The number of foreign investors, chiefly Americans, showing interest in Israeli technology companies, has been growing lately. Venture capital funds and super-angels from the US, even some who have never invested in Israel before, have been sending representatives to spy out the market for them.
One of those who believes that, in 2011, he will make investment deals in Israel is Steve Westly, founder and managing partner of The Westly Group and Westly Capital Partners.
"Our fund is looking for investment opportunities in Israel," he says in an exclusive interview with "Globes". "It's true that we haven't invested in Israeli companies up to now, but we will start to do that shortly, as soon as we finish raising capital for our second fund, $175-200 million."
Westly is not one of the investors well known in Israel. Up to now, his activity here has been of a philanthropic nature only, through the Westly Foundation, which he runs with his wife Anita, and which aims to help children at risk in California. ("For example, we support Shaare Tzedek Hospital in Jerusalem," he says. "We became convinced that this place needed help and that important things are being done there.")
In Silicon Valley, and in the US general, Westly is a key figure. Last month, he was one of a select group of people from the high-tech world to be invited to dine with US President Barack Obama, along with Apple founder and CEO Steve Jobs, Facebook founder and president Mark Zuckerberg, Eric Schmidt, outgoing CEO of Google, Twitter CEO Dick Costolo, and Larry Ellison, founder and CEO of Oracle.
What did they talk about? Westly, like the other 14 people who attended the dinner, is not prepared to elaborate. According to Obama's announcement, the conversation was about the importance of investing in companies at the R&D stage, and his intention to increase government incentives to growth companies, subjects close to Westly's heart.
He founded The Westly Group in 2006, and today it is one of the foremost firms in the US in its field. "We set out to raise our first fund in 2008, around the time that the global financial crisis broke. We sought to raise $100 million, but the round ended at $127 million, and we are currently investing from that fund," he says. The fund's performance is enviable: 84% of the capital raised has already been returned to the investors.
Three generations of capital
In his career, Westly combines politics, high-tech, capital, and academia. In 2003, he was appointed State Controller and Chief Financial Officer of California, the world's sixth largest economy. By virtue of his office, he sat on the boards of two of the world's largest pension funds that invest in high-tech, the California State Teachers' Retirement System (CalSTRS) and The California Public Employees' Retirement System (CalPERS), which together manage more than $350 billion. Some of the improvement that took place in California's state budget is attributed to him personally.
In 2006, he was an aspiring contender in the elections for governor of California, but lost in the Democratic Party primary. He was later joint chairman of the Obama presidential campaign in California.
Westly began his public career in local politics in San Jose, and he continued at the US Department of Energy in the Office of Solar and Conservation, where he first got to know the field of alternative energy. He made a foray into high-tech, and was a senior manager at eBay in its early years. Westly is currently a member of the Advisory Board of the US Secretary of Energy.
Westly divides his funds into three generations: the first, the zero generation, was from his personal fortune; the second is the current fund, from which he invests in cleantech companies; and the third generation is the fund now being raised.
"I took the money I made at eBay, about $16.5 million, and with that I set up the 'Zero Fund'. After eleven months, I returned all of the fund's money. Raising the money and the return on the investment were fairly easy, partly because our performance shone: an internal rate of return of 14.4% in just one year." Venture capital funds are not usually expected to generate any return in the first two years.
"I founded the 'Zero Fund' with my partners on the day I left public service as financial controller of the State of California," Westly says. "The US fund Kleiner Perkins was generous, and allocated us an office on its premises, and we started working. I knew that, despite my experience, I wouldn't be able to raise capital from institutional investors, which do not tend to invest in first funds. But I knew that if I succeeded with the private money, if I put myself at risk, the institutions would like that, and would invest in the first fund I raised.
"I risked millions of dollars of my personal capital so that they would invest hundreds of millions in our fund."
So it turned out with the first fund. That, Westly says, was the secret of his success, and since then he has insisted that partners should invest their own money in the funds. In the first fund, they invested $7.5 million, and a substantial proportion of the second fund too will be the partners' own money.
"I hope that raising the second fund won't take a long time," Westly says. "It will also focus on investment in cleantech, but this time we will allocate 20% of the capital for Internet companies."
"Venture capital suits cleantech perfectly"
Westly and his partners Mike Dorsey, previously a partner in Bay Area Equity Fund, and Gary Dillabough, formerly a senior manager at eBay take pride in three companies in which they invested with the first fund and which have made successful IPOs in the past two years: electric car company Tesla Motors, biotechnology company Amyris, and China Recycling Energy Corporation.
In Tesla, for example, the fund invested $9.3 million, and enjoyed a payback of $70.6 million after 30 months. There are more companies in the portfolio that Westly expects to go public in the near future. "We're happy with the portfolio," he says, "Contrary to what people think, venture capital suits cleantech perfectly."
Not many investors would agree with that claim.
"When something new comes along, and it was the same with life sciences and the Internet at the start, people argue that it's not a real business. But today, everyone understands that cleantech is a huge market, and I'm sure that this year there will be many IPOs of companies in the field. I can really promise that by the end of the year this market will be hot even too hot. Perhaps they'll invest too much in it. My job is like in a card game, to maintain our 'hand'. I invest when the market is down, and don't invest too much when it's ablaze."
Do you already have companies in your sights?
"90% of the companies we are examining with a view to investment from the second fund come from China and Israel." Westly and the group are advised in Israel by Adv. Ayelet Torem of the law firm Amit Pollak Matalon & Co.
What kind of companies do you invest in?
"We invest in companies in their second or third fund raising round, companies that have a product and sales. We won't invest in companies that don’t yet have a product, but we will invest in companies that have a product and revenue but have not yet raised capital."
The conventional wisdom is that it's very hard for cleantech companies to reach the revenue stage.
"It's hard, but possible. For example, the sales of Armonix, in which we invested, and which operates in photo-voltaic energy, were $2 million in 2010, and we expect them to reach $80-90 million this year. Our job is to get to the companies where there is no technology risk and that are on the brink of a breakthrough."
The areas that particularly interest Westly are biological fuels and transport; energy efficiency; waste treatment; smart buildings; renewable energy; and green products for end users.
How do you explain the success?
"Everyone complains about the capital market, but we have brought two companies to IPOs, and we upgraded the third from the Nasdaq OTC market. These were outstanding exits. We work hard, invest from our own money, but I have to say that luck worked in our favor as well."
Published by Globes [online], Israel business news - www.globes-online.com - on March 22, 2011
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