Many Israeli start up entrepreneurs dream of making millions on a great exit, but they all know that starting is harder than finishing. In times when the bank account is empty, and finding investors is hard, it is difficult to think in terms of social responsibility and investing in the community. People losing money from day one wait until things stabilize before contributing back to the community.
But there is another option. Tmura - The Israeli Public Service Venture Fund, founded a decade ago, makes a simple calculation: start ups have no money, but they have potential, so they can donate options on the basis of that potential. The options can be exercised for cash, which will be donated to the community, when the company is sold or goes public.
Yadin Kaufmann, a veteran venture capitalist, came up with the idea for Tmura, based on a model used in the US. "I've been in the business since 1987, and I've seen the industry develop with many interesting companies. I've seen the creation of value by many companies, but what was lacking was a mechanism to give to the community in an organized and broad way," he told "Globes".
"The idea of obtaining donations through options seemed to me then, and seems to me now, as the most suited to the needs and capabilities of high-tech companies. The model opens to an importance audience the option of contributing to and being involved in the community, at a time when if you were asked to donate cash, you could not have done it, and if you could, it would be insubstantial."
The model has a track record. In early May, Tmura received over $450,000 from the sale of XtremIO Ltd. to EMC Corporation (NYSE: EMC) for $430 million. Tmura will distribute the proceeds to some of 100 educational and youth non-profit organizations with which it works.
The proceeds from XtremIO's sales are part of the $6.3 million Tmura has received from 36 exits of start ups to date. In the past five years, the amount of donations has doubled and the number of exits has tripled. The number of start ups donating options to Tmura has risen from 100 in 2007 to 240 today.
"No one expects these companies, which lose money from the outset to use their investors' cash for charitable donations," says Tmura executive director Baruch Lipner. "There is no problem donating options because they do not affect the cash flow. This is a win-win situation that even has a favorable effect on a company's karma. It affects the employees, the corporate culture, and the values that the company wants to impart."
Kaufmann adds, "CEOs also claim that it's easier to hire employees because people prefer working at a company that is involved in the community."
Foundations supported by Tmura include Shiur Acher (which organizes volunteer teachers), Knafayim Shel Krembo (Krembo's Wings, which provides social activities for children and adolescents with special needs), and College for All. "We mainly look for small educational and youth NPOs with an educational model that can be replicated and expanded elsewhere in Israel," says Lipner.
Tmura receives only a few options from each company, usually less than 1%, but since they are allotted at a very early stage, before subsequent financing rounds and dilutions, the compensation is fair. Lipner says that, in most cases, the donation is through an exit or IPO, but that there are cases, such as with Internet start up Wix Ltd., which has allowed Tmura to exercise its options as part of a large financing round.
The best loss imaginable
XtremIO CEO Ehud Rokach told "Globes", "This is the best loss imaginable. A new start up has no money to donate. It operates under financial constraints, and it is hard to justify a direct financial donation, when it has no sales or profits. The only currency a new start up has is the chance that it will one day succeed, and that is what we donated to Tmura."
Formally, such a donation requires the support of investors and management, and Rokach stresses that this went smoothly at XtremIO. "There was no need to hold a discussion about this. It was obvious that we were pleased and happy to contribute," he says.
For years, Israel's high-tech industry has been accused of being alienated from society, but Rokach disagrees. "As an insider, I do not feel that our people are alienated, but that we're part of society. If someone feels alienation, I can only hope that activities of this kind help him overcome it."
Money isn't everything
Younger entrepreneurs also demonstrate the spirit of contributing to the community, even if they are cash-strapped. "I believe in building a start up not just to create a money-making machine, but to bring something of influence and meaning to the world," BillGuard Ltd. co-founder and CTO Raphael Ouzan told "Globes". "BillGuard was created to solve a big problem of incorrect charges on users' credit cards, but along the way, also to help NPOs in areas where we cannot help in any other way."
Ouzan added, "There should be a good enough reason to be an entrepreneur, because life is hard, and if you can't get up in the morning to do something great for someone else, then I don’t know why to do it. I look at a value as not just the company's success, but also our influence as people in the society in which we live. In the end, our success in linked with the success of Tmura."
"Globes": Why not donate directly?
Ouzan: "It's a matter of efficiency. It's hard work to invest in the right things. Money is worthless if it doesn’t go to the right place. It's much more profitable to let Tmura work and manage this front, since it knows much more than we do on our own."
Published by Globes [online], Israel business news - www.globes-online.com - on June 7, 2012
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