A complete listing of all portfolio companies of Yozma and public
venture capital funds are a partial list of portfolio companies of other
investment funds appear in Appendix II. The most prevalent sectors among
the approximately 110 companies shown are telecommunications technology
and services, data communications, software, multimedia, computer
systems, audio and video signal processing and medical technology. In
this segment we provide some insight into the nature of the investment
transactions in these companies.
1. Venture Capital Fund Relationship with
Entrepreneurs/Companies
Most start-up companies are initiated by scientists/engineers who
leave their previous jobs to start their own company. Most do not have
prior entrepreneurial experience and generally lack the funds necessary
to finance their companies. Therefore, they approach venture capital
funds to obtain financing and, no less important, to establish an
association with a sophisticated financial entity that can make
introductions to potential strategic partners abroad.
2. Size of Investments, Valuations
In most cases, the size of a venture capital fund's investment ranges
between $0.5 million and $1 million. In many cases investment is
gradual, often through preferred shares and according to pre-set
milestones. There have been several cases in which the initial valuation
was determined only after certain milestones were reached according to a
pre-agreed formula.
The following is a very broad guide to pre-money valuations based on
recent transactions: In cases in which a group of scientists/engineers
establishes a company to develop a new idea, deals are generally
completed within a valuation range of $3 to $6 million. Deals concluded
after 12-18 months of operations and an investment of $1.5-$3 million in
R&D are usually at valuations of $5 to $9 million. When it is clear that
the R&D has been successful and the potential is very large, the typical
range of valuations after 12-24 months of operations is $8 to $20
million.
Generally, in 1993 and the beginning of 1994, transactions were at
significantly higher valuations than today. Major causes were the
strength of the TASE, the overheated IPO market in Israel, and
competition for deals among venture investors. From 1994 through the
first half of 1995, valuations were more reasonable. The decline in
private company valuations in 1994 created difficulties for companies
which had their first round of financing in 1993 at a high valuation.
Some companies found that the second round had to be done at the same
valuation as the previous round or even at a discount. In some respects
the rise in technology stocks in the U.S. during 1995 is again beginning
to increase valuations of Israeli start-up companies with visions of
U.S. public offerings.
3. Exit
Most portfolio companies of venture capital funds are in early stages
of their corporate life, with the average company operating for about
1.5-2 years. Therefore, many are at a pre-stage, too early for
investment companies to consider a viable exit.
There are several
possible strategies to exit from portfolio companies. A significant
phenomenon in 1995 has been the number of deals in which foreign
companies acquired Israeli start-ups for strategic purposes at
valuations that generated capital gains to venture capital funds.
The following table show transactions in which there was an exit from
investments or other significant developments:
Table 5: Public Offerings in Venture Capital-backed Companies
Table 6: Transactions in Venture Capital-backed Companies
4. Observations
Most companies which received venture fund investments are now in
progressive stages of R&D and/or preliminary marketing efforts. In
general, Israeli start-up companies have proven successful in the R&D
stage. Marketing is usually a more difficult hurdle to overcome. Venture
capital funds, especially those with a foreign affiliation, can play an
important role in giving direction to marketing strategies of start-up
companies and facilitating contacts with overseas companies.
In
1995, there has been a noticeable trend by venture capital funds to
invest larger sums of money in a smaller number of companies. i.e., a
concentration of efforts trend. Moreover, a new phenomenon in 1995 is
growing cooperation between venture capital funds in evaluating,
investing and supporting portfolio companies.