Novanets telecomunications components enable telecoms to exploit new technologies before standards are fixed, without having to revert to the drawing boards later on. Having Ericsson hold their hand helps.
During the eighteen months of negotiations between the companys representatives and giant telephone company Ericsson, the Israelis were wined and dined at Stockholms best restaurants, tasting the regions delicacies and quite a few types of alcohol. As their hearts warmed with wine, the unaffected Swedes suddenly started bombarding them with in-depth business questions. The Israelis ultimately got wise to their hosts, controlled their alcohol intake, and signed a deal with the Swedes, for Ericssons chip group to invest $7.5 million in Novanet for 40% of its share capital.
Founded: March 1998
Product: high speed PHY solutions for Internet and Telecom infrastructure
Market: Telecom equipment manufacturers
Ownership: Novacom Technologies 60% (owners are Eli Borovsky 23%, listed company H.Mer 37% and Avishai Noam 37%); Ericsson 40%.
Novanet, located in Raanana, was founded in March 1998 by a private company named Novacom. For ten years, Novacom had developed data transmission components based on IBM environment and competing, lesser known LANs. The components were designed for niche markets, and Novacom raked in a modest net profit of more than $1 million a year.
However, changes in telecommunications led Novacom founder and chairman Avishai Noam to understand that he needed a strategic partner. In talks with potential partners, he understood they were not interested in niche markets, but in new high speed areas with a broader user base. Novacom thus decided to set up a department that would be a thoroughgoing start-up.
The idea was to change the companys position, both in relation toexisting customers and potential markets, and internally, within the company. The result was a development ten times faster than at Novacom, Noam says, and the decline of the company, which is gradually becoming a holding company. Novacom provided Novanet with a business framework, and a certain degree of credibility, most vital in a market in which a large clients dependency on a small start-up can lead to disaster.
Novanet remained in Novacoms area of expertise: high speed physical layer (PHY) products for Internet and telecom infrastructure systems. But the business concept is completely different. Instead of being a sort of small workshop that markets components to plants, Novanet sought to home in on the incessant changes on the communications market and its tremendous competitiveness. The company understood that the problem of telecom equipment marketers is that they must adapt themselves to standards of protocols that change and improve in cycles lasting from eighteen months to two years.
What did Novanet do? For those interested, here are thirty seconds of technology: Novanet manufactures high speed components (155 Mbps, 622 Mbps, 1 Gbps) and "plans to enter more exotic areas of 2.5 Gbps that are difficult, require complex development, and produce too few solutions," according to Noam. The components are for ATM protocol, which serves as the main communications artery for Internet communications. The protocol, which has had its ups and downs with forecasters, has now stabilized with an optimistic growth forecast of 35% a year, says Noam. As traffic on the Internet increases, demands for higher speed transmission grow accordingly.
In order to adapt to the pace of market changes, Novanet developed an "adaptive" chip model. Novanet intends to get to market before standards are formulated, and offer a chip to customers - telecom and communications equipment companies such as Nortel, Cisco and Lucent before the standard sets in. The chip is built in such a way as to facilitate adaptation to the standard immediately it comes into force, without any necessity to return to the drawing board and re-invent the wheel.
Noam says that equipment companies today go to market with products before a standard is finalized, in order to take a market share, on the assumption that they will have to re-adapt to the standard when it becomes final, but at a great loss.
In developing this business model, Novanet took its disadvantages into consideration: in the semiconductor market, in which it is active, a great deal of money is required in order to be a leading player. An Israeli start-up like Novanet cannot launch a new chip every few months. On the other hand, it can offer flexible technology that will facilitate the giant players fierce game in the extremely competitive market, and shorten their time to market.
Novanets flexible chip "Universal PHY" is expected to be launched only next year, and it will be manufactured in Singapore. The companys finance manager, Eran Bendoli, says the model is unique to Novanets specific area of activity, but the idea is applied to other design layers.
The company is currently conducting a $7 million fund raising exercise, this time from venture capital funds. The investment by Ericsson was made gradually, and has only recently been completed. "Ericsson is the perfect match for us," says Noam, "It gave us access to the telecom market and global marketing deployment, and we utilize their production line. This accords us an advantage in costs, time to market, and savings in overheads."
Published by Israel's Business Arena May 24, 1999