Today, Haim Sadger could have been a partner in a company worth over $3 billion. But he decided to give up the company he founded in order to return to Israel. He is now trying to find a company with the potential to become a Philips or Nokia. He stands a good chance, as he has strong backing. Sadger is the Israeli partner and manager of the fund set up by Sequoia and Cisco for investing in Israeli companies at the seed money stage.
Sadger came to the Sequoia Cisco fund, which was recently featured in the press (in reports full of inaccuracies and disinformation) quite by accident. His career began at Intel. He had completed engineering studies at the Haifa Technion, and worked for eight years at Intel in Israel. He was then sent by the company to Silicon Valley to a position which he discovered immediately on his arrival to be trivial.
"I put a stop to it and founded a sort of start-up within Intel. As I’m a communications person, I naturally thought of a laboratory for advanced communications, and I decided to focus on ATM."
Sadger’s laboratory managed to develop the sought after technology - an ATM communications card that until then the US Department of Defense, which backed the project, could have only dreamed of having. Sadger, however, was already starting to take interest in the next development. "The laboratory was financed by a division of Intel which invests in other companies, and someone called Chuck Harris worked there," says Sadger, "One day, we were sitting in the conference room and Chuck suggested we do something in the DSL field. He also said it was illogical to set it up as part of Intel and that we should set up a start-up. I was enthralled with the idea and agreed, although I knew it was a mistake as I wanted to return to Israel. The children had reached the age at which it was clear that they would lose their Israeli identity if we did not return.
"Chuck and I stayed at Intel and worked nights to develop the technology. We named the company SuperNet. Six months later, we offered Intel 15% of the company’s shares. Two venture capital funds, Accel and IVP, wanted to purchase other shares. Everything was almost finalized, we had contracts, there was a term sheet. Even Sequoia tried to enter the deal by force, but it was closed."
In December 1995, Ronit and Haim Sadger returned to Israel. The VCs cancelled the deal. "They said that, if the vice president for engineering was quitting the company, they wouldn’t invest. Chuck was stuck at Intel until 1997, when he set up his new company COVAD. He decided that instead of developing DSL technology as we had planned, he would acquire it from others and sell services. He’s a wonderful marketing man, and succeeded splendidly. At the end of 1997, Chuck left Intel. In January 1999, COVAD issued on the stock exchange."
"Globes": There were already signs of a brilliant future for SuperNet. Why did you return?
Sadger: We knew that if we didn’t return now, we wouldn’t return, and some things are more important than money.
The decision proved to be not at all simple. Sadger landed in Israel, the family settled in Haifa, and his job was to find interesting companies that Intel could invest in, or technologies it could acquire.
Over the next two years, until December 1997, Intel managed to invest in a substantial number of companies, some of which have already yielded a return. Intel invested in BackWeb (which issued in June), in Butterfly (sold to Texas Instruments for $50 million), and Libit (also acquired by Texas Instruments). "It was a fascinating learning experience," says Sadger, "I continued to be in touch with the people in the US and visited often."
Towards the end of 1997, on one of his trips to the US, his friend and number two at Cisco Frank Marshal approached him, saying Sequoia wanted to talk, and that he should meet with two partners. The very wealthy Marshall likes to attend Sequoia partners’ meetings as an observer. The forum comprises eleven partners who meet once a month, and Marshall attends, coming to talk and to influence (Now Sadger is invited to join this exclusive club, and he flies to the Valley once a month).
"I thought they probably wanted something concerning Intel, and I went to a meeting the following visit. I didn’t understand what they were doing. They started to interview me, asking what I was doing, where I wanted to go, what my opinion was. Then the cat came out of the bag: ‘We want to set up a fund for investing in Israel, and we want you to do it. You must keep it quiet. Cisco will also invest in this fund,’ they said. I didn’t understand why secrecy was called for. I agreed. The following day, we talked and I was asked to meet with Mike Volpi, one of the heads of Cisco, in charge of all Cisco acquisitions. Volpi is in a position of enormous power. The idea for setting up the fund sprang from him. He turned to his friend at Sequoia, Don Valentine, who was one of the Cisco founders (chairman, until replaced by the incumbent John Chambers) and offered to set up the fund jointly. The interview with me was more of an introduction, as they had already made their decision."
What led Sequoia to set up a fund in Israel? Sequoia doesn’t even invest in the East Coast of the United States.
"That’s correct. Sequoia is one of the world’s most important funds. Among others, it set up Apple, Oracle, 3Com, Cisco, Yahoo and ETOYS. However, it doesn’t invest in places it cannot reach by bicycle. Nevertheless, the partners decided that Israel was the only place with the same atmosphere as Silicon Valley. It will take the Europeans many years to attain the situation that exists in Israel, in which entrepreneurs are capable of starting off a company.
"Seqouia receives 6,000 business plans a year, and has been exposed to a number of Israeli companies seeking its assistance. Most of them had good ideas, but their management structure was problematic from Sequoia’s viewpoint. They also came with very high company valuations. The answer the companies received was: ‘If you had come sooner, we would have been interested.’ Then the idea of setting up a fund to invest in companies at the seed stage arose. It’s possible that, were it not for Cisco, the fund would not have been set up. Cisco gave Sequoia the feeling of security, that together they would certainly succeed."
Sequoia and Cisco are equal partners in the fund. Sadger is the Israel partner who manages the fund. He examines companies, and once he has screened them, usually after consulting Arad Naveh of Cisco (founder of Class-Data, which was sold to Cisco), he presents the investment before an investment committee, comprising another Sequoia partner and Mike Volpi of Cisco. If the investment committee decides to pursue it, Sadger prepares the company for a meeting. He coaches the entrepreneurs in what an American investor wants to see and hear. "In effect, I’m a teacher, with students who don’t disturb class, and with a better salary."
Sadger does not divulge percentages and sums. The size of the fund also remains undisclosed. I tell him that I read it is worth $40 million. Sadger says, "Don’t believe everything you read in newspapers. The sum we designated will be sufficient for everything I might like to do in the next two to three years, and if I require more money, it won’t be a problem. Sequoia will make a transfer from one account to another. In the meantime, although investments can range from $50,000 to $3 million, we managed to invest sizable sums in each company."
Sadger prefers entrepreneurs to approach him through bodies that are familiar with them and known to him. This enables him to get recommendations, although some approach him via the fund’s site ( sequoia.co.il ), and are not rejected out of hand.
Is there no conflict of interests? Cisco wants technologies and Sequoia seeks to build up companies.
"We are trying to set up in Israel a Nokia or Philips. Cisco wants to develop technologies that it can work with or acquire at a later stage. This does not bother the majority of entrepreneurs. They will be pleased to sell. In the meantime, no conflicts have arisen. We have amazing team work. The familiarity and daily work between the companies enables decisions to be made efficiently in the blink of an eye. It’s an excellent combination."
Regarding the fund’s potential, Adv. Eyal Shenhav of Eitan, Pearl, Latzer, Cohen Zedek, the law firm that has dealt with the legal aspect of setting up many funds, including Walden, Israel Seed and JVP, says, "The combination of a first class fund, a giant company, and a vastly experienced Israeli factor is unprecedented in Israel. It’s a winning combination."
Published by Israel's Business Arena July 7, 1999