Wireless telecommunications equipment maker Netro, helped by investment bank Merrill Lynch, raised $40 million at a company value of $350 million, but fair weather on Wall Street led to that value being almost tripled. After an issue of five million shares, some 11.4% of the share capital, Netro stocks soared from $8 to $23.5 on their first day of trading. The 18 million shares that changed hands made it the third most heavily traded stock on Nasdaq.
On the second day of trading, investors’ ardor cooled, and the share fell $4 to $19.5. This is still a considerable achievement for the group of Israeli entrepreneurs, as well as for the two venture capital funds whose investment in the company has been greatly enhanced.
The company was founded in 1994 as an Israeli company in every respect. Later on, it became a US company in order to make it easier to raise money from private investors in the US.
The two founders, Gidon Ben-Efraim, the company’s engine, and Eli Pasternak, its brain, then approached Erel Margalit, who managed JPV (Jerusalem Pacific Ventures), a small fund with $20 million to invest. Incidentally, Margalit has since set up JVP, Jerusalem Venture Partners, with $75 million to invest, and he is now working on the establishment of a $150 million fund.
Margalit invested $666,000 at a company value of $4 million (before money), and started helping the entrepreneurs to get the business going. The next fund raising round was at a value of $50 million, with Margaret's fund investing $333,000. Since then, the company has been through a series of rounds of fund raising which brought in a total of $42 million at a value of $320 million, or $7.78 per share.
Among the investors were impressive names such as Merrill Lynch, Cisco, the US Ventures find, AT&T Ventures, and Siemens.
Netro develops and markets LMDS wireless communications equipment. This technology facilitates high speed broadband transmission of voice, video, Internet, and data, using microwave wireless technology. Young telecommunications companies seeking to compete with the veteran companies using this tool are cropping up everywhere, and dozens of trials are being carried out around the world.
Erel Margalit, one of the big gainers from the deal, took a day off to relax at home. After all, as joint manager of JVP, whose $1 million investment soared to $30 million, he earned it. But Margalit modestly explains that he dislikes the first days of trading , because trading is so volatile, an din any case, he doesn’t consider this the peak of his career.
"A value of $850 million is fine, certainly good as far as we are concerned. It’s a fair success, and there’s a warm feeling of having brought a company from zero to a value like this, but I’m sure JVP’s next success will be even greater. We are now getting two start-up companies going that I believe will be bigger than Netro.
"I think the case of Netro highlights the importance of specialization for a venture capital fund. The fact that we focus on telecommunications means we know how to exploit various market opportunities, and take advantage of our ties with strategic investors in telecommunications equipment and the various telecommunications operators."
Published by Israel's Business Arena on August 22, 1999