Software-based communications access solutions

How wonderful it is when an international giant comes as a strategic investor to a start-up, eagerly asking to invest. It’s the ultimate dream, but not always quite so simple. I know at least one start-up that would pay dearly to have the omnipotent giant disappear forever from its board of directors. The presence of such a giant on a start-up company’s board could send many customers packing.

Surf Communications Solutions is the sort of start-up that has not one giant on its board, but two. Moreover, the two directors are sworn rivals. The first represents none other than Intel, which marched into the company as a minority investor in March 1999. The other represents Texas Instruments (TI), which also entered as a minority investor, some two months ago. The message is clear: this company has something the best and the biggest are willing to digest the unpalatable for, just to have a foot in the door. It relays an extremely positive message on the market.

It’s fortunate that Amnon Gavish (founder and CEO) and Efi Fisher (vice president for development) saw quite clearly how the market was developing, and changed direction in time. Originally, Surf was set up to develop software modems. A modem is, in effect, a certain algorithm or platform embedded in a chip. Software modems run the algorithm or platform on a generic chip. The entire market is heading in this direction, as it makes modems much more flexible than hardware-based modems: they can be upgraded, additional programs can be added, and the same component can support other modems.

The original product was directed at the end-user, and went down well. Surf even signed a contract with Nintendo, which purchased the product in order to add Internet access to its video games. In contrast to most start-ups, Surf succeeded in financing its initial activity from its first contracts.

Gavish, 34, and Fisher, 33, met during their army days in the Intelligence Corps, and both have a PhD from the Haifa Technion. They decided not to abandon their original product, but to direct their development efforts towards telephony companies instead of end-users. The modems are still software-based, but are installed on the communications systems. The Software multi-modem enables telephony companies to support various types of traffic – fax, data and voice.

The software runs on the modem chip. The modem, which processes data transmitted by the user, is installed on local exchanges, where it processes the data at a local level, rather than at the central level. The advantages are: high-speed processing of different types of traffic (fax, telephone, data), which alleviates congestion and provides users with superior services; the ability to compress a large number of modems on one chip (according to Gavish, Surf is capable of compressing the largest number of modems on one chip), thereby reducing the storage area of the modem; the widening of the range of services offered users (local calls, ISDN connection, even without appropriate infrastructure, VOIP); and more.

This provides telephony companies with a tremendous advantage. Like a traffic policeman, it disperses congestion at network intersections, instead of it converging on one place, it gives the possibility of providing more customers with a wide range of services, and it enables optimal use of existing infrastructure.

Among the manufacturers of generic chips on which Surf’s modem operates is Intel. This explains the importance of Intel’s presence in the company. Gavish calls Intel a “partner” despite the fact that it has no exclusive rights. Gavish is unwilling to disclose the names of other customers, which is often the case in the chip industry. The Intels and the TIs supply DSP chips to telephony equipment manufacturers, who supply them to the end-user – telephony companies.

The company, located at Teradyon in Lower Galilee, also has offices in Boston and Silicon Valley. The US subsidiary is managed by Ron Bleakney, formerly senior vice president of Natural Microsystems, who brought the company to its IPO.

In the company’s initial financing round in October 1997, Better Online Solutions (BOS), a NASDAQ-listed Israeli company, invested $800,000. In the following round, in March 1999, Intel and Polaris invested $4 million. The sum invested by TI was not disclosed, but it is estimated that it was based on a company value of $30-50 million.

”Globes”: It all reminds us of Libit.

Gavish: “We are being courted very intensely. We see the company as growing to the IPO stage. All the rest is speculation.”

What is Intel like as an investor?

”We are fortunate to have investors who provide assistance without interfering. Their attitude is ‘Let’s allow the company to grow’.”

They have no problem being together with TI?

“I have never seen any blows between Intel and TI at board meetings, possibly because no meeting has been held since TI entered the company. Intel had no problem with TI’s entry. The fact is, Intel approved it.”

In your case, is that a minority interest or strategic investor’s approach?

“Giving a company opportunities and allowing it to grow is definitely a minority interest approach.”

Is TI’s approach more strategic?

“I don’t know. I don’t believe they entered the company in order to prevent our technology from reaching competitors. If we get business opportunities, they will obviously profit from it as well. I believe the investments of both companies are strategic, and that means that they are not seeking to get rich from them directly. Intel has a stash of several million in cash.”

Published by Israel's Business Arena on November 1, 1999