Polaris has taken the gold medal. The venture capital management company has thrust far ahead of its colleagues in the race for the largest amount of finance raising by an Israeli fund, setting an Israeli record: Polaris III raised $500 million. This follows cruel screening and rejection of further hundreds of millions. According to the fund's management company partner, Aaron Mankovski, applications for investments totaled $800 million, but Polaris was forced to compromise. After all, it had planned to raise only $400 million.
Polaris not only manages new fund Polaris III, Polaris II (Polaris I stopped investing in 1996), but also the Eucalyptus fund which came under its roof. The move was triggered by the Chase Group, the heaviest investor in Polaris. Chase acquired the Hambrecht & Quist investment bank last year, which was a partner of Tamir-Fishman in the Eucalyptus fund (each held a third, and fund managers Bruce Crocker and Aharon Mankovski held another third). The structure of the fund's investments has not been changed, but the fund is now managed under the Polaris roof. Crocker and Mankovski, continuing to manage the Eucalyptus fund, have become managing partners in Polaris III's management company. Eucalyptus no longer invests in new companies, but solely re-invests in companies already invested in.
This was not the only change of direction Polaris underwent last year. Rami Kalish and Chemi Peres left the Dovrat-Shrem group when Shrem set up Shrem-Fudim-Kelner. The old partnership in Polaris II, like that of Eucalyptus, is continuing to operate.
The merger with Eucalyptus, they say, was not hard. Polaris funds managing partner Chemi Peres was Mankovski's junior by two years at high school, and both were helicopter pilots. Rami Kalish, who founded Polaris in 1993, worked with Mankovski at IBM and Orbot. Peres: "We cooperate a great deal. We invested in nine out of fifteen investments made by Eucalyptus, not out of coincidence, but due to the chemistry between us. It was easy, a natural merger, so serious problems such as arguments and ego did not arise."
Other managing partners in Polaris III are Rami Beracha, on behalf of Polaris, Crocker, from Eucalyptus, Zahi Hilel, who managed the NEC activity of Packard-Bell in Europe for nine years, and Zeev Binman, finance manager.
"Globes": How do you manage a $500 million fund plus another $200 million fund under one roof, and succeed in not compromising over idea and seed investments?
Mankovski: "Our size is an advantage. We're the biggest fund, not only from the money viewpoint, but also from the aspect of the number of people. We have 25. The idea was not to live on management fees with a small team. It wouldn't have worked. We're six partners in the management company, with a US office comprising a staff of five and two partners. That itself is the normal size of an Israeli fund. We have 11 people with a great deal of experience who can be directors in companies and make deals from beginning to end."
How will the fund's size affect your charter?
Peres: "The way we invest has not changed. We won't invest in 100 companies, but in 30-35 companies with greater added value. The situation has changed. We find ourselves at a turning point in an era of changes and extreme reactions. I believe that today there is no connection between the financial value companies demand and the actual situation. We invested in 1994 in Orckit at a company value of $20 million before money, which seemed to be a very wild price at the time. Today, every start-up that knows how to say 'net', 'com', or 'dot' thinks it's worth $20 million. It's very disturbing. That's why we want to enter at the initial stage, and be a silent partner at the end, shouting from behind the door. We want to be partners in building up the company. Our current message is 'we're partners'. If we invest, we want a significant share."
What you call a significant share?
Mankovski: "20%."
Per exit?
"Per exit. We can start with 20% and maintain this level in further rounds. We don't want to control the company."
Mankovski: "We'll invest more money in companies. We did an interesting calculation to see what share of financial rounds we took, compared to the share size we could have taken. We discovered that we could have invested more money in the successful companies, and have a higher yield."
In retrospect, it sounds quite obvious.
Peres (laughing): Of course. I mean it's based on conclusions the US reached about holding larger shares of companies. If we invested an average $3-4 million per company in Polaris II, now we won't allocate an amount per company, but emphasis will be placed on how many companies we'll have in our portfolio and what yield we can expect from a certain company. If it's a company from which we can extract $10 million at the end of the day, we won't deal with it."
In other words, you'll be taking a larger risk.
Peres: "We'll take a larger risk with a higher incentive for the company. If you invest slightly, you don't invest the same resources as you do for a company in which you have sizably invested."
Which companies is Polaris looking for?
"Companies with a proven business model which will survive the Internet bubble, if it bursts."
Mankovski: "New economy companies with old economy parameters."
Polaris does not define itself as an Internet investor. Peres: "In principle, the Internet is no longer an investment sector, but an infrastructure. It has become the major channel through which everything passes. Everything is undergoing changes and using it: banking, retailing, and healthcare. The best definition of the fund is therefore to say we invest in convergence."
Polaris will invest a great deal in communications, in convergence of telecommunications and data, voice and data, communications infrastructures and companies selling communications technologies as intellectual property (such as Mysticom and AudioCodes). In contrast to most funds which have not ventured into the medical field, Polaris plans to surge ahead and invest in it.
"The medical field will change. There's a feeling that something is taking place there, but it's still impossible to define it. One day, there'll be tremendous activity in it. We don't know when, but we're prepared for it. We have eight investments in the medical field, including biotechnology, medical equipment and Internet interface."
Mankovski believes the merging of forces at Polaris will not the last one in the market. "There will be five to seven leading bodies, each managing $400-700 million, and many other concerns, which I don't know whether to refer to as jumping on the bandwagon, that don't have the managerial depth or experience like the leading funds. Entrepreneurs will understand that it's better first of all to go to funds. Smaller investors may be more readily available and swifter, but venture capital funds are necessary in the long run."
Will the funds consolidate?
"We're the first sign of what will take place in three to four years in the next wave of money raising by funds. The funds will raise more, and recruit more manpower, which will be needed in order to manage large sums of money. Not many people in Israel can manage funds, so the larger funds will consolidate to strengthen ranks. Better quality groups will emerge."
Do investors that are not funds make it difficult for you to work?
"Yes. We won't invest in some companies, due to the investment structure. They don't disturb us, but they disturb the company. Some investors don't understand the business and are a bother to the companies."
Mankovski: "We want to have partners who'll be there in times of crisis, and not push to exit."
So Judgment Day for the current boom in venture capital will come when today's investments ripen for exits, or don't, in another two years?
Peres: "It will take time. Capital is available and ready to be used by investors without proven records. There's no justification for some companies' value. New venture capital concerns, with inexperienced people? We met investors in the US who told us, 'This is only your third fund? We'll talk with you when you reach Polaris IV."
Business Card
Name: Polaris I, II, III, Eucalyptus
Investing body: Venture Capital Fund
Investment Stage: Seed to late stage
Investment areas: Convergence in various fields of telecommunications and data, medicine and Internet, communications infrastructures.
Volume: $700 million
Investments offered: $6-12 million during a company's lifetime
Portfolio companies: XAACT, Mysticom, CTI Squared, Surf Communications, Instinct Software, Vigil, WebGlide, Veon, Mercado and others.
Investors: Chase, Harbour Vest, Citigroup, America Online, Teachers' pension fund, Dow Chemicals, Kodak, and Deutsche Bank
Partners in management company:Rami Kalish, Rami Beracha, Chemi Peres, Aaron Mankovski, Bruce Crocker, Zahi Lilel and Zeev Binman
Exits: Medinol, VocalTec, Scorpio, BackWweb, ITXE, Radware, AudioCodes and VCON.
Web site: www.polarisvc.com
Published by Israel's Business Arena on 27 April, 2000