CardoNet is an Israeli start-up that facilitates rapid access to vertical suppliers' catalogues - trade forums specializing in specific fields. The company last week raised $9 million from US venture capital fund Sequoia.
To those wondering at the tidy sum of $9 million, CardoNet cofounder and CTO Offer Markovich explains that other funds, from both Israel and the US, offered CardoNet more, much more.
CardoNet, however, wanted added value much more than it wanted money. The company wanted a name to arouse its customers and target markets. After all, CardoNet is no longer a tiny start-up at the beginning of the road. It has already gone through three previous financing rounds: (the seed round, plus two more) since its birth in 1997.
In the seed round, the company poured $2 million from the Newton group into its cashbox. It got a similar amount in the following round from the Yozma fund, and the Giza fund also invested the same amount in the third round, with an option for another $1 million at a market value of $20 million, while agreeing to the entry of a US fund.
According to Markovich, the company understood already at an earlier stage that in order to become a key player in the field, it would have to bring in a top-ranking US fund. "First of all", he says, "it shows the market that the company has favorably impressed the best. The value of that cannot be measured in terms of money. In addition, we need the US fund to give us a more American image. That's why we rejected the generous offers of Israeli funds and preferred to go to the US and pursue funds there."
It was no bed of roses, at least at first. They were unknown in the US, and Markovich, and particularly Dr. Itay Meiri, the second entrepreneur, a US resident, began a round of presentations to US funds. "At the beginning, only minor league funds agreed to meet with us, not the elite. We therefore manufactured a kind of tornado around the company, in order to arouse interest.
The connection with Sequoia did not ultimately result from the tornado. One of our executives knew a partner in Sequoia. "Otherwise", Markovich says, "It is very difficult to meet with those funds. It's not as if we hadn't tried before."
It later turned out that Sequoia was simultaneously examining seven companies competing with CardoNet in the catalogues field. CardoNet entered the competition for the fund's exclusive investment in the field at a much later stage, when Sequoia had already thoroughly examined the others.
CardoNet was therefore in a somewhat inferior position, particularly in view of Sequoia's unique work procedure. Sequoia has seven partners, each of whom must approve an investment; i.e. every investment must receive a unanimous vote. For that reason, Meiri had to meet all the partners and persuade them that the investment was worthwhile. He had to accomplish this in one-on-one meetings, each of which advanced the process a stage further.
"At one stage", Meiri relates, "they brought in an external expert of the very top caliber in the field - Joe Prang, president of Aspect Development, a company which was recently sold for $9.3 billion to I-2 in the largest acquisition in the history of the software industry. He must have warmly recommended us, because that's when we became the leading investment candidate."
CardoNet continued receiving offers from other funds during this period. The entrepreneurs feared losing all their opportunities, and were quite perplexed. What made them continue rejecting other offers was the thought that if Sequoia did not invest in them, it would invest in one of their competitors, which would later easily overcome them.
"It was a double gamble", Meiri says. To the entrepreneurs' good fortune, it paid off. Not only did they win Sequoia's investment, they also won Prang as chairman and president of their company - he was that enthusiastic about their technology.
The whole story, from the first meeting until the final investment decision, took only two heart-pounding months, which in Israel is considered a fairly short time span.
Another headache the entrepreneurs had took the form of the Office of the Chief Scientist, which had invested in the company, and whose consent had to be obtained. Markovich: "In the end, things went pretty smoothly after the investment decision."
Markovich reports that the company currently has 35 employees. The feeling in CardoNet is that they've reached a new plateau. For example, several customers who had examined the technology for months decided to buy immediately after the investment was announced.
Of notable importance is the fact that Sequoia's investment in CardoNet took place at a company value of $32 million. This is not particularly high in comparison with the competitors in the market, and is significantly lower than the value that could have been obtained from other funds. Other companies in the same market, such as Web method and On display, were issued at what Markovich calls crazy values, for example $600 million, and immediately rose to over $1 billion.
"Globes": This is now a key field, since it serves as infrastructure for e-commerce companies.
Offer Markovich: "There are currently many dot.com companies which have raised a lot of money. Some raised $15 million at the seed stage, and now they have to fulfill expectations quickly. They accordingly reach buying decisions very rapidly. This has strengthened interest in us, both on the part of funds and the customers."
In addition to that, how will the company function? For example, is something happening about an issue or an acquisition?
"Until now, our outlook was similar to that of many other start-ups - issue or acquisition, whichever looks more attractive. Today, the acquisition option is practically off the agenda. That is to say, if a very attractive offer comes along, we won't turn our noses up at it. The moment Sequoia invested in us, however, we are aiming mostly at an issue."
What does that mean?
"As far as we are concerned, that means that we intend to build an established company. For example, we have retained a large store of options, which we can distribute to new employees and executives, who can take us to issue. It is important to us that the company be prepared for future developments, to develop additional innovative products."
What about company management?
"It was important for them to get an answer to the question of how the entrepreneurs view the subject of management - whether we were willing to accept a US general manager. The matter was of the utmost importance to them. It was clear to me that they believed that a US general manager with experience and connections could move the company forward a great deal. I am willing, although no specific candidate is under consideration at the moment."
How will you feel about that?
"There is no doubt that this point is problematic, but we are willing in principle to hand over the reins to someone who can lead the company to a billion dollar value. That is a step of the kind that is apparently still too big for us, with the experience we have acquired to date."
Published by Israel's Business Arena on May 16, 2000