Building a Golden Bridge

It is only natural in a growing market that becomes money-intensive, in which fastidious consumers have strong purchasing power, that new services and products should emerge for new consumer niches.

This is the turn of events in Israel's amply budgeted and well supplied venture capital market. The new Golden Gate Bridge Fund is a sort of new niche product, invented after identifying a need in the somewhat traditional market, loaded with much more veteran players. Shuki Rosenker, manager of Discount’s department for intermediate-stage high tech companies, with its relevant institutions, and Shally Tshuva, general manager of Foresight (of which Discount Capital Markets holds 70%), realized that some start-up companies need money between the initial and second stage. Financing sometimes gets delayed: the stock exchange falls, deals stall, gaps in expectations emerge, bitter disputes erupt about company valuations, and the funds hold up a big STOP sign.

Just like any living creature, however, a company needs food in order to live. It has to pay salaries, continue initial contacts with potential customers for the beta stage. The thinner and hungrier it becomes, the less bargaining power it has over the price of its food (in other words its value on the eve of a financing round). Some companies suddenly require an urgent cash infusion, because a potential customer has fallen for the bait and could be a wonderful reference, if only funds were available for investing in recruiting him. What these companies need, according to Golden Gate, is bridge financing. Why should bridging only mean tens of millions ahead of a financing round, like FIMI (a mezzanine fund, also from the Discount group)?

Bridging does not simply traditionally take place at a late stage, when the company can show a proven track record, Golden Gate says. Last year, Bank Hapoalim was discovered to have followed in the footsteps of The Silicon Valley Bank, and offered start-ups a new financing alternative: a bridge loan in exchange for the prevailing interest rate, plus options as compensation for the risk involved. Unlike most cases involving banks, this risk is not backed by the founders’ personal guarantees, company collateral (most of its assets are theoretical). Bank Hapoalim chalked up several substantial successes (TeleGate, BreezeCom, DSPC), and other banks in Israel found themselves in a room with a drafty door to the venture capital market.

With all due respect to the courage banks display by offering bridge financing without the traditional risk brakes, they offer it to companies with a working product and sales; a glimmering fund in their list of shareholders; and following a significant financing round in the region of $5 million. Tshuva says that Golden Gate does not have this privilege. The fund gives start-ups bridge financing at the stage in which they have very little other than a group of people with meager means and plenty of dreams for the future.

The new fund says the need for cash does not necessarily stem from problems in the market, but rather a typical start-up ailment: entrepreneurs with no business experience, leaving it to the last minute to raise capital. “They believe that if it took them a month or two to raise money from some diamond merchant, it will take a similar length of time in the following round,” Tshuva says. “It sometimes takes four months to raise money from a fund, and they therefore find themselves penniless.”

”Globes”: It obliges you to react in a very competitive length of time. How long does it take to write the check?

Golden Gate general manager Jacob Rimer: “We make a decision within a week. We have an investment committee. On the assumption that the committee approves the investment, we make an offer to the company. If it accepts the offer, we start technological and financial due diligence. It can take four to six weeks.”

It’s still a long time for a company in need of cash.

Shally Tshuva: ”If a company reaches the stage that it will be left with no money within two weeks, it will take longer to conduct the financial due diligence process.”

This means that the more a company needs money, the longer it takes.

Tshuva: “If the company handed out options by scribbling on paper napkins, it will have a problem.”

The fund offers companies loans of $250,000 to $1 million, in exchange for prevailing interest rate, plus options totaling 40-50% of the extent of the loan, based on the company value at the next round. The term of the loans ends at the following round. What makes Golden Gate Bridge Fund particularly nice is the fact that it does not argue over the company value. “The next concern entering the company will determine its value much better than we will,” Tshuva says modestly. “We almost don’t dilute the holdings. On the contrary, in some instances, bringing in a new customer at the beta stage can increase the value, and we help in financing the move. We can be the tool for improving the value.”

In effect, Golden Gate is providing a new venture capital product. Tshuva says he does not know whether a similar thing exists in other places. Make no mistake, however. Despite the bungee atmosphere seemingly surrounding the new venture, the fund has impressive risk brakes, to the extent that it almost clones a bank.

To illustrate, while regular funds often need to pray for exits within a number of years, never mind the word reasonable or excellent, Golden Gate already has an exit at the following round, within a number of months, with a much better likelihood of it taking place. This is underscored by the fact that Discount Bank can leverage all its venture capital investments to further financing (Discount is invested in Vertex, Cedar and a new life sciences fund). In other words, it can reduce the risk.

Moreover, a short-term exit and the possibility of distributing profits in the venture capital fund only at the end of its life enable it to reduce the number of investors in the fund and the size of their investment, thereby reducing the risk it takes on itself. Initial capital totaling $12 million is likely to be sufficient for six years. The fund has “no choice” but to inject profits into the fund regularly, until its final closure.

The fund will be managed by Jacob Rimer, a graduate of the Israel Defense Forces’ computer unit, and an MA in computers from the Weizmann Institute, who spent years in a subsidiary of Nice and Ubique, which was twice sold (to America Online and Lotus-IBM). Rimer was working at his third start-up, Configate, when he received the offer from Golden Gate. He will be a partner in the management company, together with Discount Capital Markets and Foresight.

Rimer and his colleagues decided on an area that is characteristic of funds these days: software, communications and Internet – infrastructure and content. Rimer also mentioned electronics, but Tshuva reminded him that the word is old fashioned. Rimer says they do not plan to invest in life sciences.

Funds are in fact renewing investments in life sciences.

Rosenker: “It’s difficult for us to give these companies bridge financing. The ability to look six months ahead in these companies is much more problematic. Foresight’s expertise and that of the research company it represents is in information technology.”

Which changes are you expecting in the near future in the direction of funds’ investments?

Tshuva:”We anticipate a dramatic change in selectivity. One fund manager told me that he is changing trends very rapidly. He said that he was in Internet, now he’s in optic fiber because of Chromatis. I think we’ll see less trends and more focusing on businesses. A new economy examining in terms of the old economy.”

Rimer: “For example, B2B companies have a problem. It was a very large buzz word, but this is no longer the case.”

Entitled to welcome the setting up of the fund, apart from the founders, is the Discount Bank. The very fact that it joined the fund turns it into a sort of financing food chain in the venture capital market, with a hand in every stage of financing in almost every aspect of the technology sector. This includes venture capital investments in traditional venture capital funds, life sciences, underwriting, mezzanine, intermediate stage bridging, and now seed stage bridging as well.

Published by Israel's Business Arena on 11 July, 2000