Roy Erez, Gal Israeli, Amnon Shoham - Cedar (Israel)

The “New Economy” driven by the adoption of the Internet and electronic commerce as foundations for new business models is going through a natural “correction.” The key question which we are facing, however, is whether this “correction” is done and the market is stabilizing at this level, or should we anticipate yet another step down. This uncertainty is probably affecting the market more than the decrease in prices.

There is no doubt that the Internet/ Web is revolutionary and almost everyone agrees that it will fundamentally change business and is likely to be with us for many years. Moving from initial market “hype” to doubt and disillusionment with Internet companies, we must remember that the Internet isn’t different from other technologies. It will take it some time until businesses will truly learn how to benefit from it. Companies without solid business models are suffering, investors are far more cautious and calculated, and company valuations are generally lower.

Companies with Israeli developed technology are best situated as providers of the basic infrastructure (“plumbing”) of communications, like those coming from LaserComm, BigBand and Tundo and the world is currently focusing on them. However, as investors in the U.S. and Europe who are closer to the market, we continue to seek solid company business models and think that there is a very interesting group that will do well, by providing the "plumbing" for conducting business on the Internet, like solutions from WebCollage and Orsus.

Eventually, we believe that there will be more winners in the Internet services area when the dust settles. Those companies with solid business models that sell highly targeted solutions to major companies or provide real infrastructure needs will be in good shape. The world has gotten used to using technology to better run businesses and the Web is just another means of getting that. The shakeout is healthy, since it will make it easier for quality companies to rise above the noise level, recruit the better talent and thrive. Over time, as the industry understands how to use new technologies to effectively change the way they do business, the industry will recalibrate and find its proper place with long-term stability – and the market will reflect that. The cautious, long term and patient investors won't regret their investments in companies that address the “new economy” without forgetting that there is a need for “old economy” business models.

The three startups which we think will be the next big exits for 2001 are two of our portfolio companies:

BigBand Networks Provides a new network platform /service router to deliver entertainment-quality content and services combining video, voice and data over multiple broadband networks including cable, DSL, satellite and wireless. Cited by the Red Herring magazine as one of the top 10 companies to watch, BigBand was founded in 1999 with pre-seed and seed financing from the Cedar Fund.

Tundo Enables innovative, internet-age service providers to achieve incremental business growth by rapidly deploying profitable, differentiated and reliable IP-based network-hosted voice and media solutions, today and into the future, while extending existing investments in legacy voice networks. Founded in 1998 with seed financing from Cedar Fund, Tundo has over 120 employees and is headquartered in the Boston area. Its customers include major call centers and service providers.

The writers are principals in Cedar Advisors and the Cedar Fund.

Published by Israel's Business Arena on January 1, 2001