FantIne: Going with the (deal) flow

If you had asked a respected investor up until two years ago how he creates deal flow, he would most likely smile, if not burst into laughter. However, the market situation today is different and even respected venture capital funds have to fight for the really good companies. They work hard to create deal flow and are even willing to write checks for a few hundred thousand dollars just to get a foot in the door, in contrast to all the mathematical calculations and economic forecasts.

The FantIne Europe 1 fund’s claim, based mostly on deal flow, is extremely relevant today. It is particularly essential in the case of another small fund (with commitments in hand for $25 million and a target of $50 million). The fund belongs to the FantIne Group and defines itself as “consultant for start-ups in Europe”. FantIne founded a veritable nest of ants that accompany start-ups as they enter the Continent, including strategic ties and business. They have a British, French, and Finnish team and so on, responsible for penetrating Israeli companies throughout Europe (not only classical Europe), including Scandinavia and Spain, where they have a reputable name, according to a random check I conducted.

The company, currently with a staff of 45, also plans to offer the same service to US companies. Roy Ramati, who founded the company with Arie Guez (co-presidents and CEOs), explains that selling the service in the US is not like selling it in Europe, since the former is homogenous.

FantIne created a greatly-in-demand investor resource known as deal flow. The company talks about 6,000 connections and 200 meetings a month, 70-80 projects a year and 40 companies in the pipeline simultaneously. ”This isn’t all,” says fund manager Dr. Amir Guttman, formerly of Israel Discount Bank, “In the business development process, we receive information that is the dream of every venture capital fund. FantIne knows everything about the product, the technology, the competitors, and the market reaction. The due-diligence process is done effortlessly. Furthermore, the most vital part of due-diligence is over a company’s management. When you go with a company’s management to meetings and then go for a drink of beer with them, you get to know who you are dealing with.”

”Globes”: But the fund’s size dictates your investments will be in early stages. There is no time for due-diligence as you must move quickly.

Guttman: ”Funds compete on various levels. One is size. If a certain fund is stronger or better because it has more money and management fees, it provides better added value. I compete on one level: added value. Three months is not a long time. I’m not interested in investing in seed companies. Maybe I’m missing many good investments, but a quality portfolio with a lower risk level isn’t so terrible.”

There’s likely to be another problem with this model. Some investors charged consultancy fees and expenses from their portfolio companies, creating discontentment with time.

Ramati: ”We (at the FantIne consultancy firm, as opposed to the fund - EJB) sell service. We’re different from a fund. We have a separate decision making mechanism. We have our own system and get paid for the results we bring in, even though there is something non-tangible called information.”

Companies are likely to show opposition to the transfer of information.

”The mechanism for providing service is completely separate. The common ground is information, which is transferred only with the companies’ consent. FantIne holds over 50% of the equity but can’t dictate decisions.”

At the moment, the major investor in the fund is stock exchange listed company Alony Hetz (owned by Moshe (Muzi) Wertheim, Mivtah Shamir and Natan Hetz) with $8 million, the sort of faith that earned it a partnership in the management company also. Advanced negotiations are also underway with an international bank, provident fund and advanced training funds. The initial closing of the fund is scheduled for the end of the month or beginning of next year. Immediately after mentioning the target of $50 million, Guttman says, “I think reports that funds are unable to raise money are exaggerated.” One question less.

FantIne Europe 1’s charter is in line with FantIne’s deal flow policy: security, digital television, software and “companies that first of all go for the European market while their valuation is low,” Guttman explains. Most investments will be made at the first or second round, excluding seed. The fund has not yet started to invest. It plans to invest $1-2 million per round in 10-15 companies. Assuming the target is met, the remainder is designed for follow on investments.

Anyone investing more than $5 million can participate in the fund’s advisory board and is allowed to independently invest in portfolio companies. Guttman says that not only is there room for such a model, the larger funds are taking an interest. “They like the due-diligence and market approach and are interested in working with us and getting more deal flow.”

It’s quite difficult to distinguish between a consultancy firm and a fund.

”The funds love the idea of liking FantIne to a business-development service. It replaces having to order services from here and there.”

Published by Israel's Business Arena on 2 January, 2001