Immediately after Sequoia Capital opened a $150 million fund in Israel, Benchmark Capital also jumped on the Israeli venture capital fund wagon with its own $220 million fund, Benchmark Technologies Advisors. One ought to tip one’s hat to the US funds. They know how to get the job done; valuations are in the dumps, young companies are on their knees begging for investments and the local funds don’t know how to get out of the mire of the bad investments they made over the past two years. But the Americans are coming to Israel.
Benchmark Israel has three general partners: Mark Kremer, Arad Naveh, and Nachman Shelef. Naveh founded Class Data (an Israeli company sold to Cisco (Nasdaq: CSCO) in 1996, and then served as Cisco’s business development manager. Shelef managed NiceCOM, which was sold to 3Com (Nasdaq: COMS) in one of the first Israeli start-up deals. He later held various posts with 3Com, including business development manager. Kremer, who emigrated to America from Israel, and serves as the fund’s permanent Silicon Valley representative, founded and managed Nasdaq-listed Broadbase Software, which was one of the first companies in Benchmark’s portfolio.
Benchmark originally planned a $200 million fund, but high demand attracted corporate investors to the fund, including Cisco, Infineon Technologies (Nasdaq: IFX; XETRA: IFX), Rational Software (Nasdaq: RATL), and Mercury Interactive Corporation (Nasdaq: MERQ). Shelef and Naveh admit these investors are quite different from Benchmark’s regular limited partners - institutional investors, for the most part - who constitute the core investors in the Israeli fund as well.
Shelef and Naveh are two of the more well-known home-grown managers of the past decades, but they have limited venture capital experience. Their background is in business development, a corporate field comparable to venture capital, but only Naveh has actually worked in a venture capital fund. He was Cisco’s representative in its joint fund with Sequoia Capital in Israel (Sequoia’s representative in that fund, Haim Sadger, now manages Sequoia’s Israeli fund with Shmil Levy).
“Globes”: You have no real venture capital experience, yet you’re suddenly partners in one of the world’s premier firms. Aren’t you in over your heads?
Shelef: “I’ve asked myself the same question. Benchmark partners approached me following our joint work in Atrica (a semi-Israeli start-up that Shelef founded under the auspices of 3Com and in which Benchmark invested). They said the most important thing is operational experience. The things a venture capital fund actually does – accompaniment, networking, opening doors, etc. – are precisely what I did at 3Com.”
Naveh: “We think that in times like these, the financial aspects of a company’s development are less important than the operational aspects. The ability to make a contribution to a company is contingent upon business-oriented technological development and finding strategic partners. We believe that each of us can make these contributions, relying on our backgrounds as CEOs and business development managers.”
Benchmark Technology Advisors has already made two investments, in Integra5 Communications and Lycium Networks. Naveh says three more investments are in the pipeline, though he declines to offer details. He even states the fund does not comment on investments, relying on the portfolio companies to publish news, which is a refreshing approach to VC PR.
Naveh, Shelef and Kremer are planning to sit on 5-6 boards of directors. They plan to invest in only 15-18 companies, while making an average investment of $12-15 million in each. Two of the partners will operate in Israel, and Kremer will be based in the US, popping over to Israel periodically. Naveh and Shelef will pay visits to Silicon Valley to participate in Benchmark Capital board meetings.
With so many funds around, why choose Benchmark? One might have expected Naveh to join Sequoia, while Shelef would have easily fit in with Orion, in which 3Com has invested.
Naveh: “We all had opportunities to join existing funds, or establish an independent one. We sought the framework that wold give the greatest added value to companies in Israel. We decided to focus on a top-rate US fund, and we met with several. We thought Benchmark’s way of working was the most on target, both in terms of the way funds are run in general and operating in Israel in particular. Moreover, when we met them, we saw that their organizational chart for Israeli operations was almost identical to our own plans.”
Benchmark’s partners are equals. There are no assistants or junior vs. senior partners. Will you follow the same procedure [in the subsidiary]?
Shelef: “Absolutely. This was one of the main reasons we went with Benchmark.”
Is this reciprocal? If [Benchmark IV investment] Loudcloud were to hold its IPO today, would you be partners in the carry?
“Yes.”
The two men handle the venture capital industry’s traditional hush-hush climate very well. Benchmark is a member of a very exclusive club of 30% “carry” funds – i.e. general partners receive a 30% share of the partnership’s total profits. Benchmark III and the company’s subsequent funds have this carry, which means that Shelef, Naveh, and Kremer are likely to have very handsome private incomes as partners in Benchmark Capital’s US investments.
Why are there no Israeli investors in the fund, besides Mercury?
Naveh: “It wasn’t necessary. We already had to deal with the limited partners who invested less than pledged.”
Do you have rolling rights from the Income Tax Authority?
Shelef: “We have enough financial wizards at Benchmark to achieve the optimal tax solution.”
Nevertheless, you’re aware of the sad tale of the Israeli fund that operated without rolling.
Shelef: “If we create the next Juniper Networks (Nasdaq: JNPR), the tax issue will be marginal.”
Naveh: “I understand what you mean, and I can tell you that you pay for your mistakes, and anyone can make a mistake. Our investors heard the story, but they accept the additional tax in Israel as part of the investment.”
Will your returns be similar to Benchmark’s US finds?
Naveh: “Israel and Silicon Valley have similar opportunities. We believe we can bridge the US-Israel divide by exploiting Israel’s normal discount. Our early-stage investments will be at lower valuations, so the yield at realization will be higher.”
Capitalist manifesto
Benchmark Capital, as a relatively new fund among the Silicon Valley veterans, decided to shake up some of the veterans’ operating methods. The new fund established a unique approach: “Benchmark’s Way”. The unique basis of the approach results in totally capitalist Benchmark being managed according to a rather collectivist operating principle. The fund is an equal partnership of all decision-making general partners. Because funds are comprised of individualistic partners, they are mostly hierarchical - similar in structure to CPA and law firms - and clearly differentiate between senior and junior partners. The senior employees get more, while the others are given less, according to the traditional, hierarchical approach.”
Kremer explains the rationale behind Benchmark’s communist manifesto, “Benchmark’s investment philosophy is to build good companies, i.e. companies whose values last a long time. The optimization process begins with the selection of companies that have the potential to be giants. We invest our time and money in building them, so they can realize their inherent potential. Benchmark’s assistance is expressed in several areas: Formulating a strategy; personnel recruitment, especially of management teams; financial support by exploiting Benchmark’s connections in the financial system; and exploiting market connections to help market penetration. Benchmark helps in each of these areas when the companies’ CEOs call us. The moment we consider the management team as equals, we can put the whole team behind each company, enabling us to build it effectively. Each of us has our strengths and connections, and we can therefore provide stronger support for our portfolio companies when we are behind them together. There’s no competition between the partners about investments that will definitely be successful.”
How can you help small companies with only two full-time partners sitting in Herzliya?
Kremer: “We’ll make particularly major contributions to young companies, because we can provide them with all the services they need – banking, legal and accountancy – which are evaluated by us. We’ll recommend the optimal combination of services that will help them. The final decision will still be the company’s. We think the more we participate, the more attention we can give a company, working on the really important matters, and not just the business environment.”
Will two partners be able to study the proposals and business plans you’ll receive? In the end, won’t you focus on your own personal plans at the expense of new, young entrepreneurs?
“We like to have connections with entrepreneurs very much, and we therefore insist on developing them. There are ventures we’ll invest in after just reading their business plans. We had an entrepreneur in our office who sat down and planned his concept to the point where it was ripe for investment. We’ll stress the ‘entrepreneur in residence’ option. We have a great deal of contact with people in the industry, not all of whom are interested in founding a company right now. We’ll let them be entrepreneurs in residence in our fund. A great many deals come from people with whom we’ve spoken and (who then) directed suitable entrepreneurs to us. This obviously requires a lot of work on our part, including telephone calls and travel, including overseas. I’m in Israel once a month, while Arad [Naveh] and Nachman [Shelef] also visit the US once a month. We consider everyone who sends a business plan to us. Most of our time and effort will be spent in meeting entrepreneurs.”
Jealous rivals
Benchmark’s success has made it into one of the companies that annoys California’s venture capital industry the most. The youngster of the industry, in which most of the large companies have decades of activity behind them. is different from the old-timers such as Kleiner Perkins, Caufield & Byers, Mayfield Fund, Sequoia Capital, Oak Investment Partners and others, not just in age, but in its ability to penetrate peoples’ consciousness and become a byword for venture capital. Very few have managed this feat in the past.
This jealousy probably led to the rumors about the Benchmark III fund, claiming the fund would not be able to pay even a cent to investors due to heavy losses in dot.com investments. Although Benchmark III had flops such as 1-800-flowers.com and Living.com, the chance that a large fund with a relatively extensive portfolio would “lose its pants” is essentially zero. Although funds sometimes do not succeed, the funds of leading companies never lose everything, and always lose less than the others.
New rumors were later spread, claiming that partners were quitting and citing difficulties faced by Benchmark IV, which nevertheless has a 12.3% stake in 2001’s only hot new technology issue – Loudcloud (Nasdaq: LDCL). The rumors are particularly deceitful in light of the fact that the funds have been incorporated for 12 years, during which returns can be expected.
Despite the rumors, Benchmark III and IV are still waiting for their “jewels in the crown” that will allow them to match the achievements of Benchmark I and II. The malicious rumors and backbiting on the West Coast will undoubtedly continue to swirl around them until then. That’s how it is over there: The bigger the success, the more malicious the rumors.
Published by Israel's Business Arena on 9 May 2001