At this point, Walden Israel won’t manage to recruit a third, $150 million fund. Moreover, the fund's revised goal of $120 million probably won’t be reached, either. Walden Israel III has so far raised $85 million and is expected to close at the end of 2001. Is the fund a failure?
Eyal Kaplan: “It depends on which part of the glass you’re looking at. We were at the offices of one of our investors recently - a fund of funds, one of the biggest in the world. People there told us that the number of funds that they saw in the first half of 2001 went from 1,300 to 500. Of that 500, the companies that managed to raise money set up funds that were on average about 40% of the size of their previous funds. Already, Walden Israel III is much bigger than its previous fund.”
This answer reflects the opinion of this reporter about every round of financing that has been carried out recently, whether for a fund or for a company: As far as I’m concerned, every round that ends with cash or commitments in hand is a success. And if the goal —or the valuation, in the case of a startup— wasn’t reached, it doesn’t matter. They are thankful for whatever they get, and tell the investors to fulfill their commitments, if possible.
Walden Israel, one of the earlier investment funds to arrive on the scene, was founded as an affiliated fund of Walden International. The first fund, worth $33 million, was, like Walden International, the largest investor in East Asia, based on the global philosophy of the founders of the U.S.-based Walden.
Kaplan, along with Roni Hefetz, Walden Israel’s managing partners, emphasizes Walden’s international connections, insisting that the company in question is the world’s largest, “pure,” early-stage-oriented entity(Hefetz clarifies: “As opposed to Apex or Adwant, which are also engaged in other aspects of the market, such as LBO, private equity, and MBO.”).
At the same time, Kaplan and Hefetz make it clear that the intense involvement of the U.S. fund in Walden Israel ceased with the establishment of the second fund—Batzir ’98 ($60 million). Kaplan: “In the first fund, we ran with the experience of Walden International and we learned a lot from them, but the partners in the U.S. had veto power on the execution of investments. The lesson was to set up a second fund, which is now completely independent.”
Incidentally, in return for the use of the Walden name, the partners in the Israeli fund are splitting their carry with the U.S. and the Far East partners. The partners are also receiving part of the carry of the foreign funds.
Regarding the strategic charter, Hefetz makes it clear that Walden has always believed in small funds. “We’re not like those funds that think that they can make twenty new investments a year. For that reason, we limited the size of the second fund, and we were among the first in Israel to benefit from over-demand and (respond by) rejecting it.” (Fate’s little joke: Walden Israel II received demand totaling $87 million—an over-demand of 45%. That is more or less the same amount of liabilities that Walden Israel III has now, amounting to a 42% deficit.
The Importance of Institutions
Walden Israel’s investors are, for the most part, U.S-based, and are mainly large-scale institutions such as Varizon’s pension fund or Goldman Sachs Asset Management. Particularly conspicuous among the investors is TIAA-CREF, perhaps the largest pension fund in the world, which manages $330 billion for the retirement plans of many college professors in the U.S.
Globes: Why are the institutional investors so important?
Hefetz: “It’s important that your investors make long-term investments, and I’m not talking about organizations or private individuals that tomorrow can record big losses or lose value on the stock exchange. In this age of the absence of visibility, you can trust (institutional investors) not to renege on their investment.”
A Round-heavy Portfolio
In Walden Israel’s portfolio, one can find minor successes such as Abirnet and Radcom, as well as Terayon, the first fund’s outstanding exit. That’s not many exits for a fund that began with Yozma’s surplus funds in 1993, and even the claim that Yozma's investments were in the early rounds does not really explain the relative paucity of exits. On the other hand, when it comes to companies that have yet to go public, Walden Israel has one of the most impressive portfolios in Israel.
Four of Walden’s portfolio companies are in the first decile of rounds carried out in the past year: Actelis, which raised 45 million at $90 million before money; Schema, which raised $27.5 million at $87.5 million after money; Lynx, which raised $35 million at $305 million after money; and Sanctum, which raised $30 million in a down round at $56 million after money.
These numbers, like those of many other portfolio companies, have given most of Walden’s companies some breathing room. Five of those companies have enough money to last two years. Besides the companies already mentioned, the outstanding ones in Walden’s small portfolio (just 20 companies are held by all three funds) include companies such as Allot Communications, Ltd., Mercado Software, Ltd., Narus, Inc., D-Pharm, and Enigma Information Systems, Ltd.
A Success Called Enigma
This column doesn’t often go off on a tangent, but every time I run into Enigma (a company in which the publicly traded VC fund Mofet invests), I’m surprised anew. This time, perhaps it’s time to examine it more closely.
Mofet’s Elie Barr was the first person who whispered into my ears that the company was a hit. Eyal Kaplan agreed to tell me more about Yoni Yaron’s company.
Enigma engages in that frightening gray territory called the “support chain”, or post-sale for those who—like this reporter—are always a generation late when it comes to buzzwords. In other words, Enigma’s products facilitate communications between customers and manufacturers, and do not get involved with the supply chain, which mainly involves the relationship between the supplier and the manufacturer.
So briefly, Enigma’s products transform instruction manuals for airplane technicians into a web application, and facilitate the link between those technicians and GE (the manufacturer of the jet engine), Pratt and Whitney, or Rolls Royce, which are all clients of Enigma. The technicians depend on Enigma for relevant manufacturer updates, as well as the ordering of spare parts.
Enigma attempts to penetrate vertical markets, such as the jet engine market or the communications products market. In the latter market, Enigma helps companies such as Ericcson, Nokia, and Motorola, to produce giant switches that they supply to communications operators. In the jet engine market, Enigma has a firm foothold that includes many contracts with airlines whose standards exceed those of the manufacturer.
Enigma, which employs a staff of 190, sold $9 million worth of products in 1999 and $20 million in 2000; it is expected to sell $30 million in 2001. The slowdown in growth can be blamed mainly on the events of September 11th. At the same time, for the long term it could be postulated that those events actually added to Enigma’s business. The company reached the operational break-even point two quarters ago. Kaplan believes that even if Enigma does not grow significantly in terms of the number of its employees, and only carries out the deals that have already been made, it will have sales of $100 million in 2004.
Enigma is not short of money, after completing two big rounds of financing in the past two years, which allowed it to acquire its largest competitor in the content management market. Enigma’s IPO was supposed to be conducted this quarter, but the signatories decided to wait until the storm blows over. If only there were a few more private companies in Israel like Enigma, which went from the commitment stage to the execution stage, proving that when a company is built properly, an IPO is just one more way to diversify its capital structure. In the meantime, Enigma is getting along just fine without an IPO.
Enigma will postpone giving its investors an exit; right now it is busy gaining respect.
Published by Israel's Business Arena on 26 November 2001