Vectory Investment Company CEO Reuven Regev sits in his Tel Aviv office, patiently waiting for the negotiations between Israel’s Mediagate and Ireland’s Logica to conclude. When they do, Regev might be able to claim his first exit after five years of making investments. Vectory is the fully-owned subsidiary and official venture capital arm of Europe-Israel.
What is the connection between tycoon Moti Zisser, the real estate maven of Europe-Israel, and high-tech? Like many industrialists, Zisser caught the high-tech investment bug (which also infected Eliezer Fishman, the controlling shareholder of “Globes”). According to Europe-Israel’s last quarterly financial statement, referring to the period ending last September, the group has invested $132 million in high-tech companies, mostly through Vectory. Europe-Israel also invests in high-tech through its holdings in Elbit Medical Imaging (EMITF).
Vectory reported a depreciation in value, mostly due to three investments: Mediagate, a developer of unified messaging solutions, which had been scheduled to be sold to Comverse Technology (Nasdaq: CMVT) at a much higher value; HeliOss Communications, and Vanguard Security Technologies. Europe-Israel had planned to establish a second high-tech investment arm, called Gilbridge Holdings, through a joint venture between Elbit Medical Imaging subsidiary Elscint (NYSE: ELT ) and Emanuel Gil. In the end, Elscint sold its stake in Gilbridge to Gil at a loss.
Regev, who has a B.Sc. and M.Sc. in electrical engineering, held various posts during his stint as a career army officer, and afterwards worked at Rafael (Armament Development Authority), where he headed a still- classified project, which he defines as, “a multimillion dollar land and air project.” In 1987, after completing the project, Regev decided the time had come to change professions, so he left for Stanford University to study industry and business management.
In the early 1990s, he returned to Rafael to help found RDC, the joint venture between Discount Investment Corporation, Rafael, and Elron (Nasdaq: ELRN). RDC was formed to develop civilian applications of military technologies created by Rafael. One of the companies that was launched as a result of RDC's efforts was Given Imaging (Nasdaq: GIVN). In 1993, Regev left RDC for Teuza Management and Development. Two years later, he met Moti Zisser, who controlled Europe-Israel under its previous name, “Merkazei Shlita Civil and Marine Contractors”, which until recently concentrated on real estate development.
Regev says, “My relationship with Moti Zisser is very personal. There's no board of directors or other such complications; everything is direct. Our personalities are radically different, and each of us does what he knows. I know nothing about real estate and Moti prefers that I deal with the high-tech matters. I once called him and joked that I had a plot to offer him. He immediately told me, ‘Do me a favor, you deal with what you know, and leave me to deal with what I know’.”
I have no network, but I have connections
Everything started when Zisser bought the Victoria Hotel in Amsterdam in 1993. One of the investment banks in the deal recommended to Zisser a Dutch company on the verge of bankruptcy, Sagantec, which had been founded in the early 1980s. Zisser and Teuza acquired control of Sagantec, brought its technology to Israel, and opened a marketing center in the US, but retained its Dutch headquarters.
Zisser was pleased, and decided to invest seriously in high-tech. He brought in Regev, whom he knew from Teuza, and founded Vectory in late 1995. Vectory borrowed the necessary capital from its parent company, rather than raising capital from external sources. Vectory has directly invested $20 million in eight companies to date. In 1996, Europe-Israel acquired Kaldor Holdings, and, as a result, received a listing on the Tel Aviv Stock Exchange. The company has since held a number of public issues.
Regev says, “When I was at Teuza, we invested in Nova Measuring Instruments (Nasdaq: NVMI ) at the seed stage, but because we couldn't get more than 50% of the company, we were forced to bring in Inventec as another investor. Since then, I have followed my seed investment motto, but at the magnitude of millions of dollars instead of thousands. At that level, seed can push a company forward. Zisser’s policy was similar to my own, meaning take risks, identify good companies, and buy a serious interest in them. If it succeeds, it will be impressive, and not be just another small-time plant.”
Does this mean you avoid follow-up investments, even at the cost of heavy dilution?
Regev: “Certainly not. It only means that we like to put a lot of money in seed.”
Were there plans when Vectory was founded or more recently, to raise capital from other concerns too, making it an ordinary fund?
“We tried several times to bring in other partners, but it never happened for various reasons. In one case, the potential partner came from the group’s real estate business. When I look to the future, in coordination with Moti, I think we'll work slightly differently. We'll try to bring in new partners for the controlling share of the next group we set up."
“At the end of the day, it's Moti's one-man show. He doesn't want to share the risk with others, or divide the pie too soon. I cannot specify precise numbers, but I can say he had already made the first high-tech exit during the issue, and the value of the investment reached $48 million. This value was derived from an original investment of $10 million, and we achieved it in under two years."
“In the real estate industry, people like to call Moti Zisser ‘the shark’. I'm not like him; I'm more conservative. I gently explain to entrepreneurs how the whole investment and dilution process works, and I convince them to work with me. I don’t assault them. I believe we have a rather good name in the venture capital industry.”
Besides a good name and money, you don’t have much to offer them. You work alone, so you cannot provide access to beta sites through partners you’ve networked with. Don’t entrepreneurs ask you, ‘Drop some Silicon Valley names, so we can see if you’re serious’.
“I have no official network, because I have no partners invested in my fund, but because we all – myself and other managers of Israeli venture concerns – grew up together, I'm connected to these funds and connect a company through them.”
But those are personal connections, not business ones, so aren’t they less effective?
“Vectory is both a company and a person. As for Silicon Valley, I have my academic network through my colleagues at Stanford, which is an incubator for many entrepreneurs and investors. But the bulk of the personal relationships unquestionably are with people in Israel. We naturally have relations with the investment banks that were involved in the issue of Sagantec. I still have the bids by those five banks on my shelf.”
Everything except biotechnology
Europe-Israel’s subsidiaries dealing with high-tech, whether with a business model like Vectory, or as a side-business like Elbit Medical Imaging, have invested an estimated $40 million in 13 companies to date. Vectory invested in one public company, VCON Communications (Nouveau Marche: VCON), after its IPO. The subsidiaries have investments in hardware, software, IT, communications, and medical equipment companies, but they have avoided investing in the biotechnology field.
Vectory’s first Internet investment was a $2.5 million injection into Friendly Technologies, which developed software capable of analyzing and repairing breakdowns in users’ computers. NetVision, Friendly Technologies’s first customer, has paid hundreds of thousands of dollars for the software so far. The software is now also installed in Bezeq’s ADSL access service, and in other locations in Israel and around the world. Argoquest and private individuals have also invested in the company. Vectory owns 62% of Friendly Technologies.
Friendly Technologies’s business model changed over time from software used by ISPs to locate and correct breakdowns in surfers’ computers, to a king of gatekeeper software for all multimedia information reaching the computer, mostly over broadband. However, its product is compatible with all systems, making it an effective solution for information, definitions, and software distribution to end-users.
Regev says, “When the communications market recovers, this company will be worth a lot of money. I'm relying on its CEO to keep the company in good condition until the market recovery.”
Another Internet-oriented start-up Vectory has invested in is imaginariX.com, which is based in Portland, Oregon, and has a subsidiary in the Misgav industrial park in the Galilee. “In this case, the entrepreneur from Misgav came to me with an idea. I rejected it, because he lacked the necessary management skills. Some time later, two Israeli entrepreneurs came to me, Jonathan Weiss and Jacob Ben-Meir, who live in Portland and already had one exit, having sold a semiconductor company to Mentor Graphics (Nasdaq: MENT). They had managerial skills, but lacked an idea. I added one and one, introduced each to the other, and invested $1.75 million.”
"imaginariX.com develops a virtual dressing room technology that allows on-line shoppers to use their own pictures to see how garments fit and look on their bodies. The customer provides a picture wearing a bathing suit, business suit, or birthday suit (possible, but not recommended) and the necessary measurements, and the software provides a picture of the customer in selected clothes, in the hope he or she will be so pleased they will buy them."
What will allow imaginariX.com to succeed where so many have failed? Instead of adapting itself to the Internet, the company is forcing customers to photograph and scan themselves.
“imaginariX.com has an agreement with the largest international catalogue company, Germany’s Otto Versand, and already had hundreds of thousands of dollars in sales in 2001. The beauty of Otto Versand is that it requires its 40 subsidiaries to use the same model, which guarantees a steady flow of customers for imaginariX.com. imaginariX.com receives $50,000 for an annual license, $100 for each piece of apparel entered into the system, and 10% of all sales made through it. The percentage will naturally decline as purchases increase."
“I'm not worried about adoption by end-users. If Otto Versand signs such an agreement with imaginariX.com, it's a sign that it believes people will make the effort to photograph themselves. Because of the recession, the guys at imaginariX.com took drastic pay-cuts and some of them even worked for a few months without pay, until the situation improved and they had guaranteed contracts with subsidiaries of their main customer.”
Before September 11 and after
When Regev was asked whether he had already had to write off any of his Internet investments, he thought for a moment before replying diplomatically, “There's one investment whose future is uncertain. That company is Vanguard Security Technologies, now called Postendo. The company was founded in order to send secure, encrypted e-mail. The solution was intended to solve two simultaneous problems: information leakage from the company itself, since encrypted e-mail is mostly used for external communication; and transparency, so there wouldn't be a need for confidentiality statements from people who might see the e-mail.”
What happened?
“September 11, and the market stood still.”
Regev is looking for a buyer for Vanguard’s technology, and thinks that Computer Associates (NYSE: CA), which has already bought several Israeli security companies, might be interested.
Sagantec, Vectory’s first success, still lives and breathes, even though it did not fulfill its original plan for a Wall Street IPO in 1998 at a value of $200-250 million. Vectory has injected $40 million into the company, which. developed a system that can reuse and re-implement different semiconductor layout processes, such as between 0.11 and 0.13 micron technologies.
Shortly before founding Vectory, Europe-Israel had invested $3 million in Sagantec, out of a $8-9 million financing round. Teuza also invested in the company. Regev says, “Sagantec is now balanced, but may still have to raise more capital for marketing and sales. The company already sells to all the giants: Intel, Toshiba, Motorola, and Sony, and the sales are multi-year. I hope the company will reach double-digit [million] revenue in 2002.”
Between a legal dispute and an exit
Other than the almost-exit by Mediagate, Europe-Israel’s most reported investment is unquestionably Asigra, better known as DS Data Storage. The company develops secure, off-site, data management and recovery solutions. The legal dispute between the parties, which included a lawsuit by DS Data Storage’s owners David and Sarah Farajun against Europe-Israel and Vectory for $310 million plus additional shares, was apparently resolved a few weeks ago,
Regev says, “The whole story symbolizes the childhood illnesses of Israeli high-tech investments. We initially agreed with David Farajun, an Israeli who resides in Canada, to fund his company in stages, every few quarters. At some point, he decided this was inconvenient, despite having a signed contract. He claimed, possibly with a degree of justice, that the seasonal investments prevented him from making long-term decisions. We claimed that our long-term commitments would guarantee the company’s future. In response, he claimed we could easily close the tap. Each party imposed sanctions, launching a two-year legal battle.”
In the end, each party compromised on some of their demands, and the dispute was settled.
The question about the future of Mediagate remains. Regev believes the matter will be successfully resolved. “We entered this company at a rather late stage, and therefore have only a minority holding in it, unlike our other investments. Logica, which has a value of $5-6 billion, always presents Mediagate’s solution as the basis for its own technology. Mediagate’s reported value of $50-60 million is only 1% of Logica’s, so Logica shouldn't be hurt financially by the acquisition.”
Published by Israel's Business Arena on 12 January 2002