Tamir Fishman Venture Capital II (TASE:TFVC) (TFV) results largely reflect the Israel's venture capital industry's 2000 bumper crop. That year, venture capital funds were able to raise large amounts of money as investors sniffed the exhilarating high-tech aroma. But the funds have not had a comparable success with their investments. Most funds have had to make large write-offs, and in some cases, return the investors' money.
TFV II was founded at the height of the bubble, in March 2000. It manages $150 million in two funds: a $100 million private fund and a $50 million publicly traded fund. TFV II raised a gross $210 million in its flotation in 2000. Under TFV's policy, every dollar invested by the public fund is matched by two dollars by the private fund.
TFV II has lost NIS 63 million since it was founded, including NIS 21 million by the public fund. The heaviest losses were reported in 2003, when the public fund posted a loss of NIS 27.4 million, including NIS 14.1 million for the fourth quarter. Most of the loss was due to a NIS 7.92 million write-off for electro-optical platform maker CeLight.
TFV II has not yet an exit, but neither has any of its portfolio companies closed down either, despite numerous heavy write-offs. TFV II managing general partner Michael Elias doesn’t sound too concerned. "We believe that we have the best portfolio in Israel, and we assume that six of our portfolio companies will create high value for investors within the next nine to eighteen months," he says. TFV II has 18 targeted portfolio companies.
A eucalyptus forest
TFV II's public fund had $105 million designated for new investments as of March 31, 2004. During the second quarter, the public fund invested $5 million in Proneuron Biotechnologies, gave a $2 million bridging loan to CopperGate Communications, and made a $2.1 million follow-on investment in biotechnology company MGV Systems. TFV II still has considerable room to maneuver and make more investments. Elias says TFV II will invest the rest of its cash in existing and targeted companies, and that it will meet its original goal of 23 portfolio companies. In other words, TFV II, which will be dismantled in 2008, expects to expand its portfolio and invest in three to five more companies.
The public fund's share price has risen 12% since the beginning of the year to reflect a market cap of $28 million, well below its $191 million in shareholders equity as of March 31, 2004. "The capital market doesn’t price the cost of our investments in companies," says Elias. "In my opinion, we're an interesting investment opportunity. The main reason for our low market cap is the lack of turnover. We've been meeting with Israeli institutional investors to explain what we are."
Tamir Fishman & Co.'s first fund was Eucalyptus Ventures, which raised $55 million in March 1998. In contrast to TFV II, Eucalyptus had five exits from its 15 portfolio companies. Tamir Fishman says Eucalyptus gave its investors "a greater return than the amount the fund raised." The list of exits includes XACCT Technologies, sold to Amdocs (NYSE:DOX); Radware (Nasdaq: RDWR; TASE:RDWR) and Verint Systems (Nasdaq:VRNT); and Chromatis Networks, sold to Lucent Technologies (NYSE:LU), and Veon, sold to Royal Philips Electronics (NYSE:PHG; AEX:PHI). Eucalyptus still has stakes in six companies, the most prominent are CTI2 and MindGuard. TFV II has also invested in MindGuard.
TFV examined over 2,500 companies before making its investments, and says that 69% of the companies it invested were in the R&D stage and 19% were in the early sales stage. Currently, 37% of its portfolio companies are in the R&D stage and 38% have already posted initial revenue.
Two miserable mistakes
TFV II's investors include Clal Finance Batucha (17.3%), Bank Leumi's (TASE:LUMI) provident fund (16.2%), Tamir Fishman & Co. (10.3%), Gmul Investments (TASE:GMUL) (10%), Israel Discount Bank (TASE:DSCT) provident fund (5.1%), and Michael Elias (0.54%). The public owns the rest. The Bank Leumi provident fund apparently increased its holding in TFV II in recent months at the expense of Clal Finance Batucha, which reduced its stake by 2.7%.
TFV II's management company, TFV, uses the usual venture capital industry model, charging 2.5% of investors' commitments in management fees and a 20% success commission. Elias says TFV lowered its original management fee from 2.75% at the investors' insistence. TFV earned NIS 5.84 million in management fees in 2003, down from NIS 6.2 million in 2002. TFV's shareholders are Tamir Fishman & Co. (58%), TFV II managing general partner Shai Saul (15%), employess (15%), Gmul Investments (7%), and Aladdin Knowledge Systems (Nasdaq:ALDN; TASE:ALDN) (5%).
While mentioning TFV II's shareholders, it is impossible to overlook the Ilanot Batucha's mistake when TFV II held its IPO. Ilanot Batucha miscalculated demand for the share, and ended up with a 30% stake in TFV II, causing it heavy losses and forcing it to make a NIS 20 million write-off on its investment in 2002. Under pressure from Ilanot Batucha, which threatened to dismantle TFV II and distribute its assets, TFV agreed to acquire a third of Ilanot Batucha's stake in TFV II (9.5% of the fund) in late 2003. Ilanot Batucha and TFV signed a voting agreement in 2002, under which Ilanot Batucha receives a share of TFV's management fees.
Another mistake associated with TFV II is its prospectus, submitted in March 2000. At the time, Tamir Fishman CFO Daniel Leventhal and Tamir Fishman co-CEO Eldad Tamir were waiting for a decision by the State Prosecutor whether to indict them for filing late reports with the intention of misleading investors and for publishing a misleading report about an error in the TFV II's prospectus.
The prospectus stated that under TFV II's bylaws, a director could be replaced only four years after his appointment. Another clause stated that a general shareholders meeting could fire a director by a majority vote. In April 2001, the Israel Securities Authority investigated Leventhal, Tamir and Tamir Fishman co-CEO Danny Fishman, although it had already been decided not to indict Fishman. The investigation was launched even though TFV II had notified the TASE in September 2000 that an error had been made in the prospectus, and that the company had discovered it two months after it had been submitted.
A rosy future?
TFV II places great hopes in six targeted companies, whose exits might reduce its losses and possibly give its investors a return on their investment. What are the six?
The first is Modem-Art, which is developing a developing a baseboard processor - the brain of 3G wireless devices - which enables the wireless devices to process data at speeds of up two Mpbs. Modem-Art recently made headlines when semiconductor giant Broadcom (Nasdaq:BRCM) announced last month that it was acquiring Modem-Art's competitor Zyray Wireless for $99 million. TFV II owns 38.3% of Modem-Art, whose other investors include Genesis Partners, which probably has a similar stake. At the time of the Zyray acquisition, Modem-Art declined to comment whether Broadcom had considered acquiring it, but there probably feelers.
TFV II has two other promising portfolio companies: Allot Communications, a developer of quality-of-service (QOS) networking solutions for IP networks, and Expand Networks, a developer of WAN optimization and traffic management solutions. TFV II has invested $5.6 million in Allot to date, and has a 12.1% stake. TFV II has invested $5.35 million in Expand Networks, and owns 16.2% of the company. Both companies are reportedly profitable, with an estimated $20 million in sales each. Elias says TFV II has earned double its investment from both companies.
TFV II also believes that Proneuron is promising. Proneuron recently raised over $18 million, including $5 million from TFV II, through a long-term promissory note that will be converted to shares or returned to TFV II at terms determined by the two companies. Proneuron is developing products for treating spinal cord injuries and other disorders of the central nervous system. Teva Pharmaceutical Industries Ltd. (Nasdaq:TEVA; TASE:TEVA) is a major backer of the company. Founded in 1996, Proneuron's products are based on research by Prof. Michal Schwartz and her colleagues at the neurobiology department at the Weizmann Institute of Science. TFV II was the first fund to invest in Proneuron.
TFV II also considers its $2.2 million investment in Nova Measuring Instruments (Nasdaq:NVMI) in March 2003 as a success. TFV II owns 5.3% of Nova, now worth $2.9 million.
TFV II is also optimistic about MindGuard, which is developing an implantable device that prevents repeated brain strokes by diverting cardiac emboli to a non-hazardous location and filtering arterial blood. In late 2002, TFV II invested $3.1 million in MindGuard, at a company value of $30 million, for 11% stake in the company. Eucalyptus Ventures made an earlier investment in the company. MindGuard does not yet have any revenue, and its clinical trials are scheduled to be completed in 2005. What makes the company interesting, or rather the man who makes it interesting, is former Teva president and CEO Eli Hurvitz, who was appointed MindGuard chairman in April. Hurvitz developed Teva into a $20 billion company.
No rest for the weary
Which companies will not give TFV II's investors any pleasure? Its largest write-off to date was for CeLight, of which TFV II owns 10.2% after a $7 million investment. TFV II has written off 75% of that investment. It has also written off 61% of its $4.5 million investment in billing solutions company Teleknowledge, of which it owns 13.5%. TFV II's latest write-off was made in the first quarter of 2004, when it wrote off 42% of $2.27 million investment in Bluetooth-based solutions developer, Commil, of which it owns 10.7%.
Another large write-off was for a $4.9 million investment in BladeFusion, of which TFV II owns 50.2%. TFV II, which led BladeFusion's restructuring and is highly involved in its management, wrote off 57% of its investment in BladeFusion and 16% of its investment in its subsidiary BladeFusion Technologies.
Two other large write-offs were 34% of its $3.9 million investment in DiskSites, of which it owns 27%; and 36% of its $3 million investment in Voltaire, of which it owns 6.8%.
Playing it safe
Like many private venture capital funds, TFV II has begun talking about raising a follow-on fund, TFV III, expected to begin raising money in January 2005 and to invest in the same type of companies as TFV II and Eucalyptus: software, communications, and life sciences.
TFV plans to raise $150 million for TFV III and use the same investment method for investing mainly in early-stage companies. Elias says TFV has not yet decided whether TFV III will be a mixed private-public fund, or a wholly private one, and a decision will depend on Israel's capital market climate in early 2005.
Elias admits the public fund format has caused quite a few headaches and says it was the first fund to use the mixed private-public format. Two other funds of this kind were subsequently established in the US.
TFV prefers to play it safe and will bring in a major player in advance of the fund-raising for its third fund - former prime minister Ehud Barak. He joined Tamir Fishman & Co.'s board of advisors and became a partner in its private equity business last month. TFV declines to state what stake Barak will have in its activities, which mainly consists of venture capital, but he is expected to be very active in the capital raising for TFV III.
Barak is also currently a partner in SCP Private Equity Partners of the US and manages a consultancy that has advised Star Ventures, Swiss venture capital fund CMA, and Electronic Data Systems (NYSE:EDS). Recent reports claim that Barak also plans to to invest in real estate, and, judging by the publicity he brought to Israeli company Advanced Evacuation Systems (AES), which has developed rescue devices for skyscrapers, Barak will have very strong influence on TFV III's ability to raise money.
"Globes": Aren’t you worried about raising a new fund, when your previous fund had no exits?
Elias: "It's true that funds try sell their predecessors' successes when raising new funds, but sophisticated investors who examine our portfolio and how our first fund - Eucalyptus - did, will see that this will be a good investment."
Published by Globes [online] - www.globes.co.il - on August 9, 2004