Star Ventures' website states that since being founded in 1992, it has invested in 162 companies, 52 of which have had exits: whether IPOs, acquisitions, or mergers. Any fund in the world would be proud of this record, which unquestionably makes Star Ventures one of Israel's leading venture capital firms.
Star Ventures manages $1 billion in 14 funds. It is run like a secret society. D&B Israel ranks it number one in terms of money managed and number of portfolio companies, which include public companies like Alvarion (Nasdaq:ALVR; TASE:ALVR) and Radcom (Nasdaq:RDCM), mature start-ups like BroadLight, Chiaro Networks, EZchip Technologies, Finjan Software and Sheer Networks, and BioLineRX.
Star Ventures might be compared with the Himalayan kingdom of Bhutan, a closed country, run by an autocrat, and with little outside contact. Dr. Meir Barel's kingdom is Star Ventures, and he tends to be closed-mouthed. The company does not issue press releases, does not usually respond to reports about its portfolio or affiliated companies, and none of its partners holds interviews, except in very special cases, Barel himself. Barel has spoke with the foreign media, mostly about Alvarion, where he serves as vice chairman.
Barel founded Star Ventures in 1992, after serving as a director in TechnoVenture Management of Germany. Before that, he was involved in a number of Israeli and German computer and automation companies. Barel, married and a father of three, has an MA and Ph.D. Electrical Engineering from the Department of Data Communication at the Technical University in Aachen, Germany. His colleagues say he speaks with a hint of a German accent, acquired during his studies. He spends a lot of time abroad, and not only for work. Associates say he has a seaside home in Sardinia, as well as homes in Israel and Germany.
Snow White and the Seven Dwarfs
Barel founded Star Ventures as a multinational company operating in the US, Europe and Israel. It has invested in telecommunications, enterprise software, wireless technology and biotechnology companies at every stage of their development, except for very early stage start-ups.
Although Star Ventures does not talk with the Israeli media, it has close links with the local venture capital industry, and frequently makes joint investments with Pitango Venture Capital, Evergreen Partners, Carmel Ventures and other funds. Venture capitalists agree that Barel is a hard man, both in his relations with Star Ventures' other partners and with his colleagues at other venture capital funds.
Israeli venture capitalists call Star Ventures "Snow White and the Seven Dwarfs", comparing Barel to Snow White, who runs the company autocratically and with a strong hand; the seven dwarfs are Star Ventures' partners, who are beholden to him and unable to transact any deal without his authorization. Star Ventures has an investment committee to examine deal flow and potential companies, and to decide in which to invest, as is the norm in the industry.
At Star Ventures, the junior partners seek companies worthy of investment, investigate them, and then Star Ventures principal managing partner Barel decides whether to make an investment or not. A top industry sources says, "It's amazing. I remember at least one case when a partner worked on a deal for months on a really interesting company. Then he went to Meir, who rolled his eyes and said, 'No, that's not interesting.' Months of work was wiped out in a moment."
The source went on to say that even if Barel was knowledgeable about many fields, he could not recommend a company structure in which one man made all the investment decisions. "After all, no one understands everything. That's what the investment committee is for. It usually comprises experts in different fields and markets, who come from outside the fund team and who can examine a subject in depth. The investment committee also watches over the other partners."
The second reason for the "Snow White" appellation is the rather ironic title of "partner" at Star Ventures. Barel distributes exit proceeds in a way that gives him the lion's share, and only tiny percentages, if any, to the other partners.
Star Ventures' choice of partners is another cause of astonishment in the industry. In 2001, Ran Shahor, an associate of former prime minister Ehud Barak, joined Star Ventures as a managing partner. It is unclear whether there is any connection to the fact that Barel's nephew is married to Barak's daughter, Michal. Another link with Barak is through Barak's consultancy firm, which provides global services to Star Ventures.
Shahor, without any experience in venture capital or high-tech, did undergo the industry's usual basic training: a year or two as venture partner, before promotion to junior partner. He was immediately appointed managing partner, and sits on the boards of EZchip Edge Medical Devices, Celletra and Wavion Networks.
Another partner, whose professional credentials are undisputed, is Star Ventures investment manager Anthony T. Maher. He is proof of Star Ventures' close ties with Siemens (NYSE:SI; XETRA:SIE) and its venture capital arm Siemens Venture Capital, the sole investor in Star Ventures' tenth fund. Maher had been a Siemens executive since 1978, before joining Star Ventures in 2002, when it raised its tenth fund. Barel has widespread and close ties with top Siemens executives.
Maher is still with Star Ventures, but another partner Rolf Nagel, who managed the company's German office, has vanished from its website. A top venture capitalist said, "It's rather like Argentina. He simply disappeared from the company's website one day, with no explanation or announcement. It's as if he was never there."
Before joining Star Ventures, Nagel was an executive at Deutsche Bank's (NYSE:DB; XETRA: DBKG; LSE:DBK) investment arm.
More junior partners work at Star Ventures for limited periods: former in-house entrepreneur who is now Savantis Systems CEO Gil Hecht and works with Giza Venture Capital; and with in-house entrepreneur Eyal Maor, who previously founded Excedo Technologies (formerly ModusNuvo), which Star Ventures funded, but later closed after three years and one financing round.
Fat checks
Nevertheless, Star Ventures has a track record worth relating. The huge exit that consolidated its status as a leader in Israeli venture capital industry was CIENA Corporation (Nasdaq:CIEN), founded by David Huber. Star Invested in CIENA's second and third financing rounds in 1994, alongside Sevin Rosen Funds and Charles River Ventures. In 1997, CIENA raised $125 million on Nasdaq at $2.1 billion company value, still the highest ever company value for an IPO.
Star Ventures invested $3.2 million in CIENA and earned $264 million: a multiple of 82.5 and an astounding 569% internal rate of return (IRR). The critics say that while the IRR was phenomenal, Sevin Rosen, not Star Ventures, discovered CIENA, and Star Ventures only jumped on the bandwagon. It is doubtful if Star Ventures' investors cared, after receiving fat checks.
The exit made Star Ventures, and the link with Sevin Rosen has remained close ever since. Star Ventures maintains a luxurious suite at Sevin Rosen's Dallas headquarters. Not only does Sevin Rosen give Star Ventures office space, it tends to bring Star Ventures in on financing rounds it is leading. Quite a few Israeli venture capital funds would be happy to share in Sevin Rosen's deal flow.
The CIENA success left another mark on Star Ventures. Star Ventures managing partner Jeanne Bayless is Huber's daughter. She joined Star Ventures in 2002, after previously working at Intel Capital and senior positions in start-ups.
Fast exits
Unlike other Israeli venture capital funds, Star Ventures is usually in no rush to sell its holdings after portfolio companies hold IPOs or are acquired by public companies. Israeli venture capital funds do not like dealing with stocks, and prefer selling their stakes in public companies. Star Ventures' strategy has usually paid off, except in a few cases when it did not sell at the most profitable moment. That was the case with Orckit Communications (Nasdaq:ORCT; TASE:ORCT) and with Precise Software Solutions. Star Ventures invested $4.2 million in the company and earned $66.3 million, a multiple of 15.8 and an IRR of 115%.
But when Star Ventures sells, it usually makes a killing. For example, in March 2004, it sold $54.7 million worth of Alvarion shares, reducing its stake from 16% to 9%. A month earlier, Barel sold his personal stake in the company for $3 million.
That was also the case with CIENA. Star Ventures sold a third of its stake during CIENA's secondary issue, held five months after the first. Star Ventures sold $100 million worth of shares, keeping a stake then worth $30 million.
Another unusual feature is that Barel has made personal investments in another venture capital fund, Carmel Ventures, and sits on its investment committee. Industry sources can tell you that Barel's daughter, Yasmin, worked as an intern at Carmel Venture between the end of her IDF service and start of university studies. Her father asked for a favor, and no one at Carmel Ventures refused him.
An American preference
Star Ventures take pride in managing a rich interaction between its investors and portfolio companies. The best example is the merger between two portfolio companies, Floware and BreezeCOM, to create Alvarion in 2001. Another example was the sale of Onex Communications to Transwitch (Nasdaq:TXCC) for $46 million in cash and shares. Transwitch had been a portfolio company of Star Ventures, which earned $10 million on the deal.
Other examples are the investments in Tecnomatix Technologies (Nasdaq:TCNO); Imedia; and Decalog NV(sold to SUNgard Data Systems (NYSE:SNS)). All three companies were also associated with Carmel Ventures and its general partner, Shlomo Dovrat. Star Ventures and Carmel Ventures also made joint investments in Electronics for Imaging (Nasdaq:EFII); Oshap Technologies (sold to Terayon Communications Systems (Nasdaq:TERN) for $100 million); and Omnia Communications (sold to CIENA).
Star Ventures operates in Israel, Germany and the US. Most of its investments are not in Israeli companies, and are mainly carried out jointly with Sevin Rosen, as well as other US venture capital funds. Venture capital industry sources who work with Barel say he does not automatically favor Israeli companies, preferring to invest in American ones. "He says Israeli entrepreneurs are disorganized. They found messy companies that are too small."
Star Ventures and Pitango once jointly established an group that was to invest in very early stage companies. No one in the industry can remember any seed-stage investment by this group. Benny Hanigal, the partner Star Ventures appointed to manage seed-stage investments left to join Sequoia Capital 18 months ago. The Star Ventures seed fund made a few investments and had one exit.
In its effort to find new companies, Star Ventures takes care to keep an in-house entrepreneur to develop companies, except that only a few companies were founded this way. One of the hot stories in the Israeli venture capital industry was that of an entrepreneur who spend a few months at Star Ventures, and was encouraged to develop a company and products. But then Star Ventures decided not to invest in the company when the moment came to participate in the first financing round.
Sources close to the deal relate that the entrepreneur was stunned. When someone is appointed in-house entrepreneur, the fund participates in every stage of company and product development, so there are usually no surprises and no reason for jumping ship. But Star Ventures changed its mind at the last minute, and severed all contact. The entrepreneur and his company obtained financing from another Israeli venture capital fund.
Published by Globes [online] - www.globes.co.il - on November 4, 2004