Eurofund is typical of the many venture capital funds that arose in the US in the late 1990s, financed mostly by large corporations rather than investment or financial institutions. Many of these funds have since vanished, victims of corporate crises. As corporations refocused on their core businesses, venture capital was the first to go.
Quite a few corporations that also used to invest in Israeli venture capital stopped doing so. Examples include American International Group (NYSE:AIG) and General Electric (NYSE:GE), which had invested $50 million in Giza Venture Capital. Eurofund suffered a double blow, since many of its investors were from Europe, and European venture capital has yet to recover from the global economic crisis.
On the other hand, Eurofund succeeded in building a modest, but promising portfolio, and it is now considering when to raise a new fund. Eurofund associate Gideon Federmann says the decision from whom to raise money for the new fund is strategic. "We're a family business, and do not normally disclose strategic decisions."
Eurofund is a Federmann family business. Eurofund chairman Michael Federmann also serves as chairman and CEO of Federmann Enterprises. Eurofund's other partners and associates have operational, rather than financial, backgrounds. Eurofund managing partner Aharon Beth-Halachmi formerly served as Israel Air Force Research and Development, Ministry of Defense director general, president of TAHAL Engineering and president of Federmann Enterprises - Industries and Technology. He currently sits on the board of Elbit Systems (Nasdaq:ESLT; TASE:ESLT).
Eurofund venture partner Moshe Price served in various senior positions at Tadiran Telecommunications for 15 years, including R&D director and head of engineering department for military communications.
Eurofund managing partner Ron Hiram served in a variety of management positions at Lehman Brothers (NYSE:LEH) for 13 years, including assistant to the CEO and vice president in the investment banking division. He subsequently joined Soros Fund Management and represented California-based TeleSoft Partners in Israel, before joining Eurofund two years ago.
No investment institutions
Beth Halachmi says, "Eurofund's investors are not financial investors and we have no institutional investors. Most of our investors are strategic investors who unquestionably have a double motive, because large companies cannot maintain the high level of inventiveness for developing new products they way young companies can. Venture capital funds are the force that gives value to a company before DaimlerChrysler (NYSE; XETRA:DCX), for example, finds them. That is why when a concern like DaimlerChrysler invests in Eurofund it raises its exposure to new technologies."
Beth Halachmi says Eurofund exploits every advantage provided by its corporate investors by establishing close relations with them while examining a new investment. "We have a way of checking with the world's leading corporations in their fields when we make investment decisions. We consult with them and they more than once have influenced our investment focus in communications, aerospace technology and cars." It is no coincidence that two of Eurofund's largest investors are DaimlerChrysler and Lockheed Martin (NYSE:LMT).
Beth Halachmi agrees that this is not a coincidence, although Eurofund also considers investments in homeland security. "We don’t intend to raise a special fund for homeland security, but we'll definitely invest in companies in the sector. We believe we can create a new relationship in the sector, since Lockheed, one of our investors, is a leading US contractor for homeland security systems. Although the sector is still hazy in terms of venture capital, such as how exits will occur, to whom to sell companies and who the customers are, I presume that the situation will clear up."
Price says, "US government budgets for homeland security are allocated to three large companies, Boeing (NYSE:BA), Lockheed and Securities Industry Automation Corporation (SIAC), which manage the sector. It's obvious to us that the homeland security companies we'll invest in will not be market leaders or primary players, but subcontractors for subcontractors in the best case. On the other hand, the market is immense."
"Globes": Will it be worthwhile for funds to invest in these companies?
Price: "We believe that it's possible to make money from proprietary technologies. I assume that exits by homeland security start-ups will be made through acquisitions by large or even medium-sized companies buying smaller ones. For obvious reasons, we won't establish an entire fund for the sector, because it would be too risky."
Beth Halachmi says, "I believe that Israeli technology companies have a future in homeland security. Israel is perceived as a place with especially innovative technologies in these fields. Some of the technologies are developed by former defense establishment people, while other are developed within the defense establishment."
Everything changes
Eurofund's first fund, raised in 1994, managed $20 million. Its investors were Federmann Enterprises, DaimlerChrysler, DEG and Industrial Development Bank of Israel (TASE:INDD.P). Eurofund's two most noteworthy exits were Verisity Ltd. (Nasdaq:VRST) and Silicon Value (sold to Orckit Communications (Nasdaq:ORCT; TASE:ORCT)).
Eurofund's modest returns enabled it to raise a $52 million second fund in 2000, half of which has already been invested. The largest investor in the second fund was Deutsche Telekom (NYSE:DT; XETRA:DTEG), joined by DaimlerChrysler, Bertelsmann Multimedia, RAD Data Communications, Bezeq (TASE:BZEQ) and ECI telecom (Nasdaq:ECIL). The second fund made few investments during its first two years, but the pace has picked since early 2004. In the past few months, it invested in, or participated in the financing rounds, ColorChip, CyOptics and Passave Technologies.
Hiram says, "We believe that our cautious approach during the crisis is to our credit, because now that the situation has changed and there are opportunities, we can invest. Most of the investments were follow-on investments, and now that the market is waking up, there are excellent investment opportunities in interesting companies."
What stages do you invest in?
Hiram: "We sometimes invest in the third financing round, but we usually opt to make the first investment in a company at earlier stages. We don’t usually make pre-seed investments, mainly because our experience and success is working with companies beginning with the first round."
Price says, "We sit on the boards of directors of all our portfolio companies. In the past, we had some cases in which we had only a small holding and we didn’t sit on the companies' boards. We learned that to bring our advantages to bear we had to sit on a company's board."
Hiram adds, "We're very active in the companies, especially regarding financing rounds, relations with large potential customers, hiring executives and everything relating to bonuses. We can contribute in all of these areas."
Price says, "Today, more so than in the past, we understand that cooperation between funds and companies can help. In the past, when money flowed freely, everything was easier. Everything is much more calculated now. We are also much more calculating and tend to invest in cooperation with other funds. We've made joint investments with BRM Capital, Gemini Israel Funds, Challenge Fund - Etgar and Walden Israel."
Hiram says, "Everything's changed." He cites how Eurofund initiated the dismantling of Celvibe. "Its losses were heavy and we decided to minimize the damage to our investors. We led the liquidation process, and it was unpleasant, but at least we were able to sell some of the company's assets, including its equipment."
Published by Globes [online] - www.globes.co.il - on August 23, 2004