Aviv Venture Capital (formerly Fantine Europe Funds) is about to join the slew of venture capital companies raising new funds. Aviv will raise $100 million for its second fund in the coming months. Aviv co-founder and managing partner Yoav Z. Chelouche: "The Aviv 1 fund, which managed $25 million, created a platform that enabled us to manage a larger fund. This is a well-trodden path. A first fund raises a limited amount of capital, and following its success, a larger second fund is raised."
"Investors in the new fund will be foreigners, but we are definitely interested in preserving one of Aviv's unique elements, which is Israeli institutional investors. We hope that Israeli investment institutions will invest over $20 million in the new fund."
Aviv is one of the few Israeli venture capital funds that can flaunt a list of such investors. For the sake of comparison, Gemini Israel Funds and Pitango Venture Capital recently raised new follow-on funds without approaching Israeli investment institutions.
Aviv co-founder and managing partner Dr. Amir Guttman: "We conceived the idea for raising a new fund back in the days of the bubble, but in practice most of the Aviv 1 fund was raised in the first half of 2001. That was when Nasdaq was plummeting and the intifada was raging. One thing we're proud of is that we raised most of the fund - 80% of it - from Israeli investment institutions. We raised the other 20% from American investors. The fund was raised from a network of investors we had met before we raised our first fund."
Chelouche and Guttman can already feel that they are on solid ground. Their first portfolio company in the Aviv 1 fund, Actona Technologies, was sold to Cisco Systems (Nasdaq:CSCO) two years later for $100 million.
For six years, Guttman was a member of the board of management and chief economist at Discount Investment Corporation (TASE: DISI), where he worked with its then CEO Dov Tadmor and Yoram Turbowicz. In this capacity, Guttman served on the boards of Given Imaging (Nasdaq: GIVN; TASE: GIVN), the Incubator for Entrepreneurship at the Weizmann Institute of Science, and Discount Investment's portfolio companies. He says, "There was a lot of enthusiasm when we began thinking about raising a venture capital fund, but many of the enthusiasts disappeared with the crash. Those who remained, invested in the fund. They included Israeli pension and provident funds. Alongside them we have Alony Hetz Property and Investments (TASE: ALHE), Strauss-Elite Holdings Ltd., and a large US investor whom Tadmor represents in Israel."
"Globes": It's said that Israeli investment institutions don’t know about investing in venture capital, and that they don’t transfer the money when asked, such as in the case of Jerusalem Global Ventures."
Guttman: "Obviously, the crisis was bad for everyone, but we never had any problems with investors. Their return on our performance was very good. There were hard times in 2002, and reports about confrontations between investors and fund managers definitely didn’t help anyone. But now, after our first exit and the rise in value of our portfolio companies, we can say that we have an excellent, healthy relationship."
"We were enthusiastic about Actona"
Tadmor brokered the establishment of Aviv when he introduced Guttman and Chelouche. Tadmor knew Guttman from their time together at Discount Investment, and Chelouoche from Scitex (Nasdaq: SCIX; TASE: SCIX). Tadmor now serves as chairman of Aviv.
Chelouche: "Tadmor was involved in the establishment of Gemini's first fund and in the founding and fostering of companies like Given Imaging, NICE Systems (Nasdaq: NICE; TASE: NICE), Orbotech (Nasdaq: ORBK), Gilat Satellite Networks (Nasdaq: GILTF; TASE: GILTF), Rafael (Israel Armament Development Authority Ltd.) affiliate Rafael Development Corporation Ltd. (RDC). He got us going with his connections, financial support and extensive know-how."
Aviv began operating during of the hardest periods in the history of Israeli venture capital. Guttman reminisces, "We started working in a harsh climate. We made our first investment in April 2002, nine months after closing our first fund. We looked at 100 companies before deciding who to invest in. Those times should be remembered. Other funds were not making investments, all companies needed money, and everyone was asking us for money, after reading in the papers that we had completed raising a fund. It was a tough task, screening the deal flow and making a decision. Actona was our first investment, and I must say that it wasn’t the kind of company we were looking for, but we were immediately enthusiastic about it. It was different from all the other companies we saw at that time."
What kind of companies did you want to invest in?
Guttman: "We built our investment strategy while we were looking at large numbers of companies. That helped us order our thoughts."
Chelouche: "The bursting of the bubble was more than a financial event. We saw deep developments in target industries that required watching. Two-thirds of investments in Israeli technology companies were in semiconductors and telecommunications, which were the severest hit. That's why we realized that we had to decide precisely which stages and which industries we wanted to invest in."
And they were?
Chelouche: "We invest in companies in the transformation stage, in other words, companies that have already undergone feasibility study, have a product, and maybe even a customer interested in the product; companies that have moved from the R&D stage to a market orientation. This will usually be the first or second financing round, since, we define ourselves as neither seed nor late-stage investors. Financial considerations are not the only reasons for this. Amir comes from the world of investments and advising companies, and I have considerable operational experience from Scitex. We want to use our accumulated experience in our portfolio companies. That's what we know how to do: bring companies to their markets, understand their values, and bring them our added value."
Looking for special companies
Guttman: "We specialize in one of the most critical stages of Israeli companies. We know of few Israeli companies that failed because their technology didn’t work. Israeli companies have trouble formulating strategies, appointing suitable CEOs, signing good contracts, and creating a management team. We know how to help them, and when we need help in a particular area, we hire consultants."
What sectors do you invest in?
Chelouche: "We formulated our target sectors the same way, by looking at many companies. One of the things we realized quickly was that the medical devices market was about to grow massively. We therefore decided that half of our portfolio would be companies in this area. Four of our nine portfolio companies make medical devices."
Guttman stresses that Aviv's investment strategy was based on a study of companies and their markets. "The decision about sectors and stages was made in an educated way, on the basis of an analysis that tried to build a logical model that would take into account the fund's size, the size of investment in each company, the company's value, and the potential exit. Otherwise, the fund has no right to exist. We're here to create value for the investors' money."
Chelouche says, "The second sector we decided to focus on was special applications; to invest in entrepreneurs that fall between the cracks because they operate in unconventional categories. For example, we invested in FriCSo Control Solutions Ltd., which develops technologies for near-frictionless motion between moving parts, thereby greatly reducing friction costs and wear-and-tear of engines. This is a multi-billion dollar market, and there is amazing interest in the company's technology from car makers, for instance. Within six months, FriCSo went from the laboratory to trials with large companies. We believe that even though this isn’t a conventional sector, there is potential of a huge return on the investment."
Chelouche and Guttman say that Aviv also invests in Israeli venture capital's traditional sectors, but on a small scale. Chelouche says, "We invest in communications and software, albeit in smaller amounts than other funds. There are also sectors we won’t invest in at all. For example, we felt that we had no chance of creating value from wireless applications companies. Our analysis indicated that there was too much investment in this sector on one hand, while on the other, the market, i.e. wireless operators, was troubled. We saw no way of obtaining good returns on an investment.
"Another sector we avoid is semiconductors. We want to bring a company to an exit on thin budgets. For example, Actona raised $23 million and was sold for $100 million. In general, we want companies to reach exit with a total investment of under $20 million."
Aviv has invested in nine companies to date. Chelouche and Guttman say that they will make only two more initial investments from the Aviv 1 fund. The rest of the money will be allocated for supporting portfolio companies until exit.
Published by Globes [online], Israel business news - www.globes.co.il - on March 15, 2005