IGP fills Israel's growth equity vacuum

Moshe Lichtman

Moshe Lichtman tells "Globes" about his fund's efforts to help Israeli start-ups grow into large companies.

Former Microsoft executive and key Israeli high-tech player Moshe Lichtman recently teamed with former NICE Systems Ltd. (Nasdaq: NICE; TASE: NICE) CEO and Ministry of Finance director general Haim Shani to found an investment fund designed to help adolescent technology companies, with at least $10 million in sales, to grow. And thus Israel Growth Partners (IGP), which raised $250 million in early 2014, was born. The company recently made its second investment.

Moshe Lichtman is a very curious and extremely optimistic man. It is these characteristics that caused him, in the early 1990s, to pass on an investment banking position in New York and instead to join, for a much lower salary, a small, little known company in Seattle by the name of Microsoft, where Lichtman went on to spend nearly two decades as a senior executive.

What is growth equity?

The view from IGP’s window, in the heart of the Kfar Hayarok youth village, is far from your average view from an office tower window. Outside the window, you can see eucalyptus trees and a muddy dirt path, and if you step outside, you’ll find spotted cows grazing peacefully. Not something that’s easy to find on an average weekday in an urban high-tech environment.

In the Israeli high-tech scene today, says Lichtman, there are nearly 7,000 tech companies, most of them private, that concentrate a great deal of investment and entrepreneurial activity. In 2013, for example, more than a thousand companies were funded in one way or another by venture capital firms or investors. “In this respect, Israel is remarkably similar to Silicon Valley,” says Lichtman. “Like in Silicon Valley, there are many investors here who are willing to risk their personal, or their funds’ capital, and there is a very high tolerance for failure - which is something that cannot be said about most of the world, where failure can be a stain for life, and is sometimes considered an offense, and can even sometimes lead to a situation where an investor must repay debts for the rest of his life.”

So far, it all sounds great. So what’s the difference between us and the Valley?

“In the companies’ growth stages. When a company reaches tens of millions of dollars in sales, it already has customers, and now it just needs to grow its business and become an industry leader. Here there is a dramatic gap between the typical Israeli start-up and its counterpart in Silicon Valley or on the East Coast.”

The difference, Lichtman explains, is the existence of an established model called “growth equity,” which has existed in the US for more than fifteen years. Growth equity funds specialize in this particular stage of a company’s life-cycle, and “provide a much bigger check than the typical venture capital check, with the goal of speeding the company’s growth.”

In Israel, the playing field is practically empty. “This is why many of these companies were at a notable disadvantage when compared with similar companies, and similar-quality teams, and this would lead to many companies having no other choice, and they would sell. And, in fact, in Israel there are a great many exits that contribute to the economy in one way or another.”

That’s also good, no?

“There are a lot of people - including Yossi Vardi, who is both a partner in a great many investments, and a good friend - who claim that it suits the genius of the Israeli entrepreneur, and that it’s good enough. There is some truth in this, but even in Israel the law of large numbers must be at work. Out of nearly 7,000 technology companies in Israel, there must be a certain percentage that will grow to be the next Check Point, Amdocs, or NICE Systems. Even if the typical Israeli impatience and the urge to go tell the gang does exist. We don’t expect every technology company that reaches $10 million in sales to have as successful an IPO as Mobileye did, but something like this must happen.”

And this is the space that you and Haim fill with IGP?

“This is how we reached the conclusion that we need to fill this gap. This is where our backgrounds come into play, as both Haim and I have grown very big companies. We deeply believe that the potential of a company is not best realized through a quick sale, and our experience includes taking small businesses and transforming them into big companies that are leaders in their fields. We combine this experience with the growth equity model, which we did not invent ourselves.”

"Haim and I were in the same room"

Lichtman met Shani in the early 2000s, when Shani became responsible for the management of NICE Systems and sought to strengthen his board of directors with a leading software figure. Lichtman, who was still at Microsoft at the time, was on sabbatical and Shani came to him. “In the end, I couldn’t commit to the amount of time required, but we stayed in touch.”

The joint venture began in 2012, “In an informal manner. Haim and I were in the same room, just like a start-up,” laughs Lichtman. Both he and his partner were accustomed to huge offices and large staffs. “In the summer of 2012, when we told this story, we still had to persuade quite a few people that this holds water.”

How did you know that the entrepreneurs themselves wanted to grow companies, and weren’t just looking for a quick exit?

“Part of our research process was to meet with more than 100 companies, in order to see whether they have the potential to lead in their fields, and whether they even want to. After a few meetings, we understood that there are many like this, most of them companies founded by entrepreneurs for whom this is not their first venture, but who are serial entrepreneurs.”

In the summer of 2012, they set out to raise money. “The first to take up the gauntlet was Bank Leumi,” Lichtman recalls. “[Leumi Chairman] Daniel Tsiddon and [CEO] Rakefet Russak-Aminoach understood that banks today need a growth source, as the banking model is facing challenges, and right under their noses is an amazing industry that contributes 40-50% of the growth in the economy.” Through Leumi Partners, managed by Yaron Bloch, Bank Leumi (TASE: LUMI) became a strategic partner and an anchor investor, and committed to an investment of $70 million. “Immediately after [Leumi] came Clal, who rolled up their sleeves amazingly, and also committed to a $70 million investment.”

The financial institutions join the party

After Leumi Partners and Clal, it was easy. “Most of the money came from Israeli financial institutions, which claimed many times that they are remaining on the fence, and won’t participate in the high-tech party,” says Lichtman. “More banks joined the ranks of the investors, and pension, and other financial institutions, and also some private high-tech investors, as well as other private investors.”

Lichtman is somewhat vague regarding the structure of the fund, and says only that the intention was “to build an investor-friendly model. Before we see the fruits of our labor, first our investors need to see a certain return. Therefore, the model is based on a budget, and not on management fees.”

What advantage do you have over an American private equity fund that offers connections and management knowledge?

“American foreign private equity funds came to Israel opportunistically, to pick a flower here and a flower there. It’s true that they provide proximity to the American market and connections, but Haim and I are not ashamed of our network of connections in the US, Asia, and Europe.”

Why are they opportunistic? You are also not an altruistic fund. Everyone is looking for a return for investors.

“Most of them don’t have an office in Israel, some have scouts, who seek out opportunities. Some of the scouts are my friends, so I know from personal sources that they are very frustrated - they bring opportunities and it is easier for the fund in Palo Alto or New York to invest in an American company. And if it does invest, they complain about the quarterly meetings they have to attend in Israel."

“We live here, in Kfar Hayarok, and we will hold weekly meetings with the companies. There is no comparing our ability to help a company with its ongoing needs with that of an American fund.”

IGP’s portfolio is thin, for now - two investments, the first of which was $25 million in an established Israeli e-commerce company that sells diamonds and bridal jewelry, R2Net, number two in its field in the US, with sales totaling $80 million a year. The investment was made according to a company value of $100 million. The second investment was $20 million in a company called Panaya, which operates in the field of organizational software, and has annual sales totaling $30 million - and that’s all Lichtman will say for now, as the formal investment announcement has not yet been made.

”From analog to digital technology”

R2Net, the first company in which Moshe Lichtman and Haim Shani’s IGP fund invested, is a diamond and bridal jewelry e-commerce retailer, the second in size in the US, which sells under the brand James Allen. The shop sells jewelry for occasions such as engagements, weddings, new babies, etc. Oded Edelman, the primary founder, was born to a family in the diamond business, and even worked in the field. He later founded an Internet company (Daronet), and then combined the tradition with the new world and established R2Net, which has headquarters in New York, and an R&D center in Herzliya, Israel.

In addition to the bridal jewelry field, the company provides e-commerce services to Sears, and it also has a partnership with the largest jewelry retailer in the world, Signet, which has 3,500 stores.

R2Net began its growth steps prior to Lichtman and Shani’s investment. It acquired two companies: Segoma, which has developed unique diamond imaging technology, and Brio Animation Studio, which specializes in augmented reality.

They’re fairly big and well placed. Why do they need you?

“They are number two and we all want them to become number one,” says Lichtman. “Also, the rate of buying jewelry of this sort online is still in the single digits. It is more natural for people to go to a store, to see how the ring looks on the hand, and for the salesperson to show them the diamond certificate.

“In order to get to the point where this field leverages the change in the world brought about by Generation Y, we have to educate the market. But educating a market is an expensive thing, if you aren’t careful to do it efficiently. Now is the time to do this, because Generation Y, which is already accustomed to buying online, is ready to do this also when talking about their engagement and wedding rings. If the company makes the right steps, it will be on the cutting edge of this trend.”

How do you do this?

“Some of the methods that this company developed (and for which the acquisitions were made) make the online purchasing process as close as possible to shopping in a traditional store. There is, for example, an app that makes it possible to see the ring being worn on the finger on a smartphone, using augmented reality.”

But Lichtman has another hope for R2Net, one that makes his eyes sparkle as though the industry’s brightest diamond were reflected in his eyes: to control the entire diamond “food chain.” “This is an opportunity the surface of which has only just been scratched, but which has significant potential to change the entire traditional industry.”

The world of diamonds is based on a few giant mining companies, which sell the rough diamonds for production (cutting and polishing). Next, there are wholesalers who distribute the diamonds to the retailers. Right now, the R2Net system connects the small distributors, who are based on 47th Street in New York City, and most of whom are Jewish, with the stores connected to them all across the US. “You walk into a store in Chicago, Illinois, and they don’t have the diamond you wanted. The salesperson pulls out an iPad, and using the R2Net app, he shows you diamonds, which you can zoom in on, and rotate, and examine, and which he can order. And if that’s not enough, he doesn’t travel to New York anymore - he just trusts the system.”

One day, Lictman hopes, R2Net will blossom along the whole length of the diamond food chain. “I call it turning an analog industry into a digital one, and we are talking about the most traditional industry there is, with handshakes, and longstanding traditions.”

Published by Globes [online], Israel business news - www.globes-online.com - on January 14, 2015

© Copyright of Globes Publisher Itonut (1983) Ltd. 2015

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