Venturing Into Israeli Fiber to the Home

The pending IPO of Passave is one hot spot in tech investment in Israel.
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Israel has been called a fertile ground for growing tech companies -- a technology hot spot where tech giants seek strategic investments.

Recent data show, however, that the amount of capital raised by Israeli high-tech companies from foreign and local investors in 2005 declined compared with the $1.46 billion raised in 2004. That may be turning around this year.

TheStreet.com

spoke to a couple of technology heavy-hitters about their appetite for Israeli-made technology. They claim the long-term trend for investment remains positive.

Intel

(INTC) - Get Report

is probably the biggest investor in Israeli tech companies. Through its investment arm, Intel Capital, located near Tel Aviv, the chipmaker has made more than 50 investments in Israeli companies since 1997, with roughly 10 exits.

"We are a venture capital fund with a twist," says Shlomo Caine, director of Intel Capital Israel. "We look for equity investments in companies where we can find a strong strategic link to what Intel is doing, on the one hand, and where we see a good financial return on the other hand."

Intel Capital usually takes minority stakes in companies of up to 20%, and aims for technologies and services that will fit into its road map or complement existing products.

"Software applications that run best on our microprocessors would be complementary," Caine says. "We invest in successful companies, but ones that we could also have a mutual relationship with. ...

Wisair

, for instance, develops a chipset for ultra wide-band communications, in which we invested and helped drive their communication method to become a standard."

Exent

, the firm's latest investment, develops online gaming. "We did it because their application is designed to run best on Intel computers, desktops, laptops," Caine says. "We think online gaming is a very big deal."

According to Caine, the next big thing coming from Israel is the pending IPO of

Passave

(which means wide band in Hebrew).

The semiconductor company, which develops a fiber-to-the-home (FTTH) solution, announced that it plans to sell 4.7 million common shares for $15 to $17 apiece, according to Caine. He estimates the IPO will take place sometime in the first quarter. The company originally postponed the IPO in November due to "market conditions."

Passave's technology enables service providers to offer "triple play" services -- integrated data, video and voice -- over

passive optical networks. Its major sales are currently in Japan, though the company will probably try to expand to the U.S. market, where telecom carriers have yet to adopt FTTH technologies.

Laying down fiber infrastructure can be expensive for carriers, and the transition into triple play is an enormous expense no matter which technology is used. Passave says its products will lower those costs by interoperability and by packing more features into the components themselves.

Passave received some of its seed funding from Walden Israel, a venture capital outfit backed by various corporate investors, including

Verizon

(VZ) - Get Report

, which invested $2.5 million in the company at a $15 million valuation back in 2002.

According to Walden, the only other company in the U.S. that develops a FTTH technology is

Ikanos

(IKAN)

, a semiconductor company that integrates fiber with existing copper lines. Ikanos began trading publicly in September 2005 at $12 a share, and has since seen its share price double.

Intel also made a few acquisitions in Israel, the latest being the video-processing chipmaker

Oplus

. "The Oplus acquisition was part of Intel's expansion into the consumer electronics and infotainment market," Caine says. "The Oplus product provides an enhanced viewing experience over our Viiv platform, with a very strong processing power; it fits nicely into our product line."

Sabine Zindera, a VP in communications at

Siemens'

(SI)

investment fund, Siemens Venture Capital, says that roughly 20% of the 700 million-euro fund portfolio is composed of Israeli companies.

"Israel has, besides the U.S., one of the strongest entrepreneurial cultures in the world," Zindera says. "It is ranked as one of the hot spots of innovation."

To date, Siemens invested in 10 Israeli start-ups, and is "actively looking for interesting deals that fall into our investment focus. Our plan is to complete at least two to three deals within the next 12 months," Zindera said. "The first one will be announced in the next two weeks."

Siemens also searched for companies in broadband access, voice-over-Internet protocol, optical technology, mobile device technology, imaging software and nanotechnology.

Siemens previously invested in the wireless broadband company

Alvarion

(ALVR)

and

Radvision

(RSVN)

, a maker of video-conferencing solutions.