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Crushed by Israeli hi-tech

Hi-tech erased years of gains by Israel's leading firms. VC isn't their game

Last week Jerusalem Venture Partners officially announced it had obtained $400 million in commitments for its fourth venture capital fund. Its news sounded recycled, given that the press had been reporting its fund-raising efforts for about six months. But its achievement in these stormy days is certainly worthy of note.

Anybody wondering how JVP did raised money in these tight times will probably visit its website, and will glance at its portfolio. At least, that's what we did. We were in for a surprise.

The top of its portfolio section is graced by the logo of Chromatis Networks, with quotes from the company's founders Orni Petruschka and Rafi Gidron, describing JVP's contribution to the startup's success.

Fine. JVP really did make a killing on Chromatis. The few million dollars the fund invested turned into a few hundred million when Lucent (NYSE:LU) bought it in 2000 for almost $5 billion.

Thing is, the acquisition by Lucent, which paid in stock, was followed by two unfortunate developments.

The first is that Lucent stock lost 80% of its value before JVP had the sense to sell it on the market. The fund could have made half a billion from its stake in Chromatis. Instead it was left with not quite $200 million.

The second was even worse: Lucent closed Chromatis and sent all its workers home, after deciding that its product wasn't good enough to justify further investment at such uncertain times.

Once can understand why JVP left that disaster story at the top of its portfolio web-page. From the fund's narrow perspective - even though the company collapsed, its technology disappeared and its workers are gone ¿ it was a success story. JVP sold the startup and although it neglected to sell its resultant Lucent interest in time, it still cut a handsome coupon.

Sad thing is, this isn't the only example of such an anomaly. A few months ago Pitango kicked off a major PR campaign after changing its name from Polaris. Its ads blared its major successes. The sharp of eye and keen of memory will note, however, that the list includes some companies issued on Nasdaq during the bubble. All are losing money and would have collapsed if they hadn't gone public or been sold in time.

Couldn't read the cues
The vast gap between the financial successes of JVP and Pitango, versus the performance of their portfolio companies, came to mind yesterday when perusing the financial results of Tel Aviv-listed Clal Industries.

The company yesterday revealed an NIS 147 million loss for the third quarter, after writing down its investments in companies like Orckit Communications (Nasdaq:ORCT), Fundtech (Nasdaq:FNDT) and Scitex Corporation (Nasdaq:SCIX).

Clal Industries' third-quarter performance brings its loss over four quarters to NIS 730 million. That all but eradicates gains achieved over the previous four years.

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It would have been worse if Clal Industries hadn't posted a fat capital gain from selling 25% of the Mashav Initiation and Development to Irish firm CRH in August 2000, proceeds which were booked in the third quarter. Certainly, finding the buyer in these hard times was a remarkable feat by Clal Industries. But it also diluted its holding in its one true cash cow.

Clal Industries' sister company Discount Investments Corporation has yet to reveal its third-quarter results. But its bottom line is going to be low indeed. The company will be reporting a loss of more than NIS 200 million, bringing its loss for the last four quarters to more than NIS 800 million. It too will be waving goodbye to gains made over four years.

Now add the NIS 2.5 billion loss by Koor Industries (Nasdaq:KOR)Union Bank rge kasr four quarters, which in its case is worth six years of gains.

The message is loud and clear: After five years of boom markets in Israel and overseas, Israel's business concerns have lost money on their technology investments, in net terms.

ECI, the Indian giver
Why? Simple. They didn't do what JVP, Pitango, Evergreen, Genesis and all the rest of those successful venture capital funds did ¿ they didn't sell in time.

A stellar example is provided by Jonathan Kolber. He invested in hi-tech company ECI Telecom (Nasdaq:ECIL) ten years ago, when it was but a puling infant. By 1998 he was hundreds of millions of dollars richer from his investment.

That's when he brought Koor Industries (Nasdaq:KOR) into ECI as an investor. Koor bought in at the peak, only to sink to its knees together with ECI when the crash came.

The bottom line is that ECI, which brought Kolber most of the wealth he used to take over Koor, took most of it back in the last two years.

These calculations regarding the venture capital funds, Discount Investments, Clal Industries and Koor lead to several conclusions.

Firstly: Most Israeli hi-tech companies stumbled into crises that wiped out most the wealth they had created ¿ ECI, Gilat Satellite (Nasdaq:GILTF), Sitex and Elscint (NYSE:ELT) are just a few examples.

The second is that the ones who made it rich from Israeli hi-tech were mainly players who bet on timing ¿ they buy the dips and leave at the peak. Most companies that tried to build long-term technology portfolios failed dismally, financially speaking. Portfolios that produced long-term yields were ones that invested in domestic, non-negotiable sectors.

The third conclusion is that technology is a business with tremendous potential and a great future, but that investing in technology is a highly dangerous business for pros only. Some of Israel's biggest stars rode the wave to greatness, but when the crash came ¿ the true absence of their influence over events became all too evident.