Wednesday, February 07, 2007

Innovation, Incubation and Venture Capital is thriving in the tiny State of Israel

Innovation, Incubation and VC in Israel is alive and well. Published by Ivan Kaye 10 November 2006

For more pictures click to BSI Website

The Delegates on the Helen Coonan Delegation 5-11 November 2006
The past week in Israel on the Australian Israel Chamber of Commerce Mission headed by Helen Coonan, Minister of Communication, Technology and the Arts , has been an eye opener and a learning experience as to why Venture Capital and Overseas Investment has flourished and continues to flourish in the tiny state of Israel.

The entrepeneurial spirit, the focus on Education and Innovation, the strong links between Universities, Centres of Excellence such as the Weizman Institute, Incubation and Venture Capital and the Alignment between the Government Programs and Innovation Community has provided a WIN WIN WIN WIN

What is the Incubation program?
Simply put, a registered Incubator (of which there are 22 in Israel) receives up to an 85% loan from the government for every investment it makes in an incubatee.
What does this mean?
Company A needs a $600k investment - the Incubator invests $100k by the Incubator and $500k is Invested by the Government (to be repaid with Interest at LIBOR if the venture achieves a succesful outcome thorough an exit).
Company B needs a $900k investment - and $500k is Invest by the Government (to be repaid with Interest at LIBOR if the venture achieves a succesful outcome thorough an exit).
The result:-
A Win for the Incubatee – he receives the money needed to commercialise his idea with the support of professionals in an encouraging environment, that does not slate failure, but learns from it. This results in confident, passionate Entrepeneurs willing to “have a go”

A Win for the Venture Capitalists – A rich source of deal flow that has been validated by the supply chain (the Incubator is often connected to a Venture Capitalist). This saves time on due diligence and gives the VC an opportunity to make Series A and B rounds with a fair certainty that the exit will give a decent multiple for the fund and the Investors. Israel has the 3rd most Companies listed on the NASDAQ.

A Win for Government – Entrepeneurship and Innovation drives the Economy, Increases Employment, Increases Exports and encourages Foreign Investment. The recognition of the Education and focussed Innovation has resulted in the major Conglomerates building R&D Centres of Excellence in Israel (Motorola and Intel to name a few.)
Haim Kopans of Incubator JVP Studio, which is owned by Venture Capitalist JVP said that their fund resulted in Private Coinvestment to Government of 7:1 after the 3rd year of operation, and will be a lot higher over the forthcoming years. A clear indication of the programme’s success.

Exits through IPO’s are more difficult than before. The requirement for high profitability and growth rates which young companies have difficulty reaching, and the stringent regulatory requirements of the Sarbanes Oxley rules have made it difficult for companies to make an IPO . We are in a period that is exactly the opposite of the bubble period when you could float unstable companies which didn’t make any profit at all.

9 out of 10 exits in the US last year were through acquisition deals in which the return on investment for VC’s have been high. The reason is because the buyers are technology companies which prefer, for financial and organizational reasons, to acquire an off-balance sheet R&D activity which will not be seen in the company’s financial statements, and which will not affect the organizational character of a mature, publicly-traded company. These companies are willing to pay five times the R&D costs of start-up companies, or five times revenue, which is a great exit, and a great buy for the acquirer.

VC’s need to work with Investees to build good, profitable businesses, with revenue and proof of scalability before an exit. The VC’s who do this will get their exponential returns, but over a longer period of time says Chemi Peres of Pitango Venture Partners, who has recently raised their 4th Fund.

Investments in venture capital have delivered the highest profits over the long-term, compared with those in other fields: a 15-20% yield over 20 years, compared with 10% in stocks and 4-5% in bonds.
We are in a global market that is expanding continuously especially in markets such as India and China, Brazil and Eastern Europe,who have a large untapped market for technology products. This means that demand for new technologies and their products is on the rise, and one will get high premiums on technological innovation.
This bodes well for Venture Capital.

The sale of Passave Inc. to PMC-Sierra Inc. (Nasdaq: PMCS) for $300 million, after $13 million had been invested in it, (BRM Capital made a 20 fold yield on Passave, which returned one third of the $150 million fund) Maenashe Ezra says “we invested in Passave at the lowest point of the depression in 2002. No one wanted to invest, companies’ values were low, as were the amounts of capital that were raised. It turns out that these were the good years. A professional investor knows that you invest when prices are low, and not when they are rising. To sum up, I’m optimistic.”
Israeli companies that have become significant players, include M-Systems Flash Disk Pioneers (Nasdaq: FLSH), Amdocs (NYSE: DOX), Mercury Interactive Corp. (Pink Sheets:MERQ.PK), Comverse and others.
To put it in a Nutshell, ”Innovation and venture capital is alive and well in Israel.”

BSI Showcases the 14th BSI Investor Forum in Melbourne, Sydney and Brisbane- Where Innovation Meets Capital

7 Innovative Companies presented at the 14th BSI Investor Forum (The Spring 06 Collection)

With the support of Victoria's Innovative Vicstart Programme, BSI showcased the 14th BSI Investor Forum at the Crown in Melbourne.

for more pictures see BSI Investor Forum

Presenters and the BSI Team doing the 14th BSI Investor Forum Roadshow in Sydney, Melbourne and Brisbane

Steve Rafter and Anthony of CBTV
Steve Rafter founded CBTV, a producer and broadcaster of niche content, such as technology- based educational content exclusively for the internet, with the revenue model based on advertising before and after each session which is broken up into 3-5 minute bytes to meet consumer demand. 5 Episodes have been prototyped with 3-5 thousand hits per day. Partners include M&C Saatchi, Hot House, DCITA. Advertisers could include Canon, Sony, Samsung, Qantas, Harvey Norman and Motor Dealers.

David Wong presented the E2E It opportunity. E2E IT provides wireless temperature monitoring solutions with its patented product Temp Track. Temp Track automates temperature monitoring and recording 24/7 and provides auditable records for temperature management. The system is scalable, easy to install and unique in design and performance. Customers can include Health Companies for Vaccine Wastage prevention, Pharmaceutical Industry, Hospitals, Food Manufacturers. International Expansion via Distributors. ETE is a spinoff from Ericssons R&D Centre in Melbourne.

Gary Smith of WinappTechnology presented the Echo opportunity, an administration tool that sits on top of Sharepoint. Echo is currently selling to large corporates in Australia, Europe and the USA. Gary is seeking capital to develop the USA infrastructure to capitalise on the growth of Sharepoint 2007

Dieter Bohm of Catchlog and Ian McManus of My Business Manager
Dieter Bohm, a fisherman by trade, founded CATCHLOG, and has built a best of breed Fishing Vessel Management System, which includes, amongst other functions an Electronic Logbook, Catch Analysis, Industry Benchmarking, Stores Inventory and Maintenance. The system includes a government approved electronic logbook, authorised by Australian Fish Management AUthority (AFMA) and Dept of Primary Industries and Fisheries. The product is easy to install and productive from day 1. The Value Proposition to the Ships Captain (Increase focus on fishing - less time on admministration) Government (Accurate real time data, analysis of fishong stocks, Fleet (asset management capability and real time catch position analysis, and Environmentalists (Data to track endangered species). The first installation occurred in 2005, and currently 80% (70) of Northern Prawn Fisheries are using the system. The Catchlog Suite is a must for all Commercial Fisherman. Funding is being sort to take Catchlog International.
Ian Mcmanus presented My Business Manager, which provides real time dashboard reporting that links in with major accounting software such as MYOB, Quickbooks and Pastel. It takes accounting data and transforms it into management reports in minutes. My Business Manager has been developed with the SME in Mind. For an upfront fee of $399 and $100pa , the small business manager will get reports that are easy to understand, and will impress investors and bank managers. It enables the SME to make informed decisions, and is based on the premise "what you can measure you can manage". The product is intended to be rolled out via accountants, VARS of accounting packages, bookkeepers, direct sales from Eb and referrals.

Branka Korac and a team of 8 have developed and commercialisedPortfolio Business Technology, a scalable enhancement to powerpoint. It currently has 30 blue chip corporate clients in Australia, and is now looking to expand Globally. PBT will scale through Direct Sales, Targeted Distribution Channels and the Web

MHelp replaces text help with full Multimedia help using a combination of animation, audio and graphics to provide a step by step easy to follow format within a 1-3 minute movie clip. Increased productivity, improving skill base, retention of knowledge and improved business processes creates a powerful business case for large corporations to use MHELP.
John Crossley and Sandra D'Souza of Varietee and David Ehrlich of MBill
David Ehrlich presented the MBILL opportunity.

MBILL has created a mobile marketing and billing platform that has already integrated with 90% of US and UK Mobiles. It is currently seeking funding for a USA Rollout.

John Crossley and Sandra D'Souza founded Varietee which has developed a patented adjustable golf platform that enables you to practice your golf sewing from a variety of positions. The product can be installed at home for the avid golfer, or at Golf Clubs or Golf Ranges.


Presentation by Andrew Arnold - Partner of Deacons at the TiE Angel Forum

Recently, an article written by James T Greenberger concerning the top 10 legal mistakes of US early stage companies was brought to my attention. I thought that it would be worthwhile to produce an Australian version of the top 10 legal mistakes of early stage companies. This article focuses in particular on issues that emerging companies should bear in mind when dealing with proposed venture investors.
1. Intellectual Property Searches
An early stage company should obtain adequate trademark and business name searches before commencing to trade under its chosen name. Registering an exciting or catchy domain name will not provide sufficient protection if there is an existing business conducted under the same name, or a substantially similar name. The last thing an emerging business needs is to establish goodwill under a proposed new name only to find out that the name must be changed in order to avoid threatened action from an existing user of the name. Potential consequences of commencing trading under someone else’s name include threatened actions for passing off and trademark infringement.
2. Failing to adequately secure intellectual property rights
Uncertainties concerning ownership of key intellectual property can kill a proposed investment. Any significant problems in this area must be identified at an early stage. The following are examples of commonly encountered intellectual property issues.
(1) Ownership of Intellectual Property versus Licence
Where intellectual property is a key asset of a new business, then the ownership rights in that intellectual property must be clear. Key documentation concerning ownership of intellectual property should be in place from the outset. If the company does not own key intellectual property, but merely licences that intellectual property from the founders, then this may be a problem for some venture investors. We have also seen instances where intellectual property rights are claimed via a complicated series of licences and sub‑licences, in some cases involving overseas entities, and in other cases involving documentation in foreign languages.
(2) Registrations
To the extent that a company has key intellectual property assets that can be registered such as trademarks, business names and domain names, cost effective registrations should be undertaken at the outset. In addition, if the investee owns patentable intellectual property, then it may be necessary to consider patent applications within Australia, or on a worldwide basis.
3. Inadequate contracts with employees and contractors
An early stage business should critically analyse the proposed form of employment contract or engagement letter to be used with key employees. It should be determined whether the contract adequately deals with issues of confidentiality and ownership of intellectual property. For example, the employment contract should specifically state that all intellectual property rights concerning inventions and ideas developed during the course of employment are assigned to the company. The ideas and contributions of key employees are fundamental intellectual property assets of the company. It is also important to attempt to sign up key employees for a specific agreed term, for example 2 to 3 years.
4. Treating Shares and Options as a Substitute for Cash
There is a temptation for early stage companies to offer consultants and other third parties shares or options in the company in lieu of cash payments. This has the advantage of reducing the demands on the limited cashflow of an emerging business, however it can also create a number of problems. Venture investors prefer to deal with a small number of shareholders, rather than facing the prospect of negotiating with a large body of shareholders. Therefore, the temptation to issue shares to a large number of family members at the outset should be resisted. Similarly, to the extent possible, shares should not be issued to contractors and other third parties as a substitute for cash. This can also create problems under the applicable securities laws, and is discussed under heading 6 below.
5. Failure to adopt a clear policy for employee shares and employee options
Two structures that are commonly used by companies wishing to issue shares or options to employees as part of an incentive package are as follows:
(1) Shares could be issued to the employees at market value and the company could lend funds to the employees to assist in the acquisition of the shares. In that circumstance, the employees potentially have access to a 50% CGT discount if they hold the shares for at least 12 months.
(2) An employee option scheme could be adopted. One benefit of options is that they are ideally suited to the concept of incentivising senior employees and directors. Options can be tied to performance milestones so that they only become exercisable in stages upon the achievement of those milestones. One disadvantage of options is that the establishment of an employee option scheme is more costly and time consuming.
In addition, whenever shares or options in the company are being issued, great care must be taken to ensure that there is no breach of the prospectus provisions of the Corporations Act 2001, as discussed in section 6 below.
6. Compliance with Securities Laws
A fundamental aspect of the professional management of the company is ensuring compliance with the law. An early stage company must take clear advice concerning the securities laws in the jurisdictions where it will raise money. Strict compliance with those securities laws must occur in order to avoid future problems.
Offers of securities can only be made pursuant to a prospectus that has been lodged with ASIC unless a specific exception applies. Most of the exceptions are found in section 708 of the Corporations Act 2001. Early stage and emerging companies issuing shares to angels and venture investors in Australia rely entirely on exceptions of the type found in section 708. Strict compliance with these exceptions is required.
7. Company Documentation
It goes without saying that in order to attract venture investors, a company must be able to demonstrate that it has a sound business, good quality management and clearly articulated plans for the future.
The managers of early stage companies must deal with many competing demands on their time and resources. One matter that is often given insufficient attention is putting in place the key documentation and legal structures that will ensure that the company is continuously “investor ready”.
Most emerging companies will focus on one key type of product or service. The core dealings of the company with both suppliers and customers should be conducted using appropriately drafted terms and conditions from the outset. This will minimise potential “leakage” of key rights, such as intellectual property rights in core software supplied to customers during the early stages of the company’s trading.
8. Legal Structures
In many jurisdictions, the choice of legal entity is a key issue for new businesses. In Australia, the entity of choice is usually an Australian proprietary company limited by shares. However, in some circumstances, there are other entities that may be appropriate. The choice of entity must be governed not only by the founders’ taxation considerations, but also with the view to the company’s future investment audience, ie, a structure must be put in place that is both very familiar to venture investors and can easily accommodate the issue of securities to new investors.
If a short term objective is to move into international markets, then the proposed structuring for such expansions should be considered at the outset. The founders’ taxation circumstances and the needs of future venture investors are paramount considerations. For example, incorporating in the British Virgin Islands may be attractive for some founders, however, it may make a business less attractive to future investors who are unfamiliar with that jurisdiction.
9. Shareholders Agreement
Many companies do not have a shareholders agreement until their first round of venture funding. I recommend that most early stage companies should have a simple shareholders’ agreement between the founders long before the company starts talking to venture investors. This shareholders’ agreement will identify the founders’ expectations and the rights of shareholders. In particular, it is important to place restrictions on the transfer of shares by existing shareholders and the issue of new shares. This will help to avoid difficult negotiations where circumstances change, for example, where one of the founders departs or a new key manager joins the company. If there is already a shareholders’ agreement in place at the time that the company begins talking to venture investors, then this will minimise the need for parallel negotiations between the founders at the same time as negotiations take place with potential venture investors.
10. Selecting a Venture Capitalist
The process of finding a venture capitalist does not simply involve looking for someone with money to invest, rather it is a process of selecting a trusted business partner who will add value to the company above and beyond a cash investment. The founders should thoroughly investigate potential venture investors, including their other investments in similar companies, the venture capitalist’s exit strategy and time horizon, whether or not the venture capitalist is willing and able to participate in future rounds of financing and the outcome of any previous disputes between the venture capitalist and management of other companies.
The company should be continuously aware that each potential investor has its own needs and expectations. Failure to adequately respond to the particular needs of a proposed investor may cause the company to miss an investment opportunity.
This article is intended as a general summary only and should not be relied on as a substitute for legal advice.