Australian venture capital firm Square Peg Capital brought a 40-strong delegation from Australia to Israel last week, investors and company executives, who came here to learn about the local high-tech industry.
Square Peg estimates that the members of the delegation represent companies and individuals together worth some $150 billion.
Square Peg itself started operating here three years ago, and set up its Israeli office last September. It was founded by Paul Bassat, Justin Liberman, and Tony Holt, who are collaborating with local partners Dan Krasnostein and Arad Naveh.
Bassat was a founder of job search website Seek.com.au, which is active in Australia, New Zealand, China, and Central and Latin America. The company has a market cap of some $4 billion.
Liberman is a scion of the Liberman family that has invested in Israel in the past, in Paz Oil Company Ltd. (TASE:PZOL) and FIBI Holdings Ltd. (TASE: FIBI) (First International Bank), and that is one of the wealthiest families in Australia. Holt is an investment banker. Krasnostein was a senior manager at Seek.com.au, while Naveh is a veteran Israeli entrepreneur and investor. In the mid-1990s, he sold Class Data to Cisco, and later on was a partner in Benchmark Capital based in Israel.
Square Peg is substantially different from the run of traditional funds active in Israel, whether local or foreign, as much of its money has been invested by the partners themselves. In addition to the founders' capital, the fund has capital from private investors who have invested in the fund as limited partners.
Despite the legal structure that includes a general partner and limited partners, the fund does not suffer from the problems that characterize the traditional structure of a venture capital fund: a limited investment period and a limit on the allocation of money for each portfolio company. Square Peg is incorporated without an expiration date, and without any significant capital limit.
The fund intends to invest about $150 million in Israel, says Krasnostein, but it's clear that there are no rigid limitations, and the fund's managers will in practice make investments as they see fit, according to the timeframe that suits them, and, chiefly, in accordance with the quality of the opportunities that they come across.
There's something relaxed about the Square Peg guys. Perhaps it's because they themselves are the main investors in the fund, and so they don't feel a need to keep investors happy. And perhaps it's because they're Australian, and don't live under the pressure familiar to Israelis (and to the average American).
As far as investment policy is concerned, they say that they don't focus on a specific stage. They can invest at the early stage, but they can also put down a few tens of millions of dollars at late stages. Among other things, they participated in a $170 million round for a company in Singapore that provides a platform for trading in real estate.
"There's an amazing business environment here"
Why Israel? And if Israel, where have you been for the past twenty years?
Bassat: "Justin's family has been here for 25 years. But to get to your point, we visited here last year, and met Arad. We believe that in order to reach quality investments, we need good access to the market, and Arad gives us that. Besides that, if in 2000 there were 80 VC funds here, today there are fewer funds than we thought there would be, particularly at the first and second rounds.
"What's more, we thought investment here would help us in exposure to technology in Asia and Australia as well, because the most significant concentration of technology companies outside the Bay Area in California is here.
"This is the best market in the world apart from the US in terms of entrepreneurs and solving hard and complicated problems, as opposed to companies that solve incremental problems. There's an amazing business environment here, serial entrepreneurs, and we have a lot to learn here. At the same time, we can also provide support and assistance in places where we're strong, such as throughout Asia."
Naveh says he met the people from the fund a year after he stopped making new investments for Benchmark. At that time, he was making investments privately. "I saw that the environment in Israel was changing, and that many of the traditional investors were leaving the market, so that the availability of capital was in decline. Another point that was impossible to miss was the change in the global balance between West and East: China is taking more and more deals and bringing more and more buyers, investors, and capital.
"The link-up with Square Peg was natural, because I saw a group of people with strong motivation for investing in Israel, with a network of connections here and in other places, and with a great deal of available capital and an intention of investing for the long term, unlike other investors who are in and out in two-three years and disappear."
Naveh believes that this is an excellent time for investment in Israel. "The market is mature in a good way. Entrepreneurs are minded to stay in companies longer, to set up bigger companies. It's not like it was once, when I sold a company because I couldn't raise more money. There was a reason that entrepreneurs sold out early. That was the optimal point as far as they were concerned, because there was a fear that they might not be able to continue raising capital.
"When Dan Krasnostein relocated here from Australia, that to me was the concrete that set my connection with the fund. If someone comes all the way here with his family after last summer, that indicates genuine commitment. And I'm happy to tell you that we got to work immediately, and have so far made investments in four Israeli companies."
Square Peg has announced three of these investments: in Glide ($250,000); Feedvisor ($4 million); and JethroData ($6 million). An additional $2.75 million investment has still not been publicized.
"The deal looks less good"
The Square Peg people point out that, when it comes to B round investments, they may represent a good alternative to their colleagues in Israel and the US. "Israeli funds like to invest early and take a big slice," says Naveh, "When they come to the next round, the deal often looks less good by then, and the valuation looks too high. At this stage, entrepreneurs can go to the US and try to raise money there, but in general, even if they succeed, they receive draconian investment contracts that slaughter them. We have no ego. We're sometimes prepared to do a deal at a slightly higher value. We have a large pool of companies to choose from, we see everybody's deals. Everyone comes to us with their companies when they reach the second round."
Krasnostein: "It's important for us to say that we're there for the entire lifespan of the company, and we can lead both an early stage and a late stage."
Bassat: "Our intention is to make a good connection with the industry in Israel, with entrepreneurs and investors. If we succeed in being perceived as quality and ethical players, as people worth doing business with, that will be success. What we bring to the table is a desire to back entrepreneurs who are solving complex problems, a genuine will to invest in Israel and make money, and readiness to learn."
That sounds modest. You're the first venture capitalists I've met who bring modesty to the table.
Naveh: "Yes, we're not concerned with showing off what we've done. We bring modesty, good intentions, and also money and a great deal of experience."
Krasnostein: "It's important for us to get across as well that the delegation now visiting Israel exemplifies our commitment to Israel and our ability to contribute here."
On that score, people here don't stop talking about a boycott, and you bring delegations.
Bassat: "We live in a world in which there is real change, which is giving opportunities to hundreds of millions of people. On the other side there are people afraid of change. Look what technology and investment are doing in China, for example: hundreds of millions of people being lifted out of poverty. The technology really does improve their lives. At the same time, there are many who are afraid of the change, particularly those who don't benefit from it.
"If I were Israeli, I'd feel under siege in the present situation, but you should feel proud, because you are catalysts in making the world a better place. You don't have to feel bad about yourselves. We're certain - and our guests from Australia who have come here for the first time agree with us - that Israel is on the right side of history."
Published by Globes [online], Israel business news - www.globes-online.com - on June 18, 2015
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