Actelis - Riding the Boom All the Way to the Bank

At an early stage, Yuval Baron decided that before his company, Actelis, had staff, it would have capital. "When I established the company," he says, "every time I ran into Kobi, he would ask me: `Have you raised money yet? Raise more than you need.'"

You can't argue with success, nor with Kobi Alexander, the founder of Comverse, which Baron joined when it had less than 40 employees. Baron got that many and more and did it faster:

"At the end of 1998, I decided to set up a start-up with Tuvia Barlev, who had served in the Intelligence Corps. We started to think of ideas. We would sit up all night - only to discover in the morning that all we had come up with had already been done by someone else. Then came the idea of Actelis, which uses the copper cables of the telephony companies and manages, by means of complex algorithms, to deliver data with fiber optic reliability.

"The laying of optic fibers," Baron says, explaining the technology, "is very expensive. In urban areas, you have to saw through the asphalt and stop traffic. It is complicated and costs around $100,000 per mile. Using copper wires saves money and time. The installation is immediate. When a client asks a communications company to install a high-speed connection for him, there is a huge difference between a company that responds: `We are getting the tractors out right away,' and one that says: `We will be there immediately to install two boxes.'"

With the concept solidified, raising the money began.

"In early 1999, we were sitting at home and we decided that we wouldn't recruit employees before raising at least $6 million. Why $6 million? A wild guess. When entrepreneurs have to decide how much money to raise, they first shoot the arrow and then draw the circles around it. At first, we asked for $1.5 million, but we saw that the more money you ask for, the more interest you generate among the investors."

Actelis conducted talks with Israeli venture capital investors, but really wanted the Americans. "We were told we had no chance," Baron says. "I corresponded with someone from Kleiner Perkins, but nothing came of it. The breakthrough came when we met with Kamran Elahian, the founder of Cirrus Logic, who used his extensive ties and standing in the industry to arrange meetings with American investors.

"I went to the United States and there were pleasant surprises waiting for me. Walden International Fund decided to invest in us that same day. We met at four in the afternoon; at six, we went to dinner with the chairman of Walden and discussed the terms of the deal over the meal; and at 10 at night, he called in two people to perform a technical due diligence with us. We sat up till one in the morning at the Sofitel hotel near the airport, because they had closed the restaurant long before that. At 1.30 A.M., they said: `We have a deal.'

"Later, U.S. Venture Partners decided to join within a day. The Israeli fund, Vortex, joined. Sequoia asked for two more days to think it over. Tuvia and I weighed whether to wait for Sequoia, and Kamran advised us to close the financing round without them.

"There's a risk," Baron explains, "that if you wait - and in the end they decide not to invest - the others might also get cold feet."

The first round of financing, to the tune of $6.8 million, closed in June 1999, and Actelis began recruiting employees, with the help of the Israeli VC funds, Walden and Vortex, and U.S. Venture Partners. The employment contract, by the way, stipulates that an employee must be pleasant - and the prerequisite was no gimmick. "We put a lot of thought into the development of the company's code of ethics. We were concerned with avoiding power struggles in the organization; we wanted the people to feel that they were working together toward an objective; and being pleasant was important to us."

In November 1999, with $6.8 million in their pockets and a staff of pleasant employees, Baron and Barlev began planning another round of financing. "Purchasing telecom equipment requires large sums," says Baron, "and I was also influenced by the situation that arose when Comverse started out, when they assembled all the employees in a large room and said there was money in the coffers for two months.

"I wanted us to have financing for a wide scope of action. The large boom in the market was at its peak at the end of 1999, and money could be raised with a fax; in other words, you could send over your account number by fax, and you received the money. A number of funds were vying for us - really competing. We accepted the offer from NEA, and together with the previous investors, we closed a round of $12 million, based on a value of $83 million, after the money.

But the capital in hand did not ease the pressures; it just changed the nature thereof. "Because, at the time, companies were judged according to the amount of money they were burning," Baron says, "we were being pressured to spend the money. I'm happy to say we didn't excel at that game. We were very selective in our choice of employees."

Actelis eventually reached a stage at which it was also spending money - and lots of it. In early 2001, a little more than a year following the capital drive, the company was burning around $1 million a month. "The development of telecom products is an expensive business. We established the company in the United States and, as was the norm, we gave each employee a sign-on bonus. We invested in very expensive laboratories and field tests cost tens of thousands of dollars.

"We realized that we had to start thinking about raising capital. The optics market was still in good shape, but we are classed as a telecom company, so it didn't help us. I recall a veteran investment banker in the United States saying to me: `If you manage to raise money under your conditions, it will be a miracle.' I remember his words: `Mi-ra-cle. You don't have a hope in hell.' Our terms, principally, were that it be an Up Round - a round based on a company value that was higher than that determined for the previous round."

The round this time, however, was dictated by the new conditions of a crumbling market. "It was a very frustrating period," Baron says. "For six weeks, I focused solely on raising the money. I gave numerous presentations, sometimes even three to four a day, and it is emotionally trying. You are selling something to which you are tied; you have to look after the livelihoods of the families of your employees; and you know that in October 2001, the money is going to run out.

"The investors asked exhausting questions. One of the problems was that everyone wanted to speak to the clients. At first, I allowed them to speak [with them]; but with time, the clients began to complain and show impatience. They were sick and tired of speaking to investors. Kamran proposed a solution: `Get a hold of one of the VCs,' he said, `and ask him to send you a summation of his talk with a client. When another VC asks to speak to a client, you can send him the summation and say: Complete all the checks, and after you decide if you want to invest and also want to hear the same things, I will set up a meeting for you with the client.' It worked."

Actelis is in good shape. In the end, following the staggered process, the company raised $46 million based on a company value of $136 million, after the money - a sum that should suffice for at least three years. In May 2001, the respected journal, Upside, included Actelis in its list of the hottest 100 companies in the high-tech industry. Actelis has 100 employees, 80 of whom work at the company's development center in Petah Tikva.