An Israeli venture capital fund that lacks focus has a hard time justifying its existence – at least that’s how VC veteran Gadi Tirosh sees it.
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“Israeli venture capital funds need to provide added value by employing very clear tools,” says Tirosh, co-managing partner at Jerusalem Venture Partners. “You want to be multidisciplinary? The American funds with a presence in Israel know how to do that better than the Israeli ones.”
Tirosh took up his post last year; the company is now run by him and Kobi Rozengarten, a top manager for more than a quarter century. For many years, the firm was led by Erel Margalit, now a Labor Party MK.
When Tirosh joined in 2006, the company focused on investments in media technologies start-ups. It had set up a media center in Jerusalem, where the outfits in its portfolio now operate.
Tirosh came to Jerusalem Venture Partners from NDS, an Israeli digital pay-TV firm that was acquired by Cisco. He was vice president of product marketing at NDS, and in the late 1990s he was the liaison to companies such as MTV, Sky Sports and the Discovery Channel. He brought to Jerusalem Venture Partners investment savvy in media and gaming firms such as Funtactix, Playcast, Siano Mobile and ComQi.
As with JVP, Tirosh’s investment focus has broadened over the past seven years. From media, JVP has branched out into cyber security, most notably in startup CyberArk.
JVP joined a 2011 financing round led by Goldman Sachs that raised $40 million for CyberArk. JVP emerged as the largest shareholder with a 40% stake, and Tirosh is now chairman of the company, Israel’s largest privately held information security firm.
According to the IVC business data firm, there are 224 cyber security companies in Israel, including 114 that have set up shop since 2010.
“We started investing in the field about eight years ago, but in recent years this world has changed a lot,” Tirosh says. “The cyber-security market has grown by about 10% a year. But the real drama is in how the budgets in this field - $20 billion dollars to $30 billion dollars - are distributed.”
JVP’s seventh fund, through which it plans to raise $120 million, focuses on cyber security. If in the past the sector attracted 25% to 30% of JVP’s investments, the new fund is targeting 50%.
“The Israeli economy’s competitive advantage is the starting point for a discussion about investments. Once we were a country that exported oranges, then we were a country of computer chips,” he says.
“We’re still a country of computer chips, but now at a lot of places in India and China there are 10 semiconductor engineers for every Israeli one. We can’t run in place. Markets are changing and we need to constantly reinvent ourselves. In the cyber field, our comparative advantage is clear and sustainable.”
In addition to the CyberArk investment and the new fund’s cyber-security focus, JVP has opened a cyber incubator in the southern city of Be’er Sheva.
“Once information-security spending went to solutions provided by the old giants, but there has been a shift to solutions from startups developing solutions for new threats. We identified this trend early and diverted a larger portion of our investments to companies in the field,” Tirosh says.
“We realized that if this wave sticks, we can’t only work with relatively mature companies,” he says, noting the incubator where companies can be grown from scratch. The idea is to be the first to identify technology and help start a company.
ThetaRay, which had its origins in a series of math articles and patents, was JVP's first project based on this approach. Launched in 2012 by Tel Aviv University’s Amir Averbuch and Yale’s Ronald Coifman, the firm developed a method to identify anomalous events at a company. Unlike other technology to detect hacking or theft, ThetaRay simply analyzes the data streaming in.
The system looks at information from a wide range of sources at a firm or organization and warns of possible security breaches based on Averbuch and Coifman’s algorithm, which is protected by seven patents. ThetaRay got its start at the JVP incubator and last August said it had raised millions from General Electric, which has used ThetaRay’s products at its power plants.
“The main question we ask ourselves when we consider companies like this is whether their solutions are just one component in a larger system, or a generalized solution that would let the company operate based on a broad vision.” Tirosh says.
“We chose to focus on the anomaly detection field. In Averbuch’s research, we found an opportunity to create a company with a particularly broad vision. Basically, we created a company from scratch with the founders, bringing in a CEO and building a staff.”
Since the bursting of the tech bubble in 2000, Israeli funds haven’t been able to raise significant capital from Israeli institutional investors. The number of Israeli funds has greatly contracted over the past decade, and Tirosh and his colleagues in the business are trying to bring Israeli institutions back as investors.
“The value I offer as an Israeli fund begins with the return that I have provided my investors. So far, we have returned about $600 million in profits to our investors through three funds,” he says.
“I’m not in competition with the other Israeli funds, I’m measured largely against the global funds. If I don’t provide high yields in global terms, I won’t be able to raise money.”
A generational shift is under way at funds both in Israel and abroad, Tirosh says.
“The industry was founded about 25 years ago, and now long-time managers are being replaced by a new generation,” he says. “It’s a challenging process in which the next generation has to be gradually built up.”
Tirosh may be hinting at institutional investors’ longing for new fund managers, after their predecessors failed to produce sufficient returns.
“As a citizen and a pension savings-account holder, I would be pleased to have my pension money also go to venture capital investments. In a world of zero-percent interest, long-term savings entities need to take risks. They have an obligation to look after savers’ pensions and create value,” he says.
“Beyond that, the investment of money from Israeli savers in local venture capital will develop the local knowledge base and create jobs. I admit that institutions have lost money in the past in this sector, but enough time has passed and the sector is showing nice returns.”
Tirosh notes a measure of “over-hype” regarding the value of deals in cyber security. However, on the whole, he thinks the current growth is well based.
“There’s no getting around the fact that this isn’t a cell phone application. Without a lot of technology, you can’t set up a cyber company,” he says.
“If in the world of consumer applications a lot of people in a lot of fields set up companies without a lot of technology that don’t solve real problems, in the cyber field the problem is clear. And the profile of the entrepreneur who can create a company like that is different.”