The Israeli Startup That Ran Away From Home

Six years after it was founded in 1999, CyOptics moved it operations to the United States, where it finally became profitable. Last week it was sold.

The $400 million acquisition of CyOptics by U.S.-Singaporean company Avago Technologies announced last week could have gone down as one of the largest sales of an Israeli firm – on the scale of Intucell and XtremIO.

But CyOptics is a slightly different story, typical of a previous generation of Israeli startups. Indeed, it stopped being an Israeli startup at all.

CyOptics survived the dot-com crash and had to adapt to an entirely changed market. In the end its owners achieved a lucrative exit, but it had lost its Israeli connection.

The company was founded in Israel and was associated from the start with venture capital firm Jerusalem Venture Partners, established in 1993 by Erel Margalit, now a Labor MK. But by the time it was sold, the company's workforce of 900 didn't include a single employee in Israel, following the transfer of operations to Pennsylvania in 2005.

Still, even though the company hadn't employed Israelis for nearly a decade, it remained Israeli owned. JVP said the company will earn for its sixth fund, set up in 2011, $80 million in less than two years. All told, JVP will earn $200 million from the exit.

CyOptics was established in 1999 following a meeting between Uzi Koren, now its chief technology officer, Yair Alpern, who served as CEO of Semi-Conductor Devices, and Micha Zimmerman, the head of SCD's electro-optical division. The three set out to build a world-class company that could make components for fiber-optic communications equipment.

JVP was the company's first investor and the only one that stayed on to the end. The original plan, forged at the height of the dot-com bubble, was to establish an SCD subsidiary. This made it no problem for CyOptics to attract capital. A Cisco Systems investment fund put in tens of millions of dollars, which was used to set up independent operations at the company's plant in Yokne'am, Koren recounts.

"During the same period we also opened a sales office in the Boston area because we wanted to penetrate the U.S. market," he says.

CyOptics hasn't disclosed how much capital it has raised, but according to various reports the sum tops $180 million. Part of it was used in recent years to buy out investors.

"The volume of communications through fiber optics has grown at a dizzying rate due to the development of the Internet and global communications," says Koren, who learned the field doing 20 years of research for Lucent Technologies at Bell Laboratories in New Jersey. "Due to the size of the Internet and the volume of traffic that nearly doubles every year and a half, equipment is replaced quite frequently."

The equipment that transmits and receives at fiber end points is replaced after a few years, Koren explains. When CyOptics was established, the transmission rate for fiber-optic data was 10 gigabytes a second, reaching 40 gigabytes a second the following generation. "There wasn't much competition in this field at the time," he notes.

The dot-com crash in 2001 changed the founders' plans. The company's first generation of products, which enabled data transmission of 40 gigabytes a second, was ahead of its time back in 2003.

"The second and third products we made went back to 10 gigabytes a second," says Koren. "Most of our sales weren't for innovative products but for products already used by companies. We adapted to market requirements, but the company wasn't profitable because of the high cost in maintaining the production infrastructure at Yokne'am. Production quantities weren't big and competition was very fierce."

Layoffs at Yokne'am

In 2005, CyOptics had the opportunity to buy a plant in Pennsylvania that was used by Lucent's electro-optic division. CyOptics' founders had worked for Lucent and knew the factory well. "In Lucent's heyday hundreds of millions of dollars were invested in the plant," Koren says. "We had the chance to buy it for just over $25 million."

But that acquisition marked the end of the company's Israeli chapter. Nearly all the production workers at Yokne'am were laid off, with the rest remaining as employees of Vishay Intertechnology, a U.S. company that had bought CyOptics' operations in Israel. In 2009, Vishay shuttered the plant, which by then had just 15 workers, due to the global economic crisis.

Koren stresses that CyOptics' decision to leave Israel and set up shop in Pennsylvania was a do-or-die situation.

"In Israel at the end of 2004 and beginning of 2005 our annual sales amounted to $6.5 million and we weren't profitable," he says. "In 2005, after adding customers of the Pennsylvania plant to those in Israel, sales totaled about $28 million and we still weren't profitable. It was clear we couldn't survive had we stayed in Israel and not made the transfer."

Buying the Pennsylvania plant was only the second major acquisition by CyOptics, following a 2003 takeover of U.S.-based Cenix, a company also established by Lucent veterans. But in the United States, CyOptics embarked on a more aggressive M&A strategy, starting with Apogee Photonics in April 2007 for several million dollars. Five months later it bought Inplane Photonics, which had a small facility in New Jersey. The following year, Italy's Pirelli invested $20 million in CyOptics as part of a merger with Pirelli's PGT Photonics subsidiary.

The company reached $210 million in sales in 2012, triple the number from three years earlier. And it was finally profitable. "It took us a lot longer than we thought – 10 years," says Koren. "Persistence, tenacity and the support of JVP, our primary investor, led us to profitability."

In 2011, JVP led a $50 million investment round that raised its stake to 50% from 11%. Later that year, CyOptics rejected a $100 million initial public offering it felt wouldn't value it sufficiently. A year ago, Boston's TA Associates bought much of the rest of CyOptics from investors like George Soros to reach a 35% stake.

"JVP's strategy is to build companies, which we lead from their founding until they have matured. CyOptics is a good example of that," says Kobi Rozengarten, a JVP partner.

Israel is still a strong country in optical technology, says Koren. "I have to give credit to all those companies that have succeeded over the years and still exist," he adds. "There are several companies in Israel with whom we've worked. Now it's a relatively good market. These kinds of components are in demand. The competition isn't as tough as it was in the past."

Koren concedes that as exits go, CyOptics wasn't a headline grabber in the billions of the dollars. "But we think that in the end of it was a success story," he says. "The goals we set out for ourselves 14 years ago were achieved."

JVP
Robert Kaplus