The Israeli venture capital sector is young, but it has been a key player in the changes the economy has endured in the past two decades. Venture capital funds set up in the early 1990s were essential in creating the country's vibrant startup scene.
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The young industry that suffered two economic crises the previous decade is beginning to mature. For the first time, it faces the task of turning things over to a new generation.
For some funds, the process is painful and the future is clouded. Israeli venture capital firms have learned firsthand about this cruel industry. It’s hard producing returns on investment, but sometimes it pays off to have patience and persevere through tough times.
The venture capital firm Genesis Partners, founded in 1996 by Eddy Shalev and Eyal Kishon, is one of the oldest in the country. It’s now raising $125 million for its fifth fund. Genesis expects to reap some of that by this summer and begin investing.
“Eddy and I started this business 20 years ago. Most of the funds that started with us are no longer around,” Kishon says.
“One of the things that’s considered the most difficult, other than generating good returns, is managing a fund’s success. A fund always has to be moving ahead, so we decided to introduce several changes in the new fund.”
At the same time, Genesis is looking for a young partner who can help build in the coming years. “We are very long-term players,” the 55-year-old Kishon says.
“Even if there’s someone who could be a wonderful, amazing partner who’s my age, we wouldn’t take him because although today we’re raising money for the Genesis 5 fund, we need to think about Genesis 6 and 7. Unlike startups, a venture capital fund is a long-term matter, and it’s not easy to turn things over to a new generation.”
Up to now, the most prominent example of transitioning to a new generation has been Jerusalem Venture Partners, which Erel Margalit left to become a Knesset member for the Labor Party, now part of Zionist Union.
Shalev, on the other hand, hasn’t left Genesis despite reports to that effect. He says he’s also making angel investments and providing guidance to new startups.
“I really enjoy being a mentor for young entrepreneurs,” he says. “I’ll probably do this until I’m in the grave, because it’s an addiction.” Shalev is also chairman of the Trump Foundation, which helps improve Israeli education in the sciences.
A preference for hardware and chips
The Genesis 5 fund will pursue the same investment strategy as its predecessors, investing in early-stage high-tech companies and providing support to firms in more-advanced funding rounds leading to initial public offerings or other exits.
The biggest recent example of such a Genesis investment is SolarEdge, a solar panel tech firm that conducted an initial public offering in March on Nasdaq in the United States. The company’s value has surged above $1 billion from about $600 million at the time of the IPO.
Since the initial funding round in 2007, Genesis has invested $18 million in SolarEdge. Its stake is currently worth $120 million.
“In 2007, we saw that there was a story here with unique marketing potential and technology. Other funds didn’t know how to digest this, and we decided to take the plunge,” says Gary Gannot, the Genesis partner who sits on the SolarEdge board.
As Kishon puts it: “After the crisis of 2008, SolarEdge didn’t have an easy time of it for three or four years. A fund has to be able to look a little further ahead, so we continued to invest.”
Genesis still hasn’t sold its stake, which it has committed to hold on to for six months. Despite efforts by the partners to sit on the boards of publicly traded companies, the firm doesn’t intend to stick with shares as financial investments; that’s not its specialty. The partners expect to sell within two years, based on market conditions.
SolarEdge’s technology includes chips, complex electronic systems and software; it also does direct marketing. Kishon says that in recent years Genesis has preferred to invest in industries that other Israeli investors haven’t flocked to — hardware and chips.
In these sectors, Genesis has invested in companies including PrimeSense, Valens and Sckipio. Israeli research-and-development centers in this industry have grown in recent years, most notably Apple in Herzliya and Haifa.
From Genesis’ perspective, there’s no competition among multinationals for talent.
“The multinationals operating in Israel are a unique phenomenon around the world and a fantastic source of entrepreneurs who have undergone training, learned how to manage and seen how a big company works,” Shalev says.
“There is phenomenal cross-pollination here. I too started my career at IBM, and after 12 years decided that I wanted to be an entrepreneur.”
Accelerator programs popping up
Genesis is also revamping its entrepreneurship project, the Junction, to better complement its investment strategy. Genesis established the Junction in 2011, when it was launching its fourth fund. The Junction is a cozy space for entrepreneurs to work, not to mention a startup accelerator.
The Junction was a pioneer in the field and was followed by dozens of accelerator programs and startup compounds of various kinds. In the beginning, the Junction’s driving force was young Genesis partner Eden Shochat, who left in 2013 and set up the Aleph venture capital firm.
Nowadays accelerator programs are popping up one after another. Despite their differences, most have in common the goal of taking on young companies, sometimes even at the idea stage or with a very preliminary version of a product. Soon enough the mentors propel these companies forward, providing close support along the next development stage.
In some cases, the accelerator-sponsors invest in the companies. Others are linked to big-time multinationals, and many provide physical work spaces. Recently there has been a buzz about new programs established by the Tel Aviv municipality, El Al Israel Airlines and General Motors.
In 2011, just before the epidemic of such programs broke out, Genesis was a pioneer in the field, establishing its Junction in south Tel Aviv. It opened the facility to startups for a three-month period, during which they receive guidance from Genesis, as well as from professionals and mentors who cooperate.
Genesis doesn’t have a stake in the companies or even the right of first refusal to invest in them. Instead, the entrepreneurs pay a nominal monthly fee. Mainly, the Junction gives Genesis contact with young startups and lets it expand its deal flow.
The facility receives a budget of hundreds of thousands of dollars from the management fees that Genesis’ partners would otherwise reap for themselves. The program has seen 13 cycles so far, each with an average of 150 applicants. The facility has spawned 53 companies that have attracted more than $130 million in investment in total.
Genesis has only invested in two of the firms, using the Genesis 4 fund. Among companies that got their starts at the Junction are Eatwith, which pairs hosts and guests for special meals; Meerkat, the live streaming video app company; and AppsFlyer, a mobile app tracking technology firm that in January raised $20 million.
And three other participating companies have been sold: ClarityRay to Yahoo, KitLocate by the Russian Internet firm Yandex, and Moment.me, which recently announced that it was being bought by the Israeli website design firm Wix.
Over the past 20 years, Genesis has not only built up experience building major companies. Inevitably, it has had its share of failures.
“The goal of venture capital is to know how to invest so you have major stakes in the very successful companies,” Kishon says. “The law of averages doesn’t work. If we have a fund with $125 million and we’ve invested in 24 companies and invest about $5 million in each company, the result won’t be a good one.”
As Shalev puts it: “In the good companies, you try to invest as much as possible, but the trick is to know when things aren’t working and when you need to shut the company down. Not throwing good money after bad is one of the most important things.”