In VC, Veritas
|Date: Sunday, February 18, 2001|
|18 February 2001 - (February 11) - From little venture capital firms, big companies grow. Veritas Venture Partners is far from Israel's biggest VC fund, but it ranks among the best -- |
'Once a pioneer, always a pioneer" could be another slogan of Veritas Venture Partners, which is breaking out of two molds that it has been comfortable in for more than a decade, making it arguably Israel's first venture capital firm.
Actually, the Veritas story starts earlier than that, in 1985, with the Athena Fund, a $29 million American-Israeli fund that was an equal joint venture until it dissolved itself in 1997.
In 1990, Yadin Kaufmann and Gideon Tolkowsky co-founded Veritas with funds raised from the South African mining behemoth, Anglo American Corporation. It did not take long for them to strike gold of another kind: in Israeli start-ups that have become billion-dollar public companies - such as Gilat Satellite Networks, M-Systems Flash Disk Pioneers and ESC Medical Systems - not to mention Mercury Interactive and Accord Networks (both also traded on Nasdaq), Class Data Systems (acquired by Cisco), Ubique (acquired by AOL), and many more.
"It took only $3.2m. in venture capital investment before Gilat went public," recalls Kaufmann, perhaps with a bit of nostalgia for the good old pre-Internet days when valuations were more rational. "Veritas was the lead investor in Gilat, as indeed we are when it comes to most of our investments."
Which brings us to a slogan that Kauffmann himself volunteers: Be a leader, do not follow the herd. This holds true not only for individual portfolio companies, but in its modus operandi from the outset.
"We have a strong preference for getting involved with a company at its very earliest stages," Kaufmann says. In other words, Veritas was a seed stage VC fund long before it became fashionable, or before Israeli funds were squeezed into that niche by the influx of foreign VC investment.
"We have never invested in a company that had a pre-money valuation of over $7m.," Kaufmann states, giving very clear emphasis on Veritas' early-stage focus.
KAUFMANN IS hesitant about specifying a preferred equity stake for Veritas to take in a portfolio company. "We do not believe in the concept of 'control' achieved through equity ownership and prefer to focus on coaching and mentoring our companies, and providing them with added value. Therefore, we do not have fixed rules about our level of ownership in a company. This is, rather, a function of market forces, the size of our investment and the company's progress."
Nevertheless, if you pin him to the wall, he will say 20-25 is a typical percentage, although it can be as low as 15%. But "only" 15-25% of a Gilat, an M-Systems or an ESC translates into big profits.
Not that all of Veritas' investments have been winners. Of 29 portfolio companies, seven failed, while seven had successful exits, and 15 are still private and active. Still, a write-off rate of less than one in four for a seed stage VC fund is rather impressive.
"On losers, you only lose once, while with winners, you win many times over," is Kaufmann's rationale for the Veritas approach: to lead investments in companies at the earliest, highest-risk phase of their development and expect to continue working closely with the entrepreneurs, providing financial support throughout the investee companies' funding cycles.
"It's better to get your claws in early, to get the better deals. Otherwise, you might find there is no room at the table later on," he says bluntly.
This "long-term player" attitude is one that has set Veritas apart from the beginning, even through the dotcom craziness. "We always believed in investing for the long-term, not expecting exits in 18 months or so," Kaufmann emphasizes. "A realistic horizon for us is an exit in 3-4 years, although this can easily extend to six or seven years."
Kaufmann cautions that it is not as simple as it looks for a VC company that has focused on middle- and-late-stage investing to make the shift to early stage investing. "You can't just move to early stage. It requires a different mind set, as well as a different set of skills."
THE SAME could be said for investing in biotechnology, the life sciences and healthcare, areas that are becoming hot now and are prompting VC funds in the wake of Internet fallout to hire partners who are specialists in these fields, in spite of the fact that these companies take patience and longer cultivating periods before resulting in exits.
"We have always had at least 25% of our investments in medical technologies," says Kaufmann, reinforcing the firm's differentiation and willingness to wait for its return on an initial investment. But like all Israeli VC funds, Internet infrastructure and communications remain prime target sectors.
Another characteristic of Veritas and early stage investing is a reluctance to stipulate a minimum or maximum investment per company.
"No initial investment is too small for Veritas," the company insists. "We focus on the business opportunity rather than on 'putting money to work.' Our goal is to build high-quality companies that have the potential to become leaders in their industry. Our own cumulative investment in a company may reach several million dollars, and we often invite other professional investors to join us with additional capital."
Once again, if pressed, Kaufmann will reveal a minimum investment of $100,000 and a maximum of $3.5m. The minimum might have been as low as $50,000 in the past, but as Kaufmann laments along with the rest of the VC community, money does not go as far these days as it used to.
It is primarily for this reason that Veritas, backed by its solid track record, has finally decided to jump into the big leagues monetarily and raise its largest fund ever: $100m., in Veritas Venture Partners (VVP) II. The roadshow is already in progress and the firm's five partners hope to close the fund in April, 2001.
In the meantime, in addition to its $50m. AAV (Anglo American Venture) Fund, Veritas manages a $5m. side fund, Millennium, which has co-invested in six companies along with the AAV Fund. The identity of the Millennium investor is a closely guarded secret: the firm would disclose only that it is a very large Asian multi-national corporation, with a name that every Israeli would recognize.
EVEN WITH $100m. in its coffers, Veritas does not plan to change its proactive, hands-on approach. "We will continue to invest selectively, in only about 5-6 companies per year," Kaufmann explains, "so that each partner need not take on responsibility for more than four companies at one time. Our reputation is as a deliberate investor with a thorough due diligence process, and after we invest, we are very active board members."
The next frontier for Veritas with its ambitiously targeted new fund is to open an office in the US, but not in any of the areas that are the "usual suspects." Instead, Veritas has opened a representative office in Atlanta, Georgia.
"What's a nice Israeli VC doing in Atlanta?" Kaufmann muses. "We think the Southeast US - with Atlanta as its hub and the home of leading corporations such as UPS, BellSouth and CNN, as well as prestigious academic institutions like Emory University, Georgia Tech and the Center for Disease Control - is the next hi-tech growth area in the US. VC investment nearly doubled between 1999 and 2000 in that region, taking the number three spot in the US after next Silicon Valley and New England, and overtaking New York.
"At the same time, the number of start-ups is still fewer than California, Boston and Silicon Alley, so we plan to be a pioneer in that niche and venue. Other relative advantages in Atlanta include its location in the Eastern time zone, the established presence of some 50 Israeli companies who have already chosen Atlanta as their North American headquarters - including some of our own portfolio companies, such as Accord and RichFX - easy access to nearby hi-tech concentrations in North Carolina, Texas and Virginia, and high quality of living at affordable costs."
With its new fund and new office in the US, Veritas for the first time intends to invest in American as well as Israeli companies. "We project that VVP II, which will earmark $20m. (20%) for the US, can fund 18 companies in Israel and four in the US," Kaufmann concludes.
Summing up the slightly unorthodox yet still lucrative path chosen by Veritas, Kaufmann adds, "We like to do things differently."
Veritas Venture Partners
91 Medinat Hayehudim Street
Herzliya Pituach 46120
Veritas Venture Partners LLC
145 Staghound Court
Alpharetta, GA 30005 USA