Asian Venture Investments in Israel
East Meets ………. East
August 17, 1999

Amir Pomerantz
Vice-President, Triangle Technologies

Since 1995 (more or less), Asian investments in Israeli ventures have pursued one of three paths:

Direct financial investments. Examples of these include Nippon Investment and Finance’s (NIF) investment in Optibase in 1995, Jafco’s investment in RadGuard in 1998, and Kuang Hwa’s (Taiwan) more recent investment in SmartLink. Like all financial investors from the West, Asian financial investors are looking for attractive financial returns. One difference, however, is that the    Asians generally tend to take a longer time perspective as to their exit. Since the cost of capital in Japan, for example, is nearly zero, relatively low IRR’s can still be quite attractive. Official figures are not available, but we estimate that there have been from $50 million to $70 million of direct financial investments from Asia.

Direct strategic investments. Asian investors, especially those from Japan, have been particularly active in making strategic investments. Examples include CSK’s investment in Optibase, Nippon Systemware’s investments in Veon and Emultek (e-sim), and Fujitsu Business Systems’ investment in Zapa Digital Arts. In general, Asian (in particular Japanese) companies’ goals in making

;strategic investments diverge from those of their Western counterparts: rather than using the ;minority investment as a stepping stone to making an acquisition, Asian strategic investors use minority investment as a means for strengthening business ties with the investee company, sending a signal of commitment to the investor’s own organization, and opening up a window to new technologies and markets. Triangle Technologies estimates that there have been between $40 million to $50 million of direct strategic investments from Asia.

Venture capital fund investments. Compared with their Western counterparts, Asian investors have been relatively slow to make venture capital fund investments in Israeli funds, preferring to see exactly where their investments are going. Nevertheless, with the proliferation of Israeli funds and the growing renown of Israel’s venture capital industry, Asian investors are increasingly comfortable with such indirect investing. Some of the more prominent examples include Kyocera’s investment in Nitsanim, Mitsui, Jafco, and Nissho Iwai’s investments in JVP – Jerusalem Venture Partners, NIF, Hotung (Taiwan), and Kuang Hwa’s investments in Evergreen’s IJT Technology Fund, Itochu’s investment in DS Polaris II, various private Asian investors’ participation in Link Technologies, China Development Bank’s investment in Oxton, Mitsubishi’s investment in Veritas, and most recently reported investments in the new Global Catalyst Fund by Fujitsu and Sumitomo Electric. Still, the Asian investors in Israel VC funds expect to gain more from their investment than capital gain – typically they are looking for business relations with the investees, and windows to new technologies and markets. Triangle Technologies estimates that about $70 million of Asian capital has been invested in Israeli venture capital funds.

Whereas there is significant overlap between the priority lists for both Asian and non-Asian investors – Internet technologies and services, networking devices and software, CRM software, and so on - there are a few areas of particular priority for Asian investors:

Wireless telecommunications. In China and other rapidly developing regional economies there is a strong motivation to bypass the need for expensive wireline infrastructure and allow access via various wireless technologies. In general, the dense urban nature of Asian populations gives communications services a unique element. Furthermore, Japan is leading the implementation of wideband CDMA services, following NTT’s victory in getting its W-CDMA standard adopted by the International Telecommunications Union.

Hardware components. Compared with their Western (including Israeli) counterparts, Asian venture capitalists are more oriented towards investing in hardware components of various kinds, be they related to various display technologies, optical communications components, or advanced semiconductor devices. Recently at Triangle Technologies we received commitments of over $3 million from some of the top tier venture capitalists in Japan and Asia to invest in an Israeli developer of a sophisticated sensor device, after the developer had been turned down in the round by most leading Israeli VC’s. Once it was clear to the company’s shareholders that there was strong interest and financial support from Asia, the leading Israeli VC shareholder decided to lead the round with its own investment, and the round closed.

Mass market information appliances. In most categories Japanese and Asian manufacturers have lost the race to develop next generation information technologies to US companies – Microsoft, Sun, Intel, Cisco, EMC, AOL and others have gained world wide dominance in their respective markets. The Asians have been left far behind. Nevertheless, one area in which Asian players are winning is at the client device side – Casio, Sharp, NEC, Sony, Olympus – are all dominating various related markets of digital cameras, PDA’s, cell phone handsets, displays, and so on. Taiwan is maintaining its hard won position as the manufacturing center for the world’s large volume IT needs. Any technologies that can help Asian companies maintain their toehold on the rapidly rising cliff of IT will be highly valued, and invested in.

Israel has historically been at the pivotal point between Asia and the West, and in the newnetworked world, Israel can continue to be an important lynch pin. But how can Israeli ventures benefit from Asian capital? The answer is not obvious, since the primary market for most Israeli ventures is the US - why is it so important to have Asian investors represented?

There are three benefits of Asian capital:

Money is money. All capital is useful, although admittedly, some capital is more useful than others. But of course, this is not convincing, particularly since many of the attractive investments are oversubscribed and the investees can construct their own portfolio of shareholders based on their value added contribution.

Legitimacy. Investment by a respected Asian institution, be it venture fund, corporation, or other financial institution, can lend legitimacy to a new venture. Asians more than Americans are sensitive to context, and potential Asian business partners are more likely to form business relations with those foreign companies which bear the stamp of respectful regional shareholders.

Information for the investees. Eventually (perhaps sooner rather than later) the Israeli investeecompanies will enter the Asian market. Information and market intelligence is critical everywhere, but in a business culture where Israeli’s have little experience and fewer contacts, access to reliable

information about markets, business partners, key executive candidates, can play a critical role and help avoid major mistakes. Investors often have better access to such information.

To summarize, it is well worth it for Israeli companies to raise at least some capital from good quality Asian investors. It is well worth it for Asian investors to invest – directly, strategically, or indirectly – in Israeli opportunities. Through experience and cooperation, Israeli and Asian partnerscan turn to face each other, and make manifest the latent synergies between the two .