It seems that there is no case that exemplifies the bubble and its subsequent implosion better than Chromatis. The company, which was sold in 2000 to Lucent after just three years of activity for $4.7 billion in shares, was closed a year later. And so it was that a phenomenal achievement turned into an open wound. The two entrepreneurs behind Chromatis, Orni Petruschka, and Dr. Rafi Gidron, apparently did not want to be portrayed as having remained aloof from the collapse of their enterprise thanks to the handsome sum they pocketed from the exit. They didn't set about forming the next venture right away, and each took time out to pursue other interests.
Petruschka turned to political causes, taking a leading role in the Hamifkad Haleumi peace movement led by Ami Ayalon, as well as being involved in other public activities such as the Abraham Fund Initiatives, a foundation dedicated to promoting coexistence, equality and cooperation among Israel’s Jewish and Arab citizens. Gidron spent a year studying at the Rimon School of Jazz and Contemporary Music, and plays the saxophone, in addition to pursuing other hobbies.
Now, the two partners are back with an investment fund called Precede Technologies. "We're not a venture capital fund," says Petruschka of the company where he serves as managing partner. "We're an institution that connects managers with solutions to needs that we have identified in the market," he points out.
Precede's activity model is indeed unconventional. The company, which focuses on cleantech investment, and which is very appropriately headquartered at Kfar Hayarok, was founded with the goal of bridging the gap between academe and industry, or in other words, to connect R&D with the market. Precede, which began operating in 2005, is headed by four partners, Petruschka, Gidron, Albert Olier, and Nimrod Goor.
Petruschka, Gidron, and Olier worked together in Chromatis (the last was senior director for hardware and optics development). They wanted to something together again after taking time out following the highly publicized exit and the closure of Chromatis, and began looking at opportunities. It started with a partnership with the nanotechnology department at Tel Aviv University, where they examined options for photovoltaic technology, "because we came from a materials field, and it appealed to us," explains Gidron. "During the course of familiarizing ourselves with solar energy, we realized just how big and how ready the market is, and that the field is waiting for solutions, because it is highly underdeveloped in terms of technology. We decided to bring technological ideas to the market and take an interest in target markets aside from solar energy," he explains.
They were joined by Goor, a friend of Petruschka from his air force pilot training course in the Israel Air Force and they considered various ideas about what type of company they wanted to form, until they finally arrived reached the conclusion that they wanted to focus on identifying market needs, locating suitable managers, and bringing the two together to produce superior technologies for which there is an immediate demand and large markets.
"We're called Precede, because we precede the venture capital funds. We're actually a bi-directional bridge, since on the one hand, we help funds enter fields that are new to them, while on the other hand, we create companies that are highly suited to venture capital investment," says Olier. It is, in effect, a start-up production line that begins with the identification of the market, the formation of an initial team consisting of a manager with a business orientation and one with a technology orientation; and all that is before the company has even been formed.
After the potential market has been studied in depth and the needs are understood, "this is the stage when the technology is conceived," says Petruschka. "The process can often fail as well, which means the company will not be formed. In other words, if while studying the market and its needs we feel we've reached a wall, we drop the idea and move on to another need and another idea. If, on the other hand, we feel sufficiently confident, we announce the formation of the company and invest $1 million in it and sometimes even more.
"This actually means that we make a $1 million investment to see the venture through to the formation stage, if the company is indeed formed, and then invest $1 million in forming the company, of which $250,000 is invested at the first stage, and then $750,000 after that, while the laboratory research takes place at Precede, he explains."
Gidron adds, "We've looked at hundreds of ideas and 15 proposals for forming a company, each of which took several months to assess. The million dollars invested in an examination actually covers several potential companies, and also includes the potential failures."
"Once we've announced the formation of a company, we invest in it and the company grows here, with us - the Precede partners - forming part of the management team," says Olier. "We work together with the entrepreneurs daily for a year, on tasks such as building the team, creating the market and writing the patents, and then we help it raise its first funding," he adds. "After that our involvement moves to the board level."
"We invest far more in management and entrepreneurship at the initial stages of the fund's life, and make fewer financial investments than the venture capital funds," Gidron stresses. "We have an entrepreneurial background, that's our field. So at the moment we're supporting just three companies. We need to be very close to the activity of each company. For us, the primary concern is management and growing the company."
"The model has developed into what it is today, and we're happy with it," says Petruschka. "In terms of fields, we see our added value in the fact that we are pioneers, and I hope that we can spot new fields ahead of time and be there, whether in cleantech or not."
Working with Pythagoras and Coriolis
At present, Precede's portfolio consists of three companies. The first is Pythagoras Solar, which is developing sonar panels that produce electricity at low cost and highly efficiently, "not in the physical sense but in the sense of energy costs," stresses Olier. The company has already passed the nurturing stage at Precede and is now independent. Its CEO is Gonen Fink and its CTO is Dr. Itay Baruchi. "They're the pair who were our model for forming a management team," says Olier.
Baruchi was cited last year by science magazine "Scientific American" for his work on biological memory which, the magazine said, "was one of the most significant scientific breakthroughs in 2007." Pythagoras Solar is still at the R&D stage, and hopes to reach the market by the end of 2009, or early 2010 at the latest. It has a prototype, and it has filed an application for patent protection which has not yet been approved, but the company has preferred to avoid media coverage. It expects to make a launch in the next few months.
The second company is Coriolis-Wind, also named after a scientist and the law he discovered about the force that causes the different movement of air in the northern and southern hemispheres (the Coriolis effect). The company specializes in wind energy, and according to the four partners, it is developing the next generation of large wind turbines. Coriolis-Wind is currently at the seed stage and is due to raise funding in the near future.
The third company is different from the typical model of Precede's activity. The company, SolarPower, is a system integration company, and it is managed by Alon Tamari. It is a service provider, rather than a developer of new technologies, "but it is a company that has an outstanding opportunity that we wanted to take a share in," explains Olier.
In March Precede invested $1.1 million in SolarPower together with RosenRam Development Ltd., at a value of a few million dollars. It is now looking at a fourth investment and is due to make a decision in the near future.
Life after Chromatis
Chromatis's founders bear the scars of its rise and fall to this day. This is apparently also the reason that they feel it important to stress that the money for the new venture didn't come from that exit.
Globes: So where does the money come from?
Petruschka:"Our primary anchor has been the two funds that support us, Evergreen, and Pitango, and they are external partners. This gives companies that graduate from here a long-term financing horizon. Pythagoras received investment from both funds as part of the investment in Precede, and then in the company's first financing round." Pythagoras has raised $1 million to date under the auspices of Precede and a further $10 million from Evergreen and Pitango. Precede has an annual budget of $2 million. Its contract with the two funds is for three years with an option to extend it further.
Cleantech is a wide technological field. Aside from clean energy, are there any other fields you might consider investing in?
The question brings a smile on the faces of the partners who shift somewhat uneasily in their seats. "We've just been considering that question," says Gidron. "There are areas that we've looked at before, such as water and recycling, which we didn't take any further, but we may look at them again, and we're also very interested in technologies for producing energy from other sources.
What size portfolio are you aiming for?
Petruschka:"We don't see ourselves handling more than two companies at a time, because of the hands-on involvement that we have in each company. We hope that once a year, a company will graduate from here and make way for a new one. In other words, our aim is to bring in one company each year. In any event, we have two teams working side by side on the stage before the formal set-up."
The management team is a critical component in your activity. How you do find the people?
Gidron:"It usually starts with the close circle of people that we know. There are a lot of high-tech professionals that would like change track and switch to cleantech. Gonen, for example (Pythagoras Solar CEO Gonen Fink, M.A.), had a senior technical role at Check Point and wanted to move to cleantech. We get exposed to information like this, through friends, and team up with top flight professionals that want to move into cleantech. We've done a lot of legwork at the various universities and research institutes. We found Itay (the CTO of Pythagoras Solar, M.A.), for example, through his doctoral supervisor at Tel Aviv University."
Do you expect to make an exit at Precede?
Petruschka:"We want our companies to succeed and we have equity in each one as Precede. If the companies are a success financially, we'll have an exit as well.
"Because cleantech entrepenership in Israel is still in its infancy, it really is important to us that we find young people, and the universities are the right place to look for them. We're looking for doctoral students, and even post graduates or professors and engineers up to the age of 30. The fields of expertise we're looking for are varied - aeronautics, thermodynamics, mechanics, physics and electricity, materials and optics."
Published by Globes [online], Israel business news - www.globes-online.com - on September 4, 2008
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