Wednesday, May 30, 2007
Tmura Fund - A lesson in Israeli venture capital
Taking portfolio firms' donations and investing in youth and education
By Robert Daniel, MarketWatch
Last Update: 5:05 AM ET May 27, 2007
TEL AVIV (MarketWatch) -- In the crapshoot that is venture capital, a bet on the right technology can mean riches for the relative few investors and executives involved in a deal, but one investment fund has been trying to spread that wealth a bit more broadly.
Tmura, the Israeli Public Service Venture Fund, solicits options from early-stage venture-capital companies in hopes that the companies will be sold or taken public. The fund takes the proceeds from those investment exits and invests them in Israeli educational and social programs for poorer and handicapped children and their parents.
"We try to promote a culture of corporate giving and social responsibility" within the VC and high-tech community, says Yadin Kaufmann, founder of Tmura, which is into its sixth year and about to announce its 100th donation from a portfolio company.
"A lot of wealth has been created in the industry, and certainly there are generous people," he says. But when Tmura started up in February 2002, "the VC and high-tech sectors hadn't created organisms to institutionalize its connection with the rest of society."
Kaufmann is New York City-born, an attorney with a Master's degree in Middle East studies who came to Israel in 1985. He was recruited to Athena, an early Israeli venture-capital firm, and then helped start up and still runs Veritas, a Herzliya VC firm specializing in very-early-stage technology companies.
The Hebrew word t'mura has a number of meanings, among them "metamorphosis." But it also connotes giving something in return. And the fund's name is a play on words: A switch of two letters generates the word truma, which means donation.
Kaufmann, 47, says he modeled Tmura on the Entrepreneurs Foundation of San Jose, Calif., which encourages VC philanthropy in the U.S. and worldwide.
Tmura relies on the venture-capital firms to encourage their portfolio companies to donate equity. Tmura asks the earliest-stage startups to donate 0.5% of their equity and later-stage companies to donate 0.1% to 0.5%.
"Some have given less," Kaufmann says. "Whatever it is, it should have the potential for a meaningful exit," given that the holdings will be diluted as the startups raise more money.
"In the relatively few cases where we've been turned down," Kaufmann says, "it has been at two levels. Some VCs have a strong U.S. flavor and may be somewhat hesitant to donate to Israel philanthropy as opposed to U.S. philanthropy." At the company level, some have told Tmura that the decision to donate should be made by individual holders rather than by the company overall.
Kaufmann started working on Tmura at an unusual time: in late 2001 amid the wreckage of the tech boom.
"If you talked to anyone" at that point, "they told you that options weren't worth anything," Kaufmann notes.
"For us to make money" for donations, "there has to be a big difference between the exercise price and what the options are worth," he notes. In 1999, "valuations were hugely inflated," but then the tech market crashed in spring 2000.
So "because we started when valuations in the industry were low, we were able to get very significant upside," Kaufmann says. "People were more willing to give; they didn't assume that every option they held would surely be worth a million dollars."
The Tmura fund has so far raised a total of about $1.8 million. Its first investment came from KiloLambda, a Tel Aviv producer of optical power-control solutions based on nanotechnology. The options are still live and the company hasn't yet had an exit.
One exit in progress is Bioline, which went public a few months ago in Tel Aviv. Executive Director Baruch Lipner, the fund's lone employee, says the fund sold part of its options for $25,000, and if it sells the rest on the same terms, the donation will total $200,000.
Its 99th donation arrived early this month from Atria Medical. With offices in Caesarea and in Dover, Del., Atria produces implantable shunts, which help prevent fluid from building up in the lungs of patients with congestive heart failure. Lipner says that one of a number of companies might be the 100th.
Of the first 99 investments Tmura has received, it has executed 11 exits. Lipner says that about 10 of the 99 donations ended with the companies either failing or executing exits but leaving option holders, including Tmura, with no proceeds after distributions to preferred-share holders.
Among the 11 exits were donations from two already public companies: flash-memory producer M-Systems, which is now part of SanDisk, (SNDK) and Orkit (ORCT) the provider of equipment to enable high-capacity broadband services. M-Systems' $1 million donation to the fund is Tmura's largest to date.
U.S. companies that donate may see some tax advantages from the program if they execute a successful exit, Lipner says, noting that a number of Israeli-affiliated companies are incorporated in Delaware and other states. Tmura is working with Israel's income-tax authorities to enable Israel-incorporated companies to receive tax credits for such donations as well, he says.
Lipner, 39, is from Toronto and moved to Israel more than 12 years ago. His background includes positions with Andersen Consulting, in high-tech and in venture capital. He joined Tmura before it launched.
In the same sense that a VC firm tries to ensure a portfolio company uses invested funds wisely, he says Tmura challenges its grantee organizations to improve their organizational structures to use the donated funds efficiently.
The donated funds are disbursed in two installments tied to milestones that the grantee organizations must meet. Again in keeping with the VC-portfolio relationship, "we won't necessarily commit to further financing" beyond that first donation, Lipner says, "but if we're pleased with the progress, there's a reasonable chance that we'd like to stay involved, if and when we have additional funds available."
The fund's first donation was to College 4 All, a Tel Aviv organization that in 1999 "started an after-school program to help kids in [underprivileged] neighborhoods by preparing them for college and showing them that it's possible to break the mold" of poverty, Lipner says.
For the next academic year, says Adi Tevet, director of resource development for College4All, the group plans to serve about 1,000 students from grades 2 to 12 in 14 centers in Israel. The students are largely immigrants, from Uzbekistan, North Africa, Asia, Ethiopia and elsewhere. They'll be taught by some 300 tutor/mentors, Tevet says.
For the group, Tevet says, Tmura's grants have funded things like classes and operations at its Tel Kabir center in south Tel Aviv and all the current learning materials for grades 3 to 8.
Other recipients of grants from Tmura include the Tel Aviv Rape Crisis Center and four organizations that in the past few months cleared milestones and received their second grant installments from Tmura: Gallop, which runs a farm and stable for children with special needs or at risk; Yedidim (Friends), which operates a big-brother network for immigrants, drop-in centers for troubled youths, and more; Ha'Poel Tel Aviv education and social projects, for kids in the Jewish and Arab sectors in Israel; and Maksam, a support network started by Ethiopian immigrants specifically for their community.
Tmura's operating budget is met through donations from VC funds and from foundations. In addition, a number of firms provide Tmura with legal, accounting and other professional services pro bono.
And to minimize objections to the firm's investment targets, Tmura focuses on two broadly embraced philanthropic areas: youth projects and education. (Tmura doesn't actually run any of the projects it funds.) In the U.S., the company is a 501(c) tax-exempt organization, which means it can take tax-deductible donations according to Internal Revenue Service guidelines.
Having established Tmura in Israel, Kaufmann and Lipner want to reach donors outside the country.
One such project now under way: A U.S. foundation Kaufmann declines to identify donated $500,000 as a matching fund. If an Israeli investor donates, say, $25,000 or $50,000 to an organization within Tmura's guidelines, Tmura will match that donation.
The key condition: The Israeli investor's donation must be his or her first substantial such effort. "We're trying to develop a new generation of philanthropists in Israel," Lipner says. A typical donor who would take advantage of the matching program "has had an exit" and, confronted with a good deal more wealth, "has a different sense of responsibility," he says.
Kaufmann generally would like to see more Israeli companies donating, and donor companies giving more.
"There's more understanding today," he says, "that companies are citizens too and must take responsibility for the societies in which they live."
Robert Daniel is MarketWatch's Middle East bureau chief, based in Tel Aviv.