Jerusalem Venture Partners Plans Fund III, Eyes Europe

Communications technology specialist Jerusalem Venture Partners (JVP) plans to raise its third fund this summer and will target $150 million (euro 140 million). At the same time, the firm, which has hitherto concentrated on the Israel/US axis, is broadening its focus to include European investments.

Since its creation six years ago, JVP has focused on the communications sector, where development has been driven by the movement from voice-based to data-based communications networks. The deregulation of telecommunications and the colossal increase in demand for bandwidth created by the Internet has created a revolution in terms of infrastructural investment. Israel has emerged as a leading source of technologies to support this revolution, such as wireless communications, fibre optics and XDSL compression.

The firm’s current fund, which closed last year, had a $50 million target but eventually rounded up

$75 million from investors including Boeing, Axa, Merrill Lynch, FLAG Venture Partners, France Telecom, Invesco, JAFCO, Mitsui, Natexis, Nissho Iwai, Lazard Freres and

Shamrock.

Reflecting the dynamism of Israel’s communications sector, the JVP fund is now approximately 70% invested or allocated. Rather than seeking to limit risk by making a large number of small investments, JVP’s strategy is to make the smallest number of investments possible within the constraints of the “10% maximum” limit. “Typically, we like to see funding of at least $6 million per company, which enables us to devote a lot of time to each investment”, JVP’s partner and founder Erel Margalit said. “Investing $1 million to $2 million in an early-stage company that has a chance of becoming a market leader just doesn’t enable it expand quickly enough. Assuming, as one normally can, that there are other companies aiming to do the same thing then time is a key factor”.

While this highly concentrated approach might seem to run counter to most received wisdom in the venture industry, it has served JVP well so far. The firm has achieved a rate of return in excess of 45% since 1994 and, perhaps even more significantly, not one of the 13 investments made by its first fund has failed.

Erel Margalit said the group will seek to complement its existing investor base through its next fund-raising effort, bringing in additional European, primarily UK, investors of a similar calibre to current clients.

Like its predecessors, JVP III will focus primarily on Israeli communications ventures, but the firm will also target European, as well as US, companies with existing or potential Israeli connections.

“Israel is a small market, so companies need to expand internationally to secure market leading positions, and their key destinations are the US and Europe”, Erel Margalit explained. “JVP’s primary role has been to help companies internationalise”.

JVP now aims to couple European technologies with strong Israeli teams, a development Erel Margalit described as “not evolution but revolution: our intention is to facilitate market leaders in Europe and Israel and tie those in with US ventures to make leading international companies. We tend to look not at one company, but at a group active in a particular area”.

Within Europe, JVP expects to focus principally on the US, France and Germany, and the group hopes to establish a European office during the course of the year to facilitate deal sourcing; the firm already operates a US office. Erel Margalit said JVP aims to “identify an individual or two with good early-stage communications and venture experience to migrate into JVP’s culture”. He added that, for linguistic and cultural reasons, London is the most likely location for JVP’s European operation.

The firm has already made preliminary approaches to a number of UK investors, and Erel Margalit said their initial reactions were positive, thanks to JVP’s track record.

JVP has not set any geographic allocations for its third fund. The proportion of capital JVP III invests in European companies will depend upon how quickly JVP can hire principals and translate good relationships with European groups into deals, Erel Margalit said.