The venture-capital firm Blumberg Capital, founded and managed by Jewish businessman David Blumberg, has completed a fundraising round of $150 million for its third fund, Calcalist has learned. Last year, Blumberg Capital announced its intention to raise $100 million, but due to high demand, completed the ''initial closing'' on an even larger scale.
David Blumberg told Calcalist that about 40% to 45% of the fund would be invested in Israeli companies, as opposed to a mere 30% of Blumberg’s previous fund that was invested in Israel.
Blumberg can now look back and smile: Following the 2008-2009 financial crisis, which wreaked havoc on the venture capital industry, many of those funds faced a situation where impoverished investors were concerned about taking any more risks and preferred to invest in channels considered less risky. As a result, a number of funds were wiped out, while others emerged in their place.
Only a few venture capital firms have managed to pull through and grow since, and it appears that Blumberg Capital is one of them. The first fund established by David Blumberg raised $57 million, and the second raised $91 million, while his recently established fund has raised no less than $150 million. Thus, the exposure of his funds to investment in Israeli companies has increased correspondingly. Among the recurring investors in Blumberg’s funds are American businessmen and billionaires — Ron Lauder, to mention but one — as well as institutional investors such as UST Global, a provider of IT services and solutions headquartered in the United States.
Blumberg’s previous fund invested $91 million in 45 companies, with an average of $1.7 million per company, while his current fund is slated to invest $150 million in a similar number of companies.
“We are going to write bigger checks so as to maintain our relative share in the fund. So far, we have kept 15% on the average per company, inclusive of further fundraising rounds,” he said. Blumberg Capital is focusing on investment in Israeli companies dealing with information security, social networking, financial-enterprise software and virtualization interested in gaining a foothold in the business arena of Silicon Valley and New York, where Blumberg Capital is active.
Blumberg Capital is unique in that it is an early-stage venture capital firm that invests primarily in emerging startups in their first fundraising round (the seed round). Eighty-five percent of its investments are recurring investments in the same companies. Now that he has completed the recent fundraising round, Blumberg notes that it is one of the world's largest seed funds.
Up until about three years ago, Blumberg Capital’s activities in Israel had been controlled remotely, from overseas, and it was then that Alon Lifshitz was appointed as the firm’s local Israeli representative. Last year, Blumberg Capital opened stylish offices on Nachmani Street, not far from Rothschild Boulevard, in the heart of Tel Aviv. Lifshitz is currently managing the investments of Blumberg Capital in ten Israeli startups, including the Israeli apps Any.do and Moment.me, the advertising technology company Double Verify and the 3D technology company MISHOR 3D.
Fundraising was not affected by the economic crisis
Over the last year, Blumberg increased his investments in emerging companies such as CredoRax, which developed a smart payment and acquisition solution for the mobile industry and Cyvera, a provider of cyber defense solutions. Other interesting investments by Blumberg include the seed round that he led on behalf of the Israeli startup FeeX, side by side with Uri Levine, FeeX co-founder and co-founder of Google-acquired Waze, which developed a comparison and recommendation engine that helps users discover hidden fees that may be eroding their retirement savings and other savings accounts.
“We looked at Waze, but we reached them a bit too late,” Blumberg recounted. “Anyway, in time, we established contacts with Uri Levine, and eventually, he became a member of the board of directors at MISHOR 3D, in which we are invested. We then offered to partner with him in leading the investment in his new startup. What Levine liked about us was: a, that we are a venture capital firm established in the United States; b, that we are focused on early-stage investments in the seed round; and c, that we have the experience and expertise in the financial-enterprise sector, and are invested in companies providing financial services.” Lifshitz, Blumberg’s Israeli partner, said that thanks to the product, he personally managed to reduce by 1% the management fees charged by his pension fund.
Blumberg Capital managed two major exits this year. The larger of the two was that of the social-media-management system for brand management HootSuite, which recently raised $165 million. Insight Venture Partners and Excel Venture Management bought Blumberg’s shares last August, a deal which yielded a return of 52 times Blumberg’s investment in the company within four years, plus 50% of the value of its fund. The second exit managed by Blumberg was that of Nolio, an Israeli company whose acquisition by CA Technologies was at the center of a dispute between the company's founders and Cedar Fund, one of Blumberg's investment partners.
In the end, Blumberg recovered his investment in Nolio plus a reasonable single-digit return on his investment and learned quite a few lessons in the process: “You have to be more careful when you go into syndication,” Blumberg said in reference to his partnership with Cedar. "A venture capital fund cannot presume that it knows everything, and an investor has to invariably assume that the company knows better than him. Anyway, while the investment yielded a mere single-digit return for the fund, on the whole, it did yield a nice profit. In fact, we are investing in the new startup of the entrepreneurs.”
How difficult it is to raise a new venture capital fund these days, following the economic crisis?
“I believe that it is problematic, in particular for the medium-sized segment of venture capital funds. The major funds will have no problem to raise capital, as they have always done, while the small funds, targeted at a specific niche, will continue to operate, since they will still be attractive for companies in their particular niche, the way we are for young companies at the seed phase. When we launched the recent fundraising round, we set a threshold of $100 million. However, the demand was double that sum, and we decided to stop at $150 million. Unlike the major funds, which funnel millions in management fees to their senior partners, we are not focused on management fees. We are well aware that it affects their ability to take risks. Our business model, in contrast, is primarily based on success fees ("carry" in the jargon of the venture capital industry — A.G.). In our business milieu, that of the small funds, it’s a better policy not to raise too large amounts of money. It feels like an elephant dancing with a mouse. The large funds would rather not wait to see the results, and they typically show up on the scene with vast sums of money only when a company proves to be successful.”
The layoffs in Teva — the government’s fault
David Blumberg’s acquaintance with the Israeli business world goes a long way back, to his days at T. Rowe Price Associates, where he apprenticed under Abby Joseph Cohen, who currently serves as a senior US investment strategist at Goldman Sachs.
“At the time, the firm had no investments at all in Israel until, one day, I raised the issue with them and made them change their minds.” Later on, Blumberg was involved in venture capital investments in Elron Electronic Industries and Elscint, and subsequently collaborated with Fred Adler on investment transactions in Scitex, Creo and Daisy. Blumberg went on to purchase a share of Teva Pharmaceutical Industries, Ltd. on behalf of Charles Bronfman, and then invested in Abic, Ltd., which was eventually acquired by the international pharmaceutical giant Teva, which specializes in generic pharmaceuticals.
“Teva is an amazing company. However, large companies are in a constant process of cutbacks and transition between states. Larger companies are seeking to increase their business, while reducing their workforce in relation to their sales,” Blumberg noted with reference to the dismissals in Teva. Blumberg is a freethinker known for his libertarian views, which oppose any government intervention and advocate a free-market economy. He is considered a close associate of Peter Thiel, Facebook's first investor and PayPal co-founder, regarded as one of the most influential adherents of libertarianism in the United States.
“Regulation incurs costs; taxes make a difference and capital is fluid,” Blumberg says. “Tax hikes invariably reduce corporate strength and productivity, and have their cost. If you have a market with rigorous regulation and high taxes, you will have less available capital for research and development, or for investment, and companies will tend to adopt a more flexible transfer-of-employees policy. It goes without saying that Western governments should lower taxes and reduce regulation.
“The masses, in turn, would always attack the successful companies. However, in my opinion, it would be best to eliminate all government intervention. The [Israeli] government is interested in having low-cost health services, but that's precisely what Teva has done, cutting down drug prices and saving lives. I am thus really fed up of hearing people complaining about commercial companies. I would like to hear people rather complimenting them. I would like to see those companies awarded a Nobel Prize. And the solution to the situation lies in technology. There have always been traffic jams, but then Waze came up with its solution and changed the picture.”
The major funds can also invest in companies at the seed stage, and we actually witness it more and more lately.
“That's true. However, the large funds are at a serious disadvantage in that they can affect the reputation of the companies in which they choose not to reinvest. We call it signaling, meaning that if a certain fund decided not to make any recurring investments in a company, it had a reason to do so, and it tarnishes the name of the company in the industry. On the other hand, a firm like ours, which is an early-stage venture capital firm, is not expected to reinvest in the same companies, and its decision to refrain from further investments does not necessarily say anything bad about the company.”
Double Verify was one of the prominent Israeli companies in the country, with a workforce of about one hundred employees, and then you came and relocated the company to New York. Why?
“We had to move Double Verify to New York as the nature of the company required that its research and development activity be conducted close to the sales and management activities. The relocation involved several dozen Israeli employees, who were quickly integrated into the company’s operations there. This was done along with the launch of new products: They had to implement a rapid change and put on the market a video-advertising verification product — that is, an anti-bot and anti-fraud product for commercial ads, and on the whole, they are doing just fine.”
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