The greed of the R&D partnerships – the capital market

Eight months ago, Gilad Mendel, a BizPortal reporter, in an interview with Hanan Schneider, CEO of Millennium Food-Tech, the first R&D partnership issued by the stock exchange, raised the issue of exceptional management fees – “You have many expenses in the partnership; a monthly payment of $ 25,000 to the general partner. Payment to the CEO, chairman, vice president, consultants and also the cost of maintaining a body traded on the stock exchange. These are annual expenses that exceed 10% of the amount you raised and it will be every year. “

Schneider was not confused and replied – “I do not think it will reach 10% every year, but we want to make an exit that will go to the partnership. We are also building on a partnership that is growing through fundraising and in amounts of 100 and north these expenses will be less influential.” Indeed, Schneider returned for another round on the stock market. But what happens when you do more rounds? Dilute existing investors and actually reduce the value of the participation unit. Oh well, so investors are losing, for entrepreneurs it may not be pleasant, but it’s certainly not terrible.

Mendel examined and revealed 8 months ago what everyone is suddenly discovering – the management fees in R&D partnerships are a scandal. Not nice to say, but the regulator that prides itself on technology offerings is caught with its pants down. Due to the persecution and subservience to the “technology” companies, no work and inspection was done and no breaches were blocked. Only after 8 issues of R&D partnerships and another 3 on the way – sorry if we missed partnerships, they pop up like mushrooms after the rain – the Securities and Exchange Commission woke up and said this week that it will look into the issue of management fees in partnerships. Why only now, why after some horses ran away from the stable?

In any case, the management fee in these partnerships (not all, but most) is excessive and not only is it excessive it does not replace the current administrative and general expenses of that partnership. It is not a substitute for management expenses, it is in addition. So a simple question arises – why pay management fees, if there are managers for the partnership? The answer is even simpler – because it is possible. The R&D partnerships want to be the gas and oil partnerships and take everything next door. Everything is legal, everything is sponsored by the Securities Authority. The gas partnerships manage to transfer to the general partner a large portion of the profits while their holders how amazing it is – have barely earned since finding the gas more than a decade ago. Flow mainly to the general partner under the sections management fees and success fees.

Oops, we almost forgot. Excessive management fees in R&D partnerships are only part of the payments to the general partner. There is also a fee for success. If there is an exit, the partner wants a share of it – 10%, of the profit, 20% and even more – of the profit flows to the general partner. In short, it’s a great business for the general partner, not sure it’s that great for investors.

So far the half glass is empty, there is also half a full glass. We believe that the basic idea is excellent – investing in Israeli Hait is a welcome thing. The problem with Israeli high-tech also comes Israeli indulgence. Too bad. Still – one has to hope that it will succeed.

The large investment bodies on Wall Street have already identified the potential in Israeli high-tech. For example, the ARK Fund created the first IZRL Zionist ETF that was successful and achieved a return of about 14% since the beginning of the year, after a return of about 32% in 2020. Apart from that specific ETF, ARK, Blackrock and others integrate Israeli companies in almost every An ETF that deals with an evolving field.

Israeli high-tech is in the files of foreigners as well as Israelis, but it is hardly on the local stock exchange – they sat and thought about what to do and left – without cynicism – with a great idea. In early 2019, the Securities Authority announced its intention to allow the listing of a limited partnership for trading whose area of ​​activity is research and development. “This procedure is part of the TASE’s efforts to expand the range of investment products, with an emphasis on innovation and technology, and to enable the general public to enjoy the success of Israeli technology through the TASE in a transparent, liquid and accessible manner. It should be noted that private venture capital funds invest in a number of high-tech companies.” “Investors in them and are incorporated by way of partnership and not by way of a company. Today, it is not possible to register for trading a partnership that invests in research and development companies, as a result, even though Israel is a high-tech powerhouse, only a small part of activity in Tel Aviv.” Registered in the notice of the authority.

The authority obliges the partnerships to spread the risk, which means that the partnership will not be able to hold more than 40% of its total assets in one company. Also, the partnerships will only be able to invest in projects that have received the approval of the innovation and the partnership will be able to register for trading only after it has made investment contracts in companies (at least 15% -20% of total funds before raising).

R&D partnerships – the main players

Food technology
Millennium Food-Tech, The first R&D partnership registered on the stock exchange and began trading in August 20. Specializes in investing in companies in the field of food tech, “Millennium is looking to invest in companies that specialize in finding and developing innovative ideas and two consciousnesses and lifestyles in food, beverages and nutrition.” In the field of food tech, Bio-meat, Submitted a draft prospectus prior to the IPO, according to which it seeks to raise approximately NIS 25 million. Prior to the IPO, the company is expected to sign an investment in Rilbite, a company that develops a method to connect proteins from the plant in a way that creates the texture of meat and egg, along with investment in two other companies: Moore Alternative, which develops meat substitutes from yeast and by-products of the edible oil industry. A method of inverting the sex of females from females to males.

Medical Technology
EM Infinity Medical (IMED) The R&D partnership from the Infiniti Group has raised about NIS 40 million for the purpose of investing in R&D companies in the field of digital medicine. Infinity Medical has signed a strategic partnership with the public company from China, Strait Innovation, for the purpose of promoting Israeli technologies in medical centers throughout the republic.

Alameda Ventures, Of Tzachi Sultan, an investor in the fields of medical equipment, digital health and Bioconvergence, has raised about NIS 70 million. Almeda Ventures’ investment strategy includes focusing on solutions to streamline medical processes, while saving time and resources, investing in digital medical technologies, investing in companies developing unique medical devices and investing in groundbreaking convergence-bio ventures.

Agronomic Technology (Agricultural Theory)
Smart Agro – Investments, An R&D partnership that raised NIS 26 million for investment and improvement of agro-tech companies and their sons: genetic improvement, precise pest control and biological pest control, advanced growing systems, robotics and automation. The first investment was made in Canbridge, a biotechnology company specializing in genetics. Seeds and targeted at the cannabis market.

Another partnership in the field is FEAT Foundation, Led by Eyal Bakshi and Roni Kobrowski, who intends to raise about NIS 50 million for investments in start-up companies that are developing technology in the fields of agri-food technology, environment and sustainability for the food industry.

Financial technology
Israel Fintech Intends to raise about NIS 25 million for investment in companies that have developed a primary product in the field of finance and banking, and have not yet reached revenue of $ 1 million from the keys to financial technology. The partnership will invest $ 0.5-2 million in each company, and has already signed an agreement with Pinkom, which develops technology that allows comparisons of records with different structures and in different languages ​​to deal with spelling, language and other problems in different databases.

Software, Internet and Innovation
Unicorn Technologies Raised about NIS 70 million and in addition two series of options were issued which, if exercised, will flow another NIS 95 million into the partnership. Unicorn’s investment strategy is based on targeting young companies operating in the fields of technology, software and the Internet, with an investment of between $ 1-2 million in each company over a period of about three years. The partnership currently holds three $ 2.5 million binding investment agreements: CyberWan, Mobile and WeFlash.

R&D Partnership The Argentine Islands Submit a draft prospectus in preparation for raising several tens of millions of shekels for investment in the areas of IoT, a smart city, electricity storage, the future work environment, Industry 4.0, as well as precision agriculture and biological paints. So far, the partnership has invested in companies: Parrot Systems, Eicha Technologies and Chekratech. The Argento Group began its journey in the 1990s, as a wealth management company, and even led the mobilization of Mobilai’s first capital, which was still worth about NIS 5 million.

The youngest is aiming to create a broad ETF
The last to announce joining the celebration is Big-Tech 50 Which raised over NIS 85 million in an initial public offering in order to build a portfolio of the 50 largest private technology companies in Israel, similar to an index, and allow investment in them before they are issued to the public (Pre IPO) or sold to giant international companies. The target companies will be selected according to the following criteria: the value of the company when investing in it will be at least $ 250 million; The company has been in existence for at least 3 years; At least one venture capital fund is invested in the company; The company generates ARR (Annual Recurring Revenue) of at least $ 10 million and shows growth over the past three years. The average annual growth rate in the value of companies that meet the criteria is over 30% per year, far beyond any other tradable technological index.

Big-Tech 50 R&D already has signed deals to buy shares in 4 companies: IronSource, Via, Payoneer, Fundbox, in addition to 5 deals in various signing stages. The largest investment, at the moment, is $ 2 million (NIS 7 million). Via, which has developed a collaborative travel platform and is valued at $ 2.3 billion last March, is expected to improve its investment in Pioneer as Pioneer enters Spack.

Big-Tech 50 R&D raised NIS 85 million for an investment in about 15 target companies, with initially each size up to $ 2 million. Later, the size of the investment will increase to $ 5 million with the intention of reaching an investment in 50 companies with a total value of About a billion shekels.

Not everything is pink
The partnerships encourage the Israeli economy and contribute to the development of start-up companies in Israel, but not everything is rosy. Since last summer, about 5 R&D partnerships have been traded, with currently only one of them achieving a positive return for investors. The Securities Authority has begun to fear the stock market The authority is examining the possibility of increasing the amount of investment raised from NIS 25 million to NIS 50 million, with the public having to hold at least NIS 40 million. The authority is also considering extending the blocking period for implementation by developers from 18 months to 36 months as well as raising the minimum threshold for investment from the amount raised before the issue (the current minimum threshold, 15% to 20%).

With all the “hype” around those “ETFs”, at the end of the day it’s an investment in high-risk start-ups, and despite the dispersion those partnerships strive to achieve, it’s actually an investment in the entrepreneur, his reputation, and his ability to target those exits. Admittedly we hear about a huge wave of offerings, alongside countless new millionaires,
But about all those who failed along the way, burned time and many millions, was not heard. The dream return on a start-up comes from the high risk inherent in it, so for entrepreneurs it is a “WIN WIN” – if we make an exit we will make a profit, if not the public will pay.

This is how it is in America
On Wall Street there are over 20 ETFs that achieved a return of 100% or more during 2020, but most of them are grouped into several sectors – green energy, next generation technology, and online retail. Like or dislike ETFs, you can learn a lot from them, tracking the strongest ETFs in the market can teach about an accelerating sector, or provide directions of thought, what stocks are in the index and what weight do they carry? And you might be surprised by those who came in. Invest as big as: ETFs that have achieved a 100% + return