FISCHER: “Israeli high-tech has undergone a process of maturation”

"Israeli high-tech has undergone a process of maturation and understanding that the main goal is ‘to grow in order to stay’, as opposed to earlier years, when the climate was ‘to grow until the exit’,” explained Eran Yaniv, co-head of FISCHER's Hi-Tech, Technology & Venture Capital practice and a partner in the Corporate Department. “In recent years, there are quite a few companies valued at over a billion dollars that continue to run and conquer the world because this is the worldview of the entrepreneurs behind them. Israeli high-tech is no longer just setting up companies but building and maintaining world leadership in their fields."

FISCHER is one of the top Israeli law firms participating in CTech’s Most Important Gateways to Israeli Tech series. The co-heads of the firm's Hi-Tech, Technology & Venture Capital practice department answered a series of questions asked by CTech about their involvement in the Israeli ecosystem and the tech market trends of 2022.

Raz Tepper and Eran Yaniv, both serve as co-head of FISCHER's Hi-Tech, Technology & Venture Capital practice and a partner in the Corporate Department

Name of firm: FISCHER (FBC & Co.)

Tech sectors of expertise: Venture Capital including local and global Venture Funds, Corporate VCs and strategic investors and early to late-stage start-up companies. Specific area expertise include: Cybersecurity; IT; Renewables; Agro-Tech; Food-Tech; Communications; Mobile; Bio-Tech; Med-Tech; AI; Cloud; Auto-Tech; Fin-Tech; Blockchain; Big Data; IoT; HR; Real Estate.

Number of lawyers in the tech and VC departments: Over 50

Heads of department:

Adv. Eran Yaniv, co-head of FISCHER's Hi-Tech, Technology & Venture Capital practice and a partner in the Corporate Department.

Adv. Raz Tepper, co-head of FISCHER's Hi-Tech, Technology & Venture Capital practice and a partner in the Corporate Department.

Notable clients:

** This is a partial list that includes representative examples of our clientele:

• Qualcomm Ventures
• Claridge Israel
• OrbiMed
• Viola Credit
• Edwards Lifesciences LLC
• Tower Semiconductor
• Pitango Venture Capital
• Rainbow Group
• Zerto
• Bristol-Meyers Squibb Company
• ION CROSSOVER PARTNERS
• Kamada
• Ecoppia Scientific Ltd
• Check-Cap Ltd
• Mizrahi Tefahot Invest
• Claltech
• LeumiTech
• Animoca Brands Corporation Ltd
• Otama
• StarkWare
• Peregrine Ventures

Notable Deals in 2020-2022:

** This is a partial list which includes representative examples of deals:

• Representation of Qualcomm Technologies in its US$ 340M acquisition of Cellwize Wireless Technologies.
• Representation of ECI Telecom in its approx. US$ 485M sale to Ribbon Communications, a US company listed on NASDAQ.
• Representation of Zerto in its acquisition by HPE (Hewlett Packard Enterprise (HPE) for approximately US$ 400M.
• Representation of Luminera Derm Ltd., and its affiliated companies, in a share and asset transaction, pursuant to which it sold its dermal filler portfolio and R&D pipeline to AbbVie Inc’s unit Allergan Aesthetics, for a confidential consideration of hundreds of millions of US.
• Representation of Grubhub in a complex acquisition of the Israeli campus food ordering company Tapingo Ltd., for US$ 150M.
• Representation of Rainbow and its group of portfolio companies since its inspection, and through all its fund-raising rounds, totaling in more than US$ 500M to date and all strategic agreements, including recent approx. US$70M fund raising by BlueWind Medical.
• Representation of Edwards Lifesciences LLC (Valtech Cardio Ltd.), in the investment in and acquisition of Israeli Med-Tech companies.
• Representation of the OrbiMed fund in a series of investments in MedTech start-ups, each of them is valued at tens of millions of dollars.
• Representation in a merger agreement between HCC, Alpha Tau Medical Ltd.’s, an Israeli SPAC, and Archery Merger Sub Inc., its wholly owned Delaware subsidiary, in a transaction valued at hundreds of millions of dollars.
• Representation of RingCentral, Inc.’s acquisition of the technology and engineering team of Kindite Ltd., which required the Israeli Ministry of Defense’s approval, for an undisclosed amount.
• Representation of ClalTech in its investment transactions in technology startup companies, in an aggregated amount of over US$ 500M.
• Representation of ION CROSSOVER PARTNERS in ins investment transactions in technology startup companies, in an aggregated amount of Approx. US$ 500M.
• Representation of Claridge Israel in its investment transactions in technology startup companies, in an aggregated amount of over US$ 200M.
• Representation of Viola Fund in its investment transactions in technology startup companies, in an aggregated amount of over US$ 100M.

Following the SPAC and IPO boom in 2021 - What trends are you expecting for the upcoming short and medium-term?

Eran Yaniv and Raz Tepper, Partners and Co-Heads of the Hi-Tech, Technology & Venture Capital practice, FISCHER (FBC & Co.), both agree that the most notable trend in the near future will be in M&A deals.

According to Yaniv: "The market will continue to be vibrant, and we already see fewer IPOs compared to 2021. We think that the market conditions create opportunities for PEs and strategic investors, some of whom were less active in the past year, to invest available capital in interesting companies, at more reasonable multiples. While some tech companies raised significant capital in both the private and public markets, many others will need to raise additional funds to finance their operations; this creates an opportunity and leverage for private equity and venture capital funds, which will be even more dominant. We already see fewer competing terms sheets for single transactions as compared to what we’ve seen in the recent past. We will also see an increase in ‘Taking Private’ transactions.”

Tepper adds: "Financial markets and businesses are circulars. This year the access to public capital will be extremely limited to non-existing and it would be the turn of private investors and strategic players to take over the landscape for financing and acquiring Tech Companies. VC funds will be more and more active as valuation decreases and competition over each opportunity will be moderate. We would see much more ‘going private’ transactions towards the end of 2022 as the new lower valuations effect is digested. We will see much more M&A transactions since the gap between ask and bid for companies is likely to narrow with no attractive public alternative and players with cash on their balance sheet who waited on the sidelines for the market turn will be much more active. We will also see many ‘add on’ acquisitions a little later in the year when good companies run out of cash and PE back companies will use the opportunity to increase their balance sheet through smaller acquisitions."

Will we continue to see funding rounds at the fantastic valuations we saw last year? Why?

Tepper explains: "It is safe to assume that we will not see valuations at the same levels we saw last year. At the same time, it is important to say that there are still good companies that will be able to raise capital as needed, given, of course, that they are backed by strong management and supportive financial data. The values we expect to see will be realistic, grounded in the actual performance of the companies and less in trends or a market that has created almost illogical valuations."

Yaniv further points out that this depends on who leads the companies: "As a high-end law firm, we handle large-scale transactions every year and accompany Israeli and foreign high-tech companies with significant business activity. The market is sometimes volatile, and companies need to be armed with patience. We have strong confidence in the Israeli tech and believe that we will continue to see successful ventures, while the valuations would have a greater liaison to the financial criteria. Israeli technology and Israeli entrepreneurs are here to stay. There certainly seems to be a stronger demand from investors for primary investments, ensuring that a significant portion of the capital would serve to finance the companies’ activities and growth, and a reciprocal reduction in the scope of secondary transactions."

What is the most important process Israeli high-tech has experienced over the past two years and where does it leave the industry?

Yaniv refers to the impressive growth of Israeli high-tech and says that "Israeli high-tech has undergone a process of maturation and understanding that the main goal is ‘to grow in order to stay’, as opposed to earlier years, when the climate was ‘to grow until the exit’. In recent years, there are quite a few companies valued at over a billion dollars that continue to run and conquer the world because this is the worldview of the entrepreneurs behind them. Israeli high-tech is no longer just setting up companies but building and maintaining world leadership in their fields."

Why aren’t there enough Israeli institutional investors in tech? How should they be encouraged?

Tepper points out that the trend of institutional entry into high-tech is positive. "In recent years we are seeing more and more institutional entry into high-tech investments, in part thanks to the government's Benefit Track No. 43, which provides protection for the investments of institutional investors in the Tech industry. This track has led institutional investors not only to become more interested in the field but also to assign designated teams dedicated to investments in tech, these teams analyze and explore the tech landscape and are becoming savvier about high-tech investments and creative in structuring investments. I believe that as the process continues, they will become even more professional, will increase the volume of their investments and we will see more and see more investments led by institutional investors, and I think institutional investors should be encouraged to continue to build these infrastructures."

Yaniv reinforces this trend and adds: "The Israeli institutional investors have many opportunities and an important role in the technology sector. Institutional investors have access to capital and can build their investment infrastructure in Israeli technology through state-backed programs that are not utilized enough, and it will certainly be a welcome trend to see a more massive entry into the field on their part."

Are there any sub-sectors that seem riskier to you?

Yaniv: "Blockchain is a very interesting field, whose connection to the world of crypto carries with it relatively many more risks. In addition, the field of Biomed, by its very nature, requires many years of investment at many challenging stages. At the same time, Biomed companies that develop research platforms that are integrated with computational methods, reduce risk in both the discovery and development phases. These companies demonstrate how mathematical algorithms and AI can reduce the risk, the capital requirements and even shorten the research cycles for biotech companies.”

Tepper refers to the Cyber sector and adds: “Cybersecurity is still extremely important and interesting but to a large scale very fragmented. Companies which offer full-range solutions would probably be more successful than others. "

What is the most important thing an entrepreneur should focus on when selecting a law firm?

Tepper and Yaniv both agree that it is advisable to look at a few combined parameters - the experience of the team handling the company or project; a law firm that has a strong business orientation and knows how to give business advice and not just legal advice; the absence of a widespread conflict of interest between the firm and potential investors; an office that knows how to give a complete solution to all the required matters; lawyers with whom you have good personal chemistry; and finally - lawyers who have a good relationship with investors and whose opinion is agreeable to them.

They also offer to look for a law firm that has measurable depth, the ability to understand the areas of activity deep and wide, that will know how to give the best answer to your needs, for example - what is the right vehicle for carrying out the fundraising. In addition, "High-Tech" is a very broad term, and simplification of it may do an injustice to your company. Therefore, check the law firm’s level of knowledge and understanding in your specific business - those who understand cyber will not necessarily understand medical devices or pharma.

Basic mistakes made by entrepreneurs.

Tepper and Yaniv point out the following as common mistakes:

• Building the relationship between the founders - a clear distribution of roles must be ensured; also, keep in mind that commitments made before the establishment of the company have legal standing.
• Delaying addressing legal issues will not eliminate them - but will only result in them costing more time and money down the road.
• Run Due Diligence on investors in exactly the same way they do on the company - will you get along together in the future? How can they help you grow your company?
• Raising small amounts from many investors - leads to great difficulty in running a company, makes it difficult to work with the bigger investors later on, and also forces you to get the consent of a lot of people at a time.
• Raising a lot of money based on round-dependent convertible securities - leads to a lack of understanding of the Cap Table and, further down the road, to a surprise in the scope of dilution of the company's founders and the significant impact that one instrument may have on another.

What are the most important parameters for a law firm when deciding to represent an entrepreneur in a deal, and what would be a reason to turn down an entrepreneur?

Tepper: "We look at our clients as our partners and look for those who are passionate for success and are fearless to address the most complex issues."

Yaniv: "We look at the people, not the products (of which our clients will always have a better understanding than us). That is why we are looking for entrepreneurs who have a real passion for their work combined with agility and the ability to adapt quickly to change."

What are the most crucial stages of a deal?

According to Yaniv, "The structuring of the transaction is a most important phase. We help the client navigate the regulatory and legal maze and understand the right way to structure the transaction within the context of a range of issues, such as taxation; transferring know-how from Israel abroad; and more. Also, as trusted and experienced professionals, we have an obligation to find a solution that all parties will benefit from while the transaction creates value for them. A good example of this is the setting of Earn-Out clauses in the contract, pre-determined milestones that reduce the risks for all parties to the transaction.”

Tepper, too, refers to the initial stages of the transactions and says that "the Term Sheet stage - determining the details of the transaction - is critical. At this stage, the economic basis for the transaction is determined, and the structure of the relationships between the parties is set. One has to come well-prepared, master the details, understand the motivations and needs of all parties involved to obtain the best outcome for all involved."

Examples of an interesting deal from the past two years from which important lessons can be learned.

Tepper: "The sale of Luminera for hundreds of millions of dollars to the pharma giant Abbvie, which took place in October 2020. The main lesson from the deal is that once a company is structured soundly from the ground up - a successful deal can be made for its sale in the future, even in the midst of a global crisis like the Covid-19, as happened here and while the acquirer undergoes an acquisition itself (in this case Allergan who was the party for the acquisition initially was acquired by Abbvie during the negotiations of the acquisition of Luminera). In addition, and no less important, it is the law firm's multidisciplinary ability to address many different issues applicable to a transaction – not just the negotiations of the transaction itself, but also the complex regulatory landscape, understanding the needs applicable for a multinational player, relationships with different constituencies (service providers, clients, employees, etc.) - which is a critical factor to ultimately bring the transaction across the finish line."

Yaniv specifies a deal from a different field, but with a similar lesson regarding thinking into the future. "ECI's merger deal with Ribbon Communications was signed about two years ago, and one of the biggest lessons from it is that when building the instruments for carrying out a merger transaction, using equity or debt, one must look two and three years ahead and understand how these instruments would function in different scenarios. How would the agreement or the financial instrument ‘operate’ or be settled if the company decides to take effect a public offering, a stock sale, or an asset transaction? Could investors, shareholders, or other constituents hinder the deal? And more.”