Investing in homeland security
Athlone Global Security finds Israel's best security start-ups.
Batya Feldman 2 Sep 07 17:16
Last week, homeland security investment company Athlone Global Security Inc. held a conference for its investors to meet the company's management team. At the meeting, Athlone's joint chairmen Maj. Gen. (Res) Doron Almog, and Stan Bharti hosted a string of top specialists from military and intelligence agencies, all of who have now joined the company's advisory board. Athlone was founded last year by Almog and Bharti, a colorful US businessman, with the aim of investing in Israeli homeland security companies and bringing them to the main market in the US. Athlone has raised $40 million in investment, most of it from Goldman Sachs and UK hedge fund RAB Capital plc., and the rest from a long list US and Canadian investors. The company has invested $7.5 million to date in a number of Israeli start-ups. Arik Nir, a former officer in the security services is managing director, and manages the company's activity in Israel.
Athlone intends to continue making investments, and is due to hold an IPO in the US in the near future. Almog and his partners believe this is the proper approach to take in a field like homeland security. "We feel that the holding company model is more suitable that the venture capital fund model we considered initially," says Almog.
In the meantime, Athlone's advisory board boasts leading personalities in the defense and security world, including, former Mossad director general Ephraim Halevy, former FBI associate deputy director Oliver "Buck" Revell, former US forces commander in Iraq Lt. Gen. (Ret) Jay Garner, Major General (Ret) Lewis W. Mackenzie, former NATO forces commander in Europe, and Terayon Communication Systems Inc. founder Dr. Zaki Rabib. The company's board includes Arik Nir, Concord Ventures general partner Yaron Rosenboim, Oracle Systems Israel CEO Moshe Horev, and former Royal Bank of Canada-Dominion Securities managing director Gordon Hawke.
According to recently published research, the homeland security market will reach $150 billion by 2015. Last week UK market research company Venture Business Research reported that homeland security companies in the US and Europe received a total of $4.5 billion in venture capital and private equity investment in 2006, 34% more than in the previous year.
Globes: Which kinds of company will you invest in?
Arik Nir: "We'll invest in companies that develop technological solutions for day-to-day use that are designed to improve work procedures and streamline processes. Most of the investment will go to Israeli companies. Israel has good solutions in the field, and the entrepreneurs behind these companies are both mature and experienced."
So far people in Israel have had ideas and talked about homeland security but there haven't been any investment companies that concentrate on the field.
Doron Almog: "This is a tremendous economic opportunity, which has so far remained untapped. It could be either as a result of the difficulties in penetration or the ability to introduce products to the global defense product basket, or as a result of lack of persistence. The last two years have seen the evolvement of a regulatory process and there are now standards, so a lot of institutions are now clear on what they need.
"Obviously, we will aim to avoid large-scale spending. Most companies and organizations have IT protection systems in place, but the market has been waiting for the publication of the regulation governing physical protection. This process has now reached fruition. Our position is clear. We will never get involved with the day-to-day products world, but we do want to invest in products that will become a necessity, ones that will also deliver added value in the form of savings on manpower and greater efficiency in processes, such as automated entry monitoring systems, for example."
Which fields will you focus on?
"Homeland security is a vast field. According to the Chief Scientist, there are 1,000 Israeli start-ups active in this field, and we believe that 800 of these clearly belong in it. The underlying idea is that we'll have someone in each field, who will concentrate on fostering ties with the market. That's why we've brought in the world's leading specialists to serve on our advisory board. One field that interests us is infrastructure protection, and I refer here to all those kinds of infrastructure that could be at risk, such as water, electricity and energy facilities. This is a civilian market which the government regulates, to an extent, from a distance. We will also be looking at entry control and physical security applications which, as I see it, also include, for example, public transport and office buildings. The fourth field is information security, from the perspective of integration of the various information security fields.
"We will make early stage investments, and we will play a hands-on role in the companies in order to help them progress faster. We've made six investments so far, and we're now developing our contacts with big companies such as Boeing, IBM, Lockheed Martin, and others. We will engage the target markets through our advisory committee."
One of the claims that have been made about this field is that there is no exit strategy for companies.
"We believe that the exits will be delivered principally through mergers and acquisitions and less through public offerings. This is a market that is dominated by the big companies, and led by the leading integrators. This, however, is one of our reasons for opting for a holding company model rather than a venture capital fund one. Holding companies are not measured by quick exits, but by the value and marketability of the stock."
How did you get all these hot names to join?
Nir: "Ask them."
Gordon Hawke answers first, recalling how he became an enthusiastic supporter of the venture. "I'm Stan Bharti's partner in Canada, and when he proposed setting up the fund I went along, even though I had been considering something else at the time. I'm responsible for building and positioning the fund. I became even more enthusiastic after I visited Israel and saw the local team and the opportunities in the Israeli market. We'll invest in small companies and bring them to the US."
Buck Revell: "We've seen some small companies that are developing fascinating products during the visit to Israel, and we can help these companies reach the key market in the US. I am very excited."
Jay Garner: "Israel has a long record of technological development for security products. It was clear to me that joint Israeli-American cooperation could produce some extremely interesting opportunities. So I decided to join."
Bharti, a colorful Indian American businessman, was the one that helped tie up all the loose ends. An associate recalls that on last Independence Day he arrived at the fashionable Spago Restaurant in Beverley Hills California, draped in an Israeli flag, and called out "Happy Holiday".
"Two years ago, after a long career in finance and investment, I began thinking about what the next big thing would be, and I realized that the international war against terror will change the picture," Bharti recalls. "A mutual friend introduced me to Almog and the rest is history. The model we developed was to identify the best Israeli companies, invest in them, and help them progress. We raised $10 million in shareholders' equity and invested in companies in order to establish credibility and prove initial feasibility. Now that we have brought in Goldman Sachs and RAB Capital, we can continue making investments. We're not competing with GE or Lockheed Martin, but we do hope that there will be GEs, that will be able to acquire the companies we develop."
Ephraim Halevy: "Almog contacted me and asked me to join the fund's advisory board. He knows that in my role as Mossad chief and my other senior positions, I had a need for innovative, creative, technological solutions designed to provide solutions to operational needs. As a former consumer of this technology, I can assist in assessing new companies and estimate the development's prospects and the chances of penetrating the market. Additionally, in my capacity as national security adviser to the prime minister, I oversaw a wide range of international contacts and I think that by joining I have given the fund an element of credibility."
Published by Globes [online], Israel business news - www.globes.co.il - on September 2, 2007
