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Flush in Funds

By Monica Alleven
WirelessWeek – July 15, 2007

Smarter and better informed than they were in the late 1990s, venture capitalists (VCs) continue putting money into wireless startups.
Eran Eshed jokes that his home base is a seat on a plane. Spending about half his time traveling, he epitomizes the life of a marketing executive with a startup company. In a recent interview, he talked via phone at 11 p.m. from Japan to accommodate a reporter on the U.S. West Coast.

Sleep is hard to come by in the startup environment. Eshed, co-founder and vice president of marketing and business development, and a good number of his colleagues at Altair Semiconductor left Texas Instruments to found the startup, based in Israel, in 2005.
They knew what they were in for. It’s expensive to develop silicon and take it to market, and while venture capitalists (VCs) are throwing money into mobile content companies, few of them understand the chip business enough to justify the risk.

Combine that with Altair’s focus on the WiMAX space, and the sphere of potential investors gets even smaller. “You have to have a very good story to get money from VCs,” Eshed says. “They are being very cautious with investments they make now in WiMAX. There is a perception it’s overhyped and it’s slowing.”

While Eshed doesn’t share that perception, it was all the more gratifying when Altair recently closed an $18 million Series B funding round. U.S. firm Bessemer Venture Partners (BVP) led the round, joined by returning investors BRM Capital, Giza Venture Capital and Jerusalem Venture Partners. The investment followed an earlier round of $8 million.

Altair is just one of the wireless companies that have wooed VCs in recent months. Between the first quarter of 2006 and the first quarter of 2007, investors conducted 208 wireless deals, for a grand total of more than $1.8 billion, according to a PricewaterhouseCoopers/National Venture Capital Association MoneyTree Report.

VCs say what’s driving their investments in wireless is consumers’ insatiable demand for wireless devices and content, as well as companies that are solving real problems with economically viable solutions. While an initial public offering (IPO) is one exit strategy for VCs, the increased involvement of private equity firms presents another exit strategy in terms of acquisitions.

Is the bubble going to burst? Tracy Lefteroff, global venture capital practice partner at PricewaterhouseCoopers, doesn’t see it that way. “I think what we’re seeing is very rational, and I don’t see a bubble at all,” he says, adding the level of funding is nowhere near that of 1999 and 2000. “The level of investment is very sustainable.

Frazier Technology Ventures recently co-led a $7.2 million round of financing for IceBreaker, a mobile social software company, with existing investor Lightspeed Venture Partners. One of IceBreaker’s early products is Crush or Flush, a flirt/chat and hook-up application for cell phones and/or PC users.

Peter Zaballos, a former marketing executive at RealNetworks who is now vice president at Frazier, says the economics of starting an Internet-based company, whether desktop or mobile, have never been better. “Right now is a great time for people starting companies,” he says. “There are huge market forces creating big opportunities in the market.”

Consider the number of people using Internet e-mail or social networking sites, he says. The Internet has become the medium for people to find information, get entertained and socialize, yet the advertising hasn’t completely shifted over – yet.

Zaballos and his colleagues, all with experience working at startups and larger companies, bring a sort of “scar tissue,” if you will, to their endeavors. Frazier Technology specializes in Northwest-based companies, although it has and will invest in other geographies if it’s the right fit. The firm is based in Seattle, which makes it easy to physically visit their early stage investments when they need help working through strategy issues or references for filling various positions.

What distinguishes the mobile sector from the desktop Internet is access to consumers in the mobile arena is largely driven by service providers. It requires a lot of discipline and patience to get carriers to notice a startup and then strike some kind of deal. “You need to pass a pretty high bar,” Zaballos says.

Lightspeed’s partners have been investing in the mobile space for some time, going as far back to the early days when Openwave was “We try to focus on companies that could be large stand-alone companies over time,” says Jake Seid, general partner.

One of its investments was Riverbed Technology, a star IPO performer in 2006.

Seid and his partners are interested in looking at ways to rethink the network from the ground up to be optimized for data. “We do expect to increase our investment in wireless,” he says. “We believe we’re just at the beginning phases of interesting apps and infrastructure being developed. We think the opportunities are ahead of us as opposed to behind.”

As for Altair, whose product promises to reduce power consumption in WiMAX handsets, it’s still in development phases and expects its solution to be integrated into handheld devices next year. Although the heady times of the early wireless Internet years are past, to hear Eshed describe it, WiMAX could be the next Internet revolution. “It could really revolutionize the way people use services,” he says.