The Marker.com has learned that Israeli startup Schema recently completed its third private placement, raising $26 million at a company value of $86 million, after money.
The round was led by the BRM Capital venture fund, with a $10 million investment. Schema’s existing investors also participated, including venture capital funds Walden Israel, Walden U.S., Gemini, Challenge Fund, and Eurofund. Additional investors participating in the round were Dutch investment fund Docor and American funds TL Ventures and EnerTech Capital Partners.
According to Schema CEO Dr. Yosi Ben-Dov, the company began the round with the intention of raising “only” $15 million, at a company value of $60 million, before money. First aboard was Jerusalem-based fund BRM, which managed the investment from its New Jersey headquarters in the U.S.
“BRM was the first to decide to invest in our company, but competing for the lead in the round were sister venture funds TL Ventures and EnerTech Capital Partners,” says Ben-Dov. “We reached our original funding goal very quickly. We then contacted the sister funds again, with whose staff we had hit it off at the initial presentation of the company and its technology, and suggested they join as well.”
Round Increased by $11 Million
The offer was accepted and the round increased by $10 million, with the previous investors insisting on exercising their preemptive rights for the new amount, which added another $1 million.
Schema develops and installs Telecom Resource Management systems (TRM). These systems address the need to manage resources through allocation of spectrum frequencies and infrastructure equipment for wireless networks. Schema solutions are not only intended for conserving those resources, but are designed to help carriers keep up with technological requirements and alleviate possible malfunctions of such networks.
Schema’s system is called Falcom, whose purpose is to enable cellular providers to maximize network capacity, provide greater flexibility in utilizing available resources, and significantly improve quality of service to end customers.
Optimizing Allocation
Falcom’s two principal components are the Builder and the Planner. The first is responsible for gathering and presenting information on cellular network performance, using tools such as forecasts produced by specially designed simulators, drive tests by special vehicles traveling in the areas covered, which gather data on the network’s performance, and data gathered regularly on the network’s switches and computers.
As important as the Builder is for both the functioning of Schema’s system and its value for the cellular operator (the customer) is concerned, the Planner is the company’s technological flagship. This subsystem is a strong optimization tool based on complex mathematical algorithms, designed to fully automate frequency allocation planning for the cellular system.
The Planner component is based on a mathematical engine developed by company founder, Dr. Yuval Davidor, when he worked at the Weizmann Institute of Science. The optimization engine is based on sophisticated evolutionary algorithms—“evolutionary” because like processes occurring in nature, they too select the best results from among the possibilities, and allow only them “to survive”.
Thus, Falcom’s technology core functions in a type of natural selection process, ensuring optimal allocation of frequencies and resources on the network. Incidentally, this core technology is completely generic and has already served Dr. Davidor for a variety of tasks, from balancing missiles to arranging containers on cargo ships.
Frequency allocation planning is a very important element in the cellular system, since such a system is based on the principle that more than one customer can use a certain frequency at any given moment. The condition for this principle is that the two customers using the same frequency and the cellular sites connecting them to the system are located far enough from each other to prevent mutual disruptions.
It is also important to understand that frequencies are a very costly resource for carriers. Not only are they very expensive to acquire, but in certain cases, they are simply unavailable. “In the last frequency tender in the U.S., the federal government received a fantastic $17 billion for the spectrum it offered for sale,” says Ben-Dov. “A 10-mhtz range in the New York area, which we successfully cleared for one of our customers using Falcom, would have cost him hundreds of millions of dollars from the FCC or another carrier.”
Ben-Dov maintains that the carrier’s cellular engineers in the field are usually unhappy when a decision is made to retain Schema’s services to improve the system’s performance. “They always think they did the best job possible in planning the network,” he explains. “That was also the case in our last project, in which we were challenged to increase network capacity by 30%. The engineers in the field went to sleep on Friday night with a network capacity of 3,500 channels before our solution was turned on. They woke up Saturday morning with a capacity of 10,700 channels. Since then, they have been our best good-will ambassadors.”
Success against a backdrop of cancellations and cutbacks
Although in recent weeks there have been numerous reports of the completion of private placements, some on a similar scale to Schema’s, almost all were rounds that began many months ago, around mid-2000. On the other hand, Schema began its capital raise only in September, precisely when the crisis in the venture capital market and private offerings started, about six months after the collapse of the public capital markets, particularly the Nasdaq exchange.
The political-security situation in Israel also worsened at that time; many concerns expressed concern that investments in Israeli high tech would be hurt as a result. “In recent months management consulted with a number of investment bankers,” says the Schema CEO. “They advised us to lower the valuation by 30% because of Nasdaq, and then another 30% because of the situation in Israel.”
The private placement exceeded expectations without the valuation being lowered. Completion of a financing round on this scale should definitely be considered a remarkable success. According to Dr. Ben-Dov, the current telecom industry crisis may have actually benefited Schema at this time.
“The entire sector has understood that it cannot continue indefinitely posting huge losses, and therefore cannot continue to freely spend money on purchases of infrastructures and additional frequency ranges,” he explains. “Our technology succeeds in getting much more out of all the infrastructures and resources already possessed by communications providers, thereby saving them huge sums of money.”
Schema Will Employ 130 Staff by Year-End
Joining Schema’s board of directors following the investment were BRM’s latest recruit, Mike Mers, a managing partner specializing in telecom and cellular infrastructures, and William (Bill) Kingsley, a managing partner in the EnerTech fund. Kingsley is a recent senior executive in U.S. cellular company Sprint PCS. In addition to Kingsley’s close relations with Schema management, Schema hopes his familiarity with potential customers and their work methods will help promote business.
The company currently has 70 employees, up more than 100% from the end of 1999, and hopes to have 130 employees by year-end. Schema’s U.S. office in New Jersey, right across the street from Bell Labs, already includes a few members of the American management team with telecom industry experience, including the president and vice president for marketing.
Ben-Dov, who majored in operations research and has been a vice president of Amdocs, says that personnel recruitment is a very serious bottleneck for the company. Management says it is compelled to “steal” RF engineers from cellular activity in Israel and the U.S., even if some find this a bit annoying.
The company ended 2000 with $2 million in sales from U.S. Bell Atlantic and other still undisclosed customers. The sales goal for 2001 is $8 million, a planned breakthrough in the European market. “The Far East is also a great target market, but we haven’t yet taken it up,” says the managing director.
Another goal for this year is the continued R&D efforts, mainly completion of the development of a product line--currently available only for TMDA and GSM networks-for the future technologies UMTS and W-CDMA as well.
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