Jonathan Kolodny | Ion Crossover Partners

Jonathan Kolodny | Ion Crossover Partners

How a Cambridge neuroscientist, who helped oversee the $3.2 billion SodaStream acquisition, is capitalizing on the maturation of Israel’s startup ecosystem

Jonathan, you’ve had a really interesting career arc – tell us how you arrived from a PhD program in neuroscience at Cambridge to Israel’s capital markets?

Frankly, by the time I finished my PhD I was bored with academia. McKinsey was reaching out to people with slightly unusual backgrounds, and I basically got an MBA in a month through their training program. After several years in the US and UK, the real life-changing moment was having the opportunity to consult for an Israeli company – Israel Chemicals. It opened my eyes to the opportunity to bring international-quality management consulting to Israeli companies. By 2000 I had convinced McKinsey to open an Israel office, which I managed until 2011; I left McKinsey in 2013.

To do what?

I was tapped to become CEO of what was, at the time, Israel’s largest privately held company, Keter Plastics. You might recognize Keter from the plastic chairs on the beaches of Tel Aviv, but they’re actually the largest global consumer resin-products manufacturer. But far from any misperceptions one might have about a manufacturing company founded in Israel in 1948, Keter had by far the largest margins in its industry because of its focus on innovation. This made it an attractive private equity target, and the company was ultimately bought in 2016 by BC Partners (UK) for $1.7bil. I stepped down as CEO in 2018 when business operations were consolidated in the US and was approached to help found ION Crossover Partners (ICP.)

We’ll get to ICP in a moment, but while we’re on the subject of private equity, give us your take on what is driving value and returns for PE managers in Israel?

Even though mature companies in Israel like Keter fostered an innovative culture, the traditional conglomerates who owned them weren’t experts at extracting their specific value from within a diverse portfolio. These owners underestimated their growth potential and therefore the valuation.

I’ll give you an example: ISCAR – very successful, great cash generation. Warren Buffet came in and saw the global growth potential, and Berkshire doubled their investment in a few years. The same can be said of Bezeq, Tnuva, and SodaStream.

You were on the board of SodaStream from 2015 until it was sold to Pepsi. Give us an insider’s take.

Look, I was asked to join the board of SodaStream by one of its largest shareholders who was threatening a proxy fight. People may not remember that after the initial hype, by 2016 SODA had dropped from $73 to $13. No one was able to copy their innovation, but they needed better governance, skills and processes to reach their true potential. This was provided by an incredible CEO (Daniel Birnbaum) and an engaged board, culminating in the Pepsi acquisition (2018) at $143/share.

So, by this point, you’ve banked tremendous experience. Tell us about ION Crossover Partners. What is a “crossover fund”?

A crossover fund is a late-stage investor who helps a company cross over from privately held ownership through an IPO into public investors. This is a large asset class in the US, with firms like Tiger Global, Dragoneer and TCV, but it hadn’t really existed in Israel. A crossover investor provides capital and a lot more hands on support for a company that is asking, “How are we going to navigate being a public company?”

Sounds like a pretty narrow niche. Were you concerned about the supply of potential targets?

That’s a great question. When we started people asked us, “Really, how many companies in Israel are 12-18 months from an IPO?” We mapped it at the time and thought maybe 25-30, and we put together our pretty slide with all their logos.

But here is where the evolution of the StartUp Nation ecosystem became apparent: there is a growing cadre of very talented managers in Israel that are looking forward to being CEOs of multi-billion publicly traded companies. These companies are benefitting from the inflow of growth capital from Israel-based firms like Israel Growth Partners and Qumra, as well as foreign capital. So, our original estimate was off considerably – the number of near-term IPO potential companies was really closer to 50.

So, is the label untrue: are Israeli entrepreneurs capable of leading large companies, not just creating good technologies?

I don’t think it was necessarily an issue of capability – it was more about economics: Israeli entrepreneurs used to be poor. Now you have big companies being led by guys like Moshe Yanai at Inifinidat – he’s a 3x success story with the resources to play the long game. In turn, this emboldens more CEOs to believe they can be CEO of a large publicly traded company. But they need the expertise of a firm like ION Crossover to shepherd that process.

Any other examples?

Sure. Monday.com – when we originally looked at them, they didn’t meet our screen – their revenue runway wasn’t there. But they’re growing revenue 180% a year and raising funding at a $1.9bil cap; they could go public next year.

You completed the roadshow for ICP’s first fund earlier this year. What was the most common question or concern that potential investors raised?

Most of the LPs we spoke with had some familiarity with Israel, but they were surprised the pre-IPO target universe was this robust. We actually ended our raise early because one of our portfolio companies (Fiverr) was set to go public, and we had to establish a final date for investors to get in at cost.

As an investment manager in Israel, what concern keeps you up at night?

Personally, I’m still getting used to the shift of worrying about clients’ financial success versus promoting corporate health as a consultant or board member. Bigger picture, as an Israeli, I have concern about unclear regulatory certainty in Israel. This can be a deterrent to multinationals looking at doing business here. We’re seeing this in the oil and gas arena and in the telecom infrastructure around 5G. This would present a tremendous missed opportunity for Israel and needs to be addressed.

Thanks, Jonathan.