From the time of our initial investment, we are involved in nearly all aspects of our portfolio companies from technology development to business building.
Trendlines is a leader in providing technology and business development support to early-stage companies in the fields of medical and agricultural technologies. In addition to human capital, we provide our portfolio companies with technological, business development, and administrative support such as physical facilities and legal and financial services. We believe that this high support-level allows our companies to focus on developing their technology, product and markets, thereby reducing risk and increasing the chances for success.
We provide a range of services to our portfolio companies during their first years such as:
Trendlines focuses on creating and developing medical and agricultural technology companies with a view toward successful exits, which may include sales such as merger and acquisition transactions, listing on public stock exchanges, and other dispositions of our holdings.
Extensive network of relationships
We have cultivated an extensive network of relationships with entrepreneurs, inventors, technology transfer organizations, lawyers, patent attorneys, accountants, investment bankers, venture capitalists, and commercial enterprises in the medical and agricultural technologies markets. Through our extensive network of contacts, we are able to generate quality deal flow as well as undertake fund-raising activities.
Physical facilities and environment to support our portfolio companies
During their first 2 to 3 years of operations, our portfolio companies are housed in one of our two incubator facilities – in Israel or in Singapore. Our offices provide portfolio companies with a comfortable space in an entrepreneurial environment. The entrepreneurs benefit from working in close proximity with one another as it creates an environment that encourages cooperation, sharing ideas, brainstorming, and learning from one another. By working physically in one of our incubators, the companies have direct access to our extensive support structure, as well as to shared laboratories and equipment. Having the companies in our facilities increases our ability to monitor a company’s progress and to intervene, assist, and support as required.
Strong management team and track record
We have a strong management team with deep experience in creating, investing in, and developing companies to exit. Our Chief Executive Officers and Chairmen are both U.S.-born and educated and have lived in Israel for decades. Each has over 25 years of experience in investing, business development and bringing technologies to international markets, including in North America and China. Our key executive officers and staff are highly skilled and hold relevant qualifications.
We believe providing extensive technology and business support is a necessity to successfully establish and grow young portfolio companies. We have assembled a team that understands global markets and possesses the ability to bridge cultures to build businesses.
Leveraging on their collective experience, our management team is able to develop and execute exit strategies for our portfolio companies. In this regard, since our establishment in 2007, we have taken two of our portfolio companies, FlowSense Medical and E.T. View, public on the TASE by way of reverse mergers and led eight portfolio companies, including the two public companies, through successful acquisitions or sales to multinational corporations.
Effective use of funds
We initially fund our portfolio companies with what might be considered small amounts of capital so as to be highly efficient in our use of capital. Our ability to successfully limit the amount of capital that we put to work is predicated, in part, upon the fact that our portfolio companies, for at least their first 2 to 3 years, are located in our facilities and are extensively supported by our staff.
In addition, as a result of the franchises granted to Trendlines Medical and Trendlines Agtech by the Israeli government, we are able to leverage our portfolio investments with R&D grants from the Israeli government through the Technological Incubator Program (TIP). A typical investment of approximately US$120,000 is matched by the government in the form of contingent grants to a new company of approximately US$650,000.
Strong reputation and brand
Over the years, Trendlines Medical has twice been named the best incubator in Israel by the Israel’s Israel Innovation Authority (IIA) and five of our portfolio companies have been named the best start-ups of the year by the IIA. Together with our track record of successful companies and exits, and the events that we sponsor, we believe we have built a reputation as being one of the best incubator organizations in Israel.
Our strategies and future plans for the continued growth of our business are as follows:
We review the fair market value of each of our portfolio companies every quarter. When we believe there has been a change in the value of a portfolio company – either positive or negative – then the updated fair value will be determined by an external, independent valuation firm. Changes in valuation may be due to new investments, technological status change, commercial status change, or other factors. If there is an indication of irreparable difficulties and management believes there will be no return of investment, management may write-off the value. Even if none of these circumstances have occurred, every portfolio company’s fair value is reviewed at least annually by the third-party, independent valuation firm.
In performing the valuations, a variety of IFRS- compatible methodologies are used, including among others, Income Approach (“DCF”), Market Comparable Approach, Option Pricing Model (“OPM”), which is based on a company’s last non-Trendlines related investment valuation round, and Cost Approach. The valuation firm advises Trendlines as to the appropriate valuation methodology, for each specific portfolio company on a case by case basis, as described in our Annual Report.
When the most recent investment in a portfolio company is in preferred shares, the OPM Model is used to calculate a discount from the value of the preferred shares to apply to the portfolio company’s ordinary shares, which, typically, is what we hold; frequently, the OPM may result in a 20% to 40% discount being applied to the value of our holdings.
We believe that the value represents a reasonable estimate of the fair value as of the date measured. The work of the external third-party, independent valuation firm is performed in accordance with generally accepted valuation methodologies, and in accordance with IFRS principles and fairly states our portfolio companies’ values, taking into consideration measurement risks as appropriate for financial reporting. At the same time, experience has taught us that at Exit, when we have sold our shares in a portfolio company to a third-party in an arms-length transaction, it is not unusual for there to be a large jump in value of our holdings in that particular portfolio company, and we believe this jump occurs for the following reasons:
The Group, through its incubators, covers most of our portfolio companies’ overhead expenses, such as rent, insurance, and legal and accounting services, in their first two years. Additionally, we support our portfolio companies in technology development, business development, capital raising, access to government grants and administrative support. In consideration for the incubators’ obligation to provide these services to the portfolio companies over a company’s first two years, in accordance with our commitments to the Israel Innovation Authority (the IIA), the Group receives equity interests in the portfolio companies at the formation of the portfolio company. In our books we initially record the fair value of these equity interests as an asset with a corresponding liability which reflects our commitment to provide these services over a two-year period. As the services are provided, we reduce the amount of the liability and report income from services as we “earn” the equity that we received in the portfolio companies. The deferred revenues, although classified as liabilities in our balance sheet, are non-cash liabilities, but are our obligation to provide the services.
R&D Expenses represent expenses incurred by our Trendlines Labs unit; they are divided into two parts. A portion of the R&D Expenses represent expenses incurred in performing funded contracted R&D services for partner companies (for which we record revenues). The other portion represents our investments in Trendlines Lab’s research and technologies for our own account; under accounting rules, these R&D costs are expensed as incurred and not capitalized, even though we typically invent and develop these intellectual property assets with the expectation of monetizing them. We do not currently record any value for the research and development work of Trendlines Labs – their value is not reflected on our balance sheet until we either bring external investors into a project or sell them off.
We aspire to pay dividends in the future. The form, frequency and amount of future dividends for any particular financial year will be subject to the factors outlined below as well as other factors deemed relevant by our Directors:
(a) the level of our cash and retained earnings;
(b) our actual and projected financial performance;
(c) our projected levels of capital expenditure and expansion plans;
(d) our working capital requirements and general financing condition; and
(e) restrictions on payment of dividends imposed on us by our financing arrangements (if any).
With regard to item (a) above, it should be noted that the Israeli Companies Law, similar to the Companies Act (Chapter 50) of Singapore, places restrictions on the payment of dividends from paid-in capital. A company may only pay a dividend out of its profits and the distribution amount is limited to the greater of retained earnings or earnings accumulated over the two (2) most recent years. Should our Board of Directors determine it is appropriate to pay a dividend even if we do not have the legally required accumulated earnings, we can apply to the court for permission to pay a dividend. Dividends may be subject to withholding tax. For further information, please read the “Dividend Policy” section contained in pages 71-72 of the initial Offer Document of the Company dated 16 November 2015.
As stated in our answer regarding how valuations of portfolio companies are made, and the fact that these valuations tend to be on the conservative side, we believe that it is not in the best interests of our companies to disclose this information. When a portfolio company is negotiating an investment round, it is on the open market, and disclosure of a conservative valuation may be detrimantal to the portfolio company’s ability to raise the money at a higher valuation.