Modu plans IPO in TA, but questions hang over cell concept

Moran is no different than other entrepreneurs and CEOs who cite the financial crisis as an excuse for a failure.

By TALI TSIPORI
November 9, 2010 00:09
DOV MORAN

DOV MORAN Modu CEO 311 AP. (photo credit: AP)

To an onlooker, Modu, the current baby of Dov Moran, could look like an established company in its field, with a long history and a proven record. But the company’s prospectus, published two weeks ago in advance of an IPO on the local market, reveals a company that is a start-up in every respect.

It’s a start-up in which $100 million has been invested (an investment that has yet to prove itself worthwhile), with a grand vision that clashes with a cruel reality: It has yet to justify the media hype it has generated ever since it emerged from Moran’s imagination.

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“Modu came into the world with a lot of noise, because that was our strategy,” Moran said in an interview with Globes. “We wanted to start big, not small, because we believed we had a revolutionary idea. A year after we founded the company, the market changed. The financial crisis had consequences we could not have foreseen.”

Moran is no different than other entrepreneurs and CEOs who cite the financial crisis as an excuse for a failure. But in his case, perhaps because of the forthcoming IPO, it’s easier to extract an admission that he made apparently wrong decisions.

Modu, which develops modular cellphones, started out as a developer of cellphones that could connect to other devices, such as a PC or a television. But it had to switch focus and invested most of its efforts in developing its first product, Modu 1, after the software house that was supposed to produce the operating system for the device went bankrupt.

“We took upon ourselves the role of software subcontractor, and that was a mistake,” Moran said. “That decision caused us to invest a great deal, both financially and psychologically, in the wrong place. As a result, the first product was launched more than a year later than originally planned.”

You said that you chose to start big, but from the peak you can only go down. Perhaps you should have stayed on a back burner, thereby avoiding creating antagonism.

“I agree with you that the media noise created antagonism toward the company and toward me, but that’s the strategy we chose. We gambled. We decided to make a noise, to raise a lot of money, and to sprint ahead. And we did indeed raise a lot of money, and we created international awareness. But it didn’t work as planned.

“I didn’t set up Modu to become rich. I’m rich enough.”

So you admit you made mistakes.

“My mistaken decision was not to stop when the software house went. As far as the media noise is concerned, we made a decision, and the fact that the decision did not turn out well for us doesn’t mean that we were wrong when we made it.”

Still, perhaps you shouldn’t have come out with bombastic declarations and should have been a little more realistic about the company’s future.

“It’s not a matter of being realistic or not. Had the market not changed in the way it did, the first Modu might have been launched on schedule, and with the right product environment, things might have looked different.”

In three and a half years Modu has managed to change its business model, and for Moran, even if he won’t admit it, it’s hard to stay calm when he is forced, as he puts it, “to read incorrect things about the company.”

Modu, as the prospectus explains, has developed two mobile telephones. The first is the Modu T, while the second is the Modu W, a WiFi-based device. Both devices, like other smart phones, have a variety of uses. But Modu strives to distinguish its devices from the others through their light weight and compact dimensions – and, no less important, through their lower price.

Moran describes the Modu T as a solution that lies between feature phones (mobile telephones with a limited range of applications) and smart phones (such as the iPhone). He points to a forecast of research company Gartner that even in the distant future most people will be unable or unwilling to finance the purchase and upgrade of expensive smart phones; therefore, they will mostly use feature phones and devices such as the Modu.

Thanks to this projection and others, Modu has so far raised $124 million ($104m. in equity investment and $20m. in the form of a convertible loan). In the current offering, Modu will attempt to raise (in shares, bonds and warrants) tens of millions more (the final amount has not yet been decided) at a minimum valuation of $120m.

The company’s performance is still a long way from justifying such heavy investment, and there is a question whether it ever will, but such doubts don’t dent Moran’s optimism.

“We live in a changing world, and as part of the change, our personal computer goes with us everywhere, as evidenced by the success of tablet computers such as Apple’s iPad,” he said. “This is a life-changing product. When I bought one, I stopped using the smart phone I had.”

But if the iPad is wiping out the smart phone, why should Modu have a future?

“Because the smart phones will eventually go back to their roots and will mainly be used for making telephone calls. But we will still need to be connected everywhere we go. And to those places where we won’t take a tablet computer, such as to a restaurant or a party, we will take a smart phone.”

Nevertheless, Modu is in a very competitive market and is contending against giants like Apple and Google. This is not a virgin market, and Modu is not inventing the wheel.

“I have never gone into a virgin market, and I have never said I was inventing the wheel. Modu is bringing a good product to a huge market that is not saturated with players. Therefore, even taking a small market share will represent a great achievement. A billion dollars in sales sounds like a huge number, but it’s less than one percent of the entire market. It’s hard, but doable.”

Modu’s choice of the local capital market for its IPO is perceived as a default choice. The company’s existing investors did not want to continue investing in it, and it had no choice but to turn to the local stock market and pay the price of exposing its numbers at an early stage of its life.

“I did have a choice: namely, to raise more money from non-Israeli venture-capital funds.

But most venture-capital funds do not invest in companies with valuation above $10 million.

On the other hand, private-equity funds do invest in such companies. But in Israel there aren’t funds like that, and foreign private-equity funds don’t invest in nonlocal companies.

There are no entities in Israel suitable for follow- on investment in companies like Modu.”

Moran admits that it won’t be easy to persuade investors that he is on the right course.

“It’s difficult, but I hope we will blaze a trail or similar companies,” he said.

Moran cited Wintegra, which was sold two weeks ago to US giant PMC Sierra for $240m.

and gave up on a Nasdaq IPO.

“A company like that should have been floated in Israel,” he said.

“It’s hard to grow companies in Israel,” he added. “There’s no hi-tech industry here, only a start-up industry, and that’s very sad.

“In order to change the situation, we have to educate Israel’s investment institutions, such as pension companies that manage our money, to invest more in high-risk companies.

But I’m not sure they’re ready for that.

“It would be enough if the pension funds were to invest just a small proportion of their money, a few percent, in technology companies for such investments to give them value and for Israel’s hi-tech industry to flourish. You can’t blame them; the main blame lies in misguided regulation.”

Educating the institutions in Israel in a new way of thinking is no simple task, Moran said.

“But,” he added, “I’m not deterred by difficult tasks.”


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