Israel’s Saifun chips away at the flash memory market

Saifun’s NROM technology provides a better method of imprisoning electrons, which keeps the information on mobile devices secure.According to Dr. Boaz Eitan, founder and CEO of Nasdaq’s latest rising star, Israeli flash memory chip developer Saifun, even in the tightest …

Saifun’s NROM technology provides a better method of imprisoning electrons, which keeps the information on mobile devices secure.According to Dr. Boaz Eitan, founder and CEO of Nasdaq’s latest rising star, Israeli flash memory chip developer Saifun, even in the tightest prisons, people escape once in a while.

He ought to know. During his military service as a pilot for the Israel Defense Forces, he was shot down over Syria in 1970 and held for three years as a prisoner of war in Damascus. Though he was released by diplomatic means, this concept of escape has remained with him throughout his working career.

As he likes to tell Saifun’s investors, one of the main problems of most flash memory chips used in mobile devices today, are that electrons inevitably escape, causing memory to deteriorate over time.

This is extremely significant, as consumers need to know that the information they hold on their laptops, PDAs, mobile phones, MP3 players, or iPods are safe at all times, even when the power is off or the batteries unexpectedly run down.

According to Dr. Ed Mlavsky, a high tech venture capitalist, and chairman and founding partner of Gemini Israel Funds, and one of the earliest investors in Saifun, the company’s unique flash technology called NROM (nitrate-read-only memory) provides a better method of imprisoning electrons.

NROM has helped transform Saifun into one of the hottest companies on Nasdaq today. While the Israeli venture capital industry has long had it on its radar screen, it’s only been in the last nine months after it became clear that the company was headed to the US stock market that investors and the financial press have also been buzzing with anticipation.

The buzz was validated with Saifun’s subsequent performance on the NASDAQ, and its company valuation, considered incredibly high for such a young and relatively small company. The company’s stock jumped more than 50 percent on its first day of trading on Nov. 10, raising $188 million and putting its market capitalization at $675 million. On Nov. 17, that faith was justified, when the company announced quarterly revenue of $17.9 million, representing a $10.8 million third quarter profit.

Eitan founded Saifun in 1997, naming it after a flower – Saifun is the Hebrew name for gladiola. Due to the ever-increasing demand for portable gadgets, the market for flash memory is estimated in the tens of billions of dollars and grabbing even a small fraction of that market is hugely profitable.

Saifun deals in know how – selling its knowledge and carefully protected patents to semiconductor manufacturers who are participating in the intensely competitive, cut-throat race to manufacture the best, smallest and densest flash solution. Via its NROM technology, the company’s initial breakthrough was being able to place two bits in a single memory cell as opposed to the traditional one bit – doubling the storage capacity of each memory cell, and is now working a four bit solution – quadrupling it.

Saifun’s technology also offers semiconductor companies cost savings, since NROM-based chips can be manufactured in fewer steps than traditional flash devices and on their existing wafer fabrication equipment. The company then licenses its solutions to semiconductor manufacturers who use them to develop and manufacture flash memory for the telecommunications, consumer electronic, networking and automotive markets, paying them royalties in exchange.

The company also strengthens its relationships with licensees by offering design and development services for next-generation products. Market penetration of Saifun NROM technology in 2005 is expected to reach over $1 billion through its integration in products produced by some of the world?s largest manufacturers, including Spansion, Infineon Technologies, Macronix International, Sony Corporation and Tower Semiconductor.

Eitan began his career as a physicist at Intel in the early 1980s and then held various senior level positions at WaferScale Integration, a US leader in programmable system devices. After a five-year stint as the manager of WaferScale’s Israeli design center, Eitan founded Saifun in 1997 and has since served as the company’s chairman and CEO. All told, he has been named on more than 75 US patents, with the company having more than 100 US patents issued and pending.

Investor Mlavsky takes credit for returning Eitan to Israel, when, like other brilliant young Israeli scientists and engineers, he had been seeking his fortune in Silicon Valley.

At the time, Mlavsky was executive director of the Israel-US Binational Industrial Research and Development Foundation – the organization that generates mutually beneficial cooperation between the private sectors of the US and Israeli high tech industries, providing matchmaking services between US and Israeli companies, and funding joint project development and product commercialization costs.

He met Eitan when he was in California trying to entice WaferScale Integration into a joint venture with an Israeli company.

“Like many US companies at the time, they argued that there was no appropriate partner in Israel – so I suggested that they create a partner – set up a subsidiary in Israel and do a joint project. So they did it and their key guy was Boaz. While they were reluctant to let him go, they sent him to set up the Israeli subsidiary as long as he committed to stay with the company for a certain number of years. He fulfilled his commitment – and then he started Saifun,” Mlavsky told ISRAEL21c.

By then, Mlavsky had moved into the world of venture capital and Gemini was one of the earliest investors in Saifun.

When Eitan showed him the pictures of what would be the first flash memory device that had twice as many memory bits as existing devices, he recalls “I had no doubts that Boaz was a winner.”

Why is the technique of preserving memory important and the technology so valuable?

“These memories are in your cell phone, answering machine, in your Blackberry, they are in any portable electronic device that has to have a non volatile memory because it may run out of battery. The market is growing by leaps and bounds. So when he showed us a way to put more memory per unit volume at a lower cost, it was pretty convincing that he was going somewhere.”

The NASDAQ showing proves that many others have made the same estimation. Eitan is, however, holding on to a sizeable portion of the company – he will maintain a 40% stake in Saifun post-IPO.

US investors had been skeptical in the beginning, but Eitan has persuasive powers and really believes in his technology, but knows how to make others believers.

“He makes Billy Graham look like a piker,” said Mlavsky.

Early in the company’s history, Mlavsky, recalls, he asked Eitan what he viewed as the biggest threat to Saifun’s future success and that Eitan accurately predicted the challenge of protecting their patents.

“Sure enough, they had a big patent battle with AMD Fujitsu, you have to walk in with million from royalties and enough nerve to go up against the big guys. He knew it all along, when he found he was being infringed, he went after them big time and he won.”

He compares Saifun’s knowledge-licensing model to the Dolby company in audio technology – it is a company which develops new products but doesn’t produce them themselves. A similar model is common in pharmaceutical start-ups – he notes – those that develop breakthrough drugs, then license them to manufacturers who usher them through final clinical trials and bring them to market.

It is a great model for profits, Mlavsky said. “The amount of royalty money that changes hands is zillions of dollars.”

None of it would happen, however, if it weren’t for Eitan’s successful management style, which Mlavsky says is quirky, but effective. “You know the song ‘I did it my way’? I think the song was written for him.

“He really is a phenomenon. He puts his own unique stamp on everything. When employees or visitors come to the Saifun offices, they aren’t allowed to carry their cell phones, even switched off – he doesn’t allow them on the premises: he considers them a distraction. It took him a while to offer company cars – and when he did, he got himself the exact same car as everyone else.”

Another original move by Eitan is an unusually generous incentive plan he has offered his employees.

According to the financial daily The Marker, Eitan recently informed his staff that anyone who had worked there for more than two years would receive a tax free loan from the company of approximately $100,000.

The employees would only have to pay back the loan when the company is issued or sold, when they can sell their Saifun stock options for cash.

If there are no profits from selling their options, they don’t have to return the loan.

“Why does Saifun feel a need to do this? The plan is costing it $6 million it didn’t have to spend. It seems utterly bizarre in today’s hi gh tech world of trimming, slimming and eliminating,” wrote columnist Guy Rolnick.

The reasoning behind it is to help employees keep the faith in their companies during the long wait it often takes for the paper value of options to translate into hard cash.

Rolnick’s conclusion: “Allocating $6 million cash to its workers reminds us all that among the hundreds of companies likely to go broke this year, there are a few Saifuns – companies with basic technology, conservative management, and faith in their future.”