"Everyone is talking about profitability, but it's not possible for a lot of companies”
"Everyone is talking about profitability, but it's not possible for a lot of companies”
Daniel Cohen, Managing Partner at Viola Ventures, was speaking during a panel at the Work After Work conference. “The hottest sectors at the moment are supply chains and energy. There is a lot of demand for solutions in this field from companies that need the money,” noted Dina Pasca-Raz, Partner and head of the technology division at KPMG Israel
"Everyone is talking about profitability - but it's not possible. There are a lot of companies that just can't get there. We can offer amazing advice to companies like - make more, spend less. Thats possible, but it's stupid. The question at the end of the day is ‘what can be done with the money they have’, and most companies don’t reach profitability with the money they make. Therefore, they have to prepare for the next round, and that's a problem,'' Daniel Cohen, Managing Partner at Viola Ventures, said during a panel at the Work After Work conference organized by Calcalist and KPMG.
Cohen referred to what Ofer Ben-Noon, CEO and co-founder of Talon, said at the panel. Talon is a cybersecurity startup providing technology designed to protect against threats posed by distributed work and accelerated cloud usage.
"If in the past the rulebook stated that whoever spends the most wins, and for that the market rewarded them with continuous rounds and very high valuations - this is no longer the case. The new rules state that whoever reaches profitability or equity the fastest and manages to get a dollar for every dollar spent wins. The rulebook has been replaced with one that is responsible and profitable. Not all companies know how to do that, because if you have already hired very expensive marketing personnel who are unable to create profits, you have a problem. You wont fire the whole company, and it is not possible to replace the entire marketing team at once."
Amit Karp, a partner at Bessemer Venture Partners, said at the panel that "the market is pretty much frozen. It is not zero, but it is as close to zero as it has been in the last ten years. On one hand, these companies should not be profitable. If they are profitable, then there is no need for venture capital. The whole idea of venture capital is to finance a lot of companies that have no profits for a period until the moment they turn a profit. The current game is ‘who can grow more efficiently’, not who wins. The rules have changed, if before it was ‘who can reach $10 million first’, and the others tried to follow, now the goal is to reach those numbers effectively. Often it starts with budget cuts, it's not pleasant but it only makes sense because these companies just raised beyond recognition to reach those $10 million. Some of the companies will grow better and, for some, it will not be enough, as it was already broken."
In response to the question of whether there are companies that are more vulnerable during this period, Dina Pasca-Raz, Partner and head of the technology division at KPMG Israel stated: “There are many parameters and techniques, it is impossible to look at just one. There are many in the middle. In the meantime, we are seeing a return to basic and original analyzes. We are doing more in-depth tests and not looking at just one index. At the beginning of the crisis we saw that demand went to where the pain was. Technology is supposed to serve many industries, so if digital health initially spiked, now we see the energy field is very hot. We are seeing less companies related to consumers and markets dependent on consumption, as they will decrease. Opinions regarding cyber may be divided, but in the end cyber threats are unrelated to the recession and many processes of digital transformation have even increased cyber threats. Maybe some are trigger happy regarding cyber companies however, cyber is still important. Solutions in the field of supply chain and logistics are also still hot.”
How are you dealing with this confusing period in the market?
Dina Pasca-Raz: “Maybe we should zoom out and take a global look. As if it wasn't confusing enough, the capital commitment rate was $160 billion in the first quarter of 2022, which is more than half of all 2021. Even this year the amount of money flowing into startups is much higher than in 2021. While interest rates are rising and funds are shifting to more stable areas, institutions still need to achieve their returns and what we have learned in the last two years is that almost all markets are broken and technology can improve them. The hottest sectors at the moment are supply chains and energy. There is a lot of demand for solutions in this field from companies that need the money. There is a lot of money in supply, and someday demand and supply will meet.”
Ofer Ben-Noon: “Let's start with the confusion. Perhaps one of the reasons that capital commitment came earlier is that the future is becoming very unclear, and we need to be ready. Specifically, I think what companies are doing differently this year is rebuilding their business plans. There is an understanding that the market is rewarding completely different things than in 2021.”
Do companies have a plan of what they are going to do next?
Amit Karp: “First of all, regarding capital commitment, it’s true, however, it is not a representative figure. Funding is always reported with a delay of at least one quarter. So the first quarter is actually the last quarter of last year, which was the peak of the hype. These are probably funding rounds from the fourth quarter of last year.”
Do most entrepreneurs think about the basics? There are a lot of young entrepreneurs who have not experienced much, will they have a hard time as the market changes?
Cohen: “I don't think so, the message has passed quickly and the conversation with the entrepreneurs is clear. The entrepreneurs are saying themselves that they may have once wanted to raise $70 million at a value of $400 million but now they are raising $3 million at a value of $7 million. There is a big difference between companies that have raised $30 million vs. $4 million, and that is where the biggest pain point is. Because young entrepreneurs with a lot of energy have raised $4-5 million and it's very difficult to achieve something with that kind of money, and the next round is not coming so it's going to be very unpleasant.”
“Entrepreneurs are much more sophisticated than people think,” Karp says. “For the most part they did the right thing because that was the game. If everyone is playing football - you need to play football. If everyone is running and fundraising - you also need to go run and fundraise. Now the game has changed and they will have to adjust. Those who were greedy in the previous market will get hit hard, and now those who are playing too safe - the market will run away from them. One should be prepared for cycles and not resort to extremes due to market fluctuations.”
“The most significant difference is that you need to build a serious product base. Before I pour any serious money on marketing I need to think - what problem am I here to solve?” says Ben-Noon. “If you look back 10-20 years, the companies that survived are companies that were groundbreaking back then. Take the companies that are relatively large today, they were quite special at the time. Once there is less money, the less powerful will fall and the strong will survive. As the market rebuilds, you need to build yourself as a leader. “
What are the positive aspects of this crisis?
“The amount of money flowing into the venture capital industry is unprecedented, even while people are rethinking and reassessing the situation,” said Pasca-Raz. “That money exists and will continue to flow. One has to look at things in the perspective of time and distance. Talented people will form companies, grow innovation and technological solutions and the money for them is out there. Even if there is a hiccup, within a year or two everything will be fine.”
Ben-Noon added: “Despite what is happening at the moment, I have never been more optimistic about what is happening in Israel. In terms of the quality of the entrepreneurs in the country, the thought that they can conquer the market, the money that is flowing in here - there is no going backwards. Today's entrepreneurs will go much farther than the entrepreneurs of 10 years ago.”
