2024 VC SurveyIsraeli high-tech scene embodies a "big kibbutz" atmosphere, says Flint Capital
2024 VC Survey
Israeli high-tech scene embodies a "big kibbutz" atmosphere, says Flint Capital
Sergey Gribov, Partner at Flint Capital, joined CTech to discuss 2024 investment trends and Startup Nation’s reputation around the world
“Israel's tech sector has always been quick on its feet, benefiting from a global network and an outward-looking mindset,” said Sergey Gribov, Partner at Flint Capital. “It is renowned for leveraging trends and challenges and transforming them into opportunities for innovation and expansion.”
Gribov joined CTech to discuss Israel’s reputation around the world, explaining how its tech ecosystem can be compared to a kibbutz - the Israeli word for “gathering” and used as the name for a community where people live and work together.
“The Israeli high-tech scene embodies a ‘big kibbutz’ atmosphere, characterized by high levels of collaboration,” he continued. “Communities and forums abound, where representatives from every VC fund in Israel actively engage with founders, including those of direct competitors, not just communicating but also offering support when needed.”
VC fund ID
Name of the fund: Flint Capital
Total assets: $350M
Leading partners: Sergey Gribov, Dmitry Smirnov, Andrew Gershfeld
Latest investments in Israel: Nokod Security, DevOcean
Selected portfolio companies: Flo, Socure, Walkme, CyberX, Cyolo, ODAIA, Sensi.AI, Cynomi
From your perspective, was 2023 a ‘lost year’, or can the events that happened during it be seen as a springboard for opportunities in 2024?
2023 was unequivocally not a ‘lost year', but rather a period of recalibration and strategic repositioning within the venture capital ecosystem. Yes, in 2023, some stable companies needed additional help with capitalization, but overall, strong startups were not affected by market conditions. For strong VC funds with a reserve of dry powder, it was a 'year of special opportunities'. The frequency of special opportunities increased dramatically, from once or twice a year to once or twice a quarter, marking a four to five-fold increase with the possibility of entering into agreements with even seasoned founders under more reasonable conditions.
The year's events underscored the importance of resilience, strategic planning, and the ability to identify and capitalize on new opportunities in a shifting landscape. Therefore, from this perspective, 2023 can indeed be seen as a pivotal year that sets the stage for potential growth and innovation in the years to come.
What do you believe is more crucial to the state of Israeli tech: the influence of global processes and the global economy, or the local events ranging from the political protest to the war state?
The Israeli tech ecosystem has always been a global player. Our startups aren't just operating and raising funds locally; they have their sights set on international markets, with a particular focus on the U.S. This global perspective means that any shifts in the worldwide economy or changes in technology trends directly impact us. Such global dynamics influence everything from our funding sources to market opportunities and even the innovations we pursue.
The impact of local processes is more tactical; it complicates the current situation but does not change the global picture. The protests, in particular, did not have a significant impact. Some investors had questions, which we addressed, but overall, they did not have a real influence on our business.
The war had a serious impact in the short term, as it affected most companies in one way or another and created an atmosphere of uncertainty since it was unclear what would happen next. However, in the long term, in my opinion, it will likely have a positive effect on the development of Israeli tech, as companies have demonstrated resilience, which is one of the essential qualities for any startup. In my meetings with VCs in the United States, we discuss Israel often. The impressions U.S. investors have regarding Israeli startups are very positive, they understand the short-term difficulties, but note the resilience of Israeli companies.
In essence, while our local environment sharpens our focus and resilience, it's our engagement with the global market that truly propels our growth and success.
Has the prestige of Israeli high-tech been damaged, or are the protests and the war merely a 'small bump in the road' from which the sector can recover within months?
Israel's tech sector has always been quick on its feet, benefiting from a global network and an outward-looking mindset. It is renowned for leveraging trends and challenges and transforming them into opportunities for innovation and expansion. What truly elevates its reputation is not just the innovative solutions it develops but also its remarkable resilience, strong governmental support, talented and persistent founders, a significant focus on science and technology education, and a culture deeply invested in fostering new technological advancements. Moreover, the Israeli high-tech scene embodies a "big kibbutz" atmosphere, characterized by high levels of collaboration. Communities and forums abound, where representatives from every VC fund in Israel actively engage with founders, including those of direct competitors, not just communicating but also offering support when needed.
As long as there is a continuous drive for innovation and a supportive environment for technological breakthroughs, Israeli high-tech is poised to continue thriving and will maintain its solid reputation.
I think the bigger problem for Israeli startups right now is the difference in valuations in Israel vs the U.S.. Despite a slight drop, valuations in Israel are still very high, while valuations in the U.S. have significantly dwindled. This, in my opinion, stems from the oversupply of venture money in Israel. Because of this problem, many Israeli startups who plan on raising their next round from U.S. VCs may have to do flat or even down rounds or will have to extend their runway to grow to the point where they can justify their current valuations.
How much effort was required of you to maintain the fund's status with your investors in 2023? What were their primary concerns and how did you address them?
Maintaining a venture capital fund's status with investors always requires a considerable amount of effort. In 2023, investors were more interested than usual in the performance of the fund's portfolio companies. It was crucial to transparently communicate both successes and setbacks, along with the strategies in place to mitigate risks and capitalize on opportunities.
Especially at the beginning of the war, we received questions from investors about the situation with Israel and Israeli companies, but there was no significant concern. The key was to show proactivity and transparency, explaining how the companies were faring, and talking about the ones that were more affected, and which ones were less so. We needed to demonstrate to investors that most companies were still operating as usual, despite the challenging circumstances. We did this by utilizing all available channels - from quarterly newsletters and reports to personal calls and meetings.
How are you preparing for the most pessimistic scenarios, such as the continuation of the war in Gaza deep into 2024, the opening of another front in the north, or further reduction of government support for high-tech?
We work closely with our portfolio companies, assessing their needs and potential future challenges. Currently, there are not many companies in our portfolio significantly affected by the war in terms of their day-to-day operations. However, what we consider important, both in the current situation and in potential pessimistic scenarios, is for companies to aim for a global business model from the outset, which includes having their team globally distributed. Specifically, those companies that initially had their R&D distributed between Israel and other countries found this situation much easier to manage. In my view, this approach is crucial for any company, regardless of circumstances, as building a large R&D organization in Israel today is very challenging due to a shortage of talent.
Did you raise fund money in 2023 for an existing fund or a new one? What are your expectations regarding this matter for 2024?
We fundraised successfully in 2023, and we are on track to close a new fund soon.
How many investments did you make in 2023, and how does it compare to 2022?
In 2023, we made three new investments and several follow-ons. Our pace of investing naturally decreased compared to 2022, but we did not make any decisions at the investment committee level to reduce the pace—if we see a good, promising company, we invest in it. This year, we will adhere to the same principle and invest in interesting projects.
In your view, will the amounts and/or the number of deals in 2024 be more like those of 2023 or 2021-22?
In my opinion, it's not going to be the wild ride we saw in 2021-22, but it's also not going to be as tight as it's been in 2023. Rather, it will be somewhere in the middle. There are all indications that the market is recovering, and we're seeing more activity. For example, we currently have a couple of companies that are starting to plan their next funding round. And when I talk to funds about it, they are very willing to engage in discussions.
It's like we're all settling into this new normal where everyone is a bit more cautious, yet still on the lookout for those solid opportunities. The focus is definitely on making smart moves, betting on companies that have proven they can weather the storm and have something solid to offer. This situation is a wake-up call for startups and tech firms to be smart about how they operate, ensuring they're as efficient and effective as possible and really honing in on what makes them unique. For investors, it's about being selective, opting for investments that are sensible in the long run, rather than just seeking a quick win.
Which high-tech sectors will you focus on in the upcoming year? Which areas will maintain their prominence, and which ones appear less attractive?
In 2024, we're slightly narrowing down our investment focus, honing in on key sectors such as Cybersecurity, Digital Health, Fintech, and solutions for both B2C and B2B. Additionally, we are targeting not AI itself, but products that solve real-world problems using AI.
Cybersecurity is more crucial than ever. This sector is a hotbed for innovation, especially as we dive deeper into the Internet of Things and look to protect vast networks and data.
Digital Health is another area with a massive potential for impact, addressing everything from global health crises to everyday wellness, from telemedicine to biotech.
Which type of companies stand a better chance of garnering increased attention from VC funds this year - early-stage or advanced rounds?
At every stage, there are investors who will continue to invest money within their niche, be it early or late stage. However, the ratio between them is likely to change compared to last year. Last year, the number of early-stage deals did not significantly decline, while more advanced rounds saw a substantial drop. This means that many late-stage rounds were postponed, but companies still need investments. Therefore, I believe that this year, early-stage investment will remain at the same level as before, and there will be more late-stage investments than in the previous year.
What changes will you implement in your approach to evaluating investments in startups in the coming year, compared to the previous two years? What practices will you abandon, and what criteria will you now demand from founders?
We are not changing our approach, but we are constantly fine-tuning it both because we are learning and due to the market conditions. Today, we're paying even more attention to capital efficiency. In 2021 and 2022, VCs were all about growth. Nowadays, the focus has shifted to capital efficiency and helping the company get to the next stage. The potential for growth remains important, but only under the condition of capital efficiency, which is now characteristic of the entire VC market.
The second point is that we simulate what the startup's next funding round might look like because one of the problems many startups face currently is the excessively high valuations from previous rounds, which significantly complicates their ability to raise further funds. Therefore, when we look at valuations, they need to make sense in light of the metrics they need to achieve to raise a substantial and reasonable up-round relative to the current level.
Do you think it is likely we will witness encouraging IPOs, the emergence of unicorns, or remarkable exits in 2024?
Looking ahead to 2024, the prospects for the IPO market, the emergence of new unicorns, and notable exits appear cautiously optimistic. If the economy stabilizes with steadier inflation and with the expectation that interest rates will go down, we could witness a more welcoming environment for IPOs. Companies that have remained resilient through recent turmoil, demonstrating solid growth and a clear path to profitability, are likely to seize the opportunity for an IPO when investor confidence rebounds.
Several IPOs have already filed this year, and in my view, their future number will depend on the performance of these initial IPOs. Similar to late-stage funding rounds, there's pent-up demand from companies that planned to go public last year, so they will definitely try to make their move either this year or the next
Regarding unicorns, we might see more of them compared to last year, but fewer than in 2021 or 2022.
As for exits, there are quite a few companies today that have the opportunity to acquire other promising companies at relatively low prices—mostly medium-sized startups struggling to raise their next round. This presents a good opportunity for acquisitions. However, predicting big, notable exits is challenging for now; we'll have to see how the market evolves.
Provide an example of an intriguing investment you made in 2023. What sets this company apart, or what is distinctive about its sector?
I'd like to highlight Nokod Security, a company developing security solutions for low-code/no-code custom applications and robotic process automation. Firstly, this startup boasts a very strong team - both founders, Yair Finzi and Amichai Shulman, are serial entrepreneurs with successful big exits and lots of experience under their belt. Secondly, they've identified a Blue Ocean segment with simultaneously growing demand in the competitive cybersecurity market and are successfully developing it. Although working in a new market always involves a degree of market risk, in this case, we believe it's a risk worth taking.
Practical and current tips for founders planning upcoming money-raising efforts
The first piece of advice, as I've mentioned before, is to be as capital-efficient as possible. In other words, whereas everything used to be about growth, today, metrics of capital efficiency are more relevant than rapid expansion. Develop a financial plan that demonstrates how you intend to become profitable or reach significant milestones without excessive cash burn. A deep understanding of your financial metrics, from the cost of acquiring a customer to their long-term value, is crucial.
Secondly, it's extremely important to show investors some unique, sustainable competitive advantage—perhaps even more so than before. Investors today pay special attention to a company's ability to compete, the uniqueness of its project, and how easily it can maintain this competitive advantage in the future.
Two portfolio companies that you think will thrive in 2024:
Cyolo
Sector: Сybersecurity
Description: Cyolo offers a Remote Privileged Access Management (RPAM) solution that combines multiple security functions including zero-trust access for users and devices, MFA for the last mile, IdP, password vault, secure file transfer, supervised access, session recording, and much more to mitigate high-risk access scenarios with a single platform.
Total investment amount: $85.2 million
Founders: Almog Apirion, Dedi Yarkoni, Eran Shmuely
Year of establishment: 2019
Why is this their year:
The company is showing consistent excellent growth, working in an increasingly critical and lucrative cybersecurity market. The demand for innovative solutions to protect against cyber threats has never been more urgent, especially for those who safeguard data and regulate access to it. There's also a significant need for comprehensive, all-in-one solutions. Companies are looking for simple and convenient ways to protect their data, but currently, most solutions only cover one or several functionalities, while Cyolo mitigates various high-risk access scenarios within a single platform.
Sensi.AI
Sector: Digital Health
Description: Sensi.AI is the world’s first in-home virtual care agent that provides a 360-degree understanding of a senior’s physical, emotional, and cognitive needs. The Sensi platform leverages artificial intelligence to enable care agencies to offer 24/7 services, regardless of a client’s financial capacity to afford round-the-clock care. Additionally, it helps detect, predict and prevent harmful events, reduce hospitalizations, and identify caregiver training needs, extending life expectancy.
Total Investment amount: $25 million
Founders: Romi Gubes, Nevo Elmalem, Alon Brener
Year of establishment: 2018
Why is this their year:
The company operates in a rapidly evolving market, which was fueled by the pandemic and has continued to grow ever since. There's a significant shortage of caregivers and a high demand for remote care monitoring solutions. Sensi distinguishes itself by developing technology that combines AI and audio monitoring to detect key events in and around clients' environments. This is accomplished without cameras, thereby protecting patient privacy.
