2022 VC SurveyTeam8: “Here’s why Israel is more immune to global changes”
2022 VC Survey
Team8: “Here’s why Israel is more immune to global changes”
Global recession, inflation, and geopolitical tensions - it’s nothing that Israel can’t handle, says the VC firm.
“Generally, the Russia/Ukraine war is only increasing the need for cybersecurity innovation and other digital innovation that enables nations to continue ‘working’ digitally regardless of physical boundaries,” said Team8. “As for the China/US trade conflict’s impact on supply chains, this is generating new demand for innovation around trade in areas including import/export, supply chain management, shipping, e-commerce, and more.”
There are plenty of issues in the world right now that might affect the markets. Israel as a country isn’t immune to the impact that might be felt by external forces such as wars or pandemics, and yet the VC firm argues that it is better positioned than most.
“A global recession, inflation, and geopolitical tensions will affect everyone negatively. However, Israel is more immune to these changes,” Team8 said.
Name of fund/funds: Team8 Capital
Total sum of fund I: $160 million
Partners: Sarit Firon, Liran Grinberg, Hadar Siterman Norris
Notable/select portfolio companies: Talon Cybersecurity, Akeyless, FundGaurd, Dig, Classiq
Sarit Firon and Liran Grinberg, Managing Partners of Team8 Capital, joined CTech to discuss how Israel will rise to the global challenges it faces.
If 2020 was the year of the pandemic, and 2021 was the year of record, how would you define 2022 in the VC sector?
We define 2022 as the year of “back to basics” for VCs. Many VCs got carried away during 2021’s historic hype cycle, backing founders and pitch decks with millions in funding and leading rounds at unreasonably high valuations. Now that the fog has lifted, VCs are growing more cautious and increasingly serious about backing portfolio companies that demonstrate viable and sustainable business models and paths to profitability.
We’re already seeing, and will continue to see, a slower pace of investments (thankfully, the “2 days to term sheet” is gone), and lower valuations and funding rounds.
This is healthy for the industry. Many VCs were blindsided by extreme growth and it’s healthy for the entire industry to go back to focusing on value - not just valuations.
Who are the big winners of 2022 and why?
Companies that raised money during the hype cycle, but didn’t get caught up in the hype. These are the companies that didn’t let their valuations run too far ahead of their real market value. They grew responsibly and planned for a long runway knowing that it may not always be easy to raise money. They focused on creating real revenue with a viable business model and a clear path to profitability. These companies will own their own destiny and will continue to do well despite market conditions.
Who are the big losers of 2022 and why?
Companies that won’t be able to meet previous round valuations even in 3-5 years, and have a runway that’s hard to manage.
What do you expect in the VC sector in 2023?
I’m generally optimistic. I believe that 2023 will start hard, but by mid-2023 we’ll start to see some positive signals in the high-tech sector. It doesn’t mean that the hard times are behind us, but oftentimes the technology sector recovers faster than other industries.
For the VC sector as a whole, it’s healthy that there’s a return to more sane valuations and that there’s more time to do due diligence - all of this leads to better investments.
While early-stage investors benefit from lower valuations and rounds, this may negatively impact funded companies seeking follow-on rounds. At Team8 Capital, we remained focused and disciplined during the hype and invested in companies with reasonable valuations. As a result, our portfolio companies (and the companies of other investors who did the same), have not suffered these consequences. This has been another reminder to stay focused on real value and not get carried away by valuations during frothy markets.
For late-stage investors, the decrease in valuations may result in down rounds for their companies.
We won’t be sitting on the fence. From an early-stage investor and company-building venture group perspective, and specifically, ones leading Seed rounds, we’re less impacted by things like the revenue multiple to valuation in the public markets (and, thus the sharp decrease in valuations in the public market). We’re planning on actively investing and seeding new companies.
The world will continue to digitally transform and the need for technological innovation has not declined, but has risen and will continue to rise in the coming years. New companies will continue to be created and funded and there’s also still a high amount of dry powder to be allocated.
Great companies have always been built during down markets. Market conditions refocus everyone on creating real value. And this focus and discipline around creating value are what help create great companies. We believe that Seed stage companies which are built during challenging macroeconomic times are built with a stronger financial foundation, given the increased focus on unit economics and operational efficiency expected by investors and founders alike. This presents a "silver lining" in the current challenging financial environment.
What global processes will affect (positively and negatively) the Israeli market?
A global recession, inflation, and geopolitical tensions will affect everyone negatively. However, Israel is more immune to these changes because:
- We invest in the most important critical sectors - fintech, cyber, data/AI, and digital health. These sectors become more important and more in demand during crises. This doesn't mean that individual companies won’t be negatively affected, but that the sectors as a whole, won’t be significantly negatively affected.
- We’re fundamentally an innovation nation - we don’t just sell things, we create new things. There’s so much fundamental innovation created out of Israel that’s making business more efficient, improving quality of life, etc. - all things that are still in demand during a recession.
- The Israeli economy is relatively stable compared to the rest of the world and therefore is more resilient.
- We have strong core technological capabilities and manpower, which will always be in demand. We have a constant flow of highly trained technological people coming out of the IDF intelligence units and this is not going to decrease, regardless of any macroeconomic issues.
Generally, the Russia/Ukraine war is only increasing the need for cybersecurity innovation and other digital innovation that enables nations to continue “working” digitally regardless of physical boundaries. As for the China/US trade conflict’s impact on supply chains, this is generating new demand for innovation around trade in areas including import/export, supply chain management, shipping, e-commerce, and more.
How should different companies (large, medium, early-stage) prepare for the coming year?
In this market (and frankly, in every other market, even if to a lesser degree), runway is everything. You need to make sure you have enough runway to meet the KPIs you need (be it growth in revenue/ARR, profitability, product-market-fit - all depends on the stage of the company) to raise your next funding round. In general, it is safe to assume that a runway of 18-24 months is sufficient.
Moreover, companies need to change the way they think about spending money. They shouldn’t be spending money, they should be investing money - whether it’s in marketing, product, sales, etc. For every dollar they spend, they need to think about the value it creates - the ROI.
- Large companies: React fast to increase runway. Look at headcount and focus on profitability.
- Medium companies: Invest in product market fit. Recruit salespeople when you know what you’re selling, to whom, and why they should buy your product. In other words, recruiting too many salespeople prematurely without figuring out the product market fit is costly and doesn't return the investment. In a tough market, it becomes even more impossible to sell without PMF.
- Early stage: These companies are in a better place - they’re not being measured on sales, profitability, etc. Use this time to develop a product that the market really needs. Focus on achieving product-market fit from day 1 - don't develop something first and then figure out PMF.
What will be of the dozens of unicorns born last year?
Many unicorns won’t be able to achieve their growth goals, which will reduce their valuations (of publicly traded companies), or lead to down rounds for companies that have to raise money. Many of these companies will have to reign in their expenses and thus we’ve already seen many rounds of layoffs, and we predict those will continue.
The luckiest will be those that have enough cash and are private and therefore will not have to go through a new financing round that will decrease their valuation.
In general, we predict the demise of the unicorn - or more specifically the hype around the use of the terminology to delineate special status. Previously, everyone was chasing and counting unicorns and we saw companies that were unicorns after Series A without a product or customers.
Today, it’s no longer just about valuations, it’s about creating a healthy business that generates growth and profitability. There will be companies bringing real value and reaching millions of dollars in ARR who have a market cap above a billion dollars, which is great. Unicorn status will be a consequence of building a profitable and sustainable business, not an end in itself.
As a result, we’ll see fewer unicorns as the criteria for reaching a “unicorn valuation” have gotten much stricter. However, we believe that Israel will continue to create these great companies both because the ecosystem has significantly matured and we are no longer selling companies prematurely due to a lack of strong business capabilities, and because we still have core technology and product capabilities and access to top talent that will allow us to continue developing new and disruptive products at the edge of innovation.
When it comes to the importance of valuation vs. sum raised in rounds, it's a tricky one as these two factors are intertwined. A high valuation allows you to raise large amounts while limiting dilution. However, for a growing company, the most important thing is raising enough funds to enable the best execution to achieve the best performance. I would always vote for higher dilution to ensure sufficient funding. Otherwise, a company can find itself in deep water with no funds and low dilution.
What sectors in high-tech should we look out for in the coming year - and why?
Cybersecurity
- We’re seeing two main things: 1) More crises = more cyber risk and 2) Because of #1, security budgets are the last to be cut, which means there’s still money to be spent on cybersecurity technologies.
- All of these global crises (including everything that’s happened thus far: the Covid pandemic and the proliferation of remote work), the war in Ukraine, inflation and recession, etc. lead to an increase in cyber risk (cyber warfare and cybercrime), and therefore more demand more cybersecurity technology and innovation. For these reasons we’re seeing that while some IT budgets are being frozen or cut, security budgets will likely be least affected. As cyber risk continues to grow - it will be hard to find an executive who will cut the security budget by a significant amount. It’s just not a wise decision to make during these times.
- Cloud security will also see an acceleration in investment. Some think that the category leaders have ‘solved’ cloud security, but many aspects of how you secure the modern/cloud-based enterprise aren’t solved just yet, i.e. data and identity.
Fintech
Two FinTech sectors that are expected to decrease in the next year:
- Crypto - following the tumultuous year in the crypto market, culminating in the recent collapse of crypto exchange FTX, we expect the next year to be marked by significant efforts by regulators to increase regulation, and promote transparency and accountability in crypto markets. This will lead to slower growth for players in this sector, but also to the construction of a more stable infrastructure for all crypto and blockchain-based use cases.
- B2C - as a general rule of thumb, market downturns tend to affect B2C-focused verticals more than B2B. Higher interest rates and financial uncertainty cause subdued consumer sentiment, which is felt almost immediately in B2C use cases.
Four FinTech trends that are expected to accelerate in the next year:
- CFO Tools - As companies track more and more data, finance organizations are expected to provide more metrics than ever to additional touchpoints across the company. This is expanding the role of the CFO and making tools that support the CFO more valuable. Increased demand for metrics (as detailed above), overall strive for profitability and efficiency, and a general proliferation of more advanced tools has begun moving finance teams away from spreadsheets and to the usage of next-gen tools across 3 main areas: 1) Forecast and budgeting; 2) Execution & Control (including compliance); 3) Outcomes and Control
- B2B BNPL and B2B Credit in General - Rising inflation and higher cost of capital are driving small businesses to search for alternative financing solutions, such as B2B BNPL (“buy now pay later”).
- Digitalization and Automation of B2B Transactions and Processes - We’re seeing an increase in B2B transaction digitalization driven by the company's desire to make processes more efficient (and thus increase profitability), and employees’ willingness to adopt new technologies on the job.
- Open Banking - Growing, but facing regulatory and privacy-related challenges.
Finops and efficiency
- Given the current market, we’re seeing a surge in companies investing in spend management - technologies and tools that focus on analyzing and optimizing gross margins, profitability, and unit economics.
- We even invested in this space. For example, FinOut helps companies manage very large cloud spend, which is a result of running very fast and optimizing for growth above all else. This, along with similar spend management technologies, will be key to supporting the industry in managing their budgets, which becomes more critical in these difficult times.
Digital health
- The health sector is undergoing significant digital transformation, accelerated by the Covid pandemic, as well as by changing consumer demands, new regulations, the entry of new players, and more.
- It’s the perfect storm for digital health innovation and the demand for digital health technologies to analyze, communicate and secure the proliferation of health data and enhance patient experience and value is only growing.
Data Science, Machine Learning
- Companies that help make sense of all the data out there - that can use advanced data science and ML capabilities to better analyze, share and secure it - will have a big advantage.
HR: Do the layoffs, those that have already happened and those that are coming, help to fix in any way the distress experienced by companies over the past 2-3 years?
Unfortunately, layoffs are necessary in order for companies to maintain financial stability during these times. Companies that don’t look at their runway and make the appropriate (and difficult) decisions regarding layoffs, or delay these decisions, risk the financial health of the entire organization as well as the employment of 100% of the employees.
That being said, layoffs won’t fix everything. Companies can lay off 20% of their workforce, which we’ve started seeing, but it’s very difficult to lay off 50% of your workforce and stay in business.
When it comes to talent, all of the best companies will always be fighting for the top 1% of talent, and no matter what you do, there’s only 1% in the top 1%. There’s still going to be fierce competition for top employees. For the majority of employees, we’ll see a return to an ‘employers’ market with employers dictating the terms more than the employees.
These things are cyclical, in a down market it becomes an employers' market but when the market rebounds we’ll see a return to an employees market.
Additional comments:
Team8’s network of industry partners and our dedicated 70+ team of operators - ranging from technology to marketing and sales acceleration - are unique assets that help companies, especially in a down market, ensure they’re building the right thing, getting to PMF, and supporting them in bringing their products to the market (via our extensive network) and accelerating their repeatable sales model.
In frothy markets companies can cover up any mistake by raising more capital to fix them - there’s very little penalty. In a down market, if you’re not in the right direction or building the right features, you may never survive. The cost of a mistake is much higher. Having access to our breadth and depth of resources and tapping into our access to the market through our industry network, ensures you make fewer mistakes and get to the right place as efficiently as you can.
Finout, Dig, and Sayata Insurance - Team8’s notable portfolio companies
Finout
Cloud security: Finout is a modern, self-service cloud cost management and observability tool that provides FinOps unmatched business context in cloud environments. By correlating business metrics with cloud costs, Finout clients are empowered to make healthier business decisions that improve efficiency, pricing and go-to-market strategy.
Founders: Roi Ravhon, CEO and Co-Founder; Yizhar Gilboa, CTO and Co-Founder
Founding year: 2021
Number of employees: 36 employees
Explanation behind investment:
The correction in the tech market has shifted focus from top-line growth to profitability, gross margins, unit economics, and healthy business metrics for sustainable, long-term success. We’ve witnessed dozens of companies struggling to develop a solution to deal with the surge in usage-based cloud pricing, but nothing has been available — until now … That’s why we are so excited to lead this round. Finout is uniquely positioned to enable cost control across cloud platforms by providing an out-of-the-box solution that empowers the modern, cloud-based enterprise to achieve its [spend] goals.
Dig
Cloud data security: Dig Security helps organizations discover, classify, protect and govern their cloud data. With organizations shifting to complex environments with dozens of database types across clouds, monitoring and detecting data exfiltration and policy violations has become a complex problem with limited fragmented solutions. Dig's cloud-native and completely agentless approach re-invents cloud DLP with DDR (Data Detection & Response) capabilities to help organizations better cope with cloud data sprawl.
Founders: Dan Benjamin, CEO and Co-Founder; Ido Azran, VP R&D, Co-Founder; Gad Akuka, CTO and Co-Founder
Founding year: 2021
Number of employees: 40 employees
Explanation behind investment:
It's rare to meet a founding team who have both an insider view of cloud security challenges from within Microsoft and Google's cloud organizations, alongside the experience of founding successfully acquired security companies. Dig's active approach, bringing detection and response to data in the cloud, is precisely what the market needs. Data security in the cloud is high on the priority list of most CISOs today and we're proud to invest in the company we believe will lead this category.
Dig Security is shaping the future of multi-cloud data security by providing a real-time threat detection solution for data assets hosted in public clouds. The company harnesses native cloud technologies to provide an out-of-band solution to help organizations discover, monitor, detect and govern their data through a single unified policy engine.
Sayata
Insuretech: Sayata delivers rapid growth to insurance brokers and carriers that cater to small and medium businesses. The Sayata platform streamlines the once-manual process of finding and securing business coverage, allowing insurance professionals to sell more insurance policies in a fraction of the time. Sayata provides an end-to-end technological solution along with educational tools, giving their partners the ability to grow their portfolios quickly and efficiently. To date, over 120 brokerages and carriers partner with Sayata.
Founders: Asaf Lifshitz, CEO and Co-founder; Avishay Maya, CTO and Co-founder; Iddan Golomb, CPO and Co-founder
Founding year: 2016
Number of employees: 66
Explanation behind investment:
We were immediately taken with Sayata. We've seen our share of startups, specifically InsurTechs, and Sayata's growth is exceptional because they've clearly identified a market need - the ability to automate the business insurance sales cycle in a way that removes friction and ambiguity. This allows the broker, insurer, and client to get what they need with less work and in less time. Sayata's ongoing expansion into new lines of coverage will provide even more value to those that offer or need business insurance within the $100 billion SMB insurance market.
