2024 VC Survey“Resilience and adaptability have historically characterized Israeli high-tech”
2024 VC Survey
“Resilience and adaptability have historically characterized Israeli high-tech”
Grove Ventures’ Lior Handelsman has joined CTech as part of its 2024 VC Survey to shed insight on Israel’s reputation after a turbulent 2023.
“It's important to remember that resilience and adaptability have historically characterized Israeli high-tech,” said Lior Handelsman, General Partner at Grove Ventures. “The sector is powered by a belief that ‘Israeli high-tech delivers no matter what.’ This ethos, backed up by the sector's innovative capacity and its ability to maintain productivity and creativity even in times of unrest, suggests a robust foundation that can withstand temporary setbacks.”
It’s no secret that Israel had its fair share of setbacks in 2023. The year started with judicial reform protests and ended with war - all things that may test investor confidence in the country. “The sector's fundamental strengths, including its innovative prowess and entrepreneurial spirit, are likely to facilitate recovery and allow it to emerge from these challenges without long-term damage to its prestige,” he added.
VC fund ID
Name of the fund: Grove Ventures
Total assets: More than $500 million
Leading partners: Dov Moran, Lior Handelsman, Lotan Levkowitz, Renana Ashkenazi
Latest investments in Israel: Quantum Source, Wing Cloud, Particula, Vocai, and five soon-to-be-announced Stealth Mode startups
Selected portfolio companies: Wiliot, ActiveFence, Navina, Ramon.Space, Protai, env0, Datorios, Quantum Source
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?
In 2023, the high-tech sector navigated economic, political, and security challenges. It was a difficult year, and we saw a significant decrease in investments and figures taking us back to 2019-2018 levels. However, this period of adversity also led to new avenues for innovation and growth, with an increase in GenAI, defense, and semiconductor opportunities. The continued activity of foreign investors, especially during the war in Q4 2023, alongside the stabilization in seed funding, signals a continued faith in the Israeli high-tech industry's potential. The Israeli high-tech ecosystem's inherent strength and adaptability sets the stage for a rebound. The challenges may have tested the ecosystem, but they also proved its resilience and capacity for innovation. Looking forward, the lessons of 2023 can serve as a springboard for 2024, potentially making the year a pivotal moment for the birth of robust companies and groundbreaking technologies.
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?
This sector's evolution and success are deeply intertwined with international trends, particularly in technology and venture capital. Israeli startups usually look beyond domestic markets, aiming for global reach, which further emphasizes the importance of international dynamics over local occurrences. This global orientation is facilitated by Israel's unique position in the tech world, where it has become a vital source of innovation on the global stage.
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?
In 2023, the Israeli high-tech sector was challenged by the judicial reforms, the resulting political unrest, and security concerns, not least the events of October 7th and the ensuing war. All of these have contributed to a perception of instability. Concerns have been raised about the impact of such unrest on foreign investment and the operational aspects of Israeli companies, including the ability to host global investors and customers, which are crucial for the growth and international collaboration of Israeli high-tech firms.
However, it's important to remember that resilience and adaptability have historically characterized Israeli high-tech. The sector is powered by a belief that "Israeli high-tech delivers no matter what." This ethos, backed up by the sector's innovative capacity and its ability to maintain productivity and creativity even in times of unrest, suggests a robust foundation that can withstand temporary setbacks. The sector's fundamental strengths, including its innovative prowess and entrepreneurial spirit, are likely to facilitate recovery and allow it to emerge from these challenges without long-term damage to its prestige.
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?
In 2023, navigating the complexities of the venture capital landscape, particularly for early-stage investments, required a strategic approach centered on long-term goals and transparent communication. Recognizing the inherent long-term nature of venture capital investments, our focus was on ensuring that our Limited Partners (LPs) remained well-informed and confident in our ability to manage the fund effectively, even amidst local and global uncertainties. The foundation of our strategy was the acknowledgment that early-stage investments are not significantly swayed by short-term local events, as long as there is a clear understanding that the General Partners (GPs) are closely monitoring and managing these situations to safeguard and optimize long-term outcomes.
Addressing our investors' primary concerns in 2023 revolved around maintaining an open line of communication, a practice we prioritize under any circumstances. By providing regular updates and being transparent about the fund's strategies and the steps we were taking to navigate the evolving landscape, we were able to reassure our LPs.
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?
In anticipation of the challenges that may arise from a continuation of hostilities into 2024, including the potential for conflict expansion and a reduction in governmental support for the high-tech sector, we take a pragmatic and strategic approach. Recognizing the dual impact of these developments—specifically, the strain on portfolio companies' operations due to reserve duty commitments and the heightened difficulties in securing funding during periods of conflict—we are taking proactive steps to ensure resilience and adaptability. This involves a close collaboration with our portfolio companies to adjust their financial strategies, including the optimization of burn rates and the reassessment of their funding approaches and business objectives. Such adjustments are critical in preparing for a scenario where resources may become scarcer and the operational environment more challenging. This entails not just a reevaluation of immediate financial strategies but also a longer-term view on sustaining operations, innovation, and growth under constrained circumstances.
Did you raise fund money in 2023 for an existing fund or a new one? What are your expectations regarding this matter for 2024?
In 2023, our focus was on optimizing and deploying the capital from a recently established fund, which was well-capitalized and designed to support our investment strategy over the coming years. This strategic position allowed us to concentrate on nurturing our portfolio companies and seeking out new, promising opportunities without the immediate need to engage in additional fundraising activities. The deliberate planning and timing of our fund's lifecycle meant that in 2023, we were well-equipped with sufficient cash reserves to invest in high-potential startups, thus negating the need for immediate fundraising efforts.
Looking ahead to 2024, given the robust financial foundation we have established with our current fund, we anticipate continuing our investment activities without the need for raising new funds. This stability is crucial not only for maintaining focus on delivering value to our existing investments but also for ensuring we can operate with agility and responsiveness to the evolving landscape of the Israeli high-tech sector.
How many investments did you make in 2023, and how does it compare to 2022?
In 2023 we’ve made four initial early-stage investments in new companies and an additional five follow-on investments in our portfolio companies.
In your view, will the amounts and/or the number of deals in 2024 be more like those of 2023 or 2021-22?
Based on the trends observed in 2023 and the prevailing economic climate, the outlook for 2024 suggests a continuation of the cautious approach seen in the previous year, rather than a return to the more buoyant investment levels of 2021-22. It's anticipated that the number of deals in 2024 will align closely with those of 2023, reflecting a market that remains discerning and selective in its investment choices. This expectation is rooted in the recognition that many companies, after navigating the challenges of recent years, will likely find themselves seeking funding. However, the nature of these funding rounds may not herald a return to the high valuations and optimistic expansions seen in the peak years. Instead, we may see a predominance of flat rounds or, more significantly, down rounds—a trend that began to take shape in 2023.
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, our investment strategy is set to continue focusing on sectors that have demonstrated resilience and potential for innovation, without expecting a significant shift in focus areas. The changing market dynamics have introduced new challenges, particularly for enterprise SaaS (Software as a Service) companies. The rapid growth rates seen in previous years may have moderated, but the sector remains ripe for unlocking substantial value. This is attributed to the ongoing demand for cloud-based solutions that enhance business operations and customer experiences, suggesting that SaaS will maintain its relevance in the tech ecosystem. The interest in Generative AI and AI technologies is expected to persist, driven by their transformative potential across various industries.
The excitement surrounding AI is largely due to its ability to revolutionize how we interact with data, automate processes, and create new efficiencies. Technologies that support the data revolution—encompassing storage, processing, analysis, and inference capabilities—are poised to remain at the forefront of investor interest. This includes both the infrastructure that underpins data management and the innovative approaches to data processing. As businesses continue to generate vast amounts of data, solutions that can effectively manage and extract value from this data are becoming increasingly critical.
Which type of companies stand a better chance of garnering increased attention from VC funds this year - early-stage or advanced rounds?
In the current investment climate, early-stage companies are poised to attract more attention from venture capital, largely due to the inherent resilience of the early-stage funding environment during times of economic uncertainty or distress. Early-stage startups, by their nature, are often in the developmental phase, focusing on product development and market entry, which means they are not yet seeking the kind of exit strategies or large-scale funding rounds that can be impacted by market downturns. This positions them as attractive investment opportunities for VCs looking to plant seeds for future growth, even when broader economic indicators suggest caution.
Conversely, late-stage companies face a more challenging environment, primarily due to the current slowdown in Initial Public Offerings (IPOs) and the complexities involved in pricing later funding rounds amid fluctuating market valuations. The hesitancy around IPOs and the valuation challenges for late-stage rounds can lead to a tightening of capital for these companies, as investors recalibrate their risk appetite and look for opportunities with potentially higher long-term rewards. This shift doesn't diminish the value or potential of late-stage companies but underscores the current strategic preference among VCs to invest in early-stage ventures that offer flexibility, innovation potential, and growth in the longer term.
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?
Our approach towards evaluating investment opportunities in startups remains consistent with our core investment philosophy. However, the current market environment has introduced an opportunity to apply additional scrutiny to our investment process. Market conditions also enable us to negotiate better deal parameters, something which often helps build healthier companies as well as better investor returns.
Do you think it is likely we will witness encouraging IPOs, the emergence of unicorns, or remarkable exits in 2024?
Given the current trends and signals from the market, it's cautiously optimistic to expect that 2024 could see a rejuvenation of the IPO market, particularly towards the latter part of the year. This resurgence would likely stem from improved market conditions and growing investor confidence, potentially leading to a more favorable environment for companies looking to go public. The anticipation of IPOs suggests a positive outlook on market recovery, providing an avenue for companies that have matured during the downturn to capitalize on their growth.
Simultaneously, the landscape for M&As is expected to be active, driven by the strategic realignments within industries. Companies facing funding challenges or looking to consolidate their market position may increasingly turn to M&A as a viable pathway for growth or exit. This trend could lead to a dynamic market environment where acquisitions become a prominent exit strategy for startups, offering opportunities for both investors and founders to realize value.
Provide an example of an intriguing investment you made in 2023. What sets this company apart, or what is distinctive about its sector?
We invested in Wing Cloud. In recent years, we observed a proliferation in cloud, DevOps, and infrastructure startups. Many offer incremental innovation but often fall short of addressing major challenges. We believe that cloud adoption is still in its early stages and that by streamlining and simplifying modern software development, we can redefine the entire cloud development process. To do so, it takes a bold team with a ground-up approach. This is where Wing Cloud enters, with its vision to reshape cloud development as we know it. Wing Cloud has a groundbreaking vision and the Chutzpah to overcome cloud complexity and reinvent the way developers write code and manage their infrastructure.
Practical and current tips for founders planning upcoming money-raising efforts:
In the current challenging funding environment, founders must refine their approach to fundraising with precision and strategic foresight. A critical step is to crystallize your market segment and value proposition specifically for that segment. It's essential to ensure that the market segment you are targeting is not only sizeable but that your solution delivers substantial value within this space. This focus enables you to communicate a clear and compelling narrative to potential investors, demonstrating your startup's potential for growth and profitability.
Additionally, aligning your go-to-market (G2M) strategy with your projected timelines is paramount. This alignment reassures investors of your team's operational competence and the feasibility of your business model, increasing their confidence in your execution capabilities.
Emphasize the sustainability and resilience of your business model. In times of economic uncertainty, investors are particularly keen on startups that can demonstrate adaptability and potential for sustained growth, even in fluctuating market conditions. Show how your business can achieve milestones and generate revenue, even with limited resources. This might involve highlighting your startup's lean operational model, diverse revenue streams, or strategies for customer retention and growth.
Lastly, prepare for greater scrutiny by having robust, data-backed answers ready for the tough questions investors are likely to ask. This includes detailed financial projections, a clear plan for achieving profitability, and evidence of your product's market fit and customer demand. Demonstrating thorough preparedness and transparency can significantly enhance trust and interest from potential investors.
Name two portfolio companies that you think will thrive in 2024:
NoTrafficNo
Sector + description of the product/service: IoT, urban mobility. NoTraffic developed the first AI-powered traffic signal platform that connects road users to the city grid, solving today’s traffic challenges and unlocking smart mobility benefits.
Investment amount + total: The total amount of funding to date is $70.7 million
Founders + year of establishment: Tal Kreisler, Or Sella, Uriel Katz | 2017
Reasoning why this is their year: NoTraffic continues to expand its offerings beyond intersection management to enhance traffic flow and road safety across cities. It enters new markets and cities across the world and scales at an amazing pace.
env0
Sector + description of the product/service: Software Infrastructure/Cloud. env0’s platform empowers developers to easily manage, deploy, scale, and control all their cloud environments. Their solution works with every Infrastructure-as-Code (IaC) framework: Terraform, OpenTofu, Pulumi, CloudFormation, and more.
Investment amount + total: The total funding to date is $41.9 million.
Founders + year of establishment: Ohad Maislish, Omry Hay | 2019
Reasoning why this is their year: env0’s growth continued in 2023 with new customers such as BP, Medtronic, Western Union Bank, UCLA, and more. It recently also announced the appointment of Steve Corndell as COO to assist its accelerated expansion plans.
