2024 VC SurveyHow can Israel address its “corrupted image” problem among the youth post-war?
2024 VC Survey
How can Israel address its “corrupted image” problem among the youth post-war?
Sarona Ventures Operating Partner David Debash joined CTech to discuss investment trends after October 7 and how Israel can protect its image in the future.
“There is an image issue that will need to be properly assessed once the storm has passed. Particularly in the U.S., the younger generation holds a significantly corrupted image of Israel,” said David Debash, Operating Partner at Sarona Ventures. “While the short-term damage may be limited because current investor generations are generally pro-Israel or at least value the high-tech scene (even surprised by the current resilience), it's crucial to acknowledge the potential long-term repercussions.”
In the days following the Hamas attack on Israel on October 7, Israelis and Jews across America and Europe have seen protests in the hundreds of thousands of young people speaking out against Israel’s right to exist or protect itself from terrorism. These protests have taken place in physical locations while abuse toward Jews online has also increased tenfold.
“Many younger individuals espouse a very different image of our country,” he added. “This is an issue that needs to be addressed promptly to shape a more positive perception for the future.”
VC fund ID
Name of the fund: Sarona Ventures
Total assets: $120M
Leading partners: Philippe Bouaziz, Toot Shani, David Debash, Morris Levy
Latest investments in Israel: Visitt, Crowded, Buywith, Salvador Technologies
Selected portfolio companies: Deel, Cherre, Verbit, Spekit, Napo, Cal.com, Multiply, Hofy, Agora, Ukio
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 not a 'lost year'; rather, I tend to define it as a pivotal year for recalibration. We cannot use 2021 as a benchmark since the market was overinflated at that time. The market re-assessed itself, leading to a more sustainable business environment. In a Darwinistic sense, the best companies moved forward despite the reduction in invested capital, focusing on cash efficiency. Founders and investors have matured, leading to great opportunities in secondaries and bridge rounds.
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?
Israel has historically followed global trends, albeit with a delay of approximately two quarters compared to the U.S. I believe this pattern will persist despite Moody’s downgrade. It would be naive to assume that local events do not affect the local tech industry. With thousands of colleagues still at the battlefront, the economic burden of the war will be felt for years to come. However, it's during tough times that great entrepreneurs emerge. I remain highly optimistic about what we will be able to build in the future.
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?
There is an image issue that will need to be properly assessed once the storm has passed. Particularly in the U.S., the younger generation holds a significantly corrupted image of Israel. While the short-term damage may be limited because current investor generations are generally pro-Israel or at least value the high-tech scene (even surprised by the current resilience), it's crucial to acknowledge the potential long-term repercussions. Many younger individuals espouse a very different image of our country. This is an issue that needs to be addressed promptly to shape a more positive perception for the future.
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?
It's crucial to maintain transparency and clarity with your LPs. We made sure to communicate openly about our status, considerations, and concerns. Fortunately, all our LPs are highly active in the venture capital world, which meant they didn't require reassurance when the market experienced fluctuations. Our strategy focused on anticipating concerns and addressing them proactively with detailed data, even before the LPs reached out to us. For instance, during events like the collapse of SVB and the Gaza war, we provided clear strategies to navigate the challenges.
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?
As per strategy, our fund is evenly distributed between investments based in Israel and those outside, thereby limiting our exposure. Even companies based in Israel, particularly at later stages, are relatively affected since their business is predominantly global, and their team sizes allow for workload distribution or hiring to ensure continuity. Planning for worst-case scenarios remains crucial, despite the current relatively calm period and the return of several reservists. We must prepare our startups for scenarios similar to those post-October 7th.
In October, we identified companies that were more exposed and provided hands-on support to them. However, Israeli resilience often surprises us. For example, one early-stage company managed to raise funds while all the founders were on military duty.
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 began fundraising for our new fund as announced during our SV2TLV yearly conference in Q2 of 23. Despite challenging market conditions, we had a promising start, thanks to our track record and existing LPs. However, the events of October 7th prompted us to pause and reassess. Given our strategy to invest beyond Israel, we brainstormed how we could contribute to the situation and launched the TechShield initiative.
As we prepare to resume fundraising in Q2 of 24, we acknowledge the challenges ahead. It's crucial to convey the message that Israeli tech remains resilient and continues to thrive despite adversities such as war.
2024 being an election year adds another layer of complexity, with the potential to significantly impact future stability. However, from an investment perspective, challenges present opportunities. Many brilliant founders are struggling to raise funds due to international caution toward investing in Israel. This creates opportunities for investors willing to navigate these uncertainties and support promising startups.
How many investments did you make in 2023, and how does it compare to 2022?
In 2023, we deployed 35% of our total invested funds across 15 deals. The deployment rate was comparable to 2022, during which we deployed 36.5% of our total invested amounts.
In your view, will the amounts and/or the number of deals in 2024 be more like those of 2023 or 2021-22?
The pace of activity in Israel for 2024 has started positively, and it is expected to see an increase in the number of deals throughout the year. VCs have been cautious in deploying their dry powder in both 2022 and 2023. I believe the market will be further driven by an increase in IPOs and mergers, which will instill confidence in investors.
Which high-tech sectors will you focus on in the upcoming year? Which areas will maintain their prominence, and which ones appear less attractive?
We tend to invest in industries where we have expertise, and I believe this strategy has proven to be successful, especially as VCs are becoming more specialized rather than agnostic. Moving forward, we will continue focusing on Enterprise Software, Retail, Proptech, and Fintech, with a keen interest in Cybersecurity.
Regarding the legal saga involving OpenAI, it will be intriguing to see how it unfolds. However, regardless of this, 2024 is shaping up to be the year of AI adoption for all corporates, making AI a central buzzword in the industry.
In terms of sectors, the current regional and global instability is expected to drive growth in the Security and Cyber sectors, while Healthcare will also experience significant impacts - sectors that are always growing during unstable times. The fluctuation of interest rates will likely influence Proptech, and it's noteworthy that Climatech is emerging as a major investment focus for several VCs globally, albeit at a slower pace in Israel.
Which type of companies stand a better chance of garnering increased attention from VC funds this year - early-stage or advanced rounds?
The high-tech layoffs in 2023 have initiated a process that will inevitably lead to a wave of new and interesting startups, reinforced by the wave of innovation we expect to see post-war. Globally there will be lots of interest in early-stage companies. However, locally, we remain cautious, especially considering that early-stage companies are the most affected by the current war.
While growth-stage and secondaries will continue to present interesting opportunities, it's important to note that companies seeking to raise funds will likely need to adapt their valuations to the new market conditions.
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 have always been very customer and revenue-oriented. Over the past years, the focus turned more and more to the financials and the proper use of cash. We are looking for sustainable growth within an interesting TAM, led by extraordinary founders.
Do you think it is likely we will witness encouraging IPOs, the emergence of unicorns, or remarkable exits in 2024?
In 2024, we anticipate witnessing an increase in IPOs, with 2025 projected to be the peak year, along with a surge in mergers and acquisitions. Corporates, although cautious due to cost constraints, are compelled to adopt AI technologies to remain competitive and avoid obsolescence. However, it's important to note that valuations cannot reach the levels seen in 2021.
Provide an example of an intriguing investment you made in 2023. What sets this company apart, or what is distinctive about its sector?
Salvador Technologies, a cybersecurity company, is quite different from our typical investment thesis as it is hardware-based. The company enables the fastest operational recovery from cyber attacks, a critical need in light of the escalating threats this year. Remarkably, they achieved an eightfold increase in revenue within just one year, serving and protecting critical infrastructure both nationally and abroad. Their impressive growth has attracted investments from prominent firms such as Pico Ventures and Pitango.
Practical and current tips for founders planning upcoming money-raising efforts - focus on the current market environment and sentiments:
Project your budget with a runway of 18-24 months. Avoid overstating the amount you need to raise; it's better to overbook the round than to fall short of the target. Choose your investors carefully; work with your current investors to identify potential new targets and receive introductions. Ensure that your investors remain committed partners throughout your journey.
Name two portfolio companies that you think will thrive in 2024:
Agora
Sector + description of the product/service: All-in-one investment management software integrated with an investor portal for real estate GPs and LPs - I like to call them the “Carta” for Real Estate, but given Carta’s latest breach of data, we might revise the comparison!
Investment amount + total - raised: A total of ~$30M from investors such as Insight Partners and Aleph.
Founders + year of establishment: Founded by Bar Mor, Noam Kahan, and Lior Dolinski in 2019
Reasoning why this is their year:
Agora has been growing consistently 300% every year, despite market and global instability, reaching now +150B assets managed on the platform. Anticipating a pivotal period for real estate in 2024 and 2025, marked by potential interest rate reductions, Agora stands poised for significant market penetration. Agora has expanded its offerings to include additional products such as financial and taxation services, transforming into a centralized platform for clients to manage their business operations. Agora has recently doubled its team, strategically filling key positions whose impact is expected to manifest in 2024.
Napo
Sector + description of the product/service: “Tooth-to-tail” pet platform, insuring now more than 60K pets. Napo is shaping up to be a holistic platform where pet parents find best-in-class insurance and additional services to enhance the lives of their beloved pets - making their platform the go-to destination for pet care and all things pet-related.
Investment amount + total: Raised a total of $20M
Founders + year of establishment: Founded by Jean-Philippe Doumeng and Ludovic Lacay in 2021
Reasoning why this is their year:
The pet industry was highly active in 2023, marked by notable acquisitions and fundraising. Napo experienced substantial growth throughout 2023 and has a positive outlook for 2024, aiming to expand into new geographical areas. Additionally, Napo is diversifying its product offerings beyond insurance to tap into new revenue streams.
