Startup+"It’s difficult to raise Seed today, and those who succeed have to work harder for it"
Startup+
"It’s difficult to raise Seed today, and those who succeed have to work harder for it"
Ahead of the finals of the StartUp+ competition, senior executives from venture capital funds describe where the opportunities are from the investors' point of view and what recommendations they give to their portfolio companies to succeed in this challenging period
As we approach the finals of the StartUp+ competition, that serves as a springboard for startups at the beginning of their journey, we checked with senior members of the ecosystem on the affects of the changes the high-tech industry has been undergoing recently, where the opportunities are, and what recommendations investors give to their portfolio companies to survive and thrive in this period.
"The slowdown in the industry is clear and proven. The number of funding rounds has fallen dramatically and so have the investment amounts. Early-stage companies find it difficult to raise Seed, and those that do succeed, have to work much harder for it. The rounds have become low and so have the valuations. This also applies to late stage companies, which raise at the same or lower valuations than the previous round. Unfortunately, as long as the situation continues like this, we will continue to see companies that will not make it through this period," said Adi Hoorvitch-Lavi, VP of Investments and Growth at Poalim Hi-Tech.
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Adi Hoorvitch-Lavi (from right), Nofar Amikam, Renana Ashkenazi, Adam Fisher.
(Photos: Orel Cohen, David Garb, Bessemer Venture Partners)
According to her, "It is important to remember that although some funds are raising money, there are others who are experiencing difficulty in fundraising during this period. This difficulty results in VCs managing the rest of their investments cautiously, and accordingly at a slower pace than before, especially in light of the prevailing uncertainty. At Poalim Hi-Tech we continue to invest in funds, as well as grant debt to companies, in order to support the industry."
The change in the local high-tech market is felt by the funds and it is also driven by macroeconomic factors, the collapse of SVB Bank, a decrease in the value of companies, and also by the political situation in Israel. "For a year now we have been experiencing a decrease in values and funding volumes in all stages, certainly in the later stages but also in Seed. If in 2021 the average Seed round was around $7 million, today it is in the region of $4 million. In addition, when the company raises the next round more significant KPIs are required," says Nofar Amikam, General Partner at Glilot Capital Partners.
Since companies are looking to extend their runway, and 'buy' more time, Amikam believes that we will see more follow-on rounds in which companies will continue to raise at the same valuation. To her fund's portfolio companies, she recommends to focus on efficiency. "Both because it's the right thing to do and because it's something that investors at more advanced stages look at. Efficiency is the name of the game. Revenue, ARR, is the other name. For companies that raised a Series A with no revenue at all, funds will look to see real proof of feasibility from the market - as in paying customers. Therefore, we encourage our companies to go to market as quickly as possible even if the product is not 100 percent ripe," she says.
Despite the substantial changes in the market, the funds that raised large sums in the good old days are still looking for places to invest this money. "Everyone - including those who have a lot of money in the bank - will reach the point in which they have to raise more funding. Therefore, if there is an opportunity to raise early, even at a lower valuation, the chance for money increases," says Renana Ashkenazi, a partner at Grove Ventures.
Grove Ventures advises the fund's portfolio companies to prepare for a longer fundraising period, and for amounts and values that are sometimes lower than expected. "The focus on profitability has indeed increased and close monitoring of companies is required after changes in the budgets of their customers and changes in the priorities of buyers," she says.
The possibility of pivoting should be built into every company, says Hoorvitch-Lavi. "The processes currently taking place in the world and in Israel, from the global high-tech crisis to the dizzying development of artificial intelligence, have significantly increased the challenges facing companies at all stages. Every organization should be able to change its business strategy at the speed of light in response to market conditions, while focusing on managing the company's expenses; the company's customers; the preservation of the company's human capital; and, of course, close monitoring of market trends and innovations in it, alongside continuous business development. In times of uncertainty, it is important for companies to manage their cash flow carefully and efficiently. One must look for ways to reduce expenses, optimize the budget and develop new investment channels such as grants, strategic investors and debt. This means proper investment of the funds to emerge from the crisis in a stronger position."
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“Efficiency is the name of the game”
For those who are considering starting a startup, says Ashkenazi, the best way to succeed is to build something that others can't or don't want to build, and especially building tangible products. "Choose a company that provides an essential service - but is no longer innovating - and attack it," she suggests.
Regarding the hot areas, "efficiency is the name of the game", says Amikam. "When efficiency is the name of the game, it affects the products that companies are looking to purchase. Therefore, everything related to automation and cost reduction, cloud cost management, also the fintech world for companies that deal with the ability to reflect to the company what is happening in real time in its cash and bank accounts. In addition, cybersecurity is an area that will continue to be hot. Although some of the big cyber companies have been hit hard now, the threats are still out there and companies are very concerned about their ability to continue to exist," she says.
"If there is an area that will be easier to raise money for, it is likely not an amazing area to invest in because it will attract too many companies and too much money," says Adam Fisher, Partner at Bessemer Venture Partners. "It may sound counterintuitive but that's the problem with our industry. We chase hot topics instead of good businesses and entrepreneurs. However, there are certainly areas where it will be harder to raise money. Everything from food technology and cars to chips and certain types of fintech companies (like loans or insurance).”
According to him, despite the far-reaching changes in the industry, one can also find positive sides. "The companies were very inefficient and the valuations were excessively high. They (and we) thought they could continue to grow indefinitely at a rapid rate and that investors would always be happy to finance the ever-widening losses. We are back to building sustainable businesses and it is happening all around us already. For example, there are companies that are determined to reach profitability without another funding round. The media will highlight a reduction in funding rounds, but if it happens for a good reason, such as companies choosing not to raise more capital - isn't that good for everyone? Sometimes we as an industry measure the wrong things."
The political situation, the proposed judicial coup, and the opposition to it have an effect on the Israeli brand, says Fisher. "It has short-term effects and long-term effects. The short-term effect will be the least visible and tangible. Investors and buyers who do not know Israel will choose to stay away. This means that they will abandon processes as soon as they realize that they do not know the country and that now is not a good time to invest in Israel for the first time. However, investors and buyers who know Israel and have been successful here in the past will continue to do business here for now. They will closely monitor the new changes and risks but will not change their strategy. But there is something else that is changing now and that is our outlook. We are depressed and suffocated as a result of the high-tech industry not being appreciated properly. The impact is being felt. New companies are registering in Delaware. Workers are interested in relocation. Israelis who live abroad are postponing their return. This is not a mass exodus, and it is likely that one will never occur, but the accumulation of these individual decisions over the next decade will have a profound effect on the local industry."
Assuming that the system of checks and balances and the status of Israeli democracy will be maintained, Ashkenazi estimates that the industry will also emerge strengthened from the current crisis. "The industry is an inseparable part of the fabric of Israeli society and it is impossible to ignore the lively discourse and the short and long-term effects on foreign investors, funding, and the massive financial expenditures. At the same time, it is difficult to separate global macro events from what is happening in Israel today and the Israeli high-tech and innovation industry has already proven immune to many types of crises - starting with economic ones, through health and geo-political ones."
