Unicorns could struggle to survive as cash runs low


Tech layoffs are on holds as companies take time out for the holidays abroad but they are expected to return big time at the start of 2023. The reason for this is not only the global economic situation, cuts in consumption and lower procurement budgets but also the disappearance of hedge funds from the investment scene due to higher interest rates and accumulated losses.

In this cauldron, the situation privately-held tech companies is especially sensitive, since they are mainly reliant on money from private investors (usually venture capital funds or hedge funds) that are injected into them once every year or two, depending on the rate of cash burn, revenue, and their ability to grow. Unlike their publicly-traded counterparts, privately-held tech companies are not tested in daily trading by investors and analysts, but their ability to raise capital and their valuation rely on the grace of a handful of existing or new investors, who will take a rick and invest in them in anticipation of a big exit in the future.

Most tech companies – startups, growth companies and unicorns – must raise millions of dollars every 18 months to two years on average. In 2020 and 2021, many unicorns raised two or more huge rounds that gave them higher valuations, so that they could continue to grow their workforce and capture new market shares, even at the cost of heavy losses.

Cybersecurity Snyk, for example, raised $115 million at the start of 2020 and another $100 million in September 2020. In March 2021, Snyk raised an addition $175 million, and in January 2022, $380 million. Cybersecurity company Wiz completed three large financing rounds in one year, and FireBlocks raised $1 billion dollars in two rounds in August 2021 and January 2022.

Companies like Snyk, which has 1,200 employees, and probably loses money, are forced to raise $150-180 million annually to keep its workforce, most of them expensive and in-demand cybersecurity experts. For this reason Snyk raised nearly $200 million just last week but was forced to compromise on is valuation with new investor – the Qatari sovereign wealth fund.

Cuts will help avoid raising funds in 2023

An examination of the matter by “Globes” found that the desired timeframe for raising money among Israeli unicorns (like AppsFlyer, BigID, eToro, Aqua Security and Trax) has already been reached in the past few months since it has been 18-24 months since their last financing rounds.

Sisense, an Israeli company that has repeatedly postponed plans for its IPO has also not raised money since 2020, just before the start of the Covid pandemic. But it also does not see the need to raise capital this year after reaching profitability a few months ago. The veteran company generates $150 million a year in revenue, and prefers to rely on working capital rather than bringing additional investors to the table and diluting the stakes of existing investors – Sisense’s workforce has decreased by over 10% over the past two years due to the wave of layoffs and job cuts.







An Israeli company that was forced to cancel its SPAC merger is eToro. According to PitchBook, the stocks and cryptocurrency trading platform was considering raising $1 billion but following the readiness of investors in the market, the company preferred to continue operating in its current format. eToro has been profitable since 2017 and despite the wave of FTX affairs in the cryptocurrency market, the company is seeing higher revenue from share, indices and commodity trading.

Another example is digital products marketing company AppsFlyer, which raised $225 million at the end of 2020, and sources close to the matter have told “Globes” that it is now seeking to raise more capital. AppsFlyer will end 2022 with annual revenue of $300 million and relatively high gross profit. The company said, “With growing annual revenue of over $300 million in software as a service (SaaS), with very high gross profit margins, AppsFlyer is an independent company that does not depend on external investors.”

It is the same situation for Trax, which provides imaging services for supermarket shelves for control purposes for food manufacturers like Coca Cola and Procter & Gamble. In April 2021, Trax completed the largest-ever financing round in Israel – $542 million, of which about $300 million went into the company’s coffers, and the rest to buy shares from investors and employees. Trax has been through two rounds of layoffs in the past year, but still has about 900 employees and is estimated to spend at least $100-150 million annually on salaries. The company is planning to swing to profit at the end of 2023. The cash in its coffers should be sufficient until the end of 2024, and according to estimates, its annual revenue is about $200 million.

Companies that have gone more than two years without raising funds

Some of the companies that have gone a long time since their last financing round, such as eToro, Gett and Minute Media, have had to cancel or postpone their planned IPOs. In contrast, other companies such as BigID, Forter and Aqua Security – completed closed financing rounds that were not published in the media due to public relations considerations. There have also been companies that have raised loans and opened credit lines, such as Infinidat, Sunbit and Sisense, but this is a problematic solution at a time like this, when it is difficult to increase revenue and interest rates are rising rapidly.

Other companies, such as Cybereason, Fabric, Yotpo, Via and Lusha will also reach a similar crossroads in 2023. These companies stocked up with large amounts of cash during the boom years (2020 and 2021) and now they are spreading expenses over several years and will avoid raising capital in the coming year, and perhaps even in the first half of 2024.

Decreases are felt not only in the amount of capital that can be raised, but also in the valuation that investors are willing to offer. Today, the revenue multipliers for companies that are currently raising funds are more closely linked to the capital market, which offers a multiplier of eight times the revenue for good companies. This, compared to multipliers of 30-50 times according to which most of the unicorns raised money in 2020-2021. One of the largest aforementioned companies, which raised funds last year at a valuation of $4 billion, admitted that if it had been traded on Wall Street today, it would have a valuation of just $500 million.

Lightricks, the Israeli company behind the Facetune image editing app, has lengthened its ability to use the capital it raised in 2021, for three more years. Under the plan drawn up by the company’s CFO Shaul Meridor, the former head of the Ministry of Finance’s budget department, Lightricks will be able to get by until 2025. Sources inform “Globes” that the company has no plans to raise debt or raise another financing round before then.

Israeli transcription and captioning company Verbit has gone 21 months since completing its most recent financing round. It also does not plan to raise money but will use existing funds to acquire profitable companies. “Globes” has learned that Verbit has $130-150 million in its coffers, after raising $400 million in 2021, and after cuts made this year, the company plans to become profitable next year, with no capital raising plans anytime soon.

Cybereason has gone 21 months since completing its most recent financing round when it raised $355 million in early 2021 led by the venture capital fund of Steve Munchin, the Treasury Secretary in the Trump administration. The company has laid off 300 employees in two waves in 2022 and is not looking to raise more funds and senior executives are confident that the company will be able to float on Wall Street as soon as market conditions allow.

Gett, which held its most recent financing round two years ago, is now profitable after reducing its operations in Russia and axing some of its delivery services.

It’s not clear why there is no panic in the market”

While these unicorns and privately-held companies sound calm and convinced that their readiness for the slowdown year will help them survive the winter of 2023, venture capitalists warn against complacency. “I remember the high-tech crisis in 2000. There was an atmosphere of panic then that doesn’t exist today, and I have trouble understanding why,” a venture capital investor who asked to remain anonymous told “Globes.” “It is clear that it will be difficult for most founders to raise money in the next year or two, especially due to the fact that most companies have grown only in the number of staff they employ, and in view of the understanding that the revenue of most of them are not expected to increase significantly. Many companies have shown increasing revenue over the past two years, but only a minority of them. These customers renew contracts automatically. Most companies today are in a fight to retain customers and prevent churn, or alternatively, to increase sales from each customer – a challenging task in the coming years.”

Investment in the industry is at its lowest for years

One of the reasons for the lack of available capital for tech companies, even successful and growing ones, is the losses accumulated by the hedge funds and the sudden fall in venture capital fund yields. SoftBank and Tiger Global are good examples of investors who have cut investments in Israel to a bare minimum. Tiger Global’s partner responsible for new investments in Israel John Curtius is retiring to found his own fund, and among the companies he has left behind are startups that held their most recent financing round a long time ago, such as Redis, Yotpo, Vast Data and Forter.

Investment in startups has dropped to its lowest level in years. The cumulative data for 2022 is still positive, and puts the past year at a similar level to pre-Covid, but it is still mainly a reflection of the first and second quarters of the year, most of which were a direct continuation of the technology bubble of 2020-2021. The last half of the year, however, is characterized by a dramatic decrease in foreign investments in Israel, which leaves managers of Israeli companies and investors sitting on the fence.

Instead of increasing their stakes in companies, some investors have even rushed to sell their shares. According to PitchBook, Israeli companies such as Cybereason, Hailo, Brring, Logz.io, BigID, Yotpo, and Cato Networks have held such financing rounds over the past year.

Tal Ventures partner Miriam Shtilman Lavsovski says, “This is a test for the management abilities of CEOs. They will be required to come to their senses quickly, reduce non-essential expenses and focus on short-term sales in order to survive the crisis. They must take into account that this crisis can last two or three years, and understand that growth stage investors will invest very little, and that the ability to predict what will happen afterwards is limited.”

Bessemer Venture Partners partner Adam Fisher adds, “Many of the financing rounds we saw among growth companies were completed simply because they could raise a lot of money and at a high valuation and not necessarily because they needed the cash. Therefore, for them, the time when they will run out of cash may be much more distant than 24 months – and that’s even before they make cuts or extend their growth plans over a longer period.”

He explains who will be in the biggest danger in 2023, “Those with the biggest problem, in my opinion, are the earlier stage startups that have to prove that they have a sustainable business before they can raise more money. Some of them raised large sums, $50 million or more, while they produce less than $1 million annually in revenue.”

Published by Globes, Israel business news – en.globes.co.il – on December 27, 2022.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2022.




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