These are difficult days for startups in Israel and worldwide. More and more companies are struggling to raise money in the current climate and prefer to make major cuts in their workforce.
It seems that this crisis has not yet reached its nadir and layoffs will likely strengthen in the coming months and the dream valuations that startups received in 2021 will be cut.
This was the predominant prediction voiced during a roundtable discussion on tech investment last week during the Globes Israel Business Conference 2022.
Phoenix Holdings EVP technology, IT and innovation Ron Shvili said, “There is a huge gap today between investors who have become more hesitant and the companies that are still sitting on a lot of money. A large proportion of companies are using loans or taking money from existing investors, so as not to reach a situation where they need to raise money from new investors at a lower valuation. But in my opinion the situation will change in the coming months when more companies will have to raise money.”
Ibex Investors partner Nicole Priel added, “In the coming months we will see more companies that raised money in 2021 needing to cope with the situation, and raise money even at a lower valuation because there money would have simply run out. When I see a startup like Snyk, which is an example of a well-managed company, and thought of as one of the star cybersecurity unicorns, firing employees then that says something about the strength of the market, and there is no doubt that we will see more layoffs like these. I think that things will become ugly in the middle of 2023, before they will improve.”
The market is currently driven by the central banks
According to Christoph Schon, senior principal in applied research at financial intelligence company Qontigo, “What we currently see is the tech market being driven by monetary policy and the response of the central banks to inflation and the job market.
“The expectation is that the interest rates set by the central bank will reach a peak in March-April of next year and throughout 2023 and into 2024, and that is bad news for tech companies. We anticipate a difficult period until we will see the central banks changing monetary policy.”
Despite the difficult period, the roundtable participants also noted the advantages inherent in the crisis, both for the market and for the investors operating in it. Citi Ventures director and venture investing lead Israel Ornit Shinar said, “The situation is not all bad, because precisely during such periods of layoffs, we traditionally see more startups being born. Innovation stems from the difficulties in the market, and this is, in my opinion, a very good time to develop ideas. There are many opportunities in the market now for investors, and it’s quite ironic that the risk-averse are now investing less, even though the prices are the best right now.”
Shinar pointed out that while funding for late-stage startups has been cut dramatically this year, early stage companies are still a sought-after commodity. “If you look deeper, you see that the slowdown in fundraising is not as severe as we could have expected. One reason for this is that the largest funds in the world, those that previously invested hundreds of millions of dollars in a single round, are moving back and are now investing in early-stage companies,” she said.
Shvili added, “I see entrepreneurs who, if their friends raised $20 million a year ago, and they are now raising only a single-digit amount, it seems to them that this is a catastrophe. People are only now beginning to understand that we are in a different time. But the truth is that the entrepreneurs can build an even better company with $7-8 million than they would have built with $20 million.”
“Technology is eating up the world”
Consultancy company McKinsey Israel managing partner David Chinn pointed out that the world is in the midst of undergoing a historical change, when the geopolitical relations between the world’s main powers (China and the US, Europe and Russia) have been shaken, and inflation has reared its head after decades, but despite all this, the demand for technology will remain great. “Technology is eating the world, and we are seeing revolutions with the potential of trillions of dollars taking place in artificial intelligence, materials, energy, transport, space and medicine. These trends will continue, so now is the time to invest in technology.”
The last few years have been characterized by huge investments in the worlds of fintech and cybersecurity, which were the hottest and most in demand. Following the crisis, will we see an increase in new trends, such as climate technology.”
Shinar said, “I may be biased as someone who works at Citi, but I think there are things that humanity will always need and we will always need medicine and doctors, we will always need food and we will always need someone to manage our money and help us protect ourselves. These are core areas that will not disappear.”
Priel added, “Before the crisis in 2008, there was a lot of talk about areas like cleantech and alternative energies, but these trends faded when the money dwindled. I predict that this is what will happen in relation to climate tech as well. What will remain are fields such as robotics, automation and artificial intelligence, which are changing the world.”
According to Priel, another phenomenon seen in the crisis is customers who try to work with fewer solutions and suppliers, and prefer to purchase large products with multiple capabilities, in order to reduce costs. “Many of the tech companies provide a very specific solution, which is perhaps the best of breed and three times more effective than the other solutions, but it is not certain that this is enough when many customers return to the option of buying bundling.”
Panel: Tech investments from the investors’ point of view.
Participants
Christoph Schon, senior principal in applied research at financial intelligence company Qontigo
Nicole Priel, Partner Ibex Investors
Ron Shvili, Phoenix Holdings EVP technology, IT and innovation
Ornit Shinar, Citi Ventures director and venture investing lead Israel
David Chinn, McKinsey Israel managing partner David Chinn
Sapir Harosh, Partner Third Point Ventures
Moderators: Uri Pasovsky and Ofir Dor, Globes
The Globes Israel Business Conference is held in cooperation with Bank Hapoalim, with sponsorship from The Phoenix Holdings, Amdocs, BDO, HOT, Geely, Shufersal, El Al, Tnuva, Profimex, The Israel Medical Association, My Desk, Contigo, and Cisco, and with the participation of Mekorot, the Israel Innovation Authority, Mobileye, Startup Nation Central, The Port of Ashdod, and Israel Electric Corporation.
Published by Globes, Israel business news – en.globes.co.il – on November 1, 2022.
© Copyright of Globes Publisher Itonut (1983) Ltd., 2022.