These days are not easy for the Israeli and global startup industry. More and more companies find it difficult to raise financing on the terms they wanted, and prefer to sharply cut their personnel positions.
But it seems that as far as this crisis is concerned, we have not yet reached the bottom, and we are waiting for months in which the rate of layoffs will intensify, and the dream value received by technology companies in 2021 will be cut.
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This was one of the prominent predictions made at the “Round Table” on technology investment matters, which took place as part of Globes’ Israel Business Conference last week.
“There is a huge gap today between the investors, who have become more hesitant, and the companies, who are still sitting on a lot of money. A large part of the companies use loans, or take money from existing investors, so as not to reach a situation where they have to raise money from new investors at a lower value. But in my estimation, the situation This will change in the coming months, when more companies will be required to recruit,” said Ron Shabili, Deputy CEO of Phoenix and Director of the Technology and Innovation Division.
Nicole Friel, a partner in the Avex Investments Fund, added that “in the coming months we will see more companies that raised funding in 2021 have to deal with the situation, and raise funding even at a lower value, because they simply ran out of money. When I seeA start-up like Snyk, which is an example of a company that is well managed, and is considered one of the stars among the unicorns of the cyber world, lays off employees, this says something about the strength of the market, and there is no doubt that we will see more such layoffs. I think things will get ugly in the middle of 2023 before they get better.”
“The market is currently driven by the central banks”
According to Christoph Schon, senior director of applied research at the financial intelligence company Qontigo, “What we are currently seeing in the technology market is driven by monetary policy and the central banks’ response to inflation and the labor market.
“The expectation is that the interest rates of the central banks will reach a peak in March-April of next year and will remain high throughout 2023 and into 2024, and this is bad news for the technology companies. We expect another difficult period until we see the central banks change the monetary policy.”
And despite the difficult period, the participants of the round table also noted the advantages inherent in the crisis, both for the market and for the investors operating in it. “The situation is not all bad, because precisely during such periods of layoffs, we traditionally see more start-ups being born. Innovation stems from the difficulties in the market, and this is, in my opinion, a very good time to develop ideas,” said Arnit Shanar, director of Citi’s investment arm in Israel. “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.”
Shaner 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.
“I see entrepreneurs who, if their friends raised 20 million dollars 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,” Shabili added. “But the truth is that the entrepreneurs can build an even better company with 7-8 million dollars than they would build with 20 million.”
“Technology is eating the world”
David Chin, CEO of the consulting company McKinsey in Israel, pointed out that the world is at the center of a historic change process, when the geopolitical relations between the world’s main powers (China and the USA, Europe and Russia) were shaken, and inflation reared its head after decades, But despite all this, the demand for technology will remain great. “Technology is eating the world, and we’re seeing potential trillion-dollar revolutions happening in artificial intelligence, materials, energy, transportation, space and medicine,” Chin said. “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 cyber, which were the hottest and most in demand. Following the crisis, will we see an increase in new trends, such as climate technology?
Shanar: “I may be biased as someone who works at Citi, but I think there are things that humanity will always need: 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.”
According to Friel, “Before the crisis of 2008, there was a lot of talk about areas such as cleantech and alternative energies, but these trends faded when the money dwindled. I predict that this is what will happen with regard to climatetech as well. What will remain are areas such as robotics, automation and artificial intelligence, which are changing the world.” .
According to Friel, 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 technology companies provide a very specific solution, which is perhaps the best in its field (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 (Bundling)”.
Panel: Tech investments trends from investors’ point of view
Participants:
Christopher Shawn, Senior Director, Applied Research, Qontigo
Nicole Friel, Partner, Ibex Investors
Ron Shabili, Deputy CEO of Phoenix and Director of the Technology and Innovation Division
Arnit Shanar, director of open innovation and global investments, Citi Ventures
David Chin, CEO of McKinsey Israel
Sapir Harush, partner, Third Point Ventures
Facilitators: Uri Pasovsky and Ofir Dor, Globes
The conference is in cooperation with Bank Hapoalim, sponsored by Phoenix, Amdocs, BDO, HOT, Geely, Shufersal, El Al, Tnuva, Profimax, the Medical Organization, MyDesk, Contigo, Cisco and with the participation of Mekorot, the Innovation Authority, Mobileye, Start Up Nation Central, Nemal Ashdod and Electricity Company.