For the Corona-Besieged Tech Industry, Cash Is King
With private money drying up, wage reductions, and layoffs, Isaeli startups are suddenly on the defensive. People in the industry are talking about possible mergers and acquisitions, and the local unicorns are waiting on the sidelines for prices to go down
“Israeli companies do not usually stockpile money for more than six months of operations, according to serial entrepreneur Zohar Levkovitz. “Soon, those who run out of money will start shutting down, while the strong companies will upgrade their employees for less money,” he told Calcalist.Ayal Itzkovitz, managing partner at Pitango Venture Capital, is also skeptical about the survival odds of some of the local startups. “Many of these companies burned through funds quickly until now,” he said. “Soon we will start seeing bargain sales.” Interviews with many of the leading players in the Israeli tech industry create an image of a quick chain reaction, almost as exponential as the coronavirus infection graph. Many startup companies have started letting employees go in recent weeks. Others are cutting wages—the same ones that ballooned in an unprecedented way in recent years as demand for skilled tech employees in Israel outstriped supply. People in the industry are talking cuts of around 20% on average, with some shaving off as much as 40%.
There are, of course, employees who are not waiting for the swing of the sword—those who are defined as talents are abandoning ship at smaller companies with less cash, and approaching more mature companies or those with more funds. “Entrepreneurs have been telling me in the past two weeks that they are being contacted by talents they did not dream of being able to recruit before. Those people are calculating how much money is left at their current place of employment, and if it is not enough, they look for another place,” Itzkovitz said.On the other side of the equation, giant multinationals like Google, Facebook, and Amazon, and Israeli unicorns sitting on a nice pile of cash, are following the situation with interest. Times of crisis can become a turning point for companies who manage to leverage them just right. It happened to Google, which rose from the ashes of the 2000 collapse of the dot.com bubble. It happened to Facebook, which gained much of its current strength during the 2008 financial crisis. The current crisis is also expected to birth its own giants, and Israel could play a significant part in this new era. The most prominent example is Zoom Video Communications Inc. Until recently just one of many promising companies that went public during the unicorn flood of the past two years, today it provides one of the world’s most popular services. “Zoom will become a prominent acquirer in the near future, including in Israel, and there are many companies suitable,” Itzkovitz said. “It is the kind of company that can leverage the crisis to become the next Microsoft, now that its product is installed by so many users due to coronavirus.” As of January, Zoom, which listed in April 2019, is sitting on a $885 million cash pile. While a nice sum, it is peanuts compared to the likes of Microsoft, Google, and Apple, each with over $100 billion in their coffers. Facebook and Amazon have about $50 billion in cash each. That is good news for Israeli startups, because it means there are still companies that can welcome them with open arms in the near future, though perhaps not at the valuations they dreamed of. “No doubt, there will be new opportunities for the cash-heavy multinationals,” Itzkovitz said. “I know that already, the business development departments of the big companies are working on acquisitions, to get a hold of the talent before people start leaving.” Private investment funds are not short on cash, either. Together, after a record year in commitments, they are sitting on global reserves of $1.5 trillion. Called dry powder, this is money that is currently left to collect dust because the funds have not found companies valued at low enough valuations to yield high returns later. That problem, at least, is about to be solved. Israeli unicorns with cash reserves are also in the game. They usually only have reserves of $100 million to $200 million, but when valuations crash and the market becomes, after so many years, a buyer’s market, that is plenty. Furthermore, the entrepreneurs behind these local unicorns are often much more connected within the local ecosystem. “We don’t even have to look,” said Amit Bendov, co-founder and CEO of conversation analytics startup Gong.io Ltd. Gong raised a $65 million series C round in December, only half a year after raising a $40 million B round. “We have already started receiving offers from smaller companies that know us and know we have money. We are also being approached by talents from small startups or startups that are on the verge of running out of money. Today, startups understand that if they only have money for six months they won’t make it. Seed-stage companies can maybe last a year with the money they have.”
Bendov himself has lived through the 2000 and 2008 crises. “The first time, I felt on the verge of death, but in 2008 I was less scared,” he said. “Because I’ve witnessed these crises, I raised two rounds when I could, so now we have a work plan for the next 18 months and we are speeding up development.”Another Israeli startup with a nice cash pile is business intelligence startup Sisense Ltd., which raised over $300 million to date, $100 million of that just before the outbreak. The company is already considering opportunities. “The money we raised during the good years enables us to make long-term decisions and also leverage the current time to recruit employees. Even if wages do not drop, people will prefer working for large companies, and the market will be more sensible,” CEO Amir Orad told Calcalist. “You can already see there is less competition for workers. Amazon has already announced recruitment of 100,000 new employees, including programmers. Historically, the strong companies grow stronger during crises. They make acquisitions, build, and recruit while the weak companies shut down.” Orad is meeting the current crisis at the head of a relatively large and cash-heavy company. During the 2000 crisis, however, he was on the other side: as one of the founders of cybersecurity company Cyota, along with Israeli Minister of Defense Naftali Bennett. The two, together with a few other partners, founded the company just before the dot.com bubble collapsed and very quickly found themselves with almost no money.