Investors reveal: How to raise money for early-stage startups

The year 2020 is ending with a record number of capital investments in local tech companies, totaling $9.9 billion, according to a report by the IVC Research Center and Meitar Law Offices. Early-stage investments, Seed and series A rounds, saw a drop in the first and second quarters of the year, with the trend reversing in the fourth quarter, in which out of $2.5 billion investments, $579 million were directed toward early-stage startups.

In honor of the upcoming finale of Calcalist and Bank Hapoalim’s Startup+ competition, we checked with leading investors what the hot fields are, and what must be done to raise capital at the early stages of a company’s lifecycle.

“This year we saw how exceptionally resilient the Israeli tech market is, and one can say that this has happened in part due to, and not despite, the coronavirus (Covid-19) outbreak,” Guy Yamen, Managing Partner at TPY Capital said. He cites three reasons for this: the first is the digital transformation that became crucial for every business in the world because of the pandemic; second, capital and alternative investments aren’t attractive now due to the record low interest rates; and third, ever since Covid-19 swept across the globe, it neutralized the advantages of tech companies having their headquarters located in places like Silicon Valley or New York. “Today, more than ever, we’re seeing very successful Israeli companies whose marketing and sales teams, or even their entire management teams, are looking to open offices in Israel. In a world where so much of the ‘go-to-market’ has suddenly become digital, it’s less important whether a company has offices in San Francisco or in Tel Aviv,” he said.

Lotan Levkowitz, who serves as General Partner at Grove Ventures, said that the coronavirus crisis separated those who were able to adapt from those who weren’t. “During the pandemic, we’re witnessing an accelerated rate of digitalization. Those who were able to move forward are doing well and even surpassing expectations, while those who aren’t - are stuck.” The common thread between all of the hottest fields now is the acceleration of the digital revolution that transpired over the course of the pandemic. “Many things have gone from being offline to online, and many slow regulatory processes accelerated, because the world has changed, and it was a necessity.”

“Startups that entered in the market and thought that it would take them a year to break out, saw how processes accelerated quickly; while big companies who had plans to move forward during the next five years were caught off-guard.” Levkowitz thinks that the hottest fields will be those related to the computing industry and artificial intelligence, digital health, and telehealth, or anything related to the 4.0 industry. He notes that everything from the “old” world, such as supply chains, production lines, etc., needs to make the transition to online systems to become more efficient. “These are one-time opportunities,” he said.

Nofar Amikam, Investment Partner at Glilot Capital Partners has seen the effect that the pandemic has had on several fields, and at different stages of investments. “For example, in the cybersecurity world, we are seeing a rise in Seed-level rounds, and this mainly stems from the fact that during the coronavirus period companies that dealt with cyber increased their investments, since many were afraid of transitioning to the cloud, and it was crucial to work from home.” She believes the hottest areas to invest in right now are anything related to cloud computing, whether that is managing a budget through the cloud, protecting data stored in the cloud, or any technology that allows people to work remotely, such as technologies that are related to work productivity or collaboration.

Yamen distinguishes between fields that “rode out the pandemic wave,” like digital health, and cybercrime protection, which he expects will continue to rise, and those that are unrelated to the pandemic and “leaped above it,” so to speak, such as quantum physics, or areas that the next generation will utilize, such as those that are based on green or renewable energies.

Adi Horowitz-Lavie, Business Development Manager at Poalim HiTech noted that the 2019 trend of declining investments in early rounds and the shortage of new startups hitting the market carried into 2020. That said, she added, “in recent months these investments experienced an awakening, but there is still a dominant trend of investing at later stages, despite the importance and urgency for investors to support companies that are just starting out and are ultimately the growth engine for the future of the industry.” The hottest areas that she’d recommend investing in are cyber, the 4.0 industry, digital health, and also technologies that relate to remote working communications as fits the spirit of the times. For example, the startup My Interview, which has developed a smart platform for video interviews for recruiting employees, and raised $5 million in its seed round. “We are witnessing companies, like (event production company) Bizzabo, that could have crashed because of the pandemic, but were able to turn things around, adapt to the period, and even end out the year strongly.”

These investors had a number of tips for entrepreneurs interested in raising early-stage capital:

1. Now more than ever - stray from the flock. “There are opportunities here, mainly because the world has changed, the market has changed, business channels, customers, and technological processes have been accelerated. It’s possible to build a company that leads the market in a certain category, especially for those that want to raise money and build a big company. But I would advise them to be different,” Levkowitz says.

2. Build a product that can be sold "without human touch." Since it will be a while before the world returns to its former state, startups should focus on creating products that can be sold digitally. Investors estimate that there will be fewer and fewer companies whose products require physical presence to installed.

3. Be even more obsessive with your customers. “This is a unique opportunity. Most customers tend to buy products they are familiar with. Half a year ago, the entire world changed. Today, there aren’t any more exhibitions, you don’t meet with salespeople, and that’s why those who obsess over their customers and reach them first, will have the potential to secure them. All of the giant companies are struggling with internal changes, and it creates opportunities for new companies to grab people’s attention,” Levkowitz says.

4. Examine the differences between investment funds. “We are seeing more new investment funds that are starting up, and even European and U.S. funds that didn’t play the field in Israel are starting to invest in seed-stage rounds. If I started a company I’d take note of what other benefits a fund can afford me, I’d go with one that knew how to support my entry to the market and reaching my customers. During a period when there aren't a lot of entries and many struggle to create bonds with others, this is meaningful,” Amikam said.

5. Adapt yourself to the times. “Startups must know how to adapt themselves to the spirit of the times, and focus their technology and products to current demands, even if it requires them to ‘pivot’ in order to leave and succeed,” Horowitz-Lavie said.

6. Be careful not to ‘ride on the coronavirus wave.’ “The coronavirus pandemic was a significant event, but one must be careful not to ride the wave more than is necessary,” Yamen said. Companies that deal with Covid-19 tests for breathing for example, for them it’s relevant, but there are many startups that deal with other topics and ‘throw out’ the word coronavirus as if it were magic, just like in the past people would use the word AI or machine-learning. “The place where most of these startups do meet the coronavirus is in their go-to-market. That’s why, without any regards to the product, a startup that is at the seed round and knows how to move the market, even without conferences or flights to meet customers, and show that the product is able to adapt and fit the digital market will be a very impressive one.”