"We will see increased activity in Series A and B in the next six months"

“Clearly, any startup that entered the current slowdown with insufficient capital, but of those, the biggest losers will be those “addicted” to unhealthy spending,” said Lior Litwak, Managing Partner and Head of Glilot+, at Glilot Capital Partners. “We’ve definitely seen hyped startups in hyped sectors, running capital-hungry business models and getting used to burn rates that require constant capital injections to sustain growth.”

Glilot Capital Partners is one of Israel’s leading venture capital funds, with an impressive portfolio consisting of highly innovative startups in the fields of Cybersecurity, Cloud, DevOps, and SaaS. Its first early growth fund, Glilot+, operates in parallel to Glilot’s seed fund and is run by Litwak.

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Lior Litwak, Managing Partner and Head of Glilot+

He continued. “For example, we’ve seen insane rounds at some sectors of Fintech that were driven by the need for balance-sheet capital to fuel growth at razor-thin margins. Even with simpler Enterprise SaaS-based business models, we’ve seen entrepreneurs being pushed to grow and hire as fast as possible, the hell with costs. Once you’re set on a certain burn rate, it’s REALLY hard to tone it down. The old saying ‘we can dial down growth and become profitable whenever we want’ is a nice cliche, but in practice, it’s almost impossible to execute.

Name of fund/funds: Glilot+, the early-growth fund of Glilot Capital Partners
Total sum of fund: $180M (out of ~$700M AUM at Glilot)
Partners: Lior Litwak, Kobi Samboursky, Arik Kleinstein (with Nofar Amikam as General Partner at Glilot Seed)
Notable/select portfolio: AccessiBe, At-Bay, Cherre, Cider (recently exited), Cyolo, Hourly, PayEm, Seemplicity

Lior Litwak, Managing Partner and Head of Glilot+, at Glilot Capital Partners joined CTech to share insights on the future of the VC space

If 2020 was the year of the pandemic, and 2021 was the year of record, how would you define 2022 in the VC sector?

2022 was the year the music stopped - for investors, founders, and anyone involved in the VC ecosystem. In a way, we all realized that the “musical chairs” game we’ve been playing in 2021 has come to an end. It didn’t stop all at once - we were all still doing deals in Q1 and even Q2 before the first significant Fed rate hike in May - but by now most investors, especially those investing beyond the Seed stage (which has remained quite active in Israel), are more cautious. The fortunate thing is that as we look towards 2023, there are still great companies out there that need and deserve capital to continue building their business, and there are plenty of investors with sufficient capital to deploy. The biggest question on everyone’s mind now is valuation - and this is where there’s currently still a gap between most investors and founders. I believe we will see increased activity in Series A and B in the next six months as the pressure to deploy (on the investors' side) or raise (on the founders' side) capital overpowers the fear of mispricing.

Who are the big winners of 2022?

Those that managed to get their hands on capital before the music stopped - again, true for startups and funds alike. Companies that in Q1 were able to raise significant amounts at valuations that are not completely detached from reality will be able to hunker down, reassess their budgets, and stretch their available capital until the fundraising environment is more favorable - and maybe get to an up-round eventually. And of course, funds with capital will be better positioned to both enjoy new investment opportunities at more favorable valuations and have the reserves to support their best portfolio companies through the trough.

Who are the big losers of 2022?

Clearly, any startup that entered the current slowdown with insufficient capital, but of those, the biggest losers will be those “addicted” to unhealthy spending. We’ve definitely seen hyped startups in hyped sectors, running capital-hungry business models and getting used to burn rates that require constant capital injections to sustain growth. For example, we’ve seen insane rounds at some sectors of Fintech that were driven by the need for balance-sheet capital to fuel growth at razor-thin margins. Even with simpler Enterprise SaaS-based business models, we’ve seen entrepreneurs being pushed to grow and hire as fast as possible, the hell with costs. Once you’re set on a certain burn rate, it’s REALLY hard to tone it down. The old saying “we can dial down growth and become profitable whenever we want” is a nice cliche, but in practice, it’s almost impossible to execute.

What do you expect in the VC sector in 2023?

I think the main change we’ll see is much less activity from funds that were overly active in 2020-2021. Especially in the Israeli market, we probably saw the most competitive two years in VC history, with funds (mostly foreign, sometimes local) winning deals on valuation without much DD, building on their brand and on the exuberant sentiment. In 2023, we expect the market (both entrepreneurs and LPs) to go back to favoring VCs with consistent, years-long performance and a track record of support and value-creation for their startups. Funds that have exercised discipline and shown continuous growth in portfolio value, rather than suffering significant mark-downs following massive value inflation, will stand out with LPs, and will have an easier time raising new funds when necessary. This is why we expect to remain fully active in 2023 and hopefully enjoy the “new normal” - more realistic valuation expectations and healthier growth from portfolio companies.

What global processes will affect (positively and negatively) the Israeli market?

Israel is well tied to the global economy and geopolitical events, though the outsized dependence on the tech sector in Israel helps mitigate some of the trends that have hit the US and Europe a little harder. Inflation has been lower so far in Israel, in part because our consumption here is subject to higher taxes and supply chain hurdles, to begin with. In addition, Israel dominates in several tech verticals with a steady growth trajectory, Cybersecurity being one of them, helping alleviate some recessionary pressure. As for the energy crisis, we’re probably not going to suffer from it as much as Europe will this winter, thanks to local natural resources. China seems still a bit more responsible than Russia as it pertains to Taiwan, so the semiconductor sector so far is, though strained, stable. And I might be an optimist here, but I think the Russian campaign has to end soon - there’s nothing much left for Putin to gain there, other than stick it to the West (and Europe, in particular, this winter).

How should different companies (large, medium, early-stage) prepare for the coming year?

More funding, obviously, but unlike last year, companies will need to present near-perfect performance and metrics to enjoy a positive fundraising process. Companies need to operate under the assumption of no new funding in 2023, not even from existing investors with plenty of dry powder available (not something every startup has right now). A better approach is to take a hard look at financial plans for 2023-2024 and stretch your runway as much as possible, even having a drawer plan for hitting cash-breakeven (if you’re at the scale to afford that).

The key point I make to startups in planning for the next couple of years is to assume that top-line growth could be much slower than previously expected. The problem is that most re-budgeting work these days focuses on reducing costs (and by now most startups have stopped hiring and “trimmed the fat”). But entrepreneurs miss the opportunity to stress-test their assumptions on top-line growth. I’m much more comfortable when I see revised budgets that show reduced burn rates that don’t rely on significant revenue growth.

What will be of the dozens of unicorns born last year?

I actually think it will take some time before we see unicorns “deposed”. This has mostly to do with the significant amounts of capital these companies have raised in the past couple of years, and the flexibility they have in re-budgeting for lower costs and slower growth to keep their head above water. Many such unicorns also have deep-pocketed investors around the table who will not be happy to see their huge investments marked down. 2023 will be a standstill year for these unicorns as far as valuations go - if in 2021 we saw many unicorns continuing to double and triple their valuation - that will definitely stop. But lose that status? Not so quickly.

What sectors in high-tech should we look out for in the coming year - and why?

This is obviously self-serving, but we believe that Cybersecurity, a space that Glilot has been backing for more than a decade, will continue to show more resilience than other sectors. The accelerated digitization across sectors during the COVID pandemic is what skyrocketed the sector in the past couple of years, and it too has experienced over-hype - but at least the demand for products and innovation in the sector is expected to persist. The good news is that valuations will need to rationalize here too, especially in early-growth stages such as Series A and B, which will open up more opportunities for Glilot+ to continue supporting this market.

I believe that Fintech is a space that will shift away from arbitrage-like business models and revert to what I like calling “Financial SaaS” solutions. Pure-play credit or payments activity that involves tech-enabled underwriting or distribution will run out of steam as capital becomes much more expensive, and we’ll see many such startups, which were the most successful and well-funded Fintech startups of recent years, failing spectacularly. But the need for innovation in finance departments is still dire, and the Fintech talent should shift more towards helping solve business problems for CFOs, not financial actors. This is where I hope we’ll see more Fintech talent and investments flowing into in 2023.

HR: Do the layoffs, those that have already happened and those that are coming, help to fix in any way the distress experienced by companies over the past 2-3 years?

For sure. So far we’ve only seen the initial trimming of last year’s excess hiring. And most startups are still flush with cash and can stay the course for the next 6-12 months, if not longer. But if companies who haven’t prepared well for the capital shortage get closer to the edge of the cliff, we’re going to see more layoffs later in 2023. On the positive side, 2023 will see an expansion in high-quality talent going back to the market.

But additional layoffs really need to be a last resort for any company that has already gone through workforce reductions. A death by a thousand cuts is slow and painful. I think employees need to be acutely aware of that dynamic and recalibrate their expectations, both from their existing employers and future ones. That recalibration, in turn, ought to reduce the personnel cost pressure on startups. Pay cuts could be a great alternative to layoffs, and employees and management should work together to ensure runaways can be extended.

Additional notes:

The overall message should be that what’s happening now is GOOD. The last couple of years brought on trends that were not healthy for the VC industry - for entrepreneurs and investors alike. Sure, there were major winners along the way, but much of the “winning” has been on paper. LPs give VCs money in order to produce consistent, outsized returns compared to the market, across multiple funds and over decades. “Hit and run” approaches serve our industry poorly in the long run, and fail to create long-term sustainable investing and value-creation models that both LPs and entrepreneurs can rely on.

We would like to believe that at Glilot, which was focusing on purely Seed investing for a decade before 2021, we’ve proven that with a disciplined approach to early-stage investing, supported by a unique value-creation infrastructure, we can help build amazing companies AND generate consistent returns to LPs. That is what we’ve proven with Glilot+ in the last two years, and as a result, we have much reason for optimism as we enter 2023.

Cider, Hourly, Seemplicity - Glilot Capital Partners’ notable portfolio companies

Cider
Cybersecurity, DevSecOps - CI/CD Security: Cider offers a single platform for orchestrating and harmonizing all Continuous Integration and Deployment (CI/CD) security activities for Security, Developers, and DevOps teams, enabling them to work together and accelerate security to the speed of engineering.

Founders: Guy Flechter, Daniel Krivelevich
Founding year: 2020
Number of employees: 65

Explanation behind investment:
Glilot first invested in Cider’s seed round in late 2020, and within less than a year the company has shown a significant ramp in product development and getting to market. Throughout 2021, during which Cider went through our product-market fit “Mach5” value-creation process, we received glowing feedback on the company’s team and offering. We therefore identified Cider as prime candidate for doubling down from Glilot+ in the Series A, which we ended up co-leading. I guess great minds think alike, since Palo Alto shared our excitement with the team and early product feedback, and decided to acquire the company a few weeks ago for nearly $300 million.

Hourly
Insuretech - Workers Compensation Insurance. Hourly offers a simple yet effective platform for hourly workers’ compensation via online reporting and payroll application, and a complementary workers’ compensation (“WC”) insurance solution that helps with risk assessment, underwriting, and claims management.

Founders: Tom Sagi, Shay Litvak, and Amir Faintuch
Founding year: 2018
Number of employees: 106

Explanation behind investment:
The $50 billion WC insurance industry is well-established in the US and offers a largely standardized product. Traditionally, WC policies are underwritten for a period of 12 months using annual coverage estimation, which in turn is based on the nature of work performed and number of insured employees. These rough estimates are rarely on target at the end of the year, especially in businesses that leverage hourly workers, which resulted in complex claim processing and year-end auditing by carriers. By using the Hourly platform, which streamlines data into a payroll platform from employees’ apps, insured employers can manage their WC insurance posture and make sure they are accurately covered in real-time, while at the same time handling all payroll activities from a single platform.

Based on our experience with Insurtech and B2B SaaS models (e.g. with our investment at At-Bay), we were impressed with Hourly’s existing technology and GTM assets, and saw their tremendous potential for disrupting a sector of insurance that has seen little innovation over the years.

Seemplicity
Cybersecurity, Application Security. Seemplicity helps better protect organizations against ongoing security threats by accelerating security teams’ response rate to vulnerabilities, application security issues and misconfigurations. Seemplicity's automated workflow platform integrates with dozens of existing security products across the organization, uses machine learning and big data analytics to normalize countless alerts into a manageable set of actionable tasks, and automatically prioritizes, distributes, and assigns these tasks to the right remediation teams (R&D, IT, AppSec etc.) on their own native ticketing and workflow systems (e.g. Jira, monday.com, ServiceNow etc.). As a result, remediation time of security issues is shortened by as much as 6x.

Founders: Yoran Sirkis, Ravid Circus, and Rotem Cohen-Gadol
Founding year: 2020
Number of employees: 38

Explanation behind investment:
Modern AppSec and vulnerability assessment tools are providing warnings and alerts across the infrastructure, flooding security and R&D teams with information that may be in many cases duplicated or obscure, in turn creating security debts and at times leading to actual breaches. This problem is exacerbated in the current macro environment, in which teams are encouraged to do more with less and cut costs. By creating smart automated workflows from cybersecurity findings and generating specific R&D or configuration tasks for remediation teams, Seemplicity can fix security issues and shorten time-to-resolution, greatly improving security team efficiency and productivity.

Thanks to Glilot’s vast network of CISOs and security expert advisors, we were able to quickly gather feedback on the validity and need for Seemplicity’s solution. The unanimously positive feedback on the team and offering made the investment an easy decision.