"VCs have an active role in promoting founders’ mental wellness amidst market turmoil"

“As VCs, we have an active role to play to promote founders’ mental wellness and foster environments that support them amidst the market turmoil. This can be done in various ways: from enabling discrete, structured platforms for founders to share their struggles, paying increased attention to the topic in 1:1 conversation on a habitual basis and even encouraging professional mental support when needed,” says Inbal Perlman, partner at TAU ventures in a conversation with CTech as part of the project “Where do we go from here?”, which aims to examine how the Israeli VC industry is dealing with the crisis in the sector. According to Perlman one thing is for sure: “If we truly wish to support our founders’ business and personal resilience, we can’t remain idle,” she says.

Over recent months, we have witnessed one of the most serious crises to hit Israeli high-tech in recent decades: on the one hand, a global economic slowdown, and on the other hand, local political turmoil that sent the industry into deep stagnation. Since the general assumption is that the situation will not change in the near future, the question hovering over the industry is what can still be done to minimize the damage to the Israeli high-tech industry and how should we act so that when the crisis passes - all those involved can take a leap forward. Therefore, as part of this on-going project, we spoke with senior executives from the local venture capital industry to try and understand from them what needs to be done now to justify the reputation Israeli high-tech has earned as being creative, adaptive, innovative, agile and cunning.

Inbal Perlman.

Name of fund/funds: TAU Ventures 1 & TAU Ventures 2

Total sum of funds: $95 million

Partners: Nimrod Cohen and Inbal Perlman

Notable/select portfolio companies: SWIMM, Xtend, InnerPlant, Gaviti

“This is an exciting time for the VC industry, with quality human capital unlocked from large companies seeking to build new startups”

How long do you think the global economic slowdown will last?

“Predicting both economic growth and recessions is notoriously difficult. The decline in growth momentum in the United States and the EU directly affected the rest of the world economy and amplified the unpredictability and fast-changing nature in both the global and Israeli startup ecosystem. Consequently, it’s hard to predict exactly how long the current slowdown will last. However, despite the gloomy picture of the current climate, magnified by a declining stock market, layoffs, and several high-profile bank failures - lean times hold great potential for startup founders, forcing new kinds of scrappy innovation. Evidently, previous downturns produced some of the most dominant tech companies including HP, Microsoft, Airbnb, Uber, Pinterest, Slack and WhatsApp, underlining that in every downturn there are opportunities to be found, with room today for visionary founders to grow strong, durable businesses.”

How should the venture capital industry conduct itself in the immediate and medium term?

“Against the backdrop of a global economic slowdown, the VC Industry continues to play a crucial role in backing, building, and defining the companies of the future. The market will rebound, but it won’t happen overnight. Our responsibility as investors is twofold, by both supporting portfolio companies in developing successful business foundations to optimally face the shifts ahead and backing new talented and innovative business builders.

“Specifically with early-stage portfolio companies, VC’s support of founders who haven’t been through past crises is essential: from the 1:1 mental support on the founder level; the development of a sound value proposition and a viable, long term plan for growth on the strategy level; and providing an overarching support offering for portfolio employees on the team level. As an example, TAU Ventures established an in-house leadership program, set to empower, and support first-time managers in the fund’s portfolio companies, ultimately helping them build a strong, long lasting managerial infrastructure.

“There is no doubt that in a few years, we will look back and point to fantastic companies that were established during this period. The business opportunities are here, made of startups with differentiated value propositions maintaining capital efficiency, with generative AI bringing a generational wave of innovation. Simultaneously, increased due diligence continues to be vital, setting a reminder for founders that driving sustainable success takes time, discipline – and perhaps most importantly – stamina, especially in the current market.”

Are there positive sides to this crisis?

“This is an exciting time for the VC industry, with quality human capital unlocked from large companies seeking to build new startups. Simultaneously, the critical decisions existing startup leaders are bound to make to outlast the downturn, from changes in financing and operational spend, go to market strategy to product roadmap, yield stronger business focus for companies and their growth trajectory.

“When looking at the positive sides of this crisis, The COVID-19 pandemic, for example, was characterized with initial deep uncertainty. However, in hindsight, it is perceived by many as a ground-breaking period enabling accelerated innovation and digitalization and a broader reliance on tech, ultimately benefiting startup growth. The current cycle provides a reminder that startups are a long game play, with great opportunity available for companies able to clearly demonstrate a sustainable model and clear business value. These companies will not only survive in 2023, but thrive in the long term.”

When the local crisis ends - will the Israeli sector continue from the point where the crisis started?

“As a rule of thumb, healthy, well-run businesses have a higher chance of succeeding amidst turbulent market conditions. However, being part of the global economy, Israeli tech startups are inevitably impacted by the slowdown, from the changing spending habits of customers to access to foreign funding resources. Despite the ambiguity, there are some essential steps startups can take to emerge even stronger. Founders who will prepare and invest in building resilient infrastructures, by extending their runway, scaling back on non-critical initiatives, strengthening relationships with strategic customers and retaining top employees, will manage to not only weather the storm, but come out stronger at the other end.”

What are the critical points in which Israeli high-tech was damaged?

“The numbers are clear: Investments in Israeli high-tech companies dropped from a record of $26 billion in 2021, to approximately $15 billion in 2022 - to $1.7 billion in Q1 2023, reflecting the lowest quarterly fundraising since Q3 2018.

“However, beyond the dry data and widely discussed business impact on startups, the current economic environment has a critical psychological impact which is just as important to address. The pressure to remain strong in a volatile market, may come at the expense of founders’ mental health, a topic that remains stigmatized. This implicit toll was highlighted in the latest shutdown of Silicon Valley Bank, during which startup founders, many of which are first-timers, made up a key part of the bank’s portfolio and grappled with the responsibility for the livelihoods of their employees and families. While the FDIC helped shore up the bank’s deposits, the accumulative anxiety resulting from the collapse lingers.”

How should this problem be handled?

“While entrepreneurship is well-known to entail a broad set of challenges, spurred by intense risk-taking and uncertainty, navigating a downturn is even more unpredictable than usual - and can lead to a lot of stress, both for startup leaders and their employees.

“As VCs, we have an active role to play to promote founders’ mental wellness and foster environments that support them amidst the market turmoil. This can be done in various ways: from enabling discrete, structured platforms for founders to share their struggles, paying increased attention to the topic in 1:1 conversation on a habitual basis and even encouraging professional mental support when needed. One thing is for sure: If we truly wish to support our founders’ business and personal resilience, we can’t remain idle.”

How can you take advantage of this interim period (until the crisis passes) to prepare better for the reawakening when it arrives.

“Every startup is different; thus advice should be tailored and contextual. Yet as a rule of thumb, by approaching business with a strategic and well-informed mindset, and focusing on creating quantifiable value to customers, the interim period can be greatly leveraged by startups. Concretely, founders should persistently consider shifting market trends, the competitive landscape and changing customer preferences, especially at a period where shrinking spending on external vendors is taking place.

“Just as importantly, founders should be mindful of team building to ensure business continuity. On the one hand, hiring top-tier talent at a reasonable cost is more accessible given the layoffs of highly skilled employees from large companies; on the other - new employees onboarding and training is costly. Therefore, startups must embrace a competitive approach to retain talent, by investing in employees’ personal growth and contribution towards organizational goals amidst the pressures in today’s market.”