America’s regard for Israeli tech remains steadfast, says StageOne Ventures

“I don't believe the prestige of Israeli high-tech has been damaged significantly so far. I recently returned from a business trip in the U.S., where there is still a high regard for both Israel and Israeli tech,” said Yuval Cohen, Founder and Managing Partner at StageOne Ventures. “The ties between Israel and the U.S. are strong and deep-rooted in both countries’ DNA.”

Given Israel’s challenging year, starting with the judicial reform protests and ending with the ongoing war with Hamas, it is not surprising that Israeli tech has taken a hit. Large percentages of the local workforce are serving in the IDF, and investment opportunities might be drying up for companies that would have received funding in the boom of 2021.

Yuval Cohen, Founder and Managing Partner at StageOne Ventures

Despite this, Cohen maintains that all is well between Israel and the U.S. “It’s not ‘a small bump in the road’ but rather another link in the long chain that connects us,” he continued. “However, we are facing an obstacle due to the war that we need to overcome, as it has had a significant impact on the country overall and eventually could lead to erosion of the overall prestige of our tech sector.”

VC fund ID
Name of the fund: StageOne Ventures
Total assets: $500M
Leading partners: Yuval Cohen, Tal Slobodkin, and Nate Meir
Latest investments in Israel: Definity.ai
Selected portfolio companies: Avanan, Coralogix, Silverfort, Epsagon, NeuroBlade, Qwak, Wing Cloud, Backslash, Entro Security, Theator, Second Nature, Guardium, Traffix Systems.

From your perspective, was 2023 a ‘lost year’, or can the events that happened during it be seen as a springboard for opportunities in 2024?

2023 posed significant challenges globally, but while much of the world began to recover from the previous year's financial crisis, Israel faced continued instability, largely due to its political situation. Additionally, the Israel-Hamas war, which commenced on October 7th, significantly impacted the market. But while 2023 was undoubtedly challenging, I wouldn't label it a lost year. Rather, it served as a period of going back to basics and striving for efficiency for the entire market, from startups to VC firms. Despite the difficulties, there were still notable deals, such as our portfolio company Silverfort raising $116 million towards the end of 2023.

What do you believe is more crucial to the state of Israeli tech: the influence of global processes and the global economy, or the local events ranging from the political protest to the war state?

I believe that both are crucial. In 2022, we witnessed the impact of changes in interest rates that affected the global high-tech sector and in 2023, the second factor of local events had a significant effect. It is very difficult to rank those two effects. Israel, as a small economy, can’t influence global trends. We are mostly reacting to actions taken by global economy leaders in the U.S., Europe, and Asia-Pacific. However, one of the main characteristics of successful entrepreneurs is adaptability; Israeli entrepreneurs excel at that because of Israel’s day-to-day reality, starting from mandatory military service, being active in protests, and being called for reserve duty.

Has the prestige of Israeli high-tech been damaged, or are the protests and the war merely a 'small bump in the road' from which the sector can recover within months?

I don't believe the prestige of Israeli high-tech has been damaged significantly so far. I recently returned from a business trip in the U.S., where there is still a high regard for both Israel and Israeli tech. The ties between Israel and the U.S. are strong and deep-rooted in both countries’ DNA. It’s not “a small bump in the road” but rather another link in the long chain that connects us. However, we are facing an obstacle due to the war that we need to overcome, as it has had a significant impact on the country overall and eventually could lead to erosion of the overall prestige of our tech sector.

How much effort was required of you to maintain the fund's status with your investors in 2023? What were their primary concerns and how did you address them?

We received overwhelming support from our investors and continue to do so. I'll break down the year into two parts: Regarding the political landscape, we allowed our employees freedom of expression, but the fund maintained a neutral position, which didn't directly affect our investors, regardless of whether they supported or disagreed with the overall political stance. Concerning the war, since October we have been receiving full support from our investors. Given our anticipation that the situation will continue to impact the local high-tech sector and our portfolio companies, it has been crucial for us to provide them with monthly updates regarding the status of our portfolio companies.

How are you preparing for the most pessimistic scenarios, such as the continuation of the war in Gaza deep into 2024, the opening of another front in the north, or further reduction of government support for high-tech?

Since the onset of the Covid pandemic, most of our companies have adopted a 'hybrid and remote' work model. So even if the most pessimistic scenarios unfold, with companies continuing to work remotely (as many did at the beginning of the war), they will be able to adapt. While we cannot predict the future with certainty, even in the event of continued conflict in both the South and the North, we do not anticipate irrevocable damage to our portfolio. All our companies have become highly efficient both in terms of business operations and employee management. They will continue to operate efficiently even if some employees are called back to reserve duty. The element that may be affected by the ongoing war is the flow of money from abroad. Startup companies with urgent funding needs are more likely to be significantly affected in the short term, as investors may adopt a cautious approach. As a fund, we are closely monitoring their situation and offering suitable assistance.

Did you raise fund money in 2023 for an existing fund or a new one? What are your expectations regarding this matter for 2024?

StageOne did not raise a new fund in 2023, given our most recent fund was launched in 2022. However, it is expected that funds seeking to raise capital in 2024 will find it more difficult, and it may take longer than expected. VC fundraising is a relationship marathon, and I expect institutional investors to continue engaging with venture investors in their network. These are professional principals who are used to thinking in broader, macro trends rather than coming from a single event perspective.

How many investments did you make in 2023, and how does it compare to 2022?

In 2023, we made a total of 8 investments, comprising both new investments and follow-on rounds. This represents a decrease compared to 2022, primarily driven by the reduction in new investments. In 2022, we made 7 new investments in new companies and 9 follow-on rounds.

In your view, will the amounts and/or the number of deals in 2024 be more like those of 2023 or 2021-22?

In my opinion, the number of deals in 2024 will be more similar to those in 2023. The years 2021-22 were not indicative of the Israeli high-tech industry, and I anticipate that 2024 will reflect a return to the normal number of deals in a healthy industry.

Which high-tech sectors will you focus on in the upcoming year? Which areas will maintain their prominence, and which ones appear less attractive?

In the upcoming year, we will maintain our focus on the sectors that have proven to be strong and resilient on the Israeli tech scene, sectors in which we have a proven track record and expertise. This includes cloud Infrastructure, Vertical AI/SaaS, Enterprise Tools, Cybersecurity, and Deep Tech.

Which type of companies stand a better chance of garnering increased attention from VC funds this year - early-stage or advanced rounds?

Companies that are already in advanced rounds stand a better chance. In times of uncertainty, investors are inclined to take fewer risks, so mature companies have a better chance of fundraising success. These companies have probably already established a presence outside of Israel, have returning customers, and have more predictability in their sales and marketing efforts.

What changes will you implement in your approach to evaluating investments in startups in the coming year, compared to the previous two years? What practices will you abandon, and what criteria will you now demand from founders?

The truth is, we have maintained our investment approach for over 20 years, and it has proven successful for both our companies and investors. We remain steadfast in our commitment to our core values, which prioritize investing in a strong team, identifying market disruptions, and developing a superb product. We understand that for founders to build great companies, it requires more than just funding; there is a critical need for the perfect blend of teamwork, market understanding, and product quality. Once this blend is achieved, we believe that success in other aspects will naturally follow.

Do you think it is likely we will witness encouraging IPOs, the emergence of unicorns, or remarkable exits in 2024?

I don't anticipate many IPOs in 2024, but I don't perceive it as a problem. Historically, the Israeli ecosystem has predominantly relied on mergers and acquisitions (M&A). With regards to unicorns’ emergence, as a fund, we don't evaluate our companies solely based on achieving 'unicorn' status. Instead, our focus is on building strong, sustainable companies with meaningful revenues and satisfied customers, and understanding such achievements will drive strong valuations.

Provide an example of an intriguing investment you made in 2023. What sets this company apart, or what is distinctive about its sector?

We invested in Wing Cloud, which is an innovative open-source programming language that revolutionizes cloud infrastructure and application development by integrating them into a unified programming model compatible with major cloud platforms such as AWS, Azure, GCP, Kubernetes, and serverless environments. Serving as an abstraction layer across different cloud providers and services, Wing streamlines both infrastructure and application code into a cohesive programming and operational framework. This approach empowers teams to accelerate the delivery of cloud software while enhancing security measures, ultimately fostering greater independence and autonomy for both developers and platform teams. Their offerings include the open-source programming language Winglang, alongside a suite of tools and services designed to facilitate the seamless building, running, debugging, and testing of complete cloud applications on various cloud providers and through local simulation. What we believe sets them apart is their potential and ambitious vision to transform a huge and fast-growing market through open-source innovation.

Practical and current tips for founders planning upcoming money-raising efforts:

1. Prepare a solid and less optimistic financial plan.
2. Make sure you have very strong market validation before you approach investors.
3. For founders looking to raise follow-on-rounds, communicate openly and honestly with your investors and be proactive on difficult decisions that may be required to get to the best possible outcome for our companies.

Name two portfolio companies that you think will thrive in 2024:

Qwak
Sector + description of the product/service: Software Infrastructure. Qwak is a management platform for Machine Learning models in production. The platform allows all relevant stakeholders to map, manage, analyze, and observe their live ML models regardless of how they were developed, deployed, or hosted.
Investment amount + total raised: A total of $27M.
Founders + year of establishment: 2020, Alon Lev, Yuval Fernbach, Lior Penso, and Ran Romano

Reasoning why this is their year:
Qwak is targeting an interesting and fast-growing market and has been able to generate market traction with valuable customers.

Theator
Sector + description of the product/service: Vertical AI/SaaS. Theator is pioneering the Surgical Intelligence revolution, harnessing advanced AI and computer vision technology to generate actionable insights that improve the quality of surgical care. By making routine video capture and analysis the standard of care in surgery, they help surgeons and hospitals understand the causes of variability in patient outcomes, lower costs, and streamline procedures in the OR.
Investment amount + total raised: A total of $49M
Founders + year of establishment: Tamir Wolf, Dotan Asselman, established in 2018.

Reasoning why this is their year:
After several years of market education, the company has positioned itself as an innovative vendor and invented a new and fast-growing market. Furthermore, their technology drives better surgical outcomes, which means more lives being saved.