Staying Alive: Early-stage startup crisis survival tips

Forget about inflated values and flash funding, plan ahead how to keep your head above water for the next 24 months. The fever that gripped the high-tech sector last year has subsided and startups are preparing for what will come now that the bubble has burst. In anticipation of the third StartUp+ Competition sponsored by Calcalist and Poalim Hi-Tech, here are forecasts and tips for the coming year for early-stage startups from some of the heads of the Israeli ecosystem.

"After some crazy years, the market is returning to the values it was supposed to be at before 2020-2021," says Tal Slobodkin, Managing Partner at StageOne Ventures. "I do not know if it’s an explosion or a correction, but it is a return to normalcy. The value of companies in the public market or before an IPO was very high, some would say unreasonably high." Slobodkin, who predicted the crises of 2008 and 2014, added: "In most of the companies I know there is no revenue collapse or cessation of sales."

"We see deals that used to be snatched right up, but today the situation has changed. It's important for us to spend time with the investors, to bring them together with the portfolio companies. We are not interested in a shotgun wedding, we want to invest when we feel comfortable with them. Some investors will connect and some won’t.”

Tal Slobodkin (from right), Renana Ashkenazi, Rotem Eldar, Maya Pizov, and Adi Hoorvitch Lavi.

"It could be that deals are going to be executed at a slower pace than last year," agrees Renana Ashkenazi, a General Partner at Grove Ventures. "Now the logic comes in and the rounds of recruitment become smaller. To hedge the risk, the values are also going to go down. But there is money; transactions continue to take place, but they happadien more slowly. Investors examine companies with extra attention, they do longer due diligence. But deals are still being signed. It will not help me to sit on my money."

Ashkenazi explained that last year "all kinds of non-traditional players - private funds and growth funds - started investing in startups at earlier stages, because the risk decreased. There was a feeling that it was much easier to succeed. These players, all venture capitalists, may slow down their pace. The profile of investors and the pace of investment is about to change. But the good companies will still be able to raise money - no one has any doubt about that."

"Today there is a real slowdown, especially in the pace of transaction execution," testified Rotem Eldar, Managing Partner and co-founder of the VC fund 10D. "The whole FOMO (fear of missing out) element that has characterized investors for the past two years is disappearing. We no longer see term sheets that close on the basis of a meeting and a half within a week. The bar of investment is rising. My expectation is that investments will return to their historic pace, where investors will have time to get into the thick of things. Entrepreneurs will have a harder time recruiting based on buzz words and handshakes. They will need to come more experienced and clear in the seed stage. Investors will want to see more of the entrepreneurs' work. There used to be fewer recruitments based on a presentation alone. Entrepreneurs who enter the room and demand a memorandum of understanding within three days will not receive a warm welcome like they did a year ago."

How do you maintain a long runway?

Because investors will no longer open their wallets with the same generosity that characterized 2021, some startups will have to learn how to extend their "runway" until the next round of funding. Maya Pizov, Managing Partner at Amiti Ventures, advises first of all: "Bring in paying customers. In the end, entrepreneurs have two options to bring in money: either through business or through someone who believes in you and increases their investment. Ideally, the goal is to bring in a long-term investor who will allow the company to run comfortably in the next year or two. The goal is to recruit a quality round with an investor who believes in the vision of the entrepreneurs and if they are not in the right situation, then there are alternatives for short periods." Although Pizov does not recommend taking on debt, she admits: "It is a tool. In the end it is possible to raise around it with the help of current investors or find short-term solutions. Ultimately, every entrepreneur wants something that will buy them peace of mind for the next two years."

"The only thing we know for sure is that we do not know what will happen in this crisis," Ashkenazi confessed. "The responsible thing is to prepare for several scenarios: What if this crisis is going to last two years? What if it's a corona-style crisis, that in three months we're going back stronger, and what if it's something in between? Once you prepare for these three scenarios, with your finger on the pulse all the time, you understand what needs to be done in terms of manpower. Every startup needs to prepare for the worst case scenario. Are we on our way there? I do not think so, but this is what we advise our startups today. In today's market it is important to use all means to extend the runway, even for a quarter. Once upon a time, companies could afford not to take money, but given the opportunity to raise another round and extend the runway, it's something worth considering."

"Companies that come to recruit for their next round need to do whatever it takes to get through this crisis," says Eldar. "If the money runs out suddenly, it's okay to add in investors with attractive conditions for the company to overcome the crisis. Whether it means extending previous rounds or producing even more creative solutions to find investors who feel the previous value matches the current risk. One has to put aside the feelings and understand that the previous value of the company is not the basis for comparison, but the current situation. It is very difficult, but it is important to understand that the success of the company and its ability to overcome the crisis is the most important thing."

"The first thing to do in times of crisis is to reduce recruitment - only key people are recruited," Slobodkin explained. "The next thing is that they freeze recruitment of funding. After that, the next thing that happens is that the bottom 5% is cut. There are a lot of companies that have not laid off employees for a long time and they have weak employees. It's not nice to say that, but it's the reality. In all organizations, not all employees are at the same level."

"It is important to examine the money that has already been raised, and to consider the company's expenses more carefully," explained Adi Hoorvitch Lavi, VP at Poalim Hi-Tech. "If in the past there was more room for trial and error, now we need to act in a more calculated way and leverage existing funding to achieve the company's goals. It is important that the company consults with those who support them - investors or professional service providers - for a broad view of what is happening in the market based on their experience in previous challenging periods."

Which sectors are still expected to thrive this year?

"When the pandemic broke, I was interviewed at every opportunity and gave predictions that proved to be false. They say ‘prophecy was given to fools’, so it is impossible to know," Ashkenazi says. "Giant companies assumed we would never go back to working in our offices, for example. People said this with complete confidence, but they turned out to be periods, not exclamation points. I think that for an HR startup it was very easy to recruit, but now there is a slowdown because they understand that at best, the world of employment will lean towards a hybrid model. All kinds of truths that we thought could not be challenged, we realized that it might be possible."

However, Ashkenazi estimates that digitization in the healthcare system will continue to gain momentum. "Many changes - regulatory and social - that were naturally supposed to take longer, had to take less time. Many technologies that allow remote monitoring, support and treatment have received legislative approval. Processes that would normally take longer due to privacy have been greatly accelerated, providing an opening for further sector acceleration. Doctors and patients have also undergone a very rapid education process regarding the way we consume our medical services.

"I think the disruptions in global supply chains have highlighted the challenges of centralized supply chains. We understand that we need to move to smarter management and better forecasts to deal with crises, not just a global pandemic - also a drought in Taiwan, the blockade of the Suez Canal and a factory fire in Japan that produces 70% of the chips in the automotive industry. This all happened in the same six months. There are no PlayStations to be found, but the automotive industry is also stuck with delays in orders. It made the industries realize that a smarter and more digital way of managing supply chains is needed."

Eldar predicts that "now we will see much more investment in the world of Deep Tech," based on groundbreaking scientific developments. "Such companies require a lot of R&D time until they hit the market, so the market crisis affects them less. This is a great time to invest in such companies because it will take years for them to mature."

"Companies whose product has a strong connection to customer activity and it is difficult for customers to abandon them, will continue to recruit and succeed as they have been so far, regardless of the sector in which they operate," Hoorvitch Lavi said. "In addition, we anticipate continued growth in the areas of fintech and digital health."