Gigi Levy-Weiss: “I have no doubt the Israeli ‘Startup Nation’ brand will thrive for years to come”

“While the fight for Israel’s democracy, the horrors of October 7, and the war are not helping the Israeli tech ecosystem, I don’t think the brand of Israel’s tech industry has been damaged,” said Gigi Levy-Weiss, General Partner at NFX. “There could be investors who may be more cautious about investing in Israel right now, but those who know the market are very impressed with the tech ecosystem’s ability to continue building and delivering in these hard times.”

NFX has joined CTech to discuss some of the challenges that Israel has faced, and how it can bounce back in the months and years ahead. As part of the 2024 VC Series, Levy-Weiss has expressed how he sees the Startup Nation brand succeeding in the future.

Gigi Levy-Weiss

“That just strengthens our brand of being able to operate under any pressure,” he continued. We see the amazing support from some of the global multinational companies operating in Israel and some of the world’s top investors. I am dedicated to Israel and see the long view and have no doubt the Israeli ‘Startup Nation’ brand will thrive for years to come.”

VC fund ID
Name of the fund/funds: NFX
Total assets: $1B+ AUM
Leading partners: Gigi Levy-Weiss, Omri Amirav Drory, James Currier, Morgan Beller, Pete Flint
Latest investments in Israel: ScaleOps, Mana Bio, Akooda, Permit.io, Darrow, Vendict
Selected portfolio companies: Papaya Gaming, Super Play, Triple Whale, Walnut, ImagenAI

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?

As you know, NFX is a global firm. 2023 was a year where strong, well-capitalized startups built their advantage in the U.S. and globally.

In Israel, it was obviously a hard year due to judicial reform politics and then in October, the war. Israeli startups have had to overcome insurmountable challenges. Some companies had their sole founders called for reserve duty. Some saw as much as 50% of their workforce called up. Others had employees and close family members die in the attacks. These are devastating events that startups in the U.S. could never imagine.

That being said, I do think this adversity will lead to better times. Diamonds are forged in the fire. This constant fight for survival is one of the things that make Israelis so driven and successful.

IDF service has always bonded founders and led to new ideas and innovations. Many founding teams we’ve previously invested in served in the IDF together, so I do think this massive military deployment will create new networks, new friendships, and ultimately new startups.

While I don’t have a crystal ball for when this current conflict will end, I am confident Israelis will be just as, if not more, entrepreneurial, hopeful, and driven as before and we will see the industry returning to full steam in 2024.

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?

The Israeli tech industry builds no matter what. Throughout COVID our companies continued to build and innovate, better than companies globally. The difference now is that Israeli companies are affected by this horrible tragedy and the war that followed while their international competitors continue uninterrupted. That being said, we see the companies rise to the challenge and when they get back to work with the full workforce, I have no doubt in their drive and ability to catch up quickly.

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?

While the fight for Israel’s democracy, the horrors of October 7, and the war are not helping the Israeli tech ecosystem, I don’t think the brand of Israel’s tech industry has been damaged. There could be investors who may be more cautious about investing in Israel right now, but those who know the market are very impressed with the tech ecosystem’s ability to continue building and delivering in these hard times. That just strengthens our brand of being able to operate under any pressure. We see the amazing support from some of the global multinational companies operating in Israel and some of the world’s top investors. I am dedicated to Israel and see the long view and have no doubt the Israeli ‘Startup Nation’ brand will thrive for years to come.

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?

At NFX, we always tell our founders to be proactive and transparent about their data, even when times are tough. After October 7 and the weeks following, we consistently checked on the status of our Israeli companies. How many employees were affected, how many called to reserve status, how much runway they had, what impact the war would have on their operations – and we quickly relayed this to our LPs. We also leveraged our U.S. team to provide support to our Israeli teams. Overall we can share that LPs wanted to be updated, but overall show confidence in the future of Israel’s tech.

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?

On the operational front, as a fund we can continue operating even in the pessimistic scenarios. We review the potential scenarios with each company and try to create a valid plan. For the larger, more established companies, we worked on operational continuity plans that included preparing for running part of the operations from outside of Israel. We however are aware that all reservists will need to serve more in the coming few years, so we are encouraging our portfolio companies to plan accordingly.

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

We are thankful to our LPs around the world for their continued support. We announced our $450M Fund III in October 2021 and are still deploying from that fund.

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

Pacing slowed down in 2023 across all geographies. Specifically in Israel, in 2023, our dollars invested was 51% below what we invested in 2022. We’re expecting a spike in new Israeli companies formation in the upcoming months that will bring the pace back to average.

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

Outside of Israel, we see high-quality deal flow picking back up again, so pacing for new investments will likely pick up compared to 2023, but it likely still won’t reach 2021-22 volumes. For follow-on investments, the bifurcated market from 2023 will likely continue, as the flight to quality continues at all stages. As general market commentary, while more startups will go back to the capital markets this year, the market remains challenging for most companies raising follow-on funding, meaning a high likelihood of continued flat/down rounds, bridge rounds, and sadly also shutdowns in the broader ecosystem.

In Israel, new company formation and follow-on funding for Israeli companies have remained understandably slow, but it is slowly starting to pick up in early 2024, and we are optimistic it will further accelerate even more later this year.

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

We continue being bullish about several tech areas, ranging from synthetic biology to games. In that regard, nothing has changed dramatically. Clearly, we are more focused on generative AI, but we see it as a technology more than a sector.

Also while this is not our focus, we believe that defense-tech will see a spike in Israel following the war and will present interesting opportunities.

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

I think early-stage companies with sustainable growth and budgets will be the hottest companies for VCs. While interest rate hikes seem to be easing up, the focus on profitability will stay for a while.

Most of the later-stage companies still carry baggage from the bull run and either have too high valuations for this market or uneven margins, making these new rounds more complicated.

AI has also made it easier for companies to do more with fewer people. That’s a lot harder for later-stage companies to incorporate but we expect newer companies to be built from the ground up with AI and fewer people, and potentially to become unicorns with only three people or less. Hence we are super excited about investing in new early-stage startups.

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?

We keep raising the bar. Elite founders jump over it. Others get filtered out. This is what we have always done.

Any new company should either have AI at the core or at least be thinking about how AI can help them grow in the long run.

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

We expect to see a few IPOs towards the end of 2024, and more in 2025. IPOs are very closely tied to public market tech stocks and the NASDAQ recently hit all-time highs which is encouraging.

I think we’ll see a net same amount of unicorns by the end of 2024. Some current ones will lose their status as previously overhyped valuations come back to reality, and new companies, mostly AI ones, emerge with more efficient business models.

In terms of exits, I think we’ll continue to see more acquisitions in 2024 of a variety of levels. Some out of desperation and some that will match breakthrough technology with companies of scale.

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

Akooda is a half-Israeli, half-American startup that uses generative AI to give companies total access and understanding of their operational data. They connect to all of a company’s platforms, Slack, Salesforce, Hubspot, etc, then make everything searchable and answerable as well as provide insights on operational issues the company is facing. They built from the ground up using AI and are already deployed with leading Fortune 500 companies.

Practical and current tips for founders planning upcoming money-raising efforts - focus on the current market environment and sentiments.

Tough markets demand tougher founders. You need to be even better, and run a better and tighter fundraising process. A few specific tips:

• Create an amazing deck that covers all aspects of your company, but more than anything shows you know your market and competitors well and explains your product and its uniqueness.
• Work hard to find warm, high-context intros to investors from people who know and support you. The warmer the intro, the better attention you will get.
• Especially in tougher market conditions, focus on delivering positive news that proves your product market fit and uniqueness in the market (positive news about team, product, sales, etc).
• Run your fundraising process professionally. Approach many investors, follow up quickly, and be thoughtful in your replies.
• Be ready to explain how AI is great for your business. Have a real and specific answer, not a general statement

Can you choose two portfolio startups you believe are poised for success in the coming year and explain why you think they deserve attention?

Darrow
Sector and description: AI platform to help lawyers discover and win new cases
Funding: $4M from NFX from Seed through Series B, the company has raised $55M+ from us, F2, Y Combinator, Entrée Capital, Georgian, and others.
Founded: Founded in 2020 by Evyatar Ben Artzi, Emily Berg, Gila Hayat, and Elad Spiegelman.

AI has proven especially good at tasks in the legal field, one that requires a lot of content analysis. Darrow leverages AI to sift through massive amounts of data, including public records, administrative documents, social media, SEC cases and other sources of information.

The platform then surfaces egregious legal violations and unidentified high-value cases, then matches them with public interest law firms. Darrow helps lawyers find the right cases – and at the same time makes sure that corporate bad actors are not getting away with wrongful behaviors.

Imagen
Sector: AI-powered photo editor for professional photographers
Funding: $5.4M from NFX from Seed through Series A, and $34M to date from other investors including Summit Partners.
Founded: Founded in 2019 by Yotam Gil.

Photographers spend dozens to hundreds of hours editing photos for weddings and other events, many times in a very repetitive manner. Imagen’s AI-powered platform uses AI to master each photographer's unique editing style and reduces editing time by up to 90%.

They’re already helping edit more than 150M+ photos each year and have a 4/5 star review by their customers, a number that will only grow as more people turn to AI to improve their efficiency.