How will Israel’s political protests affect investors in 2023?

“The global macroeconomic situation will continue to have a major impact on the Israeli startup market, however, that impact will be both positive and negative,” shared Christian Noske, Partner at NGP Capital. “On the positive side, we will see increased government spending on technology and defense, especially by European and US Governments.”

Unfortunately, Noske also identified three main areas of risk in the year ahead, one of which was the ongoing protests against Israel’s new government taking place each week. “Israel’s domestic politics created a wave of protest from tech and VC leaders warning that the new changes will lead to business activity slow-down or redistribution if the policy doesn’t change,” he explained.

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The NGP Capital team

Name of fund/funds: NGP Capital, we launched our fifth fund – Fund V - in February 2022
Total sum of fund: $1.6B under management
Partners: Bo Ilsoe – Managing Partner, Christian Noske - Partner, Upal Basu – Partner, Paul Asel – Partner, Monica Johnson - Operating Partner & CFO, Matti Vänskä - Partner
Notable/select portfolio companies: Moovit (Acquired), Deliveroo (IPO) PubMatic (IPO), Lime, Immuta, Scandit, SecurityScorecard, Coda, Shippeo, Spacefill, DataLoop, Akeyless, and Perception Point

Noske joined CTech as part of its “2022 VC Survey” series to share how trends both micro and macro can make a difference for investors.

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

We would define 2022 as a year of major adjustment. First, we saw major reductions in job openings with startups, and then later in the year, we saw layoffs across the global technology sector. Many VC funds reduced their investment activities substantially and started focusing much more on their existing portfolios. This, in turn, meant many portfolio companies saw very different board dynamics and levels of VC involvement. Even the language their boards and investors were using changed: for example, growth at all costs turned into discussions around run-rate extensions (at least 18 months, ideally up to 36 months) and efficiency metrics, like growth efficiency scores or CAC-paybacks, became much more important.

That meant Series A+ companies needed to adjust before they went out to raise funds. As we’ve seen in previous downturns, many tried to extend their run-rate with bridge rounds at last year’s valuations or raised internal rounds with existing investors. The few that didn’t have deep pockets had to reduce their expectations of round size and valuations drastically. We saw companies receiving new term sheets at a 30% valuation of what they have received two months prior in the middle of 2022, and half of the funding. That dilution is often painful for founders and changing their expectations takes time.

It’s worth noting that once again the US market reacted 1-2 quarters faster than the European and Israeli markets – which shows that being close to the public markets means the private markets feel any changes, and need to adjust, much quicker.

Who are the big winners of 2022 and why?

Last year’s winners were created through macro-economic events, for example, accelerated digitization in the enterprise and across governments, global conflict, and climate change. In terms of sectors, this meant we saw growth across defense and energy-related technology, specific cyber applications, and environmental tech like carbon accounting and capturing. There were differences between regions in terms of how the pull and push was felt by markets, but these were global trends.

Who are the big losers of 2022 and why?

The big losers were companies that had benefited from the ‘goldrush mentality’ of 2020/2021. I would point out that B2C companies in quick-commerce and fintech suffered the most, but Web 3.0 has also experienced a dramatic change in market sentiment. Anecdotally, many Web 3.0 cheerleading VCs jumped ship quickly, as the area became less sexy. Many seem to have jumped on the next hot thing: generative AI. Web 3.0 and VCs who are dedicated to the area are likely to benefit from those trends in the long term. Not least because the startups that are still standing are laser-focused on building the infrastructure the World needs to best deploy the benefits of Web 3.0 for both consumers and businesses.

What do you expect in the VC sector in 2023?

2023 will be a great year for technology. With the wider use of generative AI and its application across numerous use cases and industries. Generative AI is not necessarily new, indeed my team and I have been excited about it for a while, but the qualitative jumps we’ve seen in the last few years in addition to new user interfaces will make it real for a far wider audience. Over the last couple of months, we have seen already a few companies coming out of Israel leveraging this exciting technology and we expect more to come especially with a data/DevOps angle to it.

At the same time, we expect to see a very tough 2023 for startups, who raised their last round in 2020/2021, including many who raised a small bridge round in 2022. We expect to see more headlines around businesses closing, slashed valuations for many unicorns, and lots of M&A with all-share types of deals.

NGP Capital continues to be highly active in Israel and the wider global market – it’s a good time for investors, and we are looking forward to working with some of the new companies that are created during this time. I would expect that much of the ‘dry powder’ will still be conservatively invested in 2023, at least by the ‘vintage funds of 2019-2021’.

It is also likely that we will see many GPs closing new funds in 2023. LPs are likely to stick to their existing fund investments and continue to support them. New funds that come out in 2023 will already have been in fundraising for 12-24 months, but we will continue to see slowdowns in closing their LPs.

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

The global macroeconomic situation will continue to have a major impact on the Israeli startup market, however, that impact will be both positive and negative.

On the positive side, we will see increased government spending on technology and defense, especially by European and US Governments.

Some of the most robust and growing topics in 2023, like generative AI, cyber and deep tech, are areas where Israel is very strong, and any recession will have less of an impact compared to less mature and less deep tech-savvy markets.

On the negative side, I see three areas of risk:

• The continued US and EU market slowdown and its ongoing impact on sales cycles and deal sizes for Israel tech.
• A continued VC slowdown and reduction of VC activities. US money plays a major role in Israel, and many US investors will be focussing on the US market during 2023.
• Israel’s domestic politics created a wave of protest from tech and VC leaders warning that the new changes will lead to business activity slow-down or redistribution if the policy doesn’t change.

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

Unfortunately, there is no one size fits all solution, but I would advise all small and large startups to be opportunistic and not to get stuck on valuation expectations or to hold on to their expansion plans, if their sales cycles and ACVs don’t improve and return to their previous levels.

New markets will be less important, so startups should look at stabilizing growth in their core markets, with good growth efficiency. At the same time, there is still a lot of money in the market, so if you can show great efficiency metrics and growth, there is unlimited capital available at very high valuations.

Knowing where you stand will be critical, and I would recommend regularly asking trusted VCs and fellow startup founders for their advice. The challenges you face today are unlikely to be the same as the ones you face tomorrow. Especially in today’s global market. Success requires not only a focused founding team with a clear vision; but also, characters with the flexibility and lack of ego to change quickly. That might mean you need to switch your focus from driving 100% growth to driving profitability, or you might need to raise a smaller funding round than you initially hoped.

I have seen founders successfully use a combination of intuition, planning, and advice from other founders and investors to adjust their course quickly. After all, no entrepreneur’s journey is the same and we will all find different ways to get on the right path.

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

Unicorns will still be born at a great rate, just not at a comparable rate to 2020/21. As long as companies follow the new fundamentals I described above there are tons of opportunities out there and that is not going to change.

The big question for me is how these companies can attract and retain the right talent, as top talent tends to be a bit more risk averse and might want to stay at their highly paid job at Google, rather than take a risk and join an ‘uncertain’ startup.

The counterargument is that the major layoffs we have seen create a lot of opportunities for younger, early foundation phase companies, particularly in terms of talent acquisition. Don’t forget that the financial crisis in 2008/9 gave birth to the NYC startup ecosystem and many well-known unicorns across the US like Slack, Airbnb, and Square were created.

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

In addition to defense and energy-related technology, specific cyber applications, and environmental tech, look out for the 10x improvement through the integration of generative AI in both enterprise software and DevOps companies.

Female founders are still grossly heavily underfunded and need to be approached more openly. Climatetech will see a big increase in large contracts in Europe and will graduate from a political headline to an obvious VC opportunity for many generalist funds.

These areas all play to the strengths of the Israeli tech ecosystem, so I’m excited about this year (2023) and beyond.

We are currently at a point in time where various technologies are converging and have reached a critical point of maturity. AI is a great example of that. Robotics is too. Automating tasks, driving efficiencies, and enabling sectors, like manufacturing, to scale globally. It’s not about replacing people. Many industries just don’t have those people in their businesses in the first place. I believe the next few years will see large-scale deployment of AI and automation-related business, alongside its supporting infrastructure.

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?

It’s easy to get used to things – it’s just human nature. High salaries and benefits won’t disappear overnight, and the current economic pressure may not have changed the expectations of many employees. I believe we will see two trends emerging:

• Startups will pivot towards attracting and retaining talent by communicating the vision and mission of the company, as opposed to offering high salaries and the lifestyles associated with startups.
• Employees and talent will learn quickly how to do more with less. This will ultimately not only help their current company, but it will also create a new group of future founders that I’m excited to see grow and innovate.

Additional comments:

We remain fiercely bullish about the opportunities offered by the Israeli ecosystem, both in terms of tech and talent. Having invested in Akeyless and Dataloop last year, in addition to continuing to support our active portfolio company Perception Point, we are always looking for founders who have the drive and motivation to create lasting societal impact and economic value on a global scale. Meeting a founder face to face is hugely important. I love getting to know their strengths and weaknesses, their approach to learning, their awareness of how they impact those around them, and their vision of the future of their business.

Akeyless, Dataloop, SVT Robotics - NGP Capital’s notable portfolio companies:

Akeyless

Akeyless is a fast-growing cybersecurity company serving mid-to-large enterprises. Akeyless was founded in 2019 by Shai Onn, Refael Angel, and Oded Hareven with the vision to protect and manage any secret in any environment. Named by Gartner in several reports related to the growing need to secure machine and workload identities, Akeyless has been acknowledged by F500 customers and cybersecurity influencers as the leading solution for secret management in DevOps and cloud environments. A fast-growing cybersecurity company serving mid-to-large enterprises.

Founders: Shai Onn, Refael Angel, and Oded Hareven
Founding year: 2019
Number of employees: 80+

Explanation behind investment: Secrets management is a foundational capability for any company hoping to develop secure software, and Akeyless is the leader in the space. But we think it’s only the beginning. With secrets management as its starting point, Akeyless is creating the next-generation identity and access management company. The company has already shown proof points of this broader vision by, for example, launching a secure remote access product. More to come!

Dataloop
Founded in 2017, Dataloop is a technology company that builds data infrastructure and a SaaS data operating system for AI companies. Businesses of every size – from startups to public companies – use its cloud platform to accelerate the development and deployment of AI into production. The Dataloop platform offers a new data development stack – combining data application extendability sitting atop our platform, and that consists of a full data lifecycle management system for unstructured data. Enabling AI teams to visualize, collaborate and explore datasets, build data pipeline automation processing and weave human and machine intelligence, its cloud-based infrastructure provides scalability, security, and reliability. Dataloop is based in Herzelia, Israel

Founders: Eran Shlomo (CEO), Avi Yashar (CPO), and Nir Buschi (CBO)
Founding year: 2017
Number of employees: 80+

Explanation behind investment: Data management and labeling capabilities are crucial for building new AI-based products and companies. For example, Snowflake states in its 2022 data science report that by 2025 80% of the world’s data will be unstructured, and only 0.5% of the data is analyzed today. The preparation of data (data loading, data cleansing, and data visualization) takes 80% of the work time of data scientists alone (Anacoda), and for each data scientist, there are 1-3 data engineers. This has all we love: A big growing market with a real pain point due to the lack of talent and importance of automation. Automation equals ROI.

SVT Robotics
SVT Robotics, whose software orchestrates and simplifies the integration and deployment of robots within warehouses and factories, has become a category leader in industrial robotics within four years of inception. The company has created an agnostic integration platform called SOFTBOT ® Platform, which allows its customers to connect any robot to any enterprise solution, in a matter of days.

Founders: A.K. Schultz
Founding year: 2018
Number of employees: 80+

Explanation behind investment: Launched in 2018, SVT Robotics has a singular focus: to develop products that make rapid deployment of enterprise robot technology quick and easy. Its SOFTBOT® Platform eliminates long development cycles and expensive, inflexible custom code. The team has redefined and automated the integration process, enabling their clients to launch complex, multisystem deployments in weeks rather than months or years. Better yet, robotics already connected to SVT Robotics’s platform can be configured with drag-and-drop ease and deployed in just hours. That’s insanely powerful. Rapidly deploy the automation technologies you need today for greater flexibility tomorrow.