“There is a pressing need to reposition the Israeli tech brand”

“From 2018 to 2022, Israeli tech companies experienced a boom period, with many achieving unicorn status and being perceived as premium products in the global market,” explained Rotem Eldar, Managing Partner and Co-Founder at 10D. “During this time, they commanded high valuations and were regarded as a high-quality, premium brand. However, since 2022, there has been a noticeable devaluation of the Israeli tech brand, resulting in Israeli companies being valued at a discount rather than at a premium.”

Eldar acknowledges that Israel’s tech is “generally aligned with global trends and reacts to macroeconomic factors similar to Silicon Valley”, but the country also faced political uncertainty and the war in Gaza, added to pressure to recover alongside the rest of the world.

Rotem Eldar - 10D

“At present, there is a pressing need to reposition the Israeli tech brand, emphasizing its unique attributes and ‘special sauce’,” he added. “While this journey requires concentrated effort, we have the potential to bridge the gap and regain our premium status… By working together, we can elevate the Israeli tech brand and reclaim its premium status in the global market.”

VC fund ID
Name of the fund:10D
Total assets: AUM $335m
Leading partners: Rotem Eldar, Yahal Zilka, Itay Rand, Adi Dangot Zukovsky.
Latest investments in Israel: Stealth Mode startup in the field of Industry 4.0
Selected portfolio companies: DriveNets, Augury, Weka, Exodigo, Onestep, Juno Journey and Obligo.

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?

In 2023, the ongoing downturn that characterized much of the venture capital industry in 2022 persisted, reflecting the consequences of nearly two years marked by abundant investor capital, inflated valuations, and a "growth at all costs" mindset. However, we recognize that the most robust companies often emerge in environments where founders must make challenging and deliberate decisions about resource allocation, focusing on precise product-market fit. We are now entering an era of "survival of the fittest."

As deal rates decline and the value of capital rises both nationally and globally, a culture of carefulness is emerging. This measured approach to deploying capital benefits founders and investors alike. While fewer checks may be written, the deals that do occur tend to be of higher quality. In the long run, a more careful and meritocratic approach to private capital lays the foundation for building and growing sustainable, innovative businesses capable of addressing global challenges and reaching new, expansive markets.

As for 10D, 2023 proved to be as active as, if not more than, 2022. We view this year as a significant springboard for opportunities in 2024. Looking specifically at Israel, history has demonstrated that times of crisis often give rise to the most successful ventures. Previous regional military conflicts had limited impacts on the Israeli stock market, with a swift recovery observed in the months following these conflicts. We anticipate a similar trend in the aftermath of the recent conflict, with the market rebounding and experiencing growth beyond its previous levels.

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?

Israeli companies operate in an international market, making the global economy crucial to their success. The global economic trends impact the local tech scene significantly; Israel is not an isolated island. In times of global crises, Israel must adapt alongside the rest of the world to ensure resilience and sustainability in its tech ecosystem. However, when local Israeli events occur, a gap emerges between Israeli startups and the rest of the world that companies need to bridge. Moreover, Israeli startups face the additional challenge of navigating local geopolitics, adding to their burden.

Israeli tech is generally aligned with global trends and reacts to macroeconomic factors similar to Silicon Valley, Europe, and other tech hubs worldwide. However, last year, due to the political uncertainty and later to the war in Gaza, we are witnessing certain unique dynamics. Unlike the U.S. stock exchange, which began to show some metrics rebounding after a period of decline, Israeli charts do not exhibit the same upward trend. This divergence is alarming and needs to be addressed and corrected.

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?

From 2018 to 2022, Israeli tech companies experienced a boom period, with many achieving unicorn status and being perceived as premium products in the global market. During this time, they commanded high valuations and were regarded as a high-quality, premium brand. However, since 2022, there has been a noticeable devaluation of the Israeli tech brand, resulting in Israeli companies being valued at a discount rather than at a premium.

At present, there is a pressing need to reposition the Israeli tech brand, emphasizing its unique attributes and “special sauce”. While this journey requires concentrated effort, we have the potential to bridge the gap and regain our premium status. This endeavor necessitates collaboration among various stakeholders, including the companies themselves, local and global venture capital firms, multinational corporations with robust R&D presence in Israel, and government support along with national resources. By working together, we can elevate the Israeli tech brand and reclaim its premium status in the global market.

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?

Transparency is one of the core values we hold dear with our investors. We make every effort to present the situation as accurately as possible and believe in maintaining a close, ongoing connection with them. This commitment is reflected in our detailed reporting and frequent communication, which fosters the development of trust and long-lasting partnerships. Our investors appreciate this approach, often choosing to work with us repeatedly.

When it comes to communicating with our Limited Partners (LPs) during the past year and with regard to the ongoing war, we adhere to our fundamental principle of transparency. There were no special or unconventional methods employed in our communication strategy this year.

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?

One of the main pillars of venture investments is closely managing risk and preparing for various scenarios. When assessing the potential impact of a prolonged war period or escalation, several factors mitigate risks for Israeli tech, especially in the early-stage market where we operate.

The main challenge during prolonged armed conflicts is the mobilization of reserves, particularly affecting high-tech employees who often have backgrounds in elite army units. By outsourcing roles of drafted employees to global teams and maintaining a strong focus on global customers, we aim to ensure operational continuity of our portfolio companies. Additionally, the tech ecosystem's adaptation to remote work during the pandemic enhances their ability to find hybrid solutions and operate effectively during times of distress.

As companies mature they often offices worldwide to be closer to their market and customers. We encourage some of our companies to adopt this strategy early and mitigate risks associated with concentrating their customer-facing activities solely in Israel. Generally speaking, the widespread practice of offshoring and outsourcing contributes to the resilience of Israeli tech companies. While they may have Israeli headquarters, these companies often have distributed teams across the globe. This setup allows for continuity in operations and support, even during times of crisis.

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

10D Fund II, launched in 2022, is actively deploying capital into innovative startups. With substantial dry powder remaining, we seek groundbreaking ventures poised for market disruption. Our focus is on high-potential opportunities driving growth and innovation. As we continue to invest, we are committed to supporting the next wave of market disruptors.

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

In 2023, 10D experienced a surge in activity, surpassing investment figures from both 2022 and previous years. Our team underwent expansion with the addition of several new members and the introduction of a new Partner, Adi Dangot Zukovsky, who already spearheaded several deals. This growth enabled 10D to increase its investment volume compared to the previous year. While many of our portfolio companies remain in stealth mode due to their early-stage status, we anticipate that the investments made in 2023 will serve as significant game-changers, built upon a robust foundation supported by their skilled teams and advanced technology.

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

Since our establishment in 2019, 10D has maintained a consistent upward trajectory in our investment momentum. We have consistently raised the bar each year, both in terms of the number of rounds and the funds deployed in early-stage investments. In 2023, we surpassed the level of activity in 2022, and our momentum is set to continue into 2024 with even greater ambitions. We anticipate compelling opportunities where we plan to take a leading role, adding to our strategy A round investments as valuations adjust from their peak in 2021. We see companies re-enter the market with increased maturity and robust business plans.

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

The latest ground-shifting, paradigm-changing revolution in technology has been AI, specifically GenAI, which is reshaping adoption patterns and utilization across various verticals and markets. One of the emerging tech sectors supporting this revolution is AI Infrastructure, which caters to the growing computing and data storage requirements resulting from this transformation, reimagining the “traditional” way of computing, networking, and storage practices. All areas in which the Israeli tech sector has historically excelled.

While the Application layer of AI may see decreased investor interest due to reduced hype and challenges in technological differentiation and increased competition from multinational organizations, the infrastructure layer presents itself as a critical and ripe domain for disruption.

Another notable sector gaining traction is quantum computing, emerging as a prominent and highly sought-after sector for investment. Once a science fiction term, quantum computing technologies begin to mature and we believe that they now fit into the time horizon of a venture fund. These systems will allow even further expansion of AI, drug development, and finance modeling, as conventional computing systems are struggling to efficiently process and analyze such vast amounts of data. Quantum computing offers a promising solution by leveraging quantum bits (qubits) to perform complex calculations at an exponential speed, enabling the processing of massive datasets more effectively.

Moreover, the Israeli tech industry has a strong tradition of technological disruption in traditional markets such as health and industry. Leveraging AI and computer vision, Israeli entrepreneurs have revolutionized traditional markets, reflecting a fundamental aspect of the Israeli entrepreneurial DNA, which is expected to continue shaping the tech landscape in the years ahead.

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

Early-stage companies are poised to take center stage in the investment landscape this year, driven by a pendulum swing from an employee's market in 2020-2021 to an employer's market in 2022-2023. With multinational corporations and later-stage startups reducing perks and scaling back salaries, the entrepreneurial spirit is being reignited as individuals seek new opportunities outside the corporate realm. This shift is catalyzing entrepreneurs to leave their comfort zones and embark on new ventures, motivated to build stronger teams and create healthier, more efficient companies leveraging AI and its endless possibilities.

However, later-stage companies with solid unit economics, robust KPIs demonstrating real ARR, and a solid pipeline of customers will continue to attract investor interest. This is particularly true in the current environment where valuations are more realistic, highlighting the enduring appeal of companies with strong fundamentals.

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?

In evaluating investments in startups in the coming year, we are adapting our approach to reflect the changing landscape, particularly in technological differentiation and operational excellence.

We recognize that companies capable of creating a significant value proposition, those that are distinctly different from others, often develop deep-tech products. These companies are becoming rarer by the day, but they stand out significantly from the rest due to their unique offerings.

With the increasing accessibility and affordability of AI in software development, creating substantial technological differentiation in software-based applications has become more challenging. As a result, we are putting more weight on our evaluation of the execution and operational excellence of the team as a critical criterion for future success. While the team has always been important, it now takes center stage as a top priority in our evaluation process.

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

The fall in tech stocks and a slowdown in the IPO market since the beginning of 2022 have tempered industry expectations. The IPO market remains cold after the 2021 SPAC craze, with startups hesitating to IPO due to challenges in justifying the big valuations given in 2021-2022.

However, despite these challenges, we anticipate witnessing the birth of new unicorns. Many ‘soonicorns’ continue to grow steadily with healthy unit economics and efficient operations.

Regarding exits via M&A, we see signs of recovery. While the numbers may not match those of 2021-2022, there are notable exits taking place. For instance, amidst the war in Israel, M&A activities have resumed, with over 15 transactions made by local and global acquirers.

In summary, while the dream of an IPO may be fading for some companies, there is renewed interest in exits via acquisitions. Thus, we expect to see more exits in 2024 compared to 2023, as companies reassess their strategies and opt for alternative paths to liquidity.

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

Quantum Source, which we invested in at the start of 2023, is developing a breakthrough technology in photonic quantum computing that will enable making scalable, useful quantum computers a reality. The technology is based on a decade of research from the Weizmann Institute and will enable a dramatic leap forward and the realization of quantum computer systems with millions of qubits. These new full-scale quantum computers will have a significant impact on many industries solving previously computationally impossible problems in multiple sectors such as drug and material development, finance, and cybersecurity.

The company's approach is differentiated from existing solutions through their method of generating photons (i.e. the photon source) which is more deterministic and stable by several order of magnitude, making the rest of the quantum computer simpler, reducing the need for extensive cooling, and consequently decreasing size and power consumption requirements.

The young company, led by a team of recurring entrepreneurs, has assembled an impressive group of PhD-holding scientists and engineers specializing in quantum optics and silicon photonics technologies. Quantum Source has already garnered support from influential figures like former Prime Minister Naftali Bennet, serving on its board of directors.

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

• Long-Term Business Planning: Develop a comprehensive business plan spanning at least 24 months to outline clear goals and milestones for your company. Investors in the current market environment seek assurance that their funds will be used efficiently and effectively. Demonstrating a solid roadmap can instill confidence and facilitate successful fundraising efforts.
• Critical Evaluation of Company/Product: In a competitive landscape, it is crucial to critically assess your company and product offerings. Even if your idea appears innovative, recognize the crowded market and identify key differentiators and competitive edges. Highlighting these factors can make your proposition more attractive to potential investors who seek uniqueness and sustainability.
• Utilize AI Tools for Advancement: Leverage accessible and affordable AI tools to enhance your business operations and product development. Incorporating AI engines as co-pilots for software development can streamline processes and improve efficiency. Furthermore, integrating features that set your product apart from others in the market can strengthen its appeal to investors and customers alike.

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

Qbiq
Sector + description of the product/service: Qbiq emerges as an upcoming leader in property-tech, harnessing the transformative potential of Gen-AI. By leveraging advanced AI engines, Qbiq is reshaping architectural design paradigms, offering a digital design engine that delivers swift automated services and AI-driven optimization. This innovative approach addresses key pain points for landlords, real estate agents, and architects alike.
Investment amount + total: $10M raised in total, recent financing Seed in Sep. 2023
Founders + year of establishment: Qbiq was founded and established in mid-2019 by three co-founders, all of whom served in elite technology units in the Intelligent Corps and related entities; Lior Solnik (CEO), Elad Kaminer (CTO), Noam Diamantstein (VP Product).

Reasoning why this is their year:
In 2019, when 10D pre-seeded the company, long before the Gen-Ai craze of 2023, Qbiq introduced the term “Generative Design”, pioneering a vision which would be a total paradigm change within several years. Marking the company as a visionary ahead of its time.

Qbiq's innovative approach revolves around its Generative AI-based layout space planning engine. This engine generates thousands of distinct plans, evaluates and ranks them based on various parameters, and ultimately presents the best options tailored to the client's specific preferences.

Despite technological revolutions transforming numerous industries, the architectural design space has yet to fully embrace this wave of change. Planning and design processes in this field remain predominantly manual, albeit assisted by CAD software. Qbiq is on its way to revolutionize this field.

Having invested in Qbiq from its inception, we have witnessed the founding team's vision materialize into a groundbreaking product. Now, endorsed by key players in the real estate and property market, Qbiq is set to revolutionize the industry. We are eagerly anticipating the real transformation that Qbiq is paving the way for in the real estate sector.

Zorro
Sector + description of the product/service: Zorro operates at the crossroads of healthcare IT and insure-tech/fin-tech, offering a unique personalized health benefits insurance platform designed to optimize the experience for employees, employers, and brokers in the US market.
Investment amount + total: $11.5M Total raised, recent Seed round in January 2022
Founders + year of establishment: Guy Ezekiel (CEO), Maya Perl (CPO) who established Zorro in late 2021, are both experienced technology leaders, healthcare experts, venture capitalists and executives, most recently working together as investors at Pitango, where they focused on digital health investments.

Reasoning why this is their year:
At 10D, our enthusiasm for the digital health sector has been unwavering in recent years. We see it as ripe for significant technological disruption and well-positioned to withstand economic fluctuations. Zorro's platform, situated at the nexus of digital health and fintech (another key focus area for 10D), leverages AI to offer an innovative value proposition. It addresses the rising demand for financial solutions that mitigate the impact of escalating healthcare costs. We view Zorro as a genuine game-changer in this space.

In the current healthcare landscape, especially in the US market where Zorro operates, there is a noticeable trend towards personalized healthcare. Zorro is strategically leveraging a recent change in health insurance-related regulation in the US, which promotes a transition towards personalized coverage. It enables organizations of varying sizes to reimburse their employees for individual health insurance premiums. This regulation serves as an ideal catalyst for Zorro's product, indicating a ripe market and a strong alignment between their product offering and market demand.

Adding to the company's strong momentum is its exceptional founding team, possessing a unique blend of expertise in both the investment and healthcare domains. Their profound understanding of the needs in this sector enables them to shape solutions that precisely meet those demands. As we look ahead, we anticipate 2024 to be a pivotal year for Zorro, marking significant milestones and contributions to the evolving landscape of digital health and financial technology.