Shibolet: M&As to gather steam in 2022

“The main trend we are seeing continue to grow is growth in M&A transactions which are led by corporations that are interested in acquiring new lines of business or products," explained the tech experts of Israeli law firm Shibolet. “They are taking advantage of the opportunity to buy technology and products for a reasonable price.”

Shibolet is one of the top Israeli law firms participating in CTech’s Most Important Gateways to Israeli Tech series. The heads of the firm's tech department answered a series of questions asked by CTech about their involvement in the Israeli ecosystem and the tech market trends of 2022.

Ofer Ben-Yehuda, Einat Weidberg, and Lior Aviram

Name of firm: Shibolet

Tech sectors of expertise: Health, Food-tech, Agro-tech, Blockchain, Cyber

Number of lawyers in the tech and VC departments: 100

Heads of department: Ofer Ben Yehuda

Following the SPAC and IPO boom in 2021 – What trends are you expecting for the upcoming short and medium-term?

• We are still coming across SPAC transactions, which started a few months ago, since the companies have a real need to raise funds and continue in their efforts to complete the process via SPAC, despite the fact that the market today poses real difficulties. In fact it seems the companies have no choice but to proceed with complex debt transactions with unfavorable terms as opposed to the traditional pipes we were used to seeing.
• We are also seeing a trend of relatively small-sized public offerings with a market cap of $50 to $100 million in the U.S. (for the purpose of dual listing or first IPO).
• The main trend we are seeing continue to grow is growth in M&A transactions (not necessarily with high valuations) which are led by corporations that are interested in acquiring new lines of business or products (as opposed to most M&As in the last 24 months which were led by private equity) and are taking advantage of the opportunity to buy technology and products for a reasonable price.

Will we continue to see funding rounds at the fantastic valuations we saw last year? Why?

I think that in the coming months (at least for the next 6 months) there will be a certain slowdown in investments (we are already feeling this effect), but investments will pick up again as investment funds have large amounts of funds set aside for backing their portfolio companies. As for valuations, we think that in light of the crisis and the lull in investments, we will see more rounds with lower valuations from their previous round (down rounds), and we will also see a slowing down even in good companies when it comes to raising their valuations.

What is the most important process Israeli high-tech has experienced over the past two years and where does it leave the industry?

I think that these are processes that are parallel to each other. On the one hand, we have seen the Tel Aviv Stock Exchange open up to tech companies. It will be interesting to see how these companies perform as some of them aren’t able to generate enough trading or a reasonable stock price and are dealing with a lack of funds in the company (as some of them still have unbalanced books business-wise and in some instances don’t have any substantial sales), so it’s possible we will see new “shells” on the stock exchange.

The second trend that I am identifying is the injection of substantial funds into fields that have thus far suffered from a lack of funds such as Edtech, Foodtech, and Agritech. I think we will see this trend continue to grow in our current climate. The last trend that we’re experiencing and that is leaving a mark is the entry of investment funds such as Insight, Tiger, and SoftBank in amounts and valuations that the industry isn’t used to. I can’t say what will happen with these investment funds later on in the year or next year given the economic slowdown and growing crisis, as it will have a great impact on the industry.

What are the business/cultural/economic differences between Israeli and foreign VC investors?

I think that the distinction isn’t between Israeli investment funds and foreign investment funds, but between investment funds that are committed to investing in Israeli tech including during more challenging times (such as now), which are here to stay, and between opportunistic investment funds which will jump ship the minute things get hard.

Why aren’t there enough Israeli institutional investors in tech? How should they be encouraged?

I think that there was a change in the past year, including mechanisms that the state has offered (such as investments that receive protection, etc.), and the involvement of financial institutions in IPOs on the Tel Aviv Stock Exchange. Nowadays, most founders come out at a loss from IPOs and therefore are sitting on the fence, wondering if to get in any deeper. In general, I think we’ll see (and are already seeing) more involvement from them in investments from a few years ago. The matter will continue to develop in light of the dominance of high-tech in the Israeli industry and the fact that founders have funds.

Are there any sub-sectors that seem riskier to you (saturation in cybersecurity, metaverse not mature enough, ICOs, etc)?

In the short term, investments in crypto trade companies will decrease. In Cyber and SaaS, there will also be a decrease and investments will be made in leading companies in those fields and we will be seeing fewer “Spread and Pray” investments in companies in those fields.

What is the most important thing an entrepreneur should focus on when selecting a law firm?

As their lawyers, we need to establish trust and provide the feeling they have a business partner. The experience of a team that has witnessed things multiple times the founder hasn’t and in that way to minimize mistakes.

Basic mistakes made by entrepreneurs:

The match between the founders among themselves and the maturity to implement an aggressive mechanism of repurchase rights to the extent there is a need to separate (while not leaving dead equity in the cap table which will most likely become an obstacle at the first financing round).

Assignment of intellectual property rights in the first stages along with the fact that the founders are still usually working for a different employer during the first stages of the start-up causes people to make many mistakes.

What are the most important parameters for a law firm when deciding to represent an entrepreneur in a deal, and what would be a reason to turn down an entrepreneur?

Trust your team. Realizing that we’re part of your team, to help think, and to manage risk. The founder’s ability to understand when they need to push forward and when they can wait. Also, lawyers need to obtain a deep understanding of their client’s business.

What are the most crucial stages of a deal?

The Term sheet stage, the valuation, and the DD.

Examples of an interesting deal from the past two years from which important lessons can be learned:

We recently finished working on a transaction with Phytolon (a foodtech company) that manufacture natural food colorings. We had an incredible combination of founders that lead the tech side, organized teamwork between the lawyers and the founders, the legal team’s deep understanding and knowledge of the company and its market, and a clear division of work and the founders knowing when to listen to their lawyers.