“2023 will be a return to fundamentals,” says Greenfield Partners

“There are a number of signals affecting the global macro-backdrop, especially with regard to growth tech,” said Shay Grinfeld, Managing Partner at Greenfield Partners. “On a fundamental level, current interest rates are directly impacting current valuation frameworks. Economically, supply chain bottlenecks, the ongoing war in Ukraine, and recessionary fears have the potential to impact the growth and traction of the greater Israeli market.”

Greenfield Partners was established in 2016 by TPG as an investment platform for early-growth tech investments in Israel. In 2020, it went independent and seeks opportunities for growth-stage investments across Startup Nation.

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Shay Grinfeld Greenfield Partners

“It’s worthwhile to note that there typically is a slight delay from what happens in the U.S. market and the effects felt in Israel. While there are a different set of circumstances surrounding each stage of a company’s life, the common denominator in 2023 will be a return to fundamentals,” he added.

Name of fund/funds: Greenfield Partners
Total sum of fund: $500M+ across two flagship funds
Partners: Shay Grinfeld, Yuda Doron, Avery Schwartz
Notable/select portfolio companies: VAST Data, BigPanda, Coralogix, Silverfort, Cynet, Panorays

Greenfield Partners has joined CTech to discuss some of the trends in the VC ecosystem.

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

In many ways we’re experiencing a return to fundamentals; if 2021 prioritized growth at all costs, then 2022 drives home the importance of establishing a discipline for efficiency from the outset. This shift in mindset, along with the reevaluation of key metrics such as sales efficiency, CAC payback, and burn multiples, will likely lead to a cohort of foundationally sound companies in the years ahead.

Who are the big winners of 2022 and why?

Throughout periods of economic uncertainty, there are always “non-discretionary” budgets that are less impacted than others. Today within organizations, we’re seeing that those budgets fall under cybersecurity and IT infrastructure.

The global adoption of technology as a vehicle for conducting business relies heavily on these two sectors, and the data is clear about their endurance. For example, the cybersecurity index funds are down 27% year-to-date vs. the broader cloud indexes which are down nearly twice as much. We are seeing similar data here in Israel - in a recent report we published, IT infrastructure and cybersecurity together accounted for one-third (11% and 22% respectively) of all capital raised year-to-date.

Who are the big losers of 2022 and why?

We’ve seen a few industries encounter stronger headwinds than others during this current downturn. Generally speaking, consumer finance and lending have been more impacted due to rising inflation and interest rates. Web3/Crypto have also witnessed shifts and slowdowns due to a combination of the crypto winter and recent volatility in those markets.

Separately, there will likely be consolidation within several industries where some companies are not providing must-have solutions or just a feature vs. a full platform, but the successful companies will be stronger and better positioned for the future.

What do you expect in the VC sector in 2023?

We believe that many dominos need to remain upright for a soft landing and a smooth 2023. For example, interest rates, the labor market, oil prices, Ukraine, supply chain, real estate, inflation, etc. Companies should be prepared for a scenario of a deeper recession in 2023 and ensure they have sufficient runway to weather the storm. However, we are very bullish on technology and innovation, especially within our ecosystem, and believe that there’s a unique opportunity for founders to build meaningful and sustainable businesses.

Largely speaking, we would expect investors to continue investing in sectors more resilient to budget shifts and economic uncertainty.

In terms of allocation, we will likely continue seeing a steady flow of investments into early-stage companies as they are less affected by macro/recessionary concerns. Their sole focus is on building their tech and product to find their product-market fit for the first few years.

On the other hand, late-stage and crossover investors are, and will continue, to slow down their pace of investments as late-stage companies are much more affected by macro shifts. As of Q3’2022 in Israel, we saw a 79% year-over-year decrease in capital raised in rounds over $100 million vs. a 16% decrease in rounds less than $25 million.

Historically, vintages following economic downturns have outperformed and this case will likely be similar, so we believe that funds that have shown strong returns and DPI over the past few years will be able to keep raising new funds.

We believe that this moment in time will allow the best companies to surface and return to building meaningful and sustainable businesses. Hence, despite the broader slowdown in the venture market, we have not changed our investment strategy and continue to operate as normal with the same discipline as always. We are constantly assessing companies in search of exceptional teams, disruptive technology, and scalable businesses.

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

There are a number of signals affecting the global macro-backdrop, especially with regard to growth tech. On a fundamental level, current interest rates are directly impacting current valuation frameworks. Economically, supply chain bottlenecks, the ongoing war in Ukraine, and recessionary fears have the potential to impact the growth and traction of the greater Israeli market. It’s worthwhile to note that there typically is a slight delay from what happens in the U.S market and the effects felt in Israel.

How should different companies prepare for the coming year?

While there are a different set of circumstances surrounding each stage of a company’s life, the common denominator in 2023 will be a return to fundamentals.

For early-stage startups, the focus should be on ensuring that product-market fit has been achieved before significantly ramping up spending on sales and marketing, and organizational expansion.

Early growth-stage startups should take the necessary steps to implement best practices early on to support growth with a line of sight toward profitability supported by positive unit economics.

Late-stage startups should be laser-focused on reducing their burn if it doesn’t support efficient scaling and, if performing strongly, explore other organic and inorganic expansion opportunities to capture greater market share.

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

Over the last year or so, many companies raised capital with high valuations. Given the shift in mindset from growth at all costs to efficiency, it will likely take those companies longer than expected to grow into those valuations. With proper cash management, these companies will ideally be able to keep growing efficiently and raise their next round once they have grown into their valuations.

For those companies that need a bit of extra runway, we are seeing an increase in extensions or other forms of financing such as CLAs or SAFEs.

What sectors will experience an acceleration in VC investment and which will suffer a slowdown - and why?

Historically, disruptive technology has emerged following economic downturns. We believe that every sector could have disruptive companies as long as they provide a clear ROI and solve large and unique problems. But in the meanwhile, we do see increased interest in areas such as go-to-market technology, CFO-related technology, construction and property technology, and new applications of AI.

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 unfortunate to witness the latest round of layoffs, but we believe that there continue to be great employment opportunities to be found.

Tech continues to boom during this time and there will always be an innovative startup seeking to recruit - this is a topic we previously discussed at length via our opinion piece on the State of HR Tech.

We are very bullish on the future of innovation and especially Israeli tech. We continue to stay disciplined around our investment mandate, and relentlessly support our portfolio companies through this macro environment.

Silverfort, Coralogix, VAST Data - Greenfield Partners’ notable portfolio companies

Silverfort
Cybersecurity/Detection & Response: Silverfort has developed the first Unified Identity Protection Platform - a single solution that aggregates and analyzes all user authentication activity across all resources. Using Silverfort’s platform, enterprises are able to gain holistic visibility across the board, perform continuous risk analysis of user behavior and apply protection across all assets (on-prem and cloud).

Founders: Hed Kovetz, Co-Founder & CEO; Yaron Kassner, Co-Founder & CTO
Founding Year: 2016
Number of Employees: 151

Explanation behind investment:

Organizations and enterprises in the past years have evolved to accommodate hybrid work models, shifting assets from on-premises to the cloud, presenting a slew of difficulties in handling sensitive assets.

Silverfort’s Unified Identity Threat Protection Platform is the first solution that secures organizations by taking in the full telemetry of identity-based activity across identity stores.

The platform integrates with all existing IAM solutions, and continuously monitors access of all users and service accounts across both cloud and on-premise environments, analyzing risk in real-time using an AI-based engine, and enforcing adaptive authentication and access policies.

Coralogix
DevOps/Data-Streaming: Coralogix is the leading stateful streaming platform for modern engineering teams, rebuilding the path to observability using a real-time streaming analytics pipeline that provides monitoring, visualization, and alerting capabilities without the burden of indexing. Its mission is to make observability accessible to all, enabling users to define different data pipelines per use case, and providing deep insights for less than half the cost.

Founders: Ariel Assaraf, Co-Founder & CEO; Yoni Farin, Co-Founder & CTO
Founding Year: 2016
Number of Employees: 215

Explanation behind investment:
Coralogix is a modern Full-Stack Observability SaaS platform for Logs, Metrics, Tracing & Security data.

Traditionally, observability tools ingest your data, index it, send it to hot storage, and only then provide analytics and alerts. By analyzing and enriching data at ingestion in-stream (before indexing!), Coralogix can provide faster, more reliable insights, and reduce costs associated with observability by up to 70%.

This empowers the customer to choose how to handle their data based on the business needs it serves and the value it provides, rather than paying based on volume only.

Current customers include Sony, Disney, Nice, Monday.com, Armis, Payoneer, PayU, Puma, Lufthansa, Adobe, and more.

VAST Data
Infrastructure Tech/Software-Defined Storage: VAST Data is a storage company bringing an end to complex storage tiering and HDD usage in the enterprise. VAST consolidates applications onto a highly scalable all-flash storage system to meet the performance needs of the most demanding workloads, while also redefining the economics of flash infrastructure to finally make it affordable enough to store all of your data on flash.

Founders: Renen Hallak, Co-Founder & CEO; Shachar Fienblit, Co-Founder & VP R&D; Jeff Denworth, Co-Founder & CMO
Founding Year: 2016
Number of Employees: 430

Explanation behind investment:
VAST Data is solving 30 years of storage complexity and bottlenecks with its universal storage platform. With VAST, enterprises no longer need to break the fundamental tradeoff between performance vs. capacity, instead VAST consolidates applications onto a highly scalable all-flash storage system to meet the performance needs of the most demanding workloads, while also redefining the economics of flash infrastructure to finally make it affordable enough to store all of your data on flash.