“Prophecies are only given to fools - and investors are not fools”

While movements in Russia and China will indirectly affect Israel because of macroeconomics, at this point I don’t see a direct effect. However Israeli companies are directly affected by the US market as this is the market that most of our startups' target,” said Maor Fridman, Partner at F2 Venture Capital. “If the US goes through a real recession, it will be harder for companies to sell software to US companies as there needs to be a real tangible ROI.”

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Maor Fridman, Partner at F2 Venture Capital

According to Fridman, it is too hard to predict what will happen in Russia and China and what that effect may be. For example, if China penetrates Taiwan, the expectation is that everything will be directly affected by that.

“Ultimately prophecies are only given to fools and (most) investors are not fools or prophets,” he continued. “When we invest in something, it's less related to macroeconomics and more merits of ROI, unit economics, value proposition, and the disruption that this company will come up with.”

Name: F2 Venture Capital
Total sum of funds: $400M under management
Partners: Jonathan Saacks, Barak Rabinowitz, Maor Fridman, Noa Matz
Notable portfolio companies: Explorium, Parametrix, Justt, 4M Analytics, Darrow, Dataloop AI

Maor Fridman joined CTech for the latest installment of “2022 VC Survey” to share insights and predictions for the year ahead.

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

I would say that 2022 has been the year of getting back to sanity and business fundamentals.

What does that mean? VCs understand the need to look at relevant metrics, for example, burn multiples, LTV/CAC, TROI, etc. For earlier-stage investors, this also means being more focused on companies that have a clear product-market fit. Early-stage investors revolve around founders and vision, but now more than ever real PMF and business merits are vital after the seed stage.

At F2, when we invest, of course we look at the founders' vision and the merit of the team, but we also look to see if their plan is reasonable and feasible. I think we managed to maintain that sense of discipline even through 2021, but it has never been more important now - and that is now a trend you will see across all VCs at all stages.

Who are the big winners of 2022 and why?

The big winners are companies that don’t need to raise money and have a real business with positive unit economics and a valuation that is tied to revenue and metrics.

Who are the big losers of 2022 and why?

The big losers are companies that do not have a valuation tied to revenue or a sustainable business. This is especially prevalent for crypto companies – who will say they’ve done amazing multiples, but the bottom line is that businesses need a real use case, and that is something the majority of crypto companies are still missing.

What do you expect in the VC sector in 2023?

Growth stage deals aren’t happening these days due to the supply/demand gap. Funds want to deploy based on the new reality and founders don’t want to raise with these market conditions. Ultimately, these companies need money, so eventually, valuations will come down.

You also have to consider how the macro environment is now different. With high interest, money is no longer cheap. Investors have accepted this new reality and slowly but surely founders are catching on and coming to terms with the shift in conditions.

When it comes to 2023, I maintain my optimism for the opportunities at the early stages. I don’t foresee another destructive economic cycle in the near future. So, as it stands, for companies with no product-market fit it will continue to be harder to raise, but for those stronger companies, this environment will ensure each dollar is tied to fundamentals and they will be better for it.

For solid founders, this is one of the best times to be starting a company - top talent is easier to find and cheaper to secure. Those that raise now in the new reality of realistic valuations are in a better spot than most of those founders who raised last year (besides the few companies who have enough money to grow into their next valuation).

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

When interest rates are up, prices are down.

While movements in Russia and China will indirectly affect Israel because of macroeconomics, at this point I don’t see a direct effect.

However Israeli companies are directly affected by the US market as this is the market that most of our startups' target. If the US goes through a real recession, it will be harder for companies to sell software to US companies as there needs to be a real tangible ROI.

It is too hard to predict what will happen in Russia and China and what that effect may be. If China penetrates Taiwan, for example, everything will be directly affected.

Ultimately prophecies are only given to fools and (most) investors are not fools, or prophets. When we invest in something, it's less related to macroeconomics and more merits of ROI, unit economics, value proposition, and the disruption that this company will come up with.

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

The bottom line is that companies of all stages should be focused on ensuring their fundamentals are sound.

For early-stage companies, this largely revolves around finding their product market fit.

Those medium-stage companies should stay laser-focused on scaling in a way that makes sense - hitting relevant metrics and aiming for their next round.

In my opinion, it is large companies that are in the most difficult situation. The IPO window is pretty much closed for the foreseeable future, and they must figure out if they need to raise money to stay private longer than expected. This will affect their marketing, HR, sales, and every other aspect of the company.

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

Like everything- it depends. The question is how much do they have in the bank? Do they have enough money that allows them to try and grow into their current valuation?

Ultimately, downrounds will happen for companies without strong enough fundamentals who need money. But remember, we saw the same thing in the dotcom bust and Wall Street crisis, and many companies that had down rounds then are completely valid and successful companies today. A down round is not a death sentence!

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

I think becoming fixated on the latest trends can be unhelpful. In this business, we are not chasing after trends, as they come, and they go- that is why they are called trends! Trendy areas are also the areas that experience a sudden influx of money pools, giving birth to fierce competition.

I prefer to invest in diamonds in the rough, the ones that will grow irrespective are what trends are ‘hot’ at that moment. Very often that means investing in the most boring, niche, and non-trendy areas.

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?

Companies are trying to be more efficient and have enough time to grow into valuations- they need to have more runway before the next funding round and to raise in a different market atmosphere.

Companies have shifted from the growth at all costs mindset to the efficient growth mindset, and that is very different from last year when budgets were not allocated with efficiency in mind- and layoffs are a very upsetting but very real part of that shift in thought.

SuperTenant, Astrix, - F2 Venture Capital’s notable portfolio companies

SuperTenant
SuperTenant solves challenges in operating and scaling multi-tenant applications for SaaS companies. The platform delivers improved performance, reliability, and security, and enables direct and indirect cost reductions, by extending customers’ existing architecture instead of forcing them to make radical design or technology changes to accommodate multi-tenant requirements.

Founders: Kariel Sandler & Tal Yalon
Founding year: 2021
Number of employees: 15

Astrix
Astrix Security is the first access management solution for third-party app integrations. The rapid increase of app integrations and automation processes has reshaped the modern IT environment into a tangled web of app-to-app connectivity – expanding organizations’ third-party attack surface at an ever-increasing rate. With agentless, one-click deployment, Astrix enables security teams to instantly see through the fog of connections, and detect redundant, misconfigured, and malicious third-party exposure to their critical systems – enabling their business to unleash the power of integrations and automation while seamlessly controlling their security and compliance

Founders: Alon Jackson, Idan Gour
Founding year: 2021
Number of employees: 30