Companies “should take more conservative approaches” to fundraising in 2023, says AnD Ventures

“Companies should look at the coming year from a more conservative approach. Founders shouldn’t be stubborn on valuations; they need to understand that they can no longer ask for whatever valuation they want and cannot ask for whatever amount of money they want because, in the new market, it won’t work,” explained AnD Ventures.

“Founders should ask what they need to get to the next funding round. For example, if they need $2 million, they should ask for $2 million, or if they need $5 million, they should ask for $5 million. After that, valuations will go back to a more conservative approach where a pre-Seed company will be between $3 million-$5 million pre-money valuation, and a Seed company will be between $6 million-$10 million pre-money valuation.”

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AnD Ventures Team

Name of fund/funds: AnD Ventures
Total sum of fund: $65M
Managing Partners: Lee Moser, Roy Geva Glasberg and Ariel Cohen (Partner)
Notable/select portfolio companies: OviO, Ludeo (Formerly Edge Gaming), OneBeat, and VineSight

The firm joined CTech for its 2022 VC Survey series to share some of its insights 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 think that 2022 will be defined as the year of realization; the year that brings us back to reality. It is the year that startups are going back to the normal process of building themselves from the ground up. With valuations being down and founders raising less money, 2022 has been a better opportunity for us, early-stage VCs.

Looking through a Macro lens, the recession, high-interest rates, and given that the amount of money invested in Israel has shrunk=, and provides us with a unique opportunity to invest with lower valuations and have a more hands-on approach to a company's growth. After two years of hype, with record-breaking numbers of investments and exists in Israel, this year, there has been a massive falloff of growth investments. However, it created a new opportunity for us as an early-stage venture capital firm because there is less competition for money being invested in startups. In addition, valuations are down to earth, meaning they are more relevant for early-stage investments. Since we are not derived from hype, we have the time to do our due diligence and make sure that we are investing in the right founders.

Who are the big winners of 2022 and why?

I think that there are four big winners of 2022:

1. Founders - Let me clarify, not all founders were winners. Founders who were patient and navigated smartly in building their early-stage startups won tremendously. They did not focus on hyper-growth since they didn’t have the thought process of, “I will raise a lot of money, invest this money into hyper-growth, and I will grow faster than I can handle.'' Instead, they are the winners because these founders were more conservative when approaching their budget because they created a correlation between the burn rate and growth. Therefore, their companies will last through the crisis/recession that we are currently facing.
2. Early Stage Companies - Again, not all early-stage companies were winners, but those that passed the $2 million revenue mark in 2021 can be crowned winners because they will always be able to raise funding since they proved that they have product market fit.
3. Early-stage VCs - Early-stage VCs have a lot of opportunities, including companies in distress, companies that have a great product but did not plan their budget correctly, and first-time founders that are not asking for a ridiculous amount of money for their first investment.
4. Funds that are closing right now - Funds like AnD Ventures are big winners because we have enough dry powder to invest now. We have money in the bank ready to be invested, and we want to invest and be involved. So we will be able to capitalize on the new allocations and the special situation that startups are currently facing.

Who are the big losers of 2022 and why?

The biggest losers of 2022 are founders who needed to be more agile, creative, or fast enough to adapt to the new reality. Unfortunately, these types of founders needed to prepare because they needed to see the future early enough, so they kept their budget the same. Instead, they continued to burn and were counting on raising money. Their flaw was that they didn’t see the change, which led them to run out of cash too early, leaving them in a position where they weren't able to raise money when they needed it the most.

What do you expect in the VC sector in 2023?

In general, I have an optimistic view on 2023 because there is still a lot of dry powder yet to be allocated for funds, both Israeli and International. A lot of funds, including ours, were open during the pandemic (2020-2021), so there is a lot of cash and dry powder in the market. I think that more money will be allocated to the early stage rather than growth because there is a big exposure of growth investments currently for funds, so they would like to be more diverse in the early stage.

I think that there will be an advantage for local VCs because they can recognize local talents faster than international VCs. This will also be an advantage for early-stage VCs that will enjoy much lower valuations in the new market terms.

New funds will be raising and will constantly be raising. However, in the current market, it will be harder to raise new funds and more money since a lot of institutions, funds of funds, and investors are sitting on the fence and waiting to see what will happen with the allocation that they already have.

That being said, we at AnD Ventures will definitely not be on the fence waiting to see the direction the market is heading in; instead, we believe that the biggest time for innovation is during a time of distress and crisis. When there is a crisis, there are innovations because change is inevitable when you need more money and more resources. Therefore, we are definitely looking to invest.

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

In any global crisis, I believe that new opportunities are continuously formed. From a startup ecosystem perspective, the Israeli market is not only capitalizing on the situations viewed as a crisis but thriving while doing it.

I think that we will see fewer new startups being formed, but the ones that are founded will be of higher quality because not every founder with an idea can raise money. Their idea needs to have a market fit, great technology, and validation in the current situation. So, the companies that we will start to see will be of higher quality when compared to the past market.

It will be harder to invest in companies that have hardware that is manufactured in China because there is uncertainty about what will be there geopolitically and economically. That is why we are seeing companies that develop hardware looking for alternative markets to produce and manufacture their products.

How should different companies prepare for the coming year?

Companies should look at the coming year from a more conservative approach. Founders shouldn’t be stubborn on valuations; they need to understand that they can no longer ask for whatever valuation they want and cannot ask for whatever amount of money they want because, in the new market, it won’t work. Instead, founders should ask what they need to get to the next funding round. For example, if they need $2 million, they should ask for $2 million, or if they need $5 million, they should ask for $5 million. After that, valuations will go back to a more conservative approach where a pre-Seed company will be between $3 million-$5 million pre-money valuation, and a Seed company will be between $6 million-$10 million pre-money valuation. Whereas growth rounds will be based on actual revenue and not expected revenue. In general, I would recommend that companies who are looking to raise funding should look to create a three-year conservative budget.

I think that companies should look at their HR and team from a very focused point of view. There is no room for extras. The people you have working for you should be the best hires on the market. Founders should hire the ideal personnel who can be agile and creative, contribute to the team, and could build their company on a low budget. You should hire exactly what you need, and you should not compromise on any position.

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

The current downturn will impact valuations across the board - from unicorns through the early stage. We will definitely see more unicorn statuses being lost, and if they do need to raise the money, they will have to raise down rounds.

Valuation currently is of no significance, and I question if it was that important before, as we see the impact of the downturn taking an immediate impact. As a founder, I wouldn’t focus on either valuation and sum raised but only revenue and potentially the rate of increase or sustaining it. Investors understand there is a perfect storm and would like to see responsible CEOs maintaining their burn rate and maintaining revenue. It’s a lot, but this is the focus.

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

We look at all verticals, and each vertical can have its own unique opportunity that comes out of it. For example, we see many founders that are building innovative solutions across industries that will transform industries and business models. We are not looking to know because we do not invest in sector-specific opportunities; instead, we ask three questions:

1. Do we believe in the team?
2. Do we believe in the pain?
3. Do we believe that it is big enough to potentially be a unicorn?

That is all you could do; an amazing opportunity could come from anywhere, in any vertical.

Though none can predict and set the perfect road map for success, founders should be aware that the current climate creates a negative motivation for CEOs to try out new solutions or implement new software on top of their existing stack. They should consider minimizing expenditures and stabilizing their business. Next year will be about saving costs and increasing profitability and revenue in the short term VS piloting new things and being innovative.

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?

I will use a personal experience story for this one. When I joined Google in 2014, Google offered the top 10% compensation in the market. When I moved to Silicon Valley and through the years, startups started offering similar compensation, not to mention Facebook and Amazon competing on talent. This is the definition of a race to the bottom - meaning compensation and benefits became the essence. However, in my opinion, smart employees and real talent will now look beyond the compensation and benefits and will try to identify a vision and potential they can relate to. This is actually a healthy process, though caused by a global financial crisis; however, I see three good things happening that couldn’t have happened before:

1. Companies will hire the talent they need and lay off the talent they don’t - justification for hiring will be the focus.
2. Talented individuals will look for promising companies and not just who offer more, which will enable companies to cut the crazy benefits budget and bring the best DJs in the world to an employee party.
3. Salaries will drop, and the future compensation basis (options and bonuses) will become more significant, meaning a better alignment between the hired talent and the companies’ success and long-term goals.

The current crisis poses a question - is this a down turn or just a return to normal I have to support a stronger case for the ladder as we had crazy insane two years with valuations, salaries, and a race on benefits that had nothing to do with sound business needs and priorities.

Additional comments:

The AnD Studio is a perfect fit for founders because after being accepted into the studio, a company is granted $200,000 and gives up 5%, a small amount when compared to the industry. Most importantly, you don't even need to worry about creating a valuation because the AnD Studio does not put a valuation on its studio companies! Therefore, companies no longer need to stress about raising capital and lowering their valuation.

In addition to the initial capital that the AnD Studio provides its companies, it also helps build the company using five major KPIs that enable startups to thrive and succeed.

1. Offering - Refine and validate startups proposition
2. Talent - Build a winning team and global advisory
3. MVP - Design and implement a successful pilot/ design partnership
4. Market Access - Reach initial customer base and revenues
5. Funding - Raise the startups seed round

With these KPIs in mind, AnD is committed to securing a startup's unfair competitive advantage in turning its vision into a successful company. As a result, the AnD Studio becomes a startup partner-in-crime in working with them on the:

1. Company Growth - Business strategy and focus, tech infrastructure and development, staffing and administrative management.
2. US Market Entry - Product-market validation and fit by our design partners and subject-matter experts aimed at driving faster customer acquisition.
3. Seed Investment - Deal structuring and terms - resulting in higher valuations and a shorter investment cycle.

We see ourselves as co-founders with our studio companies. We take on responsibility and ownership, so we add our own operational funding, hands-on talent, and US-based growth to help out companies succeed. From day one, we treat our Studio like portfolio companies because we want them to succeed as much as the founders themselves.

Queue, Vinesight, Connected Insurance - AnD Ventures’ notable portfolio companies

Queue
Business/Productivity Software: Enables brands and knowledge experts to become thought leaders within their areas of expertise by detecting and answering the most relevant questions online. By doing so, Queue is helping its customers expand their exposure online and their business opportunities.

Founders: Netanel Baruch (CEO), Doron Feder (COO)
Founding year: 2019
Number of employees: 11

Vinesight
Business/Productivity Software; A platform that tracks, analyses, and mitigates online misinformation and toxicity against brands, campaigns, and causes. The AI-driven technology provides accurate, wide-reaching protection across social media platforms and online forums, enabling ultra-fast mitigation of reputational threats.

Founders: Gideon Blocq (CEO), Nir Hauser (CTO), Yoel Grinshpon (Vice President of Research)
Founding year: 2018/2019
Number of employees: 17

Connected Insurance (CI)
Financial Software; The world is shifting from a concept of OWNING to RENTING in every aspect: Transportation, property, delivery, and employment. The Digital Economy has grown as connected technologies allow the easy and short-term usage of assets by anyone. Insurance is one of the greatest barriers to digital platforms; existing policies are expensive and limited. CI created AI-powered risk models that enable bespoke insurance coverages fit for the Digital Economy.

Founders: Tal Cohen (CEO), Arik Shpak (CIO & COO), Yaron Zurr (CCO)
Founding year: 2019
Number of employees: 15