Grove Ventures: “2022 was the year of ‘back to normal’” for startups

“In 2022, after a record year for startups in both M&A activity and investments, we have witnessed the worst first half in U.S stock markets since the 1970s. If I had to give it a title, though, I think 2022 was the year of ‘back to normal,’” explained Renana Askenazi, Partner at Grove Ventures.

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This year may seem underwhelming or significant given all that is happening in the world, but Askenazi argues that from a VC point of view, we should be looking at the bigger picture. “As has been written time and time again, the anomaly isn’t this year, it’s last year; If we look at things from a 10-year perspective and take out the irregular numbers of 2021, 2022 still shows a pretty good trend of growth. In terms of VC investments, we see the impact of the public market’s correction trickling down to private markets and affecting tech companies in growth stages, as their valuations closely reflect public tech companies,” she added.

Renana Ashkenazi.

Name of fund/funds: Grove Ventures
Total sum of fund: $500M AUM
Partners: Dov Moran, Lotan Levkovitz, Renana Ashkenazi, Lior Handelsman
Notable/select portfolio companies: RapidAPI, Wiliot, ActiveFence, ProtAI, Navina

Ashkenazi joined CTech as part of its new series to explore some of the potential challenges the sector faces after a turbulent year. In the second part of our survey, we asked her to highlight three startups from Grove’s portfolio companies that deserve attention in the coming year.

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 2022, after a record year for startups in both M&A activity and investments, we have witnessed the worst first half in U.S stock markets since the 1970s. If I had to give it a title, though, I think 2022 was the year of ‘back to normal’. As has been written time and time again, the anomaly isn’t this year, it’s last year; If we look at things from a 10-year perspective and take out the irregular numbers of 2021, 2022 still shows a pretty good trend of growth. In terms of VC investments, we see the impact of the public market’s correction trickling down to private markets and affecting tech companies in growth stages, as their valuations closely reflect public tech companies. For early-stage startups, what we mostly see is simply longer cycles: deals do not close in 24 hours, but that’s a good thing for both sides. Valuations, in early-stage mostly related to the team and promise, have so far been less affected."

Who are the big winners of 2022 and why?

"If you have been disciplined in your growth strategy, fundraising process, valuation, customer acquisition pace, and spending – you came out as a winner this year. Raising money is trickier and takes longer, so entering 2022 with enough runway and a stable team should help you make it through the winter. In the current market environment, winners are survivors."

Who are the big losers of 2022 and why?

"The companies that have found themselves struggling this year are the ones that prioritized ultra-fast growth at the expense of actual business and revenues. If you assumed that ‘cheap money’ will always be there, you might be in trouble."

What do you expect in the VC sector in 2023?

"Not only startups raised record amounts last year, but investors also did the same. So, there is a large amount of dry powder that is definitely being - and will probably continue to be - deployed. The dynamics of the market are changing, but they are simply going back to what was considered normal in the previous decade. We will see more reasonable valuations, which will reflect companies’ actual assets. We will see more reasonable fundraising processes for startups and less of the rapid-fire, 24-hour deal-making that we have seen in the past year. We are definitely not sitting on the fence. We continue to invest full force in Israeli early-stage entrepreneurs who believe that the Deep Future is now and are ready to build it. The questions we need to answer when it comes to early-stage investment decisions haven’t changed. It’s still all about the team, the TAM, and the long-term potential. Exceptional founders are still starting to build exceptional companies, and we are still very happy to back them."

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

"I’m not a macro-economist or a political scientist, so I don’t have much (intelligent things) to say when it comes to interest rates, inflation, oil prices, the war in Ukraine, or political turmoil in Europe or the U.S. What I do know is that all the risk factors that were in place early in 2022 seem to remain in place today. These are all major events that have a real economic impact. But all this also means there’s an opportunity – the global tension has increased the interest around supply chain prediction and optimization technology, and the necessity to find alternatives to products, technologies, or services that are no longer easily accessible has opened new markets and opportunities for local companies."

How should different companies prepare for the coming year?

"While it seems wise to compromise on growth in favor of stability these days, startups also need to keep in mind that for later-stage funds to get off the sidelines and invest in late stages, startups’ performance must be remarkable. The benchmarks for investments in early and later-growth startups have only increased. Rounds that seemed simple to complete last year are increasingly difficult to close, and it would be wise to plan for (much) longer and (probably) smaller rounds. Furthermore, the emphasis on startups’ profitability is increasing. In 2023, we will probably start seeing much more significant re-budgeting on the customers’ side; that’s something startups must pay very close attention to. Finally, consider what’s happening to the budget they are after and the considerations of their buying personas."

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

"Many unicorns have real, sustainable business models and products which enable them to continue growing. This means that in the long term they might still reach very high valuations, even if in the short term we might see some valuation corrections. Many of these unicorns raised significant amounts of money last year. If they work right, they can re-calibrate their plans to extend runways."

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

"We believe that Edge, Cloud, data centers, AI, and automation will continue to be strong next year. In particular, we believe that software infrastructure, digital health, and climattech investments will be very dominant in 2023. The necessities will remain strong and the nice-to-haves will probably have to wait for brighter days."

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?

"The layoffs we are seeing are partly due to some companies’ inability to raise follow-on rounds and partly due to a reconsideration of the growth pace. The layoffs enable companies to extend their runways and so be better prepared for this more uncertain market we are experiencing. In some companies and for some positions, we will still see fantastic employment conditions, but in general, the majority of companies are currently being more conservative in their spending decisions."

Continue AI, Quantum Source, OneLayer - Grove Ventures’ notable portfolio companies

Continue AI

Sustainability; Sustainability intelligence platform

Founders: Be’eri Amiel, Alon Arad, Yonatan Maor
Founding year: 2021
Number of employees: 10

Explanation behind investment:
According to its site: “With a strong belief that technology can help organizations achieve their sustainability goals, make an impact and advance toward an equitable future, we at Grove Ventures felt it was high time to look at all of the sustainability ‘experiments’ across all industries and analyze them; And that we need to move from mass experimentation to data-driven decision-making, which will ultimately improve corporate financial returns and increase resiliency.

“Inspired by this belief, we led this $5.7M seed investment round in Continue AI, with Maple Capital and with participation from Ride Ventures, Liquid2, and Kindergarten Ventures.”

Quantum Source

Quantum computing; A photonic technology to enable the scaling of quantum computers to millions of qubits.

Founders: Oded Melamed, Gil Semo, Prof. Barak Dayan, Dan Charash
Founding year: 2021
Number of employees: 30

Explanation behind investment:
According to its site: “At Grove Ventures, we met with multiple incredible teams in the field over the past few years, but Quantum Source’s passion, experience, and expertise managed to convince us to co-lead this investment. In order to solve commercially valuable problems, a quantum computer with millions of qubits is required. While most research groups and companies active in the field rely on matter-based technologies, e.g. superconducting qubit (a basic unit of quantum information) or trapped ions, and have built quantum computers with a small number of qubits (tens or hundreds of qubits), Quantum Source’s vision is to enable scaling quantum computers to millions of qubits with their breakthrough photonic technology.”

OneLayer

5G networks security; An enterprise-grade security platform for Private LTE/5G networks

Founders: Dave Mor, Or Turgeman
Founding year: 2021
Number of employees: 25

Explanation behind investment:
5G adoption is a non-avoidable reality, and the number of private LTE/5G networks is growing exponentially WW. These networks have a larger potential attack surface, but due to a completely different network architecture, existing solutions can’t be simply adapted to secure them. This creates a unique opportunity in an emerging market to build a category-defining company, established by and exceptional team.