“Israeli companies just deliver, no matter what”

“We have absolute faith in the resilience of the people of Israel. This trait has defined our nation in the face of challenges for decades, and it shines particularly bright in our founders,” said the partners of Key1 Capital. “Israeli companies just deliver, no matter what. We witnessed this in the days and weeks following the breakout of the war, and we will continue to witness this resilience, however adverse the situation that unfolds in the north.”

The firm has joined CTech for its 2024 VC Survey amid a time when Israel is celebrating the Jewish holiday of Passover while also preparing for more conflict with Iran. Despite the challenge, Key1 Capital confirms it is remaining in contact with founders and team members.

The KEY1 Capital Team

“When it comes to proactively preparing, we are in constant conversations with our founders and partners about their contingency plans, and how they are positioned to continue and deliver to their clients and customers, exactly as they did post-October 7th,” it said

VC fund ID
Name of the fund: Key1 Capital
Total assets: $300m
Leading partners: Amit Pilowsky, Sarel Eldor, Danny Akerman
Latest investments in Israel: SuperPlay, FundGuard
Selected portfolio companies: Weka.io, FundGuard

From your perspective, was 2023 a ‘lost year’, or can the events that happened during it be seen as a springboard for opportunities in 2024?

We do not believe that 2023 was a lost year. Looking at the funding landscape, growth equity raised nearly $38 billion between 2021 and 2023, averaging over $12 billion annually, far surpassing the $6 billion and $8.5 billion seen in 2019 and 2020 respectively. This means that companies raised a lot of capital before 2023 and, as a result, did not need to raise in 2023. Also, while exit volumes in 2023 dipped by 19% compared to 2022, they still totaled an impressive $10.9 billion across 92 deals, highlighting the significant activity that persisted in the market.

Considering the above, if we look at 2023 in isolation, yes, activity was lower compared to 2022. But looking at the period of 2021 to 2023 as a whole, deal activity for the period was very strong.

At Key1 Capital, we are particularly enthusiastic about investing in the current climate, where there is a renewed emphasis on a fair balance of terms between the companies and their investors. For us, successful investments hinge not only on identifying promising companies but also on ensuring equitable terms for the deal. We’re excited and ready to engage with the new wave of high-potential growth companies, fostering partnerships built on sustainable growth.

What do you believe is more crucial to the state of Israeli tech: the influence of global processes and the global economy, or the local events ranging from the political protest to the war state?

Both global and local factors have the ability to affect the state of Israeli tech. Locally, considerations like the cost of talent and office space can have a tangible impact. On the global stage, the impact revolves more around the ability to attract clients and investors and grow your revenue.

Both elements have an impact, but considering that 1) the end market for companies is usually outside of Israel, and 2) 75% of growth investments in Israel come from non-Israeli investors (unlike early-stage, which sees the exact opposite trend) it is the global landscape that carries greater influence.

Though we are amid major local instability, global economic conditions have stabilized and are improving. With recession worries starting to dissipate, employers’ optimism and outlook are improving favorably impacting growth companies.

Has the prestige of Israeli high-tech been damaged, or are the protests and the war merely a 'small bump in the road' from which the sector can recover within months?

While the ongoing military conflict and related protests, as well as the previous attempt by the government to pass a judicial reform, have undoubtedly impacted several aspects of investing in Israel (just glance at today's cost of Israeli government debt vs. US govt debt compared to pre-October 7th levels), we don’t necessarily think that the Israeli high-tech ‘brand’ was severely impacted, when taking a medium and long term view.

At Key1, we firmly believe these are just bumps rather than obstacles capable of derailing Israel’s tech community. The top international investors who are guided by rational and fundamental considerations rather than sentiment, will continue to scrutinize each company on a discrete and granular level, regardless of their origin. These investors are able to navigate complexity and make decisions based on merit which is what they will continue to do. If anything, the Israeli high-tech ecosystem proved to be a core pillar in the functioning and thriving of this country, showing tremendous resilience and leadership.

With this perspective, and considering the caliber of companies emerging from Israel, we remain confident in the sustainability and prestige of our high-tech sector, despite the challenges we face along the way.

How much effort was required of you to maintain the fund's status with your investors in 2023? What were their primary concerns and how did you address them?

Our LPs have shown unwavering support since the launch of our fund in late 2021 which has continued through October 7th and onwards both to Key1 and the country overall. Many of them expressed concern for our safety and even donated to organizations we recommended following October 7th.

Having come back from meeting many of our large international LPs only last week, their continued level of commitment was highly encouraging and there was a newfound admiration for the resilience of our country and our high-tech industry.

How are you preparing for the most pessimistic scenarios, such as the continuation of the war in Gaza deep into 2024, the opening of another front in the north, or further reduction of government support for high-tech?

We have absolute faith in the resilience of the people of Israel. This trait has defined our nation in the face of challenges for decades, and it shines particularly bright in our founders.

Israeli companies just deliver, no matter what. We witnessed this in the days and weeks following the breakout of the war, and we will continue to witness this resilience, however adverse the situation that unfolds in the north.

When it comes to proactively preparing, we are in constant conversations with our founders and partners about their contingency plans, and how they are positioned to continue and deliver to their clients and customers, exactly as they did post-October 7th.

Did you raise fund money in 2023 for an existing fund or a new one? What are your expectations regarding this matter for 2024?

We did not raise as we have only deployed 25% of our $300 million fund. At the moment we are liquid and incredibly excited to invest.

How many investments did you make in 2023, and how does it compare to 2022?

In 2022, we made a total of six investments, three from our main fund and three from our smaller pocket fund, where we can invest small tickets in promising early-stage companies.

In 2023, we did one investment, which was a follow-up round in a company we had previously invested in in 2022.

At the start of 2024 however, we made our largest investment to date (in FundGuard).

In your view, will the amounts and/or the number of deals in 2024 be more like those of 2023 or 2021-22?

The deal volume we saw in 2021 and 2022 should not be used as a point of comparison (nor as an aspirational point of comparison.) During those years, investor appetite to invest was at an all-time high, resulting in high deal volume and valuations often failing to align with realistic business prospects.

With that being said, we expect to see an uptick of deals in 2024 as many of the companies who pushed through in 2023 will be ready to raise this year.

Which high-tech sectors will you focus on in the upcoming year? Which areas will maintain their prominence, and which ones appear less attractive?

As growth investors, we are not sector-focused, but rather, we maintain a wide view of a broad range of sectors, often dictated by market dynamics. Currently, we are enthusiastic about B2B software, AI-related technology (both infrastructure and application), and cyber sectors, mirroring prevailing market trends.

Our focus remains on identifying companies that demonstrate exceptional execution, irrespective of their sector.

Which type of companies stand a better chance of garnering increased attention from VC funds this year - early-stage or advanced rounds?

On one hand, early-stage companies are in a better position. They were less impacted by the bloated valuations we witnessed in 2021 and 2022, and as such, are not dealing with the fallout such as needing to think about down rounds.

On the other hand, the growth stage landscape is incredibly deep and promising in Israel. Just to give an example, over the past decade, Israel has witnessed a staggering increase in the number of public companies above $1 billion in valuation, from just six to 22, while private unicorns have surged from one to between 35-40 - a testament to the region's phenomenal growth trajectory. This surge hasn't gone unnoticed by global investors, some of them have established a presence in Israel, recognizing the region's potential at the growth stage.

What changes will you implement in your approach to evaluating investments in startups in the coming year, compared to the previous two years? What practices will you abandon, and what criteria will you now demand from founders?

Since the inception of our fund at the end of 2021, our approach has remained unwavering, enduring through both the bubble and the burst, and it's a stance we intend to maintain. Our core focus revolves around investing behind the best management teams out there, who not only built a great technology or product, but also have exceptional execution capabilities, and strong business fundamentals.

These guiding principles enabled us to maintain discipline even during the tumultuous period of 2021 and 2022, leaving us with a well-performing portfolio and ample capital reserves and enthusiasm to deploy them this year. We stand liquid and excited for the opportunities ahead.

Do you think it is likely we will witness encouraging IPOs, the emergence of unicorns, or remarkable exits in 2024?

We do feel we are bound to witness encouraging IPOs and exits in 2024 for several impactful reasons: the macroeconomic environment is meaningfully better than it was a year ago, equity markets are demonstrating increased stability, and we continue to see a stabilizing of trading multiples. Furthermore, for the IPO floodgates to open, the first IPOs to come out need to perform well in the aftermarket, which is what we saw with Astera and Reddit's recent IPOs.

All the factors are in place for IPOs to resume in full force. In Israel specifically, we have 35-40 unicorns that are prime candidates for IPOs, with some already poised to enter the public market, while others are gearing up for potential IPOs within the next 12-24 months.

Provide an example of an intriguing investment you made in 2023. What sets this company apart, or what is distinctive about its sector?

Our most recent investment was in the investment management software company, FundGuard, where we led their $100 million Series C.

What sets the company apart is what they have managed to achieve, particularly in the complex industry in which they are playing. The finance sector is still plagued by legacy systems, specifically the investment management sector, whose barriers to entry are incredibly high.

FundGuard’s ability to attract attention from the largest and most sophisticated clients in this complex industry, due to its best-in-class technology, is a testament to how differentiated their technology is. This large and untapped market opportunity makes it an incredibly intriguing investment for us.

Practical and current tips for founders planning upcoming money-raising efforts:

First is preparation. By that we mean, ensure your equity story is clear, and your strategic plan is outlined and correlating to your financial plan. You should be able to articulate how you are building a business and how your growth will support this business (not the other way around) and have a clear understanding of how you will use the new funds raised.

The second piece of advice is to focus on bringing on investors who can help you drive the business to the next level. In our experience, founders who were smart about bringing the right investors to the company were able to materialize their ambitious plans, as they created the right support system around them.

Name two portfolio companies that you think will thrive in 2024:

WEKA
Sector: data infrastructure (software)
Investment amount + total: Total capital raised: $282 million
Founders + year of establishment: Founded in 2013 by Liran Zvibel, Maor Ben-Dayan, and Omri Palmon

Why is this their year?
In the era of exponential data volume growth, and with the surge in AI technologies demanding insurmountable amounts of data for training, the necessity for robust and high-volume data computation and storage has never been more pressing than now.

As the digital age accelerates, there is exponential growth in the complexity and volume of data they handle, making every year THE year for data companies to shine

FundGuard
Sector: Investment Management Software
Investment amount + total: Total capital raised: $156 million
Founders + year of establishment: Founded in 2018 by Lior Yogev, Yaniv Zecharya, and Uri Katz

Why is this their year?
FundGuard has laboriously worked on its technology since its founding in 2018 to craft a comprehensive and sophisticated tech stack, catering to what the complex sector of asset management demands in its solutions.

Now equipped with comprehensive technology, the only company globally to deliver that, FundGuard garnered the trust of some of the industry's biggest and most sophisticated clients, this is the year for FundGuard to soar and deliver to their clients.