Startup nation must grow up

After more than a decade of sustained growth, the venture capital community has experienced a rollercoaster for the last three years. During the pandemic we saw an extreme tide: a huge jump in the adoption of technologies, which was fueled by zero interest and quantitative easing. Towards the end of 2021, a series of threats washed over the economy: global inflation, rapid interest rate increases, the war in Ukraine, damage to supply chains, and a banking crisis. All of these led to a change in the tastes of investors, who shifted the focus from growth at any cost to efficient growth and profitability. The growth rate of companies slowed down, and there was a decrease in the value of public companies and the volume of funding rounds and transactions in the private market.

The current crisis is different from its predecessors. If previously the industry was made up of Mid Cap public companies and young startups - now the large capital that has been available in recent years has shaped an industry that includes a number of significant public companies, leaders in high-potential markets, that are all hungry for growth. On top of that, more than 100 private companies have raised hundreds of millions of dollars each in recent years, and they have no real financial limit to try to realize the vision and "go all the way."

The recalibration of the markets will take time. A lot of money is sitting on the sidelines waiting for the new equilibrium to become clear. Many companies have enough capital to run ahead for quite some time. However, many of them will not complete the journey. The model used in the industry is based on investing in growth, not profitability, so many companies will require additional investment. Many of these will need to do so at a different value and restructure the capital structure and shareholders in the company. We are expected to see many M&A deals at significantly lower values than the last funding round.

The next rise is coming. Companies that will know how to adjust their rate of cash burning to real growth, and carefully examine the suitability of the products to the needs of the market, will win. Many good companies will come out of this period strengthened and more adapted to the markets, with more experienced management.

The transition from a development-based start-up nation to a high-tech country that is home to the management of international companies is already happening. But first, we must solve this current crisis. At the same time, a new wave of innovative companies and technologies has already arisen. New fields such as ESG and Generative AI can initiate tremendous growth. But before the next boom, the Israeli venture capital industry is now dealing with the huge conflict that Israel has found itself in.

The high-tech workers are not political. They understand very well what delegations from all over the world are trying to learn: that the success of Israeli high-tech depends on the existence of the elements at its base, chief among them pluralism and liberalism. Israel has a culture of directness, creativity, entrepreneurship, and a willingness to invest and take risks. Management and execution abilities are combined with professional knowledge developed in academia, the army and hundreds of international companies. These are also joined by the talent that emerged from the former Soviet Union. What turned these elements into a cohesive ecosystem is the personal connection between entrepreneurs, managers, investors and consultants, who openly share their experience and work together to advance the industry. They are also mobilized immediately in every macro event: they worked to obtain ventilators when the coronavirus pandemic broke out, and found solutions for the employees of Israeli companies in Ukraine. When the ecosystem works together to preserve the foundations of the nation of innovation, it is an Israeli move. It’s not political.

The Israeli ecosystem is used to dealing with challenges. It is practical and looks for solutions that will advance the society around it. Israel is a young growing country. Creativity and great solutions are achieved precisely in complex conditions. This is the essence of entrepreneurship. Israeli high-tech, the socio-economic locomotive of the economy, will have a large part in the solution.

Noam Canetti is Managing Partner at EY Israel.