VCs recap 2022 and give us their forecast for 2023

We asked leading investors and finance personnel to recap what they’ve seen this year in the Israeli market, how it has affected the startup ecosystem, what to expect this coming year, and to give our readers some advice to help keep their heads up during these challenging times. Here is what we learned

Adi Gozes, Partner at Entrée Capital

“The public market downturn led to a freeze in late-stage investments, and many late-stage investors remain ‘on the fence as things unfold.

In addition, many startups actually refrained from raising capital to avoid lower valuations or tougher terms. With the absence of additional capital, startups focused on being capital efficient and many took action, including layoffs, to decrease their burn rate and increase their runway.

Surprisingly, at the early stage, valuations remained relatively high, being fueled by the oversupply of VC money. First and foremost, good businesses will prevail. However, 2023 will likely be even more difficult than 2022, with many companies holding off layoffs until after the holiday season.

For startups, there will be a slowdown in sales as potential customers will be more reluctant and focus on the “must have” value propositions which have a more direct effect on the business. On the other hand, talent will be more accessible in the coming year with the employment market shifting.

In terms of tech trends, the technological advancements in generative AI have been incredible and we will likely see additional startups emerge and leverage these technologies. It’s time to go back to basics and focus on good unit economics and capital efficiency. Growth needs to be responsible and cash flow conservative. Valuations, including at the seed stage, should be low enough to avoid surprises in the next funding round.”

Moran Chamsi, Managing Partner at Amplefields Investments

“This year was a roller coaster for the high-tech industry. At the beginning of the year, we felt that the industry was continuing with the gains from the previous year, but at the end of Q1 the train started to fall and we have not yet seen the end of the ride. The high-tech industry is maturing and adapting itself to the financial-economic models of the classical economy (pursuit of profitability, equality, and value in logical multipliers)

In the coming year, you can expect to see a more precise “duty of proof” from the companies, companies in the early stages will have to show actual revenues and explicit growth models. Even though they are private, Mature companies will be examined in the same way as public companies are examined: how profitable the company is, whether it meets the growth forecasts, balance sheets, etc. – which will directly affect the company’s value in fundraising rounds.

My advice to startups, focus. Continue to invest in the core of the company you founded and don’t be tempted to develop additional avenues that have not yet been proven. Promote the company’s revenue and profitability model to the top of your priorities and work with modesty.

If you still have to raise money – do it! It is better to harm the value of the company (at a given time) to move the company forward than to cut the core of the business and destroy it. At the end of the day, this is what you came to do and that is what you are invested in.

For investors, my advice is to start examining investments according to stricter performance (public company indices may be relevant now) but invest in entrepreneurs who knew how to make the right change in the last year for the company out of maturity. Since they are the ones who knew how to go through a difficult period as long as it lasted and move the company forward from it.”

Lee Moser, Managing Partner and Founder of AnD Ventures

“The market is constantly changing, and it is evident that it is not the same as it was a year ago, so what does that mean for founders and startups?

Since the end of the pandemic, investments have reached historic highs for five consecutive quarters, with Q1 2022 being the lowest of them all. Despite being higher than in pre-pandemic years, we believe 2023 will be “the onset of an imminent but healthy recalibration period.” Investors have become increasingly cautious with global uncertainty due to high inflation, the war in Ukraine, and the fear of recession. As a result, VCs started longer due diligence processes while focusing more on established and proven late-stage companies. These changes have affected early-stage startups looking to raise capital for the first time to help grow and develop.

The next year will see more layoffs; we’ll undoubtedly see companies close, which will allow an HR ‘smart hunt’ for young startups, as in the past two years, startups have had a hard time finding good people with average salaries. By hiring good people and building a tangible pipeline, promising startups will become even better with less money spent. When looking at the next trends, I believe the trend will be the opportunities that will arise from the economic distress.

My advice to the startup/founders is the following: Spend only what you need. Be really smart in what you’re spending money on. Make sure it adds value. Do not raise with a HIGH valuation! Founders need to honour their stage, meaning you should raise based on what you have and where you are currently. Even before you finish your current round, founders should be thinking about how to raise your next round. And for the investors, don’t be scared. This is the best time to be an investor.”

Shay Michel, Managing Partner at Merlin Ventures

“Today more than ever, investors are looking for fast-growing markets to provide some safety net for their portfolio investments. In addition, they want to see a valid early-stage business model and that entrepreneurs have met with a significant number of potential customers. As for entrepreneurs, I see 2 key elements, the first is the ability to generate meaningful recurring revenue. The second is the ability to raise additional funds in the near future.

Startups during the last two years focused mainly on growth. This year we will see startups focusing on a deep product-market-fit process. Due to high-interest rates and a decrease in companies’ income, the product sales process will be much more difficult, customers will need to be sure that the product they are buying is worth the resource and budget allocated.

My advice for entrepreneurs: find creative ways to deliver value to your potential customer even before he becomes a paying customer, to build trust. And for investors: First things first, be there for your portfolio companies and entrepreneurs you are invested in. Think of ways to generate unique and significant value. Open your network and ecosystem to introduce your entrepreneurs to experts in their field that can support them in the market-fit process in addition to meetings with potential customers.

Galit Horovitz, Co-founder of Welltech Ventures

“This year we have seen a large shift to venture capital investors taking more time and pickiness in deploying capital. Investors are being much more careful where they place their investments, looking for companies that are already showing signs of profitability while also being more conservative and in it for the long term. What this has meant for the ecosystem is that it is making it more difficult and taking longer to raise capital, thus many startups are opting to extend runways with a SAFE.

In 2023, there are strong trend markers toward services in necessities, such as healthcare, energy, and climate-related technologies.  Healthcare is the second largest industry invested in by US VCs up to Q3 2022. The wellness market is growing quickly as consumer reports have seen a rise in the necessity of health and wellness going from 42% in 2020 to 50% in 2022 (source: McKinsey and co)  We will see companies adopt a more defensive posture in response to market volatility. Startups are extra cautious, keeping small teams, conservative budgets and putting emphasis on profit. A lot of startups will have short runways, consequently resulting in down-rounds. The startup market is looking to be very selective with the survival of the fittest being the main theme; the good ones will continue to thrive, while the not-so-good ones will go under quickly.

As for advice to all those moving forward, for startups, make sure to keep your investors close to you; continuously update them, and have them on your side; keep a tight budget, concentrate on execution, demonstrate a path to profitability and plan for the worst. Have a runway of at least a year and a half to 2 years. On the flip side, investors should work to minimize risk by investing in companies with strong teams and pertinent experience, while emphasizing a path to profitability.”

Itamar Weizman, Partner and Head of Climate Investments at Firstime Ventures

“2022 set new records for climate-tech investments. While there has been a general downward trend for the tech industry in Israel and worldwide, we have seen that the variety of climate technologies – from Energy to Agriculture – has been tested ‘recession-proof’.

1 out of 7 new startups founded in Israel are now climate tech, and 10 cents out of every dollar is directed at climate-tech ventures. We believe that 2022 marked the beginning of the climate-tech breakout.

While we expect tougher environments for fundraising for the general tech industry, we believe the climate tech sector will increase its share in VC investments.

We expect to see continued layoffs, especially in “Big Tech” companies, and we believe that this will expand the potential talent pool for climate-tech companies that will continue recruitment throughout the recession.

We believe that 2023 will be the year that Carbon-Tech will break out as a serious trend in Israel and worldwide, with new solutions and continued growth in investments.

Now is the best time to start investing and developing climate technologies. Governments, banks and institutional investors will continue their investments and support for climate and sustainable investments, as there are critical technologies that need developing. So for investors – this is the time to step in.

Startup founders should understand that the market, investors and employees are looking for ESG and Carbon considerations and adapt to this new reality.”