“I believe that a crisis can have positive implications in the long run, particularly in building resilient companies. During times when money is ‘cheaper’, some organizations tend to develop undesirable behaviors that lead to inefficiency and decreased productivity,” says Gili Raanan, founder of the Cyberstarts investment fund in a conversation with CTech as part of the project “Where do we go from here?”, which aims to examine how the Israeli VC industry is dealing with the crisis in the sector.
“However,” says Raanan, “an economic downturn compels entrepreneurs to reevaluate their core business and make the necessary improvements, which eventually shed the unwanted habits. This growing notion of companies returning to ‘basics’ is beneficial – because it helps organizations refocus their efforts and energy on what truly matters for their clients. Companies that solve real, pressing problems within their respective industries, are poised to emerge stronger from challenging periods.”
Over recent months, we have witnessed one of the most serious crises to hit Israeli high-tech in recent decades: on the one hand, a global economic slowdown, and on the other hand, local political turmoil that sent the industry into deep stagnation. Since the general assumption is that the situation will not change in the near future, the question hovering over the industry is what can still be done to minimize the damage to the Israeli high-tech industry and how should we act so that when the crisis passes – all those involved can take a leap forward. Therefore, as part of this on-going project, we spoke with senior executives from the local venture capital industry to try and understand from them what needs to be done now to justify the reputation Israeli high-tech has earned as being creative, adaptive, innovative, agile and cunning.
Name of fund: Cyberstarts
Partners: Gili Raanan, Lior Simon, Emily Heath
Notable/select portfolio companies: Wiz, Fireblocks, Island, Transmit Security, Axis, Noname Security, Cyera, Dazz
“If the political crisis escalates further, the industry could be exposed to significant risks”
How is the current crisis different from the ones we experienced in previous decades?
“Unlike previous crises, the current economic turndown is a cross-industry issue, spanning across all industries and verticals. While the 2008 crisis mainly hit the financial sector, and the 2001 crisis primarily impacted the internet and telecom verticals, the present uncertainty is not sparing any sector and is affecting the market as a whole. Combined with the political issues and heated environment in Israel, the situation is even more complicated and the industry is tasked to navigate through a new and uncertain landscape.”
How long do you think the global economic slowdown will last?
“I think it is truly hard to predict. It is likely that in the coming months, we may witness additional budget cuts, with companies reducing expenses and potentially downsizing their workforce. Typically, when a crisis hits rock bottom, it tends to be a relatively brief period, lasting less than a year. However, it is difficult to determine whether we have reached that bottom at this time.”
When the local crisis ends – will the Israeli sector continue from the point where the crisis started?
“I’m an eternal optimist. Investing in and working with early-stage startups requires nothing less. I think it is always important to maintain a broader perspective – one should not be swayed by the high valuations and market prosperity at its peak, nor be overwhelmed by the significant drops. Historically, the market has always found a way to work things out.
“Having said that, I do believe that if the political crisis in Israel persists, we may encounter broken systems that could limit the growth potential of the local tech sector.”
What are the critical points in which Israeli high-tech was damaged?
“Cyberstarts is working with entrepreneurs who aspire to build large-scale organizations – and such ambitious enterprise software companies usually need a major injection of cash. To eventually achieve annual sales of hundreds of millions of dollars, they would need to raise over $500 million over time, based on their growth rates and operation efficiency. In down markets, founders struggle to raise such significant amounts, and we’ve seen how securing B-round investments has become increasingly challenging. As a firm, we concentrate on helping these companies raise the money they need to build long-lasting businesses.
“As for the political situation, recent developments have had a limited, fixable impact on our reputation so far. Israel has long been recognized as a stable environment for conducting business, and these occurrences naturally raise concerns among foreign investors and stakeholders. In my opinion, it is clear that if the political crisis escalates further, the industry could be exposed to significant risks.
How should each and every one of these problems be handled?
“As a firm, our primary focus is on helping our portfolio companies raise the money they need to build long-lasting businesses. In doing so, we also support them as they optimize their business models and value proposition, ultimately enhancing their business efficiency and laying the groundwork for sustainable growth.
“To address the local, political crisis, we would need to maintain the spirit that has characterized the Israeli industry for many years – an ecosystem driven by the hard work and innovation of Israeli entrepreneurs, and that is facilitated by a free market environment. The government should focus on the infrastructure; it should preserve a stable, robust judicial system, but also invest in building excellent schools and universities to support core research, or in enhancing the country’s transportation networks so that more people could take part in the ‘start-up nation’. The industry is capable of handling knowledge sharing, training and maintaining flow of investments on its own – but in order to do so, the tech sector must remain independent and free.”
How can you take advantage of this interim period (until the crisis passes) to prepare better for the reawakening when it arrives.
“In today’s highly dynamic market, chasing trends is pointless. Instead, entrepreneurs should focus on building terrific businesses that address real pain points. From our perspective, these challenges also serve as an opportunity to differentiate between companies offering nice-to-have products and those providing must-have solutions. Founders must acknowledge the market’s demand for efficiency and consolidation, and further enhance their value proposition to meet these changing needs.”
What are the critical points in which the Israeli venture capital industry was hit?
“The economic crisis has had an impact on our day-to-day work – but I don’t think that the Israeli venture capital industry has been specifically targeted or affected by it so far. Similarly, regarding the political situation, the damage by startups and the broader tech industry remains limited and fixable – as long as the judicial reform will not escalate further.”
How should the venture capital industry conduct itself in the immediate and medium term?
“Over the years, I have seen the market in its highs and lows, and I think it is crucial to remember the cyclical nature of these phases and how the circumstances eventually improve. As for the political situation, venture capitalists and the industry in general must remain vocal about the need for resolution that brings all political parties together, to ensure a stable legal system.”
