January 2020 - Monthly Insights Israeli Venture Capital
News and Updates
OUR 2020 PREDICTIONS FOR GLOBAL AND ISRAELI VENTURE CAPITAL
2019 has been an exciting year for venture capital as we continued to witness the growing presence of technology in our everyday lives. At the same time, 2019 has been a challenging year for technology markets, as we have seen more scrutiny by public market investors on listings of privately-held unicorn companies and growing regulatory pressure mounting against global tech companies. For us at Sweetwood Ventures, 2019 has been an exciting year during which we continued to invest in leading Israeli venture capital funds (both through primary and secondary positions) and expand our long-term partnerships. With frantic activity in the venture capital industry in 2019, both globally and in Israel, we will dedicate our following newsletter to discuss the trends which played out throughout the year. But before 2020 fully kicks-in, we are happy to share with you our top five predictions for the global and Israeli venture capital markets in the coming year.
#1 Late Stage Investments in Israeli Startups Will Continue to Expand As covered in several of our newsletters during 2019, Israeli venture capital is primed to set a new record for capital invested in late stage deals. While final numbers will be gathered and published in the upcoming weeks, late stage funding rounds (C and above) are expected to reach $4.83 billion, an increase of about 50% from 2018. In 2020 we expect this trend to continue, as investors are increasingly shunning the underwriting of technological risks in early stage companies, preferring to underwrite market risks of more advanced companies, with a view towards an acquisition or an IPO. Additionally, the hegemony of the global tech giants has become such that launching a new start-up initiative nowadays requires significantly more financial and human capital than ever before. This emphasis on late-stage funding will further encourage Israeli founders to build category leading companies out of Israel in a variety of sectors. Specifically, we believe that we will see more “mega rounds” (deals of over $50 million) in the market, as global investors look to “double down” on early winners with the aim of gaining maximum market share in “winner takes it all” markets. As in years’ past, we believe that the majority of the capital will be invested by foreign investors who are increasingly recognizing the ability of Israeli entrepreneurs to grow global category leaders and that building large tech companies is no longer only in the domain of Silicon Valley based companies.
#2 Return to Fundamentals and Unit Economics We believe that the unwinding of the WeWork saga seen in 2019 will serve as a cautionary tale for private market tech investors, understanding that public markets will not only focus on strong growth, but also on the ability to generate a path to profitability. As a result, the venture capital industry will shift its focus back to fundamentals and its emphasis to strong unit economics, effectively pushing the brakes on the “grow at all costs” mentality that has been prevailing over the past few years. Concerns of a financial slow-down will further emphasize the need for such, as investors will want to assure that their companies are well prepared for choppy waters and are able to quickly turn to profitability at the expenses of growth in a weaker macro-economic environment. #3 Focus on Core Technology We believe that part of the shift illustrated in our #2 prediction, will also include a broader re-focus by investors on companies where technology constitutes a core asset, as opposed to companies where technology is merely an enabler to its core activities. This prediction again bodes well for the Israeli ecosystem, known worldwide for its ability to produce companies bringing deep technological disruption to the field, mostly in the enterprise space. This prediction also rhymes well with the ability of companies to quickly shift into profit, as we strongly believe that the gross profit margins of companies with a strong technological solution are far superior and justifiable than those which do not have such technological advantage. This is, yet again, specifically true when looking at Israeli software companies operating in the enterprise space.
#4 Geopolitics Will Continue to have a Strong Influence on Technology Markets
The U.S.- China trade wars have been making headlines throughout 2019 and will most likely continue to do so into the reelection campaign of Donald Trump in 2020. We believe that the underlying currents beneath these trade confrontations revolve around the global supremacy aspirations of the world’s two greatest superpowers. A battle, which in our view, is largely influenced by their ambitions to control the technologies which will shape our lives over the next half a century, such as AI, computer vision, quantum computing and encryption. As the U.S. and China continue to limit investments in these technologies from one another through legislation such as CFIUS ( the “Committee on Foreign Investment in the United States“) and its Chinese equivalent (the “Security System for Mergers and Acquisitions of Chinese Enterprises by Foreign Investors”), we believe Israel will emerge as a key technology hub in which both American and Chinese players will compete to access such strategic technologies. While this sort of “battle” can be beneficial for Israel in many aspects, it poses some serious geopolitical challenges to its leadership, at a time when the country is going through its biggest political crisis in decades. We believe that it must look to maintain the delicate balance in its relationship with both parties and as tensions continue to mount, this task will be more challenging than ever before. #5 Quantum Computing will Begin to Emerge from Israel Amid recent publications by Google that their team has achieved quantum supremacy, quantum computing has been taking center stage as the next technological frontier. With the vast understanding that quantum computing will be a game changer in the technological world, many key stakeholders have placed their bets on the industry. While we have yet to see a growing amount of startups tackling the space, we believe that the Israeli tech ecosystem has the right fundamentals to emerge as an early leader during 2020 (and beyond). This prediction is based on several key ingredients for success already present in the Israeli ecosystem, including: 1) substantial governmental investment (NIS 1.2 billion national program launched in 2019 for quantum research) 2) leading quantum research institutions (the Hebrew University of Jerusalem, Tel Aviv University and the Technion all have established leading quantum research centers) and 3) venture capital funding available for investments (a good example is the round led by TLV Partners along with Battery Ventures of $5.5 million into Quantum Machines in late 2018).
Notable Investment Rounds
CyCognito, an Amiti Ventures portfolio company, secured its series A round of $18 millionled by Lightspeed Venture Partners with the participation of Amiti Ventures and UpWest Labs. CyCognito has developed a platform that provides organizations with a complete attack surface analysis from the point of view of a sophisticated attacker.
Sproutt, a State of Mind Ventures portfolio company, secured its series A funding of $12 million led by State of Mind Ventures with the participation of Moneta VC and Guardian Life. The Sproutt Insurance platform leverages predictive understanding of the customer’s lifestyle, health, activities, and interests, resulting in a more accurate and relevant user experience.
Vayyar, an Amiti Ventures portfolio company, secured its series D round of $109 millionled by Koch Disruptive Technologies with the participation of Battery Ventures and Bessemer Venture Partners among several others. Vayyar develops leading-edge 3D imaging sensors, opening the world to a new generation of safe, mobile and low cost imaging devices.
Intel (NASDAQ: INTC), the American computer hardware company,acquired Habana Labs for $2 billion, a Battery Ventures portfolio company which develops solutions for artificial intelligence (AI) and deep-learning computing.
Proofpoint (NASDAQ: PFPT), an American enterprise security company, acquired ObserveIT for $225 million, a Bain Capital Ventures portfolio company which provides an insider threat management platform.
Recommended Venture Capital Reads
Oyo planned to use SoftBank's billions to become the world's largest hotel chain by 2023. Now, though, the Indian company's problems are piling up. [The New York Times] During a decade in which private equity assumed a larger place in the global economy than ever before, the industry has made it clear that it's all about the profits. [Bloomberg]
For years, VCs have believed that subsidizing breakneck growth was the path to startup domination. Now, they're changing their tune. [The Wall Street Journal] What do Walt Disney's grand-niece and a former managing director at BlackRock have in common? They're both among a group of US millionaires who would very much like to pay more taxes. [The New Yorker]