Last week, it seemed as though the falls in the public stock markets were mainly affecting the fringe of the technology industry. Only a week ago, we were still living under the impression that the companies that would pay the price of inflation, higher interest rates and a more conservative approach by technology investors would be companies with adventurous business models such as groceries delivery company Avo. That company was always on dangerous ground: it hired hundreds of employees within a short time, maintained its own warehouses and stocks, and in general behaved more like a logistics company than a technology company. It's no surprise that the Rami Levy supermarket chain wanted to take on the employees that Avo has been forced to shed over the past few weeks.
What happened in one of the Alon Towers in Tel Aviv at the end of last week, however, when the CEO of enterprise AI solutions company BeyondMinds informed his 65 employees that he was shutting down the company, could go down as the first blow in a real crisis in the local tech industry. This is not a matter of a company powered by high tech, a consumer end-product company in retail or e-commerce. BeyondMinds was part of the core of the Israeli tech industry. It developed automatic machine learning technology that facilitated the creation of smart models for various applications, such as improving the operations of a production line or a financial system. In this field, it competed with Pecan, another Israeli company, that has so far raised $116 million.
The company admits that it was in negotiations on a sale for while, but that these came to nothing because of the sharp change in the financial markets. In fact, several months ago it sought an "acquihire" deal, that is, an acquisition by a larger company mainly aimed at recruiting its employees rather than to take over its products and services.
AI no longer so exciting
The situation reached by BeyondMinds - complete closure and the disbandment of its workforce - shatters everything we thought about the Israeli tech industry. If in the past it seemed that any company connected in one way or another to artificial intelligence would become a unicorn, we have been proved wrong. Not every company that describes itself as a machine learning company manages to turn algorithms into gold. Even if it is headed by experienced experts, sometimes it simply takes too long. Sometimes the business model or the diversification over many lines of business can't support the development people, however good they are. Anyone who knows artificial intelligence encounters from time to time work that covers up for what the algorithms can't yet produce. That has far-reaching effects on costs.
And if we though that it would be easy to sell an AI company that had got into cash-flow difficulties, that too has been proved untrue. Companies are not rushing to bid, and are not fighting over every talent. The tech industry is in a different place from where it was only a few weeks ago: companies are being required by their investors to reopen 2022 budgets and examine where they can cut back. Hiring plans have at best been slowed down, or frozen in less fortunate cases, while in the worst cases, people have been laid off.
In this new reality, technology companies will continue to make acquisitions, perhaps even at a higher rate than in the past, not just to gain workers, but mainly to gain revenue, preferably rapidly rising revenue.
And if we thought that it would be easy for venture capital funds to continue to support companies, there too we have been proved wrong. It's true that last year almost all the Israeli venture capital firms raised hundreds of millions of dollars each. Grove Ventures, one of the investors in BeyondMinds, raised $185 million only a few months ago. But this new money is earmarked for future investments, not for supporting old ones. Even when they're sitting on millions, venture capital funds don’t like to gamble, despite their name.
A new, meaner era
At other times, it might perhaps have been easy for larger companies to swallow companies like BeyondMinds. It could have been one of those many companies that are sold in obscure exits with small items in the newspapers that don't mention sums of money. To its founders' credit, it should be said that it didn't raise too much money - just $30 million - and never thought of itself as a unicorn.
With the closure of BeyondMinds, it is fairly clear that we have passed a watershed and that we are at the start of a new era. The era that hallowed above all technology, hiring workers, and sales, is giving way to a meaner and less patient era, that looks first and foremost at efficiency and operating profitability. It's an era in which companies will be closed without mercy, although their employees will generally have somewhere to go.
Published by Globes, Israel business news - en.globes.co.il - on May 24, 2022.
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