Tiger Global, one of the leading investment funds during the Covid era, reported at the start of October that senior partner John Curtius is leaving his position next year. Curtius may not be a name familiar to most in the Israeli tech sector but his departure will have a major influence on the industry. He was the contact person between the enormous capital of Tiger Global, a fund of $95 billion, and dozens of Israeli entrepreneurs seeking quick financing, an extensive network of contacts, and minimal involvement on their board of directors. Money and being left in peace are not commodities that you get from most funds, and Israeli entrepreneurs have learned to appreciate this in the last two years, thanks to funds like Tiger Global.
Over just two years, Tiger Global was involved in nearly 50 deals in Israel without a local partner and virtually no presence here. More than one third of its Israeli portfolio is built around unicorns and companies that have already held their IPO on Wall Street including ironSource (NYSE: IS), SentinelOne (NYSE: S), Pagaya Technologies (Nasdaq: PGY), Rapyd, Snyk, Gong, and Melio. Since 2020, it has been reported that Curtius was the person who made contact with promising Israeli entrepreneurs, would meet them in London, and frequently close there and then a commitment to invest. The money would be in the startup's bank account soon after.
Reactions in Israel's tech sector to the news of Curtius's departure were not long in coming. Curtius is a controversial figure among Israeli investors. They remember that time in the summer of 2021, when he arrived in Israel with his team with the stated aim of agreeing ten investments within a week - a rapid pace that Israeli funds were not used to and which, according to some investors we spoke with, indicated a superficial acquaintance with the companies.
Other investors have come to Curtius's defense: his quick handling led him to win more deals, but did this help the fund's bottom line? The results of Tiger Global's private equity fund remain confidential but its hedge fund, which invests in public companies, lost 50% on its investments in the first half of 2022. The private tech market is indeed reacting late to the crisis, but even there the value is starting to fall and threatens the ability of the giant funds to generate value from their investments. The Shibolet & Co. law firm reported that there has been an increase in financing rounds for startups and growth companies, in which there was an average fall in valuations of between 4% and 9%, from within a year of the previous financing round.
At the same time, similar large funds to Tiger Global like Coatue and SoftBank have reported losses, including on private investments, have had layoffs and people leave, and have switched to investments in earlier stage companies. These investments require less resources, contain bigger profit potential but also a more significant risk element.
According to IVC Research, Tiger Global has almost completely halted investments in more mature Israeli tech companies, which used to raise hundreds of millions of dollars at valuations in the billions, and shifted to much smaller investments of a few million dollars in early stage companies. Curtius, meanwhile, will continue to operate with Tiger Global until June 2023, when he will leave to set up his own fund.
Investment managers at Snyk and Fireblocks have left
Coatue, which manages $70 billion and has made 10 huge investments in Israeli unicorns, such as Fireblocks, Rapyd, Cato Networks, Deel and TripActions, has seen at least three senior figures leave over the past month. These include general partner Sebastian Duesterhoeft, who managed the investment in cybersecurity company Snyk, and Luca Shmid, who managed the investment in Tel Aviv-based Fireblocks, which secures cryptocurrency deals, and in Netanya-based Starkware, which encrypts blockchain networks. In addition, another Coatue veteran general partner Matt Mazzeo is also leaving.
Coatue has significantly slowed its investments in Israel. After investing in eight Israeli companies in 2021, Coatue has made just one investment in Israel this year - in Starkware. At the same time it participated in the pre-IPO financing round of TripActions, which is not an Israeli company but was founded by Israelis living in the US and has a small development center in Tel Aviv.
As of September 2022, Coatue had lost 18.7% on its investments and as of May had reduced its exposure to investments by 14%.
A similar trend can be seen with SoftBank, even though it is a growth fund that invests in both privately-held and publicly-traded companies. Yanni Pipilis, who managed the SoftBank Vision 2 Fund investment team in London and who recruited former Mossad chief Yossi Cohen to the fund, has left with other partners. He joins SoftBank Vision Fund senior managing director Rajeev Misra who also quit recently and who was once seen as a potential successor of SoftBank founder Masayoshi Son.
The pair will found a new $6 billion fund with investors from the UAE like Abu Dhabi Mubadala Fund, which invested in SoftBank Vision 1. Somewhat absurdly, SoftBank Vision 2 fund stressed after recruiting Cohen that it had no investors from Arab countries, even though, according to estimates, recruiting Cohen was meant to attract investors from the UAE and Saudi Arabia.
According to PitchBook, Misra and Pipilis are not alone. Since 2020, half of SoftBank Vision Fund board members have left, while 11 out of SoftBank's 15 board members have left. Last month the Japanese fund began a streamlining program that will see 150 layoffs, about 30% of employees, due to the losses sustained. In the last two quarters, the Vision 1 and 2 funds recorded total losses of $41.3 billion.
The key figure in SoftBank's Israeli operation
Yanni Pipilis was a key figure in SoftBank's Israeli operations. He managed investments in Israeli companies from London and the due diligence ahead of the investment. Cohen, who has spoken in the past about his interest in standing for prime minister, and is currently undergoing a 'cooling off' period, continues in his role at SoftBank, despite the changes, and reports directly to SoftBank founder Son. Moreover, "Globes" has learned that he has signed on with SoftBank to continue for another year.
Despite this, under Cohen's tenure, SoftBank has made almost no large investments in Israel - except for leading the investment in cybersecurity company Claroty and its acquisition of Medigate. Working under Cohen in Israel is Amit Lubovsky, an investment manager at SoftBank who lives in the US and comes to Israel every few weeks to examine new companies for investment. "Amit and Yossi were very dependent on Yanni and Rajeev, and when they left there was a bit of a halt," says an executive familiar with Softbank's operations In Israel. "There is a lot of rethinking there - this is a fund that recorded many losses - but the departures and layoffs in the fund do not add to the atmosphere."
SoftBank also operates in Israel through Ben Weiss, an Australian-born partner who invests in early stage companies through SoftBank Ventures Asia - a South Korea based fund specializing in early-stage startups.
The funds that have rediscovered the tech sector
Tiger Global, SoftBank and Coatue are just a few funds out of a large group of hedge funds and mixed funds that rediscovered the tech industry during the Covid pandemic, after the decline in public company returns and an increase in private company returns. These funds, which usually own a hedge fund that invests in a public company and another fund that invests in private companies, envied the returns achieved by venture capital managers - and took advantage of the low interest rates and cheap money of the Covid years to invest hundreds of millions of dollars in one go in huge companies, with valuations in the billions.
These funds were also accused of inflating the valuations of companies through the large amounts that they showered on entrepreneurs for a relatively small stake, which in turn artificially increased the value of the company. Tiger Global, for example, does not own more than 15% of any Israeli company.
Now, with the rise in interest rates, the declines in the capital market, and the bursting of the company valuation bubbles, as well as the retreat from China as a manufacturer and consumer market - the portfolio companies in many funds are causing a tremendous loss of value. SoftBank, for example, has lost badly from the DoorDash IPO at the end of 2020. Since then DoorDash's share price has fallen 73%. The cancellation of the $40 billion acquisition of chip company ARM by Nvidia earlier this year was also a big blow to the Japanese fund. Tiger Global also suffered from the stock market falls, including promising stocks that failed such as Zoom, Robinhood and DocSyn. It has also been forced to reduce its exposure to declining stocks such as DoorDash, Coinbase and Carvana.
"Tiger, Coatue and their likes have not disappeared, they simply returned to where they came from: investments in public companies, where today, after all the falls, it is possible to beat the banks in their ability to achieve a large return," says one senior investor.
Another investor we spoke with actually welcomes the exit of the giant funds from the growth company market. "There is no justification for rapid investments like those made here in the last two years," says the investor. "Before investing, you have to meet the company over the years at different points in time and develop a long relationship with the entrepreneurs. You cannot meet the entrepreneur for the first time, and at the same meeting offer them an investment agreement. In many ways, we are now returning to the situation we were in 18 months ago - a market dominated by Israeli investors, and in which American investors work in cooperation - without throwing money at the entrepreneurs."
Published by Globes, Israel business news - en.globes.co.il - on November 2, 2022.
© Copyright of Globes Publisher Itonut (1983) Ltd., 2022.