"Just as 2021 was dramatic in terms of euphoria, there has been a hard landing in 2022," observed Insight Partners partner Liad Agmon in an interview with Yiftach Mandelbaum at the annual Enterprise Technology Summit held by "Globes" and JP Morgan. "Ultimately the state of Israeli high-tech derives from the state of the publicly traded tech companies in the US. When the companies' valuations are cut on the stock exchange that influences the entire industry and now we are exactly at that stage. It has shaken up the entire way that the industry values companies. How much is a company worth, how much money to raise, how much to spend?"
He added, "The market has shifted from valuing very strong growth to valuing profits. The SaaS model was 'we will grow very much and one day we will switch off the marketing engine and we will be profitable' - and that did not really happen. The market needs to rethink this model."
That means that every company must be profitable?
"With very small companies, it is difficult to reach profitability because of the fixed overheads but what we see today is SaaS companies with revenue of $1 billion, and they are still not profitable. That's a problem.
"So from startup companies there won't be a demand to be profitable in the initial years but you will be looking at how much you spend compared with what you sell. These parameters will be more significant in assessing the health of the company on the current market."
How would you behave today as the CEO of a company?
"Every company has a unique situation but I will say that I would be careful with the cash, I would cut any unnecessary expenses to make it through the next two years and reach a good financing round. Projects that will bear fruit only in another three years or more, I would cut despite the pain, because in the coming years only the strong will survive.
"This will be a period of acquisitions, because as far as corporations are concerned, the multiples have gone down, and it is finally possible to acquire companies. But corporations like to buy in their market. So if you want to be acquired by an American company, you may not need to operate in Europe in the coming years."
Seeing a down round negatively is a huge mistake
Are CEOs still avoiding (flat rounds) at the same valuation as their last round or even lower (down rounds), or do they understand that this insistence is no longer appropriate?
"I think that seeing a 'down round' negatively is a huge mistake. There are years in which the market is prepared to give a higher price and sometimes lower. If the structure of the investors' rights in a company is healthy, this is not terrible. Raise money at a lower valuation but you will gain by living longer.
"Recently we saw articles about Snyk, which apparently completed a 'down round' but they raised $200 million at a valuation of $7 billion. Who cares that this is a down round? True, if we talk about down rounds in which 90% of the investments are wiped out then that is a drama. But if the valuation is high but a little less than in 2021 - who cares?
"Those who are locked in on a certain value may miss a round, and that will kill the company. I say - let's talk about investment and only then talk about value. When a CEO comes with unrealistic expectations, it's easy for an investor to move on to the next company."
The market is currently undergoing a correction. Are you doing any soul searching about the valuations at which you invested, which perhaps contributed to what we can now call a bubble?
"The market in Israel is correlated with the US markets. Although Insight is a large player, its relative share in the global venture capital market is not large. It really has no effect on the market, although maybe from an Israeli point of view it seems that way. Funds such as Tiger, GA and SoftBank operated in the Israeli market and influenced it as well.
"The advantage of being a huge fund is that each round of investment is just one of several rounds that we will do in the future. Sometimes you wonder how we invest at a high value, but in the distant future it suddenly seems logical. The question is who invests in the next rounds, and that is our advantage, that it will still be us.
"Another advantage is our ability to connect our companies to our network of contacts, which is especially significant in times of crisis, because managers are willing to say 'maybe I need help'. When everyone is euphoric, there is less openness to that."
"I have a relatively big mouth
In the past you had a reputation for saying exactly what you think. Now you are part of an international fund, how do you feel about your ability to express yourself freely?
"It sucks! I have a relatively big mouth, and I like to express my opinion. It's not necessarily always a positive trait, and maybe now I am more restrained, although of course also when I was the manager of a company with 400 employees, or afterwards when it was sold to McDonald's, I knew what I was doing, and that it had an impact.
"But people like someone who takes risks. People like to hear the truth, an authentic voice and something that will make them think. What makes you think and what makes you feel comfortable are not always the same.
So this is a conscious decision
All my decisions are always made consciously. I always say what I think. For example I did not like the way people celebrated the 'down round' at the expense of Snyk.
Full disclosure: The conference was held by Globes in partnership with JP Morgan and sponsored by Microsoft, Next47, and with the participation of the Israel Innovation Authority.
Published by Globes, Israel business news - en.globes.co.il - on December 15, 2022.
© Copyright of Globes Publisher Itonut (1983) Ltd., 2022.