"Startups grew 100% but losses doubled"

Erez Shachar Credit: Eyal Izhar
Erez Shachar Credit: Eyal Izhar

Qumra Capital managing partner Erez Shachar and other Israeli venture capitalists at the Globes Conference on the Economy in Turmoil discussed why the tech bubble burst.

"This was a very significant bubble that burst. After all what is a bubble? You pump air into a space until the air comes under pressure, and that's what happened," venture capital growth company investment fund Qumra Capital cofounder and managing partner Erez Shachar told the Globes Conference on the Economy in Turmoil, which was held at the Tel Aviv Stock Exchange in partnership with Bank Hapoalim and discussed the effect on Israel of the global economic crisis.

Shachar added, "When you put $35 billion into the market with publicly raised money and another $27 billion of private money, after local companies had raised $16 billion the previous year, following the annual average that had stood at no more than $3-4 billion, there is no way to contain all that money. In line with this the job market became crazy. We threw money at employees just so that they could move from company to company, and ultimately there is only a limited amount of human resources, and it was very unhealthy for the industry. Companies preferred to grow at any price and they grew 100% but the losses doubled."

"So in fact we have today returned to sanity. The companies have a lot of cash in their coffers and if we look a lot more at profitability, we are in the right direction. There are companies here that sell $100 million or $200 million annually and they can allow themselves to choose their growth trajectory. Thus the fall in company valuations is welcome because it lowers the temperature of the blaze and ensures that companies must receive money on reasonable terms. Companies that pumped up the bubble won't survive and that's a good part of the process."

Everyone retrained to move to high-tech

Tal Ventures venture partner Miriam Shtilman recalled the dot.com bubble and provided an historical perspective. "Everyone who went through the dot.com bubble was walking around over the past few years with a sense of deja vu and the smell of fuel in the air that might ignite at any moment. Everyone founded startups and everyone retrained to move to high-tech. The feeling was that everything was going up and while we were going in the right direction, everyone would be able to get out in time. But the difference between the bursting of the dot.com bubble and the bubble that burst in 2022 is the fact that we are currently living in a period of inflation and we are suffering from supply chain problems. On the other hand, many companies have a sustainable economic model and money in their coffers. The Internet industry won't collapse but there will be new winners and losers here."

Talking about layoffs in the tech sector, Shtilman said, "We will see layoffs mainly of the 'fat' on the fringes of R&D, or the fringes of business areas, and there is no small amount of this due to the fact that many companies hired a lot, in order to grow their number of employees and offices and raise the next financing round, without any business justification. But these employees will be absorbed and revitalize the market, some of them with lower salaries and some of them with higher salaries. In the fields of machine learning, data science, development tools and chips the demand will only continue to rise and there will be a layer of employees who will still continue to receive salary offers with hikes of 20% or 30% above their previous salaries."

On the danger of many tech companies reduced to a situation of having to raise capital at a lower valuation Shachar said, "That's something unpleasant that companies will try to avoid as far as possible because it creates an imbalance between investors, entrepreneurs and employees, regarding previous finance rounds. Because companies raised so much capital in recent years and some of them are continuing to grow nicely, they can build for themselves financing rounds that are at least at the same value as the previous round. It's true that many companies raised funds at too high a valuation and they may be the victims of an overvalued sector."

The crises that can be solved with the help of technology

Poalim Hi-Tech CEO Michal Kisos Herzog said that the change currently taking place in the market was influenced by what is happening around the3 world due to slow growth and inflation. In this situation Kisos Herzog said that "Policymakers have moved into action to create an economic turnaround. Technology and high-tech can take part in this turnaround if we begin to think in terms of infrastructures and not unicorns."

Kisos Herzog gave examples of the problems and challenges in various areas where it is possible to provide solutions from the technology world: rises in food prices through food-tech; climate problems and oil through renewable energy; storage and data transmission by upgrading cloud capabilities; and unemployment through building human resources. "The change brings with it concerns about the crisis and therefore this is also an opportunity for innovative technology and high tech."

Duality Technologies cofounder and chairwoman Rina Shainski sees reasons for optimism. "The two years of the Covid pandemic showed us how strong the technology revolution was, with innovation that let everybody work, shop and pay from home. There are still crises that can be solved through technology, like the supply chain crisis, or the speeding up of infrastructures in the fields of medicine, food and chips as a response to the global geopolitical crisis."

PICO Venture Partners cofounder and managing partner Elie Wurtman claims that the media headlines are more sensational than the reality and insists that the tech sector has only sustained light damage. "It is the psychology that has changed. Companies raised hundreds of millions of dollars and the world is increasingly consolidating technology and that has not changed and won't change. So we will lower our sights slightly and move forward. A problematic cloud is approaching but it is not the end of the world. We have to take things slowly, take a little breather and build society the way it should be dome. On the other hand, those who haven't taken their heads out of the sand, should do so quickly and understand what is going on around them."

Full disclosure: The Conference was held in partnership with Bank Hapoalim

Published by Globes, Israel business news - en.globes.co.il - on June 23, 2022.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2022.

Erez Shachar Credit: Eyal Izhar
Erez Shachar Credit: Eyal Izhar
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