Are Israel’s institutional investors late to the tech investment party?
Senior executives at The Phoenix explain their strategy when it comes to investments in private companies and admit they missed the insurtech craze
After years of complaints by venture capital funds that Israeli institutional investors have avoided investments in tech companies, recent months have seen that trend change. Poalim Capital Markets, Harel Insurance, Meitav Dash, Clal, and Psagot, are all mentioned in stories related to financing rounds, including those of Israeli unicorns. The Phoenix Insurance company has become a common name in those reports, with its most notable tech investment to date being in Autonomous vehicle company Ree, which has merged with a special purpose acquisition company at a valuation of $3.1 billion. The Phoenix has also invested in Otonomo, in the same industry, in Fiverr, and several other companies.
Elad Givoni runs the company’s private equity investments, while the general Investments and Finance Division has been managed for the past year by Haggai Schreiber. In their first interview with Calcalist, we tried to figure out whether there has been a real change in the institutional bodies’ investment policies, how many other companies they invested in, and wondered together whether another tech bubble was emerging and whether the big organizations arrived too late to the party.
Why did you decide to enter the scene so late, after the valuations had already climbed?
Elad Givoni (left) and Haggai Schreiber. Photo: Inbal Marmari
Givoni: “We didn’t just start investing. Institutional investors began to get exposed to the tech world through venture capital funds a few years before the dot.com bubble blew up, which meant that the initial experience was not a positive one and subsequently negatively affected their sense of security regarding the field for several years. For the last decade, the institutions have begun investing more in these funds, some of which had matured and some that had been established after the crisis and learned from the mistakes of others. The investments garnered favorable yields’ leading some of the institutional investors to deal directly with the enterprises.”
Schreiber: ”It’s not only the VC funds that have improved over the past decade, Israeli tech entrepreneurs and managers have also gotten better, and are part of the reason for the improved yields. In the past, founders only focused on the technology itself, nowadays they also have a good understanding of marketing, sales, growth management, and even the capital market.
The private equity departments are another weapon in our arsenal. As pension funds, which need to constantly be investing new capital, we examine many opportunities both in the private and public markets. One of the reasons for our current focus on private tech companies is the realization that there is a significant price discrepancy between the private and public markets when it comes to this sector. There is no guarantee that the conditions will remain that way and it’s not to say that privately held companies are cheap. They really aren’t. Investments in them come at the expense of investments of public companies in the same industry.”
Givoni: “Most of the institutional investments are in growth companies because investment in seed-stage companies is less suitable to them. The volumes are small and the analysis work is more difficult for organizations like ours. The more revenues a company has, the faster it grows, which proves that their product and the demand for it is real — making it a better fit for institutional investors.”
When did the Phoenix enter the field and what makes you stand out?
Givoni: “In around 2014 or 2015, we started receiving offers to co-invest along with the funds we’d backed— these were opportunities that we didn’t really know how to handle. Companies in series C stages started to look interesting and we developed the internal procedures that would allow us to respond more quickly, as is often required in such cases.
“In 2015 we carried out six or seven investments and one of the first was in Riskified (which is currently in talks to merge with a SPAC - G.H.) Many of the investments were carried out alongside VC funds and we are continuing to hone our capabilities. Every year we invest more and take great care to select partners we feel comfortable with. We also built up our internal capabilities, which allow us to independently identify deals with foreign partners.”
Who are your partners?
Givoni: “In the last few years we have been pretty active opposite organizations such as ION, Glilot Capital, and Greenfield, but we also enjoy good relations with Battery Ventures as well as with experienced private investors.
How much did you invest in 2020 and this year, and how do you manage the investments?
The Phoenix's Tel Aviv headquarters
Givoni: “We are currently crossing the $5 billion benchmark in terms of investments since 2015, with most of that sum invested in the past three years. Since the start of 2020, we carried out more than 15 direct investment deals at a total sum of around $150 million.”
Schreiber: “We employ 70 talented investment people in our team and many of the executives have been working together for 15 years already. It enables quick and efficient work, without any turf wars.
“As part of our participation in a new plan by the Israel Innovation Authority, we recruited a new investment manager dedicated to the tech sector and recently established a sub-committee for tech deals to help further improve and expedite our decision-making process. The committee includes people from within the sector, who possess the required network and who after a single phone call can tell us about the targeted company’s CEO, technology, and competitors. We didn’t seek out big names to stack the sub-committee, instead, we brought in young and driven people, from the same age group as the new wave of entrepreneurs with a deep understanding of technological trends.”
Why should companies be interested in institutional investments? What is your advantage?
Givoni: “In the past, good companies that raised capital preferred to avoid deals with institutional investors, mostly because of unfamiliarity. The institutions weren’t really interested in it either.”
Schreiber: “In recent years there has been a change for the better on the part of both sides — institutional investors are no longer afraid of direct investments and the companies realized that we are action-driven and that institutional money has its advantages. Companies don’t always desire another fund to come aboard in a funding round and our very presence helps them prepare for the public market when it comes to things like transparency, corporate governance, and financial reporting.”
Givoni: “And still, there is room for improvement on our part. Companies still prefer to go to Sequoia instead of coming to us since VC funds help their portfolio companies raise capital from other sources.”
We are witnessing a trend of companies raising relatively small amounts in order to set high valuations.
Givoni: “There is a lot of capital that’s chasing after the good companies and they are taking advantage of that to raise funds frequently in order to set higher valuations with minimal dilution of existing backers’ shares. These funding rounds also play a psychological role in the way the market looks at a company, enabling them to set valuation thresholds that will carry on to future rounds and eventual entry to the public market. These rounds are also used as a tool to retain talent because rounds at increasing valuations tend to indicate a company’s progress and affect the value of the options the employees hold. At the end of the day, it’s all about supply and demand, and no doubt about it, the companies wield all the power these days.”
How do you decide which companies to invest in?
Givoni: “In the beginning, we only invested alongside funds, in order to improve our learning curve — and only invested a few millions of dollars. Gradually we built up the team, gained confidence, and recruited a tech specialist to help us filter out the possibilities. Portfolio diversification is extremely important. You can’t always identify a winning company, and often there is a company or two that rise up above the rest and produce most of the ROI. We invested in several companies in the autonomous vehicle market, so we already know how to gauge companies in that industry, even if we can’t tell which will be the one to break out. The same goes for the e-commerce sector. The company needs to have a good understanding of sales and marketing, not only technology.”
Givoni noted the importance of having a diversified investment portfolio but admitted that the Phoenix is not invested in the scorching insurtech market, noting that “There is no real reason or sweeping policy in that regard.”
You missed out a bit, didn’t you? You didn’t recognize Lemonade’s promise.
Givoni: “There’s no doubt that we missed out on some good deals. Some of them never came our way, others only arrived at a stage that didn’t seem cheap enough for us, and sometimes we simply decided to prioritize other things because of resource allocations. Naturally, we have made mistakes too. There were times that we worked on a deal, but weren’t granted an allocation, and the companies developed very favorably. In 2017, we had an opportunity to invest in AppsFlyer that we didn’t realize. The company developed a platform to help app operators determine where their most profitable traffic came from. It built an impressive operation and presented significant growth, which has allowed it to reach a valuation of $1.5 billion to $2 billion, far higher than it was when we could have invested.”
Schreiber: “You asked earlier about insurtech. Companies like Hippo and Next Insurance came to us and, as of now, it’s accurate to say we missed out on them. Sometimes it is difficult to pay the sums that are asked, especially if it is in a field that you’re very familiar with, like insurance. The Phoenix has plans to invest in early-stage insurtech and fintech companies, which is being led by CEO Eyal Ben Simon and our IT department. They better understand the technological requirements of the insurance world. We also missed out on opportunities to invest in publicly-traded alternative energy companies, which happened because of our understanding of the field and the fact that renewable energy is our largest private portfolio. We had big issues with the valuations some of the companies received when going public. On the other hand, our private portfolio in the field yielded excellent returns.”
Givoni: “We didn’t consider Fiverr’s share price to be cheap when we invested in it at $20 a share pre-IPO. Today it is being traded at $220, having fallen from an all-time high of $320.”
Are there sectors you won’t invest in?
Givoni: “Gambling and offensive cyber.”