Gal Gitter (right) and Nicole Priel.

What's next?
“We don't expect to see a meaningful recovery in the venture industry before the second quarter of 2024”

Nicole Priel and Gal Gitter of Ibex Investors spoke with CTech as part of the project “Where do we go from here?”, which aims to examine how the Israeli VC industry is dealing with the crisis in the sector

“The correction in the private markets hasn't fully worked its way through the system, so we don't expect to see a meaningful recovery in the venture industry before the second quarter of 2024,” says Nicole Priel, Partner and Managing Director at Ibex Investors. “We're starting to observe positive offshoots returning to the public markets, with preparations for IPOs and large transactions underway, which ultimately should trickle down to the private markets,” she added.
Priel noted that the Nasdaq peaked in November 2021, but in the private markets, particularly in Israel, the party raged through the second quarter of 2022. “Many public companies corrected 70% or even 80%. It's hard to pinpoint exactly when the markets will turn.”
Priel and Gal Gitter, Managing Partner at Ibex, took part in CTech’s project “Where do we go from here?” trying to find out how the Israeli VC industry is dealing with the crisis in the sector.
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מימין גל גיטר ו ניקול פריאל שותפים מנהלים ב קרן ה השקעות   אייבקס ibex
מימין גל גיטר ו ניקול פריאל שותפים מנהלים ב קרן ה השקעות   אייבקס ibex
Gal Gitter (right) and Nicole Priel.
(Photo: Elisa Szklanny)
Over recent months, we have witnessed one of the most serious crises to hit Israeli high-tech in recent decades: on the one hand, a global economic slowdown, and on the other hand, local political turmoil that sent the industry into deep stagnation. Since the general assumption is that the situation will not change in the near future, the question hovering over the industry is what can still be done to minimize the damage to the Israeli high-tech industry and how should we act so that when the crisis passes - all those involved can take a leap forward. Therefore, as part of this on-going project, we spoke with senior executives from the local venture capital industry to try and understand from them what needs to be done now to justify the reputation Israeli high-tech has earned as being creative, adaptive, innovative, agile and cunning.
Name of fund: Ibex Investors
Total sum of fund: $610 million as of July 1, 2023 across our early-stage and growth-stage Israel focused funds
Partners: Justin Borus, Gal Gitter, Nicole Priel, Mike Donnely, Jeff Peters, Cooper Stainbrook, Ryan Mahon, Adam Eisenberg
Notable/select portfolio companies:, Appwrite, Nexar, Lightspin, Gauzy, Digital Owl
"We maintain our conviction that this is an opportune time for building ventures"
Does the fact that major international funds have generally slowed down the pace of their investments play to the benefit of the local Israeli funds and to the benefit of the local ecosystem? If not, why? If so, in what way?
Priel: “A reduction in foreign investment activity in Israel is, on the whole, a negative force impacting the entire ecosystem. While it could lessen competitive forces for local funds over the short term and bring back a sense of normalcy in terms of valuations, the eventual consequences could be severe, as a reduction in capital would inevitably hurt Israeli companies' growth (and exit) potential. The unprecedented capital invested in Israeli startups in recent years contributed to the growth and explosion of the local ecosystem. Should capital stop flowing from foreign sources, multinational activity may follow in kind, companies may have less access to capital, and the pace of innovation would inevitably slow as entrepreneurs are less incentivized to risk quitting their jobs and starting new companies. This means fewer new startups, fewer jobs in the tech sectors, and ultimately, less capital that flows back into Israel from the tech industry.”
Do you see a significant decrease in the number of new startups in the sectors you cover? If not, why?
Priel: “Ibex Investors, as a generalist firm which invests across all verticals and stages, has the benefit of observing activity from pre-seed through pre-IPO as well as in the public markets. We have not observed a decline in the number of new startups being formed. Early-stage has remained relatively healthy in recent months, although largely dominated by Generative AI-inspired startups trying to tackle the space from different angles - namely cyber, MLOps, and productivity.”
Do you support the general assumption that AI can rescue the industry from the current crisis?
Priel: “While AI has the ability to automate tasks and boost efficiency, it is not a panacea for all challenges. It cannot single-handedly rescue the industry from the current crisis, which is driven by very real and serious drivers - rising rates, inflation, political unrest in Israel, etc. We believe there will always be a need for new and innovative technologies in all kinds of sectors/verticals, whether cyber, climate solutions or AI. And while the recent hype around AI has helped attract investor interest and inspired new startups, it is not powerful enough to overcome the negative headwinds altogether; instead, we believe that while some of the current deals that are happening in Israel and globally are motivated by the current hype around AI, most are closing due to structural factors unrelated to just 'AI' - strong teams, unique technologies, big visions, etc.”
Which investment strategies or financial tools have entered your toolkit of solutions? Are there any that are no longer suitable to offer to startups?
Gitter: “All tools are still in startups' toolkits from a financing point of view, but the difficulty of accessing each tool in the belt has changed. If, previous to this crisis, we’ve been successful in decoupling Israel’s security risks from investment in our ecosystem, now there is another risk that needs to be discussed and explained to investors, specifically those that are not typically active in the ecosystem.”
How should the venture capital industry conduct itself in the immediate and medium term? With investors, entrepreneurs, as well as the specific sectors in which you as a VC focus?
Gitter: “We have always believed that transparency is key, communicating, and over-communicating the good and the bad, just like we tell our founders to do with their investors. It is the only way funds can build trust with their LPs and make sure they stick with them through good and bad times. We continue to believe that Israel will remain a source of innovation, especially since the business for Israeli startups is never actually in Israel, but it’s also important to understand and emphasize with the LP perspective, especially those who are less familiar with Israeli politics and are really spooked by the headlines. Funds should conduct an 'open door policy' and be open for calls, questions, and sharing materials and perspectives about what is going on.
“We are anecdotally hearing about founders that are worried about the local turmoil and therefore either 1) list in the U.S., 2) reverse list in the U.S. if they’re already listed in Israel, and 3) Transfer some or most of their cash from Israel to the U.S. It is no longer a question of whether you should take action to mitigate potential risks from the reform but rather how far you will go with those actions.
“In sectors that are traditionally very IP-centric from the beginning (i.e., Healthtech, etc.), the decision to list as a non-Israeli company is likely more prudent at this stage, as fears over the independence of the judicial branch arise. Aside from that, there is very little sector-specific advice that we can offer: companies in all sectors should seek to continue their growth in a mode that is completely decoupled from that of Israel’s economy (as they are already), accessing the top talent in the world in order to build disruptive products for international markets.”

Are there positive sides to this crisis?
Gitter: “It is no secret that we’ve seen a massive bubble in VC in terms of round sizes, investment activity, and valuation; as a result, a cooldown would help clear a lot of the noise."
Gitter highlighted some points: “A market correction that would bring startup valuations to more realistic levels. This can help align expectations with actual performance and reduce the risk of over-inflated asset prices. Focus on fundamentals: We’re seeing a shift from a single focus on growth and hyper-growth towards fundamentals, profitability, and efficiency. Companies are compelled to prioritize sustainable revenue models, cost control, and profitability (vs. the grow-at-all-costs mentality we saw in the past few years), which would create stronger and more resilient businesses over the long run.
“There is an opportunity for brave investors: those who have the capital and courage to invest in the current crisis would reap the rewards on the other end. We see a lot of opportunities to invest in great companies with strong fundamentals and growth potential at relatively discounted prices. Talent availability: the current crisis has already resulted in layoffs and downsizing, which could help alleviate the talent shortage from recent years (especially on the technical front). Favorable competitive dynamics: a major market correction can help clear the playing field from “weaker” companies and hence leave room for more promising, bolder, and resilient companies to thrive.”
What are the critical points in which the Israeli venture capital industry was hit - if at all?
Gitter: “The first half of 2023 was characterized by very few deals getting done, specifically at growth stages, and a plethora of internally led SAFEs and extensions aimed at delaying external financings. The reason for the limited number of deals in this period has been the significant gap between the bid (valuations funds are willing to pay) and the ask (minimal valuation startups are willing to accept). These gaps were huge, as startups that have raised rounds at lofty valuations at the height of the market were still anchored on those values.
“Moreover, the divergence in 2023 growth expectations between startups (expecting a similar profile to 2022) to funds (expecting a challenging growth environment, particularly in SaaS) remains large. However, we expect this gap will close and the next phase of the cycle to occur soon.
“This new phase will be characterized by the following: 1. Many more deals completed, albeit at significantly lower valuations – previous valuation anchors will no longer "count” as most growth-stage companies will be valued on multiples. 2. Heightened M&A activity - Both camps are planning to get more aggressive in this next phase. For strategic purposes, there is a huge difference between companies with differentiated strategic value (may remain at similar prices) and ones with mostly financial value (may drop materially). 3. A widening gap between top performers and the middle of the pack. Ironically, startups that can show strong and efficient growth will find it easier to raise large rounds in this market, as their results will be differentiated from the rest of the market.
“Despite challenges, we firmly believe that the Israeli tech industry possesses the expertise to transform uncertainty and crises into opportunities. We maintain our conviction that this is an opportune time for building ventures as we actively seek out the promising startups that hold the potential to become the unicorns of tomorrow.”
What are the critical points in which Israeli high-tech was damaged?
Gitter: “We believe that Israeli tech wasn’t damaged in the sense of its quality. We still produce high-quality founders with the most innovative technologies and strong teams. What we believe to be damaging is the way the startup nation brand is being perceived by the world after working so hard to build this brand.”
When the local crisis ends - will the Israeli sector continue from the point where the crisis started (let's say January 2023), or has there been a setback that will make it necessary to invest time and energy to bring it back to that same point?
Priel: “If the Israeli government continues to legislate laws that weaken democracy, the crisis will deepen, and it will be harder to return to a position of strength. We are optimistic that the combination of a global market recovery and domestic political certainty, combined with the strength of Israeli innovation, will enable the tech sector to return to prosperity and prominence on the global stage.”