2022 VC Survey“Now is a great time to invest and even greater time for contrarian investments”
2022 VC Survey
“Now is a great time to invest and even greater time for contrarian investments”
Qumra Capital Managing Partner Erez Shachar has joined CTech to look at the 2023 investment space
“I think that like the crises of 2000 and 2008, it is now a great time to invest and even greater times for contrarian investments,” said Qumra Capital Managing Partner Erez Shachar. “In the 2000 crisis, for three years, no one was willing to invest in the internet sector. During the dot com crash, many online shopping and internet companies failed and shut.”
He continued: “The post-dot.com bubble cohort of internet companies became the largest winners still today. As growth in the technology sector stabilized, companies consolidated; some, such as Amazon, eBay, and Google gained market share and came to dominate their respective fields.”
Qumra Capital has invested in a variety of companies, such as JFrogg, Fiverr, AppsFlyer, and MinuteMedia. “The largest losing sectors of the current bubble burst (mainly in sectors like blockchain, crypto, fintech, digital health, etc) can eventually become the biggest winners of tomorrow.”
Name of fund/funds: Qumra Capital Total sum of fund: $800M Partners: Erez Shachar (Managing partner), Boaz Dinte (Managing partner), Sivan Shamri Dahan (Managing partner), Sharon Barzik Cohen (Partner and CFO). Notable/select portfolio companies: JFrogg, Fiverr, AppsFlyer, Riskified, Simply, Augury, MinuteMedia, At-Bay, Aquant, Ermetic, Tytocare, ConnecTeam, Datarails
Shachar joined CTech for its 2022 VC Survey to share insights about the industry and predictions for the year ahead.
If 2020 was the year of the pandemic, and 2021 was the year of records, how would you define 2022 in the VC sector?
The year of rationalization. If 2000 was the dot.com bubble, and 2008 saw the subprime crisis, 2021 was the “Unicorn” bubble. Each bubble is different in what drives the valuation inflations, but the burst of bubbles is actually very similar. I call the 2021 bubble the “Unicorn bubble”, as the real inflation in company valuations occurred in the private markets. Yes, public market valuations were inflated as well, but the amount of capital that was directed to the private markets was unprecedented, hence the absurd number of Unicorns created in 2020 and 2021.
The rising interest rates, soaring inflation, fear of recession, and geopolitical instability, are the trigger that burst this last bubble. We have seen the two previous market downturns, in 2001 and 2008, and they look very similar to 2022. Initially, there is a shock to the market, little deals are happening, and there is a big valuation gap between public and private companies, but over time, a year to 18 months, this gap closes, expectations of sellers and buyers are reset, and there is a rationalization of expectations and investment discipline. These are the best times to build innovative new companies, which are built on sound unit economics and execution discipline. Capital availability at zero cost is never healthy for building good businesses.
Who are the big winners of 2022 and why?
Funds that managed to raise capital and ensure they have the capital to invest in this very attractive market, companies that closed growth investments after the downturn, and companies that were able to create a path to profitability on their existing cash reserves. The next 2-3 years are going to be challenging, companies with cash reserves and companies who can demonstrate operational leverage that will bring them to profitability will be able to raise capital and will make it through to the other side. Companies that will not be able to do that will have a much harder time raising capital.
Who are the big losers of 2022 and why?
Non-venture investors that joined the venture party only in 2020-2021 as well as Non-traditional venture investors that started to operate in the venture market during 2020-2021.
What do you expect in the VC sector in 2023?
One should challenge the assumption that there is a large amount of dry powder available. Many of the mega funds that announced funding rounds closing in 2022 have allocated most of the funds prior to the announcement. What is left will be used to support existing portfolios.
I expect 2023 to be one of the best venture vintages in recent history. Funds that have dry powder to allocate will be able to assemble a great portfolio with outstanding, strong companies. Founders that have the courage to start new businesses in 2023 will have the opportunity to have access to smart capital, a growing and rational pool of talent, and a much less competitive environment.
New funds will be raised in smaller amounts. Qumra will continue to invest, these times are great for investments. The key to success for growth-stage venture capital firms lies in their ability to select companies with top-class teams, great product-market fit, and a proven go-to-market motion that could scale profitably. In general, a slow economy is a natural accelerator for screening companies, The Darwinian selection process is a very powerful one.
What global processes will affect (positively and negatively) the Israeli market?
Obviously, everything that was mentioned will affect the Israeli market. The local markets are affected by global trends and events. To that, we must add the current changes in local politics which can significantly influence the Israeli ecosystem, if local policies in sensitive areas will change for the worse, it will impact the Israeli market dramatically, and not in a good way.
How should different companies prepare for the coming year?
Large companies must work on strengthening their profitability, continue to generate cash, and optimize their unit economics. Recruitment should be done wisely and efficiently. Companies need to evaluate who and what positions are truly required, this applies to all companies. Medium-size companies should be stable and show a rapid path to profitability. In terms of penetrating new markets and sales, there is no right or wrong, it is very company specific. Early-stage companies are required to grow towards the next funding round while proving Product market fit while showing converging unit economics.
What will be of the dozens of unicorns born last year?
In 2019 in our fund presentations, we focused on companies reaching $100 million ARR as the key KPI to the success of companies rather than their unicorn status. Recently, the term Centaur was coined to describe these companies. Companies that got to a unicorn status while also being centaurs are going to be in pretty good shape going forward and are probably going to “grow into” their valuation. Companies that were crowned as unicorns with revenues in the low double digits will have a much harder time justifying their previous valuations and will have a harder time in their subsequent rounds.
What sectors will experience an acceleration in VC investment and which will suffer a slowdown - and why?
SaaS B2B companies are in a good position as IT spending is continuing to grow through recessionary environments. The consolidation of SaaS sectors is inevitable as the number of vendors selling to organizations will decrease and smaller businesses will be consumed by larger businesses. AI and ML are going to continue to grow and dominate IT spending. Technologies that are transforming the way entire industries operate or consume will flourish during times of recessions. This is the best time to build large companies. Some of these we will see in the food tech, aggrotech, and supply chain-related sectors.
HR: Do the layoffs, those that have already happened and those that are coming, help to fix in any way the distress experienced by companies over the past 2-3 years?
Layoffs helped and will help to fix the distress we witness among almost all companies. Too much fat is not healthy for a startup, and this is the time to go back to what we excel in as an industry – super-efficient operations and cutting-edge technologies. Israel still has a shortage of tech talent, but we are getting back to the days of rational employment, we will see stability and normalization of compensation and incentives. The current economy affects workforce behavior and productivity is improving.
Datarails, ConnecTeam, Qumra Capital’s notable portfolio companies
Datarails: Datarails is a financial planning and analysis platform (FP&A) that automates data consolidation, reporting, and planning while enabling finance teams to continue using their own Excel spreadsheets and financial models. Automating these time-consuming manual processes paves the way for finance teams to spend more time analyzing data and less time gathering it.
Founders: Didi Gurfinkel, Eyal Cohen, Oded Har-Tal Founding year: 2015 Number of employees: 200
Explanation behind investment: DataRails built an automated, cloud-based platform for financial professionals that enables the collection, reporting, analysis, and collaboration of data with ease. With the notion that excel is being used today by practically every finance person worldwide, DataRails has developed unique, proprietary capabilities to transform them into database-like configurations. With this unique set-up, DataRails enables many customers for the first time to upload all financial data to the cloud, providing continuous agility and enabling content sharing and collaboration. DataRails in essence transforms the way financial teams in small to mid-size organizations operate as they can now automate processes to become the company’s de facto BI platform. DataRails is selling to SMBs– a huge unserved market. Globally, there are 2.8 million SMB and mid-size organizations, creating a huge addressable market for DataRails to grab. The company grows extremely fast over 250% YOY which indicates the strong product market go-to-market fit. Datarails’ founding team is strong and experienced driving the company to be a natural market leader.
ConnecTeam: ConnecTeam is a workforce management app for non-desk employees that allows managers to put their business processes on autopilot and focus on business growth while also freeing up employees to be more productive, flexible, and happy. ConnecTeam develops a mobile business optimization service designed to help businesses create their own mobile apps for managing their staff. The company’s system integrates with an online platform to create mobile training manuals, establish communication between management teams and employees, and assist executives with the monitoring and management of their remote employees.
Founders: Amir Nehemia, Daniel Nuriel, Yonatan Nuriel Founding year: 2016 Number of employees: 240
Explanation behind investment: Connecteam developed a mobile-first, SMB-focused SaaS solution for deskless employees. ConnecTeam is an “all-in-one” app that allows users to manage, communicate, engage, operate and train deskless employees easily and effectively through their own mobile devices. Deskless employees comprise 80% of the global workforce today, estimated at 2.7 billion people who do not have access to corporate email or PC. The deskless workforce market is aimed at technological disruption that will create a better way to manage, communicate, engage, train, and oversee operational execution.
ConnecTeam is led by an extremely talented executive team with previous high-tech/startup experience. The company has a very strong execution in a real PLG model growing more than 200% YOY growth. We highly believe in it leading a significant global category.