AnalysisVenture capital funds forced to slash targets amidst market turmoil
Venture capital funds forced to slash targets amidst market turmoil
Tiger Global and Insight Partners are among those grappling with the new reality, signaling a shift in investment landscape and uncertain times ahead
The crisis in the high-tech industry continues to impact American venture capital funds, leading them to announce reductions in their capital raising targets one after another. The latest fund to be affected is Tiger Global, which played a significant role in Israeli high-tech during the bubble years of 2020-2021. Many believe it was responsible for the inflated valuations of companies. Tiger Global has raised only $2.7 billion for its new fund, 55% less than its initial target, and stated its ongoing efforts to raise funds. Another fund, TCV, also reduced its fundraising target to 55%-75% of the planned amount, originally set at $5.5 billion.
Insight Partners, a New York-based fund, was the first to announce a reduction in funding for its 13th fund. In a letter to investors signed by CEO Jeff Horing, Insight revealed that it has lowered the target for its new fund to $15 billion, compared to the initial plan of $20 billion. Insight is one of the largest investors in Israeli high-tech. Considering the funding reductions by other funds, there is concern that Insight may further decrease its fundraising target to less than $10 billion. The previous fund, Insight's 12th, raised $20 billion in 2022, which was the reason for the amount set for the 13th fund.
Insight remains a substantial fund, larger than the entire Israeli VC market. Its investment approach in Israel has undergone a change over the past year, with a focus on early-stage investments rather than large-scale funding. This shift is significant for a fund like Insight, which requires billion-dollar exits to realize returns on its investments. In 2021, Insight invested $25 billion in startups globally, including many Israeli companies. Tiger Global also recently announced an investment in an early-stage Israeli company.
Insight has invested in 99 Israeli companies to date, with noteworthy investments including the acquisition of Armis, as well as investments in companies like monday.com, Wix, Papaya Global, Optibus, and Wiz.
However, Insight, Tiger Global, and many other funds are facing a new reality. After experiencing the height of the bubble, they are now witnessing a decline in the value of the companies they helped inflate. Economic uncertainty, inflation, and rising interest rates have placed these funds in a completely different situation. The number of quality applications from startup companies has significantly decreased. Companies are reluctant to raise funds at lower valuations than their previous rounds, and those not in immediate need of capital are hesitant to raise money during the crisis. Additionally, companies are prioritizing real growth based on sales, profitability, and cost reduction, rather than relying solely on investments.
2023 is proving to be a challenging year for raising new funds, especially large funds of tens of billions of dollars. Institutional investors recognize the attractive interest rates in the market, offering a return without significant risk.
The market conditions of 2023 differ greatly from the bubble years of 2020-2021, as well as from the confusing market of 2022. The focus now is on achieving tangible economic results, rather than relying on unrealistic predictions. The Israeli market is not immune to these changes, and Insight's actions have a direct impact on the local industry. However, the local market faces significant uncertainty due to the political situation, making it challenging for many players to make new investment decisions, even if they have the freedom to do so.
This year is expected to be difficult for fundraising in the Israeli market. In the first quarter, capital raisings dropped to only one billion dollars, with an estimated $1.2-1.5 billion for the second quarter. For comparison, in the first quarter of 2022, capital raisings reached $5.6 billion, followed by $4.2 billion in the second quarter. The first half of 2023 is projected to amount to a maximum of $3 billion, whereas the first half of 2022 reached $9.8 billion.
The sharp decline in capital raisings, from over $4 billion per quarter in 2022 (the second-best year ever for Israeli high-tech), to just a few hundred million dollars per quarter, is bad news for the Israeli market, particularly for companies in advanced stages seeking funding. Funds have limited appetite for investments at present, and Insight is not the only one reducing its fund and investment volumes.
However, there is a factor that could trigger an arms race, leading to billions of dollars flowing back into the market. The magic word of the current era is AI, specifically generative AI. Companies offering solutions, technology, or capabilities in this field are highly sought after and can raise tens of millions of dollars. 2023 and 2024 are expected to see significant investments in AI companies, potentially leading to a new bubble.