Q4 2021: VC Industry Trends

Towards the end of one year and as we prepare for the next, it seems like a good time to take stock of where this industry is going. Venture has been on a wild ride these past couple of years, with the initial hesitation in Q2 2020 brought on by the pandemic quickly becoming the catalyst for some of the industry’s most exciting quarters ever.

I won’t focus on the changes in how VCs operate, as that has been covered elsewhere. For example: The move to virtual meetings and writing a check without ever meeting the founding team in person are definitely a significant shift. Whether these remain acceptable post-pandemic, only time will tell. But unlocking global investment opportunities is definitely an exciting trend as investors learned that there are great teams to be backed in places other than a firm’s backyard. A trend that was just beginning pre-COVID19.

The current talk in the VC industry seems to be regarding a split between three investment strategies.

The first group are super-angels/accelerators/crowdfunding-platforms that continue their spray-and-pray approach to investing. Writing relatively small checks across many opportunities. Some may then double down in later rounds, but only on the perceived winners. I assume that promise is the strategy behind SoftBank’s Vision Fund investment in OurCrowd, a Jerusalem based crowdfunding platform.

The second group are the traditional VCs. These large funds are investing capital at a ridiculous pace, based on a strategy I could only define as “there is more capital out there, so let’s do this round and then quickly go get more”. These quick and large rounds inflate valuations making the VCs look good on paper so that they too can raise more capital before the markets cool off.

Let’s take a closer look here: As the larger players from PE and banking move downstream to play in the late-stage venture sandbox, these larger VC funds are forced to move in one of two directions. The first option is to innovate and create new opportunities for their investment thesis. These are firms like A16Z and Sequoia who are creating new methods for investing or finding their way into the public markets (which Ibex, formerly Lazarus, had been doing for years as a hybrid fund for private and public equities). Alternatively, they can move into the earlier stages of VC, bringing with them massive check sizes and out-of-proportion early-stage rounds of funding. This latter move can have dire consequences for founders.

You have heard my criticism of the approach to unicorn-building practiced by some VCs, pushing capital into companies at valuations that are unjustified with a hope that the value will be backfilled after the round. These do not always work out (WeWork anyone?) and ignore the fundamentals of building a business. This now seems to be happening in overdrive. To me this means that such investment decisions cannot be backed by real diligence or risk analysis. As Gil Dibner of Angular Ventures cynically asked in a recent blog post on this topic: for a large fund that believes there is more capital right around the corner – “why shouldn’t they just invest in everything?

The third type of investor are pre-seed/seed stage funds like ourselves who seem to be avoiding the temptation of joining this free-for-all approach to venture capital. The best founders are also probably (hopefully?) avoiding the hype, taking only the capital they can actually use to build the best company that they can and from the best partners with which to do so. Eric Paley of Founder Collective covered this is in an important article on TechCrunch back in 2018 and it seems even more relevant today.

Remember, if 9 out of 10 startups fail (in Israel it is actually more like 1 out of 20 which succeed) then it is only a fraction of those successes which become unicorns. Of those who become unicorns, most will take a decade to do so!

We cannot try to compete with a brand name $B fund who decides to write checks from $100k to $50M, active everywhere from Seed to Series C. As early stage VC investors we need to write smarter checks. We need to refocus on the needs of the founders from their early stage investors. Before investing, we must take the time to create conviction in the team, their tech and the market opportunity so that we can truly be of value on their journey.

This is a strong investment thesis that requires us to filter out the noise from all the hype and resist FOMO. We are driven by a belief that this is still where the greatest returns can be created for venture investors, as a multiple of cash-on-cash return. At SapirVP we are doubling down on the strategy of investing in 50X opportunities. These are the long-term horizon, and at times contrarian, opportunities that can change the world. Change takes time so the capital needs to be patient.

To be sure, our strategy also carries new risks in this changing market. This abundance of capital could lead to some of our companies getting acquired earlier than expected, as larger rounds enable players to consolidate within their market (especially if they need to backfill value: revenue, product or talent). It will require a delicate balance between timing and exit size in order to realize the multiples of return that we are seeking.

That is another reason why being aligned with the founders is the strongest position to be in. A core part of our investment strategy. As every VC always says: It is all about the people.

HR Bonanza

It is exciting to see so many of our portfolio companies growing, raising capital and hiring talent.

Across industries and roles there has been a spike in the cost of adding this new talent. As I keep hearing that the asking “price” for top talent s skyrocketing I noticed two additional trends.

The first is that the uneven balance across geographies seems to remain. While talent costs have risen in CA, NY/BOS and in Israel, they all still seem to stay relatively priced. Meaning, if the overall cost of talent has risen 30% then it has done so evenly across geographies such that a programmer in Silicon Valley is still proportionately more expensive than their peers in Boston or NY and Israel.

The second trend seems to be the coming-of-age of HR startups. As these companies join the unicorn club I would like to believe that it is due to their commercial success. These new tech driven HR services are delivering value to their customers. The hiring companies and the candidates.

I have yet to see anyone try to link these two trends. But could it be that these new efficiencies in the HR market are being translated to higher salaries?

If so, then this would come as no surprise considering the information-revolution we have been living through over the past 30 years. But there is a potential downside. The divide between the “haves” and “have-nots” could become even fiercer.

Candidates with the right key-words on their profile will be ranked higher. These will most assuredly include top ranked schools, degrees and previous employers. Candidates with better peer reviews and greater social reach will naturally be perceived as better fits rather than giving a chance to someone who has yet to find the right place for her to shine.

I am not minimizing the power of these matching algorithms and I do not have any inside information on how these companies operate. But based on recent revelations about Facebook, it seems clear that there is still significant room for improvement before we can fully rely on algorithms for our hiring. This imperfection may include over-inflated salaries that may be reduced if/when the bull market ends and tech companies need to reshuffle their budgets to carry them further while they refocus on generating revenue with better margins.

In such a situation, it will be the big names that prevail. The smaller companies who pulled talent from the larger players and were forced to match salaries paid there will be in a tight spot. And while equity option grants are supposed to subsidize these differences, the perceived value of these options will be dependent on the state of the market and expected time to realizing their value.

As we enjoy the years of plenty, it probably makes sense to keep an eye towards the future and potential of leaner years. So enjoy the higher salaries but be sure to save for a rainy day.

Focus

This is part of a series of posts capturing my thoughts during the Jewish High Holidays and the new year, as we emerge from the pandemic.

We talk a lot about focus in the start-up world. Founders hear this advice all the time: you need to focus. On product development so you can ship on time. On customer engagement so you can find product-market fit. On sales so you can hit your numbers. All true. And yet, it feels like something is missing…

At the early stages of the company, the most valuable asset is the team. All investors say that they invest in people, but I have come to realize that means different things to each of us. We look for passionate teams who want to make a positive impact on the world. These usually take time.

It typically takes years to transform a startup from a fantasy into a real business. Sure, there are small milestones along the way that help make the startup more real, but the road to reality is long. Be prepared!

Eric Paley on Twitter @epaley, Oct 7, 2021

So we need to consider what “focus” really means in this context. I’ll share a couple of thoughts here as I relearn how they apply to me.

Short-term vs Long-term

Focus is often misconstrued as short-term thinking. That is simply untrue. Long- or Short-term thinking relate to the goals you set for yourself. 30/60/90 goals will be different than annual or legacy type goals. Focus is about taking the steps that will move you closer to those goals. It is the trade-off between what you can do right now to move yourself forward, no matter which goal you are pursuing.

Many times the actual number of options and possible outcomes could lead to decision paralysis. So we just go with the flow. Sticking to our comfort zones and knocking out the easy tasks. We often fool ourselves that we are being productive because the number of items being checked off the list is longer than those remaining, despite knowing the outstanding tasks are more challenging.

In a great blog post, in which he shares his personal story about selling his company to Salesforce, Mark Suster asks the following questions:

How do you process your company’s biggest decisions? How do you live with uncertainty and stay focused?

Mark Suster, Both Sides of the Table, Oct 9, 2013

Mark goes on to share what works for him (music and running) to create that focus. It doesn’t matter what works for you (though some activities are more positive than others) the key is disconnecting from the grind, from being in the weeds, and letting your mind wander. Then when you are ready to refocus, it will be even sharper.

Take the Day Off!

In our pitch-deck, when raising capital from LPs, we state that we take a day off each week and encourage our portfolio founders to do the same. For me this is Sabbath, the 7th day, and is done as part of a greater set of beliefs. But the research around the importance of this practice has been validated many times over.

Being overworked and stressed does not lead to better productivity or superior results. How much has been written about the importance of better work-life balance over the past decade? – Breaks provide a boost to energy, renewed focus and enable greater creativity. Taking a step back, removed from the details, and then reengaging makes a world of difference.

This is true for vacation time as well.

I’ll share a personal example. The other night, in the middle of the week, I decided to watch a movie with my son. He is into cinema and we often discuss some of the classics which my dad forced me to watch with him usually late at night when I had an early start the next day (Thank you Abba!). My son had been home for the Sukkot holiday and happened to have no plans for the evening. It was an opportunity that I decided to be spontaneous about.

We watched the Maltese Falcon. Still a great movie, with powerful acting and terrible stereotypes (and still not as good as Casablanca!). The clearer picture (saw it originally on the ~28″ CRT that we had growing up) actually made it easier to follow the plot and helped appreciate the acting even more.

Besides the quality father-son time and another topic we can discuss next time we have a long car ride, I found that taking the evening off really did make a difference. I had more energy and clear-mindedness the next day which helped me focus. It was extremely productive. I guess I was not practicing what I preach as well as I could have been.

Life moves pretty fast. If you don’t stop and look around once in a while, you could miss it.

Ferris Bueller, Ferris Bueller’s Day Off

One of my favorite quotes from one of my favorite movies. Words to live by. Of course, the problem came later in the day when I was tempted to close my laptop a little earlier and head back in front of a screen to see what else I might be able to enjoy. I didn’t. I stayed focused. But I will definitely be looking to add some of that “down” time into my routine so that I can enjoy the benefits.

I suggest that you do too.

Signaling

Another quarter has passed and it seems that we have little “news” to report from the venture ecosystem. New records were set for venture funding since Q1, when the previous record was set. We are seeing the impact of the continued return to offices and normal life in the US. Hopefully, this new variant will not create setbacks, as we are witnessing in Israel.

As we consider these trends, one thing becomes clear: the pace for venture funding has sped up significantly for “hot” deals while it may have even slowed for every other company looking to raise capital. This dichotomy is enhanced between those companies that truly standout and those that still have much to prove.

To be sure, in both camps there are winners to be found and losers to be avoided. But identifying them becomes more complicated since previously valuable signals are now blurred. For example, time to closing a lead investor and agreeing on terms is not necessarily a good indicator anymore as to the strength of the team or opportunity.

It may be taking longer than expected because demonstrable performance metrics have expanded and a renewed expectancy of potential returns in other sectors (real estate? NFTs?) might make venture funding slow down considerably in the next 12 months. On the other end, a top-tier-fund term sheet presented within a week of a first meeting shouldn’t carry the full weight of the brand name investor who clearly could not have completed the necessary diligence to invest with conviction.

Problems with signaling have always existed. The most common being “why aren’t previous investors joining the current round?”. This is a valid question in some instances and less so in others.

For example: In the past, if a company was accepted to an accelerator program and didn’t get funding from the accelerator, or its affiliates, after “graduating” then this was a problematic signal. The solution? The accelerator programs give everyone equal funding. This was like a participation award.

However, the accelerator leadership knew which were the truly exciting companies and wanted to invest more in those. They are in this to make money too. So maybe they added an additional funding tranche which were given only to companies which hit certain milestones. This could be a requirement to raise a follow-on round within X months of graduating the program, for example.

This would then allow the accelerator team to “push” the company in front of friendly investors who are connected to the program. These investors would lead a round and the accelerator would join in. Not entirely kosher, but actually seems fair to me. Clearly the companies not being recommended are getting dinged and not enjoying the full prestige of the accelerator brand. And I am sure it is not always entirely based on performance or potential. But I am not a huge fan of participation awards. So unless the original funding was designated for use during the program to cover expenses and allow the company to take advantage of the opportunities the program creates, then this model seems to be required due to market forces. There are some programs that state this clearly and structure the support accordingly.

[As an aside, I fully recognize that what I am describing contributes to the lack of diversity in tech. It could also be used as a way to “level” the playing field unfairly if the dial were turned to the other end of the spectrum. Extremes are not good place to play.]

Accelerators are either investors themselves or backed by investors. Alignment needs to be created to accept the best companies, work with them all, but then continue to invest only in your best bets. A good selection process will help minimize the drop-outs, but I’d be surprised if anyone could have a perfect record.

This is what good investors learn quickly, and what I am learning the hard way. Every investor invests in people. They believe in them and their ability to execute on their grand vision to make the world a better place. So when things go sideways we try to help them get back on track. But when do you know that it is time to let go and focus your energy on your winners?

The famous scene in Glengarry Glen Ross (1992), where Alec Baldwin’s character Blake is giving the Always Be Closing speech*, was given new meaning for me during a great Sales class in business school. Another layer was added to the A-B-C of sales. The key is to invest in your A players as they will generate the greatest return on investment. Support your B players to see if they can become an A level player. But cut your C players as quickly as possible since they aren’t carrying their weight and can sink the entire ship if resources are wasted trying to help them get to B level. They are just too far away from the A level players you need in your organization to be successful. First place gets the Cadillac, second place gets the steak knives. Third place prize? You’re fired.

This is true for investments as it is for team members. Though sometimes the team member is just not a good fit for the specific company or the specific role. “Firing” a portfolio company is something that I am not prepared to do, unless they have crossed a line. We won’t bail when times get tough, but we might be less involved if our efforts are not well received or misplaced. After all, Like all investors – we invested in the people, right?

As I shared this story with a couple of founders this week, I made it clear that both of these situations – firing a team member or watching a company fail – are really hard to navigate. Assuming you are a decent person with a smudge of empathy.

* I read on IMDb that this speech was not part of the original play on Broadway but written by David mamet specifically for Alec Baldwin who performed it magnificently such that in later stage productions it is often incorporated.

FFF: Fundraising, FOMO and Failure

Reading the tech headlines could lead you to believe that every start-up company out there is either raising a massive funding round, is merging with a SPAC or has just listed for a record-breaking IPO. I am here to remind you that even if one of these headlines (or tweets) is not about you or your company, you have not failed. Yet. This is an open letter to help you focus on creating success rather than worrying about others.


Soona @soonaorlater
Seeing more $50m rounds for companies that don’t have a product yet. We’re at that point in the cycle where investors will gladly take on pre-seed risk at a Series A price…

12:46 AM ·May 14, 2021·Twitter Web App

Sure, the market is frothy. There is a lot of exciting activity. Companies are raising significant capital at high valuations. Some may seem like they have less traction than you or a lesser product/service offering. But we know that is not necessarily what wins the day.

It is all about the ability to execute. Creating traction across all elements of building your company – scientific breakthroughs, technological development, product-market fit, customer acquisition, retention and margins. It is about gathering the best talent around you – hires, investors and customers – to sustain long-term growth towards that elusive unicorn status. There is a reason that these are rare.

Let’s put things in perspective. Most of these record-breaking capital infusions are going into later-stage deals. PitchBook data indicates three-quarters of all VC investment dollars in the US during Q1 2021 were deployed in late-stage deals, the highest portion since 2010source. Meaning, that these overnight success stories were years in the making.

So in reality, these stories should be inspiring for younger companies and founders at earlier stages. Hard work can lead to great success. Prove your ability to execute and develop the necessary traction for your current stage, and then your company can receive strong backing for its next phase of growth.

But it seems that the opposite is occurring. Too many founders who are still on the fundraising journey for their Seed or Series A rounds are scratching their heads as to why they are not closing investors as easily as the media portrays it. Each new headline on TechCrunch has them scratching their heads asking “why isn’t that me?”.

Founders have figured out that they can raise capital from their kitchens, bedrooms, and offices in weeks vs roadshows that lasted months. I don’t think we will see founders going back on the road in any material way ever again.

Fred Wilson: https://avc.com/2021/05/in-person-vs-on-screen/

It seems like we have become impatient. We do not respect the process or appreciate the journey. The pandemic has created efficiencies that should change our industry as Fred Wilson points out in the quote above. But I do not believe that there are any shortcuts. You put in the work, you get the traction and then you will get the reward. However you define that.

A word of caution. I constantly warn founders that one good meeting does not equal a term sheet. You should not be counting your chickens before they hatch (thanks mom!). This is especially true today where the abundance of investment capital may further create a perception that a deal is done way before it actually is. Don’t make that next hire, or close that new lease (assuming you still plan to have an office), until the money is in the bank.

Everyone is out raising capital. Like others, I thought it was a seller’s market. Meaning, I assumed that the startups were setting the prices and the investors were competing to get into deals. I am not so sure anymore. The bar for any given round has been raised from where it was set a year ago. The large rounds and higher valuations are due to market forces on the investors side – they need to deploy more capital quickly and cannot dilute the founders too much while doing so, hence we have higher valuations for companies with limited traction.

To be sure, the competitive landscape amongst investors creates opportunities for smart founders who can take advantage of this. That being said, certain fundamentals of a high-growth potential business must still be solidly established to receive investment dollars. What those are seem to be getting a little blurry.

I was recently exchanging messages with a friend who is a VC at another early-stage fund. I asked them this question straight out: If the team is strong and the science exciting, with large potential markets it can be applied to – what else can you be looking for to pull a trigger on a seed stage investment?

His response: “…”

I think that sums it up pretty well.

Another VC Fund?!

I’ve been spending a lot of time thinking about what differentiates us as an investor. This was triggered from two different directions. The first is the explosion of new venture funds. It seems everyone I talk to is raising a fund these days. The tech media headlines indicate lots of capital looking to be deployed, at all stages. Differentiating your product is necessary to stand out in a crowded market.

The second, and more important consideration is rather from the other side of the table – why would a founding team choose us as an investor in their company? To be clear, it is a founder’s market today. These large amounts of capital looking to be put to work has led to a rise in valuations and we are seeing deals closing faster than ever (at least for the 15 years I’ve been exposed to venture, I was focused elsewhere in the late ’90s – early ’00s).

[As an aside, the above concerns me because it seems that one of two things are behind it. Either investors are making bets (no other word for it) without doing the necessary diligence. Or, investors are backing “cookie-cutter” founders without considering the hidden-potential of diversifying across first-time founders, female founders or minority founders. Others have written at length about these meaningful topics so I will refrain from digging in here, though that should not diminish from the importance of the conversation.]

Coming back to thoughts on differentiating SapirVP as an investor, we always refer to our tagline of: “Mentorship Driven Investing”. Is this really differentiated? – Today it seems that every micro-VC team claims to be “founder friendly” and “value-add” investors. Are statements like these based on the assumption that every other fund is not adding value? Only emerging managers can add value?

Maybe. We have all met investors who were less engaged and less helpful. These are probably not good early-stage start-up investors, or not a good fit for the company. Some advance diligence regarding the investor may have helped the company avoid that experience. Maybe not. Either way, these investors are not the majority and the market forces should be working against bad players so that they don’t stick around for long (though performance cycles in venture are long, so this is all relative). Most investors, even those who have already had great success and have $B AUM, are in this business to add value. As it should be, because: Venture Capital is a service business.

We only have two types of customers: Founders and LPs.

For LPs the service is primarily financial – take their capital, invest it, report on your progress and do your best to return exciting multiples within a reasonable timeframe. Some LPs are looking to create impact, increase diversity or identify potential strategic value. However, for most LPs the transaction is a financial investment at its core. The service elements here seem clear. Good GPs will be transparent and can stand out by offering unique opportunities of value creation for the LP. While popular in all VC pitch decks, I am not sure that a “unique” investment thesis is enough of a differentiation in today’s market. It is probably more important to show “product-market fit” between the fund (team, size, geography, focus) and the strategy.

Founders should also be sure that they are getting a service. The service level should fit the needs of the company. Industry expertise as well as stage expertise. A biotech spin-out from MIT establishing a scientific innovation as a commercial offering needs a different type of “added-value” than a Series A consumer product company looking for hyper-growth. Some founding teams are seeking the “roll up our sleeves” hands-on involvement to navigate the early-stage foundation-forming period, while others are content with taking capital from an investor and then only engaging with them once a year for the annual update (I advise all founders against this, for various additional reasons detailed in a separate post).

Founders should choose carefully which investors they choose to engage. Not all capital is equal.

The most common term thrown around by VCs is that they are “founder friendly”. Like many informal terms, this seems to mean different things to different people. I’ve found that the gap between speaker and audience can be pretty big when it comes to understanding what this term means.

For us this means that we recognize that the founders are the company. The investor is just along for the ride. Our mission is to find the best way to add value during the different stages of the journey. This can vary from team to team and from company to company. This is what we mean by “Mentorship Driven Investing”. It is a tailored experience, based on the core foundations of our mentorship-model, establishing this relationship even before we invest.

I just threw out another vague term…. Let’s unpack this further.

I’ve come to define Mentorship as the combination of Experience and Empathy. Experience is valuable, but it needs to be shared in a way that it can be received and make a difference. Sitting around telling stories of your glory days will provide few practical tools/lessons for a founder. Using a story to illustrate a situation or share a new perspective will create new neural connections and inspire innovative thinking.

Mentorship is showing, not telling. The mentor serves as a personal example and as a guide. But you can’t just do it for someone else, as they will never learn to do it themselves. And you don’t need to have all the answers. Just ask thoughtful and thought-provoking questions.

The mentor should always be there to help pick up the pieces and help make course corrections. Mistakes will be made and **** happens. It is not about you (or your ego), it is about the founders building an amazing company.

Mentorship is not about being a friend. Friendships may (and should) develop. But the mentor need not try to be a friend, especially if it will make it impossible to have the necessary open conversations about what is best for the company. A mentor is also not a teacher, at least not in the sense of making rules, handing out tasks or giving exams. Inspiring creative thinking and continued learning are great.

I think that we embrace the service mentality in a unique way, but we don’t say “founder friendly”. How then should we convey this to the world?

Earlier this week, my friend Shimon – a successful serial founder/CEO – told me that he thinks that we are “Founder Respectful”. He said some very nice things about our approach vs some of the investors he has dealt with. My takeaway from that conversation is that the empathy element we incorporate into these relationships – as mentors, not friends or investors – is where we truly stand out. It makes all the difference to the founder. This in turn gives the company a better chance of success. Said success should result in those multiples of returns we look to provide to our other customers, the LPs.

Creating alignment across the LP-GP-Founder ecosystem. Multitiered value-add. Practicing what everyone preaches: “It is all about the people.

Study: Covid19 Impact on the Israeli Early-Stage Ecosystem

The world has changed. While we yearn to return to “normal”, the impact of COVID-19 on our lives will create long-lasting change. As far as technology adoption, it will hopefully be for the better. Digital health, vaccine discovery and manufacturing, work-from-home, digital educational tools and e-commerce have all made significant leaps towards mainstream adoption in 2020.

The stock market continues to rise and the headlines in the tech industry are filled with IPOs, SPACs and massive investment rounds. Away from the headlines, we felt that the start-up ecosystem seemed ok, maybe even good, but not crazy good or depressingly bad, like the media has made it sound. We decided to take a closer look at the data which might otherwise be obscured by these dazzling headlines.

We started by collecting data from PitchBook and CrunchBase on over 600 companies that had announced fundraising events in 2020. We analyzed the data and scraped it to 150 companies which fit the criteria matching the stage, industries and geographies where we are active investors. This enabled a comparison to what we were seeing out in the field. To compliment this, we conducted a survey to take a deeper dive with a representative subset of over 30 companies which matched these criteria.

At the highest level, PitchBook reported that in 2020, “investors deployed $156.2B into start-ups, liquidated $290.1B of value via exits, and closed on $73.6B [of new capital] in traditional VC funds.“[1] Clearly a frothy market. But where are all those investment dollars being deployed?

Pitchbook continues: “…the investment cycle, seed-stage and first-time financing activity fell sharply, proving a more challenging fundraising environment for newer entrepreneurs.”1 CrunchBase supported this conclusion reporting that, globally, seed funding in the 4th quarter of 2020 was down 27% year over year, and early stage funding was down 11% year over year”[2] – despite the sense that the market was coming back with the end of the pandemic in sight due to the vaccinations.

Our survey data showed differently. From the responses we collected, the majority of the companies in our survey who successfully raised capital in 2020[3] were early-stage start-ups (pre-seed, seed, seed+). Our survey further showed that 61% of the companies had planned to raise capital in 2020, of which 68% succeeded in doing so. Of those who raised capital successfully during 2020, about 53% raised up to 3 million USD, another 20% raised up to 10 million USD, with the remaining raising either above 10 million USD or preferred not to say.

Furthermore, there does not seem to be a high correlation between companies who were able to raise capital in 2020 and the existence of a prior relationship with the investors, or whether an in-person meeting with the investors occurred.

One possible explanation for this difference between the data sets is that seed rounds are not reported when they occur but rather at a later date, whereas the survey data was collected directly from start-up executives and founders, reporting anonymously.

 While pre-pandemic the Series A Crunch was a real concern for seed stage companies looking for their next round, from our analysis it seems that there was a clear reduction in early stage companies receiving seed, and even pre-seed, investments. The “crunch” seems to have expanded to the earlier stages, raising the bar for receiving funding. Investors were being even more risk averse with their venture capital. We also derived that later-stage companies (series B and beyond) were impacted in a very limited way by COVID-19, far less than was expected at the beginning of the pandemic[4], with late-stage and growth funding up year over year by 4% in 20204.

To address this new/expanded “crunch”, professional pre-seed and seed investors need to be able to move quickly, yet responsibly, to pursue promising opportunities.

The impact of the pandemic goes far beyond capital raising. Over 83% of the companies responding to our survey stated their business operations were affected by COVID-19. The areas that were affected most included sales, marketing, operations and R&D (in that order). Over 76% stated they adopted a work-from-home (WFH) policy with positive results. This corresponds with PitchBook’s findings[5] showing that more than 80% of US employers said enforcing WFH has been successful for their company, according to a late 2020 survey by PwC which included 133 executives and 1,200 office workers.

Many companies also had to reduce their employee headcount, prioritize new products or customize existing products while implementing cuts across administration costs, operations and even salary cutbacks. These responses support Ethosia’s year 2020 conclusion, presenting a 7% salary drop in the Israeli high-tech industry for the first time in the last decade[6]. On the bright side, PitchBook stated that almost 90% of private companies in the U.S. said they are hiring in the new year (2021)4.

A deeper analysis is required to understand who were the early-stage companies that secured funding and growth in 2020. The data lends itself to several hypotheses, including for example the power of top-tier (rockstar) teams and specific industries enjoying hyper-growth pursuant to the changes demanded on our lives due to the pandemic.

In conclusion we asked each founder how they felt about their company going into 2021. Despite COVID19 having a negative impact on most industries, it seems like the tech industry was harmed less: just over 80% of our respondents believe their company is positioned for hyper-growth in 2021, and most respondents declared their company’s valuation has increased over 2020, painting a picture of an optimistic future. We would expect nothing less from a start-up founder pursuing their dreams.

We hope that you – founders and investors – find this study useful as you look to navigate the early-stage Israeli start-up ecosystem in 2021. Please feel free to reach out with any questions or to share your own experiences and insights.

**This study was conducted with Dana Rosenfarb from MIT. Thank you Dana!


[1] “Venture Monitor, Q4 2020”, Pitchbook, NVCA

[2] “Global VC Report 2020: Funding and Exits Blow Past 2019 Despite Pandemic Headwinds”, Gené Teare, CrunchBase

[3] 77% of the respondents were early-stage startups: pre-seed, seed, seed+ and Series A.

[4] https://medium.com/sequoia-capital/coronavirus-the-black-swan-of-2020-7c72bdeb9753

[5] “Job market outlook for 2021: More hiring and more remote workers”, Priyamvada Mathur

[6]“2020 Year Summary”, Ethosia, https://www.ethosia.co.il/content/לראשונה-מזה-עשור-ירידה-של-7-בשכר-הממוצע-בהייטק-בשנת-2020-0

Raising Funds: Q1 2021

Strong performance in the markets has encouraged many companies to accelerate their fundraising plans. Investors, in return, seem willing to discount certain metrics that used to be required to justify the next raise or uptick in valuation. Nobody wants to miss out.

While the tech media headlines seem full with new such announcements each day, I am not sure that it is that easy for everyone.

Take for example a first time founder. They probably have a limited network to begin with. And it takes time to develop the necessary relationships and to build trust. The same fund that just wrote a large check to a serial founder may not show as much enthusiasm for this new founder’s company. They will want to conduct more diligence, spend time with the team and get to know them, their product and their market much better before making a decision. That longer process may leave the fund with less capital to invest, a potential conflict if they already backed a company in this space (or if a portfolio company pivots in that direction) or just lost in the noise of other deal flow.

Sure, if this founder came from the right military unit, university program, unicorn, etc. that would help get some initial attention. The selectivity and pedigree of these previous roles are a clear indication of the top-tier individual/team. Or at least it used to be. But funding is far from guaranteed just because you have the right logos next to your name.

So what does one need to do to get a new investor onboard? Here are some ideas for you to consider:

  1. Stand out. In a positive way.
  2. Prove that you can own your niche – industry, technology, market segment.
  3. Become “the” expert in your space.
  4. Develop your story, materials (deck, financials) and team to support the above.
  5. Don’t hesitate to ask. Worse they can do is say “no”.
  6. Be persistent, yet courteous.
  7. FOMO

I am not sure about this last one. But it seems to be a powerful element in the VC industry where we can find herd mentality driving decisions. I prefer to focus on developing momentum, achieving smaller wins as building blocks for success that could inspire others to join you on your journey. At some point (the tipping point) it will become an avalanche of interest. That is a better place to be than FOMO driven interest, IMHO.

In raising a fund, emerging VCs face many of the same challenges mentioned above. Based on my personal experience only, it is even harder to raise capital for a fund than for a startup. With a fund the investor has even greater uncertainty since they do not yet know what the portfolio will look like. There is no FOMO.

I think that the key here is rolling intros. Introductions from those who decided to get onboard, to others they can potentially influence, or at least get you an audience with to make your pitch.

My suggestion: Ask everyone, whether they said “yes” or “no” to your pitch, to introduce two others from their network who might be interested in what you are putting together. This will create a flurry of warm intros to mostly relevant supporters. Close one, and then another, as you start to create that snowball effect mentioned above.

Branding Thoughts

I have recently been thinking a lot about brands. This has come about from multiple directions. Some external, and some internal as we navigate our path for growth at SapirVP. My friend Jonathan Friedman over at Lionbird recently shared his thoughts on the topic in his newsletter.

In a follow up call shortly after, Jonathan shared further insights from his journey in building Israel’s leading e-Health venture fund. This conversation spurred me to put some of my thoughts down on paper. Jonathan – thanks for the inspiration.

A strong brand is a powerful tool. Like other powerful tools it takes significant time and effort to create one. And despite being powerful, brands are actually very delicate. One bad move, or even a mistake, can damage the value you worked hard to create.

While the above seems true as a generalization, the nuances and details are specific for each case.

Let’s take a consumer brand as a first example. Simon Sinek, in his book Start with Why? explains the Apple fandom as being way beyond great tech and an amazing user experience. Rather, he claims that it is a company on a mission which others want to be a part of. It took decades for this type of loyalty to develop and it was not necessarily part of Apple’s strategy from its early days.

Others may have argued this before me (please share references.) but I would suggest that in his second term as CEO at Apple, Steve Jobs brought with him a very important skill learned from Pixar: Storytelling.

Sure, Steve must have been good at pitching his company and selling his vision earlier in his career to have gotten that far. But what Simon describes goes beyond all that. It is a religious support of Apple products by a mass following that endorse it through their buying power. They not only choose to spend their hard earned dollars on the generally more expensive Apple products but also vehemently defend these products even when they perform below par.

This type of devotion is naturally associated with religion, but also with books and movies that rise to cult status to create mass followings (and sequels!). They are based on powerful storytelling infused with a mission – a why – that people want to be a part of.

Shifting to a second example, I want to share a recent email discussion I’ve been having with my good friend Gil Eyal, the founder and CEO of HYPR (now merged with Julius). Gil is my go-to-guy for all things influencer marketing related. He has worked with some of the biggest names across movies, music, sports, etc. in designing and running successful marketing campaigns.

Observing some recent headlines regarding influencers backing some questionable choices (in my opinion), I asked Gil whether these influencers care what they were associated with or was any headline coverage considered good PR? Or as the old saying goes – “there is no such thing such as bad publicity” – attributed to PT Barnum.

I was actually surprised at how definitive Gil’s answer was. He unequivocally stated that these influencers do indeed care. However, he continued to explain to me that it is not just about being affiliated with products/services that they genuinely care about (or at least are not strongly against). Rather, it is that they have worked very hard to achieve their success and recognition so they must protect it. And monetize it. But that is for a separate post as we are working on an idea to help them do this better.

Which brings me to my third and last example, our personal journey in building a new micro VC. In recent conversations with potential LPs we keep hearing them ask about our “super power”. While I think it comes through pretty well in our deck, I find myself needing to explain what isn’t necessarily obvious in the deck. Namely, that we are developing a brand, not just a single investment vehicle.

We have a unique approach to investing in seed stage deep-tech companies through the blend of what we do. It is not just one specific thing that gives us an edge. Sure, there are others that do elements of what we offer. There are some really great investors out there today and we are lucky to work with many of them. (Too many to name here, but you know who you are. Thank you for your collaboration across the ecosystem!)

But our core values could (and should) be applied to any new venture. Our current seed-stage deep-tech fund or our future funds, whatever they may look like. (Again, we have ideas and are already working on them…)

Creating a brand is about recognition. Flash an image, mention a name or quote a tagline – immediately everyone knows who you are and what you are all about. I’ve never needed the spotlight, though I don’t necessarily shy away from it. At times, I even enjoy it. Usually when I feel that I can add value. Not as a pulpit from which to preach or as a soap box to chase publicity. I am comfortable being backstage and just making things happen. Truthfully, as an investor – that is the role. We should remember that.

When I was a teen, my mom used to say to me that if you don’t publicize what you have done, then nobody can give you credit. That is true. But still something I struggle with. So, in 2021 I am launching a few initiatives to help spread the word about what we do and how we do it. If you don’t feel like you are hearing from me (or at least more than in the past…) then please hold me to this. Thanks.

Deep Tech vs Now Tech

I find myself struggling with the question of whether Deep Tech must always be a long-term prospect, by definition.

Sure, creating meaningful innovation takes time. Deep Tech means that a lot of research and development is going into this new product or service. And as an early-stage investor this would lend itself to a long-term investment strategy.

Accordingly, most of the companies that we invest in require significant R&D before they can go to market. We focus on these companies because that is where we can roll up our sleeves and lend a hand. We find ourselves mentoring them as they navigate early customer engagements to bring the voice of the customer into the R&D process. This helps create truly game-changing innovation and strong product-market fit. And the next round of funding to continue their growth.

But then I meet a deep-tech-driven company that believes they are market ready. They are usually wrong. If so, then we can still add a lot of value and they are just placed later on the spectrum of early-stage, a little closer to a Series A than to a Seed round. Still well within our wheelhouse. However, if they are right, should we even be considering them as an investment opportunity?

From a portfolio construction perspective it makes a lot of sense to have some “later stage” companies which may generate earlier returns. It also balances the levels of engagement required from our team amongst the portfolio companies, as far as the time we spend with each.

Despite these considerations, I find myself second-guessing myself. Am I too just being anxious instead of practicing the patience I preach to my LPs? Or can Deep-Tech be engaged with the market and still be considered Early-Stage?

I welcome your thoughts.