Outwardly, things seem to be business as usual for Israeli high-tech companies. Layoffs are still relatively insignificant compared to the US, new unicorns continue to be born, albeit more slowly, there’s no shortage of new rounds of funding, and tech-hub restaurants are still packed at lunchtime. However, a look behind the scenes shows that all is not well at Startup Nation.
Calcalist examined three distinct signs showing that the month of June was a turning point for the local ecosystem and that stress levels are beginning to rise significantly. These signs include a proliferation of secondary deals being made by tech workers and early-stage angel investors who are proactively selling their stocks rather than waiting to be courted by funds willing to sell their holdings for a lower rating than the company received in its latest round of financing.
Other signs include the dramatic drop in the number of job vacancies posted on company websites and a return to draconian conditions that venture capital funds dictate before investing, conditions not seen in over five years since power shifted from investors to entrepreneurs .
All these changes have so far taken place behind the scenes and many employees in the industry are not even aware of it. This allows technology executives to insist that journalists are overly pessimistic in their forecasts or even gloating over the sector’s demise. However, barring a miracle in the US economy or on Wall Street in the coming months, these changes will have far-reaching implications and affect the entire sector.
The stress is currently felt mainly underground and it is in everyone’s interest that it stays that way. Or, as one veteran VC put it last week, “The least thing entrepreneurs and investors want right now is to meet up because they know they need to talk about the company’s current valuation at a meeting, and no one wants that.”
Funds specializing in secondary deals have been the ones courting tech workers and investors for the past two years, but that’s reversed in recent months. Employees have been in no rush to sell their shares for the past several years, expecting their valuation to rise with the next round of funding. There have been instances where company directors have had to persuade junior staff to divest at least part of their holdings in order to reduce overall risk. That situation has now changed as Calcalist learns that many employees are currently pushing for secondary deals after seeing what has happened to Wall Street company valuations and given the financial strains they faced during their heyday have taken. These deals are with management approval but are made at valuations lower than the companies achieved when they last raised capital.
For example, shares in Fundbox, one of Israel’s newest unicorns, which raised $100 million last November from a $1 billion valuation, recently sold at a valuation 20% lower than previous rounds. Employees of Sisense, another unicorn valued at $1 billion in its latest round, have also sold shares at a discount of 10% to 20% compared to the most recent valuation. Employers at eToro, understanding that the company will no longer go public after abandoning the SPAC merger valued at $10.3 billion, have disposed of a portion of their stock in transactions involving the company valued at $3.5 to $5 billion.
“Inquiries from employees have increased by 30% over the past few months, with early-stage angel investors also approaching us in June,” said Moran Chamsi, co-founder and managing partner of Amplefields Investments, a private equity fund specializes in late-stage tech companies. “I currently have 50 deals on my desk to purchase shares, having researched over 100 companies over the past few months. Not everyone has come down to earth on the evaluation, but staff understand that it’s better to have a bird in hand.”
Chamsi said most deals are made with employees at ratings 10-15% lower than the company received in its last round. “On average, these deals are 10,000 shares when it comes to employees, but when it comes to angels, they can also reach 2-5% of the company,” revealed Chamsi. “What is striking at the moment is the panic and eagerness of the staff to get whatever they can before the rating continues to drop. In many cases we are approached by a group of employees who have come together to sell a more significant stake in the company.
“Lately we have also been receiving inquiries from more experienced employees as well as from early-stage investors. However, the vast majority are still relatively young workers, in their thirties with one or two children, trying to meet the financial commitments they have made. They’re out of millions, but most of the deals we’ve done have been in the hundreds of thousands of dollars per employee.”
According to Amplefield’s website, the company holds stakes in several notable unicorns, including Verbit, Via, Trax, OpenWeb, StoreDot, and Cybereason.
In addition to falling valuations, more and more VCs have included protective clauses in their investment offers in recent months. This was common until five years ago, but has all but disappeared since around 2015, when the tide turned in favor of entrepreneurs. Now the investors are in control and making the best of the situation, so sometimes a seemingly impressive investment round, even in the case of a lucrative sale, would involve paying a dividend to the investors and would leave very little for the entrepreneurs, let alone the employees . Most safeguards are included in investments in later-stage companies that are already worth hundreds of millions of dollars.
Natalie Refuah, general partner at Viola Growth.
“The market is in an adjustment phase. It started with the decrease in ratings, continued with the decrease in the number of deals, and now there are already situations when the rating in the preliminary round is too far from the rating that investors are currently willing to invest in . In these cases, rather than completing a round down, they look for creative ways to reduce the risk taken by the youngest investors entering the market. We haven’t closed any deals like this yet, but I’m hearing more and more about them,” Natalie Refuah, general partner at Viola Growth, told Calcalist.
One such creative avenue is what’s known as a dividend clause, which despite its name isn’t like dividends paid to shareholders of public companies, but rather is a mechanism whereby investors receive an accumulated dividend in the event of an exit.
For example, in a situation where a fund invests $100 million in a company and agrees to a 12 percent dividend clause (this represents a real-world case), the fund would be entitled to around $170 if the company was acquired after five years million US dollars, in addition to the value of his holding. Assuming the company was sold for $500 million, more than half of that sum could go to a single investor, and that’s before the entrepreneurs, let alone the employees, have received a single dollar from the sale.
There are other clauses such as “participating preferred stock” where the holder has the right to receive dividends equal to the preferred dividends paid to preferred shareholders plus an additional dividend, or SAFE loans (simple future equity arrangement) that were issued at the start of the Covid- 19 pandemic became relatively popular but quickly faded.
While lending banks and funds try to persuade startups to take out debt, most of them still prefer equity financing rounds, as borrowing sends a signal to the sector that VCs don’t want to invest in you. Refuah also believes that despite draconian terms sometimes included in offer sheets, it is still preferable for startups to pursue funding rounds rather than borrowing.
“Personally, I don’t like getting into debt during stressful times because that’s when you have to make payments too, and in a time of uncertainty it’s best to avoid such situations. Better to do another round with the same rating and avoid debt or another round with a higher rating but on draconian terms.”
In the tech sector, the employees are of even more interest than money. Israel’s unique position in the world of technology is a direct result of its workforce, which has made the country a global R&D hub. While over 20,000 tech workers have already been laid off in the US, the number in Israel has not even reached 1,000, and that means the industry is already short of 10,000 skilled workers
Meanwhile, the number of Israelis employed in the technology sector hit a record 431,000 last April, accounting for 11.7% of the total local workforce, compared to 10.5% in 2020, according to Israel’s Central Bureau of Statistics. Almost all employees who were recently laid off had no problem finding a new job, some even testifying that they did so on improved terms compared to their previous position.
Still, according to data intelligence platform Lagoon, the number of vacancies advertised by tech companies on their websites has declined sharply. Lagoon, which scans company websites, job sites, LinkedIn profiles, and more, found that the number of these open positions decreased by 20%. This is a similar rate to the 23% drop seen on American giants Salesforce and Coinbase’s websites.
The reality could be even worse, as many employees have found that after applying for a position listed on a company website, they have been notified that the position is no longer being filled. Recruitment managers have also said they were told to keep the positions listed on their website but made no effort to fill them.
“The number of job openings continued to increase in Q1, but the trend completely reversed in Q2 and things got worse in June,” Omri Shtayer, Lagoon co-founder and CEO, told Calcalist. “You can even see the change in hiring rate on LinkedIn profiles, with a company like Riskified, which hired over 100 people in 2021, settled for just 20 new hires in the first half of this year.”
According to the data, the drop in hiring was larger for public companies than for private companies. Public companies have already slowed their hiring rate earlier in the year, while private companies only followed suit in April. The Israeli companies that saw the largest declines in open interest were eToro (which abandoned its SPAC merger), Snyk (which also laid off employees), and SimilarWeb (which went public last year and saw its share price fall by more than had fallen). 50% since early 2022).
Elsewhere, Facebook Israel has reduced the number of its vacancies by almost 50%, while at Microsoft that number has fallen by 15%. Not every reduction in vacancies will necessarily result in layoffs, as most companies are likely to be content to stop hiring and forgo filling vacancies. However, the Lagoon results show that the situation in Israel is not that different from the situation in the US and that the only difference is the delay and intensity.
