“In most cases, a $25m Seed is too high. It doesn’t make sense.”

Some call it a crisis, others an “organized restructuring”. Anyhow, it is undeniable that there has been a correction in Israel’s high-tech ecosystem in recent months, as companies have laid off scores of employees and IPOs have been canceled at the last minute. In 2021, record-breaking funds were invested in Startup Nation, and yesterday’s actions are catching up with today’s players.

“Today there are many tools and open sources and resources that founders can use to build something preliminary and test the market,” said Dor Lee-Lo, co-founder of the IBI Tech Fund. “With that in mind, it’s much easier for you, as a software-driven company, to come up with a seed round today than it was 10 years ago.”

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Dan Dor IBI Tech FundDan Dor IBI Tech Fund

Dan Aks and Dor Lee-Lo from the IBI Tech Fund

(Photo: Ilan Bzor)

IBI Tech Fund was founded in 2018 by Lee-Lo and Dan Aks and the two serve as Managing Partners of the firm. The founders decided to set up a fund to pool their “empirical and theoretical” research on Israeli VCs and the ecosystem to help them fund seed-round companies. Typically, the fund invests $3-5 million in B2B companies in various industries, except biomedical. Some portfolio companies are LightSolver, Solidus and Shopic.

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Traditionally, the ballpark of $3-5 million for a seed round is a fair and reasonable number. However, over the years, more and more money has been invested in Startup Nation, prompting an inflationary reaction, with recent seed rounds reaching gargantuan numbers. Above all, Winn.AI $17 million secured, and OX security raised $34 million in seed rounds in September 2022, causing a stir in the investment community.

“If you can reduce the investor risk a bit and need more money, it’s natural that the seed will be higher than it was five years ago,” Lee-Lo continued. “Take that into account, plus the salaries are much higher and it takes less time but still lots of money and expensive people to build a quality product. With that in mind, it makes sense that the amount you’re raising is higher than it used to be.”

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When the IBI Tech Fund was established in 2018, the total amount invested annually in the Israeli tech ecosystem was around US$5 billion. In 2021, that number was closer to $25 billion. “It’s about the supply of capital and the fact that there’s tons of money in the market,” Aks added. “When you see these big seed rounds, the investor said to himself, ‘We’re confident about the team, we don’t want to wait for a suitable product market, we want to be sure that we can get into the A round and combine them together’. I’m not sure if it’s very healthy because I think it’s coming from the investors and not the needs of the company.”

According to the pair, those high seed rounds resulted in early high ratings that led to even higher A and B rounds, and it ballooned into ratings that could eventually collapse. Earlier this summer CTech reports that Israeli company Bizzabo saw its valuation fall 30% in its new round of funding. Their argument is that large seed rounds lead to high valuations and these companies either crash or become too big to buy.

“I haven’t seen the details because we’re not investing in seed rounds that are $25 million… maybe it’s warranted and maybe there’s an isolated case where it’s right and that’s the best way to go for that Businesses grow,” explained Lee-Lo. “But I think in most cases a $25 million seed is too high.”

For now, the IBI Tech Fund remains in the sweet spot of early-stage companies “just” looking for a few million dollars. As the companies around them shrink in size and value, Aks and Lee-Lo admit they don’t feel the pressure as early-stage companies prepare to enter the market in two or three years.

“We have the feeling that things will continue as usual,” said Aks.

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