Many of the difficulties currently faced by global venture capital funds are universal. Higher interest rates in the United States, introduced by the Federal Reserve in a bid to tame inflation, have stifled access to capital. Particularly in the tech and fintech spaces, valuations have tumbled, albeit with some notable exceptions. The bubble of 2020 and 2021 – which saw record amounts of dealmaking and fundraising – is widely believed to have burst. Global economic growth is sluggish and geopolitical risks everywhere are increasing.
VCs in Israel are facing several other challenges in addition. Most notably, Benjamin Netanyahu’s controversial package of judicial reforms have led to mass demonstrations on the streets and threats from entrepreneurs to withdraw capital from the Middle Eastern country.
Jerusalem Venture Partners (JVP) is one of the longest standing and most established VCs in Israel, with $1.75 billion in assets under management (AUM). Set up by prominent entrepreneur and public figure Dr. Erel N. Margalit in 1993, the firm has weathered many political and economic storms, and has repeatedly been ranked as a top-10 global consistently performing fund, as ranked by Prequin. JVP has built more than 160 companies to-date, resulting in more than 40 notable exits, including 12 NASDAQ IPOs. How are they seeking to navigate the latest bout of turbulence?
Yoav Tzruya, a General Partner at JVP who specialises in enterprise software, cybersecurity, AI, and fintech, told Disruption Banking that “if you look at the macro environment, certainly on a global basis, there’s been multiple hurdles that the tech scene, at large, has had to go through.”
“The global economic crisis, interest rates, the availability of capital – they’re all impacting the industry in certain ways,” he added. “But I think we have hit rock bottom. I see that both in public markets and in the deployment of capital by private equity and VC organisations. We are already seeing a growing appetite to re-engage with disruptive companies in the space.”
Tzruya said that part of the reason for this is that, despite the challenging economic situation globally, many disruptive companies still solve acute and painful business problems, across several strong use-cases. More speculative companies have suffered, perhaps, but that should not detract from the core value of those with strong business propositions. He argued that this is particularly true in the cyber, fintech, and related domains.
“Cybersecurity, for example, is here to stay. It’s not going away. The problem is only getting bigger and is here and now,” he said. “There’s a growing maturity of understanding of the risks involved with cyberattacks. But there is still a big gap between the risk level and the effort that is being done to address it.”
“There are several ‘blue ocean’ pockets of opportunities within the domains. For example, the risk level is for SMEs is certainly not lower than in larger organisations – maybe in sheer magnitude, the potential attacks are smaller, but the potential impact on the viability of the business is much higher,” Tzruya said. “But SMEs have been neglected because everyone was looking to cater for the large financial and governmental institutions.”
“One of our companies, called Coro, has really been skyrocketing because it addresses that need for SMEs. It’s a very different notion than cyber-solutions for Goldman Sachs or Morgan Stanley because they recognise that small businesses don’t have the knowledge, manpower, budget, or time to deal with all the manual business processes around cybersecurity that large companies can afford to spend.”
In other words, good businesses that offer an important and useful service will always thrive.
Indeed, Tzruya argued that, initially, during periods of monetary tightening activity is lower and VCs become more selective in which companies they invest in. “As a result, great companies start to attract more investors and more attention and so forth. This is an opportunity for savvy investors, such as JVP, to pick the winners for the next 5 years.”
“When the water goes up and down during the tides,” Tzruya said, “You start seeing the great companies float up.”
Another sector which has generated plenty of attention despite sluggish economic growth is artificial intelligence (AI). JVP has invested heavily in the space and is bullish on the future growth of the industry. However, Tzruya also noted that the value of AI companies must be placed in context.
“AI is a tool. Very much like any other computerized problem-solving capability. The AI aspect of a company, in and out of itself, doesn’t make a company good or bad,” he told Disruption Banking. “Being a tool, just as coding is a tool and data management is a tool, and so on. The question is: what is the application? What can you do with it? What significant business problem are you solving?”
“What we’re looking for today from companies that apply AI is the business application and the value that can be derived. Generative AI is a great tool, and we have several companies that have integrated that into other products already,” Tzruya said.
“For example, Pyramid Analytics have really started to integrate language models, allowing people to ask questions in natural language and get prescriptive rather than just descriptive information – such capability at the hands of decision makers – and, today, every employee is a decision maker – is a real game changing capability. Other companies, like Centrical, provide AI-powered employee success platforms to large organisations, making sure that employee engagement and performance are aligned, from recruitment, through on-boarding, execution and retention states, increasing productivity and performance.”
“AI is not a generic capability, it’s not a differentiating technology unless there’s a business problem that you can solve using AI in a quantifiable manner.”
One of JVP’s strengths as a VC firm is that they have developed deep expertise in technology and associated sectors. This “thematic expertise,” as Tzruya put it, not only allows JVP to offer general guidance to fast-growing disruptive companies. It also means that they can provide an entire ecosystem and support network to portfolio companies, giving them a stronger base to grow. Their range of “start-up cities” – in Jerusalem, Tel Aviv, Haifa, Be’er Sheva, Galilee, and New York – provide a space for “entrepreneurs to develop groundbreaking solutions and disruptive technologies.”
“The ecosystem that we have helped create, means we have a range of strategic companies and large partners in the space with whom we collaborate,” Tzruya explained. “We also have contacts in academic and research institutions, helping us engage with more than 1000 start-ups annually, giving us a very good view as to what is happening in the market.”
“Our goal is to provide startups, across stages, an envelope of value, ranging from strategy, marketing, business development, product definition, positioning, executive leadership team buildup and, of course, funding. We provide that, teaming up with management teams and entrepreneurs, in our various facilities in Israel and globally, in Margalit Startup City, from the super early stages, operating our non-profit accelerators, all the way up to our NASDAQ IPO-ready companies.”
We couldn’t end the interview without acknowledging the volatility of Israeli politics – which JVP’s Founder, Erel Margalit, is deeply involved in as a former Labor member of the Knesset. He, along with several other prominent entrepreneurs, has been vocal in his opposition to Netanyahu’s judicial reforms and the impact he believes they would have on investment in Israeli tech.
“Nobody is immune to such a significant set of events – at JVP, we are very much a firm believer in the need to preserve Israel’s democratic infrastructure and to make sure that the business setting continues to be conducive to business,” Tzruya noted.
“Certainly, if you look at the numbers, Israel has been somewhat impacted by these events,” he outlined. “If you look at the Israeli Shekel – US Dollar exchange rate, you can see there has been an impact. That said, there seems to be an understanding among investors that, after the initial backlash, things will are starting to go back to normal.”
“We’re optimistic about the long-term impact, or lack thereof, of this situation,” he added.
Regardless of the impacts, JVP will be doing what it has successfully done for three decades – creating eco-systems and teaming up with entrepreneurs to build disruptive category leaders.
Author: Harry Clynch
