Market insights

10

May 2020

The Game Has Changed

10

May 2020

Market insights

The Game Has Changed

In the face of a downturn we must avoid the instinct to solely play defense, nor should we simply try harder- playing yesterday’s game. We must take note of the changed playing field, adapt and modify our focus and plan accordingly and then push forward. By focusing our efforts on areas where we can make the most impact, we ensure we remain a viable player and come out stronger.

The Covid-19 crisis has been unprecedented in its characteristics. It started to affect us by disrupting supply chains in China, delaying deliveries of our treasured iPhones and components to our assembly lines. It then caused a dramatic decline in demand by both consumers and enterprises, at times creating a vacuum in our sales model. Lastly, financial markets crashed, reflecting the corporate value (and perceived value) destroyed by the effects of the virus, and the implications of the mounting personal and corporate debt came into sharp focus.

Those 3 factors: supply chain disruption, drop in demand, and looming financial crunch, affect us, but they also affect our competitors and partners. In understanding our unique position, we can adapt more quickly and deploy resources far more effectively and efficiently.

Supply chain – software comprises the largest sector of the Israeli high-tech industry. This sector is unique, having no dependency on manufacturing supply chains or retail outlets. Software companies have control over almost 100% of their development, production and distribution. This puts them in a situation superior to almost any other industry. By mastering remote work and maintaining team cohesiveness within days, they can achieve full productivity swiftly. Rapid and efficient adaptation to the “new normal” enables them to excel over their competitors and shine as outstanding providers to their customers. We have already seen numerous enterprise clients taking note of exceptional service provided by some of the Israeli start-ups.

Demand – the area least in our control. We can’t force a purchase decision in the current climate. Increased sales efforts do not always provide results. Ensuring our existing customers are satisfied pose a clearer path to short and mid-term growth. Past crises taught us that companies should remain true to their core vision. Rather than tailor the company’s vision and product strategy to address the temporary (and ever-changing) circumstances, we should adapt the sales lingo to emphasize efficiency and savings, and most of all, trust in our core and unique advantages as the key for renewed growth as the market recovers.

Finance – another key lever in our control. Start-ups naturally attempt to shore up their cash reserves and reduce burn. They should. Valuation adjustments are of lesser importance in the face of a capital crunch. Financial stability is important far beyond the immediate resilience of the company. An enterprise client buying from a young company will now prioritize the startup’s viability and longevity over the buzz surrounding the product. Gross margins, marketing efficiencies, customer retention, and- yes- profitability will appeal most to investors waiting on the upward slope of the V curve.

From our perspective as a Secondary Fund, a crisis highlights another important lesson for any founder and investor. The start-up journey – from founding to successful exit – will take on average 8-12 years. In this (very, very) long game, it is more likely than not that an economic downturn (or even two) will occur in company’s lifetime. We can’t predict it, time it, or prevent it. That does not mean we should therefore ignore it. Quite the opposite- we should factor it into our plan from the outset. Secondaries allow an investor or founder to balance the risk inherent in such a long-term commitment, financially and personally. Founders (and investors) should enjoy some of the fruit of the value they’ve created, by selling part of their stake and remain more steadfast and committed to their venture for the long term.

I started out by emphasizing that in the middle of a storm, we must focus on the elements within our control. An equally important conclusion is that we should prepare in advance for the ones we inherently cannot control. Secondary Deals facilitate a significant de-risking of personal financial security and a firm’s investment goals. A secondary transaction is not intended to be a key liquidity event for the founder, but rather a tool to align long term stakeholder interests and provide necessary peace of mind to the commander in chief, tasked with guiding the ship through troubled waters.

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