Why the SVB Bank Scare Highlights Reason for Startup Optimism

The cautionary tale of Silicon Valley Bank has been both dramatic and memorable. Most analyses so far have focused on negative lessons around what went wrong, and how these things reflect badly on the hi-tech world with which the bank was so firmly associated - which is understandable, given the fear and uncertainty caused.?

In our opinion, however, there is also a far more optimistic lesson to draw from recent events; equally valuable, equally relevant, and important for both entrepreneurs and investors to internalize in different ways.?

Don’t Miss the Signs of Increasing Opportunity

The SVB drama caused a lot of noise and panic, particularly within the tech industry. Despite the market regaining confidence quickly due to the US government stepping in, we have seen how quickly companies are reacting by thoughtfully diversifying their banking strategy. The cause of this step in financial maturity might have been unfortunate, but it’s an important and overall positive step for the industry.?

For full disclosure, we will note at this point that our portfolio companies and fund have seemingly been unaffected long-term by the bank run, partly because our fund administrator appreciated the dangers very early on and enabled us to communicate the relevant message to our founders effectively and with ample time for them to act on the advice. Nonetheless, despite the lack of direct impact, our companies, too, are reconsidering their strategy for the future.

Looking at the Israeli situation, from our vantage point on the ground, it’s notable that many companies are turning to Israeli banks, widely considered stable and safe institutions, rather than focusing on US or UK/European solutions. From the perspective of investment in the Israeli startup ecosystem, this is a sign of strength and resilience.?

The timing of the SVB bank scare has been significant, coming at a time of global economic uncertainty and retrenchment. For investors, perhaps counter-intuitively, the combination of events brings opportunity.?

Technology is Eating the World

As we noted in the Financial Times last month, regardless of what else is happening in current events, “Technology is here to stay. Technology is going to eat the world.”?

This trend has been clear for some time, but has been obscured recently by the whirlwind of economic and financial conditions. In fact, though, if you look beyond the noise, what’s really happening is that the power of technological change is being super-charged by the wave of AI innovation - accompanied by opportunities to invest in that new cycle and adjacent products.

Focusing just on technological innovation through AI and its practical implications, it’s an enormously exciting time across a wide range of industries. ChatGPT and the like have gained most of the hype, but canny investors can see the impact far more broadly, most notably in medical software, gaming and production, and fintech.?

At the same time, because of the economic factors in play, we’re starting to see a sensible contraction of both VCs and opportunistic entrepreneurs, correcting the excesses of the past few years. Strong players are starting to naturally stand out.?

From the Israel-based perspective, it is also interesting to note that western funds that raised a lot of money in the past few years are actively looking to invest outside their own markets, in places like Israel with strong startup ecosystems and home-grown talent. As a fund, it’s a factor we’re bearing in mind particularly when it comes to later stage follow-on investors and secondary opportunities.?

Entrepreneurs: Time to Tidy Up and Get Your Startup in Order

It’s no secret that the valuations from 2021 and early 2022 weren’t sufficiently based in realistic analyses and assumptions. That’s a concern for our ecosystem, but again, the negative coverage of this trend has prevented many founders from seeing the opportunity.?

We’re seeing strong startups engage in candid cleanup work, which will leave them with solid foundations and crisp internal clarity - important for both short-term resilience and for long-term success. Things like:

• Monthly spends are starting to be gradually re-assed
• Cap tables are being cleaned up
• Positioning activities are coming under scrutiny
• Founders are getting back to basics?
• Realistic valuations, getting back in line with norms from pre-pandemic levels and/or based on more realistic assumptions than have previously been the case

It’s great to see these reassessment activities under way, and we hope to witness a harder reset playing out more widely as well.?

Investors: Time to Look at Investment and Innovation

From where we stand, we believe it’s a better time to be investing than it was a couple of years ago. Lots of fluff is being washed out. Product innovation is far more exciting than it’s been for a long time.?

There are amazing, innovative tech businesses out there, right now, that will come to have a huge impact on the world - and now is the ideal time to be looking for good investment deals. Look for great products created by companies that are structured around making money out of the products themselves.?

Yes, the market is paying less to own shares in companies. Yes, things aren’t stable. Yes, asset prices have gone down. None of that changes the fundamental value of a company and its product. In fact, it makes it a great time to invest in extraordinary tech with robust products that will make money. Just stay disciplined and avoid getting caught up in hype cycles and inflated valuations.?

The times they are a’changin. But they always are. The important thing is to look for the opportunities in today’s reality. The good news is that there are a lot of those. And that’s something we can all bank on.?