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April 8, 2020 7:19 am

The Real Pains of the Tech Sector Are Yet to Come, Says Israeli Senior Shibolet Partner

avatar by Meir Orbach / CTech

IDF soldiers working with computer technology. Photo: IDF Spokesperson’s Office.

CTech – The coronavirus (Covid-19) crisis caught the Israeli tech sector entirely off guard. The industry that was riding high had to suddenly hit the brakes and prepare for an emergency the likes of which most had never encountered before. “People’s memories tend to be highly selective and many do not recall what happened in previous crises, like the ones in 2001 and 2008, during which many of the current crop of entrepreneurs had yet to assume their roles,” Lior Aviram, the head of the tech practice at Israel-based law firm Shibolet & Co. and a member of the firm’s executive committee told Calcalist in an interview last week.

“In 2001, Israeli venture capital firms were still able to raise funds, but it all dried up two years later,” Aviram said. “The same thing happened in 2010, funds were simply not raising money.

People tend to forget the lesson learned from those crashes: that the private equity sector is two years behind the rest of the world. “The financial markets might collapse in a day, but in the past, it took a long time for the core problems to be discovered,” he added.

We are now in the midst of a global crisis that impacts businesses throughout the world and across a wide spectrum of sectors, Aviram said. “It is therefore extremely difficult to assess the magnitude of impact we will eventually experience.”

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Following the previous crises, capital raising and seed funding froze, Aviram said, which resulted in a drop in company valuations. “In 2003 most of the funding rounds were in decline and I anticipate the same type of cycle playing out in the current crisis.”

Surveys conducted by Shibolet following the burst of the dot-com bubble in 2000 and the financial bubble in 2008 show that after the Nasdaq stock market began to crash in March 2000, it took some time for the impact to ripple out. “When it did, we witnessed a steep drop in the number of new launches, the sums of venture capital raised, the number of buyouts, and the frequency and scale of initial public offerings,” Aviram said.

According to data compiled by Tel Aviv-based research firm IVC Research Center, venture capital funds raised no money in 2003, preferring to postpone funding rounds until the market showed signs of recovery. The data indicates that the recovery began in 2004 and conditions continued to improve until the subprime crisis of 2009.

Luckily, the Israeli tech sector was not hit as hard by the subprime crisis compared to its US counterpart and the crisis was felt more in terms of capital shortages than in stricter investment conditions, the data showed. In the following years, the number of down rounds decreased, but they still made up 53% and 54% of total funding rounds in 2009 and 2010, respectively.

According to the data, the number of seed and series A rounds declined dramatically to make up just 16% of the investment ecosystem while later rounds ballooned to make up 46% in 2009, suggesting that funds preferred to invest their money in existing portfolio companies rather than risk new investments.

A study of Silicon Valley trends by international law firm Fenwick & West — Shibolet’s partner for yearly surveys — found that the first quarter of 2009 was the first time that down rounds beat up rounds since the fourth quarter of 2003. The numbers showed that 46% of shares in private companies were sold at a lower price than they had been sold for in the previous financing round, 29% showed flat prices, and only 25% saw a rise. Capital investment dropped drastically in the 2009 year-over-year across all industries, the study showed.

The sums raised in Silicon Valley in the first quarter of 2009 were also the lowest they had been since 2003, the study showed. Similarly to Israel, the market conditions only began to improve in Silicon Valley in 2012 and 2013.

“Maybe this time the government will intervene before it is too late,” Aviram said. “The tech industry had unimaginable excesses and people kept talking about a looming wake up call. This call has arrived and, going forward, there will be less money and everything will drop in value.”

“Companies’ price tags are going to be much lower in the near future, but we will not experience the wasteland that was 2001 when we saw weeks go by without anything raised, because there is still enough money spread around to keep up some level of activity,” Aviram said.

“The hysteria and spending that we are currently seeing in the market is only temporary,” he added. The crises of 2001 and 2008 predominantly hurt the West, he said, but this time the crisis is truly global and harmful to many additional industries and regions.

This is not a crisis that impacts one or two people but rather the engines that power entire economies, he said. “The tech sector has money and will have companies that can hang on for longer, but since its end customers will have less income, the tech industry is sure to feel the pain as well.”

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