Promising startups suffer as profit trumps growth

What makes a startup promising? It depends not only who you ask but when you ask. Startups considered promising two years ago when growth was everything, suddenly found themselves judged by completely different standards, when investors started looking for profitability, even at the expense of rapid growth. As Globes announced its 10 most promising startup for 2024 at the Globes Tech IL Conference, we look back at some of the startups who made the top 10 most promising startups in recent years.


Layoffs and lower valuations

Since being included in Globes’ promising startups list in previous years, many companies have been forced to recalculate their course with the rise in interest rates and the cooling of the economy and tech industry. StuffThatWorks, which was ranked sixth in 2021, was founded by CEO Yael Elish, former head of product at Waze. When Waze was sold to Google she sought through StuffThatWorks to help the chronically ill to find treatments and drugs through crowdfunding and AI. But it soon became clear that the model was built for the age of low interest rates and revenue was slow to come. Now the company is trying to build a similar engine based on collaboration with pharmaceutical companies and institutions.

Snappy, which has developed a platform to provide gifts for employees of large companies, was ranked ninth in 2020. In mid-2022 when the tech crisis struck, the company was forced to lay off one third of its employees, and recently was forced to cut its valuation in half to complete a financing round. But the company has renewed its management and expanded to new products. CEO Hani Goldstein has hired VPs from US companies and launched a new service to provide gifts to employees and to order marketing gifts for conferences and events. The company returned to growth last year of 40%, with annual revenue of about $30 million.

One of the lessons that Snappy learned during the crisis is the need to convert its service from one based on human client portfolio management to an online self-service system. This business model, known as self-served, has become particularly popular with Israeli startups over the last two years: a website that provides an online service not only requires a smaller workforce, it is also the key to faster adoption of services by customers. For Israeli companies, such a service also reduces the friction between Israeli or Israel-based staff and foreign markets, such as for example in Arab or Muslim countries.

This was a lesson that was also learned by Pecan AI, which ranked tenth in 2022, but was subsequently forced to lay off 60 employees in two waves and terminate agreements with non-profitable customers. Pecan AI has developed software based on machine learning algorithms that scan the data of client companies and extract analytical insights, with the aim of saving them data analysts. In the last year, the company focused on the launch of OpenAI’s ChatGPT-based chatbot, and on an online self-service interface designed for small and medium-sized businesses, and went on a path of renewed and healthy growth.

OwnBackup, ranked seventh in 2020, which specializes in backing up and restoring data from Salesforce sales software in large organizations, had to lay off about 170 employees, but then enjoyed two excellent years, growing annual recurring revenue (ARR) by 30-40%, and according to estimates, ARR has crossed the $200 million threshold. As revealed by Globes last week, the company is considering a Wall Street flotation.

Who shuffled the deck?

A company that has been more modest but has been successful is grief support company Empathy, which was ranked eighth in 2021. Even in a year when it was easy to raise money, the company – which helps grieving families by shortening the bureaucratic processes involved in the death of their relatives – chose to raise a modest amount at a low valuation. Today it is reaping the rewards. The company received a valuation of $400 million in its most recent financing round, which included strategic investments from six major life insurance firms – Allianz, MassMutual Ventures, MetLife, New York Life Ventures, Securian Financial, and Sumitomo.

Generative AI has wreaked havoc with some of the startups in past rankings. Captioning and transcription solutions company Verbit, which was ranked fifth in 2019. The company has had to cut several dozen of its employees and rethink the integration of language models in its service, which until now was based mainly on its own algorithms and thousands of transcribers. Gong, which was ranked fifth in 2018, grew through its platform for analyzing sales conversations but saw its growth slow due to competition from Zoom Info and the emergence of generative AI, which has been successful in the field of transcription and sentiment analysis.

“What distinguishes growth companies today from those that grew in 2021 is that in most cases the growth is healthy and genuine,” says Dell Technologies Capital managing director Yair Snir.

“The costs structures are healthier and the company is already at a stage where it has genuinely solved something,” says Vertex general partner Yanai Oron. “There is a phenomenon known as flight to quality, in which investors flock to invest in a smaller number of companies, but with a higher quality. Companies that are not in the category, are left out. We have returned to a world where investors are very sharp, are afraid of missing investment opportunities and do not sit back and watch.”

Started the wave of exits

There are also successes. Cybersecurity company Ermetic, which was ranked second in 2022, initiated the recent wave of exits by Israeli cybersecurity companies, when it was acquired in September 2023 by US data security company Tenable for $265 million. This was an impressive amount, but taking into account that it had raised nearly $100 million since its inception, the average return to investors was not great. Ten months earlier, CEO and founder Shai Morag told Globes, “We have received many offers to purchase, but it is less relevant for us to sell. We see an opportunity to build a strong platform for cloud protection and a company that will be worth tens of billions.”

Ultimately Morag was caught in the conflict between burning cash and responsible, slow and measured growth. He preferred the latter option. As a serial and experienced entrepreneur, he chose modest but healthier growth.

Published by Globes, Israel business news – – on April 17, 2024.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2024.

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