Q4 2021 Update

This has been quite a noteworthy year for both Israel’s tech sector, as well as for our firm. As a prelude to our Q1 semi-annual LP call, for which each of you will be receiving an invite shortly, we wanted to offer some of our views on the state of the market, in addition to a few fund and portfolio-level highlights.

In the first 11 months of the year, Israeli start-ups raised a record $25.4 billion – a 136% increase over a record-setting 2020. According to Start-Up Nation Central, the number of companies that reached a billion dollar valuation doubled bringing Israel’s unicorn total to 53 start-ups – 5% of all unicorns globally according to CB Insights. Fueling this explosion of Israeli unicorns is the 310% rise in mega-rounds ($100M+) over last year – the bulk of which went towards fintech, IT infrastructure, enterprise data, and cyber security solutions (areas where Joule focuses almost exclusively).

While the numbers coming out of Israel are certainly cause for congratulations and continue to cement the country as one of, if not the leading destination for enterprise technologies outside the United States, we at Joule are approaching the current market conditions with some caution and heightened discipline.

According to Viola Group’s State-of-the-Unicorn report, from 2013 to 2018, Israeli start-ups needed to post at least $75-100MM in revenues to achieve unicorn status. From 2020 to 2021, that revenue threshold fell to less than $25MM turning start-ups into billion dollar businesses in less than two years, whereas in 2015 it took on average 6-10 years. This, and numerous other data points in the report, serve as some of the basis for our concern that many of the current conditions and pricing are not sustainable. As such, we may look to monetize some of our portfolio positions in the coming 12-18 months.

For the early stage funds who were the first money into some of these unicorns, the mark-ups are certainly impressive; however, the entrepreneurs that ultimately must make good on these hyper inflated valuations with actual business metrics and corresponding exit strategies are finding themselves taking on considerable, and perhaps unnecessary, revenue and macroeconomic risk.

We at Joule know these risks well as we got our start investing in the height of the last recession. Our memories are of growth funds shutting off the spigot for new investments to focus on portfolio preservation, while liquidity events are put on hold for years until more favorable market dynamics emerged. Our fund and portfolio level activity over the last 12 months is reflective of a expansionary market strategy that takes into consideration the belief that a meaningful correction is on the horizon.

2021 – A DISCIPLINED EXPANSIONARY PERIOD STRATEGY

Round and Valuation Rightsizing
Joule invested in four new companies in 2021 out of Fund IV — in each of the deals we led or co-led the round to ensure that round sizing and valuation risk are appropriate for the stage of the business:

$4.36MM - average round size led by Joule
$8.6MM - average pre-money valuation

Those four investments include:
Arnica - Cyber Security & DevOps - $5MM seed round
Vox Studio - Voice Enablement - $6MM seed round
Perfect - HR Recruitment Platform - $4.5MM seed round
TRST - Machine Learning Operations - $2MM pre-seed round

Bolstering Portfolio Company Capital Reserves
With the availability of capital in the market, Joule advised all of its relevant portfolio companies to raise in an effort to bolster its capital reserves. The result was nearly $80MM raised across seven portfolio companies in a mixture of equity rounds and interim rounds designed to inject modest yet highly strategic capital into the business as it prepares to scale:

Coralogix (Fund II, SPV III, SPV IV) raises $55MM Series C - led by Israel growth arm of U.S. PE firm TPG
ShieldIoT (Fund III) raises $7.4MM Series A - participation by strategic investor Akamai (NASDAQ: AKAM)
Reposify (Fund III) raises $8.5MM seed round - led by Joule, First Rays Ventures, and Fosun Industries
Mirato (Fund IV) raises $2MM post-seed round - led by Serendipity Capital
Perfect (Fund IV) raises $1M post-seed round - led by strategic Angel investors from leading corporates
Rupert (Fund IV) raises $1M post-seed round - led by strategic Angel investors from leading corporates
Atomation (Fund II, III) in process of closing $5M Series A - led by strategic family office investor

Despite the increasingly transactional nature of venture capital, we believe that the best investor-founder partnerships are those built on relationships established over time. As such, we have encouraged all of our companies to start talking to funds that they believe could be the best fit for their next round or two. We at Joule have played a meaningful role in facilitating those introductions by connecting our entrepreneurs to funds such as NEA, B Capital Group, Innovation Endeavors, General Atlantic, and Bain Capital. It is our expectation that some of these aforementioned funds will be leading rounds in a number of our portfolio companies in the not too distant future.

Raising Investment Capital
Joule took its own advice - raising capital and bolstering its investment capabilities to both continue deploying but also ensure we had the ability to do so in a market correction when valuations are depressed and early stage venture capital retracts. In July 2021, we re-branded from Janvest Capital Partners to Joule Ventures and executed a final close on a $56.7MM core Fund IV with an additional $10MM in Special Purpose Vehicle (SPV) commitments, which we discussed in this blog post Janvest to Joule: A Fund Evolution

With Fund IV and the ability to deliver a full set of U.S.-centric value creation services, we find ourselves highly competitive as lead investors even in a frothy market where name brand multi-stage VCs are attempting to access Israel’s seed market. There are a few factors that we believe contribute to our competitiveness and ability to win the deals we want, which are further reinforced by feedback from entrepreneurs collected in an early Q4 portfolio-wide survey we conducted:

Being a partner-only fund ensures that relationships between founders and VCs are being built exclusively by key stakeholders

72.7% of our portfolio entrepreneurs claim that the dynamics and culture of Joule’s team was the primary reason for choosing us as their first-check financing partner
68.2% of our founders feel engaged with the entire Joule team

Ability to effectively leverage our bi-national infrastructure specifically designed to add maximum value to early stage Israeli-founded businesses

90.9% of our portfolio entrepreneurs claim to have received value from Joule beyond the capital
47.6% of our founders feel as though our Advice and Advisory are most valuable to their business, followed by 33.3% that believe the connections we facilitate on their behalf are most impactful

Entrepreneurs appreciate that with Joule they are a high conviction choice rather than a low priced option to invest more in later rounds

40.9% of our founders believe that if they had to do their seed rounds over again, they would choose a boutique seed specialist (like Joule), while another 40.9% feel as though they would still want a boutique seed specialist, as well as a big name multi-stage VC

Founders want seed investors with deep ties to the U.S. market. We at Joule are one of two U.S.-based seed funds with an exclusive Israel focus and which has both American and Israeli General Partners.

90.9% of our founders felt it was important to have a seed investor with ties to the U.S. market
77.3% would want their next round of financing to come from an American VC, while 22.7% are indifferent (Israeli VC vs. American VC)

We look forward to covering the fund and portfolio-level activity in more detail on our Q1 Semi-Annual LP call. In the interim, please do not hesitate to reach out with questions. Thank you for your support and a Happy Holidays to you and your families from all of us at Joule —

Dafna, Daniel, and Brian