A Bright New Day for Startup Nation? Or Just Another Bubble?

The record number of venture capital investments and parade of IPOs are more cause for caution than joy.

These are heady days for Startup Nation. In the third quarter of the year, tech companies raised $660 million in new capital, the most in any three-month period since 2000. This quarter looks like it's on its way to beating that figure, with a stream of double-digit fund-raising rounds by the likes of Outbrain and Wilocity ($35 million apiece), SundaySky ($20 million), TabTale ($12 million), and Mintingo ($10 million) and a host of smaller fry.

Then there have been the outsized mergers and acquisitions deals. Besides Google's $1 billion dollar purchase of Waze last summer, there was has been IBM's $650 million buyout of Trusteer and Facebook's $150 million purchase of Onavo, which came with the extra bit of good news that the Godzilla of social media would be opening its first research and development center in Israel, certifying Israel's reputation as the place to be for innovation.

And then there are the initial public offerings. In recent weeks, Wix and Varonis have each filed for $100 million share sales, and Mazor Robotics plans to raise for $46 million on the market. Enzymotec has raised $63.5 million and Alcobra scored $33 million. Matomy and Outbrain are weighing IPOs of their own.

Even Israel's ailing venture capital industry is looking healthier. Pitango, the country's largest VC, just raised $270 million and a new fund called Aleph has $140 million under its belt. Carmel, Vertex, Qumra and the Israel Growth Fund are also raising money to invest in tech. The Chinese have begun investing in a big way and, of course, the Americans have been in the country – and now are the leading player in the local VC industry.

All in all, the level of activity in Israeli high-tech looks more brisk than it has in years.

Are we witnessing a magnificent sunrise, heralding the dawn of a glorious new era for Israeli high-tech? Or is it just a bubble wafting up from that glass of antacid we've all been sipping from since the last one burst in 2000?

Remember Pets.com?

The last place to look for an answer is the tech industry itself. For all its geekishness, high-tech easily rivals the media and entertainment industries for salesmanship and self-importance. Everyone is promising revolutionary changes, new paradigms, industry disruptions, the next Facebook or the next Twitter.

The one thing you can say in high-tech's defense is that there is an occasional Google or Facebook, the things that dreams are made of. They are amazing enough that memories of Pets.com (the Amazon of dog food) or Myspace (a social media company clobbered by Facebook) easily fade away.

More importantly, there actually is a revolution in the way people communicate, buy and sell, and consume their news and entertainment that all add up to very, very big business. Israeli startups have made their contribution to the revolution, so there is no reason why they shouldn't be getting part of that business, too.

But, of course, the catch is that not everyone is going to get that business.

In 1920, on the cusp of the automobile revolution, you could have bought shares in General Motors or the Stanley Motor Carriage Company. The first would go on to become the world's biggest maker of automobiles for the next several decades; the second the maker of the infamous Stanley Steamers, would go bust four years later after the internal combustion engine proved to be the technology of choice.

Most Israelis happily believe that The comfortable and conventional wisdom holds that in Israel Waze is responsible for ushering in the emerging new era. Investors are intrigued by a company that multiplied a $67 million investment by its backers into a billion-dollar return. Entrepreneurs are inspired by the way Noam Bardin was able to build a company in Tel Aviv that could lure tens of millions of users to its navigation app and compete with the biggest in the industry. Israelis proved they can do more than not just innovate: They but can build an extremely valuable business.

The problem with this wisdom is that high-tech is a global industry that takes its cue from America. If valuations for startups are climbing and IPOs are back in style, it isn't an Israeli story but a tale of Silicon Valley and Wall Street.

And they didn't live happily ever after

Let's start at the end of this story, just before "and they lived happily ever after," since such an outcome is by no means for certain.

The U.S. IPO market has taken off this year and tech offerings account for about a quarter of it. These days Twitter is capturing the headlines - or should I say tweets - with its planned $11 billion IPO.

But there are plenty of small- and medium- tech companies in areas like cyber -security, cloud computing and digital advertising going public as well. Investors have done well by them: Dealogic says that in the first nine months of the year the share prices of tech IPOs on average rose 39% in their first month of trading.

Going further forward into the story, a strong IPO market increases the value of startup companies raising venture capital. Thus Pinterest raised $225 million last week at a $3.8 billion valuation, a 52% increase from just eight months earlier. Another startup called Snapchat is in talks to raise $200 million at a $3 billion valuation, three times its valuation in June.

Is this a bubble?

Some say no. Jay Ritter, a University of Florida academic who follows the IPO industry, was quoted in The Wall Street Journal as saying the average tech IPO is selling at just 5.6 times sales as opposed to more than 26 times sales at the peak of the 1999 tech bubble. The average stock jumped a mere 25% in its first day of trading versus 75% back in 1999.

But in other ways the market is looking dangerously bubbly. Twitter doesn't earn a profit, and Pinterest doesn't have any revenues at all. They all have millions of satisfied users who could one day be monetized, but haven’t we have heard that line before, say back in 1999? Why are perfectly intelligent, ordinarily savvy investors assigning these companies such immense valuations?

Maybe it's because they don't see any alternatives. Interest rates are low, the broad stock market has racked up very impressive gains that are unlikely to be repeated and the economies of the United States and Europe are still shaking off the dust of recession.

With the opportunities to make handsome returns so few, the ordinary calculations investors make get thrown by the wayside. The dream of solving their problem by hitting it big with Twitter, Pinterest or an Israeli startup looks irresistible -- until the bubble bursts.face

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