Unless you follow the Israeli high-tech scene closely, you’ve probably never heard of a company called Nanox. But it’s an interesting story for two reasons.
One is that it has developed a revolutionary new X-ray technology – the first, it claims, since X-rays were invested in 1895 – that could make a critical diagnostic tool available to parts of the world that today can’t afford it. The second is that the company went public on Wall Street last Thursday at an $800 million valuation amid strong investor appetite for the stock. Since then, the shares have risen by close to 50% and its valuation has grown to more than $1 billion.
What can we learn from this? Is it another inspiring instance of Israeli technology prowess? And/or, is it another case of the stock market’s complete disconnect from reality?
On the one hand, Nanox’s technology could disrupt a $21 billion global market. On the other hand, it’s a $1 billion company that hasn’t any revenues and hasn’t gotten regulatory approval for its device. Let’s concentrate on that other hand.
There has been a lot of moaning and groaning about the future of Israeli and global high-tech in the midst of the coronavirus, but so far the pandemic has been only good news for local technology. In the first half of the year, Israeli startups raised a record amount of cash and tech exports have been growing even as the world economy goes from bad to worse.
Now, a wavelet of tech initial public offerings by Israeli startups seems to confirm that all is okay with tech. In the last few days, JFrog announced on Tuesday it is looking to raise $100 million and PainReform priced a $23 million initial public offering. Lemonade raised $320 million at the start of July, Polypid netted $60 million in June and Ayala Pharma $55 million in May. Playtika is rumored to be contemplating a giant IPO. At least three other offerings have or will take place on the Tel Aviv Stock Exchange.
This may not seem like a huge number, but bear in mind that in all of 2019, Israeli tech companies conducted just four IPOs.
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The tech IPO boom, of course, isn’t confined to Israel. The number of tech offerings on Wall Street has surged since the end of May and more are on the way, most notably Airbnb. Investors recognize that even more than before and during the coronavirus pandemic, tech will be king afterward. More of life – learning, working, shopping, being entertained, medical care and even psychotherapy – is going online.
The IPO surge could even be taken as a sign that Startup Nation, which is forever on the edge of “maturing” into something more than cowboy entrepreneurs, is finally growing up. Rather than selling themselves to the highest bidder, maybe Israeli tech firms are starting to think about a long-term future as standalone companies. After all, if they are ready to list themselves on the Nasdaq, rather than being swallowed up by a global giant, it tells us they’re in the business for the long run.
Unfortunately, the IPO wave isn’t about Startup Nation growing up. It’s about Wall Street becoming completely disconnected from the real world and its coronavirus.
It would be a mistake to think that (apart from a growing community of clueless day traders) the stock market is stark raving mad. But it has logic of its own and that logic is that investors have no other place to put their money. Interest rates remain close to zero, but share prices are soaring.
The life of this party is tech because, as everyone knows, it’s the future. The result is that even companies like Nanox and Lemonade, which aren’t profitable, can attract investors and command high valuations. Everyone assumes the disconnect isn’t sustainable, but who wants to leave the party while it’s still going so strong? Your hearing need not be terribly acute to detect the sound of a 1999-style dot.com bubble
No one should fault the tech companies who are cashing in on it: They’re making hay while the sun shines. But going public doesn’t mean that these companies plan to stick around any longer than it takes for an attractive merger and acquisition deal to come along.
Nanox certainly is a perfect M&A target. Its X-ray technology looks promising and, assuming it gets the regulatory approvals and achieves a successful rollout, the big medical-device multinationals will begin circling around it. That’s the story of Israeli med-tech companies, such as Given Imaging, Mazor Robotics, Lumenis and NeuroDerm, all of which went public, only to disappear in M&A deals.
But it is the fate of bubbles to burst, and the problem for Israeli tech is that once this latest stock market bubble bursts – as happened 20 years ago, the impact will reverberate across the financial world. Venture capital will become tight and exit options, whether it’s an IPO or an M&A deal, will evaporate. Without the capital, a lot of startups will shut down and many will never get off the ground, as happened in the wake of the dot.com bubble and again after the 2008 financial crisis. When the current Wall Street party is over, the hangover for Startup Nation is going to be a real doozy. The IPO boom isn’t looking like the beginning of good times.