Here are two startup companies that typify the global high-tech scene these days.
The first is Aquant, an artificial intelligence startup whose business is inscrutable to almost everybody. In its own words: “Aquant’s AI technology captures the knowledge of subject matter experts before they leave, by unlocking insights from clients’ data silos (e.g., CRMs and ERP systems), analyzing the free-text of customer comments and field technician notes, and validating findings with top performers.”
Nevertheless, somebody must know what it does because its customers include blue chip companies like Johnson & Johnson and Home Depot. Last month, Aquant announced that it had raised $30 million from investors.
The second startup, Zume, was until recently using robots to make pizza and baking the pies in oven-filled trucks to whisk them to customers’ homes just as they were ready. A five-year-old could understand that business, although he would be wise not to put any of his allowance money into it. Leave that for billionaire investors like Masayoshi Son, the founder of Softbank, who invested $375 million in Zume a little over a year ago, valuing the company at $2.25 billion.
If a money-losing pizza business doesn’t sound like a multi-billion-dollar proposition to you, you’re too smart to be a venture capitalist. Around the same time that Aquant raised its $30 million, Zume announced it was firing half its human staff (and apparently all the robots) and focusing on two ancillary businesses: helping other restaurants deliver takeout and making high-tech food packaging.
Despite its robots and algorithms employed to perfectly time its pizza deliveries, Zume wasn’t really a tech company and didn’t deserve a tech valuation. Yet even today, as it “pivots” to new businesses, Zume is employing the high-tech gloss it once tried to give to pizza. Thus, the restaurants it hopes to serve – a new breed that make meals exclusively for takeout – are known as “cloud kitchens,” echoing the internet cloud. Get real. They’re about pots, pans, carrots and cooks just like as any other restaurant kitchen.
The difference between these two companies is that Aquant is about real tech and Zume is about gimmicks: it's a restaurant business with a Silicon Valley facade. Another important difference is that Aquant is an Israeli startup and Zume is based in California.
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That last difference is important amid signs that Silicon Valley is heading for harder times – perhaps not on the scale of the dot.com bust 20 years ago, but certainly an era of lower expectations and less money.
As The New York Times reported this week, Zume is just one of 30 startups that have laid off 8,000 staff in just the last four months. The tech industry has been embarrassed by a string of IPO flops, including by Uber, WeWork, SmileDirect Club and Casper Sleep. The latter is a company like Zume, in this case a mattress store whose products happen to be for sale online. It had hoped to go public at a $1 billion valuation, settled for $476 million and today trades at $382 million.
Silicon Valley is a lot more than a bunch of Zumes and Caspers, but there are far more frothy companies than there are in Israel’s Startup Nation. If you look at the 18 biggest startup fundraisers in Israel last year, they all engaged in heavy-duty tech – cybersecurity, fintech, cloud computing and automated vehicles. There’s even a growing deep-tech sector of startups pursuing next-generation technologies that require lengthy research and development cycles.
This isn’t a testament to Israeli sobriety but to the fact that we’re a tiny country too far away from the U.S. market to successfully engage in tech theatrics. We’ve had a few, like the startup Yo whose app's sole raison d'etre was to enable the user to send a single message,“yo,” but it’s the exception that proves the rule.
If a big global tech shakeout is coming, as The Times suggests, it will be the pseudo-tech companies that get hit the hardest. Israeli sobriety will shield it from the worst.
There are already some tentative signs that the shakeout is happening in America. In the United States, startup fundraising fell last year to $136.5 billion from a record $140.2 billion in 2018. The number of deals was on a downward trajectory throughout the year. In Israel, the deal flow also declined in 2019, but the amount of money raised jumped by more than 30% to $8.3 billion.
The danger to Israel is not a shakeout, but the possibility that U.S. tech is standing on the precipice of a second dot.com cliff. The great majority of the venture capital invested in Israeli startups comes from the U.S. America remains the biggest market, Wall Street is where the most successful Israeli tech companies go public and U.S. companies are the biggest acquirers of Israel startups. Where America goes, we follow.
A year or two ago, China might have been a candidate to pick up the U.S. slack. But the U.S.-China trade war and growing pressure from Washington on Israel to pare back its tech ties with China make that unlikely. Even before the coronavirus hit the Chinese economy, its tech sector was slumping. The truth is that 20 years after the dot.com boom and bust, Israeli tech is still joined at the waist to America, in good times and in bad.