Opinion

Is Startup Nation Taking on Water?

Startup Nation continued to float high even though the flow of money into global high tech slowed, in part thanks to cyber-crime. But the party is ending.

Reuters

So long high-tech boom, it was good to know ya. That’s more or less the message arising from a report this week on fundraising by Israel’s startup companies.

The headline figure in the IVC Research Center's report showing that Israeli high-tech companies raised $1.2 billion in the quarter looked good enough. It was sharply down from the third quarter’s $1.7 billion – the most raised by Israeli startups in a decade – but was in line with the $1 billion-plus levels we’ve been accustomed to in the last two years.

With nearly $4 billion under their belts in the first nine months of 2016, this year seems very likely to break the 2015 record for high-tech fundraising.

The underlying data, however, show something less encouraging.

For one, the third-quarter figure was given a boost by a $204 million private placement of bonds by Ormat Technologies, a publicly traded energy company – not exactly a classic startup. Excluding that, the quarterly total falls below $1 billion.

Moreover, investing by Israeli and foreign venture funds continued to decline. Seed investments in the earliest-stage Israeli companies were down 60% from a year ago, constricting the pipeline of startups that will be available for investors in the years ahead.

When something better comes along

None of this should come as a surprise because Israel’s Startup Nation has been an outlier in continuing to suck up investment money.

Globally and in America, the tech sector has been in a funk.  In North America, high-tech fundraising was just $47.8 billion in the first nine months of the year, down 20% from a year earlier, according to KPMG-BC Insights.

Like in Israel, there have been fewer, but bigger, investment deals, which reflects the fact that a lot of non-traditional investors, like hedge funds, are getting into the act. With interest rates at record lows, they desperate for any asset that can holds out the promise of better returns.

But these are not traditional tech investors – they’re not betting on innovation, they’re buying mature tech companies that have a proven product. If something better comes along, like an interest rate hike, they’ll be gone.

Hackers are so 2015

There are a couple of reasons why Startup Nation has stayed afloat like a high-tech rubber ducky as other tech centers take on water.

One is Israel’s outsized presence in cyber-security, which was the technology du jour for much of 2015 and 2016.

Hacking has hardly become history (just ask John Podesta), but investor appetite is diminishing. CB Insights found that cyber investing in America plunged 24% year over year in the third quarter.

Another factor is automotive technology, especially self-driving cars, where Israel has also carved out a big niche for itself. That technology is still hot, but by itself, it can't keep Startup Nation swimming in capital.

A third factor is Chinese investment – some of it by companies looking to tap into Israeli tech expertise, some of it capital looking for a safe-harbor amid worries about the Chinese economy. But you have to have a pretty rosy-eyed take on China to believe its credit-fueled boom won’t end badly, shutting the China money pipeline to Startup Nation.

Startup Nation’s optimists, which is nearly everyone, are putting their hopes on a revival of the initial public offerings market in the U.S. to inspire VC funds and other investors to give them an exit they can look forward to and keep putting money into startups.

Ten months into 2016, the dollar-volume raised in new listings in the U.S. is the lowest in 13 years. There has been however a handful of successful IPOs in recent weeks that have sparked hopes that the drought is over.

Maybe, but IPO trends are hard to predict. The stock market in general has been riding a low-interest rate wave and that can’t go on much longer. If it goes down, it will take the IPO market with it.

No one likes booms to end. At least, the high-tech funding boom probably won’t end in a bust.