Is Israeli Tech One Big Bubble?

“Hillel, you always paint such a positive picture of Israeli tech as if there are no challenges and everything is just perfect.”

Well then, I’ll just leave this here. https://en.globes.co.il/en/article-israeli-wall-street-tech-stocks-all-fall-below-2021-debut-value-1001409982?fbclid=IwAR3KICGxpp5othznYzuuxdx_KzjYA4Q6WOEJlAi2ax1Oo0YUHvMhEKWEkzw

No matter how you spin this, it’s not good.

A little background.

2021 was the first year in which Israel had more IPOs (initial public offerings aka “Going public”) than exits.

I like to quote this statistic because, in theory, it points to an important trend, the transition from ‘Startup Nation” to something more mature, whether you call it Scale-up Nation, Unicorn Nation, or anything else.

Many years ago, I interviewed the legendary venture capitalist and serial entrepreneur, Marc Andreessen. It was one of the most fascinating interviews I ever conducted. You can read about it here https://venturebeat.com/.../a-twitter-interview-with.../amp/

One of the questions I asked Marc is when he’ll be opening his Israel office. He told me that they have a one office rule but when they do open another office, good chance it’ll be in Tel Aviv. But offline he told me that Israeli entrepreneurs sell too early. He was of course right.

But that interview was conducted years ago and I believe the ecosystem here has matured and founders I meet are less concerned with “exits” and more focused on building large companies.

So what’s the problem? The problem is that we Israelis, and maybe this is even a Jewish thing, like to find shortcuts. Now don’t get me wrong. If you’re able to find a hack to do something more efficiently, great. But sometimes that shortcut comes at a steep price.

So many of these IPOs were actually not your traditional IPO. Many of these companies that could have potentially went public the old school way had they waited a little, ended up going public via a SPAC.

Most of the worst performing Israeli tech companies held SPAC mergers rather than IPOs, merging with a special purpose acquisition company which had raised money with the express purpose of merging with an existing tech company.

So some public company raises money just to merge with a tech company. That tech company essentially hitches a ride to the public markets. That way they skip over all the headache associated with going public. They basically found a shortcut to Wall Street.

Sounds great, right? Well, no. The numbers speak for themselves.

Just today, before I saw this article, I had this conversion with a hedge fund guy. I asked him why these SPACs are crashing.

Simply put, the faster something goes up, the faster it’ll come down.

That headache I mentioned before? That headache might be necessary for a company going public. Like I said, some of these companies could have gone public without a SPAC had they just waited a little bit. Instead they went for the shortcut and apparently, you can’t trick the public markets.

It’s one thing to have a valuation as a private company, even if it’s a massive multiple of the current revenue, but when you’re public and everything is transparent, there is no room for BS.

Now, full disclosure: I am not a financial analyst. Far from it. Having said that, some of these SPACs rubbed me the wrong way. Some of these companies just didn’t have the revenue to justify an IPO. And truth be told, they would not have gone public without that SPAC because the IPO would have crashed and burned (See WeWork’s attempted IPO.)

But the SPAC gave them a shortcut and the ability to bypass the very strict and thorough process of going public.

Time will tell what will happen with these stocks because I can tell you first hand that some of these companies, and I’m tempted to name names but I won’t, are incredible.

Some of these companies are legitimately building the future. Some of them might not have the revenue yet, but have massive partnerships in place. Some of these stocks WILL bounce back, but I think companies will now think twice about going public via SPAC, and that, in my opinion, is a good thing.

So, for now, Israeli public companies are getting demolished (by the way, not only Israeli companies are experiencing this.) and it’s not a good look.

Am I worried about the strength of the Israeli tech ecosystem, long term? Absolutely not. It’s never been this exciting. This news though, is quite the hiccup.