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Co-working facilities at the "Library" in Tel Aviv.(Photo by: TEL-AVIV YAFFO MUNICIPALITY)
Israelis shrug off fears of hi-tech bubble
By NIV ELIS
06/29/2016
Right now, Israeli companies may be benefiting from the fact that they are “cheaper” than American ones, but that could cause the local market to overheat.
No sooner did the news break that local hi-tech companies raised a whopping $561.4 million (so far!) in June than the gears celebrating Israel’s start-up prowess began whirring anew. Graphics were created, articles were written, backs were patted.

But what if news of ever-higher investment is not the sign of a hi-tech market continuing to prosper, but rather of a bubble inflating, a bubble that could burst?

For the past several months, there have been similar concerns in Silicon Valley, where the proliferation of “unicorns” – companies valued at $1 billion or more – have raised questions as to whether the firms are over-valued.

In November, when payments start-up and renowned San Francisco-based Unicorn Square, Inc. went public, it seemed to confirm everyone’s worst fears. A year earlier, it had charged investors $15.36 per share. By the time it went public, it hoped to earn just $11-$13 a share. Today, it’s trading below $9. A trend was true of companies such as Etsy, peer-to-peer e-commerce website, and Fitbit, a maker of wireless-enabled wearable activity trackers, whose enormous valuations went tumbling once they were traded in public markets.

Many recall the dot.com crash in 2000, which led to a recession in the US and was associated with a large number of tech companies going under. But investors say that the current situation is not on the same scale, and that Israel will not be affected the same way as Silicon Valley.

“Unlike the previous bubble, the Internet population is 20 times bigger than it was then, so you actually have customers and you actually have revenues,” said Eden Shochat, an equal partner at Aleph VC in Israel.

Gadi Tirosh, managing partner at Jerusalem Venture Partners, agreed, and added that the overheated market may not even be a bubble at all.

“What we’re experiencing isn’t a bubble burst, but definitely a slowdown, returning to more sensible valuations on the [US] West Coast,” he said.

So what caused the “bubble” in the first place?

Shuly Galili, co-founder of UpWest Labs, which helps Israeli start-ups in Silicon Valley, said the high valuations were due to investors’ over-exuberance, which created an oversupply of investment cash there.

“All the ‘tourists,’ the people who came in with money to throw at the Ubers, are starting to leave, which is very healthy for the economy and the startup scene, because the money is smart money,” she said. “People are slightly more diligent when they are investing.”

There are two reasons why the cooling of an overheated investment market in the US might not affect Israel as harshly as one would think.

First, the trends that hit the US tech scene do not always affect Israel the same way, or as quickly. Despite their connections, Silicon Valley and Israel remain separate markets.

“Everything that’s happening here becomes news in Israel six months later,” said Galili.

Added Tirosh: “I think Israel follows the trends in the US, but on a different scale, and usually with a shift of a quarter [i.e., three months] or so.”

The Israeli market might be affected differently than Silicon Valley because prices in Israel tend to be cheaper for investors. According to IVC Research Center, Israeli companies have seen 30-40 percent year-over-year increase in investment, as compared to doubling or tripling in the US.

“At high tides and at downturns the valuations in Israel are more sensible than in the US,” Tirosh said. “It has to do with the overall prices here. Salaries and rents and total cost of living is lower than on the West Coast.”

Israelis, he surmised, are adept at making more with less, using their entrepreneurial spirit to overcome tough problems with fewer resources.

“[A bubble burst in the US] would affect the amount of capital available for investment, but if we learn from history, we see that the Israeli market knows how to operate with lower levels of capital,” he said.

Koby Simana, CEO of IVC, thinks Israel could be moderately affected if things come crashing down.

“Israel is not an island. The global tech world is connected, and if something will happen, it will affect Israel,” he said.

Right now, Israeli companies may be benefiting from the fact that they are “cheaper” than American ones, but that could cause the local market to overheat.

“I think Israel may be benefiting right now, but we should be very careful and look at things with our eyes wide open. We should be realistic. Companies that raise too much capital are setting expectation too high, and the more capital you raise the more capital you need to return. So the question is, does it make any sense?”
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