AnalysisCan positive stock market momentum resurrect the high-tech industry?
Analysis
Can positive stock market momentum resurrect the high-tech industry?
Unlike the sporadic jumps observed in stock indices over the past two years, there are now also signs of life in the IPO market
Is the turning point in the high-tech market close? In situations where the depth of the industry's depression is apparent, and difficulties in raising capital for investment funds, such as Insight Partners and Tiger Global, along with pessimism among entrepreneurs prevail, it's easy to overlook the change in the wind's direction.
Although it won't happen immediately, we shouldn't dismiss the 30% rise in the Nasdaq index and the over 16% increase in the S&P 500 index since the beginning of the year, and their implications for high-tech funding activity. Just as public company shares collapsed at the start of 2022 while unicorns continued their progress, the opposite is currently unfolding: unicorns are still hesitant, while public companies are making significant strides forward.
Unlike the sporadic jumps observed in stock indices over the past two years, there are now signs of life in the IPO market. Although high-tech company IPOs have not yet emerged, changes in sentiment typically start elsewhere. For instance, Cava, a chain of Mediterranean restaurants operating in the United States, has already signaled the opening of the IPO window. The company debuted with a valuation of $2.45 billion, which swiftly climbed towards $5 billion. Last week, six more companies went public, with four raising over $100 million.
Currently, two conditions must be met before the metaphorical bell can ring, signaling the end of the crisis, at least in the markets if not the real economy. The first condition is positive returns in recent IPOs, and the second is the continuation of momentum in the stock market. It is expected that the rate of increases will slow down and trading will become sluggish in the next two months, but traders will return towards September.
Assuming no further interest rate hikes are in store, the positive momentum in stocks will continue to spread. Just as private high-tech companies experienced a dramatic slowdown in capital raising and waves of layoffs a few months after the stock market crash, the opposite will occur as well.
Institutional bodies have suspended inflows of funds into private funds and venture capital due to the decline in the value of their tradable holdings. Entities managing public savings funds are obligated to maintain a balanced ratio between marketable investments and alternative investments, avoiding any excessive weighting in either direction. When share values increase, funds can be redirected to startups. When the IPO market opens, it becomes easier for investors to allocate funds to large and mature companies since the possibility of exits becomes a reality.
Simultaneously, several processes are unfolding in startups, making them more attractive to investors. Less successful companies will be closed or sold, while surviving companies will undergo efficiency improvements, experience increased sales, and some may even approach profitability. Most of them will exhaust their cash reserves, necessitating fundraising efforts. Consequently, investment funds will have an opportunity to invest in stronger and healthier companies at lower revenue multipliers compared to 2021. While the global economy and the Nasdaq experience these developments, the numbers for the first half of the year in Israel are concerning. Furthermore, countries like France and Germany, which sought to replicate the Israeli Startup Nation model, have surpassed Israel in terms of activity volumes.
The clock is ticking for the Israeli government. The Israeli ecosystem has only a few months to rid itself of the remnants of the judicial coup and prepare for the return of investors with renewed enthusiasm for tech. If the rest of the world begins to recover while Israel lags behind, the damage to the local economy will be irreversible, potentially erasing all the progress achieved over the past three decades.
