The legitimacy paradox: What drives or destroys tech sectors
AI fuels consumer tech, defense rides geopolitical tailwinds, but binary options, crypto, and NFTs show how fast hype can sour. What defines an industry's legitimacy and trendiness in the Israeli and global landscape?
There is a transient nature to the sexiness of different tech sectors; the macro and micro influences that drive which industries are perceived as legitimate, if not trendy, at any one time.
Defense tech, once shunned by investors over reputational concerns and strict regulation, is now buoyed by a global push toward patriotism, accelerated, some argue, by Russia’s invasion of Ukraine. Other once controversial sectors, such as offensive cyber, are being rebranded as mainstream security solutions. And the applications of AI through its recent revolution are also propelling sectors such as consumer tech with advances that were once thought a figment of the future.
At the same time, the reputation of crypto has plummeted, its early promises overshadowed by associations with the dark web and criminality. Sectors like algorithmic trading (algotrading) and binary options, similarly enjoyed their fleeting 15 minutes before collapsing under the weight of brand damage. Meanwhile, once promising sectors like climate, psychedelics, cannabis, and food tech remain in limbo, still searching for the conditions to turn ambition into a viable reality.
And as AI drives the tech industry’s latest boom, some experts caution it can still be difficult to separate genuine transformation from another hype cycle. “It’s no longer technology just for the sake of technology,” said Fiona Darmon, Founder and Managing Partner, Sunvest Capital Partner. “It’s actually technology meeting a growing need.”
“One of the hardest parts for both VCs and for employees is actually being able to figure out when a problem is fake and when it is real,” added Shahar Tzafrir, Managing Partner, TLV Partners.
“You can have the most amazing technology, but if the problem is not real and the market is not significant enough, there's just no chance.”
“The trendiness of different tech sectors… has to do with many aspects,” said Rotem Eldar, Managing Partner at 10D.
“One aspect is the readiness of the market to adopt new technology… and another is the maturity of the technology to actually make an impact that is not evolution, but rather revolutionary in that domain.”
“Israel is a microcosmos of global demand”
As Tzafrir, Eldar and Darmon have noted, what often makes a sector “sexy” comes down to timing, with the right technology meeting the right demand.
In Israel, however, it is crucial to understand what defines demand and readiness. The startups that emerge are not shaped by local consumer values. The supply of new ventures, and the talent they attract, is driven almost entirely by international markets.
Unlike larger economies where startups can test their products domestically, Israel is an export-first ecosystem. “Israeli startups are launched to serve global markets, and not the Israeli market. So we are always a part of global trends,” said Eldar.
Thus the boom and bust cycles of sectoral “trendiness” tend to mirror global priorities. When international money floods into crypto or NFTs, Israeli startups follow suit. When the world turns to defense, Israeli founders pivot there.
“Like it or not, Israel has no local market,” added Darmon. “Israel is a microcosmos of global demand, because it’s about what sells, it’s what’s appealing. The world is our market.”
Where Israel excels, she explained, is in taking existing global trends and acting as a “technology powerhouse,” with Israeli ingenuity scaling or propelling global readiness. “Israel has for years been a technology hub serving the global market. So when you try to do something contrarian, it doesn't work. It's always solving a problem which is part of a bigger global problem.”
One example of this dynamic is autonomous driving, with companies like Mobileye. Initially avoided by VCs skeptical of thin automotive margins, it eventually became one of Israel’s most vibrant ecosystems. “This became more trendy because it seemed like there’s starting to be a shift in the automotive space around electrical vehicles and around autonomous vehicles and a lot of sensors and a lot of connectivity for the car,” Eldar recalled. “And all of a sudden it became a very vibrant ecosystem of startups.”
“It’s about seeing a global need and thinking the way that we do out of the box in order to solve them,” said Darmon.
From buzz to burnout
Some of the most vivid cautionary tech trend tales come from the scandals of the last decade. Trading tech such as algotrading and binary options lured both employees and investors with promises of fast money before collapsing in a storm of fraud and regulation.
Tzafrir recalled one such episode in a June 2025 tweet, describing an encounter with binary options founders fresh out of the IDF who were pitching what looked like a promising tech platform. Curious, he attended the industry’s first London conference.
“I walked in. And it took exactly one minute to understand what was going on around me,” the tweet read. “An extraordinary collection of Russian and other gangsters, surrounded by entourages that were unmistakably escorts, many of them wearing wildly over-the-top crocodile leather shoes.”
Binary options as a sector was not alone in this regard. Other bubbles burst because they were solutions in search of a problem. NFTs, for example, show how even mainstream VCs can be swept up in mania.
But even technologies with genuine potential can suffer reputational damage, not because they fail to meet a need, but because the market is not ready. Regulation, in particular, can make or break legitimacy.
“The crypto arena is suffering from a lack of regulation, which makes it very attractive, because it seems like you can get rich fast, but it also means a lot of fraud,” said Eldar.
Darmon argued that many Israeli startups in the early 2000s fizzled because they were “too groundbreaking ahead of their time.” Since then, she said, the ecosystem has matured by getting closer to customers from day one, whether through multinationals on the ground in Israel or by opening offices in target markets early. “Even at the idea stage, they’re already establishing what solution they’re trying to solve,” she added.
On the other hand, oversaturated markets fuel hype fatigue and leave little room for more than a handful of winners. “We're oversaturated with cybersecurity companies,” said Tzafrir. “Everyone is looking at Wiz and they want to be the next Wiz. However, there will be just one, two Wiz’s in the history of Israel.”
The balance between market readiness and a solution that truly meets demand has seen even necessary domains like climate tech struggle to find their place in the ecosystem. Darmon, who defines climate tech, much like insurance tech, as an “application of technology,” predicts “there will be a lot of trial and error until they realize what is the right transformative technology to drive the change in the required change of the industry.”
“If no one is paying to solve that problem, then there isn’t really a market. You can have fantastic technology, but there’s no market,” she said. Without that clarity of purpose, investors stay away. That being said, for founders and employees, there is more to what makes an industry feel meaningful to build in than simply following the money.
Tech sectors gaining legitimacy
As the experts argue, what makes a sector attractive is not only capital inflows. Founders and employees are also drawn to personal significance, the sense of working on problems that matter.
“Entrepreneurs and employees that have an entrepreneurial streak want to test their boundaries. They want to try to explore new markets, to revolutionize,” said Darmon. “We are people who constantly want to conquer new peaks, and going into uncharted territories is the best way to do that.”
Eldar also sees this ambition translate into talent gravitating toward impact-driven markets. “They want to be part of the forefront of innovation and of the biggest success stories,” he said. “If that market has an impact on people's lives… people want to be a part of something that is bigger than them, something that they will be proud to talk about.”
And because solving a real problem is central to a sector’s legitimacy and trendiness, once-taboo fields have turned into attractive opportunities for founders, employees, and investors alike, with defense tech’s rebranding into the mainstream standing as one of the clearest examples.
“Defense is an industry, and defense is going through a massive revolution,” said Darmon. “Many investors didn't make that call because they said it's too risky.”
Now, she argues, there is “this sudden realization that old technologies are out and that it requires new ones. And it is heavily driven by what happened in Russia, with a bit of sentiment of what’s happening in Asia, with China and Taiwan and North Korea.”
“The playing field of defense tech has moved center stage because A, there's going to be a market of acquirers. B, there's a need for new innovation… and so it's been legitimized because everybody's doing it, because it's saving people's lives.”
However, when it comes to the second component of tech trendiness, market readiness, Eldar pointed to the global regulatory shifts that have helped this sector take off. “The reason that [defense] was out of favor for a long time is because defense technology is predominantly being bought by government agencies, and government agencies don’t necessarily behave in a very business-oriented manner.”
Remembering that Israel is a microcosm for the values of the rest of the world, Eldar noted that the impetus came from trends already in motion abroad. “Defense technology, it's not an Israeli trend. We feel it now in Israel, but it's not an Israeli trend,” he said, pointing to investments in the American defense giant Anduril Industries. “It's something that started in the US a few years ago already, maybe six, seven years ago, the leading funds, like Andreessen Horowitz (a16z) already started investing in that space.”
Still, there are limits to what sectors can move from the fringes into the mainstream. As Darmon stated, “the brutal reality is that they will invest in less than 1% of the deal flow that they will see every year.”
Some areas may never escape the margins, such as porntech and gambling. Others, however, have managed to reinvent themselves. Offensive cyber and surveillance tools have been reframed as critical infrastructure. “I would now categorize [offensive cyber] under defense tech as well,” said Eldar.
Looking ahead
AI is the latest disruption to influence the cycle of tech trendiness, though leaders caution against treating it as a sector in itself. “I don’t see AI as a sector. I see AI as a new tool available for developers who are now able to solve in a very different way a new set of problems that previously just couldn’t be solved,” said Tzafrir.
He gives the example of Buildots, an Israeli startup using AI to optimize construction. “The problem is extremely complicated. It couldn’t be solved before the era of AI.”
For Eldar, one of the most immediate impacts of AI is in consumer tech, where it is revolutionizing UX. “AI has made the user experience and the user interface much more intuitive,” he said.
Looking further ahead, quantum computing is edging toward plausibility. “I always thought this is kind of science fiction,” Eldar continued. “That really has changed over the last two, three, four years. It’s still a decade away, but it’s a decade, not three decades.”
According to Darmon, “every industry is going through transformation [and] will continue to go through transformation. Every time that new technologies are introduced, every industry is revolutionized.”
So which of these revolutions will stick, and which will go the way of crypto? For Startup Nation, tech is arguably only as sexy as the problem it solves.
