It often feels like half of the new security startups that receive funding are from Israel. As YL Ventures’ Yoav Leitersdorf and Ofer Schreiber wrote last month, investments in Israeli cybersecurity startups increased to $1.4 billion last year, with average seed rounds of $4.7 million, up 30.5 percent from 2018.
I spent some time on the ground at CyberTech Global in Tel Aviv a few weeks ago, and the energy in the nation’s security ecosystem was palpable. But this is also an ecosystem that has changed a bit over the last few years as its first wave of startups have been acquired, gone public or shut down. Now, these entrepreneurs are coming back for their second acts, which creates a different dynamic.
There are a lot of reasons why Israel excels in cybersecurity, but one of them is undoubtedly its talent pool, which is fed by intelligence units like 8200 and 81. Indeed, it’s exceedingly unusual to come across security startup founders in the country who did not receive their initial training in the intelligence services. This experience also gives these founders a network of potential co-founders and employees right from the get-go.
It’s worth noting, though, that while more than half of the workforce at Unit 8200 is female, that number does not translate to the same number of cybersecurity founders in the country, though that is slowly changing.
For a long time, Israeli startups had a bit of a reputation for selling early instead of trying to build a massive company. That’s changing a bit now, in large part because the founders themselves may have already sold their first company and aren’t looking for that life-changing sale anymore — and because they now have the experience that gives them the confidence to build larger companies.
“I know that a lot of people say, you know, in cybersecurity, it’s really hard to build a billion-dollar company,” YL Venture’s Schreiber told me. “Most of the exits are 200 to 300 million dollars now. So my question is: In which other sectors is it easier to build a billion-dollar company? It’s just the amount of exits in cybersecurity is so big, that people say, ‘oh, there are no big companies.'”
YL partner John Brennan echoed this sentiment. “I think you’re starting to see that shift. We talk to Series A and Series B investors who are generally the most concerned with that reputation. Security is a naturally inquisitive market, so you definitely have a lot of data points. But now you’ve got more mature people who are thinking bigger.” In his view, VCs need to do due diligence for ambition; nobody wants to invest in a founder who only wants to build a small company and sell it as soon as possible (which is also not easy, of course).
There were, of course, always some Israeli security startups in it for the long run, with Check Point spawning a bit of a PayPal-like founder ecosystem and CyberArk going public as far back as 2013. At $410 million, last year’s sale of Twistlock to Palo Alto Networks is yet another example of a recent large acquisition.
So now we are seeing what’s essentially a second generation of Israeli security startups. Some, like Snyk, which recently raised $150 million, have already surpassed a $1 billion valuation.
Another good example of a company founded by industry veterans is VDOO; its founders previously co-founded Cyvera, which they then sold to Palo Alto Networks. Now they are back for more, having learned plenty of lessons from their first time around and with a lot more patience to build a platform that supports a larger business.
Another good example is Cycode, which was founded by serial entrepreneur Ronen Slavin (ex-8200 and co-founder of FileLock, acquired by Reason Security) and former Symantec security architect Lior Levy (who also cut his teeth in the Israel Defense Forces). Levy told me he has a roadmap for the next 10 years and noted that the overall tendency toward selling companies quickly has changed. “You will see that the trend has changed in the past years,” he said. “People are getting into the business with the intention of building bigger companies and not to sell them. Sometimes, that will result in higher exits […] but also in more IPOs than there used to be.” He also stressed that now that founders are looking at building their second company, they don’t do it for the money anymore.
Similarly, Sigmadots, an IoT security startup that spun out of Essence Group, is currently managed by Itsik Harpaz — a former senior manager in the Israeli Defense Force. His take on building his company exemplifies what I heard from a lot of other startups. “We’re aiming to be dominating in the world, not to be a minor player,” he said. “In the last few years, you can see a lot more unicorns that evolved out of the Israeli ecosystem — so you feel more confident to aim for it.”
For VCs, increased interest in the Israeli cybersecurity ecosystem also means that the dynamics around seed rounds are getting more aggressive (which, in turn, is probably good for the startups they are vying for). With typical seed rounds now close to $5 million, that also leaves less space for angel investors, Schreiber noted (though YL tends to lead its rounds and sets aside a small part for serial entrepreneurs who can provide strategic value to the company).
As Israel’s profile in security increased, large international companies began opening offices in the country. Now, these companies are competing for the same talent pool as native startups. And Israeli engineers tend to stay in the same jobs for longer, too — at least more so than in the Bay Area. For the time being, that doesn’t seem to be having any major effect on the startups that I spoke to, but it’s something to keep an eye on in the long run.