Cyber-security Compensates for Narrow Financing Trends in Israeli Tech

Israel Cyber Security

This year’s third quarter marks an impeccable period for fundraising deals in the Israeli tech industry. The sector raised $1.44 billion, which represents a 54 percent increase from the same quarter last year according to the latest report from the Tel Aviv law firm, Zysman Aharoni Gayer & Co., and IVC Research Center. Software companies accounted for a fourth of total market capital, which is actually a considerable decline from the two-year average of 35 percent albeit still significant.

This year’s massive uptick in cybersecurity capital and share value, which is largely attributed to the WannaCry ransomware scare from the Spring, is still manifesting for Israeli cybersecurity companies like Skybox Security and Nanolock Security Inc.

Market analysts are taking stock of the fact that fiscal 2017 saw more fundraising deals this quarter than 2016 to the tune of 144 as compared with 140 respectively. This pales in comparison, though, to 2015 Q4’s 202 deals, and 2017 Q3 also marks a sharp decline from the previous quarter’s 158.

Overall, experts aren’t viewing the number of fundraising deals as being all that remarkable, but what is remarkable is that relatively fewer deals saw a 54 percent increase from this same period last year. Pundits say the answer lies in the size of the average financing round, which was $10 million as compared to last year’s Q3 average of $6.7 million.

“Basically, what it means is that a smaller number of startups are getting more money, while others are missing out,” according to Marianna Shapira, IVC Research Center director of research. This is primarily due to a 17 percent decline in seed and early stage deals in comparison with the five-year average. It’s a significant trend “of investing larger amounts in fewer companies,” according to Shmulik Zysman of Zysman Aharoni Gayer & Co. He feels it points to investors having “an appetite for greater risk.” Evidence suggests that the cybersecurity rush this year in response to the WannaCry scare has been fueling investment for the market that leads one of the biggest and most sophisticated tech industries in the world.

On Wednesday, Oct. 25, Skybox Security announced it had benefitted greatly from the joint round of financing between CVC Capital Partners’ Growth Fund and Pantheon to the tune of $150 million. The company is clearly thriving, having been established in 2002 in Herzliya Pituach and now headquartering in Silicon Valley, but the company has never raised this much money in any period. To date, Skybox Security has raised $288 million in total. CEO Gidi Cohen said in a Globes interview, “Within 12 months, we’ll be in a position to hold an IPO in terms of our financial profile but at this stage that is not part of our focus.”

Skybox perfectly exemplifies what increased VC funding in the cybersecurity space is doing for the tech industry as a whole. It’s a burgeoning firm benefitting from the aftermath of the ransomware scare, and a tech company of its size outside of the cybersecurity space would be statistically far less likely to see this kind of success. Skybox is a firm that engineers cybersecurity management software solutions that provide client companies with thorough visibility of their individual attack surfaces. They rely on analytics to impose a hierarchy of importance onto a client’s liabilities and then advise the client on how best to deal with those risks. They have an expansive software suite that lets clients mitigate risk exposures like policy violations and device misconfigurations.

According to Cohen, “Enterprises, governments—everyone is either embarking on or going through massive digital transformation, and this means new challenges for security because the attack surface of these organizations is growing more complex. We’ve been consistently evolving our technology to meet those challenges. With this investment we’ll accelerate that innovation, focusing on some of the most critical areas, such as security management for the cloud and the OT networks that control critical infrastructure.”

The perception of an increasing complexity of corporate cybersecurity is, in large part, spurred by the ransomware scare in tandem with the less-than-reliable light cast on Microsoft’s security practices this year and the subversion of NSA code and hacker tools. More importantly, that perception is the reason why investors appear inordinately willing to take risks in the cybersecurity space. It’s not that economic trends have given speculators confidence but, rather, that cybersecurity investment appears to be an infrastructural imperative in virtually every country around the globe at this point, which makes it ostensibly much less of a risk and more of a necessity.

A senior managing director at CVC Growth Partners, Jason Glass, said, “Skybox’s track record is impressive and there is clear demand for their solutions. It is a true leader in cybersecurity management, helping organizations better protect themselves and become more efficient. Gidi Cohen, Skybox’s co-founder and CEO, is a respected innovator in security management and analytics, and we look forward to working with him and the wider executive team as we expand Skybox’s offering and global reach.”

Zion Market Research published a significant, global market analysis of the cybersecurity market in May this year in which they forecast 9.5 percent market growth from 2016 to 2021 due to current trends and rapid growth potential in light of all the infrastructural advantages afforded by a developed cybersecurity space, so it stands to reason that the heart of one of the most dominant tech industries in the world exemplifies this so aptly. Smaller deals and smaller firms in the tech industry aren’t seeing much VC fundraising as of late, yet in the cybersecurity sector, this foible of a trend is far less acrimonious.

Awz Homeland Security Fund is a Canadian venture capital fund that solely invests in Israeli intelligence, physical security tech and cybersecurity. Because of the Awz HLS Fund and many others around the world like it that similarly focus on investments in Israeli tech, a smaller firm like Nanolock Security Inc. and Siga Data Security Ltd. benefit more than their tech counterparts outside the cybersecurity space, this quarter to the tune of $4.5 million and $3.5 million respectively.

“Israel is recognized as one of the world’s foremost leaders in cybersecurity and is commonly referred to as the ‘startup nation’ for high-tech innovation,” according to Yaron Ashkenazi, CEO and Founder of Awz HLS Fund. “There is a growing global need for Israel’s powerhouse security capabilities and expertise. The strategy for our Fund is to invest in companies that are at the forefront of generating real solutions to the most challenging existing security threats.”