Cybersecurity investment in Israel surges 47% to over $1b in 2018

Data protection is fastest-growing vertical, with 13 new startups in the field, according to an industry tracker report

Shoshanna Solomon was The Times of Israel's Startups and Business reporter

Illustrative. Hackers/cybersecurity (iStock by Getty Images)
Illustrative. Hackers/cybersecurity (iStock by Getty Images)

Investments in cybersecurity firms in Israel crossed the $1 billion mark for the first time in 2018 as interest by foreign investors surged, a new report by Start-Up Nation Central, which tracks Israel’s tech industry, shows.

“Israel’s longstanding position as a leader in the global effort to prevent cyber-crime remains indisputable,” the report said.

By the end of 2018 there were 450 active cybersecurity companies in Israel, 60 of them founded in the past year. Israel’s cyber industry is second only to that of the US, taking 20 percent of the overall venture-backed cyber investments worldwide, according to an analysis of PitchBook and Start-Up Nation Central databases.

The figures were released ahead of a cybersecurity conference, CyberTech, that will see more than 15,000 attendees from over 80 different countries flocking to Tel Aviv this week, starting Monday.

Participants at Israel’s CyberTech 2016 conference (Courtesy: Gilad Kavalerchik)

The number of startups founded in 2018 is lower than the 75 set up in 2017 and the 82 in 2016, SNC said in a statement. Indeed, like the rest of early-stage Israeli technology firms, fewer cybersecurity startups are being established every year as the industry matures and companies stay private for longer periods before exiting,

Funding for the cybersecurity sector in Israel rose to $1.19 billion in 117 deals in 2018, a record-breaking amount for the fourth year in a row. The sum exceeded 2017 investments by 47% In 2014, the total amount invested in the sector was $240 million in 50 deals, the data shows.

The median size of investment deals continued to grow and stood at $6 million in 2018, compared to $3.5 million in 2017.

Non-Israeli VC investors continue to be a dominant player in the industry in Israel, participating in 65% of the investment deals. The vast majority are American investors, with a few more from France, Japan and UK.

Nir Falevich, cybersecurity sector head at Start-Up Nation Central and the author of the report, said the leap in investment deals of late-stage companies during 2018 shifts the focus from early-stage startups to maturing companies that generate significant revenue.

The fastest-growing sector in the Israeli cybersecurity industry, by number of new startups, is data protection, which includes solutions in privacy protection and encryption. Thirteen new startups were founded in the field in 2018, bringing the total number of active startups in the vertical to 65, or 15% of the total cybersecurity sector.

As the world becomes more digitalized and our home and office gadgets smarter, the threat of cybersecurity breaches grows. The global cybersecurity market is expected to grow from some $153 billion in 2018 to $248 billion by 2023, according to data firm MarketsandMarkets, with the major forces driving growth stemming from the strict data protection directives issued by the European Union and growing cyber terrorism.

“The distinction between criminal and adversary nation-state activity in the cyber domain has become increasingly blurred, as state-sponsored and criminal hacking teams, with mixed financial and geopolitical motivations, share the same tools, capabilities, and even victims,” the report said, citing data compiled by CrowdStrike. “Attacks have become better targeted and more sophisticated than ever before, which has made them far more harmful.”

The growing demand for privacy, generated by the large data breaches over the past few years, and the needs of companies and organizations to comply with the new European General Data Protection Regulation (GDPR), “are attracting entrepreneurs and investors to next-generation solutions including AI based data governance solutions, and advanced cryptography,” the statement said.

The challenges that cybersecurity professionals face today are many: there is a “widening shortage of cybersecurity talent,” which puts the organizations at risk of not being protected; there is growing uncertainty about regulation and compliance and how companies need to protect their and their customers’ data; the balance between business growth and growing security requirements; the transition to the cloud; and workers who work remotely as well as the growing use of unsecured smart and connected devices, the report said.

Exits slowdown

Last year saw 12 exits — first-time deals, including IPOs and buyouts — for Israeli companies. Six of these deals totaled $418 million, while the values of the other six deals were not disclosed. Compared to previous years, this is a decline in numbers in deals activity, the report said.

“We see a similar decline across all sectors which could be interpreted as a sign that more companies are choosing to stay private longer and grow their business, rather than look for an early exit. Another possible reason for the slowdown in M&A activity is that many of the top-tier global security vendors have already established local R&D centers” and are therefore less inclined to acquire startups, the report added.

The largest deals in 2018 were Dome9 Security, which was acquired by Check Point for a reported $179 million, and SECDO, acquired by Palo Alto Networks, for a reported $100 million, the report said.

The cybersecurity industry in Israel saw a 13% increase in the number of employees between 2016 and 2107, reaching a total of nearly 12,500 employees. There are 47 multinational corporations’ cybersecurity-related operations in Israel, the report said.

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