Why Your Next Cybersecurity Tool/Service Might Just Come from Israel — PART 2: The Land of the Cyber Startups

Note: in June 2017, I was invited by the Israeli Ministry of Foreign Affairs to attend the CyberWeek conference in Tel Aviv, as part of a delegation of journalists from around the globe. This article is the second of three articles that I wrote following that experience;  the first article, explored the question of  “Why Israel?

[T]he prominence of Israel in the technological field and in the cyber field have made Israeli companies very, very attractive. So because we have a lot of speed chess players, because we have hundreds of startups, because we have demonstrable success in providing solutions in this rapidly changing sphere, Israel has become an attractive target for cyber security investment, and I think if I tally it roughly as we can see, in 2016 we have about 20% of the global private cyber security investment around the world.
PM Netanyahu at the CyberWeek conference (June 26, 2017)

In a previous article, we explored some of the factors that have contributed to positioning Israel as a potential leader in the cybersecurity innovation domain. However, potential isn’t always realized, but in the case of Israel, there is strong evidence that the formula for leveraging their special mix of circumstances into cyber startups and investments is working.

Growing Alliances

One cannot hear the Prime Minister and deny that Israel is a country deliberately focused on cyber. There is a palpable deliberate effort by government sector, financial sector, industry sector, and academia to come together and collaborate. This effort is having an impact on the way the rest of the world sees Israel, as evidenced by Indian Prime Minister, Narendra Modi, who visited Israel in early July, the first visit by an Indian PM. In part thanks to its cybersecurity expertise, Israel is being courted by many countries according to its PM.

At CyberWeek, representatives from the US government were also in attendance, marking a new level of collaboration. Thomas Bossert, Assistant to the President for Homeland Security and Counterterrorism announced the creation of a bilateral cyber working group to “stop adversaries before they can get into our networks and hold bad actors accountable.” According to Reuters, the working group will focus “range of cyber issues — critical infrastructure, advanced R&D, international cooperation, and workforce.” Bossert went on to explain one of the reason for working together: "[t]he agility Israel has in developing solutions will innovate cyber defenses that we can test here and bring back to America.”

From Alliances to Startups and Vice Versa

The two high profile announcements about collaboration will likely be a boom for Israel’s continued ability to produce hundreds of cybersecurity startups. How many startups are we talking about exactly? Reuters quoted a figure of 400, while other sources put that figure closer to about 350 startups. Regardless of the exact number — as by their very nature startups come and go, sometimes in a matter of weeks or months — Israel is at the forefront of the global race to innovate in the cybersecurity space. Several (former) cybersecurity startups have now reached global name recognition; here are just a few, whose name you might recognize: IAI, Check Point, Verint, CyberArk, ECI, ByNET, CyberX, BGProtect, Clearsky, Safebreach.

The vibrant amount of activity in Israel hasn’t gone unnoticed by the global investment community and the US. A recently introduced piece of legislation, Senate bill S.719, entitled “United States-Israel Cybersecurity Cooperation Enhancement Act of 2017” introduced in March 2017 might help the US adapt Israel’s recipe for success to further energize US activity in this key sector. The bill “requires the Department of Homeland Security (DHS) to establish a grant program to support cybersecurity research and development, and the demonstration and commercialization of cybersecurity technology.” Grant eligibility requires that “a project must be a joint venture between: (1) for-profit, nonprofit, or academic entities (including U.S. national laboratories) in the United States and Israel; or (2) the governments of the United States and Israel.”

Most companies in the cybersecurity domain are enjoying great levels of attention and success. For example, Israel Aerospace Industries Ltd. (IAI), which is the country’s largest aerospace and defense company (and government-owned), recently announced that it ended 2016 with over $100 million worth of contracts in “cyber-intelligence, cyber-forensics and analysis, and cyberdefense centers.” Its President and CEO, Joseph Weiss, recently said: “[w]e consider cyber to be a strategic field of activity and a growth engine at IAI, and expect it to continue to expand significantly in the coming years” adding that “[w]e will continue to invest in cyber companies and research and development centers in order to continue to expand in this field.”

Fuel for Startups

While the Middle East is known for its fuel reserves, startups require a different kind of fuel — financial fuel. From a global cybersecurity investment perspective, PM Netanyahu during his CyberWeek address mentioned that Israel had garnered double-digits worth of private cyber security investment from around the world in 2016. Added to the generous incentives provided by the government, such as a 4% tax rate for cybersecurity startups (compared to 25% tax rate for regular businesses), as well as seed money that need only be repaid if the startup is successful, the environment is highly conducive to having academics and former military elites join with business leaders in rapidly creating startups.

Globally, investors have proven eager to invest billions of dollars into this domain. From 2012-2016, VCs reportedly invested $12.5 billion worth of seed money (in over 1,200 startups), from $1.32 billion in 2012 to $3.67 billion in 2015 (global figures). From an Israeli perspective, the country saw the creation of 65 new startups in 2016 — putting the total number of companies active in cybersecurity at 365 — and “maintained its leading position as a global center of cybersecurity innovation” according to a data by the nonprofit Start-Up Nation Central. The amount of investment flowing to Israeli startups was second only to the US, but managed to grab 15% of the global venture capital flows. The amount of capital raised by cybersecurity startups in 2016 was reported to be $581 million, up 9% from 2015.

The figures below, about the number of active Israeli cybersecurity companies and the exit deals, are produced by Start-Up Nation Finder™, a free online platform providing data and opportunities for collaboration with Israeli high-tech companies and start-ups. The tool was also used to analyze the data as part of a report by Start-up Nation Central on Israel's Cybersecurity Industry in 2016 (SNC report).

Figure 1 — Active Cybersecurity Companies in Israel (src: SNC report, used with permission)

Figure 2 — Exit Deals for Israeli Startups, 2014-2016 (src: SNC report, used with permission)

Human Capital and Academic Expertise

Although financial incentives and easy access to seed money makes for a frantic level of startup activity, it is the ability for these budding companies to tap into a well trained workforce and expertise from academia that helps buds turn into full-bloom flowers. We’ll focus on academia next, since our first article in the series already covered many aspects of Israel’s workforce.

While many countries have reasonably close ties between academia, few countries display the level of collaboration, cooperation, and freedom of movement between industry, the military, and academia as Israel. The country’s leading academic institutions, such as Tel Aviv University (TAU) and Ben-Gurion University of the Negev (BGU) are not only home to cybersecurity research centers, but figure also prominently at the center of a hive of activity around startups, applied research, and technology transfer.

One such center of activity, Beersheba (also spelled “Beer Sheva”), is located 70 miles South of Tel Aviv. Beersheba has been called the Silicon Valley of Israel, and being home to BGU, it also showcases this tight collaboration between VCs, academia, and the military as the Israeli Defense Forces move a large portion of their activities to Beersheba. A key center in Beersheba is CyberSpark, an Israeli Cyber Innovation Arena. CyberSpark describes itself as “a joint venture of the Israeli National Cyber Bureau in the Prime Minister’s Office, Beer Sheva Municipality, Ben Gurion University of the Negev and leading companies in the cybersecurity industry.” Beersheba is now home to R&D centers for many global technology firms including EMC/RSA and Lockheed-Martin (LM), and the close proximity to BGU further fuels exchanges between students, industry, and academia, as exemplified by its close work with Deutsche Telecom.

Closing Thoughts

A fellow journalist described Israel’s approach to nurturing cybersecurity startups as “a potent mix of tight government oversight and large-scale public investment in education, talent identification and development and R&D.” Other countries seem to agree, and so do international investors.

Reflecting upon my first visit to Israel just last week, I have found the country to be both an innovator and an incubator. Israeli companies seem to be able to move fast, innovate, and when things don’t go well, learn their lessons and adapt. With a strong ability to leverage expertise found in academic and military sectors, combined with a strategic directive from the government to invest in cyber — both as a matter of self-defense as well as to tap into this new burgeoning market — Israel has quickly risen to be a key player in the global cybersecurity market, and is likely to continue its leading role for decades to come.

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