Israel’s cyber-security startups take a hit as global competitors rise in numbers

The Cyber Ecosystem of Israel has seen a sharp decline of 33% in new startups in the new decade. This is likely because of the growing level of global competition.

The rapid rise of competition in the cybersecurity market across the world is at the foundation of Israel's recent fall in its cyber startup ecosystem, according to Elron and RDC's Vice President in Cyber Investments, Mr. Zohar Rozenberg. Rozenberg has an elemental role to play in the formation of the cyber policy of the Israel Defense Forces' (IDF).

At the cybersecurity conference Cybertech Tel Aviv, Rozenberg said, "Markets saturate, power consolidates, and competition grows stronger. Nothing runs on its own without energy. We must tirelessly fuel innovation, boldness, and ingenuity without letting our guard down."

For automobile, automotive, manufacturing, and fintech industries, cyber challenges, including aspects like VPN security, continue to grow. So, the need of the hour for Israel is continuous investments, along with mass support. This will help to boost the talent in the country and infrastructure and revive Israel's cyberspace.

Why Israel became the hub of cybersecurity

Recently, Ofer Schreiber and Yoav Leitersdorf from YL Ventures reported the increase in the investments in cybersecurity in Israel from $4.7 million in 2018 to a massive $1.4 billion last year! It's no wonder that Israeli cybersecurity startups seem to be receiving half the funding.

The major reason behind investors' interest in Israel is its talent pool. What's interesting is that such advanced agencies are established by people who have not had any formal training in intelligent services. However, the network that's in place there right now can help find co-founders and service providers easily.

For a fairly long time, Israeli startup founders sold their business at an early stage, instead of trying to grow and build a company. However, the scenario has started to change a little, as the new startups coming up in the country are often founded by those who have already made their first big sale and gained enough confidence, and are now looking to build something for themselves. 

Decline in Israel’s new startup scenario

The decline in Israel's startup scene has been quite evident recently. The Central Bureau of Statistics had reported that the number of startups in their early stages of setting up dropped by 6% between 2017 and 2018. And, this figure does not even take into consideration the startups that had matured to the manufacturing stage.  

However, between 2011 and 2018, Israel saw the closure or the suspension of operations of 5,313 startups which is roughly 45% of the total number of new organizations in the country. From 2012 to 2015, every year has seen the establishment of at least 500 startups, utilizing the funding flowing into Israel. However, within a span of three years from 2015 to 2018, the number of startups closing down was more than that of newly established ones.

Less funding in Israel’s new startups

So, the question is, why is there a decline in the cybersecurity scenario of Israel. The answer is, diminishing funding. Startups, after all, are a risky venture. From 2016 to 2019, the number of startups in Israel saw a drop of 33%. It is clear that Israel's success has taken a hit, even though it can boast of a healthy local ecosystem, as well as the support of the critical mass.

In 2019, It can be said that Israel is gradually losing out on the early mover's advantage that it had been enjoying for a long time, with more and more startups from around the world flooding the existing markets. And, investing in new startups often leads to fast revenue, which attracts financers more than significant innovations do.

Global tech giants help entrepreneurs understand the needs of the corporates so that they can provide tailor-made solutions. In addition, innovators are now trained and market-ready and, with proper financial literacy, they have the option to choose between starting something new or joining a global establishment. They are ready to handle all kinds of cyber challenges, both existing and potential.

The big change in exit value

Clearly, Israeli companies have been exiting the startup scene in large numbers, whether or not they were backed by Venture Capital (VC). Reports state that the number of VC-backed companies exiting the scene increased by 53%, from 2010-2014 to 2015-2019. On the other hand, in the case of non-VC-backed establishments, the number of exits has decreased by 14%.

If we take into consideration the aggregate exit value of these companies for the same periods of time, i.e. 2010-2014 and 2015-2019, the number has gone up by 38% for VC-backed establishments, while the same has dropped by 16% for non-VC-backed organizations. Thus, 2019 proved to be a year of meaningful liquidity for VC-backed companies.

The value of exits in 2019, including IPOs, M&A and Buyouts, went up to $21.7 billion. Of the 138 deals included in this, the acquisition of Mellanox by Nvidia alone was worth $6.9 billion. In fact, 2019 saw exits of the highest value ever, at $14.84 billion. Of this, the exit of private companies alone was $10.33 billion. 

The seed funding scenario

Israeli cybersecurity startup Armis, which is noted for making IoT software, is about to be acquired by the Insight Partner based in the US, in a massive deal of $1.1 billion. Meanwhile, one of the most noteworthy developments in the startup scene in recent times would be the acquisition of seed funding worth $4.5 million by Cervello Ltd., a Railway cybersecurity startup. It was led by Israel’s Tel Aviv-based North First Ventures and Toronto-based Awz Ventures, with Israel-based Comsec Consulting Ltd.’s founder Nissim Bar-El’s participation.

Cervello was founded in 2017, and it is noted for developing a service of detecting potential threats in the operational networks of railway and metro systems. It helps companies in the said industry to evade safety issues and service delays as a result of cyber-attacks. Its security platform is designed to meet the needs of the rail industry in terms of cybersecurity. 

Another notable news involves the Serie A funding of $12 million, raised by Cylus, which also provides cybersecurity services in the railway and metro industry. The seed money is for the business expansion of the organization. Vertex Ventures and Magma Venture Partners, which are the existing investors of the company, led the round of funding for Cylus, along with new financers like GlenRock, Cerca Partners, Cyient, and FollowTheSeed. this was in the presence of the company’s former investors, SBI and Zohar Zisapel, as well as former Austrian Chancellor and managing director of Blue Minds Company Christian Kern.

Credits: Pro-Riterz (Diptesh Das)