As hackers gain strength, Israeli cyber firms raise more money than ever

Investors poured a record-breaking $815 million into the Israeli cyber ecosystem in 2017, totaling some 16% of all global investment in the cybersecurity industry, second only to the United States.

JANUARY 30, 2018 02:00

Updated: JANUARY 30, 2018 13:44

Cyber hackers [illustrative] (photo credit: REUTERS) — Cyber hackers [illustrative]

(photo credit: REUTERS)

Guests getting locked out of their hotel rooms. Hospitals unable to access patient files. Cars not turning on unless you pay up. Hackers can now break into your consumer products or workplaces like never before, demanding ransoms totaling billions of dollars.

Israeli cybersecurity firms are rising to the challenge, with 2017 being another banner fund-raising year for local startups, according to a report published by Startup Nation Central on Tuesday.

Investors poured a record-breaking $815 million into the Israeli cyber ecosystem in 2017, totaling some 16% of all global investment in the cybersecurity industry, second only to the United States. To put that in context, Israelis make up only about 0.1% of the world population.

“Individual hackers are now armed with state-level cyberattack capabilities,” the report states, authored by Nir Falevich. “2017 will be remembered as the year when the cybersecurity sector, both worldwide and Israeli, began to invest highly significant effort in defending IoT [the Internet of Things] and connected devices.”

Nearly a third of newly-founded cybersecurity startups in 2017 focused on “Internet of Things” security, in fields such as medical devices, automotive systems and industrial control systems. Some 70 cybersecurity companies were founded in 2017, a slight decrease from 84 new startups formed in 2016.

At the end of 2017, there were some 420 active cybersecurity firms in Israel. Thirty multinational corporations have cybersecurity-related R&D centers locally, with Daimler AG, the owner of Mercedes- Benz, setting up shop last year.

Israel’s cybersecurity industry is also maturing, with investors increasingly turning to later-stage companies. Three of the five largest Israeli cybersecurity deals of all time took place in 2017 – with investments totaling $150m. in Skybox Security, $100m. in Cybereason and $70m. in SentinelOne. And one Israeli company, Forescout, held an IPO on NASDAQ.

And in the past year, Israeli startups made fourteen exits – when a startup founder decides to cash out and sell the company – totaling more than $1.4 billion. That eye-popping value is due to Argus Cyber Security being bought by Continental for $450m., and Skycure and Fireglass being acquired by Symantec for $280m. and $250m. respectively.

On the other hand, early-stage start-ups face greater challenges in raising funds, with fewer seed-round investment deals. Despite those challenges, the average seed-round investment in Israel – $3.6m., almost twice the size of seed rounds in 2016 – exceeded the average in the US.

The average investment in Israeli cybersecurity firms in 2017 stood at $10.8 million, 26% higher than in 2016.

And more multinational corporations and sovereign governments are working with local industry. Foreign investors participated in two out of every three funding rounds for Israeli cybersecurity startups.

The most active Israeli investors in 2017 were YL Ventures and JVP Cyber Labs, each making four investments in cybersecurity.

Globally, the threat that hackers pose is only increasing, the report notes. Hacking tools that were once only affordable to deep-pocketed individuals and sovereign governments are now more affordable than ever.

As more people adopt IoT devices, companies selling the household devices are not taking the proper cybersecurity safeguards, putting at risk industrial operational technology networks, smart grids and connected cars.

In response, the global cybersecurity industry is trying to expand use of encryption in network and data storage, along with improved software patching and better incident response.

And cybersecurity firms are trying to use Artificial Intelligence and machine learning to better detect malicious and intrusive activities.

Start-Up Nation Central is a non-profit group which seeks to connect multinational corporations and foreign governments with Israeli startups and entrepreneurs. The organization offers a Finder platform which maps the Israeli hi-tech ecosystem, with accurate information on more than 5,500 companies across dozens of industries.