13 minute read

What Lies Beneath Israel’s Start-Up Supremacy

The Cyber Security Market    13 minute read

What Lies Beneath Israel’s Start-Up Supremacy

Israeli start-ups attracted total investments of $2.8bn in the first half of 2016. This is 35% more than in the first six months of 2015. One might not be impressed by the total investment amount when compared to those in countries like the US. However, as the Sydney Morning Herald emphasises – Israel, the global leader in research and development, has more than 3,000 start-ups employing almost 20,000 people, with the entire high-tech industry employing 300,000 people.

It is more than impressing for a country with a population of just 8.4 million. By comparison, a PricewaterhouseCoopers report found that Australia, with the population of nearly three times that of Israel, had only 1,500 start-ups. While for some industry specialists this Israeli start-up success’ phenomenon might not be a surprise – the most recent growth of cyber security industry in this country is worth noting.

Today’s Challenges

One of the biggest dangers that the high-tech world faces nowadays are cyber attacks. Today no entity is immune from exposed embarrassing emails, passwords, social security numbers and other sensitive data.

Once Sony Pictures Entertainment, Amgen and other companies together with CIA Director John Brennan and Democratic political organisations, including Hilary Clinton, have suffered from cyber hack attacks, the whole world took notice. Increased and more sophisticated cyber security all of a sudden has become the most pressing need for all big enterprises and governments across the world, as they store an enormous amount of private data.

Fortunately, there is a belief that the solution to this expanding global problem once again has an enormous potential in Israel. In 2015, the number of cyber security start-ups, as well as the capital raised by these newcomers increased by 25% compared to a year ago.

Israel, a country which has become known as a start-up nation, dedicates 16% of its all investments to the cyber security field, while the average spending of other world economies is around 7%. Not surprisingly, today Israel’s cyber security industry as a whole is the second in the world after the US, according to YL Venture. According to the Financial Times, Israel today has around 430 cyber security companies.

Despite the times when the global economy enters the slowdown stage, the start-up nation (or cyber-nation) once again positions itself in the centre of the major return-seeking investors. It is very likely that Israel and its growing cyber security industry is becoming a safe haven for those sophisticated investors looking for a riskier alternative. But time paved the way for the profit generation, placing their money in the hands of the most innovative nation in the world. Nevertheless, this phenomenon raises some critical questions: what lies behind Israel and its eight million population’s astonishing success in attracting global investors and why does it matter more than ever before?

The Israeli Secret Weapon

‘Chutzpah’ is a Yiddish word which could probably not be translated by one word into any other language. Even though it is very often translated into English as audacity, chutzpah comprises more personal characteristics such as insolence, gall, brazen nerve, effrontery, incredible guts, presumption and arrogance. Something that in many cultures would be considered completely inappropriate behaviour, in Israel it is a secret weapon used (often purposely) to dominate in many aspects of life, including in the business world.

Behind every improvement in sales numbers or in profits, chutzpah is likely to be a factor. In other words, chutzpah could be the Weapon of Mass Business Development (WMBD). Moreover, as Forbes stated, old-fashioned charisma nowadays is dead, and chutzpah steps up to take the stage. While there are still a significant number of world leaders living in long ago established norms of a bureaucratic Western world, dominance and power in the future belong to those with the fearlessness to go after what they want and the audacity to do it how they want. It is not a surprise that Forbes indicates chutzpah personalities as the ones who are making their mark and changing the world.

While chutzpah can be found in many nations, it is mostly common among Jewish people. If one tried to make the list of successful and famous people around the world who came from a Jewish background and relied on their chutzpah to be where they are today, it would be a neverending one. However, in this long list, one could easily see names like Abraham, Mosses, Albert Einstein, Karl Marx, Sigmund Freud and recent well-known names in the economic and business world – George Soros, Carl Icahn, Ben Bernanke, Mark Zuckerberg or the co-founders of Google-Sergei Brin and Larry Page.

Driving The Innovation

Being aware of the chutzpah, Intel US developed a guidebook for its employees on what to expect when visiting the Israel branch. Some bullet points in the guide suggest being prepared to be cut off regularly during a presentation – no matter the position and where in the business hierarchy one stands. Continuous debate and challenging another’s ideas is an inseparable part of chutzpah that pushes innovative thinking and maximises results.

The roots of some big cyber-security companies’ success worldwide also hide deep inside Israel and its people. For example, Check Point, Israel’s best-known cyber security business, throughout the years has bred successful entrepreneurs in this field. The Financial Times thoroughly presents some of these industry leaders.

$175bn is the forecasted value of cyber security products and services in 2020

One is ex-employee Ofer Israeli, a software developer who founded Illusive networks, another company that successfully prevents cyber attacks globally. Another one is Almog Cohen, who after seven years working at Check Point, co-founded and became the chief technology officer of Sentinel One an advanced threat protection company based in Silicon Valley. The third and most interesting, Nir Zuk, one of the first virus developers in the world, is a co-founder of Palo Alto Networks, a company that today fearlessly competes against Check Point in the firewall business. Notwithstanding this fact, Palo Alto Networks’ most recent quarterly revenue jumped 41% to $400.8m, beating the average analyst estimate of $389.7m.

The Military Tech Incubator

Israel’s military unit 8200: from decrypting computer codes to intercepting electronic signals, from cyber security to cyber warfare, this battalion means business. Yossi Melman, a former 8200 soldier who used to hack into enemy countries computers, says there is not a single major Israeli intelligence operation in which Unit 8200 is not involved. Extremely skilful IT specialists who once belonged to this military unit play an important role in the development of start-ups in the country.

After leaving the group with invaluable experience gained while working on a lot of insight required missions in a military division that they were not allowed to speak of (not even to their parents), many soldiers have built startups and sold them for a lot of money. Avishai Abrahami, also a former member of 8200 and founder of Wix (the world’s leading cloud-based web development platform), refers to one room in the 8200 unit of ten people as a magic room due to the astonishing fact that all people who once worked together have created companies with the average market cap of $500m. It becomes clearer why today 25% of all cyber security companies in Israel are founded by military graduates.

Investment returns in Israeli cyber security start-ups are even more fascinating than their origin story. Trusteer, in the 7 and a half years time before being acquired by IBM, generated a 100% return on investment, while NSO in 4 and a half years time brought its founders a 75% return. Many other start-ups have also generated impressive returns in the range of 10-30% over less than four years, including HyperWise, CyActive, Aorato, Cyvera and SkyFence.

The Digitalising World And Its Costly Consequences

The rapid growth of digitalisation across the world promotes heavy investments in the cyber security market too. Juniper Research recently predicted that the rapid digitisation of consumers’ lives and enterprise records will increase the cost of data breaches to $2.1trn globally by 2019. This is almost four times the estimated cost of breaches in 2015.

In other words, big businesses, governments, educational institutions and consumers around the world face a huge challenge of how to become more resistant to the cybercrime epidemic. Last week, Yahoo announced the largest publicly disclosed cyber-breach in history, with data from 500 million accounts stolen. According to Recode Media:

“In the 21st-century, hackers are the bank robbers and data is the hostage.”

More recent data reveals how seriously this problem is for some of the world’s leading banks. J.P. Morgan Chase & Co doubled its annual cyber security budget, from $250m to a staggering $500m, while Bank of America strongly emphasised that their budget for combating cyber security is unlimited.

$2.1trn is the predicted cost of data breaches globally by 2019

To protect themselves from this continuously growing costly threat, all businesses must dedicate their resources in the most efficient way possible. Specifically, security of many entities’ private information must be entrusted to the most competent experts in the field, who could successfully fight against the most sophisticated cybercrime activities globally.

As a result of an increasing tendency of double spending on cyber security, Israel and its expertise in this industry seem to be having a bright and rich future ahead. The global market for cyber security products and services is expected to grow from $75bn in 2015 to $175bn in 2020. Starting with chutzpah and the 8200 military unit generation of high-tech talents, and ending with an investment attractive environment, there is a big certainty that Israel is going to have a huge piece of this delicious pie.

Israel is determined to further expand its dominance in the industry by pouring its major resources into a comprehensive cyber security development complex – CyberSpark – in Be’er Sheva. Today, in the city that is emerging as the cyber capital of the world, many major enterprises have opened their branches, including IBM and PayPal. This is one location in which significant mix of professors, young researchers, entrepreneurs, venture capitalists and large corporations are converging their minds to prepare for future challenges of the cyber security industry.

Such cooperation and most importantly – Israel Defense Forces (IDF) involvement, has turned CyberSpark to an international centre of excellence where even more successful and diligent entrepreneurs are likely to be bred in coming years with even more advanced knowledge and competence in cyber security.

Companies To Watch

  1. Check Point Software Technologies – Israel’s top cyber security company and a hub of entrepreneurs – deserves to be on the list of companies to keep an eye on. First, the company’s share price over five years rose by 44.6%, from $52.35 to $75.70. Check Point’s P/E ratio is 19.2 (vs. an industry’s average of 23.20), while its ROE is 19.43% (vs. the industry’s average of 12.5%). Also, its EPS is on stable uprise too (see chart below). Nevertheless, the company uses little debt in its capital structure and has a current ratio of 1.66. In line with strong fundamentals, it is safe to presume the company can sustain its competitiveness and long-term share price stability due to its innovative nature and power with trust it had gained in the industry throughout the years.picture 300
    Picture 301

    (Source: Financial Times)

  2. Palo Alto Networks Inc – An American company, but with origins leading to Israel and unit 8200. As opposed to Check Point, Palo Alto Networks share prices are much more volatile, but its growth should attract the attention of many investors. Company’s revenues for the full year of 2016 was $1.38bn or impressive 48.54% above the prior year’s results (see chart below). Notably, the main reason was a strong spending by companies and governments on cyber security after a spate of major cyber attacks in the past few years. However, the company struggles to generate profit due to heavy spending on marketing activity, and this is one of few reasons why share price in the last 52 weeks ranged between $111.09 and $194.73. On the other hand, this tech giant in the last four years has accumulated sufficient amount of cash in its reserves to afford temporary profit falls. Also, the company recently decided to enter $500m share buyback program, and this action just proves that company cares about its shareholders and is ready to put its cash reserve in use. Moreover, the ability to maintain sales growth at such a high percentage leave many analysts predicting a further uprise movement in its share price in the next 12 months, with few of these analysts even anticipating an all-time high of over $200/share (see chart below).
    Picture3002

    Picture3008

    (Source: Financial Times)

  • Deep Instinct Ltd – another Israeli startup that has been in the industry only for three years. Deep Instinct is the first company to apply deep learning to cyber security and its game-changing approach to information security issues has landed them the Most Innovative Startup Award in the Best of Black Hat Awards program held in August. The recognition for the company’s creativity in finding solutions that could help enterprises become more secure comes from one of the world’s most well-known IT security conferences. This early success of Deep Instinct lies in a strong, diverse management team with a relentless drive for innovation. For example, company’s CEO Guy Casspi is a leading mathematician and data scientist global expert who has extensive work experience in applying mathematics and machine learning in the aforementioned famous technology elite unit of IDF and in other intelligence operations across the world. Guy Casspi is not the only member of the team with a military connection, as there are more tech veterans from individual cyber units in IDF, including CTO of the company – Dr Eli David. The unique feature of this Israeli startup is a deep learning, which according to cyber security Excellence Awards, “is currently not widespread because the entry barrier to developing a deep-learning-based technology is very high.” Furthermore, considering that there are very few experts in this novel domain of artificial intelligence, Deep Instinct and its innovative drive makes it one of the most impressive startups to follow. Beside of the fact that company’s financial information is not accessible to the public, it clearly has a huge potential of becoming a leading player in the cyber security industry. Finally, taking into account the speed of company’s customer base growth it becomes just a matter of time when Deep Instinct gets quoted on the stock exchange or being acquired by the bigger company for a sweet bid price.
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