Israeli Cyber Sector Growing Quickly, but Still Mostly Tiny Startups

IVC report says fund-raising, exits grew at double-digit rates last year and industry now counts 430 companies.

Israeli high-tech workers. Rare is the Ethiopian-Israeli among them.
Alon Ron

Israel’s cyber industry is growing at a breakneck pace, with the value of startup fund-raising and exits growing at double-digit rates in the past year. But the industry remains dominated by tiny startups without any sales or profits. That according to the state-of-the-industry report released by the Israel Venture Capital Research Center on Sunday, which showed that 78 cyber startups raised $540 million last year, a 20% increase over 2014.

Meanwhile, IVC figures showed that 18 companies were acquired or conducted an initial public offering for a combined $1.2 billion, up 40%. That was up from 13 in 2014 and just four in 2013. IVC said it expects similar momentum in 2016.

The Israeli industry counts 430 Israeli companies and 40 research and developments centers operated by multinational companies working in the field, IVC said. The number of new startups has been growing on average by 50 every year since 2000.

But IVC estimated that 46% of the companies are so-called seed-stage enterprises still developing products, and only 9% of them are generating revenues of $10 million or more a year. Only 19% of them are publicly traded.

Moreover, said IVC, while the industry employs some 17,000 people, the great majority of cyber startups are tiny – two thirds of the industry workforce is employed by just 9% of the 430 companies, it estimated.

IVC noted that in 2015 there were no major cyber IPOs on the scale of Cyber Ark’s 2014 $86 million offering.

Israel’s high-tech sector, a major growth driver, has been bolstered by a global surge in demand for cyber technologies. Many of the companies were founded by graduates of elite cyber warfare units in Israel’s military.

The odds of a cyber startup surviving are much higher than for other startups, IVC said. It estimated half of cyber companies formed in the last 20 years were still in business, versus 21% for all startups.

But many in the industry are concerned about plans by the National Cyber Authority and Defense Ministry to introduce export controls on the sector, saying they are concerned that sensitive Israeli technology could fall into enemy hands. Cyber industry figures said the controls, whose final form is still being designed, would create red tape and deter exports.

Last week a Defense Ministry official insisted that the controls would only affect a tiny number of companies, those involved in fathering sensitive information relating to defense and developing hacking technologies

“Supervision will only be imposed when necessary,” Dubi Lavi, head of the Defense Export Controls Agency, told a meeting with cyber executives. “Ninety nine percent of the world of cyber won’t require supervision – just the sectors specializing in information gathering and hacking.”

Israel’s biggest cyber investor last year was Jerusalem Venture Partners, whose portfolio counted nine startups, not counting companies it had exited from. Another big investor was Microsoft Ventures, the investing arm of the U.S. software company, which also had nine companies but had invested less in them because if its preference for seed-stage companies.

The Glilot Capital Partners counted eight cyber startups in its portfolio and was the third largest.

With reporting by Ora Coren.