Tech Roundup / Hackers Inspire Investors: A Boon for Israeli Cyber Security Companies

The industry sector that Check Point developed has emerged from the doldrums and is once more alive with investment activities and opportunities.

In the latter half of the previous decade, Israeli cyber security companies were having a hard time trying to raise investment capital. The disappointing exits, the feeling that the new companies were merely providing complementary services for the products of the giants in the field and the growing interest in the “sexier” Internet companies that dealt directly with the consumer all contributed to a situation in which investors shied away from the new cyber security firms.

Many entrepreneurs who had served in technological units in the Israel Defense Forces and who had worked with such cyber security companies as Check Point, Aladdin Knowledge Systems and Cyota tried to set up their own companies and came face to face with this difficulty. The absence of investor interest led to a significant reduction in the number of new companies that were founded in this field in Israel. However, over the past two years, the investment fears of this sector have vanished as a new approach has developed on the issue of cyber security.

In a report issued by the IVC Research Center on new investments made by investment funds in Israel, no less than nine companies listed are new cyber security firms that were established in 2012. The report does not include the many investments that have been made by micro funds, seed angel venture capital funds, accelerator funds and foreign investment funds that have recently begun to operate in Israel.

For investors who are more interested in investing in companies in this field, a wider range of opportunities are now available. According to a survey conducted by the PricewaterhouseCoopers (PwC) accounting firm, 45 cyber security firms were established in Israel last year.

“Not only are more information security firms being created today, the fields in which they operate are not the standard sectors of the past,” says Yaron Blachman, who leads PwC Israel’s Security and Forensics advisory services. The recent innovativeness in the field can be attributed to three technological trends that have shaken up the old models over the past few years: the shift to cloud computing, the smartphone revolution and Big Data, or the analysis of data on a huge scale.

Other factors are the significant changes the field of cyber security is undergoing and the threats it must deal with.

In recent years, sophisticated cyber attacks on various organizations have aroused immense public interest. Computer systems that had previously been considered to be highly protected, such as those of the RSA cyber security firm and Lockheed Martin, have been hacked, and cyber attacks have been launched against the internal data banks of Google and various technological firms, financial organizations and large media groups. In light of these attacks, the entire field of cyber security has evolved from a specialized niche to a major component in the information security strategies of companies and organizations around the world.

“This field has always been very active. However, there has been a dramatic increase in activity globally, especially in Israel,” notes Shlomo Kramer, one of Check Point’s founders and the founder and CEO of the Imperva business security company, which began trading on NASDAQ in 2011. Kramer is the most prominent investor in the field of information security in Israel and he has invested in many cyber security firms. Some of them – such as Trusteer and Palo Alto Networks, whose shares are traded on NASDAQ and which is considered one of NASDAQ’s most successful technological companies in recent years – are major firms and top performers.

New cyber security threats

Two weeks after Twitter announced that its computer systems had beem hacked, Facebook reported over the weekend that its computer systems had also undergone a cyber attack. The attack on Facebook’s systems was carried out through the infection of the computers of a number of the company’s employees when they visited a site intended for mobile developers. In the case of both Twitter and Facebook, the hackers used a serious breach in security that was recently discovered in JAVA software and which allows computers to be infected with malware without any advance warning and without any action being undertaken by the user. The Israeli-based Cyvera company, founded in 2011, has developed technology to prevent the exploitation of such security breaches. According to Netanel (Nati) David, Cyvera’s Chief Product and Operations Officer, all cyber attacks have been thwarted in companies that use this technology.

Last September, Cyvera completed a round of fundraising that was spearheaded by Blumberg Capital Partners and which brought in $2.1 million. “A year ago, I had to explain to investors in what part of their information systems our product would operate,” recalls Davidi. “In the past, methodologies such as the utilization of a JAVA malfunction were known only to cyber security experts. The market and recent incidents of hacking have eliminated the need for such an explanation.”

Dan Yachin, research director in IDC’s EMEA Emerging Technology Group, argues that cyber security has received a major push forward thanks to the administration in Washington.

“This is one item on America’s defense budget that has not been reduced," Yachin says. "That investment has led major players like Boeing, Lockheed Martin and General Dynamics to make significant purchases in the field. Here in Israel we are also witnessing the entry of companies such as Rafael Advanced Defense Systems, Elbit Systems and Magal Security Systems into the field of cyber security.”

In addition to the increase in cyber threats, Kramer attributes the growing interest in cyber security to tectonic changes in the computer field that have served as a catalyst. “The field of cyber security has developed in accordance with the infrastructures it must protect," he adds. "In recent years, major changes have taken place in Information Technology infrastructures. Web and mobile applications, cloud computing and the increase in quantities and in information-sharing have created new cyber security needs and have opened the door to new projects.”

Looking for the Blue Ocean

The investment by major investment groups in eight new cyber security firms in 2012, as noted in the IVC report, is unprecedented. Horizons Ventures, a Hong-Kong-based investment company founded by Li Ka-Shing, who is also its chairman, has invested in Shine Security, which specializes in mobile protection services. In addition, considerable capital has been invested by other investment companies in a number of cyber security firms.

Alongside the activities of well-established investment funds and the activities of Kramer, who invested in many cyber security companies even when the field was experiencing a relatively listless period, many new investment groups have begun to focus on cyber security. Glilot Capital Partners, a micro fund that completed last October a round of fundraising that netted $30 million, is concentrating on cyber security companies. Jerusalem Venture Partners, which operates an incubator that specializes in the media sector in Jerusalem, recently won the bid for a new incubator tender and is currently creating a cyber incubator that will operate in Be’er Sheva in collaboration with Ben-Gurion University.

Alongside the activity in the present incubator track, the Ministry of Industry, Trade and Labor announced last November the establishment of an investment track for cyber companies – KIDMA, for the advancement of research in the development of cyber security systems, with a budget of NIS 80 million. The KIDMA project will allow companies to enjoy an increased budget relative to their investments in the current tracks offered by the ministry’s Office of the Chief Scientist. In addition to these companies, many foreign investment groups, including groups from South America and Europe, are showing a great interest in the cyber security industry in Israel.
 

Bloomberg