The Equifax breach, WannaCry, NotPetya, the NSA leak, and many more cyber incidents – 2017 was certainly a busy year for hackers, illustrating yet again just how vital innovative cybersecurity solutions are in the fight against cyber threats.
Second only to the U.S., in terms of cybersecurity investment 2017 was another excellent year for Israeli cybersecurity startups, with dozens of companies being formed, breaking fundraising records and producing solid exits. The 2017 data also suggest that the Israeli cybersecurity industry is maturing, as we see a shift in funding towards later stage companies.
More Capital, Fewer Startups
In 2017 we witnessed 60 newly founded cybersecurity startups emerge in Israel, a 28% decrease from the 83 companies founded in 2016. Conversely, the average 2017 seed round increased 16% YoY, growing from $2.85 million to $3.3 million. This is Israel’s fourth consecutive year of increasing round sizes at the seed stage – a trend that we are observing and contributing to as we write larger checks to invest in great cybersecurity entrepreneurs.
One might think that the decrease in the number of cybersecurity startups is an alarming signal, warning of an industry in decline. Our view is that this is a positive indicator of a maturing industry. Cybersecurity is a crowded space, in which thousands of companies operate. CISOs are bombarded with dozens of solutions every day, each of which promises to stop the next big attack. Given this dynamic, it is getting harder for “me too” cybersecurity companies to receive funding, as investors are looking for more differentiated and broader solutions that address the increasingly complex needs of customers.
Those who do manage to raise money tend to convey a grander vision, while aiming to build robust products that require more capital. The result is fewer startups being funded by more capital. This is a positive development for the entrepreneurs who want to build sustainable companies, the investors backing those ideas, and the customers who need more sophisticated solutions.
Younger Teams and More Female Founders
The 2017 data show a steep increase in the percentage of female founders. While still a predominantly male field, 15% of newly established cybersecurity teams in 2017 had a female founder, an increase from 5% the previous year.
As in 2016, there was a nearly even split between startups founded by experienced teams (those with more than a decade of executive or entrepreneurial experience) and companies founded by less seasoned entrepreneurs. We did witness a slight increase in teams led by IDF graduates, founders that leverage their relevant military experience to build cybersecurity companies soon after being discharged. One such example is Axonius, which was founded by three graduates of 8200, the IDF’s elite intelligence unit, who are building a visibility and control platform to secure assets on enterprises’ networks.
More Funding, Fewer Rounds
Looking at 2017 Israeli cybersecurity fundraising, we see a familiar trend of fewer companies raising larger amounts of capital. Israeli cybersecurity companies across all stages raised over $847 million this year, representing a 23% increase from the $689 million raised in 2016.
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