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.