(Bloomberg) -- Investments in Israel’s cybersecurity industry jumped 9 percent in 2016, a year when the world suffered a successful cyberattack on a national power grid, a massive e-mail leak that may have altered U.S. elections, and an $81 million central bank heist, according to a new report from Start-Up Nation Central.
According to figures based on the non-profit’s data platform and tech industry database PitchBook, 365 Israeli cybersecurity companies raised a total of $581 million in 2016, about 15 percent of all capital raised by the industry globally. About a quarter of the 65 Israeli cyber start-ups founded last year have already succeeded in raising funds, the report said. The report was released ahead of next week’s Cybertech Tel Aviv 2017 conference.
Prime Minister Benjamin Netanyahu often touts cyber tech as a growth engine for the Israeli economy. The new research suggests the country’s cyber industry is maintaining its status as a global leader, drawing on expertise and experience gleaned from the country’s elite military intelligence forces.
“Israel is at the forefront of innovation in cybersecurity” as entrepreneurs who completed their mandatory military service “uniquely bring their cyberwarfare and cyberintelligence expertise to the commercial sector,” said Avivah Litan, a vice president and analyst at Gartner Research.
Check Point Software Technologies Ltd., a pioneer of network firewalls, is a leader in its field, as is CyberArk Software Ltd., which focuses on privileged-account security within corporate networks. Both companies are Israeli.
Last month, the U.S. approved legislation that will expand joint cyber research with Israel. The stakes are high: The global cyber security market will grow to more than $200 billion by 2021 from $122 billion last year, according to the MarketsandMarkets research firm.
Multinationals also are expanding their presence in Israel, as Huawei Technologies Co. acquired HexaTier Ltd. and Volkswagen AG started Cymotive, a security solution for connected cars, in a joint venture with a former head of Israel’s General Security Service.
More than one-third of funding for Israeli cyber companies came from corporations last year, up from one quarter in 2015, according to the report. Investors included Deutsche Telecom Capital Partners and Singtel Innov8 Pte., as well as the venture arm of Israeli military security company Raphael Advanced Defense Systems Ltd.
Israel needs to capitalize on that advantage to make the local industry into a significant global player, said Yoav Tzurya, a partner at Jerusalem Venture Partners.
“There’s no doubt that Israel’s competitive advantage in cyber stems from the military, but the question is if this advantage is being exploited to its fullest,” Tzurya said in a phone interview. “The answer is no.”
He said the country should develop and pursue some sort of framework that would allow soldiers to build their own companies while contributing to national security.
“To build an industry that will draw more money and grow, we need to create a wide pipeline,” said Tzurya, who runs Jerusalem Venture Partners’s Cyber Labs in the southern city of Beersheba.
Even as investment grew last year, exits fell by one quarter in number and about 50 percent in value terms. The report says that shows companies are choosing to take more time to grow rather than allowing themselves to be acquired for relatively small amounts.
As more start-ups exit innovation hubs, their products are seen as safer investments and they’re able to skip seed rounds. As a result, the industry saw an unprecedented 32 A rounds last year, and average funding at that stage grew 44 percent to $9 million, from $6.3 million in 2015, the report said.
“If you look at the number of later rounds, it shows companies are going for another cycle of maturity and not running off to be bought,” said Guy Hilton, chief marketing officer at Start-Up Nation Central.
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