Cyber security industry nearly doubles in past decade

cyber security

Israel's cyber security industry is booming, with 430 active companies and 18 exits in 2015, IVC reports.

According to an IVC report, 430 cyber companies operate in Israel, compared with slightly more than 250 in 2006 and just 20 in 1996. Foreign companies also have 40 R&D development centers in Israel in the cyber niche - probably the result of the acquisition of Israeli companies by foreign companies. IVC says that some of these companies provides security cyber solutions or cyber for government purposes (such as missile interception), but emphasizes that most of the companies are aiming at the organizational and consumer market.

Of these 450 companies, only 19 are public companies. This is no surprise, because the distribution of the cyber companies shows that a large proportion of them are either still in the R&D phase, or their revenue is merely beginning, and they are therefore unsuitable for a public offering. Check Point Software Technologies Ltd. (Nasdaq: CHKP), the pioneer, which was founded 23 years ago, is now listed on the US stock market at a $13.6 billion market cap, and CyberArk Software Inc.(Nasdaq:CYBR), less veteran than Check Point in both years of activity and as a public company, is currently traded at a $1.5 billion market cap.

Just how young most of the Israeli cyber companies are can be seen from the distribution of their current stage: only 46% have initial revenue, and only 9% have more than $10 million in annual revenue. The remaining 45% are still development laboratories for all intents and purposes - companies whose product is not yet commercial, and may never be commercial. Statistics prove that most startups never complete the long road from a theoretical idea to a working product.

The boom in Israeli cyber business (among other things, a byproduct of military service, mainly in IDF Intelligence Corps Unit 8200, where Check Point's founders served) is reflected in the annual average of the number of companies founded. Since 2000, an average of 52 companies a year has been founded, but the average over the past four years has been 66. The peak year was 2000 with 76 companies; only 2013 came close, with 73 companies.

In its study, IVC comment on the number of companies that failed, i.e. were closed or stopped operating, and asserts that one out of every two cyber companies founded in Israel over the past 20 years still exists. "This is an extraordinary proportion, given the general survival rates of startups in Israeli high tech," IVC states. For example, 21% of companies that were active in 2000 are still operating, and 57% of the companies active in 2010 are still operating.

17,000 employees

A no less interesting and possibly quite significant figure is the number of employees in the cyber industry in the 430 companies found: 16,864, almost 17,000, which is quite impressive. Unsurprisingly, however, large-scale companies (with annual revenue of over $500 million) account for a large proportion of these employees. According to IVC, there are seven such companies employing 8,270 workers. Check Point, for example, has 1,486 employees in Israel (as of 2014, because the company's 2015 reports have not yet been published).

225 of the companies - about half - employ a total of 1,028 workers. These companies have less than $10 million in revenue. In other words, according to IVC, these companies average five employees each. The IVC report also stresses that companies that have received only seed investments account for 16% of all the companies, they employ only 2% of all the industry's workers, while the same 9% over $10 million in revenue account for 67% of all the industry's workers.

18 exits in 2015

Any analysis of the Israeli cyber industry must address the question of acquisition of local companies by foreign companies. There have been more than a few such acquisitions. According to IVC, 18 deals for the sale of Israeli cyber companies took place in 2015 with aggregate proceeds of $1.2 billion, while not a single company held an IPO. In other words 4% of the industry's companies were sold, compared with a 2.5% average for Israeli high tech as a whole. For example, acquisitions in 2015 included Adallom, sold to Microsoft for $320 million, and Cyactive, sold to Paypal for $65 million.

One important point is that IVC includes in its analysis Israeli cyber companies acquired by other Israeli companies, rather than by foreign companies, e.g. Check Point's acquisitions of Lacoon for $100 million and Hyperwise for $20 million, and the sale of NICE Systems Ltd.'s (Nasdaq: NICE; TASE: NICE) cyber division to Elbit Systems Ltd. (Nasdaq: ESLT; TASE: ESLT) for $150 million. As for Elbit Systems, IVC say it is Israel's largest cyber company, especially after its recent series of acquisitions.

Cyber investment

Israeli cyber companies could not succeed without financing, meaning mostly venture capital investments. These investments have grown, and continue to grow, given the industry's importance. According to IVC, the average first financing round for a company was $2.3 million, while in 2015 it was $6.9 million - three times as much in three years.

Thus it happened that in 2012, "only" 29 Israeli cyber companies raised $65 million, while last year, 78 companies raised $539 million, 10 times the 2010 figure of $58 million. "This means that the cyber niche heads the local high-tech industry as an investment instrument," the IVC study states.

IVC also asserts that the 78 companies that raised capital in 2012 make up 20% of all the active companies - double the rate of the Israeli high-tech industry at a whole.

Published by Globes [online], Israel business news - www.globes-online.com - on January 24, 2016

© Copyright of Globes Publisher Itonut (1983) Ltd. 2016

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