The huge valuations and 2021 funding rounds left some room for optimism about the state of the Israeli cybersecurity industry in 2022, which gives a sense of security in the first quarter of the new year. While other sectors began to feel the changing tide of the market as the year progressed, capital continued to flow freely into cybersecurity, reinforcing the belief that it is a persistently resilient outlier in technology, immune to market instability and unable to be shaken in a downturn.
After closing the book on 2022 this week, it’s safe to say that this optimism was somewhat misplaced. In retrospect, 2021 can be categorized as an anomaly that sent the industry into a tailspin, with inflated valuations outpacing actual earnings and funding rounds scaling at what many believe is an unhealthy pace. The ramifications of this spiral are evident in our 2022 analysis of financing and M&A data for Israel’s cybersecurity ecosystem.
In 2022, total funding for Israeli cybersecurity startups fell by a dramatic 64%, from $8.84 billion in 2021 to $3.22 billion this year, and the number of funding rounds dropped from 135 in 2021 to 94. total funding in 2020 ($2.75 billion over 109 rounds of funding), it looks like 2021 was a blip on the radar and the industry will return in 2020 to where it left off.
Most of the capital that did flow into Israel’s cybersecurity industry flowed directly into seed rounds of early-stage startups.
Early stage gets the funding
Our data indicates that the majority of capital does did stream in cybersecurity this year has flowed directly into a very separate area: launch rounds of cybersecurity startups. The 2022 average seed round even shattered 2021’s record ($7 million), reaching a whopping $9 million. Overall, seed funding increased 65% this year, from $233 million in 2021 to $384 million in 2022.
This striking amount of capital, earmarked for the earliest stages of business building, demonstrates investors’ continued confidence in the cybersecurity industry’s potential to innovate and build solutions to increasingly acute threats.
In addition, it indicates the difficulty of raising Series A rounds this year as investor thresholds for these rounds grew in the face of the economic crisis. While the number of Series A rounds has remained virtually unchanged since 2021 (30 rounds last year and 24 rounds in 2022), investors preferred to support the seed rounds of startups that will grow sustainably and prudently from the start.
“Investors understand that seed capital has a clear baseline as the cost of building a business has not fallen,” said Iren Reznikov, Director of Corporate Development and Ventures at Sentinel One. “They know it takes money to build a company from the ground up and make sure it hits its Series A round with maximum maturity while hitting all the benchmarks. At the same time, investors expect founding teams to set clear goals for achieving their Series A and strive to achieve product-market fit early by engaging with potential customers more quickly.”
This confidence is shared by the founders of cybersecurity, who, despite this year’s market volatility, still believe in the potential to build something meaningful for business protection and business continuity. “Early-stage startups are best placed to respond to the changing needs of a tax-constrained market,” said Slavik Markovich, co-founder and CEO of Descope, a stealth startup building a service for application developers in the field of authentication.
“A tight economy is usually accompanied by more fraud and cyber-attacks. User adoption and conversion have become even more important in this market, with companies looking for solutions that reduce friction for their end customers to avoid sources of customer churn. Establishing teams at early stage companies focused on solving these problems will continue to attract investor interest.”
Return of the cyber veterans