From COVID-19’s curve to election polls, public temperature checks to stimulus checks, 2020 was dominated by numbers — the guiding compass of any self-respecting venture capital investor.

As a VC exclusively focused on investments in Israeli cybersecurity, the numbers that guide us have become some of the most interesting to watch over the course of the past year.

The start of a new year presents the perfect opportunity to reflect on the annual performance of Israel’s cybersecurity ecosystem and prepare for what the next twelve months of innovation will bring. With the global cybersecurity market outperforming this year’s panic-stricken expectations, we carefully combed through the figures to see how Israel’s market, its strongest performer, compared — and predict what it has in store.

The “cyber nation” not only remained strong throughout the pandemic, but even saw a rise in fundraising, especially around application and cloud security, following the emergence of remote workflow security gaps brought on by social distancing. Encouraged by this, investors have demonstrated committed enthusiasm to its growth and M&A landscape.

Emboldened by the sector’s overall strength and new opportunities, today’s Israeli visionaries are developing stronger convictions to build larger companies; many of them, already successful entrepreneurs, are making their own bets in the industry as serial entrepreneurs and angel investors.

Image Credits: YL Ventures (opens in a new window)

The numbers also reveal how investors are increasingly concentrating their funds on larger seed rounds for serial entrepreneurs and the foremost industry trends. More than $2.75 billion was poured into the industry this year to back companies across all stages, a 97% increase from last year’s $1.39 billion. If its long-term slope is any indication, we can only expect it to continue to grow.

However, though they clearly indicate progress, the numbers still make the need for a demographic reset clear. Like the rest of the industry, Israel’s cybersecurity ecosystem must adapt to the pace of change set out by this year’s social movements, and the time has long passed for true diversity and gender representation in cybersecurity leadership.

Seed rounds reveal fascinating shifts

As the market’s biggest leaders garner experience and expertise, the bar for entry to Israel’s cybersecurity startup ecosystem has gradually risen over the years. However, this did not appear to impact this year’s entrepreneurial breakthroughs. 58% of Israel’s newly founded cybersecurity companies received seed rounds this year, totaling 64 seeded companies in 2020 compared with last year’s 61. The total number of newly founded companies increased by 5%, reversing last year’s downward trend.

The amount invested at seed hit an all-time high as average deal size in 2020 increased by 11%, amounting to an average of $5.2 million per deal. This continues an upward trend in average seed rounds, which have surged over the last four years due to sizable year-on-year increases. It also provides further support for a shift toward higher caliber seed rounds with a strategically focused and “all-in” approach. In other words, founders that meet the new bar for entry are raising bigger rounds for more ambitious visions.

Image Credits: YL Ventures

Where is the money going?

2020 proved an exceptional year for application security and cloud security startups. Perhaps the runaway successes of Snyk and Checkmarx left strong impressions. This year saw an explosive 140% increase in application security company seed investments (such as Enso Security, build.security and CloudEssence), as well as a whopping 200% increase in cloud security seed investments (like Solvo and DoControl), from last year.

When Salesforce acquired Quip in 2016 for $750 million, it gained CEO and co-founder Bret Taylor as part of the deal. Taylor has since risen quickly through the ranks of the software giant to become president and COO, second in command behind CEO Marc Benioff. Taylor’s experience shows that startup founders can sometimes play a key role in the companies that acquire them.

Benioff, 56, has been running Salesforce since its founding more than 20 years ago. While he hasn’t given any public hints that he intends to leave anytime soon, if he wanted to step back from the day-to-day running of the company or even job share the role, he has a deep bench of executive talent including many experienced CEOs, who like Taylor came to the company via acquisition.

He and his wife Lynne have been active in charitable giving and in 2016 signed The Giving Pledge, an initiative from the The Bill and Melinda Gates Foundation, to give a majority of their wealth to philanthropy. One could see him wanting to put more time into pursuing these charitable endeavors just as Gates did 20 years ago. As a means of comparison, Gates founded Microsoft in 1975 and stayed for 25 years until he left in 2000 to run his charitable foundation full time.

Even if this remains purely speculative for the moment, there is a group of people behind him with deep industry experience, who could be well-suited to take over should the time ever come.

Resurrecting the co-CEO role

One way to step back from the enormous responsibility of running Salesforce would be by sharing the role. In fact, for more than a year starting in 2018, Benioff actually shared the top job with Keith Block until his departure last year. When they worked together, the arrangement seemed to work out just fine with Block dealing with many larger customers and helping the software giant reach its $20 billion revenue goal.

Before Block became co-CEO, he had a myriad other high-level titles including co-chairman, president and COO — two of which, by the way, Taylor has today. That was a lot of responsibility for one person inside a company the size of Salesforce, but promoting him to co-CEO from COO gave the company a way to reward his hard work and help keep him from jumping ship (he eventually did anyway).

As Holger Mueller, an analyst at Constellation Research points out, the co-CEO concept has worked out well at major enterprise companies that have tried it in the past, and it helped with continuity. “Salesforce, SAP and Oracle all didn’t miss a beat really with the co-CEO departures,” he said.

If Benioff wanted to go back to the shared responsibility model and take some work off his plate, making Taylor (or someone else) co-CEO would be one way to achieve that. Certainly, Brent Leary, lead analyst at CRM Essentials sees Taylor gaining increasing responsibility as time goes along, giving credence to the idea.

“Ever since Quip was acquired Taylor seemed to be on the fast track, becoming president and chief product officer less than a year-and-a-half after the acquisition, and then two years later being promoted to chief operating officer,” Leary said.

Who else could be in line?

While Taylor isn’t the only person who could step into Benioff’s shoes, he looks like he has the best shot at the moment, especially in light of the $27.7 billion Slack deal he helped deliver earlier this month.

“Taylor being publicly praised by Benioff for playing a significant role in the Slack acquisition, Salesforce’s largest acquisition to date, shows how much he has solidified his place at the highest levels of influence and decision-making in the organization,” Leary pointed out.

But Mueller posits that his rapid promotions could also show something might be lacking with internal options, especially around product. “Taylor is a great, smart guy, but his rise shows more the product organization bench depth challenges that Salesforce has,” he said.

Applications based on artificial intelligence — whether they are systems running autonomous services, platforms being used in drug development or to predict the spread of a virus, traffic management for 5G networks or something else altogether — require an unprecedented amount of computing power to run. And today, one of the big names in the world of designing and building processors fit for the task has closed a major round of funding as it takes its business to the next level.

Graphcore, the Bristol, U.K.-based AI chipmaker, has raised $222 million, a Series E that CEO and co-founder Nigel Toon said in an interview will be used for a couple of key purposes.

First, Graphcore will use the money to continue expanding its technology, based around an architecture it calls “IPU” (intelligence processing unit), which competes against chips from the likes of Nvidia and Intel also optimized for AI applications. And second, Graphcore will use the funding to shore up its finances ahead of a possible public listing.

The funding, Toon said, gives Graphcore $440 million in cash on the balance sheet and a post-money, $2.77 billion valuation to start 2021.

“We’re in a strong position to double down and grow fast and take advantage of the opportunity in front of us,” he added. He said it could be “premature” to describe this Series E as a “pre-IPO” round. “We have enough cash and this puts us in a position to take that next step,” he added. The company has in recent weeks been rumored to be eyeing up a listing not in the U.K. but on Nasdaq in the U.S.

This latest round of funding is coming from a roster of financial investors. Led by the Ontario Teachers’ Pension Plan, it also includes participation from Fidelity International and Schroders, as well as previous investors Baillie Gifford and Draper Esprit. Graphcore has now raised some $710 million to date.

This Series E gives Graphcore a definite step up in its valuation — the company last raised money back in February of this year, a $150 million extension to its Series D that valued the company at $1.95 billion — but all the same, it closes off what Toon described as a “challenging” year for the company (and indeed, the world at large). 

“I view this year as a speed bump,” he said. “It has been challenging and we’ve realigned to speed things up.”

As it has been for many companies, the year came in different parts.

On one side, Graphcore’s hardware and software product development continued apace with ever-faster processors in ever-smaller packages. In July, Graphcore launched the second generation of its flagship chip, the GC200, and a new IPU Machine that runs on it, the M2000, which the company described at the time as the first AI computer to achieve a petaflop of processing power “in the size of a pizza box.”

But on the other side, the building and launch of those products was largely done with a remote workforce, with employees sent to work from home to help slow down the spread of the coronavirus that has gripped the world and rewritten how much of it operates.

Indeed, the industry at large, and how companies are spending and investing during a period of uncertainty, has also likely shifted. Some companies like Amazon, Apple and Google are all getting more serious about their own chipmaking efforts. Others are caught up in a wave of consolidation: Witness Nvidia’s efforts to acquire ARM in a $40 billion deal.  

All of these spell challenges for an upstart like Graphcore. Toon said Graphcore doesn’t have any plans to make acquisitions: Its strategy is based around organic growth.

And, no great surprises here, he is not excited about Nvidia’s acquisition of ARM: “If we’re not careful, things will consolidate too much and that could kill off innovation,” he said. “We have made our position clear to the U.K. government. We don’t think the Nvidia ARM deal is a good thing.” (Somewhat ironic, considering he and Graphcore co-founder Simon Knowles sold a previous startup to none other than Nvidia.)

He also declined to talk about new customers for Graphcore, but he said that there has been interest from financial services companies, and some from the world of healthcare, automotive and internet companies, “large hyperscalers” in his words, that require the kind of technology that Graphcore is building either to run their systems, or to complement processors that they are potentially also building themselves. (Strategic backers of the company include the likes of Microsoft, BMW, Bosch and Dell.)

Graphcore said that the company is shipping its newest products “in production volume” to customers, and Toon said that a couple of big names are likely to be announced in the coming year, one that some believe might actually be calmer overall for the chip industry compared to 2020.

It’s that pull of technology, and specifically the processing demands of the next generation of computing, that investors believe will continue to drive business to Graphcore as the dust settles on this year.

“The market for purpose-built AI processors is expected to be significant in the coming years because of computing megatrends like cloud technology and 5G and increased AI adoption, and we believe Graphcore is poised to be a leader in this space,” said Olivia Steedman, senior managing director, Teachers’ Innovation Platform (TIP) at Ontario Teachers’. “TIP focuses on investing in tech-enabled businesses like Graphcore that are at the forefront of innovation in their sector. We are excited to partner with Nigel and the strong management team to support the company’s continued growth and product development.”