In recent months, it’s been hard to find Shlomo Kramer in a peaceful moment. The serial entrepreneur, a partner in founding companies like Check Point Software and Imperva, as well as a funder of many other companies as they started out - the most prominent of which is Palo Alto Networks - looks very worried. In December, he abandoned his impartial stance, and became an active leader in the high-tech protest against the judicial reform, first by making occasional appearances at conferences and signing petitions, and then by actively encouraging his employees to demonstrate, an unusual act even among those executives at the head of the opposition. His social network posts, expressing his concerns, shared by senior people in the industry around the world, were hard to miss. For an Israeli who represents, perhaps more than anything else, the key companies founded in the Israeli cybersecurity sector, the new reality is unbearable.
Last Tuesday should have been a day of celebration at Cato Networks, the third company founded by Kramer, and the second which he has managed personally. Despite the global high-tech crisis, as well as the cyber bubble bust, and despite Kramer's doom-laden prophecies about the damage caused by the judicial reform, Cato Networks raised $238 million from its existing investors, among them Lightspeed Venture Partners, as well as from some surprising new investors, including former Mossad chief Yossi Cohen, who led a $30 million investment by SoftBank, where Cohen has been employed for the past two years.
This is Cato Networks’ eighth fundraising round. Not an earth-shattering move, but in a difficult environment even an increase from the $2.5 billion valuation at which it was issued two years ago, at the height of the bubble, to $3 billion today is a fine achievement. Considering that its annual revenue rate last year was $100 million, this is a high, 30x multiplier, a rare valuation that only experienced entrepreneurs, who have proven themselves in huge IPOs, could ask.
Kramer is just that, as an experienced entrepreneur who knows what he's doing. Cato was founded nine years ago, and is considered a leading candidate for an IPO. Despite the high-tech crisis, Cato did not lay off employees, and even grew, so chances were good that it would raise funds at an increased valuation. And despite it all, Kramer says, it was not easy. "This was the hardest funding round I've ever done in my life."
The Nasdaq IPO market seems to have opened up, with three offerings in the past week. What are your plans?
"We’ve been preparing for some time for the possibility of going public in the fourth quarter of 2024, and if the market is open enough to allow a successful public offering, we will go for it too. We have an orderly timetable, and we're working methodically to get there."
Cato Networks was founded in the middle of the previous decade, and has since raised close to $800 million. It was founded by Kramer and his Imperva colleague Gur Shatz as a "Next-Generation Firewall (NGFW)" cyber company using innovative cloud technologies to protect the enterprise communication network from the outside world.
Cato Networks gained unicorn status in 2020, when it raised $130 million, but it took a bit longer to gain recognition. Only during the past year has it been able to convince research firm Gartner Group to create a special industry category called Secure Access Service Edge, or SASE, which put Cato in a prominent spot alongside Palo Alto Networks, Fortinet, Cisco, and VMware. The category represents a new way of protecting access to devices in the enterprise -- phone, computer, car, even refrigerators -- that are connected to the cloud through a service provided to IT systems administrators.
Since August, we’ve seen six large merger and acquisition deals worth hundreds of millions of dollars each for Israeli cyber companies, three of them in the last two weeks, including Ermetic, Bionic, and negotiations to sell Talon Cyber Security for $650 million. What’s going on here? Does this characterize high-tech in general, or does it apply to cyber only?
"As far as I can figure, it’s mostly focused on cyber. I haven’t seen much activity outside this industry. The reason is that we’ve opened a new chapter in this book called cyber, and it’s characterized by the fact that companies in this sector are aiming to build platforms: systems that offer an entire suite of services and not just one single service. That's what customers are looking for; they can’t deal any longer with the complexity of working with individual products. The pace of business demands that they move quickly, so cyber is now in a major transition, and SASE is at the center of all this activity. "
You say it was hard for you to raise funds, but you succeeded.
"Israeli high-tech is not going back to normal. I can assure you from personal conversations with leading funders in Silicon Valley that there is great concern, and their awareness of the exposure and geopolitical risk in Israel is enormous. Right now, there’s momentum -- even when an aircraft's engines are shut off, it continues to glide. If a fascist state comes to pass, as this government is currently planning, there will be no high-tech here, period. I won’t be able to go public or raise funds. Of this I have no doubt, and therefore the messianic intentions of this government -- and I don't know what the prime minister is planning, I think he’s only thinking about himself -- will bring about the destruction of Israeli high-tech There’s no question at all."
As a venture capital investor and an entrepreneur, do you identify a rise in investments in Israel?
"I don't see a rise. I see danger. I see a tactic that’s been modified by that gang of marauders. They’re doing it in stages -- the salami method - like Hungary and Poland, instead of ‘one and done.’ I see the rot they’re spreading in the middle and lower levels of state administration. They will destroy the country in the service of their crazy ideology - that's what I see. I don't think I can put it more bluntly."
Behind closed doors, what do the investors you speak to say?
"They say they like the idea behind the company, believe in us, hope we’ll be able to work together in the future, and that it just isn’t working out this time. They all give the same answer, so you can assume there’s something that they’re not telling you. The existing investors in the company are strong believers; the lead investor in the round (Lightspeed - A.G.) is an existing investor. We're in the mezzanine financing stage (supplementary capital - A.G.), so in any case, there aren't many funds that can come in."
You’re an activist within the company as well, and you encourage your employees to demonstrate. What sort of reactions do you get?
"I encourage those who believe to come out and express their opinion, for a simple reason: we all work hard, want good results, and there is a process going on which harms our business. As CEO, anyone who agrees with me should work for our company’s future, and not just as a citizen. Personally, I’ve only gotten positive reactions."
"I’ve developed everything in the same square kilometer"
"I haven’t moved much during my career, everything I've done in my life has been developed within the same square kilometer," Kramer says proudly in discussing the third company he’s founded. "A few hundred meters from here, at Check Point, we produced the first diskette, containing the world’s first commercial firewall software, which blazed the trail for those who came after us. Not far from here, Palo Alto Networks, which I also fostered, developed the information security management standard that defined what the modern enterprise network protection should look like. When Palo Alto founder Nir Tzuk and I worked together at Check Point, we tried to embed the software in hardware.
"Here at Cato Networks, we’re developing the third generation of this technology. It's adapted to an era in which all of us, as employees of organizations, are constantly on the move, connecting at any moment to various applications in the cloud -- like Amazon or Salesforce -- and using devices or machines that are mobile or sit on a remote server: smart cars, home computers, hotel refrigerators, factory production floors, even a pacemaker at a hospital."
Of SoftBank, Kramer says, "I've known this fund since Check Point; they had an option to invest in the company in the nineties. A representative of the fund from Silicon Valley talked to us, but it didn't happen. Today, at Cato, we've been working with them for some time. We were interested in working with them because they are a major telecom operator in Japan, but today they also serve as our partner. The relationship began with them marketing our solution, and now they are also becoming an official distributor. 3,000 car dealerships in Japan currently run on Cato together with SoftBank. Entrepreneurs should look to the US as the most important target market, and Japan is in second place."
SoftBank is also connected to investors in Saudi Arabia and the United Arab Emirates, and Kramer sees a large market there as well. "We have significant activity in the United Arab Emirates, and we recently expanded our network to Saudi Arabia as well. There is an environment there with a lot of money living on borrowed time economically, and on the other hand, an Israeli environment with enormous amounts of innovation that can push it forward, so the connection is powerful."
"Israeli companies aren't just income tax revenue"
It's hard not to wonder if you're planning to relocate, given the current state of affairs.
"I have no such plans. I founded Cato with the perspective of an Israeli who’s worked for 30 years in establishing the cyber ecosystem in Israel, founding the latest company where he is the CEO as an Israeli company, managed from Israel, with all the senior management here, and supported by an Israeli network of accountants, lawyers, marketing companies, consultants -- and one that contributes to the state. I don't know if you can call it Zionism because that’s too big a word for me, but I don't intend to relocate -- not even personally -- and I don't intend to change the company structure. All that’s left for me is to go to Kaplan Street (the main protest location in Tel Aviv) and fight, and contribute, and be involved, and do what’s necessary so that this madness doesn’t happen here."
And your employees, are they asking to relocate?
"There’s definitely significant demand. The initiative to move comes from them, we're just checking to see if we can employ them overseas as well, but we employ workers all over the world. Recently, one of our key employees decided he no longer wanted to live in Israel, and moved his entire life to Barcelona, where he continues to be employed by us as a Spaniard for all intents and purposes."
In the past, you’ve talked about how, in Check Point’s early years, about 30 years ago, you were advised not to speak Hebrew at conferences abroad, an to pretend to be an American and that the company was American.
"We had a consultant in Boston who gave us this advice. I don't know exactly how he thought it would work with our Israeli accents. But it's true that, at the time, he thought it would be better for us to hide the fact that we were Israeli. Things have changed since then: a few years ago, I was sitting at Softbank and someone mentioned the fact that Cato was an Israeli cyber company, and that that was the reason he wanted talk to me. At that moment, I felt we’d accomplished something over the 30 years in which Israel had become a global cyber brand."
And then in 2000 you founded Imperva -- the second cyber company you co-founded after Check Point -- as an American company.
"Yes, at the start our investors didn’t want us to be an Israeli company at all. We had founded Check Point in Israel, before we had investors. We knew nothing, we were innocents. But when I raised money for Imperva, I went to the best investors in Silicon Valley, and they were adamant that under no circumstances should the company be Israeli. The intellectual property had to be located in the US, and the company managed as a Delaware corporation. 'What do I know about Israel and what is this thing in the Middle East' -- that was the attitude at the time. Naturally, I relocated to the US before the IPO. The entire management sat in the US, and Israel was the development center. And it wasn't just us -- other Israeli companies were established abroad on a similar model. A few years later, when I founded Cato, I was one of the first to set up a company here, headquartered in Israel, and one of the first to say: the CEO does not have to relocate. It is possible to found a company here and recruit Israeli managers. I think half of the technology companies in Israel today are structured this way."
Israel paid the price for the decision to establish Imperva in the US. In July, the company was sold to Thales of France for $3.6 billion without the Israel Tax Authority gaining anything from the sale, as might have happened if it had been established in Israel.
"Certainly. But an Israeli company is not just tax revenue. There’s also the fact that the VP marketing, for example, is an Israeli employee and sits here, next to me, and not in Silicon Valley. There is industry-building value here, because he will learn the profession, and teach the next generation of marketing people, and in 20 years there will be a hundred people like him, and some may possibly also establish new companies. Now, that’s going to be lost completely."
You lived the good life in Palo Alto, you had a reputation as a cyber investment statesman.
"I still have a statesman-like reputation. It’s the state that isn’t statesman-like. I’ve stayed in the same place. My ability to raise money is proven, I won't have a problem, but talented young people who are demobilized from the army today, want to start a company, and raise new capital for it -- I worry for them."
Did you move corporate funds abroad, like Verbit and Papaya Global?
"I cannot comment on Cato 's internal affairs."
And what about your personal accounts? We’ve also learned that you transferred hundreds of millions of dollars to foreign accounts.
"There's no connection. I won't talk about it."
Will we see more investment in Israel?
"This is the time to invest, because the entrepreneurs who are stepping out of their comfort zones to found a company are entrepreneurs with true determination. They’re not entrepreneurs who’ve heard that there’s money to be made, and investors can also get better value."
You’ve seen the industry through three cycles of boom and bust, in 2000, 2008, and 2022. What did investors and funds learn from the way things went in the Covid-19 tech boom?
"They learned nothing. In another few years it will be exactly the same."
What gives you hope?
"The good thing that happened from the coup attempt is that the dialectic cultivated in the last decades by Netanyahu and his minions has changed from one that talks of left or right, to one that differentiates between liberalism and democracy on the one hand, and fascism and messianism on the other. This is the true dialectic in which we are living. One of the reasons why the left has failed in recent years is that this option has run its course and the story -- the discourse around it - hasn't caught on. The real discourse is whether we are becoming a Western country, or, as a Saudi blogger recently wrote, ‘Israel has become another Middle Eastern country.’ This is something good that they (the government - A.G.) succeeded in creating, without meaning to, and when we win this fight, we will win big, because this will be the future discourse."
"It will be hard to keep up with our platform"
Kramer, one of the first investors in Palo Alto Networks, does not conceal the fierce competition he now has with it, as CEO of Cato. He maintains that the Cato system is superior to Palo Alto as, from the start, it was built as a platform that can be activated with the push of a button, making life easy for IT administrators with simple enterprise systems. "They don't have a platform," he says of Palo Alto. "And when you have a platform, the speed of development is much higher, because up to 90% of the engineering work has already been done."
Still, Palo Alto maintains a large sales staff and a range of complementary products, all offered at attractive discounts. How do you compete?
"We can give bigger discounts. The problem with Palo Alto isn’t its parallel processing product. In 2019, they had to reach the market as quickly as possible, so they decided to do this by wrapping the hardware in software, and 'tossing' the parallel processing solution into the Google cloud. Google provides the hosting, the data, the communication. But it’s an inferior product, because you’re riding one horse. The physical device was migrated from one place to another, so what was solved? This is not a real cloud architecture, and it’s also a business problem because a public company gets 'stuck' with Google, and pays a huge amount for the services."
Microsoft also announced it was entering into your territory recently, causing some cyber stocks to drop sharply.
"The whole world is getting into it because it's the future. Our goal as a company is to move forward as fast as possible, and take as big a share of the future as possible, and what's special is that we started first. We were the only ones crazy enough to build a real cloud-based platform and not a collection of solutions. Trying to catch up with us -- a single platform built entirely on the cloud for cloud consumers -- will be hard."
What is the government's role in promoting artificial intelligence in Israel? All around us, Saudi Arabia and the United Arab Emirates are spending huge amounts of capital on graphics processors, and the US is investing huge amounts in AI research institutes and AI chips.
"I have a completely different idea, in which the government leaves Israeli high-tech alone, and lets it grow organically. There are great people here with a wealth of talents, bringing with them abilities from the army, the academy, previous companies, and from Silicon Valley, who felt they wanted to come back to a democratic and liberal Israel, which is no longer the case. My best workers are emigrating to wherever will accept them. This is very troubling to me.
"The government should lay down the nationalist, fascist sword, and let Israeli high-tech operate freely, within a liberal system of laws, a strong justice system, a modern taxation system, a modern corporate governance system, and stop the continual wearing down of all levels of government, which is turning us, as they wrote in Saudi Arabia, into another Middle Eastern country. All that remains at this stage, after Bibi has destroyed the country, is to ask what kind of country will we be: Lebanon, Egypt, or Iran? What is certain is that none of them will have high-tech. Therefore, it is up to Netanyahu to leave high-tech alone, and stop the destruction he and his friends are wreaking all around us."
Published by Globes, Israel business news - en.globes.co.il - on September 28, 2023.
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