Team8: A unique model, but will it work?

Team8 Photo: Team8 / Photo:  Team8
Team8 Photo: Team8 / Photo: Team8

Instead of investing in startups that come with an idea, Team8 identifies technological solutions that are needed and finds teams to develop them.

The annual event held by the Team8 group of companies, held the other week in Tel Aviv, brought together 100 information security managers from large international corporations. Alongside representatives of Walmart, Airbus, Microsoft and others global giants, the event was attended by Bank Leumi (TASE: LUMI) CEO Rakefet Russak-Aminoach. People who were there related that she talked intensely to Team8 cofounder and CEO Nadav Zafrir, a former head of the IDF 8200 intelligence unit, and his wife Maya, chief marketing officer of Bank Leumi USA.

A week later, the mystery surrounding this intriguing meeting at the conference was dispelled: Russak-Aminoach announced that she was stepping down from her role at Bank Leumi after seven years, and a few hours later "Globes" revealed that she was in negotiations to join Team8, a unique entity in Israel's technology industry, focusing on setting up startups and investing in the companies. Russak-Aminoach is in talks on joining Team8 as a partner and as head of its fintech arm.

If the talks bear fruit, Russak-Aminoach will be following in the footsteps of Dani Tzidon, who was her deputy at Bank Leumi, and who left to join venture capital firm Viola, where he set up the Viola Fintech Fund; and of Lilach Asher-Topilsky, CEO of Israel Discount Bank (TASE: DSCT), who recently announced that she was departing and joining private equity firm FIMI. But whereas Tzidon and Asher-Topilsky joined large firms managing huge sums, Russak-Aminoach is on her way to a firm that currently manages just $150 million.

It could be that what attracts Russak-Aminoach is Team8's connections to leading global companies that have invested in it and have become strategic partners. Among them are Japanese corporation Softbank, retail giant Walmart, aircraft manufacturer Airbus, and insurance company Munich Re. One source told "Globes" that Russak-Aminoach's connections in the global banking system would be very valuable to Team8.

The group's operational model is very special to it, to the extent that people both within Team8 and outside it find it difficult to label. Over the years of its activity it has been called an investment fund, a startup incubator, a startup for founding companies, a cybersecurity syndicate, and a cybersecurity group. What actually happens is that instead of investing in startups that come with an idea and seek initial capital, like a classic venture capital fund, Team8 identifies areas in need of technological solutions and looks for management teams that can implement them. Each company that is set up receives a check for about $5 million, assistance in connecting to strategic partners and in recruiting manpower, and a general support network meant to help the company get off the ground and attain substantial sales.

The people behind the idea

The idea of Team8 was thought up by Zafrir and Israel Grimberg, formerly head of the 8200 cybersecurity division. They started working on setting up the group in early 2014, less than a year after they left the IDF, and naturally focused on cybersecurity. As graduates of 8200, the pair had seen former comrades in the unit set up many companies, and, as happens in the world of entrepreneurship, most of them closed down "The two failures that we see in this industry are firstly, that not enough large companies are built up, a situation that has improved in recent years, and secondly, the rate of success of ventures in the early stages; the statistics for company closures are crazy," a venture capital investor close to Zafrir told "Globes". "The basic idea at Team8," he says, "was to come along and say we can create a mechanism for bringing ideas from the field with a customer in hand, finding the teams, and setting up companies with a much higher success rate than the market statistics."

Zafrir and Grimberg co-opted as a co-founder Liran Grinberg, who served as an officer in 8200, where he managed several development teams working on a system for collating data from different parts of the unit. Grinberg had already managed to open and close a startup and to work as a product manager at trading platform eToro. Grinberg has related in the past how Grimberg asked his help in creating a presentation and was impressed by the result, and the rest is history - he received the position of chief marketing and business development officer, while Grimberg is chief innovation officer and Zafrir is CEO.

The fourth person in the founding of the firm is Ronni Zehavi, an experienced entrepreneur who founded Contendo, which Akamai bought for $300 million in 2011. From the time of the acquisition until joining Team8, Zehavi managed Akamai's cyber technology business. He was appointed VP Strategy at Team8, and served in that role from January 2014 until February 2015, after which he became more distant from the group, serving as a consultant until leaving completely at the end of 2015 in order to found Hibob, a startup in the field of human resources. The three other founders remain in the same jobs. Zafrir lives in the US and manages the headquarters set up in New York in 2017. Assaf Mischari is head of research at Team8, and Dr. Eldad Rom is VP of organizational development.

Zafrir was an officer in the Sayeret Matkal (General Staff Reconnaissance Unit) commando, took part in Mossad operations, and then rose up the ranks in Unit 8200 until he became commander of it. Many of the people with whom "Globes" spoke in the industry described Zafrir as exceptionally impressive, talented and charismatic. "He could have been the best ever Mossad agent, because he is capable of forming ties with people and sweeping them along, and he is very impressive in a one-on-one meeting. The key thing with him is not cybersecurity, because hundreds of people do cybersecurity. The key with him is leadership and the ability to open doors," a source close to Team8 told "Globes".

Zafrir and Grimberg's Achilles heel, however, is that for all their rich military experience, they had not accumulated much business experience before founding the group. Market sources with whom we spoke, who are familiar with the group, said that potential partners and investors whom Zafrir met at the outset raised this issue, but industry sources, among them cybersecurity investors, say that Zafrir managed to overcome the shortcoming by putting together a group of people around him that made up for the knowledge he lacked.

On of those people became a very important figure at Team8. This was Yuval Shachar, who joined as the first investor while he was still a partner at Innovation Endeavors (which merged with the Marker fund, which he founded). He later left the fund and joined Team8 as executive chairman and partner. So, in Team8's first year, Zafrir was mainly seen as the visionary, while Shachar helped to connect the vision to reality. "The key at Team8 is Yuval, who also put down the money and believed in the model. Additional investors followed after him," says an experienced cybersecurity entrepreneur who is close to the group.

In addition, last October, the group announced that Adm. (res.) Michael Rogers was joining Team8 as an adviser. Rogers is a former director of the US National Security Agency (NSA) and was the commander of the US Cyber Command (USCYBERCOM) until May 2018. Other advisers to the group are Walmart global chief information security officer Jerry Geisler, Citigroup global head of information security Charles Blauner, Cisco Security Business Group VP and CTO Bret Hartman, Morgan Stanley global chief information security officer Gerard Brady, and Scotiabank CISO and SVP global technology services Steve Hawkins.

Expansion to retail and transportation under consideration

With the announcement of the second fund last October, Team8 also announced that it was expanding beyond the cybersecurity realm to big data and artificial intelligence. "In the past five years, we focused on purely cyber problems - what terrible things can happen to an organization and how to prevent them. That's what we did with Claroty, Sygnia, and Hysolate. Now, we don't want to focus on problems that will happen; we want to focus on good things that are liable not to happen because these organizations won't want to share information, and because the regulator won't allow all of the information to be shared. In other words, we want to enable these organizations to take advantage of their enormous store of information to move and develop more quickly," Zafrir told "Globes" in October.

"In any sector you look at, there are huge opportunities in this triangle of big data, real artificial intelligence, and cybersecurity. In biology, for example, the human genome has been mapped, but you can't run algorithms on it and cure diseases, because the information can't be shared safely. We want to spot these opportunities and these problems, and enable companies to race forward safely and at low cost," Zafrir added in that interview. At the time of that conversation, the Duality company, which encrypts information in a way that protects it and use it for cooperation at the same time, was focusing on developing the solution for the medical field. The company has now shifted its focus to the financial sector.

It is believed that Team8 wants to become a broad platform for digital transformation of large organizations in various spheres. It is now trying to do this in the financial sector, and therefore wants to hire Russak-Aminoach, and is fostering ties in the banking and financial sector. Representatives of the World Bank and the World Economic Forum participated in a recent conference. Team8 plans to do the same thing later in other sectors, such as retail, health, and transportation. The group therefore plans to recruit more partners and officeholders specializing in the areas to which it decides to expand in the future.

"What they're doing in cybersecurity is successful, but can they also take this into fintech?" said one of the investors we spoke with. "Nadav's main advantage is his ability to do networking, and success of fintech activity will be judged by whether Rakefet is capable of doing networking like Nadav."

They brought Walmart's CEO to Israel

In late March, Walmart CEO Doug McMillon and other company executives visited Israel. They met with startups and other industry players. This visit was intriguing mainly because of their search for technologies that would enable Walmart to compete with Amazon. The Team8 group, one of whose partners is Walmart, was behind the visit. The connection between them was created with Team8's first fund, but the cooperation between them was not yet officially announced at the time. Ohad Finkelstein, a member of Walmart's advisory board and a partner of Shachar in the Marker fund, was responsible for connecting Team8 and Walmart. The company's strategic partners are mainly global companies, with a few being venture capital funds that made a financial investment. In addition to Softbank, Airbus, Munich Re, and Walmart, you can also find the Moody's rating agency, Barclays Investment Bank, South African company Dimension Data, and investors who invested in Team8's earlier fund: Nokia and its research laboratory, Bell Labs; Qualcomm, AT&T, Microsoft, Cisco , Temasek from Singapore, Bessemer Ventures, and Innovation Endeavors, controlled by former Google CEO Eric Schmidt.

One of the advantages for the strategic partners is their share in the process of founding companies, with the goal of developing technology that will also be used by the partners themselves. The model of founding and raising companies emerged over time in a process of trial and error. It began with an internal study led by Grimberg assessing problems in the cybersecurity sphere, and recently expanded to artificial intelligence and big data. The team is examining the existing solutions for problems and various spheres of knowledge likely to be useful in formulating a new and comprehensive solution.

The group says that the process is composed of three stages, and describes it like this: the first stage is presenting the problem to partners and getting feedback from them. At the same time, a search is conducted for an entrepreneur or two with an affinity for the sector. If they manage to defined the problem, they go back to the partners with the selected entrepreneurs and present them with a description of all the stages of the solution. The third stage is applying the solution itself, and then the company usually has a team of employees that begins applying the solution with some of the partners. "When entrepreneurs come to international companies and present a solution to them, it's hard for them to succeed. With us, the entrepreneurs have a different type of interaction with them, because the were part of the process of developing the product," Shachar previously told "Globes." The entire process takes a year, and at every such stage, there are between one and several days of meetings and talks of all the partners in Team8, who examine the matter.

Does the financial model work?

From a financial standpoint, all of the partners in the new fund invested $5-10 million. Team8 is investing up to $5 million in each company and taking half of the shares for itself. Team8 invests only in the founding stage, not in the follow-up rounds; it transfers its rights to invest in the later stages to its strategic partners.

"When they began, a lot of people asked themselves whether the model of investment in a company that builds companies is logical. Investing in a startup is already difficult, so investing in a startup that builds startups is even more challenging," a venture capital investor tells "Globes." The investor adds that when it started, Team8 had trouble recruiting partners because of its unique and unusual model. "There was no doubt about the quality of the people. Nadav is very talented, but it wasn't clear whether it was financially feasible. In terms of the result, they have a lot to prove, because there has been only one exit, but it made back what was invested in the fund, and they proved that it was feasible."

Another investor who asked to remain anonymous said, "Some of Team8's structural problems lie in the layers before the company. When I invest in a certain company, I put a million dollars on it and I get the return on the investment. When I invest in Team8, there's someone in the middle who takes part of the pie. They solve this by not investing more in the company, and someone who invested in Team8 gets first rights in the rounds of companies that made it past the seed round."

The high-tech industry still says that the model has not necessarily proven itself, mainly because not enough years have passed since the fund was founded. The company has achieved one exit to date - the sale of Sygnia to Temasek for $250 million. This was a phenomenal exit, because the company raise $4.3 million from Team8 only. The deal gained $125 million for Team8, and returned triple the entire first fund to the company.

The decision by the group that the second fund would also be used to invest in external companies not founded by the fund, not exclusively for founding new companies, however, cannot be ignored. An example of this is the investment in Duality. Some in the industry believe that this is proof that the model is not yet working smoothly. One criticism is that the group takes 50% of the shares. "I'm not a big fan of the model," says another venture capital investor. "I come from a school that believes that the industry is based on entrepreneurs. My job is to find very strong people, but in the end, I'm not the entrepreneur. In Team8's model, who is really the entrepreneur? If they get a high proportion of the shares, it damages their motivation. Furthermore, how much brain and innovation can be in one body? I see hundreds of entrepreneurs a year, and I eventually choose three or four."

Another investor believes that the model works well, and that the external investments were designed to help the group reach more entrepreneurs. "Team8 realized that good founders wouldn't necessarily want to give away 50% of the company, and they don't want to give up the option of investing in them. So they decided to open the investments." "They have no monopoly on ideas. It's possible that somebody outside of Team8 could have a good idea. They have an arm that helps to found companies, and there's an arm that helps companies bring and expand sales, so logically, they can invest in companies and support them with their connections in recruiting personnel and customers," another investor says.

"This is a unique model, but it's not for everyone," a cyber entrepreneur close to parties in the group says. "Team8 is very good for entrepreneurs who are strong technologically but not on the business side, because they're a proper incubator. They take ex-army people and help them with all the business aspects such as the market and customers. On the other hand, they take a high proportion of the shares," he adds. This did not prevent experienced entrepreneurs like Amir Zilberstein, Zohar Kaufman, and Ran Ilany from founding Claroty and Portshift in the group's framework. "Why should a good entrepreneur go to Nadav when he takes 50%? An entrepreneur who sees himself as being on the same level as Nadaq won't come to work for him for 50%," explains one of the investors, " but the fact is that they found good enough and strong enough people."

What is happening with the companies that Team8 founded?

Team8's first and only exit to date was the sale of Sygnia to Temasek for $250 million, while the company had raised $4.3 million (half went to Team8). Sygnia was a cybersecurity services company that combined technology for scanning and tracking attackers with a team of experts from Israel Military Intelligence Unit 8200 and the security forces. Sygnia helped organizations cope with cyber attacks and defend against future attacks.

Sygnia was founded in 2015 by Shachar Levy, Ami Kor, and Arick Goomanovsky (Goomanovsky left the company a few months before it was sold). Although it sold services, not a purely technological product, the sale of the company proved to many doubters that Team8's model worked. Some of the success, industry sources say, is due to the fact that Temasek was very interested in acquiring the company's services, and agreed to pay a price regarded by many as high after just two weeks of negotiations.

In addition to Sygnia, Team8 has founded nine companies, six of which have been officially unveiled, and another company that closed down before it was launched. The group currently openly operates Claroty, which develops cybersecurity infrastructure for industrial networks; Hysolate, which splits the operating system in organizations into two separate systems with different levels of security; Illusive Networks, which plants erroneous information in computer systems in order to mislead hackers; Portshift, which develops secure infrastructure automation tools; and Curv, a startup for safe management of cryptographical assets on the cloud. Team8 has invested in another company, Duality, that it did not found, which specializes in analysis of encrypted information.

Published by Globes, Israel business news - - on July 7, 2019

© Copyright of Globes Publisher Itonut (1983) Ltd. 2019

Team8 Photo: Team8 / Photo:  Team8
Team8 Photo: Team8 / Photo: Team8
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