Back in 2013, when he was a relatively unknown entrepreneur on the Israeli scene, Nir Zuk became famous mainly thanks to a provocative local marketing campaign for his company, Palo Alto Networks. The campaign’s high point was a billboard positioned on the Ayalon highway, in plain sight of its major competitor, Check Point Software Technologies, captioned: "You’ve just passed Check Point. We have too! We’ve just been named the leading enterprise firewall again!"
The justification for this campaign was somewhat obscure - shortly before it launched, Palo Alto Networks had come out ahead in Gartner’s 2013 Enterprise Firewall Magic Quadrant - but other motives lurked below the surface. Fourteen years earlier, Zuk left Check Point, slamming the door behind him, and went on to found Palo Alto Networks in the US as a competitor in enterprise network security. Someone in the US company found it important to put up the sign directly in front of the office windows of Check Point CEO Gil Shwed and his thousands of employees, and even pay for it to stay up far longer than usual, just to drive home the point. Zuk has denied any connection to the billboard - apparently it was a surprise prepared for him by the then-VP of Marketing, René Bonvanie - but the Israeli entrepreneur’s reputation was burned into the Israeli tech industry’s collective memory as one of its biggest provocateurs.
This, of course, was not the first time Check Point had been the target of a Zuk provocation. Years earlier, when he was a founding partner in another network security company, Zuk used to drive around Silicon Valley in a BMW with a license plate that read CHKPKLR - "Check Point Killer" - a gift from NetScreen Technologies, which acquired the first startup he founded after Check Point, OneSecure.
Although OneSecure was sold for half the money it had raised, NetScreen - at the time Check Point's biggest competitor - hired Zuk as a senior vice president, making him one of the most influential people in the Silicon Valley’s emerging cyber sector, and greatly enriching his bank account. For Zuk, this was a recognition of his abilities and a kind of compensation after missing out by leaving Check Point. By quitting and selling his shares, he lost out on a 300-fold increase in the share price within two years. But Zuk wasn't in it for the money, and he got rich anyway in the end. Plus, the provocative license plate turned out to be particularly profitable: he turned up with it to meetings with potential investors and customers, and the sardonic joke added spice to his pitches for Palo Alto Networks, the cyber company he founded in 2005.
Zuk of the nineties no more
Zuk model 2022 is not the same as the Zuk of the 1990s. His target is no longer Gil Shwed, Check Point, or Microsoft (about which he also has a bellyful). As a returning Israeli resident who moved back with his five children - his new battles are against over-regulation and predatory social networks.
Among the ventures revealed so far are a current affairs project with former Channel 10 chairman Modi Frydman and television producer and host Lior Schleien, digital bank Esh with former Israel Securities Authority head Shmuel Hauser and former Bank Massad and Bank Otsar Ha-Hayal CEO Kobi Malkin. These are just two on the list of initiatives in Zuk’s planned overthrow of the relationship between corporations and the individual. Some acquaintances describe him these days as "a modern Robin Hood, except perhaps for the fact that he is financially secure." Others call him the "Israeli Elon Musk", a billionaire with enough free time and motivation to disrupt various industries, make his mark, and gain influence. At the same time, Zuk does not view himself as a philanthropist; he expects to break-even in all his ventures. But if he wages this war with the same fervor and intensity with which he talks Check Point or Microsoft at Palo Alto Networks sales conferences, we have reason to be optimistic.
Back in Israel and building some buzz
After the outbreak of the Covid-19 pandemic, Zuk realized that geography no longer held any meaning, and he decided to return to Israel with his family. This was due, in part, to some of his children being inducted into the IDF, including to his old unit, signals intelligence unit 8200. He purchased a house, that of former Prime Minister's Office director general Shimon Sheves in the upmarket residential Tel Aviv neighborhood of Tzahala, for NIS 50 million.
Zuk meets with journalists, non-profits, and businessmen, is hosted at conferences, and is exploring new ways to influence Israel and the technology arena, outside of Palo Alto Networks. He was also one of the first investors in the unicorn Fireblocks, which deals in information security for cryptocurrency transactions, and even joined Shlomo Kramer, Marius Nacht, and Mickey Boodaei as an investor in Gili Raanan and Lior Simon’s cyber fund, Cyberstarts, whose portfolio companies include Assaf Rappaport's Wiz, Cyera, Fireblocks, Island and Noname Security.
The greatest danger: Social networks
Zuk sees social networks as among society’s greatest dangers; the same companies that helped make Palo Alto Networks a powerhouse. In fact, Zuk's company was one of the first cyber companies to anticipate the extent to which social network usage would grow, and warned giant corporations to protect themselves against the dangers that could arise from using these services. Zuk claims that social networks are weakening democracies the world over, and in Israel in particular. The decline in hard news and current affairs consumption, and the preference among more and more young people for consuming news through TikTok, Instagram, Facebook and Twitter, keep him awake at night.
On the other hand, Zuk believes that regulatory conditions make it difficult for news and current affairs outlets to provide the requisite added value. The capital outlay on regulatory compliance and license fees means that news channels’ ability to produce the kind of content that can entice the younger generation is limited. On the other hand, video production costs are actually going down, thus lowering the barriers to entry for producing current affairs content. As far as Zuk is concerned, anyone equipped with a mobile phone and editing software can replace an entire studio.
Zuk has shared his concern with friends since coming back to Israel 2020. Finally, someone decided to take practical action, and arranged a meeting with Channel 10’s former chairman Frydman and former show host Schleien, both of whom wanted to set up a new venture. Their emergent production company is expected to produce current affairs content, not only of daily news but also economics, sport, and entertainment. Its goal, according to some of those involved, is "to make quality, dependable current affairs, restore news to its former glory, and do journalism the way it’s supposed to be done."
This is not the first time Zuk and Frydman have collaborated in media. In the past, Frydman led an investor group seeking to buy Channel 13, and he invited Zuk to join the group as well. Other investors, like Sir Frank Lowy and Medinol CEO Dr. Kobi Richter submitted competing offers to owner Len Blavatnik, but he declined all offers, as the station’s value had decreased at that time, and he did not want to sell at a low price.
To avoid the Israeli regulator, the current venture has formed as a content company that produces videos and current affairs programs, distributing these via a smart TV and mobile phones app, and - of course - also through social networks. Zuk, who is considered the man behind the idea, is investing only a few million dollars at this stage.
The connection between a cyber company and founding a bank
Another venture in challenging established corporations, in which Zuk has been involved for over two years now, is digital bank Esh. Unlike the current affairs company, where Zuk initiated the relationship, this time, it was the bank that reached out to him.
About three years ago, former Securities Authority chairman Shmuel Hauser contacted Zuk, and suggested a meeting with him and a pair of high-tech entrepreneurs who were, at that time, unknown to the financial establishment. One was Alex Liverant, among the founders of digital advertising company DoubleVerify.com that had previously operated in Israel, closed its Israeli development center, and then successfully gone public in New York. The other was Yuval Aloni, a high-tech executive who had founded a medium-sized digital advertising agency called Innovi. They were later joined by big names like Kobi Malkin, the former CEO of Bank Massad and Bank Otsar Ha-Hayal, and a former EVP of the banking division at First International Bank of Israel, together with Moshe Wolf, the former CEO of Bank Clearing Center Ltd. (MASAV).
Zuk was completely receptive to their pitch. Having lived in Silicon Valley for half of his life up to that time, and having had quite a few banks as clients with his cyber companies, Zuk had inside knowledge about outdated banking systems and the high price customers paid for their maintenance. He felt that Liverant and Aloni, who already presented prototypes of the financial system they had been working on for three years, had the ability to build complicated infrastructures like a core banking system, or credit underwriting, from the ground up. There could be a niche in Israel, where most banks use outdated or complicated technologies like Temenos (Bank Leumi and Pepper) or Tata Consultancy Services (One Zero), if everything works properly, and the technological infrastructure indeed makes operations more efficient. Whereas digital banks such as One Zero employ hundreds of employees, Esh wants to employ no more than 150 people at the time of its commercial launch, which is planned for another year and a half. And although the founders are outsiders from the world of digital advertising, it is precisely the practices drawn from the worlds of ad-tech and e-commerce - such as, for example, smart data extraction from various databases - that can enable banks to work more efficiently in an era of open banking.
Another element about Esh that appealed to Zuk is the fact that it has become the first bank in Israel to receive a permit to migrate to a public cloud, in this case Amazon. The move reduces storage and operational costs, so that all banking operations now take place on the cloud, similarly to the way Palo Alto Networks monitors cyber threats.
The controlling shareholder group that owns 67% of Esh includes Zuk, founders Aloni and Liverant as well as Adv. Alon Shine. The founding team, which also includes Hauser, Tom Yonai, who was a senior advisor to Moshe Kahlon when the latter was minister of finance, Esh Chief Product Officer Shir Raanan, and Jacob Garten, the former VP, Head of Operations and IT at Israel Discount Bank, owns 18%. The other investors, including art collector Jose Mugrabi, and Canadian investors Mike Flinker and Shmuel Gniwisch, own less than 5% each.
According to the Registrar of Companies, corporations from tax havens such as Barbados (Strathmore Trading Corp.), and the Cayman Islands (Tamar Consulting), are also associated with the bank, but according to the bank, these were reviewed by the regulator before the license was issued, and in any case, do not hold more than 5% each. In total, the bank raised NIS 50 million, for the initial equity to obtain a license, which may increase in the next year and a half by tens of millions of additional shekels.
The bank hopes that this equity, together with capital that will be deposited, will revert back to customers through credit. In addition to low fees, Esh hopes to capture the credit niche that is somewhat lacking among digital banks, even without the need to open an active current account, and to offer credit at lower fees to households and businesses.
"Check Point wasn’t the place to achieve perfection "
Defiance, impatience and stubbornness have always characterized Zuk and have become his hallmark. These days, his targets are big banks and social networks, but his fighting spirit was also what drove him to leave Check Point, and eventually found Palo Alto Networks.
The pivotal event that caused the chain reaction which led to founding a cyber company was, without a doubt, a confrontation that occurred at Check Point between the management and Zuk in the late 1990s. Zuk was one of the first ten employees at Check Point, which was founded in 1993, a group of demobilized soldiers from Unit 8200, which was smaller and more exclusive than it is today, who were vetted by graduates like Gil Shwed and Shlomo Kramer, who had served in the unit. People who worked with Zuk at Check Point mention his tempestuous, demanding character - someone who likes to fly solo, which is not unusual in the Israeli cyber industry - with an inexhaustible need to succeed, and very little patience. "He used to take customer feedback very seriously and argued with some of the developers and management about the need to improve and invest more in development," says someone who knew him at the time. "He always said that maintaining an operating profitability rate of 60% was too high, and that a company must invest in its future at the expense of profitability."
But Zuk felt his words were falling on deaf ears. He was not interested in a management position, and after the appointment of Dorit Dor to the position of Chief Product Officer, the arguments with Shwed and other development managers increased. One of the people closest to him at Check Point, Shlomo Kramer, left for the US to manage the company’s operation there, and a few years later, when a technical position opened up, Zuk took advantage of the opportunity to relocate.
In retrospect, the move of two senior managers, and the distance between Silicon Valley and Ramat Gan (where Check Point was then headquartered) were what eventually brought about their departure. Differences in space and the time led to differences of opinion between Gil Shwed, on the one hand, and Kramer and Zuk, on the other. Kramer and Zuk, who met existing and potential customers every day, held views that often clashed with those of CEO Shwed, who was closer to the development department in Israel.
"Zuk is a perfectionist, and Check Point wasn’t a good place to achieve perfection," says a former employee. "It was difficult to create something of such high quality when you were doing it for the first time, and on the go." Kramer left his managerial position in 1998, but remained a board member. It was then decided to close the development department in the US, then managed by Guy Tene and where Nir Zuk was involved. All the products, successful and not so successful, were shut down, and Zuk took this as a signal to leave and establish what he saw as a better version of Check Point.
From Check Point to Sequoia’s in-house entrepreneur
In 2004, NetScreen, where Zuk was working as CTO, was sold to Juniper Networks for $2.7 billion. Zuk then took on the challenge of moving information security into a space that no cyber company wanted to enter at that time: migrating enterprise security to the digital cloud and conduct all enterprise activities from there, from browsing websites to transferring files. Another revolutionary idea he championed was the development of a single platform to unify all of the cyber products and services that serve the enterprise - in an industry that was and remains fragmented.
Zuk invited the person he was closest to while at Check Point, Asheem Chandna , now of Greylock Partners, to join his new venture as vice president of business development. The two then brought in Sequoia Capital and Shlomo Kramer, who had also benefited from Chandna's investment in his new start-up, Imperva.
A short time later, Zuk also became an in-house entrepreneur at Sequoia. He was given an office and a promise of an initial investment after formulating a finalized business plan. The incubation process took about a year. "Nir was the primary developer of Check Point’s firewall and he knew the weaknesses there, and we thought there was a chance to basically reinvent security," recalled Jim Goetz of Sequoia Capital in a conversation published on the firm’s website.
"We didn't yet know what the precise disruption was, though, and so we spent from March 2005 until the end of that year - about nine months - trying to lock down the idea. "At a certain point, Zuk and Sequoia located the person who would become the company's VP Engineering, Rajiv Batra, who previously served as VP Engineering at Juniper. Batra became Zuk's co-founder in the company, and he serves as its VP Engineering to this day. "I'm a CTO. I don't like to manage people, and I told that to Jim and Asheem," Zuk says in the conversation on Sequoia’s website. "They said they’d find a VP of engineering, and that’s when Jim brought Rajiv into the picture. And I liked him from day zero."
In 2006, the company received its first investment from Kramer, Sequoia and Greylock. It then experienced three lean years in which the shareholders were diluted, until Zuk was able to convince Gartner to include the company in its reports. "Palo Alto Networks wasn’t a blazing success from the start, it’s not the same case as with Wiz today," says a person closely familiar with the company. "It had hard times."
First, it appointed as CEO Mark D. McLaughlin, who took it public on Nasdaq at a valuation of $2.8 billion, and was then replaced by the current CEO Nikesh Arora, who had managed Google in Europe and the Middle East and then spent several years at Softbank as the most likely candidate to replace the founder, chairman and CEO Masayoshi Son.
Under McLaughlin and Arora's leadership, Palo Alto Networks became a success story. From the outset, Zuk was smart enough to put himself in a non-managerial role in order to utilize his skills in technology and product development. Among his other duties, he meets with existing and potential clients: IT Security managers who see him as one of their own: a cyber geek, through and through.
Thanks to investors with connections, proper management, and a staff of very experienced managers from Silicon Valley in senior positions, Palo Alto Networks grew rapidly from the start. It was an American company in every respect, with no Israeli senior managers, aside from Zuk. Post-IPO, however, the founder began to appear more frequently at events in Israel, with the intention of selling to the local market - not to mention with the desire to beat Check Point on its home turf.
A decade after going public, Nir Zuk's bet on Palo Alto Networks appears successful in almost every way. Palo Alto is one of the most successful cyber stocks: the share price has risen from $42 a decade ago to a current $135, and it is considered one of those stocks that are immune to major capital market write-downs. Anyone who invested in Palo Alto five years ago will have seen a 192% rise, whereas an investment in Check Point stock would have yielded a rise of only about 22% over the five-year period. However, there has been a reversal in the past year: Check Point stock has risen by more than 9%, and Palo Alto Networks has actually gone down by about 25%.
Unlike profitable Check Point, for many years Palo Alto Networks was a loss-making growth company. Check Point's profit margin is indeed higher, but in recent quarters, Nir Zuk's company has begun showing a net profit, and the end-of-year forecast surprised even the analysts - the upper limit of forecast range of earnings per share was updated from 3.17 to 3.44 in the last quarter.
Palo Alto Networks has also overtaken Check Point in revenue: Zuk's company's revenue is three times higher than that of Shwed's. In the last quarter, Palo Alto Networks logged $1.56 billion revenue, while Check Point brought in only $577 million. This is also true of market cap: Palo Alto Networks’ is $42.7 billion, while Check Point’s is $16.3 billion. Both companies had negative cash flow in the last quarter, but Palo Alto Networks' cash reserves are ten times larger than Check Point’s. Last year, Palo Alto Networks won a symbolic victory when it became part of the Nasdaq index at the expense of veteran Check Point. Nevertheless, a rash of acquisitions and high compensation packages for employees has placed a burden of debt on Palo Alto Networks. Its liabilities total almost $4 billion. Check Point, by contrast, has almost no liabilities (just $22.3 million).
Palo Alto Networks was smart enough to enter into digital cloud security at a relatively early stage, much earlier than Check Point, and it has made many acquisitions - including in Israel. Over the past eight years, it has acquired seven companies, including LightCyber, one of whose founders, Gonen Fink - a former colleague of Zuk at Check Point - became the director of the Israeli development center, which is located not far from - and even overlooks - the Check Point offices.
Startup founders call it a monopoly
Palo Alto Networks is already in the global cyber giants league. The market has termed it a "marketing and sales machine," employing thousands of salespeople in the US who work day and night to beat the competition, and increase market share in more and more cyber markets. This behavior is sometimes criticized by startup founders, who call it a monopoly, but such conduct is typical of Silicon Valley giants, and is no different from the practices used, for example, by Microsoft. And yet, says one entrepreneur who asked to remain anonymous, "Palo Alto offers software bundles and subsidizes products in a market where it has competition, which may hurt startups."
Another example of these practices came to light in 2019 when Orca Security, at the time a young cloud cyber company founded by former Check Point staffers, posted a series of videos in which it compared its system performance to that of competitors such as Check Point, Tenable, and Palo Alto Networks. Palo Alto Networks was the only one to issue a letter to Orca threatening legal action, claiming that Orca had violated its license agreement. (To produce its video, Orca had purchased a license for Palo Alto's system, the terms of which prohibited customers from posting product reviews). The video was never taken down but the threat was never realized.
But the digs at Check Point continued, even years later. At a sales conference in Israel held about a decade ago, Zuk said, "Our competitors call and threaten our partners, saying they’ll stop working with them," "Our competition is panicking, they’re making false promises. Then, when they release a product, to the customer’s disappointment, it turns out to be a dud." But Zuk has matured. Today, now that Palo Alto Networks has exceeded Check Point in almost every possible parameter, and when Zuk himself is already worth $863 million, of which - according to Wallmine - he has already realized more than half a billion dollars, it’s possible to move on.
Published by Globes, Israel business news - en.globes.co.il - on January 8, 2023.
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