February 2025
From: Brian, Tobias, and Gaby
Subject: The implications of DeepSeek
Hi all,
Welcome back to the BT&G infra newsletter.
Tobias and I spent the last week in Tel Aviv, visiting a couple of portfolio companies and further connecting with the ecosystem there. The talent in Israel is well-known, and it is fantastic to see how thriving the community is in the wake of a difficult year and a half. Coming out of that trip, we want to share some reflections on the ecosystem there, our learnings, and how that all should inform our investing activity here in the states.
Before we dive in, it's worth noting: many of you have spent far more time investing in Israeli companies than we have, and we're sharing this email with several new friends in Tel Aviv. While we're enthusiastic about the Israeli tech scene, we recognize that our insights are still developing. We hope they're helpful and would genuinely appreciate feedback from those of you with deeper experience investing in Israel.
Setting the scene:
For years, Israel has been known as “Startup Nation,” and for good reason. Despite its small size, the country has produced an amazing number of large technology companies. Checkpoint ($25B market cap), WhatsApp (acquired by Meta for $19B), Mobileye (acquired by Intel for $15B), and Mellanox (acquired by NVIDIA for $7B) are some of the most famous success stories from the ecosystem.
The Israeli market continues to produce winners, however, with companies like Monday ($13B market cap), Wix ($10B market cap), SentinelOne ($8B market cap), and Habana Labs (acquired by Intel for $2B), in addition to high-flying cyber companies like Wiz, which may end up being the biggest company of all. The source of this entrepreneurial DNA is totally unique: everything in Israel stems from experience of founders in the military.
The ecosystem and the military:
The Israeli tech ecosystem and the military are inextricably connected. In Israel, units like 8200 and 81 are tossed around like talking about Ivy League colleges in the U.S. People take for granted why it has been such a successful training ground for entrepreneurs.
First, everyone has the shared military experience, which creates a foundation of shared values, experiences, and reference points. Often founders will recruit the best people from their units to be the first employees at their companies. Second, the skills learned and real-life experiences are powerful; a CS grad in the state will not have touched a production system, whereas a technical 21-year-old in Israel will have spent years building in high-stakes production environments. The flow between the military and startups is also surprisingly fluid (at least right now). We saw teams “lending” talent to the military, negotiating reserve time, and more. Lastly, there is a sense that service to the country gets extended by entering tech – a strong tech ecosystem and strong economy bolsters the country. The purpose and sense of mission of the founders is palpable.
The Market has rebounded:
Israeli founders and investors have faced a hellish year and a half, and in the wake of October 7th, a lot of them were concerned investor interest and capital would flee. However, the opposite has happened – 2024 was a strong year for the ecosystem. According to Vintage, M&A hit a peak in 2024 of $10.5B, led by acquisitions of companies like Own by Salesforce ($1.9B) and Run:AI by NVIDIA ($700M). VC funding also grew from $8.3B in 2023 to $10.6B in 2024, although that number will increase as currently unannounced rounds become public.
When we spoke to investors and founders, there was a general feeling of excitement and momentum. 2024 exceeded the expectations of many, and people on the ground are hoping 2025 is an even better year, building on big wins from 2024.
Cyber reigns supreme:
Cyber still dominates the ecosystem, with 36% of the total VC investment in Israel going to the category in 2024. Maybe more importantly, many of the top investments in the ecosystem are still cyber – Wiz, Cyera, Axonius, Armis, Island, and Upwind all raised big rounds in 2024, to name a few.
The VC ecosystem is broadly split into three categories:
The gravity of cyber in the Israeli ecosystem is unlike any standalone category in the U.S. market. As companies like Wiz and Cyera have broken out, multi-stage funds have flocked to collaborate with the specialist cyber funds when they can – this includes U.S. funds that have been in Israel for decades like Bessemer to funds with only a more recent presence there like Sequoia. Even funds without an on-the-ground presence in the market, like Redpoint and Coatue, are getting active as well.
One interesting observation was that these multi-stage funds are much more active at seed in the Israeli cyber market than they are in the U.S., where their seed activity tends to be pretty focused and selective and not at all the core strategy. In Israel, it definitely seems to be the main stage at which the multi-stage funds want to participate.
Capitalization over dilution, big premiums for second-timers:
Round sizes and valuations in Israel are quite different from the U.S. Even an unseasoned founder still at the idea phase in cyber will raise at minimum $6M, but more likely $8M. The second-timers will raise $10M+ in a seed round and sometimes even $20M+. Founders tend to be less dilution sensitive, though. It is not uncommon to get diluted 30% or even ⅓ at the seed, so founders are choosing more money over less dilution.
This dynamic is a stark contrast to a lot of the thinking in the U.S., which treats dilution as much more precious. We often meet founders who would rather raise less if it means getting diluted less, with the assumption that a Series A is coming. This is not at all the mentality in Israel, where founders want more capital to build and get to market.
Why this difference exists is a complicated question, and there are likely many reasons. Perhaps some are cultural. However, we think a big part of the answer specifically relates to cyber, a market defined by waves and sub-categories where there are always a dozen or more players building similar products and entering the market at roughly the same time, fighting for customers and mindshare. In this kind of market, speed to market is everything, and the capital to hire engineers and build quickly ends up being a huge determinant of who wins.
The premiums given to second-timers is also reflective of Israeli investors’ emphasis on people. We were struck time and again by the unbridled and unapologetic focus on the founder – many large rounds happen because of a founder, even before an idea exists. It is an important reminder about what this business is truly about – exceptional, outlier people.
AI up-and-coming, but still a lot to prove:
In 2024, AI made up 47% of all of the ecosystem’s investments, although with a much lower average investment size than cyber. AI now makes up 30% of all of Israel’s startups, although AI encompasses many different kinds of companies across infrastructure and the application layer. SSI opening an office in Tel Aviv and hiring researchers there is exciting, and legacy companies like NVIDIA (via Mellanox acquisition) have begun to produce top tier AI talent.
When we spoke to investors about the AI ecosystem, there was a sense that it still had a lot of room to grow. AI21 has been a great success story so far as a foundation model company coming out of Israel (most recently valued at $1.4B), but the main exits so far have been Run:AI (acquired by NVIDIA for $700M) and Deci (acquired by NVIDIA for $300M). Israel has yet to see many AI unicorns emerge, especially at the AI application layer where so much of the funding activity in the U.S. has occurred. There was a sense of desire for that to happen, to diversify away from being so heavily concentrated on, and known for, cyber.
We think it’s just a matter of time. Israel has a long history of producing great low-level networking technologies, most notably Mellanox. And, the technologies being used in the army are always a foreshadowing of what founders will work on – this was true for networking in the 90s and 2000s and cyber more recently. As one investor we spoke to said, it is just a matter of time before AI becomes a key technology used in the military, and more entrepreneurs start businesses with that expertise.
We are already starting to see great companies out of Israel focused on low levels of the AI infra stack. We invested in an Israeli company over the summer focused on memory optimization for GPU fleets. That company is building foundational technology core to GPU efficiency, with talented Israeli engineers from Mellanox, Next Silicon, Granulate, and other companies. We are sure there will be other interesting Israeli companies in this sector.
Room still to grow:
Israel has produced many good cyber outcomes – people there talk about how “easy” it can be to get a cyber startup acquired for a few hundred million dollars – but the number of decacorns is quite limited. During lunch with an investor, he mentioned hoping Israel soon gets its first $100B business (perhaps that will be Wiz). Amazingly, investors and founders are not satisfied with the current success of the tech ecosystem. They want more.
There is a chance this $100B business is not a cyber business at all, but an AI business. We think the AI wave is going to help the Israeli ecosystem dramatically – the talent density is there, and people are hungry for big swings and outcomes. The cyber community will of course continue to flourish, and it may even accelerate with bigger rounds, valuations, and businesses in an age of AI where tools become more sophisticated and attack surfaces more complex. However, we think there will be great AI businesses emerging from this market as well, and as a result, the ecosystem still has a lot of runway to continue growing.
Learnings and concluding thoughts:
We left our week in Israel inspired by the entrepreneurial spirit of the founders there – the drive and ambition of the people in the ecosystem is as strong as ever despite a traumatic war. We also learned a lot about how we want to invest in the ecosystem – tread lightly and collaborate, especially in sectors dominated by well-resourced, local funds. Lean into our advantages as a seed-focused fund that excels at supporting companies in the earliest days with GTM, recruiting, downstream funding, and more. We think a one-two punch of a specialist local fund and a U.S. generalist fund can be a great combination, so more so than when investing in our own backyard, we want to co-lead and collaborate with funds in Israel. We hope this trip is only the beginning of fruitful partnership to come.
Until next time,
BT&G