“Fireblocks is ‘the one’ of the crypto industry”

Fireblocks valuation to surge to $8 billion in $400 million Series E

Most people will remember the past two years as being difficult and riddled with previously unseen challenges that touched every aspect of our lives – our health, mental condition, family relations and financial stability. But as far as Michael Shaulov is concerned, this will always be a period to look back upon favorably.

In the summer of 2019, Fireblocks – headed by Shauolov and co-founded with Idan Ofrat and Pavel Berengoltz – was still a stealth startup, the clandestine phase in which startups develop under a shroud of secrecy before unveiling the product. Only then it announced its initial, relatively modest, funding round of $16 million. By last March it had become a unicorn, and on July, it completed a $310 million round on a $2.5 billion valuation. And today (Thursday), Fireblocks is announcing another round for a staggering $550 million at an $8 billion valuation. For those who didn’t do the math – Fireblocks’ valuation catapulted threefold within a mere six months, and it is now one of Israel’s three highest valued private companies, following Rapyd and Snyk.

The company owes its unusual quantum leap to its product: a secure digital platform for crypto transactions. The cryptocurrency market experienced a dramatic growth spurt over the past two years, hitting the $2 trillion mark before the current crash. Increasing numbers of traditional businesses are beginning to adopt cryptocurrency, and according to forecasts, this year alone, a quarter of small businesses will be accepting payment in these currencies – and Fireblocks is going with that flow. To date, the company’s platform boasts a 15% share of all cryptocurrency transactions. At the same time, crypto is carving itself a growing share of a broader arena: not that of private consumers but of the institutionalized financial industry. The crypto advocates dream of taking over or completely replacing these leviathan institutions, although the likes of Goldman Sachs and J. P. Morgan have recently established dedicated crypto units and are allowing clients to hold cryptocurrency and trade them. Naturally, Fireblocks is relishing these developments.

Now, in an exclusive interview to Calcalist’s supplement, Shaulov reveals what this stellar eruption looked like from within, and how it led to a total of one billion dollars in funding – an unusual sum considering the rapid growth in high-tech lately – from large funds such as D1 Capital Partners and Spark Capital, who led the Series E, as well as General Atlantic, Index Ventures, Mammoth, Alphabet’s CapitalG growth fund, Altimeter, Iconiq Strategic Partners, Canapi Ventures, Parafi Growth Fund, Sequoia, Coatue, U.S. financing giant BNY Mellon, and others.

"Three things came into play here," Shaulov explains in a series of Zoom interviews from the company's New York offices. "Firstly, I think investors have begun to grasp that at least for now, Fireblocks is the dominant and triumphant player, or in investor lingo — “the one”. An understanding that we have set the industry standard is starting to permeate the market. I'm wary of viewing us as the single solution, because we’re not, but we are the best solution in the market. The second thing was that our whole theory regarding the direction in which the market is heading with NFT, DeFi and digital payments is materializing – everything is unfolding exactly the way we said it would.

“The third thing is the fact that despite a certain inflation of prices and company valuations in the background, our value is sustained by a truly insane growth-rate. We’ve had to update our annual forecast four times in the past year. Initially we adjusted our revenue forecast from $8 million to $25 million, followed by $35 million, and lastly to $45 million. We actually ended 2021 with $60 million in revenue – that’s growth of over 600% in one year, and for this year as well, we forecast a tripling of our revenue.”

It’s not cyber – it’s fintech

To get a clear grasp of these figures, one has to understand the product, and to understand the product – one must be acquainted with its creator. Shaulov (39), father of two, immigrated to Israel at the age of 6 with his mother from the Ukraine. They lived in Haifa, where his mother married a computer engineer, who started teaching Shaulov programming already at the age of 7. By the time he was thirteen, he had founded his own web development company and by 17 even won an award for an online watch store website. He served for four years in the IDF 8200 intelligence unit, which has famously produced some of the brightest minds in the field of technology past and present. Upon completing his military service, he studied computer science and physics and started working for NICE Systems. Later he went on to co-found Lacoon Mobile Security, a developer of mobile security technology, with Ohad Bobrov. The other employee was Berengoltz, and when Check Point acquired Lacoon in 2015 for $100 million, Shaulov and Berengoltz joined the cyber giant’s team

In 2017, while working at Check Point, the two were asked to investigate the giant crypto exchange breach in South Korea, in which $200 million dollars’ worth of bitcoins were stolen. While doing so, an idea struck the two and they embarked on a venture of their own, bringing Ofrat on board. Thus Fireblocks came to be, as a solution for the protection of digital assets against hackers, which is not just another security solution patched onto existing technology, but rather a basic platform for cryptocurrency transactions, secured from the foundation up.

“We didn’t want to do IT security again, chasing and schmoozing CISOs (chief information security officers),” says Shaulov. “It’s true that technology and cyber are in our DNA but I view Fireblocks as a fintech company.”

The key to the technology is, well, keys. The crypto security keys are distributed among a number of computers, making them challenging for hackers to crack. The technology is based on multi-party computation (MPC) – a field spearheaded by Israel for the past decade. MPC was conceived in the labs of professor Shafi Goldwasser (awarding her the Turing Award), professor Oded Goldreich (who was nominated for the Israel Prize, but has not received it), and professor Yehuda Lidel (the founder of Unbound). Until the arrival of cryptocurrency, MPC was used mainly in the world of encryption, with few commercial applications. When the need arose for the protection of anonymous digital assets, MPC emerged as a solution. Rather than using an easily breached or stollen single computer password, comprising characters and numbers to protect these assets, Fireblocks (and its rivals) break up the key, distribute it among several devices, and connect all the parts only for the owner – sort of like a lock that has differently notched keys, each kept at a different location, all of them required to open the lock. In other words, to “unlock” the account and access its funds, hackers have to break into several devices at once – a tall order at the very least. Fireblocks’ secure system serves the cryptocurrency at every possible juncture – from inter-bank transactions, through investments, to digital wallets – the latter characterized by fierce competition. Fireblocks’ users’ wallets already hold $50 billion. In effect, the platform enables users to perform all crypto transactions with about 1,000 cryptocurrencies.

Fireblocks is considered a white-label product, or a “private product” – it provides the clients with a non-branded platform. Users are unaware that their transactions are made through Fireblocks. Among the product’s users are some of the largest global banks such as Credit Suisse and BNY Mellon; stock markets, hedge funds, billing companies and popular financial apps such as Robinhood and Revolut. Only a year ago the company had 150 clients – today it boasts 800 customers, who channel through its platform $2 trillion worth of transactions to date. “We expect to end next year with 1,800 users,” Shaulov estimates. “The materialization of the metaverse and NFT vision motivates us. These days, even the gaming companies are trying to understand how to shift their monetization to crypto, giving the industry another push forward.”

Alongside the soaring funding rounds, number of clients and deals, the company’s workforce has grown from 70 to 260 within a year. Half of these are based in New York and half in Tel Aviv. “We’re relocating all of our global offices because we’ve run out of space. It’s true for Israel as well – soon we’ll be moving to our new headquarters in the Hassan Arfa business tower district.”

Where do you get your employees?

“We seek people who specialize in blockchain technology but they’re few and far apart. Therefore, just like we came from cyber – we train cyber professionals in this technology. For them it’s very interesting because it affords them some diversity, letting them do something different from what they’re been doing up to that point.”

Is it harder to recruit in Tel Aviv then in New York?

“We recruit engineers exclusively from Israel.”

All your engineers are Israeli? Why?

“For reasons of security. Our technology is extremely sensitive relatively to cyber companies, and we are the keepers of $50 billion in cryptocurrency. So it’s very important for us to know who we are recruiting, where they live, who exactly they are. In Israel it’s much easier for us to ascertain this information and install the controls we need. Granted, we don’t run Mossad level background checks, but we certainly perform thorough checks. In Israel I know exactly who to call, and with our network of connections, I can reach anyone with three phone calls. That would be pretty difficult to do elsewhere.”

Is there a bubble? Are you heading to an IPO?

Fireblocks is currently the leader in its field, but it’s not alone. Its rivals – all either Israeli or founded by Israelis – chalked up a fantastic year. Curv was sold to PayPal for $200 million in March; in June, Shard X was sold to Gemini – Cameron and Tyler Winklevoss’s crypto platform; in December, Unbound sold for $200 million to Coinbase – the $40 billion crypto giant that is planning to establish a R&D center in Israel.

And above all of them flutters Fireblocks’ current valuation, raising the question whether we are witnessing a bubble. There is also a generational element here: the “tribe elders” of cyber, i.e. Gil Shwed, Shlomo Kramer and Nir Zuk, were mentors for the next generation, namely Shaulov, Yevgeny Dibrov (Armis) and Assaf Rappaport (Wiz). All three served in the Intelligence corps together, are well acquainted, have a friendly relationship, hang out socially and even invest together in young startups. Shaulov was also the person who convinced Shwed to reach for his wallet and acquire Lacoon for $100 million. To put that into perspective, since taking over Lacoon, Check Point has made only one more large deal.

However, recently Shwed, Kramer and Zuk have expressed – explicitly or not – concerns over a possible bubble and the fact that the “young” companies, mainly from the cyber industry, have exorbitant valuations. Shaulov remains unfazed: “I have a lot of respect for Shwed and Kramer, I’ve worked with them for years, but I think that the truth lies somewhere in the middle”.

What does that mean? A three and a half fold leap within six months isn’t enough to raise concerns about a bubble?

"In 2014, Assaf (Rappaport) and I were at Sequoia's base camp, a kind of workshop weekend that the fund holds for its portfolio companies. I remember back then saying there was a bubble, there was a feeling of a historic moment in cyber — and since then, everything has just been climbing. Already then, we were both shocked at the number of startups and the sheer amount of money. We felt there were too many startups in cyber, most of which didn’t even have a product-market fit. Today there are fewer companies, and there is better infrastructure. When I started Lacoon, aside from seeking advice from Shlomo Kramer and Mickey, there really was no one to talk to in Israel. Today, we have funds that specialize in cyber — Gili Raanan's Cyberstarts, Glilot Capital, YL, and Team8. It's a very strong infrastructure that can take people from zero to ten, allowing them to get to sales and to recruit senior executives, ensuring that fewer startups than before fail."

So the foundation is good, but that still doesn’t explain the valuations.

"What’s happening with the valuation levels is not related to any particular company, but rather to a macroeconomic phenomenon of rising multipliers during the Covid-19 pandemic. This happened because 40% of the world's money was printed in these two years, and it needs to find somewhere to flow. Venture capitalists have performed impressively over the past two years, not only on paper but also in IPOs, enjoying amazing returns, and this creates another multiplier on the amount of money. Now they're raising even more money, you could even say the sums are ludicrous. A few months ago someone said to me: 'People aren’t looking at 2025, but at 2027'. It's a global thing. There's also nothing cyber-specific about it. In fintech, for example, the multipliers are even crazier, take Roblox and Rapid for example.”

Since November the Nasdaq had lost over 10%, but we aren’t seeing this kind of correction in the private market yet. Just two weeks ago, the Andreessen Horowitz fund completed a $9 billion funding round for a high-tech fund, and is now raising $4.5 billion for a fund dedicated exclusively to crypto investments. The question of course is to what extent can a company the size of Fireblocks continue playing in the private market.

Three of you rivals have been sold already. With your current value – what are the chances of you being acquired as well?

"Never say never, but when analyzing the market landscape today I don't think our current value is feasible for any buyer. Furthermore, a very large part of the value we provide is our network, and if one player acquires us, they lose a substantial portion of the business. Coinbase, for example, stopped working with most of Unbound’s customers and PayPal no longer works with most of Curv’s clients. If you take a look at who might still be able to acquire us, for example, Visa — it has $400 billion in cash, and that’s still not enough. Most of these traditional players have a lot of money, but they are so far behind when it comes to crypto and have no grasp whatsoever of the market, that there is very little impetus among their management and board. For now they cannot make any strategic moves in this market. Meanwhile, we’re cementing our dominance, and this will take us to the public market down the road."

The public market is not yet entirely open to companies like you. Meanwhile, Coinbase, the world's largest crypto exchange that went public this year, is the sector's near-single success. Any activity relating to crypto is closely examined by the securities authorities, and we can see thi, for example, in the delays in the offering of Israeli company eToro.

“We won’t be looking to go public in the upcoming year. But looking at companies like Stripe, which hit the $100 billion valuation on the private market, it’s clear that they’re heading for an offering. I believe that in the next year to year-and-a-half, Coinbase will not be alone on the tickers – eToro and Gemini are heading to the stock exchange already. There are more than a few companies in the industry that I know of, which are working on their prospectus. I’m not claiming that I would like to pioneer this move – I prefer not to lead the expedition with the machete.”

The main question hanging over the encounter between the crypto world and the stock exchange is the issue of whether cryptocurrencies are currencies for all intents and purposes, or securities, similar to stocks. And while the crypto players are constantly trying to label it as a currency, in practice Bitcoin and its counterparts behave more like shares with their ups and downs. How do you think this issue will be decided?

"If we’re talking dollar-backed currencies (stablecoins) – ultimately, 98% of those currencies' value is held in dollars in the bank. With traditional currencies, banks are required to maintain only 15% liquidity, so stablecoins are guaranteed with high liquidity. And if they're backed by dollars, then it goes without saying that the asset is linked directly to the economy. I think the Fed will soon proclaim companies such as Circle, which is behind dollar-backed currencies, to be banks — imposing certain restrictions. In any case, we self-impose very strict requirements and standards, do not work with entities that violate sanctions, and therefore banks have no problem working with us. And the financial world doesn't like recalling this, but the one that almost tore the global financial system to tatters in 2008 was a bank – Lehman Brothers," he laughs.

The competitors have just a hammer

In this respect, investments by large entities and the acquisition of competitors by large companies grants the industry in general and Fireblocks in particular a stamp of approval of sorts. Meanwhile, Shaulov isn't bothered by the competition. "Technologically speaking, Curv is the closest to our solution, and Unbound is farthest from what we do. Curv was founded in 2014 to provide generic technology to a wide range of cyber applications, and simply decided to focus on crypto. It created a sort of hammer you can use on anything. They provide a solution for managing multiple keys, but it’s not exclusively for crypto. That's why their market penetration is limited. On the side of the scale, Coinbase announced six months ago that it wanted to get into wallet technology. They tried to develop their own, but later consulted with us and other industry researchers, and it seems they’ve had enough so they acquired Unbound, which provides them with what they were missing – mainly development abilities, once their center in Israel will be established.

"I think someone must’ve sold them a tall tale that in Israel you can go out on the street and shovel up 30 cyber engineers with a bulldozer," he laughs again. "But the reality is different. Every programmer recruited to cyber today – by me, by Yevgeny at Armis, or by Assaf at Wiz - we have to contact that person ourselves and convince him that it’s worth their while to work for us and not for someone else."

In addition to the competition, Shaulov's company is now also facing a lawsuit, which is yet another testament to the complexity of the crypto world. Last June, StakeHound - another company in the field – filed a lawsuit with the Tel Aviv District Court against Fireblocks, claiming that it was responsible for the loss of $75 million worth of digital currencies. The plaintiff is demanding compensation, allegedly due to the negligence of a Fireblocks employee, who didn’t make a backup of the keys, leading to the loss of the money. Fireblocks' lawyers instructed Shaulov to refrain from commenting on the lawsuit, but the company itself argued that the StakeHound project was not part of the company's regular MPC wallet, and that in fact, the keys were created and stored by the client and not on the Fireblocks platform. "The customer did not store the backup for the keys through a third-party service provider, as instructed by our guidelines," the company says.

None of this is holding Shaulov back from his grand vision. He looks at SWIFT, the longstanding system for inter-bank financial communication, and believes that "we can be the SWIFT of dollar-backed currencies, only unlike SWIFT, which is a closed system that empowers the big guys, blockchain flattens the hierarchy and allows everything to get done faster, including direct wallet to wallet transfers."

Are you among those who view crypto as the key for changing the financial world?

"I think that in the future, we will no longer see financial intermediaries – not just SWIFT but also credit card companies in their current format will no longer be around, certainly not as clearing bodies, and sections of banks, such as currency trading rooms, will change drastically. Everything will be done directly. I estimate that in the foreseeable future, the banks will come to their senses and quickly move towards cryptocurrency, as has been the case recently in the U.S. There, anyone who claimed last year that this is a pyramid scheme was caught with their pants down and are now scurrying to close the gap. Those who will benefit most from this tectonic shift are companies that engage with end users, such as PayPal, but banks too can profit if they switch to the new kind of technology such as we provide. Bitcoin will not become a major payment method any time soon, but the infrastructure of all our financial assets is going to change, and this will lead to democratization and greater access to people."