"Palo Alto Networks didn't invest a billion dollars in Israel as a show of solidarity"

Amid the harrowing backdrop of conflict and national distress, Liran Grinberg, co-founder and Managing Partner at VC firm Team8, reflects on the recent seismic billion-dollar acquisitions of Israeli cyber startups Dig and Talon by Palo Alto Networks. In the shadow of war's toll, Grinberg unveils the poignant human stories within his Team8 family, intertwining tales of tragedy with a glimmer of hope provided by these exceptional exits. While the prevailing sentiment is one of solemnity, Grinberg underscores the strategic importance of such acquisitions in tumultuous times, spotlighting the resilience of visionary founders and the enduring strength of Israel's tech ecosystem.

"This is a terrible time for an interview about the success of companies. Our hearts are with the kidnapped and wounded soldiers. We have a product manager in one of the portfolio companies whose two sisters were kidnapped with their babies. We have developers who had family members murdered, and there is Yaniv Vardi, CEO of Claroty, whose mother-in-law was murdered and 15 minutes later he learned that his son was wounded in battle. In Team8's extended family, there are endless difficult cases."

Cpt. Sagi Golan, an officer who was killed and was supposed to marry his partner, interviewed for a job with Team8 a month before he was killed.

"It still gives me chills. I am still in shock, such pain. A month ago I met him face to face when he interviewed for a position with us. We gave him a business analysis task and he gave us a one-hour presentation and entered our hearts. You see a man who is the salt of the earth. He was an amazing guy who jumped into battle. I knew nothing about him personally, it was a very professional meeting. When I saw the terrible news about his death and the article about his partner and his mother - I didn't stop crying."

There was talk of the opacity surrounding the recognition of his partner, and this was corrected in the Knesset's decision to recognize IDF widow/ers from the gay community.

"To me as a gay person, the amendment in the Knesset that will allow to recognize the spouses of LGBT victims as IDF widow/ers gives me a glimmer of hope that after the war they will recognize all soldiers from the gay community as equals, not only in death, but also in life. There is no shortage of things that need to be corrected in our lives: for example in the field of marriage and children. I want to build a family and will have to go through a complex and expensive American surrogacy process overseas."

During this whole ‘terrible’ period, as you defined it, there were two huge exits. How do you mark them?

"We even debated about posting it on LinkedIn. These two exits are a huge success, which at other times we would have celebrated. But now is not the time for celebrations. So we debated whether to reveal them at all. In the end, we decided to publish them, with all the necessary reservations. We wrote that these are difficult days, but such a purchase is a tremendous expression of confidence in the Israeli economy. We have already sold six companies, this is our seventh and eighth exits, but this time the reactions were heart-warming - it shines some light in the darkness. In the end, high-tech has an important role in the war and the day after."

What is special about the purchases of Dig and Talon?

"The heroes in this success are the founders of Talon, Ofer Ben-Noon and Ohad Bobrov; and the founders of Dig, Dan Benjamin, Ido Azran and Gad Akuka. They built companies and reached such great success in just a few years and managed to sell during a time of a terrorist attack and war, which was preceded by a period of economic slowdown in the economy, division and political crisis; and before that there was the pandemic. These entrepreneurs managed during these roller coaster times to establish two startups and achieve success."

Why did you invest in them?

"What both companies have in common is the fantastic teams they built, which we have known for more than 15 years. These are teams that have already built companies that have been sold - with the ambition to do it again in a big way. Talon chose to build a browser and compete with the browsers of giants like Microsoft and Google. But Talon said we will make a browser for organizations that have cyber defense at their heart - and this will become a standard of what a browser should look like in an organization. And this vision for a browser that sits on an employee's computer with the ability to prevent data leakage, isolate attacks and secure access to the organization's resources - is a category worth tens of billions of dollars.

"At Dig, the vision was to solve the challenge of data protection with the transition to the cloud. It is a company that looks at organizational information from end to end, and help the organization answer questions such as which information is sensitive and which is not, is part of it exposed, vulnerable, who has access to it, and if there is any suspicious behavior around this data, even before it is breached. In both cases, we believed in both the teams and the abilities to build a huge company around the ideas they brought."

How much have you invested and what holdings do you have in each company?

"We don't disclose percentages, but regarding Talon, the company raised $140 million and we invested in the first round from the beginning, and also in the second. We invested about $14 million in the company. In Dig, we invested about $8 million in the first round out of about $42 million. We led the Seed round and we were the largest shareholder in the company."

What is the importance of the purchase, especially during war?

"Palo Alto Networks has acquired 17 companies in recent years, investing $2.5 billion in acquisitions in the last five years alone. This is not a small acquisition. Exposure to Israel amounting to a billion dollars in ten days is a significant event. Dig is a purchase of approximately $400 million and Talon is a purchase north of $600 million, the second largest purchase in Palo Alto's history."

It seems that you have a good relationship at Team8 with Nir Zuk, the founder and CTO of Palo Alto Networks.

"Nir Zuk is a good friend of Team8, but in the end Palo Alto has a CEO of Indian origin, Nikesh Arora, and it is a public company, and the executives who were involved in both transactions are neither Israelis nor Jewish. Let's not kid ourselves, this did not happen because the founder Nir Zuk is Israeli. Palo Alto Networks didn't decide to invest a billion dollars in Israel as a show of solidarity during wartime. They have a very organized board, and this is a huge investment for them. Palo Alto is only buying the companies because it thinks they have good technology with a strong team.

"Dig, for example, has American competitors. You could buy one of them for a quarter of the price. They chose to pay an astronomical amount, at a very premium price, because these are the best companies to buy in the field."

Is there a chance that it comes from Israeli sentiment? Perhaps this is Nir Zuk's way of supporting local high-tech these days?

"I'm sure that Nir Zuk is a big supporter of Israel and the Israeli acquisitions, but I don't think that Palo Alto Networks bought the companies out of a motivation to show solidarity with Israel during the war. The negotiations started before the war, but the war didn't scare them away. Palo Alto has a huge site in Israel, they are aware of the risk that 10%-15% of the workforce is recruited into the reserves, they are aware of the impact on the rate of development of new features. On the other hand, there is no damage to the customers, the product already works, the solutions exist, no customer has been harmed, even if at the moment the output is not 100%. Palo Alto did not back out of the deal even though they could have. Today Palo Alto is worth $75 billion, it is the largest cyber company in the world, and it has a vision to cross the $100 billion mark, and this will happen following acquisitions like Dig and Talon."

You are a veteran of the IDF’s Unit 8200. How do you feel about the resounding intelligence failure on October 7?

"There was such a big failure here and it will be investigated, but at least the motivation to improve intelligence technology capabilities in Israel is now higher than ever. This means using technologies that may have been needed and were given low priority and developing what is missing. The growth that will happen in these units will also benefit high-tech."

Is there a fear that there will be some kind of October 7 cyber attack?

"The business paradox is that in times like this there is an increase in demand in the cyber industry. It happened during the pandemic when we moved to work from home because attackers took advantage of it, it happened in the war in Ukraine and it's happening now as well. We see attacks on government and private entities. There are more attempts but at the moment they are more of the same, not sophisticated. However, cyber is a great threat, we have seen difficult scenarios of attacks on critical infrastructures and it is likely that the world will see such again, so it is not correct to exaggerate about the strength of Israeli cyber and that we will not be attacked."

Israeli high-tech suffered a blow with the start of the judicial reform, and now the war has broken out. Will the industry experience a revival?

"Obviously this is a difficult time. We are not working at 100%, but the industry is functioning, I can tell you that in one of my portfolio companies, a funding round that started before the war was successfully signed last week. The leading investor is a Japanese company whose investment team is in the U.S. I am not out of touch and won’t say that there is no effect, but high-tech continues to roll along.

"Acquisitions and investments happened and will happen, hundreds of foreign venture capital funds that invest here signed a letter of support for Israel. I have a conversation at least once a day with venture capital investors in the U.S. or Europe, and I tell them the truth: there is a slowdown, but no partner has been hurt. And the support I get is absolute. Funds that were active in Israel before October 7 and know the Israeli ecosystem may have canceled visits here, but they will continue to invest. A fund that has never done anything here will not come in time of war, there is no such expectation. We do not expect any favors, and do not ask for donations. And I'm sure there are also those who got cold feet because of the war."

Investors are not keen on instability. Combat rounds, and now actual war, have a wide impact on the world.

"Paradoxically, the prosperity of high-tech is not in spite of Israel's security difficulties, but because of them. This survival need, to protect yourself, to equip yourself with technological security means, will only increase after the great disaster that happened here. Historically, it gives rise to the success of high-tech as a secondary effect. The sophisticated investors understand that. In order to survive, we must know how to protect ourselves in a tremendous way. This gives rise to means and technologies. This is a huge disaster, and the heart hurts, and as terrible as it is to say it, after every round of crisis there is innovation and prosperity."

You have registered two exits in the cyber field. Isn’t the sector saturated?

"I hear a lot that you can't consume so many solutions and there are a lot of companies here. That's not the case. Every new technology creates a new attack surface. This creates a need for an endless cycle of solutions. Attackers are constantly reinventing themselves, so I don't see how it ends. When mobile came into the world, it became a new attack surface that created a new security category.

"The revolution of moving to the cloud has created new attack surfaces, and this is now happening in AI. The use of artificial intelligence has become a weapon. AI makes it possible to write things with unbearable ease. It makes it easier for attackers to trick the employee of the organization into opening a phishing email. It helps attackers write in a good way to attack an organization."

Has the age of unicorns passed?

"If in 2020 all we were interested in was value - today 'Centaur' replaces the term unicorn as a code name for a healthy and reasonable goal of crossing the milestone of $100 million in revenue. For early-stage investors (like in Claroty, which we founded) Centaur is a huge success. It Illustrates the change in focus with the bursting of the bubble at the end of 2021 after companies raised at irrational values. Today the focus is on the company's important business parameters - revenues, expenses, profitability (even if it only comes later). The industry has sobered up. We are working with the new companies in our portfolio so they understand the new reality."