How Israel's Top InfoSec Honcho Picks New Ventures

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Shlomo Kramer is unrivaled when it comes to information security start-ups. Among his most successful ventures are Check Point Software Technologies (CHKP) and Imperva (IMPV). And he has another, Palo Alto Networks ? that?s filed for an IPO.

I doubt anyone can rival him when it comes to information security start-up success. In a June 12th interview, Kramer told me three tests he uses to pick the next market segment in which to invest.

Kramer served in the same Israeli army unit as Gil Schwed. They were both experts in information security. After they got out of the army, Kramer and Schwed started their own ventures. Kramer?s focused on medical imaging?while Schwed?s targeted enterprise resource planning.

But in the early 1990s they both agreed that there was a great untapped opportunity in building firewall software as businesses began to go online. They co-founded Check Point Software in 1992 and took it public in 1996 at $4 a share. In the last 16 years, the stock has?advanced an average of 17.6% a year (though it?s down more than 50% from its October 2000 high).

And the market for information security has grown from next to nothing in 1992 to somewhere in the $10 billion to $12 billion range according to Kramer. And he believes that the growth is being driven by new business requirements.

Moreover, Kramer finds information security to be among the most dynamic sectors of the IT industry because after 25 years, it still spurs start-ups thanks ? in part ? to?the ongoing creativity of ?bad guys? who are trying to break in to corporate networks.?

Kramer left Check Point and helped found several other security start-ups. Among those are

• WatchDox, about which I wrote in February?? that taps the growing corporate popularity of smart phones and iPads outside the direct control of corporate IT departments;
• Palo Alto Networks ? a network security company. Though Kramer, who helped fund the company,?declined to comment citing SEC regulations regarding the quiet period, I thought?its prospects for?performing well as an investment were?much better than Facebook?s (FB) when I wrote about it in April; and
• Imperva ? that Kramer took public in November 2011 and is up 20% since then.

How does Kramer keep picking winners? He told me that there are three critical dimensions he considers when evaluating sectors in which?to launch new?ventures. Specifically, he likes to start companies that?protect enterprises against security risks due to

• New kinds of connectivity;
• New types of threats; and
• New ways of thinking about existing markets.

A good example of this is Palo Alto Networks. Thanks to new technologies such as Web?2.0, social media, and Software as a Service (SaaS) ? traditional firewall technologies using so-called stateful inspection are not able to predict how traffic targeting a corporate network will behave.

Palo Alto Networks? technology, however, uses an approach that protects against threats from these new technologies and its prospectus suggests to me that customers love its product, as a result,?the company?has been growing much faster ? at a 198% annual rate between 2009 and 2001 ? than the industry.

This growth is impressive compared to Check Point?s 13% revenue growth but what I find most remarkable is?Palo Alto Networks?s accumulation of 6,650 enterprise customers since its 2007 founding, according to its prospectus.

Israel has several features of its entrepreneurial ecosystem ? corporate governance, financial markets, human capital, and intellectual property protection ? about which I wrote with Srini Rangan in Capital Rising.

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