Michael Cortez, YL Ventures: “cybersecurity has become widely accepted as business critical”

Cybersecurity continues to develop in an AI maturing market. Venture Capital companies are paying close attention to this transformation.

Any business that fails to address cyber-tech advancements will soon realize its mistake. After all, high-profile breaches often result from malicious actors, like cybercriminals, gaining access to valid credentials. Without embracing foundational security, like investing in the best VPN, entrepreneurs and companies alike risk more exposure to bad actors.

To speak more on this topic, we interviewed Michael Cortez, Partner at YL Ventures – a venture capital company focused on cybersecurity businesses and “funding and supporting brilliant Israeli entrepreneurs from seed to lead.”

How did the idea of YL Ventures come to life? What has your journey been like so far?

YL Ventures was founded in 2007 by serial entrepreneur Yoav Leitersdorf. YL Ventures developed out of the belief that Israel’s unique cybersecurity ecosystem requires an equally unique investment approach and support structure. We are laser-focused on the niche market of early-stage B2B cybersecurity solutions and follow a high-conviction and high-involvement model. That leads us to write big checks for a small number of companies.

Our strategy puts us closer to entrepreneurs and allows us to work directly alongside founders from the earliest days of their company-building journey. Each of our portfolio companies matter a great deal and we are always working on new ways to support them. Over time, we have developed an extensive and very hands-on value add strategy tailored to the needs of young Israeli cybersecurity entrepreneurs. It includes a wider multidisciplinary team of experts to fill in departmental roles of young companies–from operations to business development, and marketing and HR–while they grow.

Another key method for providing value is through our extensive network of cybersecurity leaders, decision-makers and potential customers. We are proud members of the Israeli cybersecurity ecosystem as well as the wider cyber community–especially in the U.S.. This dual presence operates as a critical connection for our portfolio companies as they seek out customers and scale.

Over the last 15 years, this strategy has proven fruitful and we have raised five funds. That includes our oversubscribed $400M Fund V, which single-handedly doubled our total Assets Under Management to $800M. Our track record includes investment in Israeli unicorns Axonius and Orca Security. We have also seen successful, high-profile acquisitions by major corporations, including Palo Alto Networks, Microsoft, CA, and Proofpoint.

Tell us more about what you do. What sets YL Ventures apart from other venture capital firms?

YL Ventures is deeply connected to Israel’s cybersecurity community. Many of our Israeli team members have served in the same military units as our aspiring founders or even with the founders themselves. These connections also tend to deepen, given how closely we work with our founders across their company-building journeys.

We also appreciate that our founder’s unique skill sets usually lie in the technological nature of the product. We look to complement these skills with an extensive team of multidisciplinary experts that can help with the rest of the process. We are proudly on-call to provide value-add support when and as needed. This helps kickstart and fine-tune the product development and company launch process. It saves our founders incredible amounts of time and energy by providing more support across marketing, HR, sales, operations, and financial management.

With a focus on cybersecurity startups, what unique challenges and opportunities do you see in this specific industry?

Though cybersecurity has developed into a mature market, the breakneck speed at which its sub-sectors keep emerging and evolving requires us to stay on our toes. Competition among investors also means that its opportunities keep moving even faster. To stay ahead, our investment team must assess highly technical pitches very quickly. We must keep constant tabs on market developments to ensure that we are always the first to learn of newly formed founding teams.

A critical way we succeed is by involving sector-specific experts in our investment research and analysis. That includes our full-time CISO-in-Residence to offer customer perspectives and Investment Team members with product experience. We also keep a highly active presence in the cybersecurity community with events like webinars, workshops and fireside chats.

It's worth noting that the close nature of Israel’s cybersecurity ecosystem presents its best opportunities. If the world is typically separated by 6 degrees, it seems as if Israelis are separated, on average, by 2 at most. This makes due diligence activities like reference calls a breeze. These calls help us provide entrepreneurs with quick answers.

YL Ventures has a unique approach to investing in cybersecurity startups. How do you identify promising startups, and what sets them apart from the rest?

Promising startups require promising leadership, which is why we prioritize the quality of the team over anything else. That includes pitching the idea. Our strategy is to seek exceptional individuals with technical strength, customer focus, and the ability to attract top talent in Israel. We want to feel confident that the founding team can operate successfully as a unit. In that way, we will want to work closely with them for the next several years.

When a team is promising enough, we even support their ideation process before we invest. We have a large team of in-house experts, and also have a network of thousands of CISOs and other security experts that can help support the ideation process with practical customer feedback. Over the last few years, we have increasingly applied this team-first focus. We're currently supporting many companies remaining in stealth as they fine-tune their MVPs.

How has the COVID-19 pandemic affected YL Ventures and the companies in its portfolio? What strategies get employed to navigate these challenges?

We remain as bullish on cybersecurity as ever. We continue to invest in new companies and the follow-up rounds of our portfolio companies throughout the pandemic and downmarket. We’ve helped launch 6 companies since the first COVID-19 lockdown in Israel.

This isn’t to say that cybersecurity companies have been entirely unaffected, but the sector has proven very resilient. By opening continuous lines of communication with prospective customers and through ongoing support from the team, we have been able to help our portfolio companies understand what has changed, how customer decision-making has been impacted and how to adjust accordingly.

More context: When COVID-19 first broke out, many enterprises were still going through a digital transition. They got caught off guard by the immediate need for remote operation. Security leaders suddenly found themselves responsible for overseeing the transition of hundreds or thousands of users. That responsibility meant protecting the newly expanded attack surface that accompanied the increased use of SaaS, cloud storage, and remote logins.

How does YL Ventures stay up to date on the latest trends and developments in the cybersecurity industry? How does this knowledge inform investment decisions?

We pride ourselves on our industry expertise and thought leadership. Our content and investment teams often collaborate to produce in-depth, data-driven reports about cybersecurity market trends and performance. The data is the result of extensive research and market intelligence efforts. We create informative panels, fireside chats, and webinars to engage the community and also collaborate with other cyber-focused organizations and investors.

Our investment team routinely monitors the market and we make sure to remain proactive about staying connected. We are always looking for new ways to encourage entrepreneurs to approach us with industry questions we can resolve together.

In this age of ever-evolving technology, what do you think are the key security measures organizations and individuals should use?

These measures are so idiosyncratic to each individual and each organization. However, I believe that everyone needs to take a hard look at the basics and determine how to master them. To date, foundational security is still a struggle for many.

For individuals and organizations alike, strong passwords, password rotation and embracing zero-trust principles are still important. Though we traditionally associate cybersecurity as a means to protect against malware, many high-profile breaches actually originate from malicious actors getting access to perfectly valid credentials and misusing them.

The rise of AI and the potential for its nefarious use (e.g., more sophisticated email phishing attacks or impersonating the voice of a boss or loved one) underscore the importance of mastering the basics as we move into a new paradigm where trust is harder and harder to maintain.

How has the venture capital landscape evolved in recent years? Are there any emerging trends you see in this industry's future?

Venture Capital is cyclical, like any business. 2021 was an incredible year by most metrics, and I think a real outlier year if you look throughout history. What we’re experiencing now is a bit of a comedown from those unsustainable highs of a couple of years ago. We are getting back to basics in many ways and focusing on more sustainable growth over time, rather than exponential growth at any cost.

As for the companies that will receive funding, sustainability is the name of the game. The best companies will always get funded in any macroeconomic climate. But, I predict the companies more focused on delighting their customers while keeping burn sustainable will do the best in the near term.

Value-add will also continue to be paramount in VC. Though the heyday of 2021 is at an end, many funds are still ready and willing to deploy capital. This means that capital in and of itself continues to serve as a poor differentiator. It is incumbent on VCs to show why they are the best partners for their founders. They must prove why they are able to de-risk their investments and be the best stewards of capital for their LPs.

What does the future hold for YL Ventures? What are the company's long-term goals?

We are continuing to grow and stay committed to doing so without losing sight of our north star, which is investing in the best Israeli cybersecurity entrepreneurs we can find and helping them build world-class companies.

We are investing out of our fifth fund now. Our growth in headcount and AUM only underscores our commitment to this driving force and mission. We believe we can best serve our investors and our companies by remaining laser-focused on our core area of expertise. That is, providing extensive, one-on-one support to cybersecurity company founders from the very beginnings of their journey.

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