This week, unicorn company CrowdStrike is expected to make its public market debut on the NASDAQ in what is expected to be the biggest cybersecurity IPO in at least a decade. This IPO comes in the midst of a blockbuster year for unicorn IPOs in terms of proceeds, with more anticipated to come. However, we thought it would be useful to take a narrower view of the cybersecurity industry, given its strong private capital investment to date and how exits in this sector have played out recently.
In our Cybersecurity Report published last year, we posited that exits in the field would likely continue to arrive predominantly via M&A activity, despite notable IPOs including ZScaler, Carbon Black, and Tenable in 2018. This hypothesis was largely generated by the expectation that existing trends would remain consistent. Between 2015 and August 2018, M&A deals accounted for more than 95 percent of yearly cybersecurity exits, and it is apparent that pace has persisted. Since August 2018, we have tracked nineteen formerly VC-backed cybersecurity M&As, with notable targets including Duo Security, AlienVault, and Cylance. Meanwhile, CrowdStrike’s debut will be only the second public offering this year after Tufin (NYS: TUFN), which completed its $105 million IPO in April.
|Duo Security||Cisco Systems||9/28/2018||$2,350 M|
|Demisto||Palo Alto Networks||3/28/2019||$560 M|
With ever-increasing security risks and a growing number of solutions to address them, deep-pocketed corporations are evidently eager to acquire private companies that serve to accelerate existing solutions or assist in their creation. These firms have also demonstrated a willingness to pay steep premiums when necessary – Cisco paid over two times Duo Security’s last private funding round to acquire the company. In fact, up-round exits have been the norm for cybersecurity companies over the last ten months: eight of the nine acquisitions with disclosed purchase prices saw increased valuations over their last private funding round. At the midpoint of CrowdStrike’s most recently disclosed pricing range, Wednesday’s IPO will value the company 73 percent above its last private funding round. The round-by-round valuation for the three largest acquisitions since August are shown below, along with CrowdStrike. Based on the trend in implied valuations, it appears public and private investors, along with corporations, see significant growth potential in these cybersecurity companies.
The above discussion focuses on success stories – those companies that navigated the venture capital ecosystem through to an exit. In an increasingly crowded landscape, we’ve identified a number of still-private companies that have differentiated themselves from the pack. As younger and less developed firms in some instances, these companies inherently represent higher-risk investment opportunities. Still, given their growth to date and earlier life stage, they could present attractive investment opportunities for late-stage investors. The list includes both existing unicorns and soon-icorns (companies near the unicorn threshold), as well as younger companies that have experienced impressive growth in their short periods of operation. We’ll be eagerly following these firms as they move forward in a market expected to eclipse $300 billion by 2024.
|Company Name||Year Founded||Total Raised||Last Known Valuation|
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