investors flock to cyber security start-ups - ft

Deals for cyber security

March 12, 2014 2:36 pm

By Hannah Kuchler in San Francisco

Cyber security start-ups have become the latest fascination for Silicon Valley investors, who have

flooded the sector with venture capital investment as they seek to back the latest technology to

combat criminals online.

Early-stage funding for the sector soared by almost 60 per cent last year to $244m worldwide,

according to data from research group PrivCo. The number of deals rose even faster, up more than

100 per cent year-on-year to more than one a week. The figures imply multibillion-dollar

valuations in total for these young companies, which often only have a small number of employees.

The investment boom in cyber security companies comes as cyber

crime is on the rise and recent high-profile attacks, such as the data

breach at US retailer Target and the theft of customer details at

Adobe, the software company, have highlighted the extent of the

threat.

Ted Schlein, a partner at Kleiner Perkins Caufield Byers, the Silicon

Investors flock to cyber security start-ups

Chris Tosic

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companies

The cyber security

landscape now is

getting more attention

than ever

- Kevin Mandia, COO of FireEye

Valley venture capital firm, says there has been a huge mental shift

in companies and they are increasingly willing to spend on cyber

security.

The bad guys have got smarter, better funded and the tactics have changed and the good guys

need to keep pace, Mr Schlein adds. As a result there is an enormous spend on the side of the

Global 2000 [leading companies] and others to protect their systems.

New sectors such as universities are also finding themselves at the top of lists of victims of attacks

and even small businesses have become prime targets.

Mr Schlein, who is on the board of some of the hot young companies

and backed Mandiant, which in January was acquired by FireEye for

about $1bn, says executives now realise there are only two types of

companies: those who have been breached and know it, and those who

have been breached and dont know it.

Overall, cyber crime is up 14 per cent last year, according to a report

from Cisco, the networking equipment company. Nation states have

been accused of backing hackers to steal intellectual property from

companies to hand to rivals in their own country, while underground markets have sprung up that

enable even those who do not have advanced skills to purchase tools and vulnerabilities to use for

financial gain.

As traditional methods of fighting cyber criminals such as antivirus software and firewalls have

failed to keep companies safe, start-ups experimenting with new ideas have been welcomed with

open arms by the venture capital industry.

The average valuation given to the whole company for each VC round raised last year rose by 41 per

cent to $31.5m, after an increase of 26 per cent from 2011 to 2012.

Mr Schlein, who has invested in cyber security for years, says recent valuations have become

pretty high but as these companies do generate revenue, they are still more of a bargain than

social media start-ups, where valuations have also soared.

The valuation of these cyber security companies may also be rising in anticipation of a dealmaking

boom. Mr Schlein says he expects most of the new start ups to eventually be snapped up by the

larger technology companies.

Cisco acquired threat protection company Sourcefire for $2.7bn last year and has said it is seeking

other security acquisitions. Dell spent about $1.2bn on SonicWall, a network security company, the

year before, and in 2010, Intel bought McAfee, one of the biggest antivirus software makers, for

$7.7bn.


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Michael DeCesare, president of McAfee, told the Financial Times last month that the fragmented

market would eventually be owned not by the new generation, but by the big guys such as Intel,

IBM and Dell.

But some among the new generation of cyber security companies have already become large public

companies in their own right.

Shares in Palo Alto Networks, which listed in July 2012,

have risen 34 per cent since the start of this year to give it

a market capitalisation of $5.58bn, while FireEye, which

had its initial public offering in September of 2013, is up

by 86 per cent to give it a market value of $11.2bn.

FireEye issued a secondary offering last week, pricing the

offering at $86 a share, less than six months after it had

priced the IPO at $36. Kevin Mandia, chief operating

officer of FireEye said the companys shares were in

unprecedented territory after investors cheered its acquisition of his former company Mandiant

for about $1bn.

This is a problem that cannot be ignored by the audit committee, the board, the chief executive,

the chairman so the cyber security landscape now is getting more attention than ever, he adds.

Thats obviously a lot of upside for companies like FireEye.

Mr Mandia added that FireEyes growth could come from acquisitions as well as organically.

Sam Hamadeh, chief executive of PrivCo, said it is this recent record on the public markets that has

sparked venture capitalist interest about the industry.

VCs want a short term turnround, he says. They see that a couple of cyber security companies

like Palo Alto Networks have such tremendously high valuations...and see that backing them now

or in 2013 could mean a 2014 or a 2015 IPO.

Mr Hamadeh also says that while demand and therefore potential revenue is rising, the cost of

running a cyber security company was actually falling, making them better value for money.

The cost of funding for cyber security start-ups creating apps in the cloud has gone down. Five or

six years ago it would be prepackaged software like McAfee but now it is all in the cloud with

continuous updates, he said.

Rush to fund smart solutions

A new generation of start-ups is promising smart solutions to the growing threat of cyber crime


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RELATED TOPICS

and venture capitalists are eager to fund them. Just last month three start-ups Ionic Security,

Shape Security and Cylance were among companies raising money from VCs, writes Hannah

Kuchler in San Francisco.

Ionic Security raised a $25.5m fundraising round led by Google Ventures and Jafco Ventures last

month, including money from Kleiner Perkins Caufied Byers. Ionic is rethinking data protection by

encrypting each piece of data, putting an envelope around it that follows it wherever it goes. As

cyber criminals increasingly target the suppliers or contractors of major companies as a way into

their computer systems, Ionic aims to give the control over the data back the original owner,

wherever the data are.

Shape Security is also backed by Googles venture capital arm and Mr Schleins firm, as well as

executives from Facebook, Twitter, LinkedIn and Dropbox who have contributed as individuals. It

raised another $40m round led by Norwest Venture Partners and Sierra Ventures in February. The

company claims to be the first to create technology that allows the code behind web pages to

constantly change, evading hackers by never looking the same twice. This real-time

polymorphism aims to break botnets by making cyber criminals unable to automate attacks.

Cylance closed a $20m round with funding from Blackstone, Khosla Ventures and Fairhaven

Capital last month. The company claims to be the first maths-based threat detection and

prevention company that uses artificial intelligence to discover threats. Using its infinity platform

to protect devices from threats even if it has never seen the attack before. Blackstones chief

information security officer said it was like having an expert security professional in your

computer at every decision making point.


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investors flock to cyber security start-ups - ft

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