Investing in Cyber Security
Abstract:
Commercial interest in cyber solutions continued to accelerate in 2016 as companies looked to replace legacy installations and bolster their security platforms with new technologies. However, despite this strong commercial interest, investments in and acquisitions of cyber companies declined following two record setting years; a likely healthy reset following an unprecedented influx of new capital, new investors and new competitors. Deals are still getting done, but investors and acquirers are being more circumspect in their deal selection. The funding that did occur in 2016 tended to be concentrated towards later stage companies with established businesses and well-known management teams, a shift from prior years in which funding flowed freely into across the stage spectrum. As investors shifted their focus to later stage in- vestments, companies seeking A and B rounds found it more difficult to attract sustained, and often struggled to achieve valuation aspirations. Later stage companies that did raise capital achieved premium valuations in select instances, and, after a slow year in 2016, a rebound in the IPO market could provide a viable exit opportunity for these companies in the future. Against the backdrop of constantly evolving security threats and myriad emerging solutions, we’ll discuss the shifting landscape of preferred subsectors and the optimal financial profile to attract investment. We’ll look at what constitutes a successful security busi- ness and the capital markets’ approach that may support one. Piecing together a comprehensive security solution has proven to be both a complex task and an expensive one due to still healthy valuations and subsequent integration costs. We’ll hear from a group of panelists who have successfully navigated this landscape and gain insight into how it’s done. M&A volume reached 207 transactions in 2016, falling short of the 298 transactions completed in 2015. However, 2016 witnessed a number of mega take-private transactions with noteworthy deals including TPG’s acquisition of Intel Security ($4.2B), KKR’s acquisition of Optiv ($1.8B) and Vista’s acquisition of Infoblox ($1.3B). Cyber security funding in 2016 was ~$2.8B across 117 deals, down from more than $5B in 2015. 2016’s high profile growth equity financings include investments in StackPath, Cylance, and Symantec. Sought after segments in 2016 included next gen endpoint, orchestration, and threat hunting and IR automation. Market Activity:
Our panelists have also been active over the past few years:
Allegis Capital
Sophos
Invested in Area 1 Security in October 2015, De- cember 2014 and May 2014 Invested in RedOwl Analytics in July 2015 Invested in E8 Security in October 2016 and March 2015 Invested in AttackIQ in November 2016 Invested in Cockroach Labs in March 2016 Invested in Skyport Systems in March 2016 and April 2015
Acquired Barricade IO in November 2016 Acquired SurfRight in December 2015 Acquired Reflexion Networks in June 2015
Clearlake Capital
Acquired Landesk in January 2017 Acquired Vision Solutions in May 2016 Acquired SIGMAnet in December 2015
Index Ventures
Sunstone Partners
Discussion Topics:
What are you doing differently as part of your process today versus 12 months ago? 6 months ago? Have you followed the mar- ket and adopted a more risk-averse approach towards cyber?
What are the scale requirements in this sector? What critical mass is required to succeed as a stand-alone security vendor?
What subsectors of security are you most interested in? How has your focus changed in the past 12 months?
How do you identify prospective targets / investments? What percentage of your deals are internally vs. externally sourced?
Comment on valuation trends in the security space. How do you price a transaction?
How important are competitive factors in assessing the attractiveness of a prospective transaction? Has the sheer volume of early stage security companies affected the competitive dynamics in the industry? What is happening in security financings by stage? Where have all the early investments gone? How will the surge in late-stage funding affect exit opportunities in the future?
How do you see the pace of new investments / exits changing from recent years?
How does the information security M&A / PP / IPO landscape look heading into 2017?
Made with FlippingBook - Online catalogs