As cyber attacks spread this year, Sanjay Beri, CEO of Netskope, a cloud security startup, received a call. Then an email. Then more news.
All of them were from venture capitalists looking to invest in his company. With the ransomware attacks and nation-state hacks making the headlines, they told him that companies that make security products have a bigger market and a bigger mission than before.
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“We weren’t looking for capital,” said Beri, who founded Netskope in 2012, but the cyberattacks “have definitely increased their interest.”
Following offers from seven investors, Netskope raised $ 300 million this month at a valuation of $ 7.5 billion, up from a valuation of $ 2.8 billion last year. It was one of the biggest cybersecurity funding rounds of the year, but not the maximum Netskope could have made.
“We could have raised $ 1 billion in capital,” said Beri.
Recent cyberattacks around the world have crippled the operations of gasoline pipelines, hospitals and grocery chains, and potentially compromised some intelligence agencies. But they were a gold mine for one group: cybersecurity startups.
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So far this year, investors have poured more than $ 12.2 billion into startups that sell products and services such as cloud security, identity verification, and data protection. That’s more than $ 10.4 billion cybersecurity companies raised throughout 2020 and more than double the $ 4.8 billion raised in 2016, according to research firm PitchBook, which is tracking the funding. Since 2019, the rise in cybersecurity funding has outpaced the rise in total venture capital funding.
The surge follows a number of high-profile ransomware attacks, including against Colonial Pipeline, software manufacturer Kaseya and meat processor JBS. When President Joe Biden met with Russian President Vladimir Putin last month, Russian cyberattacks were high on the diplomatic agenda. That month, the Biden government and its allies also formally accused China of carrying out hacks.
The violations have raised concerns among businesses and governments and increased spending on security products. Global spending on information security and related services is expected to reach $ 150 billion this year, 12 percent more than last year, according to research firm Gartner.
“Before we got to that point, we as security teams had to fight for every penny we could get, and now it’s just the opposite,” said John Turner, information security manager at LendingTree, an online loan marketplace. Managers, he said, ask, “Are we protected? What do you need?”
All of this will propel the business for cybersecurity companies and create a potential windfall that has got investors excited. The average rating of cybersecurity companies raising funds this year has more than doubled from $ 221.8 million in 2020 to $ 524.1 million, according to PitchBook.
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“I’ve never seen ratings this high in nearly two decades as a VC,” said Asheem Chandna, a venture capitalist at Greylock Partners who has invested in security companies like Palo Alto Networks.
The money goes to startups that are fighting hackers in new ways. Traditionally, security systems in companies were based on the idea of securing a perimeter. This meant that companies installed firewalls and other software to protect access to their corporate network.
But in recent years, the move to cloud computing has made the perimeter and dependence on corporate networks obsolete. Employees can now access applications over the Internet rather than through a data center operated by their employer. That opened the door for startups that focus on cloud-based security and identity verification.
“Don’t build higher fences – have really good IDs,” said Jason Crabtree, CEO of Qomplx, a risk analysis startup that offers identity verification software and is currently going public.
The financing mania has been building for months. The pandemic took off as companies switched to remote working, which required securing these remote access systems, investors and executives said.
On Friday night in October, Chandna introduced the CEO of Abnormal Security, an email security company he’d invested in, to another investor, he said. That investor, Venky Ganesan of Menlo Ventures, who had been following a meeting with CEO Evan Reiser for months, immediately emailed Reiser to invite him for dinner that evening.
Reiser was driving, he said, from San Francisco to Ganesan’s home in Atherton, California, about 30 miles away. By the end of the weekend, Abnormal had signed a deal to raise $ 50 million on a valuation of $ 600 million, bringing the total funding to $ 74 million. The $ 40 million check from Menlo was the company’s largest investment of all time.
“When it comes to shotgun weddings, it’s as good as possible,” said Ganesan.
Since then, the ransomware attacks have given the wave of funding further impetus.
In January, Lacework, a cloud security startup in San Jose, California, received a $ 525 million grant. Investors have come forward about Lacework’s products that use artificial intelligence to detect threats, said Andy Byron, the company’s chief resource officer. In total, Lacework has raised $ 625 million since its inception in 2015.
Mike Speiser, a venture capitalist at Sutter Hill Ventures who led the January funding for Lacework, had no problem getting other investors involved, he said.
I called the five people I thought were the best investors and asked if they would be interested. Everyone was interested and we had a deal within 48 hours, ”said Speiser. “A hundred percent of the people I called said they wanted in. We could have raised well over $ 1 billion. “
The lacework business is booming because of the “combination of all of these ransomware and nation-state attacks, along with the people who are so aggressively moving to the cloud,” said David Hatfield, who joined the startup as CEO in February.
Other security startups have also benefited from it. Orca, a cloud security startup, raised $ 210 million in March. Trulioo, a company that ensures users are who they say they are when they join a platform, raised $ 394 million last month.
Security startups are also acquired for large sums or go public. Last month, SentinelOne went public with a market cap of over $ 10 billion, the highest rated public cybersecurity offering. In May, Auth0, an identity verification company, was bought by Okta, another security company, for $ 6.5 billion.
Netskope’s Beri said the funding boom is likely to continue amid mounting cybersecurity threats.
“A lot of investors are not security savvy,” he said. “But when your neighbors say, ‘Hey, what about that ransomware stuff,’ then you know it has hit the public eye. From an investor’s point of view, when something occurs to the average person, it becomes clear: “Wow. This is here to stay. ‘”
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