If you’re thinking about starting a technology company, you may want to consider focusing on cybersecurity.
Last week was an incredible M&A whirlwind with four security companies getting acquired over just a three-day period:
- On Tuesday, FireEye bought Verodin, a five-year-old startup that helps measure the effectiveness of your cybersecurity defenses for $250 million.
- On Wednesday, Palo Alto Networks entered the fray, buying not one, but two Israeli security startups. The big prize was container security company Twistlock for $410 million. It also snagged serveless security company PureSec. Reports in Israeli media pegged that deal at between $60 and $70 million.
- If that wasn’t enough for you, private equity firm Insight Partners bought 10-year old threat intelligence company, Recorded Future for $780 million.
That’s more than $1.5 billion changing hands for those of you keeping score at home. If you take a look at the four firms, the one common denominator was that each one was covering a different aspect of cybersecurity. Two were looking at more operational tasks, while the two companies that Palo Alto Networks grabbed were aimed squarely at modern developers using containers and serverless technologies.
So many attacks
In spite of the sheer number of cybersecurity companies out there — startups and established companies alike — taking vastly different approaches to defense, it doesn’t seem to actually help prevent breaches. Every week, it seems there is another astonishing security event, one more damaging than the next.
To be fair, there will never be a perfect defense. For every security action, there is an equal and opposite hacker reaction, and when you’re dealing with well-financed nation states and organized crime syndicates with lots of money, talent and patience, it makes it that much harder to defend against.
Hence the need for threat intelligence information, so you know what you’re up against, or at least so you can keep up with the “known-knowns” that are out there. It also explains why a product to check your defenses for gaps like Verodin would be an attractive target to any established security vendor.
Big market opportunity
It’s not just your imagination that security is a huge market. According to research firm Canalys, the security industry worldwide reached a staggering $37 billion last year, up 9 percent over the previous year. While it’s not the kind of growth you see in the cloud computing market, it is quite substantial.
According to Canalys, the biggest players in the space are Cisco with 9.9% of the market, up 14.3% from 2017. (Cisco bought Duo Security last year for $2.35 billion, another proof point of the value of security companies.) Palo Alto is number two in the market with 6.9%, and grew a brisk 28.5% from the previous year. Meanwhile, CheckPoint checks in at number three with 6.1%.
Canalys analyst Claudio Stahnke actually predicted the market for security companies would stay brisk this year in an April 8th report. “We have seen many acquisitions in the cybersecurity space in 2018 as vendors are expanding their offerings to profit from the complexities that end users are facing. This will not stop in 2019 as the market remains highly fragmented and new threats force incumbents to further expand their platforms.”
He probably didn’t foresee four companies being acquired in the same week though.
Raising security startups for a reason
Yoav Leitersdorf, managing partner at YL Ventures, and an early investor in the two firms that Palo Alto acquired this week, says he backs security startups specifically to be sold, so the outcomes last week are really what they strive for. “Almost all of our portfolio companies are ultimately acquired by public U.S. companies. Therefore, an acquisition like this is completely normal for us. It is part of our normal value creation process for our entrepreneurs and for our limited partners (fund investors),” Leitersdorf told TechCrunch.
He added, “Of course the magnitude and significance of this particular transaction are attributable to Twistlock itself — the incredible work of the founders and team. We never lose sight of the fact that we merely play a supporting role in all of this.”
It’s a supporting role that paid handsomely. Having invested $12 million, it bought 20 percent of a company that raised $63 million in total and sold for $410 million.
Surely, not every company will come through like Twistlock did for YL, but given the size and scope of the market and the range of problems it’s trying to solve, security companies could remain hot commodities for the foreseeable future.
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