Big Money Chases Cyber
Among many parties interested in the cyber(1) market, investors are pushing their way to the top of the list. Venture capital (“VC”) firms, in particular, appear enthusiastic about growth prospects.
VC funding has poured into cyber companies over the last two years, increasing by 103.6% from $1.2 billion in 2010 to $2.4 billion in 2012, even as overall VC funding only increased by 13.7%, from $23.3 billion in 2010 to $26.5 billion in 2012. Additionally, there is indication that investors cheer public companies that make cyber acquisitions, as described in the January blog, “Cyber Acquisitions Favored in the Market.”
However, with funding, valuations, and media attention surging, is the money simply chasing a cyber fantasy?
After the recent, highly-successful $254 million IPO of Tableau Software, a provider of data visualization and business analytics solutions, other recent success stories such as Qualys, Palo Alto Networks, Imperva, Splunk, and Proofpoint suggest that the frothy cyber market stands on a solid foundation. For one, cybersecurity concerns and demand for data analytics continue to compound, creating prime conditions for disruptive technology and investment opportunities to flourish. The chart below shows that revenue growth had been explosive for cyber companies around their respective IPOs, with a median four-year compound annual growth rate (“CAGR”) of 55% from FY2008 to FY2012. In addition, the median gross margin remained strong throughout the growth period at about 80%.
Another common thread is that these companies all benefited from significant VC investment, ranging from $15.0+ million (Tableau) to $92.4 million (Proofpoint), helping the firms race up the growth curve.
Lastly, demand for these cyber companies has endured beyond the IPOs. Post-IPO share prices of the six examples have risen by a median 53%(2), buoyed in part by consistent financial performance and positive investor perceptions of the growth outlook. Tableau Software surged 63.7% following its IPO on May 17th, suggesting that the public equity market is hungry for Big Data solutions.
Seeing that multiple cyber startups have experienced fast, quality growth over the past few years, positive market fundamentals may continue to underpin strong performance for cybersecurity and Big Data companies – rewarding investors as well.
——————————————————————————————————————————————– (1) Note: “Cyber” is used to describe both cybersecurity and Big Data markets
(2) As of May 17, 2013