One-time cybersecurity darling FireEye Inc.’s stock is down significantly from two years ago – closing at $15.82 on Thursday, compared to $51.80 in June 2015. The company’s challenges had the potential to turn off investors, entrepreneurs, and analysts from the space.
But while many acknowledge that the sector can be a volatile one, some investors still appear quite bullish on cybersecurity startups with IPO potential.
FireEye’s (Anti-)Deterrent
In what could be seen as rising from the ashes, shares of FireEye have rebounded by 28 percent since the Milpitas-based company announced better-than-expected first-quarter sales in early May.
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But make no mistake about it. FireEye has struggled in recent times due to its malware detection technology essentially becoming obsolete. The company revealed plans for 300 to 400 positions being eliminated last August, and it also announced a major restructuring. These days, it appears to be in the early stages of a turnaround as it works on drastically altering its business model – although shares are still way off from their $80 highs.
David Cowan, a partner in Bessemer Venture Partners’ Menlo Park office, doesn’t believe FireEye’s experience should be a deterrent.
“Does that deter investors? It absolutely does not,” he told me in an interview this week. “It actually encourages investors… There’s an entire population of people out there rendering (cybersecurity) technology obsolete and so this area of technology needs constant replenishment of new technologies.”
Cowan believes there’s plenty of potential for companies in the space. In other sectors of technology, he points out, companies who are leaders tend to be consolidators and control market share. But with cybersecurity, “there are people making a living finding holes in mature technologies… so there’s always demand for something new. No company can rest on its laurels.”
In FireEye’s case, the company is working to help deflect nation state attacks. With email hacking by the Russians making headlines during the US elections and beyond, more companies are trying to help combat other similar attacks.
“All of the cybersecurity companies that are public today were invented before nation state attacks, or advanced persistent threats, began plaguing enterprises and nation,” Cowan told me. “What we need today in the form of cybersolutions is not what people were building to in 2014. So the entire industry needs to be re-tooled, and the stumbles faced by companies like FireEye, Symantec, and Palo Alto Networks signifies opportunity for a new generation of startups to step in.”
Also, Cowan points out, the appetite of investors in almost any sector follows the fortunes of the public comparables in that sector.
“In 2017, the cyber sector is outperforming the Nasdaq,” he said. “The more awareness of cyber breaches, the more expectations people have for the performance of the cyber sector.”
Cyber Rising
Andrew Nowinski, a Piper Jaffray analyst, agrees that the cybersecurity space as a whole is having an up year.
In FireEye’s case, he told me that the company essentially saw its technology get commoditized by firewall vendors. But that didn’t spell doom for the company.
“They’ve done a really good job of reacting to the market,” he said. “The new CEO has done a great job of pivoting the company from a point product standby solution to a threat intelligence-led platform that is virtual.”
“Breach activity continues to increase in the U.S. and abroad,” he said. “That will continue to drive spending in the U.S. New requirements in Europe will be a growth driver for companies with European businesses.”
Menlo Ventures’ Venky Ganesan, who previously invested in Palo Alto Networks and currently has cybersecurity startup BitSight in his portfolio, describes himself as being “super bullish” on cybersecurity.
“If there’s a recession-proof idea that’s not cyclical, it’s cybersecurity,” he told Crunchbase News. “In essence, everything in our lives is going from analog to digital. When that happens the most important thing becomes protecting digital assets…And all these people trying to hack into companies and governments’ accounts are creating demand for cybersecurity products.”
Looking ahead, Ganesan expects Boston-based BitSight to be one of those that could go public in a few years.
‘They have revenue in the $50 million to $70 million range,” he said. “Overall, I expect there will be substantial companies created and exits being made in this sector.”
Up And Coming
Leaving behind the public, and the next-to-debut, let’s look to Illumio, the cybersecurity startup that just locked in a nine-figure round.
On Wednesday, the Sunnyvale-based data center and cloud security company Illumio announced it had raised $125 million in a Series D round led by J.P. Morgan Asset Management.
Previous investors, Andreessen Horowitz, General Catalyst, 8VC, Accel, Data Collective, and Yahoo’s Jerry Yang, also participated in the round along with some unnamed backers. The raise took Illumio’s total funding to $267 million.
Traditional network segmentation is primarily used to boost network performance and requires control of the infrastructure, which can be a challenge in the public cloud.
Founded in 2013, Illumio focuses on adaptive segmentation, which enforces security policies – what should and should not be allowed to communicate among various points on the network – by filtering traffic.
The company’s chief commercial officer, Alan Cohen, told me this week that his company focuses on the interior versus the perimeter of data center protection.
“In the old world, the data center was trusted, but that assumption has gone away with hacks and insider threats,” he said. “We are able to control the interior and that puts us in the right place for not the greatest of reasons.”
Illumio saw a 400 percent increase in its bookings year-over-year for its fiscal year ended January 31, according to Cohen. The company completed “many seven-figure deals” and completed its first eight-figure deal last year, he added.
“We’re still accelerating,” Cohen said. The latest round of funding was an up round, meaning that the pre-money on the D round was higher than the post-money on the C round.
Illumio is not yet profitable, but Cohen said the cybersecurity startup has the potential to go public one day. Customers include medium and large enterprises in various industries, such as JP Morgan Chase, Morgan Stanley, Salesforce, Workday, NetSuite, Oracle, Plantronics and Oak Hill Advisors
“We work in data centers and across the cloud,” Cohen told me. “So in that way, I think we’re very unique… We believe we have the opportunity, technology, team and resources to build a large and sustainable company in this space.”
FireEye may have publicly stumbled, but investors and founders alike don’t appear ready to pull back.
The next test is if public investors will match the enthusiasm of their private counterparts when the next generation of cybersecurity players look to go public.
Illustration: Li-Anne Dias
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