Key Takeaways
The cybersecurity industry is growing annually at 14.5% and seeing increased early stage investments in startups.
The first quarter of 2021 saw 12 cybersecurity unicorns created globally, which is more than double the previous quarterly high.
Experts believe that the increase in cyber unicorns reflects the growing importance of cybersecurity, but others see the trend as a result of speculative strategies and that we could be seeing ‘Synthetic Unicorns’.
Rapid Market Growth
The cybersecurity industry is booming with concentrated growth in IoT, cloud security, and tools leveraging AI and machine learning. In 2020, the Cybersecurity market was valued at USD 156.24 billion and is further expected to reach USD 352.25 billion by the year 2026, with a CAGR of 14.5% in the time span of 2021-2026.
Because of the steep market growth and other reasons, the funding landscape for cybersecurity startups is seeing all time highs on investments this year. Startups go through different funding ‘rounds’, by which they obtain investment from venture capitalists and other institutional investors. The availability of venture funding is a primary stimulus for the development of these new companies and their technologies.
This year started with Lacework, a cloud security vendor, closing a $525 million round and OwnBackup closing a $167.5 million round. Then came cyber insurance vendor Coalition with a $175 million round and Plume closing a $270 million round. That was just January and February of 2021. The list goes on and on, showing a trend of major investments in cybersecurity startups this year.
Investors in these companies are hoping to find themselves a unicorn. A unicorn is a privately held startup company valued at over $1 billion. The term was coined in 2013 by venture capitalist Aileen Lee, choosing the mythical animal to represent the statistical rarity of such successful ventures.
Luckily for these investors, a record was set in the first quarter of 2021, with 12 cybersecurity unicorns created globally, which is more than double the previous quarterly high. It’s also well above the five cybersecurity companies that achieved unicorn status in all of 2020 and the eight that achieved it in all of 2019.
What are experts saying about the cyber unicorn surge?
Some believe the trend is a result of speculative strategies and that we could be seeing ‘Synthetic Unicorns’.
Brendan Burke, a Senior Emerging Technology Analyst at PitchBook points out that, “In 2020, forward revenue multiples for high-growth public cybersecurity companies more than doubled to around 40x, effectively halving the revenue target that startups must reach to achieve unicorn status. Growth equity investors are using public market comparisons to judge how much private companies are worth, even at a relatively early stage. While several years ago a startup might need to reach $100 million in annual recurring revenue to become a unicorn, only a fraction of that sum is required now. Startups can achieve unicorn status soon after finding product-market fit with the expectation of growth to much higher valuations in public markets.”
Hank Thomas, CEO of Strategic Cyber Ventures, shares his thoughts about the surge, “After spending the last year scanning the universe for cybersecurity unicorns, I have strong opinions about this. Check to see if a unicorn’s horn is real, or if it is glued onto a horse. A real cybersecurity unicorn’s horn needs to consist of real scaled revenue somewhere north of fifty million annually depending on the type of technology. This revenue needs to be happening right now, combined with a realistic multiple that quality investors in the market are willing to pay.
Others believe that the increase in cyber unicorns reflects the growing importance and value of cybersecurity.
Yoav Leitersdorf, Managing Partner of YL Ventures, states, “The number of companies being valued at over $1 billion is reflective of the market gaining a better understanding of how important cybersecurity is. The increase in the valuation of cybersecurity companies is commensurate with the increasing number of breaches and compromises that we see in the headlines. Digital transformation represents a myriad of new ways of doing business (e.g., cloud) and new attack surfaces and attack vectors. This also creates a demand for new security solutions. Also, we see a shift in the market in terms of the goals and ambitions of the founders. These entrepreneurs aspire to build large, platform companies to compete with the bigger players, not just exits. That’s another reason why we see larger rounds.”
John Funge, Managing Director of DataTribe, explains how the trend fits into a larger market narrative: “One important driver in this unicorn trend is what is happening in the broader financial markets. In the past ten years or so, we have seen one of the strongest bull markets in history. From 2011 to 2021, the NASDAQ has increased nearly 4x. When this is combined with historically low interest rates, you end up with a lot of capital seeking return. In an environment where there is robust capital availability, valuations will continue to rise given the scarcity of mature, growth-stage companies to invest in. With some later-stage startups returning spectacularly for investors, it has further accelerated the feedback loop drawing additional investment to unicorn-stage growth equity … Cyber is a very large market that generally doesn’t exhibit strong winner-take-all dynamics like other parts of tech, such as social media. So, there is space in the market for multiple unicorn-scale companies to form.
Unicorn Spotlights
Here are a few of the companies that have achieved unicorn status in 2021.
Armis Security is an IoT security company that provides enterprises with a real-time view of the status of any device and empowers them to take action, fix problems and prevent attacks.
Company Details:
Founded: 2015
Location: Palo Alto, CA
Number of employees: 250-500
Valuation: $2B (February 2021)
ID.me is a private network of websites, companies and online applications that have come together to create an ecosystem for your digital identity. This ecosystem allows users to bypass the lengthy identification process by storing their information in one centralized location.
Company Details:
Founded: 2010
Location: Mclean, VA
Number of employees: 500-1,000
Valuation: $1.5B (March 2021)
Orca Security provides advanced cloud security solutions that work faster than competitors.
Company Details:
Founded: 2019
Location: Los Angeles, CA
Number of employees: 100-250
Valuation: $1.2B (March 2021)
Signifyd is a fraud protection technology for e-commerce businesses. They protect clients from chargebacks, identity theft, and other fraudulent activities on their websites.
Company Details:
Founded: 2011
Location: San Jose, CA
Number of employees: 250-500
Valuation: $1.34B (April 2021)
Axonius is a cybersecurity asset inventory management platform designed to help clients enforce data security across their organizations.
Company Details:
Founded: 2017
Location: New York, NY
Number of employees: 100-250
Valuation: $1.2B (March 2021)
Conclusion
Cyber startups are riding a wave of enthusiasm from investors who are seizing the opportunity of a bull market. Skeptics believe that the companies’ earnings don’t warrant unicorn status quite yet. Others notice that cybersecurity is uniquely positioned as a market that can support multiple unicorns and believe that the rise of threats warrants these recent valuations.