Solera Acquisition Highlights Promise of Cybersecurity Investments

In the latest example of the growing value of cybersecurity companies, Blue Coat Systems, a diversified provider of Web traffic filtering and related products, acquired Solera Networks, a developer of technology to more closely monitor network activity to thwart cyber attacks. Solera is an Allegis portfolio company. Although I can’t disclose the exit price, what I can say is that it was an all-cash deal and Allegis will see a return of more than 10x on the first money we invested in Solera.

As great as the deal is for Solera and Allegis, the real significance is that it underscores the unrelenting demand for better, more comprehensive cybersecurity solutions — and the attendant desire to deploy capital to build or acquire cybersecurity companies with long-term value.

This is a healthy reminder of the major opportunity in building technology-based defenses against the successful cyber attacks that continue to plague America and other free countries at an unsettling pace. As the number and costs of these attacks increase, so does the demand for effective defenses – encouraging significant investments in innovative startups, as well as acquisitions by major technology companies working to stop and/or blunt these attacks. The long-term goal is a more secure digital foundation for the global economy.

Across the board, investors are sending a clear message that cybersecurity is the front line of arguably the most complex and expansive conflict confronting the global community. Venture capital is surging into cybersecurity startups, cyber-related M&A activity is strong, and stocks of recently public cybersecurity companies are faring well. In short, investors see a great opportunity to build value and generate returns while addressing a critical economic and societal need.

Last year, venture investing in cybersecurity rose 5 percent to more than $1 billion, while overall venture investing fell. And there are signs it will rise more this year, as venture capital valuations continue to rise briskly. Last year’s increase came after a hefty 94 percent jump in dollars committed to cybersecurity in 2011, according to PricewaterhouseCoopers and the National Venture Capital Association.
Funding announcements in cybersecurity startups have become regular news. PerspecSys, a McLean, Va., based cloud security and data protection firm, recently announced that it closed a $12 million round. That deal follows the infusion of $15 million into Cylance, $50 million into FireEye, and $23 million into Endgame. These four deals alone represent $100 million chasing cybersecurity companies deemed to have substantial growth potential to defend company networks against data thieves and cyber spies.

Other cybersecurity companies that have attracted venture capital in the last 12 months include AnchorFree ($50 million), Bit9 ($35 million), Ciphercloud ($30 million), Veracode ($30 million), Bromium ($27 million), Skyhigh Networks ($20 million), and Nok Nok Labs ($15 million).

Cybersecurity-related M&A activity is also strong. Total investment in global deals has exceeded an average of more than $6 billion a year since 2008 and is expected to rise as players target more power grid applications. Last year, Cisco alone acquired five companies, including video software and content security company NDS for $5 billion. Dell bought Quest Software for $2.4 billion. Network security firms Fortinet (FINT) and Sourcefire (FIRE) have also been rumored as acquisition targets.

On the IPO front, relatively recent cybersecurity related offerings — including Imperva, Splunk and KEYW Holding Corp. — have performed respectably. Another – Palo Alto Networks – is trading near $50, up from $42 when it went public 11 months ago. Looking forward, the pipeline for future IPOs looks strong with cyber innovators like FireEye rumored to be contemplating public offerings in coming months.

The challenges and opportunities in cybersecurity are unprecedented. The battlefield for most attacks is the Internet – a network domain never originally intended to be a reliable infrastructure for secure transactions. The combination of billions of interconnected devices accessing the vast volume of global data at the speed of light has created a gold mine for thieves and cyber spies — hence an unusually large opportunity for cyber innovators. According to Gartner, global demand for cybersecurity solutions is growing 9 percent annually and will soar to $85 billion in 2016, up from an estimated $66 billion this year.

The landscape is not without obstacles outside of the technical arena. One big and growing problem is that the U.S. government and private industry cannot agree on how to share intelligence on attacks. The very nature of the cybersecurity threat demands cooperation and collaboration between the collective communities under threat. As societies join together in fortified communities for their common defense, there is a strong argument for a collective sharing of intelligence, expertise and action in curbing cyber attacks.

Just last month, the Cyber Information Sharing and Protection Act, which passed the U.S. House of Representatives in April, was short-circuited in the Senate. It would have given businesses and the federal government legal protection to share substantial cyber information following cyber attacks.

The act would have allowed private Internet companies to provide the government with personal emails, tweets, text messages, phone calls and Facebook postings related to potential culprits without a warrant – seemingly a violation of the Fourth Amendment for people to be secure against unreasonable searches and seizures. The obvious solution, as always in Washington, is compromise, but unfortunately, this is virtually a dead concept in the Capitol. So the lack of sharing is likely to remain a significant problem for the foreseeable future. Advantage: bad guys.

Nonetheless, the imperatives — and desire — for aggressive cybersecurity investing remain. Allegis Capital and other experienced venture firms see cyber as an important investment area with opportunities for significant financial return and social good. Our portfolio companies have considerable traction in their businesses as the market continues to grow in size and opportunity.

Startup cybersecurity companies and investments are certain to remain hot for a long time.

Robert R. Ackerman Jr. is the founder and a managing director of Allegis Capital, an early stage Silicon Valley venture capital firm that invests heavily in cybersecurity. Current Allegis cybersecurity portfolio companies include Solera Networks (which is being acquired by Blue Coat Systems), Bracket Computing, Shape Security and Symplified. Ackerman previously wrote about cybersecurity for peHub in April.

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