Why It’s Time for Investors to Redeem Their Cyber Security Investments

Cyber security technology is one of investors’ dearest investment channels of the second decade of the millennium. In the wake of unending attacks on political bodies, the most famous and recent of them have been directed at the Democratic Party in the U.S and the French President, and on corporations such as Yahoo, Lockheed Martin, Sony, and Target.  It is undeniable that cyber tech is here to stay.

As attackers change and improve their methods to better cope with cybersecurity weaponry, new technologies are constantly being developed, thus justifying an unending wave of new startups and a massive flow of funding into them. But now that we’re a few years into the cyber trend, investors are starting to look into their books in search of a paycheck.

It is possible that this time has arrived, and the industry is going to soon witness a few interesting deals. We at Zirra, a research company focused on the private tech market, have found several indicators which support this trend:

1. The market capital of cyber companies is on the rise again: After a long “winter,” Symantec’s stock is up by 35% since January 2016, CheckPoint is up by 26% and Fortinet is up by 28%; Fireye is up finally, after a 48% cut in stock price from the beginning of 2016 to the lowest point this March. Their stock has gained about 36% since then. The last year and a half was also hard on Palo Alto Networks who has seen a gradual decline in stock price since January 2016, but in the first days of May the company’s price is up by 5%; CyberArk’s stocks, too, experiencing its best times in almost two years.

Source: Google Finance

Rising stock prices improve the appetite for acquisitions in a couple of ways: 

A general optimistic, constructive sentiment.

The acquirer can better tolerate a temporary decline in the stock’s price inflicted on it during the hours and days following a deal.

Investors can now demand higher prices for the startups they are selling, after a long period of sitting in the middle.

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2.Too many companies were established in a very short time, but only a fraction will get acquired: There is no argument that there has been a significant amount of money invested in the cyber security segment in recent years. The number has almost quadrupled from 2012 to 2015, and is just short of $4 billion. But, it is not the total funding that worries the investors, so much as the number of companies that were funded in total.

From mid-2014, there were nine quarters in which 90+ companies were funded in each. Quarters with 100+ companies appeared five times. In comparison, the hot area of AI surpassed 100 companies per quarter only at the beginning of 2015. But, whereas investors keep pouring more and more money into AI, that now reaches around 170 companies per quarter, cyber security had cooled down to 76 companies in the last quarter of 2016, according to CB Insights.

The funding could be well explained if there were enough exits to justify it. But after two great years, 2014 and 2015, that have produced 107 and 124 exits and 11 IPOs together, 2016 was a tough year, with only 88 exits and one IPO. Following the good news coming from New York stocks exchanges, VCs are interested in selling some of their companies, and when valuations are going up again, it will be easier to do so.

Source: CB Insights

Oren Bar-On, senior partner at EY, told the press that 2017 is going to be harsh on many startups in the cyber security industry. Startups that had raised small financial rounds of $1-2 million in the last two years will find it quite challenging to complete bigger rounds now. Therefore, it’s possible we’ll see a good deal of small and medium sized acquisition deals.

Who will be the next cyber company to be acquired? Zirra put together a list of some of the most interesting cyber security startups. Click on their names to get the full Premium Insight Reports.

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TrapX is a deception-based security firm that detects, analyzes and defends new zero-day and APT attacks in real time.

Inpedio offers mobile security solutions through Mercury, its flagship solution, using multi-layered deep defense security that covers the device, network connectivity, and communications from within

Tufin automates and accelerates network configuration through security policy orchestration. The company’s proprietary technology enables IT organizations drastically to reduce the time and cost to implement network changes. Specializing in the management of firewalls, routers switches, and load balancers, Tufin also allows customers to automate daily configuration changes to all network security devices.

Upguard, formerly known as ScriptRock, has developed the Cybersecurity Threat Assessment Report, that provides in-depth and actionable intelligence on the preparedness for enterprises. UpGuard allows the user to monitor all server, network device, and cloud app configurations.

Alcide is planning to build a network security platform from the ground up for modern, large-scale data centers that leverage multiple technologies and micro-service architectures.

Ensilo was founded on the recognition that external threat actors cannot be prevented from infiltrating networks, and instead focuses on preventing the theft and tampering of critical data in the event of a cyber-attack. It is doing so by blocking in real-time ant data-related malicious activity.

Endian provides open source network security and remote connectivity solutions under their brand: Unified Threat Management. The system, comprised of hardware, software and virtual appliances provides gateway security that includes firewall, VPN, web and email security services to networks in all sizes.

5 Startups That Snapchat Should Buy

Snap has worked its way wisely through small and medium acquisitions. In fact, the company had its largest growth recently in 2015, thanks to the acquisition of Looksery, the AR company that’s behind Snap’s animated lenses. Now, armed with at least $3.4 billion dollars that they raised during their IPO a week ago, Snap can indulge itself and buy more and larger companies. To benchmark that assertion, consider that Looksery was Snap’s biggest M&A so far, costing it $150.6 million.

 

Snap’s acquisitions. Source: Crunchbase

Musical.ly

The teen-focused lip-syncing app Musical.ly seems like a natural acquisition target for Snap. It is one of the fastest growing social networks apps which engages users with the phone’s camera, just what Snap is looking for. The Shanghai-based company boasted some 100 million users last fall and is growing rapidly, particularly since last May when there were not more than 60 million users.

Musical.ly is what Vine wanted to be but failed to achieve. It allows users to share videos of themselves lip-syncing to 15 seconds of a famous song or a familiar scene from a movie. Unlike Vine, the app plays the song for you and makes sure you can sing in your tempo and style. Musical.ly allows users the freedom to move and dance in a cool way and matches it with famous songs, making for some very viral video clips, turning a few of the users into online superstars.

The Chinese company behind it launched a few more apps, such as video streaming app Live.ly, which has become more popular than Twitter’s Periscope but still competes with Facebook Live. The have also released Ping Pong, a video messaging app, and Squad, a group video chat app that competes with Houseparty.

Nevertheless, If Snap chooses to buy Musical.ly, it will need pay not only for 100 million users but also to cover the total investment in the company that sums up to about $120 million. Undoubtedly, if executed Musical.ly would be Snap’s biggest acquisition so far.

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Blippar

UK-based Blippar has turned out to be one of the largest and most promising AR tech and content companies around the globe, raising almost $100 million and serving dozens of brands, publishers, and agencies. In addition to augmented reality and computer vision technology, Blippar’s strategy was commercial from the beginning, offering a platform that allows its customers to create AR content themselves. The company has counted Coca-Cola, Pepsi, McDonald’s, and Walt Disney as clients and, in that manner, Blippar can bring assets such as advertisers, technology, and users while being in line with Snap’s camera company strategy. [Read here for the full Company Analysis report on Blippar].

The company has seen better days regarding valuation, which could entice Snap to offer a deal good for both sides. In 2015, the company was rumored to have been valued at $1.5 billion following a takeover by US-based mobile chip maker Qualcomm. Zirra, a company that analyzes startups using data from 85 public sources, estimates Blippar’s valuation at no more than $700 million. According to a report published by Bippars’ accountants, the company is in need for another financing round, after raising about $100 million from two rounds, the last one a year ago.

Blippar is unique in its computer vision and deep learning technology that allows its app to recognize objects immediately and efficiently. The company had created the “Wikipedia” of the visual world, a byproduct of its technology that allows getting recommendations, definitions and more features about each object scanned.

Facetune

Jerusalem-based Lightricks, the company behind Facetune, is another smaller and cheaper candidate for being snapped up by Snap.  The Facetune app makes it easier to take selfies and then make them look awesome. The app enables users to perform high-quality edits to their photographs without the need of desktop software. The company currently offers three iOS apps: Facetune (also available on Android), Facetune 2.0, and Enlight. The first two enable users to quickly adjust their portraits, while the latter is aimed to editing any kind of photograph. Recently, Lightricks added automatic 3D meshing capabilities, making it the closest thing to having a professional photo retoucher in your pocket.  Zirra values the company at about $60-$70 million. [Read here for Zirra full Company Analysis Report on Lightricks]

Fitfully

Snap’s long term camera strategy has the potential to accelerate AR commercial applications, such as measuring physical items and transforming them into virtual objects inside the app. An application that scans the user’s foot and then recommends several shoe models would then make sense down the road.

Fitfully launched an app that takes a 3D scan of the user’s foot and produces an accurate model which is then used by the fitting engine they have developed. This fitting engine places and aligns the user’s 3D virtual foot “inside” a shoe to ensure its fit and accuracy, helping them buy shoes online with confidence. Users can share their 3D foot with others, which allows people to accurately buy shoes for friends and family.

In addition, online stores can also integrate with Fitfully’s mobile scanner and technology which offers a dashboard that can track inventory and generate shoe or user specific data. Fitfully’s potential market is huge: 35% of total online purchases of shoes are returned to the store, 90% of those because of poor fit, costing online stores an average of $4.90 per return for restocking. [Read here for the full Company Analysis Report on Fitfully]

Pinterest

Pinterest is, first and foremost, the biggest database of curated photos, but now it would also like to brand itself as the visual search engine for objects in the real world, a very similar quest to that of the UK-based Blippar. This can place Pinterest in an exciting position as a candidate for acquisition by a Snap that wants to be a “camera company.” Think of a Snap user taking a photo of an armchair, which Pinterest then identifies using Lens, a company acquired recently by them.  Cimagine, another acquisition of Snap, could then embed the virtual armchair in the room the user would like to preview it in before purchasing.  Pinterest, which already has e-commerce capabilities, is now pushing itself into search advertising, making this an interesting pairing.

Pinterest is considered as one of the dozen tech unicorns most likely waiting in the pipeline to go public after Snap. Now valued as low as $4.3 billion by Zirra, after being previously valued at about $11 billion, Snap may find the company more attractive to take over, along with their $300 million in revenue.

Post-IPO Optimism

After the hype tied with the first days of the IPO, the stock went down from $27 to about $21 today, back to the natural valuation of the company: around $24 billion. Yet, Oren Bar-On, senior partner at accounting firm EY thinks that Snap’s IPO is a good sign to the market. “The public likes to hold stocks of well-known brands and is willing to take risks after years of ‘drought’ in the IPO market. These are great expectations for additional yield over the market yield. Within two years we’ll have to see if Snap doubles its revenue on a year-on-year basis. 2017 will keep challenging growth startups with a blurry business model or without the elite technology that promotes growing platform such as VR, autonomous cars, AI, and bot. ”

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