Investors Search for IPO 'Unicorns' Among Cyber-Security Startups

Investors continue to pour cash into cyber-security ventures hoping for big initial public offering payoffs, but workforce issues and technology complexity add to the risk.

Cyber-Security Startups 2

Driven by a seemingly unending parade of breaches, investors looking for the next big score—the rare "unicorn" company that becomes valued at $1 billion or more—are pouring money into security startups and early-stage ventures.

So far in 2015, cyber-security firms received more than $1.2 billion in nearly 100 funding deals in the first two quarters, putting the year on track to match last year's record pace, according to investment tracking firm CB Insights. Over the past eight quarters, investors put more the $4.6 billion into cyber-security firms, the firm stated.

In the latest such deal security-in-the-cloud company Zscaler announced it closed a $100 million round of funding from a group of investors, adding to the $38 million it had previously received. Dan Druker, chief marketing officer for the company, hesitated at divulging the on-paper valuation of the company, except to say that it had reached an estimated value of more than $1 billion.

Because Zscaler did not take early funding—the company was self funded by founder and CEO Jay Chaudhry—the company had few problems reaching its lofty valuation, Druker told eWEEK. "Because of the funding model, we are not just a unicorn, but more like a unicorn sliding down a rainbow," he said.

It's a claim that every startup would like to make. And because of the heated activity in cyber-security, Zscaler is unlikely to be the last security firm to claim the status.

Yet, there also is a danger that the market is becoming overheated. Too much investor interest and a restricted supply of skilled cyber-security entrepreneurs mean that investors have to pay a premium to get in on the action. In short, investors may be paying not for unicorns, but some entirely mythical beast.

As a result, venture firms need to question the value of security startups, Robert R. Ackerman, Jr., managing director and founder of Allegis Capital, told eWEEK.

"I think the cautionary note is that this stuff is complex, and there is a risk of things getting funded that perhaps are not as well thought through and perhaps not as differentiated as they should be," he said. "'The old fools rush in.' I think we are seeing some of that in cyber."

Despite the caution, this year will likely match the investment activity of 2014. While the number of cyber-security companies that are acquired or go public has fallen from the 2012 high, at least seven currently claim unicorn status.

CB Insights lists Tanium, Good Technology, CloudFlare, Lookout, Illumio, AVAST Software and Zscaler as the current crop of companies with valuations of $1 billion or more. In July, cloud-based security provider CrowdStrike also announced it had received $100 million in its third round of funding.

Robert Lemos

Robert Lemos

Robert Lemos is an award-winning freelance journalist who has covered information security, cybercrime and technology's impact on society for almost two decades. A former research engineer, he's...