After two years of declining investments and lower valuations for Israeli cybersecurity companies, the last week may mark a turning point in the industry.
Cybersecurity company Wiz, one of the Israeli startups growing around the cloud security market, is currently simultaneously conducting two very critical moves for its future: firstly, it is reportedly raising hundreds of millions of dollars, which will allow it to continue to maintain its $10 billion valuation. The round has not yet been completed, despite demand from investors including Josh Kushner's Thrive Capital, and Wiz is not preoccupied with concerns that bother other companies: it still has many hundreds of millions of dollars in cash, and it does not have to restrict itself in hiring new employees, so it does not need to compromise on its valuation in the financing round underway; secondly Wiz is set to acquire Israeli startup Gem Security, for $350 million, "Bloomberg" reports.
In both instances, these are very high valuations, compared with equivalent companies in the capital market. All this could be dismissed and attributed to the amazing situation at Wiz - a privately-held company with annual recurring revenue (ARR) of $350 million. The fact that Wiz is also ready to offer $350 million for Gem Security - an early stage Israeli startup founded only two years ago, and has raised just $30 million dollars and has revenue of only a few millions dollars, suggests it is not just Wiz.
Another example in the revival of the fortunes of Israeli startups came today when US cybersecurity company Zscaler announced it is acquiring Israeli cybersecurity company Avalor. Zscaler is paying $350 million for Avalor, an estimated 100 multiple on its ARR.
Cybersecurity fatigue
In the capital markets, the picture is a little more modest. Particularly since Palo Alto Networks (Nasdaq: PANW) revised its forecasts on February 21 and spoke of fatigue among cybersecurity customers. While Wiz's latest financing round is being carried out at a 30 times multiple of its ARR, Israeli cybersecurity companies like SentinelOne (NYSE: S), which reports annual revenue of $724 million, is traded at a multiple of 10 of its revenue, as is Palo Alto Networks, which has a market cap of $93 billion and annual revenue of nearly $10 billion.
An exception on this is US cybersecurity company CrowdStrike Holdings (Nasdaq: CRWD), one of the only cybersecurity companies that has risen on the stock market since the start of 2024, and is traded at a phenomenal multiple of 31 times its latest annual revenue, and which inspires hope among many privately-held cybersecurity companies.
Israeli cybersecurity was the field that suffered the hardest blow among the various tech sectors in the crisis that began in May 2022, with the interest rate hikes that caused many investors to abandon the industry. Cybersecurity investments had reached an all-time high in 2021 and were also the first to evaporate in 2022, with a 60% drop in capital invested in companies in the field. Some of the cybersecurity companies, mainly the largest among them that previously benefited from the tidal waves of 2021 - such as Cybereason and Snyk paid for this with a fall in valuation and the need to impose layoffs.
Growth companies were paying the price until very recently. But earlier this month Israeli startup Axonius was able to raise $200 million in an "expansion" of its previous financing round two years ago at the same valuation of $2.6 billion. By reporting its annual recurring revenue (ARR) of $100 million, the company revealed a relatively high multiple of 26 but even so the flat valuation meant a fall in value for the later investors.
Two months ago, Israeli cloud security company Aqua Security, a rival of Wiz, raised $60 million at a valuation of just over $1 billion, the same as three years ago.
Especially high multiples
Even the financing round that Wiz is planning is essentially a flat round, at the same valuation as its previous round last year, even though this is a phenomenal valuation, due to the company's large growth. Its acquisition of Gem Security demonstrates that it is prepared to diversify its products and add new attributes according to changing demand from enterprise data security CEOs.
Another company who planned financing round has leaked to the media is Israeli data security company Cyera, which is planning to raise money at a company valuation of $1.6 billion, according to estimates a 100 multiple on its ARR of $15-20 million.
When it comes to acquisitions, recent months have indicated a return to high valuations for cybersecurity companies and this is due to the assessment that large companies are willing to pay especially high multipliers for small companies, as long as they complement their product offerings according to customer requests.
The "cyber fatigue" that Palo Alto Networks CEO Nikesh Arora talked about last month, indicates that data security managers in enterprises are willing to increase their spending on cybersecurity systems only when they can receive them organically from the same platform, without the need to go on a shopping trip to dozens of startups, and that it is better that these systems come from the same company, and not be offered as a collection of patches.
That's why Wiz is willing to offer a 100 multiple on ARR for Gem Security, and why Zscaler is prepared to pay a 100 multiple to buy Avalor. And that's why all the other recent acquisitions of Flow Security, Talon and Dig - were bought at extremely high multiples by giants like Palo Alto and CrowdStrike who are in ever fiercer competition.
Published by Globes, Israel business news - en.globes.co.il - on March 14, 2024.
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