Start-ups securing major venture capital for faulty valuations and concepts in April 2015.
Mid-April proved to be a lucrative time for investors and security tech start-ups who secured massive investment from venture capitalists and from floating on the stock market. However, gaining investment now-of-days seems to be a dog and pony show where companies must seem get the highest valuation possible before they have a viable leg to stand on. If investors have a choice between a viable company that has a promising record of performance with a lower valuation, and a tech startup with a lucrative idea, little performance history, and a high valuation, VCs will pick the company with the highest valuation - bar none.
What does this mean for future tech start-ups? For one it means that those with shoestring dreams can still earn a lot of venture capital if they play their cards right. However, high valuations come at a high price. Venture capitalists want to at least secure two times their investment from IPO. This means that the IPO on a company with a valuation that is too high can have detrimental effects if the stocks perform way below or higher than expected. For the most part, tech startup entrepreneurs are finding that their stock holdings are further diluted during the IPO when investors have a chance to gain a further shareholding by converting preference stocks and/or enacting their terms and conditions is IPO fails to supply the minimum 2x guarantee.
Here are some tech security companies that made out like bandits mid-May from VC capital and IPO on Wallstreet.
Illumio raises an additional $100 million
Illumio is a company that aims to provide a software only solution that secures business’ websites, firewall, data centers, and public/private clouds. The company already had a group of high profile backers that they worked to gain since their companies started in 2013- working behind the scenes in stealth mode to raise over $40 million. In a recent Series C round of investment, Illumio raised another $100 million from high profile clients including Yahoo! co-founder Jerry Lang, Formation 8, and Salesforce CEO Marc Benioff. Illumio has been able to capitalize on the immense value that their potential products have for Fortune 500 companies to secure financial backing. Illumio’s enterprise security systems are different because they wrap a firewall around every piece of business IT and work on a white list system, instead of a blacklist system. Illumio’s success in the Series C round has led to its swift market entrance into London and plans for a corporate office in Asia by the end of 2015.
Duo Security raises $30 million
Duo Security is a dual-factor authentication company that has recently secured $30 million utilizing Redpoint Ventures. Duo Security was originally backed by Benchmark and Google Ventures in its initial startup phase, but now the company is increasing their authentication offering as an enterprise solution called Duo Platform. The new Duo Platform will make logging in to enterprise systems more secure for employees and customers alike. Duo Security already has big clients including Facebook, Box, Etsy, and Yelp. Since more company attacks occur by hackers compromising customer networks to gain access, the Duo Platform will be able to have greater control over customer networks and access methods to prevent threats at all access points. With the recent hacks of Sony and Target, it seems that security companies like Duo Security have been able to capitalize on an emerging market opportunity by providing more promising security systems that make keep hackers at bay for a bit longer.
Npm Inc., raises over $10 million
Box’s $14 IPO value is exceeded with trades of up to $24.73 – Giving investors preference and diluting founder’s shareholdings.
While the previous examples have told of how security companies have raised vast amounts of VC from enterprises that are hungry for IT security solutions, the story of Box demonstrates what’s at stake for entrepreneurs. While VC for private companies is one ordeal, securing primary investors and an IPO guarantee is another ordeal entirely. The name of the game for Series F involved companies getting the highest valuation possible, and investors diluting the shareholder base to secure more capital.
While companies that have floated on the stock market with an overestimation of their valuation have performed extremely poorly, Box’s conservative IPO had other infuriating effects. Box priced their IPO at $14, which triggered their first round of private investor’s preferences. Box shares actually traded for up to $24.73 on opening day. This great performance benefited their Series F investors who were able to capitalize on their investor preferences which allowed them to convert their common stock at over 1.5 as opposed to a one to one ratio. This meant that their investors were able to significantly dilute the shareholdings of Box – infuriating the founders.
Even though Box performed well on the stock exchange, their IPO pricing sealed their dismal fate - investors were able to enforce their unfair terms and conditions to gain greater shareholdings at lower cost. In future, companies should be very careful to ensure that they are getting a fair capital investment with fair terms and conditions.
CrossCHX raises $20 million
Finally, we’ll review how a health tech start-up raised a huge amount of money to do something very mundane. CrossCHX essentially fixes errors in patient’s records. They claim that their technology will increase patient care and prevent identity theft. While I’m not sure that their claims of preventing identity theft are accurate, it seems that their technology can increase patient care. Their system consolidates all patient information to one, singular ID (Social Security Number). They found that over 10% of medical records had identity related errors. I suppose this explains why poor hospitals tend to read the wrong charts and give non-diabetics diabetic medication.
Due to a round of Series B investment and a round led by Khosla Ventures, including Drive Capital, CrossCHX has raised over $20 million. The CrossCHX platform is currently operating in over 100 hospitals to-date.
So far, it seems like security technology start-ups are hot on the investment market for VC and IPO floats, however, VC investor preferences can kick in to dilute the founder’s shareholdings. We’ll have to stay tuned to see how the next few quarters treat these newly funded companies, but I’m sure there will be stories of rampant success coupled with infuriating tragedy.
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