Last June, legendary venture capital firm Andreessen Horowitz doled out its second-biggest funding round to date.
The $90 million investment wasn’t for some consumer mobile app or “sharing economy” marketplace. It went to a relatively stealthy security software startup, Tanium, which hadn’t previously raised any venture money but had already managed to score contracts with at least half of the Coins2Day 100.
Its technology is a “central nervous system” that uses data analytics to detect potential threats in close to real time. “As an already successful and profitable company with dozens of customers in massive, mission-critical and global deployments, this type of innovative and inventive technology can only come about from a team with years of experience and a depth of understanding of the enterprise,” says Andreessen Horowitz partner Steven Sinofsky, who sits on Tanium’s board.
Indeed, some of the sexiest business technology companies this year for investors hail from two decidedly unsexy categories: next-generation cyber security and software that helps businesses migrate mission-critical applications to public cloud services with less angst than is currently required.
No one wants to be the next Sony
Private money has been particularly kind of late in rewarding convincing pitches for thwarting advanced security threats on mobile devices. During the first half of last year, nearly $900 million was invested in the category—more than for all of 2013. The total for the past five years is about $5.2 billion.
And in the wake of high-profile systems breaches at seemingly invulnerable companies like J.P. Morgan Chase and Home Depot, global spending on this technology category is projected to grow 8.2% during 2015 to $76.9 billion. The personal nature of the Sony Pictures Entertainment breach is fueling boardroom discussions.
“Putting up moats, gates, and fences isn’t enough,” says Jerry Chen, a partner at Greylock Partners. “You have to work under the assumption that your company is going to be compromised in small ways and big ways.”
The poster child for this situation, of course, is Palantir, which sniffs out suspicious activity using algorithms (and perhaps justifying its estimated $15 billion private valuation). “Knowing that human nature doesn’t change, security is all about making the enterprise more secure in two areas: circumventing software flaws and thwarting the practice of phishing,” Chen says.
In addition to Tanium, here are five other intriguing security companies, early stage and late stage, that are well-positioned to reach the billion-dollar mark:
1.) Shape Security, an early-stage company that has raised at least $66 million for technology that helps protect websites against botnets.
2.) Okta, an identity management company that has scored deals with 2,000 companies including Adobe, Chiquita, LinkedIn, and MGM Resorts. It has raised $155 million.
3.) Good Technology, which specializes in mobile device management, has raised north of $290 million. It is mentioned often as a 2015 IPO candidate, after delaying its public market debut last year. (Bonus: OpenPeak, backed with about $184 million, is one notable rival.)
4.) VArmour, which offers a twist on protecting server-to-server traffic within data centers. It emerged from stealth last fall; backed with $42 million in three rounds.
5.) Bromium, a specialist in endpoint protection, its access control technology is used by the likes of ADP, Aetna, and Box. It is backed with at least $76 million.
Private clouds are so 2014
Another emerging obsession for the venture capital community this year: technology that helps big businesses move existing servers and applications to low-cost public cloud services.
The motivation, explains Mike Harden, co-founder and senior partner at ARTIS Ventures, is simple: Why should big companies spend millions on private cloud investments when credible businesses are being built on more cost-effective public services from the likes of Amazon Web Services, Microsoft, Google?
“If you really stop and think of the dichotomy between what the consumer Internet companies use and how enterprise computing infrastructure is run, the gap has become crazy,” he says.
As a result, at least two-thirds of big businesses will embrace “cloud-also” or “cloud-first” investment strategies by 2016, predicts market research firm IDC. It also believes spending for public cloud services is on pace to reach $127 billion, a big bump over the roughly $56.6 billion spent on this stuff last year.
Here are three notable startups that stand to benefit from the cloud boom:
1.) Bracket Computing, which has raised $85 million (so far) for technology that “contains” applications so they can seamlessly be moved between data centers, regardless of location.
2.) Docker was called DotCloud in its previous incarnation. Variations of the “container technology” it is commercializing could become as important for mission-critical software development as the Hadoop data management platform has become for big data analytics. It’s backed with $66 million, and customers include eBay and Yelp. Microsoft and IBM are fairly recent partners.
3.) Mesosphere sells technology that orchestrates how software runs across data centers and cloud services. If a server goes down, the application are moved elsewhere to avoid an outage. With $50 million behind it, the company’s approach is embraced by the likes of Airbnb, eBay, and Netflix.
Who needs expensive, proprietary network gear?
For years, companies like Cisco Systems and Juniper Networks grew rich by selling proprietary switches, routers, and other data center communications gear. Then an emerging wave of startups focused on software-defined networking (SDN) decided that businesses should be able to use cost-effective, programmable hardware instead. Exhibit A: Artista Networks, which jumped 33% when it made its IPO last June and currently has a market cap of about $4.15 billion.
This is a fast-growing market. Revenue from these products was a modest $960 million last year but could grow to $8 billion by 2018.
One company to watch closely is Pluribus Networks, which just disclosed a $50 million Series D round led by telecommunications equipment player Ericsson and Temasek Holdings (one of the companies behind Alibaba). That brings its total funding to $95 million, bumping it above rivals like Cumulus Networks ($51 million) and Big Switch Networks (about $44.5 million).
“Pluribus is one of the few companies in the IT infrastructure space that has taken a platform approach to deliver on the promise of SDN network programmability, operational simplicity and unification of the economic model of computing and networking,” said Kittu Kolluri, general partner at New Enterprise Associates, one of the company’s investors. “We are pleased to be able to help catalyze the company’s execution and look forward to its expansion in the next few months as the best funded and most innovative SDN startup in the market.”
For more on billion-dollar startups, see the cover story of the February 2015 issue of Coins2Day , “The Age of Unicorns.”
