By Rahul Bhushan, Managing Director at ARK Invest Europe
In July 2024, cybersecurity firm Wiz decided to reject Google’s $23 billion acquisition offer in favour of an IPO – sending shockwaves through the cybersecurity industry.
This bold move not only highlights the immense potential of cybersecurity firms but also presents compelling reasons for investors to take notice.
However, it is not the first cybersecurity vendor to go public recently. Rubrik, the Microsoft-backed US data security firm went public in April and the first in two years. In that period, the IPO market had dried up. The Rubrik IPO jump-started the sleepy market once again, and Rubrik’s plans gave Wiz confidence to pursue the IPO.
Wiz’s strategy is a pivotal moment for cybersecurity IPOs – and could lead to a flurry of more companies looking to do the same.
Bull Case for cybersecurity IPOs
Market Validation and High Valuation: Google’s willingness to pay 46 times Wiz’s forward revenue underscores the immense value that cloud security companies hold for major tech firms and should hold for public market investors, given their growth potential. This not only validates Wiz’s business model but also signals to investors the high growth prospects within the cybersecurity sector.
Investor Confidence and Growth: Wiz, a venture-backed company, has demonstrated phenomenal growth since its inception in 2020. Receiving its seed check in early 2020, Wiz has rapidly expanded to achieve $500 million in annual recuring revenue (ARR) within 4.5 years. The rejection of Google’s offer indicates that Wiz’s shareholders believe the company holds significant intellectual property and intrinsic value, further enhancing investor confidence.
Robust Revenue Growth and Industry Potential: Wiz’s rapid growth trajectory—reaching $500 million in ARR within 4.5 years—demonstrates strong business fundamentals and market demand. This growth illustrates the industry’s huge potential, despite recent muted investor sentiment. As the world becomes more digital, dynamic approaches to security threats are crucial, and this dynamism is evident in the cybersecurity industry.
Leadership: The leadership of a CEO can play a vital role in whether a cybersecurity firm can pursue an IPO. Assaf Rappaport, the co-founder and CEO of Wiz, has demonstrated exceptional leadership in guiding the company through rapid growth and significant strategic decisions. Rappaport’s strategic acumen is further highlighted by his previous success with Adallom, which he sold to Microsoft in 2015, showcasing his ability to create and scale successful cybersecurity ventures. Rappaport’s focus on achieving $1 billion in ARR before considering an IPO reflects a disciplined approach to growth and value creation. His belief in the strength of Wiz’s team and their ability to innovate and compete in the dynamic cybersecurity market underscores an insider’s confidence not just in his product/solution, but also in the growth opportunities still existing in an industry that many investors believed had matured.
Three hotly anticipated cybersecurity IPOs
There are many cybersecurity companies looking to pursue an IPO – below is the three most hotly anticipated:
• Cato Networks: The network security company provides a secure access service edge (SASE) platform that integrates SD-WAN, security, and a global private backbone into a single cloud-native service. What sets Cato Networks apart is its comprehensive SASE platform. The company has been preparing for an IPO with Goldman Sachs, JP Morgan and Barclays, with a potential public listing expected in early 2025.
• Snyk: The developer security platform helps organisations identify and fix vulnerabilities in their code, open-source dependencies, containers, and infrastructure as code. Snyk’s platform integrates security directly into the development process, enabling developers to build secure applications efficiently.
• BigID the data privacy pure play company uses advanced machine learning and identity intelligence to help organisations discover, manage, and protect their sensitive data. CEO Dimitri Sirota has discussed the company’s growth trajectory and market readiness, indicating strong preparation for an IPO.
Positive signal for cybersecurity IPO pipeline
Wiz’s confidence in its ability to compete organically and pursue an IPO sends a strong positive signal about the cybersecurity IPO pipeline. The choice to reject consolidation into a larger entity like Google suggests that the cybersecurity sector is not yet ready for consolidation into a small number of dominant players.
Such dynamism means that picking individual winners in the cybersecurity space can be challenging, as the landscape is continually evolving with new threats and technological advancements. For investors, a diversified approach to investing in cybersecurity, such as through a diversified cybersecurity ETF, is a sensible strategy.
There is a significant disparity in valuation between private cybersecurity companies and their public counterparts. Google valued Wiz at 46 times its future revenue, whereas public cybersecurity companies like CrowdStrike currently trade at around 47 times their free cash flow.
This valuation gap has been exacerbated by a broader sell-off in the cybersecurity industry following the CrowdStrike incident. Historically, valuation convergence between public and private markets has been observed in the cybersecurity sector. This disparity presents an attractive entry point, suggesting considerable upside potential in public cybersecurity equities for investors looking to capitalise on growth and innovation within the sector.
