The CEO of Deep Instinct, which just raised $43 million, explains why he he's committed to a cybersecurity IPO instead of selling out
On Wednesday, cybersecurity startup Deep Instinct announced it raised $43 million in series C funding. Deep Instinct uses "deep learning," a branch of artificial intelligence that creates computer programs to work similarly to human brains, to prevent attacks. Despite the trend of cybersecurity startups selling themselves to big companies, Deep Instinct CEO and co-founder Guy Caspi says he plans for Deep Instinct to go down the IPO path – and he says he's even turned down a few acquisition offers. Visit Business Insider's homepage for more stories.
Last year, the cybersecurity industry saw plenty of M&A activity in the industry, such as BlackBerry's acquisition of Cylance, Broadcom's acquisition of Symantec's enterprise security business, and VMware's acquisition of Carbon Black. But Deep Instinct CEO and co-founder Guy Caspi says he wants his startup to go down a different route. While many of the traditional cybersecurity companies couldn't survive and address new challenges, Deep Instinct focuses on stopping attacks before they happen. Previously, he says the security market mostly focused on reacting to attacks. "Most of the endpoint players have been acquired," Caspi told Business Insider. "The reason for that is most of these technologies have been lagging behind the threat landscape and couldn't address the new challenges in the market." Caspi says Deep Instinct had already turned down a few acquisition offers, but he plans for the company to eventually go public. To help it get there, Deep Instinct announced Wednesday that it raised $43 million in series C funding led by Millennium New Horizons. With the funding, Deep Instinct plans to grow the company in sales, marketing, and hiring. Right now it has about 150 people, and it plans to recruit an additional 100 people. 'Detection is not enough' Deep Instinct was founded about five years ago by Caspi, CTO Nadav Maman, and chief scientist Eli David, who all come from cybersecurity backgrounds. Today it now has several products for securing phones, operating systems, and computer networks. And about three years ago, Deep Instinct participated in an NVIDIA artificial intelligence startup competition and won the "Most Disruptive Startup" award. This helped it get funding from NVIDIA, which also participated in this round of funding. Likewise, it caught the attention of HP, LG Technology Ventures, and Samsung, which also invested. "You still need to prevent more threats in the organization," Caspi says. "In some of the cases like ransomware, detection is not enough. The network is already infected. In ransomware, these are like terror attacks." To identify and stop attacks, Deep Instinct uses deep learning, a field of machine learning that allows a computer program to imitate how a human brain works to learn and identify patterns. "We noticed the problem and what is happening in the security market to combine this very unique AI and deep learning know-how together with security," Caspi says. "We do both offensive and defensive. We know what is missing in the market." Currently, Deep Instinct competes with traditional players like Symantec, Trend Micro, and McAfee, as well as newer players like Cylance and CrowdStrike. But Caspi says Deep Instinct is better at predicting attacks. "When we came, the current approach of detection and response is also losing confidence as the landscape is escalating," he says. 'It was not easy for us as founders to say no to an M&A a few times' Last year was a turning point for the cybersecurity market, Caspi says, when companies started focusing more on prevention. Still, it was difficult to convince the market two to three years ago, he says. "I think the main challenge for us as a company and the last two to three years was to convince the market that prevention is possible and the approach of detection with a very successful IPO of CrowdStrike just last year," Caspi said. "It was not easy." Caspi says he has "no doubt" that Deep Instinct wants to take the IPO track although it's still early and there's no planned date. Deep Instinct does not disclose its financials, and Caspi says only that the five-year-old company's revenue is comparable to that of an eight or nine year old cybersecurity company. While Deep Instinct received offers for funding from other technology companies and investors, it didn't need the money because of funding from existing investors and its revenue, Caspi says. "We are there on the trajectory in terms of customer acquisitions, the numbers, the financial metrics," Caspi says. "We just need more time to accelerate the business. We're going to get there with this unique technology." And with some notable exceptions like CrowdStrike and Zscaler, cybersecurity startups often reach an exit by getting acquired. "It was not easy for us as founders to say no to an M&A a few times," Caspi says. "The founders and also the shareholders are really super aligned in the fact that this company is going to IPO and I think the market is there. When you speak with bankers and the Goldman Sachs and J.P. Morgans of the world, they all tell us they are missing good cybersecurity IPOs."SEE ALSO: Google Cloud CEO Thomas Kurian lays out his master plan for taking on Amazon and Microsoft and says deals over $50 million more than doubled in 2019 Join the conversation about this story » NOW WATCH: What it takes to be an NFL referee, according to an official who spent 19 seasons in the league
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Meet the Silicon Valley 'talent agency' helping young tech workers land jobs at billion-dollar startups like Brex before they get huge
Silicon Valley-based entrepreneurs Armaan Ali and Baris Akis built Human Capital, a talent agency for engineers,...Silicon Valley-based entrepreneurs Armaan Ali and Baris Akis built Human Capital, a talent agency for engineers, after they realized that their peers weren't fully taking advantage of all the job opportunities available in Silicon Valley. Human Capital says it landed engineers early roles at 12 startups that have gone on to be worth over a billion dollars. The 25-year olds say that they uncanny success in placing engineers onto the early teams of hot startups like Brex and Robinhood, thanks to the relationships that they've developed with prominent VCs. The agency also has a $75 million fund dedicated to investing in any engineers looking to kickstart their own startup. "We see ourselves as a partner for an engineer's entire career," Ali explained, saying that the pair had looked to Hollywood's talent agencies as inspiration. Visit Business Insider's homepage for more stories. For many engineers looking to kickstart their careers, the dream is to work at a startup that is only just beginning to change the world — and then, ideally, cash out in an IPO or in a big sale to a tech giant. But startup life is risky, and the founders and early employees are more likely to end up with nothing — particular amid the current state of market tumult — than with a big payday. That makes it very important for would-be startup workers, fresh out of school, to stake their bets on the right company. That's how Armaan Ali and Baris Akis first came up with the idea for their company, Human Capital. As their peers at Stanford prepared to graduate, the pair found themselves wondering why so many were taking up jobs at Facebook or Google when the opportunity to create a greater impact at a younger company existed. "They had this conception of startups being too risky," Akis explained. "But there was a full spectrum of options that they had not explored. So I asked them if they would be interested in exploring those options, and having a partner who can assist them." The founders see Human Capital as akin to a Hollywood talent agency: they want to match promising tech talent to the right company in the same manner as a Hollywood talent agent matches movie stars to the latest Marvel superhero movie. So far, the 25-year olds boast of their success in placing engineers onto the early teams of high-growth startups like Anduril, Brex, and Robinhood — thanks to the relationships that they've developed with prominent tech investors and their portfolio companies. Ali told Business Insider that 12 of the startups that they connected engineers with had gone on to be worth over a billion dollars. "We've placed engineers that had been within the first 50 employees, at 12 companies that have gone to be worth over a billion dollars. Imagine how life changing that is when like you didn't even know you should consider a startup." Ali said. Growing the network About 5,000 engineers are part of the agency's network at the moment, according to the cofounders. Human Capital has a campus presence in around 20 universities and also has an open application on its website for interested engineers looking to join. Ali and Akis said they developed relationships with Silicon Valley venture capitalists like Hemant Taneja at General Catalyst and Brian Singerman at Founders Fund, to find out which startups that they were most excited about. They then pitched those portfolio companies the opportunity to connect with young, smart college graduates, ready to get to work. "The way that companies find people and people find companies is still pretty archaic," Ali said, adding that LinkedIn and resumes simply didn't say enough. "We actually have people go and speak to engineers and find out what they're passionate about, to make those matches. You can't discover those without actually probing and asking questions." Landing jobs at hot startups Orion Despo, who went to college with Ali and Akis, said he worked with Human Capital to land a job at Brex, just one month before the buzzy fintech came out of stealth mode and revealed itself to the world. Despo was one of the first 20 employees at the startup, which is now valued at over $1 billion. "I didn't want a normal job," Despo said, explaining the criteria he'd given Human Capital when he was out job-hunting. "I was looking for the most unique opportunity that I could find." Doug Qian, who interned at Google the summer before graduating, said he attended Human Capital events and met with various startup founders during that time because he already had a sense that he wanted to shift gears and join a high-energy startup. Qian ended up with a job at the cloud services startup Clumio through the agency. "I knew deep down that the startup scene would be right for me," Qian explained. "Human Capital gave me advice on what I was looking for - the kind of size, leadership, and engineering culture." Going Hollywood But Human Capital aims to go beyond job placement, and help support engineers through their entire career — wherever it takes them. "The reason that the talent agency is actually an interesting analogy, is because we see ourselves as a partner for an engineer's entire career," Ali explained. The agency wants the engineers to reach out when they're ready to embark on their next career move — be it landing another startup gig or kickstarting their own startup. Human Capital has recruited advisors outside the realm of the tech to help guide that process. Michael Ovitz, the cofounder of the famed talent agency CAA, is both an advisor and investor in the agency. "We don't like to think super transactionally in this business," Ali explained, describing the agency's focus on relationship-building. "We like to think long return." And Human Capital has the means to to be able to do so. The agency, which was the first to invest in Brex alongside startup accelerator Y Combinator in 2017, raised $75 million at the end of last year, according to the Wall Street Journal. In total, Ali says the agency has raised $200 million to invest in the engineers in their network. Join the conversation about this story » NOW WATCH: Jeff Bezos reportedly just spent $165 million on a Beverly Hills estate — here are all the ways the world's richest man makes and spends his money
Tech startups have a new 'exit' strategy. Why private equity firms have started plowing billions into acquiring startups.
Among startups that don't fail, most are acquired instead of going public. Although most startups that...Among startups that don't fail, most are acquired instead of going public. Although most startups that are acquired are still purchased by other independent companies, a growing number and proportion are being snatched up by private equity firms. In the past, private equity firms were largely considered bottom feeders, buying up companies on the cheap for their cash flow, but increasingly, they're buying companies with the intent to help them grow or to combine them with other startups to reach a larger scale — and they're more willing to pay up for them, industry experts say. The trend is being driven by a surge of cash into private equity firms and the growing number of companies that are avoiding the public markets, they say. Click here for more BI Prime stories. It used to be that the goal of every startup founder was to take their company public. That may still be the goal for most, but in the last several decades, a much more realistic option for startups that managed to stay afloat was to be acquired by another company in the same sector. In recent years, though, a third option has emerged for startups — being purchased by a private equity fund or by a company owned by one. Those kinds of buyouts now far outnumber IPOs and account for one out of every five so-called exits for venture capital-backed companies in the US, according to data PitchBook compiled for Business Insider. The growing influence of private equity on the startup market has "really reshaped the industry," said Wylie Fernyhough, a senior private equity analyst at PitchBook. The kinds of startups being targeted by private-equity firms likely would have gone public 20 years ago, industry experts told Business Insider. But today, they're generally considered too small or don't have bright enough prospects to hit the public markets. For such companies, private equity has become "an attractive exit opportunity," said Pete Flint, a managing partner at venture capital firm NFX. The vast majority of startups that don't fail are acquired Venture capitalists back startups with the intent of cashing out those investments at some point in the future, either by being able to sell their shares to public investors when or after the companies go public or by selling the startups to other companies. While initial public offerings get lots of attention, they've become relatively rare. In part that's because many startups never make it to the exit stage at all, because they go out of business first. But also it's because the vast majority of startups that don't go out of business are acquired instead of going public. Last year, for example, of the 934 startups that had some kind of exit event, 853 — about 91% — were acquired either by another company or as part of a private equity-related deal, according to PitchBook. That rate has been relatively steady over the last 18 years. "The vast majority of exits that all of us are thinking about are things that are not the public markets," said Sean Foote, a member of the professional faculty at the Haas School of Business at the University of California, Berkeley. Acquisitions, he continued, are "the major way in which companies find their home." While such deals have long been important, what's changed over the last 20 years is the growing influence of private equity. In that time period, private equity firms have gone from bit players in the startup ecosystem to major actors in it. In 2003, just 17 startups were acquired by private equity firms or companies owned by them, according to PitchBook's data. That amounted to just 5% of total exits that year. By 2012, 88 startups were snatched up in private equity-related deals, accounting for 10% of all exits. Last year, 186 were acquired in private-equity deals, amounting to 20% of all exits. Private equity firms are big players in the acquisition market In 2004, IPOs outnumbered private-equity buyouts by a ratio of 3-to-1, according to PitchBook. But private equity acquisitions have outnumbered IPOs every year since 2008, and for the last three years, there have been more than twice as many of those kinds of deals as public offerings. What's more, even as startup acquisitions of all kinds have skyrocketed — jumping from 279 in 2002 to 853 last year — private equity-related ones have accounted for a growing portion. They accounted for 22% of all startup acquisitions last year after making up less than 7% in 2002, according to PitchBook. "I think it's a trend that's going to keep growing," said Lanham Napier, the cofounder of startup investment firm BuildGroup. The amount of money startups are seeing from selling to private equity firms is still a small portion of the total value of all exits, varying from less than 1% to about 8% annually over the last 10 years. But it's grown significantly, going from just $690 million in 2012 to $6.3 billion last year. And some individual deals have become quite large. In 2017, for example, private equity-backed PetSmart bought online pet supply retailer Chewy for $3.35 billion. And last year, PE firm Thomas Bravo acquired ConnectWise, a maker of mobile device management software, for $1.5 billion. Generally, the private-equity firms are snatching up more mature startups. On average, the companies they're acquiring are around 10 years old, according to PitchBook's Fernyhough. By contrast, startups that went public were about 9 years old at the time of their IPO and those that were acquired by other companies were about 7 years old, he said. But increasingly, private equity firms are backing more mature companies and using them to buy younger startups, creating larger companies or "platforms" that potentially offer better growth or market prospects, the industry experts said. "You can sell early stage companies to PE-backed platforms," said Dan Malven, a managing director at 4490 Ventures. "I think we're going to see more and more of that." Fewer companies are going public Part of what's driven the surge of private-equity buyouts — and acquisitions overall — is that fewer and fewer venture-backed companies are going public. That's a trend that dates back to the 1990s and one that's linked to the growing dominance of small numbers of firms over large sectors of the tech industry, according to research by Jay Ritter, a professor of finance at the University of Florida who has been studying the public offering market since the 1980s. But that trend has arguably been accelerated over the last 20 years by regulations that added to the costs and burdens of being a public company and, conversely, made it much easier for companies to remain private for far longer periods. "The public market has evolved to a point where it's not that you couldn't have these companies go public, but there are significant regulatory costs that you can avoid if you stay private," said Robert Hendershott, an associate finance professor at Santa Clara University's Leavey School of Business. "Private equity is a natural way to give someone an exit." The kinds of startups generally favored by the public markets these days are those that are growing quickly, operate in a large market, and are either profitable or have a clear path to profits, NFX's Flint said. Unfortunately, there are lots of good companies that don't meet all three of those criteria. But they can be a good fit for private equity firms, because such firms can invest in their long-term growth or combine them with other startups to give them the scale they need to be more attractive to public investors, he said. "They are perfect opportunities for private equity rollup or acquisition," Flint said. Private equity firms are swimming in cash The surge in private equity buyouts has also been stoked by a huge gust of money into the industry, particularly in the last 10 years. In 2010, US-based private equity firms raised $59.2 billion, according to PitchBook. Last year, that amount had swelled to $301.3 billion. While only a portion of those amounts are going to tech-focused funds, that portion has been growing. Tech-focused private equity funds based in North America and Europe raised just $3.7 billion in 2010, according to PitchBook. By last year, that amount was up to $68.3 billion. By contrast, the US venture capital industry raised $46.3 billion in new funds last year, according to PitchBook. Private equity funds have access to "a staggering amount of capital," said Mike Smerklo, a managing director at Next Coast Ventures. But another reason why private-equity acquisitions have become increasingly popular for startups and their venture backers is because the deals can be more attractive than either going public or being acquired by another operating company, industry experts said. It used to be that private equity firms acted kind of like bottom feeders in the startup market, paying relatively small amounts for firms that had few other options and focusing on the cash flow those companies could generate for them. But that's no longer the case. Private equity firms — particularly the tech-focused ones — are increasingly looking at companies that can offer revenue growth and they're often willing to pay top dollar for them, the experts said. Startups used to see the biggest exits by going public or by being acquired by an operating company, said BuildGroup's Napier. Now, though, "some of these private equity firms have gotten so good at [buying startups], some of their valuations are just as big as those other things," he said. PE firms can move quickly and offer fewer restrictions Private equity firms also tend to be far less bureaucratic than corporate merger-and-acquisition departments, they said. Such firms also can often throw far more resources to bear on analyzing potential deals than corporations can. And the deals they strike typically don't have to go through the kinds of shareholder votes or board approvals that corporate deals often require. "They're able to move a lot more quickly," said PitchBook's Fernyhough. What's more, venture investors and founders often confront more obstacles to accessing their promised returns when they sell to corporations or take their companies public than when they sell to private equity firms. Typically in an IPO, there's a lock-up period of up to six months during which early investors are barred from selling the company's stock. Meanwhile, in corporate acquisitions, there often are conditions put in place that allow founders or early investors to see the full value of the buyout only if the startup hits certain financial or performance targets after the acquisition. "When I sell a company to a private equity firm, it's clean," said Foote, who in addition to his role at Berkeley is a managing director at venture capital firm Transform Capital. "There's often very few strings attached." It's not unusual for acquirers, whether they are large, independent enterprises, other startups or private equity-backed conglomerates, to pay for their purchases with shares of their own stock. But the private equity-backed roll-ups often are perceived to have greater prospects for growth than big, established corporations, potentially making their shares more desirable. "We try and analyze that growth potential," said 4490's Malven. They try to figure out if "we want to ride on their equity." The fast pace can also cut against startup founders and VCs To be sure, the growing influence of private equity does have some drawbacks for venture capitalists and startups. The fast pace of those firms and their large research teams can go against founders and their backers, Malven said. The private equity firms can have their teams analyzing multiple companies and potential deals at once, he said. If a startup doesn't act on an offer quickly, the firm can threaten to move on to doing a deal with a rival company, he said. "They can put you in a squeeze," said Malven. And the firms can have their shortcomings when it comes to evaluating startups, industry experts said. Because they're typically focused on analyzing the financial health of companies, they can be very good at evaluating companies that already have established a market for their products and have a revenue stream, they said. But they're not as good at sizing up companies based on the potential of their technology or their intellectual property or their unproven ideas, they said. "They're much at better looking in the rear-view mirror than they are in through the windshield," Malven said. Still, by and large the venture capitalists and other industry experts said the venture ecosystem has benefitted from private equity firms providing more exit options for startups. Venture capitalists are often looking for home runs with their investments — companies that have the potential to deliver huge returns on their investments. That remains the primary focus of firms like his, said NFX's Flint. But not every startup is going to be a home-run investment, and having the ability to get a modest return on those kinds of companies is a good thing, he said. "More options for more capital is great for the ecosystem," Flint said. "It's great for founders, it's great for early stage VCs, it's great for customers." Got a tip about the venture-capital industry or startups? Contact this reporter via email at firstname.lastname@example.org, message him on Twitter @troywolv, or send him a secure message through Signal at 415.515.5594. You can also contact Business Insider securely via SecureDrop. Read more about the venture-capital industry and startups: SoftBank's $100 billion Vision Fund had a no good, very bad year in 2019, but was still in the black overall. Here's why experts are still struggling to make sense of it. Here's why Casper's disappointing IPO could spell disaster for other unicorns This LA founder just raised $40 million for his startup. Here's his unconventional advice to founders on putting together a pitch deck. Stunned venture capital investors say the government's move to kill the $1.4 billion acquisition of shaving upstart Harry's is a 'wakeup call' that could leave some types of startups unviable SEE ALSO: Here are the top 10 best performing venture funds that launched at the turn of the decade, which posted returns as high as 50% Join the conversation about this story » NOW WATCH: Watch Google reveal the new Nest Mini, which is an updated Home Mini
A founder whose startup was acquired by Cisco for $3.7 billion reveals the key decision that helped him build and sell his business
Startup acquisitions aren't a black-and-white issue. Jyoti Bansal, the founder of AppDynamics, recommends selling some stock...Startup acquisitions aren't a black-and-white issue. Jyoti Bansal, the founder of AppDynamics, recommends selling some stock in your company if you need cash now, but want to retain control over your business. That's what Bansal did years before he sold AppDynamics to Cisco for $3.7 billion. Click here for more BI Prime stories. Jyoti Bansal had recently launched his app-analytics startup, AppDynamics, when he was offered $350 million in exchange for the entire company. AppDynamics was still small, and for Bansal and his wife, the prospect of receiving even part of a $350 million sum was tantalizing. But Bansal turned down the offer. Instead, he sold a small amount of stock in his company to another investor. (For privacy reasons, Bansal declined to name the organization that made the $350 million offer or the investor that purchased the small number of shares.) Fast-forward to 2017: AppDynamics was acquired by Cisco for $3.7 billion. Bansal is now the founder and CEO of the automated software deployment platform Harness, which was valued at $500 million as of April 2019. Other startup founders may find themselves in the same boat. Research suggests companies today wait longer to go public than they did in years past. Meanwhile, fewer startup executives in 2019 predicted an acquisition in their future compared to 2018, and more were uncertain about their plans for an exit. When Bansal talks to founders who are considering selling their company in order to get some liquidity, he shares with them his personal experience. Selling your startup "doesn't have to be binary," Bansal tells them —either someone else holds complete control over the business or you do. If you're in need of cash, you can alleviate the pressure by selling some of your company's stock now and holding onto the rest until the business achieves its full potential — and a buyer like Cisco comes along. You can run a successful startup and still be strapped for cash It's typical for startup founders to hold equity in their company, meaning they own a portion of it. But until a liquidity event — which happens when the company goes public or gets acquired — the founders don't actually make money from that equity. So it's possible for a founder to be running a successful business and to still be strapped for cash. Turning down the $350 million offer was "one of the hardest decisions I ever made as a founder," Bansal said. "I had really nothing in the bank." But he could see that his business was growing quickly. In a few years, he remembered thinking, his business would be worth three to five times that amount. This scenario may be more common today than it was in years past, since companies are waiting longer to go public. A 2019 survey by the venture-capital firm First Round found that, of 950 founders, roughly 30% plan to wait five to seven years to IPO. Another 30% said they don't intend to IPO at all. Bansal said he speaks with some founders who are considering selling their business because they're exhausted, and eager to see the fruits of their labor. "They've worked hard for five years or 10 years to get there," Bansal said. "They want that cash." In other cases, investors might be pushing a founder to sell the company, Bansal said, especially if the VC firm is relatively new and "hungry to show an exit" in its portfolio. There's a middle ground between selling your company and retaining total control Selling the company you built from the ground up comes with its own set of challenges. Some founding CEOs have said they regretted handing over the reins and letting someone else determine their company's trajectory. Knowing that founders may regret selling their company, either because they missed out on a giant payday or because the acquiring organization didn't have the same long-term vision, Bansal reminds entrepreneurs that there's an alternative. He often counsels these founders to consider selling between 5% and 10% of their shares in the startup — even if the company is doing well and there aren't any obvious risks to the business. Harness, Bansal's latest startup, uses artificial intelligence to help software engineers undo changes that negatively affect site performance. It's raised a total of $80 million from investors including Alphabet's GV. Bansal still thinks selling some of his AppDynamics shares was a good move. As a founder, he said, "You don't have to be like, 'Either I sell and get all my financial security, or I don't have anything in the bank.'" Ultimately, deciding how much of your company to sell and when is an individual choice. "It really becomes a bit of a personal-situation question for a lot of entrepreneurs," Bansal said. "It's a life-impacting decision."SEE ALSO: How to sell your startup in 2020 for a boatload of cash, from founders who sold their companies for billions Join the conversation about this story » NOW WATCH: Taylor Swift is the world's highest-paid celebrity. Here's how she makes and spends her $360 million.