03 Sep Scrutiny of Security Start-Ups May Signal Shift in Venture Funding
SAN FRANCISCO — A funny thing happened to Orion Hindawi while he was raising $120 million for his cybersecurity start-up last month: Investors asked him about profits.
A year ago, Mr. Hindawi raised $90 million, followed by an additional $52 million this year from the Silicon Valley venture firm Andreessen Horowitz. Investors were willing to place a $900 million valuation on his company, called Tanium, without so much as a glance at revenue or profit margin.
This time, not so. As he made the rounds with investors like Institutional Venture Partners and T. Rowe Price, Mr. Hindawi said, he was asked to show sales and profit margins. “A lot of the funders we spoke with are starting to get really scared,” he said. “This time the questions were, ‘Is this a sustainable business? Do you guys actually make money?’ ”
That sudden dose of skepticism about cybersecurity start-ups, which as a group recorded record investments last year, may be a harbinger of change across the entire technology sector. With global stock markets struggling, investors may be ready to move away from the focus on growth over profits of the last few years.
If that shift proves to be more than a blip, it will represent a sharp turnabout. Cybersecurity entrepreneurs in recent years have had an easy time raising money as breaches at the nation’s largest companies and government agencies have become front-page news.
In 2014, American venture capitalists poured $1.77 billion, a record amount, into private security start-ups, topping the previous record of $1.62 billion invested in 2000, at the height of the dot-com bubble, according to Dow Jones VentureSource.