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Cybersecurity firm Arctic Wolf, which raised $150 million last July and tripled its previous estimate ($4.3 billion), opted for all debt in its latest funding round, in a sign that the cybersecurity firm is getting tougher. The company announced today that it has acquired $401 million in convertible notes with participation from Owl Rock’s new and existing investors Viking Global Investors, Ontario Teachers Pension Plan and Neuberger Berman. If an initial public offering (IPO) happens, as Arctic Wolf once planned, the debt will be converted into shares at par.
The Information reported in late August that Arctic Wolf was in talks to raise $300 million, making the round a success in a punishing macroeconomic environment. As cybersecurity startups continue to attract funding (see: NetSPI’s $410 million growth round), with investments in the sector expected to total nearly $4 billion in Q2 2022, deal flow and valuations are starting to slow, Crunchbase reported in July. This week, Crunchbase also noted that while cyber startups saw more funding in H2 than in 2020 ($8.9 billion), funding for VC-backed cybersecurity startups is not on pace to beat last year’s high ($23 billion).
“We have evaluated various options, including increasing cultural equity, but [debt] It was the best for Arctic Wolf, the highest growth rate for us,” Schneider said in an email. “In a challenging economic environment, safety remains a top priority for companies. Being able to secure this amount of funding from both new and existing investors is a testament to what our team is doing and that Arctic Wolf is recognized as one of the top performing private software as a service companies. by investment community”.
The debt brings Arctic Wolf’s total revenue to $900 million, with $499 million in venture capital. CEO Nick Schneider told TechCrunch that the debt will be focused on product development, strategic mergers and acquisitions investments, and global expansion, particularly growing the company’s presence in the Asia Pacific region and Australia and New Zealand.
Brian Nesmith and Kim Tremblay co-founded Arctic Wolf in 2012 believing that cyber security had an “efficiency problem”. Nesmith, now executive chairman, was the company’s CEO until August 2021, assuming the role after Schneider served as Arctic Wolf’s president and chief revenue officer.
Eden Prairie, Minnesota-based Arctic Wolf originally built solutions to target mid-sized enterprises that couldn’t afford dedicated security teams for employees. But in the coming years, Wolff will offer its products in larger enterprise markets, develop security awareness and training programs, and launch a partner program with standard support services.
“Arctic wolf [adopts an] An approach to security through a cloud-native platform,” Schneider said. “Safety is not just an equipment or manpower problem – it’s a process problem. It needs to be solved with a fundamental and unified platform that delivers actionable intelligence. Unlike other industries like Customer Relationship Management, Salesforce or HR, Workday has never done this system of record platform in cyber security – until Arctic Wolf.
Arctic Wolf’s flagship software platform provides a single view into cybersecurity threats from data from company endpoints, cloud environments and networks. The likes of Symantec, Cisco and startups like Rapid7 do the same, but Schneider says Arctic Wolves stands out with its ancillary security teams. The company’s consultants monitor organizations’ data and learn their businesses, requirements and improvement measures, customizing Arctic Wolf software for their environment.
For example, to reduce alert fatigue (it’s not uncommon for security teams to receive hundreds of alerts a day, many of which are false positives), Arctic Wolf uses machine learning to verify cybersecurity issues. Of the more than 2.5 trillion weekly observations made on the company’s platform, fewer than five are sent to the average customer each week, Schneider said.
“The biggest challenge facing both security vendors and internal security teams is that threat actors are working around the clock to exploit and attack their victims,” Schneider said. “As our industries race to stay one step ahead of threat actors, much of the innovation in cybersecurity has been outsourced, creating an ever-present challenge for cyber teams defending all types of businesses.”
Arctic Wolf has more than 3,000 customers worldwide, more than 100 state and local government agencies in the U.S. Schneider declined to disclose current revenue — last September, Arctic Wolf reported $200 million in annual recurring revenue for the past 12 months — but at the time of the outbreak, Hybrid workflows continue to drive Arctic Wolf business growth as organizations struggle to protect their data and systems remotely.
“[The pandemic] It has sparked a digital transformation trend that has been a long-term driver for Arctic Wolf’s business and next-gen security spending in general,” added Schneider. “Furthermore, cyber security and the broader enterprise industry are experiencing significant skills shortages as businesses seek to have in-house security capabilities to prevent and defend against these attacks.”
Artic Wolf’s embrace of debt comes as the broader VC market slows. According to Crunchbase data, VC-backed startups in the US raised nearly $15.9 billion in debt through the first seven months of the year. In the year At the same time in 2021, startups had about $13.3 billion in debt.
Debt is not a death sentence. For companies with high recurring revenue and visibility into future performance, debt has historically been a great asset. Loans can provide money to grow while preventing dilution; Profitable, cash-flow-positive, late-stage startups — for example, Spotify, which raised $1 billion in convertible debt before its IPO in 2016 — are prime candidates because defaults on debt could derail the company.
Owl Rock’s David Jarr and Ilan Aharoni expressed confidence in Arctic Wolf’s latest growth direction, which — unsurprisingly — may or may not include an IPO. Schneider hinted in January that the company might go public later this year, but has played down the talk in recent months.
“When we first invested in Arctic Wolf, we saw a huge market opportunity, a clear market leader and a fantastic team,” said Jarr and Aharoni. “While the team’s execution is world-class, we believe the company is only at the beginning of its journey. Today, organizations of all sizes lack the capacity or knowledge to adequately protect themselves from cyber threats. Arctic Wolf fills that gap with a one-stop, cloud-native solution and delivery model. We are very pleased to strengthen our relationship with the company.
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