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He is an award-winning pioneer in the fast-growing cyber security industry, boasting the intelligence community and Britain’s political establishment on his payroll.
It is also an issue that has seen US private equity consider a possible £200m payout to the management team from the out-of-pocket house.
But there are clouds hanging over Darktrace, with analysts criticizing its business model and concerns about its workplace culture, not to mention an escalating legal battle over a multibillion-pound fraud.
Within weeks, a High Court judge will decide whether Darktrace founder Mike Lynch, the British billionaire entrepreneur, can extend his fight against extradition to the US.
There, the man sometimes dubbed Britain’s answer to Microsoft founder Bill Gates faces fraud charges over the $11bn (£8.5bn) sale of Autonomy, the technology business he founded, to Hewlett-Packard.
It hasn’t been going well for the 57-year-old tech giant.
Lynch’s former lieutenant, Autonomy Finance Director Sushovan Hussain, was jailed for five years on charges related to similar incidents.
In January, the Supreme Court ruled in a civil fraud case brought by HP that Lynch had defrauded HP into buying the company.
Almost immediately, then Home Secretary Priti Patel decided that Lynch could be extradited. The charge carries a maximum sentence of 25 years in prison.
Lynch’s only hope of avoiding extradition is the right to appeal, which is expected to be decided this month. Failure to do so will cause the transmission wheels to move.
The uncertainty casts a shadow not only on Lynch, but on Darktrace, although it claims to be unaffected by Lynch’s legal woes.
Darktrace has at least a decent sized corner of the Atlantic politics and intelligence community. The advisory board includes former MI5 director Baron Evans of Weardale, 35-year CIA veteran Alex Wade and former British home secretary Amber Rudd. Former Tory minister Lord Wilts is on the board, while another ex-CIA man, Marcus Fowler, heads the US branch of Darktrace Federal.
As Darktrace prepared to float on the stock market last year, Rudd came out to hit out at the company’s efforts to distance itself from Lynch, a largely female leadership team he lamented is starving because “the only name that seems to be mentioned is the founder.”
Documents filed before the float went some way to explaining that.
Among the risks associated with an initial public offering, Darktrace acknowledged the prospect of liabilities from the sale of autonomy.
These will add to potential money laundering charges, if it is found that the deal resulted in Lynch’s investment vehicle, Invoke Capital, funding £6.6m of start-up loans it extended to Darktrace as it grew.
But the links to Lynch don’t end there.
According to one person familiar with the company’s early days, Lynch was more than a source of funds.
“It was reported that it was an early investor who gave them some office space,” they said.
“It was his idea, he was the inventor, he brought the first humans, he named it, he named the immune system. [the AI cyber-defence system that has become Darktrace’s flagship product]He said.
He remained a member of the company’s science and technology advisory council until earlier this year, when coverage of the Lynch trial reached fever pitch. They still own more than 12% of the company with his wife, Angela Bacares.
This week, the company is preparing to announce its first financial results as a public company. But the longer-term backdrop is continued buying interest, which could soon be taken private again, from US private equity group Tomá Bravo.
Judging by the buoyant stock market reaction since bidding interest came out, a deal could be worth around £3.6bn, Lynch said, adding that the claim would have been higher had it not been for “retaliation” by US authorities.
Even at that price, Lynch & Baccarés’ share of the revenue would be over £430m.
The rest of the management team, including chief executive Poppy Gustafsson, could share up to £200m in pay, according to stock market reports last month.
But one of Darktrace’s staunchest critics, hedge fund ShadowFall, argues that this group of people should give investors pause.
“The prevailing view is that the current management of Darktrace has very little to do with autonomy,” said Matthew Earle of Shadowfall Management. .
“This couldn’t be further from the truth.”
According to ShadowFall’s research, about 41 former Autonomy employees ended up at Darktrace, and more than 25 of those left, including Gustafson and Chief Strategy Officer Nicole Iga. During Lynch’s civil fraud trial, HP’s lawyers described Eagan as part of a trusted “cabal” around Lynch that had masterminded the accounting strategies that fueled the US company’s legal claims.
Earl raised concerns about the proportion of Darktrace’s budget that goes into research and development in a fast-growing area like cyber security.
The company claims that this cost is lower than its competitors. Rival Vectra openly mocked Darktrace’s approach on its website in a now-deleted post.
Another question mark, Earl said, is the speed at which companies that have paid for Darktrace’s much-vaunted AI-based protection are choosing not to renew their contracts.
Darktrace typically works with three-year contracts, Earl said.
This means that the reported churn rate of 6-8% is likely to be much higher as most of the customers signed up within the last two years and remain locked into their contracts. This, ShadowFall argued, covers the amount of withdrawals between those entitled to a defect with a competitor.
“We think it’s between 20 percent and 30 percent, which is much higher than the competition,” he said earlier.
If churn rates are that high, ShadowFall’s analysis suggests that it might be due to a highly aggressive sales culture.
Earl says he’s identified an unusual number of complaints about toxic workplace behavior on the job review website Glassdoor to pursue new business.
A former sales department employee who spent more than a year in the company, there is some truth in this.
“Everything we did was monitored by software on our computers,” he said.
“Sometimes they keep track of the number of emails you send, asking why you took a five-minute break or why there isn’t enough activity on your laptop.”
As the company prepares for its stock market float and seeks to burnish its credentials as a market leader, the employee puts this down to a high sales culture.
“It was stressful and sometimes toxic,” they said. “On the other hand, it was very profitable.”
Darktrace did not return a request for comment.
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