by Brenon Daly
Fittingly enough, there are two main types of ‘dual tracks.’ In most cases, dual track refers to a company simultaneously pursuing both the two exits available to startups, M&A and IPO. By keeping one foot on both roads to an exit, an in-demand startup can cultivate new sources of capital on Wall Street while, at the same time, pressuring any acquirer to effectively outbid the public market. Assuming the laws of economics hold, when supply remains constant, any additional demand invariably boosts pricing.
There is also a smaller-scale version of that process, which happens at a level below Wall Street. In a ‘dual track lite,’ a startup also explores an outright sale and a capital raise at the same time. But in this case, the funding comes once again from private-market sources, such as VCs, rather than the public market.
Of course, to be able to effectively – and profitably – dual-track, a startup needs strong interest from the demand side, from both potential backers and potential buyers. And right now, no other segment of the enterprise IT market has more dollars available from both investors and acquirers than the information security (infosec) market.
When it comes to M&A, the 451 Research M&A KnowledgeBase shows acquirers pay two to three times higher valuations in infosec deals than they do in the overall broad market. (Since 2017, our data shows the prevailing multiple in infosec transaction at nearly 6x trailing sales.) And for those security startups pursuing the other track (funding), there is an unprecedented amount of money available from VCs. In just the past month, for instance, we’ve seen big-money fundings for infosec startups, including:
$120m for SentinelOne. (Subscribers to the premium of 451 Research’s M&A KnowledgeBase can see our proprietary estimates for SentinelOne revenue from 2016-19.)
$100m for Auth0. (Subscribers to the premium of 451 Research’s M&A KnowledgeBase can see our proprietary estimates for Auth0 revenue from 2016-18.)
$100m for Vectra Networks. (Subscribers to the premium of 451 Research’s M&A KnowledgeBase can see our proprietary estimates for Vectra revenue from 2016-19.)
But this flood of VC money has skewed the dual track, highlighting just how inflated funding valuations have gotten recently. Consider the two different outcomes, separated by less than three years, for a pair of rival firms. At the end of May, Dashlane raised $110m. We would note that’s exactly the same amount of money that rival password manager LastPass got when it sold the whole company to LogMeIn in October 2015. All in, Dashlane’s funding valuation was roughly 5x richer than the terminal value of LastPass, according to our understanding.