Understanding SPACs Better

by tradmin | April 7, 2021

Keep up to date with the latest research

“The premise of SPACs relies heavily on the reputation of the SPAC founder – their ability to raise funds from a broad group of shareholders”

We inspect in detail how SPACs work, how has been the performance of SPACs in the past, and whether it is a fad that would fade away soon or meant to stay on.

SPACs are a major movement in the IPO world right now. Over the past few years, firms such as Nikola, Draft King, and Virgin Galactic have all joined the market through SPAC (Special Purpose Acquisition Companies). This has been a record year for SPACs with nearly $34.6 Billion in SPAC gross proceeds so far in 2020. That’s 3-4 times higher than the $12.1 Billion in gross proceeds in 2019 and the $9.7 Billion in 2018, as per Dealogic.

These structures, also known as blank check companies give private firms an alternative to an otherwise costly and time-consuming IPO process, making them hugely successful these days. Some investors see strong potential in SPACs and claim them to be a more effective way for firms to go public, but serious critics suggest they encourage backdoor transactions that are not worth the risk and promote opacity.

How do SPACs work?

SPAC mergers are very similar to a reverse merger. They are generally formed by investors with expertise in a particular industry or business sector to pursue deals in that area. While forming a SPAC, the founders sometimes have at least one acquisition target in mind, but they explicitly don’t identify that target to avoid disclosure requirements needed during IPOs. Hence, the name blank check companies. Many have argued that companies like Nikola and DraftKings wouldn’t have made been able to go through the normal IPO process because of the strict due diligence involved in a typical IPO.

Investors who buy stocks in the IPO have no idea what company they are ultimately going to invest in. They are effectively buying the target company’s IPO in advance (say Virgin Galactic) without knowing the essence of what the target company does and the price that will be paid by the acquiring company (say Social Capital Hedosophia Holdings Corp). It is important to note that these deals will be usually structured in such a way that if the investors don’t like the target company they can get their money back by just backing out of the deal before the merger closes.

Unlike normal belief, SPACs don’t seem to be cheaper than traditional IPOs. They pay underwriters and institutional investors a fee of around 5-6% of the sum raised and gives the founder up to 20% of the shares for free. Even after accounting for the additional cash brought in by SPAC’s sponsors and other friends and family, SPACs aren’t any less expensive than IPOs today.

With a conventional IPO, promoters and directors, and officers sign a lock-in for 180 days from the IPO date. For a SPAC IPO, the standard lock-in period ranges up to one year after the close of the closed merger or De-SPAC deal, subject to early termination of the common stock sell at a fixed price (generally $12 or above) for 20 out of 30 trading days beginning 150 days after the closure of the De-SPAC transaction.

The money earned by the SPAC is deposited into an interest-bearing trust account. The funds are only used to make an acquisition or to refund the capital to stakeholders when the SPAC is liquidated. SPACs normally have two years for getting completed or winding-up. Some instances include the SPAC’s working capital being funded by the interest received from the trust. Following the acquisition completion, a SPAC is listed on one of the prominent stock exchanges.

In our opinion, the fees and structure for SPACs would continue to whittle down and can become better than IPOs where bankers have created high-cost structures. Our primary concern is all-around compliance, investor rights’ protection, initial and ongoing disclosures, and scrutiny that make it safer for the general public to invest through an IPO. Unless SPACs can match IPOs in terms of transparency and reporting and third-party scrutiny (analysts industry experts), they will continue to be the domain of a small bunch of fund managers and institutions engaged in dodgy financial engineering. As the overall crypto industry has realized that being regulated has its benefits, SPACs will need to evolve to have the same or better standards than IPOs.

The biggest SPAC deals made thus far

Pershing Square Tontine made waves in the rapidly growing SPAC space with its July debut. The firm raised $4 Billion with its IPO, a record for such investment vehicles and a new sign of Wall Street’s obsession with SPACs. The stock is currently trading at a share price of $23.90.

Churchill Capital Corp III, and MultiPlan Inc. entered into an agreement to merge in a deal worth $11 Billion that will take the U.S. healthcare services firm public. The deal will expand MultiPlan’s data analytics platform and is the largest SPAC merger ever. The merged company will be listed on NYSE and will operate under the name MultiPlan.

MultiPlan will receive up to $3.7 Billion of new equity that will reduce the firm’s debt. The transaction includes $1.3 Billion worth of common stock at $10 a share and $1.3 Billion in convertible debt that will be convertible at $13 per share.

Blackstone-owned Vivint is also one of the biggest corporations to enter into a SPAC arrangement since the IPO. Blackstone had explored an IPO or sale of the technology company and ended up merging with a SPAC raised by SoftBank’s Fortress Investment Group, in a deal valued at $5.6 Billion including debt.

 

The SPAC and PE camaraderie

The SPAC burst is taking place at a time when trillions of dollars are sitting in private equity and venture capital funds. For institutional buyers, SPACs serve as an incentive to buy into glittering businesses that would otherwise stay private. Analysts claim that these cash shell structures remain a lousy gamble for average investors. The majority trades at less than $10-$12 per share, the regular price at which SPACs first sell their stock to the public.

For private equity funds, they have a strong economic interest in the company due to less upfront spending. A private equity fund financing a SPAC typically purchases between 2% and 3% of the shares on the public listing, more often by buying businesses via SPACs to pay down their obligations more efficiently.

For 21% of the founders of SPACs, an institution is either linked to a private equity fund or one of the managers is operating a private equity portfolio simultaneously.

 

Why are SPACs so popular now when they have been around since the 1980s?

In the 1980s, SPACs acquired a shady reputation tied to penny stock frauds. In the past two decades, new laws and regulations helped add credibility to bolster investor confidence. SPACs have an appeal to private companies that wish to go public in this volatile environment because SPACs guarantee the transaction at a certain valuation as opposed to the IPO which are seen as riskier and may or may not go through once documents are publicly filed. For example, WeWork’s IPO got scuttled once it published its details and intense scrutiny of the company led investors to back out.

It can take months for companies to negotiate pricing, file documents, get necessary approvals and then finally list on stock exchanges SPACs have an edge here where companies can work with stakeholders that understand them well and can conclude transactions quickly. Given the long timelines associated with an IPO, the valuation of the underlying company can also take a nosedive.

IPOs require significant private information to be made available to the general public for scrutiny. A large number of companies, especially tech companies are uncomfortable disclosing such details and may instead want to go through the SPAC structure which has lower disclosure requirements.

Businesses going public through SPACs in 2020 have had higher valuation and share price growth than traditional IPOs; in September, United Wholesale Mortgage went public in the latest SPAC transaction with a valuation of over $16 Billion.
With the quality of management teams improving, SPACs are gaining traction and more institutional investors and HNIs are buying in. With SPAC funds getting bigger, the scale of blank check deals is also expected to increase.

A lot needs to be done before SPACs go mainstream

One of the biggest issues is that firms going public via SPACs can afford to bypass critical oversight and intense scrutiny, unlike conventional IPOs. For example – Nikola, who went public via the SPAC a few months ago has turned out to be the focus on multiple allegations lately. Federal authorities have since begun to pose questions and the SEC is also investigating how SPACs report their ownership and how compensation is related to the purchase.

Investors are at greater risk compared to IPOs as they do not know the target investee company at the time of investment.

SPACs may prove to be quite expensive. In certain blank-check transactions, the founders of SPAC have the right to purchase 20% of the resulting public business at rock-bottom valuation. For example, initial shareholders of Social Capital got 20% of the Company at $0.002 per founder per share while the public shareholders got the remaining 80% at $10 per share.

Target firms also give up more power as they sell to a SPAC that has its operating staff in place. They are therefore subject to a vote and control by the owners of the SPAC. This can lead to deal cancelations even after the announcement. 

Analyzing the performance of previous SPACs 

We analyzed 50 SPAC merger deals that happened between 2015-2019 and how they are faring now. Are they profitable, what share price are they at now and how does the valuation look like? Look at the table attached in Annexure I for the detailed analysis.

While Nikola Corporation has been the biggest loser after its SPAC merger closed, its valuation has dropped by more than 50%, and currently stands at $7.14 Billion. The biggest gainers have been in the healthcare segment, financial services, analytics, and consumer goods. For Immunovant and AdaptHealth in the healthcare segment, the valuations have soared by more than 85%. For SaaS firms like Clarivate Plc, the valuation leap has been a colossal $5.7 Billion. Open Lending Corp which focuses on lending now has a share price of $26.12 with a valuation higher by 80% than its SPAC price.

The underlying fact is although some good names get benefitted from the SPAC route, total losses outnumber profitable SPACs. The majority of companies have not been able to perform well. Talking about the 50 deals that we analyzed, 37 of them (74% of total) now have current share price trading at less than $10 per share with a current average market capitalization of less than $250 Million. The number further disappoints as 40% of those firms end up with share prices trading at less than $5 in the stock market.

Upcoming SPACs

On 7th October, Momentus Inc. reported its intent to sign a merger agreement with Stable Road Acquisition Corp Momentus offers a “last mile delivery” service for spacecraft, with a transfer vehicle that helps deliver satellites from a rocket to a specific orbit. The merging business entity will be named Momentus Inc. after termination of the deal and its shares are to be listed under the ticker symbol “MNTS” on Nasdaq.

This merger will create the first publicly traded space infrastructure company. Strategic partners and clients include Lockheed Martin and veterans like SpaceX and NASA. The combined company will have an estimated valuation of approximately $1.2 Billion following transaction close in January 2021.

Post-merger Momentus will have approximately $310 Million in cash on the balance sheet, to be funded by Stable Road’s $172.5 Million of cash held in trust (assuming no redemptions) and $175 Million from a fully committed common stock PIPE at $10 per share, including investments from private equity growth investors, family offices and niche top-tier public institutional investors.

Will SPACs fare in the long run?

Bill Ackman’s SPAC which recently raised $4 Billion for his Pershing Square Tontine Holdings is by far the largest SPAC ever raised. There will be no founder’s stake in the company saving up on huge SPAC fees. If the SPAC succeeds in taking a large private company public – this will be the best proof of concept for the SPAC structure.

The premise of SPACs relies heavily on the reputation of the SPAC founder – their ability to raise funds from a broad group of shareholders. A blank check company is a testament to the faith that the investors have in that person’s ability to find and execute a good deal. We believe that the future of blank check companies remains doubtful. Investors find SPAC deals as a better way to go public, while critics argue that the SPAC boom is just a trend that isn’t destined to last in the long run.

This article has been co-authored by Sargam Palod, who is an Investment Analyst at Torre Capital.

 

Related Posts

Crypto Scare: Is the Hype Settling Down?

by Sandeep Kumar

Keep up to date with the latest research

Crypto Volatility Index (CVI) hit a near one-year high of 127.03 on May 12th. The value of Coinbase, a big bitcoin exchange, has plummeted. A cryptocurrency that advertised itself as a reliable medium of exchange has gone bankrupt. A drop in cryptocurrency values has wiped away more than $300 Bn. The decline in cryptocurrencies is part of a broader shift away from riskier assets, which has been fueled by rising interest rates, inflation, and economic uncertainty resulting from Russia’s invasion of Ukraine. These reasons have exacerbated a “pandemic hangover” that began when life in the United States began to return to normal, damaging the stock values of companies like Zoom and Netflix, which profited during the lockdowns. However, crypto’s collapse is more severe than the stock market’s overall decline. While the S&P 500 has lost 18% this year, the price of Bitcoin has plunged 40% in the same time. Bitcoin has dropped 20% in the last five days alone, compared to a 5% drop in the S&P 500. Let us have a look at the kind of impact the crypto slump is creating on various stakeholders.

How the fall of TerraUSD and Luna has created panic?

The crypto shock occurred primarily after the sudden crash of the stable coin TerraUSD and Luna token. For the past six months, investors bought UST in order to profit from Anchor, a borrowing and lending platform which offered a 20% yield to anyone who bought UST and lent it to the protocol. The idea was criticized as it was likened to a Ponzi scheme which would not be successful. Karma hit the founder, Do Kwon, hard enough who is known for calling out critics as “poor”. Former Terra employees and retail investors in the crypto are holding the Kwon responsible for the losses. While he is still optimistic about his plans to revive Terra, Kwon is facing some major backlash in the form of lawsuits, fines and penalties.

Since May 10th, when TerraUSD and Luna began to show indications of difficulty, cryptocurrencies used by South Korean gaming firms for in-game purchases and trading have experienced erratic trading. As of then, C2X, which formerly used TerraUSD as its main platform thanks to a collaboration with Terraform Labs, the firm behind TerraUSD, which is now depegged from the US dollar, was trading at roughly 1,000 won. According to industry officials, game firms with products that include virtual coins and other blockchain functionality are still on high alert due to the recent collapse of the TerraUSD and Luna cryptocurrencies.

Wemix, a cryptocurrency run by Wemade Co., the maker of the play-to-earn game “MIR4 Global,” dropped by 28 percent during the TerraUSD fiasco before recovering back to the 2,700 won level on May 16th. MBX, Netmarble Corp’s virtual currency, has also plummeted by more than 80% to roughly 11,000 won, compared to around 64,000 won on May 6. Klaytn, a blockchain platform established by internet behemoth Kakao Corp., was also down to roughly 500 won, down from over 650 won on May 10th. Companies are keeping a close eye on the newest developments and concerns in the Bitcoin market in general since a loss of user and investor confidence might jeopardize the gaming industry’s Blockchain ecosystem, which many companies have already extensively invested in. Several crypto exchanges including Coinbase, Binance, Coinswitch Kuber, CoinDCX, even temporarily delisted Luna coin.

Sector euphoria that fueled the NFT boom has given way to more pessimistic conditions, forcing the mostly speculative NFT market to face reality. NonFungible, an NFT data business, stated that transaction volume was down 47 percent in Q1 2022 compared to the previous quarter. The figures are even more dramatic when looking at daily average sales, which fell by 92 percent between September 2021 and April 2022. Such challenges are far from insurmountable. For an NFT market that has been weak on value proposition but strong on hype, a washout was always going to happen. This data will be seen by critics of NFTs as the beginning of the end for projects that have been marked by over-promises, rug pull scams, and flash over substance. A reduction in speculation is more likely to refocus entrepreneurs on adding clear value to digital assets. A more clearly defined use case with a highly motivated and well-capitalized stakeholder to assist drive forward development is required to propel innovation forward.

What to expect in the longer run?

The fall of USDT has reflected poorly over the entire stable coin industry. Developers created functional and safe algorithmic in order to make it less susceptible to government oversight and more resistant to inflation than fiat-backed stable coins. However, they have lost their peg and failed. Some crypto analyst even suggest that the idea of algorithmic stable coins will now be put to rest. On the other hand, despite the volatility in the crypto industry since the beginning of 2022, private equity and venture capital investment into the crypto and Web3 space have been optimistic. The recent shocker has led Terra’s major investors to decide whether to help bail the project out or pull back and escape. While Lightspeed Venture Partners, one of the investors of Luna token, is planning to double down specifically in infrastructure, DeFi and emerging use cases, there is a possibility that the DeFi hype may now calm down. Until economic growth and corporate earnings forecasts are altered, there will be a sluggish flow of fresh money into equities, commodities, bonds or cryptocurrency markets in the coming months.

The arising concerns due to the crashing crypto market have been drawing attention to the regulation of cryptocurrencies. From USA to India, public officials are calling out the need for a regulatory framework to guard against the volatility risks of crypto. The US Treasury Secretary Janet Yellen has called for stable coin regulations to mitigate the risks, ensuring there are no gaps in the regulation. In India, experts are in a process to lay out tax policies for cryptocurrencies. However, naysayers believe that it could disturb the huge potential that the crypto industry brings in terms of intersection of blockchain, machine learning and job creation. Lack of clarity on policies is discouraging innovation in the sector and forcing job seekers to look for opportunities outside India where there are more crypto friendly policies.

A wake-up call for investors

There is no doubt that crypto is a volatile space. The crypto market has survived all this due to the underlying premise that the blockchain is a powerful tool that can change the way the next generation of digital products is built. However, some investors try to make quick money out of these volatile markets. Several people lost their entire life savings through crypto investments. It is advised that investors should research the projects, the technology and promoters before investing in tokens and not just follow returns blindly. Shocks like the recent one will act as a wake-up call and likely make investors mature. As per Sidharth Sogani, founder and CEO of Crebaco Global, a rating, research and intelligence firm focused on blockchain and crypto, more trouble is yet to come. He mentions that as for the crypto market is concerned, we might see a further down or a sideways movement for the next three to six months before it enters the bull market again.

So next time you make any investment decision, especially in a volatile market like crypto, be sure to be patient and do extensive research instead of running after quick returns.

– – – – – 

This article has been co-authored by Sayan Mitra and Tamanna Kapur, who is in the Research and Insights team of Torre Capital.

Valuation Reset: Who are the gainers and losers?

by Sandeep Kumar

Keep up to date with the latest research

From a year of record funding to valuation check, how have things changed?

For any startup, raising funds is an inevitable part of the journey, and it highly depends on how the company is valued. VC funding sky-rocketed in 2021 with over $643 Bn going into global venture investment. This marked a 92% growth compared to the previous year. Consequently, we witnessed more than 10 new unicorns being minted each week on an average, adding around $1.8 Tn in value.

The amount of funds that went to higher-risk, early-stage startups was notable in 2021 as it witnessed almost 100% YoY growth in early-stage funding, with $201 Bn in about 8,000 startups. However, the good times do not seem to continue in 2022. Often, startups overvalue themselves in order to raise funds without giving up much of their equity. This may be detrimental in the long run — in case the company struggles to meet the expectations of the investors, it will have to raise funds at a lower valuation in the future rounds. Moreover, external factors like geopolitical tensions, inflation, underperforming IPOs and public markets have also affected the startup valuations. Through this article, we try to understand the different reasons for the decline in valuations and the kind of impact it could have on investors and startups.

Source: Crunchbase

Valuation reset for overvalued tech unicorns

After the hyped market in 2021, venture capitalists are now renegotiating their deals. As reported by WSJ, Tiger Global Management which has been one of the most prolific startup investors is renegotiating the investments for several companies, reducing the valuations by more than 20%. Manhattan Venture Partners also noted a nearly 10% plunge in the stock purchases of certain private companies in the first month of 2022. Some high-growth startups are even scaling back the funding rounds or delaying their IPOs that could value them lower than expected.

Let’s have a look at some recent examples where startups have been revalued by the investors or have themselves reset their valuations.

  • Philadelphia-based growth startup, Dbt Labs Inc, scaled back its funding round that valued it at around $4 Bn instead of the initially negotiated $6 Bn.
  • Fidelity, which has an investment in fintech giant Stripe, recently marked down the value of the company by over 9%.
  • The delivery giant, Instacart slashed its valuation by about 40%, valuing the company at $24 Bn down from its earlier valuation of $39 Bn.
  • Startups like OYO and Pharmeasy, who were preparing to go public are now considering downsizing their IPO valuations considering the market conditions.

The effect of tech sell-offs in public market is also visible in the private secondary market as there is a heightened interest in selling shares at a discounted price, typically 10% — 30% lower than the last quarter of 2021. With fewer IPOs, shareholders are looking for liquidity solutions in the secondary market, ready to sell their shares at a discount.

VC pull-back and a shift in focus

As market correction started happening in the public markets, its effects have been trickled down to the private market as well. As a result of huge tech sell-offs and dropping valuations in the public market, many VC firms have tightened their grip on startup funding as well. Investors are rechecking the startups’ valuation at a lower level to account for the pressure on the public peers. Firms like Tiger Global Management and D1 Capital have pulled back from investing in late-stage startups. The growth stage and later-stage funding seem to be stagnated. At times like these, some startups may be in desperate need of raising funds, so they will have to lower down their valuation expectations to be able to raise some cash. Meanwhile, startups that had raised huge rounds last year are being advised to use their funds wisely and prepare for even worse times.

The plunging tech stocks facilitated by inflationary concerns and rising interest expectations added to the pessimistic lending behaviour. The stocks of public companies, which typically guide the valuation of startups, saw a decline in valuation. By the end of January, companies that went public last year were down an average of 32.6% since their listings. Less proven companies performed even worse. Not only did the drop hold back investors, but also delayed the startups from going ahead with the IPO. The reset in startup valuations was well predicted, but what is surprising is that historically there has always been a long lag in the private market’s reaction to a public market slowdown, now it’s much faster.

However, things are not the same for all the sectors. While consumer businesses have taken more brunt of the pullback, companies dealing with blockchain, cryptocurrency, and cybersecurity have continued to attract VC interest. Despite the tight funding hand, investors’ focus has been shifted to seed and early-stage startups. The risk may be high with early startups and they are far away from taking a meaningful exit, but they allow investors to write smaller checks that could still give them some returns.

How is the valuation reset going to impact the stakeholders?

A drop in valuations is a double-edged sword. Investors may welcome the dip in valuation as it would mean that they would get new deals at a meaningfully lower value. VCs would love to offer lower prices on new deals, but also want their existing portfolio companies to be marked up in subsequent rounds. There is also a significant chance that the public companies, that guide startup valuations, will normalize back to the mean of the last couple of years. Consequently, VCs have tightened their lending capacity and shifted their focus to early-stage startups. Many startups had raised huge amounts for the early rounds, which raised the expectations and hence the valuation of the company. Now, slashing their valuation in order to raise funds would mean that startups will have to dilute a greater chunk of their equity.

The kind of valuation reset that we have started to witness was much needed after all the craziness in 2021. However, whether this is just a minor correction or has a long-term impact is difficult to determine now and we will have to wait and see at least till Q2 or Q3 of this year to understand where this goes. Till then, startups need to utilize their available cash prudently.

– – – – – 

This article has been co-authored by Tamanna Kapur, who is in the Research and Insights team of Torre Capital.

How will the Cybersecurity Sector Rise in a Digitized World?

by Sandeep Kumar

Keep up to date with the latest research

Every now and then we keep hearing about instances of cyber threats and attacks wiping out millions of dollars from various organizations. The cases have risen as several companies went completely digital, especially post-pandemic. 2021 saw a record rise in cybercrime with ransomware attacks rising by 151%. As businesses realize the importance of digital security, they are taking steps to keep their digital stack secured, making cyber resilience a top business priority. As per a survey by WEF, nearly two-thirds of businesses find it difficult to deal with cybersecurity incidents due to a lack of skills. Hence, they need to rely on partnerships with security firms to secure their business from such threats. Cybersecurity is a massive market with over $150 Bn in annual spending. It has led to a positive outlook toward cybersecurity startups. As a result, VCs are betting their money on security startups. 2021 is considered a record-breaking year for the sector as cybersecurity startups raised over $29 Bn in venture capital, outpacing the previous two years combined.

Source: 2022 Cybersecurity Almanac | Momentum Cyber

VC activity and trends

VC investments in cybersecurity have grown gradually over the years. In 2021, VC firms had a really big appetite for cybersecurity as the deal volume crossed $29 Bn, seeing a YoY growth of over 136%. With this, the size of the funding rounds has also increased for security startups, as 82 financing rounds grabbed a deal of more than $100 Mn.

As the startups in the sector are attracting VC money, there has been significant growth in the number of unicorns. About 30 cybersecurity startups achieved the unicorn status last year, with a few of them achieving the mark in just a few years of their inception. For instance, Orca Security, which was founded in 2019, raised $550 Mn in October at a valuation of $1.8 Bn. Wiz, a cloud security provider which was founded in 2020, is now valued at $6 Bn!

According to Momentum Cyber, cloud security has been the favourite segment to receive financing with a total of $4.3 Bn, followed by identity and access management receiving $3.4 Bn in funding, and endpoint security with $2.8 Bn. Geographically, the majority of the cybersecurity startups that received funding, securing over $17.4 Bn, belong to the U.S. followed by Israel (as per Crunchbase data).

Source: 2022 Cybersecurity Almanac | Momentum Cyber

Cybersecurity investment trend forecast

Based on the current momentum and growing threat landscape, the cybersecurity sector could see an even bigger year in 2022. This year, cybersecurity startups could see a market opportunity in the following areas, thereby drawing investors’ interest.

 Cryptocurrency

The crypto market is booming across the world. However, the area is also prone to growing amounts of cyberattacks. Most recently, Axie Infinity was a victim of one of the biggest crypto heists worth over $600 Mn. There are multiple cases like these, hence crypto security platforms (like Fireblocks) are expected to see investors’ focus. According to the Managing Director at Insight Partners, areas within crypto security, such as coin monitoring will see a critical focus. It is expected that large payment companies and even traditional market exchanges will carefully look at the space around security.

 Compliance and Auditing

2022 is likely to see a move towards “shifting left of compliance”, which intends to find errors early in software delivery for compliance and third-party audits. This also includes smart contract security audits. Some startups already working in this space include CertiK, Certora, and OpenZeppelin.

 Web3 and Metaverse

A large number of startups are exploring the web3 and metaverse space. This means startups involved in securing user identity and ownership could attract VC money. Identity management and authentication have already been popular in 2021, however, startups looking beyond and into the future of the internet could win big.

How to spot promising early-stage cybersecurity startups?

The number of cybersecurity unicorns and new startups in the sector is multiplying. As many startups are attracting VCs and raising funds at higher valuations, it is important to spot promising startups early-on to get higher returns.

YL Ventures, an America-Israeli VC firm specializing in early-stage cybersecurity investments, suggests some benchmarks that you can look out for. Some of the early-stage startups backed by YL Ventures include Orca Security, Enso Security, Grip Security, Piiano, Valence, and Eureka.

 Initial Revenue:

Series A companies with $500k in ARR attract strong investors. Best startups in the sector manage to reach the $500k benchmark in less than 18 months of operation. From this level, top-performing startups can reach $1 Mn in 18–24 months, which largely depends on the company’s ability to get relevant customers.

 Average Contract Value:

Contrary to founders’ concern, Average Contract Value (ACV) is rather a misleading point of comparison as cybersecurity goods and services, along with their business models, sales motions, and customer profiles, are far too divergent when compared across the industry. However, despite the divergence, it is expected that growth-oriented companies can improve their ACV over time as the company develops additional features and improves their ability to secure large enterprise customers.

 Initial Paying Customers:

On average, successful US-based cybersecurity startups will have closed their first payment within 12 months of their seed round. A company should aim to secure at least one paying customer one full year from initial funding. As per YL Ventures, at around the 18-month mark, a startup should aim for at least 10 paying customers. However, security startups in traditional and heavily regulated sectors may have a smaller number of contracts. They should instead focus on the size of the contract.

 Hiring:

On average, successful startups will have a go-to-market (GTM) executive within the first year of securing seed funding. Apart from this, successful startups tend to have about 25 full-time employees by the 18-month mark, and the number doubles at around two years.

Cybersecurity’s demand on rise

The number of cyber threats is growing in current times, and they are not expected to decline in the near future. It is expected that over the next five years, global cybercrime costs will be rising by 15% per annum, and is estimated to reach $10.5 Tn by 2025. As businesses have made a shift towards a digitized economy, they need to protect themselves from such malicious attacks. Security companies are building themselves continuously with the necessity to deal with the present and possible threats. Contrary to the horizontal approach which focuses on enterprise applications, cybersecurity has now been focusing on the vertical approach so that specific pain points of each industry can be addressed.

The global spending on cybersecurity products and services is estimated to reach $1.75 Tn between 2021 and 2025. This number suggests the huge TAM potential that the industry holds in ensuring cyber safety. As the security concern comes to the forefront in business discussions, the cybersecurity bubble is going to rise and is not expected to burst any time soon.

– – – – – 

This article has been co-authored by Tamanna Kapur, who is in the Research and Insights team of Torre Capital.

Right Menu Icon
Cancle

Login to your Account

Sed ut perspiciatis unde omnis iste natus error sit voluptatem

Forgot Password?
cross

Select Country