Extrahop Acquisition: Network Security Startup Exits for $900M

ExtraHop Acquired for $900 Million by Private Equity Firms

Previously, Seattle-based network security company ExtraHop experienced significant growth, nearing $100 million in Annual Recurring Revenue (ARR). Discussions regarding a potential Initial Public Offering (IPO) in 2021 were also taking place. However, an IPO is currently off the table, as the company announced its acquisition this morning.

The acquiring entities are Bain Capital Private Equity and Crosspoint Capital Partners. They are investing in a security platform designed to manage controls within hybrid environments. This capability is increasingly valuable as organizations adopt a mix of on-premise and cloud-based assets.

Network Detection and Response (NDR) Market

ExtraHop operates within the specialized Network Detection and Response (NDR) market segment. Jesse Rothstein, ExtraHop’s CTO and co-founder, emphasized the enduring focus of the company. He stated that their core mission has consistently been to derive actionable intelligence from network traffic data.

Rothstein believes NDR technology is particularly effective in the current threat landscape, explaining, “ExtraHop’s north star has always really remained the same, and that has been around extracting intelligence from all of the network traffic in the wire data.”

The company leverages both analytics and machine learning to identify and pinpoint threats, irrespective of the infrastructure deployment method utilized by its customers.

Evolving Threat Landscape

Rothstein anticipates a future characterized by increasingly distributed environments, diminished network perimeters, and more permeable networks. He highlighted the importance of robust detection and response capabilities.

“So the ability to have this high-quality detection and response capability utilizing next generation machine learning technology and behavioral analytics is so very important,” Rothstein added.

Bain Capital’s Perspective

Max de Groen, Managing Director at Bain Capital, explained the firm’s attraction to the NDR sector and their assessment of ExtraHop. He noted that ExtraHop distinguished itself as a leading technology provider.

“As we looked at the NDR market, ExtraHop, which has spent 14 years building the product, really stood out as the best individual technology in the space,” de Groen stated.

Continued Growth in the Security Market

The cybersecurity market continues to demonstrate robust growth and potential. Both emerging startups and established companies are actively competing for market share. Private equity firms are frequently seeking to consolidate services within the security space.

Recent activity includes Symphony Technology Group’s acquisition of FireEye’s product group for $1.2 billion, following their purchase of McAfee’s enterprise business for $4 billion. These moves indicate a strategy to build comprehensive enterprise security solutions.

ExtraHop’s Journey

Founded in 2007, ExtraHop secured over $60 million in funding, as per Crunchbase data. The company successfully transitioned from a hardware appliance provider to a cloud-based service model.

Its ARR trajectory suggested a likely public offering, rather than a private equity acquisition, indicating the strong position the company had established.

Analyzing the Financial Data

In January 2020, ExtraHop shared its growth metrics with TechCrunch. The company reported $150 million in bookings for 2019, representing an increase from the $100 million achieved in 2018.

Specifically, ExtraHop announced a second consecutive year of 40% growth in 2019, and projected exceeding $100 million in Annual Recurring Revenue (ARR) by the end of 2020. At that time, the company’s public relations team indicated a potential Initial Public Offering (IPO) in 2021.

Considering these figures, the $900 million exit price appears somewhat unexpected. Even assuming a growth deceleration from 40% in 2019 to 25% in 2020, the company would likely have reached a size suitable for an IPO within the year, and thus be adequately positioned for a public offering currently.

Based on comparable market valuations, a 25% growth rate would typically justify a valuation multiple of approximately 13x its annualized revenue. Given expectations that ExtraHop surpassed the $100 million ARR threshold in 2020, it’s reasonable to assume its current size is larger as the second quarter of 2021 concludes. Multiplying a figure exceeding $100 million by 13 yields a valuation significantly higher than the reported $900 million exit price.

What explains this discrepancy? During a conversation with the company this morning, TechCrunch verified the $900 million sale price and learned that private equity firms will hold a “significant” controlling stake. However, ExtraHop’s founders will retain a minority ownership position following the completion of the transaction.

The investment group conveyed confidence in ExtraHop’s current performance, stating to TechCrunch that they anticipate growth of 40% or more this year. They also expressed optimism regarding ExtraHop’s capacity to generate continued value within the competitive cybersecurity landscape.

Rothstein characterized the deal as a “milestone, not a conclusion,” while de Groen affirmed that his firm would be investing “substantial capital” to support the company’s future expansion.

This transaction represents a positive development for the Seattle technology ecosystem – any exit approaching a billion dollars is noteworthy for a startup community. However, the comparatively low valuation, below 10x trailing revenues, for a rapidly expanding cybersecurity firm raises questions.

Several aspects of ExtraHop’s business remain unclear, as its S-1 filing was never made public.

Despite these uncertainties, the deal has been finalized, marking another exit for a startup within the $100 million ARR range. Monday.com is next in line, scheduled to price its IPO tomorrow and begin trading on Thursday.