Cyber-company Arctic Wolf raises $401 million in debt and eyes potential IPO

In a sign that pure equity funding is becoming increasingly difficult to come by, cybersecurity firm Arctic Wolf, which last July raised $150 million at triple its previous valuation ($4.3 billion), opted for all debts in its last funding cycle. The company announced today that it has secured $401 million in convertible notes from Owl Rock with participation from new and existing investors Viking Global Investors, Ontario Teachers’ Pension Plan and Neuberger Berman. Should an initial public offering (IPO) take place, as it did at some point in Arctic Wolf’s plan, the debt will be converted into equity at a premium to the price.

The Information reported in late August that Arctic Wolf was in talks to raise $300 million, making this round a breakthrough success in a trying macroeconomic environment. As cybersecurity startups continue to attract funding (see: NetSPI’s $410 million growth cycle), with investments in the sector totaling nearly $4 billion in Q2 2022, deal flow and transaction sizes are starting to drop, Crunchbase reported in July. This week, Crunchbase further noted that while cyber startups received more funding in the second half than all of 2020 ($8.9 billion), funding for VC-backed cybersecurity startups is not on the way. to reach the peak of last year (more than 23 billion dollars).

“We evaluated a number of different options, including a traditional capital raise, but [debt] was best for Arctic Wolf, for our hyper-growth stage,” Schneider said via email. “In a turbulent economic environment, security will remain a top priority for businesses. To be able to secure this amount of funding from new and existing investors is a testament to what our team continues to accomplish and reflects the fact that Arctic Wolf continues to be viewed as one of the private software companies in as the most efficient service. by the investment community.

The debt brings the total raised by Arctic Wolf to $900 million, including $499 million in venture capital. CEO Nick Schneider told TechCrunch the debt will be allocated to product development, strategic investments in M&As and global expansion, with a particular focus on growing the company’s presence in the region. Asia-Pacific, Australia and New Zealand.

Brian NeSmith and Kim Tremblay co-founded Arctic Wolf in 2012, spurred on by the belief that cybersecurity had an “efficiency problem”. NeSmith, now executive chairman, was the company’s CEO until August 2021, when Schneider assumed the role after serving as president and chief revenue officer of Arctic Wolf.

Arctic Wolf, based in Eden Prairie, Minnesota, initially designed its solutions to target midsize businesses that could not afford to staff dedicated security teams. But over the next few years, the Wolf company launched its products in enterprise markets, rolled out security awareness and training programs, and launched a restructured partner program with multi-level support services.

“Arctic Wolf [adopts an] operational approach to security through a cloud-native platform,” said Schneider. “Security is not just a problem of tools or personnel, it is an operational problem. It must be solved by a fundamental and unifying platform that offers action-based intelligence. Unlike other industries like customer relationship management, which has Salesforce, or HR, which has Workday, this system of record platform was never done in cybersecurity — until Arctic Wolf.

Arctic Wolf’s flagship software platform ingests data from a company’s endpoints, cloud environments and networks to provide a unified view of potential cybersecurity threats. Tools from Symantec, Cisco and startups like Rapid7 already accomplish this, but Schneider says Arctic Wolf’s differentiates itself with its concierge security teams. The company’s consultants monitor organizations’ data and learn about their activities, requirements, and remediation steps, tailoring Arctic Wolf’s software to their particular environment.

For example, to reduce alert fatigue (it’s not uncommon for security teams to receive hundreds of alerts a day, most of which are false positives), Arctic Wolf uses machine learning to validate incidents. of cybersecurity. Schneider says that of the more than 2.5 trillion weekly observations taken by the company’s platform, less than five are delivered to the average customer each week.

“The biggest challenge facing security vendors and internal security teams is that threat actors are working around the clock to find new ways to exploit and attack their victims,” ​​Schneider said. “In many ways, the bar for cybersecurity innovation is set from the outside, as our industry races to stay one step ahead of threat actors, creating an ever-present challenge for cyber -teams protecting businesses of all sizes.”

Arctic Wolf has more than 3,000 customers worldwide, including more than 100 state and local government agencies in the United States. The transition to hybrid working during the pandemic continues to support Arctic Wolf’s business growth as organizations strive to protect their data and systems remotely.

“[The pandemic] has sparked a digital transformation trend that is a long-term driver for Arctic Wolf’s business and next-gen security spending in general,” Schneider added. “Furthermore, the cybersecurity and broader business sector is facing a massive skills shortage, as companies clamor for in-house security talent to defend and mitigate against these attacks.”

Artic Wolf’s embrace of debt comes as the broader venture capital market slows. According to data from Crunchbase, VC-backed startups in the US raised nearly $15.9 billion in debt in the first seven months of the year. During the same period in 2021, startups had around $13.3 billion in debt.

But debt is not a death knell. For businesses that have high recurring revenue and visibility into future performance, debt has always been a huge 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 in 2016 ahead of its IPO — are prime candidates because loan default risks to bring down the business.

Owl Rock’s David Jar and Ilan Aharoni expressed confidence in Arctic Wolf’s unsurprising near-term growth trajectory – which may or may not include an IPO. Schneider hinted in January that the company could go public by the end of this year, but he has toned down the comments in recent months.

“When we first invested in Arctic Wolf, we saw a huge market opportunity, a clear market leader and a phenomenal team to execute the thesis,” Jar and Aharoni said. “While the team’s execution was world-class, we believe the company is only at the beginning of its journey. Today, organizations of all sizes do not have the resources or expertise to appropriately protect against cyber threats. Arctic Wolf fills this gap with its one-stop cloud-native solution and delivery model. We are excited to deepen our relationship with the company.”

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