WEBVTT 1 00:00:00.930 --> 00:00:02.670 Michael Novinson: Hello, this is Michael Novinson with 2 00:00:02.670 --> 00:00:05.370 Information Security Media Group. We're going to be talking 3 00:00:05.370 --> 00:00:08.700 about cybersecurity startups in the economy with Dino Boukouris. 4 00:00:08.730 --> 00:00:12.030 He is the founder and managing director at Momentum Cyber. Hi 5 00:00:12.030 --> 00:00:12.780 Dino, how are you? 6 00:00:12.810 --> 00:00:14.100 Dino Boukouris: Great. How are you? 7 00:00:14.160 --> 00:00:16.050 Michael Novinson: Doing really well. Thanks for making the time 8 00:00:16.050 --> 00:00:18.810 here. Why don't you talk about we've seen obviously a lot of 9 00:00:18.810 --> 00:00:21.810 discretionary budget cuts over the past year, given the high 10 00:00:21.810 --> 00:00:24.450 interest rate, high inflation environment we are in. Why do 11 00:00:24.450 --> 00:00:26.640 those discretionary budget cuts have more of an impact on 12 00:00:26.700 --> 00:00:29.340 early-stage startups than established cyber vendors? 13 00:00:29.880 --> 00:00:31.290 Dino Boukouris: Yeah, so typically, when you say 14 00:00:31.320 --> 00:00:35.970 discretionary, or I call those the innovation budgets, right, 15 00:00:35.970 --> 00:00:39.900 so it's really cyber spend that is not part of the core kind of 16 00:00:39.930 --> 00:00:43.020 must-have technologies, like an endpoint security company, 17 00:00:43.020 --> 00:00:46.320 they're not going to suddenly slash the budget. You know, the 18 00:00:46.350 --> 00:00:49.710 staples, I would say, are always going to have healthy budgets. 19 00:00:49.920 --> 00:00:52.260 In an industry like this. I mean, they continue to go up 20 00:00:52.260 --> 00:00:55.740 into the right, where they can kind of squeeze out is really 21 00:00:55.740 --> 00:00:58.590 for these innovative startups that have, you know, either 22 00:00:58.620 --> 00:01:01.650 nice-to-have solutions, maybe they have should-have solutions, 23 00:01:01.650 --> 00:01:04.830 but they're just not in the top priority for the professionals, 24 00:01:04.830 --> 00:01:08.250 or if it's some new capability and new visibility that they're 25 00:01:08.250 --> 00:01:12.600 unlocking. It's just, it's harder for those budgets to get 26 00:01:12.600 --> 00:01:15.990 approved nowadays, which, as you can imagine, just based on how I 27 00:01:15.990 --> 00:01:19.290 describe these budgets, that tends to skew heavily towards 28 00:01:19.290 --> 00:01:21.690 the startup ecosystem, right. Those are the innovators. And 29 00:01:21.690 --> 00:01:23.850 those are the ones that have kind of the the latest and 30 00:01:23.850 --> 00:01:27.690 greatest technologies doesn't really affect like the Palos and 31 00:01:27.720 --> 00:01:30.120 CrowdStrikes and others in the world as much. 32 00:01:30.360 --> 00:01:32.460 Michael Novinson: Interesting. So in terms of innovation 33 00:01:32.460 --> 00:01:36.180 budget, other particular technology areas within 34 00:01:36.180 --> 00:01:39.330 cybersecurity that you feel have been hardest hit by the economic 35 00:01:39.330 --> 00:01:42.570 downturn where all organizations have maybe pulled back from 36 00:01:42.570 --> 00:01:43.170 spending. 37 00:01:44.160 --> 00:01:45.720 Dino Boukouris: I wouldn't say there's like a particular 38 00:01:45.720 --> 00:01:49.200 sector, per se. I mean, there's obviously up-and-coming sectors. 39 00:01:49.200 --> 00:01:52.290 And there's newer areas, right, like, whether it's data 40 00:01:52.290 --> 00:01:55.650 security, or some new innovative identity technology, or risk 41 00:01:55.650 --> 00:01:58.980 management technologies, there's really across the cyber 42 00:01:58.980 --> 00:02:03.150 industry, there's always either you're kind of a nascent 43 00:02:03.450 --> 00:02:06.090 sub-sector, or you're reinventing something in that 44 00:02:06.090 --> 00:02:10.290 space. So I don't think there's like a disproportionate amount 45 00:02:10.290 --> 00:02:13.560 kind of heavily skewed towards one versus another. But just, in 46 00:02:13.560 --> 00:02:15.900 general, like the more innovative solutions tend to be 47 00:02:15.900 --> 00:02:18.180 the ones that take a bit more convincing. 48 00:02:18.870 --> 00:02:21.210 Michael Novinson: So in terms of slashing this innovation budget, 49 00:02:21.210 --> 00:02:23.490 what does this mean for the early-stage startup community? 50 00:02:23.850 --> 00:02:26.460 How has the impact been felt over the past 12 months? 51 00:02:27.180 --> 00:02:29.040 Dino Boukouris: I'd say when you look at softness and 52 00:02:29.040 --> 00:02:33.000 performance. So, you know, looking at what they forecast 53 00:02:33.000 --> 00:02:35.820 versus what they actually achieve in terms of sales. I 54 00:02:35.820 --> 00:02:39.060 mean, you'll, as expected, those are the companies that are 55 00:02:39.060 --> 00:02:41.970 seeing, either they're missing their numbers, because they're 56 00:02:41.970 --> 00:02:44.370 just like getting the budget approval, or sometimes they 57 00:02:44.370 --> 00:02:46.650 might, you know, win a deal, they might actually have 58 00:02:46.680 --> 00:02:50.400 approval, but they need to wait a quarter or two for those funds 59 00:02:50.400 --> 00:02:52.620 to actually get, you know, unlocked and released, like 60 00:02:52.620 --> 00:02:54.960 that's the other thing we're seeing is that it's not just, 61 00:02:55.260 --> 00:02:57.990 they're not able to make the sale, it's that they're just 62 00:02:58.050 --> 00:03:01.380 having to wait a longer period of time. So sales cycles are 63 00:03:01.380 --> 00:03:04.020 getting longer, which as you can imagine, if you're a startup, 64 00:03:04.020 --> 00:03:06.660 you're burning a ton of cash, you're kind of scaling your 65 00:03:06.660 --> 00:03:09.480 expenses, in line with what you're projecting for your 66 00:03:09.480 --> 00:03:12.660 revenue. So when your revenue gets kind of pushed out, you 67 00:03:12.660 --> 00:03:15.150 then start having a situation where you're scaling a bit too 68 00:03:15.150 --> 00:03:19.740 fast. So you might have higher burn, you know, kind of coupling 69 00:03:19.740 --> 00:03:23.730 between the challenges that we're seeing, raising capital in 70 00:03:23.730 --> 00:03:26.820 the current market, kind of coupled with sales cycles that 71 00:03:26.820 --> 00:03:29.280 are getting extended, and, you know, softness in their 72 00:03:29.280 --> 00:03:32.640 forecasts. It's kind of creating a perfect storm for, you know, 73 00:03:32.670 --> 00:03:35.910 making these companies have a bit of a challenge, I would say, 74 00:03:36.030 --> 00:03:37.710 relative to 2021 or 2020. 75 00:03:38.820 --> 00:03:41.250 Michael Novinson: So one of your options then is do you see 76 00:03:41.460 --> 00:03:43.500 people looking to exit the market? Are they looking at 77 00:03:43.500 --> 00:03:46.740 layoffs, what's happening at the startups that are perhaps not 78 00:03:46.740 --> 00:03:47.550 hitting their numbers? 79 00:03:47.610 --> 00:03:51.720 Dino Boukouris: I mean, all the above, I would say, layoffs 80 00:03:51.750 --> 00:03:55.920 unfortunate, but we've seen that happen. Oftentimes, companies 81 00:03:55.920 --> 00:03:59.190 also are just not willing to throw in the towel quite yet. So 82 00:03:59.220 --> 00:04:02.010 instead of you know, raising around the capital at a 83 00:04:02.010 --> 00:04:04.560 significant bound round to the what they raised the last time 84 00:04:04.560 --> 00:04:07.530 around, they might, you know, do a convertible note or some kind 85 00:04:07.530 --> 00:04:10.230 of a safe structure, something that effectively kicks the can 86 00:04:10.230 --> 00:04:14.100 down the road on the valuation. And, you know, they're able to 87 00:04:14.100 --> 00:04:17.340 bring in some cash to kind of, you know, bridge them for 2, 3, 88 00:04:17.340 --> 00:04:19.650 4 quarters, however long they think this period is going to 89 00:04:19.650 --> 00:04:24.090 last. So that's kind of option one. Obviously, option two would 90 00:04:24.090 --> 00:04:27.120 be to do some kind of layoffs and kind of bring those expenses 91 00:04:27.120 --> 00:04:30.450 back down more in line with the growth that they're seeing. And 92 00:04:30.450 --> 00:04:33.450 then of course, option three is if they're not able to either, 93 00:04:33.450 --> 00:04:37.140 you know, raise capital or find some creative source of capital 94 00:04:37.350 --> 00:04:40.470 and layoffs aren't enough, they might actually have to consider 95 00:04:40.470 --> 00:04:45.690 an exit. So you're seeing a lot of M&A activity. So the number 96 00:04:45.690 --> 00:04:49.830 of deals might be, you know, reasonable and decent, but the 97 00:04:49.830 --> 00:04:53.460 actual deal sizes and kind of the quality of those assets, I'd 98 00:04:53.460 --> 00:04:57.510 say are a bit lower today than they were, you know, two years 99 00:04:57.510 --> 00:04:58.500 ago in Q1, I will say. 100 00:04:58.500 --> 00:05:00.660 Michael Novinson: Let's say that's because often these 101 00:05:00.660 --> 00:05:04.470 companies have already made cuts before deciding that they have 102 00:05:04.470 --> 00:05:05.610 to sell or why does that? 103 00:05:05.640 --> 00:05:08.640 Dino Boukouris: I mean, that was just survival of the fittest, 104 00:05:08.640 --> 00:05:13.590 right? So you tend to see the stronger, more mature companies 105 00:05:13.590 --> 00:05:15.840 that have strong business fundamentals. They're able to 106 00:05:15.840 --> 00:05:19.590 raise capital. So it's unfortunate, the weaker 107 00:05:19.590 --> 00:05:22.170 companies, maybe the ones that haven't been performing as well, 108 00:05:22.170 --> 00:05:26.460 that had to make cuts, you know, and they're just, you know, 109 00:05:26.460 --> 00:05:29.460 forecasting lower growth in the future. All of that kind of 110 00:05:29.460 --> 00:05:34.140 combines to, you know, to make those M&A targets just a little 111 00:05:34.140 --> 00:05:38.190 bit lower quality, not all of them, right. We saw HPE Axis 112 00:05:38.190 --> 00:05:41.700 deal get done, you know, high quality asset, healthy premium 113 00:05:41.700 --> 00:05:46.290 being paid there. Cisco with Lightspin, Valtix. So there's so 114 00:05:46.290 --> 00:05:49.530 many strategic deals that are happening. But just I'd say the 115 00:05:49.530 --> 00:05:53.070 majority of them fall in the other category of just companies 116 00:05:53.070 --> 00:05:56.370 that are struggling a bit, and just looking for a soft landing. 117 00:05:56.850 --> 00:05:58.890 Michael Novinson: In terms of the convertible notes. I know, 118 00:05:58.890 --> 00:06:01.350 we saw two high profile ones Netskope and Arctic Wolf do 119 00:06:01.350 --> 00:06:04.560 that. How common has it been among earliest stage smaller 120 00:06:04.560 --> 00:06:07.320 startups? First off, and then secondly, what do you feel the 121 00:06:07.320 --> 00:06:10.410 impact is going to be in the medium to long term that they're 122 00:06:10.560 --> 00:06:12.780 getting the capital via convertible note, rather than 123 00:06:12.780 --> 00:06:15.330 the equity, the more traditional route? 124 00:06:15.810 --> 00:06:18.720 Dino Boukouris: I mean, debt typically has a clock associated 125 00:06:18.720 --> 00:06:22.890 with it. So when you start, you know, taking in debt, instead of 126 00:06:22.890 --> 00:06:25.770 raising equity, you put a lot more pressure on the company, 127 00:06:25.770 --> 00:06:27.810 right? And really depends on the structure. And obviously, 128 00:06:27.810 --> 00:06:31.170 there's a wide range of these types of instruments. But I 129 00:06:31.170 --> 00:06:34.890 would say, you know, you try to shy away from debt being an 130 00:06:34.890 --> 00:06:37.950 earlier stage company, one, because it's tough to service 131 00:06:37.950 --> 00:06:40.230 the debt, right? It's hard to make interest payments, if 132 00:06:40.230 --> 00:06:43.320 you're burning cash, and you're not actually cash flowing into 133 00:06:43.320 --> 00:06:44.910 if you have some kind of structure that you don't have 134 00:06:44.910 --> 00:06:47.790 interest payments. But maybe, you know, there's a balloon 135 00:06:47.790 --> 00:06:50.220 payment likely comes, you know, comes due to three years down 136 00:06:50.220 --> 00:06:54.120 the road. Again, it just adds a layer of complexity. And also, 137 00:06:54.120 --> 00:06:56.760 when you go to raise your next round of capital, oftentimes you 138 00:06:56.760 --> 00:06:59.880 need to raise around not just-enough capital to fund the 139 00:06:59.880 --> 00:07:03.300 business, but to also take care of whatever obligations you have 140 00:07:03.300 --> 00:07:04.320 associated with that debt. 141 00:07:05.490 --> 00:07:09.510 Michael Novinson: Interesting. So in terms of those points you 142 00:07:09.510 --> 00:07:12.060 outlined, you talked about layoffs, you talked about the 143 00:07:12.180 --> 00:07:15.000 debt financing, and you talked about an exit via M&A. I mean, 144 00:07:15.150 --> 00:07:17.880 which path are you seeing most companies follow and why? 145 00:07:18.960 --> 00:07:21.210 Dino Boukouris: I'm not sure if there's really one versus the 146 00:07:21.210 --> 00:07:24.750 other, a lot of times, it's a combination, you typically 147 00:07:24.750 --> 00:07:27.420 wouldn't see a company, just try one approach. And that's it, and 148 00:07:27.420 --> 00:07:29.610 then throw in the towel, usually, you're gonna see some 149 00:07:29.610 --> 00:07:31.380 combination, and they might do a little bit of headcount 150 00:07:31.380 --> 00:07:34.500 reduction, they might, you know, tap some of the debt markets. 151 00:07:34.500 --> 00:07:37.350 But again, if you raise enough that maybe advise you two 152 00:07:37.350 --> 00:07:40.890 quarters, and you know, the slowdown has lasted longer than 153 00:07:40.890 --> 00:07:43.080 two quarters, that mean, you still might end up going and 154 00:07:43.080 --> 00:07:45.870 taking path number three as well, or some people buy 155 00:07:45.870 --> 00:07:48.690 themselves a bit more time, they actually hit their numbers, and 156 00:07:48.690 --> 00:07:51.480 they're able to raise equity, right? So there's more in more 157 00:07:51.480 --> 00:07:54.870 than just those three paths, but it's never usually just one 158 00:07:54.870 --> 00:07:55.530 solution. 159 00:07:56.010 --> 00:07:57.930 Michael Novinson: For those companies who are able to raise 160 00:07:57.930 --> 00:08:01.200 equity, why are investors today focusing more on business 161 00:08:01.200 --> 00:08:02.790 fundamentals than vision or team? 162 00:08:03.510 --> 00:08:06.330 Dino Boukouris: I think the the notion of growth at all costs is 163 00:08:06.330 --> 00:08:09.180 just I wouldn't say it's out of the window, but it's very hard 164 00:08:09.180 --> 00:08:12.780 to find kind of capital, if you're a business that's just 165 00:08:12.990 --> 00:08:16.740 burning, you know, I won't give the exact metrics. But if you're 166 00:08:16.740 --> 00:08:20.010 burning, kind of disproportionate amount relative 167 00:08:20.010 --> 00:08:22.830 to your growth, you're gonna be in trouble in the current 168 00:08:22.830 --> 00:08:25.650 environment. So that pendulum kind of swings between growth 169 00:08:25.650 --> 00:08:28.800 and profitability. It's kind of swinging back to profitability 170 00:08:28.800 --> 00:08:31.410 at this point in time. So I would say they're looking at, 171 00:08:31.560 --> 00:08:34.290 you know, things like gross margin, retention, whether 172 00:08:34.290 --> 00:08:37.320 that's, you know, burn efficiency, magic numbers, it's, 173 00:08:37.950 --> 00:08:40.950 there's a lot more focus on the union economics, just to make 174 00:08:40.950 --> 00:08:44.850 sure that these assets, if they were to pour additional capital, 175 00:08:44.880 --> 00:08:47.640 you know, kind of into the engine, they want to see kind of 176 00:08:47.640 --> 00:08:50.670 predictable revenue on the backend. So they're just, you 177 00:08:50.670 --> 00:08:53.220 know, kind of measuring three times and cutting once, if you 178 00:08:53.220 --> 00:08:56.610 will, you know, as opposed to, I'd say what the environment was 179 00:08:56.610 --> 00:09:01.020 like in late 2020 and early 2021, where capital was a bit 180 00:09:01.020 --> 00:09:01.920 more free flowing. 181 00:09:01.920 --> 00:09:04.200 Michael Novinson: And finally here from a M&A standpoint, I 182 00:09:04.200 --> 00:09:06.990 know, you said the volume of deals is so pretty healthy size 183 00:09:06.990 --> 00:09:11.280 however is down. What are the implications for startups who 184 00:09:11.280 --> 00:09:14.430 are considering an exit the fact that deal size is smaller today? 185 00:09:16.050 --> 00:09:17.460 Dino Boukouris: So it's an interesting question. I mean, 186 00:09:17.460 --> 00:09:21.150 there's, it's not so much that the rest of the deal sizes are 187 00:09:21.150 --> 00:09:24.450 smaller. It's more about kind of how companies are being valued, 188 00:09:24.450 --> 00:09:26.400 right? When you look at the public markets, and you have 189 00:09:26.430 --> 00:09:30.090 high fliers that were trading at 50, 60 times revenue, and now 190 00:09:30.090 --> 00:09:34.050 trading at seven. You know that that creates a problem, right? 191 00:09:34.590 --> 00:09:38.400 And what I mean by that is you are a private company, you're 192 00:09:38.400 --> 00:09:41.910 trying to justify some revenue multiple to calculate what your 193 00:09:41.910 --> 00:09:44.880 business is worth. It's tough to say you're worth 30 times 194 00:09:44.880 --> 00:09:47.910 revenue, if you know the leaders in the space are worth eight or 195 00:09:47.910 --> 00:09:51.150 nine or 10. So I think there's kind of pressure that's being 196 00:09:51.150 --> 00:09:55.410 put downward pressure on how you would value a business. And then 197 00:09:56.280 --> 00:10:01.230 there the overall kind of comp set if you will as it relates to 198 00:10:01.230 --> 00:10:04.650 M&A when, you know, the last two or three companies to be sold in 199 00:10:04.650 --> 00:10:08.340 your space, were sold at a low price, it's harder to justify 200 00:10:08.340 --> 00:10:11.070 your prices. It's like real estate, right? If all the houses 201 00:10:11.070 --> 00:10:13.860 in your neighborhood are being sold at a low value, it makes it 202 00:10:13.860 --> 00:10:16.440 even harder for you to ask for something that's a premium to 203 00:10:16.440 --> 00:10:18.990 those houses, because a lot of times, you will look at the 204 00:10:18.990 --> 00:10:21.780 comparables and that's how they triangulate down to a number. 205 00:10:21.780 --> 00:10:26.490 It's not always scientific. But I would say that, you know, a 206 00:10:26.490 --> 00:10:28.500 lot of these factors, unfortunately, are pointing in 207 00:10:28.500 --> 00:10:31.740 the downward direction when it comes to triangulating on a 208 00:10:31.740 --> 00:10:34.710 numbers. So it's a challenging environment to sell your 209 00:10:34.710 --> 00:10:38.820 business and actually kind of attract a premium price for it. 210 00:10:39.270 --> 00:10:41.100 Michael Novinson: Interesting perspective. Dino, thank you so 211 00:10:41.100 --> 00:10:41.940 much for the time. 212 00:10:41.970 --> 00:10:43.020 Dino Boukouris: Thank you. Appreciate it. 213 00:10:43.050 --> 00:10:44.790 Michael Novinson: You're very welcome. We've been speaking 214 00:10:44.790 --> 00:10:47.520 with Dino Boukouris. He is the founder and managing director at 215 00:10:47.520 --> 00:10:50.940 Momentum Cyber. For Information Security Media Group, this is 216 00:10:50.940 --> 00:10:52.950 Michael Novinson. Have a nice day.