Does Google's Massive Wiz Acquisition Signal End of Startup Exit Drought For VCs?

This is interesting on several levels. Perhaps most importantly, that the biggest potential payout/exit for venture investors in years is not coming from AI but from cyber security. 

But before every startup and VC investor starts renaming its product and company, it is important to note that Wiz is one of those companies that has generated real recurring revenues by providing a much-needed service that major corporations can use immediately without being subjected to a lot of vaporware and Silicon Valley hype. A real product!? You mean, that might just actually matter? JL

Berber Jin and Meghan Bobrowsky report in the Wall Street Journal:

Google parent Alphabetis in talks to purchase Wiz for $23 billion. It would be the largest exit for any tech startup since Rivian’s $77 billion IPO in November 2021. The sale price would be almost double what Wiz was valued at by its VC investors two months ago. Wiz’s annual revenue hit $100 million 18 months after founding and grew to $350 million in 2023. It brought on Index Ventures, Sequoia Capital and Greenoaks. Wiz provides software that helps companies scan and identify security risks from cloud platforms such as Azure and Amazon Web Services. The deal provides hope for hundreds of other private tech companies looking for an exit. Much of the startup sector outside of AI is in shambles thanks to slowed venture funding, a chilly IPO market and regulatory scrutiny that has discouraged acquisitions. 

decrease; red down poin is in advanced talks to purchase Wiz for $23 billion, 

Wiz was founded four years ago by a quartet of former Israeli military officers with one goal: grow as fast as possible to become the dominant company in cloud cybersecurity, and then reap the reward. 

Now Chief Executive Assaf Rappaport and his partners are on the verge of doing just that, as Google parent Alphabet GOOGL -1.40%decrease; red down pointing triangle is in advanced talks to purchase Wiz for $23 billion, The Wall Street Journal reported Sunday.

It would be the largest exit for any tech startup since Rivian’s $77 billion initial public offering in November 2021, according to Crunchbase. The sale price would be almost double what Wiz was valued at by its venture-capital investors just two months ago.

 

The deal talks provide a glimmer of hope for hundreds of other private tech companies looking for an exit path. While giants such as Microsoft and Nvidia have been on a tear, much of the startup sector outside of artificial intelligence is in shambles thanks to slowed venture funding, a chilly IPO market and regulatory scrutiny that has discouraged acquisitions. 

“This could be one of the largest and fastest returns ever for a private security company in tech history,” said Alex Clayton, a general partner at the venture firm Meritech Capital, which isn’t a Wiz shareholder.

Rappaport and his co-founders Ami Luttwak, Yinon Costica and Roy Reznik stand to profit handsomely from the deal. Each owns around 9% of Wiz, according to a person close to the company, meaning they could walk away with individual fortunes worth some $2 billion. The four met over two decades ago when they worked in the Israel Defense Forces cyber intelligence division called Unit 8200. Veterans of Unit 8200 have also founded other highly valued cybersecurity companies including Palo Alto Networks, Check Point and Fireblocks. 

In 2012, they started their first cloud cybersecurity company, Adallom, which they sold to Microsoft three years later for $320 million. They spent the ensuing years working at the tech giant’s Azure cloud-computing division before starting Wiz in 2020. 

Assaf Rappaport often brings his border collie Mika to work. PHOTO: NETANEL TOBIAS/WIZ

“You’re kind of naive when you’re starting your first company. You don’t know what to expect,” Rappaport said in an interview last year with one of Wiz’s board members, Shardul Shah of Index Ventures, posted online. “When you’re starting a second company, you know it’s going to be a roller coaster.”

Rappaport and the other co-founders declined to comment through a spokeswoman.

The quartet initially called their second company Beyond Networks and focused on network security. But they soon pivoted to software that helps companies scan and identify security risks from dominant cloud platforms such as Azure and Amazon Web Services, betting that customers would want more protection than the tech giants provide themselves. They renamed their company Wiz.

Born in Tel Aviv, the 41-year-old Rappaport often dons a hoodie with Wiz’s logo on it or a white T-shirt, joggers and sneakers—the standard laid-back uniform for tech founders. 

His shoes, from the luxury Italian brand Golden Goose, typically cost more than $500. It is a step up from his Adallom days, when he was photographed wearing beat-up Converse sneakers.

Rappaport often brings his border collie Mika, dubbed Wiz’s chief dog officer, to work at the company’s offices in New York and Tel Aviv and encourages other employees to bring their dogs as well. Mika has her own LinkedIn page, where she has held multiple roles, including as junior vice president of Canines at Microsoft. 

Wiz also has a cybersecurity toy store that sells tank tops and juggling balls for chief information security officers. A top-selling eye mask reads “No Security Incidents Here.” 

Wiz grew fast as more businesses in recent years have migrated their data and applications from local servers and data centers onto the cloud. Its first customers included the global bank Barclays and food conglomerate Mars. It eventually added big-name clients such as Morgan Stanley and Slack and counts 40% of the Fortune 500 as customers.

Wiz’s annual recurring revenue hit $100 million 18 months after its founding, the company said, and grew to $350 million in 2023. Along the way, it brought on investors including Index Ventures, its largest outside shareholder, Sequoia Capital and Greenoaks. 

Google is trying win more customers to its cloud service in a competitive market. PHOTO: MIKE KAI CHEN/BLOOMBERG NEWS

At one point, Sequoia’s former leader Doug Leone, a Wiz board member, told Rappaport his startup was raising too much money too fast, but the CEO ignored him, the two recalled during an interview at the Web Summit conference in 2021. In May, Wiz raised $1 billion at a valuation of $12 billion, intending to use the pile of cash to acquire startups and accelerate growth. 

A few weeks later, Google came knocking. The tech giant had long lagged behind Amazon.com and Microsoft in the cloud-computing business. Thomas Kurian, CEO of Google Cloud, led the negotiations.

For Wiz, a $23 billion sale price was irresistible. Google would value the startup at 46 times the $500 million in annual recurring revenue it currently generates, a person familiar with the matter said. By contrast, CrowdStrike, one of the most richly valued major cybersecurity firms that trades publicly, has a market capitalization 25 times its annual recurring revenue. Offering enhanced security features like those from Wiz could help Google win more customers to its cloud service in a fiercely competitive market where demand is booming partly due to generative AI companies’ need for computing power.

If the deal is completed, it will likely draw scrutiny from antitrust regulators in the U.S. and Europe, who have cracked down on acquisition efforts by tech incumbents. Google is currently facing two lawsuits from the Justice Department over its dominance in search and alleged unfair practices in its ad-tech business. 

Last December, Adobe called off its planned $20 billion acquisition of the collaboration-software startup Figma after the two companies couldn’t see a clear path to regulatory approval in Europe. That cast a chill on venture capitalists’ hopes for more large sales in the tech industry, a mood that could be lifted if a Google-Wiz deal goes ahead.

After the Journal reported Google and Wiz are in advanced sale talks, Sen. Richard Blumenthal (D., Conn) wrote Sunday on the social-media platform X, “Seems like this deal would be one for the antitrust textbooks—how to enrage enforcers & elude law & logic in pursuing monopoly power. It deserves exacting scrutiny, & some skepticism.”