The purchase by Bain Capital Private Equity and Crosspoint Capital Partners won’t affect ExtraHop’s status as a standalone company, but it will mean more R&D money to expand into natural adjacencies, and more opportunities for channel partners.
Network detection and response provider ExtraHop has entered into a definitive agreement to be acquired by venture capitalists Bain Capital Private Equity and Crosspoint Capital Partners for $900 million. The deal is expected to close in the summer of 2021 subject to customary closing conditions.
The large price paid is witness to the significant transformation of ExtraHop since its move into the NDR space, with the launch of its Reveal(x) offering a little over three years ago.
“Weve gone through a number of transitions in the business that are very impressive,” said Chris Lehman, ExtraHop’s CRO. “We have moved from our original focus on NPM [Network Performance Management] and IT operations to become a cybersecurity company, which are more highly valued. This has been a very successful pivot, to the point where cybersecurity is now the vast majority of our bookings. We broke through $100 million in ARR in Q1 of this year. Just last year, we also helped a large North American retailer detect malicious behaviour that was same type of attack that was in the DarkSide attack.”
ExtraHop has also undertaken a massive change in its licensing model.
“We moved from perpetual licenses to having the vast majority of our sales being subscription based – which are much more highly valued,” Lehman noted.
“We also have transitioned from an appliance-based model to cloud technology, as more and more has moved to the cloud,” he added.
ExtraHop had investor participation before, but they only raised $65 million in total, and the founders had done some bootstrapping. Those investors were Seattle’s Madrona Venture Group and MeriTech from Palo Alto, and some private investors, all of whom are likely pleased today with their investment.
“We have not had a funding round since 2014,” Lehman said. “We always ran much leaner than typical tech companies. It’s what makes this sale all the more impressive.”
The hotness of the NDR space certainly enhanced ExtraHop’s value. Gartner has projected NDR as the second strongest growing area in security. They do not yet have a Magic Quadrant for the new area, but they do have a market guide, and the top three vendors in revenue were Cisco, Darktrace and ExtraHop.
Bain and Crosspoint see the deal as an investment in a well-run company in a growing segment.
“This is not a cost-reduction efficiencies play,” Lehman stated. “We are not a big, loaded low-growth businesses where they can take out costs to improve profitability. We are a growth equity investment for them. They are big believers in NDR. Their goal is to help us to grow even faster.”
ExtraHop is the first dedicated investment made from Bain Capital Fund XIII, the firm’s new $11.8 billion private equity fund.
“We will be a standalone company under the new owners, not combined with other companies,” Lehman said. “But we will now have the financial might that can do a tuck-in acquisition that could expand ExtraHop. We are very much a platform, for analytics, and we can do a lot more than behavioural analysis of the network. We will still be capital efficient, but we will have much deeper pockets. We will expand our R&D, add people, and increase awareness though marketing.”
Lehman sees logical adjacencies into which ExtraHop can expand with additional R&D capital.
“We think we can take bites out of legacy segments like IDS and forensics, sleepy segments that haven’t really innovated over the last few years, as well as a growing market like IoT,” he said.
Lehman stated that ExtraHop has the most channel-friendly company of all the NDR players, and that the channel will be big winners from the deal.
“A big part of the thesis is that NDR will be a much larger category,” he said. “The investments we will make will mean more customers will benefit and more opportunities to invest in our products. We will target CISOs and CIOs for market awareness. This decreases the amount of evangelizing a partner has to do to make a sale. Better awareness means faster sales cycles. The deal also means more channel sales managers on the street, and more channel SEs.”
The new ownership will also consolidate ExtraHop’s channel commitment rather than change it, Lehman asserted.
“We will absolutely continue to be a channel-first company,” he said. “Bain and Crosspoint are asking how to create more business through the channel. They recognize you need to create leverage to get to the next level, and the channel is the best way to do that.”
ExtraHop CEO Arif Kareem and co-founders Jesse Rothstein, Chief Technology Officer, and Raja Mukerji, Chief Customer Officer, will continue in their respective roles. Rothstein and Mukerji will also remain significant investors in the company.