From theCUBE Studios in Palo Alto and Boston bringing you data-driven insights from theCUBE and ETR. This is Braking Analysis with Dave Vellante As you well know by now the cloud is about shifting IT labor to more strategic initiatives or as Andy Jassy laid out years ago removing the undifferentiated heavy lifting associated with deploying and managing IT infrastructure. Cloud is also about changing the operating modeling rapidly scaling a business operation of a company. Often overlooked with cloud however, is the innovation piece of the puzzle. A main source of that innovation is venture funded startup companies that have brilliant technologists who are mission-driven and have a vision to solve really hard problems and enter a large market at scale to disrupt it. Hello everyone, and welcome to this week's Wikibon CUBE Insights Powered by ETR. In this Breaking Analysis, we're pleased to welcome a special guest and author of the Elite 80, a report that details the hottest privately held cybersecurity in IT infrastructure companies in the world. Erik Suppiger is that author and joins us today from JMP Securities. Erik, welcome to theCUBE, thanks for being here. Thank you very much, Dave. I'm looking forward to having a discussion here with you. Yeah, me too. This is going to be great. So let's dive right in to the Elite 80. First if you could tell us about JMP Securities, and fill us in on the report, its history, your approach to picking the 80 companies out of thousands of choices. Sure. So JMP is a middle markets investment bank. We're a full service investment bank based in San Francisco. We were founded in 2000 and we focus on technology, healthcare, financial services and real estate. I've been with JMP since 2011. I cover cybersecurity companies, public companies, I cover IT infrastructure companies more broadly. And having been based here in San Francisco, I've long kept a good dialogue with private companies that compete with the public companies that I cover. And so about seven years ago, I started developing this report, which is really designed to highlight emerging private companies that I think are well positioned to be leaders in their respective markets. And overtime, we've built the list up to about 80 companies and we published this report every year. It's designed to keep tabs on the companies that are doing well, and we rotate about about 15 to 20 to 25% of the companies out of the report every year, either as they get acquired or they do an IPO or if we think that they're slowing and others are getting a little bit more exciting. And you talk directly to the companies, that's part of your methodology as well. You do a lot of background research, digging into >> Yap. funding, but you also talk to the executives at these companies, correct? Yes, for the most part, we try to talk to the CEOs at least the CFOs. The object here is to build a relationship with these companies so that we have some good insights into how they're doing and how the market trends are evolving as they relate to those companies. In particular, some of the dynamics that go into selecting companies is one. We do have to talk to the management teams, two, we base our decisions on who we include on how the companies are performing, on how their competitors are discussing those companies, their performance, how other industry contacts talk about those companies. And then we track their hiring, and other metrics that we can gauge them by. Got it. Okay, so I dug into the report a little bit, and tried to summarize a few key takeaways so let's take a look at those. And if you allow me just set up the points and then ask you to add some color. So the first two things that really jumped out I want to comment on are the perspectives of the technology companies, and then of course, the other side is the buyers. So it seems that the pandemic really got startups to sharpen their focus. I remember talking to a number of VCs early on in the shutdown, and they were all over their portfolio companies to reset their ICP, their ideal customer profile and sharpen their UVP, their unique value proposition, and they wanted them to do that specifically in the context of the pandemic and the new reality. And then on the buy-side, let's face it, if you weren't in digital business, you were out of business. So picking up on those two thoughts, Erik, what can you share with us in terms of the findings that you have? Well, that's very consistent with what we had found basically when the lockdown came in March, we reached out to quite a few companies and industry contexts. At that time at that time, feedback it was a period of great uncertainty and a lot of budgets were tightened pretty quickly, but it didn't take very long and a lot of these companies having been innovation engines and emerging players what they found was that the broader market quickly adopted digital transformation in response to the pandemic, basically, that was how they facilitated keeping their doors open, so to speak. And so the ones that were able to leverage need for emerging technologies because of an acceleration in digital transformation, they really stepped up and quite a few of these companies, they kept hiring, they kept their sales, did very well. And ultimately a lot of the VCs that had been putting on the brakes, they actually stepped up and continued funding pretty generously. Yeah, and we've got some data on that that we want to look into it, so thank you for that. Now let's take a look at some of the specific date of the study, just to break that down, the Elite 80 raised more than $3 billion last year, eclipsing the previous highs in your studies of 2019. And then a big portion of that capital went to pretty small number, only 10 of the 80 firms, and most of that went to cybersecurity plays. So what do you make of these numbers, especially, given your history with this group of Elite companies in the high concentration this past year. So one of the trends that we've seen in the public market or the IPO market is companies are waiting until they're a little bit more mature than they used to be. So what we've seen is the funding for companies, the larger rounds are far larger than they used to be. These companies typically are waiting till they're of size. Maybe now they're waiting to be 200 million in annual revenues versus a hundred million before. And so they're consuming quite a bit... The larger rounds are much bigger than they used to be. In the most recent report that we published, we had one round that was over half a billion and another one that was over 400 million.

And if you go back just a couple of few years ago, a large round was over a hundred million and you didn't get too many that were over 200 million. So that's been a distinct change. And I think that's not necessarily just a function of the pandemic, but I think the pandemic caused some companies to kind of step up the size of their rounds, and so there were a handful of a very large rounds certainly bigger than what we'd ever seen before. Yeah, it was a great observations. I mean, you're right, a hundred million used to be the magic number to go public, and now you get so much late money coming in, locking in maybe smaller gains, but giving that company a little more time to get their act together pre-IPO. Let's take a look at where the money went, talk about follow the money and Erik you and your team, you segmented that $3 billion into a number of different categories. As I said, most of it go into cybersecurity categories like application security, assessment and risk and end point, end point boomed during the pandemic, same with identity. And this chart really shows those categories that you created to better understand these dynamics and sort of figure out where the money went. How did you come up with these categories and what does this data tell you? So these categories were basically a homegrown, these are how I think of these companies, it's a little bit of a pulling some information out of the likes of Gartner but for the most part, this was how I conceptualize the landscape in my mind. The interesting thing to me is... A lot of that data is skewed by a few large transactions. So if you think about the allocation of those different categories and the investments in those categories, it's skewed by large transactions. And what was most interesting to me was, one the application security space is a space that had quite a few additional smaller rounds.

And I think that's one that's pretty interesting going forward. And then the one that was a surprise to me more than that was the data management. Outside of cybersecurity data management is a space that's getting a lot more attention and it's getting some pretty good growth. So that's a space that we're paying some good attention to as well. Yeah, that's interesting. I mean, of course data management, it means a lot of different things to a lot of different people, and VCs throwing money at it maybe trying to define it. And then the AIOps, and that data management piece took a portion of it, but wow, the cyber guys really are killing it. And now, as we mentioned 10 companies sucked up the lion's share of the funding. And this next chart shows that concentration of those 10 investments. So Erik, some big numbers here. One trust secured more than a half a billion dollars, four others nabbed more than a quarter billion in funding. Give us your thoughts on this, what do you make of that high concentration? Well, I think this is a function of companies that are waiting longer than they used to. These companies are getting to be of considerable scale. Tanium would be a good example. That's a company that could have gone public years ago and I don't think they're particularly eager to get out the door. They provide liquidity to their previous investors by raising money and buying those shares back. And so they basically just continue to grow without the burden or the demands that being a public company create. So that's really a function of companies just waiting longer before they get out the door. Got it. Now, here's another view of that data. So the left side of this chart that we want to show you next gives you a sense of the size of the companies, the revenue in the Elite 80. Most of these companies have broken through the a hundred million dollar revenue mark as you say and they're still private and so you can see the breakdown. And then the right-hand side of the chart shows the most active investors. We just pulled out those with three or more transactions, and it's interesting to see the players there. Of course, you've got some strategics, you got Citi in there, you've got Cisco along with a little bit of P&E, private equity action, maybe your thoughts on this data. So to give you a little flavor around the size of these companies, when we first started publishing this report, a little bit of the goal was to try to keep those categories relatively equal. And as you can see, they've skewed far to the left to the larger revenue stream size. So that just goes to the point that the companies that are getting... A lot of these private companies, they're of considerable size before they really go out the door, and I think that's a flection of the caliber of the quality of investments that are out there today. These are companies that have built very mature businesses and they're not going into the market until they can demonstrate a high confidence and consistency in their performance. I mean, I remember when Cloudera took that massive, I think it was 750 billion or a million dollar investment from Intel way back when. That bridge them to IPO. And that was sort of, if I recall started that trend. And then now you get a IPO last year, like snowflake which is priced to perfection and you got guys that really know how to do this. They've done it a number of times. And so it really is somewhat changed that dynamic for IPOs which of course, came booming back. It was so quiet there for so many years, but let's look into these markets a bit. I want to talk about the security space and the IT infrastructure space, and here's a chart from Optiv, which is one of the Elite 80 ironically. And we've shared this with our audience before. And the point of this is that the cybersecurity space is it's highly fragmented.

We've reported on this a lot. It's got hundreds and hundreds of companies in there, and it's this mosaic of solutions. So very complicated and bespoke sets of tooling, and to combine that with a lack of skilled expertise, CSOs tell us the lack of talent is the biggest challenge. It makes it a really dynamic market. And Erik, this is part of the reason why VCs they want in. So the takeaway I get from that chart is we still have a great need for best of breed. Digital transformation, cloud, mobile, all these trends are creating such a disruption that there's still a great opportunity for somebody that can deliver a real best of best of breed solution in spite of all the challenges that IT departments are having with trying to meet security requirements and things like that. The world has embraced digital delivery and your success is oftentimes dependent on your digital differentiation. And if that's the case, then there's always going to be opportunity for a better technology out there. So that in the end is why Optiv has a line card that's (laughs) as long as you can read it. I'm glad you brought up the point about best of breed is it's an age old debate in the industry is that we go best of breed or we go integrated suites. You look at a company like Microsoft, obviously that works very well for them, companies like Cisco. But so this next set of data, we're going to bring in some ETR customer spending data and see where the momentum is. And I think it'll really underscore the points that you're making there in terms of best of breed. This chart shares a popular view that we like to share with our community. On the vertical axis is net score, that's spending velocity and the horizontal axis shows market share or pervasiveness in the data. As we've said before, anything above 40%, that red line and the vertical axis is considered elevated. And you can see a lot of companies in cybersecurity are above that mark. Now, a couple of points I want to make here before we bring Erik back in, first is the market, it's fragmented, but it's pretty large over a hundred billion dollars depending on which research firm you look at, it's growing in, the low double digits so nice growth.

And it was putting on $10 billion a year into that number. And there are some big pure plays like Palo Alto Networks and Fortinet. But the market includes some other large whales like Cisco, they've built up a sizeable security business. Microsoft. Microsoft is in most markets. It serves its software customers, but you can see how crowded this market is. Now we've superimposed in the red recent valuations for some of the companies. And the other point we want to make is there's some big numbers here and some divergence between, as Erik was saying, that the best of breed and the integrated suites and the pandemic as we've talked about a lot has fueled, a shift in cyber strategies toward endpoint, identity and cloud. And you can see that in CrowdStrike's $50 billion plus valuation, Okta, another best of breed, $34 billion in identity.

They just bought Auth0 and paid four and a half billion dollars for Auth0 to get access to the developer community, Zscaler at 28 billion, Proofpoint is going private at a $12 billion number. So you can see why VCs are pouring money into this market, some really attractive valuations. Erik, what are your thoughts on this data? So my interpretation is that's just further validation that these security markets are getting disrupted, and the truth of the matter is there's only one really well positioned platform player in there, Palo Alto. The rest of them are platforms within their respective security technology space. But there's not very many broad security solution providers today. And the reason for that is because we've got such a transformation going on across technology that the need for best of breed is getting recognized day in, day out. Yeah, you're right, Palo Alto, CSOs love to work with Palo Alto. They're kind of the high-end gold standard, and we reported last year on the divergence and valuations between Fortinet and Palo Alto Networks, Fortinet was doing a better job pivoting to the cloud where you said Palo Alto will get its act together, it did, but then you see these pure play best of breeds really doing well. So now let's take a look at the IT infrastructure space and it's quite different in terms of the dynamics of the market. So here's that same view of the ETR data, and we've cut it by three categories. We cut on networking, servers and storage, and this is a very large market. It's over $200 billion, but it's much more of an oligopoly in that you've got great concentration at the top.

You've got some really big companies like Cisco and Dell, which is spinning out VMware so we're going to unlock more value of the core Dell company, Dell's valuation is 79 billion, and that includes it's 80% ownership in VMware. So you do the math and figure out what Dell is worth. HPE is much smaller. It's notable that its valuation is comparable to NetApp. NetApp's around one fifth the size of revenue wise for HPE. Now Erik, Arista, they stand out as the lone player that's having some success clearly against Cisco. What are your thoughts on the infrastructure of space? So a couple things I'll take away from that. First off, you mentioned Arista. Arista is a bit of an anomaly, a switching company, a networking company that is in that upper echelon like you've pointed out above 40%. It is unique and basically they kind of cracked the code. They figured out how to beat Cisco at Cisco's core competency, which is traditionally switching and routing. And they did that by delivering a very differentiated hardware product that they were able to tap into some markets that even Cisco hasn't been able to open up, and those would be the hyperscale hosting vendors like Google and Facebook and Microsoft.

But I would put Arista kind of in a unique situation. The other thing that I'll just point out that I think is an interesting takeaway from the slide that you showed is there are some infrastructure or what I would consider bordering on data management type companies. You look at a Rubrik, you look at Cohesity and Nutanix, Veeam, they're all kind of bubbling up there and Pure Storage. And I think that comes back to what I was mentioning earlier where there is some pretty interesting innovation going on in data management which has traditionally not had a lot of innovation. So I would bet you those names would have bubbled up just in the last a year or two, where that's been a market that hasn't had a lot of innovation and now there's some interesting things coming down the pipe. Yeah, that's interesting comments that making there, because if you think back to sort of last decade, Arista obviously broke out, the only two other companies in the core infrastructure space, and this was the hardware game historically but it's obviously becoming a software game, but take a look at Pure Storage and Nutanix, you can see their evaluations, five billion and $7.4 billion respectively. And then to your point, Cohesity, you got them at 3.7 billion just did a recent round. Rubrik, 3.3 billion, that's from 2019. And so presumably that's a higher valuation. Now Veeam got taken out last January at five billion by Inside Capital, and so I think they're doing very well and they'll probably up from that, and SUSE is going public at a reported $7 billion valuation.

So quite a bit different dynamic in the infrastructure space. So Erik, I want to bring it back to the Elite 80 and startups in general. My first question to you is what do you look for from successful startups to make this Elite 80 list? So a few factors, first off their performance is one of the primary situations. If it's a company that's not growing, we'll probably pull it from the list. I would say it is also very much a function of my perception of the quality of management. We do meet with all these management teams. If we feel like they're putting together a leadership team that's going to be around for a long time and they've got a product position that's pretty attractive, those would certainly be two key aspects of what I look for. Beyond that certainly feedback that we get from competitors, feedback that we get from industry contacts like resellers.

And then I'd also just say my enthusiasm for their respective market that they're in. If it's a market that I think is going to be difficult or flat or not very interesting, then that would certainly a reason to not include them. Conversely, even if it's small company, if it's a sector that I think is going to be around for quite a while, and it's very differentiated, then we'll include a lot of the smaller companies too. Well, a good example of that's like a (indistinct). I didn't want to into these companies, but these Elite 80 company is going to leave somebody out, but that that's a good example of a smaller company that used to be disruptive. How should enterprise customers or buyers do you think evaluate and filter startups. Do you have any sense of that? Well, a couple of things that I struggle with that would be something that's a lot more readily available to them is just the quality of the product. I mean, that's obviously why they're looking at it, but if it's a company that's got a unique product that is built that works, that would be the starting point. And then beyond that, it's also is it a management team, is the behavior of the company, something that reflects a management team that's a high quality management team. If they are responsive, if they are following up, if they're not trying to pull in business quickly, if they're priced appropriately, metrics like that would certainly be key aspects that would be readily available to the buyers of the technology.

Beyond that, I think the viability of that market is going to be a key aspect as to whether or not that company is going to be around. Even if it's a good company, if it's a highly competitive market that's going to have some big players that can kind of integrate it to make it a feature across other product lines. Then that's going to make it a tough road to go for a startup these days. The other thing I wanted to talk about was the risks and the rewards of working with startup companies. I've had CEOs and enterprise architects tell me that what they have to do in RFP, they'll pull out the Gartner magic quadrant. They will always pick a couple in the top right just to cover their butts. But many say, you know what? We also pick some of those in the challenger space, that are really interesting to us and we run them through the paces and we manage those risks so we don't run the company on them, but it helps us find these diamonds in the rough. Think about in the second part of last decade, if you picked a snowflake, you might've been able to get ahead of some of your competition, things like data sharing, or maybe you found that, well, you know what? Okta is going to help me with my identity in a new way. And you're going to be better prepared to be a digital business, but do you have any thoughts on how people should manage those risks and how should they should think about the upside? I don't think today a company can work today using legacy technologies. I think the greater risk is falling behind from a digital transformation perspective. This era, I think the pandemic is probably the best proof point of this. You can't go with just a traditional legacy architecture in a key aspect of your business. And so the startups, I think you've got to take the "risk" of working with a startup that's got a viability concern or a sustainability concern, the risk of having an IT infrastructure that's inadequate is a far greater risk from my perspective. So I think that the startups right now are in a very strong position. And they're well-funded, and that's the last question I wanted to talk about is how will startups kind of penetrate the enterprise in this modern era? This is really a software world and software is this sort of capital efficient business, but yet you're seeing companies raise hundreds of millions of dollars. I mean, that's not even absurd these days. You see companies go to IPO that have raised over a billion dollars and much of that if not most of it goes to promotion and go to market. So maybe you could give us your perspectives on how you see startups getting into the enterprise in these sectors. So one of the really interesting things that we've seen in the last couple of years is a lot of changes to sales models. And if you look at the mid market, the ability to leverage viral sales models has been wildly successful for some companies, it's been a great strategy. There's a public company, Ubiquiti that built a multi-billion dollar business without a sales organization. So there's some pretty interesting directions that I think sales and go to market is going to incur over the coming years. Traditional enterprise sales I think are still pretty standard today but I think that the efficiency of social networking and the delivery of products in a digital format is going to change the way that we do sales. So I think there's a lot of efficiencies that are going to come in sales over the coming years. That's interesting because then you'll... I think you're right. And instead of just pouring money at promotion, maybe get more efficient there and pour money into engineering, because that really is the long-term sustainable value that these companies are going to create. Yeah, I would absolutely agree with that. Again, if you look at the charts of the well-established players that you had mentioned, those companies are where they are, the ones at the top are where they are because of their technology and maintenance. It's not because of their go to market. It's because they have something that other people can't replicate. Well, Erik, hey, it's been great having you on today. Thanks so much for joining us. Really appreciate your time. Well, Dave, I greatly appreciate it. It's been a lot of fun, so thank you. All right, hey, go get the Elite 80 report. All you got to do is search JMP Elite 80, and it'll come up. There's a lot of data out there so it's really a worthwhile reference tool. So thank you everybody for watching. Remember, these episodes are all available as podcasts. Wherever you listen, you can check out ETR website at etr.plus and we also publish weekly a full report on wikibon.com and siliconangle.com. You can email me david.vellante@siliconangle.com or DM me on Twitter at DVellante. Hit our LinkedIn post and really appreciate those comments. This is Dave Vellante for theCUBE Insights Powered by ETR. Have a great week everybody, stay safe and we'll see you next time. (bright music)