If you don’t follow the financial section of the paper and you’re not a network administrator in a massive organization, it’s likely that, like most companies engaged in software solutions for the enterprise sector, you’ve never heard of and Varonis Systems. The company, one of Israel’s most successful information security companies, managed to pull off a billion dollar valuation almost completely under the radar.
But the most interesting part of this story is that the Israeli startup, which had an initial public offering on the Nasdaq at a value of just $524M million, managed to double its company value by 100% on the same day of issuance and break the billion dollar mark.
Solving for the weakest link
Varonis Systems was founded in 2005 by Yaakov (Yaki) Faitelson and Ohad Korkus, trying to solve several Information security related issues such as information rights management, access control, file usage and information sharing. Learning from their experience at NetApp and NetVision, the two founders understood that a large part of security issues facing organizations arise, not at a result of equipment or software failure, but rather due to the unauthorized access and usage of information by users within the organization.
Thus, the two decided to try and find a solution that would allow companies to map and analyze large amounts of information in an organization and apply them to a central policy monitoring and control platform. Some say that the company started about a year or two ahead of the market but today there aren’t many network administrators in large organizations who do not know of the company’s Datadvantage package, with many making use of it.
The company’s solution enables enterprise CIOs to make updates and offers a simple view for each of the information sources in the organization to be managed centrally. In addition, the system enables users to locate files and information (such as credit card numbers, medical information or other sensitive information) according to predefined templates, policies and apply security permissions in uniform fashion for everyone. Along with their monitoring and auditing capabilities, Varonis solutions are particularly effective at providing full documentation for each type of access to files and information.
Varonis is a recognized leader in the field despite there being quite a few companies with competing solutions, including a number of Israeli startups. The area of Data Governance is now considered one of the emerging areas with the most significant amount of growth potential for Enterprise, especially due to the ever-increasing demands for regulations requiring full documentation of information access and strict management of accessed information.
The long road to the $1B mark
Since the company’s founding in 2005, the founders have managed to raise just over $13M from Israeli VC’s Evergreen Partners and Pitango Venture Capital, as well as the American venture capital fund Accel Partners and storage company EMC before it reached its first tender offer.
In 2008, a little more than 3 years since the company was founded, EMC tried to acquire the company for an estimated $200M but the move did not work out. Although unsuccessful in their purchase bid, EMC is still considered today the largest customer of Varonis Systems responsible for close to 10% of the company’s sales in 2012, according to a report released before the IPO.
Since then, Varonis managed to increase sales (which totaled -74.6 million in 2013 according to public reports) and raise another $20M to fund the long path to IPO which culminated this past Friday.
The biggest beneficiaries of the move are likely to be the three largest funds that supported the company, Accel Partners, which owns 25.6% of shares, Evergreen holding 23.1% and Pitango holding 17.7%. Added to these is EMC still holding 6.4% and each of the co-founders who hold a little over 9% in total.
Although corporate headquarters has been running out of New York for several years now, Varonis still maintains its development activities in Israel.
Should a 100% increase in share price on the first day of trading be considered a huge success?
Naturally, the typical answer to this question would be that any increase in share value should be considered a success. Nevertheless, a significant increase that more than doubles a company’s value the day after issuance is usually indicative of a significant miscalculation of the company’s valuation by the underwriters which will leave quite a bit of money on the table that could have been used by the company. To better clarify, if the company was issued at par with what it reached at the end of the first trading day, about $44 per share (versus the 22 it originally was priced at), the may have pulled in double the amount (a little over $200M) following the actual issue.
Nevertheless, when pricing out share values, there are other components that must be taken into account by the underwriters. One such element is the effect of public opinion, consisting primarily of investors and bankers familiar with company executives as part of the pre-IPO RoadShow. Reportedly, the first pricing set by the public opinion in question was between $17 to $18 per share before the issue rose to $21, and finally settled on the final price of $22.
In this case, if the company believes it can raise more money, it should try to issue at a value share that’s higher, which could jeopardize the whole issuance (if not enough people end up buying the stock) or lower the share price significantly over the course of the first few trading days, a move that will significantly affect the general public’s trading behavior.
In the case of Varonis, it seems that the company chose not to take the risk, rake in the safe profit for the company coffers and relinquish any potential stock surge to the investors.