Six reasons for Wiz’s $6 billion valuation

The cyber company’s high valuation may seem odd, but when realizing its investor, Insight Partners, looks at things in a whole different manner, it makes far more sense

Sophie Shulman 14:4013.10.21

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Even during the madness of recent years in the Israeli high-tech sector, the $250 million raised by Wiz on Monday managed to surprise many who asked, ‘how is a year-and-a-half-old startup worth $6 billion?’ However, that is not the right question.

The real question people should be asking is how much Wiz is worth for Insight Partners, its largest investor since its inception in 2020. The $6 billion figure is not particularly relevant, certainly not if you look at it in terms of Wiz’s current revenues. Insight led the most current round, which came just six months after the previous one, where the company secured $350 million at a valuation of "only" $1.7 billion. However, if you ask Insight Partners’ Managing Director and driving force behind its move into Israel Jeff Horing, the $1.7 billion valuation six months ago was a bigger gamble than the $6 billion now.

Insight Partners Managing Director Jeff Horing. Photo: Orel Cohen

The lack of a local market is an advantage

At Insight, and recently in other venture capital funds as well, people are starting to look at Israel from a different perspective. The lack of a local market, a fact that until recently was perceived as a built-in disadvantage (and is still perceived as such by most Israelis), has recently become an advantage.

If you ask Insight’s staff, they will say that because Israeli companies do not bank on a trial and error period in the local market, they are built from the start for international markets and therefore start selling at earlier stages. Their managerial structure, investment in marketing, and emphasis on adapting the product to the international market are there from the moment the company is established, unlike German, British or American companies that can afford to begin within their local markets.

It is also part of the reason we witness more aggressive actions recently by private investment funds and other large entities investing in Israeli companies in the early stages. This is in contrast to when large funds invested in local companies only at the final stages before the IPO. Insight, for example, is increasingly investing in B and even A rounds.

The funds see these companies as more mature and more ready to become unicorns faster. This is especially true for entities like Insight, which has well-developed support systems that take portfolio companies by the hand and lead them from identifying the right niche in the market, through product design, its interface, and packaging, to marketing or any other function it needs. By the way, this is also one of the reasons for the increase in Israeli unicorns: because of the distance from the markets, the young horses have to learn to walk earlier.

Wiz's sales rate

When examining Wiz’s annual sales rate (ARR) of $25 million this year against its $6 billion valuation, it is easy to notice that the multipliers are unfounded. However, what Insight, as well as the other tech investors, see in these numbers is the speed with which Wiz reached such a revenue pace. Wiz founders Assaf Rappaport, Ami Luttwak, Yinon Costica, and Roy Reznik founded the company in March 2020, and the fact that in October 2021 we are talking about double-digit numbers in the millions indicates a very high growth rate. This brings down the multiplier that investors are looking at more and more today - the income growth multiplier (PEG). Only time will tell if this multiplier provides the right assessment, but in the meantime, as long as the triple-digit growth rate of revenue is weighed against the value, the multiplier becomes much lower.

Wiz co-founder Assaf Rappaport. Photo: Nathaniel Tobias

Another thing that could be learned from Wiz’s current fundraising is that investors are probably pleased with another parameter - the cost of acquiring the client. In the announcement Monday, the company stated that 15% of Fortune 500 companies are already on its customer list, which implies that it is easier for it to get the next customer and the next one.

Timing

One of the major factors for Wiz’s high revenues during its first year in the market and since it launched its sales, is not only the talented founding team, but rather the timing of the company’s inception. Before Covid, the whole world of technology began to move towards the cloud, but it did so slowly, certainly when it came to the big old companies, and it was the same with the cyber market. But the Coronavirus led to a real revolution: on the one hand, a rising number of cyberattacks as criminal organizations moved to remote work like the rest of us, and on the other hand, an accelerated transition to the cloud following the global movement to work from home.

This combination led to unexpected high demands for cloud cyber solutions, and so Wiz found itself in the right place at the right time. The company has developed a solution that simply connects to the systems of a given organization and scans its entire cloud environment. Using a simple "dashboard" for management and operation, Wiz provides a mapping of the various threats, including the level of risk, so that the organization's information security personnel receive a kind of "instruction book" on what to do first and where the most burning problems are.

The cyber market structure

Wiz’s advantage is that its solution offers a simple connection to the system of the organization and the output it provides. It also touches on all layers of information systems and also ranks risks using a simple interface.

One of the major problems in the cyber market today is the excess number of solutions offered for pinpoint problems, which only causes a headache for security system administrators because they do not interface with each other. Security personnel are bombarded with endless alerts that do not rate the level of threat, and therefore do not receive real tools as to what requires immediate treatment and what can suffer a delay.

Another issue is the adaptation of cyber solutions to the cloud. Today there is a war in the market between the new start-ups that speak "cloud" from day one, and old players like Check Point, for example, who adapt their products to the cloud. All of these allow a start-up company that comes up with a good solution and enjoys a large marketing budget to grow quickly.

The “Rappaport” factor

Of course, Wiz is not the only one who thought about cloud-based cyber security and recognized that with enough money it is possible to take over large market shares. But Wiz has something that not many companies have, in fact, most of them - a past. Although in their previous exit Wiz founders sold Adallom, their previous company, for $320 million to Microsoft, it was one of the most successful deals for the buyers. A rather rare event, which makes Adallom a kind of case study.

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According to estimates, a few years after the acquisition of Adallom, Microsoft, with the active assistance of Rappaport, who became the General Manager for Microsoft Israel’s R&D, built a security division with an annual revenue rate of $1 billion based on the modest acquisition. In terms of Insight, if Rappaport, then not yet 30, and his team, have managed to turn technology into a successful product once, there is no reason he could not do it again.

The SoftBank method

With all that being said, the raising of more than half a billion dollars within a year and a half of a company’s inception generates great concern, with the memory of WeWork-style disappointments remaining ever present. When Insight (or other investors) pour huge sums on a company making its first steps, it operates on the SoftBank method - first come, first served. There is fierce competition and business rivals see the same reality as you and will try to capture large market shares. It is even more true in the cyber market, since to date, no single large "gorilla" has emerged, and an all-out war is ongoing.

In the meantime, the method has already brought success to Insight with other Israeli companies, led by the cyber company SentinelOne, which become one of the two strongest companies in its field in the world, going head to head for supremacy against U.S. company CrowdStrike.

It also worked for WIX, which has become one of the biggest players in its field and it seems to be starting to happen with monday.com as well. It could also not happen in the end with Wiz, but then the company, which is indeed a unique and intriguing story in the Israeli landscape, is just one of the hundreds of startups that a fund like Insight is invested in. After all, this is only a fraction of the $30 billion that the VC has invested in startups in recent years, and it will also be able to absorb a small Israeli failure.