With the next round of financing behind us and a great new investor, Fred Wang from Trinity Ventures, on the board, I thought I would look back at why we invested in Digital Shadows just over a year ago. I wanted to see how our thesis measured up and put a stake in the ground moving forward. Cyber security will be a continued theme for Storm in the enterprise.
Digital Shadows executed its plan incredibly well last year. When we invested they were still fairly early in their business, with mostly European customers and far less history as basis for an investment decision. At that time, the entire company was based in London (and still maintains most of its intelligence operations and development there). Soon after we invested, one of the founders and CEO, Alastair Paterson, relocated to San Francisco to start building the US team.
Looking back at the internal case for investing there were three key reasons that made the investment in Digital Shadows compelling: market, product fit, and team. While variations of these three reasons are the the foundation of all investments, I think it can be helpful to other entrepreneurs to understand the Digital Shadows case in more detail.
As cyber attacks have become more sophisticated and targeted, there is an increasing need for solutions that deliver relevant intelligence about external threats taking aim at organizations. Digital Shadows delivers a scalable data analysis platform, complemented with an intelligence operations team, that tailors intelligence around the customer requirements that are truly unique to their organizations. They call this approach cyber situational awareness. While the global security market is very large, this is an example of a new emerging category of solutions as compared to like firewalls, which is much more mature and well understood market. Digital Shadows instead focuses on threats, and potential sensitive data loss, that exist beyond a customer’s perimeter, where most solutions only focus within the perimeter. Digital Shadows SearchLight is a true SaaS solution, bringing with it all the benefits of SaaS which we liked and we knew we could help accelerate. While the total size of their addressable market was an unknown (and still is, due to the crowding and confusion in threat intelligence), the company believes the market opportunity size to be more than a billion today and growing. But what we now know after a year is much more about the target customer profile (>1000 employees, sensitive data, high profile executives, etc.). This has enabled us to accelerate our marketing efforts and continue to build the right sales and customer success organization. Although it’s still early, the indicators are good.
At Storm we spend a lot of time thinking about product fit. Unless we are explicitly making a seed / pre product investment, we are looking for companies in SaaS that have some initial indicators of fit. To some it may seem that we aren’t taking enough risk. In reality, we are most helpful to companies which have figured out their initial product market fit. Understanding in great detail a customer pain point and delivering a solution against that pain is a critical step in the startup journey before scale. Otherwise, you risk burning through a lot of cash, without results, if you apply venture dollars towards scaling a business before you have a clear product market fit. At the time of the investment, we believed Digital Shadows just found a clear product market fit with more than a dozen blue-chip customers who were paying enterprise amounts for the solution. The company grew its recurring revenues more than 4x in 2015, ahead of the Series A plan and are on track for an exciting 2016.
The founders, who have deep understanding of the market and requirements, were a part of Detica. Detica was a threat intelligence security company that was sold to BAE Systems (a British defense contractor) in 2008. The security industry can carry heavy consequences and doesn’t tolerate impostors. What we saw was a team that had the security chops to sell to a challenging security buyer. We would not make an investment in a security company team that didn’t have this DNA, which is perhaps different than some other areas of SaaS. Looking back, one of the biggest risks Digital Shadows took was believing they could move to San Francisco and build an executive team in the US. Although their network was in London, they were successful in tackling the tremendous task of recruiting and hiring at team in San Francisco. While we helped, the team was able to build a solid foundation in the US in a remarkably short period of time.
It is all still relatively early for Digital Shadows. But if the past year is any indication of things to come, the future looks bright for the business. And our investment thesis – a year into things – looks to be more or less accurate. We’ll see with more time.