from the cube studios in palo alto in boston bringing you data-driven insights from the cube and etr this is breaking analysis with dave vellante as you well know by now the cloud is about shifting i.t labor to more strategic initiatives or as andy jassy laid out years ago removing the undifferentiated heavy lifting associated with deploying and managing i.t infrastructure cloud is also about changing the operating model and rapidly scaling a business operation or 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 cyber security and i.t infrastructure companies in the world eric suppenger is that author and joins us today from jmp securities eric welcome to the cube thanks for being here thank you very much dave i'm uh i'm looking forward to uh to having a discussion here with you yeah me too this is going to be great so let's dive right into 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 full-service investment bank based in san francisco we were founded in 2000 and we focus on technology health care financial services and real estate i've been with jmp since 2011. um i've uh i've i cover uh cyber security companies public companies uh i cover uh it infrastructure companies uh more broadly and um we have having been based here in san francisco i've long kept uh a good dialogue with uh private companies uh that that compete with the public companies that i cover and so um about seven years ago i i started uh developing this uh this report which is really designed to highlight uh emerging uh private companies that uh that i think are are well positioned to be leaders in their respective markets and uh and over time we've um we've built the list up to about 80 companies and uh and we publish this report every year uh it's designed to uh to keep tabs on on the companies that are doing well and uh and we rotate about uh about 15 to 20 to 25 percent of the companies uh out of the report every year either as they get acquired or they do an ipo or um uh they uh they if we think that they are slowing and others are getting a little bit more uh 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 funding but you also talk to the executives at these companies correct yes for the most part we uh we try to talk to the ceos at least the cfos the object here is to build a a relationship with these companies so that we have some good insights into uh into how they're doing and and how the market trends are evolving as they relate to those companies in particular some of the some of the dynamics that go into us selecting companies is one we do have to talk to the management teams uh two we uh we we base our decisions on who we include on how the companies are performing on how their competitors are uh are are discussing those companies their performance uh how other industry contacts talk about those companies and then we we track their hiring and uh and and how they've uh you know other metrics that we can uh 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 if you allow me just set up the points and then and ask you to add some color so the first two things that really you know 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 a digital business you were out of business so picking up on those two thoughts eric what can you share with us in terms of the findings that you have well that's that's very uh consistent with what we had found uh basically um when the pandemic first when the lockdown came uh in march we reached out to quite a few companies and industry contacts at that time feedback was uh you know it was uh it was a period of great uncertainty and a lot of a lot of budgets were were tightened pretty quickly but it didn't take very long and a lot of these companies uh you know having been uh innovation engines and and emerging players what they found was that uh the broader market quickly adopted uh digital transformation in response to the pandemic basically that was how they they uh facilitated uh keeping their their doors open so to speak and so um the ones that were able to uh to leverage uh need for emerging technologies because of an acceleration in digital transformation uh they they really stepped up and and quite a few of these companies they kept hiring they kept uh their sales uh did very well and uh and ultimately um a lot of the vcs that had been uh putting on the brakes uh they actually stepped up and uh and and continued funding uh pretty generously yeah we've got some data on that that we wanna look into so thank you for that now let's take a look at some of the the specific date of the study just break that down the elite 80 raised more than three billion dollars 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 and most of that went to cyber security plays so what do you make of these numbers especially you know given your history with with this group of elite companies and the high concentration this year this past year so one of the trends that we've seen in the public in the public market or the ipo market is um companies are are waiting until they're a little bit more mature than they used to be so what we've seen is um the the funding for companies uh the the larger rounds are far larger than they used to be these companies typically are waiting until they're of size you know maybe now they're waiting to be uh 200 million uh in annual salary in annual revenues versus a 100 million before and so they are consuming quite a bit the larger rounds are are much bigger than they used to be um in the in the most recent uh report that we published we had uh 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 100 million and you didn't get too many that were over 200 million so that's that's been a distinct change and and i think that's not necessarily just a function of the pandemic but i think the pandemic caused caused some companies to kind of step up the size of their rounds uh and so there were a handful of uh very large rounds uh certainly bigger than what we've ever seen before yeah those are great observations i mean you're right it was 100 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 you know a little more time to get their act together pre-ipo let's take a look at where the money went you know talk about follow the money and eric you and your team you segmented that three billion dollars into a number of different categories as i said most of it go into cyber security uh categories like application security is assessment and risk there's endpoint endpoint 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 these categories and what does this data tell you so these categories were basically uh homegrown these are how i um i think of these companies um it's a little bit of uh pulling some information out of uh the likes of gartner but uh for the most part this was how i how i conceptualize the landscape uh in my mind um the interesting thing to me is you know so a lot of that data is skewed by a few large transactions so um you know if you if you think about the the the allocation of those uh those different categories and and the uh investments in those categories it's 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 um outside of cyber security uh data management's a space that's getting uh a lot more attention and uh and it's getting um uh some pretty good uh growth so that's a space that we're uh we're paying some good good attention to as well yeah that's interesting i mean of course data management means a lot of different things to a lot of different people and vc's throwing money at it maybe trying to define it and then and then the the the ai ops and and the that data management piece you know took a took a portion of it but wow the the cyber guys really are are killing it and now as we mentioned ten companies sucked up the lion's share of of the funding and this next chart shows that concentration of those 10 investments so eric 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 um i i think this is a function of companies that are waiting uh longer than they used to um they're these these companies are getting to be of considerable scale i mean titanium would be a good example that's a company that could have gone public years ago and uh and i don't think they're particularly eager to get out the door uh they provide liquidity to their previous investors by raising money and uh and and buying those shares back um and so they uh they basically uh just continue to uh to grow uh without the uh the burden or or the um uh the demands that being a public company create um so there's this that's that's really a function of of companies just waiting longer before they get out the door got it now here's another view of that that data the so the left side of this chart uh that we we want to show you next um gives you a sense of the size of the companies the revenue in the elite 80 and you know most of these companies have broken through the 100 million dollar revenue mark as you say uh and they're 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 it's interesting to see the players there and of course you've got some strategics you got city in there you've got cisco along with a little bit of p and e private equity action maybe your thoughts on on on this data so so to give you a little flavor around the uh 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 uh far to the left uh towards the uh to the larger revenue stream you know size so that's that just goes to the point that um uh the the companies that uh you know that are getting that a lot of these private companies uh they're they're of saw considerable size before they uh they really go out the door and and i think that's a reflection of um of the caliber of uh of or the quality of investments that uh that are out there today these are companies that have built very mature businesses and they're not going into the market until um until they can demonstrate uh high confidence and uh and consistency in their performance yeah i mean you i remember when when cloudera took that massive i think it was the 750 billion a million dollar investment from uh from intel you know way back when they that bridged them to ipo and that was sort of if i recall started that that trend and then now you get a ipo last year like snowflake which is price 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 that dynamic uh 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 um i want to talk about the security space and the i.t infrastructure space and here's a chart from optiv which is one of the elite 80 ironically and we've shared this with with our audience before and the point of this is that the cyber security spaces it's highly fragmented we've reported on this a lot it's got hundreds and hundreds of companies in there it's just mosaic of solutions so very complicated and bespoke sets of tooling and combine that with a lack of skilled expertise you know csos tell us the lack of talent is their biggest challenge makes it a really dynamic market and eric this is part of the reason why vcs they want in so the takeaway i get from that chart is we have a lot of um we still have a great need for best of breed um digital transformation uh cloud mobile all these trends are creating such a disruption that there's still a great opportunity for somebody that can deliver a uh you know a real best of the best of breed uh solution uh in spite of uh all the challenges that uh id it departments are having with trying to uh to meet you know security requirements and things like that uh the the world has embraced uh you know digital delivery and uh you are your success is oftentimes dependent on your 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's that in the end is uh is why uh optiv has a uh a line card that's uh as as long as you can read it i'm glad you brought the point about best of breeze it's an age-old debate in the industry it's do we go best of breed or do we go you know integrated suites you know you look at a company like microsoft obviously that that works very well for them uh companies like cisco but so this next uh set of data we're gonna 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 to share with our community on the vertical axis is net score or that's spending velocity and the horizontal axis shows market share or pervasiveness in the data as we've said before anything above 40 percent that red line on the vertical axis is considered elevated and you can see a lot of companies in cyber security are above that mark now a couple points i want to make here before we bring eric back in first is the market it's fragmented but it's pretty large at over 100 billion dollars depending on which research firm you look at it's growing at you know the low double digits so so nice growth is putting on 10 billion dollars 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 uh they've built up a sizeable security business microsoft microsoft's in most markets and serves its you know software customers so but you can see how crowded this market is now we've superimposed in the red recent valuations for some of the companies and and the other point we want to make is there's some big numbers here and some divergence between us eric was saying the the best of breed and the integrated suites and the pandemic as we've talked about a lot is fueled a shift in cyber strategies toward endpoint identity and cloud and you can see that in crowdstrike's 50 billion plus valuation octa another best of breed 34 billion dollars in identity they just bought off zero and paid four and a half billion dollars for auth0 to get access to the developer community z scaler at 28 billion proof point is going private at a 12 billion dollar number so you can see why vcs are pouring money into this market some really attractive valuations eric what are your thoughts on this data so my interpretation is that's that's just further validation that uh that these security markets are uh are getting disrupted and uh and the truth of the matter is there's only one um really well positioned uh platform player in there uh uh palo alto the rest of them are are platforms within their respective uh security technology space but uh you know there's there's not very many um you know broad security solution providers today and the reason for that is because we've got such a uh transformation going on uh across uh technology that the need for best of breed is uh is is getting recognized uh day in day out yeah you're right palo alto they're they csos love to work with palo alto they're kind of the high-end gold standard but and we reported last year on the divergence in valuations between fortinet and palo alto networks fortinet was doing a better job you know pivoting to the cloud we said palo alto will get its act together it did but then you see these pure play best of breeds really you know doing well so now let's take a look at the it infrastructure space and it's 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 uh three categories we cut on networking servers and storage and this is a very large market it's it's it's over 200 billion dollars 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 you know more value of the core dell company dell's valuation is 79 billion and that includes its 80 ownership in vmware so you do the math and figure out what core dell is worth hpe is much smaller it's notable that its valuation is comparable to netapp netapp's around you know one-fifth the size of revenue-wise uh hpe now eric arista they stand out as the lone player that's having some success clearly against cisco what are your thoughts on on the infrastructure space so so a couple things i'll take away from that now first off uh you mentioned arista arista is a bit of an anomaly um a switching company you know a networking company that is in that upper echelon like you've pointed out above 40 percent it is it is unique and and basically they kind of cracked the code they figured out how to beat cisco at cisco's core competency which is traditionally switching switching and routing and they they did that by delivering a very differentiated uh uh hardware product um that that they were able to tap into some markets that uh that even cisco hasn't been able to open up and and those would be the hyperscale uh hyperscale you know hosting vendors like uh google and facebook and microsoft but i would i would put i would put arista kind of in a in a unique situation the other thing that i'll just point out that i think is an interesting takeaway from the um from the the the slide that you showed is there are some uh infrastructure or what i would consider is bordering on data management type companies i mean you look at uh rubric you look at cohesity and nutanix veeam they're 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 uh year or two where that's been a market that hasn't had a lot of innovation and and now there's some interesting things coming down the pipe you know that's interesting comments that you make in there because if you think back to sort of last decade arista obviously broke out the only two other companies in the in the core infrastructure space and this was a hardware game historically but it's obviously becoming a software game but take a look at pure storage and nutanix you can see their valuations at five billion and seven point four billion dollars respectively uh and then to your point cohesity you got them at 3.7 billion just did a recent you know round rubric 3.3 billion that's from 2019 and so you know presumably that's a higher valuation now veeam got taken out last january at five billion by uh inside capital uh and so i think they're doing very well and they're probably uh up from that and susa is going public at uh at a reported seven billion dollar valuation so quite a bit different dynamic in the infrastructure space so eric i want to bring it back to the elite 80 in in in in startups in general my first question to you is is what do you look for from successful startups to make this elite 80 list so a few factors first off uh their performance is uh is is one of the primary uh situations if it's a company that's not growing we'll we'll probably pull it from the list um i would say it is also very much a function of my perception of the quality of management uh we we do meet with all these management teams um if we feel like uh they're they're they're putting together a uh you know a um a leadership team that's gonna be around for a long time and they've got a product position that's uh pretty attractive uh those would certainly be two key aspects of what i look for beyond that uh certainly feedback that we get from competitors uh feedback that we get from industry contacts like resellers and then then i'd also just say my enthusiasm for their respective market that they're in if it's a a market that i think is is going to be difficult or flat or not very interesting then then that would certainly be a a reason to to not include them uh conversely even if it's a small company if it's if it's a sector that i think is going to be uh around for quite a while and it's very differentiated uh then we'll include um a lot of the smaller companies too well a good example that's like a weka i mean i don't want to i don't want to go into these companies but two because we believe we 80 companies are going to leave somebody else but that that's a good example of a smaller company that looks to be disruptive um how should enterprise customers the buyers do you think evaluate and filter startups you have any sense of that well um a couple things that i struggle with that that would be uh you know something that's a lot more readily available to them is uh is just the quality of the product i mean that's obviously uh why why they're looking at it but uh if it's a uh if it's a company that's got a a unique product that uh is is built uh you know that that can that can that works that would be the starting point then then beyond that it's also is it a management team is is the behavior of the company something that uh reflects a management team that's uh that's that's you know a high quality management team if they if they you know are responsive if they're following up if they're not trying to pull in business uh quickly if they're priced appropriately uh metrics like that would certainly be um key aspects that would be readily available to uh to the you know to the the buyers of technology beyond that um you know i think the viability of that market is going to be uh a key aspect as to whether or not that company is going to be around even if it's a good company if uh if it's a highly competitive uh market that's going to have some big big players that can kind of integrate it and to make it a feature across other other product lines then that's going to make it a a tough a tough road to to go for a start-up these days you know the other thing i wanted to to talk about was the risks and the rewards of working with with startup companies and i've had i've had cios and and enterprise architects tell me that they'll when when they have to do an rfp they'll pull out the gartner magic quadrant they'll always you know pick a couple in the top right just to cover their butts but they many say you know what we also pick some of those those in the challenger space because because that are that are really interesting to us and and we run them through the paces and we manage those risks we don't we don't run the company on them but it helps us find these diamonds in the rough i mean think about you know in the in this in the second part of last decade if you picked a snowflake you might have been able to get ahead of some of your competition things like data sharing or or maybe you found that that well you know what octa is going to help me with my identity in 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 uh people should manage those risks and and how they should think about the upside i don't i don't think today um a a you know a company can work today using legacy technologies i i think the risk the greater risk is falling behind from a a digital transformation perspective this this era i think the pandemic is probably the best proof point of this um you can't you can't go with just a uh a traditional legacy architecture in a in in a key aspect of your business and so the startups um i i think you've got to take the quote-unquote risk of working with a startup that's uh you know that's got a viability concern or sustainability concern uh the risk of of having a um uh an i.t infrastructure that's inadequate is uh is a far greater risk from my perspective so i think that the startups right now are are are in a very strong position and they're well funded that's the last question i wanted to talk about is how will startups kind of penetrate the enterprise in this modern era i mean you know 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 uh so so how maybe you could give us your perspectives on how you see startups getting into the enterprise in these sectors so i one of the really interesting things that we've seen in the last couple years is a lot of changes to sales models and and if you look at the mid market the ability to leverage viral sales models uh has been wildly successful for some companies um it's been um you know a great strategy uh there's a public company ubiquity that did a uh has built a multi-billion dollar uh you know business on on without without a sales organization so there's some pretty interesting um directions that i think sales and go to market is going to uh incur over the over the coming years uh traditional enterprise sales i think are still uh pretty standard today but i i think that the efficiency of um of you know social networking and and uh and and what would the the delivery of uh of products on on a digital for in a digital format is going to change the way that we do sales so i think i think there's a lot of efficiencies that are going to come in uh in sales over the coming years that's interesting because then you'll you know i i think you're right and and and instead of just just pouring money at promotion maybe get more efficient there and pour money in into engineering because that really is the long-term sustainable value that these companies are going to create right yeah i i would absolutely agree with that and um again if you look at the you know if you look at the charts of the well-established players that that you had mentioned those companies are where they are that the ones at the top are where they are because of their technology i mean it's it's not because of uh their go to market it's it's it's because they have something that other people can't uh can't replicate right well eric 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 uh it's been a lot of fun so uh 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 it'll come up there's a there's a lot of data out there so it's really a worthwhile reference tool and uh so thank you everybody for watching remember these episodes are all available as podcasts wherever you listen you can check out etr's website at etr dot plus and we also publish weekly a full report on wikibon.com and siliconangle.com you can email me david.velante at siliconangle.com or dm me on twitter at divalante hit up hit our linkedin post and really appreciate those comments this is dave vellante for the cube insights powered by etr have a great week everybody stay safe and we'll see you next time you