Darktrace: Dips and Dives
For a cyber security firm Darktrace’s reputation has been anything but secure. As Jack Stockdale, CTO and founding partner, told City PM: “One minute you can be the tech darling, the next minute you’re not. Then, suddenly, you are again!”
Whilst its debut valued the company at around £1.7bn, the immense growth of the British darling has been marred with stock turbulence and controversy.
An issue that has particularly stuck is its close ties with tech tycoon Mike Lynch, who was accused of fraudulently inflating the value of Autonomy when he sold it to Hewlett Packard for £8.6bn in 2011. This sent shares into a brutal frenzy.
Brokers have also weighed in on the legitimacy of the Cambridge-based company; a scathing Peel Hunt note last October rated it a ‘Sell’ stock, indicating that it was worth only half its value. They suggested intense marketing had overhyped the Darktrace offering.
Speaking with City PM, Stockdale was unsurprisingly dismissive of these criticisms. He instead pointed to its 6500-strong client base, and high retention: 65 per cent of customers said they would spend more on Darktrace products, according to independent research from Berenberg.
Instead, like ad tycoon Sir Martin Sorrell suggested earlier this week, Stockdale pointed to the more general difficulty for ambitious tech companies in the London market.
“If you go to Silicon Valley, there is a lot more willingness to invest in people who have failed or whose ideas have no revenue prospects. Historically London is more used to classical companies”.
The validity of this standpoint can be seen with the sheer volume of UK tech firms that have been snapped up by US counterparts.
He called this the “void” between starting a company and an eventual IPO. Stockdale explained that a lot of successful companies struggle to pass this initial stage without being acquired.
This also makes the landscape much more fierce for firms who do ‘make it’. Stockdale explained that the lack of players made issues “totally amplified” for the likes of Darktrace: putting an intense spotlight on whatever it does.
However, in his view, the tide is gradually turning; London investors are shifting to value the “future potential rather than the right now value” of companies: emulating a more American approach.
James Wootton, corporate partner at Linklaters, echoed this point and told City PM: “While macro and market conditions have undoubtedly caused some levelling off of activity over the last few months, we see the record levels of London IPO activity in 2021, the innovative nature of many of those deals and the regulatory reforms coming out of the Hill and Kalifa reviews as creating a powerful foundation for further listings later this year and in 2023.”
He added that whilst the debate will linger on, the US market “is not without its own challenges”, pointing to litigation and complicate considerations.
However, there seem no major plans to jump ship for Darktrace.
“We’re proud to be a UK tech company that is still here and hasn’t been bought by an American company. We are listed in London, which is our natural home”, he emphasised.
Just yesterday, Darktrace snapped up competitor Cybersprint for €47.5m (£39.6m), making the transaction 12.5 times the Dutch firm’s annual recurring revenue. Not only does this show consolidation, but it also demonstrates that Darktrace practises what it preaches with its “future potential”.
A key message that Stockdale wanted to drive home was that the company isn’t just looking to be a defensive form of cyber security, but a proactive one. This means building tech that can respond to cyber attacks that haven’t even happened, ultimately moving away from the mental model where companies are waiting for a problem to occur and then reacting.
Looking ahead, Stockdale is confident Darktrace’s unique approach will be able to fight the rising number of cyber attacks. It seems brokers are also sharing this confidence. Since that note, Peel Hunt has upgraded the stock to a ‘Hold’.
So with Darktrace’s whole philosophy being about doing things differently, perhaps it is fitting that it has had a rather bumpy ride on the markets – whether that’s in London or eventually in New York.