Duo Makes Sense for Cisco: Target’s Backer

By Chris Nolter

As Cisco buys Duo Security for $2.34 billion, backer Brian Neider of Lead Edge Capital discusses the evolution of the security unicorn.

The $2.35 billion purchase of Duo Security Inc. is Cisco Systems Inc.’s (CSCO) second-largest deal since Chuck Robbins became CEO three years ago, underscoring the appeal of technology that authenticates a user’s identity as more traffic moves onto cloud and wireless networks.

Founded by CEO Dug Song with CTO Jon Oberheide, Duo was an attractive investment for its backer Brian Neider, Partner at Lead Edge Capital, as he explained to the Deal.

“One of the things we see very frequently is a product ends up only meeting the needs of one or two people within the organization,” Neider said. If a single person in the IT department purchases a security product to address “outlier type issues” and leaves the company, he suggested, the software can be orphaned.

“Because what Duo does is protect password security through their multi-factor authentication product, they touch basically everyone within an organization,” he said, referring to authentication software that requires more than one credential or method of verifying identity before a user can log in. Cisco cited the importance of identifying users as more traffic on corporate networks moves onto cloud and mobile networks, in a Thursday call.

Since its 2009 founding, the Ann Arbor, Mich., company has signed up 12,000 customers include Etsy Inc. (ETSY), Facebook Inc. (FB), K-Swiss Inc., Viacom Inc.’s (VIAB) Paramount Pictures, Bertelsmann SE & Co. KGaA’s Random House, Toyota Motor Corp. (TM), Yelp Inc.(YELP) and Zillow Group Inc. (Z).

“It’s very sticky. It’s very easy to deploy across organizations because Duo has a great product and it’s very simple to use,” Neider said of the product. “Beyond that, it’s hard for companies to dislodge from it because its being used by so many folks within the organization.”

While Duo started with multi-factor authentication, the Lead Edge partner said, it added capabilities such as “single sign on,” which lets users sign on to multiple apps through one dashboard, and vulnerability assessments that test the strength or weakness of security measures.

“It’s not the type of product where one single solution is accounting for all of the sales,” he said. “It’s a whole suite of products.”

Duo Security has raised $119 million. In addition to Lead Edge, backers include Meritech Capital Partners, Geodesic Capital, Index Ventures, Redpoint Ventures, True Ventures, Workday Inc. (WDAY) and Alphabet Inc.’s (GOOGL) GV, formerly Google Ventures.

The last round of funding in October 2017 valued Duo Security at $1.17 billion—about half what Cisco is paying.

The deal is the largest since Chuck Robbins became CEO in 2015 and began to expand in software and lines of business with recurring revenue. Robbins’ biggest payout was $3.7 billion for application and business monitoring company AppDynamics. It is Cisco’s largest security acquisition since the $2.7 billion purchase of Sourcefire in 2013.

When Lead Edge first invested in Duo Security back in 2015, Neider said the company’s use of its funds impressed him.

“Many security companies, especially in the startup phase, end up being ‘upside down,'” he said. “What I mean by that is they raise a ton of capital early on and they don’t end up executing on their go-to-market strategy. You see a lot of companies that have raised $80 million or $90 million and they get to $5 million to $10 million or $20 million of revenue. They burn through a lot of capital before they really prove out what they are trying to do.”

Duo Security had higher capital efficiency, Neider added. “They had crossed the $10 million revenue mark having burned less money than that,” he said. “They generated in excess of $100 million and well past that over the last year, let’s say, and they had only burned in the couple of tens of millions of dollars, which is a very unusual thing to see.”

In venture capital parlance, Neider said, Duo Security is a product-led company, which he attributed to co-founders Song and Oberheide.

“A lot of companies build a product and most of what they need to do is figure out how to sell it,” he said, noting that the focus and spending shifts to sales and marketing. “In product-led companies, the product in some ways can sell itself and the majority of the spend goes to making sure the product is cutting-edge and above and beyond the competition.”