CEO Q&A: Digital Security Prospects for 2014

When it comes to IPOs, cybersecurity firms have had a good year — just look at the recent offering of FireEye (FEYE), which is up 95%. But going into 2014, it’s a good bet that the momentum will continue.

To get some commentary on this, I interviewed James Foster, who is the CEO and co-founder of ZeroFOX. Foster is more than just an entrepreneur, though. He also has written more than a dozen books and holds various patents on cybersecurity.

Here’s what he had to say:

Q: Can you give us some background on your company?

A: We live in an era of globalized and perpetual cybercrime. 99% of companies today have a security virus and don’t know it. More than half of all cyber attacks are targeted toward small businesses; the average cost is $188,000 per breach. Companies that don’t stay ahead of these security challenges will become [cyber crime’s] next victim.

Traditional security solutions defend the perimeters and devices of your organization, through firewalls and antivirus software. At best, they catch about half of all attacks. At worst, they neglect to identify anything.

Companies today must identify and predict adversaries’ next moves before they make them. This requires actionable, real-time intelligence. The ZeroFOX Protection Cloud, fed by over 100 million next-generation sensors every second of each day, replaces outdated appliances or enhances current defense-in-depth strategies. Our solution identifies your potential attackers and anticipates their methodologies. We prevent and block attacks in our cloud even before they would have reached your network, systems, and mobile devices.

Q: How can investors make sense of the market?

A: We are in an online security crisis. Traditional solutions by the big box antivirus vendors are no longer effective. Threats are networked, and it takes intelligent, cloud-based, data-driven and self-educating technologies to fight them.

To paraphrase the Chinese saying, everywhere you see great danger, there’s also great opportunity. According to a recent USA Today publication, cybercrime costs US corporations anywhere from $40-500 billion annually. We hear about them all the time: crimes where millions of credit card numbers are breached, ATMs are hijacked, trade secrets stolen. Criminals live everywhere from Asia to Europe to the house next door.

Companies, meanwhile, are seamlessly networked with partners, suppliers, vendors and third-party technology providers — all points of entry for an adversary. The entire enterprise lives in an ongoing state of risk. Awareness within the C-suite, however, is just beginning. Only recently have boards begun to form risk committees to measure privacy and security threats. As executives continue to prioritize security, they’re investing more in tools that address the real and present danger online. That’s why the IPO space for security companies is so hot right now.

Q: What are some of the top security companies that have come public lately?

A: Palo Alto Networks (PANW), which built a next-generation firewall that detects cyberattacks on any device, set the precedent with its successful IPO. FireEye, which uses virtual machines to sense malicious network attacks and share new intelligence, went public this September. When rival Barracuda Networks (CUDA) debuted in November, shares were up 32% on the first day.

Q: Prospects for ’14?

A:  Awareness around cybersecurity options will grow even more next year, leading decision-makers to increase their investment in the space. That, in turn, will bring out a new host of IPOs and players in the space. We’ll see more and more service providers pop up along with technology vendors combine big data in-the-cloud with software to come up with new kinds of defensive solutions.

Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO StrategiesAll About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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