Will Co-founder Vikram Kapoor’s Lacework Emerge as a Cloud Security Winner

August 9, 2022

Last year, the funding for U.S. technology businesses, by public, venture, and angel investors, reached a cyclical peak. For instance, in 2021, hundreds of start-ups in the cyber and information technology (IT) security business raised $30 billion in venture capital funds, more than double that in the previous year.

But now the down cycle shake-out in the U.S. technology industry, triggered as in the past by a decline in the stock market, is currently underway. Companies are reluctant to sign major business deals with recent start-ups because they are unsure if the new companies will survive. Valuations of most large public technology companies have fallen while that of most start-ups have taken a big hit. Funding for new companies has largely dried up and managements, seeking to conserve cash, are laying off employees. 

Among the companies dealing with the downturn is Lacework, based in San Jose, California. It offers cloud security, seeing it as fundamentally a data problem. Laceworks seeks to solve this problem by using a data-first, machine learning engine which automates the process of enabling customers to “see and understand cloud changes at scale without requiring manual intervention by security teams, leading to safer innovation at higher velocity,” according to the company.

In 2021, Laceworks raised more than $1.8 billion in two rounds, with the last one valuing it at $8.3 billion. A post on the company’s website states it was “the largest funding round in security industry history.” The funding came from Tiger Global, Morgan Stanley, Sutter Hill Ventures, Snowflake Ventures – Snowflake was co-founded by Sutter Hill - and other firms, “the best strategic venture capital and institutional investors in technology and finance.”

The plan was to use the funds to “chart a very aggressive course as we invest in a range of areas in the company,” including expanding to the Asia Pacific markets, Mike Staiger, Lacework’s Chief Financial Officer told sdxcentral in November 2021. “We want to build big, fast-moving teams…and that requires a significant investment,” he added.

Last year, the company tripled the number of its customers and increased its staff by five-fold to more than 1,000. Several customers are companies in which Sutter Hill has invested including Grail, a cancer screening company, Wavefront, a monitoring start-up, and Pure Storage, a data center hardware maker, as well as other firms including VMware, a cloud software company with a market value of $51 billion.

In May this year, Lacework Co-Chief Executives David Hatfield and Jay Parikh sent a note to employees about “some difficult news.” The note, which is posted on the company’s website, stated that, “Over the past several weeks and months, a seismic shift has occurred in both the public and private markets.” The CEOs added that they said “goodbye to some of our colleagues.”

While they did not state the number of employees laid off, Lacework cut a fifth of its staff according to news reports. The CEOs, the note continued, have “adjusted our plan to increase our cash runway through to profitability and significantly strengthened our balance sheet so we can…weather uncertainty in the macro environment.”

Hatfield was formerly the president of Pure Storage, a company also incubated by Sutter Hill. From 2009 to 2021, Parikh was at Facebook, including as vice president of engineering. He earned a degree from Virginia Tech, 1994.

Jay Parikh, Co-CEO Lacework

Lacework was founded in 2015 by Mike Speiser, a founding investor, Vikram Kapoor and Sanjay Kalra. Speiser is a Managing Director of Sutter Hill Ventures, Palo Alto, California. His strategy is to find two or three co-founders for a start-up, be the founding investor and often take on the role of the initial CEO, according to Crunchbase.

Five months before Lacework’s founding, Kapoor joined Sutter Hill as an entrepreneur-in-residence. He is the Chief Technology Officer of Lacework. Earlier, from 2011 to 2014, he was the Senior Director of Engineering at Bromium, which he co-founded. Bromium’s products are used to isolate browser-based attacks, malicious downloads, email attachments and other security applications. In 2019, it was acquired by HP, a vendor of personal computers, printers and 3D printers. From 2004 to 2011, Kapoor was at Oracle, the database company.

Kapoor, 47 years old, is a serial entrepreneur with Lacework being his sixth start-up. His dad owned a textile business in India which sold shirts and women’s clothing. During his first year in college, when he was around 18, Kapoor’s dad asked him to buy something and sell it. He bought textiles to make T shirts and, despite trying five different ways, was unable to find a customer to buy it. This experience, Kapoor says in a video posted on Lacework’s website, instilled in him the importance of developing a product that customers need.

In 2000, he earned an MS in Computer Science from the University of Minnesota and in 1997 a BTech from the Indian Institute of Technology (IIT), Varanasi Hindu University, India.

Sanjay Kalra, a co-founder, chief product officer and board member of Lacework, left in 2019 to found ShiftRight, a workflow automation software. Kalra, 52, earned an MBA from Santa Clara University, California, 2001; an MS in Computer Science from the University of Southern California, 1994; and a BTech from the National Institute of Technology, Warangal, India, 1992.  

Demand for security technology continues to be strong given the rise in data breaches, ransomware attacks and sharply rising costs for insuring against security risks. In 2021, there was a three-fold increase in encrypted attacks compared to 2020, according to a study by Zscaler, a security firm based in San Jose, California. Zscaler is one of Lacework’s major competitors in the crowded cloud security business. Zscaler was co-founded by Jay Chaudhry, who, like Lacework’s Kapoor, is an alum of IIT, Varanasi, India.

Zscaler’s cloud-based software, enhanced by machine learning and artificial intelligence capabilities, is distributed across more than 150 data centers around the world, servicing more than 450 major companies. Siemens, for instance, uses Zscaler to secure the traffic of its 350,000 users in 185 countries. The United Kingdom’s National Health Services provides a secure online portal to more than a million patients through Zscaler.

Zscaler’s stock, while down by half from its November 2021 high, gives it a market value of $23 billion, nearly three times the 2021 valuation of Lacework. Chaudhry, 62, with a net worth of $9 billion according to Forbes, is the richest Indian American. In June this year, Lacework’s co-founder Kalra sold Shiftright, his new start up, to Chaudhry’s Zscaler and joined Zscaler.

Another major Lacework competitor is Palo Alto Networks, which has a market value of $51 billion. Based in Santa Clara, California, Palo Alto sells hardware and software systems to protect digital operations across clouds, networks, and mobile devices. The products are used by more than 84,000 customers in over 150 countries. Palo Alto’s CEO is Nikesh Arora, who also earned a BTech degree from IIT Varanasi. Other big competitors Lacework faces include CrowdStrike, founded in 2011, with a market value of $46 billion; Fortinet, with a market value of $42 billion; and Check Point Software, with a market value of $15 billion.

Lacework’s founding investor Speiser is unlike other venture capitalists who invest and work with a number of companies. At Sutter Hill Ventures, he spends 80% of his time and resources on one company till the business takes off, as he did with Snowflake, he told CNBC. He turned an initial investment of less than $200 million in Snowflake into $12 billion, a sixty-fold gain, at the time of the cloud-based data platform’s initial public offering in 2020. Snowflake has a market value of $54 billion.

Snowflake and Lacework are each other’s clients. Thierry Cruanes and Benoit Dageville, who co-founded Snowflake with Speiser, were earlier at Oracle where they knew Lacework co-founder and CTO Kapoor.   

Apparently, the intense competition in the cloud security business does not make Speiser nervous. He told CNBC “There hasn’t been a $100 billion company in security, and we think that’s about to change,” with Lacework. He said that in January 2021, when technology stocks were booming and investors were eagerly funding Lacework and other security start-ups. Will “the seismic shift in public and private markets,” over the past seven months, help or hurt his forecast?

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