Industry Voices—Chua: Cato Networks goes from dark horse to $1B unicorn

SD-WAN and SASE vendor Cato Networks scoops up $130 million at a pre-money valuation of $1 billion to fuel its expansion. (AvidThink)

Cato Networks, an Israeli-based startup in the SASE and SD-WAN space, announced today that it raised an additional $130 million for a total of $332 million raised to date.

Lightspeed Venture Partners led this new round with the participation of a new investor, Coatue, a $25 billion hedge-fund. Previous investors, including Aspect Ventures, Greylock Partners, Singtel Innov8, and Shlomo Kramer, participated. Another previous investor, USVP, did not join this round.

Cato's been steadily raising ever-larger rounds, beginning with $20 million in a Series A in October of 2015, $50 million in 2015 September of the same year, $55 million early last year, and then seven months ago, a $77 million Series D round in April. The milestone of over $1 billion in valuation is laudable, especially in the time of a pandemic. But in Cato's case, it's likely because of the pandemic and the move to work-from-home (WFH) and work-from-anywhere (WFA) that's propelled it to this astronomical valuation.

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Cato gets cash-rich start to 2021

With this round, Cato will have $240 million cash in its war chest entering next year, allowing it to grow its team size from around 270 in 2020 to an anticipated 385 by the end of 2021. Cato believes this will help fuel its market expansion and accelerate its product roadmap, positioning the company to better attack an available market that it estimates is around $11 billion. The combined SASE/SD-WAN market pre-consolidation is about $30 billion, primarily due to the size of the telco backbone market and the numerous security capabilities that analyst firm Gartner has thrown into the SASE kitchen sink.

Overvalued? Or appropriately valued?

In the context of 128 Technology being bought by Juniper for $450 million last month, perhaps Cato Networks isn't overvalued. Based on whisperings and rumblings in the market, I would make an educated estimate that Cato's valuation is likely about 2X higher than 128's valuation (using estimated trailing 12 months revenues). Given Cato's rapid growth of 352%  bookings growth in 2018 as the company hit its stride in the market, and then a doubling of bookings in 2020 compared to 2019, it might be justified.

Cato believes its valuation is higher because of the company's focus on the SASE market, which it views as more massive than the SD-WAN market. Other SD-WAN players are also pivoting into this market. Still, I believe part of Cato's valuation premium is due to the management team's reputation and early bet on a fresh cloud-centric approach to the enterprise edge security problem.

Cato's secured over 650 customers in the five years since its founding, serving 7,000 locations across 100 countries. Cato has about 200,000 users on its software clients (and clientless), outside its 7,000 branch units, all served from Cato's 60 points-of-presence (POP) worldwide, which I'm expecting will grow in 2021. During the pandemic, Cato saw a tripling of daily active concurrent users to 50,000.

RELATED: Cato Networks CMO Yovel on what is and what isn't SASE

With these strong metrics, Cato likely saw an opportunity to secure more funding at a favorable valuation while taking advantage of a world that's moved to a hybrid working model, where an over-the-top SASE offering will be on every CIO's buying list.

Competition will be fierce

The market that Cato plays in has multiple sources of competition today, including Aryaka, an OTT player that's pivoted from its original roots into cloud-centric SD-WAN, Zscaler and Palo Alto Networks, which are focused on cloud-based security, and security vendors like Cisco, Juniper, Fortinet and Barracuda. Not to mention the SD-WAN players all pivoting to SASE, including VMware/VeloCloud, HPE/Silver Peak, Nuage Networks, Versa, Huawei (in non-U.S. markets), and many others. Cato's main competition will likely be managed service providers  and telcos that offer cloud-managed converged security and network solutions, many of whom will use products from these other vendors to build their managed services.

Nevertheless, the Cato team is led by industry veterans CEO Shlomo Kramer and President and COO Gur Shatz, both of whom co-founded Cato. They have built successful security companies previously and know how to leverage a worldwide channel partner model to gain economies of scale and efficiencies.

Laying the right foundation

From a solution foundation standpoint, Cato Networks made a bet when it started by building a clean-slate cloud-based platform to address what the company saw as a new enterprise security model — one served primarily from the cloud. While Cato provides customer-premises equipment (CPE) for branches, most of its value-add sits cloud-side. Cato has also built out POPs worldwide to reduce network latency.

With the ability to perform application-centric routing and acceleration from the edge, Cato could provide a converged platform that addresses today's converged needs. Over the last five years, the market has moved towards Cato's direction, and the pandemic accelerated an already-growing trend.

Likewise, Cato's observations that being privy to all that enterprise data at the edge provides tremendous analytics opportunities (AI/ML-powered), which allows it to build a new breed of analytics-driven security solution that reduces the need for many of today's standalone security products such as NGFW and SWG. While application-layer logic and identity-awareness will be needed to replace CASB and WAF (though WAF isn't usually deployed in the enterprise edge location), Cato has a chance to rethink enterprise edge security.

What's next for Cato Networks?

To date, most of Cato's customers have been mid-market. It will need to secure several large enterprise customers (Fortune 50, 100) to prove its mettle versus the incumbent security vendors. In parallel, Cato will likely leverage channel partners and its cloud-technology to serve SMBs. The leadership team has experience doing both, and it's a matter of money (which they have loads of now) and execution.

The CSPs and MSPs and the other security vendors won't go quietly, and I expect a spectacular fight for the SASE/cloud-based security market in 2021.

Given the accelerated pandemic timelines, this is a unique gold rush-type opportunity where fortunes are made and lost. For me, I'm going to stock up on pick-axes and shovels and head on over!

Roy Chua is founder and principal at AvidThink, an independent research and advisory service formed in 2018 out of SDxCentral's research group. Prior to co-founding SDxCentral and running its research and product teams, Chua was a management consultant working with both Fortune 500 and startup technology companies on go-to-market and product consulting. As an early proponent of the software-defined infrastructure movement, Chua is a frequent speaker at technology events in the telco and cloud space and a regular contributor to major leading online publications. A graduate of UC Berkeley's electrical engineering and computer science program and MIT's Sloan School of Business, Chua has 20+ years of experience in telco and enterprise cloud computing, networking and security, including founding several Silicon Valley startups. He can be reached at [email protected]; follow him at @avidthink and @wireroy

Industry Voices are opinion columns written by outside contributors—often industry experts or analysts—who are invited to the conversation by FierceTelecom staff. They do not represent the opinions of FierceTelecom.

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