Private Equity Pay Attention: Online Privacy & Cyber Security

It's all fun and games until all your credit cards are maxed out and your company let millions of people credit card data leak.

Market Mentalities and Tunnel Vision

The race for AI dominance is on and it seems as though investors have developed a herd mentality: tunnel vision. While the herd plods along mumbling something about AI and Nvidia, you should imagine yourself as the rancher. Standing there wondering why the animals are walking away from the editable hay you put out for them to eat. Alright, enough with the ranch analogies - let’s talk investments.

My point above is everyone seems to have this deadset focus (a herd tunnel vision) on AI and Nvidia. It seems like everything in the news has to mention those - now buzzwords - terms to be relevant. This type of action in the market reminds me of a quote, said to me by my grandfather:

Rarely is the majority right.

Given the current market conditions and stark focus on one segment, this quote should be at the forefront of everyone’s mind. While everyone continues to chase the everlasting hype around AI and Nvidia (NVDA 0.00%↑), I believe now is the perfect opportunity to break away from the herd. The question remains, “Where is the biggest stack of hay?” (I had to get another reference in there.)

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A History Repeated

I would like to remind everyone of another time the entire stock market had tunnel vision and set its sights on one stock/sector. Remember that little ‘ole company called Tesla (TSLA 0.00%↑)? Well, in case you have forgotten, Tesla was once the sweetheart of investors (Nvidia is only missing a CEO smoking pot with Joe Rogan).

TSLA stock over the past 5 years.

While Tesla is still up over 900% from five years ago, it is no longer the Wall Street love it once was. Additionally, TSLA has leveled off and isn’t anywhere near the growing track it was once on. I believe the same will happen with the stocks riding the AI hype train.

Tesla isn’t the only example either…

Quick, Breakaway!

So why shift from AI to cyber security? For one, there is potential for a high upside without Isaac Newton chanting “What goes up, must come down” in the background. Look at the rise of VPNs in recent years. Hilariously, VPNs are one of the lowest forms of security and don’t do all that much in terms of protecting you. A VPN is like Batman’s mask or Clark Kent’s glasses - if you really strain the eyes you can tell who they are.

Large companies, however, can’t keep their data hidden behind Clark Kent’s glasses. They need invisibility cloaks - time to switch to Harry Potter references? In all seriousness, cyber security is growing in importance and shows no signs of stopping. As the world becomes increasingly interconnected, and continuously relies on the online world to operate the value of keeping your information safe will compound. We are also beginning to see a world transitioning to a time of uneasiness. War rages across the sea, reports of China surrounding Taiwan seem to surface now and again, boats in the US are destroying bridges after they seemingly lose power, and events like these (whether conspiracy theories or factual events) are going to drive people into “privacy mode.”

Similarly, (and I hate to mention AI again, but…) AI and the subsequent deep fakes are creating currently unrealized security issues. Programs running on AI are capable and already have been able to create images, video renderings, and voice spoofs of people that are nearly 100% accurate. Face ID becomes increasingly less valuable when you realize that AI can recreate your face from other images online. Your bank using voice recognition to verify that it is truly you on the phone - done for.

Oh, by the way, that car of yours that has all that fantastic technology in it… it also collects your data.

Data Breaches and Distrust

Now, you could argue that since people are spending more time online they are valuing their privacy and security less. People don’t care about keeping their information safe when they are willing to let their fridge, car, or even toilet connect to their phone. If that is the way you think, I would sit down before I start thrashing you with these terrifying stats from a Forbes article. In 2023 there were over 2,300 cyberattacks and over 343 million victims - a 73% increase from two years prior. But how much money has this cost companies and individuals? Well,

A data breach costs $4.45 million on average. Business email compromises accounted for $2.7 billion in losses in 2022 [and] information security jobs are projected to grow by 32% between 2022 and 2032.

Are you starting to see the light? If you owned a business and knew that a cyber attack could run you a $4.45 million tab would you be more or less willing to pay the $20,000 per month charge to ensure that never happens?

Businesses trying to save some money won’t be the only driver for cybersecurity companies. US adults, especially those in the Republican party, have a growing distrust of how the government uses their data. What a perfect time for online privacy, VPN, and cybersecurity companies to capitalize.

At some point or another, our lovely Uncle Sam will likely start putting stricter cybersecurity regulations on companies. When AT&T gets 73 million people’s data taken, T-Mobile loses 37 million, and other companies total tens of millions more, regulations will soon follow.

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Bring Me My Money

The real trick to investing is to be early. What a surprise, right? To be truly “early” you would have to go back in time and invest 50 years ago, but sadly Elon isn’t there yet. Cybersecurity has yet to experience the same world focus that sectors like AI have - the best is yet to come. That being said, there is no lack of capital being thrown around as stated by PitchBook,

Investors poured more than $9.6 billion into information security startups across 693 deals in 2023, according to PitchBook’s latest report on the sector. Cybersecurity unicorns outperformed many of their emerging tech peers in valuation growth last year.

Some of these companies, which will be revealed for paid subscribers later on in this letter, have reached valuations of over $1 billion a piece with one recently topping $10 billion. If you think that venture capital firms have been a bit too loosey-goosey with their money and don’t want to follow their money then I have some great news for you. Microsoft — yeah that same little ‘ole company that capitalized on OpenAI big time — will be investing $20 billion into its cybersecurity work, according to a Reuters article. Google is devoting $10 billion to cybersecurity while training 100,000 people to obtain cybersecurity certificates. Similarly, IBM is training a workforce of 150,000 people in cyber. Here is a formula I have created to show industry growth:

growing workforce + invested capital = growing industry

That is a pretty revolutionary formula, isn’t it? I am thinking about entering to win a Pulitzer for it — can I do that? Nonetheless, you can see there is money flowing towards the industry and the mainstream media isn’t exactly up to date with reporting on this growth.

Set Your Sights

If you’re working in private equity, venture capital, or looking to invest in companies within the online world of cyber, never fear, The Simple Side is here! Just a quick throwback reference to the superheroes from earlier. Alright, let’s get serious, and set our sights on some of the companies making a name in the cybersecurity industry.