7 lessons from reaching a $1.7 billion valuation in just one year
One year after its founding, cybersecurity startup Wiz turned into a unicorn faster than any other cyber company in the world. Assaf Rappaport, one of the company’s founders, offers seven lessons from the rollercoaster journey
I’m the entrepreneur with the most cliche story in Israel: A Tel Avivian; graduate of Talpiot (an elite Israel Defense Forces training program); alumnus of Unit 8200 (the IDF’s renowned intelligence-gathering unit) and of Unit 81 (a Military Intelligence technology unit that’s even more secretive and selective than Unit 8200); and a former consultant for McKinsey.
In 2013, I founded Adallom, together with my army buddies Roy Reznik, Ami Luttwak and Yinon Costica. It was our first company. We started without an idea or a direction, but we decided to commit ourselves to the project for a year. It was very important to us that the company would be ours; we were wary of bringing in partners who might take over the startup, like venture capital funds. In retrospect, I realized it was exactly the opposite: The successful VC funds prefer the entrepreneurs to lead the way as much as possible. We were naive.
We had no idea that the more we would try to avoid them the more interested they would become.
Gili Raanan, a general partner at Sequoia Capital, was one of the first ones we tried to avoid. His phone number was not in my contacts and one time I answered by mistake, and there he was, on the line. He suggested that we set a meeting, and I told him we’d meet in a few more months. He insisted that I choose a time and place. We agreed on a date a few days later and I just stood him up. That’s how arrogant and inexperienced I was. It’s not something I’m proud of. To my good fortune, he wasn’t insulted and he didn’t give up; instead, he persuaded us to come to an introduction meeting. It turned out to be an ambush – instead of a one-on-one meeting, there were 16 partners from Sequoia’s offices in the United States and Israel. An entire delegation that included managing partner Doug Leone, the head of Sequoia worldwide, who has been called ‘the godfather of Silicon Valley.’
In another moment of arrogance, I presented the company and the team, but I purposely didn’t share with them information about our business plan, the amount we wanted to raise and what we’d do with the money. Looking back, I acted like an idiot, because the things I ignored were the things they were most interested in.
The day after the meeting, Sequoia offered us $5 million. We asked for time to think about it over the weekend, but Gili insisted on inviting me to breakfast on Friday. We met at a gas station between Tel Aviv and moshav Michmoret, because he didn’t want to drive down to Tel Aviv and I didn’t know where Michmoret was. He told me our presentation was one of the worst ones he’d ever seen and also said the idea wasn’t wonderful – and added that he believes the right team with the right guidance would find the right idea. That statement was meaningful and very liberating. It was only later that I understood this investment philosophy: As entrepreneurs, we tend to give too much weight to the idea, but we need to change the sentence ‘I have an idea for a startup’ to ‘I have a team for a startup.’ A good idea is important but it will come with the right team, and not the other way around.
Conclusion: A startup is built not around an idea, which is going to change anyway, but around a team. The really good VC funds invest in talent, and not in products, ideas or business plans.
And also: Don’t drag your feet when it comes to meeting with the best funds. Don’t leave them till the end.
2. One who listens to problems will find ideas
So we had a team and money wasn’t lacking. We understood that the idea will emerge not only from us, the entrepreneurs, but also from the market. Sequoia set up meetings for us with the best data security people in the world, simply because 40% of the companies listed on Nasdaq are Sequoia companies.
Listening is not a trivial task. It’s hard to go into meetings with potential clients and detach from the conceptions you arrived with. The natural tendency is to echo what fits our molds and to reject what doesn’t fit in. During the initial weeks, we met with close to seven companies a day, and we tried to understand what their most burning problems were. Each one of us heard something different. Sometimes it seemed as if we hadn’t been present at the same meeting.
Eventually, we found a direction that was totally different than what we’d started with: cloud security. When big organizations use the cloud for a huge number of cloud applications, their data security people aren’t aware of them and of what data are stored in them. Our challenge was to enable organizations to continue being flexible thanks to this technology, while, on the other hand, not endangering the data, the workers and the clients. Ultimately, Adallom was at the intersection of the cloud and data security exactly during the period when this field was hitting its peak.
Conclusion: When you meet with customers, you’re not coming to convince them; rather, you’re there to learn from them. If you’re the one who spoke for more than a quarter of the meeting, it wasn’t a good conversation. Customers have problems that you didn’t even know existed, and the way to discover them is with question marks, not exclamation marks.
And also: You need some luck.
3. ‘No’ is the correct answer to determine whether the investor is serious
As the world’s largest cloud company, Microsoft became Adallom’s business partner very quickly. Adallom’s technology enabled more companies to stream more data into the cloud. Here, too, in my naivete, I didn’t see the offer coming. While we were busy building a commercial partnership, Microsoft had other intentions. When the phone call came in the wee hours of the morning from Ryan Cooper, Corporate Development Director at Microsoft headquarters in Redmond, Washington, I was with friends at a hotel in Vegas. I walked around in the hotel’s corridor so I wouldn’t wake them up. Cooper offered to buy us and I answered instinctively: ‘I’m very flattered, but no thanks.’ From that conversation, the offer was upgraded several times. For us, it was really a surprise: It was unbelievable that out of all companies, it was Microsoft that would be buying a security company – and, even more so, for that amount of money. When I told my mother about the offer, she insisted: ‘Make sure you get a company car.’
In Israel, an exit is publicized before it really happens. We had barely received a letter of intent from Microsoft when news of the acquisition was leaked to the media, along with the deal’s price tag: $320 million. Our employees heard about it from the headlines on the websites (“Microsoft makes a huge acquisition in Israel”) and were stunned. My mobile never stopped vibrating from all the congratulatory messages. People I hadn’t seen for years texted me ‘Mabrouk’ (congratulations, in Arabic) and celebrated something that hadn’t actually happened yet.
Conclusion: No matter what kind of offer you get – investment or acquisition – there’s only one response: ‘I really appreciate your offer, but no thanks.’ This kind of answer never deterred a determined investor or company – and if they’re not determined, they won’t invest in any case.
And also: You need to prepare a media plan, both internal and external; when things leak, you’ll have only enough time to hit the Send button.
4. The exit is just the beginning of the hard work
Exit is a confusing concept. You might think that after it’s done, the work is finished – the conventional saying is ‘Vest in peace,’ to relax until the options are vested and then wind down – but in an exit, the work is just getting started. The acquisition changes the company across the board, but the need, the customers and the competition don’t disappear. Our goal was to take Adallom to the extreme, to use Microsoft’s power in order to transform a small startup in Israel into the world’s leading cybersecurity product.
When I came to Microsoft, I committed to manage Adallom and the sphere of cloud security for two years. I never thought I’d stay there a single day past that time. I didn’t think corporate America was a place that would suit me. In my first meeting with Satya Nadella, CEO of Microsoft worldwide, he said something that surprised me: ‘I’m here to set the rules, you’re here to break them.’ That simply doubled my life expectancy at Microsoft.
Mergers and acquisitions are complex processes, and in more than a few cases, they fail. Connecting different cultures requires investment and openness on both sides, the acquired and the acquirer. Adallom’s 130 employees became Microsoft employees overnight, without having chosen to do so. Thanks to the openness led by Nadella, the acquisition of Adallom succeeded – both commercially and culturally. The approach was ‘We acquired Adallom not to teach them what to do, but to let them teach us.’ And it worked: On the commercial side, we grew the business from zero to $1.5 billion in revenues, and we did it all from Israel, via organic growth and additional acquisitions.
Conclusion: On the day after being merged into a giant corporation, don’t sit back and wait until the options mature. Instead, adopt the commando approach: We’re part of a big army, but we belong to an elite unit.
5. Don’t be afraid of activism
My job at Microsoft expanded every six months and after two years, I was appointed CEO of Microsoft Israel. When I took up the position, Microsoft was perceived as a stodgy, old-fashioned workplace. We were ranked in the second decile of good places to work in Israel, but within two years, we were chosen as the best workplace in Israel.
I never imagined I’d have such a wide space in which to operate. I discovered an open, accepting company that was able to effectuate a conceptual and cultural change and also to assimilate social activism – our move to support surrogacy for single-sex couples, which included a financial grant, became a standard at other companies in Israel. In my view, taking a values-based stand against discrimination, even if it opposes the government’s position, is essential.
In our efforts to stamp out the practice of using outside contract workers, we were only partially successful in mobilizing the rest of the industry. Contract workers are a convenient solution for increasing resources without making a commitment, a way to expand the workforce while discriminating against the workers. We worked together to obtain positions for 120 contract workers who became employed directly by Microsoft, and we opened new job opportunities for them. Regrettably, the industry still has a long way to go in this area.
Conclusion: In every company, a moment comes when you have to give the conservative corporate people a kick, and then go ahead and act. To be the best workplace and to recruit the best workers, you need to be brave and take a stand, engaging in social activism that gives rise to tremendous team spirit.
6. Take a deep breath and don’t exhale too soon
Leaving Microsoft was not a simple decision, but the knowledge that I’d be continuing with the same partners made it easier. Wiz is my opportunity to blend Adallom with Microsoft – to forge a link between a startup that knows how to run very fast from zero to one and a technology superpower that knows how to do scaling from one to 100 and capture the market.
The market changed fundamentally during the period between Adallom and Wiz. It matured and today many companies aren’t looking for a quick exit; instead, they want to grow and become unicorns or do an IPO at a massive valuation. If during the Adallom period there was one Israeli company in each sector of security, today there’s an abundance of local competitors.
The changes in valuations stem from the fact that Israeli companies’ potential to become unicorns has skyrocketed. Once, there was one Wix and one Fiverr – these days, there are more unicorns than ever. It’s because the entrepreneurs are more experienced – they’re not in a hurry to sell and aren’t afraid to build a large company. And also because the investors see the performance of Israeli companies and understand that the market has become super-professional. We’ve moved up from being an ecosystem of exits to being an ecosystem of unicorns.
There’s a lot of money in the market that’s chasing after entrepreneurs and seeking good investments. We see funds that in the past invested in mature companies at a very late stage, and now they’re investing at very early stages. The funds are afraid of being late for the train and missing out on the best investments, so they prefer to catch successful companies at early stages. These funds don’t invest at the seed stage and their goal is not to make a speedy exit for a few hundred million dollars. Instead, they invest a lot of money in the Series A and B rounds so they can build substantial companies.
Entrepreneurs need to be careful and not be dazzled. When you take a great deal of money at a high valuation, you remove from the table good options for acquisition at a valuation of hundreds of millions of dollars. This didn’t suit Adallom, but it does work for Wiz. You also need to steer clear of a ‘down round’ – if you don’t meet your forecasts and targets, you’re liable to raise funds at a lower valuation in the future and create negative sentiment around the company, which will harm the company itself, along with the entrepreneurs, the workers and the investors. The most critical thing for a startup is positive sentiment, which will enable it to recruit workers and investors – and, of course, customers.
The existing valuations are very confusing. Some are high but realistic, and some are detached from reality. Therefore, investors need to look at the business itself; they have to consider not only the quality of the entrepreneurs and the market, but also performance. For example, which customers are already paying the startup millions of dollars for its product and is the company at the stage in which it has a sustainable business model that works, one that’s been proven by large Fortune-500 customers. Also important is whether the company’s main objective is to get really big. While Wiz became a unicorn faster than any other cyber company in the world, it was also a company that had already attained significant revenues and significant customers during its first year in existence.
Conclusion: You shouldn't be blinded by big money, instead, use it to quickly acquire paying customers, turn down acquisition offers of hundreds of millions of dollars, and grow the company rapidly so it will become a unicorn.
7. Today, it’s possible to overtake everyone with a computer and Zoom
We founded Wiz in March 2020, at the outbreak of the coronavirus pandemic. At first, we felt very pressured because the world was paralyzed. We thought we had picked the worst possible time to establish a new company. But very quickly we realized that this was the best thing that could have happened to us – because as a startup with no infrastructure whatsoever, which is facing off against huge corporations with sales systems scattered across the globe, you can overtake them with a computer and Zoom. We raised $230 million in less than a year and turned into a unicorn faster than any other cyber company in the world, with a valuation of $1.7 billion. It’s not just a matter of ‘Who is bigger?’ – the money allows you to grow at record-breaking speed, to recruit the best people, to expand geographically in no time, to turn down tempting acquisition offers, to sleep peacefully and to install the system among as many customers as possible.
One of the reasons for Wiz’s rapid growth is, first of all, the team. It’s comfortable to be engaged in fundraising, valuations, investors, sales – but it’s impossible to win without people. This time, in contrast to Adallom, we’re solving a fundamental problem in a mature market. Unlike with Adallom, which invested considerable resources in raising awareness of the problem and creating a market, with Wiz, the time needed to educate the market was minuscule. The ability to deeply understand the acute pain, the place where other solutions didn’t succeed, and the inner processes with which organizations are coping, allowed us to reach product/market fit with lightning speed.
Where do we go from here? This is my conclusion: It’s time for the largest security company in the world to be Israeli.