Cyber Valuations, Moats & the Road to Black Hat

Cybersecurity investor Sid Trivedi of Foundation Capital joins me to dig into AI SOC valuations, services-as-software, moats, and what founders should know heading into Black Hat.

Sid is a Partner at Foundation Capital, where he invests at the seed and Series A stage with a focus on cybersecurity and IT infrastructure. This is our annual pre-Black Hat check-in, and a lot has moved since last year, from massive M&A to record-setting rounds in categories like the AI SOC.

In this episode:
- What has actually changed a year into the AI wave, and what hasn't
- Services-as-software, the $4.6 trillion market thesis, and automating cyber workflows across the SOC, IR, pen testing, and threat intel
- What AI means for cybersecurity jobs and how practitioners should adapt
- Consolidation vs. best-of-breed after Palo Alto's $25B CyberArk deal and Alphabet's $32B Wiz acquisition
- AI SOC valuations, including Seven AI's record Series A and Torq crossing a $1B valuation
- The double-edged sword of big raises and why founders should be cautious about the valuations they accept
- Why you can't simply spend your way to growth in cybersecurity
- Moats and defensibility when frontier labs can push into your category
- The Black Hat Innovator Investor Summit and the Startup Spotlight competition

Chapters:
0:00 Intro
0:52 What's changed a year into the AI wave
2:42 Services-as-software and the AI SOC
9:38 AI adoption and forward deployed engineers
10:57 M&A, platformization, and best-of-breed
14:17 IT and security convergence, plus AI SOC valuations
18:48 Seed-stage risk calculus vs. later-stage investors
21:43 The double-edged sword of big raises
26:20 Why you can't spend your way to growth
29:05 Moats and defensibility in the frontier-lab era
32:25 Deal flow, pricing, and staying disciplined
37:06 Black Hat Innovator Investor Summit
40:17 Startup Spotlight competition
43:28 Wrap-up

Black Hat is offering listeners $500 off registration with code USA500Resilient.

Connect with Sid:
LinkedIn: https://www.linkedin.com/in/siddhanttrivedi/
Foundation Capital: https://foundationcapital.com

Resilient Cyber: https://www.resilientcyber.io
Subscribe for more conversations with security practitioners, founders, and leaders.

Transcript

SPEAKER_00 0:00

These valuations are grounded in like what customers are actually paying, or is it some of it the market kind of pricing a story ahead of the numbers something in a sense?

SPEAKER_01 0:07

Oh, it's certainly a market pricing story well ahead of numbers. And I think that those are always dangerous games. I think many founders, they think that, oh, I'll just spend all this money and the product market fit will come.

SPEAKER_00 0:19

Growth doesn't necessarily mean headcount and salaries. It means they want you to grow more market share, more revenue, more customer base, etc. Like, how do you think of that?

SPEAKER_01 0:26

The most important fact that just growing, having more social media presence, getting more likes in your posts, having more followers, getting more events, going to speak at more conferences, none of that matters.

SPEAKER_00 0:38

There's a double-legged sword to the, as you said, cautioning that. Like, what could it mean if you don't grow into that valuation or it doesn't go the way you want it to go? Like, what does that truly mean for the founder, the team, those kind of things? What does that mean?

SPEAKER_01 0:48

One of the easiest, unfortunate ways to destroy a company is to have a down round. I mean, we could just give the money and say, go and spend it in these six areas and this will work. Yeah, unfortunately, it doesn't work that way.

unknown 1:20

Thank you, Chris. Thanks for having me.

SPEAKER_00 1:22

Yeah, it's it's kind of turning into, I guess, an annual, an annual thing. I had you on about last year around this time, you know, heading into uh to Black Hat or Hacker Summer Camp, as people call it. But you know, for folks that don't know you, don't know your team, can you tell us a bit about yourself and the team before we get going?

unknown 1:36

Sure.

SPEAKER_01 1:37

We invest at the earliest stages, seed and series A in startups, and we invest across three broad areas enterprise software, fintech, and crypto investing. I spend all my time on the enterprise side, and as as you know, Chris, and many of I'm sure our listeners know, I focus on cybersecurity and IT infrastructure investments. So very much connected to where you and I spend time, where most of the listeners who are joining us uh spend time.

SPEAKER_00 2:02

Yeah, that's what's what's exciting about chat with you is like you get to meet with some of the innovative teams that are kind of building the future of this you know field essentially. Um so I wanted to start there, you know, one year in, like we talked last year around this time. And, you know, last time you were on, you walked us through how Foundation Capital finds and backs early stage, you know, cyber IT founders and so on. A year later, with everything that's moved in terms of AI, uh, LMs, all the things, you know, where are you actually writing checks today and what's changed, you know, uh in the past year or so?

SPEAKER_01 2:30

Well, you know, the firm's been around now for over 30 years. I don't think a lot has changed is the real answer in terms of how we invest, which is that our focus is investing at that formation stage. We're either the first or the second institutional investor, and 80% of the time we're the first investor. And we come in when the companies are just getting started. So that aspect hasn't changed. I think as you described very uh rightly so, what has truly changed is actually the fact that technology is ever changing. And as technology has changed, we've had to adapt. And and certainly over the past, whatever, two, three years, we have seen a massive kind of increase of of usage of these large language models for different, you know, uh use cases. For for these different use cases. And I think that that that's been the most exciting part. Um, and I think, you know, AI is permeating across multiple different um, you know, segments of our market. In enterprise, we're seeing changes in application in middleware and in infrastructure. And certainly now we're seeing some of the use cases for both fintech and crypto as well.

SPEAKER_00 3:32

Yes, definitely a lot. Uh a lot has changed. Of course, like the fundamentals are still the fundamentals, but it feels like every company has an angle. All the startups I see like, you know, have an angle around AI, genetic AI, whether it's you know, leveraging it for security, looking to secure its usage, a combination thereof, make things more efficient, more effective, et cetera. And a big thesis, like, you know, around this time last year, too, was like this concept of uh services as a software, like the ability to use AI to, you know, go after labor and services and the TAM, right? That you know is associated with that, you know, often knowing that a lot of the cybersecurity spend is not necessarily on products, but on services as well. And it's historically kind of been outside of software's reach. And we're now seeing like, you know, different uh categories, whether it's AI SOC, and I see it in AppSec, uh, SecOps, you know, QRC, you name it offensive security, it's kind of touching all the things in terms of going after services in addition to the software itself. Um, you know, is that playing out the way you expected? And I know you've wrote and spoke about this before. Uh, you know, where is that reality kind of diverging from the pitch and how is it evolving?

SPEAKER_01 4:32

I think it is in in many ways it's playing out what the way we expected. Uh, and and you you pointed it out well. You know, two of my colleagues uh uh pushed a big post on serve services software quite a few years ago now, and and highlighting that this was going to be a $4.6 trillion market. And certainly that has you know kind of continued to to play out. I think the biggest change we've seen in cybersecurity, you mentioned AI SOC. Um, you know, uh if you remember this a year ago, we talked about AI MDR with AirMDR and you know the the managed service aspect of MDR and how that will change with humans plus AI agents. And certainly, you know, we have seen that. And I think you know that that aspect has been you know pretty interesting to kind of um uh uh witness. Uh one of one of the things that you know we spend a lot of time trying to think about is where are the other aspects of services software being you know applicable. And you know, one of the things that I mentioned to you last year that that I've been spending time on is what are the different workflows in cybersecurity and how do we go about automating portions of that workflow? Um so every time we you know think about different tasks and different teams within cybersecurity, what are the aspects of those jobs that can be automated? Um that that's product security, whether that's, as you mentioned, detection response with with the SOC, whether that's incident response, whether that's pen testing, threat intel, you know, yeah, security strategy, there are each of these areas where we will see services software being implemented. And a combination, we've seen a combination, which is external services, so services from you know MSPs, MSSPs, large consulting firms, and seeing how we use agents to automate portions of that work, but also internal workflow. So, you know, when you have uh employees, what portion of those jobs and tasks can be automated? Um, I think the the biggest debate probably in the past year has been you know, does this strike the end of uh many jobs, particularly white-collar jobs? And and certainly, you know, the the number of layoffs that's that have been happening have only increased in the past year since you and I were on. Um and I think that that is causing a lot of heightened risk. I don't worry that long-term people will lose, you know, kind of the ability to work. I think the jobs themselves will change. Uh, and so the biggest thing for each of us is how do we adapt, how do we use these new tools in an effective manner. There's been, you know, kind of a big learning from that in terms of, you know, kind of where do we, you know, see see new innovation, pockets of innovation. I think people are trying to adapt to um these new changing roles. And at Foundation, we've been pushing to you know, get more and more folks to use these tools more effectively for their own work, whether that's been, you know, scheduling uh a new calendar invite, which is certainly what many of our EAs spend a lot of time thinking about, all the way to you know, how do we write more effective memos? So I think you know that that aspect is you know is something that you know we we spend a lot of time thinking about.

SPEAKER_00 7:31

Yeah, I've been advocating for folks in cybersecurity uh you know as well, like leverage into these tools as much as you can, right? You know, in your own daily workflows, how you do research, how you think about things, how you put together presentations, materials, artifacts, all the kind of things, coding, et cetera, design. It's kind of touching everything. And when you were talking about the services thing, it made me think of a question. I know this isn't necessarily like your guys' uh core focus, but like I've seen this trend among the uh the labs, right? Where they're kind of spinning off these billion dollar uh subsidiaries or like new business entities to kind of put forward deployed engineers, right? Like even the hyperscalers, I think AWS made a massive announcement around this like a week or two ago. When you look at that as part of the AI, you know, digital transformation, the rollout of AI and so on that's going on. What do you make of that? Like these these massive investments in terms of trying to kind of entrench, embed, and and kind of implement AI. Uh, what do you think of that when you look at that trend?

SPEAKER_01 8:21

You know, I I I I think we're still early days and kind of seeing, you know, uh pockets of innovation and you know, where's the where where is their opportunity? Um I I I don't worry too much about kind of you know how how how things will change here. And I I think that there's an aspect that, you know, kind of you know, we have to all adapt to things. Um, so yeah, that's you know, it's kind of a learning in itself.

SPEAKER_00 8:48

That makes sense. So last time, you know, since we spoke, a lot has happened in the MA space, you know, both obviously like small, but also massive acquisitions. Like since we last spoke, yeah, Palo Alto had closed, you know, a $25 billion acquisition of CyberArc, very identity-centric type major play. You know, there's Alphabet finalizing their $32 billion acquisition of Wiz. Uh, you've posted about consolidation a bit, I think, in some sense sense with you know big players like uh ServiceNow, expanding its security platform through acquisition. You've also argued, though, that a handful of handful of players will never fully kind of dominate cyber because of how many niches and categories and sub you know domains there are within cyber. How do you kind of square that platformization push that we're seeing kind of play out in some ways, but also the best of breed that you know is always there, always innovating, always bringing new capabilities uh to the market at the same time?

SPEAKER_01 9:36

I think this is the quintessential question that that keeps coming back again and again. And you know, I I think that when there will this this debate will happen and has continued to happen since the kind of the dawn of cybersecurity or broadly IT infrastructure uh as a whole. I think, you know, I don't expect a world where where best of breed goes away, uh, even with you know LLMs, even with AI agents, even with the fact that whoever has the most data will be most likely dominant uh in this space. Uh so you know, I don't look at it and and and worry about that. That being said, I think the biggest change that's happened in the past year, uh, and you mentioned, you know, kind of ServiceNow uh with both Vesa and Armis at the same time we had Palo Alto buying Chronosphere end of last year, is this view that that folks who have predominantly targeted the IT uh, you know, kind of customer base, so the CIO and the the head of cloud operations and uh you know, head of infrastructure are now also adding in cybersecurity. And ServiceNow is an excellent example of that. I mean, when when they did the combination acquisition of Armis and Vesa late last year, they really made a push for cybersecurity and why they care about that category. Um, at the same time, you saw Palo Alto networks buy Chronosphere after buying CyberArc in a very, very heavy year. And, you know, as they highlighted this point, they they they noted the the advantages of focusing on observability more broadly. And what they're showing is, you know, just like ServiceNow is entering this the security um, you know, kind of business, they are also entering the IT infra business. Uh, and we're certainly seeing more and more of that. I mean, just this year we had Databricks announce Lake Watch and then subsequently by Panther. I mean, that's a very big focus on cybersecurity um Salepoint, which we would argue is more of an IT-oriented or an identity-oriented company has gone and acquired intro to be more actively on the cybersecurity side. So we're seeing this kind of amalgamation of the CIO and the CISO buyer. And we're also seeing that certainly happen with the customer base. There are more and more uh, you know, CISOs who now play the role of CIO and and and um you know kind of have that that that joint role. Um, so I think that this is probably the biggest change that we have seen in the past year. Um, I think the debate on best of breed versus platform will continue. I've obviously I'm uh as you highlighted on the view that best of breed won't die. Um, but there's some people who you know believe that that may change.

SPEAKER_00 12:06

Yeah, I definitely think it's uh several interesting things there. You said like the convergence where it's it's bi-directional too. Like some of the IT players are moving into security, some of the security players are moving into IT. Both of them obviously are looking at this from a market expansion perspective, bringing more consolidated capabilities to bear. Um, and honestly, like you see it in the workforce, like you talked about. There's the you know, most famous example in my mind is Equifax, where you have Jamil like moving from CISO to you know, CIO, I believe it is, uh, or CTO, but not CTO, yep. Yeah, yeah, moving into the you know, obviously like the the broader IT space beyond just cyber. Uh and then that that that age-old debate is gonna go on forever. There's always gonna be innovative startups that kind of covered niche capabilities that the incumbents can't move fast enough to capture or build out, and then you know, they're obviously gonna get absorbed in some way in platforms a lot of times, and it's never gonna end. I don't think it's a there's no end in sight for that per se. I also wanted to ask you about valuations, like maybe just just talking about even AI SOC as an example, uh not to pick on that category or the players in it, but you know, when you look at it, like uh Seven AI, for example, wrote raised like the largest series Cyber A on record. Uh Torque, you know, crossed a billion dollar valuation, Exaphorse, Exaphorce, you know, raised a massive uh raise in the same category. Like you sit pretty close to the revenue and the the founders and the funding and so on. Like, do you think these valuations are grounded in like what customers are actually you know paying, or is it some of it the market kind of pricing a story ahead of the numbers in a sense?

SPEAKER_01 13:30

Oh, it's certainly a market pricing a s story well ahead of numbers. And I think that those are always dangerous games. I I uh the the reason that this market is is pricing the story is that when you look at areas outside of cyber, for example, if we targeted code gen or we looked at some of the new AI apps that are coming, the the pace of growth, the pace from you know zero to hundred million of ERR or a billion of ERR or multiple billions of ERR is has has increased so dramatically in these other categories that the view is that maybe this will happen in cybersecurity and other sectors as well. And so the market, and particularly investors who invest across a broader landscape of you know kind of areas, they are starting to believe that, hey, this will be possible here in cybersecurity. Uh, and they are certainly investing well ahead of metrics. I think there are complexities in cyber that make it much harder for us to see that level of astronomical growth, principle of which is obviously the fact that we are in an industry that focuses on reducing risk. And so we are automatically targeting a customer base that is very risk averse and so wants to get all the boxes checked before they go and purchase these solutions. This is very different to a developer looking for a new code gen tool to automate a portion of their development. Um, so I think that that aspect will make you know kind of the the level of growth that we have seen in other categories hotter here. Uh, and there is risk that investors are taking when they you know put in these large valuations. And unfortunately for you know ever all of these good companies, if we went a few years ago, we would see several unicorns that were invested in during that 2021 and 2022 time period. So the you know, the ZERP era, um the zero interest rate policy era when uh money was relatively cheap and a lot of uh new unicorns were being birthed. When you look at those unicorns today, three, four years on, you're already seeing several of them being acquired for a significantly smaller, you know, kind of uh end result than even the amount of capital that went into those companies. Forget about the let alone the valuation. So there is risk when when founders take this level of kind of uh these valuations and and and these astronomical goals. And my my only caution to founders would be to think about it. You know, for for investors, uh, this is you know one investment that they make in a portfolio. And if they're wrong, it's it's certainly not great, but it's one of 10, one of 20, one of 50 in a fund. But for a founder, it is one of one. So it's really thinking about do I feel like this is what I would value the company? Do I feel that this is something that I can grow to in the next year? Um, and if the answer is no, then you know, my recommendation has always been, and I say this to my own founders, really think about do you want to take this valuation? I've you know increasingly spent more time cautioning my founders from taking higher valuation, certainly in the past year.

SPEAKER_00 16:35

Yeah, actually, I want to double down on a couple of things you said there, if you don't mind, because a lot of my audience, you know, obviously there's founders, investors and things like that, but a lot of cybersecurity practitioners and folks thinking about starting companies, things like that. Um, two things you said there. One is like you invest in the C stage, like earliest stage startups. Is your risk calculus a bit different than some of the later stage investors and how they think about, you know, the path to liquidity or successful exits and acquisitions, et cetera? Like, you know, what does that look like from your perspective when you look at the valuations? And like you said, some people are being bought for even less than they raised uh altogether. Like, you know, what does that look like for you?

SPEAKER_01 17:10

Yeah, it's a great question, uh, Chris. You know, uh for for us, we are investing so early that we don't even you can't even imagine what the end exit value of the company will be. And for us, our hope is that that end exit value will look very exciting. And even when a company goes public, we remain large shareholders. A great example of that. You know, we were very, we've been very fortunate. One of our companies, Cerebris, which was incubated in our offices by my partner Steve, you know, that went public earlier this year. It was one of the kind of the um cornerstone AI IPOs. And that company is trading at that you know 50 billion valuation. You know, I don't think that uh that that Steve, when he made that investment in 2016, that his goal was to value the company at that at that number. I don't think that you know, even the founder, none of us could imagine what that company could grow to. Certainly we had big ambitions and the founders had big ambitions that if this works, this can be a massive opportunity in a in a in a critical company. But that you know is very hard to determine, you know, at the time that we make an investment. So at the time that we make an investment, our our primary goal is to go and figure out what is the current, you know, broader valuation in the seed market, and and you know, how do we kind of make sure that our founders don't feel like we got some special deal, that we are you know right down the fairway. And then I think that the the the second most important thing that I think about is okay, what is the series A, which is the the absolute next round that happens right after? What's the series A going rate right now? And how do we make sure that we price the seed round in such a way that you know when we meet the milestone for what is expected for that series A round and those milestones change, you know, roughly every year or so. But do we think that that new valuation that the series A goes at, we will have enough of a step up between the seed and the series A that the founders, the employees, the you know, investors will all feel excited about the business. And typically that ends up being you want to see a step up that's you know, three to four X uh between seed and series A. And you know, those are the two ways to try to figure out how we we think about valuation.

SPEAKER_00 19:25

Yeah, that's excellent insight. I was just wondering that from your perspective. And then the other thing was you caution against, you know, uh for founders, right? Like in terms of the level of of funding that they raise or accept and then the valuations they accept. Like, what are the practical, you know, the realistic implications of that? Because you, you know, when you look on social media, uh, all these valuations are like congratulatory and celebratory and like, you know, the bigger the number, the more exciting. But like, what is the there's a double-legged sword to the you, as you said, like cautioning that. Like, what could it mean if it if you don't grow into that valuation or it doesn't go the way you want it to go? Like, what does that truly mean for the founder, the team? Uh, you know, those kind of things. What does that mean?

SPEAKER_01 20:02

I think the two two things that I think about in in that aspect is one, the dollars that come into your company. And whenever you raise a lot more dollars than what's expected of you, as much as you don't want to spend money. I've so many times founders tell me, Oh, I'm raising this extra money, but I won't be you know spending it. I plan to just you know pack it away in a in a side, you know, kind of uh uh bank account and I won't touch it. The issue is that the investor who's giving you that money is expecting you to to spend it to grow faster. So, you know, that's not gonna work for the new investor. That group will start to push you to say, hey, we gave you more money than what's in the market and and what your peers have, that means you should be growing faster. You should not be, you know, kind of continuing to grow as is. Let's say the investor is also open to you, you know, kind of not spending all that money immediately and not growing crazy, which would be very weird, but let's just imagine that scenario. Well, every time you interview an employee, you interview a uh, you know, a partner, you interview a service-oriented, you know, vendor that you're working with, they know how much you've raised. It's all public information. So, you know, if if if you raised a hundred million dollars series A round versus the average series A is 15 to 20 million, they're going to also expect that you're willing to pay a lot more money. And so, you know, I see this all the time. Developers are asking more, sales leaders are asking more, AEs are asking more, product marketers are asking more, your you know, recruiter is asking more, the person who creates your pitch decks is asking more, your events marketing uh outsourced team is asking more, they want you to do more events. Suddenly you end up spending a lot more. I mean, that is a very difficult situation. And it it isn't something that you are planning to do, but you know, it's suddenly the going rate changes because you have more money. So that's the the ask that's one aspect, which is the actual dollars that come to you. The second aspect is the value of the company, the dollars assigned. So the total valuation and and there the complexity is really that you know as you have uh a higher valuation, more is expected. The end outcome also needs to change. What the buy what the potential buyer, you know, if you end up uh targeting an MA or what you know the IPO markets are looking for also changes. But the person, you know, who's looking at you from an exit scenario or the next investor won't just look at that valuation number, they'll also be looking at revenue. And if revenue isn't growing and isn't keeping up with that you know higher valuation, then they start to argue, hey, maybe this isn't worth what what it was assigned last time around. And you know, one of the the easiest, unfortunate ways to destroy a company is to have a down round. Um, it really kills multiple things. Firstly, your your employees see the value of their stock go down and that really stresses them. Secondly, your customers hear about this down round, and then they start to question hey, maybe this company isn't in a good situation, you know, footing. Thirdly, obviously, you are personally impacted by dilution as a founder, and as a result, your motivations change. You start to you know strike more for a crazy outcome because you say, Oh, I own a lot less than you know what I should because of this crazy down round that happened. And then your existing investors, who typically are also impacted, a subset of them, maybe they didn't invest in that, you know, down round, they start to be very difficult and combative. So all these things start to play out. And it just, you know, many times people only think about it after the fact. I'm sure you've watched Silicon Valley, the TV show. They had a great clip about uh, you know, you could raise less. Like no one told me I could raise less. There's this you know situation where Richard meets with a founder and he asks him, hey, what if you just raise a little less money? And and that founder starts to think about it and realize, oh my God, actually, my company wouldn't have failed if that happened. Like nobody told me I could do it. Um that's you know, such an important uh Yeah, that's that's why I wanted to ask.

SPEAKER_00 24:02

It's like a great distinction or something that people don't often think about or talk about. And uh I actually wanted to ask one more question on this topic before we move on. You made that that that uh kind of there's an implication, right, to spend the money, to grow. You use the word to grow. Um, but there's a big distinction, as you point out, between growing salaries, growing headcount, growing, you know, product marketing, marketing events, you know, all these kind of things, uh, uh, you know, engineering, talent, capacity, et cetera, and growing revenue. Like you can't, and you talked about this earlier, like, you know, cybersecurity is a bit of a unique market in the way that the buyers behave and the implicit level of trust that's involved in procurement decisions and things like that. You can't necessarily spend your way to growth per se. You know, you can in some ways, but it's not just throw more money at it, right? It's not that's more complicated than that. So can you unpack that distinction of like, you know, there you have more capital, you have more money to spend, but you know, it's not simply just throw more money at it. Like it's not necessarily how it works in terms of growth. And the growth doesn't necessarily mean headcount and salaries. It means they want you to grow more market share, more revenue, more customer base, et cetera. Like, how do you think of that?

SPEAKER_01 25:04

It's 100% true, Chris. I mean, that's the most important fact that, you know, just growing, having more social media presence, getting more likes in your posts, having more followers, you know, getting more events, going to uh speak at more conferences, none of that matters. Like the investors, unfortunately, at a certain stage, like it doesn't matter. Um, certainly it doesn't matter if you want to take your company public. The you know, public market investors don't care at all about it. What they care about is revenue and they care about customers and they care about low churn and they care about high-end DR. I mean, those are all the things that matter. And, you know, yes, could they be influenced by the number of you know followers you have on LinkedIn? Maybe. I mean, maybe they'll increase the number of customers who are looking and hearing about you. But is it just because you know somebody reads your post that they end up becoming a you know a viable, uh valuable customer and somebody who believes in you? Probably not. I mean, probably they care a lot about your product, they care a lot about the execution, they care a lot about the pricing, they care a lot about the end result and what it does for them, how it adds value to you know to their goals. And those are very different, you know, things that that matter. So product market fit and figuring out when you have product market fit before you go and spend all that money to do all those other things is so critical. I think many founders they think that, oh, I'll just spend all this money and the product market fit will come. And unfortunately, that I wish that were true because it would make our lives a lot easier. I mean, we could just give the money and say, go and spend it in these six areas and this will work. But unfortunately, it doesn't work that way.

SPEAKER_00 26:45

Yeah, exactly. It's much more nuanced and complicated than that. And it's not just throw more money at it. That's why I wanted to pause and kind of dig in on that one. Um, I also want to ask you, there's, you know, of course, a lot of conversations going on about the moat, right? Or what is a moat anymore? What's defensible, things like that. There's a lot of conversations around uh a model can copy uh your roadmap, or even the frontier labs themselves could push into your category, uh, as we saw with, you know, native security offerings or design offerings and things like that, even beyond cyber. Like through Cyberseed, you talk to a lot of early um inaspiring founders. Like the hard question, of course, is like what is the moat? If the frontier model can release, you know, or replicate a chunk of your product overnight or quickly, uh, given their size, their capacity, their distribution, et cetera. Like, what are you actually underwriting in a founder and a company today and what no are what no longer counts as you know being defensible, maybe that used to be defensible or less more so defensible, I guess I'd say.

SPEAKER_01 27:37

You know, I think I think the there are parts of motes that are, you know, that I believe will be enduring, at least for the moment. And there are parts that are starting to feel like they don't have as much of um as as much of a long-term, you know, viable path anymore. I think, you know, there are there are obvious areas, proprietary data, massive mode. And the more proprietary data you have that it hasn't been released to the foundation model companies, the more value uh you can you know attain. And I think that that's a really deep understanding. Uh, we've pushed at foundation, we've talked a lot about context, having deep understanding of the workflow, having deep understanding of specific human-based decisions, of exceptions that are made, that context ends up being really, really important. Connected to context, having integration depth, you know, having this, you know, integration across a whole bunch of both external applications as well as internal apps and internal tools that have been created, which is all connected to this context aspect. Big moat today. Could that change that part, the integration part? Could it change over time? Potentially. But you know, there's a lot of internal apps that are much harder to go and uh uh have the integration necessary. Um, speed of distribution, speed of innovation, speed of pushing out new product and updates, I believe that that will remain a moat. That is that is something you have to constantly change. You have to constantly be willing to kind of be at that cutting edge. But if you if you maintain that culture, I do believe you will have, you know, kind of a long longer term mode. I think areas that are harder, um, UI, which used to be a huge area of focus for the last you know four or five years. I mean, if we look at companies like Wiz, it was all about creative design and UI. I think that is less of a mode today. And that's because we can use these models to go and and and build simplistic design, build you know, futuristic product, given that nice user experience. And by the way, the way that we are interacting with applications is changing. Last you know, decade, the focus has always been you and I click a bunch of buttons and then things happen. Now it's us speaking to a system of agents and things happen. And you know, now it doesn't matter where the buttons are. We're able to just go type stuff in and things happen. And so that UI aspect is becoming less and less of an area of focus.

SPEAKER_00 30:02

Yeah, great answer. Uh the last piece you touched on, like the UI UX, uh, there's been a trend of, you know, kind of quote unquote headless, as they call it. Like some software companies are going that direction. We've even seen some cyber companies uh starting to kind of move that direction. And then you start off about the proprietary data aspect. Uh, there was a very viral rant now by one of the largest um, I guess you'd say like uh defense tech companies that are out there that went went viral about, you know, the moat and the proprietary data and all these things and Frontier Labs pushing into it. And that's kind of spurred a lot of interesting conversation around open source versus you know closed source AI and all things therein. Uh so definitely folks check that out. Um, before we jump to like the last 10 minutes or so, talking about, you know, uh Black Hat and so on, I wanted to ask you, uh, you know, another thing is that deal flow uh is is kind of at all-time high prices, I think, in some ways. Like seed and series A valuations, which you talked about a little bit, uh, are at or near record highs in many cases. Uh, but the capital is also concentrating into, you know, maybe a few hundred deals per year. Like as an early stage investor, how do you stay disciplined and non-consensus when the best rounds are this competitive and this expensive? Are you walking away from deals that you would have done maybe a couple of years ago? How do you look at that?

SPEAKER_01 31:13

That's a really, it's a great question. It's something we think about all the time. And you know, you know this well. And I spoke about it earlier in this conversation that our focus at Foundation is to back investors at inception stage and be that first investor. And we're typically investing as a result at the seed or series A. And, you know, I think the the the big change that has happened is the concept of a seed in series A is is evolving. You you mentioned these crazy series A rounds that are happening. You know, what used to be normal is no longer normal. And I think that we are having to adapt to. We try to be, we try to focus on discipline, and that is around how do we, what are we good at? What are we the best at? And we we we certainly believe that we are very good at incubating, we're very good at inception stage. That's something that that we care deeply about and we enjoy doing. And so our goal has always been finding the best founders who are going after cutting cutting edge areas within whether that's cybersecurity or other other categories, and you know, really helping them, brainstorming with them to go and come up with the ideas for what hopefully will be generational companies. So, you know, that that aspect is slightly different. We are not going out there for the most part and chasing rounds that you know, 12 other VCs are also putting term sheets for, and we are now the 13th term sheet in there, and and then it all becomes about who has the most interesting price in the loosest terms. Um, for us, it's really about trying to go and sit down with founders well before the idea has been created and brainstorm with them on a whiteboard what that idea could look like. And, you know, whether that's Cerebrus, and certainly, you know, that's been a fun journey to talk about for the you know past uh two months, because everybody is now, you know, spending time thinking about that company. But it's also companies, you know, we you and I talked about RMDR and in, you know, in our last session. It's companies like AJCI and email security and prime and product security, you know, and stacklit in in cloud and AI governance. Those are the types of kind of early uh conversations, all of those companies we invested at the inception stage. All of them we sat down when it was just the founders and we spent the time brainstorming with them, what would hopefully become an interesting idea. And then our aspect is around, you know, our focus is around how do we make that from an idea into reality and into a product that to your point customers want, not just, you know, where we get the most marketing, but one ones where there is a product market fit, where there is a value point that we're eating for the customer. So I think, you know, that's been the the aspect here is just how do we kind of ensure that we are playing, you know, in the field that we feel strongest in, and that we don't get, you know, kind of uh overexcited when other things start happening. At the same time, we're we're certainly trying to look and say, okay, well, what are the areas? Are there certain foundation next generation foundation model companies? Maybe they're focused on physical AI that we should be thinking about. Are there great researchers coming out of Stanford or MIT or Berkeley that we should be thinking, you know, and spending more time with? How do we kind of go and have those uh relationships and figure out how to work with those those folks and figure out how to work with those folks in our own constraints and our own goals of what we think is a normal, you know, kind of uh interesting company?

SPEAKER_00 34:35

Yeah, I love that answer because as you're kind of uh speaking to it, it's much more complicated than just throwing money at it. Like there's a lot, there's a lot that goes into that. And honestly, I've spoken to several of the teams you mentioned, Aegis and Prime and so on. And uh the founders are incredibly passionate about their uh you know problem spaces. They've often lived the problems firsthand or helped build you know previous generations of solutions, you know, in in product technological waves and all that kind of compound to give them a bigger opportunity, right, to go and tackle that problem and provide a new innovative solution, which of course, as we talked about, becomes the best of breed offering in the market. Um so you know, last aspect of the conversation I want to talk to you about is uh Black Hat. Like I know you're heavily involved in different aspects of uh Black Hat, different events. Uh, of course, the big one that you and I have been talking a lot about is the Innovator Investor Summit. Uh, for folks not familiar with it, can you tell us a bit about it? You know, what should they anticipate? You know, those kind of things, who should attend?

SPEAKER_01 35:28

Yeah, great question. So the Innovators and Investors Summit was started a couple of years ago, and it's really focused on cybersecurity founders and startup uh execs. Um, it's also has several venture investors, you know, and broadly even some of the later growth stage and private equity investors join, as well as corporate buyers. And and the target is, you know, what is happening on emerging technology? What are some of the areas that um founders are thinking about? What are the next generation of products that could be relevant? And every year, the Black Cat team, I know this year your MC were very excited to see you on stage, but the the team spends a lot of time trying to go and curate some of the best speakers. You know, I still remember a couple of years ago, to his credit, George Kurtz coming up on stage. You know, and this was weeks into one of the largest, you know, uh complexities in cybersecurity, which was the CrowdStrike uh summer incident that that completely put cybersecurity as front and center for all of us. But you know, George came up on stage and talked a little bit about how CrowdStrike was was formed and you know what were the areas that they focused on, where's innovation? And he did that you know two and a half weeks after that incident. And I think he did it in many ways because he really believes in founders. He wanted to get up on stage uh and you know still still be in front of people, despite you know the complexities that the business was going through. And so I think there's that level of passion to say, hey, where's innovation? What's the cutting edge of innovation? And I'm very excited to kind of see uh the summit you know play out another fantastic year. And I think for those of your listeners who are uh excited about innovation and are thinking about either starting a company or have started a company or work at a startup or are investing in startups or you know, just broadly thinking about the landscape. Fantastic one day to spend during Black Hat. The the great part is it's just the day. Uh, you know, we have a great number of sessions. Uh, I know we'll talk about Startup Spotlight. We have that session happen, of course. And then there's also these breakout sessions where you can go and meet people who are in the audience. I think it's a very unique uh product that's been created.

SPEAKER_00 37:45

Yeah, super cool. I'm excited to MC it. Like obviously, I'm feeling some big cues from uh Mike Prevet and others who have done it prior, but it's an incredible opportunity to bring together, as you said, investors, you know, founders, people innovating in the future, the the kind of domain in cybersecurity, especially at this time of AI. Um, I did want to make a note Black Hat is actually willing to, you know, offer these listeners, folks of the show, uh $500 off the registration if you use the code USA500Resilient, USA500 Resilient. So check that out. Uh and then the last piece you talked about was the Startup Spotlight competition. Um tell us a bit about that. Like how is that shaping up this year? You know, what can folks look for?

SPEAKER_01 38:20

It is, you know, every year the field gets more and more competitive. And we had a fantastic group of startups that uh as judges, we had to evaluate. And I can tell you, Chris, it is it's always a debate every time we sit there and we think it's gonna take us 25 minutes and it ends up taking us two hours as we debate, you know, which founders uh deserve the stage. And that's not because we, you know, have a strong number of you know disputes within us. It's more that we actually feel that that more founders deserve to stage than you know, obviously we can provide. And what ends up happening is that uh as judges, we go and evaluate these submissions that come in uh from founders and we watch these five-minute videos where founders share what they're building. They provide a product demo, they talk about the customers, they talk about the competitive landscape. And then post that we have to go and rank each of these founders and companies, and then you know, we we debate internally, and usually the scores end up being very tight. And we come and you know, we we have to ultimately pick four uh companies that get to present. And we just announced the four, so we're very excited for them to you know go up on stage and talk about you know their journeys and hopefully, you know, our our goal is that that they end up having a great, you know, kind of five minutes of fame in front of uh uh a very large stage, which is also recorded. And then our goal is to go and pick one winner. I think the biggest change that's happened this year is whoever wins what is now called Black Cat USA startup spotlight will later that day go and speak on the main stage of Black Cat. So the biggest stage at Black Cat. They will speak um in front of a different set of judges, and I'm I'm I'm excited to be there for that one as well, and you know, kind of compete for a global uh award. So we have picked uh there have been three other um uh startups that have already been chosen for the three other regions that Black Cat operates in. Uh so they want the startup spotlight for those regions, and they will join in with the with the Black Hat USA uh winner to go and basically compete for the crown of global startup spotlight champion. So I think that's a big big change. I'm excited to see how that plays out. I obviously will try not to uh not to um be biased towards the USA winner given given we are both in the US, but uh I'm very, very excited about you know that session as well.

SPEAKER_00 40:51

Yeah, I think it's super cool. It's kind of like the uh the the World Cup or the Olympics of you know cybersecurity startups. So it's a super cool thing that it that they're doing there. But Sid, thanks you thanks so much for jumping on. Sorry about the technical difficulties in the beginning, uh, but we got it done covering everything from valuations, deal sizes, you know, founders, uh, how much they raise, all in there in between. So thanks so much for jumping on, man. I look forward to chatting with you in a few weeks in uh Las Vegas.

SPEAKER_01 41:16

Thanks so much, Chris. Thanks for having me on and thanks for doing all the amazing work you do. I mean, it's so much fun to read, you know, to listen in and think about all of the work you are spending time, I think, for your listeners. Just the amount of information that Chris is able to consume is I in my mind, I have not seen many others be able to do that. So huge kudos to you for you know dissecting all that information, uh allowing us not to go and read 500 articles and instead just summarizing it for us so that we can we can just read your posts instead. Awesome. I appreciate it. Thanks so much, man. I look forward to talking to you soon. Thanks so much.

SPEAKER_00 41:52

All right, bye bye.