With New $40M Funding Round, LogRhythm Continues March Toward IPO

Another month, another Colorado tech company closing a big venture round that puts it on track for a potential IPO.

LogRhythm said this week it closed a $40 million Series E round. The round brings the total investment raised by the Boulder, CO-based IT security firm, which was founded in 2003, to $71.5 million.

LogRhythm president and CEO Andy Grolnick said this round should be the company’s last.

“It’s a significant milestone,” said Grolnick, who has been with the company since 2005. “We’ve matured and are in a stage where this will be our last fundraising round prior to at some point becoming a public company.”

While an IPO is a logical and increasingly attainable goal, details about when it might take place will be worked out down the road, he said. Right now LogRhythm is focused on expanding its place in a market that gets bigger with each new major security breach that’s reported in the news.

“It’s a great time to lean in and become more aggressive on all fronts of our business and to grow very rapidly. Our growth has been accelerating over the past year, and we just see a lot of opportunities ahead of us,” Grolnick said.

The infusion of cash puts LogRhythm on a growing list of Colordo-based companies that have banked major VC rounds that have set the table for IPOs in the next few years. In May, Westminster-based Datalogix closed a $45 million round, while last year Denver-based Ping Identity raised $44 million.

Meanwhile, younger startups like Welltok and Sympoz also have closed large growth rounds.

Grolnick said LogRhythm’s new funds will be used to improve the company’s core threat monitoring and analysis product, develop new products, expand sales and marketing in existing and new markets, and build the company’s technical infrastructure so it can grow into an enterprise IT company with global reach.

LogRhythm is in a growing part of the enterprise IT security market known as security information and event management, or SIEM. Unlike software that tries to keep intruders out, SIEM software is built on the assumption that breaches will happen no matter how well secured a system is. The idea is to quickly recognize a breach has occurred, analyze and track what intruders are doing, limit damage by closing security holes and preventing new ones from being opened, and undo whatever the intruders did.

“A lot of traditional defenses, like perimeter and preventive security technologies, people are recognizing they’re just not enough…. Sophisticated and motivated attackers can get around them,” Grolnick said. “So it’s when, not if. More and more people are recognizing that you just can’t keep everyone out, so what you want to do is detect when they’re in…and [determine] how to catch them.”

LogRhythm’s software supplements traditional security products such as firewalls. It works by tracking billions of events, such as attempted logins, and analyzing them for suspicious behavior. LogRhythm’s specialty is automated real-time analysis that warns of potential attacks.

“It’s not enough to find the needles in the haystack, it’s also important to automate it and show customers what needles to pay attention to,” Grolnick said.

A report issued in June by Gartner estimated that in 2013 the SIEM market grew 16 percent to approximately $1.5 billion annually, and it’s expected to grow by 12.4 percent this year. Grolnick said industry experts expect SIEM’s share of enterprise IT security budgets will shift from about 10 percent of spending to nearly 60 percent within several years.

LogRhythm’s customers come from industries that need to protect sensitive information or infrastructure, like retail, financial services, healthcare, and the government. Their growing interest in SIEM is driven by one very big concern.

“Companies don’t want to be the next Target. They’ve seen the tremendous cost, both financially and to the reputation of the company,” Grolnick said.

LogRhythm faces some tough competition. IBM, HP, McAfee (which is now part of Intel), and Splunk all sell related products. They’re established companies with large salesforces, existing client bases, and comprehensive security products.

The competition doesn’t appear to daunt LogRhythm—or its investors.

“We’ve faced strong competition for years, and in some cases the players have changed,” Grolnick said. “There’s a Darwinian weeding-out process.”

Right now, LogRhythm views its comparatively small size as an advantage, he said. Security information and event management is all it does, so it’s easier to stay focused on improving the core product as threats emerge and evolve.

Although LogRhythm doesn’t disclose its revenue numbers or annual rate of growth, all signs suggest it is doing very well. To be included in the recent Gartner “Magic Quadrant” report, a company had to report more than $13.5 million in revenue last year.

“That’s well in our rearview mirror,” Grolnick said with a chuckle. He did say annual revenue growth continues to accelerate, and LogRhythm’s headcount has increased to 300, with 200 of those people working in Colorado; the company plans to add about 50 people in the next year.

Riverwood Capital Partners, a private equity firm that makes late-stage investments, led the new funding round, and its partner Jeff Parks will join LogRhythm’s board. The firm’s best-known investment is GoPro, which recently went public.

Piper Jaffray participated in the round and is a new investor. Prior investors Adams Street Partners and Westminster, CO-based Access Venture Partners also participated.

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