Every time major data breach strikes a well-known company, cybersecurity stocks outperform the public markets by about fivefold on average.
That’s one of the findings of Bessemer Venture Partners’ newly debuted Cyber Index. The venture capital firm’s collection of tickers tracks the performance of 29 pure-play cybersecurity companies as weighted by their market capitalizations (where larger companies count for more than smaller ones) since January 2011.
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BVP, best known for investing in startups such as Pinterest, Box
box
, Yelp
yelp
, and LinkedIn
lnkd
, pulled together the index as part of its research on the cybersecurity sector, in which it has made three dozen investments since 1993. The firm currently has 11 early stage cybersecurity startups in its portfolio, including Endgame, Auth0, Dashlane, and Virtru.
You’ll notice some big names absent from the Index: No Cisco
csco
, no Hewlett Packard Enterprise
hpe
, no Intel
intc
, no IBM
ibm
. That’s because these companies engage in security as a side business; the Index showcases companies that are cyber through and through.
On the list is a wide-ranging set of cybersecurity firms. Domestic success stories like Palo Alto Networks
panw
and Fortinet
ftnt
, next to internationals such as Check Point
chkp
and Gemalto
gtoff
, beside tinier firms like Zix
zixi
, an email security firm, and Mobileiron
mobl
, a mobile security firm.
In the stock chart, reproduced below, one can see the fluctuations of cybersecurity share price compared with standard measures of market performance over time, like the Nasdaq and S&P 500. You’ll notice the plots generally follow each other, except the Index’s gains outpace the others by about double. The Index also gets a boost right after big data breaches are announced.
Courtesy of BVP
Fear fuels the business. For the most part, the share price ups and downs stay in sync (barring an early 2014 cybersecurity market correction). Yet in the wake of major hacks, the Cyber Index takes off.
In January 2014, a month after the public learned that hackers had ransacked retailer Target
tgt
, the cybersecurity sector’s share prices spiked 27% compared with the Nasdaq’s 3% and the S&P’s nada, according to BVP’s findings. After attackers breached film studio Sony
sne
Pictures at the end of that year, cybersecurity stocks jumped 12% versus the Nasdaq’s and S&P’s 5%. And after we learned of last year’s robbing of the health insurer Anthem
antm
, cyber stocks surged 29% in contrast to the Nasdaq’s 5% and the S&P’s 9%. You get the idea.
“Hackers continue to move the needle,” Sunil James, a cybersecurity investor at BVP and alum of Google
goog
, Amazon
amzn
, and Mandiant, told Fortune on a call. He said he believes that entrenched security companies often have a hard time coping with the latest attacks, so they lean on acquisitions to stay ahead. “Often you don’t find bleeding-edge capabilities in their tool kits just yet—that’s why they buy companies.”
The prospect of such exits coupled with heightened fears about hacking has made cybersecurity an attractive sector for venture capital dollars in recent years. Recently, though, there has been a notable chilling in the industry, and earlier stage companies have had more difficult time raising funding (a predication that Fortune made at the end of last year).
For more on cybersecurity startup funding, watch:
David Cowan, head of BVP’s cybersecurity practice, puts the predicament of the incumbents in blunter terms. “All these public company stocks we’re tracking are basically selling obsolete products,” he told Fortune, mentioning that he expects an uptick in mergers and acquisitions to take place. “The only way to sustain this growth rate is to develop a successful or rapid cadence for acquiring smaller companies. In the security space all the innovation comes from startups.”
For reference, here is a list of all the companies included in BVP’s Cyber Index:
Absolute Software
alswf
AVG Technologies
avg
Barracuda Networks
cuda
Check Point Software
chkp
Cyberark
cybr
F-Secure
fsoyf
FireEye
feye
Fortinet
ftnt
Gemalto
gtoff
Guidance Software
guid
Imperva
impv
Imprivata
impr
KEYW Holding
keyw
Lifelock
lock
Mantech International
mant
Mobileiron
mobl
NQ Mobile
nq
Palo Alto Networks
panw
Proofpoint
pfpt
Qualys
qlys
Radware
rdwr
Rapid7
rpd
Sophos
Splunk
splk
Symantec
symc
Trend Micro
tmicy
Vasco Data Security International
vdsi
VeriSign
vrsn
Zix
zixi
This isn’t the first time that Bessemer has debuted an index. In 2013, the firm put out a Cloud Index that tracks the performance of cloud software companies—like Hubspot
hubs
, Salesforce
crm
, and Workday
wday
—in the public markets. The companies included had a combined market cap of $100 billion, and cap-weighted returns that, like the Cyber Index, also exceeded the Nasdaq and S&P.
“We believe that the companies we’re creating ultimately have to partner with these public companies, that’s why we need to ultimately understand them,” Cowan said, explaining the rationale behind the creation of the firm’s indexes.
The Cyber Index is the latest addition to the BVP family. Even barring the spikes that accompany big data breaches, investors’ cybersecurity bets seem to have paid off. Now you know: If you’re looking to buy securities, you might consider investing in, well, security.
