Zscaler raises $100 million to pulverize security appliances

August 3, 2015, 10:30 AM UTC

Jay Chaudhry—the CEO, founder, and chairman of the cloud-based security company Zscaler—has a brashness about him.

At the RSA conference earlier this year, a representative of his company obliterated competitors’ electronics on stage with a mallet. (Much to the periodic vexation of the neighboring booths.) One cannot mistake his message.

“The old technology based on appliances is not really relevant,” Chaudhry says, sharing his vision that incumbent security companies, ones that rely on selling hardware “boxes” to businesses in order to help them secure their network endpoints, will face a coming crisis. “When business happens in the cloud, you need security in the cloud.”

Zscaler sells security as a service. Companies subscribe, point their Internet traffic to the firm’s security “checkpoints,” which reside in about 100 data centers globally, and let Zscaler inspect and scrub it. “We like to talk about ‘Internet gateway’ as a new category that needs to be done in the cloud,” Chaudhry says.

On Monday, the company announced that is raising $100 million in a funding round led by TPG Growth, which has also financed other notable tech startups such as Uber, Airbnb, and Box (BOX). Other participants in the round include existing investors EMC (EMC) and Lightspeed Ventures, which invested $38 million in the company in 2012.

Chaudhry, a serial entrepreneur who hails from a small Himalayan village, originally self-financed Zscaler with $60 million in two earlier rounds. He tells Fortune that the San Jose, Calif.-based company is “pretty close to cash flow neutral,” and will likely go public within the next year or so.

“The next step for us is sales and global expansion,” he says, adding that he also plans to beef up the company’s research team.

Nehal Raj, a TPG partner who specializes in software company investments, sees great potential in Zscaler’s particular cloud model. “They control the access to the web for corporations,” he says. “That’s a strategic place to be.”

Indeed, given a boom in recent funding announcements, many investors seem to believe that the field of security is itself a strategic place to be. Last month another cybersecurity company, CrowdStrike, raised $100 million in a funding round led by Google (GOOG) Capital. And investment firms have poured $1.2 billion into cybersecurity startups in the first half of the year, up from $771 million in the same time frame in 2013, according to researcher CB Insights.

Investors’ enthusiasm doesn’t dissuade Raj, however. “It feels like a very rational bet to be making,” he says, speaking on TPG’s involvement in Zscaler’s latest funding round. “But I’m not surprised if others feel the same way about the other companies they’re spending on.”

Chaudhry has no doubts about his company either. If and when the proverbial mallet strikes, he believes his firm will be just fine.

“I think if I were an appliance company I would be worried,” he says. “We built in the cloud for the cloud and we’re seeing tremendous growth. Are we worried about it? Not really.”

Read More

Artificial IntelligenceCryptocurrencyMetaverseCybersecurityTech Forward