Darktrace: cyber security company prices in Mike Lynch connection

British bankers aren’t having much luck pricing UK tech companies. After markets knocked down Deliveroo shares, cyber security company Darktrace appears to have underpriced its initial public offering by some 40 per cent. 

Darktrace opted to list with a £1.7bn valuation — far lower than the £3bn mooted earlier by people close to the deal. Investors seem to see the price as a discount, buying up its shares on Friday morning.

London’s lack of listed tech companies makes comparisons, and pricing, difficult. Using food delivery company Deliveroo’s disappointing initial public offering to explain Darktrace’s listing price ignores the fact that the two are very different companies. Deliveroo’s reliance on gig workers unnerved institutional investors. Darktrace sells software that uses machine learning to spot abnormalities that might suggest a cyber attack. It is lossmaking but the subscription model means potentially high margins.

Darktrace has its own set of problems. It has tripled its client base in three years but year-on-year revenue growth has slowed from 72 per cent in the 2019 fiscal year to 45 per cent the next year to 39 per cent in the first six months of the current fiscal year. This is in spite of employing a lot of people — more than 1,500 — mostly in sales. Sales and marketing costs were more than two-thirds of revenue in the first six months of the current fiscal year, vastly more than R&D. Note, too, the paucity of listed tech clients.

Then there is Mike Lynch. The co-founder of Autonomy is fighting US extradition over fraud charges related to Autonomy’s sale to Hewlett-Packard, which he denies. He was an early backer of Darktrace via Invoke Capital, sits on its science and technology group and had a 19 per cent pre-IPO stake together with his wife. Darktrace acknowledges that links to Lynch represent a reputational risk. It is in both their interests to cut ties. But these are hard to unpick. Darktrace’s apparently modest listing price should not be regarded as a bargain.

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