Deal Anatomy: How VC Highland Capital Got In On Fast-Grower Malwarebytes

Highland Capital Partners cold-called Malwarebytes CEO Marcin Kleczynski about a year ago looking to make an investment in the San Jose, Calif.-based company.

Kleczynski wasn't interested at the time, but communication remained open between the two and Highland Capital ultimately provided $30 million in Series A funding recently for Malwarebytes.

The antivirus technology company has what many venture capital firms or investors look for. It's been profitable from the start with growing revenue, and it's not new to the scene, having been founded in 2008 first as a consumer antimalware download and in more recent years moving on to the enterprise. And up until this year, the company had been self-funded and bootstrapped without outside capital, an "old-fashioned model" for a company, said Corey Mulloy, partner at Highland Capital Partners, which has U.S. offices in Menlo Park, Calif., and Cambridge, Mass.

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The security sector is a no-brainer for Highland Capital, and an area where there's plenty of opportunity to invest, Mulloy said.

Highland's ninth fund, a $400 million fund focused on tech companies, is about split between consumer and enterprise companies and invests in about 10 to 12 companies annually, on pace for about an average investing year, Mulloy said.

Virtualization, software-defined anything and the Internet of Things are all focus areas for Highland Fund 9, Mulloy said. Malwarebytes' technology and traction in the marketplace made sense for Highland.

"The customer references were just incredibly strong in terms of the brand of the company and what it means to them, the quality of the products, and the team and so forth was just very positively referenced," Mulloy said. "What they've done with no institutional capital, and some of the ways they were looking to grow the business through acquisitions, gave us conviction that they were committed to building the next-generation endpoint security company."

Kleczynski had already been fielding interest from all sides of the spectrum throughout the years: venture capital firms, private equity and larger antivirus vendors either looking to make an investment play in Malwarebytes or purchase it.

The interest wasn't there for Kleczynski but he socked away the emails and placed the contacts in a spreadsheet, "always keeping the door open," he said.

Malwarebytes had been doing fine on its own, gathering donations from early adopters in the very beginning. It notched a 100 percent increase in 2013 revenue, although Kleczynski declined to state what the company's sales were for last year except to say it was in the "low-tens of millions to mid-" dollar amount range.

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Kleczynski wasn't interested in an investment from Highland Capital when the firm reached out about a year ago, but things changed this year.

"We've been growing very quickly. We're significantly understaffed with 40 people in the queue to be hired," Kleczynski said. "We're extremely profitable, but it's good to have extra cash."

In addition, Kleczynski had been eyeing a number of acquisitions of smaller companies that have now become more achievable with the extra funding.

A deal under $1 million is likely to close by the end of the year, Kleczynski said. He declined to elaborate but said the purchase would be akin to past deals Malwarebytes has done of companies within the same community as itself, such as freeware apps or infection-removal tools.

Expect to see Malwarebytes employee ranks grow to between about 150 to 200 workers by the end of first-quarter 2015, Kleczynski said. Most of those open positions are in sales and engineering.

The company launched a formal channel partner program about two months ago. It also has between 2,000 and 3,000 enterprise customers.

Much of the gain last year came from recurring revenue along with organic growth of the customer base. Malwarebytes launched a subscription-based model in March for consumers, canceling out the $25 fee in exchange for lifetime use, although consumers who bought the product before this latest move are grandfathered in, Kleczynski said. Consumer revenue is expected to double, a gain set to be realized next March when subscriptions are renewed.

Malwarebytes more recently hired a CFO in Mark Harris, formerly of Seven Networks and Nimsoft, with public company and venture-capital-raising experience.

Filling the position was one of the first things Kleczynski asked of Highland Capital when the two began working together, hoping to tap the firm's well-connected network.

And now Malwarebytes can continue to focus on its main priority, Kleczynski said: "Just trying to fix computers worldwide."

PUBLISHED JULY 25, 2014