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Security startup Arctic Wolf raises $401 million in convertible debt

By Krystal Hu

(Reuters) - Cybersecurity company Arctic Wolf has raised $401 million in convertible notes led by existing investor Owl Rock, the latest example of late-stage startups seeking alternative financing to bridge the longer-than-expected gap between funding rounds and an initial public offering (IPO).

The fundraising, in which Viking Global Investors, the Ontario Teachers’ Pension Plan and Neuberger Berman also participated, will help the company to bolster its balance sheet and fund potential acquisitions, its chief executive, Nick Schneider, told Reuters in an interview.

Arctic Wolf, which raised equity financing at a valuation of $4.3 billion in July 2021, has been working with banks on IPO preparations since the beginning of this year.

Rising interest rates and volatile market conditions, however, have resulted in one of the longest droughts for tech IPOs in the U.S. market, which is on track to record the lowest IPO proceeds since 2003, according to a report from EY.

"The markets just aren't in a great spot for IPOs, and that's why in part we wanted to make sure that we looked at our other options," said Schneider.

The convertible notes come with a conversion premium, meaning the price at which they are expected to convert into shares is set to be higher than the eventual IPO price, signaling investors' confidence that the company's shares will trade higher after going public.

Convertibles with a valuation cap and a conversion price, along with downside protections for investors, have become more popular among startups as valuation resets in the market.

Eden Prairie, Minnesota-based Arctic Wolf provides security software tools and services to help companies detect and recover from cybersecurity threats. Set out to provide enterprise-level security to organizations that typically don’t have the security resources, it now serves over 3,000 customers across industries, from healthcare to manufacturing, with over 1,100 channel partners.

The company has doubled its headcount and revenue in the past year, driven by expansion into new regions including South Africa and Australia, Schneider said.

(Reporting by Krystal Hu in San Francisco; Editing by Mark Potter)