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Datto IPO doesn't mean other backup vendors will follow

Experts say Datto's deep investment in MSPs and the SMB market made it well-positioned for an IPO, and it doesn't mean other data protection vendors should do the same.

Datto made its IPO plans public and seems poised to ride Snowflake's IPO wake, but experts pointed out most backup vendors are still private and they expect them to remain so.

Last week, Datto publicly filed for its IPO on the New York Stock Exchange with the plan of claiming the ticker symbol "MSP." On Datto's form S-1 registration statement, the company set an initial offering of $100 million. However, when Bloomberg reported in July that the company had confidentially filed for an IPO, the publication estimated that it could be worth more than $1 billion.

Datto's IPO filing came two weeks after cloud data vendor Snowflake sold 28 million shares and raised about $3.4 billion from its IPO, making it the largest software IPO ever. Other tech IPOs this year include Sumo Logic and Rackspace, the latter of which returned to the public market after going private in 2016.

Datto's IPO filing listed revenue for the first six months of 2020 as $250 million with $10 million in net income, impressive numbers compared to Snowflake's $240 million in revenue and $171 million in losses over the same period.

Datto said it is not conducting interviews during this timeframe and did not provide any further detail on its IPO when contacted by SearchDataBackup.

Datto's portfolio of backup, recovery and business continuity products include Datto SaaS Protection, Datto NAS and Backupify. It sells exclusively through its ecosystem of managed service providers (MSPs).

Data protection market unhindered by COVID-19

The data protection market has seen multiple major equity events in the COVID-19 era. In April, backup and data management vendor Cohesity raised $250 billion in Series E funding and brought its valuation up to $2.5 billion. In June, disaster recovery (DR) vendor Zerto raised $53 million. In July, VMware purchased DR as a service vendor Datrium.

COVID-19 has driven businesses to invest more heavily in data protection. Ransomware attacks have increased in frequency while organizations adjust to an increasingly remote workforce. Krista Macomber, senior analyst at Evaluator Group, said the pandemic laid bare organizations' readiness (or lack thereof) for disasters and prompted them to invest in shoring up their data protection weaknesses. Citing statistics from a study Evaluator Group plans to publish later in October, Macomber said 30% of respondents in the study permanently increased their data protection capabilities as a direct response to COVID-19. Another 15% said they have temporarily increased their data protection.

"Customers are reevaluating their data protection strategies due to the need to cut costs and the need to address issues around recoverability due to ransomware," Macomber said.

With increased customer demand for and spending on data protection, Macomber said it might make sense for vendors to move forward with their IPO plans. The CEOs of Rubrik, Actifio, Druva and Veeam have each said they have IPO plans in the works in past interviews with SearchDataBackup. People in the industry have identified others, including Cohesity and Zerto, as other IPO candidates.

However, Macomber stressed the uncertainty in the larger economic environment means these companies need to be cautious with their IPOs. She pointed out Datto is in a particularly bullish area of data protection -- backup as a service delivered by MSPs. What may work for Datto won't necessarily work for other backup vendors.

Christophe Bertrand, senior analyst at Enterprise Strategy Group, shared similar words of caution about data protection IPOs. He said investments by private entities don't always translate to similar market confidence when a company goes public. Bertrand described Datto's claiming of the MSP ticker symbol as a declaration of its focus on its MSP channel. Datto's commitment to providing MSPs with products to deliver data protection services to their clients is what puts them in a strong position for an IPO. Bertrand also noted Datto has services around networking and suggested the combination of data protection meets networking could be a potent combination for countering cyberthreats and ransomware.

Bertrand said categorizing Datto as just another data protection vendor and viewing its IPO through that lens is inaccurate. Datto ultimately targets SMBs as its core audience through its MSP channels rather than enterprises. There is currently strong demand among SMBs for data protection as a service offerings because these businesses are just as vulnerable to ransomware attacks but lack the expertise and resources to deal with them the same way enterprises would. Bertrand said it's more useful to say Datto's competitors are backup vendors that tap into SMBs through their MSP ecosystem.

"Datto's IPO sends a strong message to Kaseya and other midmarket players. It's saying, 'We are claiming the MSP space,'" Bertrand said.

Although he described data protection as a "red-hot market" and noted the growing reliance on backup and DR, Bertrand warned that it is still a volatile place with no safe bets.

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