Already early his first visit to Israel, Fazal Merchant the new CFO and president of cybersecurity unicorn Wiz, was treated to a welcome that only the Middle East can offer with wailing sirens catching him by surprise at 3am. He recounts, "I followed the hotel's instructions. I had left a pair of shoes and bottle of water by the door, they explained to me in advance where to take shelter, but when the alarm sounded, it was very unpleasant and I found myself trying to get into the elevator contrary to instructions. It saddens me to think that many of you are used to this – no one should have to get used to something like this, and the truth is that it was very upsetting." Like foreign executives who come to Israel for the first time, Merchant is also "amazed by the food here, I would gain a few pounds if I lived in Israel." He has also been "totally shocked by the prices."
Merchant (51) could easily have come to Israel as a tourist: After a long career as an investment banker at Barclays, CFO of several major US entertainment giants such as DreamWorks Studios and Satellite Direct TV Corporation, he thought about retiring and traveling the world. In fact, he has already retired three times, but something always drew him back to work.
The last time it was a friend who drew him to the position of CFO at a cybersecurity company called Tanium, where he found himself promoted to co-CEO, until the Covid pandemic dictated it was time to retire again. "The first time I retired was not successful because I didn't have a plan. The second time I caught a lot of fish and watched a lot of sunsets – it was fun the first week, but the second week it was enough to drive me crazy."
During his third retirement, during the Covid pandemic, he would choose travel destinations at random and enjoy the cheap prices and empty planes offered by airlines. He recalls, "When you're one of the only passengers, the airlines are grateful to see you." That was until he began offering his services as an experienced financier to boards of directors like that of Warner Bros.-Discovery Studios, but he was looking for depth and focus, or in his words, "To put your hands on the wheel and not sit in the back seat."
Then Wiz came along. Wiz CEO and cofounder Assaf Rappaport, hangs out in the social circle of some of their mutual acquaintances – one of whom is Hollywood producer Jeffrey Katzenberg, under whom Merchant worked as CFO of DreamWorks Animation Studios.
Protracted search
Since last summer, Wiz has been searching for a CFO. The company, founded in 2020, has broken records for a privately-held Israeli company's valuation ($12 billion), for the largest funding round for a private company (nearly $1 billion), and for annual revenue growth (about $500 million). Wiz claims that its potential valuation may be even higher than the $23 billion that Google agreed to pay for it but which Wiz turned down. Merchant's acquaintance with Rappaport lasted about a year, as informal meetings became official and earlier this month he took office. "I've never seen anything like this," Merchant says in his first interview since becoming Wiz's CFO, when asked about the Wiz data he has seen. "The challenge of providing the necessary infrastructure and operational aspects to meet the rapid pace of demand is great – my job is to ensure that we maintain that speed with proper control, because speed without control is chaos."
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Does your joining Wiz indicate that the company is going for an IPO?
"My job now is to ensure that the company is ready to go public when it wants to, but preparing a company for an IPO is a different process than the IPO itself. Typically, companies go public for three reasons: a need for liquid capital for the company and investors; strengthening the brand and building awareness around the company; and public recognition of the company's maturity. You can't have the first two without the third – but when you have the third factor, it gives you a lot of options and flexibility around the first two.
"I was the CFO of an animation studio (DreamWorks) that was eventually sold – because the realization hit that this was too volatile a business to generate stable growth for investors. But in our field, predictability and linearity are very important, and at a large scale and at the current rate of growth, predictability and linearity are difficult. So we need to maintain operational and financial discipline to cope with rapid growth. My job right now is to prepare the company for the IPO, so that when the decision to implement it comes, management will have the flexibility to cross the bridge when the time is right."
So when will the company be ready to launch an IPO?
"I would say within a year, more or less. It is difficult to say precisely but I have been pleasantly surprised by what I have seen when I got here and I would say I don't see how the operational aspect will be particularly challenging. They've already prepared for that."
Is the capital market ready for a wave of IPOs?
"We've moved from an environment where it's like any company can issue at any time to a period where select companies are able to be absorbed into the capital market as long as they chart a healthy path of cash flow growth and profitability, with more moderate valuations. In this new period, there are winners with high confidence and there is everyone else, but we're in a healthy period. However, there's still geopolitical uncertainty in the Middle East and Eastern Europe and uncertainty stemming from the change of administration in the US. This period is not very certain."
So when do you think the wave of tech IPOs that everyone is waiting for will arrive?
"We're only at the beginning of the year, but I'm quite optimistic that we'll see quite a bit of activity this year, also in the context of mergers and acquisitions because they come along with IPOs. There are still a lot of fragmented industries that are ripe for mergers and acquisitions – the outgoing administration wasn't particularly friendly to deals, so I'm overall optimistic that the new administration will be more open to it, so that we'll see more activity this year in both channels: IPOs and acquisitions."
A representative of corporate America
Merchant brings to Wiz a DNA that was previously lacking at the Israeli company: 30 years of experience in corporate America – in a variety of purchasing, finance and operations roles at companies such as Ford, Barclays and Direct TV.
Merchant was involved in a $100 million debt offering at Ford, was one of the leaders in the sale of DreamWorks to Comcast and was a partner in the sale of Direct TV to the media giant AT&T.
He says, "I think I have raised in the public, private, domestic and international markets much more than the average person." At the same time, his appointment has been criticized in the industry for his lack of experience in IPOs, even though that is one of Wiz's goals for the coming years. "It's a bit like asking me if I know how to start a car after I've driven it around the neighborhood," he responds to the criticism. "I've been incredibly active and spent a huge amount of my time in the capital markets. I held senior positions in private and public companies and sat on boards of directors, including the position of chairman of the audit committee in public companies."
Perhaps ultimately you'll go for a huge sale as almost happened with Google, which offered $23 billion?
"If that will ultimately be the decision that the shareholders make. That doesn’t mean I won’t have an opinion to express, but I’m ultimately an executive who executes what the shareholders ask for."
The controversial metric
One of the controversial tools of cybersecurity companies like Wiz is waving about annual revenue rate (ARR), which is a non-GAAP accounting term and which is often subject to interpretation and manipulation to show high growth, sometimes regardless of actual revenue. How comfortable would you feel using it in your role?
"Very comfortable. Evaluating the health of the business goes far beyond the definitions of what is established by GAAP. Take another common term: EBITDA, which is also non-GAAP, but it is used as a common measure of the quality of mature companies, which are sold by the EBITDA multiple rather than the accounting revenue multiple.
What is annual recurring revenue (ARR)?
But it is clear to everyone how EBITDA is calculated while calculating ARR is in the eye of the beholder.
"I agree that it is not a regulated metric like revenue and that there is no accounting standard for it. But I would tell you that the variation I have seen between portfolio companies of private equity funds (large and mature companies) is negligible. Obviously, you do not want to rely on a company that measures ARR according to the time the sun rises and the time the sun sets. But our ARR is high because it represents our growth profile, which is higher than the average company, and ultimately the metric is an indication of the long-term potential of the business."
Will you bring with you a more conservative approach to measuring ARR in the company?
"I do not know if conservatism is the right way. I would say a consistent and balanced way. You can imagine that when we go out to raise money, there is no ambiguity about how we calculate ARR – it is consistent and it is clear to investors. These are the same investors who look at how we calculate it. What does the consistency and growth of that look like, and from there they apply the multiples that you see to give us our valuation today."
When Wiz announced last May that it had raised about $1 billion at a valuation of $12 billion, its annual revenue growth rate was then about $350 million – an ARR multiple of about 34. For comparison, Palo Alto Networks' revenue multiple is currently 14, and Crowdstrike's is 23.
Published by Globes, Israel business news – en.globes.co.il – on January 26, 2025.
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