Tailscale CEO and co-founder Avery Pennarun.Supplied
Tailscale Inc., a Toronto-based company that has rapidly become the virtual private network technology provider of choice to artificial-intelligence companies, has raised $230-million in a deal valuing it at $2-billion, including funds received.
Silicon Valley private capital giant Accel Management Co. LLC, which first backed Tailscale in 2020, led the deal. Fellow existing investors from the San Francisco Bay area, including CRV, Insight Partners, Heavybit and Uncork Capital, and the chief executive officers of CrowdStrike Holdings Inc. and Squarespace Inc. also participated.
The financing, which was first reported Tuesday by Bloomberg, increases Tailscale’s valuation from $1-billion after its last financing in 2022 and cements its position as one of Canada’s most highly valued, rapidly growing and financially fortified “scaleups.” Chief executive officer and co-founder Avery Pennarun said the 150-person company still has most of the US$100-million from its last raise and will now invest to expand engineering, product and sales teams. Tailscale has raised $395-million in its six-year life.
Accel partner Amit Kumar acknowledged the deal set “an aggressive and generous valuation for the business,” but added that “it’s a reflection of how excited we are about Tailscale, the magnitude of the opportunity.” He noted the deal was oversubscribed “with all the insiders trying to put more capital in. Tailscale feels like one of those companies that are truly unbounded.”
All $230-million will go to Tailscale’s coffers, unlike most recent nine-figure tech financings in Canada that have mainly seen early investors and employees sell shares.
Mr. Pennarun said there will be a smaller, subsequent secondary for employees to sell, though he won’t participate. “I’m keeping my shares because they’ll be worth a lot more in a few years. This is not a good time to get out of Tailscale.”
The company offers an alternative to virtual private network (VPN) systems provided by incumbents such as Cisco, OpenVPN and Palo Alto Networks that doesn’t require costly hardware or infrastructure, or even for users to sign in to employers’ systems to access their enterprise software. Instead, Tailscale users establish direct, secure networks between devices, fellow employees and their software. Companies keep tabs on users not by routing their traffic through their systems, but by ensuring the programs or devices users connect to receive the correct login information.
Setting up and administering Tailscale is simpler and less expensive for companies, and results in faster-running programs because traffic doesn’t have to route through a central point.
Tailscale was founded by Canadians Mr. Pennarun and David Carney and Australian David Crawshaw. Mr. Pennarun and Mr. Crawshaw had worked at Google Inc. as software engineers, while Mr. Carney worked for two of Mr. Pennarun’s prior startups. (Tailscale is managed virtually; Mr. Pennarun and Mr. Carney, the chief strategy officer, are in Montreal and Toronto, respectively. Mr. Crawshaw, who is less active in the business, is based in Berkeley, Calif.)
The trio saw an increasing amount of internet traffic being routed through cloud operations controlled by a handful of giants, but felt the vast infrastructure wasn’t optimized for solving simple problems that took up most of users’ time. They felt that could be more efficiently handled by facilitating direct connections.
Tailscale’s product made its debut in 2020 and benefited from the pandemic as employees looked for ways to connect remotely to their workplaces.
It was quickly adopted by engineers who spread the word to their colleagues, and eventually their employers, after a “bottom-up” viral growth pattern that helped Slack and 1Password win over corporate IT departments.
“Our sales team never has to do cold outreach to new customers,“ Mr. Pennarun said.
Tailscale has consistently doubled revenues annually and revenues now run in the tens of millions of dollars a year, though it is not yet profitable. It recently surpassed 10,000 paying business customers, and millions of individuals use it for free.
Demand from AI startups has driven much of its recent growth as the company has added Cohere, Mistral, Hugging Face, Groq and Perplexity as clients.
That is because AI companies have to move significant amounts of sensitive data securely between many remote machines and multiple cloud-computing providers to cost-effectively optimize access to processors that power AI calculations.
That’s a task Tailscale is well suited to handle, and AI companies use it “as their network infrastructure, which is a huge discovery for us given we’ve never actually done a lot of work trying to push into the AI marketplace,” Mr. Pennarun said. The company also counts Telus Corp., Instacart, SAP AG and Motorola Solutions Inc. as customers.