There's a very good reason why Cisco shelled out $2.35 billion to buy hot startup Duo Security

Dug Song/About Me

Duo Security CEO Dug Song, known for his love of skateboarding.

• After months of negotiating, Cisco has confirmed that it's buying Duo Security for $2.5 billion in cash.
• This was a smart and totally expected move by Cisco, who had been watching this company's fast growth from the inside as an investor.
• While Cisco is paying a hefty premium over Duo's last valuation of $1.17 billion, the price is not outlandish given how well these companies fit together, as well as Duo's strong growth.

After months of negotiating, Cisco has confirmed that it's buying Duo Security for $2.5 billion in cash and assumed equity awards.

Duo is a hot, up-and-coming Ann Arbor, Michigan-based startup that was last valued at $1.17 billion. It was even named as one of Business Insider's 50 startups that will boom in 2018.

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And really, it's no surprise that Cisco was the one to snap up this startup. Cisco was one of the investors in the $70 million round that pushed its valuation over $1 billion, meaning that it was clearly on the acquisitive tech giant's radar.

Duo is a cloud service that manages passwords and employee access to cloud apps and the network. It provided an alternative to "clunky VPNs," as it describes. As every employee who works at a large corporation knows, the VPN, or virtual private network, can be a headache to deal with. And the largest provider of VPN software is Cisco.

So to Cisco, Duo was both a threat (of the annoying, ankle-biting kind), and an opportunity - Duo is a cloud service with subscription revenue, which fits into Cisco's current strategic focus. Duo fits exactly the mold of the kind of company Cisco wants to buy, and is willing to spend double its private valuation to get it on board.

It is an acquisition in the image of one of Cisco's most successful purchases, the WiFi-gear and cloud service company Meraki, which it bought for $1.2 billion in 2012. Meraki is the acquisition that CEO Chuck Robbins is constantly holding up as example of the direction he is taking the company.

The deal was done by Cisco's David Goeckeler, the super-powerful exec running the enormous network business unit and its enormous security unit. He said in a blog post that the deal was "several months in the making," and that buying Duo was "highly strategic." It will allow Cisco's next-generation networking gear, designed for enterprises who want to use multiple cloud platforms, to handle the password security part.

On top of all that, Pitchbook estimated Duo's total revenue at around the $100 million mark at the end of 2017, growing at 37%, based on what investors revealed in their financial documents. Cisco was not immediately available for comment on those figures.

The company was founded by CEO Dug Song, a long-time member of the Ann Arbor startup community, and CTO Jonathan Oberheide, who founded Duo based on his PhD work at University of Michigan.

Song made his mark as a key engineer at Arbor Networks, a network security company founded out of the University of Michigan in 2000, also backed by Cisco and bought by Tektronix for an undisclosed sum in 2011. Beyond security, Song is known for his sense of humor and his support of skateboard parks. Through their fund raising, investors owned about 60% of the company, leaving the founders and its 700 or so employees with the remaining 70%.

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