March 12, 2007
For nearly five years now, Wall Street has been an unfriendly place for
security companies. The security industry saw its last big IPO in early
2001, when Sunnyvale, California-based Netscreen Technologies, a maker
of firewalls and virtual private network management products, listed on
the Nasdaq. With about $60 million in revenue, Netscreen had a fairly
There hasnt been much activity since. In general, the technology IPO
market has dried up as a result of the increased scrutiny placed on
public company operating performance, the increasing pressures on
management and board members, the exorbitant cost of regulation
including Sarbanes-Oxley, and the attractiveness of the M&A markets,
says Charlie Rice, principal with investment banking firm East Peak
Advisors. Security firms havent had it any easier.
That could change quickly. Experts estimate that the industry sustains
some 700 private security players, compared to just 50 or so public
security companies. Many of these private firms have been around for
years and are ready to make a bid for the public markets.
Take Sourcefire, a Columbia, Maryland-based company that markets
open-source security software that detects and prevents intrusions on
corporate networks. In October, Sourcefire filed for an IPO and is
looking to raise $75 million. Founded in 2001, Sourcefire will list on
the Nasdaq, though it is still not clear when the companys ticker FIRE
will hit stock screens. If that IPO pans out, it could make Wall Street
hungry for more such investments.
The public market exit opportunity for technology companies has been
weak for a number of years, says Jonathan Silver, managing director of
venture firm Core Capital Partners, and one of the investors in
Sourcefire. But for companies that are able to demonstrate significant
revenue growth, widespread customer adoption, and a very clear and
compelling business plan, there are now public exit opportunities.
If successful, Sourcefires IPO could open the floodgates for other
security startups. The following are three prime candidates:
LOCATION Boulder, CO
CEO Peter Walkins
FUNDING $108 million
KEY INVESTORS Technology Crossover Ventures, Accel Partners, Mayfield
Anti-spyware has become a category almost as big as antivirus, and
Webroot rules the roost there. Spyware programs infect computers and
then steal personal or proprietary information from users. IDC estimates
that sales of anti-spyware products will grow to $305 million worldwide
in 2008. Webroots flagship product, Spy Sweeper, is the market leader,
beating established giants like Symantec and McAfee. But the company
that has, thus far, emerged the winner on retail shelves is likely to
face tough weather ahead. Microsoft recently launched its own antivirus
and anti-spyware product, and Webroot needs to fight hard to ward off
the challenge from Redmond. Webroot is also a niche player, and for a
successful IPO bid, it would need to go beyond spyware and develop a
diversified portfolio of products, say observers. Though the company
hasnt indicated when it will aim for a public offering, analysts say
Webroot is likely to take a shot at the markets in the next year or two.
That is, if it hasnt been acquired by then.
LOCATION Sunnyvale, CA
CTO Michael Xie
FUNDING $100 million
KEY INVESTORS Redpoint Ventures, Meritech Capital Partners, iD Ventures,
Legend Capital/Doll Capital Management, Acorn Campus
Fortinet, which sells antivirus and firewall devices to companies, is
the security industrys leading candidate for an IPO. The company has
often indicated its interest in an IPO, but has said it is waiting for
the right window of opportunity. Fortinets revenues, meanwhile, have
been growing aggressively. The company saw a huge increase in revenues
from 2001 to 2005, enough to earn itself the No. 2 spot in the Internet,
Media & Entertainment and Communications category of Deloitte & Touches
list of the 50 fastest-growing firms in Silicon Valley. Fortinet CEO Ken
Xie may well have a lucky touch. Mr. Xie also founded Netscreen, which
made the last big security IPO in 2001.
Featured Profile: Qualys
LOCATION Redwood Shores, CA
CEO Philippe Courtot
FUNDING $65 million, 6 rounds
KEY INVESTORS ABS Ventures, GRP Partners, VeriSign, Trident Capital,
Mercury Interactive, Bessemer Ventures
Philippe Courtot likes to show visitors the customer support area at his
companys headquarters in Redwood Shores, California. Although thousands
of corporate customers, including some of the worlds largest companies,
depend on Qualys security products, there are just four technicians on
duty at any time.
Qualys can get by with such a small support staff due to its
software-as-a-service model, which CEO Mr. Courtot says challenges the
old approach to enterprise software. The company, which focuses on
security risk and compliance management, offers its security product as
an appliance attached to a customers network. Any bug fixes in the
Qualys software and threat updates are automatically sent to the
customers appliance via the Internet. That means fewer frantic calls to
the support center.
Mr. Courtot, 63, is not shy about predicting that the security sector is
due for massive consolidation in coming years. He says security sector
IPOs have been few and far between in recent years because many security
firms havent figured out how to grow into large companies. They become
niche players, he argues.
But Mr. Courtot is hoping his track record of building profitable
companies will enable him to take Qualys all the way to IPO and beyond.
Three times before, Mr. Courtot has built companies that have delivered
solid returns to investors.
He wanted to run his own company, so he applied for a CEO vacancy at
email startup ccMail and turned it from a 12-man shop into a formidable
competitor to IBM and Microsoft. He sold the email company to Lotus
Development in 1991. Then, as CEO, he took Verity, an enterprise search
company, public in 1995. Later, he became chairman and CEO of Signio, an
electronic payments startup that he sold to Verisign for $1 billion in
Now, under Mr. Courtots direction, Qualys has raised $65 million in
venture funding from Trident Capital, GRP, and AES Ventures. He says the
companys gross margin is 83 percent and that it is cash-flow positive,
but wants to hold off going public until 2008. By then, the market
should be ready to support a new public security company.
Copyright 1993-2006 Red Herring, Inc. All rights reserved.
Visit the InfoSec News Security Bookstore