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VCs see tight market for security startups




VCs see tight market for security startups
VCs see tight market for security startups



http://www.infoworld.com/article/07/08/02/VCs-see-tight-market-for-security-startups_1.html 

By Robert McMillan
IDG News Service
August 02, 2007 

These are tough times to start up a security company, but entrepreneurs 
should not give up hope altogether, a panel of venture capitalists said 
Thursday at the Black Hat conference in Las Vegas.

Though security was one of the hottest investment areas during the 
post-9/11 economic downturn, investors today feel that those investments 
generally have not paid the returns they expected with few initial 
public offerings or acquisitions of security startups. "The reality is, 
not as many exits came out of that era as people were hoping for," said 
Mark McGovern, tech lead with the In-Q-Tel investment firm.

In the past few years, more startups have been chasing the same ideas, 
said Maria Cirino, general partner with .406 Ventures. "It became very 
crowded, and it became sort of a lemming space," she said. "When a space 
becomes crowded and overheated, I think it puts pressure on the space in 
general in terms of exit valuations."

Still, though there may be too many security startups right now, that 
doesn't mean there's no room for innovation.

Regulatory compliance is the most active area of investment today, but 
the panelists saw a few other areas that were underrepresented as well.

Good service companies that are "technically driven" are hot, said 
Cirino. "Those are more valuable than enterprise software companies 
nowadays," she said. "We just think that's the way that big companies 
like to do technology."

Google's recent purchase of e-mail security service provider Postini and 
GreenBorder Technologies has been "a very energizing trend," for 
investors, she added in an interview after the panel discussion.

Code-review service provider Veracode initially approached investors 
pitching itself as a developer tools company with little success, Cirino 
said. But when the company changed its model and planned to offer its 
code-reviewing software as a service, it got funded, she said.

Another area that seems underinvested right now is physical security, 
where there is a lot of opportunity to integrate security into network 
technologies, McGovern said. "There's remarkably little money being put 
into developing new capabilities for physical security," he said. Though 
physical security is an important concern, right now there is little 
alternative to "paying a guard at the front door," he said.

Looking to cash in on any new security ideas that may be percolating at 
this week's conference, show organizers have announced a new 
entrepreneurial contest.

The Black Hat Defcon Open business plan competition, announced Thursday, 
will be asking conference attendees to submit business plans beginning 
in January 2008. The winner, selected by a panel of security and venture 
industry judges, will get cash and services to help get their winning 
idea off the ground. "It's a startup in a box," a Black Hat spokeswoman 
said.

Thursday's panelists had a little advice for those looking for venture 
funding. Be humble, and don't think of your venture investors as a bank. 
"We're looking to become partners in a business," said McGovern. "If 
you're coming to a VC for just money, you're in the wrong place."

Another word of advice: Stay away from mixing personal hygiene with 
stimulants. When asked to name the worst business pitch he'd ever heard, 
New Enterprise Associates Partner Patrick Chung gave a two-word answer: 
"caffeinated soap."


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