The venture capital community is calling on security startups, more often than ever before.” Are you interested in raising capital? Do you want to sell the company?” they ask the entrepreneurs. There appears to be no respite in sight.

According to Thomson Venture Economics, VCs have pumped about $350 million into 35 security-related companies during the first six months of 2004. Not only are security startups receiving plenty of venture funding from a variety of investors, but are also being trumped in the Mergers and Acquisitions (M&A) market.

In 2004 there were 20 security-related M&As. Going forward, M&A will be the primary vehicle for exit within the security space.

M&A seems to be a better option of exit than Initial Public Offerings (IPOs) because bigger players in the market have continued to acquire companies at attractive multiples. For example, in October 2004 Cisco acquired Perfigo, a network security company, for about $74 million. Venture Wire says Greylock is the sole investor, and had invested $2.8 million into the company back in 2002. Industry observers say Greylock held close to 30 percent stake, which would mean Greylock cashed out at 10 times the investment. That’s indeed an attractive multiple!

Most acquirers have big market capitalization and liquid stocks. “If you are planning to go public, you not only have the burden of competing with bigger players but you also need to comply with various regulatory issues. Entrepreneurs should keep in mind that bigger players will not let you own a whole new segment. If you really believe you have built a complete-breakthrough product such that no one can touch you, then you can think of going public. If you are just building something incremental to an existing product or application then your company is more valuable as part of a broader suite M&A,” says Amish Jani, Vice President, Pequot Capital.