A new call to VCs
Date: Tuesday , January 31, 2006
The most daunting task for an IT entrepreneur is not just to sell his product but also to raise capital to fund expansion plans and to get acquired or merge with a bigger player. M&A activity will continue as bigger companies aim to assemble broad IT security portfolios. No reason for this trend to stop anytime soon. It continued early into the year when Symantec acquired instant messaging enterprise software maker IMLogic.
It's not just the rising M&A that the industry is witnessing; even the VCs are keenly looking at the sphere. “Of all the spaces, the security space will continue to get VC investments. CIOs across the board are continuing to buy security technology. It is always on top of CIO’s spending list. They are willing to invest in new breed of security technologies and ready to take risks of buying from these early stage companies,” enthuses Ed Sim, founding member and Managing Director of Dawntreader Ventures, a New York based Venture Capital firm.
Spending and New Threats
2005 was as bad as 2004 for security breaches and it ended with the emergence of the worst Microsoft security problem yet. It can’t get any worse. Threats like spams, phishing, data theft, worms will continue to force their way into the secure networks of companies. The community of security violators will not grow bigger but will get even more smarter waiting to pounce on any new vulnerability.
At the same time, driven by the bitter experience of security breaches, the investment in IT security has grown which is gradually plugging some of the loopholes that the security violators had been feeding on.
Cut throat competition, maturing technology and depleting profit margins have led the industry to shift from point solutions to platform solutions. Companies prefer to invest in platform technologies than point solutions because they believe investing in platform technologies will solve the increasing threats. The converged model of having all security related feature in one compact machine has made inroads. Most security companies realize that by offering one product replete with all security features will sell. “We will see more converged products i.e. number of functions in one box in the coming year,” says Sim.
Unshackled from the new wave of threats to the critical devices that make our businesses easier, security solutions have to be unique and better in response to threats and hence the need for platform solutions. “There can't be one solution for all types of security needs. There has to be a platform for ever increasing amounts of data and devices that needs to be protected,” says Ann Winblad, co-founding partner, Hummer Winblad Venture partners.
Will the IT security problem diminish in 2006? No. But it is moving to segments where opportunity is the greatest like Opensource, mobile security and regulation. That would be the mid-market right now.
Security products that run on open source like Linux are the next bet. Open source works because of its flexibility and configurability and it can be upgraded with some features one can’t put in the software. The open source parade isn’t just about open source technology being used. It’s a matter of survival. This year Venture capitalists see development of security products revolving around open source.
“Most products are being developed for enterprise application. Most of these companies are not just building these enterprise applications but are bringing these applications to open source. Since it’s ability to secure application by being in open source, we are really getting to see newer products. There are new applications everywhere and what's deployed on security,” says Winblad.
“We have seen some great open source technology. We saw some great work being done on it. So lets see what happens this year,” says Sim. As open source software has a smaller amount of legacy exposure to carry forward, they are not vulnerable to attacks; hence they make for better security technology. VCs are seeing lot more work on this technology in this arena.
It’s not just the open source based technology that promises to be hot this year. Mobile security is also catching up fast. With the proliferation of mobile devices and launch of newer versions, mobiles are the next targets and this segment looks pretty exciting. Besides the demand of regulatory compliance has grown. Bound by the need to comply with new regulations like the California Privacy laws and Sarbanes Oxley, companies are hard pressed about data security. “Technology based on California privacy laws and SoX will be hot this year and we see a lot of work happening in this sphere,” says Ken Gullicksen, General partner Morgan Thaler ventures, based in Menlo Park, CA. “There are very active investors including us. We are quite interested in breakthrough high quality teams working on technology-based laws. It is very easy for good quality teams or companies to get funded,” Gullicksen adds.
Startups are always looking at being bought or acquired based solely on the merits of possessing technologies that can defy threats. “I would say there continues to be interest in very high quality companies that redress problems and now it’s the great time to be entrepreneurs. The shift will come not by entrepreneurs but by which entrepreneur comes out with the best solutions and ideas and that addresses the securities in the market place. The VCs will be driven by very best the entrepreneurs are giving,” says Sim.