[ISN] Report: Internet Security Is VC Hot Spot

From: InfoSec News (isnat_private)
Date: Tue May 22 2001 - 23:43:41 PDT

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    By Nora Macaluso
    Tuesday May 22 01:22 PM EDT 
    The booming market for outsourced Internet security services could
    provide a home for venture capital money previously directed to
    dot-coms, according to a report announced Tuesday by the Yankee Group.
    Yankee analysts spent the last three months of 2000 interviewing and
    researching companies that provide so-called "managed security
    services," talking to Internet service providers (ISPs), security
    equipment vendors and others about the market for outsourcing these
    The analysts concluded that the market is poised for growth, and could
    benefit from a surge in venture capital investment. Successful
    companies, they said, could eventually raise funds through initial
    public offerings (IPOs).
    "With the demise of the 'dot-bombs,' many VCs have been looking for
    alternative ways to invest their money," Yankee said. "There is a high
    market demand for managed security services, so the venture
    capitalists are more than willing to back the many (security service
    provider) startups that have emerged."
    Eventually, "initial public offerings will begin to emerge," the
    report said.
    Top Dogs
    Yankee identified a number of Internet security companies as
    aggressive players "poised to win the race." Those firms included
    Alexandria, Virginia-based Riptech, a managed security services
    company; Denver, Colorado-based OneSecure, a company that designs and
    manages open, secure networks; and Providence, Rhode Island-based
    DefendNet, a security services wholesaler that was acquired Tuesday by
    Guardent announced Tuesday that it closed $20 million in a Series C
    round of equity financing led by Citigroup's e-Citi unit. Mercury
    Interactive (Nasdaq: MERQ - news) and existing investors Charles River
    Ventures, New Enterprise Associates and Sequoia Capital also
    participated in the funding round.
    Core Competencies
    The report said that small and mid-sized businesses will need more
    help with managing firewalls and virtual private networks, as well as
    services including intrusion detection, virus scanning, Web site
    security assessments, monitoring, applet scanning, content inspection
    and URL blocking.
    "Companies realize that they are not security companies, and do not
    possess the core competencies to implement a holistic approach to
    security, and that they should remain in the business for which they
    were created," said Matthew Kovar, director of Yankee Group's security
    research division.
    Key drivers of the market for outsourcing include a shortage of
    workers specializing in Internet security.
    "Security workers are commanding premium salaries, and it is difficult
    to find, hire and retain security personnel," the report said. "Once
    IT (information technology) professionals are skilled enough to
    precisely manage the security of their enterprise, many leave to start
    their own managed security service provider companies or
    Going Wide
    Of course, not every company that gets into the business will thrive.
    "Companies that can be forward-thinking, offer a breadth of products,
    and have the ability to execute their services will have the
    competitive advantage," Yankee said. "The ability to execute services
    is important now, but the breadth of products will become increasingly
    Security consulting, intelligence services, Internet risk management,
    Web site security management, portal and marketplace security, and
    secure content delivery are among areas that will be key in the years
    ahead, Yankee said.
    Yankee predicted that the market for managed Internet security
    services will approach US$1.7 billion by 2005, up from $140 million in
    Trimming Down
    Like other industries, the security sector will also likely see some
    consolidation, according to Yankee.
    "Acquisitions of smaller companies by larger players to enhance their
    service portfolios will continue to occur, and managed security
    service providers will look for strategic alliance partners," the
    report said.
    According to Yankee, companies that use fast, indirect sales channels
    are likely to succeed, and "whoever can complete the land grab of
    market share will be the land baron in control."
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