http://www.redherring.com/Article.aspx?a=21627 March 12, 2007 Print Issue 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 warm welcome. 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: Webroot LOCATION Boulder, CO URL www.webroot.com FOUNDED 1997 CEO Peter Walkins EMPLOYEES 38 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. Fortinet LOCATION Sunnyvale, CA URL www.fortinet.com FOUNDED 2000 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 URL www.qualys.com FOUNDED 1999 CEO Philippe Courtot EMPLOYEES 150 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 2000. 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 http://www.shopinfosecnews.org
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