Report: Internet Security Is VC Hot Spot

[InfoSec News <isn () c4i org>]

http://dailynews.yahoo.com/h/nf/20010522/tc/9917_1.html

By Nora Macaluso
www.EcommerceTimes.com
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
services.

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.

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
consultancies."

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
important."

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
2000.

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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