While it may not always be politic to point out, the genius of markets lies in their ability to generate value in the aftermath of even the most horrific tragedies. In the wake of 9/11, for example, the security sector became - almost overnight - a productive and patriotic destination for venture and other forms of capital. Even while the sector's "15 minutes" appear to be ticking toward a close, relatively constant market dynamics within the security space ensure that opportunities will continue to abound for those who know where to look for them.
The evidence that the security sector is finally cooling down is unmistakable. While the post-9/11 acceleration created a substantial pipeline that continues to yield opportunities, spending levels within this space have begun to flatten out. Customers have come to realize that even best-of-breed point solutions (generally the specialty of startups) are hard to deploy and can be expensive to maintain. The resulting preference for complete solutions, whose costs of ownership are easier to anticipate, has generated a wave of consolidation in which bigger companies have begun rolling up point solutions into more robust offerings. The cooling effect on innovation - rarely the strong suit of larger roll-ups - will continue to tighten the marketplace.
So from where will future value in the security sector come? Fortunately, certain dynamics within the sector will always generate opportunities for trained eyes. After the initial rush to address perimeter security through a wave of anti-virus protection, spyware detection and firewall technology, companies are now beginning to focus on internal security - or, preventing the "inside job." This challenge will continue to be complicated by the prevailing trend toward greater network accessibility for partners and customers - which results in a constantly changing risk profile. Changes in regulatory controls also create challenges for players in the sector to solve. These dynamics, however, represent only two aspects of a larger and more long-term reality: the amount of malware out there is growing - not shrinking. As threats continue to evolve and proliferate, innovators will step in to combat them - and thus create new opportunities and value within the security space.
Ironically, those seeking such value should look no further than where the sector's last boom began: the U.S. government. Few entities have a greater awareness of and more acute sensitivity to onerous security threats than government labs - which is one of the reasons our firm has worked so diligently over the years to maintain close relationships within this community. In fact, one of our portfolio companies whose focus is on stopping targeted attacks and zero-day worms received research dollars from the Department of Homeland Security. The recent success of Trusted Computer Solutions, which allows information to be shared securely and has been adopted widely in the government sector, provides another example of how the government continues to be an early adopter of cutting edge security technology.
Thanks to these market dynamics, opportunities in the security sector will persist long after the spotlight fades.
Andrea S. Kaufman is a partner with Novak Biddle Venture Partnerts.
