Security Startups Flood the Market

With funding flowing into startups and an ongoing blizzard of M&A activity, security startups are popping up all over the place and the field is getting crowded.

In the space of the last few days, security startups Cloakware Corp. and Vontu have been racking up the dollars, while Altiris Inc. (Nasdaq: ATRS) paid $65 million for Pedestal Software (see Cloakware Secures $10M, Vontu Brings Funding to $25M, and Altiris Acquires Pedestal ).

Since the start of 2005, the VCs have been getting increasingly intimate with any number of small security vendors (see Zeus Scores $6M, Arxceo Raises $1.2M, Applied Identity Adds $8M, and Procera Picks Up $4.6M).

The possibility of a startup being whisked off its feet by a larger vendor is very real. Increasingly, larger players are looking to replace their point products with all-encompassing security frameworks (see CyberGuard Gets Zix's Anti-Spam, Netifice Looks for VOIP Deals, and Could Sygate Get Snapped Up?).

Pete Lindstrom, research director at Spire Security warns that the outlook for some security startups is not as rosy as it may first appear. If you are doing less than $10 million in revenue a year and you have been around for more than three or four years, there is chance that you could be operating with ‘shadow limbs,’ ” he says.With the influx of capital from VCs, some startups are living in something of a fools’ paradise, according to Lindstrom. “They are dead and they don’t know it yet,” he adds. [Ed. note: He sees dead people!]

Lindstrom believes that marketing, in particular, poses a real problem for young firms. On the one hand, security technologies are becoming increasingly sophisticated, while the folks writing the checks are, well... less so.

To wit, desktop and network managers often make the buy decisions for security gear, and these guys often aren't security experts. So startups have to walk a tight-rope -- somehow finding a way to sell complex features without turning off potential customers.

”A lot of times [startups] haven’t thought through who their buyer is and how they position themselves against existing solutions on the market,” warns Lindstrom.

— James "Shadow Limbs" Rogers, Site Editor, Next-Gen Data Center Forum0