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FIRMS COMPETE IN MARKET TO SHORE UP WEB'S SAFETY

By Dan Lee

Mercury News


Start-ups rushing to develop Internet security seem to be popping up almost as fast as the latest computer virus.

Companies are spending more to protect their computer networks from worms, viruses, hackers and other increasing Internet attacks. At the same time, venture capital investment in all sorts of security start-ups has spiked in recent months.

But the outlook for these fledgling companies is, well, anything but secure.

Some fail. Others survive as small, private companies. A precious few hit the big payday -- being snapped up by a large high-tech company, or cashing in on an initial public stock offering. Only about 5 percent of security start-ups do well enough to ever land the IPO or big acquisition payoff, according to the Gartner Group.

The trick for customers and investors is trying to sort the true innovators from those latching on to a tech trend.

``For any good idea, there are still too many start-ups getting financed,'' said Ted Schlein, partner with venture firm Kleiner Perkins Caufield & Byers. ``You want to make sure you're finding a large, rapidly growing marketplace that is under-served.''

Three Silicon Valley computer security start-ups -- Reconnex, PassMark Security and ServGate Technologies -- are among those attempting to carve a niche in one of high tech's hottest areas. Worldwide computer security sales are forecast to reach $45 billion in 2007, up from about $19 billion in 2002, according to market research firm IDC.

Reconnex has designed a hardware appliance to stop leaks and security breaches -- accidental or malicious -- from employees within companies. ServGate has bundled anti-virus, anti-spam and other security features onto an appliance to protect small businesses or branch offices of larger companies from outside threats. PassMark Security has created a personalized icon to assure customers that a bank or e-commerce Web site is authentic, and not part of a ``phishing'' scam designed to steal passwords or account information.

All three companies stress the simplicity of using their products, but each faces challenges as well.

``There's definitely an opening'' for a company like Reconnex, said John Pescatore, vice president of Internet security for market research firm Gartner Group. But, he added, companies tend to worry about cracking down on employee behavior less when the economy heats up.

He said verification systems such as PassMarks are a ``cool thing,'' but that they could be more of an interim solution as user-authentication technology evolves.

Pescatore said ServGate faces stiff competition from others, including networking giant Cisco Systems and security provider NetScreen Technologies, which is being acquired by Juniper Networks. But he said ServGate has done well building sales in emerging Internet markets such as China.

Executives and analysts predict a wave of consolidation among computer security companies, with the industry looking to start-ups for innovative products and services that are easy to use or help simplify already complex computer systems.

``Most security companies in the past two years, their exit strategy is acquisition, not IPO,'' said Pescatore.

And the race for the big money may get more intense.

The National Venture Capital Association said it does not track investing in specific industry niches of start-ups. But venture funding of start-ups with ``Internet security'' in their business description soared from $49 million in the first half of 2003 to $125 million in the second half of the year, according to the NVCA.

``It's hard to make money in a lot of areas of security, and there are a lot of entrants,'' said Earl Perkins, vice president of security and risk strategies at research firm Meta Group.

Yet, he added in an e-mail interview, ``there are a few jewels still to be had.''