Signal Hill Blog: Analysis & Perspectives

IT Security has witnessed numerous serious cyber attacks over the past few months, and investors are taking notice. Prominent companies and institutions such as Citigroup, Google, RSA, Sony, the International Monetary Fund and the U.S. Senate have been hit by these attacks and reports show that cyber security threats are only growing. Mobile malware threats were up 46% in 2010 compared to 2009, according to research by McAfee, accounting for more than 20 million new pieces of malware – approximately 55,000 new malware threats each day. More worrisome is that these seemingly more high profile attacks are exceedingly more sophisticated — suggesting state-level or organized criminal involvement — and threaten large numbers of online users.  No one is immune, not even security companies themselves, as the recent hack of EMC’s RSA tokens business illustrates.

Partly in response to these threats, venture investments have been increasing in the security sector. More than $147 million in funding was poured into IT Security during Q1 2011, according to data from the NVCA — a pace which if upheld would beat 2010’s total of $432.3 million. Investment valuations are rumored to be rising as well. Advanced threat protection in particular has been an area of focus for investors and corporations over the last several months. Palantir Technologies, a provider of intelligence analysis tools to help government agencies improve public safety and security, recently raised $55 million in funding from The Founders Fund at a purportedly high valuation; in October, Endgame Systems, a cyber security solutions provider, raised $29 million from a consortium of investors.

Other significant venture investments within the security sector include: MobileIron, a creator of mobile device management and security tools for enterprise systems, which brought in $20 million in funding in a D round last month; Bit9, an endpoint protection provider for smartphones, tablets, and computers that connect to enterprise networks, raised $12.5 million in April in a fifth round of funding, and Alertlogic, a provider of on-demand security-as-a-service technology, raised about $12.6 million in Series E funding at the end of March. U.S. investors have also shown an interest in China, buying stakes in companies such as NetQin Mobile, a mobile security company with solutions based on cloud computing. IPO filings are up as well with Imperva, a provider of data security used to protect files in data centers and cloud computing environments, filing last week to raise $75 million, while Trustwave, a provider of on-demand compliance management software, filed for a $100 million IPO in April.

Large non-security technology players stepped up their acquisition activity in the security market recently as well. RIM, EMC, Google, SAP, and VMware all made security acquisitions since the beginning of 2011. While deal values were not disclosed for these transactions, others were not afraid to spend significant amounts for strategic targets — Symantec shelled out $390 million for Clearwell, an eDiscovery platform provider, while Rambus paid $342.5 million for Cryptography Research, a provider of research and system design for tamper resistance, content protection, network security, and financial services. Although deal value was not disclosed, EMC’s acquisition of network security analysis solutions provider NetWitness in April was rumored to be around $450-500 million. Private equity firm General Atlantic also made a big investment in January, when it took a $200 million stake in Moscow-based Kaspersky Lab, a provider of anti-virus software, just a few weeks after Dell paid $612 million for SecureWorks, a provider of Security-as-a-Service solutions. Overall, median announced sector M&A valuations so far this year have risen to 3.78x from 3.19x during the same period last year.

As attacks continue unabated, and computing technology continues its shift away from desktop computers and onto mobile devices and into the cloud, we expect to see a continuation of venture funds flowing into security start-ups, particularly those focusing on the protection of datacenter/virtual environments and mobile endpoints. Eventually, these well-funded startups will be prime targets for bigger security firms and companies looking to stay ahead of the curve — meaning potentially more pay-days for current investors and growing valuations for the security market.