Investors Go Hog Wild for Anti-Spamming Companies

It was December 2001 and Jeff Ready and Scott Loughmiller had just sold their first company to software developer Digital Candle. Each was headed back to Indiana for the holidays. Loughmiller’s mother, at home on her dairy farm, switched on the computer to check her email to find her inbox flooded with credit card offers, new diet pills and the chance to meet teenage girls in Italy.

;If Scott’s mother on the dairy farm has spam problems, then everyone has spam problems,” Ready says.

Thus an idea was created and Corvigo Inc. was launched a few months later to filter out unwanted email messages. Ready is CEO and Loughmiller is CTO. Corvigo’s technology hit the market in October 2002. Today, the Mountain View, Calif.-based company closed its first round of venture capital. The $5.5 million Series A round was funded entirely by Sequoia Capital of Menlo Park, Calif. Sequoia Partner, Mark Kvamme has joined the company’s board.

Sequoia not only invested in Corvigo, it also became a customer. After the firm looked at a dozen anti-spam companies, Sequoia replaced the anti-spam system it had been using with Corvigo’s technology soon after it closed the funding deal.

Although Corvigo is Sequoia’s first investment in the space, VCs are eating up spam companies right and left. Nearly a dozen anti-spam companies have raised venture capital since 1997. And from August to mid-September, investors spent about $38 million to fund Corvigo and four other anti-spam companies that are in nearly every stage of development:

Postini Inc. of Redwood City, Calif., pulled in a $10 million Series D round led by Bessemer Venture Partners on Sept. 15. To date, Postini has raised $26 million.

FrontBridge Technologies Inc. of Marina Del Rey, Calif., raised $8 million in a Series C led by BA Venture Partners. This brings the company’s total VC to $17 million since its 1999 inception.

MailFrontier Inc. of Palo Alto, Calif., pulled in $10 million in an over-subscribed B round. The 18-month-old company’s new investor Menlo Ventures led the deal with $5 million.

MessageGate Inc. of Bellevue, Wash., picked up $5.1 million in a Series A led by Polaris Venture Partners, Northwest Venture Associates (NWVA) and Boeing Ventures.

;Spam is a huge problem for entities of all sizes,” says Tom Simpson, managing partner of NWVA. “Yeah, there are a lot of companies that have been funded — maybe even too many — but there is a real opportunity here.

Ready argues that Corvigo has a competitive edge despite its late entry into the anti-spam market. The company’s MailGate spam-blocking product acts like a firewall on a company’s mail server. It filters unwanted emails with an artificial intelligence system that reads the text of the message to understand its intent. It doesn’t blacklist certain email addresses or check emails against a database of rules like other anti-spam systems do.

At the end of the day, each user gets a report of all the filtered messages quarantined on the server. That way, a user can read any of the undelivered messages. After a 90-day quarantine, the messages are permanently deleted from the server.

It may seem an elaborate way to trash unwanted messages. But some estimate that office workers receive up to 10 spam messages per day even though more than three out of four servers are equipped with some level of spam-blocking.

Companies selling anti-spam products and services are anticipating that their revenue will grow to $650 million this year and as much as $2.4 billion by 2007, reports The Radicati Group, a market research group based in Palo Alto, Calif.

So far, Corvigo’s 50 customers include 20 law firms, OPEC, Purdue University and software companies. Two-thirds of its customers were replacing other anti-spam systems, Ready says, and the company also is working on reseller agreements with Internet service providers, telecommunications companies and other Internet security providers.

This round of funding will be used to bulk up the company’s sales and marketing team. Currently, most of the company’s 17 employees are engineers. It will also be used to hire a handful of new engineers as the company begins to build anti-spam systems for cell phone text-messaging users and instant messenger systems.

Email Carolina Braunschweig

Daniel Primack contributed to this story.