Security Deals Heat Up In 2004

A pair of Massachusetts security companies took center-stage last week as the industry heats up with investments and acquisitions.

In late June, Q1 Labs, a Waltham, Mass.-based network security provider, raised an $11 million Series C round from Globespan Capital Partners, Menlo Ventures, Polaris Venture Partners, BDC Venture Capital and New Brunswick Investment Management Corp. The funding comes on the heels of the company’s $14 million Series B round late last year. Q1 Labs has raised nearly $30 million to date.

Meanwhile, database security provider Guardium Inc., which also is based in Waltham, raised $5 million in a second round of financing held last week. Founding investor Cedar Fund led the round and was joined by Veritas Venture Partners and Stage One Ventures. This funding brings the total raised by Guardium to $9 million.

The backing for the security providers come at a time when security deals are happening at a pretty good clip. At least 35 security related companies have raised about $350 million during the first six months of 2004, based on preliminary data from Thomson Venture Economics (publisher of PE Week). VCs have always been interested in security, but the market is growing as virus and other network threats continue to occur and corporations increase their spending on security.

Meanwhile, VCs security companies are becoming an attractive acquisition target. Last month, F5 Networks bought MagniFire Websystems for $29 million. MagniFire, a New York-based provider of Web security gateways, had raised about $9 million from JVP and Lucent Venture Partners.

International M&A advisor Broadview International predicts there will be about 18 acquisitions this year of security companies at prices above $20 million. In comparison, in 2001, after the Internet Bubble burst, there were only six security related transactions of $20 million or more.

Broadview Managing Director Scot Sedlacek says that security companies are an attractive buy because most of the recently funded startups each have their niche in the growing security industry.

“Symantec and Microsoft and all the other large companies are vying to be the one-stop shop for security needs, so they will continue to acquire these companies and build their businesses,” Sedlacek says.

Definitely, there is consolidation taking place and plenty more of it will come this year in the security industry, says Jonathan Silver, managing director and co-founder of Core Capital Partners, which is a backer of SourceFire, a provider of network security that has raised $36 million.