Net security firm Counterpane pulls in $20M

[R. A. Hettinga]

http://www.thedeal.com/NASApp/cs/ContentServer?pagename=TheDeal/TDDArticle/TDPrinterFriendly&c=TDDArticle&cid=1042442844803&ArtID=1042442844803&Box1=1020131906467&Box2=1019496876560&banner=/images/headers/VENTURE_CAPITAL.gif

The Daily Deal

Net security firm Counterpane pulls in $20M
by Clifford Carlsen Posted 03:36 EST, 14, Jan 2003


Antihacking software and services company Counterpane Internet Security
Inc. found a safety net of its own Tuesday, Jan. 14, landing $20 million in
fresh capital to carry it to profitability and allow for possible
acquisitions.

The 4-year-old provider of information technology monitoring and protection
services recruited strategic investor Comcast Interactive Capital of
Philadelphia and Meritech Capital Partners of Palo Alto, Calif., to lead
the deal, which brings total funding of the company to $78 million.

Previous investors Accel Partners and Bessemer Venture Partners of Palo
Alto, Dell Ventures of Round Rock, Texas, Morgan Stanley Venture Partners
of New York and Symphony Technology Group of Palo Alto also joined.

Not reinvesting in the startup were Goldman, Sachs & Co. and Amerindo
Investment Advisors of New York. The new money is the first capital call
the company has made since November 2000, when it raised $24 million in a
deal led by Amerindo just months after raising $24 million in a deal led by
Goldman in March.

The company was able to make that money last while it retooled its business
away from serving dot-com companies to focus more tightly on enterprise
security. But the startup opted to raise the new cash now to take advantage
of a changed industry landscape.

"We really need very little operating cash to run the company," said
Counterpane CEO Tom Rowley. "But we see quite a bit of strategic
opportunity and wanted to have a war chest for possible acquisition of
products and customers, and for international expansion."

Rowley would not say how the new round values the company, or how much of a
discount it represents from the previous round. But he characterized it as
a good deal given the changed investment climate.

Although the new round valuation was down, investors maintained pro rata
positions. Options were also adjusted to maintain a stake by management and
employees.

"Valuations have all changed, but as long as you get management to have
appropriate ownership and investors buy pro rata stakes, it doesn't mean
much." Rowley said. "It's always good to get realigned to the market."

Rowley was equally philosophic about the stratospheric valuation the
company posted at the height of the tech bubble. "Those days are over," he
said. "They're like hazy dreams of drunken parties now, and they don't have
much to do with today's world."

Counterpane enlisted the Boston investment bank SG Cowen to help land an
outside lead, to provide an independent valuation to the deal and to bring
some strategic value. Doug Collom of Palo Alto law firm Wilson Sonsini
Goodrich & Rosati counseled Counterpane.

Counterpane emerged in the dot-com bubble along with competitors Predictive
Systems Inc. of New York, Para-Protect of Centreville, Va., and Telenisus
Corp. of Rolling Meadows, Ill. But Rowley said  there were once about 50
companies offering monitored Internet security.

Now, though, most of those companies have been sold or gone under, he said,
leaving no significant startup competition. Only IBM Corp. 's Global
Services unit is a significant challenger.

For its part, Rowley said that at the peak of the boom, all of
Counterpane's customers were dot-coms, but now its customer list is
composed entirely of the information-technology departments of companies he
would not disclose. Rowley insisted, though, that investors in the new
round were attracted to his startup based on its customer lists.

He added that the potential of the industry was also a draw. Security
software is often cited as a top priority in corporate surveys, and it has
become more important because of broader global security unease.

While IT spending has been depressed in many sectors, security spending was
up 18% to $6 billion in 2001, according to the research firm IDC Corp. of
Framingham, Mass. IDC projected similar growth for the year just ended.

Rowley said new strategic investor Comcast came into the deal to apply
Counterpane's expertise to Comcast's growing broadband services business.
But the investment arm of the cable company also judged the deal from an
investment standpoint, said Sam Schwartz, senior managing director of
Comcast Interactive Capital.

"Counterpane's services are delivering tremendous value to their
customers," Schwartz said in a statement. "Counterpane's growth and strong
relationships with its customers, channel partners and industry analysts
convinced us that Counterpane represents an excellent investment
opportunity."

Rowley also would not disclose Counterpane's revenues, but claims the
company reported record revenue and bookings through December and the
fourth consecutive record quarter of growth over 30%. He cited its
so-called channel sales strategy, or working with partners to resell
services, as contributing to its growth. That strategy has cut the
company's sales cycle from six months to less than 90 days, he said.

-- 
-----------------
R. A. Hettinga <mailto: rah at ibuc.com>
The Internet Bearer Underwriting Corporation <http://www.ibuc.com/>
44 Farquhar Street, Boston, MA 02131 USA
"... however it may deserve respect for its usefulness and antiquity,
[predicting the end of the world] has not been found agreeable to
experience." -- Edward Gibbon, 'Decline and Fall of the Roman Empire'

---------------------------------------------------------------------
The Cryptography Mailing List
Unsubscribe by sending "unsubscribe cryptography" to majordomo at wasabisystems.com