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Risk

5/8/2014
12:30 PM
Rick Gordon
Rick Gordon
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The Cyber Security Market Is Hot! Here’s Why

A dozen years ago the $3.5 billion security market was dominated by five vendors. Last year, VCs bankrolled 230 startups. My, how things have changed!

By any credible account, the cyber security market is hot. According to Gartner analysts, in 2014 worldwide information security market growth will accelerate to 8.6% and exceed $73 billion. Cyber-related M&A activity and trading multiples are indicative of customer and investor markets that are demanding much more innovation, faster.

It has not always been that way.  

In 2002, I briefly abandoned the then information security market. Frankly, it sucked. I can remember more times than I care to admit saying, "This is just too hard." Or, "There’s no money in information security." We all knew the problems for the solutions we were building existed, but back then, the market simply didn’t care.

In 2002, the minimum standard of care for enterprises was limited to anti-virus, firewalls, intrusion detection, and, later, if you were in a regulated industry, SIEM or some sort of log aggregation solution. Enterprise executives lived in ignorant bliss, believing that their biggest risks were related to being out of compliance with their respective regulatory authorities.

In 2002, Gartner estimated the worldwide security software market to be an anemic $3.5 billion -- a market that was dominated by five vendors that owned approximately 60% marketshare -- Symantec, Network Associates, IBM, TrendMicro, and Check Point.

Fast-forward to 2014. New product categories abound, with Gartner covering too many cyber security-related magic quadrants to list (with more on the way).  Investors are enthusiastically entering the market, with VCs investing $1.4 billion in 230 cybersecurity companies in 2013 alone. 

So, what has fundamentally changed since 2002? What are the factors that are driving cyber security market growth? Here are four fundamentals that we at Mach37 continue to think about.

First: The obvious. The threat continues to accelerate in capability and scale. Cybercrime is big business and has finally reached the tipping point where consumers and regulators are demanding that businesses deploy effective solutions.

Second: The Internet-of-Things is exacerbating the problem. Now, we have laptops, iPhones, wearable computers, gaming systems, other mobile devices… the list is boundless. Many of these devices are either themselves untrustworthy or are interacting with untrustworthy mobile networks. Few have the computing horsepower to perform traditional security functions of familiar desktops and laptops -- making them even easier targets. As difficult as the security problem was before, it just got a lot worse.

Third: Cyber security is now a Main Street issue. Every one of us is affected --  and now we finally realize it. Retail-related breaches, such as the recent Target breach, have hit tens of millions of consumers. Cyber security stories are now common in all mass media outlets. 

Fourth: The competitive market is finally rewarding innovation.  For many years, the information security market was dominated by large security platform companies that milked their antivirus cows and had very little incentive to innovate. Because of incumbent supply chain dominance, new entrants were often forced to battle over a very small number of early adopters or to sell to or through these powerful few to reach the broader market.   

Over the past few years, new entrants have emerged and are challenging the fat incumbents… and the financial markets are rewarding them. As I write this, FireEye enjoys a market cap of $5.7 billion, with an astounding 35x (yes, I said 35) enterprise value to revenue multiple.  Similarly impressive, although more modest, Palo Alto Networks trades at roughly 9x revenue with a $5 billion market cap.

Conversely, historical incumbent Symantec is trading at paltry 2x revenue and recently fired its CEO and executive management team. 

I am sure there are many other factors, but whatever has changed in cyber security, the need for continued innovation has remained constant. Similarly, the fundamentals described above are not likely to change for at least a generation. And, speaking for those of us who lived through 2002, I am really glad to be in this market.

Rick Gordon is an expert on security technology, business strategy, and early-stage venture development. He currently serves as Managing Partner of Mach37 TM, a cyber security market-centric accelerator developed by the Virginia Center for Innovative Technology. MACH37 ... View Full Bio
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Marilyn Cohodas
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Marilyn Cohodas,
User Rank: Strategist
7/15/2014 | 10:24:03 AM
Rick Gordan on Dark Reading Radio Wednesday, July 16 @ 1 pm EDT
He'll join Editor Tim Wilson to discuss how hot new security companies are born and how they are funded. Don't miss this broadcast. To register, click here. 
JérômeM921
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JérômeM921,
User Rank: Apprentice
5/10/2014 | 4:11:38 PM
TetraUpload VPN
This is why i'm use a good VPN to protect my idendity on internet.
I'm use VPN from http://tetraupload.com 

But i guess some other VPN provider do also this job

 
Marilyn Cohodas
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Marilyn Cohodas,
User Rank: Strategist
5/9/2014 | 11:26:56 AM
Re: Stunning comparison between now and then...
I'm going to tuck that away as the market matures and keep score of who are the stars and the dogs. With 230 startups in the mix, that will be a pretty large scorecard.
RickGordon
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RickGordon,
User Rank: Author
5/9/2014 | 11:23:03 AM
Re: Stunning comparison between now and then...
Yes.  That's the matrix.  
Marilyn Cohodas
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Marilyn Cohodas,
User Rank: Strategist
5/9/2014 | 11:07:07 AM
Re: Stunning comparison between now and then...


You really got me curious, Rick. Here's that Growth-Share Matrix from 1968, courtesy of Wikipedia. Is this what you were referring to? 
RickGordon
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RickGordon,
User Rank: Author
5/9/2014 | 10:59:23 AM
Re: Stunning comparison between now and then...
Great question.  My own view is that the near-stepwise increase in demand for more innovative security approaches will last a generation - fueled by a convergence of factors that should not change in the near-term.  Given short media cycles, perhaps cybersecurity may fall off as a mass media issue du jour.  However, the other factors should persist for some time.  The internet of things is still in its infancy.  The threat continues to accelerate. And, the advocates for milking cash cows have been put out to pasture (see Symantec's recent view on AV).

I am not sure if there is a perfect historical example of the convergence of similar factors - but it's fun to think about.  A lot of my thinking around how the market has evolved was shaped by Boston Consulting Group's Growth-Share Matrix from 1968.  (I know it's an old framework, but it's really instructive.)  What it explains well is how the relative market share of the incumbents and limited market growth rates from a decade ago stifled the need for innovation to compete in the market and fostered a false sense of security within the marketspace.  
Marilyn Cohodas
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Marilyn Cohodas,
User Rank: Strategist
5/9/2014 | 9:48:23 AM
Re: Stunning comparison between now and then...
Yes, cyber security is definitely a necessity -- always has been and always will be. what different and exciting, at least to me,  is to see so many $$$ going towards security innovation. I can't wait to see the products that emerge. It will be fun to watch the successes and failures. 
Robert McDougal
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Robert McDougal,
User Rank: Ninja
5/8/2014 | 4:20:36 PM
Re: Stunning comparison between now and then...
I agree, great article!  The interesting part about this to me is that I don't know if we will ever see an end.  So long as humans are coding software, there will be mistakes and things that are overlooked and other humans will try to do things they are not supposed to do.  It is sort of our nature, it is impossible to be constantly vigilant and we like to stick our noses where it doesn't belong.

Until quantum cryptography is a reality for all aspects of computing (May or may not happen) then the Cyber Security market will continue to be a necessity.  
Marilyn Cohodas
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Marilyn Cohodas,
User Rank: Strategist
5/8/2014 | 3:24:37 PM
Stunning comparison between now and then...
Great article, Rick. I love the fact that there is so much innovation going on that will -- hopefully -- lead to some great products. But how long can it last? If there a historiical precedent this will follow?
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