Betting on Security Start-Ups in an Age of Data Breaches

Betting on Security Start-Ups in an Age of Data Breaches

The hackers appear to be winning. Each month, it seems, another company’s records get compromised and another shadowy group amasses millions of private documents.

The result: Today, any consumers, companies or entrepreneurs who have been paying attention to the news are thinking long and hard about cybersecurity. And so are Silicon Valley’s sharpest investors.

Investment into security start-ups has soared in recent years, creating opportunity for entrepreneurs and risk for venture capitalists trying to avoid the kinds of bandwagon companies that fade away as a market starts to mature.

Last year, there were 240 investments worth a combined $1.7 billion in such companies, up from 83 investments worth just $340 million in 2009, according to CB Insights, a research firm that follows venture money. Those numbers continue to grow. The second quarter of this year was the biggest ever for such investments by dollar value, with $767 million put to work through 56 deals.

“When everybody gets a new credit card mailed out to them because Home Depot got hacked, it’s on everybody’s minds,” said Scott Weiss, a partner at Andreessen Horowitz, the venture capital firm.

More important than proverbial mindshare, security spending is a growing part of corporate technology budgets.

A decade ago, most large information technology customers would spend 2 to 6 percent of their budget on security, estimates Asheem Chandna, a partner at Greylock Partners, a venture capital firm. These days, it is more like 5 to 15 percent, creating an estimated $80 billion-a-year market for security products and services.

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