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Security Startups (Suddenly) Less Secure?

The days of easy money from VCs in Silicon Valley may be waning, as would-be investors, spooked by roller coaster stock prices, take a harder look at the numbers before they commit. Is that ultimately good for tech land?

In the race for fundraising, where startups compete against one another for precious capital from venture firms and individuals, one word is starting to be heard more frequently: profits.

Usually with a question mark – as in, “Where are your profits?” Or perhaps the wording may be “When do you expect to become profitable?” These questions are mattering more to the people who commit funds to small or bootstrapped firms. And, as The New York Times reported on Thursday (Sept. 3), companies in the security technology space are feeling some pressure from increased scrutiny of their real and projected numbers.

In one telling example, and the vignette that opens the NYT story, Orion Hindawi, who was seeking funds for his security firm, Tanium, had no problem raising tens of millions of dollars from marquee investors such as Andreessen Horowitz; the funds raised implied a valuation of as much as $900 million. Now, the spigot seems like it might be tightening just a bit.

In recent fundraising meetings, Hindawi told The Times, he has been asked to divulge sales and profit information. “A lot of the funders we spoke with are starting to get really scared,” he said in an interview. “This time the questions were, ‘Is this a sustainable business? Do you guys actually make money?’”

The group as a whole, that is cybersecurity firms and startups, had been a darling last year, with record investments logged over the same timeframe of nearly $1.8 billion in the United States alone, and that’s more than the $1.6 billion seen in 2000, the landmark (of sorts) that represented the tech bubble before it burst.

But as the old saying goes, it’s different this time: Now the case may be that the field is simply getting too crowded, that the easy fruit has been picked, and as noted in The Times story by David Cowan, one of the partners at Bessemer Venture Partners, “a good story is not enough to attract capital anymore.”

And yet, the promise of pointed financial questions may not be here quite yet. Hindawi said his firm saw some due diligence from investors centered on cash flow and the like – but the latest funding round has elevated the valuation to more than $3.5 billion, after turning down an acquisition offer, and quite a leap from its status at under $1 billion last year – the company did not even really need the $400 million it had raised, Hindawi conceded, but at least it precludes him from having to raise money again.

Hoarding cash may smack of prudence in this rocky stock market. Names in a group that one swaggered across the tech landscape – garnering ever higher stock prices – have been humbled a bit, such as FireEye and Palo Alto have all been hit by retail investors’ worries and mid-single digit plunges (on a daily basis) amid worries of slowing growth. As has been posited here at PYMNTS, concerns over China’s growth could have a chilling ripple effect across fundraising, IPOs, and perhaps even useful and necessary corporate innovation.

The fact that venture capitalists are (finally?) asking the tough questions is a heartening turn of policy ensuring that ideas with real potential should demonstrate real cash flow. But is that change of heart coming soon enough, and will it stick?

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