VC survey: ISP network security is bright spot

Although news about venture capital investments in network start-ups has been grim so far this year, one bright spot is security products. One of the most intriguing security start-ups that attracted first-round financing in 2004 is TurnTide, which is developing anti-spam services for ISPs and enterprises.

Several security start-ups received later-stage financing during the first quarter of 2004, but TurnTide was the only security start-up to receive first-round funding, according to the MoneyTree Survey, a leading source of information about venture capital activity in the U.S.

PricewaterhouseCoopers, Thomson Venture Economics and the National Venture Capital Association compile the quarterly MoneyTree Survey. Network World receives a special subset of the MoneyTree Survey data that includes investments in ISPs as well as network hardware and software suppliers.

The MoneyTree Survey identified 11 start-ups that received first round – or seed – financing during the first quarter of 2004. TurnTide, in Conshohocken, Pa., received $1 million from private and public investors including Innovation Philadelphia, a local economic development organization.

“Security is one of the hottest technology markets today, and anti-spam is probably the hottest segment of that market,” TurnTide CEO and President Lucinda Duncalfe Holt says. “It’s a top-three issue for 70% of enterprises. So, for starters, we’re in a good market.”

TurnTide is developing an anti-spam router that is delivered as a service to either an ISP or an enterprise. By using traffic shaping techniques, TurnTide’s anti-spam router controls the flow of e-mail traffic allowed onto a service provider or enterprise’s network. It eliminates spam by limiting the amount of bandwidth and network resources available to spammers to send inbound e-mail.

Holt says TurnTide’s solution is different than other anti-spam approaches because it doesn’t use filtering. “And even better, our product is already working in production for large customers, so there’s not really any technology risk,” she adds.

Helping TurnTide attract financing is the fact that its management team includes seasoned entrepreneurs including Josh Kopelman, the company’s chairman and lead investor, who sold half.com to eBay for $350 million.

Holt sees brighter prospects ahead for venture capital investments in network startups. “It’s not easy to get venture capital in general yet, although it’s definitely loosening,” she says. “And network security is definitely a hot segment. The key is to be in a market where prospects have a real problem they have to solve and a better mousetrap to solve it.”