Tech Bubble Is Stable for Cybersecurity Companies

Social media booms, but cybersecurity enjoys more stable growth.

Between September 2012 and September 2013, 78 cybersecurity companies either went public on the stock market or were acquired by a larger business.

Between September 2012 and September 2013, 78 cybersecurity companies either went public on the stock market or were acquired by a larger business.

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Social media companies are enjoying a bubble of prosperity as stocks reach new highs and venture capitalists seek new investments, but that growth will be more stable for cybersecurity services, which have an easier time proving their value. 

Investment in security is so popular that 78 cybersecurity companies either went public on the stock market or were acquired by a larger business between September 2012 and September 2013, according to a report from venture capital research firm CB Insights. Merger and stock offering activity for cybersecurity businesses grew 50 percent between 2011 and 2012, and spiked 109 percent from 2010 to 2011, the report adds.

Social media companies are the most popular example of the current Internet boom, as Twitter stock reached a new high of $51.99 on Tuesday, above the $45.10 price set during its first day of trading in November. Pinterest also is valued at $3.8 billion by Fidelity Investments following a round of venture capital financing in October.

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The market is ripe for tech companies to go public, and while speculation is not as outrageously high as before the dot-com stock bubble hit bottom in 2001, social media companies have a steep value given that those services are still developing a solid way to generate money, says Robert Ackerman, managing director of Allegis Capital. 

"With social media you are not trying to solve a problem, you are changing how people interact. Cybersecurity is solving a problem. It has a clear value," Ackerman says. 

Although Congress remains stalled on legislation to improve cybersecurity standards, members of both parties and American businesses recognize the need to guard networks to protect intellectual property, data and even power plants as more critical infrastructure connects to the Web.

The business of cybersecurity likely will see more stable growth thanks to this demand, but the money does not come as quickly compared to consumer-targeted websites because the technology behind cybersecurity is more complicated than social media, Ackerman explains.

"If you want to get into the space because you think cybersecurity is hot but you don't have a deep background in this area, the chances to make a serious mistake by investing in a company or starting a company are magnified," Ackerman says.

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Working on cybersecurity with the Department of Defense was key for James Foster, CEO of ZeroFOX, in starting to develop security solutions as an entrepreneur. Hackers are often a step or two ahead of business security software, so former government engineers and analysts are designing new real-time programs to guard networks, instead of antivirus software that needs to be updated, Foster explains. ZeroFOX sells a cloud-security subscription service that analyzes and blocks threats to devices and computers on a company network, instead of antivirus software that requires regular maintenance.

Cybersecurity services are meant for large networks, so government agencies make good customers. But getting a contract can take months or years of vetting and arranging security clearances, Foster says.

Lawmakers are considering ways to make procurement processes easier so the government can encourage innovation by tech startups.

"There is so much competition for cybersecurity companies compared with five years ago," Foster says. "You will see a lot of smaller companies fade, but there will be consistent liquidity and a handful of new players will rise. There is a demand for new services, and right now there is no global brand for cybersecurity."

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