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Silicon Valley Venture Funds Invest in Anti-Spyware Software Maker

Posted on: Tuesday, 8 February 2005, 00:00 CST

Feb. 7--Three Silicon Valley venture funds are betting $108 million that Boulder-based software company Webroot can take on Microsoft and the biggest players in computer security.

The investment -- to be announced today -- equals nearly a quarter of all venture capital received by Colorado companies last year. It's also the second-largest venture funding of a software company nationally since 2001, according to the company.

Webroot's products battle spyware, the unwanted software code that ranges from cookies to keystroke loggers that secretly transmit bank account numbers to cybercriminals.

Spyware was virtually unheard of in early 2004 but now infects an estimated 92 percent of all Internet-connected computers.

The cyber-epidemic has caused the anti-spyware software market to explode from $82 million in 2004 to $395 million in 2005, said former Gartner Inc. research analyst Richard Stiennon, who joined Webroot last September.

Webroot, meanwhile, has mushroomed from 50 to 225 employees over the last 10 months, with sales doubling every quarter since late 2003.

Webroot must grow even faster -- or get acquired -- to battle new anti-spyware competitors like Microsoft, Computer Associates and computer security giants Symantec and McAfee.

"We ultimately want to be a very big player in the security market," said David Moll, the company's chief executive. He said the company was on the verge of losing Fortune 500 clients because of uncertainty over whether Webroot would be acquired.

The decision not to do an initial public offering -- and to take such a large chunk of private funding at once -- means Webroot will stay independent for the foreseeable future, Moll said.

The lead investor in the $108 million round is TCV, a $3.3 billion venture fund in Palo Alto, Calif., that also has funded Expedia, Netflix and anti-spam company Brightmail.

TCV general partner Jake Reynolds will chair Webroot's five-person board, which will also include TCV's John Drew and two independent members.

The fifth seat will go to Moll, while company founders Steve Thomas and Kristen Talley will leave the board but remain invested, Moll said.

Until now, Webroot, founded in 1997, hadn't received a penny from outside investors. Now it is controlled by a syndicate of Silicon Valley investors, which also includes Accel Partners and Mayfield.

"Our goal is to provide guidance and assistance," said Reynolds. "Webroot doesn't need much changing." Moll says the company's new investors will help Webroot tap talent and technology in Silicon Valley, the center of the computer security industry.

"We need a strong pipeline into the valley," Moll said.

Webroot remains committed to staying in Boulder, though it will open a Palo Alto office soon, he said.

Webroot's main product is Spy Sweeper, a $30 consumer software program that has won top ratings from PC Magazine three years in a row.

The company launched an anti-spyware solution for corporations last June and already has sealed deals with a dozen Fortune 500 companies, Moll said.

But Webroot's competitors are close behind.

Two months ago, Microsoft acquired anti-spyware company Giant and has already released a rebranded anti-spyware product. Industry experts expect Microsoft chairman Bill Gates to announce this month a corporate anti-spyware product at RSA, an information-technology security conference in San Francisco.

But experts are unsure how aggressively Microsoft will pursue anti-spyware solutions.

"Does Microsoft look at spyware as a revenue source?" asked Ed Maguire, vice president of equity research at Merrill Lynch. "Or just a huge black eye that has kept them from selling operating systems and applications?" But no one questions the seriousness of computer security giants like Computer Associates, which acquired anti-spyware company PestPatrol last August for an undisclosed amount of cash.

Computer security giants McAfee and Symantec, meanwhile, are racing to integrate anti-spyware solutions into their consumer software suites and are already testing corporate solutions.

One obstacle Webroot must overcome is that most consumers, and many corporations, prefer to buy an all-inclusive product when it comes to dealing with software threats from the Internet.

"Buyers are upset that they have to buy virus and spyware solutions separately," said John Girard, research director of Gartner's Security Group. "People do not want to have to add line items to their budget." But Maguire thinks Webroot can compete against its much larger competitors as long as it maintains its technological advantage.

"There is typically room in technology markets for a best-of-breed player," he said. "The effectiveness of the solution is the most important." A firewall made by Zone Labs, a San Francisco-based software company, competes successfully against the same computer giants that now threaten Webroot.

Webroot will use the $108 million for consumer and corporate marketing, growing the company's presence in Asia and Europe, and new technology. Some of the money will also go to the company's founders.

On the second floor of Webroot's offices on Boulder's 55th Avenue, 40 computers continuously search the Internet -- at the rate of 400 Web pages per second -- for new spyware threats.

Moll says another 60 computers will be added next month. "The only way to find spyware is to hunt for it," he said.

Webroot competitors rely on passively collecting spyware programs found on computers or manually searching the Internet with paid programmers, Moll said.

Automation is giving Webroot the lead for the moment.

"It's going to be tough sledding for a while," said Moll. "But we plan to vigorously defend our turf."

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MSFT,

Source: The Denver Post

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