Preventing, Rather Than Plugging Up, Leaks

Management: PortAuthority’s president and CEO is Pete Foley, who was recently installed after its latest investment round in June 2005, switching over from entrepreneur-in-residence at investing firm Sequoia Capital. In one fell swoop, Foley changed the name of the company, moved its headquarters from Israel to Silicon Valley, and brought in new management, including PortAuthority’s vice president of sales, Dan Phelan, and its vice president of marketing, Raj Dhingra. Previously, Foley was chairman of the security firm Infoblox.

Investors: PortAuthority recently raised $13.4 million in Series C from prestigious VC firms Greylock Partners and Sequoia Capital.

Business Model: PortAuthority sells content-monitoring software that sits on servers within a company as well as agents dispersed throughout the company’s network. The software prevents information leaks of confidential files, such as executive memos, financials, and intellectual property. The product works with Microsoft Exchange and Lotus Notes as well as dozens of other file formats. It might seem simple enough to block flagged documents before they leave a server. But it’s not that easy. The challenge is detecting content that has been manipulated, reformatted, retyped, or cut-and-pasted into separate files. Instead of requiring that each document be manually fingerprinted, PortAuthority’s software scans documents for unique data structures. It’s certainly a hot market – given both a greater awareness of internal security leaks and new government regulations.

What’s more, just as many security breaches originate inside organizations as outside them, according to a CSI/FBI computer crime and security survey in 2004. There have also been some very high-profile breaches of private customer information caused by human error. For instance, this year in Palm Beach County, HIV information was emailed to unauthorized recipients. And confidential Apple Computer Inc. product information was leaked and posted on Web blogs. On top of that, the Sarbanes-Oxley regulations mandate information protection.

Competitors: Computer Associates, Reconnex, Tablus, Verdasys, Vericept, and Vontu

Dirt: Because so much is at stake with information leaks and so few companies have the expertise to prevent them, those who can do the job are able to demand high licensing fees. PortAuthority charges $20,000 – and that’s for software alone. It does not sell human-operated monitoring services. The company claims that it can get a client up and running in just two days, because its software does not require a lot of client customization. Competitor Vericept is the leader in this market, with more than 1.7 million users monitored at 160 companies. PortAuthority has just 22 clients now, but claims it can prevent information leakage better in real time – before the horses are out of the barn.

Two Roads to eCommerce Riches
When it comes to shopping, “search and refer” is the thing…and other alarm:clock news from the land of private venture funding.

eCommerce is hot again – but this time around it’s not just about virtual mega-malls, such as Amazon, eBay, and Buy.com. Nor is it about shopping platforms such as Broadvision. Rather, the newest areas are shopping search engines and niche eCommerce stores.

Proving how much value exists in shopping search engines, media company EW Scripps announced on June 6 that it had put down a cool $525 million to acquire Los Angeles-based Shopzilla, formerly Bizrate, a comparison shopping search engine that currently draws about 14 million unique visitors per month. Founded in 1996, highly profitable Shopzilla is expected to have revenues in 2005 of $130-140 million. Shopzilla earns most of its revenue from referral fees paid by online retailers.

Just days before the acquisition of Shopzilla, eBay had announced that it would pay $620 million for Shopzilla competitor and publicly-traded Shopping.com. Despite the hefty premium that eBay paid out, the move was seen as a smart one by many observers, including Standard & Poor’s analyst Scott Kessler, who wrote: “If people are going to make use of these other forms of acquiring customers, why not own them?”

eBay’s growth has started to flatten, whereas Shopping.com’s growth rate is more than twice its buyer’s (although of course Shopping.com has a much smaller revenue base). Furthermore, eBay is gaining a revenue mix, since Shopping.com earns its revenues from advertising and referrals, while eBay makes money primarily on commissions. Some other privately held companies that are reportedly pulling in significant revenues and that remain open to potential buyers: Nextag and PriceGrabber.

Another eCommerce strategy that’s meeting with great success is for dotcoms to focus on niche markets and win customers through superior customer service. Venture capitalists and entrepreneurs are excited about such niche players for several reasons: the costs of eCommerce technology, from servers to shopping carts, have fallen dramatically; more and more consumers buy more products online; and keyword search sales through Google and elsewhere have made it easier for markets to find buyers at the decision point. A number of companies have proven that they can build big businesses through a narrow focus.

The fastest-growing eCommerce company in the United States, according to Internet Retailer, is the shoe and handbag retailer Zappos. An armchair analyst would not have been blamed for dismissing Zappos. But the company, founded in 1999, has exceeded all expectations by selling every possible type of shoe, from hard-to-find “vegetarian shoes” and extra-wide boots, to $1,000 designer heels.

Las Vegas-based Zappos had revenues of $184 million in 2004, up 163 percent from $70 million in 2003. The company expects its torrid growth rate to slow, but says it is on track to reach sales of $300 million in 2005. Although arguably it did not need the cash, Zappos took a $20 million investment from Sequoia Capital at the close of 2004 as well as a $40 million line of credit in order to continue to fuel growth and add customer support.

Another eCommerce pure-play is privately held Newegg, which had another blow-out year, and is now doing close to $1 billion per year in revenues, according to the company. Newegg predicts that it will earn revenues of $1.4 billion in 2005 – amazing numbers for a company founded only four years ago. Los Angeles-based Newegg sells computer hardware, software, components, consumer electronics, and networking gear, including wireless products. Its bread-and-butter has been the do-it-yourself (a.k.a., “geek”) market, which has embraced Newegg for its stellar customer service. As with a number of successful eCommerce startups, Newegg was bootstrapped by its founder.

With more than a third of all U.S. households making at least one online purchase each year, according to Forrester Research, Internet retailing has clearly come of age and remains the U.S. retailing industry’s fastest-growing sales channel. So expect to see many as-yet-unfamiliar names break out and post big numbers.