Asian security startups not attractive to investors

Security startups in Asia may not be deemed worthy investments partly because they lag behind their counterparts in the United States in terms of technology and brand recognition. They also face intense competition within their domestic markets, noted industry observers, who add companies with more appeal will be those with niche offerings or have partnerships with their state or national governments.

An August report in The New York Times illustrated how security startups are becoming popular among investors in the U.S.

Several security startups have gone for Initial Public Offerings, such as Palo Alto Networks, while some are becoming takeover targets by large companies, such as with EMC Corporation's acquisition of NetWitness.

There has also been interest from venture capitalists, who have invested US$935 million in technology security companies in 2011--nearly twice of US$498 million invested during 2010, according to a MoneyTree Report by PriceWaterHouseCoopers, the National Venture Capital Association and Thomson Reuters.

Strong competition for investors
However, Sally Shan, managing director of Haborvest Partners, observed Asian security startups will not be as attractive to venture capitalists and larger companies, because they may face difficulties with customer demand and profitability.

On the Internet and network security front, there are already many domestic players and with the proliferation of Internet usage, more Internet content security tools are set to spring up and this could mean greater competition for them, the managing director of the China-based private equity said.

On the desktop side, there's still low demand for paid antivirus and antispam software among consumers, because many citizens especially those in China, are used to getting pirated software instead of paying for desktop security software, she pointed out.

Furthermore, Asia is "way behind" the U.S. in terms of security technology, she explained, noting even though these Asian security startups continue to grow, the market is still smaller and less established that the U.S., and Asia is at least 5 years behind.

Brand and image obstacles
Her words echoed that of Ngair Teow Hin, founder and CEO of SecureAge, who previously told ZDNet Asia in an interview it will be a long time before Asian security firms are able to catch up with their western counterparts. The Asian culture of not wanting to fail means businesses in the region will not be willing to try security products without a good brand name, he said.

Asian startups may also not able to expand beyond their countries and get international recognition since many governments, especially the U.S., are also concerned about possible Trojan viruses hidden within software programs so there will always be controversy surrounding them, Michael Yoshikami, CEO and founder of Destination Wealth Management, added.

For instance, with the recent accusations by the United States that China was behind cyberattacks on Google and other firms, it may be a difficult bridge to cross to move regulators toward comfort of allowing security code to expanding outside of the U.S, he noted. This will be a limitation to the potential synergy between the U.S. and China, he said.

Have unique offering, partnerships with governments
In order for startups to effectively compete and match up to their U.S. counterparts, Vinnie Lauria, co-founder of Golden Gate Ventures, noted the need for "a unique play to the region".

"If you're competing against Silicon Valley companies, with Silicon Valley investors, local business development deals, and some of the top talent in the world, you will be at a disadvantage," he said. "But if you have a unique service offering for this region, then you are set to do very well and catch the interest of other companies."

Security giant, Symantec too told ZDNet Asia, it will acquire Asian startups which have "niche" technologies to pair with its security developments." These strategic acquisitions allow [us] to leverage existing strengths into new opportunities, while also capitalizing on emerging industry growth trends such as mobility, cloud and virtualization," Eric Hoh, Asia South vice president of the company said.

Asian security companies should also work closely with their national and state-level government organizations and corporations to ensure these are early adopters before selling to the open market, Dennis Phua, executive director of Azione Capital, advised.

At least one board member should be "personally connected" with these organizations, understand their requirements and strongly recommend the start-ups to them, the director of the Singapore-based venture capital said.

However, there are still exceptions within the region, and it will be important to keep an eye on the region for opportunities, according to Yoshikami.

He observed that IT security becoming a big issue and the need to protect data, especially as companies outsource information to the cloud, will be tremendous, he explained.

Agreeing, Lauria noted that a good example here in Asia is TenCube, a Singapore company which offered a service for people to track lost cell phones. It took off in the Philippines and Indonesia, went to the U.S. to raise funds and was eventually acquired by McAfee, he said.