Even in tough times, some promising companies are attracting more offers for venture capital than they could ever possibly absorb.
Consider CipherTrust. This month, the spam-protection startup received promises of $42 million in venture capital.
Some of the top names in VC – and scores of lesser-known finance houses – chased Atlanta-based CipherTrust. Greylock and Battery Ventures joined up with U.S. Venture Partners, Noro-Moseley Partners, and Silicon Valley Bank to back CipherTrust.
More than 70 VC firms jockeyed for a position in CipherTrust during the six months in which the company raised the latest funding round, says CEO Steve Raber. Eight top-notch funds courted CipherTrust to lead the round, but scores of other VCs cold-called Mr. Raber once word leaked out that CipherTrust was fundraising.
“During the bubble, everybody hung up a VC shingle,” says Mr. Raber, who himself served as an investor with a now defunct VC firm. When the bubble burst, Mr. Raber was under the impression that most VC firms had also shut their doors. CipherTrust’s fundraising foray changed his mind. “I was shocked at the sheer volume of the VC responses,” says Mr. Raber. “I guess they didn’t go out of business – they’ve just been waiting.”
CipherTrust makes IronMail, a product that provides both email security and anti-spam protection to corporations. The startup counts 27 of the Fortune 100 among its customers, as well as roughly 25 percent of Fortune 500 companies. Though it raised just $6 million from individual investors prior to the March round, the company has been profitable for the last six quarters.
Mr. Raber says VCs were attracted by the company’s strong momentum with customers and the associated uptick in revenue. Indeed, the company originally intended to raise only $20 to $30 million to further expand R&D and ramp up sales in Europe and Asia.
But VCs wanted to put more money into the company, says Mr. Raber. “Once VCs find a good company, they want to put in enough money and have enough of a stake to make it meaningful,” says Mr. Raber. In other words, VCs are looking for large enough positions to make a dent on the performance of their funds.
They also seek surer bets with quicker paybacks. “VC firms are looking for companies past the idea stage,” says Mr. Raber. “There is plenty of money out there that is urgently trying to find a return.”
As the IPO window opens up, VCs want to use the opportunity to score some big hits. Companies targeting large and growing markets, like CipherTrust, become very enticing investment opportunities. This results in higher valuations, and Mr. Raber says he is pleased with the valuation CipherTrust received.
Along with an opportunity, the activity in the public markets is also a threat for startups. Acquired rivals find themselves with the deep pockets and strong backing of their corporate owners. And those that go public find themselves with new war chests. This creates an imperative for startups to grow or lose out.
Just this week, for example, San Francisco-based rival Brightmail announced its plan to go public and raise $80 million. Brightmail focuses only on spam solutions. But with its coffers full, it will likely expand to other security products and take on CipherTrust more aggressively.
As the capital spigots turn on in the public and private markets, large rounds may again become an imperative rather than a luxury. Many VC firms, with loads of capital to invest, will be happy to oblige.
For more, read Red Herring’s series on the VC overhang: