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Security startups: Recipe for success

Stir one part technologist with one part experienced CEO and some VC money and you have the recipe for successful security startups.

At a VC panel discussion at a recent security conference, I was asked what venture capitalists view as more important when evaluating a security or IT startup: the management team or the technologists.

While there are many key elements in considering an investment in a startup (market opportunity, competition, differentiated product, ROI proposition, capital requirements, etc.), the management team is perhaps the most important element, and within that team the CEO is the key individual.

As a technology investor, I've had the opportunity to follow a number of companies with compelling technologies. A good number of these companies succeed, but many more fail or struggle. A number of fantastic security products have failed to gain critical market acceptance, and ultimately failed to weaker technologies that are supported by superior marketing and sales. One of the most consistent reasons for success is management's experience to make the right decisions at the right time.

In a startup's development stage, the key personnel are strong technologists, preferably with relevant domain expertise. The technologists must be experienced enough to create, communicate and execute their vision. But having a stable of degreed, experienced professionals isn't enough to carry a startup from inception to IPO. Such technologist-heavy companies lack the management experience necessary to transform their product from a development project to a commercially viable release. In such companies, the product remains forever in some state of R&D. (I will forego listing the endless number of failed companies out of respect for the dead.)

When a product emerges from the R&D phase, it requires a different set of skills to bring it to the marketplace. Senior management keeps the company's eye on the ball, ensuring it doesn't burn through cash reserves while setting the agenda for market penetration and new growth. Product management, sales and marketing people know how to introduce and sell the product to early adopters, and continue to direct development to ensure continued commercial success.

Unfortunately, a strong technologist with fantastic ideas for new security applications doesn't equate to a strong manager or executive. Many technology entrepreneurs who strike out on their own with titles of "Founder and CEO" often struggle with management issues because they lack the training and experience of their MBA counterparts. The wiser technologists will set aside their egos and take a backseat, assuming a lower-tier position, such as senior vice president or CTO.

An experienced CEO brings real value at this stage of a company's growth. Failure to recognize this need early enough can be painful and ultimately damaging to a startup's future prospects. The firm may lose valuable time to competitors -- or, worse yet, suffer from a failed product introduction. It's critical to the investors and the founding technologists to recognize their strengths as well as the areas they need to recruit strength to maximize the companies' success.

Venture investors look for opportunities with strong ROIs with minimal risk to their portfolio. In this equation, the CEO and CTO are of the utmost importance. I look to the CTO to bring the domain expertise, technical understanding and know-how to craft the right solution to the problem along with ability to drive a product through R&D until it's ready for market. I look to the CEO to have the experience to ensure that the organization is properly staffed with the right mix of technologists and managers through each stage of its evolution.

Without these two individuals or with inexperienced individuals in these roles, a company may have a solid product, but will likely make many costly mistakes on their long, uncertain road to success.

About the author:
Robert Logan is vice president of the ETF Group, a New York City-based venture capital firm.

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