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Safe Bet

Federal funds are motivating VCs to invest in security firms.

The push for homeland security is unlocking a treasure trove of government money, and venture capitalists are taking note. Combining pieces and parts from 22 other government agencies, the new Department of Homeland Security controls a budget of more than $31 billion for 2004. Analysts at corporate consulting firm Frost & Sullivan estimate total federal spending aimed at homeland security initiatives will be $41.3 billion this year.

With all those dollars up for grabs, VCs are looking for young companies that can address the security market. While some wonder if VCs and government bureaucracies will ever be compatible, there seems to be little doubt safety and security in general is a good investment. VC firm Core Capital Partners LLC counts itself among the believers. "We've been interested in security for a long time, but now that the technology has additional applications in homeland security, it's an even more attractive investment," says Jonathan Silver, founding partner at the Washington, DC, firm.

Not to be left out, the government itself is entering the fray. In-Q-Tel, a venture fund launched by the CIA in 1999, will soon be joined by a new $25 million fund from the Army. The National Security Agency has thrown its hat in the ring, partnering with a homeland security business incubator, and is rumored to be launching its own venture fund in the near future.

Sourcefire Inc., a computer network security firm in Columbia, Maryland, is one beneficiary of the VC fervor for security tech. Sourcefire has landed $18 million in venture investment since 2002. The 3-year-old company posted $6 million in sales in the fourth quarter of 2003, up from $4 million the quarter before.

"Government agencies now make up about 35 percent of our revenue," says Sourcefire CEO Wayne Jackson, 42. But he emphasizes that while security is a growing government priority, there is an even larger opportunity to serve private enterprise.

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This article was originally published in the February 2004 print edition of Entrepreneur with the headline: Safe Bet.

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