Stay East Young Man

I recently read the New York Times article, “The Pentagon as Silicon Valley’s Incubator,” by Somini Sengupta, which highlights a welcomed trend in cyber security investing that most of us in the industry are watching unfold.  The article highlights the enhanced relationship between Silicon Valley venture capital firms and DoD and Intelligence Community cyber security stakeholders.  The article also underscores my assertion that the DC-Maryland-Virginia Cyber Beltway is the center of mass for global cyber security expertise (see Blog Post: dated   August 2013, “The Cyber Beltway’s Innovation Dislocation“).

We at MACH37 are thrilled that Silicon Valley and other venture capital rich regions are bridging the gap with the Cyber Beltway.  We continue to strongly support initiatives focused on achieving such gains, such as the Security Innovation Network, which has made tremendous strides in bringing both communities together.

However, Sengupta’s article illuminates a related and troubling trend – the migration of cyber entrepreneurs from the Cyber Beltway to Silicon Valley.

Specifically, Sengupta references two cyber security start-ups, Morta and Synack, both of whom recently pulled up chocks and moved to Silicon Valley to secure venture investment.  Sengupta also references several other high profile cyber security policy stakeholders who migrated West to join other cyber security startups.

I can imagine why VC’s would desire to keep first time entrepreneurs close to home.  It’s difficult for VC’s to effectively mentor and manage young and inexperienced entrepreneurs when they are separated by over 2,850 miles.  I can also imagine why former policy stakeholders would be drawn to the luster of the fast-paced Silicon Valley start-up environment.  I am sure that echoes of Horace Greeley’s “Go West Young Man” add to the excitement and romance of their first entrepreneurial experience.

However, if VC’s have already recognized the unmatched density of cyber security expertise residing within the Cyber Beltway, it makes little sense to me that they would desire for these entrepreneurs to leave the rich intellectual ecosystem that originally inspired them.

In the cyber security space, perhaps more than any other technology sector, intellectual capital has a very short shelf-life.  In order for cyber security companies to thrive beyond the releases of their initial alphas and betas, their founders and technologists must continue to innovate.  In order to do so, they must maintain an awareness of the state of the cyber threat as well as the state of their competitive environments.

By pulling these entrepreneurs out of the cyber intellectual epicenter, their VC’s are inadvertently undermining their ability to compete over the long term.  Outside the Cyber Beltway, these entrepreneurs are going to lose a step and will find it more difficult to, not only keep up with the threat, but also to seize and defend a competitive market position.

To be certain, in Silicon Valley, these entrepreneurs are going to find a wealth of expertise in new venture development, software engineering, and enterprise solution sales and marketing.  But they will also find a dearth of cyber security expertise.  There are lots of folks out West who know how to build a highly scalable database to search through and correlate log and threat data, but very few of them have any idea what they are actually looking for.

Let me suggest an alternative approach.  Stay East Young Man (and Woman).

If VC’s want to give their cyber security entrepreneurs every advantage to succeed, leave them inside the Cyber Beltway.  If the entrepreneur is a first timer, establish your firm’s presence here and surround the entrepreneur with experienced talent.  By allowing the entrepreneur to remain immersed in the ecosystem that originally inspired her, her venture will continue to innovate, keeping pace with the cyber threat and competitive environment.  Several venture firms with strong cyber security track records such as NEA, Grotech, New Atlantic, Valhalla, Harbert, Columbia Capital, Paladin and Alsop Louie understand the importance of this immersion and are either already established or are in the process of building a more sustained presence within the Cyber Beltway.

MACH37 is working hard to make it easier for both cyber entrepreneurs and venture capitalists to build cyber security companies inside the Cyber Beltway.  We augment our entrepreneurs’ existing cyber security skill sets with the critical product management, development, sales and marketing and venture development capabilities they will need to succeed.  We pair them with seasoned entrepreneurs, cyber technologists, market analysts and venture advisors who are committed to helping them be successful.  We drive their ventures through concept validation, target market customer acceptance, and alpha commitment and provide them and their investors with the strong market-driven foundations they will need to achieve the success we are all driving towards.

Creating a Market-Focused and Product-Oriented Company is Not a Part-Time Job

While there are many factors impeding the successful insertion of disruptive cybersecurity concepts into the current market, I want to explore the underestimation of the focus required to build an enterprise that is market-driven and product-oriented.

The business ecosystem inside the DMV’s Cyber Beltway is heavily prejudiced toward the development of bespoke solutions targeted toward single customers.  This ecosystem is dominated by large systems integrators and government contractors who employ low-risk business models based on time and materials billing and very limited internally-funded research and development investment. There is nothing wrong with this business model, as evidenced by the hundreds of wealthy government contracting business owners that our region has created throughout the past decade.  However, this model thrives on labor-intensive integration and operational support and, by its very nature, is antithetical to disruptive innovation.

When budding cybersecurity entrepreneurs who have grown up in this ecosystem decide to start their own businesses, the siren’s song of SBIR grants, federally-funded research projects and government consulting contracts becomes extremely alluring.  In contrast to the twenty-something social networking and iPhone app entrepreneurs populating other techno-regions, entrepreneurs in the Cyber Beltway typically have families, mortgages and car payments.   The majority of them are lured toward services models out of financial necessity.

Yet they continue to dream about making a disruptive impact.

Last week alone, I met with five different entrepreneurs, all aspiring to take to market innovative cybersecurity product ideas.  Several of them outlined plans to invest cash flow generated from their consulting operations to build a product and deliver it to market.  In most cases, the product team consists of one or two developers working on a product concept part-time.  Consistently, these entrepreneurs believe they can bootstrap their way to a generally available product release within 12 months, avoid the dilution of a sizeable venture round and retire on the sale of their product business at a 10x multiple of projected revenues.

Here’s my advice:  Pick one or the other.  You can’t do both effectively.

Building a product business will take 100% of your focus.  Validating the concept, building the team, and raising the capital necessary to build an organization to support your market entry will take more than all of your time.  Getting your concept to market will require significant outside investment made over a number of years. Even if bootstrapping initial development enables you to reach the market first, without the capital to seize market share and create competitive barriers to entry, better capitalized competitors are going to own the market you have created.

Yes, it takes guts to make the leap, especially if your services business is already showing promise.  But if you want to make a disruptive impact, 100% commitment to the endeavor is simply table stakes.  You won’t be able to find the necessary financial backing otherwise.

At MACH37™, we are working hard to make taking this leap easier for our entrepreneurs. We have built a 90-day program to enable our entrepreneurs to fully validate and hone their concepts by working with our network of cybersecurity customers, serial entrepreneurs and industry experts.  We provide them with capital, allowing them to focus over a tailored 90-day program and build the effective business case that will support additional seed investment from us and third-party investors. We teach them how to be market-focused and how to build products that address what their customers need, instead of what the entrepreneur wants them to have.

The Cyber Beltway’s Innovation Dislocation

Last week, I had the opportunity to participate in the AGC Partners “Disruption: Innovation at the Edge of Cybersecurity” event in Las Vegas.  My panel explored how cybersecurity entrepreneurs become inspired to innovate and what dislocations are preventing them from disrupting the cybersecurity marketspace.  As I thought about what ingredients are required to insert disruptive concepts into the current market, it occurred to me that within the Northern Virginia, Fort Meade and DC Metropolitan “Cyber Beltway,” the problem is something beyond a lack of creative inspiration.

On the contrary, at MACH37 I see at least three new product ideas a week coming from young entrepreneurs, members of the intelligence community, small cybersecurity services companies, university researchers and FFRDCs located within the Cyber Beltway.  To be sure, cybersecurity companies operating in the Cyber Beltway enjoy privileged insights into the cyber threat landscape.    These companies often support the offensive side of cyber operations, have an intelligence analysis DNA, have been doing big data since before it was called big data and enjoy unique access to the intellectual property derived from thousands of classified and unclassified incident response and remediation activities.  Individuals working within these companies know better than most how the cyber threat operates and how to rapidly collect and analyze artifacts to discover a cybersecurity breach within an enterprise network.

However, in spite of this treasure trove of intellectual property, we aren’t seeing the conveyor belt of disruptive cybersecurity products entering the market from this region that we should expect.  Why is that?

While our region’s cybersecurity technologists are filled with creative ideas, the ecosystem forces downstream from their creative genius are undermining their ability to disrupt the market.  In general, their innovations:

·      Are driven out of academic curiosity rather than emerging market need

·      Lack the entrepreneurial sponsorship required to build a viable business case for the innovative concept

·      Lack the financial backing necessary to deliver, support and take to market an enterprise-worthy solution

Over the next several blog posts, I intend to explore the dislocations in our local ecosystem.  My hypothesis is that none of these are terminal and that we at MACH37, with the help of others in the industry, can positively address the current gaps and create an environment that not only fosters the creation of potentially disruptive cybersecurity concepts, but also supports the many other, perhaps more practical, ingredients required to bring positive disruption to the cybersecurity market.