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Venturing into security

Recent cuts in earnings estimates may have tarnished the computer-security market's image as the golden goose of the tight tech market, but VCs are still on an egg hunt.

MENLO PARK, Calif.--Recent cuts in earnings estimates may have tarnished the computer-security market's image as the golden goose of the tight tech market, but venture capitalists are still on an egg hunt.

On Tuesday, several dozen representatives from some of the largest venture funds assembled here to listen as network-protection firms, software companies, and financial houses discussed the state of computer security.

The verdict: The computer-security market is not immune to the tech malaise, but it still appears to have strength, said Israel Hernandez, vice president of equity research for investment firm Lehman Brothers.

"We are not yet in a recovery, but the seeds are germinating," Hernandez added.

Last week, two of the computer-security sector's bellwethers, Check Point Software and RSA Data Security, warned that they would miss their revenue estimates by 15 percent and 12 percent, respectively.

The pronouncements were the most significant of several hard knocks in the security sector, including cuts in revenue expectations from SonicWall and widespread speculation that Cisco Systems may also miss its mark.

Hernandez said he cut his own growth estimates for the 30 top companies in the sector to 10 percent from 15 percent based on the most recent revenue cuts.

Yet, these are just bumps on the road to recovery, not crashes, said James Anderson, vice president of information security for Inovant, a subsidiary of Visa International that is responsible for the financial firm's internal security.

"This is what a recovery feels like in the security world," Anderson said. "If there are those who are waiting for something cushier and plusher, I would say, don't hold your breath."

However, Anderson does hold out hope; while Visa International's information-technology spending has not increased, the share earmarked for security has risen.

And the warnings haven't dampened the enthusiasm of venture capitalists for start-ups aiming to better protect companies' information and networks.

Venture firms ranging in size from the large Benchmark Capital to small consultant teams attended Tuesday morning's presentations put on by Garage Technology Ventures in a conference center near Stanford University. Representatives of well-known firms, such as Symantec and Computer Associates, also attended the conference, on the lookout for any potential contenders to add to their stable of security technologies.

While security companies may have to tough it out, they are seeing more potential customers aware of the need for security.

"Everyone is using it," Asheem Chandna, vice president of business development and product management for Check Point, said of security. Check Point has nearly 100,000 of its firewalls and virtual private networks installed in companies worldwide.

Microsoft's chief security strategist, Scott Charney, agreed that companies and the government have a new sense of urgency about protecting their data.

"The demand for security has never been higher," Charney said. "And the consciousness about what happens if we don't do it right has never been higher."

Charney, a former Department of Justice cybercrime prosecutor, started at Microsoft at the beginning of April. He spoke on a panel discussing current trends in security.

That doesn't mean it's easy selling out there, said Wyatt Starnes, founder and CEO of data-security software provider Tripwire. Companies are also getting smarter about the technologies.

"Fear, uncertainty and doubt no longer fly," Starnes said. "You can't frighten a company into buying from you by saying they will be hacked. (People are asking) how does this make me money or how does it save me money?"