Launching and Scaling a Security Startup During an Out-of-Favor Time: HyTrust President Eric Chiu (Part 4)

Sramana: Let me probe a bit on that because you bring up an important point. Can you use your own value proposition and investment thesis for the Series A? What was your investment thesis, and why were VCs telling you no? In my experience of fundraising, VCs typically give you good feedback, and if you get nos you can usually learn something from them.

Eric Chiu: The thesis was that virtualization was a new platform. Security and compliance were necessary for that platform in order for people to adopt it in their data centers. The key areas that we address are around role-based access control, audit logging, and policy enforcement for that virtual infrastructure.

There are two buckets of nos. We had a bucket of nos where the VCs simply found security and infrastructure to be out of favor. In 2008, web 2.0 was in fashion. It was all about SaaS and clouds. We were neither. We were an infrastructure security company.

Sramana: Did you find the majority of your nos to be related to the category?

Eric Chiu: That was the predominant bucket of nos. Then there was another set of nos which were VCs telling us that VMWare just went public and that all the people who just made a bunch of money were going to start new companies and put us out of business. The competition of the market coming from all of the technologist leaving VMWare would be too much for us to handle.

It is hard to argue against the first bucket. If a firm does not like security and infrastructure, you are probably not going change their mind. There are firms that will not invest if you don’t have a SaaS model.

Sramana: If a category is out of favor during your fundraising time, there is almost nothing you can do about it other than to keep looking for the investor who is willing to go against the trend.

Eric Chiu: Exactly. We found a great set of investors with Trident Capital and Epic Ventures, which really believed in security and infrastructure. They invested in virtualization and cloud and saw it as a new wave. Finding the right investor who believes the thesis and believes in the team is key. You cannot pitch five firms and expect to get a home run with one of them. You may have to pitch 15 to 20 firms to find the right one that is a fit.

We went after 20 firms, and we also had partner level relationships with all of those firms. That allowed us to have a faster process than a lot of startups. When you are in that process, things do not seem to be going as fast. It took us four months end to end and that allowed us to raise $5.4 million. We were able to hire our core development team and develop our first product.

Sramana: Your first $200,000 got you up to the point of validation, but you did not have a product yet, correct?

Eric Chiu: Exactly. When we went through the funding model, we knew that we were not going to be able to get by with half a million dollars. We knew we needed $4 million to $5 million in our Series A to get first product out.

This segment is part 4 in the series : Launching and Scaling a Security Startup During an Out-of-Favor Time: HyTrust President Eric Chiu
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