Launching and Scaling a Security Startup During an Out-of-Favor Time: HyTrust President Eric Chiu (Part 5)

Sramana: Raising money like that is very difficult these days. You were able to get VCs to invest in a concept and that is not common. What was it about your situation that enabled you to clinch the opportunity?

Eric Chiu: First, I think we went to the right firms. Trident committed to the term sheet first and they are a company that believes in security. They believed in our thesis that virtualization was going to take over the datacenter. We were introduced to the partner by a trusted person. That created a level of trust and interest that they were able to put into their term sheet a week later. When you find the right firm, everything falls in place and moves fast. It is the process of finding the right firm that takes a long time. That is where most entrepreneurs fail.

Sramana: Would you say that the customer validation that you did prior to the Series A was a key factor?

Eric Chiu: That was in due diligence. My traditional venture background was that you would put in a term sheet first before you did the full due diligence. That is the dynamics we experienced in HyTrust. I am sure there are plenty of situations where people ask to do due diligence before a term sheet. We got the term sheet first that outlined the size of the deal and the terms of the investment. Due diligence came after that.

Sramana: It could be that you were working with partners at Trident who were on top of the market and could connect with the opportunity. Often times when VCs are presented ideas the primary way that they decide if there is a real opportunity is by looking at the customer validation done to date. VCs have limited amount of knowledge about a lot of different things, they are not absolute domain experts.

Eric Chiu: You are correct. Our bucket was security so it was an easy thesis to tell security professionals that virtualization needed to be secured. From my standpoint I see most VCs today starting to specialize. There is always a consumer guy. There will always be an infrastructure or security guy. I am seeing former entrepreneurs in those seats more and more, so they are domain experts. That is how they develop the ability to react quickly to opportunities. There were a lot of generalist in the late 1990s.

Sramana: The venture market has matured since the late 1990s. When you look at a category like SaaS or cloud computing there have been tons of deals. A single VC may have 10 of them in their portfolio so they know the metrics to track. I think security people have been investing in security since the 1990s. There is a lot of domain knowledge inside of firms in certain areas. When I look at FaceBook or MySpace coming into the market when social media was unheard of.

Eric Chiu: Or when Reid Hoffman came up with social networking before PayPal nobody could imagine it. It was not until he came up with LinkedIn, after he had started PayPal, that he was able to get people to invest in it. When you have a new thesis you must show real results. On infrastructure deals like ours there is a lot of precedence. VCs are great at recognizing patterns. I highly believe in that.

This segment is part 5 in the series : Launching and Scaling a Security Startup During an Out-of-Favor Time: HyTrust President Eric Chiu
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