Innovation Pipeline

Lt. General Kenneth A. Minihan (USAF retired) has spent his career focused on security. He was the 14th director of the National Security Agency/Central Security Service and in his 20 years of Cold War engagement Minihan looked to technology to save lives and solve security problems. He is now a principal with Washington, D.C.-based Paladin Capital Group. Packed with Beltway insiders, Paladin specializes in security and antiterrorism technology investments. Minihan focuses on investing the private equity firm’s fund dedicated to Homeland Security-related technology companies. We spoke with the three-star VC to find out where security investment is headed next.

Innovation Pipeline: Are security deals as popular as
they were a year or so ago?

Kenneth Minihan: The space is still hot and deals are
getting done. We recently participated in a $20 million
C round of a company called CloudShield. CloudShield
has developed an open-network services platform that
does deep-packet inspection of internet connections. It
secures, monitors, measures and controls network traffic
and use. It’s a next-generation security apparatus.

IP: That doesn’t sound like the sort of protect-the-
perimeter security technologies that were getting funded
so frequently. Has the role of security been broadened?

KM: Yes. There’s an emerging trend in security to go
beyond the traditional definitions and talk about the
“assured business transaction.” It’s continuity of opera-
tion rather than just security—recognizing that you can
be secure but there needs to be more. If you are secure
but you can’t do the deal or get the job done, there’s an
issue. The question isn’t now simply, is it secure? It’s, can
I do what I want to do under abnormal circumstances?

IP: Is that a tougher sell for a company, this notion of
continuity of operation or assured business transactions?

KM: It’s a longer sell, not a tougher sell. We’ve all got
to think about return on investment and what the real
purpose of security is. Many corporations and major
operating entities are looking for these kinds of offerings
and they don’t think of them as security, they look at
them as being able to do business in the face of inappro-
priate competition, terrorist attacks, natural disasters,
surviving whatever has occurred and continuing to per-
form. That takes time.

IP: Your Homeland Security fund isn’t focused solely on
government business then, is it?

KM: The deals we’re doing are dual-use for us. For us to
fund a company and its technology it has to be both com-
mercially and federally successful, with customers and rev-
enue in both arenas. That mitigates risk for us and it also
fits the model of homeland security, which is that vulner-
abilities are not all within the national security apparatus,
they’re within the commercial apparatus as well.

IP: Have startups realized that the dual-purpose
approach is better?

KM: Yes. The way I would characterize it is that they’ve
come to understand that to work in the homeland secu-
rity market they need to have a commercial-facing and a
federal-government-facing proposition.

IP: How hard is it to take on dual roles for a small com-
pany? And what are the different approaches?

KM: You sell products, services and technology commer-
cially. You sell solutions to the government. They’re not
competing but they are two different sales cycles, two
different approaches.

IP: What are the major issues a startup needs to keep
in mind when working toward that dual-purpose busi-
ness model?

KM: Recognition that the sales approach commercially
is not sufficient with the government. Thinking in terms
of a solution is important with the government. The gov-
ernment has criteria, good-housekeeping seals of
approval that are not necessarily part of the commercial
side. So you have to be prepared to spend some time
meeting those criteria.If you have reached the point where you’ve got enough understanding to put a revenue plan together, it’s important to remember that the government’s budgetary process is a five-year process, with an annual budget. So you have to plan your money, in terms of your revenue streams, accordingly.