Founded in 1993, Trident Capital remains one of the most self-effacing venture firms in the industry. It owes much to co-founders who are either located in Washington or to its current head, Don Dixon, who avoids the media spotlight. One of its best-kept secrets is that the Silicon Valley firm has for years been quietly running a specialized security investment thesis that's proven profitable and able to weather economic downturns. Based on the firm's financial performance, Red Herring ranked Trident No. 26 out of 1,800 global venture outfits surveyed globally. Trident's management team only recently agreed to share its approach in an interview.
Trident spoke with Red Herring at the venture firm's Palo, Alto, California, offices to detail its strategy on security and enterprise software investments. Managing Directors Don Dixon, Peter Meekin, investment professional Michael Biggee, and entrepreneurs-in-residence Mark Iwanowski and Alberto Yepez were on hand. Over the past seventeen years, amid growing needs for digital and physical security, Trident has built a security and enterprise software practice based on a three-part investment approach.
At the core of Trident's investment thesis stands one notion: Every generation in information technology creates its own unexpected new security problems. Intruders and malware specialists find the holes in the system and start to exploit them. Trident identifies a new market's flaws -- be it in software-as-a-service or virtualization technology -- and searches for startups with the answers. Alternatively, it considers forming a company with its own entrepreneurs-in-residence. With a promising new technology breakthrough in mind, Trident next checks the needs of the top ten acquiring companies and talks with those insiders it knows. The firm then investigates the regulatory environment for compliance needs driving particular technologies. Meanwhile it scouts what competitive technologies are coming about and deploys a high-level team member with government connections to vet the company. If a startup eventually meets Trident's built-to-buy thesis, the venture firm moves forward to invest, build, and operate it with the goal of an acquisition exit.
The second part of Trident's thesis is grasping and tackling the next security threats and the compliance or regulatory restrictions involved. In order to assess the new trend, Trident has surrounded itself with a cadre of former intelligence and security pundits in Washington and across the country. Its second office is located in Washington, D.C., and it works with several close advisors, including General Ken Minihan, former NSA chief, and Howard Schmidt, the U.S. cybersecurity czar under the Obama administration. The firm has noticed throughout the years that security matters and priorities migrate first from government agencies to the financial sectors and then to the broad commercial markets. A full and early anticipation of the threats and of the possible technology solutions represents a key competitive advantage.
"Government agencies are the early adopters, then the banks, and later on we can expand to the general marketplace," Mr. Yepez said.
The third part unique to Trident's strategy is its exit approach. Trident partners eventually sign off on a startup investment with a set of buyers already in mind, and during its lifetime has maintained tight relationships with the big five software vendors and a few other technology acquirers.
"I always liken this to a kids' birthday party game of musical chairs," Mr. Dixon said in the interview. "There are five chairs and they are named EMC, Cisco, Oracle, IBM, Symantec, and when the music stops you have be in a chair. As soon as we make an investment, we have a pretty good sense of the potential acquirers. We have a pretty good sense of what they don't have and what they're not making in their labs today."
Trident is openly eschewing the IPO market. It's a strategy that's served them well this past decade with the Nasdaq nearly shut off to new issues. During that period, Trident has sold 18 startups to a series of industry's giants. The firm believes the notion of just financially backing startups, placing bets, and hoping for a good IPO market is dead. Trident talks with the big software and security companies they have good relationships with to see if a startup they are interested in could help any of them. The venture firm then looks at the upstart's early "channel relationships, OEM deals, and ISV deals" to get a better sense of the company's industry traction. Finally, Trident gets to know and trust the management team.
"This is like wine tasting," Mr. Dixon said. "We know what the bottle should taste like before we pull it off the rack -- so when a company comes in we know what it should look like."
In order to deliver the goods, they hire former CEOs from security companies to add to the 8 partners. That means members of the firm's security team -- Messrs. Iwanowski and Yepez joined Trident from security roles at Oracle and Thor Technologies, respectively -- examine the market for opportunities. The firm tries to discover a security problem that is emerging to a point where a larger company needs to be able to offer a software product or service to stop the issue from harming its brand.
"We went and talked with our close customers and said, 'Is this a problem to you?'" Mr. Yepez said. "So we introduced the company."
As a result the firm has continued to prosper and made some significant exits -- including Signio. It invested in Qualys, the leading software-as-a-service security company, which has now added more than 3,000 corporate clients worldwide. The intrusion-detection and compliance company is on its way to hit $100 million in yearly sales and could go public in the meantime if the IPO window widens in 2010.
As importantly, according to one limited partner, Trident has returned over $230 million to its backers over the past two years, far beyond the capital calls and amid an industry drought. And according to one backer, Trident VII, its next fund, has already crossed the $200 million threshold and should be closing soon. In Washington, where Trident has located its second U.S. office, the firm has "earned its stripes", says Gen. Minihan, who is now a partner at Paladin Capital.
"They are the best in the security field, and they have figured out a well-defined strategy," Mr. Minihan said.
Upon successfully testing its approach in the security field, Trident has broadened its focus to a couple more segments, using the same methodology, and it's charging ahead both in the enterprise software field and the clean tech arena. Stay tuned.