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No Exit – Malware Is A Bad VC Investment

April 20, 2005

Our moles chime in yet again to tell us that VCs who invested in spyware/adware/malware companies are starting to feel some pain. A case-in-point is NYC-based Hotbar which raised $11M in 2000 on a $50M valuation from Deutsche Bank Alex. Brown and CE Unterberg Tobin. Hotbar is apparently now going through a round of layoffs and management changes.
A number of VC firms invested at later stages in malware firms because, as malware purveyor Claria’s aborted S1 reveals, these companies were once making sick revenues with great margins. Growth seemed unstoppable. VCs’ prescription to get to liquidity was to remake adware companies in more respectable forms by starting to care about consumers and to adhere to forthcoming legislation. Picture Michael Corleone taking the Godfather’s assets and investing in real estate and spending time in Lake Tahoe with politicians.
Malware VCs Take the Michael Corleone Approach
The trouble is that anti-spyware/adware companies like Webroot, Symantec, Microsoft’s Giant Software, etc. are being installed at a fever pitch. No matter how decent Claria and WhenU seek to make themselves, the anti-spyware scanning apps will continue to zap them. From what we hear, the scanning apps have caused malware growth to become stagnant, throwing a wet blanket over VCs’ dreams. In fact, the companies that continue to grow are the more insidious ones that dynamically change their appearance. So the VC strategy of self-cleansing is, in fact, backfiring. There are no IPOs in the future for these companies and the bigger Internet players would be loath to acquire malware companies, even if a good valuation could be had. As one investment banker put it, “They are going to have really funky exit strategies.”

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