Privacy Networks gone, but not forgotten

FORT COLLINS – Timing recently took down the first startup to inhabit the Fort Collins Technology Incubator.

Privacy Networks in February quietly shut its office at 200 W. Mountain Ave., in what is now called the Rocky Mountain Innovation Initiative incubator. The startup was on its way to record sales in the second half of last year and was seeking a second round of financing when the economy came crashing down.

Privacy Networks was founded in 2002 by technology veteran and serial entrepreneur Todd Massey. The company’s first product was an e-mail security and spam-filtering program. Soon, it expanded to include e-mail management such as archiving and indexing. By most accounts, the company was running full-speed ahead.

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Privacy Networks was the first tenant in the technology incubator, moving in during the summer of 2004. The next year, the company landed a $2.4 million round of financing from Boulder-based Aweida Venture Partners, headed by StorageTek Inc. founder Jesse Aweida. Since then, the company made strides, landing clients such as 3t Systems and CH2M Hill and receiving industry accolades.

But when the world financial markets hit a wall last fall, so did Privacy Networks.

“The economy drove it all,´ said former Privacy Networks CEO Steve Berens.

Privacy Neworks actually saw a record third quarter in 2008 and was anticipating an even better fourth quarter. Berens estimated the fourth quarter would have seen sales compared to the third quarter.

Market freezes deal pipeline

“When the market crashed, everything basically froze,” he said of pending sales and negotiations. The pending sales pipeline – companies looking to upgrade, migrate or implement e-mail security and archiving – moved out about a year.

“We had a lot of deals in the pipeline,” Massey said, many of which were in the area of compliance. The problem became that everyone became worried about spending.

“It’s a product that they wanted, but it wasn’t a ‘need-to-have’ right now,” he said.

Berens saw the same issues. Customers shifted focus to maintenance of current systems while compliance concerns were overshadowed by just staying in business.

“I’ve talked to our competitors, and everyone’s hurting,” he said.

What it comes down to, he pointed out, is who has the deeper pockets. Privacy Networks was in the process of seeking a second round of financing last year, but the venture capital market dried up and remains arid. Most funds are funneling money into existing portfolio companies to help them ride out the storm.

According to the MoneyTree report from PricewaterhouseCoopers and the National Venture Capital Association, venture capitalists invested $3 billion in 549 deals during the first quarter of this year – down 47 percent from the fourth quarter. The quarter marked the least dollars invested since 1997.

The software sector saw the highest amount of investment with $614 million but that’s down from more than $1 billion in the fourth quarter and $1.4 billion in the first quarter of 2008.

“We were looking for equity while all of this was going on,” Berens said.

Privacy Networks was looking for a B-round of investment to boost sales and markets while competitors were already into their C- and D-rounds.

Technology lives on

In the meantime, Privacy Networks technology lives on. Berens said that the company, technically, still exists. The office was closed and the bills were paid, and all of Privacy Networks customers still have access to the company’s technical support staff.

The value, he explained, is not only in the technology but also in its customer base.

“When they shut down, it really didn’t affect us,´ said FRII President and CEO Bill Ward. FRII has been offering and selling Privacy Networks’ products since 2006 – mostly as a hosted solution – and still does.

“Generally speaking, we’re not having to maintain the software,” he said. “As long as we don’t have a failure in the software itself, we can maintain the hardware.”

Berens said there are several discussions ongoing regarding the future of the company’s technology. He anticipates that another company or investors will pick it up. Massey spent March and some of April in Silicon Valley meeting with potential buyers.

Ward also anticipates that another company will pick up Privacy Network’s intellectual property. He said that he knew the company was having issues raising money but that the closure was a bit of a surprise.

“It was actually very sudden,” agreed Mark Forsythe, director of RMII. He also was aware that the company was looking for an additional round of funding for some time.

Forsythe is sad to see the company go, but found a silver lining in the dark cloud of the closure. He pointed out that the company employed very intelligent, talented people that have all moved on to other things already. One, he said, has started a business that might become a member of the incubator.

The closure freed up some office space for Wirsol, a solar integrator just launching into business in the United States.

Massey also saw the potential opportunity in the situation.

“The incubator is going to have failed companies,” he said, but added that there will be a dandelion effect, with the seeds of talent spreading. “My hope is that out of Privacy Network’s closure, other successful companies will evolve out of its employees.”