Investors Look to Security Sector –

SAN FRANCISCO – While the recent terrorist have left little cause for economic optimism, some venture capitalists believe that the attacks may encourage increased investment in the network and electronic security sector.

“Through a loss of innocence, it’s increasingly clear that there could very well be hostile forces out there, and one form of that terrorism could be electronic. Defenses against that terrorism could be electronic,” said John Repko, a principal with Vista Ventures in Colorado.

The electronic security sector – one that includes everything from facial and iris recognition systems to smart cars to secure online payment systems to network-wide defenses against computer hackers – witnessed a boom following the recent rise in consumer usage of the Internet and e-commerce services. Companies like Guardent Inc. and Visionics Corp. have raised more than $1.9 billion in the last two years from venture investors like Charles River Ventures, InterWest Partners, New Enterprise Associates and Sequoia Capital.

The need to closely monitor electronic communications, and to provide those services to government or military agencies, may drive a new boom in the sector.

“Perhaps there will be more opportunity in the security space, and companies selling to the military will have more demand,” said Ken Elefant, senior associate with Silicon Valley’s Lightspeed Venture Partners.

Indeed, companies in the sector already are prepping for a new round of interest on the part of private equity investors. In Fairfax County, Va., a region just south of Washington, D.C. and home to telecommunications giants like Nextel Communications Inc., the local economic development authority is working to lure young companies that might develop ties with the government.

“[Tuesday’s events will have a potential upside] for our Fairfax County companies who do security and intelligence work for the federal government…our economy will go on. It has momentum,” said Gerald Gordon, president and chief executive of the Fairfax County Economic Development Authority. The region is home to network security players like CounterPane and ParaProtect, both of which maintain a mixed roster of corporate and government clients.

Meanwhile, the events of Sept. 11 have brought the private equity market to a near-standstill. When a normal pace of investment resumes, however, investors seem ready to carve out a slice of what may be one of the few sectors to sustain the compounded impact of the World Trade Center’s and the Pentagon’s collapse, and possibly prevent another one.