Opportunities in saturated sectors: Security and Social Networks

One of my first articles ever was an analysis of an old blog post written by one Marc Andreesen in which he said that the best way of being succesful was to actually begin your venture in an area which does not have many entrenched firms. Well, while that idea does make sense, keeping to it very strictly does not. Why?

Recent news has it that Facebook’s share price was overinflated. The company began trading at $38, and the share price was down to about $20 the last time I checked (which was not too long ago). Facebook, as I guess we all know (unless you’ve been living under a rock the past decade) is a 2004 start-up. It went public some time ago, with a much hyped IPO. Mark Zuckerberg actually rang a bell in the NYSE when the stock began trading publicly.

And now analysts are calling the stock too expensive. Facebook game maker Zynga reported disappointing figures for it’s last quarter and shortly after, Facebook reported a net loss of $154 million. Its user base has gone up, true, but the avenues available to it for making money off its content are declining.

Now comes a very pertinent question. How exactly does Facebook make money? It’s never sold it’s services, right? The answer? Advertising. There are two companies who’ve become super-giants by giving people good quality free services. Facebook, and of course, Google.

Right, you might say. What’s wrong with its advertising model? It’s been going great so far. Facebook was the social network to beat, and remains the top dog. Google+  remains a place for misfits and engineers, no matter the amount of “Facebook saturation” pundits predict. However, for those of you who’ve used Facebook on their mobiles, I guess I don’t have to tell you the problem. First off, the mobile interface is horrible. Second, the precious real estate there on a mobile screen does not take kindly to ads. This has lead to smaller social networks like Path gaining popularity.

Another area in which old firms have themselves entrenched is Network Security. Kaspersky, Symantec, Macafee and their ilk have been ruling the roost for quite some time now. However, a recent look by the NYTimes into this has revealed that the shares of security start-ups have skyrocketed compared to that of Facebook or Zynga. Imperva is an obscure start-up company whose shares on the NYSE were high enough for it to be counted as one of the year’s top offerings. Security start-ups Splunk and Palo Alto Networks have seen their shares rise precipitously too. And why is this? It’s because old companies with their traditional means of securing networks are simply not able to work properly any more. Amorphous threats like Anonymous cannot be repelled by old tried and tested means of securing networks any more.

Huge companies like Apple have also started taking notice of them. Apple, which has avoided big-ticket deals, agreed to acquire AuthenTec for $356 million last month in its second-largest acquisition to date. And last year, the EMC Corporation, which already owned RSA, acquired NetWitness. The price was never disclosed but people close to the acquisition talks say NetWitness sold for $400 million, more than 10 times its 12-month trailing revenue.

And what’s more, Venture capitalists have started to take notice of this. Last year, they collectively poured $935 million into tech security companies, nearly double the $498 million they invested during 2010, according to a MoneyTree report compiled by PricewaterhouseCoopers, the National Venture Capital Association and Thomson Reuters.

This tells us something. Start-ups are seen as the very bleeding edge of technology. Be it social networking or network security, or something completely and totally new, start-ups are they way to go. Do not be afraid to have a start-up in a field which has existing players, no matter how saturated it may be. If your idea is hot, someone is bound to take notice.