Agencies' homeland security spending may bolster high-tech sector

Innovative homeland security products could enable some investors to buck the downward trend in the general high-tech sector, several venture capitalists said Tuesday.

"I contend that security investments are holding their own and are escalating," Michelle Kraus, founder of Accelerator Group, said during a conference sponsored by the Council of Security and Strategic Technology Organizations.

Kraus, who moderated a panel discussion on security-investment trends and opportunities, said "investments are being made every day" in firewalls, authentication technology, routers and other technology products that could help protect critical infrastructures and information networks.

Other promising investments opportunities include scanning devices, detection systems and information management applications, Kraus said. She also pointed to wireless and handheld devices as a "burgeoning area" for security investments.

"The bottom line is, there are opportunities for investment in security technologies and services," Kraus said. "There's money being spent in these areas."

Since the Sept. 11, 2001, terrorist attacks there have been 66 mergers and acquisitions involving companies that are developing homeland security technologies, according to Richard Phillips, vice president of Houlihan Lokey Howard & Zukin, a Los Angeles-based investment firm.

"This is where the dollars are flowing," Phillips said. "This is one of the few industries where we're actually seeing an active market [for initial public offerings of stock]. And the IPOs have, for the most part, performed extremely well."

But Kraus cautioned that the security markets are large and diversified, without a clear leader. "The question is, how do you decide which companies [to fund]?" she told potential investors. "Choose carefully as you go forward-because there's going to be a lot of consolidation."

Private venture-capital firms are not alone in their careful quest for promising security technologies. Small startup companies that might not appear on the larger firms' radar screens-and have never done business with the government-might find a potential investor in In-Q-Tel, a strategic venture-capital arm of the CIA that serves as a "catalyst" for emerging technologies.

"We're on the lookout for interesting technologies that could help solve agency problems, and we've got money to spend," said Kim Cook, In-Q-Tel's director of Technology Assessments. "Typically, we're looking at early-stage companies with commercial technologies that are of value to the agency."

Cook said other federal agencies have shown "great interest" in adopting the In-Q-Tel model. She said the Army, for example, recently issued a broad agency announcement to hire a venture capital-type firm to speed development of technologies to meet the Army's specific needs.

Cook said she expects that trend to continue within the Defense Department and the proposed Homeland Security Department. "But it's not a one-size-fits-all approach," she said. "Different agencies have different needs."