Firm formed to invest in cybersecurity

Three Maryland businessmen have formed a new investment firm focused on acquiring or backing local cybersecurity businesses.

Catonsville-based Maryland Cyber Investment Partners is hoping to capitalize on the region's swell of cyber-focused businesses, setting up shop near Fort Meade where the government is establishing the U.S. Cyber Command and moving the Defense Information Systems Agency. Its founders said the firm is prepared to financially back or even acquire small, proven businesses and has $25 million in committed capital from about 20 investors.

Managing partner Joe Tedesco, trained as a software engineer, sold his information technology business, Architech, to Navigant Consulting in 2006. By 2008, he was managing partner at Potomac Investment Partners and taking advantage of the economic downturn to invest in real estate companies, data centers and privately owned businesses. Based on his research, investing in cybersecurity was an obvious choice.

He's teaming with Larry Letow, president and chief operating officer at Glen Burnie-based Convergence Technology Consulting, and Art Jacoby, who owns a small-business consulting firm in Catonsville.

The firm is seeking Maryland-based small businesses that already have a cybersecurity-related contract or two in hand and some operating history. The businesses don't have to be profitable, Tedesco said.

MCIP is prepared to take a minority stake in a company, acquire it in full or consolidate companies if it makes sense, said Tedesco and Letow, who emphasized that the company wants to also offer guidance.

For instance, they said they might recommend that smaller businesses consider the commercial market and transform the way they market services provided to the government into products they could sell to businesses.

MCIP, which is close to completing its first transaction, is operating on a deal-by-deal basis and has not raised a fund.

"If we don't find deals that are appropriate, then I don't want to feel obligated," Tedesco said.

The firm is also looking to hire people who might be able to supplement or replace management teams, said Letow.

The investment firm enters a competitive market, in which large firms as well as private-equity groups have been acquiring or backing smaller cybersecurity firms.

"There's no hotter market right now in [mergers and acquisitions] than cyber," said Robert D. Rodriguez, chairman of the Security Innovation Network, a group founded to encourage cyber innovation and public-private collaboration. He counted 68 transactions in 2010 worth more than $15 billion.

Philip Eliot, a principal at the D.C. private equity firm Paladin Capital Group, which counts cybersecurity as one of its primary investment focuses, said competition over cybersecurity firms is fierce, meaning potential investors have to offer more than simply cash.

It's about "how can you help the company accomplish its goal . . . in ways that aren't just about the funding itself," such as providing strategic guidance or introducing companies to potential customers or partners, he said. "When they've got options, we've got to convince them we're the best partner in building their business."

Rodriguez said investors will likely have to look at increasingly young companies.

"The challenge we're going to face is all the emerging good companies have basically been bought up or are going to be bought up in the near future," he said.