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    Shannon Henry's The Download Live
    Discussion With Data Security Expert Steve Walker

    Thursday, June 24, 1999 at 1 p.m.

    Shannon Henry Welcome to The Download Live. I'm your host, Shannon Henry. My guest today was Steve Walker (below, left), former CEO of Trusted Information Systems.

    Steve Walker Walker spent 22 years working in various divisions of the Defense Department before starting Trusted Information Systems (TIS), a Maryland firm that made headlines by leading the effort to design encryption technologies that could be legally exported. TIS went so far as to set up European offices to develop encryption products that can't be exported from the United States.

    "The national security interests, which I understand and believe in strongly, wish things were the way they were 20 years ago," says Walker, "and they are not."

    TIS was acquired last year by Network Associates Inc., a fellow computer security firm. Walker's current business, Walker & Associates, is a hybrid of a venture capital firm, a technology consulting business, and as the money is all Walker's a private $5 million "angel" investment fund.

    Transcript Follows

    Shannon Henry: Hi Steve! Let's get to the questions. Can you start off by telling us how you decided to start your current firm? Tell us a little about it and how you made the transition from a big-company CEO.

    Steve Walker: Hi, Shannon. As the sale of TIS to Network Associates was closing a year ago, several of us from TIS decided we would like to help new Internet startups get past some of the early stage difficulties by offering both investments and consulting in all stages of company development from human resources to sales and marketing to business strategy. To date we have invested around $3M in 15 companies and are having a ball! I have found the transition to be very easy. I am involved with lots of new exciting ideas without having to deal with the million details of running a public company.

    Shannon Henry: Coincidentally, I just got off the phone with one of your investee company CEOs, who said you're "awesome." Obviously you give them money, but what else? What kind of advice do you find they need?

    Steve Walker: I think the ability of our team to work closely with the companies helping with whatever the problem of the day is, is what makes us valuable to them. We help folks figure out how to sell their brilliant idea, we help them work through HR issues, find the people they need, and give them general business strategy advice. Working closely with them like this is a lot of fun as well.

    Atlanta, GA: What are the key things a Venture Capitalist seeks when reviewing business proposals?

    Steve Walker: At the early stage level that we work at, we look for a committed team with a unique idea that looks like it can make a big difference. At this stage, every team is incomplete and every idea needs lots of work. The trick is to find a team that knows its strengths and is willing to listen to advice on how to fill in its weaknesses. If we find such a team, anything can happen.

    College Park, MD: What kinds of companies do you "mentor?" Any that a regular old techno-joe would have heard of?

    Steve Walker: Our focus is on Internet related companies, mostly in the software space. The ideas generally are pushing new frontiers but aren't too far out. One of our companies is building a Latin American portal for financial information. Another is building software systems to all biometric identification (fingerprints, voice, facial recognition) to be extended to large corporate networks. Others are building techniques for recognizing copies of digital images for trademark or copyright infringement. One of our favorite companies is building collapsible lacrosse goals.

    Washington, DC: With more powerful computers being developed every year and the emergence of projects that utilize the Internet to allow many remote PCs to work on cracking encrypted messages, do you think encryption will be superceded by some new technology?

    Steve Walker: Cryptography is an age old technology for hiding information. It has always been a cat and mouse game between the encryptors and the code breakers with occasionally dramatic successes on one side or the other, such as in WWII. Crypto will not be superceded, instead we will keep building stronger algorithms with longer key lengths and more powerful ways to break codes. This can and almost certainly will go on forever.

    Shannon Henry: How does a start-up know it's even ready to look for venture capital?

    Steve Walker: Startups almost always start with funding from friends and families. Many times this can carry them quite a ways but eventually they will need outside funding. Usually the first place they turn is to private investors, folks like those in the Private Investors Network. From there they hopefully with graduate to real VC rounds. The key to this is to ask for the right amount of money at the right time. Many people simply state that they need $5M to keep them going for 3 years. What they actually need is $200K for 6 months followed by $500K for the next 6, followed by ...
    They are more likely to get the funding in smaller increments and they will end up owning a lot more of their company by taking smaller amounts early on. This is one of the most important concepts that early stage companies over look.

    Arlington, VA: A friend of mine recently completed a master's degree in computer science with a focus on encryption and security technologies. She's being wooed by both the Dept. of Defense and a very wealthy bank--of course, the latter can offer her a huge salary and other incentives while the government job cannot. She's torn, because she thinks she can do more "good" working for the DoD, but is really having trouble turning down a six figure salary and stock options at age 31. I see this kind of stuff all the time--talented computer professionals eschewing government jobs for high-paying private industry positions. How will the government cope? Could this trend imperil national security?

    Steve Walker: I firmly believe that the government, especially the DoD, is a great place for people to start their careers to get a solid foundation, and then go into the private sector. I spent 20 years (during college and beyond) at NSA, then DARPA, then at the Pentagon. Then I started TIS and now SWA. Those early years were a great foundation that has had a profound effect on everything else I have done. You don't need to stay there 20 years but in the right position, a government career is a wonderful starting point. And who knows you may love it and stay on forever.

    Arlington, VA : Once you've financed and mentored a company that then is ready to go out for big "institutional" venture capital, do you advise the entrepreneur or actually make the introductions to the large VC firms -or some combination-?

    -- John Casey, Caucus Systems

    Steve Walker: We have only been at this for the past year but already several of our companies are going for a bigger round. We know a lot of folks in the bigger funds and have provided intros and helped get larger rounds. At each stage in the chain, your current funding source should be active in helping you get to the next level.

    Washington, D.C.: Steve,
    How much of your company do you typically have to give up during your first round of funding?

    Steve Walker: This is the classic question and relates to my earlier answer on when and how much you should take. By taking smaller rounds early you can retain more equity to use later when your company is worth much more. If you have a well developed idea that is moving toward a working prototype, you company may be work $1-2M. If your first funding is for $100K-200K, you are giving up around 10%. If your first funding is for $1M, you may be giving up half. Don't do that, soon you won't own enough equity to motivate you and your team. Most early investors only want a small stake so that the team remains highly motivated.

    Shannon Henry: What are the hardest parts of starting a business? Any big-picture advice?

    Steve Walker: Once you have a good idea (thats the hardest part), getting a good team to make it happen quickly is critical. Here, you need to understand your strengths and shortcomings and find people who can complement you where you need help. Find the very best folks, ones that are better than you are at what they do, and give them the authority to do their jobs well. No body can do everything well. When an early stage company can't move past the initial idea folks, it is going to have trouble succeeding.

    College Park, MD: I know some banks are starting to employ iris-scanning ATMs, but how long do you think it will be before we REALLY start to see biometrics in everyday life?

    Steve Walker: For replacing passwords and tokens in ordinary computer systems, biometrics will be very popular within the next two years. Watch this space!

    Washington, D.C: Are venture capitalists still interested in putting money into e-commerce companies although the "hype" might be dying?

    Steve Walker: I don't seek the hype dying. Ecommerce is a hugh space with lots of innovation still to be done. Big companies are swinging into this space (they have to to survive) and they are often looking for new startups to show them how. There is plenty to do here for a long time to come.

    San Diego, CA: At the end of 1998 the law governing the export of encryption changed, some would say, dramatically. Making it easier for companies to export stronger encryption products.

    The pendulum in Congress seems to be swinging back the other way -Cox Report, Satellites going back to DOC-. What regulatory changes do you foresee?

    Steve Walker: The crypto export problem is one of the most difficult public policy issues we as a society face. I think the series of relaxations of crypto policy over the past few years show that the government is listening and trying to work out solutions with industry. This trend will continue. Industry will never be fully satisfied and some folks will always say we are giving away too much. I think the gradual change is far better and more likely than any dramatic shifts,

    bethesda, MD: If you were to start a new data security company today, what niche would you seek to fill?

    Steve Walker: If I knew the next niche, I would go off and do it instead of investing in others. I think biometrics is clearly a space who's time has come. The tough job in security now is integrating all the technologies we have evolved over the years into something that is easy to use as part of gigantic networks. Maybe the major break through ideas are already here, we just have to figure out how to make them work together. I'm not sure.

    Shannon Henry: What's the most unusual investment you've made...something you wouldn't have even imagined a year ago?

    Steve Walker: This one is hard. I feel like every investment we have made is unique in one way or another. I never would have thought I would be helping make lacrosse goals that people can carry around in their cars. This is truly a wonderful time to be coming up with new ideas and especially wonderful to be helping make them happen. Keep them coming!

    Shannon Henry: Thanks Steve for the great insight into the venture capital and encryption worlds. And thanks for all the good questions. See you all in two weeks. Bye!

    © Copyright 1999 The Washington Post Company

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