In its third year of mentoring and investing in cybersecurity start-ups in Northern Virginia, state-funded start-up accelerator Mach37 is starting to show it can churn out self-sustaining businesses.
Last week, the incubator pulled off its first “exit” when an alumni company called Cyber Algorithms was bought by D.C.-based security company Thycotic for a sum that wasn’t disclosed. Earlier, a $4 million investment in Manassas-based Virgil Security was the biggest yet for a Mach37 alumni company.
“I think we’re hitting our stride,” said managing partner Rick Gordon. “At the end of the day we’re only going to be able to demonstrate how effective we are by getting companies exited.”
Mach37 takes its name from the velocity needed to escape Earth’s gravitational field, a metaphor for the organization’s mission to help cyber start-ups become free-standing companies.
Virginia Gov. Terry McAuliffe (D) has said he wants to eventually transfer full ownership of Mach37 to the private sector, and new corporate partnerships with Amazon Web Services, General Dynamics and SAP suggest that the accelerator is stepping assertively in that direction. With every successful exit, Mach37’s average returns will look a little rosier to big-ticket investors and private companies, potentially making it easier to step beyond government funding.
Like many cyber-companies in the D.C. area, Cyber Algorithms traces its origins to the government intelligence community. Founder Tim Brennan was a systems engineer at Northrop Grumman and cyber-analyst for the government before founding his company with the help of seed capital from Mach37.
Brennan’s résumé — heavy on technical acumen and light on entrepreneurial experience — is typical of those selected by Mach37.
The accelerator stands out from some of its peers in that it looks for entrepreneurial novices with technical backgrounds: engineers, hackers and software developers who have never run a company before.
Managing partner Rick Gordon admits that a lack of entrepreneurial experience has made it harder for some founders to woo investors. The inherent risk built into the start-up economy means that smart investors tend to favor those with entrepreneurial experience. Second- or third-time entrepreneurs can often command huge capital infusions before they have a proven revenue pipeline, while first-timers are much more closely scrutinized.
The accelerator’s first exit comes at a time when new start-ups are having a harder time finding funding, and Mach37’s portfolio companies have been no exception. About 63 percent of its alumni have gone on to raise seed funding, down from 70 percent reported a year ago.
Those that are picking up funding tend to be on the more experienced end of the spectrum. The latest is Atomicorp, a Chantilly-based company that works to “immunize” computer systems operating in cloud-based environments and allow them to automatically patch themselves up after incidents.
Founder Michael Shinn was a cybersecurity analyst in the Clinton administration who later founded and sold his own company. Atomicorp already has about 2,000 paying customers and generates projected annual revenue of about $1.2 million. Last year, Shinn turned down a $10 million buyout so he could continue expanding his company.
On Tuesday morning, the company announced a $1 million investment from local angel investment firm Blu Venture Investors.
Steven Chen, an angel investor with Blu who helped fund both Atomicorp and Virgil, says that the typical Mach37 team’s lack of entrepreneurial experience has made it harder to close deals but that he sees improvement.
He recounts abandoning a once-promising investment in one of Mach37’s alumni companies after the company fired a newly appointed chief executive, leaving the business in limbo.
“We like [Mach37] a lot, but we had trouble making deals because some of the those entrepreneurs were inexperienced in making money,” he said. “It’s all about a learning curve for them, for the program and for customers. They are slowly getting there.”
Mach37 appears to be sticking with its early selection strategy, opting for leaner enterprises that don’t do a lot of advertising.
A founder’s relative inexperience might make it harder for the average start-up to find capital, Gordon says, but the so-called unicorn companies that employ thousands of people are usually created by founders who have technical expertise.
He points to a few local success stories in which technologists were able to build successful companies without any prior business experience: Tenable Network Security founder Ron Gula, Mandiant founder Kevin Mandia and Sourcefire co-founder Martin Roesch.
“If you look at the start-up ecosystem it’s extraordinarily rare to have a [$1 billion company] where you didn’t have technical founders directly involved in setting the business direction,” Gordon said.