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For Cybersecurity Startups Raising Cash, Customers Not Required

Cybersecurity startups are reaping tens of millions of dollars in funding despite a lack of big customer contracts, raising the likelihood of a shakeout in the years to come.

The valuations being placed on some of the most high-profile startups in the sector—often higher than $200 or $300 million—might not seem eye-popping in an era where many consumer Internet startups are commanding multibillion-dollar prices without much revenue.

But to many people in the security industry, the current frenzy looks like a race among startups to position themselves for a future windfall even before their products are validated by customers. The assumption by these startups is that successful—and costly—hack attacks will continue unabated and corporate security budgets will increase markedly.

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Meanwhile, some longtime-private companies have been able to turn things around. OpenDNS, an eight-year-old firm that develops a cloud-based software to monitor and secure all the devices that a customer’s employees use to connect to the Internet, now seems to be on track. Its revenue is expected to exceed $25 million this year and that revenue is subscription-based, meaning it is recurring and is more valuable than non-recurring revenue booked at other security firms.

With enough funding, sometimes firms can figure a way out of trouble.

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One longtime security product salesman likened the security startup rush to “Field of Dreams,” where the attitude is, “if you build it, they will come.”