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Webroot's Spyware Challenge

It was a crisp Colorado morning in February, 2004, and David Moll was rushing into the office with the anticipation of a kid on Christmas morning. His company, Webroot Software, had launched a new Internet security product called Spy Sweeper almost a year earlier. The software was slowly getting traction -- welcome news for a small company that had been teetering on the brink of insolvency.

This day he was spurred on by especially promising news: Spy Sweeper had just been named Editor's Choice by PC Magazine in one of the earliest articles on spyware, the onerous nuggets of code that hide on computers, capturing sensitive financial data or popping up unsolicited ads. Moll was met at the door by his head of Internet sales, David Dunn, who conveyed even more good news: By 7 a.m., Webroot had already exceeded its average daily online sales of $10,000.

"We did three times our average online sales that day, and it never came down," Moll says. "That's when I knew we had a tiger by the tail."

SPYWARE BLOCKBUSTER. Momentum has grown with the proliferation of spyware, a particularly stealthy tool often used by hackers to make a buck. Spyware emerged this year as one of the biggest online threats, according to a recent report by Sophos. Malware -- which includes any type of malicious code -- increased 48% overall, and spyware represented more than 60% of attacks. Tools used to combat spyware have generated about $300 million in sales this year, three times the total for 2004, according to researchers. Webroot has profited perhaps more than anyone.

Spy Sweeper is also selling well offline. The product has been a force in big retail chains like Best Buy (BBY) and Wal-Mart Stores (WMT) -- nudging aside such giants as Intuit (INTU), Symantec (SYMC), Microsoft (MSFT), and Electronic Arts (ERTS) to become the top-selling software for PCs in October, according to researcher NPD Group. It has remained in the No. 2 slot since, second only to Symantec's Norton AntiVirus 2006 (see BW Online, 11/9/05, "Webroot Takes Root"). Over the crucial long weekend following Thanksgiving, Webroot sold more than 150,000 boxes.

The blockbuster product has helped the company accomplish two feats that are rare in today's software world. Webroot has carved out a thriving Internet security business among stalwarts like Symantec, McAfee (MFE), and Microsoft. What's more, it has built a formidable retail presence at a time when shelf space for software products is shrinking, as more vendors rely on Web distribution.

BIG BACKERS. Next year, Webroot could pull off a third anomaly: a software IPO that generates healthy interest among investors. Only two venture-backed software companies went public this year, the fewest since at least 1992, according to venture-capital researcher VentureOne. That's down from a measly four software IPOs in 2004.

An initial share sale is certainly on the wish list of some venture capitalists who parked $108 million in the company earlier this year, as well as the investment bankers who have swarmed the company since mid-2004. In fact, bankers from Morgan Stanley (MWD) and JPMorgan Chase (JPM) helped recruit Webroot's chief financial officer, Michael Irwin, who served as CFO of anti-spam company Brightmail before it was sold to Symantec for $370 million in 2004.

Webroot is now in a stronger position to go public than Brightmail, which had filed to go public by the time it was acquired, Irwin says. With more than 300 employees, Webroot has for three years generated more than enough cash from day-to-day business to cover operating costs, making it cash-flow positive. Moll says the company is close to $100 million in annual revenues, though several analysts have pegged revenues closer to $50 million.

WASHING WINDOWS. Either way, the numbers are impressive. (CRM) had $98 million in sales when it hit the market in 2004, becoming one of the most successful software IPOs in recent history -- the shares jumped to $17.20 from $11 on its first day of trading. Robin Vasan, of venture-capital firm Mayfield, thinks Webroot could rank among his biggest hits. He recalls convincing fellow partners to back Webroot: "I'm not a very emotional guy, but I pounded the table very hard to say this is one of those deals you don't see very often in your career."

But as the company nears this milestone, it's facing some big challenges. Symantec and McAfee are finally releasing their own spyware products, and Microsoft has released an early anti-spyware product for free. That threatens to commoditize Webroot's lucrative consumer market (see BW Online, 12/1/05, "Norton Gets a Bit Less Secure"). Webroot is trying to build on its early success with consumers by making a play for the corporate spyware market, following the lead of companies like Intuit and Microsoft.

Webroot and Moll are no strangers to long odds. The outfit was started seven years ago by Steve Thomas and his girlfriend, Kristen Talley. Hoping to make enough money to buy a new car, the two wrote a precursor to Spy Sweeper, called Window Washer. It helped clean up anything inadvertently downloaded to make Microsoft Windows run faster and more smoothly. The company grew rapidly until it plateaued at about $3 million in annual sales in 1998. That's where it stayed until they met Moll in 2001.

LIVING DANGEROUSLY. Moll, a onetime factory supervisor in Brownsville, Tenn., took a circuitous route to becoming a high-tech exec. He spent weekends getting an MBA from Northwestern University's Kellogg School of Management, then took a job with Electronic Data Systems (EDS) in Boulder, Colo.

Fresh from a heartbreaking experience as a founder and investor in a startup called DataPlay -- which hoped to cash in on the online music craze and burned through $120 million in the process -- Moll did a trial run as Webroot CEO, before the founders hired him in April, 2002.

But by late that year, just 90 days before the release of Spy Sweeper, the company almost went under. It had three, roughly equal revenue streams: direct sales over the Web, retail sales, and sales via America Online's (TWX) Shop Direct store.

GOING GREEN. AOL closed the site down, and one-third of Webroot's revenues were gone overnight, leaving the company in a cash crunch. Moll and the founders stopped taking paychecks, and managed cash on a day-to-day basis. In March, 2003, Spy Sweeper was launched. It started winning awards, and the company's fortunes revived.

In addition to growing sales online, Webroot was finally getting the attention of national retail chains. It made a risky move of recasting all of its products in green boxes to create a signature Webroot look, similar to Symantec's yellow boxes and McAfee's red boxes -- despite the early objections of some retailers who hated the color. The surging sales show consumers weren't put off.

In another well-timed move, it struck a deal with tech-support groups at big retailers like Staples (SPLS), Circuit City (CC) and Best Buy. Today, these specialists recommend Spy Sweeper to consumers with infected computers. The strategy generates four times as many sales as regular customers picking it up off the shelf, according to the company.

ENTERPRISE ENDEAVOR. Finally, by late 2004, Moll and Irwin had a story to take to investors. The $108 million investment by Technology Crossover Ventures, Accel Partners, and Mayfield was one of the largest deals of the year -- not to mention an unconventional one: A significant amount went to cashing out the founders, so Irwin and Moll could have more control over the company's fate and the new investors could hold a bigger stake in the company.

Yet, in Moll's mind, another big challenge remains before Webroot can go public: It needs to see predictable, steady growth among business customers. Webroot released its enterprise product in June, 2004. The software now runs on 3 million desktops, although revenues are still dwarfed by the consumer business. The company doesn't disclose a breakdown.

Some analysts remain skeptical. Webroot is up against companies that sell a wider range of products at a time when corporate customers want one-stop software shopping. Andrew Jaquith, of market researcher Yankee Group, did a survey of 500 businesses and found that only 2% use Webroot. "Why trust security to a little company that's not proven to work at enterprise scale?" Jaquith says. "I think they're stuck between a rock and hard place."

AT A CROSSROADS. Others argue that, because of the stakes involved, companies are more willing to go with the best product when it comes to security -- even if it's a hassle. That means Webroot will have to maintain its innovation lead over competitors and prove that its software catches threats that other software doesn't.

Consider one of Webroot's early customers, Guidant (GDT). Richard Snyder, desktop system administrator for the medical-device maker, says he's happy with Webroot, which provides better technical support than bigger vendors. Still, he continually tests the software against other products. So far, Webroot still comes out on top. But if that changes, he'd consider switching to another vendor.

That puts Webroot at a crossroads: Sell to a bigger rival, buy up other companies to fill out a product line, or continue to take chances by doing one thing well. It's a choice that has left a lot of predecessors stalled or dead in their tracks. Webroot has already turned down acquisition offers that it didn't deem lucrative enough. Don't expect it to idle here for long.

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