VentureBeat

Bracing for the downturn, Palo Alto Networks has added $10 million to the third round of financing it announced in August.

Lane Bess, chief executive of the enterprise firewall and security firm, raised $27 million just a few months ago but felt it was prudent to raise more. He said that the company was taking the advice of one of its venture capital investors, Sequoia Capital, which advised clients to hunker down in a now-famous presentation entitled “R.I.P.: Good times.”

Bess attended the Sequoia presentation a few weeks ago and felt he should “top off” the company’s funding, based on the expectation that customers will delay purchases and it will take longer to get to breakeven in the worst-case scenarios that are becoming more likely by the day.

“I wouldn’t say I saw panic in the room that day, but I did see fear,” he said, speaking of the Sequioa meeting. “I did not interpret the message as we should all run for cover. I took it as meaning that we should all invest our money wisely.”

After the Sequoia meeting, Bess called an all-hands meeting with all of his 100 employees. He told them they wouldn’t have to worry about the startup having enough funds.

Bess said the new funding would give the company about 2.5 years of cash, based on its worst-case analysis. Bess said he hadn’t planned on new funding, but decided to do so after a discussion with his board members. The company turned to investors that wanted to participate in the late August funding but could not do so.

Bess approached those firms again and asked if they wanted to invest. JAFCO Ventures, Japan Asia Investment Co., and Northgate Capital agreed to invest $10 million. Best said he decided not to go to existing investors such as Sequoia because he wanted diversity among investors. This kind of decision-making is no doubt happening at many startups in Silicon Valley.

Although Palo Alto Networks had to give up more ownership of the firm to get the money, Bess calculated that the vote of confidence from the investors and the reassurance for both employees and customers was worth it.

“This is money we could have gotten when we closed the earlier round, but we decided not to take it then because we didn’t feel like we needed it,” Bess said. “For our employees, I wanted to take fear out of the picture so that they could focus.”

Palo Alto Networks, based in Sunnyvale, Calif., has more than 100 enterprise customers for its next-generation firewall products. The firewalls of the past have been designed to stop threats coming in from emails and web sites. But as employees adopt new web-based services — instant messaging, Skype, and Salesforce.com — they open up the networks to new threats. That’s where Palo Alto Networks’ firewall appliances come in.

Instead of offering generic firewall protection, Palo Alto Networks’ PA-4000 family of products can set corporate firewall protocols on more granular levels so that each user has a distinct set of permissions on a network. As a tool, it gives network administrators more control by letting them see all applications on a network and which users are installing unauthorized or personal applications on their work machines.

The hardware devices have enough speed to filter the traffic without slowing down a network. They range in price from $12,000 to $80,000. Competing products often don’t give detailed information that can help IT managers make quick decisions about what users are allowed or not allowed to do.

With the new funding, the company’s third round is about $37 million. Altogether, the company has raised $64 million since its founding in 2005. The strong backing is good for Palo Alto Networks at a time when markets are slowing down. One reason is that other startups trying to do the same thing may not be able to raise funding to match the company. On top of that, would-be rivals at big companies such as Cisco might decide not to expand into the firewall market.

Bess said that the assumptions of how fast sales would grow must now be reassessed. Some customers have actually accelerated their purchases in order to comply with regulations before the end of the year, Bess said. Others have delayed purchases. But so far, no one has canceled outright.

It’s interesting to see that, in the face of the downward trend, the company is still preparing for expansion. Some companies have responded to the Sequoia presentation by slashing their payrolls But Bess said his plan for 2009 still calls for growing the employee base by about 20 percent.

Next Story: Tesla absorbs another $40M to keep the motor running
Previous Story: MindTouch shows good revenue growth

Tags: co:Palo-Alto-Networks, inv:greylock-partners, inv:JAFCO-Ventures, inv:japan-asia-investment-company, inv:Sequoia-Capital