June 25, 2010

ControlScan Raises $3.5 Million

E-commerce security provider raises capital

An Atlanta-based e-commerce Web security firm that helps keep your credit card away from prying eyes has raised $3.5 million.

ControlScan Inc. provides software-as-a-service that scans small-business websites and point-of-sale systems to ensure they’re compliant with credit and debit card security standards.

While ControlScan’s software identifies security holes and alerts merchants to problems, it does not provide remediation services.

Thanks to high-profile online security breaches and privacy blow-ups, startups focused on protecting consumers’ financial and personal information are drawing interest — and dollars — from blue-chip venture firms, including Accel Partners and Kleiner Perkins Caufield & Byers.

Truste, which offers seals of approval to websites that meet certain privacy standards, raised $12 million earlier this month, The Wall Street Journal reported June 21.

Also, online privacy startup ReputationDefender Inc. raised $15 million in new venture funding, the Journal noted.

The online commerce market and the need for security within that market, is significant, said Sean Banks, partner at Atlanta-based Total Technology Ventures LLC, a ControlScan investor.

“You’ve got more people out there transacting online, you have more people offering their goods online,” Banks said. “The fact that online environment is relatively new in terms of the application of security for payment card acceptance, it becomes fraught with more vulnerability to fraud.”

The $3.5 million that ControlScan raised from Harbert Venture Partners and Croft & Bender LLC will help the company further penetrate the North American market and launch new security-related services, CEO Joan Herbig said.

“Initially, we will be expanding our presence in North America,” Herbig said, noting the company currently sells in the United States and Canada.

Tapping the under-served

To grow its geographic footprint, ControlScan plans to expand its workforce by nearly a third, to more than 60 employees. The company, which has raised about $10 million so far, is relocating to roomier digs next month — growing from about a 6,500-square-foot office to a nearly 10,000-square-foot facility.

ControlScan’s subscription model is attractive to investors because it provides predictable and recurring revenue.

The company gets paid a monthly fee from its bank clients, based on the number of its merchants who use the security software. ControlScan, which does not disclose revenue, expects to break even this year.

ControlScan’s focus on small and mid-sized merchants allows the company to tailor its products for a large, under-served and time-sensitive market, Croft & Bender Managing Director Steve Tye noted.

Control Scan is servicing the 6 million small businesses in North America — a market that exceeds $300 million annually, Herbig said.

“[We] are one of the top three players in the marketplace servicing the small merchants,” she said. “We expect to be probably in the 10 to 20 percent penetration range over the next six to 12 months.”

The market is relatively under-served because it’s difficult for some of the larger security providers to effectively sell into that fragmented group, Total Technology Ventures’ Banks said. The venture firm has invested about $7 million in ControlScan.

The small-business market requires a specialized level of service, Banks said. The revenue generated from that market, he added, also doesn’t make it as economically attractive for the large security players.

In 2008, ControlScan shifted its strategy away from marketing directly to individual retailers and aimed at selling to merchant banks, which typically have thousands of merchants in their portfolio.

“When you have 6 million small merchants available,” Herbig said, “you want to try to find a very efficient channel to market.”

Read more: E-commerce security provider ControlScan raises $3.5M - Atlanta Business Chronicle

ControlScan has relationships with more than 80 merchant banks that, combined, give it access to more than 300,000 small businesses.

The company’s growth strategy involves signing on new customers and selling additional services to current small-business customers.

One of the biggest operational challenges will be to grow ControlScan fast enough to keep pace with demand, Herbig said.

Another challenge is to stay abreast of changing security standards and delivering software that can be easily adopted and used by small merchants, she noted.

ControlScan Inc.

Background: The Atlanta-based e-commerce security services provider scans small-business websites and point-of-sale systems to make sure they’re compliant with payment card security standards.

In the news: ControlScan recently raised $3.5 million from Harbert Venture Partners and Croft & Bender

Employees: 46