New kids on the Czech tech block

By bne IntelliNews February 1, 2013

Nicholas Watson in Prague -

If AVG Technologies and Avast Software (as well as ESET in neighbouring Slovakia) are the senior members of the cyber-security fraternity in Central Europe, then Cognitive Security is the new whizz-kid on the block. Such is the company's promise that it's being eyed by global technology firms.

Started in 2009, Cognitive Security was a spin-off out of Prague's Czech Technical University (CTU). Michal Pechoucek, one of Cognitive's founders and its chief strategy officer, explains that while it might not have been the first spin-off from that venerable institution, it was the first that was not a shared-equity structure but used a licensing model, where the university receives a royalty fee from the sales of the products that are based on the technology.

The problem with giving the university a stake in the company, Pechoucek explains, would be that any company decisions have to be reviewed by various committees, making strategic moves a bureaucratic and slow process; a licensing agreement removes that problem. "We are nearing the second round of financing, but if we were in a shared-equity structure with the university, we probably wouldn't have approved the first round yet," says Pechoucek.

That first round of financing came from local venture capitalists Credo Ventures, which in April 2011 invested in return for a stake in Cognitive a reputed €1 million out of its Credo Stage I Fund, which targets early-stage technology companies in the region, primarily from the Czech Republic and Slovakia.

For Cognitive it was not just about the money. Cognitive founder and CEO Martin Rehak says it's one thing to a have a good idea, another to successfully commercialise it. "Credo have been textbook seed investors. They invested in us to bring a product to the market, to advise us on the more strategic issues, and we are now looking for more investors," says Rehak. "Credo identify the golden nuggets hidden at the universities or from the spin-offs, and they help them to grow much faster than they would be able to grow on their own."

Vladislav Jez, a partner at Credo, says his venture capital firm also used its longstanding relationships in the industry to beef up Cognitive's management board. Karel Obluk (previously CEO and CTO at AVG) is now a board member, as is Richard Seewald, a partner at Zurich-based global private equity house ALPHA Associates, who also sits on AVG's board. The founders of Avast, Eduard Kucera and Pavel Baudis, are investors in the Credo Stage I fund, so are indirectly investors in Cognitive.

So what are such luminaries, and increasingly foreign tech giants, so excited about?

A stranger in our house

Cognitive's technology first came to the attention of the US military, which was interested in its ability to monitor internet traffic for anomalies that could signal that a system was being hacked. "It's like we are acting as the immune system of a network that finds strange or non-typical things in the body and these are highlighted," says Rehak.

At first, Rehak explains, only military or government institutions were interested in such technology because they were the only ones being hacked at such a level. However, over the years industrial hacking has grown to a point where it has become a problem at all levels. "This problem has become much more widespread and is now a standard issue for the networks of companies, both big and small," he says. Until now, network security has primarily focused on securing the perimeters of networks, but "even if the door is locked, someone can get through the window and we can detect that," says Rehak.

This opens up lucrative new possibilities for a $10bn-15bn industry that has, to some degree, been commoditised. "Cognitive Security is in an interesting space, as the evolution of malware and malicious threats go well beyond the perimeter (handsets and PC) and now deeper into the network where valuable IP and specific disruption of business functions is targeted by hackers," says ALPHA's Seewald, whose Swiss-based private equity firm has more than $2bn invested directly in Central and Eastern Europe. "Cognitive offers security as a service platform which is scalable and protects against these advanced variations of malware for large corporates, government and small business where I believe vulnerability will be the greatest in the coming years."

Rehak highlights the fact that by being more intelligent, "we can be less intrusive, respect the privacy of the data in the network and work solely with the statistics - this is something Europeans feel very strongly about," he says.

Rehak says Cognitive's "magical ingredient" is the quality of the people it can hire from a pool that is being constantly refilled by the Czech and the region's technical universities. "We have a great team, the core of which is Czech, Slovak and Ukrainian, that is surely in our field one of the best in the world."

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