A week before it was to make its pitch for funding at the Venture 2002 conference, high-speed encryption technology company CipherOptics has completed a deal for $5 million in venture capital.

Kodiak Venture Partners of Concord, Mass., has provided CipherOptics with its first institutional funding, and Kodiak partner Ilan Carmi will join the company’s board of directors. Founded in August 2000, CipherOptics had been funded by founders Mike Doss and Dennis Toothman until now.

CipherOptics, which has been in operating so stealthily since its inception that its website didn’t go online until 15 minutes before it announced its funding Monday afternoon, plans to unveil its first product at trade shows in Las Vegas and San Jose, Calif., next month.

The CipherOptics Security Gateway can encrypt data passing through a network at gigabit speeds, allowing companies to secure all of their data without compromising the performance of their network, company spokeswoman Barbara Capone says.

Existing encryption devices don’t work at such high speeds and cost much more, she says, adding that CipherOptics’ appliance also works on both major security protocols now in use: SSL and IPSec.

“Our engineering team is the core of the company, and they bought the best (hardware) of what was out there and used their background to develop the system that runs it and create a high-performance product,” she says.

Security a ‘hot issue’

The team was assembled by Doss and Toothman, who have extensive experience in the network security industry. President Doss formerly worked at Nortel Networks, IBM and Siemens, while Chief Technology Officer and Vice President of Engineering Toothman worked at Celotek, an MCNC spinoff that was sold to Cylink for $21.5 million two years ago.

A recent report by market research firm IDC says sales of Internet security software soared 18 percent, to $6 billion, in 2001. The market should hit $14.6 billion by 2006, IDC says.

“There are lots of ways people can access data, like when you put something in storage, and companies aren’t protecting themselves enough,” Capone says. “Security is a very hot issue right now, and network engineers are working well out into the future to determine their needs.”

The funding from Kodiak will help CipherOptics keep pace. Although the gigabit speed Security Gateway provides is sometimes ahead of network operating speeds, Capone says company engineers are researching even faster speeds for the next generation of the product.

“We’ll work based on industry demands, but ideally, we’d like to work at 10 gigabits,” she says.

The new cash also will allow the company to ramp up sales and marketing after its trade show splash in the next few weeks, although Capone says there are no plans to dramatically increase the number of employees from the current 30. The company is pursuing the medical, financial and government markets, as well as e-commerce sites and data storage over IP networks.

Conference appearance still planned

CipherOptics approached Kodiak about a deal after first analyzing the venture industry to determine which firms had the most experience dealing with network communications, Capone says.

“CipherOptics has created a security appliance that overcomes the historic price performance problems in high-end data centers, high-performance networks and storage network environments,” Carmi says in a statement. “The ability to encrypt all data without compromising network throughput at a reasonable price will make the CipherOptics solution very attractive to security-conscious companies.”

Although the $5 million the company sought is now in the bank, Capone says officials still will make their presentation at the Venture 2002 conference next week in Chapel Hill, N.C. The annual event is sponsored by the Council for Entrepreneurial Development and is among the largest such events in the Southeast.

“We’re always interested in getting more money,” she says with a laugh. “We still need to get our name in front of people, and this is a great way to accomplish that.”