Investors Flood Money Into Internet Privacy Companies

Until recently, Internet privacy has focused mostly on children. Considering the many predators online out there, this certainly makes sense. But now it seems that privacy is becoming a much more pervasive issue, especially as a growing number of people spend greater amounts of time on social networks.

Some of the privacy threats include: misuse of photos and emails, identity theft, tracking of location movements, purchases, and so on.

As should be no surprise, Silicon Valley venture capitalists (VCs) have been eying the field for some time and are now putting their money to work. This week ReputationDefender, a startup that helps people manage their online reputations, raised $15 million. This transaction followed two other financings earlier in June: an $8 million round for SafetyWeb and $12 million for TRUSTe.

These recent deals have attracted investors like Bessemer Venture Partners, Accel Partners, Kleiner Perkins Caufield & Byers. Yes, these are the same firms that invested in game-changing companies like (AMZN), Google (GOOG) and Facebook.

A New Frontier

So far this year, there have already been several major privacy lapses from large companies. One of the most prominent was from Google, which collected personal data while building Street View for its mapping system. The company says it was an innocent mistake, but this hasn't convinced the Federal Trade Commission and dozens of states and countries, including Germany and France.

Then there was a major breach from Apple's (AAPL) iPad. The product's carrier, AT&T (T), exposed 114,000 email addresses. Not long after, Apple changed it privacy policy to allow for the collection of user's real-time geographic locations. And, of course, Facebook suffered a huge backlash when it was discovered that its content was available on other websites and to people without Facebook accounts.

In view of all this, it seems that there will be increased government action on Internet privacy.

So how can Internet privacy companies help out? Well, in the case of ReputationDefender, the company provides tools to allow people to manage their online reputations. It's become common practice to search for information on people via Google or social networks. With ReputationDefender, it's possible to track your digital footprint and even delete information. In today's tough job market, this can certainly be a useful tool.

TRUSTe has developed a privacy trustmark -- something like the "Good Housekeeping Seal of Approval," but for websites. It's a powerful concept and if it becomes a standard, the company will definitely have a valuable franchise. Already 40% of the top 50 websites have TRUSTe certification.

Or look at SafetyWeb. With a subscription to the service, parents can monitor the activity of their children on social-networking sites in real-time. Keep in mind that the average child from eight to 18 is spending over 7.5 hours per day using a smart phone or computer.

The End Game

A big question is whether consumers will pay for online privacy protection. As more and more people are affected by privacy issues, there will definitely be a greater incentive to use online tools. After all, this is how antivirus software -- today an enormous business-- got its start.

Of course, it will still take time for adoption to spread and there will eventually be a few top players in the market. And yes, this could lead to some IPOs. However, it seems more likely that the large security providers, like Symantec (SYMC), EMC (EMC) and McAfee (MFE), will eventually buy up the smaller ones and the privacy tools will become an integrated offering for online security.