Israeli start-up XoSoft traveled a long road before it was acquired by CA Inc. (NYSE:CA). XoSoft, which began as an Internet content distributor, changed direction in 2001 after the high-tech bubble burst, and began developing disaster recovery technology. After a seven-year journey, the company reached its destination when it was acquired for about $100 million, according to unofficial estimates.
Behind the scenes, XoSoft’s story is more than just another killing by high-tech investors who gambled on Israeli entrepreneurs. The company’s story also has an unusual technology and marketing side that provides food for thought for anyone who believes that a foreign CEO or American marketing techniques are better than familiar Israeli ones.
XoSoft VP marketing Gil Rapaport joined the company in May 2000. He is the only company representative who talked about the CA deal. In an exclusive interview with “Globes”, he talks about the reasons for the sale and how the company won 1,600 customers in an almost impossibly short time for a start-up.
“When I joined XoSoft, the prevailing concept was to raise capital and go to the US with an American CEO. After the bubble burst, we did restart. We closed our office in the US, cut our staff from 70 employees to 17, and returned to Israel with almost no money to continue,” Rapaport says describing the company at the time. In 2001, XoSoft resembled Akamai Technologies, a distributor of static content. But the content XoSoft distributed was dynamic and constantly changing, which was highly relevant for the financial market. This was how the company learned about the need for continuous data back-up.
Rapaport: “What we did was to change direction and develop a real-time application that copies everything that happens on a computer onto a second computer. In this way, if a disaster occurs, at the press of a key it’s possible to continue working on the other computer. We discovered that there were good back-up solutions within local area networks (LAN), but not for backing up from overseas.”
By coincidence, XoSoft’s timing was superb. Shortly after the company’s change in direction came the 9/11 terrorist attacks on the US, which resulted in the disaster recovery market being seen in a whole new light.
XoSoft’s new solution was in a field known as continuous data protection (CDP), the continuous saving of an enterprise’s non-core data. The data XoSoft's technology backs up is on Windows Servers, Microsoft Exchange, Microsoft SQL, Microsoft IIS, SQL and Microsoft IIS, Oracle databases, and systems operating in UNIX/LINUX environments.
XoSoft has registered two patents on its technology and is now in the process of registering a third. In addition to the technology, the company’s marketing story is also fascinating. “Everyone exposed to the way we work called it the machine,” says Rapaport. “We decided that it was very important for us to define how the sales process would be handled. As part of this, I have a programmer on my marketing team, and we monitor every customer from the moment they show of interest through to the sale. We have statistics how many leads we have, and how leads we manage to turn into a sale.”
Rapaport’s descriptions would be irrelevant were it not for a very impressive top line. In less than three years, XoSoft managed to sell to 1,600 customers, and it posted $20 million in sales in 2005. The bottom line is impressive too - the company has been profitable since 2004.
“Everything should work like a machine”
Rapaport describes XoSoft’s sales system as “an exact science”. The company’s marketing mechanism is mostly web-based, assisted by the search engines, a site for downloading demo versions of the software, and other means. “We lose very few deals. We saw that we were generating a lot of leads, but not enough sales. Two weeks before we introduced our sales process, 53% of our leads did not result in a sale, because the customer did not respond. Two week afterwards, only 25% of our leads did not result in a sale. We did an analysis that showed that we had to contact a customer four times before he or she responded, and to send e-mails as well, and the results changed. For example, I know that you have to contact a customer after 24 hours, not 48 hours, otherwise you lose half of your sales,” he says.
XoSoft not only benefited from the 9/11 disaster and creative marketing, but also from natural disasters in the US in recent years. “A law firm we worked with can be considered a test case,” says Rapaport. “Hurricane Rita that hit Florida caused them to press the solution key and transfer the data to another center in Chicago and continue working as usual, even though their head office was destroyed.”
Rapaport also used other ways to recruit potential customers. He used magazines that run web-based seminars, or “webinars”. “What’s Israeli here?” he asks. “When they sign a contract with you to produce an event like this, there’s an unofficial guarantee of at least 350 participating leads. But when we did a seminar of this kind, we got a lot less. I told the companies running it that I was not prepared to pay until I had all the leads they promised me. That made no difference, so I didn’t pay because there was a company promise. I did this to three companies that manage these seminars. When they realized there wasn’t the usual American reaction, they changed their attitude and began to work hard to get our money. Every month, I get hundreds of leads from seminars they run. Everything should work like a machine. Everything is statistics, and I know exactly what works and what doesn’t. For example, I know that webinars work.”
One of XoSoft’s products, "Assured Recovery” won “Storage” magazine’s Silver Award for Best Product of the Year 2005. “We realized that customers spent a lot of money on disaster recovery systems, but almost never tested them. We conducted a customer survey that found that 72% of customers check their solution once a year, and 40% don’t rely on it. So we offered a product that automatically tests the systems, which is a sore point at enterprises.”
“This is a market of gorillas”
Rapaport is not willing to discuss XoSoft’s sale to CA. All the details provided about the company, including monetary amounts, controlling shareholders, who negotiated with whom, and so on, are all speculations attributable to the market speculations or to journalists’ imaginations.
“Globes”: I have to ask: why did you sell?
Rapaport: “There are shareholders who wanted a return on their investment. This was the best time for us to sell. We wanted to maintain our high growth rate, and not see it fall. We achieved 30% quarterly growth for every quarter over the past three years, and we wanted to maintain this rate.”
The growth in XoSoft’s sales is also reflected in the size of the company’s workforce, which is reportedly 100, of whom 60 are overseas and 40 at the company’s development center in Beit Dagan in Israel.
CA Israel general manager Arie Offner has a similar explanation. “This is a market of gorillas. The back-up market isn't a new market where a company operates alone. This is a market where very powerful forces operate, and in which almost every large software company is playing. The large companies also block attempts by newer technologies to enter the field. That’s why the link-up with XoSoft adds value to both sides, which can boost it much higher.”
“Addition to CA’s genome”
“This acquisition adds significantly to CA’s genome,” Offner said after the acquisition of XoSoft. CA has made in acquisitions in Israel to the tune of $1 billion in recent years, and XoSoft is undoubtedly not the last word. Offner is also a member of CA’s investment committee in Israel.
Offner emphasizes that XoSoft will continue to operate as a separate business entity in the short term. In early 2007, XoSoft and CA are due to launch a joint technology solution called “Recovery Manager”, which will offer a full back-up solution integrated with CA systems. “The addition of the company is relevant for enterprise information technology management (EITM) solutions, where CA is the leader,” says Offner. “It will help us make the change that the company is planning in enterprise computer resources management.”
In addition, the acquisition is also interesting on the part of CA, which for several years has had an acquisition strategy that is different from its policy in the past. “CA now buys technologies of companies, rather than their customers, as it used to do several years ago,” says Offner in explaining CA’s $2 billion in acquisitions in recent years, some of them in data storage, and half of them in Israel.
Published by Globes [online], Israel business news - www.globes.co.il - on July 26, 2006
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