Israeli data protection company Own became the subject of one the biggest exits in Israel’s technology industry in the past year, when it was sold to Salesforce (NYSE: CRM) for $2.1 billion, of which $1.9 billion is in cash. The company’s origins, however, are very different from the cubicles and workspaces of Tel Aviv’s glass towers.
One of the founders, Ariel Berkman, who served in the Israel Air Force special technology unit, is an expert in retrieving and rescuing data from memory cards, hard disks, and recordings, who operated a service lab called Creo Recover, which provided solutions to private customers, but also to companies, and even to the security forces.
As time went by, and companies switched to a private cloud and then to the public cloud with Microsoft, Google and Amazon, more and more companies got in touch and asked for data backup and recovery on the cloud as well. At first, Brekman thought of developing a data backup system for social networks, but he quickly discovered that the business potential lay in the enterprise market.
The solution that eventually caught on in the market was the development of backup for Salesforce software - an online system that enables enterprises to conduct all sales and customer service processes and gather data on the use of their products or the success of their marketing and sales drives. Backing up software such as this is not a simple matter, since it has to be done remotely, without physical access to the servers that store the data.
The person responsible for the company’s management DNA, however, is none other than Monday.com CEO Roy Mann, who offered his services in connecting Brekman to other experts in sales, marketing and backup. The second Own founder - who no longer works there - is Ori Yankelev, the son of Israeli parents who left for the US, and who grew up in Boston and worked at local venture capital firms. In 2014, at his family’s suggestion, he came to Israel and joined the Tel Aviv University Entrepreneurship Center, where he met Mann, who told him about the most sought-after back-up lab manager he knew, Brekman. Yankelev, who is currently a partner and chief revenue officer at investment firm Team8, brought with him an American entrepreneur whom he knew from his investment career, Sam Gutmann, who had previously set up and sold a data backup company.
"We had a basic product with a few customers," Brekman told "Globes" in the past. "Yankelev and Gutmann came along and built a company around it." It was they who advised Brekman to abandon backup of social networks and to focus on Salesforce - the backup product that succeeded and grew at a surprising rate. Brekman, Gutmann and Yankelev have yet to respond to "Globes’" requests for comment following the announcement of the sale.
Two additional founders, Daniel Gershuni and Eran Cohen, left the venture at earlier stages. Cohen did manage to connect the company to Yuval Shachar, who now works with Yankelev at Team8 but was then a partner at Innovation Endeavors. The investment did not go ahead, but the company then went to a little-known fund at the time, Oryzn Capital, run by Yaniv "Jacob" Jacobi and Aviad Ariel, who was then still with the fund.
The initial investment in the company was a SAFE (simple agreement for future equity) round, that is, a round without a valuation or equity, with the promise of shares in the future when the company shows signs of success. "Although it was a SAFE round, the company already had a working product and initial customers," Ariel, who is now a director of Own on behalf of Vertex Ventures, told "Globes". "We had a thesis that the enterprise world would switch to the cloud and that backup and data management would be an important element of that, and we believed that this would also advance the company’s business, even though backup wasn’t very trendy among investors at that time." At the seed round, Innovation Endeavors came in, and Salesforce, which had invested in the company from day one, also invested.
Ariel moved from Oryzn to Vertex Ventures, and continued to manage investment in the company, leading the B round after Insight Partners led the A round. Altogether, Own raised $507 million from its founding in 2014. The big winners from the deal are the five founders, who hold 10% of the company; Insight Partners, which holds 30% and will pocket about $500 million; and Israeli fund Vertex, which holds 13% and will pocket about $270 million.
Funds that joined as investors in the company later on - among them B Capital and Alkeon - have not posted a return, but they have made back their investment, which is an impressive achievement for a company in which they invested at the height of the 2021 bubble. The company is registered in Israel, as is its intellectual property, but its management resides in the US, as do most of its employees: of its 850-strong workforce, only 200 are employed in Israel.
You chose to work mainly with Salesforce from the start, which is an unusual decision. If you wanted to backup the public cloud, why didn’t you go to Amazon, Google, or Microsoft?
Ariel: "The CEO, Gutmann, came to the company with the idea that the first stage in a company’s life is to grow it rapidly to annual sales of $100 million, while keeping the numbers fairly balanced. The product designed for Salesforce had been the most mature and successful over the years, and a situation came about in which rather than spread the company over different products, we thought that Salesforce was the most important market for the company.
"It’s also the most complex one. A backup product for Microsoft or Google’s cloud is simpler and also operates in a more competitive market. But we didn’t stick with backup. On the basis of the basic product that provides backup to Salesforce users, we added additional products of data management and data security. In the past two years, we have started developing products for additional platforms, such as ServiceNow."
Basically, you created a dependency on Salesforce.
"You could call it co-opetition, or even a bearhug - on the one hand, you pay them a distribution commission on their stores; on the other hand their salespeople are very important for our sales, and furthermore they are also an investor, and at the same time also a competitor, with a product that they developed that in the end didn’t succeed.
"One of our fears was that Salesforce would buy the company at an early stage, because they would take advantage of their strength not for the good of the product, so the relationship was complicated, but there was a great deal of mutual respect."
Who approached whom to talk about an acquisition?
"Salesforce approached us. After a decision was made in principle to do deals, Own was one of the biggest companies in its ecosystem. We had always been on its list of acquisition targets, and when someone said something to Gutmann at a dinner party, a discussion arose, and then another, and since we were already acquainted no complicated processes were needed. It was a concrete conversation, and when you have a board that’s harmonious and works for the good of the company and not for personal benefit, in the end you reach a result good for everybody. Most of the investors made a nice return, and the minority that didn’t, didn’t lose money but made it back, a considerable achievement for a company that raised money in 2021."
Truthfully, the company raised capital at an exaggerated valuation of $3.35 billion at the end of 2021, which led to the late investors making back their money but not seeing a return. Was a sale at this price the right thing to do?
"If you believe that from here on company valuations will only rise and the markets will flourish, then perhaps not. But if, say, the company had gone for a flotation in a year’s time, the late investors would have lost. To wait a long time until the company’s valuation doubles in an IPO is to take a risk. In the end, the fund raising rounds across the market in 2021 damaged all the companies and hurt their performance. Will the market learn a lesson from that for the next wave? I doubt it."
Did Salesforce express any concern about closing such a large deal in Israel in wartime?
"First of all, it sees the Israeli company as a strategic acquisition and one that can operate well even in the current crisis. Secondly, the company is geographically diversified, and most of the employees are in the US in any case. Development is mostly in Israel, but the management and all the business activity are located overseas. Irrespective of this deal, the risk in Israel is a subject that arises in conversations with foreign investors. It always appears as an asterisk or as ‘force majeure’. As an Israeli investor, I’m worried, and I see growing discourse about the risk of investing in Israel."
Own has been advised since it was founded and in the current deal by Adv. Erez Mizrachi and the high tech department of FWMK. Salesforce was represented by Meitar in Israel and by Hogan Lovells in the US.
Published by Globes, Israel business news - en.globes.co.il - on September 8, 2024.
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