One day in 1987, Yuval Rakavy’s computer was acting weird and erasing files. A short check by Rakavy, a student at Hebrew University’s computer science department, and another student, Omri Mann, revealed that files were erased mysteriously from Mann’s computer as well. It quickly became clear this scourge had invaded the university undetected. At that time, "virus" was a medical term.
The two called in their good friends, and fellow computer freaks, Nir and Eli Barkat. The group spent many long nights discussing the problem. The result: the first anti-virus program, which they gave out to anyone they knew.
Only later did they realize there was money to be made, and set up BRM, one of Israeli high-tech’s major success stories.
Putting Eggs in Many Baskets
"It wasn’t easy", says Nir Barkat , today BRM’s general manager. "At that time, no one knew about venture capital funds, and we were essentially working on borrowed time. We had a product, but we made a decision - which turned out to be correct - to focus on development, not marketing, where we had no experience".
At the same time, computer viruses started making headlines. Virus-hysteria was at its peak, which played right into the Jerusalem-based company’s hands. Untouchable V-Analyst, their product, became a recognized brand name on the market, and a bit of cash began to flow into BRM’s empty coffers.
Marketing was given over to Israeli firm PFI, who took an additional step by finding a distributor in France, where the product was very successful.
"In early 1990 we felt ready to make the big move, and penetrate the US market", Nir Barkat relates. "We came at the right time because major companies, like Lotus, were interested in our product. The breakthrough was a company called FGS, a leader in the utilities field, (later taken over by Symantec). They understood the potential of our product".
"We signed a marketing agreement and had excellent ties with them. They gave us a number of their development projects, in the back-up field. Sales rose. That whetted our appetite. In 1990 we understood that we were profiting nicely but that we couldn’t put all our eggs in one basket, and we started looking for new ideas".
The most successful idea, and the reason why every BRM partner is a millionaire today - dollars, not shekels - was provided by three young computer geniuses: Gil Shwed, Shlomo Kramer and Marius Nacht, today better known as Check Point Software Technologies.
"The Check Point team came to us in 1993 with a good idea for Internet data protection. Everyone knows who Check Point is today, but three and a half years ago they were just three nice ex-soldiers. We decided to establish a start-up with them. At first, we were very involved in the project, we helped in formulating the concept, and understanding the central idea. We went with them to the States, rubbed shoulders with customers and funded all operations. The rest you know".
Israel’s Best Venture Cap Investment
And so, the $150,000 which BRM invested in Check Point in return for a 50% share, has become the best venture capital investment in Israel’s history.
Check Point, a world leader in its field, went public in June 1996 on Wall Street at $458 million company value. At that point, BRM sold a bloc of shares for $6.3 million. Since then, Check Point has continued growing at an amazingly rapid pace. Riding that wave, a second share issue was made in May of this year, bringing in another $30 million.
To date, with a 26% share in Check Point, BRM’s three partners - Yuval Rakavy, Nir and Eli Barkat - are worth a lot of money, even if still only on paper. By the way, partner number four, Omri Mann, recently left the company to pursue his studies in brain research, in return an estimated $20 million in cash.
On the Lookout for the Next Check Point
The company’s new direction, which was apparently less attractive to Mann, is a transition from active software house to start-up and technology incubator. In other words, BRM is looking for the next Check Point.
Two start-ups presently under its wing are BackWeb Technologies and MediaPath Technologies. BackWeb , founded in 1995, specializes in push technology. The company has developed an innovative technology which enables an automatic flow of information, tailored to the user’s needs. Using the program saves clients from time-consuming Internet searches, as well as download time. The program also enables clients to receive information directly on-screen, according to their personal specifications.
There are over 30 BackWeb channels today, and companies like SoftBank, Comdex, Zdnet, InfoSeek and others have adopted the technology.
This is a nice achievement, but as anyone in the Internet business knows, it’s only a drop in the bucket compared with the agreement signed by BackWeb and Microsoft, which recently announced that BackWeb would be integrated into its new Internet browser, Explorer 4.0, and will appear as part of the active desktop during browser use.
‘There is no other player, on the technology level, with this sort of cooperation [with Microsoft]", says Nir Barkat . "Point Cast is not a push technology player; they don’t sell a server. Our primary competition is Marimba, which works with Netscape. I think we’ve chosen the right partner".
Barkat doesn’t mention BackWeb ’s technological limitations, compared with Marimba. BackWeb knows Windows only, while Marimba is a cross-platform product, like Java. Marimba’s program, CastNet, will be integrated into Netscape’s new browser, Communicator 4, and multinationals such as IBM, HP and Sun have already contracted to use the program.
Barkat isn’t fazed. He says BackWeb may be the new Check Point. "They have the potential. Today people understand the push technology market is no smaller than the Firewall market. I think BackWeb is among the three leaders in the field. I assume that in the future, Microsoft and Netscape will be in the picture, one way or another".
"Analysts estimate the market will reach $15 million by the year 2000, so we have a lot of leeway for growth and development".
We Believe in Partnership
Another believer in BackWeb , aside from BRM which has invested $1.5 million, is SoftBank, which acquired a 10% share for $3 million. The company raised $13 million in a private placement of which Goldman Sachs represents $7 million, Polaris 2 (Dovrat Shrem) represents $2.5 million, Intel - $1 million, Trinity Ventures and Evergreen R&S - $1 million.
BackWeb is managed by Eli Barkat , Nir’s brother. The partners expect the company will reach profitability in 1998.
"The company’s market value in December was $60 million", Nir Barkat says. "Since then, sales have more than doubled each quarter, and we expect this will continue".
What About Going Public?
"You go public when you can foresee the next 12 months, and after you have a proven business plan. If things go according to plan, I assume the company will view this favorably in mid-1998".
If Nir Barkat allows himself to get so excited about BackWeb , it’s hard not to feel he’s underplaying MediaPath, the other start-up. MediaPath, established in 1996, deals in a field which may grow rapidly in this information age. The company has developed Media Agent, a product which enables CD ROM management within a multi-platform system, so that CD ROMs can be accessed and controlled from any server or work station within an organization. The product fits in with the trend in the market, which is gradually moving from office networks to multi-platform systems, and solves problems of CD management and access.
MediaPath’s target market is small and medium-sized businesses using multi-platform systems, estimated at $450 million in 1997, but expected to grow significantly in the coming years, as the result of the expected transition to storing and distributing information on CD, making CDs the leading technology for storing large amounts of data on the web.
Experts forecast MediaPath’s volume of sales will reach several dozen million dollars next year. Venture capital funds such as Polaris and Atid-Evergreen, which invested $2.1 million in MediaPath, in return for a 20% share, presumably scented this potential.
"We believe in partnership, in principle", Barkat explains. "It’s not the money itself, because we really don’t need the funding. It more a matter of the connections these funds have in the States. My recommendation to start-ups is to look for as many partnerships as possible, and of course I implement this policy at home".
Today, after Check Point, can’t BRM just knock on the door of any US industry? What sort of connections do these funds provide?
"Its true," says Barkat. "We do have good contacts. The truth is, it’s no problem for us to bring over representatives of major companies such as Microsoft, Lotus and others".
Money is the Least of Our Worries
In order to lay the groundwork for operations, BRM recently established a business development team. The goal is to sniff out new enterprises and ideas in information technology. "The idea is to take fate in our own hands, and not wait for ideas to fall out of the sky", Barkat says.
"Over the last nine months, we have seen over 100 start-up proposals. The less pleasant aspect is that most of the ideas we’ve seen don’t have any chance. A smaller part do have a chance but we’re not interested because they’re too ripe. I can count on the fingers of one hand, the number of projects we’ve researched more thoroughly, to see if they suit us. We haven’t entered those either".
So, what are the criteria for entering into partnership with a start-up? "We want to enter in the very early stages, when we can have maximum influence on the project. We enter only in the seed phase, meaning when the idea is still forming".
"We define ourselves as an technology incubator. The main difference between us and a venture capital fund, is that we participate in the start-up’s operational and management activities in the early stages. When someone comes to us with an idea - depending on whether they need very little help, like Check Point, or a lot of help, like BackWeb - we try to fill the management and other gaps, and carry a major part of the weight, in order to advance the company. A venture capital fund doesn’t do this".
"At the beginning we are very involved. Afterwards, the goal is to make the [start-up] company completely independent. We close gaps. If BackWeb wants to enter the Japanese market, we will help them during the market penetration stage, after which we let their managers continue the process, within the BackWeb framework.
"If we discover a gap in product development, we can provide BRM engineers to close that gap. When a group of entrepreneurs comes to us, our goal is to build them up as an independent entity, like a future Check Point or BackWeb . Our guiding principle is simple: whoever lives and breathes their company and industry, understands a lot more about it that we do".
The Formula for a Successful Start-up
"Our formula has three basic principles. One: get a North American partner, gain critical mass and run to the US market fast. You’ve got no market here [in Israel] and you can’t do everything all at once. Our model is something like a SWAT team: a few people who do a lot, fast. There’s no time to waste".
"The problem is that in Israel, we do everything under wraps, assuming that when we are ready, everyone will want to know. In the US, it’s exactly the opposite. You can’t be afraid of anything. You have to talk to anyone and everyone in the field you think might be interested in your idea - you might get to Microsoft only in the end - show them and get feedback. Rapid exposure to the industry is critical. You have to form partnerships fast".
It’s true that people are afraid their ideas will be stolen, says Barkat. "But if you’re a decisive, good team, people will want to cooperate, not compete with you. That’s how it works in most cases".