SpearHead Technologies: Money in the bank = flexibility

RADGuard’s closure could have caused various Internet security company executives sleepless nights and added to the woes they already have due to the uncertainty in the market. However, the fact that the veteran RAD Bynet group company has ceased operations appears to be merely an interesting anecdote to Buky Carmeli, founder and CEO of start-up SpearHead Technologies.

”For the time being, the security market is the most stable,” Carmeli says. “Just look at the shares of companies in this field. Although RADGuard’s technology did not compete with ours, the company’s collapse led me to keep tabs on shares of companies in the security market every day, and so far I don’t think the market has been affected by RADGuard’s collapse. I believe other factors have caused the decline.”

The closure of a company like RADGuard may not have much effect on Carmeli, but it has certainly added to SpearHead employees’ fears. So Carmeli has decided to fly out to Israel from his 37th floor Manhattan offices to present the company’s financial situation to them every quarter. SpearHead currently has $17 million in cash, following a series of financing rounds totaling $32 million over the last three years.

Why has SpearHead remained relatively stable? Carmeli knew in advance that the investor in his company would be an American. He says the reason is the added value this sort of financing provides a company trying to penetrate the US market. In all other respects, Israeli money is just as good as American money.

Like other managers of information security companies, Carmeli left the Israel Defense Forces after a long stint (17 years) in the 8200 unit (Intelligence Corps). His only possessions when he was demobilized in 1998 were a Powerpoint presentation and lots of ambition, which he took with him to the US, in an attempt to raise seed money and set up his company.

Carmeli, like other 8200 unit alumni, wanted the professional and financial rewards he deserved in civilian life, after witnessing the success stories of other entrepreneurs, who founded VocalTec Communications (Nasdaq: VOCL) at around the same time. In 1995, Carmeli was awarded a prize by the IDF for developing a technology similar to Vocaltec’s. The only difference was that Carmeli’s prize was a certificate he could hang on his wall, while the prize Vocaltec’s founders received could be counted and placed under their mattresses.

Carmeli raised all the money in the US by himself. “Part of the reason for the successful financing rounds was simply due to the high quality of the road-show,” he says. Carmeli stresses to colleagues that the secret of successful financing rounds is being able to make your intentions clear in only thirty seconds. “I believe I will meet with you again during the year to discuss closing another financing round, since I believe it is the general manager’s job to ensure the company always has cash.”

SpearHead wanted to raise only $15 million in its most recent financing round, held in July 2000. However, more investors wanted to invest in the company, and they offered it $25 million. As usually happens under normal supply and demand market conditions, Carmeli was “obliged” to raise the price (i.e. the company value), which had been $60 million. “I told investors that I wanted $15 million at a $60 million company value and that if they wanted to invest $25 million, then we would raise the price to $75 million and see how many investors were still interested. Ultimately, they were all interested.”

In retrospect, the timing of SpearHead’s financial round was perfect. The company can now concentrate on doing what it does best, while still holding $17 million in the bank. What does this mean for the company? If it had planned to create an ERP (enterprise resource planning) system, then it will be able to build one next year. It can also postpone setting up an Intranet system between the branches. “We’re currently talking more about focusing expenses, rather than cutting back,” Carmeli says. “It (the flexibility) means that if as I’m talking to you three R&D engineers pass by, I’ll take them.”

A particularly fast wall

What, then, makes SpearHead a success story, at least on paper? Its solution is based on the widespread theory that the best way to provide security is to cut the cable and not reconnect it, rather than having a continuous online connection. SpearHead did not invent this, and there are many security companies with similar solutions.

However, to illustrate SpearHead’s unique solution, imagine an office lobby. There is a secretary at the reception desk, who screens visitors (checking to see if they have an appointment, giving them security tags, etc.). However, she can be distracted and the visitor can sneak through. SpearHead puts a large glass wall in the lobby, through which the secretary can identify the visitors. She will not be able to allow the visitors to enter, but she can relay a message to the people in the office that a visitor is asking for them.

The glass wall (i.e. disconnecting the network) idea is not new, and it has been working for many years. The disadvantage is that it takes the “secretary” time to understand and relay the message. SpeaHead’s solution makes this process much faster, even faster than network speed, i.e. the message behind the “glass wall” goes faster than the speed at which the information would have been transmitted if the wall had not existed.

Check Point (Nasdaq: CHKP)’s firewall solution and other similar solutions can be illustrated with the same analogy. Using only firewalls, the visitor can approach the secretary, shake her hand, and hopefully be encouraged to continue into the sought-after office. SpearHead’s product complements this technology.

One alternative is for SpearHead to sign OEM agreements with companies like Check Point. Carmeli, however, says that for the moment, it is more worthwhile for SpearHead to concentrate on a much larger market – network servers (28 million worldwide).

The company is trying to market its technology in three different formats. The first is through off-the-shelf sales through communications boxes priced at $54,000 each. The second is through OEM agreements and the third involves putting the contents of the box onto a single chip.

Published by Israel's Business Arena on 11 April, 2001