This week, Israeli start-up Guardium announced the completion of a $4 million seed financing round. Guardium is a spin-off of Ramat Gan-based Log-On Software. Investors in the round include the Cedar Fund, Veritas Venture Partners, and StageOne, the latter making its third seed investment.
Log-On has been around a while. Co-managing directors Joseph Segev and Gil Migdan founded the company in 1983. Log-On, which initially supplied mainframe products, began providing outsourcing services to high-tech companies in 1992, and later began supplying the services to start-ups, sometimes in return for equity. Segev says that although some of the companies in which Log-On acquired holdings have closed down, there are still four or five with the potential of creating real value. He adds, however, “Now we ask for cash in hand.”
Log-One wasn’t the only company that tried to become part of the start-up food chain during the high tech boom, when it sometimes seemed as if money was boundless. NESS Technologies founded NESS Ventures, which provided outsourcing services to 20 start-ups for cash, and sometimes even equity. The company discontinued most of its activities in this format in 2001. Other companies, which lacked the strong financial backing available to NESS, frequently found themselves as the plaintiffs in court cases against start-ups.
Segev says that outsourcing work for start-ups began to decline about mid-2001, but recovered in early 2002. “Before 2001, this type of company used outsourcing in order to cut costs, and sometimes to accelerate development. Starting in 29002, however, managers began to use outsourcing services in order to avoid having to hire employees and fire them afterwards. With outsourcing services, they could develop without feeling guilty.”
At the same time, due to questionable stability of these customers, contracts with start-ups are liable to be frustrating, when the start-ups fail to find financing for their activities. “The situation is different than in previous years,” Segev says. “First of all, we started checking every detail about our customers several years ago, in order to verify their financial durability. Furthermore, we have a more personal connection with them, so it’s easier for them to come and tell us their money is running out. We’re liable to find ourselves stopping the work ahead of time, but we’re unlikely to have to chase after them to collect a debt, although we’ve had a few such cases in the past.”
Out of 160 Log-On employees, 50-60 are engaged in outsourcing. At its peak, the company’s staff numbered 200. These employees are used mostly for integration-related development, where the customer is developing a product, and Log-On’s job is to adapt it to various platforms. “Far fewer companies are asking us to help them develop a product from scratch,” Segev says. The company now supplies mostly solutions from storage company DTS and products from Israeli company Business Layers. The major players in the outsourcing market, such as NESS, Matrix, IBM Global Services, and Hewlett Packard (NYSE: HPQ), may have convinced the Log-On that it’s better to concentrate on sales.
Guardium, which deals in information security, is one of two activities Log-On undertook with the intention of splitting them off. The other was Viven, which markets multimedia content for cellular devices. This company took the Wireless Application Protocol (WAP) vision and tried to apply to content that included animation and special effects. As a result of the general communications market recession and the bad reception accorded WAP, Viven found itself in a tough market. The company’s survival is attributable to the fact that it has only five employees, and operates out of Log-On’s offices.
”Last year was a very hard year for Viven,” Segev explains. “Nevertheless, the company already has a large German distributor, and its revenue is rising every month. Hard times kept us from raising external capital, in addition to the initial financing from angel investors in 2000, but I hope we’ll be able to raise money this year.”
Published by Globes [online] - www.globes.co.il - on January 20, 2003