After a four-year hiatus, telecommunications equipment giant Cisco System is acquiring Israeli companies again. On Monday, “Globes” reported that Cisco had completed the acquisition of Israeli start-up Riverhead Networks for $39 million in cash. Founded in late 2000 under the name WanWall, Riverhead is developing a solution to detecting and defeating attempted attacks on networks.
The Riverhead acquisition is another sign of the recovery in global and Israeli high tech, and of consolidation in the data security market. The big fish are swallowing the small ones. The acquisition can also be considered the first good exit since the global economic crisis. Investors in Riverhead, including venture capital funds Gemini Israel Funds, Koor Corporate Venture Capital, Sequoia Israel, and Cisco itself, will receive 2.5 times what they invested in the company.
This is Cisco’s first Israeli acquisition since it bought Hynex, InfoGear, Pentacom, and Seagull Semiconductor in 2000 for a combined total of about $500 million.
Former Ministry of Industry, Trade, and Labor chief scientist Orna Berry, now a venture partner at Gemini Israel and chairperson of Riverhead, has accompanied Riverhead from the idea stage. Berry has made a substantial contribution to the company’s success. She was the first to spot its potential, and helped formulate an idea for a reasonable business model for it.
Berry says that the beginning was unpromising. “Riverhead Networks CTO Prof. Yehuda Afek, the entrepreneur, encountered the problem of network loads in the course of external attacks. He sketched out a preliminary solution, which differed widely from the existing solutions at the time. Afek’s idea was to combat attacks before they penetrated the site itself, i.e. examining the traffic. Two other entrepreneurs, Dr. Dan Touitou and Dr. Anat BremlerBarr, joined in the initial stages, and the three of them designed the solution at the architectural level, in order to persuade the investors that it could be done,” Berry explains.
Berry relates that at the time, the entrepreneurs were circulating among the venture capital funds, trying to attract investment, and not succeeding: “Their solution was different, the market segment was narrow, and their idea was totally different.”
Berry, who thought that the idea had potential, worked together with the entrepreneurs to construct a reasonable business model that could attract investors. “Gemini invested very little at first about $200,000, and made it conditional on the recruitment of a professional CEO. That was where Yuval Rachmilevitz entered the picture. I can say now that he has succeeded in producing a return for the investors and money for the entrepreneurs and employees, and developed the connection with Cisco that made the acquisition possible,” she says.
Investors in Riverhead’s first financing round were Gemini, Intel Capital, and Koor Corporate Venture Capital. Berry explains that after the company had devised a suitable business model, and needed additional capital, it experienced difficulties. After hesitations relating to the size of the market and the potential for a return on their investment, Sequoia Israel and Cisco invested. Let it be noted that Cisco regarded its investment as financial, not just strategic,” Berry emphasizes.
Cisco and Sequoia Israel also invested in Arbor Networks, which had developed a similar solution. Berry says that Riverhead’s solution was more complete; it not only detected penetration, it also took countermeasures to prevent it from disrupting traffic on the site.
Riverhead showed no impressive results until the first quarter of this year. Berry says that it took time for potential customers to realize that they had to address the problem. Riverhead’s first quarter sales leaped to more than double the company’s forecast. Cisco realized that the market was ready. Berry is willing to go out on a limb by saying that while the company has sales of $4 million this year, its sales will skyrocket next year, and could reach $100 million. “Customers and service providers both now understand that they must deal with this problem. Keep in mind that the model was complicated, because it linked the end customer and the Internet service provider. It took them time to realize that they had to find a solution, and pay for it. The problem that Riverhead is solving this year is a problem that people are already aware of,” Berry explains.
The attacks that Riverhead deals with can cause enormous damage, both in money terms, and to a company’s reputation. The Yankee Group research firm has stated that attacks of this kind are liable to cause damages amounting to $50,000 per hour to 9% of US enterprises. Riverhead’s solution is designed to enable an enterprise to continue operating while being subjected to this kind of attack.
”Globes”: Is this a good exit?
Berry: ”I think so. It’s a cash deal. It’s good for the investors, who are getting a nice return on their investment, and, of course, it’s good for the entrepreneurs and employees. In addition, Cisco is absorbing the entire company, which shows appreciation for development, and also marketing and sales. All in all, of the deals I’ve seen, this may be the best.”
Maybe it would have been better to have waited a little longer, and sold at a higher price.
”It’s certainly possible that, had we waited, we could have gotten a better price, but the moment Cisco made an offer to the company, the investors decided that they shouldn’t wait. No one knows what will happen on Nasdaq in another two months.”
Riverhead currently has 44 employees in its Tel Aviv development center and California branch. Following the acquisition, all the development employees will transfer to the Cisco development center in Netanya. Rachmilevitz will continuing managing the company for the next two years.
Published by Globes [online] - www.globes.co.il - on March 25, 2004