In late 1999, software house Computer Associates Inc. (NYSE:CA) signed one of the largest cheques written to date by a foreign company for an Israeli one. CA paid $550 million in cash for Memco Software, then a public company, as part of a $3.5 billion acquisition of Platinum Technology International Inc. A year earlier, Platinum Technology had signed an MOU to acquire Memco, but the negotiations had dragged on, and Memco was ultimately sold directly to CA as part of the overall deal.
Memco, a developer of data protection products for dispersed systems, had achieved $85 million in annual sales and a net profit of $15 million when it was sold. Today, as a CA division, its products, which are included in CA's eTrust Security Management solution, have about $500 million in sales a year.
Memco was founded in 1993 and went public in 1996. Its sale made a group of founders and employees very wealthy, beginning with Israel Mazin and Eli Mashiah, each of whom held 16% of Memco, and made $88 million in cash from the sale.
Three years after the sale, a group Memco executives went on to found a new start-up OpTier Ltd.. The group included Mazin, Mashiah, Dov Gal, Motti Tal, Amir Alon, Jamie Georgeson, Mirit Manor, Scott Lenga, and Israel Mazin's brother Ori Mazin.
Although OpTier is not in the same sector as Memco, there is more in common between the companies than their founders. OpTier develops software that automatically examines, improves, and manages application performance. It has developed a product designed to solve the problem of transaction workload in an enterprise's IT system caused by the switch to multilayer computing. Similarly, Memco developed data protection products for multilayer systems that were replacing mainframe computers.
Mazin conceived the idea for OpTier in the wake of his failure in Emicom, an investment company that raised $57 million in 2000, and later merged with Divine Inc., an investment fund. Emicom made investments in the last days of the bubble, with the result that most of the companies folded and the investments were written off.
"We concluded that we preferred the operations side over the investment side," said Mazin. "We surveyed the market and tried to understand where it was going, which trends would drive it in the future, and where exactly enterprises were hurting.
Saving human resources
Mazin and his team found that whereas the business of most companies depended on computer transactions, they had no way of monitoring or managing the transactions they and their customers were carrying out, because of the increase in computer infrastructure layers in the enterprise. Whereas previously this infrastructure was based on mainframe computers, which handled all processing and storage, in dispersed multilayer systems, each action encountered several different infrastructures, such as web servers, applications, and databases.
OpTier was founded to develop a solution and management application that would link the computer infrastructures and user transactions in the various applications running on them, in order to control the service, and prioritize certain procedures over others in accordance with business priorities.
For example, in a foreign currency dealing room, the price-setting action for deals must have priority over other actions. A dealing room survives on very narrow margins, and if the price-setting process (from the moment that a trader sets the price vis-à-vis a customer, until the moment when the transaction is recorded in the computer system) is prolonged, the dealing room is liable to lose all its commission on the transaction, or even lose money.
OpTier's product, called CoreFirst, monitors a price-setting action as it moves through the infrastructure, giving it priority over other actions at all stages of execution. CoreFirst is a platform that sits on a dealing room's existing trading management infrastructure programs (database servers, applications servers, and so on), and tells the infrastructure software and hardware that processing price-setting actions must always have priority over other actions.
OpTier launched CoreFirst in January 2005 with little media fanfare. Mazin says it had three parts: monitoring all transactions, prioritizing them, and a management infrastructure that controls the process.
"This prevents loss of income and customers caused when the service level fails to meet business needs," says Mazin. "It also saves immense amounts of IT human resources currently devoted to putting out fires, as well as many unnecessary processing and server resources, which are not utilized for most of the day, but only during peak times and pressures to achieve maximum processing power."
A team of 30 engineers worked for two and a half years to develop CoreFirst. OpTier currently has 60 employees, including 40 in Israel. 18 months ago, OpTier held two financing rounds one after another, totaling $16.1 million, to finance development and set up a marketing team, which now number 20 people, in Europe and the US.
Large sales potential
OpTier's founders made the initial investment in the company. Carmel Ventures and Pitango Venture Capital subsequently invested, and were followed later by Lightspeed Venture Partners, with a $7.5 million investment. The reputation OpTier's founders brought with them from Memco apparently greatly helped the company in negotiations on valuation, and enabled them to hold onto a large stake in it.
Israel Mazin, who servers as OpTier's chairman, and Tal, its EVP marketing and business development, absolutely refuse to discuss the company's revenue projections for the coming years. However, OpTier will reportedly post several million dollars in revenue this year, and it is expected to achieve $10-15 million in sales in 2006, probably close to the upper limit of this range.
"We plan to grow faster than Memco," says Mazin. Achieving Memco's growth rate is unquestionably an ambitious goal, since Memco achieved 100% growth a year following its IPO. "We have already built one successful company, and we now want to do even better. We've already had offers for the company, but we immediately rejected them. We plan to build an independent company; we're in no rush to sell."
"Globes": What's your sales strategy?
Mazin: "The trick isn’t just winning sales, but to create an infrastructure that will support exponential growth. At every enterprise, we try to reach several departments simultaneously, not just one department, in order to make a bigger noise, and make several sales at each enterprise. I believe that at large enterprises there is huge potential for making sales amounting to $5-10 million over two to three years. I'm talking about large enterprises where our product will support many servers."
How is your platform priced?
"The consumer price is several thousand dollars per CPU."
Are you planning another financing round soon?
"Not at the moment. We have enough cash."
When do you expect to break even?
"We can definitely achieve profitability within a short time. The question is how to build the company: what the customers' needs are, and how much we'll decide to invest in development."
Who are the direct competitors of the technology you developed, and how are they different from you?
"Competition comes from Mercury Interactive Corporation (Nasdaq: MERQ), Precise Software Systems (now owned by Symantec (Nasdaq:SYMC)), IBM (NYSE:IBM), and CA. The difference between us and them is that we provide real-time monitoring of all transactions at a low overhead, and prioritize certain transactions over others."
You're competing with big companies.
"Indeed. But that's exactly what we did with Memco. The big companies that Memco competed against gradually saw that we were taking market share from them, and began to cooperate with us in distribution."
As it happens, OpTier's CEO, Yori Lavi, is one of the few people among the company's founders and senior management who are not ex-Memco. Lavi came to OpTier from US company CompuWare.
Published by Globes [online], Israel business news - www.globes.co.il - on May 18, 2005