Until a few years ago, Moshe Yanai was considered a serial entrepreneur with a golden touch, a Midas of Israeli high-tech. Indeed, Yanai has had a long career as one of the world's largest data storage experts, having been part of IBM's mainframe success and competitor EMC’s revolutionary Symmetrix product. In 2008, Yanai demonstrated his magic touch once again when he sold two start-ups he had founded - XIV and Diligent Technologies - to IBM, one after the other, for a total sum of about $500 million.
Yanai thus became one of the richest high-tech entrepreneurs of the early 21st century. In addition, he owns a helicopter pilot training school, as well as an executive helicopter that once belonged to Senator Ted Kennedy, which Yanai uses to pilot VIPs around the country.
So when Yanai chose to found Infinidat more than a decade ago, with the promise that it was not intended for sale to a technology giant, it became one of the most intriguing companies in Israel. Yanai, who throughout his career had developed ground-breaking storage solutions and served them on a silver platter to US corporations, now wanted to do things differently. He aimed to establish a revolutionary storage system, one that would significantly improve the information storage capabilities of large enterprises, and would compete directly with the tech giants, all the way to an IPO.
No one imagined that within less than a decade the company would oust Yanai from its management, lose dozens of employees, and wrangle in the labor courts over legal charges by those former employees. No one could have imagined how, a year after that wave of departures, Infinidat would turn into a profitable company, with strong investor backing, and a new management that sees the potential Yanai envisioned from the outset.
Average deal $700,000 a year
Infinidat had an ambitious vision that perhaps was also its Achilles’ heel: a smart storage system capable of hopping between different types of storage using principles of artificial intelligence, algorithms, and mathematics. The aim was to reduce costs and raise workload application speeds for the enterprise. Underlying that vision is the same technology Yanai and his partners thought up a decade ago, currently protected by more than 100 patents. Infinidat is one of Israel’s biggest startups. It has raised $370 million in total, and employs about 500 people in Israel and the US.
Today, enterprises must choose between different types of storage: slow magnetic drives, flash-based solid-state drives (SSDs), and arrays of digital memory cells based on random access, (dynamic random-access memory or DRAM). The latter are fast, but their use, unfortunately, is much more expensive. Infinidat's algorithm learns the organization’s data flow - types of information and usage patterns - and knows to store it in the right place so that it can be accessed as needed, faster and more cheaply than the competition.
But Infinidat sells more than algorithms - it sells a complete system: flash drives, hard disks, its "Neural Cache" software that is the product’s smart core, and full-service company support - the "white glove" model of continuous performance monitoring and immediate troubleshooting. Today, the price of an average deal is about $700,000 per year, and can easily rocket into the millions of dollars.
"A premium product sold at high profit"
In September 2020. Shahar Bar-Or took up the post of GM of Infinidat Israel and Chief Product Officer. Since then, two complementary product lines have been developed: a flash drive system, for those wishing to further enhance their storage activity, and a new backup system that adds disaster recovery capabilities and cyber-attack resilience. The company declines to comment, but according to market estimates, its annual revenue rate now tops $300 million and it makes an operating profit.
In January of this year, the company announced to investors and employees that orders grew by 40% last year, with a 68% increase in the fourth quarter, compared with orders in the corresponding quarter in 2020.
Despite dreams of an IPO, the company is realistic. Just as things were going well for it, the market did an about-face, and New York IPOs have been shuttered for almost a year.
Infinidat’s cost structure is beyond belief: the company has about 500 employees in Israel, as well as anywhere in the world where it has a customer. It produces its systems in-house, maintains production lines at its Kfar Saba facility, not to mention a half-million-shekel monthly electric bill for the large server farm it leases from GDC of Herzliya, located down the street from its headquarters on Hamanofim Street.
"This is a premium product aimed at the largest customers in the world, and it’s sold at a high margin - it’s not an off-the-shelf product sold at a low profit. The company’s position as a privately-held, growing, and profitable company that has been working for several years with hundreds of large and important customers, allows us the flexibility to stay balanced," says Bar-Or.
The employees: Cancelled acquisitions, diluted shares
Unfortunately, many of the partners to this success no longer work for Infinidat. 2020 marked a turning point for the company, but this was preceded by a long period of turmoil accompanied by resignations, lawsuits, and changes in management. According to a lawsuit filed with Tel Aviv District Court and the Bat Yam Regional Labor Court by more than 30 of the company's original employees, it appears that already in early 2020, the company began reneging on its commitment to buy shares back from its employees - a plan first implemented in 2018 that was supposed to happen in 2020 as well. The employees claim this plan kept them waiting for many years, that the framework was supposed to last five years, that the company had committed itself to purchase 2% each year of the special share capital issued to each employee, priced at approximately $1,300 per share.
According to the employees, the management refrained from providing proper information on the matter. It was then discovered that the company also stopped reporting regularly to the Registrar of Companies about other changes made to its share structure, statutes, and board of directors. Upon investigation, the employees discovered that the purchase plans actually diluted the remaining special shares in their possession. Concurrent with the repurchase plan, special employee shares were issued to the Claridge fund (the Bronfman family), and the ION fund, which were protected against dilution. This ultimately diluted the employees to half the shares originally promised to employees only.
An examination conducted afterwards by a few veteran company employees made clear that their situation was even worse. The share series issued especially for them - which was supposed to provide them with protection from dilution so that, in case of a sale, IPO, or liquidation, they would the first receive 20% of the proceeds - had been changed continually without their knowledge since 2015, as new investors had come into the company. This paralleled the company's decision in 2020 to dilute its former employees to one-thousandth of their holdings.
According to the claimants, the original commitments to the employees were initiated by and made in the presence of super-entrepreneur Yanai, to persuade them to continue working at the company for years. In one example cited in the indictment, Yanai is even quoted as raising the notion that, should the company be sold for $1 billion, its employees would receive $200 million.
"In addition to the fact that harm was done to the employees, it was done covertly and only came to light later, after many years and thanks to the resourcefulness of the employees," attorney Yaron Alon of Horovitz, Even, Uzan & Co., who represents a large group of employees, told "Globes". A similar lawsuit has been filed by Gad Ticho and Alon Kanety of Caspi & Co. A significant number of the claimants were senior executives, some of whom had been with the company for years. These include the person who was Yanai’s manager at Elbit and then left with him for EMC; many of the company’s first product architects, and vice-presidents of marketing, sales, development and product throughout the life of the company. Dr. Alex Winokur, who managed development at both XIV and Axxana, (a startup Winokur founded that was eventually acquired by Infinidat), is now in the process of negotiating with the company on the terms of payment due to him. All these proceedings are at different stages in the courts.
"I’m happy the company is doing well, but that success must be attributed to the veteran employees who contributed to its establishment, to the invention of its products, and to their development," says Adv. Alon. "Those employees worked solely in the light of the explicit promises they received about the shares that were to be allocated to them. We are confident that the Economic Affairs Court and the Labor Court will compel the company to meet its obligations."
Infinidat responded: "We believe that the claims are baseless, and in any case will be determined by the appropriate courts."
Upheaval, promotions, and growth engines
The upheaval happened in 2020, after years of the company hemorrhaging operating losses, estimated at tens of millions of dollars a year. The board decided to remove Yanai from the position of chairman (he remains an active company director to this day), and named Boaz Chalamish, founder and president of Clarizen, in his place, and Kariel Sandler as co-CEO and CPO and Nir Simon as co-CEO and CFO. As part of the long recovery process, the company raised tens of millions of dollars from TPG Capital, the Bronfman family’s Claridge fund, ION, and Goldman Sachs. The process also included a plan to dilute the holdings of former employees that, although it was put into effect only a few months later, caused employee resignations, along with employees sent on furlough due to the Covid-19, epidemic, and employees who were fired. In all, the company shed 70% of its workforce.
"In September 2020, we identified those core employees who could be given greater responsibility and we promoted them to more senior positions," said Bar-Or. "I looked for the team leaders who, despite the turmoil, had the courage and strength - some of them even approached me and said, ‘I'm not going anywhere'. The absolute majority of directors you’ll see in the company today are team leaders who have taken responsibility and advanced. Similarly, many of our team leaders today were engineers who took on additional responsibilities. Although we had a high turnover of managers, and the average seniority of management is one year, the company is anchored by product, technology, sales and support that have continued to support customers throughout this time. We hired experienced managers from outside, mainly from large companies, built plans for launching two product lines, and focused on new growth engines, like flash products and backup.
"During the first half of the year, I was losing sleep from the weight of care and responsibility resting on me, but after this period we could say that the company was stabilizing and that the existential threat had lifted."
How did you transition from loss to profit?
"We cancelled unnecessary projects, and had to think better about adjusting the workforce to our revenue level. Up until a half year ago, the term ‘profit’ wasn’t much used in the Israeli high-tech lexicon, but already in 2020, we had committed to ourselves to not spending more than we could afford. That’s considered old school. During the first half of 2021, it was hard, because our teams needed more people, and we wouldn’t allow that until we felt we were meeting our sales targets. Now, in mid-2022, as we go into a global economic crisis, we’re 'privileged ', because we’re already used to operating profitably. We have great conditions here, including fully stocked kitchens, every type of coffee machine, generous meal vouchers, events and activities - but we’re not the type to host extravagant performances or staff trips to exotic islands. We’ll invest in growth and our workers."
"I was excited by the challenge"
What was the moment when you said to yourself, "We've made it"?
"Towards the end of 2020, I saw that we’d succeeded in filling most of the critical positions through internal promotions and external recruitment. I also saw that the acceptance rate for our job offers had crossed the 90% threshold, which means that most of the candidates we interviewed, each considering several different job offers, decided to go with us. In addition, we saw the number of deals increasing rapidly. Up to that point, our competitors were doing unbelievable things, including going to one of customers and telling them we were about to go under. We had to persuade the customer that our competitor was mistaken - and that customer decided to believe us, and has stayed with us to this day. The investors were behind us all the way. Gilad Shany of ION told me: ‘I’m not in your position but I can guess what you’re going through. Even if you miss, know that I’ve got your back.’"
You came from a very stable job. What persuaded you to stick your head into "the hornet's nest" at that time?
"The more difficult the situation described to me, the more attracted I was. They told me about the technology, the people, and the revenue, which was impressive even then, but also about the lawsuits, the loss of trust and the departures, and how desperate the situation seemed for people. That excited me even more, because this was a bigger challenge than coming to a company where everything was okay. Even though, almost every day I was asked at home ‘What were you thinking?’ or ‘What have you done?’, I saw the opportunity in a company with both technological and managerial challenges. After 15 years in corporate America, the combination of a large Israeli-American company with a great opportunity to bring value to Israeli high-tech attracted me. In retrospect, I’m grateful because this is a lesson you won’t learn if you don't roll up your sleeves and get to work."
Does the current economic crisis affect you?
"Since 2020, we’ve avoided unnecessary expenses. We’ve grown in a responsible manner, and we have no need or intention of cutting back. On the contrary: we have many open positions in Israel and in the world, and we’re hiring on the basis of our performance and increased sales. It’s true that in a difficult economic environment, companies are cutting back on many product purchases, but it is less likely that a senior executive at a major enterprise will cut back on storage at a time when the volume of information it collects doubles every period."
- Sector: Data storage servers.
- Executives: Global CEO Phil Bullinger, responsible for sales and service, and Infinidat Israel GM Israel Shahar Bar-Or, responsible for R&D and product.
- History: Founded in 2011 by Moshe Yanai, the company has so far raised $370 million from investors such as Claridge and Goldman Sachs.
- Employees: 490 people in some 17 locations worldwide, more than half of them at the development center in Herzliya.
- One thing more: For two years, Infinidat Israel GM Shahar Bar-Or taught computer programming at a high school.
Published by Globes, Israel business news - en.globes.co.il - on July 31, 2022.
© Copyright of Globes Publisher Itonut (1983) Ltd., 2022.