If anyone ever writes "The Guide for the Israeli Tech Beginner", the story of startup company Argus will surely have a substantial chapter devoted to it. It includes all the classic elements: friends from military service identify an idea, develop a product, pitch it to investors, build a company from scratch, position it as an international company with international partners, raise a minimal amount of money ($30 million), and sell to a giant automotive industry corporation - Continental - for hundreds of millions of dollars, and all that in less than four years.
There are those who think it was too fast. An experienced auto-tech investor to whom we talked said that if Argus had chosen the long road of an IPO like Mobileye, it would have stood a good chance of becoming a unicorn (a startup with a valuation of over $1 billion). "Argus is positioned in two of the hottest fields in investment today," he says, "On the one hand, it is in smart, networked vehicles, and on the other, in cybersecurity. Investors are crazy about these things at the moment."
Argus CEO and co-founder Ofer Ben-Noon is, however, unmoved by arguments like that. "I'm happy that investors pay us compliments," he says, "but what was important to me as an entrepreneur and CEO was fulfilment of the vision. We wanted to be a company that provides protection capabilities to networked vehicles in the automotive industry and counter the risks of malicious hacking. With a company like Continental, which has huge power in the auto industry, we have a much better chance of giving that industry good service and fulfilling the vision than we would have had independently. That was the aim in setting up the company."
Ben-Noon stresses that the deal gives Argus, as a company, an unusual level of freedom within the giant enterprise that bought it, certainly in comparison with previous M&A deals in vehicle cybersecurity, such as the acquisition of Israeli company TowerSec Automotive Cyber Security, which was effectively swallowed up by HARMAN (which in turn was swallowed up by Samsung).
"Continental will enable us to preserve our work culture and startup mentality, and at the same time it will provide us with resources for accelerated growth, including the hiring of dozens more employees, which will start soon. Argus will be part of Continental's Elektrobit subsidiary, which is an independent supplier of services and products to the entire automotive industry. We have a full mandate to continue all our collaborations with all the chip makers, as well as with other large subcontractors in the industry, including those that compete with Continental. We won’t work with just one auto industry supplier."
Argus still refuses to comment on the amount at which the acquisition deal was closed, despite the wide media coverage, but is prepared to say that "in the weeks preceding the deal we had several concrete acquisition proposals at substantial amounts of money."
When did you start to realize that the exit was going to be big, not just an eight-figure amount as in the case of other companies in the field that had been acquired before you?
"We realized that in the past few months, not only because of the offers on the table, but also because of the dramatic developments that had taken place, mainly in the context of regulation in the US and other places, which meant that there was a significant acceleration in demand for our solutions. That undoubtedly had consequences for the valuation of the company."
Argus spotted the importance of regulation in its field early on, and took steps designed to "help" the US regulator reach the right decisions. Among other things, the company recruited for its US management two senior and well-connected executives formerly with General Motors and Chrysler; and its CMO Yoni Heilbronn was even summoned to appear this year in a critical hearing of the US Congress that dealt with vehicle security, and met senators and congressmen and other relevant people.
Some might call that kind of behavior "Israeli hutzpah", but the company prefers to call it "a proactive approach". Heilbronn says that the appearance before the Congress committee was "an Israeli-Zionist experience' as far as he was concerned. "I was the only Israeli at the hearing, at which several senior automobile industry executives were present, and I was surprised to discover the expertise that the members of Congress demonstrated in the subject," he says. He estimates that within a few months a law will be enacted in the US obliging all vehicles to be equipped with multi-layer cyber protection, of the kind that Argus specializes in.
Although the prospect of the installation of software-based cyber protection in millions of vehicles might put the price at which Argus was acquired into perspective, that is only part of the story. The sales and revenue model of many companies that develop systems and components for smart vehicles is currently based mainly on the number of one-time installations, in an 'install and forget" formula. But smart vehicle cybersecurity systems hold the potential for a continuing stream of revenue from updates against viruses and new threats that crop up all the time. A revenue stream like that continues throughout the life of the vehicle, and adopts the highly profitable revenue model of the various kinds of anti-virus companies.
Argus confirms that that is indeed part of its long-term business model. In addition, cooperation will be required between vehicle manufacturers to create a cyber threat database, in a similar way to what happens in other markets, such as banking, in which banks update each other with this kind of information.
The first steps towards this have been taken in the US, where an information-sharing body has been set up, Heilbronn says. "But this body is still in the initial stages, and it will probably take more time for it to become sufficiently effective, as happens in other industries," he adds.
Meanwhile, Argus is expanding into OTA (over the air) updates for vehicle software, a move it recently announced in collaboration with Elektrobit. "There is a significant overlap between the need for frequent cyber updates for vehicles and the need for software updates for smart vehicle systems in general, and we entered this field in the light of customer demand."
Even this does not exhaust the market's potential. Compact, mobile, integrated cyber protection is acquiring increasing importance in the IoT (Internet of things) age, and not just for vehicles. A great deal of other mobile, expensive, and vital equipment with robotic or autonomous capabilities and connection to the network is vulnerable to cyber-attack. Engineering equipment, production lines, armaments are examples of areas in which this is more and more the case.
These are very interesting business opportunities, and Heilbronn says that there are certainly further areas that are very relevant for Argus's technology. "The military sphere is not necessarily where we want to be active. There are many other markets in the civilian world where cyber solutions based on our technology could be very relevant, and we have already received quite a few approaches in those contexts. Up to now, we have been very focused on vehicles and have not spread into other areas, and I believe that that has been one of the secrets of our success. All the same, given the current change in the company and the extensive hiring of manpower that we expect in the coming years, it makes sense to examine possibilities of expansion into other fields."
"High entry barriers"
Argus has collaborated with cybersecurity companies, including Israel's Check Point Software Technologies Ltd. (Nasdaq: CHKP), which is currently rumored to be mulling independent activity in cybersecurity for smart vehicles. This is besides giant companies in the US, Europe and Japan.
Do you not fear that this sector will become a playing field for the cybersecurity giants?
"Anyone who starts getting into this field today," says Heilbronn, "will reach the point where Argus is now in three years' time. We have a strong portfolio of patents, and in any case there is quite a gap between cyber protection on the web and the world of automobiles. You can't take existing protection protocols and simply put them into a car. Most of the attempts to merge the two worlds have not so far stood the test. Our advantage is not just in technology.
"Argus has been in existence for four years, during which it has managed to establish relationships with the automotive industry, to forge ties with the right people in giant companies, and to pass a great many technical assessments by customers as part of the sales process. We have demonstrated that our products work, that they do not affect the way the vehicle behaves, and that they are the best on the market. The barriers to entry to this field are still high."
When we ask Ben-Noon for another tip for beginning startups, he does not forget to give credit to the investors, most of whom also served as mentors and door openers. "We were three inexperienced entrepreneurs, and we received the push to success from the experienced managers we hired and from our investors, among others from Zohar Zisapel and from the people at the Vertex and Magma funds, who contributed a great deal from their rich experience.
"There's a big difference between financial investors and experienced investors who bring with them added managerial value. We were also fortunate in hiring an outstanding group of workers at every level, from research and development to marketing and business development"
Several Israeli vehicle importers also invested in Argus at the early stage, prominent among them Gil Agmon, who features on the company's advisory board. The importers are of course financial investors, but at the same time they serve as door openers in the automotive industry, being connected to the senior managements of some of the world's largest vehicle makers.
"The Israeli vehicle importers who invested in the company undoubtedly helped us to make connections, both by giving access to vehicles and equipment and with important information," they say at Argus. "Gil Agmon, Tzvi Neta, the Levy family, and Allied, which owns Champion Motors, are only some of the importers who always helped us and lent us a hand when necessary."
Published by Globes [online], Israel business news - www.globes-online.com - on November 16, 2017
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