When I talk to entrepreneurs and business students about financing their Big Ideas with their company’s business income, I see them gaping. Why invest your own money? After all, it’s so much sexier to have a big name VC fund throwing money at you as you go from Silicon Valley boardrooms to TED Talks to SXSW or CES, basking in your genius. Sexy? Could be. Expensive and pushy? Definitely. In return for their funds, venture capital organizations demand 25% to 55% equity ownership of the company and more than a little control over strategic planning. And in three to seven years they want out.
There was nothing sexy about Jere Simpson’s plan to transform his company, KITEWIRE, from a government contractor for time and materials he launched in 2007 into a B2B cybersecurity software company. In fact, Jere wasn’t even that interested in cybersecurity. But he saw a great opportunity and went for it.
By 2016, the BlackBerry phones carried by government officials — even President Obama — looked positively antique next to the wildly popular iOS and Android smartphones. However, they had little choice, as BlackBerry was more secure than the newer phones, whose biggest selling point was their ability to run multiple third-party applications, causing potential security vulnerabilities. So he presented the idea of smartphone security to the FBI, with a few tweaks to his typical government contract. First, instead of time and material, he set a project fee. Second, the agency could determine the requirements for the project and rate it for effectiveness (a process called “red-teaming”), but it wouldn’t own the final product — just a license to use it.
See what Jere was doing there? He made the FBI pay him to develop a highly sought-after product and they insisted on vetting it – essentially handling quality control. When the FBI bought it, excuse me, license- the final product, Jere could pitch his product to Fortune 500 companies, banks, government security agents and tell them that “this security product has been validated by the FBI.”
Jere could pitch his product to Fortune 500 companies, banks, government security agents and tell them that “this security product has been validated by the FBI.”
Getting the FBI to effectively approve his product was genius, but the other part of the deal—being paid by the project rather than by the hour—was no less brilliant. This meant that the more efficiently the company could deliver to customers, the more profit it would make. Jere would put any additional profits into an elite internal team working on the mobile security project. KITEWIRE’s normal activities, meanwhile, served as a talent funnel for the team. “If someone showed promise, I would take them off the project they were commissioned on and move them to the mobile security project,” he explains.
All in all, it took about two years for the product to be ready for sale. Those two years were tough. Funds became very tight and some team members left the ship. Ultimately, however, it set KITEWIRE Mobility, as the company was now known, on a path to reach $55 million in revenue by 2019, and allowed it to expand into the consumer market.
But KITEWIRE didn’t just grow. It grew in an incredibly clever way. You will recall that the original business model was to develop custom software based on time and material. That meant that the profit margin was more or less set at the difference between what the government paid KITEWIRE and what the company paid its employees. A predictable profit margin is nice and safe to have. Increase your income and your profit grows with it. But you probably see the problem here: you make money, but there is no opportunity for a breakthrough – a highly scalable moonshot in which the profit margin increases as revenues grow. A money making company with a predictable profit margin is worth a small multiple of that profit. A moonshot with the potential for exponential growth is worth huge multiples not of profit, but of revenue. Spoiler alert: That is a lot of money.
KITEWIRE didn’t just sell to a wider audience. It used a very different model, which you’ve probably heard of: software-as-a-service (SaaS). Under this model, companies didn’t just buy software like KITEWIRE’s mobile security solution. They’ve essentially subscribed to it. If they stopped paying the monthly subscription, the software would stop working. This has certain benefits for buyers: it transforms software from a large, incidental capital outlay (CapEx) to a regular and predictable operating expense (OpEx). The software is automatically updated, receives security patches where necessary and is available where and when it is needed.
For the company that sells SaaS, the benefits are enormous. Just imagine how much it costs to develop and deploy a cloud-hosted application. Imagine selling it to 100 users. Then imagine selling it to a million users. The cost difference is negligible, but the revenue difference – the profit – is getting bigger and bigger. Your business becomes more and more profitable as it becomes more efficient.
And KITEWIRE got terribly efficient. Before KITEWIRE launched the commercial product, it was earning approximately $100,000 per employee. After that, that figure rose to $1.7 million. Moreover, it was no longer worth a small multiple of profit, but a large multiple of income. Last year, just three years after launching KITEWIRE Mobility, Jere sold it for a $1 billion stake in the acquiring company.
For Jere, cybersecurity was not a passion. It was a means to an end – something he was very good at and which could help him achieve his goal of building a multi-billion dollar company. And now that he can tick that off his bucket list, he’s already on his way to his next adventure.
If you lie in bed at night trying to dream about the “big, earth-shattering idea” that your rocket to the moon will be, maybe take a step back. Your moonshot — and the money to fund it — may already be in front of you.
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