Startup Defies the Rules by Going It Alone – Till Now

Formed more than a decade ago, AlgoSec raises capital for the first time in a $36m fundraiser from Claridge Israel

Yuval Baron and Avishai Wool on AlgoSec, January 2, 2018
Moti Milrod

In the world of Israeli startups, especially those in cybersecurity, there are few companies that can boast a history that goes back 10 years, sales in the tens of millions of dollars annually and be entirely owned by their founders and employees. It even employs a lot of women.

The typical startup has raised capital from an angel investor, venture fund or other outside investors already in its earliest stages. And men predominate.

The story of the network security firm AlgoSec defies all the rules. Formed in 2004, it has kept a low media profile while earning a profit and opting to finance its own growth – that is, until now. On Wednesday AlgoSec’s founders – CEO Yuval Baron and Chief Technology Officer Avishai Wool – said they had raised $36 million from the Canadian-Israel investment firm Claridge Israel to help it expand globally.

Claridge Israel will take a minority stake in the company, buying some shares from AlgoSec employees and injecting money directly into the company. Claridge Israel is a partnership between CDPQ, one of the largest institutional investors in Canada, and the Bronfman family’s investment firm Claridge of Canada.

In an interview with TheMarker, Baron and Wool said the company had revenues of more than $50 million last year, earning profits in the millions. They expect sales to grow 30% this year and to reach $100 million annually within the next two years.

Neither AlgoSec nor Claridge would reveal the company’s valuation in the deal, but it is estimated to have been done at $350 million.

“We started talking a long time ago – two years after the dotcom bubble burst [in 2000], with investors who asked us if we could envision a company with a $1 billion valuation and we simply answered ‘no,’” said Baron. “Their response was that if that’s the case, then we’re of no interest to them. So, we decided to raise money from our customers by actual sales.”

AlgoSec quickly developed an Israeli client base of several customers, among them Teva Pharmaceuticals and Israel Discount Bank, which generated several tens of thousands of dollars in revenue. “We didn’t take any loans or grants from the Office of the Chief Scientist at any stage I worked without a salary for three years,” Baron said.

AlgoSec wasn’t Baron’s first startup. He began his career as a programmer at Comverse – one of Israel’s first big high-tech companies – and then moved to RAD. At the end of the 1990s, he started up a company called Actellis Networks, which provided technology to send broadband over copper wires.

The company raised $75 million from blue chip investors, but he left it after three years. After a stint at home, Baron decided the time had come to form another startup and turned to three academic researchers for ideas.

Only response

“I was looking for people dealing in software and in 2003 the only one who responded was Avishai Wool, who had just finished his post-doc that involved a computerization project.”

Today a professor at Tel Aviv University as well as CTO, Wool began his career in the 1980s at Israel’s Elron after serving in the Israel Defense Forces’ legendary 8200 unit. After several years he left high-tech to pursue a doctorate in mathematics and computer science and did a post doctorate at Bell Labs in the United States.

“At the time the labs had 600 PhDs and a cybersecurity product that competed with [Israel’s] Check Point Software,” Wool recalled. “Two floors above we saw the people that developed Unix operating systems.”

Wool used his time at Bell to develop an improved security product, which became the basis for a startup formed in 2002 and employed 15 people. Wool, however, wanted to return to Israel and the business was disbanded.

“When my daughter was entering first grade we decided she should be growing up in Israel,” said. “The board of the company understood quickly that it couldn’t work [with Wool in Israel] even though we already had three customers, and the product was pulled.”

As it turns out, Baron’s approach to Wool came at the perfect time when Wool had a ready product but not business. “I asked him what his vision is and he answered that the project should succeed,” said Baron. Wool added: “I thought it could be a big deal.”

The two bought the intellectual property from Bell after a short round of negotiations and formed AlgoSec.

Visitors to the company’s new offices in Petah Tikva – a 3,000-square-meter facility – are likely to be shown a picture of AlgoSec’s first headquarters, a single room in which 10 people worked. Today the company’s payroll is 350 – 120 of them hired in the past year and 41% of them women.

AlgoSec’s product enables organizations to automate their network security policy management. Its software simulates traffic on the network and advises what should or should not be passing through the network.

“Security policies at big organizations are very dynamic. Big companies need to make tens and even thousands of changes every day and they can’t do it manually,” explained Wool.

The company cooperates with companies such as Cisco and Check Point, and counts AT&T, Microsoft, Unilever and British Telecom as customers.

AlgoSec’s biggest competitor is another Israeli company called Tufin, which has raised $26 million to date.