Communitech photo: Anthony ReinhartScaling the heights: How Magnet Forensics is facing the challenge of growth Anthony Reinhart June 30, 2016 Columns, Small to Mid Size, View from the ‘Loo It’s one of the biggest clichés in tech; a staple of innumerable startup pitch decks: “We’re changing the world.” Magnet Forensics, whose software has helped put murderers, terrorists and child pornographers behind bars, is one of the few companies that can credibly make the claim. By now, the Magnet story is familiar within Canadian tech circles, and a notable one in several respects. Jad Saliba, who started it all, was a code-literate police constable and cancer survivor when he developed his first product, Internet Evidence Finder, in 2009 and gave it to other cops for free. Two years later, looking to commercialize his creation, Saliba met Adam Belsher, an executive who had just left a 13-year career at BlackBerry to try his hand at entrepreneurship. They had the same accountant; he introduced them. Saliba quit the force and, with Belsher as his CEO, started a company that has been profitable from its first day and grown into global contention without any outside investment. Magnet now employs just over 100 people, has 3,200 accounts in 92 countries, and has helped authorities prosecute countless cases through use of its software, which recovers evidence from computers, smartphones and other devices. Those cases include the 2013 Boston Marathon bombing and the murder, that same year, of Tim Bosma near Hamilton, Ont., a saga that ended this month with a pair of first-degree murder convictions after a long and sensational trial.Earlier this week, I caught up with Belsher in the company’s headquarters, in a former BlackBerry building at 156 Columbia St. W., to talk about Magnet’s steady upward trajectory and the challenges of scaling a high-growth tech company in Canada. Q – Magnet was recently honoured by the Forensic 4:cast Awards, and not for the first time. What does this kind of recognition mean to your company? A – What’s interesting about those awards is that customers vote on the awards, which is great. It’s not a panel of industry experts or Gartner or any of these guys. It’s actually customers who use your product and vote on the best tools in the industry. I think it’s our third or fourth year winning the computer forensic software award. For us it’s a great accolade, especially for the dev team. Obviously, sales are a barometer of how well you’re doing, but when you get those forensic examiners who are voting on the award saying ‘this is the best tool,’ that resonates with all of us, but specifically with the development team. Q – How many companies are really competing in this business space? A –I would say, in digital forensics software, there’s probably 18 to 22 different companies; some on the mobile side and some on the computer side. We cross both computer forensics and mobile forensics; we actually have a product in the mobile forensics space as well. What’s a bit unique with us, especially with our new product, is that we combine evidence you may have acquired from someone’s smartphone or tablet and computer and PC, and you’re able to see everything in one place, whereas traditionally, customers buy a mobile forensics tool, and they buy a [separate] computer forensics tool. As you can imagine – with the amount of data and potential evidence; somebody has 64 gigs on a smartphone, plus they may have a laptop, plus they may have an external drive connected, plus, plus, plus – there’s so much data from different devices. Most of us live a lot of our lives on our smartphone, but we also have a computer and maybe we have a tablet, or a couple of tablets. The beauty of this new platform is that we’re able to pull all that data into one place and be able to view the data, understand connections, how is it related. Q – Are you the only ones taking that combined-platform approach right now? A – Yes. There are other guys doing dedicated computer and dedicated mobile, but we’re really the only ones who have done a good job of tying it all together. Q – Size-wise, among all those competitors, are you steadily climbing the ranks? A – Yes. We’ve transitioned from our first product, Internet Evidence Finder (IEF), which was really a complementary platform [to the incumbents’ products] to recover Internet-related data, and we kept adding things to it. Then it became more and more obvious to us that if we had a few more things, we can actually be that [big] platform and compete with the incumbents. That’s where the new product, AXIOM, comes in. One of the things that we’ve taken advantage of is that there hasn’t been a ton of innovation in the space, and we’ve come on as that young upstart. Incumbents’ systems were built in the early 90s, when hard drives were 150 megabytes, and now the average drive is closer to a terabyte. So, the paradigm has shifted from when smartphones didn’t really have any traction, to a single computer, to a pretty small hard drive, to now, with multiple devices, lots of data, lots of different types of applications for how we communicate – chat, social media, SMS, whatever. Q – How is the cloud affecting all of this? A – Although people are using cloud services, whether it’s storage like Dropbox or Microsoft SkyDrive, it’s amazing how much still gets left on a hard drive. Sometimes you’re not necessarily getting the document, but what you’ll get is, ‘OK, I know that you uploaded a PDF, and the name of the PDF was this, and the size of the PDF was this, and you uploaded it at this time.’ In some cases, that’s enough for police to get a search warrant and go to Google or Facebook and say, ‘We believe this is related to our investigation.’ There’s still quite a bit that gets left on a PC and on a mobile as well. This whole privacy and encryption thing has been in the media a lot, but there is still a lot that can be found on a mobile. Certainly, encryption creates more barriers to getting that, so I think the laws need to be updated for this new world of encryption. Q – Do you have a timeline in mind to become the world’s top digital forensics company? A – We certainly have a vision of where we want to get to, and shorter timelines on specific milestones, but I wouldn’t say it’s like, ‘Hey, in three years we want to be the leader in the space.’ I think what I’ve learned, in the short time that I’ve been doing this, is that if you do the right things and stay focused, listen to your customer – and you have to say no to a lot of opportunities – focus on a segment, a vertical segment, and really try to own that and get maximum market share, then you can kind of slingshot yourself into different segments. It’s kind of the Geoffrey Moore, Inside the Tornado approach – or even Peter Thiel; he talks about this in his book, Zero to One, where you find a niche and own that and monopolize that. Then, once you’ve got that strong footing, then you figure out if there are adjacent segments where you can leverage the technology or your channel. It’s not as sexy as saying ‘there’s a $10-billion market and if we get .01 per cent of that we’re going to be a $100-million company.’ Having a real purpose, it grounds us in a lot of ways, and it helps us from a recruiting perspective, especially with the younger generation, who want to make a difference; they want to have an impact. Frankly, what more impact can you have if you’re helping find evidence on a potential terrorist suspect, or you’re helping break up a child exploitation ring? I mean, the Tim Bosma case – there’s records that IEF was a big part of [recovering]. Q – How big is Magnet today? A – We have 3,200 accounts in 92 countries. I think we’re between 100 and 102 [employees[ or something like that. I think the open headcount for the remainder of the year is something like 25 or 21. I would say that our headcount has probably grown 30 to 40 per cent over the last couple of years, roughly. Our revenue, which we don’t disclose, has been consistently growing for the last three years, between 40 and 50 per cent on the top line, year over year. And we’ve been profitable and cash-flow positive from the beginning. We did announce a relationship with a company late last year, in December, called In-Q-Tel. That was interesting for us, because when you’re in the position we’re in – which is good in a lot of ways, in terms of you don’t need the money to fund operations – we were able to say, ‘OK, who are the players in the market we’d like to partner with to get us closer to those customers that we want to help?’ So, who deals with things like terrorism and national security and things like that? We came upon In-Q-Tel, because essentially their model is to identify commercial technologies in the market that, with some modification, could further the mission of the U.S. intelligence community. Q – Is that an equity relationship? A – They do take a very, very, very, very small equity stake, but really, what they will do is fund a project. So they’ll say, ‘We love this product. If you could do these five things, two things, three things, that would really help us with the work we do.’ It’s an interesting model, because they take a very small equity piece and then they fund you to either accelerate your roadmap or tweak it. It helps us better understand their challenges, which is always a good thing. Q – Turning to issues around scaling, what are the biggest challenges you’ve faced as a CEO around scaling, and how are you working to overcome them? A – Integrating people. If you’re in one spot, it’s easier for them to understand the culture and drink the Kool-Aid a little bit, if you will. If they’re remote, they’re on a bit of an island. I think we do a decent job, but how do we disseminate, communicate and keep those people engaged when they’re not at the nucleus of the company, and empower them with the tools they need, the information they need and the feeling that they’re plugged in? I think a lot of the things I think about are the people stuff, and how do you do a good job of integrating those folks. We haven’t had the typical running-out-of-money, can’t-make-payroll situations. I think we’ve done a good job of managing our business that way. We haven’t had crazy competitive headwinds that have slowed us down; we’ve kept innovation at the forefront. I think it’s the people stuff, and how you make sure you get everyone moving in the same direction. Doing that in one place is hard, but then how do you scale that to other countries? You get different personalities; like, the Brits are different to deal with than the Americans. Q – Is it just Britain and the U.S. where you have people now? A – And Singapore. Outside of Canada I would say we have 10 to 12, but we’ve taken a fairly measured approach. Q – What about sheer numbers of people? Do you struggle to hire due to a general shortage of talent? A – I think a lot of Waterloo Region focuses on development talent, which is hard, but I would say sales, marketing, experienced people in product management, experienced people in marcomm – those are as hard to find. The University of Waterloo is a pretty good feeder for dev talent, but some of those other disciplines are not easy to find in this area, and I think other tech companies have struggled at getting good sales and marketing talent. We have someone in California. Our VP of the U.S. is based in D.C., basically. Our VP of marketing commutes here from Toronto four days a week. So we’ve come to the realization that you’re not going to be able to get everyone to come to Waterloo, and we have to be open to other options. That’s why the scaling of the culture and the systems and the communication, all that stuff becomes super important, because I know we need to go outside the region for talent. I think talent is always a challenge, but I would say it’s probably not as challenging for us as for other companies, because of what we do and the impact we have. That resonates with a lot of people. Q – How big a factor is that in recruiting? A – Millennials want to work on something meaningful, something that’s bigger than themselves. Assuming all other variables are the same, such as compensation, do I go to another company? A lot of them will tell you they’re changing the world and having an impact. I think we can actually put hand on heart and say, ‘We are actually impacting people’s lives.’ Q – What about the challenges you’ve faced personally, as a CEO? When we first met, you had only a handful of employees. Now you have more than 100 people relying on you for their livelihood, and I’m sure your day-to-day duties have changed considerably since you were a rookie CEO. How difficult has that been? A – It comes down to self-awareness. I’ve been around for 42 years now, so I kind of know where my strengths are and where they’re not. What I think I’ve done a good job with is just getting people into those key spots. You can have people who are absolute star performers but they’re not great people managers, so you have to put people in the right chairs, where they’re going to be successful and feel like they’re successful and make meaningful contributions. I’m still learning a lot. Having a few great mentors has really helped me to go through the different phases. What I think we’ve done a good job with is getting people in place who have experience; who have been there and done that. I’ll use our CFO as an example. You could argue we hired him a bit early, but he basically came at a time where we probably could have waited another six months before we really needed him, but he saved us from making a lot of mistakes during that time. I would say my stress has actually gone down, because I’ve put trusted people in place. There’s different types of challenges, but it’s allowed me to be more forward-thinking versus in the weeds, firefighting. Q – How do you deal with the political and regulatory complexities of selling into 92 countries, to mostly government agencies, in a sensitive field like forensics? A – We’ve done a couple of things. We make sure we follow export control rules. Basically, it’s ‘here are the companies you can actually do business with.’ We follow both Canadian and U.S. export controls. There are some countries where they’ll say you can sell to them, but you need to know the end user, and then we will write to the Canadian government and get a letter saying ‘you have the right to sell to this person.’ We put a bunch of procedures in place here to make sure nobody can, by accident, sell to Syria or North Korea or something like that. Even in Salesforce, people can’t enter orders for certain countries. But really, where we go to first, is, what is the U.S.’s and Canada’s position on selling to these countries? Governments kind of set the rules. There’s been some instances where we haven’t been able to sell to certain countries, and that’s OK. We’re focused on helping the broader law enforcement community and helping them do what they do every day, not going against them. Q – What other talent-related challenges come with scaling? A – Part of the challenge of scaling is certainly finding the talent and getting the right people in place, but in my mind, you only can bring on people so fast. Say I wanted to hire 100 people tomorrow. What resources is it going to take internally to get those people up to speed, to onboard them? And, obviously that distracts them from the stuff they’re trying to deliver on. I’m not sure if we’ve found the perfect velocity of bringing new people on, but I do feel that, even if you had all the money to hire all these people, I think you have real challenges just getting those people up to speed and getting them into the culture of the company and how we do things. We went through a year, it was 2012 or 2013, where we hired a lot of people and it was a real strain on the organization, both in hitting milestones that we needed to hit, and getting those people up to speed and on board. We were probably not being as rigorous around the hiring and then faced having to deal with it; having to let people go or have them not fit in. It’s not as sexy as saying ‘we’re going to hire 200 people next year,’ but I think that’s a way to scale your business in a way that you don’t jeopardize the culture. You find the right people; you have a balance of your current folks focused on the priorities they’re working on, plus trying to help [bring on new people]. Q – With the 3,200 accounts in 92 countries, how close are you to hitting the ceiling of that market? Is there still a lot of room to grow? A – Yeah. I would say we’re probably nine to 11 per cent of that market. And today we sell to the forensic departments, if you will; the high-tech crime units, but there’s an interesting opportunity beyond that. For example, Waterloo Region has maybe five forensic examiners, and they have 200 or 300 investigators. Those could be major crime guys, homicide, fraud. And they use the output of what we recover to help them in their investigations. The digital forensic guys are kind of the processing hub for recovering the data, and going deep into the data if needed, but there’s an interesting shift where there’s so much data, and such a backlog – like, some of these agencies have a year to two years of backlog, with cases sitting on someone’s desk that they can’t get to, so unless it’s a missing person, a homicide, or terrorist or national security related, they just don’t get looked at. For those examiners, they need tools that are easy to use and can get them to the data quickly, and then be able to share that. If somebody is investigating a homicide and they’re knocking on neighbours’ doors, they have the full context of the case. The forensic guys are just getting the devices, and a lot of times it’s like, ‘Get whatever you can off these devices,’ but the investigator has the context. The interesting thing for us is, the data and the evidence we uncover is really, really important, and to have some ability to share that. How do you get it to the 200 or 300 investigators? Then, all of a sudden, our TAM (total addressable market) really grows. You’re recovering this data and you’re putting it in a form that’s digestible from a non-technical person, and that’s a real interesting opportunity for us, as we grow beyond the forensic units. How do you make that evidence you recover shareable within an agency, in a format that someone who hasn’t taken two weeks of forensics training (can understand?) Q – One last question on scaling. What should we in Canada be doing to address the challenges facing scaling companies? A – I think it’s a great question and something I think about. We have a good ecosystem in K-W and other parts of the country that are really good at helping those true startups; giving them mentors and support around getting the product out and getting some marketing and stuff like that. The needs of someone like us are different, for sure, at a different level of knowledge and experience. Also, with the U.S. intelligence agencies, we have a strategic relationship with them. In our own [Canadian] backyard, where we’ve got intelligence agencies and police, they’re our customers to a certain extent, but we’re still seen as a vendor. We’re not like a partner. I know this is frustrating for some of the politicians as well, but we’ve actually got to start giving a bit of an unfair advantage to the home-grown Canadian companies, whether it’s strategic procurement of our product or some other measure. Governments say they want to innovate, and want Canada to be a centre of innovation, but you’ve got to stimulate it. Giving to [startup incubators and accelerators] and things are great, but you need to pick 20 or 50 companies that are scaling and say, ‘We’re going to help you get to the next phase.’ U.S. investors have contacts where they want you to sell to another U.S. company, and all of a sudden these indigenous Canadian companies get sucked into the U.S. vacuum and get acquired or whatever. I, as a shareholder, will probably do OK with that. But what about the rest of the people here, who we’re employing in Canada, and are paying taxes? They get the short end of the stick, frankly. So I think there’s something the Canadian government can do. They say they want to be innovative in technology, yet they continue to give massive subsidies to bail out automotive; they bail out softwood lumber. Why don’t you carve off one-tenth of a per cent, like $100 million, and pick 10 horses or five [tech] horses, and give them money? If we really want to help companies scale, I think the government has to get serious about engaging those companies directly. Have a dialogue. Outside of policy, I think there has to be real engagement from government directly to companies – especially at the scale-up stage – around how do we help you? Q – But how do you then respond to the criticism that this is just corporate welfare, and people asking ‘why does a fast-growing tech company need government money anyway?’ A – Business success is revenue. If you’ve got revenue and you’ve got sales, you can hire people, you can file more patents. As we’ve increased our revenue, we’ve been filing more patents; I think we’ve got six or seven patents filed, and those aren’t cheap, because you’re filing them internationally. They’re $30,000 to $40,000 apiece. But a little startup can’t afford to get a patent, and especially in the software world, IP is so important. Revenue cures a lot of things; you can hire people, you can pay them well, you can pay them so they don’t leave and go to the Valley, you can build a strong IP portfolio, you can globalize your company. What’s frustrating is, a lot of the government’s focus is on startups. And that’s great; you still need that, but you also want this segment of companies that are midsize or small. Like, how do you go from 100 to 500, or 500 to 1,000, or whatever the number is? That gets lost, I think, in the current funding model or innovation focus. Take a slice off what you’re giving to automotive. They could actually probably come up with $100 million to $200 million and hit a good number of companies, and really have a great ROI. If these guys want political capital for the next election, what better way? It is what it is; we’re going to continue to do what we do and not depend on them, but it sure would be nice to have a little help from your government for the home team. Photo: Adam Belsher in the boardroom at Magnet Forensics headquarters in Waterloo. Anthony Reinhart is Communitech’s Director of Editorial Strategy and senior staff writer. View from the ‘Loo looks at the issues, people and events that shape Waterloo Region’s technology sector.