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CEO Spotlight: Jonathan Yaron, Enigma Inc.

By Angel Mehta, Managing Director, Sterling-Hoffman Executive Search

A top-seeded Israeli tennis player, ex-soldier, and software entrepreneur: Jonathan Yaron seems to get what he wants. Enigma, which counts industry luminaries Ray Lane and Leo Apotheker as board members, is an anomaly in the consolidating world of enterprise software: an applications startup that is actually thriving. Angel Mehta, Managing Director of Sterling-Hoffman, sat down with Jonathan Yaron to talk about the early days of Enigma and how it plans to dominate a market space that old school ERP vendors seem to have ignored.

Angel Mehta: Someone told me that as a young man, you were on the way to becoming a professional tennis player… how does someone go from a career track leading into professional sports, to business?

Jonathan Yaron: Well, I grew up in Israel and yes, was a serious athlete there - at one point ranked No. 3 in the country in tennis as a teenager… But in Israel, by law, you have to go into the army and that changes your life. The Israeli military is known to be the state-of-the-art but what is not completely published is that it's a huge breeding ground for modern technology. Although I was in the field, I got attracted to the relationship between modern technologies in the military, so I found myself on many different committees as a heavy-duty user and became more and more involved through the years.

I spent five years in the military, learning about software and computers… then when I left, got a significant offer as a Consultant to lead a project for the Military where they let me go through university at the same time. I spent five years running that project and did a degree in economics and management at Tel Aviv University.

After ten years, I decided that I had had enough of government life. While applying to Harvard to do an MBA, my friend and I wrote two business plans. Like good entrepreneurs, we wrote two because one company wasn't enough for us. You know, young, 27, 28-year-old guys think they can conquer the world in one shot.

Angel Mehta: So you were bitten by the business bug…what happened to those original business plans?

Jonathan Yaron: We launched them both. In 1991, we actually started the two companies. One, Business Graph was a decision support system for the stock market, and the other one was Enigma. My friend was a completely scientific type of guy, so I ended up running the business side of both companies. In 1993, we sold Business Graph to another small software company. My friend did his PhD in finance at MIT and stayed a small shareholder in the company and moved on. He's now on Wall Street, doing something with derivatives.

Angel Mehta: Enigma started as an Israeli company, right? So why and when did you move to the U.S.?

Jonathan Yaron: Yes, between 1992 and 1997, Enigma was managed as an Israel company selling worldwide. The R&D was in Israel. We grew it from zero to four and a half million bucks. The U.S. market was a very small business for us. It was a little bit over a million dollars. We didn't raise a lot of money either; we were basically running a shoestring operation. In 1997, I made a strategic decision to move the headquarters to Boston, and it changed from an Israeli company worldwide to an American company that develops in Israel. I saw an opportunity to become a leader in the market, and I was determined to pursue it to make it my long-term career.

Angel Mehta: What one customer win was most influential in shaping the company early on?

Jonathan Yaron: Pratt & Whitney. I remember Mark, my only sales guy in the U.S., said to me, "oh, they're going to have an RFP and it's for the triple seven jet engine… triple seven is a big thing… it's coming up." I said, "Mark, why are you wasting our time. They're not going to give it to a company that has one sales guy in the United States, and the CEO is the Sales Engineer…"

He said, "Humor me. You know I'm crazy…let me do it." I remember they issued a very detailed RFP and I hired a professional guy who knew how to answer government contracts, (it looked like a government contract), to actually write the response, not from a technology standpoint but from a wording standpoint. We honestly had no idea how to answer a piece of paper like that.

I went in, serving as the Pre-Sales guy…the negotiator…the post-sales guy…the whole deal. After a couple of meetings, I said, "Mark, it's costing a lot of money, we're not going to get the deal, let's leave it alone…"

And he said, "No way - let's keep going." So finally we issued the response to their RFP and suddenly started to get specific questions about our response. All this time I was preparing myself to hear that we were no longer a contender. That May, I was in Singapore at a trade show and Mark phoned me at four in the morning. I don't think he needed a phone because he was shouting so loud. We got it. I flew to the States and we negotiated the final contract.

Angel Mehta: Was there ever any hesitation about your ability to properly deliver what they expected?

Jonathan Yaron: At the surface, yes. Deep down, no. They trusted us and I wasn't going to let them down. In particular, I remember one of their engineers saying, "Look guys, Pratt tried to do what you're going to do for us twice before and failed. You're going to make this thing happen because otherwise, after 29 years in this company, I'm going to lose my job." He wasn't harsh, cocky or arrogant. He was just speaking his mind. After that meeting, I said to the guys who were with me in that meeting: "If this is not delivered on time, I will kill all three of you with my own bare hands." They knew I could be tough. The point was we were not going to fail this guy. It had nothing to do with money. It had to do with the trust they had put in us - and we had to make it happen. Period.

And so…we made it happen. And that obviously changed the world for us. Pratt signed us to a five-year, multi-million dollar contract. The whole company changed, and this was, in fact, a key factor in influencing our move to Boston.

Angel Mehta: How large were you when you were closing Pratt & Whitney?

Jonathan Yaron: We were tiny. We closed Pratt & Whitney in June 1995. In 1994, we had half a million dollars in revenue. So in 1995, we probably sold one million dollars, or a million and a half dollars, and we won a $300,000 first deal with one sales guy in the U.S. He closed Standard & Poor's, Scientific America, Pratt, and then NatWest. You never forget your first clients.

Angel Mehta: What resulted in Enigma reaching the $20m revenue plateau so quickly?

Jonathan Yaron: In 1998, Enigma as a small company, was working on securing GE Aircraft Engines as a customer. We were strong in the commercial aerospace sector, and GE was the last big player. It's always been tough to secure any GE company. I found out around that time that there are all kinds of matchmakers that phone you to try to bring you money. So I said to one of those matchmakers "I'll sign your contract if you name one company you can bring me that I really want." And he said, "GE"… so I was surprised. "Okay, I'll sign the paper if you bring me GE." And then he said, "Well, how about one more? Barnes and Noble."

This guy had relationships in the two companies we really wanted - I could see he'd done his homework.

We signed a single piece of paper with him, one page. Today you get a whole book to sign these kinds of documents. Two weeks later I'm meeting with GE Equity and I talk about the business with GE Aircraft Engines. I tell them, "If you will help me win the deal I will allow you to invest. If you don't help me, I don't need you. I don't need money." I was happy to run a business very conservative.

Angel Mehta: You sat down at that meeting and said, "I will ALLOW you to invest"? Were you crazy?

Jonathan Yaron: Absolutely. Then another bit of luck hit because the guy that used to be the Vice President of Business Development in GE Aircraft Engines just moved to GE Equity. They brought him in and he started to ask tons of questions. At that time we already had Rolls Royce Aircraft Engines and he could see in a heartbeat that we really understood his business. He ended up championing the deal and GE Aircraft Engines became our first major US investor.

About eight months later, we bought a very prominent competitor, here in New England. It was a division of a public company called Inso Providence Corporation. EBT is a company that was a pioneer in the SGML world and they had a good SGML system that the government, the U.S. government, military, mostly funded. Anyhow I saw Inso…the mother company was in trouble…so I basically phoned the President of the competition and said, "I want to buy that division". I didn't have the money, but I said: "I'm going to pay you cash. I only have six million that I just finished raising, but I'm making an offer to buy you for fifteen million dollars that I really don't have."

He says to me, "I'll think about it." He comes back two weeks later and said, "Okay, let's do it."

So I went to GE and told them my plans were to raise more money to buy this company… they told me I was crazy. But somehow, I raised $20m, and the same day we got that money, we paid $15m to Inso to buy the unit. It was ridiculous - I was running the cheques between banks to make sure the transaction cleared. But after that, immediately, the company jumped into becoming a serious player. It gave us two critical technologies that we merged into one, but this ended up taking us to the next level of competitiveness.

Angel Mehta: So at this point you're ready to go public?

Jonathan Yaron: We reached a very nice peak at the end of 2000; the company was growing perfectly…everybody liked us… bankers were all over us, and yes, we decided to go public. We were on the road. We were choosing bankers and we got to the final round and the choice was between Goldman and CSFB. Those were the final two, and just before actually announcing the decision, the market started to show signs of weakness. We had reached a point with new deals at Pratt and GE and Delta for worldwide implementation of the solution….deals that would have brought us tens of millions in revenue. But we ended up postponing because the market was getting killed. Still, the deals are flowing great - we passed an eight-figure negotiation with procurement inside GE. People were saying that Commercial Aerospace was slowing down for seasonal reasons. And then suddenly, 9/11 happened which scrapped all three deals right away.

We woke up in the morning of the 12th of September. Obviously the world changed politically but I quickly realized that economically this was going to be horrendous for the company. It was fully dependent on commercial aerospace and the OEMs were going to be hurt even more than the airlines because the airlines were going to stop buying everything from the OEMs until they absolutely had to. Everything died for us.


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