Anthony A. Caputo, chairman and chief executive of SafeNet Inc. in White Marsh, recently was named this year’s “Baltimore extraordinary technology advocate” by the Greater Baltimore Technology Council.
Caputo joined SafeNet in 1986 as an investor. The company specializes in technology security services. He then became a director. Founded in 1983 by a group of data-security professionals, the company initially was named Information Resource Engineering.
The company changed its name in 2000 and now has 228 employees, with net income of $2.8 million and revenues of $32 million last year. It is scheduled to announce its third-quarter earnings results on Wednesday.
Caputo also founded a computer security firm, TACT Technology Inc., which he managed before joining SafeNet.
He is a member of Gov. Robert L. Ehrlich Jr.’s Commission on the Development of Advanced Technology Business, which is tasked with charting a framework for reviving Maryland’s the high-tech economy.
In selecting Caputo for the BETA Award, the technology council cited that under Caputo’s leadership, “SafeNet has made a difference in the way Greater Baltimore and its tech community are perceived throughout the world.” He will be honored at “TechNite 2003” on Oct. 30 at the Baltimore Convention Center.
How does this recognition reflect your efforts?
It’s certainly a wonderful honor, but in terms of my efforts, I’m focused on
building SafeNet and trying to contribute to the growth of Maryland’s technology
community. That process was under way before the award — and it will continue
after the award.
I was very surprised after being told I won the award. We, SafeNet, are one of
the Maryland companies that is doing very well; we are growing very quickly —
doubling sales last year — and we intend to double sales this year as well.
We have had several opportunities to leave Maryland, but we decided to stay
here. In fact, recently as part of an acquisition of a California company based
in Silicon Valley [Cylink Corp., an Internet security firm, for $35.4 million], we not only decided not to move but brought
staff from California to Maryland.
What does that mean to you?
It’s kind of illustrative of why Maryland is a good place for technology
companies. We identified key people from the staff in California — and even
with the poor weather from last winter, 20 out of 25 people chose to come to
Maryland.
Maryland has a standard of living that is 20 percent less than Silicon Valley,
so those people are coming here and are having a finer quality of life. That is
a major strength that Maryland has over other parts of the country.
SafeNet has been profitable despite tough times in the technology industry
and the economy in general. How did you accomplish this growth?
Basically, by focusing on market segments where growth opportunities exist
today. Over the years, we have been able to establish several different sales
channels for our products. Those channels are sufficiently diversified, so that
if one channel — such as large financial institutions — is not spending much
money, which seems to be the case today, another channel — government
customers, for instance — is spending a lot of money.
We adjust our focus and our investments to the areas of the economy where there
are growth opportunities.
What did you do differently such that SafeNet has weathered the technology
bust?
We were not so caught up in the Internet bubble. We were a part of it — and in
1999 and 2000, we grew rapidly. We did not, however, buy into the belief that
the bubble was going to last forever. As a result, we did not overspend.
Therefore, we were in sound financial position when the tech downturn came in
2001. We had a couple of bad quarters, but we were able to adjust very quickly
and start running again. … We were not faced with a huge correction. We just
had to make some minor tweaks. In most cases, we reassigned people into
different positions.
You started at SafeNet as an investor in 1986, but then moved to greater
responsibilities. What leadership do you believe you provided that made a
difference in the company’s growth?
Throughout the company’s life cycle, I have always focused on picking market
segments in which our company would have the maximum opportunities to prosper.
In the early years, that meant finding a segment that was large enough to
provide us with the ability to grow — financial institutions. The first thing I
did when I became an investor was help the existing management team focus on a
single market segment, rather than trying to be involved in many different
segments.
We began to be successful in the financial community, then we moved on to the
[federal] government and, subsequently, to [original equipment manufacturer] distribution.
These are our business areas today.
How else would you describe SafeNet’s general business strategy?
The key steps are to define and agree upon a business model, one that the
management team embraces, and then to communicate that to our employees — and
then to our investors, so that people understand who we are.
Our focus is to grow SafeNet with a combination of organic growth, with business that
exists today, at about 25 percent per year — and then layering on top of that
acquisitions that either broaden our markets or strengthen our products in
existing markets. That’s the plan we’ve been following the last couple of years,
and that has led to 100 percent growth per year over the past two years.
While we don’t forecast that growth rate to investors going forward, we are
comfortable with forecasting 25 percent organic growth plus any acquisitions we
actually complete.
What does it take to be a member of SafeNet’s management team?
Our key is that everyone is on the same page. There are important qualities that
we have on our team — honesty, intelligence, integrity, hard work — like most
other companies.
The difference here is that our team understands what our business model is: The
things that we do and the things that we don’t do. If you spoke with five
different SafeNet executives, and asked, for example, “What different channels
are you in?” you’d get the same answer.
By way of another example, we sell many different types of products: we sell
encryption chips, encryption software, encryption appliances. If someone were to
ask our executives if we are a chip company or an appliance firm, the answer
you’d get is, “No, we are a security company.” We’ll make our technology
available in any form to meet the customer’s needs.”
SafeNet has had two straight losing quarters, with net losses of $9.6 million
in the first quarter and $2.2 million in the next. How do you account for
that?
It is correct that the financials are on the downside. If you look at net income
as reported under generally accepted accounting principles, however, the large
portion of those losses were as a result of the [Cylink] acquisition.
According to those principles, the accounting rules required us to take those
expenses directly related to the acquisition as soon as possible. If you look
beyond those charges, as most investors do, what you will see is that our
operating income has been increasing very rapidly, essentially doubling. We
increased both sales and profitability during those quarters. The charge-offs we
took were to write off any business unit we were not going to continue — and
any actual expenses for the acquisition [lawyers, accountants].
Without those expenses, the business was extremely profitable. I expect we will
continue to be profitable going forward.
Governor Ehrlich recently named you to his Commission on the
Development of Technology Business. What must be done to spur more investment in
technology companies in Maryland and, more specifically, the Baltimore area?
The step the government took to create the technology commission and, hopefully,
promoting technology is the first step. Promoting technology and technology
companies, as well as Maryland’s and Baltimore’s capabilities is very important.
Second, if you look at Maryland’s strengths, one is the education of the
work force. Whatever we can do to further the education of a technically savvy
work force is of primary importance in the future. One of our key strengths
should be improving the level of primary and secondary education in the state.
This is going to be even more important in the future.
We will never be the lowest-cost provider in the work force. The United States
will never be the low-cost provider of technology; those will go to countries
such as China, India, Korea and others. In 20 years, it might be someplace else,
another country — Africa — or some other low-cost place.
What we can be is to be the source of intellectual property. Those jobs are
well-paying jobs.
What needs to be done?
We need to focus on education. I know budgets are tight … but I would like to see the private community
foster scholarships and assist schools to breed a quality work force.
Are there any other issues being examined by the commission?
One of the recommendations that might come out of the Technology Commission is
taking some steps for making Internet bandwidth available to start-up
businesses, as well as to primary and secondary schools. These costs are
expensive to a start-up company.
You said earlier that Maryland has contributed greatly to SafeNet’s growth.
How?
That is exactly right! Maryland has certain important strengths for a technology
company and from a community standpoint. Now that I have been given the chance
to get on a soapbox, I’d like to talk about this.
One of the strengths as I’ve mentioned is that — while we are not the lowest-
cost state in the United States, compared with other technology states — the
costs of doing business here are quite good — and the standard of living as a
result here, in theory, is quite good.
That point leads to the next: The availability of a well-educated and
technically savvy work force is important in any technology company. Maryland
has important strengths in this area. We have a terrific university system. We
have the Johns Hopkins University. There is a quality, educated work force. We
have excellent secondary and primary schools as well.
Perhaps most important of all, we are located in the corridor between Washington
and Boston, which is the largest technology market in the world. More technology
products are purchased here than anywhere else in the world. We are also very
close to where most of the spending takes place today, Washington.
Are there any other issues?
While you’ve got me going on this subject, I might add that we need to focus
more on what we have, focusing on our assets, while continuing to improve
ourselves. I’ve seen, over the years, that Maryland’s business and political communities focus
too much on the negative issues without focusing enough on the positives.
For instance?
We need an awareness of our existing strengths. It’s important that we think
more regionally than we do now. As an outsider, I see that portions of Maryland
think of themselves as the entire universe. There is the GBTC, which has
graciously given me an award — and I think the world of what they are doing.
However, there is another fine council [Technology Council of Maryland in
Rockville] — and they don’t need to compete. We all should work together.
I would hope that working together would be an outcome of the Governor’s
Commission. This should take some effort from the local areas, as well as the
state and perhaps on behalf of the governor, so that we could work together
But we should go beyond that. We should encompass DC and Northern Virginia. We
need to think regionally, because that’s where the money is — and we need to
take advantage of it.
What role does venture capital have in reviving the state’s technology
economy?
We have a strong venture-capital community, and a couple of relatively large
investment banks.
However, in the middle, there is a vacuum. There really is a lack of small
boutique investment banks that will focus on the businesses that become
established. At some point, they are going to [take those companies public], and
the high end — the big New York and one or two Baltimore banks — will handle a
small amount of them.
But the companies in the middle really suffer from the lack of local boutique
investment firms. These are companies that specialize in second- or third-round
financing. … There were banks in Baltimore that did that, but they were bought
and moved to New York. That vacuum never got filled. The same happened in San
Francisco; however, that void got filled with secondary boutique firms.
Those boutique firms served the needs of mid-market companies and flourished.
That’s not happening in Maryland.
But just having these firms in place is not enough, right?
I would love to see some more entrepreneurial spirit out of the investment
community.
If you are an investment banker working for a large, well-established investment
banking firm, you may not be as likely to take a risk on a small-to-mid-sized
company, as you might if you were an investment banker out on your own with
three or more partners trying to build your own business.
The more championing of that idea in making specific recommendations will help. I
don’t know the investment-banking business well enough to know exactly how to
get these things started, but I know they are getting started.
Will this innovative approach help bring quality-level technology jobs to
Maryland?
The key to creating jobs is to have vibrant companies. In Maryland, we have a
lot of resources that can be better presented or marketed, so that people can
understand that this is a good place to be. Then, when you look at the financial
mood, the continued creation of an investment banking community for middle-
market companies will go a long way to attract investment.
The bubble burst has made people more skeptical, but it is possible to get
investment capital.
One of our executives left our company a few months ago to start a new company –
– software product for business-development applications. They have been able to
get some seed money. He and his partners have put together a sound business
plan, used some of their own money, some money from the state.
I know for a fact that the organization had offers from venture capitalists.
It’s possible, probably not as easy as during the bubble period. But if you have
a good idea and a sound business plan — and you are willing to work hard — you
can attract money in Maryland. It’s out there.
Do the state and federal governments have a role in providing seed
money to help create venture capital?
Government can create environments where growth can take place. My personal
view is that I don’t think that a government venture-capital arm is likely to be
successful. I believe the terms “government” and “venture capital” are an
oxymoron. It’s a short-term fix. But a little bit of money to help something get
started is like priming the pump to fire up an engine. It’s the small things
[that provide the most assistance]. The things the state does, like enterprise
zones [lower taxes in certain areas to spur growth], are very smart.
How do you see the future of technology in Maryland?
The future for technology and communications companies is bright, very bright.
We’ve been through the worst part of the downturn — and it’s starting to get
better, if not uniformally better. Some companies are doing well, and we are
fortunate to be one of them; some are not — and that can’t be helped. The
excess communications capacity that caused the technology downturn is being
worked out. As it is worked out, it will allow technology companies to grow and
hire more people.
What would you do to attract more technology firms to the state?
Success breeds success. That is the key to attracting business. I would like to
see three or four more start-ups similar to the firm that my former executive
started (I would hope it wouldn’t be any of my excecutives). That is going to be
a winner, and I think he will be successful. That is a seed that will have been
planted, which would ultimately grow big trees. The way they grow is that you
feed them: feed them with money and feed them with talent.
What advice do you have for those starting out in their own businesses?
Business endeavors are like anything else: Think about what you’d like to do,
pick an area in which you’d think it would work. Then, it all comes down to
perseverance and hard work. If you are the type of person who can persevere,
then you need to be conservative with your money.
Everyone will make mistakes; whatever plan you start out with, something will go wrong. The key to weathering the misstep, the thing that goes wrong, is a conservative business approach. It lets you pick yourself up, dust yourself off, and say: “OK, I’m going back out at it again. I did this wrong; here’s what I should have done.” Then, you make the adjustment and keep working at it.
