How This Security Company Sold to the FBI—and Scored a Billion-Dollar Payday
As founder and CEO of KITEWIRE, Jere Simpson captained what might be called a cruise ship of a company: It puttered around successfully in the profitable waters of government contracting, never far from its origin. But nonetheless, it enjoyed a very pleasant moneymaking journey.
When I first met Jere back in 2015 during the Birthing of Giants Fellowship Week (then called Masterclass), he had plenty to be proud of: He had grown his company from a one-man startup in 2007 to a $4 million enterprise with about 40 highly skilled employees. At the time, KITEWIRE was a government contractor selling custom application development services primarily to the Department of Defense. KITEWIRE’s time-and-expense model meant that as long as the company’s hourly rate was more than it paid its team of developers, it was all but guaranteed to make a profit.
So what was the problem? KITEWIRE could only scale linearly. It could easily find more work and keep more developers busy fulfilling its contracts, but its profit margin would still boil down to the same formula. This type of moneymaking company would be worth about twice its operating margin—or as Jere puts it “two years’ salary.” It wasn’t the huge payday an entrepreneur hopes for after years of hard work. And there was something else that stuck in Jere’s craw: His entire business model required paying talented developers—like him—less than they were worth.
It was at this moment of inflection that I met Jere. He was frustrated with KITEWIRE’s business model because it wasn’t especially rewarding for him or his developers. So, he had come up with a plan that he hoped to develop further during the Masterclass. KITEWIRE would transition from a company that created custom applications for its clients to one that developed a software-as-a-service (SaaS) solution that it could sell to multiple customers.
SaaS, in which software and its data reside in the cloud and are accessed remotely by customers who pay a monthly subscription, is the ideal paradigm for launching an entrepreneurial moonshot. Salesforce is a perfect example of SaaS, as is Google’s suite of software—Gmail, Docs, Sheets, etc.—that it offers free to consumers (and by paid subscription to businesses). That is because SaaS is practically infinitely scalable. The only difference between serving 1,000 customers and millions of them is a nominal increase in hosting costs. Even better, this approach is appealing to business customers because they get regularly updated software with predictable monthly payments, rather than having to make a huge initial investment in software, IT infrastructure, and the staff to run it. Moreover, using SaaS allows them to avoid future hardware and software upgrades that require significant outlays.
Jere’s plan was straightforward, but it asked quite a lot from his developer employees. To fund the development of KITEWIRE’s as-yet undetermined SaaS product, it would switch the tried and true, time and expense business model to charging on a per-project basis. This essentially shifts the risk of cost overruns from the customer to KITEWIRE, but it also meant that the more efficient the company could be, the more profit it could reinvest into the new initiative. His employees would have to work harder and faster, without seeing immediate rewards. Rather, they could look forward to working for a company that had better resources, less competition, and opportunities for better work/life balance. In other words, Capitan Simpson was proposing to steer it out of its regular circuit of scheduled fueling stops and out onto the open seas with a destination beyond the horizon that the crew could only imagine. The company’s operational profit—driven by efficiency—would be its fuel.
As yet, the S.S. KITEWIRE didn’t have a specific destination—that is, Jere didn’t know what the company’s SaaS product would actually be. So he and his team set out on a fact-finding mission, canvassing existing clients for unanswered challenges that could open an opportunity. This is a page out of the classic entrepreneurial handbook: a small company solving a problem for big companies more efficiently than they could themselves.
They soon found their answer: Back in 2016, the world had fully embraced smartphones running on Apple’s iOS or Google’s Android operating systems. The BlackBerry, once a status symbol, all but disappeared from the market. Except in government. Even President Obama was forced to use the antique-looking device during most of his time in office. It turns out that BlackBerry was more secure than the newer phones, whose biggest selling point was their ability to run multiple third-party applications—which created potential security vulnerabilities. KITEWIRE, then would create software that made modern smartphones secure enough for the federal government and highly regulated industries such as financial services.
Jere thought of the perfect first customer: the Federal Bureau of Investigation. After all, if the software had the approval of the FBI, it should be good enough for anyone. The FBI was perfect for a couple more reasons. The government agency would fund the application’s development without sharing any stake in its intellectual property, and it would put it through rigorous testing (called red-teaming) that would have been costly to achieve otherwise.
To Jere’s great credit, he was able to generate the enthusiasm his team needed to see this venture through, making sure his employees maintained focus and commitment the whole way—even when things got especially tight as the capital tank neared empty. Well, not all his 40 employees. Some jumped ship along the way for whatever reason. The process was a form of self-selection so that at the end of the road, Jere was left with a trimmer but an even more dedicated team of 32.
That smaller team managed to operate a business that, by 2019, was ringing up $55 million in revenues. If you do the math, that means KITEWIRE went from making about $100,000 per employee to making $1.7 million. What’s more, it was no longer worth a small multiple of profits, but a large multiple of revenues. In fact, last year, just three years after launching KITEWIRE Mobility, Jere sold it for a $1 billion stake in the acquiring company.
Do you want your business to be a cruise ship or a rocket ship? Your answer should give you a good sense of your willingness to take calculated necessary risks. But if it’s a rocket ship you’re looking to build, make sure you are developing and inspiring the engaged, energetic, and loyal crew you need to make it happen. That definitely requires communicating a compelling vision of your future destination, but it also involves cruising successfully around your safe harbor for a while to build experience and sharpen your expertise before hitting less-familiar waters.
Lewis Schiff runs the Birthing of Giants Fellowship Program, a one-week guided strategic planning process that’s attended by the owners of the fastest-growing companies in the world. He also runs Moonshots & Moneymakers: The Oxford Innovation Conference for American Entrepreneurs.
Want the inside scoop on how Jere Simpson and other entrepreneurs built their companies from moneymakers to moonshots? Visit Birthing of Giant’s free monthly video series, How I Did It.