Cryptek Isn’t Puzzled By $10.2M Influx

Network security provider Cryptek managed to crack the code on raising an up round in a hostile economy. The Sterling, Va.-based company designs, manufactures and sells secure communications products for the government and private sectors and counts the U.S. military among its clients.

Cryptek raised $10.2 million in its Series B round. The post-money valuation of the round was approximately $65 million, up from the company’s $5 million Series A round, which closed in late 2000 with a post-money valuation of $50 million. The Series B funding brings Cryptek’s total raised to $30 million. The company raised $5 million in seed funding at the end of 1998 and took in another $5 million in debt that was converted to equity.

New investor Westbury Partners led the round, and together with Walden Capital Partners invested about $8 million. Previous investors Angelo Gordon & Co., VAL Investment Group and individual investors contributed the rest. Friedman Billings Ramsey & Co. acted as a placement agent.

President and CEO David Gross says that Cryptek’s ability to obtain government contracts was what made them attractive to their two lead investors. “We met a lot of VCs who frankly loved the company, but their attitude was call us when you get commercial traction.’ With the two new investors that came to us, they owned commercial and IT companies and the commercial guys were not doing well and the government guys were doing well,” Gross says. Cryptek earned $23 million in revenue in 2002 and expects to bring in $35 million in revenue in 2003.

“So far the buzz on the hill and in corporate America is that these guys are as good as they get,” says Westbury Partners President James Schubauer. Shubauer joins the Cryptek’s board of directors with Westbury Chairman Joseph Fogg. “They’re already in the government space and can apply their skills to the commercial space. That’s less daunting than trying to start in the commercial space and move over to government.”

Shubauer and Gross emphasize that one of Cryptek’s greatest challenges is snaking through the sometimes arcane laws and practices of government appropriations. It will be a challenge to convert current contracts into revenue in the first half of the year. “In the good interest of what we’re working on, you sometimes have to work without a contract and count on your customer,” says Gross.

Gross says that Cryptek doesn’t need any further private equity funding and expects it will hold a liquidity event in the next 18 to 36 months.

Cryptek, which was founded in 1986, has a sales office in August, Ga., a technical office in Hawaii and a sales and development office in San Diego. Cryptek has approximately 120 employees and expects to hire three senior executives in 2003.

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