Keep on cold calling to find deals.
That’s the moral of a recently completed $13 million Series B financing for Internet security software firm OpenNetwork Technologies.
In an age where investors and entrepreneurs alike strive to stay within the good old Palm Pilot network, the Clearwater, Fla.-based company launched a $5 million VC offering back in June (See PEW 5/29, pg. 2) and began fielding term sheets from what it considered to be the usual suspects. Before a final deal could be consummated, however, health-care player MedEquity offered an unsolicited $10 million package in association with its pseudo-syndicate brigade Chase Capital Partners, GE Capital Commercial Finance’s Health-care Group and The Kaufman Fund.
“We were fine with raising more than $5 million, but we already had [Gartner Inc. investment arm] SI Ventures considering a lead investment and we wanted them involved if possible,” said Kurt Long, chief executive with OpenNetwork. “We thought it would be a powerful affiliation so we asked [MedEquity] if they’d consider SI being in on the deal for $3 million and they said, Yes’, so long as SI brought on a quality board member.”
And they did. Dr. Adam Rin, managing director with SI Ventures, joined the OpenNetwork board and was joined by Robert Daly, managing director with OpenNetwork, and Brandon Ingersoll, principal with MedEquity.
The reason for all of this interest in OpenNetwork can, in large part, be traced back to a piece of 1996 federal legislation called the Health Insurance Portability and Accountability Act (HIPAA). While providing for things like the ability of an employee to maintain his health insurance when he changes jobs, the law was most notable for enacting both civil and criminal penalties for the misappropriation of medical patient information.
“It put a lot of health organizations on notice, to the extent that they want to make certain information available on the Web,” said MedEquity’s Daly. “We were screening hundreds of companies benefiting from this legislation, but [OpenNetwork] really jumped out at us. It’s not specifically a HIPAA company, but it has a terrific amount of traction at the moment in the health-care industry.”
More specifically, the firm has designed a specialized database system that allows various user groups – such as doctors or administrators – access to certain information while restricting them from accessing other information. Currently, the company counts approximately 60% of its customers as being health-related firms, with the rest coming from the insurance and financial sectors.
“We do want to continue being a leader in health care, but we do want to see the product’s acceptance broaden a bit,” said OpenNetwork’s Long.
He added that, while the company was profitable when the deal was launched, it recently went back into the red due to expansion but expects to regain profitability in 2002.
As for future financing, Long said he doesn’t expect to be back in the private market, with a public offering tentatively set for late next year. The firm will begin speaking with analysts later this quarter.