Deal Radar 2010: Layer 7 Technologies, Washington, DC

In the past year, adoption of Web services and service-oriented architecture (SOA) has accelerated with the advent of cloud computing, which uses these technologies to programmatically connect applications and infrastructures between the cloud and the enterprise. Layer 7 Technologies provides security and networking solutions for connecting applications across the extended enterprise and cloud. Its products address SOA and cloud governance, XML firewalling, Sarbanes-Oxley compliance, and two-way authentication, among others.

The company is based in Washington, DC, and was founded in 2002 by Dimitri Sirota, Lonny McLean, and Dr. Toufic Boubez. Sirota is the vice president of marketing and alliances, and McLean is the vice president of sales. The CEO, Paul Rochester, invested in Layer 7 in 2007 and joined the company in early 2009 to help scale operations. Rochester has helped to lead numerous technology companies through their expansion stages, including both large companies such as Sun Microsystems, where he was a general manager and senior vice president, and venture-funded companies like Conformative Systems and PS’Soft/BDNA, where he was president and CEO.

The idea for Layer 7 began as a way to address the challenge of security and networking for applications connecting to one another across the Internet using open Web service standards. The company name derives from the application layer of the OSI (open system interconnection) stack: layer 7. With the ubiquitous and seamless connection of companies and people on the Internet for commerce and information sharing came many new security concerns. Layer 7’s products are designed to protect these Internet-based connections.

Layer 7 aims to simplify and secure the integration of applications across the Internet so that data and business logic can be shared safely among systems in Web 2.0, SOA, and cloud computing. Its products help enterprises to connect corporate applications across divisions, partners, and cloud data centers.

Layer 7’s SecureSpan line of XML appliances are designed with architectural deployment flexibility in mind. All its XML appliances are configurable as edge devices, data center class clusters, enterprise service bus (ESB) co-processors, or counter-posed B2B gateways. Consequently, the SecureSpan line can satisfy DMZ security requirements (a DMZ is like a “buffer zone” between trusted and untrusted networks), performance and availability data center needs, have their functionality callable as a service endpoint off an ESB, or dynamically establish secure and reliable SOA channels across numerous B2B scenarios.

The current market for the gateway technology that Layer 7 sells is roughly $200 million. However, enterprise adoption of cloud computing is dependent on the ability to safely share data and functionality between corporate premises, private cloud, public cloud and partners. This requirement to safely connect to the cloud is expected to increase the TAM to $1 billion within three to four years. Although there may have been a drop in SOA a couple of years ago, people such as Steve Bell, who writes on “lean IT,” feel that SOA’s modular approach with its focus on reusable elements is part of the drive to cloud and is the future of the enterprise IT market.

Layer 7 has a diverse target audience. By industry, leading customer segments include telco, which is a major adopter of both SOA and cloud; the public sector, for its reliance on the secure exchange of information among agencies; healthcare, a growing segment since securing electronic health records is a major concern; and banking, supply chain and logistics companies, business services, and SaaS providers such as Amazon, Google, and Salesforce.

Private sector customers include global and Fortune 500 companies such as British Telecom, Boeing, and Erie Insurance. The Pentagon, the U.S Department of Homeland Security, the Dutch ministry of health, MIT, and the governments of Ontario and Quebec are among education and public sector clients.

Additionally, system integrators like Accenture and CSC, two important partners that have already implemented significant projects with Layer 7, are expanding their SOA footprint, which Layer 7 believes will drive its expansion and adoption as well. It expects more OEM and acquisition opportunities with Internet service vendors such as Sun, Software AG, Oracle, and others. Layer 7 added several new resellers and distribution partners around the world, including JVL in France, First Point Global in Australia, and SeedTS in Brazil.

Layer 7 competes with IBM’s WebSphere, AmberPoint, Sonoa Systems, and smaller vendors such as Vordel and Xtradyne. The company believes that its competitive advantage lies in that it sells hardware, software, and cloud solutions in a single stack whereas many companies sell just hardware or software solutions.

Layer 7’s annual revenue is currently in the low double-digit millions and has grown by double- and triple-digit percentages for the the past four years. Even in the poor economy of 2009, Layer 7’s revenue increased and sequential growth accelerated. The company closed 2009 with record growth and quarterly results, and achieved profitability.

The company has raised more than $20 million from both VC and angel investors, including an $8.9 million Series B in October 2006 led by BDC Venture Capital and the Working Opportunity Fund and managed by GrowthWorks Capital, and most recently an unattributed round of $11 million in February 2009 from GrowthWorks Capital. Layer 7 says that most of the money from this round is still in the bank.

Layer 7 plans continue to aggressively grow its franchises in North America, the United States federal government sector, and Europe. The company is seeing increasing spontaneous demand from the rest of world, including South Africa, South America and Asia. Layer 7 will address these ROW areas with partners in 2010.

The company believes that it has several options for the future and feels no pressure for an immediate exit strategy. Management predicts that Layer 7 is perhaps two years away from preparing an IPO. However, it isn’t ruling anything out at this time. I have to say, there is no way this company will go public in two years from now, when revenues will most likely still be well below $50 million. But it seems to be executing well, so unless the VCs get antsy, it’s perfectly okay to keep building for another three to four years.

Related Readings
Deal Radar 2008: AmberPoint
Deal Radar 2009: Sonoa Systems
Deal Radar 2009: MuleSource

This segment is a part in the series : Deal Radar 2010