Forbes_USA_June_13_2017

INVESTING
FINTECH
In 2000, in his senior year, Estes launched Digital
Reasoning with Kenneth Elzinga, now chair of
UVA’s economics department, as his biggest financial
backer. He had less than $1 million in startup
cash and figured he would need a deep-pocketed
customer to develop a working system. He started
talks with U.S. Army intelligence shortly before
the 9/11 attacks and by the mid-2000s had built a
system, called Interceptor, that enables analysts to
search intercepted messages for links to terrorism.
Still, as Estes discovered the hard way, living off
government contracts, which originally accounted
for 100% of his business, can be hazardous for a small
company. In 2008, Digital Reasoning had a neardeath
experience: The expiration and renegotiation
of a federal contract that had provided the bulk of its
revenue led to a half-year gap in payments.
Estes couldn’t meet payroll for his 15 employees
and took a second mortgage on his house to cover
health insurance premiums for workers. Some employees
worked for months without regular paychecks.
(Their dedication paid off; they got equity
and, later, bonuses.) In 2009, Digital Reasoning’s revenues
exceeded $5 million, up from $1.5 million in
2008. In late 2010, the CIA’s venture capital arm, In-
Q-Tel, invested in Digital Reasoning. (Estes won’t say
HOW TO PLAY IT
BY JIM OBERWEIS
The explosion of digital communication is like manna
from heaven for budding cybersecurity firms. Some of
the top buys can be found among smaller, best-of-breed
niche firms like CyberArk Software, which specializes in
and leads the market for privileged account management.
Amid cloud migration and high-profile insider
data breaches, CyberArk focuses on stopping bad actors that have already
breached the network firewall. The company’s revenues grew at
an average of 46% annually over the last five years, and it counts 45%
of the Fortune 100 as customers. Another pick, Proofpoint, develops
email-security software. Revenues grew 41% in 2016 as it gained share
over outdated offerings from market leader Symantec.
Jim Oberweis is president of Oberweis Asset Management.
how much.)
With the company now healthy, Estes turned to
his next market: financial services. “There is a longstanding
tradition in analytics and security of banks
adopting technology from the intelligence community,”
he says.
Lacking Wall Street cred or connections, Estes applied
in 2012 to the Partnership Fund for New York
City’s FinTech Innovation Lab, which connects promising
tech startups to the city’s financial powerhous-
FINAL THOUGHT
es. Through the lab he arranged to install his software
at UBS, Goldman Sachs and Credit Suisse, with
the latter two investing $24 million in the company in
2014—Digital Reasoning’s first big funding round, at
the ripe age of 14. That delay was strategic, Estes says.
“We were working on a hard problem that is very
complex. If you raise money too early you only solve
part of the problem and you create only a fraction of
the value, but your investors start a clock.’’
Having conquered trading surveillance on his
own timetable, Estes is picking up the pace, expanding
into other financial regulatory areas, such as
money-laundering rules, insider threats and interactions
with customers. (Think Wells Fargo.) Plus,
in 2015, he tackled a whole new industry, signing up
HCA Healthcare as both an investor and client. The
Nashville-based hospital company is using Digital
Reasoning’s software to comb through medical records
and doctors’ notes. The aim: to assist in diagnosis
and improve clinical decision making.
With all its new commercial work, Digital Reasoning
hit 170 employees by the end of 2016, up from
30 in 2012. In April, Estes brought in a veteran tech
executive as CEO to handle continuing expansion.
While he does want to spend more time with his
one-year-old son, Estes is hardly stepping away from
Digital Reasoning. Instead,
with the title of president, he’ll
focus on keeping its technology
cutting-edge. “We are clearly
the emerging leader in surveillance,’’
he says. “Our ambition is
to become the best artificial intelligence
company to understand
human communication.’’
Meanwhile, Estes hasn’t forgotten
that one of his original
ambitions was to do more than
make money. Digital Reasoning
worked with Thorn, Ashton
Kutcher’s venture aimed at combating
human trafficking, to develop
Spotlight, software that scrapes online ads and
photos to identify traffickers and victims. Some 4,000
law enforcement officers nationwide have access to
the system. Thorn CEO Julie Cordua says in the past
12 months Spotlight has helped identify 6,000 trafficking
victims, including 2,000 children, and is expanding
to Canada and Europe.
“We are a fairly apolitical place,” Estes says. “Our
social issue is let’s go rescue underage girls from being
trafficked. We all can pretty much agree on that one.”
“The true use of speech is not so much to express our wants as to conceal them.”
—OLIVER GOLDSMITH
SOUND
STRATEGIES
FOREIGN POLICIES
Marc Halperin, senior
portfolio manager at the
$1.6 billion Federated
International Leaders
Fund, seeks discount
blue chips abroad. New
bullishness in Europe and
China has his fund up 15%
as of early May. Three of
his current picks:
CREDIT SUISSE
Trading far below book
value, and new CEO
Tidjane Thiam’s cost cuts
offer long-term payoff.
One growth catalyst: its
$700 billion wealthmanagement
business.
DAIMLER
Down 3% in 2017 but with
a dividend yield of 4.7%,
it’s set to exceed $3 billion
in free cash flow this
year. Accelerants include
its truck division and
improving sales in Asia
and Europe.
PRADA
The Milanese powerhouse
dominates luxury fashion.
Its shares, though, are
50% below 2013 highs
due to overexpansion and
a sales tumble in China.
Halperin believes store
retrenchment and low
new-product inventories
will write Prada’s
“recovery story” in the
months ahead.
—A.G.
ILLUSTRATION BY THOMAS KUHLENBECK
64 | FORBES JUNE 13, 2017