Founded in 2018, Kobalt focuses on the cybersecurity needs of small and mid-sized businesses. Michael Argast is the CEO.DARRYL DYCK/The Globe and Mail
For Vancouver-based Kobalt Security Inc., the past two years of reduced travel and U.S.-Canada border restrictions have had an ironic upside: a level playing field with its competitors to the south.
“In some ways, it’s been easier to compete with the U.S. companies than it would have been otherwise,” says Michael Argast, CEO and co-founder of the cybersecurity business. “Nobody in either country was going on-site to customer premises. No one was delivering work in person, and most of our customers are high-tech startups, who are very distributed anyway.”
Founded in 2018, Kobalt focuses on the cybersecurity needs of small and mid-sized businesses – an often-overlooked market, Mr. Argast says.
With limited resources, smaller businesses are often underprepared for cyberattacks and data breaches and they can find it especially difficult to recover when they do occur.
Kobalt has about 25 employees and around 200 clients across North America. U.S. clients currently account for approximately 40 per cent of its revenue but, as recently as last January, those customers were nearly non-existent. The first ones were “opportunistic,” Mr. Argast says, thanks mostly to word-of-mouth.
U.S. expansion has always been on the company’s radar, but the pandemic presented an opportunity to engage with them on a more even footing.
“The market is simply 10 times as large,” Mr. Argast says. “There are so many potential clients in the U.S.; we would be remiss to ignore that market. They usually budget in U.S. dollars, so there’s a kind of currency arbitrage there. The opportunity at our doorstep is too big to ignore.”
Even though the pandemic helped mitigate some disadvantages over U.S. competitors, Kobalt still faced a two-fold problem: The first was simply getting in front of U.S. clients. The second was figuring out how, as a startup with limited resources, to transact with those clients in a simple, frictionless way, compliant with the complicated patchwork of state tax laws south of the border.
To tackle the first challenge, the company hired a marketing director in 2021. He focused heavily on advertising-based marketing, designed to reach potential clients in key, tech-heavy areas of the United States. Those sites included California and Texas as primary markets, and secondary markets that complemented Kobalt’s west-coast location, especially Seattle and Portland.
The ad-based approach had limited success. The company did attract some new clients, but not enough to justify the expense. Things turned around when Kobalt’s marketing efforts pivoted to more active lead generation and sales, including building a small sales team and reaching out to potential clients with email marketing and cold calls.
In retrospect, it’s because of the sector Kobalt is in, says chief operating officer Mike Tedesco. “Many small technology businesses, when building their team, think ‘I need a finance person, I need HR, I need a sales team.’ They don’t think about security as much, even though they really need to. You can’t overcome that education gap about the need for security with an ad by itself, you need to have a conversation.”
Once clients started rolling in, another challenge became obvious early last year: Kobalt had only around $1-million in annual revenue and a tech stack that looked, in Mr. Tedesco’s words, “like a startup’s – because it was.”
It included a limited suite of tools for quoting, invoicing and financially engaging with customers. The thicket of differing sales-tax thresholds across U.S. states also posed an accounting challenge because the company couldn’t take U.S. payments through its billing software. It was also unable to transact cross-border credit-card payments, forcing clients to make bank transfers.
It was far from a frictionless experience that would put the business on an even footing with U.S competitors.
With input from its Vancouver-based accounting firm, Enkel Backoffice Solutions, the company put together a new payment toolkit, moving transactions to more powerful platforms. That included shifting payment processing to accounting software Xero for credit-card payments, which processes international payments using Stripe.
Kobalt’s management also debated whether or not to incorporate in the United States, setting up what’s known as a Delaware corporation (Delaware is the most popular state for incorporation in the U.S., thanks to its perceived business-friendly regulations).
Ultimately, the choice was made for the company last year: It wanted to transact with a software partner that sold a program Kobalt wanted to offer to its own clients. The partner in question required transactions using Amazon’s Consulting Partner Private Offers (CPPO) software, which required U.S. incorporation. If not for that, Mr. Tedesco isn’t sure Kobalt would have incorporated south of the border, at least not so soon.
“You can do business in the States without spinning up an entity there,” he says. “The challenge is whether you’re doing heavy business in a particular state, if you need to hire people there, how big do you want to get, do you anticipate needing people on the ground there. These choices will determine how you approach it, but I don’t think it’s necessary off the bat to set up a U.S. corporation just to get a foothold.”
With American business closing in on half of Kobalt’s revenues, Mr. Argast suggests he may be looking at some U.S. hiring next year, possibly in sales. That, he says, could help further cement what he feels is another advantage Kobalt has had with U.S. clients: cultural rapport.
“The border just doesn’t present this huge issue for technology companies like it does for a company dealing in moving parts,” Mr. Argast says. “It’s really about building relationships … I’m lucky that I’ve worked and travelled through the States before; I have relatives there. That gives me a better sense of the regional markets, but also cultural norms.”
For example, he says, Americans don’t think of U.S. dollars as U.S. dollars, they’re just dollars. “If you say ‘USD’ you’re stating that you’re foreign, in a way. Little things like that grease the way.”