Richard Hyatt, left, and his brother Michael Hyatt, built and self-funded their first two tech ventures._Beyond Infiniti Photography/Supplied
Two of Canada’s most successful tech entrepreneurs, Michael and Richard Hyatt, are back in business.
The brothers have bought control of Toronto cybersecurity company DataStealth Inc., the third operation they have owned together in their 35-plus years as business partners.
They built and largely self-funded their first two tech ventures. One of them, risk assessment software maker Dyadem International, they sold in 2011 to IHS Inc. for almost $100-million. The other, server technology specialist BlueCat Networks Inc., was purchased for $400-million in 2017 by Madison Dearborn Partners LLC. The brothers kept a small stake in BlueCat, and Michael remained on the board until Audax Private Equity bought the company for $700-million-plus in 2022.
The Hyatts are influential in Toronto’s tech scene. They advise venture capital firm Northleaf Capital Partners and back several startups, including Bolt Technologies and Xanadu Quantum Technologies. They helped found the Creative Destruction Lab accelerator program and bankrolled their brother Jon Hyatt’s documentary, Screened Out, on the negative effects of too much screen time on minors. Michael starred in the Dragon’s Den spinoff Next Gen Den.
Earlier this year, when DataStealth reached out, the pair found an opportunity to get operational again.
“We just like being in the grind,” said Richard, the technical expert of the duo. Michael focuses on sales, operations and finance.
“I thought this would be another high-growth cyber company losing tons of cash,” Michael said. “I kiss a lot of frogs.” But DataStealth was different.
The 30-person company was growing quickly, but it was also profitable and debt-free. The more the Hyatts heard, the more they were impressed by DataStealth, which has 35 customers, including Canadian telecommunications and financial services companies, and generates more than $10-million each year in revenue. When Richard looked under the hood he found “there was a ton of thought behind how they designed the technology,” he said.
DataStealth and a predecessor company had built a range of applications during their three-decade history. Six years ago, DataStealth built software for itself, to protect payment card information in its systems. “People in our network found it interesting and useful, and we realized we had an opportunity, so we built a more commercial, enterprise version,” DataStealth chief executive officer Ed Leavens said.
DataStealth takes for granted that hackers will breach firewalls, so its products digitally cloak the sensitive stuff within: They find, classify and shroud data and documents inside an enterprise’s network by “tokenizing,” or encrypting information. As that tokenized information is accessed across an organization, it flows through DataStealth and is unmasked only for the purpose at hand.
“We feel your data will get stolen,” Michael said. “But it doesn’t matter because it comes in as scrambled eggs.”
Customers don’t have to change their existing software systems to interact with the company’s programs, a plus for large institutions that run in part on ancient technology. “You just plug it in, activate a policy, that’s it,” Mr. Leavens said. Richard loved that: “Being able to still use that code in production – but add security to it – there’s something very sexy about that,” he said.
There was just one problem: The reason Mr. Leavens and his team were interested in the Hyatts was that relations with their majority shareholder, veteran tech investor Abe Schwartz, had broken down over a difference in vision, according to court documents. Mr. Schwartz had invested in 2013 and wasn’t involved in operations until last year, when he became more active in the company’s affairs. He wanted the company to cut costs and sell out. The executive team wanted to keep growing.
Early this year, Mr. Leavens and his team proposed a management buyout. Mr. Schwartz turned them down and said the only options were to sell the company or shut down. Mr. Leavens and chief information officer Marc Carrafiello, who together own one-third of the company’s shares, exercised a shotgun clause in the shareholder agreement, offering to buy out Mr. Schwartz’s two-thirds stake for $7-million, or $1.16 a share.
Under the agreement, he had 15 days to accept, or to pay the same share price for their stake. He refused both options. That prompted the CEO and CIO to apply for a court order to enforce the shotgun clause. Mr. Schwartz sued.
In June, Ontario Superior Court Justice Michael Penny ruled that by agreeing neither to sell nor buy, Mr. Schwartz “is deemed to have accepted the offer to sell his shares at the specified price” under the shotgun clause. Justice Penny also dismissed other issues brought up by Mr. Schwarz. Two weeks later, Mr. Schwartz discontinued his action, and the Hyatts bought his stake.
With the ownership issue settled, the Hyatts are actively involved as board members. Michael is executive chairman and helping with international expansion plans. Richard is spending much of his weeks helping beef up the technology.
“Michael and I know how to do this because we’ve done it a bunch of times,” Richard said. “This is our sweet spot.”