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BlueCat co-founders Richard Hyatt, left, and Michael Hyatt are seen in this photo. (Beyond Infiniti Photography)
BlueCat co-founders Richard Hyatt, left, and Michael Hyatt are seen in this photo. (Beyond Infiniti Photography)

Hyatt brothers strike again: Toronto tech entrepreneurs sell BlueCat Networks for $400-million Add to ...

Brothers Richard and Michael Hyatt have been business partners for more than 30 years. At grade school in Richmond Hill, Ont, Richard, a self-taught programmer, created video games on his Commodore 64, and Michael sold copies in the schoolyard.

In his early 20s, Richard wrote a program to help their father, an engineer, manage risk assessment on complex projects. The software was so good they built a firm, Dyadem International, Ltd., to sell it. Dow Chemical Co., General Motors Co. and BP PLC became clients before IHS Inc. bought the Hyatts out in 2011 for almost $100-million.

Now, the Hyatts have struck their biggest deal yet. On Thursday, their BlueCat Networks Inc. said it had been bought by U.S. private equity giant Madison Dearborn Partners LLC. Terms weren’t disclosed, but The Globe and Mail has learned the deal values BlueCat – whose server technology is used by 1,000 corporate and government customers to connect users and devices securely to Internet-based applications and services – at about $400-million. Michael Hyatt will remain a director.

As with Dyadem, the Hyatts raised little venture capital, meaning they banked most of the proceeds.

Completing two successful “exits” as majority owners is “unusual,” said Rob Louv, managing director with U.S. investment bank Houlihan Lokey, who advised the brothers on both deals. “We never wanted to give up control of our fate,” Michael Hyatt said. “We’ve done fantastically well … but it was a climb. We didn’t win the lottery.”

The BlueCat deal comes at a bright time for Canada’s tech sector. Last year was one of the best to date for Canadian startup financing, and there has been a rash of nine-figure takeovers of domestic firms by Airbnb Inc., PayPal Holdings Inc. and others. (Ottawa-based Halogen Software Inc. also said Thursday it had agreed to a takeover by California’s Saba Software Inc., valuing the company at $293 million) Canada is also emerging as a global leader in artificial intelligence.

The Hyatts’ first company, Dyadem, started in the mid-1990s after Richard dropped out of engineering school to write code as a consultant and Michael graduated with a biochemistry degree from the University of Western Ontario. After Richard built the software, Michael cold-called prospects out of phone directories and mailed demos, then followed up to help them install the product.

Developing software without the readily available online resources of today was also challenging. “Doing anything in software in the early 1990s was next to impossible,” Richard said.

But persistence paid off, with Dyadem generating $1-million in sales in its second year.

The Hyatts created BlueCat after Richard purchased a domain name server for Dyadem. It was expensive and complex, so he created his own, which was smaller and faster. “He showed me this thing … and said: ‘I bet we could sell these,’” Michael recalled.

They launched BlueCat in 2002, charging $10,000 apiece for the units – half the price of competitors. They sold 25 in their first quarter, manufactured by an employee in a backroom. Dell Technologies Inc. now handles production and shipping.

Michael spoke of the hardships of being an entrepreneur, noting BlueCat had dealt with bad software releases, customer and employee issues and a short-lived patent infringement lawsuit in 2011. “It’s important to talk about the struggles and challenges,” he said.

Ajay Agrawal, founder of Creative Destruction Lab, a Toronto program that helps startups – which the Hyatts have supported as financiers and mentors – described Michael as an extroverted big-picture thinker and Richard as an introvert who quietly helps entrepreneurs on technical issues. “They work well as a brotherly pair,” he said.

Michael and Richard stepped back from their roles as CEO and chief technology officer in 2013 and 2014, respectively, to make way for professional managers. They weren’t looking to sell, but after BlueCat’s larger, publicly traded rival Infoblox Inc. sold to a private equity firm last fall for $1.6-billion (U.S.), Mr. Louv began gauging the market’s appetite for a similar deal. Madison Dearborn made a pre-emptive offer valuing BlueCat at a premium to Infoblox, and the parties quickly reached a deal.

Madison Dearborn managing director Doug Grissom said he was drawn to BlueCat’s “high-quality management team” led by CEO Michael Harris, its solid roster of blue-chip customers and its success helping them manage their complex web of connected devices over internal networks and cloud-based services. He said BlueCat has a “huge opportunity” with a new security offering to help clients monitor for suspicious network activity. Mr. Harris said he expects the security product will help boost BlueCat’s revenue growth rate to more than 30 per cent from the low 20s.

The Hyatts plan to remain active backing Canadian tech entrepreneurs – they have invested in many hot startups, including Shopify Inc. and Thalmic Labs Inc. – and Michael is a CBC business commentator and star of the Dragons’ Den spinoff Next Gen Den.

Asked if they could launch another startup, Michael said: “Richard is threatening to do another company. I’m preparing my bottle of Advil … I don’t know, we could.”

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Follow on Twitter: @SeanSilcoff

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