How Spanish Start-Up Scytl Is Innovating Democracy

PERE

It took three months to determine who won the 2010 Ivory Coast presidential election. Some 3,000 people died in the ensuing conflict, which broke out after the incumbent president, Laurent Gbagbo, refused to accept challenger Alassane Ouattara’s victory.

Fast forward to the October 2015 Ivory Coast presidential elections: technology from Barcelona-based Scytl allowed 40% of the votes to be counted within 24 hours, making it clear Ouattara had won a second term. There was no turmoil.

Valles: not looking forward to going back to working for a public company

“Our technology improves democracy by increasing voter participation in developing countries but the impact is even more amazing in developing countries where we can help to mitigate election fraud,” says Scytl CEO Pere Valles, a scheduled speaker at NOAH 2015, a conference for late-stage Internet companies in London November 12th-13th.

Digitizing elections has turned out to be a lucrative business. The Spanish company, which has raised a total of $120 million in venture capital and is planning a 2017 initial public offering on NASDAQ, has averaged 70% year-on-year growth over the last 10 years. It has more than 40 patents, made seven acquisitions and essentially cornered the market for digitizing elections. “Of the 21 countries using online voting in the public sector, 19 are using our technology so we have more than 90% global market share,” says Valles.

The 21-year journey from a university research lab to global dominance has involved a number of twists and turns, including the death of founder Andreu Riera and several changes to the business model.

A Slow Start

Riera, a scientist who was part of a research group at Universitat Autònomade Barcelona, started working on applying cryptography to electronic voting in 1994. “At the time online voting didn’t exist,” says Valles. Riera founded Scytl in 2001 after the vote-count debacle in the November 2000 U.S. presidential election. “That was the catalyst. If the most important democracy in the world had to take one month to determine who won and bring in the Supreme Court to make a final decision than the traditional voting system was clearly failing and could benefit from the adoption of new technology.”

Scytl At A Glance

Founded: 2001

Headquarters: Barcelona, Spain

Venture Capital Raised To Date: $120 million
$2 million round, in two tranches from Riva y García Financial Group in 2002 and 2004.

$4 million round in 2007 from Nauta Capital

$10 million round in 2010 from Balderton Capital

$104 million round in 2014 led by Vulcan Capital with participation from Sapphire Ventures, Vy Capital, Adams Street Partners, Industry Ventures and existing shareholders Balderton Capital, Nauta Capital and Spinnaker Invest

Traction: 19 out of the 21 countries that have adopted electronic voting in the public sector use Scytl’s technology. Scytl counts 1,400 out of 3,200 county governments in the U.S.s as customers and has clients in 42 different countries.

Number of Employees: 525

Acquisitions: Seven

IPO Planned for 2017 on NASDAQ

The first three years “things moved much more slowly than expected,” says Valles. “It was not easy for a group of academics from Spain to start selling complex technology that is critical to elections to governments. The challenge was getting the first country to take a risk in a general election.”

Everything changed once the Swiss canton of Neuchâtel signed a contract to automate voting in the country’s 2004 public sector elections. “Once we got that first reference we started to grow very fast because governments are very competitive, they don’t like to be the first ones to do something but they don’t like to be the last ones either,” says Valles, who was brought on board as CEO right after the contract with Switzerland was secured.

Valles, a native of Spain, had been living in the U.S. for 10 years when he was recruited to run Scytl. (He worked as a senior manager in KPMG’s M&A group and also as chief financial officer at voice over IP provider GlobalNet, a public company.) His wife and children were ready to return to Spain. So, when a friend at Nauta Capital, one of the original backers of Scytl, called to offer him the job of CEO he accepted.

The choice was not an obvious one. In 2004 working for a start-up in Barcelona “was not an advantage,” says Valles. “There were very few technology companies there then and this type of technical solution was something that people expected to come out of the U.S. or the UK or Canada. The assumption was that if the company came out of Spain it probably doesn’t have something that is that great.” What’s more, he says, “the cost of the opportunity was quite high at the time. There were a lot of good paying jobs with banks and consulting firms.”

U.S. Breakthrough

Valles says he took a gamble because he was impressed with the technology and Riera. “He was an extraordinary person, both from an intellectual and personal point of view, and we understood each other very well,” he says. Riera loved to start companies but not to scale them so was happy to cede the role of CEO to Valles. The founder took on the role as chairman and was already moving on to a next venture when he was killed in a 2006 car crash.

After his death the company continued to scale. Scytl broke into the U.S. market during the 2008 presidential election. Its first customer was the state of Florida. “The first reason, obviously, was what happened in the 2000 elections so this time around it wanted to be the best state in the elections,” says Valles.

“At the time there were two wars going on and lot of military people from Florida were stationed in Afghanistan. They were looking for a system that would allow people deployed overseas to vote.”

Other states and counties (geographical areas within states) quickly followed. Voting in federal elections is mainly handled by local governments. In the U.S. there are 3,200 counties and today Scytl says it counts 1,400 of them as customers.

Still, transforming the actual voting process from off-line to online was a limited market. So in 2010, the company changed its strategy, enlarging its product portfolio to include not just electronic voting but 24 products that can automate or modernize any process in an election, including voter registration.

Authentication And Privacy Don’t Go Well Together

The challenge in designing online voting is how to authenticate the voters but at the same time guarantee the secrecy of their identity. “Usually authentication and privacy don’t go very well together,” says Valles. “We solved that problem in the first generation of our technology but now governments are getting more demanding because voters want a way to verify that their votes have been counted. We have developed technology that auditors can use to see if the votes cast were the same as those that were counted.”

Online voting is still mainly used to count the votes of those who are out of the country at the time of the election or for local voters to vote in advance if they know they will not be there during the election, but several countries are taking steps towards allowing everyone to vote electronically in general elections. Norway has piloted such a system and the Swiss government has passed a law that extends online voting to the general population.

In September, Scytl announced a strategic partnership with Swiss Post to provide online voting technology for both binding elections and citizen consultations.

Scaling Challenges

Under his leadership, the company has grown from 15 employees in Barcelona to more than 500 spread across 42 countries. Valles has had no trouble getting executives from the U.S. or engineers from other parts of Europe to relocate to Barcelona, but that doesn’t mean that scaling hasn’t had its challenges. “The management team you started with is going to have to change as the company grows,” says Valles. “At some point you have to decide who can continue. This is difficult because you develop a strong personal attachment with these people and secondly because these people were very successful in helping you get where you are.”

There is also the issue of liquidity after 14 years in business. “In 2014 we had three investors: Balderton, Nauta Capital and Riva y García. We had a potential buyer who wanted to buy the company at a significant valuation so the question was, ‘do we sell the company or raise more money and try to do an IPO?’. The acquisition offer would have made a very good return for the investors. We made a compromise because the management team wanted to continue towards an IPO. So we raised a large round and as part of that there was significant liquidity for the existing investors and at the same time they still remain significant shareholders so they can partake in the upside of an IPO.”

In order to prepare for a planned 2017 IPO, the company is searching for a CFO and a COO who have past experience working for public companies. It is also tweaking its business model once again, moving away from a traditional licensing model to a SaaS model with recurring monthly payments. “The problem with a traditional licensing business model is you don’t have visibility on future revenues,” he says. “When you are public you need to have good visibility on what you are going to sell every quarter. Moving to a recurrent revenue model will involve big changes, including compensation to sales people — there are all kinds of implications — so it will take two to three years” to get ready for the IPO, he says.

Working For A Public Company “Difficult And Very Painful”

“I am honestly not looking forward to going back to working for a public company,” says Valles. “It is difficult and very painful. Investors are intolerant. If you miss a quarter by 5% the stock goes down by 20% and if you miss the next quarter you lose all credibility and the stock goes down by 50%. Investors are focused on the short term. There is a lot of pressure. But it is the only way to give a return to the eight investors who own 80% of the company and to keep Scytl intact.”

He says the company will remain headquartered in Barcelona even though it plans to list in the U.S.

“This is a very political market and being American is not an advantage,” he says. “People think about [former CIA worker] Edward Snowden’s leaks about global surveillance programs and are suspicious about who is going to be behind the technology. If we want to sell into Ukraine or the Middle East it would be difficult if we were American headquartered. By staying in Spain and going public in the U.S. we get the best of both worlds.”

The fact that the company has been able to build a global giant from Spain is a point of pride, part of Scytl’s legacy and its contribution to the building of the tech scene in his native country, he says. “I feel an emotional and personal attachment to what we have built,” says Valles. “ I also like what we do. I am proud that we are introducing technology to innovate democracy.”

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