TheDeal.com: Identrus gets $20M

July 27, 2005

By Clifford Carlsen

Financial services security management provider Identrus raised $20 million in a restructuring that converts the former bank consortium into an independent company and allows it to expand into new markets.

Enterprise Ventures of La Jolla, Calif., put the deal together, and brought in Rho Ventures of New York as co-leader of the round, which also included a new investment by Zions Bancorporation of Salt Lake City as the only previous shareholder to participate in the new round. The deal leaves San Francisco-based Identrus' other 20 shareholding banks with only a small amount of common stock following the restructuring, valuing the deal marginally higher than the $20 million raised.

The deal will allow Identrus to continue offering identity certification to banks' financial services customers and trading partners under a framework certified by the Federal Reserve Bank and the Office of the Comptroller of the Currency, and will allow the company to expand its identity management technology into new markets in government and other industries. The new capital is expected to carry the company at least two years, at which point it expects to have positive cash flow.

Identrus chairman Andrew McLachlan said the company began the process of spinning off as an independent company in late 2003, and began fundraising in earnest in the third quarter of 2004. He said the company considered a trade sale, but owners determined that their continuing interest as Identrus customers would be better served by an independent company, and further determined that their ownership stakes were less important than putting the company on a strong footing in the future.

"This took longer than expected because the owners grappled with whether they wanted to keep a large stake in the company, and in the end decided they were more interested in being customers," McLachlan said. "Their position in the restructuring was more of a strategic issue than one of pricing."

Identrus was formed in 1999 to formalize a system that ABN Amro NV, Bank of America, Bankers Trust, Barclays, Chase Manhattan, Citigroup Inc., Deutsche Bank AG and HypoVereinsbank had put together to authenticate identity and provide security technology. The company added banks to the ownership consortium as they became customers, and Zions Bancorporation became the company's largest shareholder when it sold its Digital Signatures Trust division to Identrus in May 2002.

McLachlan said Identrus worked with a banker he declined to identify to define a process for taking the company independent, but engaged attorney Mike Flynn of Sonnenschein Nath & Rosenthal LLP of New York to find investors and close the round.

Investors were represented by Ross Birmingham and Mike Kagnoff of Heller Ehrman LLP in San Diego.

Carl Eibl, a managing director with Enterprise Ventures, said he had been looking for investment opportunities in identity authentication for e-commerce for some time, when he came to the deal through Flynn. Eibl said he was attracted to Identrus' technology and the opportunity to expand beyond the company's existing market, but said the transaction was complex.

"The owners were interested in keeping the system together, but it required careful communications and [careful] unwinding of the ownership," Eibl said, adding that the new capital investors are putting into the company will ensure its continued strength as well as help it grow.

"This $20 million will provide the capital to really get the product launched in other markets and leverage the capabilities the company has," Eibl said. "This will fund the company a couple of years at least, but investors intend to put a lot of money into growing the company."

McLachlan said Identrus initially focused on banks and other financial institutions, and the company maintains that its close regulation by the Treasury Department and other government agencies makes it the only similarly authorized identity management system. But Identrus already has moved beyond financial services into other key identity-protected industries such as healthcare and government.

Identrus cites market estimates by Framingham, Mass.-based IDC that peg the identity management market at $5 billion by 2007, and investors hope to leverage the company's operational framework and network of banks to provide services to a broad range of global e-commerce customers. The company will use funds from the new investment to broaden sales channels in industries such as pharmaceuticals, government and transportation/logistics.