John Mutch joined HNC Software in July of 1997 as Senior Vice President of Marketing and Strategy, reporting to then-CEO Bob North. At the time, HNC was doing about $100 million in revenue and had completed the acquisition of Risk Data Corporation and Retek and had a market capitalized value of $250 million.
But, let’s backtrack for a moment. Two years earlier, in 1995, HNC had gone public at approximately $50 million in revenue based on the dominant market share achieved by its core product Falcon, a first-of-its-kind product that used propagated neural network models to detect fraud in credit card transactions. The product was developed by a team of talented scientists, led by Krishna Gopinathan and Anu Pathria.
“One of the key elements that enabled the Falcon product is that HNC went to all of the major credit card issuers and got them to contribute data to a ‘consortium model,’ which gave the technology a cross credit card issuer view of transactions and made the product much more accurate,” Mutch said. “Today, that would be impossible as people protect and understand the true value of data, but in the early days of enterprise analytics and pattern recognition technologies, there was a high spirit of industry cooperation.”
That cooperation was fostered by HNC’s late Co-Founder Robert Hecht-Nielsen, who has been described as a larger-than-life scientist and entrepreneur who had a profound impact on the global analytics scene. The former UC San Diego professor and his late Co-Founder Todd Gutschow are also credited with giving birth to San Dieg’s current data science community.
“HNC was a center for the growth of analytics capabilities in San Diego. Through the ebb and flow generated by its own acquisition, growth, and spin-off cycles, HNC magnetized the San Diego analytics community, infusing it with the entrepreneurial energy that fueled its expansion, attracted new talent, and helped bring analytics to its current prominence on the national stage,” said Mutch, who spent eight years at Microsoft in a variety of sales and marketing positions before joining HNC.
Below, Mutch takes a deeper dive into HNC’s growth and prominence, as well as his life after the company, including taking the reigns of a very troubled Peregrine Systems and later launching an advisory firm focused on shareholder value and corporate governance.
At the Helm: In December 1999, Mutch moved to the CEO slot at HNC after Bob North retired. Under Mutch’s leadership, HNC acquired several additional businesses in 2000, including: Casa Systems, a Los Alamos, N.M. pattern recognition company focused on fraud detection that was pulling in about $20 million in revenue. Casa was run by Bruce Hansen, who ran HNC’s financial division and later became the company’s president; and Steve Coggeshall, who became HNC’s CTO and was later CTO of ID Analytics, whose other founders were also HNC alumni (more on that later on in this series).
It’s important to point out that Hansen is currently Non-Executive Chairman of Mitek Systems, which purchased its core digital identity verification and mobile capture technology from HNC; and Coggeshall, who is still very active in the analytics community, is an adjunct professor at UC San Diego and USC, teaching teaching classes on fraud analytics and business analytics.
Key Acquisitions: A few other key acquisitions under Mutch’s HNC leadership included Onyx, an ASP provider of credit and fraud checks; Systems/Links, which focused on fraud detection related to telecommunications using real-time call data; and Blaze Advisor, a business rules management system (BRMS) for managing and deploying business logic.
“The Blaze acquisition was a big deal because it became a strategic piece in our business model and became the core technology for many HNC products and later FICO products,” Mutch said.
During that time, HNC also spun off Retek, which brought in more than $2.8 billion for HNC and its shareholders.
One of my Mutch’s contributions to HNC was helping Bob North, Robert Hecht-Nielsen, and the board think around branding “pattern recognition” and a vertical industry strategy. “The acquisition of Risk Data and the Retek began the march to expand the company based on a vertical market strategy – the goal was to find companies in the industry where the ability to recognize patterns in transaction data could improve the company’s business results and we simultaneously expanded our R&D capability to try to develop effective models outside of the core financial industry,” he said.
Shortly after, HNC grew to $250 million in revenue and hired close to 1,000 full-time employees across three or four geographies in the US. “Retek was the growth star of the portfolio – they were the closest vertical business unit to a pure play software company and we made a decision to spin them out in an IPO,” Mutch said. “We launched this into a frothy market in 2001 and the IPO got a $3 billion dollar value. The spinout took a company valued at $800 million based on $250 million in revenue and turned it into a company worth $3 billion. HNC distributed its 90% ownership back to its shareholders in a tax free dividend and shareholders profited handsomely.”
Did you get all that?
Slow Growth, High Profitability: While successful, the challenge for HNC, Mutch said, was growth, specifically “how to grow what was an inherently slow growth, high profit business model into a company growing +50% as investors in tech were now paying premiums for fast growing software business,” Mutch said.
“This was the unique fact of HNC – people did not understand the value of the data and the value of recognizing patterns in data and enabling better business decisions. Early investors like Cap Research got it and profited tremendously.”
He also pointed to a few interesting elements that catapulted HNC’s success.
- The company benefited from an accounting policy at the time which was called “pooling of interests” and used its public company stock to buy companies. “Pooling had the effect of allowing you to add growth and profitability together and therefore you could artificially inflate reportable growth rates of the company. The subsequent acquisitions of Compreview, Blaze, and our expansion into the telecom market all generated apparent growth. In reality, the true model for the core business was slow growth, high profitability.”
- HNC also benefited tremendously from approximately $15 million annually in government sponsored R&D projects, “primarily three letter agencies that led to the development of unstructured text recognition and context vectoring technology that became the basis for future products and companies that were spun out of the original HNC. This group was managed by a brilliant young Ph.D. named Joseph Sirosh, who became Robert’s protege. Robert worked tirelessly behind the scenes with the scientists and developers to encourage their innovation.”
- Mutch also credits late HCN Co-Founder Todd Gutschow as a tremendous asset and the directional compass in many respects for HNC. “If there was a controversy or tough decision to be made, Todd’s point of view was highly sought and considered; he always put the companies interest first and was a voice of reason in all situations.”
Pioneer: “One point to note is that HNC was an early pioneer in convincing customers to pay on a per transaction basis – a very early leader in a recurring revenue model – which today is mainstream in the software industry,” Mutch said. “The quality and success of the company was driven by approximately 50 Ph.D.s in math combined with some strong software engineering that provided GUI’s (Graphical User Interface) and API’s (Application Program Interface) to integrate the products into real time transaction streams.”
The Sale: In August 2002, Mutch helped lead the sale of HNC to Fair Isaac & Co. (FICO) for $810 million. Looking back, however, Mutch is not sure that was the best idea at the time.
“The sale to Fair Isaac was a difficult decision – not many people know this, but one of my first recommendations to Bob North was that we should buy FICO and he and I approached Larry Rosenbrger, CEO of FICO and attempted to buy them. In retrospect, the sale to FICO was a mistake and we should have held onto the company and continued to build it. Today, I am sure that it would be worth $100 billion.”
San Diego Software Scene: “When we sold HNC in 2002, the San Diego software ecosystem was somewhat immature and today it is much stronger and can support a scale software business and I think the success of ServiceNow is a proof point. Today, there are countless former HNC folks who have gone onto successful ventures, including Krishna Gopinathan and Micheal Thieman (Co-Founder, Zebit), as well as Tom Tobin who recently launched a company called Modelshop. Joseph Sirosh is now CTO of Compass, the global realty tech company. And, it’s hard to believe that both Robert and Todd Gutschow have passed.”
Several other HNC alumni went on to launch or run young analytics companies, including BasePoint Analytics (acquired), Covario (acquired), ID Analytics (acquired), Certona (acquired), Global Analytics (acquired), to name a few. Follow this mafia series through our newsletter to find out more!
Peregrine: Post-HNC, in March 2003, Mutch was recruited by the US Bankruptcy court to join the board of Peregrine Systems, a year after the software maker filed for Chapter 11 citing legal issues raised by accounting irregularities in recent financial statements. Peregrine had been caught in the windstorm of corporate disgrace, which started with Enron and gained speed through other companies such as WorldCom, Tyco, Global Crossing, ImClone, along with San Diego-based JNI Corp.
The entire John Moore’s-led board at Peregrine was forced to resign as a condition of a non-monetary penalty settlement with the SEC. After helping the board and company emerge from bankruptcy, Mutch was named CEO in July 2003.
“We spent two-and-a-half years restating five years of operating results and positioning the company to relist on the Nasdaq,” Mutch said. “Before that could happen, IBM and HP got into a bidding war for the company and we sold it. There was huge malfeasance and fraud perpetrated at Peregrine System and while I was CEO, 12 former executives were indicted and found guilty of various charges, including the former CEO Steve Gardner, who died in prison in 2013. The FBI had offices in our building and I will never forget my first sales meeting in Miami, where the FBI burst into the room and arrested three executives from overseas – they had ignored US subpoenas and had been tracked by the customs system entering the company. That changed my planned remarks to the group a bit.”
Mutch ran Peregrine Systems from 2003 to 2005, restoring customer confidence and retention, reinvesting in the product line while operating the company under an SEC consent decree. Mutch successfully restructured the company, restating five years of operating results, which culminated in a sale to HP for $425 million in 2006.
MV Advisors: As a result of Mutch’s work at Peregrine, and understanding the malfeasance of shareholders rights, he founded MV Advisors LLC a diversified advisory services firm which provides focused investment and operational guidance to both private and public companies. MV Advisors’ private company portfolio includes businesses in the technology, active lifestyle and sports segments valued in excess of $100 million. In the public capital markets, MV Advisors’ partners with large investment firms that share a deep value and activist investing strategy to purchase significant equity positions in undervalued technology companies that can be restructured to increase shareholder value.
Mutch, who has served on the board of over 10 public companies, is currently Chairman of the Board of Aviat Networks, and serves on the board of Agilysys Inc. He is also an operating partner for a publicly traded SPAC (special purpose acquisition company) called Osprey Technology Acquisition Corp., in which his advisory firm recently helped raise $317 million.
BeyondTrust: While launching MV Advisors, Mutch was also recruited to lead a BeyondTrust, a $20 million revenue Privilege Identity Management Software company. While there (2009-to-2014), he developed a growth strategy, recruited a new leadership team, refined inbound marketing sales model, and executed five acquisitions, building the company to $80 million in revenue. He also expanded the company’s product line and increased the global customer count from 2,000 to 3,000. Mutch also executed re-capitalization in December 2013, resulting in a $130 million capital distribution to investors.
Not bad for five years.
San Diego: When asked why he has stayed in San Diego, Mutch said, “I’ve made my home in San Diego and done the thing I am most proud of – co-parented and raised four beautiful children – Natalie, Garret, Annabelle, and Lauren.”
As for the local ecosystem, Mutch said, “Today, the tech scene in San Diego has matured considerably – from the startup incubators and advisors like Evonexus and Tech San Diego to the availability of venture capital with folks like Analytic Ventures and corporate venture funds like QUALCOMM Ventures. The technology talent, capital pool, and cooperative climate make San Diego an ideal place to launch and build a significant technology company.”
Editor’s note: This series is dedicated to late HNC co-founders Robert Hecht-Nielsen and Todd Gutschow, who set the stage for San Diego’s vibrant analytics and data science community.
This is part 2 of a multi-part series that spotlights several HNC alumni and serial entrepreneurs that still call San Diego home today and their impact on the ecosystem and our daily lives. Read part 1 & part 3.