Jan 22 2014, 5:46am CST | by Forbes
You wouldn’t know it from its modest adobe-and-brick-tile headquarters on National Avenue, but like a lot of its larger neighbors in Mountain View, Calif., AnchorFree aims to change the world. Not by becoming the biggest search engine (and advertising machine) or the most prodigious professional network on the planet but by letting you browse the Internet anonymously–protecting you from the prying eyes of malicious hackers, governments bent on stealing your private data or even your everyday snoop by offering so-called activity encryption for anyone who accesses the Web. “Just like an antivirus protects your computer, we protect everything you do online,” says David Gorod?yansky, the 31-year-old cofounder and CEO. “We wanted to make the world a better place.”
Making the world a better place can be a pretty good business. AnchorFree has been buoyed by dissident movements in the Middle East, Thailand and Turkey. But it’s also gained fans in the U.S., with heightened concerns about intrusions by relentless data gatherers, from the NSA to Google and Facebook. The company’s virtual private network app, Hotspot Shield, has been downloaded 200 million times since late 2007; another 250,000 people sign up every day. With net margins of 30%, AnchorFree pulled in revenue of $35 million last year, up from $25 million in 2012. Half comes from almost nonstop pop-up ads and paid content; the rest from a sliver of its 25 million monthly subscribers who pay $30 a year for its Elite (ad-free and faster) service.
It took a while for Gorodyansky and cofounder Eugene Malobrodsky, also 31, to find their focus. Both the children of computer engineers who immigrated to Silicon Valley as the Soviet Union crumbled, the two met at their Palo Alto synagogue 18 years ago and have remained inseparable. Gorod?yansky, an intense, fast-talking Muscovite, and Malobrodsky, a laid-back techie born in Lithuania, founded their first venture in 2002: Intelligent Buying, a network-equipment sales platform that reached $1 million in revenue.
The duo aimed higher. While keeping the business and their college courses going, they met in coffee shops–and groused. “This paid Wi-Fi stuff has to die,” Gorodyansky recalls thinking. “It has to be free, and it has to be secure.” Why not provide such a service–and get advertisers to pay for visibility on their network, covering infrastructure costs and leaving a little profit? AnchorFree lumbered into the world in 2005.
In classic entrepreneurial form, they maxed out their credit cards, spending $50,000 or so to finance Wi-Fi antennas in downtown Palo Alto and San Francisco. The ploy snagged a few thousand users and caught the attention of then San Francisco mayor Gavin Newsom, who invited Gorodyansky to advise his tech council, which included Craigslist founder Craig Newmark and Google folks. Through their lawyers, Wilson Sonsini, which took its fees in equity, the founders met former MCI Communications CEO Bert Roberts, who convinced RENN Capital of Dallas to lead a $6 million Series A round in 2006.
Great idea, but little money in it. “The cost of upkeep and infrastructure just doesn’t generate enough revenue to pay for itself,” explains Malobrodsky. “So we started thinking about what kinds of products would.”
AnchorFree jettisoned everything except Hotspot Shield. Here’s how it works. When you download and activate the program on desktop, tablet or mobile, you visit websites via the company’s servers in the U.S., the Netherlands, Germany, Switzerland and Japan, which scrub any information (including IP addresses) that could determine your location or identity. After you log off, your data are deleted. The free download caught fire. “We had to add servers literally every two days because it would get oversaturated,” Malobrodsky recalls.
The slimmed-down company rises in popularity whenever repressive regimes crack down. In 2010, after Chinese authorities blocked the site, AnchorFree figured out a bypass: It sent e-mails to its entire user base with links to download Mac and Windows versions of Hotspot Shield; because Web surfers rode Gorodyansky’s servers, they steered clear of the censors. “That helped us quadruple traffic,” he says.
During the 2011 Arab Spring, when governments shut down websites like Facebook, YouTube and Twitter, protesters flocked to Hotspot Shield. That January, as crowds in Tahrir Square tried to oust Egyptian president Hosni Mubarak, Hotspot Shield downloads there jumped literally tenfold overnight to 1 million. “We were the only way to get to social media, to communicate and to share,” says Gorodyansky. Last year, when Turkish Prime Minister Recep Tayyip Erdogan threatened to raze a park in Istanbul, thousands of people discovered the AnchorFree loophole, boosting usage 1,000% nationwide.
You might think the two ex-Soviet founders had been inspired by legendary dissidents Andrei Sakharov and Natan Sharansky. Gorodyansky, a onetime Forbes.com contributor, shakes his head. “We pretty much grew up here.” He points to his paternal grandfather, Aaron Leonid, a Red Army reconnaissance photographer in World War II, who used to tell him, “Don’t just stop because there’s a wall or a door in front of you. Keep going!” The Arab Spring uprisings, however disappointingly they turned out, clarified AnchorFree’s mission. Says Gorodyansky: “We wanted to be a business with a soul and a real social mission, instead of just a financial one.”
Making dough sometimes clashes with that higher goal. Hassle-free communication and browsing come with a price–a relentless barrage of ads that follow you like black flies wherever you go on the Web. Some are content teases by publishers; AnchorFree distributes content for the likes of AP, UPI, PC World, Mac World, National Geographic and News Distribution Network, which pay for the service. Many ads are annoying and random–getting hit with an ad for a dating service, say, when you’re visiting a musical instrument site, served by an ad network from Google, Yahoo or AOL. Says Gorodyansky: If you don’t like the ads, pay for the Elite service.
But the app can be a challenge for some advertisers, too. Because AnchorFree doesn’t collect an individual’s data and deletes everything except page cookies, brand advertisers glean only the most minimal information about potential customers. They know you’ve come to a site via the app and hope they’re hitting you with something you’ll click on.
AnchorFree may have to reconcile its competing interests at some point. In three rounds of financing it has raised $63 million. Its biggest backer is Goldman Sachs, which led a $52 million Series C round in May 2012, giving AnchorFree a valuation of $250 million. (Goldman declined to comment on its investment.) Half that wad went to pay off some early investors and staffers. Roughly one-third of the equity is still in the hands of the founders and their 70 employees.
Bert Roberts, the onetime MCI chief who owns more than 10% of AnchorFree, is letting his money ride a while. There may be an acquisition of a company or two that develop security and identity management apps for mobile. AnchorFree is also beta testing a portal called KaboomIt.com that lets users express themselves and share information, pictures and videos before disappearing them, ? la Snapchat. Roberts talks about achieving a user base on a par with some of those other Valley titans trying to change the world. AnchorFree, he insists, “has that kind of potential.”
Follow me on Twitter @KarstenStrauss
Source: Forbes Business
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