Code42's retrenchment last week is part of its plan for long-term growth

The layoff of 55 people last week at Minneapolis-based Code42, which is trying to transform itself to a broader IT security provider at the same time it accelerates growth, shouldn't diminish the company as a potent player in Minnesota's growing software industry.

Nor should it tarnish our local software industry.

We're not Silicon Valley, Austin, Texas, or Boston when it comes to software startups and funding. We are a promising second fiddle.

And, if the strategy of Code42's leadership works, the now 550-employee company could become a much larger outfit.

CEO Joe Payne said in an interview last week that Code42's board still intends to be a publicly held company. However, to capture the price valuation sought by its venture-capitalist owners, Code42 must grow by 25 percent and achieve revenue around $150 million.

Code42 last year had sales of $117 million, declining from a multiyear pace of 25 percent annual growth, to 17 percent in 2018.

Payne decided he needed to let go of about 9 percent of employees who were tied to the company's legacy as a provider of data-backup products to consumers and small businesses. The company, including its data-backup software, is moving to sell a broader suite of "data loss protection" products to businesses and other organizations.

If this works, Payne, an energetic software veteran of 53, expects the company to top 600 employees within a year.

Data-loss prevention or protection (DL) is critical to business. Data can't be locked in a safe at night. It's out there on PCs, laptops and mobile devices.

"Code42 has a very useful product for the data-loss protection problem, but they have to climb the hill to prove that their solution works," analyst Chase Cunningham of Forrester Research in Virginia said in a telephone interview Friday. "Their software doesn't impact use but allows organizations to see who did what with what. That's important. It doesn't just block usage. That can be a problem for legitimate uses of sensitive data.

"If you try to upload … Code42 still lets you use the file, but it also lets IT security know that somebody is downloading or sharing this file. Part of the problem is that they are coming into an area of the market where the buyers are hesitant. Data-loss prevention systems never lived up to the hype. It was difficult to use. [Code 42] does have an opportunity to take a piece of the market share that has been left for somebody to win.''

A recent example has turned heads in the wealth-management industry with allegations of a former CEO stealing data from his former company.

Cole denies that he illegally obtained anything or shared confidential information with Cresset.

Code42 has $30 million in the bank and said it doesn't need more private capital to succeed in its running transition

Right now, Code42 needs more experts in IT security and needs fewer people who work on data backup. Code42 faces fierce competition from entrenched competitors such as Digital Guardian, Forcepoint and GTB Technologies. Payne said he has a disruptive product.

"We don't block anything," Payne said. "We just track and keep a copy of everything. We know if something is stolen and who did it."

David Chiang, an IT systems engineer at Macom in Massachusetts said Friday that the Code42 loss-protection service "gives me a complete view of everything that happens to our data, including … vulnerable endpoints such as PCs and laptops. And if people upload to the cloud, we can see what they took and with whom they shared it."

And it will be another good story for the local software trade.

Earlier this month, Wisconsin-based technology company Alula announced plans to move its headquarters and 120 employees from Hudson to St. Paul. The change will bring 120 Alula employees to the Twin Cities with plans to add more.

"The Twin Cities has proven to be a dynamic place to scale a tech company," Alula CEO Brian McLaughlin said last week.

Alula, which provides software and hardware for security, alarm and video automation, will move in next month to the Midway Innovation Center near Hwy. 280 and Energy Park Drive. Talent was a major reason for the private company's relocation, said Brad LaRock, vice president of marketing for Alula.

"We really love the tech scene … in Minneapolis-St. Paul," he said. "It's growing."