Eyewitness Surveillance helps secure car lots, but finds that next Chevy buyer, too

January 11, 2015/The Washington Post/ – The story goes that some people are born on third base and think they hit a triple.

The pair of entrepreneurs I am writing about this week certainly started out with advantages such as valuable connections, sophistication and good educations.

But Rush McCloy and R.T. Arnold didn’t choose to slide into Wall Street.

The 40-year-old MBAs instead bought, grew and now run a Maryland-based security company called Eyewitness Surveillance, whose 4,000 high-tech cameras, backed by analytics, sweep the grounds of auto dealerships and metal-recycling companies from here to Texas.

The gear can do simple things such as spotting a thief slipping under a Chevy to snatch a catalytic converter (for the platinum) or more-complicated tasks such as connecting the dealership with potential customers who prefer to stroll the car lots in off hours. Eyewitness also uses high-resolution cameras and software to identify dents and scrapes on cars as they enter a dealership’s service lanes, giving the dealer a fighting chance against false damage claims.

The company is headquartered in Anne Arundel County and has more than $5 million in revenue. Its profit margin is probably somewhere between 15 and 20 percent, based on industry averages. It employs 45 people.

McCloy and Arnold, chief executive and president respectively, own a piece of the firm. Investors own the rest.

“Our drive and focus is building and running a small company, innovating and creating jobs,” said McCloy, grandson of the late John J. McCloy, a Wall Street lawyer and banker regarded as one of the most influential private citizens of his time.

I was intrigued by how McCloy and Arnold, both from New York, ended up in Maryland.

After graduating from the University of Virginia and getting his MBA from the University of Pennsylvania’s Wharton School, Navy reservist McCloy went to Afghanistan for a year on intelligence missions and was awarded a Bronze Star.

Not the usual next step chosen by a business-school graduate.

Arnold (Duke University and Wharton) found his way to Merrill Lynch before moving to Africa, where he helped implement a microfinance program. The son of a successful investment banker, he also worked on a political campaign in New York (his guy lost).

McCloy and Arnold became friends at Wharton, and soon after they bought and sold a yoga accessories company called Manduka, which turned out profitably for the pair. The money came from family and friends.

Arnold was the yoga company’s chief financial officer while McCloy was in Afghanistan.

In 2009, in the midst of the Great Recession, they launched a “search fund” called Channelstone Capital Partners.

Search funds work like this: The fundraisers sell “units” at $25,000 to $35,000 or so, seeking to raise between $400,000 and $500,000 from investors. The search fund then uses that money to pay the founders’ salaries, cover legal fees, office space, travel and due diligence while they look for a company they can turn into a long-term success. Once a target is located, the founders return to the investors for money to buy the company.

Search funds target businesses that tend to range in price from $5 million to $20 million, with the majority coming from investors and the rest from a lender, such as a bank.

It took McCloy and Arnold five months to raise nearly $500,000. They found their largest shareholder, Salt Lake City-based Peterson Partners, through research, where they learned Peterson had experience owning security companies.

“We wrote them a letter and called,” McCloy said. The audition included binders, résumés and background informing Peterson who McCloy and Arnold were and what motivated them.

“They get pitched all the time, so they wanted to see what makes us tick,” Arnold said. “Do we have the fortitude to find and run a company. What is our management style going to be? What is our vision? What is our leadership style? Can we motivate people?”

They probed Arnold’s fundraising at Wharton to help Philadelphia Boys and Girls Clubs. They asked about his microfinance mission in Africa.

They asked McCloy about fighting in Afghanistan. They asked how he built an organization to recruit teams to run marathons and ultra-marathons across the world, including Antarctica, to raise money to fight cancer.

Once the duo had funding, they began to focus on purchasing a company in the video-surveillance sector, where the ability of cameras to read human behavior is advancing at a mind-boggling rate.

“Video-monitoring is exciting to us,” Arnold said.

As they burrowed in, they started networking through security-industry associations, calling business brokers, business owners and attorneys, anywhere they could find opportunities.

They found a small company in Annapolis that a business broker was looking to sell. They closed in 2011, paying several millions for the firm.

There are 17 investors, but the major shareholders are Peterson and Cambria Group, a private investment company. McCloy and Arnold’s ownership shares grow if the company performs.

The opportunity hasn’t been without shared sacrifice. The business partners moved their families to Maryland. McCloy lives in Annapolis and Arnold lives in Baltimore. Their wives did their part: McCloy’s wife commutes to Pfizer’s New York headquarters, and Arnold’s physician wife got a job at Johns Hopkins.

McCloy and Arnold liked that Eyewitness already had made inroads into the auto-dealership market.

They also liked the business model of recurring revenue. Eyewitness clients sign up for multi-year contracts, each generating monthly revenue of $1,300 to $2,000 on a 12-camera operation.

The company has more than doubled its revenue in less than four years. The number of states where it does business has increased from two —Maryland and the District — to 10.

I estimate the company earns a profit somewhere between $500,000 and $1 million. It plows every cent back into expansion. There are no dividends — yet.

The company’s main mission is security, but there is plenty of upside helping car dealerships capture new buyers.

For example, Eyewitness works with dealers to put a sign on the windshields of cars that are for sale:“If you are interested in this vehicle, text this number.”

When the would-be buyer texts the number, Eyewitness’s software reroutes the message so a salesperson can call them on the spot.

How many preppies end up in life helping to sell cars?

By Thomas Heath