SmartBear Revenue in 2017: Nearing $100M, and Why $2,500 Was Only the First Sale

Where Latka’s missing $75 million went

Early in the conversation Latka asked what the average customer pays a month. Teague offered something else: “Well, I’ll give you a better one. Our average transaction’s about 2,500.” Annual, he confirmed, and “we’ll acquire about 7,000 customers a year that way.”

About five minutes later Latka multiplied it out: “if I take 10,000 customers times that $2,500 ACV average you just gave me, obviously that’s 25,000,000 annually. I’m missing $75,000,000 of revenue. Where is that?” Teague did not object to the word revenue. He objected to the multiplication: “That 2,500 transaction is our new software transaction, our new customer acquisition. And we have an expand model.”

“we have developer tools, so five developers writing the next mobile application download and like it, it spreads. And we might wake up one day two years later and find out that there’s 200 users in the same account.”

He had promised “two answers,” and the one he spelled out was the installed base that keeps buying. Latka then ran the division the other way. Spread roughly $100 million over 10,000 customers and each pays $10,000 a year, or in Latka’s words “much closer to like $8,000 or $9,000 or $10,000 a year versus $2,500 a year on average.” Teague agreed, “Yeah, average customer pay, you’re right,” and pinned the $2,500 down: “The average new, yeah, sorry, be super clear. The average first time purchase.”

So 10,000 × $2,500 multiplies the price of a first purchase by every customer, including accounts that had been expanding for years. On the division Teague accepted, the average customer paid three to four times what a new one spent in its first year. Latka had called the $2,500 an “ACV average”; as an annual contract value it describes a new logo, not the installed base.

Prices vary widely. “Our products can cost anywhere from a $100 to a couple thousand, but it’s a pay as you go subscription model,” Teague said, and SmartBear was not pure SaaS: “Some of them are pure cloud SaaS delivery, others are on desktop.” CrossBrowserTesting, which lets a team test an application across devices and configurations without keeping its own phone lab, was “a pure monthly pay as you go,” with spike usage paid on top. Other tools were sold as “traditional annual subscription payments.”

Growth: half new customers, half expansion

Latka asked which drove more growth, expansion or new customers. Teague started with the market. “So APIs, of course, are exploding in the world. We own and develop two of the leading open source tools, one called Swagger and one called SoapUI.” As existing and new customers worked out how to “deploy, build, and test these APIs,” SmartBear was “sort of riding that wave. It’s about fifty-fifty actually.”

The free tools sit at the top of the funnel. “We have 20,000,000 downloads a year, for example, we process about 400,000 leads, people that raise their hand and say, Hey, I’m trialing, I’d like to buy.” He gave the 7,000 new customers a year separately and did not say how many of those leads became customers. Nor does the tape reconcile 7,000 new customers a year with a base of about 10,000. Latka didn’t ask, and the two numbers are no basis for estimating churn; Teague’s own retention figures, below, are.

Customer counts also differ by source. When Francisco Partners announced its deal on 3 May 2017, the release credited SmartBear with “over 20,000 customers.” Six months later Teague told Latka “we are going to be at 10,000 customers.” Neither defines a customer, so the gap cannot be settled from the public record.

The other engine was buying companies. Teague described SmartBear’s portfolio as assembled by finding “very similar companies, founder led passionate software engineers that were developing tools to fix problems for other software engineers.” He gave one example without naming it: “One of them, for example, was as small as a million dollars. It’s now about $45,000,000 of our revenue.” Many of those founders stayed on to run what he called innovation centers, “which is why we have six locations around the globe.”

$45Mof SmartBear’s revenue in November 2017 came from one acquired company that “was as small as a million dollars,” Teague said. He did not name it.

“we’re sort of, I would say entrepreneur friendly, right? … we have innovation centers that are still driven by our founder led owners, entrepreneurs.”

Justin Teague, CEO, SmartBear, November 2017

Retention, CAC and marketing spend

Teague’s net retention figure was his own and specific: “our net retention’s in the 115 to 120% range.” He called it “the easy metric.” The one he preferred was harsher: “My favorite metric is gross dollar churn, because it tells me if I wake up in the morning with 10 customers paying $10 and I end the year, how many of those 10 customers are still paying that original $10.” Whatever those customers bought on top does not count.

Over the past twelve months he put it, measured as retention, at “right around high eighties,” with a goal of 90: “We’re trying to get to 90.” Latka checked the direction (“that’s retention, not churn, right?”) and Teague confirmed. A minute later, after a false start at 90 and “mid 90,” he settled on “mid eighties retention.” Either way, gross dollar retention sat in the mid-to-high eighties percent.

Two figures from this stretch belong to Latka. He rounded the high eighties down to “80% dollar retention,” and added that expansion “gets you up to about 150% expansion year over year.” Teague answered “Right, you got it,” but his own net figure, given a minute earlier, was 115 to 120 percent, and that is the one to use. For how the gross and net measures differ, see revenue churn.

SmartBear measured acquisition cost per dollar, not per customer: “what does it take us to acquire a dollar of new revenue or new ARR rather than a new customer. And our metric is we try to stay below 1.25.”

Spend to acquire $1 of new ARR: below $1.25Teague’s ceiling, November 2017. Latka read it as a payback period of “about twelve, thirteen, fifteen months” and Teague said “That’s right,” but the months are Latka’s inference, not a figure SmartBear reported.

On spend, Latka asked about the past month, excluding headcount, and said a year would do. Teague answered by the quarter: SmartBear would “probably spend about $750,000 a quarter.” Asked whether that was mostly AdWords or conferences, he pointed to content instead: “We have a big inbound demand engine. So a lot of content based,” because the trial-and-buy motion “sort of demands us getting people to come to us.” Against CAC benchmarks, the $1.25 ceiling is the number to compare; the quarterly spend was his hedged estimate.

Lifetime value he refused to reduce to one number. SmartBear looked at it “by logo, then we look at it by product, and then we look at it by total spend,” because a mobile project can end and its licenses move to a new one: “Is that a loss or not?” What mattered to him was “more the trend” than any industry benchmark.

Ownership, funding and the team in late 2017

Asked what year he joined, Teague said “Two years ago,” which Latka took as 2015. “I came in as COO and transferred to CEO.” Latka’s introduction adds that he came from Bullhorn, where he had also been COO. SmartBear’s team page in December 2016 still listed him as president and chief operating officer, and Francisco Partners’ release of 3 May 2017 quoted him as CEO, which fits his account that he “had transitioned to CEO before” the sale.

He described the founding without names: the company “was launched by an engineer that really wanted to solve problems for other software developers,” in about 2003, with “a code collaboration product where engineers could together keep track of the code and who was making changes and whatnot.” SmartBear’s own about page names that engineer: Jason Cohen started SmartBear in 2003.

The sale has no price on the tape. “We just sold to Francisco Partners in the spring,” Teague said, calling it “part of building SmartBear two point zero.” The firm’s release said it had acquired a majority stake, that “Terms of the transaction were not announced,” and that the deal marked “a transition in lead investors from SmartBear’s original 2007 investor, Insight Venture Partners.” It also described SmartBear as “highly profitable” and as “growing at double digit rates for more than five years.”

On money raised, Teague drew a line between SmartBear and the companies it bought. Those companies “had their own sort of self funding model or bootstrapped. And then the previous investor put some funding behind it in order to buy and roll up.” He named neither the investor nor the amount. Asked what SmartBear itself had raised, he said “I don’t have the exact figure” and guessed about $1.5 million, a number that leaves out the roll-up money. SmartBear had outside investors; the bootstrapping he described belonged to the companies it acquired.

Latka tried the IPO question twice. He suggested that, by other CEOs’ telling, a company starts thinking about listing in “the 110, 130,000,000 ish ARR range.” Teague: “we try not to focus on an outcome as much as building just a great great company.” Pressed with a hypothetical of Latka’s, $200 million from private investors or from an IPO, he said: “I haven’t had to make that decision yet because we’ve been living in private equity and private equity is great.”

The company he ran was “just going to hit about 400 employees globally across six innovation sites.” The biggest offices were in Somerville, just outside Boston, and in Galway, with an offshore center in Tula, Russia.

Since the interview

• 2 March 2020 SmartBear announced that Teague would step down as CEO “for personal reasons” and stay on as executive chairman. Frank Roe, who had joined in 2018 as chief revenue officer, succeeded him. In the same release Brian Decker of Francisco Partners said that “Under Justin’s leadership, SmartBear has more than doubled in size,” without saying by what measure.
• 21 October 2020 SmartBear secured “a significant investment” from Vista Equity Partners, with Vista and Francisco Partners as “equal owners of the company.” The release disclosed no amount.
• 22 October 2020 PE Hub reported that SmartBear “generates around $150m in revenue and around $75m in EBITDA, according to sources,” who put the deal’s value at $1.8 billion to $2 billion.
• 4 March 2021 SmartBear said the Vista investment had closed.

If PE Hub’s sources were right, SmartBear had passed $100 million by late 2020, but no public source dates the crossing, so Teague’s “next year” cannot be confirmed to the year. SmartBear’s about page now says developers, testers and engineers at “32,000+ organizations” use its tools.

The Famous Five

In Latka’s closing round, Teague’s favorite business book was a biography of Ben Franklin (“you find out that the guy invented the library, it’s like, wow”). He was reading The Everything Store, the Amazon story, for one lesson: “he was a maniacal focus on the customer, and that’s something that we’re trying to get closer and closer to.” His favorite tool was Slack, because “we’re a big, you know, diverse, geographically dispersed company,” with Flipboard on his phone. On sleep: “I don’t know if it’s eight, but I’m approaching eight.” He said he has three boys, and he was 45.

“I wish I had taken more risk, right? Because the time to take it is when you’re young and the implications are not quite as, let’s say, dramatic. But I accumulated a lot of experience going overseas, living in London, different types of software companies. And I think accumulate as much experience as you can early because you can always leverage it later.”

Justin Teague, CEO, SmartBear, November 2017