How Arkadium Reached $15M in Revenue and Bought Out Its Investors While Staying Profitable (Interview with Co-Founder Jessica Rovello)

Nathan Latka

00:00You're gonna love this interview. Just got done editing it. I'm glad I got it live for you. I'll be in the comments for the next thirty minutes hanging out answering any questions you have. In fact, leave a comment below about data points or what you think is gonna happen to the company, and I will respond to every comment. Additionally, if you're just loving the content, click the thumbs up, and I will go and check out your

00:18profile as well and give your videos some love as well. In the meantime, enjoy the interview.

Introduction to Arkadium and Jessica Rovello

Nathan Latka

00:26Hello, everyone. My guest today is Jessica Rovello. She is building a company called Arkadium, which provides interactive content to the world's most well known brands and publishers like CNN. Jessica, you ready to take us to top?

Jessica Rovello

00:36I am ready.

Business Model: Games Licensing and Direct to Consumer

Nathan Latka

00:37Okay. So tell me first, is Arkadium a pure play SaaS model or is it more consultative?

Jessica Rovello

00:43No. So we are quite simply a games company. So we make games and we either license them to brands or we deliver them directly to consumers And those consumers either pay us for them through things like the App Store or they're monetized through advertising.

Founding Story and Early Revenue

Nathan Latka

01:01Okay. Great. And when did you found the company? What year?

Jessica Rovello

01:042001. So it's been quite a long time.

Nathan Latka

01:082001. Now I wanna get into the backstory here because you raised capital and bought out your investors. So I wanna get into that because it's actually becoming a trend right now. So 2001 you launched the company.

Jessica Rovello

01:16Is it a trend? Oh my

Nathan Latka

01:17There's more people doing this. So that's why I said yes when your folks said, hey, should have just gone. I said, I'll have her on. So you launched the company in 2001. Do you remember what first year revenue was?

Jessica Rovello

01:29Oh, it was zero. I mean we didn't have revenue for the first three years I would say.

Nathan Latka

01:29Okay.

Jessica Rovello

01:29Yeah, first two to three years, no revenue.

Nathan Latka

01:37No revenue. And then when...

Jessica Rovello

01:38It was probably in the third or fourth year that we actually started making revenue and then it scaled fairly quickly. Probably the first year that we were... Had revenue, we probably did about 600,000.

Nathan Latka

01:50Okay. And what was that revenue? Mostly advertising?

Jessica Rovello

01:52No, back then, I mean, had a slightly different model back then. So we were still making games but we were licensing them more directly to large brands. So that was pure licensing revenue at the time.

Nathan Latka

02:06Okay. And then so fast forward, so 2004, call it $600,000 in total sales, what'd you scale to up in 2010?

Jessica Rovello

02:14Oh, boy. Do you remember? I would say by 2010, we were probably

02:236, seven.

Nathan Latka

02:236,000,000?

Jessica Rovello

02:23Six. Yeah. Sounds about right. I'd have to go back and look to get you, you know...

Nathan Latka

02:29That's okay. But same model, licensing?

Jessica Rovello

02:32Yeah. Primarily the same model. I mean, by 2010, our industry had changed pretty significantly. When we started the business, social gaming was not a thing and then that took off. Then, the iPhone didn't exist when we started the business and then that started taking off. It definitely shifts in how we earned revenue, it was all, you know, through the whole eighteen year history, it had something to do with games, whether that be multiplayer games like poker

02:57or single player games.

2013 Fundraise: Scale at the Time and Why They Raised

Nathan Latka

02:59So I wanted 2010 as a beachhead because then in 2013 is when you raised the 5,000,000 from Edison. So explain the dynamics around that. Start with what scale you were at. So were you at about what $10, 11, 12,000,000 in ARR?

Jessica Rovello

03:10We were probably around somewhere between 10 or 12 at that time, I would say.

03:18You know, it was more kind of what was... I think there were two dynamics at play. One was what was going on in our industry, what we were seeing in our industry. And at that time, if you can kind of remember back then, was like, at least in the gaming sector, Words With Friends is really starting to take up. Zynga. FarmVille was a huge hit and there was a lot of consolidation going on in our industry.

03:38A lot of people were gobbling up game companies. And so that was kind of the first time... You know, we had been through multiple cycles. We've probably been through two cycles at that point. That was the first time when we ever really considered, because we're getting a lot of inbound interest, like, we interested in selling? Are we interested in doing something? And the gaming industry is, like many media industries, is very hit driven. And what a

04:04lot of people who play games don't realize is it's really expensive, know, they think it's just some guy in their basement who's coding something, know, and Games, even casual games that people play on their mobile phones, can cost upwards of $1,000,000 for a studio to make, if not more. So, if you have a string of those and you don't have an out of the box hit, like 99% of them aren't necessarily making their money back. So

04:28to do that and be self funded at the same time can be a very expensive prospect. So that was the first time we kind of started looking at, Is this something that we should even consider? And that kind of ended up with... We looked at various different options from selling to taking investment. And luckily, at that point, we had already built a profitable business that was scaling and so we were able to take investment on pretty

04:53good terms. We took a minority stake in the business.

Selling Less Than 20% for $5M, and the Pressure to Raise

Nathan Latka

04:56How much did you sell?

Jessica Rovello

04:58We sold less than 20%.

Nathan Latka

05:00Okay, that's pretty good. So less than 20. And how much did you raise?

Jessica Rovello

05:045,000,000.

Nathan Latka

05:05Okay, got it. So you're looking at like a 20,000,000 pre money, something like that?

Jessica Rovello

05:08Yeah. It was somewhere in that range. And, I mean, I think the other important thing is that, you know, outside of the cycle that the industry was going through was just kind of what we were thinking and feeling as entrepreneurs. And I say this because it kind of influences a lot of my thinking now and a lot of what I believe in as an entrepreneur now. That was kind of that... I always had this little monkey

05:29on my back that if we didn't raise, we wouldn't be a serious business. We wouldn't be large business, we wouldn't be a player.

Nathan Latka

05:40Jessica, I think you're a I think you're a player. You you check the player. You're you're good to go on. You're good to go on, Nisa. You're a hustler.

Jessica Rovello

05:45Good. I mean, I think, you know, when you're an entrepreneur and you're you're in tech, you're kind of... You see a lot of of unicorns around you and they get a lot of ink and a lot of people talk about, you know, these high growth, you know, ridiculously scaling businesses. And I think it's very easy to compare yourselves to what you see in the market. And the truth of the matter is, it's like you don't always

06:06know what's going on inside a business and people don't write about the 99% that aren't necessarily having that success. And, that success, from what I've found, can be very shallow and it can be very fleeting. Top line revenue does not equal a healthy, profitable, thriving, sustainable business.

Profitability and EBITDA Margins

Nathan Latka

06:23Yeah. Now were you guys burning on 12,000,000 in revenue in 2013? Were you profitable or breakeven at least?

Jessica Rovello

06:28Yes. We were profitable. Yeah. We've...

Nathan Latka

06:28Okay.

Jessica Rovello

06:28Like,

06:32We've always done somewhere between, I would say, 10 to 20% EBITDA margins. I mean, it's pretty good. High growth years, maybe a little bit less, but that's what we always aim to be at.

How the $5M Was Deployed

Nathan Latka

06:43Now, you raised capital in 2013, you take dilution, you're gonna burn capital after that to invest it. So I imagine in 2014, 2015, maybe you were cash flow negative because you were investing the 5,000,000, right?

Jessica Rovello

06:55We were maybe cash flow negative a couple of quarters. At most, I would say one calendar year, but never more than that.

Nathan Latka

07:03So where did you invest that 5? Was it fixed cost or more like variable marketing?

Jessica Rovello

07:07It was in creating new product for the most part. So so we were

07:14working on games that took longer to make, that had larger teams, that took longer to get to market. That primarily where the investment went and then

07:27then marketing. So

The Team and the Business Today

Nathan Latka

07:28let's fast forward now. We've got a good touch point in 2004. We got a touch point in 2013. Take us up to 2018, right? So how many folks are working at the company now today?

Jessica Rovello

07:37Oh boy. So as of today, we probably have we're right around the 100 range, anywhere from 98 to 101 depending on, you know, time of year.

Nathan Latka

07:47And how many engineers?

Jessica Rovello

07:49We have about 40 engineers.

Nathan Latka

07:52Okay. And and who are the rest?

Jessica Rovello

07:56Sales, marketing, people innovation, which is what we call our HR function.

08:03We have

08:04quality

Nathan Latka

08:04Are the sales people... Are they on, like, commission... Are they, like, a quota structure or no?

Jessica Rovello

08:09For sales? Yeah. It's a... It is a goal structure.

Nathan Latka

08:14Okay. Yeah. Fair enough. So how many salespeople do you have incentivized by this goal structure?

Jessica Rovello

08:20I would say one, two, three. We have three who only do sales and then we have an additional four account managers who also do sales.

Nathan Latka

08:31Okay. So what does the business now look like today? So last year, were you still selling and licensing games to large brands? Is that still the product?

Jessica Rovello

08:38Yep, that's still the product. I mean, it is a mix between distributing our games through large brands and publishers and distributing them direct to consumer.

Nathan Latka

08:38Okay.

Jessica Rovello

08:38But the revenue comes from either via somebody else's website or via our own website, people playing games

08:56or by the

Nathan Latka

08:56Are there any media outlets, because I know this is very in vogue right now, using things that almost feel like a game which is actually more like a survey where you're capturing, you know, you know, play this game to see if you're like Elon Musk or Tim Cook. Right?

Jessica Rovello

09:10Yeah. Yeah. I mean, that's not something that we do, but that's something that definitely exists in the market. I think that, you know, that's something that we'll see what the lifespan of that type of gamified data collection is based on how privacy is trending in The United States and certainly abroad. It... That becomes a more and more difficult thing to be able to monetize.

What Arkadium Builds for News Publishers

Nathan Latka

09:34So what product did you create? Like, us an example. Everyone knows CNN. What do you do for CNN?

Jessica Rovello

09:38So for CNN or for... More specifically for somebody like the Washington Post, for example, we... They all have... In the physical papers that have been around some for hundreds of years, right, they always had a crossword section and I'm sure you can picture it in your mind or a Sudoku or a word jumble or something like that. We basically took that concept concept and brought it into digital in the early two thousands. So a lot

10:04of these large news publications, whether it be a CNN or LA Times or Washington Post, it's something that their readers are used to doing in print or have traditionally done in print. They're not going to create a game studio in house. Right?

Nathan Latka

10:04Yep.

Jessica Rovello

10:04They don't have the desire to do that and they don't have the expertise to do that And so, that's really where they turn to us and we provide them with kind of a turnkey

10:27gaming solution that they put in their game section of their digital property.

2018 Revenue and the Decision to Buy Out Investors

Nathan Latka

10:33Yep. Okay, very good. And then, last question on 2018 before we talk about how you maneuvered kind of buying out your investors. What did you break in 2018 in terms of total top line revenue?

Jessica Rovello

10:422018, we were in the $15,000,000... Just around 15.

Nathan Latka

10:47Okay. And still about 10% to 20% EBITDA margin?

Jessica Rovello

10:47Yep.

Nathan Latka

10:47That's great. Okay. So when did the discussion start festering inside of you and co founders and early team members that we should maybe buy these guys out?

Jessica Rovello

11:00You know, I would say

11:04that it was a... It was something that took place over time. And I think it was something, again, nothing's ever black and white. There's nuance to every kind of decision that you make as a business person, as an entrepreneur. So I think two things were happening. I think, one, we noticed in us having been through a real existential crisis in our business that involved a political situation. We had engineers based in Ukraine. We had to move

11:31them due to kind of the political crisis that was going on there. And so in facing that existential crisis as the business, and that was really kind of like a time of reflection, we realized that like, we're not done building this company. We don't feel like we've hit

11:48the point of success that we know that we are capable of achieving, and we love the journey that we're on in building this business. That was kind of point number one, just coming to that realization. I think point number two was just always kind of going in eyes wide open and understanding that when you take investment, your investors expect a return. If you have not necessarily been upfront with them about your thinking because at the time,

12:19we didn't even know it in ourselves, this is something we may want to do for the next twenty years. It seemed like it was the right thing to do to say, Listen, we understand that you invested in us in order to get a return and that return may take significantly longer than your fund is prepared for. And so, you know, rather than feel like you have to hold on to something that, know, who knows when there

12:47will be a liquidity event and rather than us feel like we have to make decisions for the business based on our investors outcomes as opposed to our employees outcomes or our company's outcomes. And luckily, you know, we had the ability to do it. It just seemed like the right thing to do.

The Buyout Price: More Than the Investors Put In

Nathan Latka

13:08Well, decode... Decode that. Yeah, decode that for me. So, you know, luckily, you said luckily, you have the ability to do it. What does that mean? What did you buy these investors out for?

Jessica Rovello

13:18Yeah. Well, I mean, I can't tell you specifically what the dollar amount was or how it was financed necessarily. I'll just say that the company is profitable and has been profitable and is healthy. And we were just in a position where we could make them an offer that was palatable that gave them a return on their investment.

Nathan Latka

13:35So it was... Whatever the deal was, it was more than $5,000,000

Jessica Rovello

13:40It was more than they put in. Yeah.

Nathan Latka

13:43Yeah. They they... Did they put in $5,000,000?

Jessica Rovello

13:45Yes. They put in $5,000,000.

Nathan Latka

13:46Okay. So it was more than $5,000,000. And was it... Mean, the reason I asked this, there are a lot of CEOs I've had on that have bought out investors, but, you know, Gumroad comes to mind. Right? There was $77,000,000 put in. I forget the VC, but they bought them out for a dollar because the VC wanted the $6,900,000 essentially write down because their other portfolio companies performed well, so it a tax loss. Weren't you able to

14:07get a deal done at like a dollar?

Jessica Rovello

14:11You know, I didn't... I don't... That never was on the table for us. That was not something that was discussed and I'm sure everybody comes to negotiation like that from a different place in terms of where their fund is or what they're willing to accept or what they're not. Just for us as business people who value in all of our relationships, our integrity and doing what we said we were going to do, we felt like they

14:38trusted us with their capital and it allowed us to continue to grow the business for a number of years. And just because our paths were divergent didn't mean that we didn't want to try and do the best that we could that wasn't going to harm the business in terms of what they came into the deal for, which was to get a return.

Debt-Free and Disciplined With Cash

Nathan Latka

15:00Yeah. Which which debt provider did you use to help fund the deal?

Jessica Rovello

15:04I will say that we are a debt free organization.

Nathan Latka

15:08You raised no... You literally... I mean, if if you're no debt, the only way I can think that you did this is you guys were just very good with your cash flow. You saved up enough to get the

Jessica Rovello

15:08We've

Nathan Latka

15:08deal

Jessica Rovello

15:16always been profitable and we've always been great with our cash.

Nathan Latka

15:19But even though on 15,000,000 in 2018 that you said you did top line or about 15,000,000 and 10% EBITDA margin that only adds 1,500,000 to your bank that year. I mean, you would have had to sit... Been saving basically since 2013, but you said you were burning even in

Jessica Rovello

15:31'20 I can tell you that as entrepreneurs, we are not the types of people I run the company with my co founder who happens to be my husband and our ethos from day one has always been to be great with our cash and to put profits back into the business. We are not the type of entrepreneurs that have ever taken significant amount of money off the table for ourselves, always reinvested back in and we've just been

15:53really smart with our cash.

Nathan Latka

15:54Yeah. Jessica, I'm literally just doing math, right? Yeah. 15,000,000 top line and 10... These are your numbers, 10 to 20% EBITDA margin. That means in 2018 at the max, if you hit both those, you put 1,500,000 in extra cash in your bank. You... That doesn't equal 5,000,000.

16:08You had to get

Jessica Rovello

16:08We've

Nathan Latka

16:08five

Jessica Rovello

16:08been in business for nineteen years.

Nathan Latka

16:10Yeah. So I'm gonna keep going I'm gonna keep going backwards here, okay? You said in 2013 you raised the 5,000,000 and you said you maybe had a couple quarters max a year of burning in 2014. So it's not like you've been saving up this 5,000,000 since 2001, right? Yeah. Probably started...

Jessica Rovello

16:24Why why would you assume that we spent all of the money that we took in?

Nathan Latka

16:28Well, you told me that you were... You burned the... Said there was a couple quarters in 2014 of burning capital where you were cash flow negative.

Jessica Rovello

16:34Burning for me can mean losing, you know, a $100,000 in a year. It doesn't mean losing $6,000,000 in a year. It can mean losing $10,000 in a year.

Nathan Latka

16:34Okay. You...

Jessica Rovello

16:34Anything that is not that is not...

Nathan Latka

16:46You told me that games cost sometimes 1,000,000 to create and you said you raised that 5,000,000 to create new games to market. So you could easily solve the number by simply saying if you feel like in 2014, you actually just didn't spend the money, that's fine too. I mean, that would be a... That's a great strategy as well. So is that what happened here is you just... You put the 5,000,000 in and you didn't spend the

17:04money?

Jessica Rovello

17:05There were a number of years that we had significant

17:13expense savings after we went through what we went through in having to transition the business. And that allowed us to just be smart with the cash and continue to reinvest it back into the... Either into the business or to save it up.

Nathan Latka

17:29Yep. This was when you went through the kind of political crisis. You had to cut your team in half, your fixed headcount...

Jessica Rovello

17:33We cut significant... Everything got cut in order to make sure that the business was in a safe place and get us back to the point where we were putting significant amounts of cash back onto the balance sheet.

Nathan Latka

17:47And the best...

Jessica Rovello

17:47But we were never ever, ever, we never ran the business in a place where we were burning significant amount of cash. So just because I say burn, burn in my world is anything that is less than zero. It is not 10,000 a month, it's not a million dollars a year, it's not $10,000,000 a year. It's hard to conceive because we're kind of surrounded by people who are burning billions of dollars a quarter. But like for my

18:10business at this scale, that's just never happened.

Nathan Latka

18:13Yeah. By the way, I don't know if you listen to the show or not but I can tell you there's no one that protects bootstrappers more than I do. Okay. I beat the hell out of people that come on and brag about what they burn. So I'm not trying to get you caught in a catch 22 here. What I'm trying to do is literally do the math so that other people can do what you did. Right?

Summing Up: Cash on Hand When They Raised

Nathan Latka

18:28So you just tell me if this is a true or false statement. Okay. I'm gonna try and summarize as best I can. You raised 5,000,000 in 2013. You sold about 20% of the company. A political thing happened where you had to drastically change the expense structure of your business in 2014 and 2015, I e, you cut costs. In that year, maximum potential EBITDA to the bottom line is 20%. You said between ten and twenty percent the

18:48past couple years, 20%. Between then and now, you number one didn't spend necessarily all the 5,000,000 and you've been saving diligently since 2014 because of this better expense structure and that allowed

Jessica Rovello

18:48And

19:00we already had cash on hand when we took the investment.

Nathan Latka

19:02Got it. Okay. So those are all the things that allowed you to have leverage to kinda do this at a return that your investors

Jessica Rovello

19:07We were not in a place where we raised when we were at less than zero. Already had significant cash on the balance sheet when we raised. And that's how we were able to raise on terms that allowed us to eventually put us in a position to buy out our series A.

Would They Sell Today?

Nathan Latka

19:22Yep. You raised in 2013 at about a 1.7 x kind of multiple, 12,000,000 in revenue, twenty million pre money valuation. If someone offered you that same multiple today, so they offered you about $30,000,000 to buy the company, would you sell?

Jessica Rovello

19:22No.

Nathan Latka

19:22Why not?

Jessica Rovello

19:37Because I still do not feel like the business has reached the level of maturity and scale that it is capable of doing.

Nathan Latka

19:47Mhmm. If you if you said... If you went to to Night Over Gen and said, hey, babe, you're not gonna believe this. I got a $30,000,000 offer. Told him no instantly. Would he be like, oh, yeah, babe. Good decision. Or he go, what were you doing?

Jessica Rovello

19:58Yeah. You know, I think I think absolutely. I think in our minds, we're pretty aligned on what we wanna do with the business. And honestly, it's never been about an outcome being related to a dollar amount. The outcome is related to the impact and the achievement that we have inside the business, in the community at large, in what we wanna do with our lives. It's really about the journey of building the business as opposed to, you

20:28know, sitting on a pile of cash.

Nathan Latka

20:30Guys, there you have it. Arkadium founded back in 2001 between 2003. No revenue than $2,604 in revenue mainly from licensing games to large brands. In 2013 revenue hit $12,000,000, sold about 20% of the company for $5,000,000 raising 5,000,000 from a VC. Then just quickly realized some changes in the business, they weren't gonna deploy capital like they thought and ultimately did. What I think a good founder would do, you get creative, saved cash, a profitable growing company

20:54now today doing about 15,000,000 in top line revenue still 10 to 20% EBITDA margins but most importantly bought back that equity that they sold earlier in an arrangement that worked not only for them, Jessica and her husband and the co founders, but also for Edison and the investor. Great way to keep control of your destiny and get wealthy and free off cash flow. Right, Jessica?

Jessica Rovello

21:15Some day.

Nathan Latka

21:16She doesn't like the numbers. She doesn't like the numbers. I like wealth. Okay? I like money. So Jessica, thank you for taking us to the top.

Jessica Rovello

21:22Thank you.

Nathan Latka

21:25Do you guys know I fight like heck to get these data points for you from these CEOs that rarely do these kinds of shows? If you want more shows like this, make sure you subscribe right now. We're trying to get 10,000 YouTube subscribers by the end of September here 2019, and it would mean the world to me if you clicked now to subscribe. Additionally, I've got two more great interviews for you. If you want more data

21:48points from the world's leading SaaS CEOs, click and watch

21:51one of them right now.