How Cloudability CEO Mat Ellis grew to $20M revenue and 1K customers in 2018.

hello everyone my guest today is matt ellis he founded cloud ability in april 2011 and is its current ceo before the company he held executive positions with four startups and key technology roles at free delay pepsi cola and goldman sachs he currently sits on the boards of oregon entrepreneurs network and the technology association of oregon originally from the uk and now residing in portland matt is known as a mentor and advisor to startups across the us matt are you ready to take us to the top yes all right so tell us about cloud ability what do you guys do and what's your revenue model how do you make money we make your cloud cheaper and we do that by reporting on what you're doing and helping to optimize it if you think about a supply chain of materials and the materials of the cloud services then we master those we haven't made the best buying decisions every day and we charge you based broadly on the amount of money you're spending on the cloud okay so you look at kind of cloud budget you're taking some percentage of that um not just a percentage there's a bunch of other fees it gets quite complicated now we're dealing with very large enterprises very large tax companies that are spending hundreds of millions of dollars on the cloud so with some services and some other things okay is it so i mean walk me through that right a complicated pricing model can be a good thing or a bad thing it could mean you're not leaving anybody on the table but it can also be really hard to explain how do you deal with that well there are two modes for cloud cost management first mode is reporting so i'm reporting we charge you a percentage of the spending and that works because generally you're growing your cloud deployment and we're helping you make sure you're not wasting any money but in the second mode you're optimizing it so you've kind of moved to the cloud you've got the hang of it and now every day you want to take advantage of moore's law which means moving aggressively between the different products well in that mode we're adding value we're not just doing reporting we're actually reducing your bill typically by 20 to 30 percent a year on a unit cost our build personal credibility in february was the same as it was in april 2015 for businesses 11 times bigger so in that mode we have to charge you a bit more like regular software and it's based on the kind of modules that you're using okay when you look at your financials though is it predictable kind of sas revenue or does it get lumpy okay yeah we sign we sign annual contracts and generally put a package together for you based on whether you're just reporting or whether you're reporting and you're optimizing i know you have a large kind of a delta between your cohorts of customers enterprise small business et cetera yeah but if i if i it's gonna be a tough question for you but we'll see if we can make it work if i forced you into an average i mean are we talking 100 grand typically typical acvs or where are you at generally um typically it's a hundred to 250 grand atp is a sweet spot okay yeah good okay so we're right on the money there and then give us more of the back story so you launched it talk take us back to launch day and why decide to spend the rest of you know the next part of your life on cloud ability well i spent 10 years in big data um i followed my wife out to oregon which is where she grew up and i had no no job at the middle of the recession i had 10 ideas to go follow all in big data and what year was this it's 2010 and two months in uh i'm in hospital two emergency surgeries no health care because it's obamacare very large healthcare bills and i needed to get back on my feet and get back to being liquid i called around a few buddies who were moving to cloud we've been doing two years of cloud in my last startup um so i helped move to the cloud they all had problems with their spending they complained all the time i'd unwittingly helped their tech team get around all financial controls and because there were three people i worked with before when they called me up and asked for what they'd spent yesterday on the cloud i couldn't charge them 400 for a billing analysis and it was taking up a lot of my time so i wrote credibility to get them off my back and i sent a daily email with what they spent yesterday and what i thought they were going to spend for the month that was great a few months later it broke i was in iceland at the time that's pretty if you got a few if you got a few months out of it that's pretty damn good actually right oh yeah yeah yeah a few months have no phone calls everyone's happy and and then i come back from iceland and my voicemail's filled up my inbox is filled up and people are trying to see me because this thing's not working and they really need it and that's when i sat down and thought hang on what's going on here and that's when i realized that a cloud is simply the maturation of technology the way you made technology work before was you had smart people to make it just work that ubuntu server wasn't going to stay working unless it's someone to keep it working now you buy it from google for eight cents an hour now the problem is not making it work picking the right one and that's a supply chain problem and that's what we do we see it we're erp for people with a supply chain of raw materials of cloud which held very early days it's a lot of it's like with sap in the early days which is reporting on what you're buying but the more advanced users are using not just to making choices but getting down to building materials for each individual customer not an average but an actual and one of these pretty and between 2011 and today i mean what have you scaled to in terms of total customers using you we have 11 of amazon's revenue going through our system and um and a very large amount of the other two big clouds going through our system too walk me through that metric you said 11 of aws going through your system when amazon say their um revenue for q1 is 5.6 billion yep we will have about a billion dollars for that spending go through so about half a billion dollars of revenue is that kind of how you measure your market share it's amount of spend through your system yeah and who are the two other big ones rackspace or google and itunes google and i got it got it and what percentage of those do you have i couldn't tell you oh okay okay got it but is amazon your biggest yes okay i'm the biggest in the market anymore okay and i mean can you give me an actual number on like the number of customers you're serving is it is it okay why don't you share that just a competitive thing yeah okay but if you if you're controlling 11 revenue i imagine it's it's not a it's not a low arpu high volume game you're very much in the enterprise space yeah yeah we're similar to companies like axio we have you know under a thousand customers yep but they're some of the biggest things in the world yep that's right what's your kind of i mean do you measure penetration on like fortune 500 or anything like that yes but again it's a really competitive early market who do you compete with who do you compete with there's a company called cloud checker health out of boston and a company called cloud checker out of uh rochester they both do kind of reporting and they're more kind of um tech ops single pane of glass diana c we do data science on your infrastructure it's it's more for the pool kids and sas companies but also the cheap kids who want to get a few points off their margin airlines supermarkets they're very big users of our product so there's we call them big kids and cool kids internally the big kids are like really big companies that are very focused on on efficiency really smart kids and cool kids yeah that's interesting um and nothing in between you're either smart you're either smarter you're cool right well there's a lot of people who are early and proud and for them a simple reporting tool is pretty straightforward and also a tool that might be oriented towards a more devops way of thinking where a human is picking from a list of a million options just for instances alone yeah a human might have a religion that this particular one is good we let the data do and that's the background we've got on our think set team we're all like big data met some of us is ad tech we just let the data do the talking and so we have to be very accurate we processed two exabytes of data last year and to get these very accurate we call it the true class platform because we automate our recommendations our competitors put a human in between and if you're kind of still dealing with treating your servers like pets instead of like cattle you kind of give them names a bit about around their neck then that's good enough churn is obviously critical in a sas business tell me about your churn and how you think about it you see in a typical quarter we may lose a customer we lose very few customers our customers are on a five-year journey with us and we have this is that hey matt is that a legal journey i mean are they signing five-year contracts um we wish they would but they find three contracts sometimes and the first three customers who signed for this in 2012 are still customers today yeah so is that code for you saying you know lifetime value is at least five years oh yeah oh yeah yeah what people who do switch it seems like there's very very few of them why do they switch well we went through a period we grew the business 40 times in revenue um early on and we grew the revenue um ten minutes the data the data set size 10 million fold and we had a couple years where we had to focus on scaling our platform instead of our features that gave our competitors a chance to catch up and we had a few feature gaps so um two three years ago we lost customers because of a continued problem to scale you know we had the biggest customers early on uh we had a more complicated product and we lost customers we have one customer who left our ship they're making too much money to bother with this that's so funny yeah there are only a few spaces like that right now and they're like we just can't be bothered to do this sorry we're not gonna renew yeah and we've had we've had customers turn because um they went out of business uh all got acquired and they don't want to focus on this now so generally they don't leave because of the products uh i mean look if you're focused on enterprise and you have less than a thousand i mean there's a finite number of customers out there to go grab which means at some point more of your revenue growth is going to come from expansion revenue that is going to be from adding new customers have you already crossed that threshold it's about 50 50 right now oh okay okay so you're crossing it as we speak um interesting and net revenue retention annually i assume you're well above a hundred percent yeah oh yeah okay north of to north of 200 um it depends on the quarter the cohort yeah occasionally what we have is like right we have very we every quarter we have a few very large customers who are at say five million dollars of annual spending yeah but in the next three years we'll go over 100. you mean they're cloud spending not they're spending with you yeah yeah yeah yeah yeah well i wish yeah so so we look at the core driver of our business is our percentage share of your i.t budget and we can out sell more services or we can get your total spending to go down most people take the total spending and repurpose it for other technical activities more product faster performance or more engineering interesting and then um i mean you give me a general sense of kind of where you're at today can you give me a sense of growth year over year what are you seeing we are doubling or more than doubling everything okay that's great that's and you think you'll do that this year as well oh yeah oh yeah okay guitar it guitar with big numbers yeah but we we are um breaking every quarter we're breaking new logo records that's great so so you i mean you are adding additional logo still at a fairly rapid pace even though it's a finite you ever get memo from amazon when they did ipo in 97 day one day two yeah it's always good they're still on big one heavy bootstrap matter have you raised capital we've raised that we spent nearly 60 million dollars of our investors money okay i love how you say i so appreciate how you phrase that so i really do so you raised 60 million bucks right yeah we raised a mix of debt and equity and uh we've been fairly imaginative in how we do that okay very supportive investment but just equity-wise 60. 32 in equity oh 32 equity okay good what some people are not familiar with the kind of leverage a ceo like yourself can create with debt especially combined with equity can you kind of educate us on that a little bit for a second well it's very sensitive and quite uh a big differentiator commercial so i don't look too much into it but there's a leverage limit to what the venture debt people will give you and then you can generally get more debt from a mezzanine provider and you'll pay a higher much higher rate of interest maybe three or four times what you pay on the venture debt but you can get even more leverage and there's less dilution for your next round basically you're borrowing money this time against your next round so you're getting the money your next valuation instead of your last value i mean when you look at like lighter capital sas capital underneath these venture debt i silicon valley bank square one i mean a lot of them will put out term sheets somewhere between four and six x of your monthly recurring revenue is what they're comfortable doing an initial deal and what you're saying is you'll close something like that but then on top of that you'll go to a mez round and those are both sitting on top of your last round of venture financing yes venture capital okay smart i love that that's really smart yeah um okay great and then um can you give us a sense of size i mean have you guys broke 20 million in ar at this point yeah okay when do you think you break 50 or 100 what's your next revenue goal we'll be double double double so sometime i think by the end of the next year we'll be over 50. oh okay good so you think next year break the 50 mark that's great and what do you want what do you want to do i mean this is you could argue you could plot the volume of kind of cloud spend over time and make an argument for the size of your market over time um what do you want to do with the company over there over over you know many many years is it something you take public you stay private you just keep getting more spend you launch new products what do you do many years ago i saw video games and about 20 years later i saw a visual visual effect in a game on a playstation with my kids there was something i invented in the mid 80s very simple thing you just closed the screen yeah and it gave me tremendous satisfaction that something i built in the 80s was still being used 20 weeks later and the people who join credibility are about um improving the way that cloud affects technology and technology affects the world we are thinking about a capital structure that takes us through the next recession we think that optimizations can become mandatory like virtualization did in the a20304 recession and we're looking forward to what will we continue to make compute more efficient and with all that data we collect we have got a mountain of data uh we think that there once we become clear the way the cloud is done is it serverless is it containers what makes the of infrastructure to containers to surpass some things it happens we think there's an opportunity to roll up the business and become like a broader compute platform but if you're trying to do all things to all people today you're going to lose in every vertical you've got to win in one vertical and then combine the winning vertical the winning solutions and that happens when the industry matures so in some time in the next five years it will mature we will probably be an ipo we can use our currency to combine or join a combined entity and go out there and just become something akin to a new version of cisco or sap if amazon wants to hit microsoft or hit google or sure or or google wants to hit amazon or short it makes perfect sense to go buy a company like you both as an aggressive tactic and a defensive one because they're essentially controlling that kind of where that spends going how would you how do you deal with these natural biases when you're recommending different products amazon has said in public that they uh welcome companies like ours and our competitors because we're demonstrating to their customers that they're good value they're very customer-led business and so it's very important that the advice we give our our customers is seen as switzerland and i don't think that can be done by an internal tool so i think this is something imagine if sap we're running your supply chain and telling you where to buy your steel and your wheels you'll be worried that they're diverting your money to their best lines instead of yours right so i think it's hard that when your cfo's on your back saying how do i know that your cloud is efficient that is your cloud vendor telling you to be official yeah all right do you have any allegiance though to any of these providers or any of them investors or have any exposure as lps and funds that have invested in you no but um we are very uh close to them and um so we treat um we try and align uh as best we can because when we help their customers we help them and that's basically the way we work with them are you in any acquisition talks right now no no that's great okay last economics questions here before we wrap up with the famous five um cac what are you spending to acquire new customers i've been telling you that in public let me ask it let me ask you a different way you might feel more comfortable sharing uh payback period how quickly do you like to get your money back inside the first year when when when you just look at upfront um contract value the thing that we're seeing is that about 75 percent of our upfront logos are spending ahead of where they thought they were because we accelerate what they do they do it better they get more comfortable with it sometimes way ahead of it so it's even quicker if you take it based on what we're actually seeing customers use their contract then it's actually getting ahead of that yeah cash first recognized revenue right yeah i mean look 12 month payback you said earlier kind of average accounts between 100 and 200 i mean it's fair to say you're willing to spend somewhere around 100 grand to bring these guys on right as long as the token stays below 12 12 months yeah oh yeah okay fair enough and then last questions here on team uh how many are on your team and where are you guys based around terry um three quarters of us are based in portland oregon we have a great team in boulder and then either in boulder colorado oh colorado and then the rest is made around the us and the world about fifteen percent of our staff foreign oh very good all right guys let's wrap up here matt with the famous five number one what's your favorite business book um um leaders he lost leaders eat last number two is there a ceo you're following or studying right now yeah luke denise uh former ceo of puppet labs at which one puppet language puppet labs okay good number three besides your own what's your favorite online tool for growing the business i don't have one i use a lot of tools they're all broken all right i i must i must give you a call out to cohan k-o-a-n dot co uh founded by the former co-founder at jive a really good tool for managing goals interesting okay good dot co good number four how many hours you sleep to eat every night uh five to six okay that's so bad and what's your situation married single you have kiddos i assume you're still with your wife because you moved to portland four yeah married to three kids three kids and how old are you i'm 46 46 last question matt what do you wish your 20 year old self knew um it's gonna take way longer to buy that island than you think it's a marathon not a sprint guys there you have it it's gonna take longer to get to that island than you think you know he's doing some consulting work they went on vacation you know consulting with cloud clients sending them emails each day each month saying what they spent on cloud over the past month and what he thinks they're going to spend it was working fine until he came back from a vacation and his inbox was totally flooded the thing broke and he realized then there was a massive need here launched a company officially in 2011 now 130 people helping you spend and really optimize your cloud spend more efficiently so you can handle more especially playing in a space that's obviously growing year-over-year aggressively they control about 11 or they have about 11 percent of total spend that goes through aws it goes through cloudability rates 32 million bucks in equity obviously more than that when you put on mez and uh and uh and venture debt uh 2x in a year over a year north of 20 million are today hoping to break 50 million next year over 100 net revenue retention annually as well healthy company matt thank you for taking us to the top thank you for having me