How Code42 CEO Joe Payne grew to $60M revenue and 800 customers in 2023.

guys last year Code 42 with their combined products h10 million bucks of Revenue they sold off a $50 million or sorry a $70 million Revenue stream for 250 million bucks to a private Equity Group Joe's now in a very good defensible position with a bunch of cash on the balance sheet and the product Left Behind which is a product they're very excited about at Code 42 doing still 50 million bucks of Revenue that was a year ago targeting 20% year-over-year growth who put them if they hit it at 60 million in AR this year we'll see what happens there think about 800 customers on that product several paying uh more than a million per year which is great 220 folks on the team 30 quota caring reps as they continue again to build products here to make sure that internal employees don't accidentally or or intentionally take files from your company into their next gig hey folks my guest today is Joe Payne he's the president and CEO of Code 42 a leading data security company that focus on reducing the risk of data leakage from Insider threats with more than 20 years of experience as CEO he's a proven track record leading high growth technology companies uh over a long period previously he served as CEO of eloqua e security and E Grail and as president of I defense Joe you ready take us to the top let's go all right so Code 42 I guess help us understand how you're helping big I assume SAS compan or companies in general prevent Insider threats is it social engineering is it team training is it code exclusively what is it yeah it's really interesting Nathan um a lot of security is focused on the external threats it's on the it's on the bad guys on the outside and that's it's easy in the sense that you can when somebody tried to reach your network they are a bad person and you can hit them with the hammer and you can isolate their Network traffic or their machine or something like that um and security people are really attuned to those kind of threats and and they're growing and they're a big deal and we need to pay attention to them however um if you look at what actually happens in terms of data loss in an organization most data loss actually comes not from external actors but from insiders from employees from contractors um sometimes malicious sometime accidental sometimes sort of in the middle and so what we we see is that about 60% of employees admit that they took data from their last company to help them in their current job and um and that's the 60% that admit and our data pretty much shows that it's almost 100% of people especially when they leave a job take a bunch of data with them so we founded this company sort of inside another company we founded this product called Insider uh we built it from scratch starting about five years ago um to really tackle that problem and give visibility for security people into hey who's moving stuff to Dropbox who's putting stuff on a thumb drive who's uh you know opening up a window in Gmail and emailing themselves some source code or customer list or or or things like that and so um we built this product to give great visibility and also you know we're we're people uh that like building great cultures so part of what we've come at this is with the strategy to help course correct employees and contractors to not do things they shouldn't do maybe not go against their you know wor not be their worst self and take a bunch of things they shouldn't and so we provide part of what we do is also provide a lot of education and positive reinforcement for people that um to do the right thing so that's a key part of our strategy also understood and and what do you charge for this technology on average per month or per year well that's a you know we sell to organizations from as few as 200 people uh our largest customer has over 120,000 employees so what we charge really depends on your size but think about it is you know maybe um you know $100 a year $120 a year per employee um that's just a good rule of thumb but obviously it depends on you know the sophistication of the product that they buy how how many features they buy Etc I mean our product as an example connects to things like salesforce.com that's an option you can have so you can see who's exfiltrating data using Salesforce our product connects to your one drive your G Drive account to see who's publicly sharing documents that they shouldn't share there because that's where all our data sits you know our our the product that product makes tons of sense I we hear about this all the time um I guess just to just to hone in there a bit though a company with 120,000 employees using you if you build them the full rate of a 100 bucks per seat you're doing the same math I am right we'd love for you to be making 12 million a year on that contract maybe you are well would you say the average though customer paying you is paying per seat is it more like maybe 20 per seat 50 oh no no the average is closer to 80 bucks a seat so you know there's there's comp companies that are paying us more than that uh obviously but and there's companies that buy 120,000 seats they they get to price they get a better price as you would expect so um it's it's all over the map but we have a number of multi-million dollar a year customers for sure and um you know this is a multi-million dollar problem it's um our research shows that the average cost an organization $16 million think about that so a big company is going to pay a lot of money if they have a breach from an Insider so we're we're a small drop in the bucket compared to that oh what's going on there YouTube good to see you guys now imagine this you love watching these interviews with SAS Founders but imagine if we took all of the valuation data out from over 287 interviews I've done manually saves you a lot of time well we've done this we've built it into the beautiful interface inside of founder path check this out I'll show you how you can access this in a second but you 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realtime valuation data points Founders share with us on the show so traction 1.2 million seed round 3.7 raise they sold 22% of their business go in here and filter by the event maybe you only want to see companies that have sold the whole business well here are a bunch that have been acquired the valuation and the multiple maybe you're going out right now and you're raising your seed round well go in here and look at all the recent seed deals that went down what they raised what valuation they raised at and what percent that they sold there's never been a larger data set of SAS valuation than what you can get now inside of founder path and we're thrilled to bring it to you all right we're going to go back to the YouTube video here in a second but if you want to check this tool out if you want to jump in and sign up you can check it out for free to get your valuation at this link this link founder path.com products SLV valuations or if you go to founder path.com and hover over products click on get your valuation here and go ahead and sign up to give it award again all that valuation data live right inside the platform I hope to see you there all right let's jump back into the interview that that makes sense and what would you say you know you have teams as small as 200 and as big as 120,000 what would you say your sweet spot is a thousand person team what would an average be there well you know Nathan the thing I love about SAS software is it's democratized software for everybody so the same awesome product that I'm giving people uh you know at 120,000 I'm giving to a 200 person company so so I'm giving them that same power and capability um so I'm not going to define a sweet spot per se I will say the people that are buying fastest today from us are midmarket companies so think of that as companies between sort of a thousand and 5,000 employees because honestly they're making Fast decisions today and it's much easier for them to make decisions today in this economy big companies are taking forever to make a decision on new technology purchases so again that if you talk about who's buying today I would say The Sweet Spot is in that 1,000 to 5,000 sweet spot or medium I understand there's obviously edges on both sides but a thousand person company wanting to sign up with with Joe Payne's Code 42 you know paying 80 bucks a seat we can sort of think about okay these average contract values are called 80 120k on average something like that yeah that's right give me more of the backstory here because you said something interesting you said you started this inside of a company called inside uh did you lead the spin out or help me understand how you got this intellectual property outside of a parent go so so I joined a company called crash plan um in 2015 or it was called Code 42 but the product was called crash plan it was an endpoint backup product and the board hired me to figure out what we were going to do with that product long term and that's an endpoint backup product so basically think backing up all your data from your laptop into the cloud um and the idea was that like look that long term is going to go away because most people keep their data in the cloud today you keep your date in one drive you keep your data in G Drive Etc and so we set out to figure out how we could use all the skills we had to build a company that added a lot of value in the market what year was that and that was 2015 okay and so we really uh spent a lot of time doing research and one of the things we discovered is that that the DLP Market the data loss prevention Market was right for disruption because everyone that we talked to hated their DLP and they that product didn't work and they had bought spent a lot of money on it but they weren't actually using it and they they weren't solving the a problem and so we we built a product we launched it in 2017 and we've been growing it pretty aggressively since then we grew it enough uh we over 50 billion in ARR last year on that one product on the new product you said 50 you said 50 million right 5 Z yeah so that was enough for us to feel comfortable to we actually then sold the crash plan product so we incubated this idea inside a company uh with it what I would call an entirely new founding team founding technical team Etc we built this new product we grew that new product and then we last summer we um we sold crash plan to a private Equity Firm and and basically we don't do that anymore we only do this uh this news thing so we're completely focused on Insider threat and um and data protection now okay got it got it got it got it okay so Code 42 no longer has crash point a privity group bought that I think it mpoint capital right did a carve out there took that off okay and why get rid of that if it was just like printing I mean it sounds like it was a really great business it was a good business um but it was a declining business and um and the people that you sold to in that business were uh it people and you were selling to Old organizations that hadn't moved to the Cloud yet so you could see the TR where that business was going to go long term and also we were selling now to security people so um our focus is on a completely different buyer solving a completely different problem and one thing I would tell any entrepreneur is you better be focused you if you want to disrupt an industry if you want to win in a space you can't be a uh you can't have lots of different products doing lots of different things you can do that when you become bigger and your crowd strike or your you know GE or you're some large company you can you can have lots of different products in your bag but if you want to disrupt a market and win in that market you better be very focused on it so that's why we did that and it made a lot of sense for us and we sold it for $ 250 million so we balance sheet yeah that's great okay so that's all on the balance sheet now so I guess what was left behind though at Code 42 I mean was there like no Revenue after the 50 million was sold off or what was left sorry Nathan you got the I messed you up on the numbers the 50 million was The Insider product it's the product that we kept that product is at 50 million the old uh crash plan product was another 70 million or so of AR so we were 120 million we got down to to 50 million so that's what's our our belief once we got to 50 million is we should focus entirely on this new product and we should sell that the crash I see I see okay this makes loads of sense now got it okay and and so where do you think the codee 42 product will end this year in terms of Revenue I mean do we get up to 55 60 you think we have three more months left in the year we'll see we got some really big deals in the pipeline and so we we're we'll definitely grow this year um and you know I I don't want to jinx it so I'm not going to give you any actual numbers you'll have to come back next year for that story but it's been um it's been a pretty exciting process I think the thing that's most exciting for us is the number of security companies that use Code 42 today how many is that how many folks use you today well we have over 800 customers today on paying right on paying customers that's the only kind we have um and some people some people get creative there and say Well they're free customers you know yeah yeah no no we we you know it's interesting because we our product requires a lot of uh you have to install our product you have to put there's a sensor that sits on the end point there's no sort of plg model where the average person could just download it themselves also because we're looking at what insiders are doing there's also no natural growth for an Insider to say hey I want to put a agent on my machine to see you know how I'm exfiltrating My Own data um in fact most insiders don't want that on the machine at all because they want the opportunity if they when they leave if they need to to to take things with us with them so I mentioned security companies security companies there's probably 30 security companies using Code 42 today and and they're they're the they're the big names in the space it's people like crowd strike and and OCTA and ping and Rapid 7 and Splunk and Cisco and so it's we have really really good customers and they're the smartest people in security and they're using us to solve this problem so it's a I think it's a real validation for us as the as the folks you want to talk to um just to solve what is a really difficult problem and Joe you're said you're doing 50 million bucks of Revenue today at Code 42 and you mentioned you have many million folks paying you more than a million dollars per year can you share how many are we talking like two or three or more like 10 12 15 Nathan so I've run a public company and what what's what's great about a public company is that it's public and you can share stock but what stinks about it is you have to share all your actual data with people what's fabulous about being a private company is I don't have to answer questions like that for you because I've got a lot of comp told me you just told me what you sold for you told me your Revenue you told me a bunch of transparent I'm pretty but but now you're now you're diving into tell me how many actual multi-million dollar customers you have and I've actually got some pretty good competitors in our in our space who are targeting my customers actively targeting my customers so I be a little bit more careful about that because I I don't want to help them um come after us that's what happens when you're the leader in the space you know when you're the leader in space you should expect everyone you put a case study up everyone's going to knock on their door and say we can do it for half the price and we've got one of those competitors in our space who is that competitor now Nathan should I give them any press I'm never going to do that you're going to have to find them yourself but just guys Joe is trained he is press trained I'm going to keep pushing though this is good stuff walk me through how you plan a grow Code 42 right so so what's the team look like today and are you doing an outbound sales motion inbound what's it look like great question so we have both we have we have a uh we have a outbound obviously everybody's doing we all do inbound you have to do inbound right if you're crazy if you're not to we're um we're aggressively looking at intent in the market so we use tools like six sense to look for who's interested in buying it in this space um we have a new business sales team that's entirely dedicated to new business and we have a customer success team that's entirely uh dedicated to make our customers successful and to grow their accounts so um we you know these are uh a lot of SAS companies follow this model today it's something that I help Pioneer when I was running eloqua to to se to separate those two functions and have what we at the time coined as hunters in the forest which is your new uh you know new business people but then also hunters in the zoo which are people that are hunting for business in your install base Joe what's a full team size today at the company company's about 220 people okay and how many would you say just based off memory a quota carrying sales reps uh I would say there's probably 30 of those 25 30 of those do you feel good about how you have their plan structured in this new macroeconomic environment in terms of their quota the OT to quota ratios things like that moving into next year or have you had to make some adjustments I think we're all looking at quotas uh given the macroeconomic environment and you know the macro has been interesting for security especially because a security in the last few years has sort of had a blank check you can if you needed a product you just asked for it and you got it and I've seen I've been involved in two deals this year where procurement overrule of security on on on the deal and I have never seen that I've never seen a procurement person you know U tell a security uh leader that they can't have a product that they want that we're going to go with a cheaper product um so that's a really that's a c change and I think the data showing right now security budgets are growing about 5% in 2023 and you know historically over the last 10 years security budgets grow 30 to 35% so this has been a really tough year in security so for me and my the way we're looking at it we'll we'll relook at quotas next year going into 2024 we'll look at territories we'll make sure there's enough business there for our for our teams to uh to do well 250 million bucks on the balance sheet from the sale last year I assume you still most of that in the bank are you looking to be opportunistic in a downturn with m&a always what are you buying I mean what are you interested in we haven't bought anything and again this is all about Focus so we you know it it's a very high bar for us you know it's a very high bar you're going to look for somebody that augments something that you already do uh but you know it's worth buying because you you not as opposed to building and so far in all the analysis we've done we every time we look at something that we really get excited about we end up saying we could build most of what they have or we don't want to take on their uh customers or their challenges so we're being very judicious about that it's the other thing that hasn't happened yet in security it's interesting that the budgets are down to 5% growth but we haven't seen valuations the valuation expectations for a lot of companies are still pretty high because people raised money during difficult times I mean during good times and so they still have money on the balance sheet and until people start running out of money valuation expectations uh are going to still be high so things are that's a long way of saying things are not cheap yet yeah I guess going back really quick to your guys's capital structure story obviously a nice big uh moment last year with the sale but um your guys I think your first round was like 20 wasn't it back in 12 with Excel for 50 million bucks but you said the company launched 2015 so what was going on there well the company's been around since 2011 so crash plan has been around for a long time so the previous uh Founders raised money from Excel in 2012 and that was the the only round that that they did and then I joined in 2015 and then raised money in a b round in 2015 and um but I think that round was 85 million and we you know we used that money we're pretty cash flow I run what I call the East Coast offense uh as opposed to the West Coast offense which is you pretty much spend what you have to grow your business as opposed to um you know o overs spending early you know early so we try to run it so we've been pretty Capital efficient uh throughout the process and we'll continue to try to be that way does that mean this year closing out 2023 you guys will be what plus or minus 5% EIT margin somewhere in that range no one um I'm still I'm still the same person that was trained 10 minutes ago Nathan so I'm not going to tell you all that stuff our our our our IA is still being affected by the separation of our two businesses so we just sold that business last year so we're still working through some of that stuff um we we we'll we'll be a consumer of capital this year um but again we're careful of of of how we use our money and how we use our resources I've never I've never sold a company for quar billion dollars what would eat cash 12 months after that you know at the company that just got rid of that company and sold it wouldn't the new company be the one sort of taking the cash at there or help me understand that well I I think it's really all about this the our our the size of our business today so our business today is probably a little bit bigger because we have people um because we were $1 120 million company and now we're a $50 million company so we're a little bit bigger than probably most people are size people didn't go with the deal I would have thought the buyer would have taken a bunch of the people some did but a very small percentage of the people oh I see I see it's it's uh again and again it depends really on how we end up the year you know the great thing about the the the SAS business almost all of us charge in advance upfront so it's a very cash efficient business and that we get a lot of cash if we close a deal on November 30th we'll get a Year's worth of cash from that customer um but and then we'll just deliver them service for a year so it's October still so we have a couple months left and we are we've got a few good things in the pipeline so a lot of how our our year will be determined is over going to happen over the next couple months yeah Joe a lot going on at Code 42 but when you were setting your goals a year ago what were you hoping to grow by year-over-year percentage wise yeah I think our our sort of uh original uh goals were like most SAS companies our size sort of 20 to 20 5% uh growth and you know we'll see how we do on that yeah I mean the rule of 40 is obviously very interesting right if growth is lower then you got to juice get 20% deotto margin basically to get there right so I mean is when you talk I don't know if ji is still on the cap table but when you think about how to position the company for the next couple years do you want to get back to the rule of 40 at some point and if so what what what is the split between growth and cash flow you think I think all of us want to have the rule of 40 I was talking to some Vista folks a few months ago and they go we like the rule of 50 and I was like well who doesn't like like who doesn't like the rule of 50 so I I think yeah we all aspire to get to get to uh 40% growth plus evida and you know honestly I think if you know growth is out of style right now but I I think long-term growth always trumps uh for a SAS business because the the way the economics Mo the economic model works is if you're growing at a high rate great things can happen so um you know I would always air on the side of trying to be high on on that growth uh and then you know you want to monetize you want to be profitable at the right time and you know different companies have done it different ways um we've you know Salesforce proved that you can get to a billion dollars and just have a ton of Leverage in the model and um I don't think the market is going to stand for that for most people today but I do think that that um that I still I still believe and I know it's unpopular this month but the growth trumps profitability uh right now especially if you're early in a market and you're and you're uh not at scale I mean we're not aund we're not a hundred million dollar company today and so you know there's still a big grab and you want to you're going to keep these customers three five seven years and so you want to make sure that you're you're the market leader uh come come the time that the Market's got a couple hundred million dollar players in it you mentioned you talked to Vista recently are you in talks to sell the rest of the company to them no no no I was just you know I meet with people all the time you know that was a casual breakfast there was nothing going on I just I I think like you know for your listeners you know and your your Watchers of the podcast is you should always be talking to everybody in your in your Market space u particularly strategics who think about how they're building their businesses and you know what holes you might fill and what Innovation you have and I think sometimes entrepreneurs are worried that if they talk to a big company if they talk to to you know a splan or a Cisco or an oracle or somebody like that that they're going to steal their ideas and um in my experience those companies have trouble executing on their own like building their own products they don't have the cap they don't have the capability just to listen to small companies like us steal our ideas and go execute them better than we do and so I'm always telling people like you know get in there make sure they know what you're doing and how they're doing it so I do that with with strategics and people that are in our space because we you never know those Partnerships are going to come but I also like to meet with the private Equity people because they have great insights and you know vist is probably the largest software company in the world today so they're a great company you know to hear how they're thinking about business and to hear how how they're thinking about um you know how to manage their companies is is super interesting yeah Joe I want to wrap up here so just rapid fire stuff really quick to build out the revenue growth story I don't know were you around on the company hit their first million of Revenue or you joined after well I was around we heard for the for the product that we sell today um I was absolutely around because the only product we have today is Insider and we hit our first million in Revenue about four years ago okay go I guess just to keep the story the same when you have the combined companies though do you remember the first like maybe 25 million year or just some some end point in terms of before 50 million of Revenue yeah um yeah I mean I was I was here when crash plan was a $50 million company but I wasn't here when it was a when it was a $225 million company I don't know if that answer your question that's helpful that's helpful okay let's wrap up here with the famous five number one uh book you're reading today I I just finished uh infinite uh whatever on S bankman freed uh so uh that was good but I also just about right before that I just finished Covenant of water so I would recommend that book uh highly uh to people in the tech industry even though has nothing to do with tech it's all about India and uh there's so many folks of Indian descent in the tech tech industry I I found it to be a great uh a great read Joe number two is there a CEO you're following or studying today um you know I'm I'm following Jamie Diamond more closely than I normally do because of the larger economic issues and so he's been uh vocal recently but but he's not a tech exec that someone that that I would emulate uh on the product but there's there's actually I'm in a CEO group with about 40 Tech CEOs and they're all fantastic and I'm not going to call any one of them out because they would all be like why didn't you mention me but iist an EO group what's that like an EO group what's the name of that group it's called the enterprise software CEO Council oh cool okay very cool number three what's your favorite online tool for Building Code 42 I think we you know we use six cents better than most do and it's been super helpful for us to uh to build our business number favorite online tool is eloqua Ela yeah yeah I just was drinking Irish whiskies with with Mark Oregon in Dublin at sasak a couple days ago so I think you maybe joined after him but um all right number story Nathan that's a very deep story yes number four we actually have that story I recorded that with Mark I think gosh it must have been four three four years ago but anyway back to the point number four Joe how many hours of sleep do you get every night seven okay and situation married single kids married four kids wow been married I've been with the same woman for uh 40 years wow that's impressive and how old are you Joe I'm 58 last question...