D2iq Revenue, Valuation & Funding (2019)

hello everyone my guest today is florian liberty he's the co-founder at mesosphere the hybrid cloud platform company which helps companies like mbc universal deutsche telecom and royal caribbean adopt transformative technologies like machine learning and real-time analytics with ease florian you ready to take us to the top yes for sure all right so i'm sure you've done this before try and simplify this idea for us help us understand what you guys do and what the revenue model is are you pure place ass no we're not the pure play sales company so i'll give you a quick background so we started the company because i used to work with my co-founders at twitter and airbnb and we helped both of these companies actually built the next generation infrastructure that helped the company scale and we took a lot of those learnings and figured that we want to bring that same sort of technology to any company out there not just the top engineering companies out there but really any company and the companies you mentioned royal caribbean and so forth they are all customers that are now employing our technology to actually build modern products and so how do they pay you those a licensing model a sas model or something else it's a subscription-based pricing but um most of our customers run even if they run us in the cloud um they still pay us a a subscription license for support and for the proprietary version yeah so you i mean you are a sas based business then yeah i mean but it's not self-serve it's not sas and it's not just the hey swipe your credit card and and you're ready to go no no no i don't mean self-serve no i mean i've had a lot of ceos doing on you know between 100 and 400 million dollars in ar they're all selling enterprise they're all pure sass um but they're definitely not swiping credit cards on online portal exactly all right okay good so that's helpful to understand so um give me a general sense of kind of sweet spot for you then right what are companies paying on average per year to use this technology you've built so um our average pricing really varies depending on how big the customer's footprint is measuring the cloud by the number of physical servers okay or by the number of virtual machines if they're actually using our software in the cloud okay interesting so you upsell based off number of physical servers or virtual machines do you do any seat based or feature based upselling so um a product that we're actually launching pretty soon is going to be seat based that's going to be actually a mixed model between both nodes and seats um and i can unfortunately can't go into details about what that product is but yes we definitely have that um okay so so no but today you're only upselling based off number of virtual machines number of physical servers nothing based off number of seats or number of nodes well notes is basically the number of nodes is basically the number of physical servers or virtual machines we have some customers that have very special hardware and uh for them we've done pricing based on a core basis okay i want to capture i want to capture more of kind of the founding story here how you realize this was a problem you know your twitter and airbnb days before we do that though this is gonna be painful for you but we can't talk about every customer cohort what would you say a sweet spot is for you like a hundred thousand dollar years or a million a year 10 million a year what's the sweet spot uh the sweet spot is a couple of hundred thousand a year okay you feel like that's fair and let's just role play for a second if someone's signing up average customer 200 thousand dollars per year how many virtual machines might they have i mean it really depends we have a number of ways of packaging our product but i'll give you i'll give you an example so generally customers start with like an accelerator package which can start anywhere from fifty thousand to a hundred thousand dollars or so and then oftentimes they get a lot of value out of the software and embed our technology into more and more of their products because it really helps them develop their products faster and that's how we expand so it's really a land and expand strategy that our business is based on okay but generally speaking it sounds like almost all customers spending now more more more than 100 grand a year yeah exactly yeah pretty much everybody starts somewhere and then as the application footprint grows the needs to use more of our software subscriptions grows and that's how we grow our footprint yeah that's great okay let's put this on a timeline what did you launch the company um we launched the company in 2013 so i think it was march 2013 2013 and you've chosen to raise capital i'll tell everyone how much you've raised and then articulate kind of why why you had to raise why did you have to take the dilution yeah so we raised a total of 252 million uh in funding um and uh the reason is simple we're building something that's very very complicated right i mean we are basically we're basically taking a number of open source technologies and also work with some proprietary software vendors and we're basically automating all of these software components um to let our customers focus on what they're best at and that is usually building their products so um [Music] that requires dealing with all of these software components and the complexity that these run on different versions of operating systems like different versions of linux different flavors of linux is very very complex we have to create a lot of software that automates these components think for example on a cruise ship we mentioned real quick in cruise lines they use our software on the cruise cruise ships in order to power their um mobile app and some other analytics that they're running and on the cruise ship you don't necessarily have software engineers right on board that can that can actually fix something if a server for example has an outage so our software has to actually self-heal and uh building that is actually very very complex we have a lot of really talented engineers who come from the likes of twitter airbnb how many folks total are on the team we have around 390 people right now and how many are engineers i would say we have about 110 120 engineers okay fairly a fairly healthy engineering team there okay so take me back here so 2013 was when the first line of code was written well i mean really the first line of code that went into our technology was written well before then it was written um when my co-founder ben hinton was doing his phd thesis at uc berkeley he was working on a on a piece of software that really automates the data center and that software was the first product that we or the first open source project that we productized and later on of course many other technologies came into the mix but uh really the first line of code was probably written in 2008. okay 2008 and then i guess the reason i ask is i'm always curious how much money a company will sink into their building their mvp before they you know they asked for their first dollar of revenue yeah so how much i imagine is probably a hefty amount how much did you guys put into the mvp before you got your first dollar so so i mean the interesting thing is if you if you look at twitter and airbnb for example as actually contributing to this open source software project um that we were based upon i mean i think you can say hundreds of millions i mean there were large engineering teams at both of these companies that were actually creating this open source software so hundreds of millions even before the uh mvp was was uh written in mesosphere if you just look at again literally dollars out of your bank account that you had to pay essentially engineers to kind of get this thing going before the first dollar revenue what would that actual amount be you know uh i mean let's let's say we had the first product we had the first product that we built from this open source project and that was pro that probably cost us like i'd say a million dollars the first mvp that we built ever as mesosphere yeah i'd say it was probably it was probably three quarters of a year and half of our seed round on our seed round was about um 2.2 million so point two okay and did you raise that seed round right in 2013 right at the start yes exactly we raised that right away and um we wanted to we wanted to really get to know ours and was that really was that really based off the credibility of your background plus your partner's phd project yeah exactly and the and the community that was actually behind the project yeah so how do you look we had we had the the automatic focus on obviously great story there and i always ask these folks that launch company on top of an open source platform how they managed literally pr right so when you go into open source community and then you're essentially going to profit on top of an open source platform that other people contributed to it's a hard thing to balance right so how did you make sure you didn't piss a lot of people off by essentially productizing something that was open source that everyone got value from free yeah that was indeed our concern initially as well so one of the one of the things that we continue to do is to actually contribute continue to contribute to the open source project right basically spending company resources on making sure that the free free users of the software can continue to to use it and um we never tried to hold back any any major features or anything like that what we try to do is we try to provide provide additional value that uh the customers that were not naturally self-adopters and and early early adopters of of technology um would use and find useful and uh yeah trying to just make complicated things much easier for less sophisticated customers right and we figured that we probably will never get twitter to be a customer because they just had such a large engineering team already that they could build most of these uh or could actually implement most of what they needed on their own so today how many lines of code are you contributing monthly to the open source project for free i don't know i i really don't have those steps um i think the engineering team certainly measures their code contributions but the the complexity is that we actually contribute across a wide breadth of projects right not just a single a singular project but really like a probably on the order of 20 to 30 open source projects where we actively contribute fixed bugs and so forth i see so that's your way of staying in the good graces of the open source community why you build a big business on top of it we hope to do so yes yeah that's i think that's probably a smart move you don't want that community revolting on you yeah but and i think it also helps us right because i mean it's it's a it's not just it's a little self-serving as well because of course we we don't have to maintain necessarily a different code path and then have a lot of complicated logic uh to to reconciliate those two different projects so what we try to do is we just at least in theory i don't know if it's in practice all the time like this but we try to put we think of plugins like that's kind of like what we're trying to do like evaluate things on top that leave the existing code base uh as it is yeah that's smart okay so you're doing all this to scale um you launched on top of that open source platform how many customers are now serving today so we have about 130 140 customers okay fair enough now 130 customers um uh take me back to kind of your team today right so do you have an inside sales team i know you're probably talking about sales because you're an engineer but do you have an inside sales motion um i had to i had to actually get used to talking a lot about sales i mean it was until january um i had the role of the ceo until we hired mike fay was just a phenomenal guy who came out of symantec he was the president ceo of symantec and uh the cmo of symantec afterwards also joins a phenomenal um but sales yeah of course we we haven't we have an account development uh rap team or sales development rep team so they basically find find our leads and convert them into into good prospects and and and sorry they could they convert the leads and um they go to where we a community team that goes to trade shows we also have the sales reps that attend trade shows and conferences to collect leads and um so uh yeah so basically initially of course what we had was customers calling us because we were the only company at the time that was servicing the software the open source software so companies initially called us when they had problems but um as we grew and as of course there was more competition we had to have an outbound sales team as well yeah so i mean do you know how aggressive that team or you as a company are being in terms of if you see a company's going to be worth 250 000 to you in terms of their year one contract will you spend that full amount up front to get the customer are you happy with the 12-month payback i mean look i think i think like we don't really look at it that way right now um we're really in in growth mode i mean i i think it's not this is we're not like a super traditional business where you can where you can say we can exactly attribute how much it cost to to win that customer right there's there's a certain amount of overhead i already mentioned the community team it's hard to measure like the exact impact because you're building up goodwill right um to be fair though foreign i mean you're uh i mean your partner's phd you're an engineer which means you understand i mean your metrics you're a rule kind of based guy there are ways to calculate cash some people take all their company expenses every month divided by new customers sometimes it's just sales and marketing sometimes it's just paid spend i mean there are ways to measure this i mean you can slice and dice this in many different ways of course i mean uh i think i think we we don't want to i think right now there's there's the cac is probably lower than than the full 12 months i mean i'm sure about that i don't know the exact number here and i i don't i don't know that we've shared this before yeah but but uh it's certainly less than 12 months yeah and i mean so do you the reason i ask that is because many people argue whoever wins a space right comes the number one or number two spot is actually the company that builds the healthiest economics because then they can pay the most to get the customer right so that's the reason i ask how aggressive you're willing to be on cac yeah i mean like i think we're a venture-backed startup so by the nature of it i think we're pretty aggressive right we but actually six months is not aggressive at all most venture back startups that have raised between 100 and 500 million bucks in revenue i mean you see payback periods in like 18 24 month kind of time frames yeah i mean again i think i think it depends on how it depends on what you what you add to the to your cost basis right for for uh i think like it's probably longer if you add all of the community in and we don't really do that because it's a little harder to to attribute the leads that come into the community bucket uh well there's no cash outlay for that for you today really direct for the community team correct right well i mean like besides salaries well yeah but i mean those are pretty substantial right yeah you're talking about engineering salaries that are contributing back code to these projects that giving bring you leads exactly exactly yeah yeah no that makes sense okay let's move on from that um it sounds like you have a pretty healthy expansion module where the cruise line installs you on one fleet and they love you so much the next year they triple their account and they install you on the european fleet etc do you know if you look at the past 12 months kind of what kind of a gross revenue churn is relative to expansion on that same cohort yes so so we of course know that and we measure that but that's unfortunately a metric i can't share that's okay i guess what i'm asking is i think most companies um at scale world-class net revenue retention will be something like 140 percent have you hit that yet today we've had we've hit that before yes okay okay but you're not there today um i i think i i don't have the number in my head right now i mean like for us for us like quarterly sales in the enterprise business right a little lumpy so sometimes a quarter i mean q1 always looks different than q2 q3 and q4 right so um so i think uh yeah i mean like there's some fluctuation depending on what time in the year you look at it and i don't i can't share the number for last year yeah no no that's fine that's fine um uh next question here uh folks at your scale when you're going out and doing doing a capital raise how do you think about how much you want to raise for in terms of how much runway you want to buy yourself do you raise for 12 months 18 24 months what's your theory no we we've um we've always tried to race for 36 months really okay that's that's i've never heard the number that high before why 36 months well because um because i think like if if you look at our business it's first of all i mentioned this very capital intense the the um the amount of time it takes to close these deals the ramp is pretty long the ramp for for the sales force is really long because it's a very complex product and we wanted to always have have uh basically the room uh room for error or room for a changing ecosystem right because we we are in a spot where uh in some in some ways if google comes out with a new technology which they did three years ago we really have to we really have to change gears and and double down on this new technology itself and that that plus um plus wanting to have uh the additional resources in case in case an opportunity comes up always made us want to to have 36 months of cash that last raise was back in may of 2018 125 million bucks if we divide that by 36 months that would mean at that point maybe you were burning between three and four million a month are you still being that aggressively still burning that amount per month unfortunately i really can't talk about the the burn number but um i think we have we have we have a lot of headroom in order to to um grow as a business yeah well form by the way i want to put numbers in your mouth those were numbers you gave me you said you raised for 36 months and your last race was 125 which would mean burn would be about between 3 and 5 million a month yeah but i mean that i mean that's that's kind of like the i think that's the that's the average case i think that obviously you want to be you want to have it last even longer if possible by being more profitable or by not profitable but by burning less over time right yeah well i mean unless you're in a kind of winner take all space that's highly intensive being profitable at your board meeting would actually be a massive weakness because they'd go oh my gosh flooring doesn't know where to invest anymore i mean i think it's all i think i think businesses that are run as profitable businesses are always are always the best businesses right but i mean um let me put it this way i would be shocked if your company with your funding history was going to tell a story at a board meeting or pre-ipo saying we're looking at being profitable right now with how much you've i just i think that's like is a story that's not a story you're going to tell well no i mean but i'm just saying i mean aspirationally of course of course we all want to be one like you know profitability you know 60 of the bottom line every month of course okay fair enough um what's next on the road map again that last race was a little over a year ago are you raising now again or prepping for an ipo what's the next move no so i mean obviously we brought in mike and the team because we wanted to to set the company up for and potentially an ipo or um or a really like high growth future and really like shift the company around from being super um well be an open source only company or to to perceive this kind of an open source company to being a real enterprise company right we want to be the folks that come in and help other help our customers bring really complicated software and turn their products into production products right not not just and then and mike has a background of doing that when he when he and his team came into blue code they actually um they actually quadrupled i think the company valuation within two and a half three years um and then they were acquired by semantic and they did a phenomenal job there before before leaving here so obviously we just did this shift about six months ago where we brought in that team i'm super excited about that and um in about a month or so uh we have some really exciting product news as well yeah i'm not gonna i'm not gonna share them right now because we take it stealing the thunder basically that's okay but florian i mean you bring it you bring in great talent you have a big product releases a great storyline leading up to an s105 i mean if you did decide that ipo was the right move for you i mean could you see that happening next call it two to five quarters two to five is a pretty broad spectrum i mean that's i think i i i'd say definitely not within the next uh definitely not within the next yeah i think definitely not within the next year okay and why is that do you feel like you have to like you know some revenue target before you actually actually file or why not definitely in the next to 12 months i mean i i i just i just know that the that we're just launching this product and i already mentioned that the ramp period for reps is pretty high right like in complex software it takes about nine to sometimes even longer than nine months to nine months to ramp a sales rep so i i think we really want to see the value of these awesome products that we're bringing out and so so it'll be a while until we see the aggressive growth of that and i think that's that's uh once once we have those nailed and once we have um uh all the reps uh that basically be fluent with that new set of products then i think we we can have that conversation again that's great with the new product launch and some of the other changes you're making i mean does it does it feel reasonable or uncomfortable to have you know you know to hit 100 million bucks an ar run rate next year i think i think it's possible yeah but but a little uncomfortable um i mean uh i there's always there's the possibility i mean i think well you never want a safe goal safe goals are boring i'm just curious is that going to make you nervous or no you guys feel pretty darn good about hitting it so i think we brought in a really amazing executive team right to um to take us to the next uh to take us to the next level and i think anything is possible with this team that's great all right um last set of questions here you mentioned 140 customers it sounds like everyone is north of 100 grand maybe even more than that called 250 a year in terms of acvs that would put you north of three million bucks a month right now in revenue potentially way north of that is that accurate it's north of that that's great and then if you go back a year ago today i mean was annual growth rate you every year in that kind of 30 40 range or higher again like those those numbers we haven't shared publicly yet what do you target we i haven't shared our goals around around exact numbers okay i mean would you if we don't talk about you for a second you know most companies this kind of stage you're doing three x three x 2 2 2 2 2 x basically to ipo i mean is it fair to say that kind of 2x benchmark industry average is what you're also targeting i think i think yes definitely with new new product revenue that's always the goal right at least 2x yeah all right very good let's wrap up with the famous five number one what's your favorite business book um favorite business book is probably um um probably well it's not a book well crossing the chasm and that's a book obviously by geoffrey moore that's amazing but i think there's a really cool research paper actually i forgot which which business school it came out of but it's called the sales learning curve um that was one of the one of the by mark leslie and i think that's a really really great um paper to read for anyone who's thinking about um sales and sales operations number two is there a ceo you're following or studying well i'm learning a ton from mike fay now who's our ceo here at mesosphere number three what's your favorite online tool built to build your company g suite all right number four how many hours i sleep to get every night uh i try to get i try to get no more i try to get like six and a half seven hours of sleep and what's your uh how old are you 36 36 in situation married single kids um married with a kid on the way oh congratulations that's exciting thank you all right uh last question what do you wish your 20 year old self knew um um i think i think i mean back then i was still living for the most part in germany right and so um i think i would have told myself hey come to the state sooner come to silicon valley sooner guys move to the state sooner uh mesosphere helping over 140 enterprise customers paying caught 100 200 north of that grand in terms of acv first year acv helping them really get technology that florian helped build inside of these other engineering giants like twitter and airbnb back in the day along with the phd research his partner was doing again scaling nicely now launched in 2013 spent quite a couple million on the mvp on top of an open source community uh now 252 million dollars raised 390 folks on their team hoping to hit 100 million dollars in terms of run rate next year but no ipo in the next 12 months more focused on the next product release the new ceo the new leadership team and scaling from there florian thank you for taking us to the top thank you so much