How Functionize Reached About 36 Customers and $16M Raised with an AI-Powered Testing Platform (Interview with Tamas Cser)

Introduction and What Functionize Does

Nathan Latka

00:00Hello, everyone. My guest today is Tamas Cser. Since 2015, he's been building Functionize, which has been delivering the first AI powered autonomous cloud based testing platform to automate the painstaking process of testing web applications. Tamas, you ready to take us to the top?

Tamas Cser

00:14Absolutely. Ready to go.

Competitive Landscape: Rainforest QA and Sauce Labs

Nathan Latka

00:15Alright. So, I mean, should we think of this like kind of Rainforest QA or Sauce Labs or kind of what space are you playing in here?

Tamas Cser

00:22This is really the next generation automation platform if you think about Rainforest or Sauce Labs. It's traditionally either still really manual or very, very script heavy. And what we're trying to do here is really take big data on computer vision and natural language processing and make testing truly the next generation AI/ML driven, very, very low human touch required approach.

Named Customer: Zenefits Wins from Rainforest

Nathan Latka

00:51Okay. So I mean, tell me a specific customer that right now has this deployed and how they're using it. What cost savings have they had? Would they switch from?

Tamas Cser

01:00Absolutely. So we see basically a couple of different scenarios where we see customers either dropping existing existing stripped in solutions, some that have dropped Rainforest that we've taken.

Nathan Latka

01:11Yeah. Tamas, sorry. Can you give a really specific example? Like, actually name the customer.

Tamas Cser

01:15Absolutely. Zenefits, for example, is a customer that we took. They were customer of Rainforest and moved over to Functionize and have been successful ever since, and and we're excited to have them as a customer. Certainly, we see greenfield opportunities as well as as customers that have tried scripting such as Salesforce.

Nathan Latka

01:32What did... So... Actually, Jay was just on the show four weeks ago. He's obviously leading a nice turnaround there at Zenefits, but help help me understand what they were able to save or get with you they couldn't get from Rainforest. Do they have to have, like, less developers, you know, committing code or doing automated reviews, or or where do they save money or time or energy?

Tamas Cser

01:50I think it's primarily speed. It's expertise required and the overall effort involved, basically, to get automation in place.

Nathan Latka

01:57Okay. So you're making testers more efficient, or are you replacing them?

Tamas Cser

02:01We don't necessarily replace testers. What we see generally in a deployment is customers generally struggle for expertise. So people generally just get more productive. There's not enough coverage in place, so they get to do more coverage, more work, more productivity, faster time to market.

Nathan Latka

02:17Mhmm. I mean, most developers who I've interviewed in this space, the biggest issue is is actually making sure you write all the tests so you have full coverage on critical piece of the application. And a gap in a test or a test that breaks or things like this, this obviously then makes things not work so well. So are you essentially plugging those gaps, helping make sure those things do not happen?

Tamas Cser

02:40Absolutely. So we plug the gap coverage. We got... Plug the gaps in maintainability. So as testing scales out, it's a huge challenge to keep that up to date. And those are the main key challenges that we help our customers, you know, basically, as you were saying, plug those gaps.

Nathan Latka

02:56Okay. And now what's your model? Are you pure play SaaS or professional services plus SaaS or something else?

Tamas Cser

03:01We're a pure SaaS model primarily. We see some demand certainly around professional services. We we have done some of these, but we're looking at partners to to take that burden, if you will. We're primarily focused on product.

Starting Price and Target Market

Nathan Latka

03:15Okay. And, I mean, give me a general sense here. I see your pricing. You have a lot of different kind cohorts. We don't have time to talk about all of them. But on average, what's the sweet spot? What's the customer gonna pay you per month for your tech?

Tamas Cser

03:25So we're looking starting at around 5 k. We're primarily focused mid market to enterprise, and we really are a high value, high impact type of product where we really don't come in and don't start playing unless there's a a serious business problem to solve.

Nathan Latka

03:41Okay. So all customers basically paying north of $5,000 a month, you know, call it $60,000 ACVs?

Tamas Cser

03:48Right now, that is our sweet spot, and that's what we're focused on. You know, I think as we mature as a company and as a product, certainly other type of models, I think, is something that we're talking about or considering. But right now, that is absolutely the sweet spot and what we're focused on.

Historical Pricing Experiments and Market Positioning

Nathan Latka

04:00When you look at your historical pricing experiments, though, did you move down market or up market? In other words, know, is that $5,000 a month, is that a fair average across your current paying base or a bunch of them on cheaper plans because of early pricing tests?

Tamas Cser

04:15To be perfectly honest, last year, we were starting at 10 k. So this this has been a drop. But I think in the previous years, we started much much much lower. So this is really a question of maturity and as as the as the company evolves, us finding the right one. So we kind of started much lower and then moved much higher and kind of are now coming down. And and as we find more productivity in our

04:36product and we understand our customer base and getting more efficient in deployments, we can we can start introducing lower tier pricing and make that successful.

Company Founding and Early Development

Nathan Latka

04:44When did you guys write your first line of code for the MVP?

Tamas Cser

04:48Oh, boy. That's probably early twenty fourteen.

Nathan Latka

04:52Okay. And how much did you guys... You and your co founders sink in to kind of product development before your first dollar revenue?

Tamas Cser

04:59You know, we were probably two to three years in before our

Nathan Latka

04:59Can

Tamas Cser

04:59first

Nathan Latka

05:04you quantify that? I mean, are you talking like a million dollars into the platform before revenue?

Tamas Cser

05:09Oh, that's a great question. It's it's slightly difficult to quantify because it was spun out of, you know, primarily did a lot of development myself and spun out of a previous company that was successfully running with cash flow positive and that I ran for about, you know, over ten years and we did development and it kind of started, you know, leveraging existing resources. There was not really solid dollar amount assigned to that, and it really started

05:35as a, you know, as a pet project to solve our own internal problems.

Nathan Latka

05:39If you ignore your sweat equity though, imagine maybe you paid some developers, contractors, designers, folks like that. Can you try and quantify what that cash is?

Tamas Cser

05:46It's millions of dollars for sure sunk in before we saw the initial dollars start returning.

Bootstrapping and Early Fundraising

Nathan Latka

05:53So you're really rich or you raise capital on day one?

Tamas Cser

05:59Cash flow positive company, successful previous company that that enabled me to dabble and take the company and bootstrap it to quite far. And then we... Once we had a working product and we saw early beta customers, you know, we charge always charge something. So we're charging, I think, $500 per customer early on. Then then we were able to raise friends and family round, and then from there, things kind of took off organically.

Nathan Latka

06:23And how much today have you raised all in?

Tamas Cser

06:26We raised about 16,000,000 all in.

Nathan Latka

06:2816 or 60?

Tamas Cser

06:29Yep. 16. 16.

Nathan Latka

06:31Okay. And I mean, why did you like... I mean, don't raise unless you have to because you get diluted. Right? Why did you absolutely have to take that dilution? Why couldn't you keep bootstrapping this with your own money?

Tamas Cser

06:43I think it primarily comes down to, you know, what type of company do you wanna build and and market conditions. So So I think that this is a huge market with a huge opportunity. And when I was considering the, you know, the raise or not raise question that I think is on the mind of a lot of founders, it was very clear to me that the market opportunity and the timing meant that we have to move

07:04quickly. And what the capital is allowing us to do is just to move and do that, you know, faster, more iterations, and and more basically trial and errors that are faster. So I think time to market for us and really the sweet spot solution and land grab, I think is worth worth the the dilution, if you will.

Series A and Burn Rate

Nathan Latka

07:24And I mean, you've done this before. You had a successful company since, like, prior to this, so you understand cash management. When you talk about being aggressive, I always like to understand what amount of burn comfortable... Founders are comfortable sleeping with at night. So you've you've brought in 16, you're scaling a company, are you cool with, like, a $100,000 burn or a million burn per month? Where do you kind of trying to optimize that?

Tamas Cser

07:46I think like like every other company in Silicon Valley, we're looking at probably eighteen to twenty four months runway where we are very focused and very specific milestone that we want to reach. If we reach those milestones, we're comfortable increasing the burn and and also going after opportunity. So we see a lot of opportunity, and that's across the board. And for that, I think we are a little bit more aggressive than we initially thought. And that's

08:14across the board, I think, customers, partner opportunities, and and and, again, just if you look at the market horizontally. So it's a very difficult question, I think, what is the right amount of burn? And it's something that, you know, we're adjusting as we go.

Nathan Latka

08:28So just to be clear, you're saying when you think about raising based off your historic expertise, you like to raise for between eighteen and twenty four months of runway?

Tamas Cser

08:37Yeah. I think that that... I think that's something that that works pretty well. I think you adjust. Things do not turn out the way that you imagine. I think that conditions change very quickly. I kind of feel like every three months the company's a new company and conditions change

Nathan Latka

08:50Yeah, guess that's burn what I'm asking though is like, again, you're trying to be aggressive. You raised the series A on 03/05/2019 for $16,000,000 Right? If you and your pro formas and in your deck are saying this is gonna cover eighteen months of runway, you basically have a forecast that takes you up to almost $800,000 a month in burn. I'm just trying to quantify when you say aggressiveness, it's a land grab market share. These are critical

09:10words. I'm just curious how aggressive you're willing to push it.

Tamas Cser

09:14Well, I I wouldn't say... I I wouldn't go quite that high. I think that we're gonna probably be a little bit more conservative than that. But it's something that, again, I think if you look at a 10 to $12,000,000 raise, so we we we had some convertible notes converting to our series a obvious and and taking up to the to the total amount of 16. So just the way that I look at it is, let's say,

09:38anywhere between two fifty to five hundred k, I think, a reasonable burn rate for a company of our size and opportunity.

Nathan Latka

09:45That's helpful to understand. Yeah. So so... Okay. So 2014, you launched the company. You're coding for a couple of years. You bring in, you said your first dollar revenue was 2015?

Tamas Cser

09:56No, I think it was 2017. The first time I coded it was 2014, but it wasn't in the form of like concentrated effort to do anything. Like I said, it was, you know, let's try to solve a problem for ourselves internally, and started working on it myself, and it was interesting, and I learned more, and I got more curious about the market and the opportunity. So it was very organic and very slow early on. And, you

10:18know, we founded the company late twenty fifteen. Our first dollar of revenue, I think, was late twenty sixteen, early

Nathan Latka

10:18So '20

Customer Count, Churn, and Expansion

Nathan Latka

10:26since since 2017, so you call it two, three years now, how many customers are you serving now today?

Tamas Cser

10:32So we have about three dozen customers that that we're serving today.

10:37We're obviously, again, adjusting and and learning more about the market who are the right customers for us. So, you know, some of the early customers that you have, I think, in working at that stage, you know, you can go through and look at that and you learn maybe they're not quite the right customers. So there's a little bit of shedding going on and focusing on acquiring the right

10:58customers

Nathan Latka

10:58So you've manufactured some churn. Look. I think churn can be healthy sometimes. When you look at your revenue churn, not logo churn, but revenue churn historically last twelve months, what would you pin it at?

Tamas Cser

11:08Oh, it's really difficult.

11:11I would say that the largest churn that may be, I don't know, 10 to 20% would come from what what do we call on prem deployments. We kind of played around with that and and and ventured into deploying our solution on prem.

Nathan Latka

11:23You mean private cloud or physical servers on location?

Tamas Cser

11:27On location. And and it's probably the largest dollar churn that we're seeing currently.

Nathan Latka

11:32Okay. So got it. So just to be clear, you so if you had a $100 a month in revenue a year ago, you're saying because of these tests, about $20 a month would have churned from that?

Tamas Cser

11:43Yeah. I would say that that sounds about right.

Nathan Latka

11:45Okay. Fair enough. Now do you... I'm not sure where you're at company stage wise, right? It sounds like this is a muscle you might build in the future. Do you have a strong expansion muscle right now where you can double and triple contract values year over year or no? That's still something you're building?

Tamas Cser

12:00What we're really focused on right now is not to push the the contract values because we kinda proved that out last year. And and on the back of that, I think we're much more focused on repeatability and velocity, and and really just getting really efficient at finding, identifying the right type of customers and onboarding them and onboarding them successfully. And that is the primary focus for for the company right now.

Nathan Latka

12:23Got it. Okay. So 20% gross churn, it sounds like no or little expansion. So about 80% net revenue retention annually.

Tamas Cser

12:31No. No. We do we do... We we absolutely do have expansion across the board. This is... It really means that the the churn is really more of the opportunities that we walk away from. Certainly, like every other company, we

12:43we

Nathan Latka

12:43Does the have expansion fill that churn hole, though? What is your expansion annually? 10, 20%?

Tamas Cser

12:49Yeah. So I would say that that not counting on prem, then the the expansion easily fills the churn

Nathan Latka

12:49Okay.

Tamas Cser

12:49On on the... On on on just the the normal contracts.

Team Size: Engineers, Sales Reps, and India Office

Nathan Latka

13:00Yeah. Okay. Fair enough. Then talk me through your team today. It sounds like this is an engineering heavy tool. What's your team size say, and how many engineers?

Tamas Cser

13:08So we have about 22 engineers right now. And and certainly still looking to expand and get real rock stars on board. We're

Nathan Latka

13:18What's the total team size, though?

Tamas Cser

13:20Yeah. So we have about 35 right now in The US, and then we have we have an office in in the way that we invest quite a bit in data labeling and and and gathering data. That's that's really the the cornerstone of our technology.

Nathan Latka

13:33Wait. Where is that?

Tamas Cser

13:34So that's in Noida in in Delhi, India.

Nathan Latka

13:38Really interesting. Okay. Do you have a cofounder from there?

Tamas Cser

13:41No. Don't. But I have I have a super strong technical slash business lead over there.

Nathan Latka

13:48Okay.

Tamas Cser

13:49But I have a ten year relationship from my previous company, a super smart guy, Encore, who's who's been, again, with me for, you know, since the beginning of the journey probably, and overall as a business technical relationship well over ten years.

Nathan Latka

14:03So 35 on the team, 22 engineers. How many quota carrying sales reps?

Tamas Cser

14:07So we have three quota carrying sales reps.

CAC Payback Period

Nathan Latka

14:10K. So something to scale. And are you... I mean, when you factor in their their commissions and everything else related to your marketing, I mean, how aggressive will you be on a $5,000 a month customer? Will you spend the full $60,000 upfront to acquire them?

Tamas Cser

14:23So CAC is really difficult for us to to compute because it's moving quarter by quarter if you look at last year to this year, especially as we adjust our our our ACVs and where we start. So I would say we are comfortable. We would be comfortable spending 60 ks because we need to land and expand model as we get into an enterprise account that has expansion opportunity horizontally in business units as well as growing an existing

14:49business unit. I think that's that's certainly a number that we're comfortable with.

Nathan Latka

14:52What's your payback period today, though, across all cohorts? Are you, like, six... Are you all optimizing over six months, twelve months, eighteen months, twenty four months?

Tamas Cser

14:58We were we were about eight months at the beginning of the year, to be honest, again, we... We've moved the model very quickly. We need to see a little bit more in terms of... You know, for that to play out for me to to give you something that's meaningful.

Revenue Snapshot and Year-Over-Year Growth

Nathan Latka

15:12Yeah. I'd be more aggressive. That's good. Okay. And then look. So 36 customers, $5,000 a month ARPU. That puts you about $180,000 a month right now in revenue. Is that about right?

Tamas Cser

15:22$180,000 a month revenue as in

Nathan Latka

15:22Yes. You mentioned

15:27you mentioned earlier your ARPU was about $5,000 a month I had 30... You said three dozen customers. 36 times 5,000 is $180,000 a month.

Tamas Cser

15:34Yep. Yeah. So I I I don't have the exact numbers right here, but you're... It's close, I think.

Nathan Latka

15:39Okay. And then take me back exactly a year ago. Do remember where you were then?

Tamas Cser

15:45Yeah. Absolutely. We were a third of that, maybe less.

Nathan Latka

15:50Okay. So good. So so kind of $60,000 a month about a year ago, 180 now during that time period, you experiment with a higher price point. You did some on prem stuff. You're now moving away from that a little bit lower price point, that's how you think you're gonna scale.

Tamas Cser

16:05Absolutely. I think that, again, it's it's velocity. It's getting the the right starting price point for our customers and finding the right customers and repeatability is what we're focused on.

Famous Five Rapid-Fire Questions

Nathan Latka

16:13Very good. All right, let's wrap up here with the famous five. Number one, what's your favorite business book?

Tamas Cser

16:20That's a great one.

16:23I know there's so many great books out there.

Nathan Latka

16:25Pick one.

Tamas Cser

16:27I I don't think

Nathan Latka

16:29If one, you don't just say none. It's fine.

Tamas Cser

16:32Okay. Yeah. No. Good to go.

Nathan Latka

16:33Number two, is there a CEO you're following or studying?

Tamas Cser

16:37Again, many great CEOs. I mean, obviously, I love what Musk is doing. I think that just risk profile, just the vision, you know, just what he takes on, I think it's absolutely inspiring. So love what he does. Love what love what he's doing with that, you know, kind of what

Nathan Latka

16:53Number three, what's your favorite online tool for building your company?

Tamas Cser

16:57Oh, man. I mean, we use a lot of Slack. That would be

Nathan Latka

17:00Number number four. How many hours of sleep you get every night?

Tamas Cser

17:05I try to be good about that. I I try to get seven seven, eight hours of sleep a night. That doesn't always happen, but I try to be good about that.

Nathan Latka

17:12And how old are you?

Tamas Cser

17:14I'm 43 years old.

Nathan Latka

17:1543. And, Tamas, what's your situation? Married, single, kiddos?

Tamas Cser

17:18I am married with two kids.

Nathan Latka

17:20Oh, wow. You have your hands full. Alright. Last question. What do you wish your 20 year old self knew?

Tamas Cser

17:28Oh gosh, many things. I mean, gee, how do you pick? So many things. Be aggressive. Be aggressive. You know, be more aggressive early on. I don't know. I was pretty aggressive, but... Yeah. I don't know. Just go for it. Just don't worry about things. Try, learn, and and do your best.

Nathan Latka

17:46Guys, functionize.com, helping dev teams write better tests, more efficient tests, and scale their deployments faster. 36 enterprise customers right now paying about $5,000 a month, $180,000 right... A month right now in revenue up from $60,000 a month just a year ago. First line of code in 2014, first customer 2017, call it a couple million in the MVP. Now scaling 16,000,000 raised. Comfortable with, call it, 250,000 to $500,000 a month in burn as they look to

18:09scale their team of 35 people. Currently, 22 engineers, three quota carrying sales reps, a data team in Delhi. 20% churn expansion fills that gap, call it 100% net revenue retention with the eight month payback period right now on most of new customers. Happy to push that up a little bit higher as they look to scale. Tamas, thank you for taking us to the top.

Tamas Cser

18:26I really appreciate it.