Mercatus Revenue, Valuation & Funding (2024)

hello everybody my guest today is haresh patel he has a 30-year career which spans entrepreneur startups to be leading three public companies in 2009 he founded his current company mercatus an investment bank focused on renewable energy assets today the software platform serves 450 billion in assets and investments under management for the world's leading energy companies and global alternative investment funds are actually ready to take us to the top uh absolutely nathan okay that's a lot of assets you get one percent of all of them right absolutely tell us about the company what's mercatus doing how do you make money yeah so mercatus is a software platform we help private equity funds that are investing in renewable energy energy and power real estate infrastructure and it's a physical asset we help them actually digitalize and help them digitally accelerate their world because it's pretty inefficient today in terms of the only way they've really scaled is by throwing bodies of the problem and with the type of growth that's coming over the next 30 years which is about 90 trillion dollars uh the growth is you know they just need the the right tool sets to to compete and fight and disagree sorry 90 trillion of where's that where's that money coming from well that's going to come from endowment funds and pension funds and you know various sovereign funds uh and just the money that's lined up on the sidelines that invest in other asset classes all lining up to really invest because the whole globe is kind of going through a major restructure of its energy and power grid uh moving to more you know carbon neutral in the world and even as if you think of transportation when you build buildings are they lead friendly are they eco-friendly so there's kind of a global build out of uh you know of of that um you know that uh the infrastructure so why are so why are these pe firms using them are they are they organizing their investments or they're using this to find brand new investments it's like the bloomberg terminal for renewable energy uh yeah i would describe it as a the modern microsoft office right today they do things in email and excel excel is the engine that the entire world uses it's the best financial product and it's something that is is isn't scaling because it's not connected so imagine you know trying to pass around 1.6 million financial models and these are very very sophisticated financial models and you're trying to figure out you know what's how do you make heads or tails out of it so this is at the end of the day a data collection problem and a data analytics problem combined with how do you get 50 or 70 or 100 or 1500 people collaborating you know around this process because it's a fairly lengthy uh diligence and underwriting process and every step is is is related to you know collaboration so just be clear this is not for like helping these private equity firms find new deals it's for them like putting performance together or collaborating around data inputs on deals they've already done or that are already part of their portfolio absolutely so think about i think we've all bought a home or a motorcycle or you know leased a car and so if you remember you you put a lot of you know paperwork together and you submit it to some broker or financial institution or your bank and then you get you know 90 days later you get like an approval and that whole process of analyzing that data that comes in documents goes into some sort of financial model say is xyz fanciable and do we want to make that investment that process is very labor-intensive manual and error-prone and it's not scaling for the type of you know dollars that are coming into this marketplace yeah okay so how do you make money so we make money uh as a software as a service business model so we charge our customers a a fee uh based on the dollars of aum so you were tongue-in-cheek about you know one percent uh you know one percent would be rich for a software company but we we do make a percent of what we call basis points in the world of financing uh we'll make a percentage of basis points on the aum or the assets under management that the customer will put on our platform so it's a recurring uh recurring fee that every year they'll pay a different amount depending on how many assets they have on our platform okay what would you say the average customer pays per year for this our average customer uh typically pays uh somewhere between on the on the low end it can be as low as a hundred thousand dollars a year on the high end it can be as high as eight to ten million dollars it just depends if they're a 40 billion dollar fund they're going to probably pay us in that very high you know you know eight to ten million dollar range period give me an average that's a huge range give me an average would you say that the kind of the perfect cohort or the mean across your customers is like like a million bucks a year oh she ha hits half of that it's about about five hundred thousand dollars a year yeah what our average is i imagine you you definitely see power laws where the top 10 percent of your folks make up more than 90 of your you know aum or something like that it's yes it's 80 20 world right so there's always a large customer base but there's about 20 or 30 that make up a vast majority and that's the way the the private equity world shakes out today there's about 600 customers today in our universe uh that you know 10 or 15 of those are greater than 50 billion dollars a year how many of the 600 have you been able to capture so what's your market share so we're still we're still a venture back company uh so we're under about two or three dozen uh total uh global funds we've taken a strategy much like i would say ibm did in the 80s and 90s you go after pepsi and coke you nail the two big guys and then everybody else wants to copy them so we've been we've been deliberate in terms of being very focused going after some of the biggest global names in the world and uh making them highly referenceable so now we're beginning to see that network effect so just to be clear you've got about maybe 24 customers right now with the the possibility of spending maybe 600 over time 600 is kind of the first landing spot yeah okay but 24 today 24 today yeah and 600 is our total ecosystem when we apply our pricing uh to that and we're actually applying pricing we're getting not pricing we'd like to get against that profile of those 600 customers it's about a 1.8 billion dollar market size for us so right can i can i multiply the 500 000 acv you just gave me times 24. i mean that put you at what like a 12 million run rate right now is that about right yeah that's in that rate range yes okay right and and talking about growth where were you a year ago so we're in the phase where we're doubling okay so you're doing about 500 500 grand a month a year ago we've had a good yeah that's great growth where does most of the growth come from expansion revenue or new customers all together we get it from both so uh we actually get kind of three approaches obviously new customers kind of give you that big step up uh our customers are growing because as we said it's a growing market so our customers if we just leave them alone uh grow somewhere between 18 and 25 a year so we get nice organic growth because they're growing and so their assets under management our platform are growing and then clearly we try a land and expand strategy so a large company uh you know that has a global footprint may have actually 30 different teams different investing in different asset classes so we may land at a particular spot and we'll close that opportunity a lot of times because our heritage started with renewable energy we start with that group but then they have a sister real estate group they have a sister infrastructure you know sister oil and gas and so we'll begin to expand our footprint so that's what i call land and expand strategy interesting um and then if you have 18 expansion that's great what's your gross revenue churn annually uh gross churn in terms of uh how many customers we lose no no not not a number of customers the actual revenue churn so if someone downgrades you'd have revenue churn but they didn't you didn't lose them as a customer oh okay uh we don't have as much we have i would say our churn is more related to you know customers coming to the market uh and their business goes aground that's usually what causes our churn uh we're not seeing and many customers this is a marathon race right now and everybody's running downhill so even the best are actually doing really really well what's your number though right now is it five percent 10 20 annual revenue churn uh it's not well under 10 percent uh uh revenue churn process okay so 10 revenue churn 18 expansion you're at what uh over 108 percent net revenue retention yes that's great that's really great um how are you talking about your sales model how are you landing new customers you have an inside sales team or what we actually uh kind of use a multi-channel strategy again when you're trying to do what i call a vertical play uh it's an arrow uh looking for needles in a haystack i call it dust of spec and haystack um you know we use a combination of a direct sales organization which attends a lot of conferences where like-minded people come together that's probably our most rich uh source of information okay but we do a lot of inbound and outbound marketing what we call account based marketing which is what i would say highly customized it's not a generic email blast to the whole world but optimizing it by the customer by the persona so that's another part of our marketing approach we also have channel partners because our customers will reach out to large consulting firms uh and our specialty firms that help private equity sort through their problems and saying how do i build my i.t stack so those channels we educate them so they can recommend us as part of their services and then we also have a really strong board and advisory network and those folks are highly connected so our sale is at a very high level it's sea level and so getting those connections uh are really really critical so it's a it's a it's a direct model combined with a variety of different highly optimized markets how many people are on the team uh so our total company size is about 45 people and about a third of our i'm sorry almost 40 percent of our of our organization is customer facing between either the sales team marketing team which is you know grabbing new customer logos and we have a whole customer and professional services team that you know makes customers really happy so they're new with us haresh when you take on all their salaries and any direct marketing spend conference sponsorships what's your fully weighted attack to get a new half million dollar a year account it's roughly running about uh about three hundred thousand dollars to get a customer but we're getting multi-year contracts so eight month payback though on the cash yeah typically that's that's that's our cost of customer acquisition that's great and where's the team good sorry i was saying our average you know customer signs this up for three to five years as well so they're making a long-term commitment so it's nice what do they pay up front in terms of cash just a year they will pay for yes a one full entire year okay in advance and then typically half of the first year's licensing fee is what's required to provide that configuration training service change manage all the professional services to make them successful where's everybody based 45 people uh we are a very distributed company so we're headquartered in silicon valley so about 30 of our employees are here in silicon valley we're about 15 miles shy of san francisco south of san francisco and then we have a development team in st petersburg florida and then we have two overseas teams and we have an office in italy so california and remote now have you bootstrapped this or race capital uh we started the first couple years as a bootstrapped organization um our journey is quite interesting and then we did and i'll share with you what our journey is but and then we raised our series a in 2012 and then we raised series b in 2015. so how much does it all raise to date a little over 20 million dollars is what we've raised all equity or any of debt in there all equity that's great now so how aggressive are we being today in terms of kind of burn rate i mean are you burning capital today are you casual positive uh no we are still burning uh we still have a burn rate and uh we're anticipating break even uh either if we're if the winds are to our back up in the fourth quarter uh and if you know we had a little bit of headwinds or just a few hiccups which every startup does probably you know we're targeting right now first quarter okay somewhere between the first quarter early second quarter is our time frame so when you say burn rate today i mean are we talking like a million a month a hundred grand a month it's it's it's about three or three or four hundred thousand a month okay so not nothing crazy it's trending downwards because of just as we add customer customers we're keeping our you know overhead as lean as possible and when did you launch the company what year so our journey is interesting we actually started uh about six years ago as a software company and um we actually were an accidental software company our prior business model was actually investment banking we found an opportunity to actually be a sell-side investment banker for solar projects and we realized wow we had our own uber moments saying this is the most inefficient thing why do people do this way why do they live in data rooms and spend weekends and thanksgiving weekend putting together investment memos because there's got to be a better way so we want to be the best and we want to be the most efficient so we built the software for ourselves and as we were shopping projects on the sell side the same customer said wow we love your software can we have that we'd love to buy that from you that's when we recognized we had a golden product and so what turned out to be a platform turned out to be a very unique architecture because we had no legacy in the way we built the software so we're able to do any physical asset class it just happened to be we solved the most complex because solar comes with the dynamics of a large project but it comes in very high volume interesting oh today we were shocked when we heard some of the top global private equity firms uh they're investing tens and billions of dollars of our money and your grandmom's money and my grandmother's money uh and uh it's they're flying blind in terms of how fast their business is growing so we're trying to get organized and get their data in in a more centralized place it makes a lot of sense talk to me about what you want to do moving forward i mean any place do any plans to raise capital right now uh right now uh no i think we're looking to really stay focused we raised you know our uh an internal round uh late last year and so it gives us a great runway to really scale the company because we've got really good product market fit now it's just you know getting customers and making sure we retain and make happy the existing customers so this is a scale game this year and so the timing for our capital raise is uh is likely to start in the fourth quarter and it'll be not choosing because we'll be cash flow break even by then but i think we smell a really really strong opportunity so if we want to add more uh you know uh foot to the accelerator then that's why we would raise it doing about 12 million bucks a year right now you raised 20 million bucks i'm sure there's some kind of liquidation preference or something like that in there if someone came and offered you like 67 million 70 million bucks to sell the company would you sell uh we had that offer and we said no who and why do you say no well i think that when you look at the when you look at the market potential right you've got uh uh we're still early in our current in our maturity as a company when we're able to actually get some of our customers to have real definitive proof points the leverage of our our pricing will be significantly higher uh also you know when we're at this stage you know a software company will get six and a half to eight times multiple on average and you if you're well above average you can get almost 20 times revenue and so uh when you look at a 1.8 billion dollar market you know if you if you're where we're at today uh and you think you've got a shot at getting to 100 million dollars there's a significant and a multiple that can be had that could be a more substantial uh you know exit so exits that have gotten us excited are other vertical plays one is viva systems uh they did a vertical place selling to pharma yeah their customer is actually no more narrow than ours was and they had a nice 1.8 billion dollar ipo adaptive insights just got acquired by uh by workday and they were doing the same kind of financial modeling planning and budgeting uh you know revolving around the financial model like we do and they were acquired by 1.3 billion so we just see significant you know upside potential and it's a little early very good let's wrap up quickly with the famous five we're out of time number one what's your favorite business book what's my favorite business book i would say it was one that i read really early in my career because he gave me my career goal post it was leah coca's book and this is when he was the rock star much like tim cook is today when he was turning around chrysler and you know it inspired me because i was about four years out of college and i didn't have a goal and i was flying to corporate for some business meeting and i read his book in his first chapter he set his goal on the day one of out of college when he was working for ford and he saw a bunch of vice president said you know what i'm going to be vp like that by 35 and so i borrowed his his uh his goal and i hit my goal as well of being a vp by 35 so i look i look i like the but there's certainly better books out there than that but i like it because i had a lot of personal meaning to me in terms of how i was able to shape my career very good lee number two is there a ceo you're following or studying right now uh i would say that i really like historically what steve jobs i like airbnb and uber are doing to their business it's the disruption that you can create great jobs number three what's your favorite online tool right now for building the company online tool for building a company uh i would say that it's probably uh at this stage a collage of two or three different pieces of software the one you use the most we probably use uh salesforce the most okay number four how many hours of sleep to get every night ah a good question uh probably about seven is my average that's good and what's your situation married single kids i am married uh we celebrated our 30th anniversary uh last year congratulations and we have we have three children so 28 uh daughter lives in san francisco sun 26 lives in san francisco and we have a 16 year old straggler that is so we're preciously holding on to her before we become empty nesters very good harassing how old are you i am 57. last question what do you wish your 20 year old self knew i'm sorry say that again what's something you wish you knew when you were 20. oh what would i know whatever 20. you know um i would say that you know business is a journey and uh you know count on ups and downs and don't let yourself get down so i think uh had i known that i wouldn't have spent as much time but i as i see other entrepreneurs i just see that you know some of the most successful ones uh had some really interesting roller coaster rides where that bottom of that roller coaster was almost full nose dive very good guys mercatus lunch back in 2012 now 24 private equity clients paying him again to manage their pro formas their diligence you name it data related to their deals these private equity firms have over 450 billion in assets and are under management heat prices against that so doing about 12 million bucks today in arr that's up double year over year from about 6 million bucks in ar again just a year ago 20 million dollars raised burning about 400 grand per month right now with an eye to profitability by the end of uh here q4 2019 before they start their next race 45 people in california and remote 10 revenue churn 18 expansion annually so net revenue retention 108 spending maybe 300 grand to acquire customers with an eight month payback period haresh thank you for taking us to the top thank you for the time appreciate the opportunity to speak with you