How Logianalytics CEO Li Zhao grew to $30M revenue and 1K customers in 2018.

hello everyone my guest today is steven schneider with more than 20 years of technology leadership experience he's the ceo today of logi analytics prior to this role he served as both ceo and cpo at logic where he held both sales product and engineering marketing and customer success teams prior to this company was the founding partner of on-demand iq a hosting business intelligence solution and a practicing manager at leading web technology company proxycom all right stephen are you ready to take us to the top let's do it all right what is logic analytics and how do you guys make money sure so logi works with application teams typically product managers and the developers on their teams to embed dashboard reporting and analytics in their software application typically self-service reporting visualizations dashboard things along those lines and they typically come to us because the end users of their application are demanding it uh they're losing competitively so they need something to differentiate or they need to make sure to maintain the maintenance stream of an existing product that they have and they want to be able to get to market fast and they want something that is better than they can build it themselves okay so i don't understand give me a customer story a name name the customer and tell me how they use it sure motion soft they make gym membership management software they spent most of their original kind of software development effort figuring out how to make a software for managing a gym how people walk in and check how many people to staff that sort of stuff they then found from their customers that they wanted to have reporting on top of that to figure out what are their busy times how many people should i staff at specific times that sort of thing they needed dashboards to show key metrics across multiple gyms for some of their customers that had multiple gems they may want to embed things like how do i predict if someone coming to the gym is likely to churn for example so that they can take action when that person comes in to give them a free personal training coupon or something like that so this is all internal it's not the gym members seeing how many times they checked into the gym like in the consumer app so we we offer something to product managers that they embed in their software application and most of those software applications are b2b software applications because businesses want to run analytics on their on their businesses yeah i get that steven i just want to be clear though this is not people are not buying your tool to give their consumers applications they're buying your tool to get make their businesses smarter internally so we sell primarily to software companies that want to embed us in their software application that they then sell to other companies that want to improve their businesses yeah not to not to consume not to the gym member that's right so motion soft would sell to curves or gold's gym or you know uh 24-hour fitness or whatever it may be and they would deploy it across all their locations got it okay without going down every customer cohort i'm sure you have many give me a sense of what the average customer might pay per year for something like this so it varies uh i'd say on the low end it's about a half an fte from a developer standpoint on the high end it could be achievable hold on actually give us numbers here because my audience won't that'll lose them yeah yeah so it can range from maybe fifty thousand dollars per year up to a million dollars plus a year it really varies on the size of the deployment so a smaller company that is only selling to maybe 20 gems is going to pay something on the lower end a larger company is deploying it across hundreds of sites across the country are going to pay much higher i want to know your averages stephen like to what is your the perfect kind of customer for you and what are they paying per year is about 100 000 okay got it typical but it can vary got it so that would put it like 30 40 location kind of thing uh well again it depends so we offer to customers in a wide range of different uh verticals and different deployments so if you have a lot of deployments but those deployments are very small in terms of deal size like a thousand dollars a piece or two thousand dollars a piece then we're gonna need a lot of customers for in order for to make financial sets some of our customers for instance we have one that sells software to sovereign wealth funds they have 20 locations but each of those locations they charge millions of dollars for sure so we don't really need a lot location so it really varies got it okay put this on a timeline for us when'd you launch company so the company was founded in 2003 actually and it was founded as more of an application development framework in the kind of business intelligence space but it really didn't start growing until about 2010. okay so what were you doing before those seven years i mean was it more of an agency uh it was a bootstrap company it did not have a lot of resources to spend so it was you know three to five million dollars of revenue working with customers that came in through the web with very small transaction sizes five to ten thousand dollars okay and in 2010 that's where we really kind of found our niche of working with application teams so again principally software companies but often enterprises that look like software companies and that's when we started growing and now do it sounds like those the three to five million businesses between built between 03 and 2010 that was more though like a go hunt get a project do the project move on to the next customer like move a sale it wasn't a recurring sas model then yeah so so let's talk about that for a second so so we are not a sas business okay let's talk about what that means though we often work with companies that are sas companies to embed within their application but our software is deployed uh up until about 2010 and actually really until recently and really about the 2015 time frame about half of our business was perpetual so we'd sell it they'd package it within their software application and we'd get a maintenance stream but it was more of a perpetual model today we're 95 all term contract based okay like per year or something like that right yeah yeah so by the way why do you say that that's not i mean most people define sas as something cloud related and there's a recurring revenue stream annually and you're charging per seat per usage per whatever why do you say you're not a sas company well so to me the definition of sas is software as a service right and we don't host anything we don't have any devops we have nothing hosted on our own internal cloud that we manage um we we have software that we ship they deploy it within their cloud environment but we're not actually managing anything but they have to keep coming back to you every year it's not like they can keep doing it every year without you they have to come back and keep what renewing the license or something uh typically if they want to keep distributing it they would keep renewing the license and why do they have to do that if they own it um well so again if the way we structure our licenses is to allow them to deploy it to new customers so as long as the business is healthy and they're still getting new customers or they're still wanting to deploy new upgrades and things along those lines that they'll keep coming back to do you think do you make any money if you so if you deploy part a and they're using that for a year and they keep just using part a and yours twos threes and four you're saying they don't pay you for two three and four unless they add a part b in part two three and four so every contract we map back to their business model it's not like a traditional transactional software application where here's the price and this is how we price it we first have say how do you license your software is it per user per site per additional person is a term or perpetual and then we have a model that maps back to their model so it really comes back to how do they sell their software is how we will ultimately continue to generate revenue okay interesting um okay so 2003 really got things going in 2010 and then fast forward today so bootstrapped will be raised capital so we raise venture capital in i think uh well our first round series a small round was in 2008 we did additional rounds in 2010 2013 but we were actually acquired by a private equity firm last year uh actually one year anniversary was on friday well okay so but okay so let's keep talking about before that acquisition so pre-acquisition total raise in the company was how much about 50 million okay five zero 50 million bucks there and then you sold in 26 uh 2017 so take us through that story why sell well so the company had gotten to a point where we had we had grown a decent amount um and we had started to bake the track towards profitability in 2017 and it just made sense for us to get new investors that were more aligned to kind of how we intended to grow in the future a lot of our earlier investors were venture investors and as you probably know when you're talking to a lot of vc oriented companies those companies are about grow grow grow grow grow up into a certain point it's more of a roulette wheel type model we were at the point now we had grown to a certain amount our growth had frankly slowed down a little bit and we were orienting to profitability and we wanted to just start growing in a different path also we saw an opportunity to potentially do m a in the future to grow faster and new investors made sense for us at that point yeah just because i mean private equity obviously they might not be looking at growth growth growth but they're looking at cash flow cash flow cash flow right so walk me through the private equity firm that came in and bought you guys i assume they took you know usually they're taking a majority sick or buying 100 of the company did they buy the whole company they bought the whole company we're 100 owned now but that's right okay so you know i'm asking this and you'll laugh but i mean so why are you still there it's hard to motivate someone once they're once they're wealthy uh well so so first off um i you know i come to work every day not necessarily for that reason i come to work to build things and grow things and and like any other like a private equity firm coming in is really just another investor right so so when you talk to a private equity firm you establish what is the story what is your growth path how are you going to grow the company and we firmly believe here at lodging and i believe that there's this new evolution of a product stack emerging if you think about 10 years ago we sold the marketing was uh maybe 15 years ago marketing was trade shows and collateral now there's a whole industry that sells to marketing around marketing automation and marketing technology and lead optimization uh i believe that product managers which frankly didn't exist 20 years ago is a new industry that's emerging and people nowadays aren't going to build products completely from scratch they're going to go out and get best of breed components to get to market faster and assemble those those things into a modern product stack that they deliver you saw it happen in infrastructure you know i agree with that i can't totally agree with that thesis i mean this is why sas is taking off well and we believe that our next evolution is to go after that space and we needed frankly a partner with bigger pockets that could help us assemble that product stack faster yeah um so that's the vision i'm here still here in execution and this is marlin by the way right yeah um um interesting okay very good so uh give me breakdown team size so where does that say in terms of total team yeah we're about 140 employees uh we have a team in the a small team in the ukraine and a small team in the uh uk and ireland and then the register yeah here in dc d okay dc northern virginia area tyson's corner tyson's corner yeah yeah i know i do the same thing there people where are you from i say dc but you know leesburg close enough yeah yeah uh okay very good i don't know if i'd give you that one okay hey listen is the metro going out there yet if the metro reaches there our train reaches there from dc then i call it dc you know that's right well it goes not quite to dallas airport but it'll get there eventually there you go all right very good so i'm good sold it last year and then walking through today so you um oh sorry pre uh pre uh pre-sale you said you raised 50 million bucks you said one of the reasons you sold is because you really would look at potentially acquisitions for growing have you done any acquisitions to date uh we have not yet okay we have not but again you know we're focused right now on both organic growth and looking at inorganic growth options um but you know inorganic growth is hard to harden time right so it's about getting to the right place from an organization to where we can support that in organic growth and i firmly believe we'll get there uh but no we have not done any uh today yeah and from 2010 when you really sort of ramping things up to today walk us through how many customers you've scaled to so so if you go back to the inception of the company we've brought on about 1900 customers um so so quite a few um we're you know from a revenue standpoint we're mid-thirties just to give you some kind uh well actually both so so both revenue and are going to be start with a three that's exactly right um and that's where we are today and just to understand we you know a lot of small companies think about growth in terms of aor growth or top line growth one of the challenges we have in the broader analytics space is you have a lot of companies that raise the vc funding play the roulette wheel and just spend a lot of cash to do new customer acquisition without necessarily regard to the economics or building a long-term sustainable business we're really focused on long-term sustainable business so we think about growth as a function of growth in ar as well as margin growth so we're profitable today we intend to continue to be profitable uh and we're so we're focused on growing our ar and our growth and our uh give it up for that kind of thing yeah total the rule of 40 makes sense stephen and i get it but the fl i'm gonna be counterintuitive i mean the flip side of that is you look at bezos at amazon i mean he famously manages the negative 14 right even to margin there's a reason because there's a lot of these companies that you just you gave an example that have raised capital yes they're being more aggressive with cac yes they're doing that but that's also because their economics related net revenue expansion to churn are really healthy and they know if they can spend more up front more than anybody else to get the customer that it's going to make sense over the long term so how do you compete with these folks that are willing to spend more than you do acquire the customer because they know their economics are healthy well so so i'll answer your question i'm going to argue with you on the first one look at domo domo is a competitor in our space that raised i think 600 million dollars went public and is trading at last i checked less than that and they certainly went public for a net loss for their investors so you look at companies like burst that raised a ton of money and then ultimately imploded yeah you're citing two are the ones that didn't do so well though i mean those most it's the flip side uh i would argue i think if you go up and at it you'd find that the ones you hear about are the ones that do really well and the ones that don't are the ones you don't hear about but let me answer your second question because we could get into that topic for a long time um so how do we compete with them we compete with them by being smart knowing our use case our use case is to focus on product managers and application teams and our focus and our win theme is around the ability to embed so deeply within their application that no one knows that it's us as part of their application we want to deliver the best engaging product experience and we're the only company of scale that focuses on that use case most of our competitors in the space go out after direct use cases go after wide industries they go after any kind of operational type improvement use case they can we're the only ones out there that really focus in on the product managers and application teams and how do you embed it within an application that requires a different product stack it requires a different licensing model it requires a different go to market sure the effectiveness of that just because most of these are words until you actually like figure out how to actually measure these things right so the measurements that would articulate yes what you just said is actually true and it's working is you look at churn and you say is it really really low so you said 1900 customers since 2010 you said earlier an average price point have called a hundred grand per year and you're doing about 30 million ar that would put you at about 300 customers today so what happened to 1600 customers over the past 10 years well so so keep in mind that is true if you had a sas model with reoccurring business again remember until two years ago much of our business was perpetual and so in perpetual you're not necessarily getting that full recurring revenue right you're only going to get a percent of it so when i talk to you about a typical asp today those are new business deals that we're doing not deals that we did 10 years ago for 10 000 15 000 whatever sorry that my question was just active today active customers paying you monthly today sure it's about a thousand yep okay but even that if i multiply a thousand if i multiply a thousand times that acv you just gave me that puts you well it puts you at like 90 90 million in ar yeah so again keep in mind a lot of the people that we brought on in prior years brought in is perpetual right so when you sell a hundred thousand dollar deal on perpetual you get a twenty thousand dollar maintenance stream right i see what you're saying work that way into sort of historic i mean if i can tell you right now if i was to look at our average asp last quarter was about 90 thousand dollars yesterday all right but much of our customer base came in on a perpetual license model and so many of those are on a maintenance stream type which are much much lower they call it 10 20 grand something like that that's exactly right 20 of acv that's like uptime related sla related stuff maintenance contract but that kind of stuff support basically log support tickets that kind of thing yeah right so how do you measure things like churn uh so we measure churn in three ways so first off we measure churn as a percent of our total ar base on both a number of customers as well as a dollar basis um we measure churn on a net renewal rate so including upsell and then we measure churn or renewal rate on a standard renewable rate in terms those up for renewal in a given year our renewal rate is about 90 okay so it's about 90 and that's in that's grosser net that that's so so so net renewal which includes upsell is over a hundred percent how far uh i can go back and look at exact numbers i i can't recall top of my head but it's 100 or 110 120 somewhere in that ballpark um but gross renewal so renewal on the ar base is 90 got it so said differently you correct me if stephen correct me if i'm wrong here okay so said differently you're churning about 10 of your revenue each year however your expansion revenue is more than 20 so net net you're at 110 plus good math i mean is that is that but i wanna make sure that's accurate okay yeah that is accurate okay so the people that are churning are those typical old licenses that are that are stopping their maintenance contracts or is it people that are on your sas model what are maybe downgrading or seats or something yeah so we measure that and we have a monthly meeting where we literally categorize why people turn um roughly about 60 of our turn is the product is discontinued okay so keep in mind we what we offer gets embedded in a product that they then go sell and we work with a lot of companies that are 50 person companies 100 companies sometimes the product they sell gets discontinued or they no longer are in business um and that's about 60 of our reasons for churn the other 40 is they don't ever actually get into production um and and that's something we do a lot to try and help them get into production um but the reality is you know sometimes priorities change at organizations sometimes people leave sometimes projects get killed um and so those are the typical reasons interesting walk me through let's go back to the top of the funnel we were just kind of at the bottom let's go back to the top um how aggressive are you being in terms of acquiring these customers so when you look at your fully weighted cac right and let's say your first year acv you said is about 100 grand right now what are you willing to spend to acquire that kind of account well so we look at it in terms of payback that's how we kind of think about it um uh you know i cac and ltv i've seen five different calculations and i've talked to multiple different investors on that and we tend to find that metric is confusing and requires allocation of marketing spend and all that sort of stuff that is subjective so so we look at it as how much we spend in sales and marketing and how much acv do we get and what's our kind of rate of return on that um if i look on new acv that we get versus versus how much we spend in sales and marketing it's about a one-to-one ratio okay so you're spending a dollar to get a new dollar of ar there stephen sorry we cut out there for a second just to be clear so you're spending about a dollar to get a new dollar of ar um one dollar yeah yeah yeah that's that's great and when you when you are spending that money so if you're spending a hundred thousand bucks to get 100 000 acv contract where are you typically spending that is it mostly like an inside sales team or direct spend on google where do you see it yeah so it's a combination so we have an inside sales team that's doing outbound outreach things along those lines we have a sales team that is doing um that's what i'm looking for outbound emails webinars all that sort of fun stuff as well yeah okay very good and then um and then walk us through i mean you mentioned lifetime value some people live and die by it some people ignore because it doesn't help them drive the business at all do you use that at all and if so how do you use it um so so we look at it um you know i think it's challenging because you have to build in assumptions around expansion and upsell and things along those lines and the reality is our expansion and upsell um has really taken off in the last year or two we started to introduce new modules and new capabilities um and that's give us an opportunity to go back to the customer base and add additional value and so we're getting more of that um so so truthfully we probably do need to go back and and reassess our metrics and how we look at that but you know we haven't today we again look at it as how much are we spending in sales and marketing and what kind of acv do we get as a result of that um and that's typically how we look at it yeah last complicated question before we wrap up with some easy ones when you look at bookings growth like in a quarter um do you have a target for that and if so what is that target um well so so we do have our targets right um and we have our targets in terms of acv from new ac from expansion all that sort of stuff um you know again our plans are built around this growth plus margin concept so of the 40 i'm sorry 40. i know that will be high 20s 25 yeah this year will be high 20s next year we'll be in the 30s year before that we were in the teens and the year before that we were negative so we were on this kind of path to profitability right um and so we think about how we're going to grow our bookings but we also think about it relative to how much we want to spend to grow our bookings yeah yeah um i cut you off i want you to go back to i rudely cut you off tell us how you some people don't know that rule yet so tell tell everyone how you calculate it yeah so we think about it as growth plus margin and growth is percent growth of ar on an annual basis and margin is ebitda has a percent of revenue okay so earnings before interest tax and depreciation it's a it's a measure of profitability right um and so you just add those two together from a nominal basis and and most studies will show that the most valuable companies um have higher gpm right so we decided to go on this path about a year and a half ago when we had a negative gpm and by the way most of these hyper growth companies do have a negative gpm and have steadily been growing that year over year so this year our targeted growth was in the teens on both arr growth and and eva growth and we should in the year somewhere in the high 20s in terms of the combination thereof yep guys a good public example of this if you want to dig in deeper is like mulesoft for example so in 2016 their you know unlevered free cash flow margin was like negative 5 but their growth was 75 so their rule of 40 would put them at about at about 70 when you're adding those two together there's a lot of public companies though that actually fall below that uh cloudera sorry uh uh a few companies fall below that but that's the same rule that you're using even as a private you know private equity owned company correct that's exactly it's all about building the most valuable company we can yeah whether you're public or you're private what we see is those companies get higher multiples yep now when you look at your cash flow margin bottom line are you including any the value of any stock you're issuing to incentivize employees you don't include that okay so that's some people do some a lot of investors i know actually do include that they do consider that a hit on cash flow you don't no no we do not interesting it's the only thing that comes out of that are any kind of tax liabilities and you know we have a little bit of debt on our books so interest payments of the debt yeah which is expected if you were just bought by a private equity company all right stephen let's wrap up with a famous five number one what's your favorite business book uh book i'm reading and i use a lot right now is blue ocean strategy i think it's really refle and i have five copies of it on my bookshelf and i give it to employees all the time because i think it's very reflective of the market that we're in number two is there a ceo you're following or studying right now no and i'll tell you why you know it's funny you look at the the celebrity ceos and you look at the the press out there it feels a little bit like us weekly or people magazine uh and the reality is i don't care if elon musk is smoking pot on a on a podcast show or whatever sorry the the purpose of the question is to actually discover new people no one's talking about tell me one in someone in northern virginia that you just love getting lunch with that no one talks about uh well i don't know about northern virginia but but jerry dolinsky is one of the operating partners who's current ceo of longview and is working with a number of marlin operating partners and he's someone i talk to every week to get input on sales strategy marketing strategy new growth levels that sort of thing this is jerry dolinsky jerry delinski very good number three what's your favorite online tool for building your business oh favorite online tool for building our business so you know i spend eight hours a day in salesforce i know that's a very straightforward answer but that i live and die in that in that thing my wife hates it number four how many hours i'll sleep to get every night i get a solid eight that's good i'm not i don't get my eight and what's your situation obviously will you just mention wife any kiddos uh yeah so i'm married 15 years just celebrated 15 years this year and i have an 11 year old boy and an eight-year-old daughter congratulations stephen and how old are you today 42 42 last question take us back to your 20 year old self what do you wish he knew what i wish i knew uh you know it's funny um 20 year old self what do i wish i knew um you know i i think planning really far ahead is is valuable but you can never get really more than one or two years um i think having a longer term goal is fine but trying to plan out everything meticulously is just going to defeat the purpose plan the first six next six months really specifically after six months to two years make it a little more wide open and 10 years out just have a high level goal but don't try to get any more specific than that because life gets in the way guys life gets in the way don't plan too far ahead founded in 2003 really got things cranking in 2010 with his perpetual model and then selling uh maintenance contracts on the back end just recently launched the sas model past 30 million bucks in arr raised about 50 million bucks up through 2016 before he sold to marlin in 2017 today serving over a thousand active customers and that's a blend between perpetual licenses on maintenance contracts and uh new just kind of pure sas revenue uh scaling nicely economics healthy net revenue retention 110 percent peel back that onion there's gross revenue churn under that of about 90 so expansion kicking in nicely in terms of aggressiveness and aggressiveness on customer acquisition spending about a dollar in to get a new dollar in arr folks in ukraine the uk ndc 140 strong steven thanks for taking us to the top thanks nathan take care