Mfilesrevenue & funding

hello everyone my guest today is mika makitalo he is the ceo of m-files leading the fast-growing business on its mission to change the way the world manages information before m-files he had senior management positions within the finnish government managing large national i.t systems and projects he's got a phd in industrial engineering and management amica are you ready to take us to the top i'm ready all right thanks for being here man talk to me about m-files what's the company do when are you a pure play sas company we are a software company for intelligent infamous management we are on our way becoming a through sas company but the enterprise content management space is a bit conservative so over the years many customers have preferred uh wanting to have their system as perpetual license okay so right now when you look at your revenue over the past 12 months how much is sas versus kind of new license revenue so it's it has been roughly one third has been sas but the number is growing quickly as we are going through transition that's great because it's moving quickly towards subscription so of course we want to do the same and the perpetual license model that's not sassed was that also kind of an on-prem installation for security reasons yes of course the future for us means either in the cloud or on promises but of course it will be invoiced as subscription i see okay so for this interview let's just focus on the sas component of your business so for just that cohort on average what are companies paying per year would you say uh we have tiny customers to massive massive enterprises so roughly the numbers are 30 bucks per seat per month okay and and then i don't know what the average team size is that you're signing up is the average team 100 people or 10 000 or one uh it's a hundred hundreds okay so like i said we have time customers five users and then 000 here says you know again i understand you have many different cohorts but i don't want to go down every cohort on on this short call so just for for the sake again of averages you said about 30 bucks a month per seat an average team has 300 seats yes okay so it'd be about nine grand a month per logo or brand great okay and paint the kind of customer profile for me are these governments you're selling to or large corporations who are you selling to it's a mid-market and smes so any companies of course all companies are dealing with information and documents so infos gives a much better way to manage that data more efficiently so employees can be more productive in their work they can focus on things that really matter focus on innovations rather than trying to find the information or thinking where i'll find the latest version and put this on a timeline for me when did you launch the company so the company was was founded early 2000 infants as a product was launched just in 2005. so we've been around the market quite a bit okay and are you the founder or did you come in later i joined a company in 2010 okay so what happened there the founders got tired or what uh he wanted he had to choose then we had 40 employees and he had to choose whether he wanted wants to coach focus on architecture and building the world's best product or to lead the company and he decided to do the first and uh i was hired to uh skyrocket the business that's great okay now did you come in with a round of funding like an eir and a vc firm or what well back then we were still both bootstrapped so for for the first uh was it like six seven years we were bootstrapped and now we drop our a round 2013 led by draper s3 we raised 6 million and then we need i'll be around three years later 26 uh 2016 led by uh france us-based bardec partners okay and so total raise to date is what so those equal to roughly 40 40 million euros for the plus million u.s usd and also where we took a a loan from european investment bank last summer close to 30 million u.s okay so just be clear you've got about 30 million in equity in that 30 million kind of line of credit or is that a term loan that's in loan okay it is a term loan do you have to pay um did you pay it down kind of as you use it or do you have to pay an efix interest rate no matter what no we will pay you know we have transfers there we had the balance payment then he had what a balance payment in the end so we can of course do uh so we are raising that in francis and we are paying the loan back after five years i see okay good all right so so i want to get back to that in terms of um how you're using money to grow the company here in a second uh but first so 2000 launched 2005 the product launch 2010 you joined the company how did you how did you learn about the founder i mean what was the chemistry between you two i i knew some of the founders and some of the others early founders i knew the company company well so that was the reason reason uh to join the company in a way that i knew that those are super talented guys that can can create the software that is better than others have created the market so that that was you know enough confidence for me to join the company of course any company growing fifty percent a year being bootstrapped shows that the product is awesome yeah now what have you scaled to today in terms of total customers using you just on the sas side of things so says site is a couple of thousands so all together the customer account is 9 000 and and uh sales customers is uh maybe 2 thousand okay two thousand and uh you said earlier you know each of them kind of paying 30 bucks uh per month per seat team size 300 so i mean i can kind of multiply 2 000 brands paying nine grand a month that will put you just on your sash stream 18 million bucks in mrr is that accurate um [Music] well alexa there are there are so many large customers so we haven't disclosed our numbers numbers uh exactly exactly but the total revenue is approaching 100 million u.s or maybe in the next two years we are we are there and our arr growth has been uh last year 30 or exceeding thirty percent okay that's great where are you today though in terms of run rate you're like 80 million or 70 million we haven't disclosed the exact numbers so okay well just to be clear you did give me exact numbers in terms of acv and customer count you just said 2 000 and you said earlier 9 000 bucks a month if i multiply those exact numbers it gives 18 million yeah that is correct but like i said that 2000 was was an estimate on how many customers we have in the cloud the the exact number on total customer account is indeed 9 000. but since we started perpetual say maturity of small accounts are still still in the in the on-premises environments yeah this is why i'm ignoring the other revenue streams i just want to focus on sas so just to be clear you you have a business that you believe over the next year or two years will hit a hundred million dollars in arr the majority of your 9 000 customers are still not sas you do have about 2 000 that are sas paying about nine grand a month so the sas component of your revenue stream today is about i mean that would put it at 18 million dollars a month which obviously is inaccurate 18 million uh we said 80 million a month yes 2 000 customers and you said earlier they pay on average 9 grand a month because it's 30 seats and they have about 300 uh seats i i have to calculate it so that sounds a bit uh a bit off of uh uh well it's not a bit off mika it's not a bit off it's way off because that stream alone would be 18 million a month would be 216 million a year so it's something is something is way off so it must be obvious to you what is way off the the acv or the customer count custom accounts oh i see okay so you think the acv is accurate at nine thousand dollars a month but the customer counts lower okay do you i mean so do you know what just your sas portion of the company is are we talking like 10 million bucks an arr or something like that it's slightly below that okay good okay so you're going through something that's magical right now which is transitioning people from an old model to a new model what's the biggest friction point in convincing people to move from on-prem and perpetual license to the sas based cloud model so it's a we feel that we are going through the through the front system for benefiting customers for for for those customers they are getting all the benefits in the cloud scalability all this they can easily add users all these and security aspects uh all the latest cool features we can easily implement in the in the cloud environment so those are benefiting customers of course pay as you go all the benefits in the cloud i think the the old mental model is that hey since this is our data uh our documents our contracts we have to have those in you know beside our own firewall and that is the mental model i think now is uh changing thanks to say microsoft uh microsoft systems office 365 sales force of course is driving that so i think in the last two years the mental model of where we where we have our data has changed and of course we are we are uh also wanting to change the market from this my point is though what's the biggest friction when your sales person calls an on-prem customer and says start paying our sas model what's the biggest pushbacks just security a security team yes yeah interesting okay and round out the team for me how many folks are on the team [Music] 500 and where's everyone based so we are headquartered in finland uh and uh material devouring rnd is here then we have a large u.s operation one of 30 employees in the us 10 in canada 30 in the uk 20 in france and then small offices in germany and australia and talk to me about how you're driving this growth of kind of new customers what what kind of channels are you getting the most growth from right now in terms of where your sales team is spending most their time so it's uh like i said we are we are a platform play so we can serve almost any kind of uh information management use case vertical or horizontal cases so um we are serving across the board we are focusing on final services manufacturing professional services of course that are document heavy information everywhere they can benefit of having a more intelligent system and where are you looking to find those kinds of customers um so in those key regions where where we are operating so us is number one for us where we are seeking growth then of course all the uh sorry i meant how are you finding manufacturing companies and professional services companies your target in the us are you using linkedin targeting google ads facebook ads what's the actual tactic it's it's everything it's everything so of course we are we've calculated how much marketing qualifies leads we need so it's linkedin seo ppc uh many online online uh you know uh vehicles to create leads to create interest it's a trade shows participating right right kind of of when you speak engagements everything you get the amount of leads we need to uh hit the quota sales quarter targets we have and how aggressive are you being there so for a comp to get a customer that's going to start paying you 9 000 a month what are you willing to say to to pay to acquire that customer fully weighted um well of course it depends on the opportunity and and i mean like a small customer of course that's why i use the 9000 mark though mika is so for a nine thousand dollar a month customer what are you willing to pay for them uh so so 2x compared to what they are paying 2xml uh uh see uh no it's like ideally we want to be below one point uh 1.5 arr in in marketing and sales cost versus what they are paying so just to be clear let me make sure i understand you you're willing to spend 1.50 to get a new dollar of ar yes i see okay so your payback period there on average just call it maybe 16 to 18 months okay got it and the reason i'm asking this question is i don't think i've talked to somebody i've talked to a lot of people that are raised you know 100 million 200 million i don't think i've talked to someone that's raised 40 million and is also leveraging um a bank to the tune of you know 30 million on top of it how are you able to convince the bank that your kind of cohort data will indeed be predictive so they felt comfortable lending against it yeah so so also the key reason why we decided to take a loan was going through the transition financing the transition from perpetual world to accelerate our efforts on subscription and and sas so it was showing the numbers what we are doing what's our plan was enough to convince the bank that hey this definitely makes sense and they were happy to finance us did they use do they just use your revenue stream or is there is there on-prem kind of hardware collateral that's backing the loan [Music] looking at the overall business and of course so the benefits in the sauce model that was convincing okay but so you don't own like buildings that are your headquarters and they're using those as collateral yeah correct okay interesting very cool okay well so another component obviously this price point that you i'm sure i've dialed in are things like retention and churn so when you look at churn over the past 12 months what has it been it's uh for fast it's roughly 15 percent it's a bit higher than i'd like to have it and of course it's it will be lower in the stars world so um in in with sars customers it's roughly maybe twelve percent that's a long return or revenue churn per year but yeah okay uh and aiming at having it below 10 percent would be some something i'd be say pleased yep yep now let me ask you a different question if you have 12 revenue return per year i'm assuming that's gross if you add back expansion revenue from that same cohort do you get above 100 net revenue retention yes okay so what's your expansion typically like on that cohort year over year uh it's it's like 100 104 was was the last 12 months okay so just to be clear just to be clear what you're saying is you'll churn 12 percent of your revenue over the past 12 months but you'll expand that same cohort ignoring new customer ads but you'll expand that same cohort via upsells 16 so net revenue retention is 104. yes that's great what um what price taxes are your sales people using to drive people to upsell is it just number of new seats uh yeah new seats new use cases uh everything across the board and one one key aspect there is that end users allow the system so that is driving so it's not like our sales guys are pushing something there it is often customers pulling more yeah that's great now besides number of seats though are there additional feature upsells or any other utility or value based metrics you upsell against yes certain key key features like the new innovation we launched intelligent metadata which can help you access information regardless of the system so emphasis like a system or layer on top of other systems and this is a cool cool feature you know companies want to use are there any other number based upsells besides number of seats for example number of terabytes stored or number of documents stored there are a couple of these kind of points when of course if they want more capacity more power from from the servers then then they taste the upsells okay so a couple of additional features they can have on top of implants are any of those again metric based upsells proving to be the most valuable for example a lot of upsells are happening because they want more server capacity uh no it's pretty much across the board uh you know what what is working so there is not like single key driver for the upsell got it okay last question here before we wrap up with the famous five um the last round of funding you raised was you said december of 2018 uh uh it was february 16 when without rb round oh february of 2016. yes okay mika you know what that means right tell me right right now you're either either raising more capital or you're selling to your number one competitor which one is it no it's neither neither so come on no no no it's the business has been proceeding very well so it's almost like we are putting pets in making investments and those are all yielding in growth so the the only reason why why now we are burning money is the sas transition we are making so the business is doing outstanding uh and and we are growing way faster than the market is growing so i think uh we are doing so well today and definitely we are keeping our eyes open on can we accelerate our growth even further and then we might be raising more capacity loan in place is well enough for our uh next 18 month investments and the strategies how how aggressive are you being though in terms of net burn i mean are you north of a million bucks a month in terms of net burn uh yes okay interesting um that's helpful to understand what you're saying is you basically you still have money from your series b back two years ago in the bank plus the loan you don't need to go raise additional capital right now you have plenty of runway correct very good all right let's wrap up with the famous five number one what's your favorite business book um number two is there a ceo you're following or studying right now there are so many so many um outstanding ceos who i i named say from finland okay and what's the he's the ceo of which company uh it's a software company called brings it okay number three uh what billing tool do you guys use [Music] what billing tool do you use we use azura and netsuite yep netsuite number four how many hours of sleep to get every night depending from the right stage from two to seven okay because two would not be healthy all right and what's your situation married single kids um married and kids how many kids two dinosaurs two boys two boys and how old are you mika 41 41 last question what do you wish your 20 year old self knew so yeah what's something you wish your 20 year old self knew i i'd say be brave do it change the world guys be brave change the world as company m-files was founded in 2000 product kind of released in 2005. original founder built it till 2010 when then mika joined and has taken over now the company has call it you know 10 million bucks in sas revenue that's just one third of their total revenue because they're transitioning from an old on-prem model they're moving those people over he's doing it with a lot of capital behind him 43 million bucks raised in equity another 30 million in terms of loan burning over a million dollars a month in net burn but again the growth is there if they're growing about 30 percent year over year 500 folks on our team between finland and remote locations 12 revenue churn annually 16 expansion so 104 net revenue retention again spending a dollar fifty on cac to get a new dollar of ar so call it an 18 month payback period as they look to scale again file storage file management privacy mika thank you for taking us to the top thank you nathan thank you