Namely Revenue & Funding (2017)

[00:01] Hello, everyone. My guest today is Matt Straz. He's the Founder and CEO of a company called namely, the all in one HR payroll and benefits platform built for today's workplace. They're headquartered in New York City. We're gonna dive in today. Matt, are you ready to take us to the top? [00:14] >> I'm ready, Nathan. [00:15] We were just kinda chatting before this. You just opened an office in Austin. [00:18] >> We did. About eighteen months ago, we opened an office there for a central reason region, and it's been it's been a great decision for us. [00:25] You said a lot of the folks that you have up in New York are actually relocating to Austin. How many team how many folks are on your team now today? [00:32] >> The we the team nationally is over 400 employees, and I think we we got a few dozen employees in Austin, and that office is one of our fastest growing. [00:41] That's great. So okay. Let's back into the story here. Tell us more about namely what it does, and what's your business model? How do you make money? [00:47] >> Sure. So we're we're a SaaS company, and we provide HR, payroll, and benefits software and services to midsize companies. So we focus on companies with anywhere from a couple dozen to a couple thousand employees. And I founded the company six years ago after working in building two startups in the advertising space. [01:06] This would have been so 2011? [01:09] >> Yeah. 2000 we officially launched January 2012. [01:13] And where was your I wanna understand kind of emotion where you were at that moment in your life. So did you just have a big exit and you're like, I'm gonna go risk it all in the HR space, or you're going, better make this HR thing work. Otherwise, I'm gonna be broken on the street. [01:24] >> I had a pretty good exit, and I was I was having a career midlife crisis. I had worked in advertising in New York for about twenty years, and I realized I could have a comfortable rest of my life kind of play out the string and make a good salary in advertising. Or I can get into a new industry, which would be a lot more exciting for me. And it was definitely the more risky path. And I [01:48] >> was also super passionate to help New York create a software industry in addition to having an advertising media, fashion, finance industry. [01:57] Yep. The the starting days, did you kind of bootstrap this, or did you raise capital right on the on onset? [02:04] >> I went door to door raising capital from think it ended up being about angels, and they helped me fund the first million dollars of the company. [02:16] Literally door okay. So tell me about this, because there's a lot of people listening right now that want to do that exact same thing right now. I mean, how did you find these contacts? And when you say door to door, do you mean like cold email to cold email? What did what did it actually look like? [02:28] >> So I had worked in the city for for about over a decade, and I had got to know a number of people. I had found another ad tech startup that was somewhat successful. [02:40] Was strapped there or raised? [02:42] >> That was a little bit of VC, but a lot of sweat equity for the most part. And I had this network of people that I'd built over a ten, fifteen year period, and I cashed in a lot of chips and I went to them and raised $25.50 ks increments to finally to ultimately get to to a million dollars raised in the in the in the angel round. [03:06] And that was a was that priced or just a kind of roll note? [03:09] >> I I priced it myself. I priced it at $4,000,000 pre. [03:15] No, that on a real note, like real equity, not a cap. [03:18] >> Yeah, I wasn't sophisticated to know [03:23] >> how to do a note. I was really a caveman trying to learn this on my own for the first time. So I figured, well, let's price it. It seemed 4,000,000 seemed like a reasonable price, depending on how you looked at it. So that's we started from there. [03:36] That's pretty cool. And then update us today on funding. How much total have you raised? [03:40] >> We've raised over a $157,000,000 to date. [03:43] Yep. So take us back. You know, we've had a few folks in the kind of HR space on the show, you know, the guys at Gusto, and there's many other kind of people in the space. How do you see this space? Like, first off, it's clear there's many winners. If you say a winner is anyone over $100,000,000 in ARR, they're like, there are many winners this space. Why do you think that is? And secondly, what niche [04:03] would you say you're carving out for yourself? Why are people choosing you over the other ones? [04:07] >> Sure. [04:10] >> Everybody, every founder, when they go to pitch their business says, The market is enormous. The TAM is incredible. But this is one of those industries where that part's actually true. It's a many tens of billions of dollar industry, which is why virtually every company that's been able to go public in the payroll and benefits space has been successful to some degree or another. And multi billion dollar companies tend to be created in the core payroll and [04:34] >> benefits space because those are the number one and two things that businesses spend money on. We started out focused really, really early on in the mid market. I had worked with a lot of mid sized companies when I was working at WPP. They're a large ad agency holding company. And I just Is that who [04:51] you sold your first company to and you were like on an earn out or something? [04:54] >> Yep. Exactly. Exactly. And then my second company was acquired by AOL. So I knew I knew that there was a lot of mid sized companies out there without good HR, payroll, and benefits software. So that was the that was the major insight. And then I of course, I had no HR payroll or benefits experience at all. I was a fine arts major in college. But I just I kind of went on intuition that it seemed like [05:17] >> there were hundreds, if not thousands of companies across The US that could use a modern, easy to use system that was as powerful as enterprise software, but as was was less expensive and a whole lot easier to manage and maintain. [05:31] And what are you so right before you came on, Brian Halligan actually was the last interview, and he talked about how he has different pricing axes at HubSpot to drive expansion revenue. Tell us how you price your product. How do you sell it? And then what kinds of economics are you using to drive ARPU expansion year over year? [05:45] >> Sure. So I think the number one advice I can give is don't let your founder set your pricing. We tend to be terrible at pricing because we always are hypercritical of our own product and aren't always aware of how bad the competitor's products can be, or at least if they all have issues, right? So I brought in a VP of Sales, Michael Mani, who joined us from Ultimate Software, which is also a payroll company. And he [06:10] >> immediately increased our pricing and got it to a much better place. [06:15] What are you at now? Like, the average first year, would you say? [06:18] >> It it ranges. Our average ACV at this point is around $440,000 a year, which is a good place to be. It allows salespeople to hit their OTEs. [06:29] What's an OTE? [06:31] >> On target earnings. Yeah. [06:33] And is that how many seats is that typically? What's the average size of that first? [06:37] >> Yeah. So that's what makes us a little bit different than some of the other other HR systems that emerged that were focused on the smaller end of the market. So we're we're our average customer size is around 200 employees. And I think a big realization is that we decided to get in our swim lane, our mid market swim lane really early on and just focus there. And I think you have to do that. In this space, [06:59] >> the product needs are very different for small, medium, and large business. So you've got to decide really early on what what swim lane you're gonna be going to be in. [07:07] So you're so, I mean, you've raised a lot of money. I imagine board meetings sometimes could sound like, Matt, you need to go more enterprise, like bigger contracts, more efficient, less support, higher margins, but you've stayed kind of in that core 200 employees. How have you resisted that temptation, and why are you so bullish on the space kind of you're currently targeting? [07:26] >> Well, I think it's probably the last remaining white space left in the HR payroll benefit space. We started focused on that part of the market six years ago. Now there's other companies getting religion around that, but the the fact is we've always been focused there. Every year, at the end of every year, I asked myself and our team, do we wanna go up market or do we wanna sell more things to the same customer? And we [07:51] >> always decided on the latter because we're just so passionate about mid sized companies. They're fun, they're challenging, they're dynamic. They need a lot from us. Can make a difference in their lives. And I think that's why we continue to focus on the mid market. [08:04] And can you share what have you scaled to over the past six years? So how many customers or businesses today are using you? [08:11] >> Oh, yeah. Well, yeah. We start started off with virtually none is in the beginning, just a handful in year one with virtually virtually no revenue. [08:20] How low was it? Give us the actual number. [08:23] >> Oh, god. I think if we ended our year one with a few tens of thousands of dollars of ARR, that would have been a lot. If I go back and look now I let I went back and looked recently at our business plans and even our series a pitch deck, and it was so embarrassing to look at. I don't know how we raise money. God bless True Ventures. But today, we have a thousand customers. And based [08:43] >> on the deal size that I shared, you can probably figure out where we're at in terms of AR. [08:47] Do you typically do you typically share that or you like to kinda keep that close to the vest? [08:51] >> You know, I think companies that are well funded are not technically public, but they we need to provide a lot of transparency. And frankly, everyone seems to know any everything anyway. Yeah. So I've I've become less protective at this point. I'm I'm pretty been pretty open with our own employees in the general public. [09:10] Well, I certainly appreciate that because it makes my audience kinda learn faster. So we'll get to the number at a thousand customers paying on average that ACV, you're making about $3,300,000 a month and about 40,000,000 in ARR or you're above that at this point. [09:22] >> Yeah. It's above that. It's above that. [09:24] That's great. [09:25] >> We're about halfway to the to the big next goal, which [09:28] Which is 100. Right? [09:30] >> Which is a 100. Yep. [09:31] That's good. That's good. That's the that's kind of the mark where you start going, okay. This is kind of getting if I wanna go public range, I'll do it. But you're a lit guy, so I'm gonna assume you have a great ego, and you actually don't maybe care about going public. [09:43] >> Actually, I do, but it's for reasons why for a couple different reasons. [09:51] >> One is because in the payroll space, we're competing against companies that have been around for fifty years, and they're most of them are public. [09:58] Can you name a few of those, Matt, just to put a face on them? [10:00] >> Oh yeah, ADP, Paychex, newer ones like Paycom and Paylocity. They're all multi billion dollar companies and they obviously are public companies, so there's a lot of transparency in their business. And I think we're today processing $7,000,000,000 of payroll. People hand you one of their When they hand you over one of their one of the largest expenses and, you know, they really want they want the certitude that you're gonna be around for a long time. So that's [10:29] >> one of the reasons why we raised a lot of capital, and it's one of the reasons why our a midterm business goal, a realistic midterm business goal would be eventually to be a public company. [10:38] That makes a lot of sense. Can you give us a sense of growth? So do you remember a year ago in December 2016 kind of what your run rate was? [10:44] >> Yeah. We we basically doubled our ARR this year. [10:48] Wow. So you're like $2,025,000,000 about twelve months ago. That's congratulations. That's great. Okay. Take us back. We've kind of teased kind of the bigger part of your business, taking back to those first few years, I mean, how did you get your first 10 customers? [11:01] >> Again, it was a lot of door to door. A lot of, networking, calling in favors, asking people to take a meeting with a product that was, at best very nascent. It was essentially a database of employees and an org chart, and it wasn't much more than that. And I didn't come from HR, so I didn't even know in the year one what I was actually selling. It wasn't until I was in a meeting with a prospect, [11:30] >> and he said, So you built an HRIS? And I said, Yes, I did. And then after the meeting, had to Google what is an HRIS? And I found out it was an HR information system. [11:39] Fake it till you make it, right? [11:40] >> Yep, exactly. But then, of course, in more recent years, we've hired people with a, you know, a ton of HR experience. [11:47] Okay. So so that's helpful to understand. Coming forward kind of today, when you look at your unit economics, what are you at now today in terms of churn? Whether Whether you want to talk about logo or revenue, whatever you focus on more. [11:58] >> Yeah. I think industry wide for our segment, churn tends to be around 20% a year. [12:08] Logo? ARR. Okay. [12:10] >> Revenue churn. [12:12] >> Yeah. Yeah. Revenue churn, which is, you know, what I I feel most comfortable speaking to. And I think and I think that, you know, we're certainly much, much better than that. So, you know, we're at least yeah. [12:25] So can phrase that in one sentence and say, namely is retaining significantly more than 80 of their revenue each year? [12:34] >> Yes, Easily. And in fact, we're we're we have negative net churn. So our expansion is growing faster than than people coming off the system. [12:42] I was just gonna ask that. Is your number one lever for driving that expansion just additional seats, or are you adding up and upselling products or features or usage? What is it? [12:50] >> Seats. Actually, we thought that upsells would be a big driver of that, and there's some element to that, but it's actually people just adding more seats to the product. So we're I think we've kind of curated the first thousand customers that we wanted on the platform, and we focused on ones that are companies like ours that are growing. So they're adding a lot of seats to the product, which is helpful. [13:10] And to get these folks on in the first place, what are you paying right now for CAC, or what are you willing to pay? [13:17] >> You know, I'd have to look at the exact numbers. I don't I don't have that. I'm not avoiding the question. I just don't wanna give you an answer. No. That's okay. [13:23] That's wrong. I just wanna get in your head about the the initial economics. Like, what do you care most about? Is it like the CAC ratio, the CAC LTV ratio? Is it payback period? How fast do get your cash back? What do you really focus on the most? [13:34] >> Well, I'm definitely a convert. Being a former fine artist, I wasn't particularly quantitative or quantitative driven to begin with in the early days of this business. But I've got a board that's definitely helped me become more quantitative. But I kind of go back to basic metrics of public companies, right? Revenue growth, churn, lifetime value. There's a lot of those basic metrics. Churn really tells you where you're at, ultimately tells you where you're at. So you can [14:05] >> do all the customer data you want, right? And you can find out sentiment and all that. But ultimately, the end of the day, churn tells you whether whether how you're doing. It's kinda like a one loss record, right, if you're a sports team. So I I kind of like those big metrics in in looking at public companies. Gross margins is another one that we look at really carefully. [14:27] You guys are probably in this I imagine you don't have any weird above the line expenses. You guys are in the 85 to 90% range like most SaaS companies? [14:33] >> No, no. Because actually, you look at companies in our sector, ADP has gross margins in the 40s. [14:41] Oh, wait, wait, why is it so Most SaaS companies I talked to, they're 85%, 90%. Why is it so low? [14:46] >> Because there's a service component to HR payroll benefits business. [14:52] >> The hard part of the business is not necessarily doing any one of these things. It's doing all three of these things well together in a coordinated way with a level of of touch, that may not be like enterprise software, like that kind of level of touch, but you definitely have to support your customers. And a lot of them are small comp are are small HR departments with maybe just one HR person. So there's a fair amount [15:19] >> of support that you've gotta provide them. It's not just about the product in this sense. [15:21] Are you a [15:22] pure play, or is at least $4,050,000,000 we talked about earlier? Is that pure SaaS or is there professional services? [15:26] >> Yeah. [15:27] >> That's that's all pure SaaS. [15:29] Okay. Got it. Okay. Good. And then in terms of, like, you've raised so much money. Do you have less of a focus on getting your cash back quickly since you have a war chest? [15:38] >> No. I mean, we run it like a real business. We're driving to profitability. [15:42] What do you like [15:44] to hit payback period wise? A year or more? [15:47] >> One to two years is fine. Because of the stickiness and how long people are on a payroll product. Nobody who goes through a payroll implementation wants to do it again anytime soon if they can help it. [16:00] So with that in mind, you're payback between one and two years and that first year ASP around $40, it's fair to say you're totally comfortable spending between 40 and $80 getting the customer in the first place? [16:11] >> Yeah. I I again, I don't have the numbers right in front of me, but I think yeah. I mean, I think we're we're we're thoughtful about how we how we drive leads into the top of the funnel. We measure everything, including our our our television and our out of home, and we look at everything that we do. And we we're we're very, very rigorous about making sure that that cost doesn't doesn't get out of out of [16:33] >> whack. [16:34] All right, Matt, let's wrap up here with the famous five. Number one, what's your favorite business book? [16:39] >> This is going to be cliche, but I read this book almost every single year, and I love Crossing the Chasm, especially as, know, at my core, I'm a marketer. So marketing tech products and the lessons that are taught in that book, even though the book is decades old now, the lessons are still the same. Getting a beachhead, then going after adjacent markets, and especially creating the whole product. And I think one of the number one things [17:08] >> that people sometimes forget in SaaS is it's not just about the product, it's about everything that's wrapped around that. [17:14] Well, Jeffrey Moore, the author, is thanking you, but coming from a Litka, I'm expecting like some book on stoicism and how it applies to business, and you give me Crossing the Chasm, Matt, okay? [17:23] >> I can give you fun books and Tales of Survival, which I think are some of the best business advice out there. But for me, if you have to push me on a business book, I'd go with that one. [17:34] All right. Number two, is there a CEO you're following or studying right now? [17:38] >> You know, that's a great question. I was thinking about this one. And I will say, I think just in the last couple of months, [17:46] >> when Stitch Fix went public and Katrina Lake as FounderCEO and the way she actually incorporated her son in that, and just the joy around that, that's somebody that I'm just fascinated by. I want to find out more about how she founded that company and what her journey was like. I'm sure it was not easy like most founders, but but especially especially for her, I would imagine. [18:08] We will get her actually on the show coming out of that lockout and kinda silence period. So we'll we'll keep that up to date. [18:12] >> Yep. [18:13] Number number three here, besides your own, what's your favorite online tool? [18:16] >> This is gonna be the weird probably the weirdest, most boring answer. I I'm a huge notetaker, idea taker. I have ideas all the time about our business, other people's businesses, creative ideas. So this is the probably the silliest answer, but I love the notes app in my iPhone. I just use it absolutely constantly. Like the fact that it backs up to my other Macs, and I can go back in and just take quick notes constantly. [18:45] Number four, how many hours of sleep are you getting every night? [18:49] >> Not as much as I would like. It varies. More a little bit more on weekends. I think as a Founder, no matter how far you get along, we are all prone to having the 4AM scaries when you wake up at 4AM and worry about something about your business and can't go back to sleep. [19:07] What do you average, would you say? [19:09] >> I would average probably seven or eight. [19:11] Okay. [19:11] >> And then, you know, once or twice a month, have that sheer moment of panic where you feel you yeah. How do you take the business to the next level and double sales again the next year? [19:19] Yep. And what's your situation? Married, single, you have kids? [19:22] >> Married, two teenagers, one who's getting ready for college. [19:26] That's exciting. And how old are you, Matt? [19:28] >> I'm 50 years old. [19:29] Last question. Take us back thirty years. What do wish your 20 year old self knew? [19:34] >> That success is a never ending pursuit. There's like literally no finish line to it. As much as you accomplish, you'll still gonna if you're driven, you're still gonna wanna accomplish more and you're never done. [19:46] Success is a never ending pursuit. You guys got to hear from Matt founded namely after leaving the ad tech space many years ago back in 2011, had $10.20, $30 in first year revenue, really learning what the terms of the industry meant after he made the sale and the customers are going, do you have this acronym? And he's Googling and building it as he goes. Now 400 people spread across their different offices. They're helping over a thousand [20:11] businesses right at their core. 200 ish employees is a good size for them. They're doing up 40,000,050 million in ARR growing quickly up from 25,000,000 in December 2016. They raised about a $157,000,000 in capital, super healthy economics retaining well over 80% of their gross revenue annually and are obviously net negative revenue churn as well. Matt, thank you so much for taking us to the top. [20:32] >> Thank you so much, Nathan.