Numerated Revenue, Valuation & Funding (2020)

hello everyone my guest today is dan o'malley he's the founder and ceo of a company called numerator a data scientist turned entrepreneur dan has built a reputation as a problem solver inside the banking industry working as an executive at both capital one and eastern bank and having founded perk street financial and original challenger bank dan you ready to take us to the top you bet all right banking is an interesting field to be in right now what's numerated doing and what's your revenue model how do you guys make money yeah so we are a data driven sales platform for banks uh banks are facing a sales crisis uh banks have traditionally been inbound sales organizations they build branches and they wait for people to walk into them that just doesn't happen anymore and so the industry is transforming to selling digitally to selling outbound and there simply is no software besides our platform that enables them to do it so why can't they use a traditional outbound tool like like outreach or discoverorg or some of these tools yeah it's a great question it's because banks need to price risk in real time to be able to do up on sales or even in advance so if amazon could sell a book and then two years later lose a quarter of a million dollars on that book it would need a different software platform to do sales that's the situation that banks are in they need to be able to assess credit risk and advance in real time and it's hard to do that with software unless you have the right data okay and what is that is this these are banks so banks use you to lend to consumers like they've historically done or to businesses what's is it b2b or bdc yeah so uh our banks today all lend in small business we will move into consumer next but the small business space as everyone's probably seen in the headlines is being massively disrupted by non-banks and so banks need a better set of tools to go in and compete against them that's where we started first and foremost okay you're talking like i've had many of these folks on you're talking like cabbage or even stripe not giving credit advances on stripe payments to smbs these kinds of alternatives that's right yeah and think about it banks have a cost of capital that is a fraction of the companies that you just mentioned they just don't have the customer experience and the sales tools to be able to bring new businesses into the bank right now and are you so are most banks that are using you are they looking to more accurately price credit risk on companies that historically didn't check their kind of bureaucratic boxes so they're looking to expand they can lend to i mean this is why cabbage took off right cabbage would lend to people that banks couldn't touch because banks didn't know how to price the risk yeah i mean certainly we help banks uh get smarter about what their credit box is expand it where they can and shrink it where they should uh but i think the real the real thing that companies like cabbage and on deck have proven is that people don't walk into a bank branch anymore to want to buy a loan and so if you can't let them do it digitally you just lose business and so i think what those guys do with risk is interesting it's not the real transformation they brought to the market though okay so let's dive in again to your business right so so how do you help these banks achieve this and then how do you price is it pure play sas yeah and we make we generate ar in a couple ways so we go into a bank and we install our platform we consume all of the data at a bank we consume all of the data about all of the prospects in their market when bankers that use our platform wake up they know every business who is lendable within uh within their states and so setting that up setting the platform up turning all of the sales tools on that we have which i can tell you about is uh generates platform fee on an annual basis for the bank banks pay us that and then the second way we generate arr is we charge origination arr if you go and build a portfolio with our platform and you do more loans then we're going to charge you more based on the size of the portfolio and how many points is that typically it depends on the size of the bank and their volumes but think about it as one percent on the value of the portfolio on an annual basis and we're going to charge it monthly but interesting okay so when you look across your current coordinate customers i mean on average what are banks paying you per year again for both sides of your ar kind of stream yeah on average for the platform it's 120k of arr and then how we expand that with the origination error depends on the size of the bank big bank's going to pick a lot of loans a small bank is going to book a smaller model so our drr on a per customer basis is between 110 and 175 so what's drr uh the dollar revenue expansion of customers so one of our larger banks is going to grow our arr at 75 percent a year that's one of the really attractive things about our business financially is we install and then the more bank doesn't loan the more money we're going to make is that the main expansion lever the the loan portfolio growing are you also upselling on a feature-based receipt-based fee yeah it's the first way we started expanding and now that we actually have more products in the platform we've been in business for two years and so as we've launched products we're now expanding our arr by going in and up selling a cross-sell that's interesting if you take oh if we look at a weighted average across your entire base so ignore the size of customers and instead of looking at customer churn or things like that or customer expansion we'll talk about revenue churn and revenue expansion so across your entire base when you look at total revenue churn or downgrades meaning people either cancel the platform fee or they do less loan volume for whatever reason what has gross churn been over the past 12 months i mean we signed three to seven year deals so churn is just not a major driver of our business today when when you're a bank you take a long time to buy a platform but when you install it you keep it for forever and so we'll eventually have to figure out churn it's just not a major driver of the business okay so no customers that were paying a year ago have stopped paying as of today uh no no customers that were paying a year ago are paying today okay well none have left yeah that'd be very bad if none of them that were paying a year ago all right and then the next side of this because i'm building essentially to net revenue retention is what has your expansion been across the cohort so ignore new customers over the past 12 months if you just look at your business growth from the historical cohort signed up a year ago how much did the business grow uh if i looked at the court a year ago it's probably up 25 okay that's pretty good so again you're driving expansion revenue to the tune of 25 percent which means again the loan irrigation volume across your base is increasing by that same amount very good okay so net revenue retention call at 125. i mean um so with the sales cycle you just mentioned right and in the stickiness right three to six year kind of contracts and also this net revenue retention uh calculation i mean how aggressive are you being to land these customers it sounds like you can spend a lot because they're very sticky and they expand yeah you can and i think our our sales and marketing team is really small today we only have two sales executives that's one of the areas we are staffing up right now um two out of how many out of the total team oh gosh two two out of our 50 people are our sales exactly okay yeah so our cac is pretty it's pretty modest right now but honestly it probably could be a lot higher and we would still be pretty excited about it um you know sign in three to seven year deals where on average we're charging 120 000 out of the gate before any expansion uh we can afford to we can afford to pay to acquire customers is that your minimum year when a c is about 120. it's not minimum that's the average today to all of our customers uh this year so far it's actually 150 so it's going up yeah that makes sense obviously you're signing bigger and bigger customers as you go so uh just to pinpoint down kak one more time here so to get a new 120 000 your customer i mean are you comfortable spending up to that 420 grand the first race to get them or are you way below that right now yeah yeah we are and uh we also charge an implementation fee to kind of cover our cost getting going with the cost how much is that yeah it ranges between two and two hundred twenty 200 i'm just again depending on 20 grand and 200 grand that's right yeah okay do you use that strategically to essentially get instant payback on whatever the cac was to get to that point no we use it to cover our costs for the implementation um and then we typically are going to get the platform fee either up front or right as we launch so we pull cash forward yeah yeah okay okay good so just to be clear again you're happy going up to one year ac but where are you now are you talking like three month payback period six month payback yeah we're we're less than a year but how much depends on like who you're going to load into the cac i mean do you include me i'm involved in some of our data i want to know how you measure it everyone's different yeah i think um i i think we look at the cac as having a one-year payback roughly today um depending on how you want to load up um i think we're going to probably expand the team and invest in growth so it'll be it'll probably continue to be around a year even as we get more efficient yeah round out the rest of your team for me so 50 people two sales what are their other 48 doing yeah so half's in development we've got about 10 implementations i got about 10 across sales marketing and customer success customer success is a pretty noteworthy part of our business because we can expand arr for so by so much with banks doing more loans and upselling uh we invest in customer success pretty heavily that's a five-person team today uh the rest is in gna that's great now have you booted strapped the company or you raised capital now raised capital raised 17 to date oh dan i liked you so much and now you tell me you gave up a bunch of your company and took delusion huh was that just required as kind of a stamp of approval in other words a big bank's not going to sign with you unless they know you have some capital behind you is that the main reason you did that or did you really need the capital to build mvp yeah it's uh two things uh one the answer to first question is yes um you know thanks to a financial due diligence on a new vendor that's pretty intense and if we didn't have quality capital partners we could never we could never do it two i mean it's worth noting banks spent 105 billion dollars every year just in the u.s on technology there's a massive re-platforming that is happening right now and we're going to take our piece of it and so we're willing to invest in growth because of the size of the opportunity how aggressive are you being in that i mean let's call that what it is which is probably burn right now as you grow the team are you burning call it 100 grand a month or a million a month how aggressive are you being no we're brilliant burning right now about 600. so not not a crazy number but again that there's a huge tan we're going after and all the dollars are going up in the air and falling in different places yeah when was the last raise uh we put money in a little about a year ago okay about a year ago and what were you raising there for like 12 18 months of runway yeah exactly okay so a year ago uh you you took it i think that was eight it was eight million right that's right yeah yeah so if you're raising for like i call it an 18-month runway that's you know covering 400 grand a month essentially in burn burn is not north of that so are you looking at raising capital now or in q4 or sometime soon yeah yeah we'll raise in the back half of the year we're capitalized through the end of the year and uh but we'll put more capital in to continue growing and how does a guy like you think about what the right amount is to raise the next round yeah i mean i think it uh it depends on what we think the business can do and how much we can invest and get a return on growth um and then how much capital is required to do that uh and you know i think raising for for anything less than 18 months is probably a mistake you know we'll probably raise 15 um somewhere around there and that'll get us through a couple years investing pretty aggressively in growth again because there's a there's a big tam opportunity yeah yeah i mean if burn is 600 grand right now and you're hiring aggressively let's say burn grows to 700 800 grand a month times 18 months puts you at about 15 million bucks of cash you need to get 18 months of runway yeah that's good most the additional hires you said are gonna be the sales and marketing team or anything else yeah we'll also expand the development team to keep adding more products today we sell a variety of small business products we're expanding into larger commercial loans and expanding into consumer loans and so we want to augment the development team to go after that quickly very cool and then give me a little bit here about your background and put this on a timeline when did you launch the company what year we launched it 26 27 months ago so we're pretty young um and scaling pretty quickly um sorry how many months ago 26. okay so about two years ago that's right good so it's called call 2017 there and then um tell me how you got your first customer yeah so we have a pretty unique founding story we built the technology originally inside of a bank and not just any we built it inside eastern bank which is the seventh oldest bank in the united states we built a team of entrepreneurs inside of a 200 year old bank uh because we have this crazy idea where we could get bankers old-school bankers who really know the industry and entrepreneurs together we could probably come up with something special and so we did we changed how eastern bank went to market uh the they are now the number one business lender in boston and they beat bank of america and measured by what uh measured by how much they do in uh in small business loans in the area and what's that number uh it's gosh for their all their small business loans under a million they've got a multi-100 million dollar portfolio um which is i don't think what the exact number is but it's it's tops for the uh and why only boston if it's working so well why aren't they that you know the number one throughout the whole entire us yeah i mean you have to understand how banking works like if i if i'm a small business and i want to go borrow money i don't want to borrow it from anybody i don't want to borrow from somebody that i don't know if i have a line of credit might shut it down into financial crisis that happened quite a lot by the way and so i want somebody who can grow with me who can be a trusted financial partner i probably want somebody who's been in my market for a while and not some new entrant and so banks like eastern who have a reputation in their community they do really well in business banking um and they're not going to do really well in you know minnesota or california where they just they have no branches they have no presence but the whole point was that people don't go into branches anymore true true uh but i think historically because the sales transformation is only happening now most of people's brand perception of a bank has been driven by how many branches they have and where and so i think it is more about people than it is about branches you know if there's folks that i bump into at chamber of commerce events or small business mixers and hey i keep seeing this guy from eastern bank around and i've talked to him and actually know other people who work with them like this is a trusted partner you really do need people in local communities if you want to build up a reputation in those communities interesting another fun fact too eighty percent of small business loans are sold by people not online as much as these online lenders have been grabbing headlines most of their loans are still being sold by people it's a fairly shocking statistic hold on so you're saying most of cabbage and on deck they're still selling by people they're like you know banks with branches are essentially reselling them is what you're saying yeah i don't know cabbage's numbers but i do know on deck and some other of the lenders uh yes most of their loans are being sold by people either the independent sales organization with or um or on the phone frankly it's the number one sales channel for most of these guys think about if i'm going to pay ten thousand dollars for a loan over the course of three four or five years i'd probably like to talk to a human being before i spend 10 000 bucks and commit myself to paying that much money um how many customers have you scaled to today we have 16 banks we work with today okay 16 and then how did you spend this out of eastern uh through a heck of a lot of conversations between eastern and uh and our investors who uh who helped us create the company okay so six 16 customers at a ten thousand dollar rpg you're doing about 160 000 a month right now in revenue yeah yeah okay and what was growing where were you about a year ago do you remember yeah so i mean our top lane numbers and i'll just tell you that we're doing 2.4 million in arr right now we double their our end of 17 to end of 18 and we've grown up by over 60 so far this year okay great congratulations with that in mind let's wrap up with the famous five number one what's your favorite business book uh there's a book that i mean called uh building a story brand uh which is written by a guy who's a former uh a former hollywood uh script producer talks about how you can tell a great story about your company so that's been creating a good one number two is there a ceo you're following or studying uh not in particular right now no okay number three what's your favorite online tool for building your company yeah we're pretty heavy hubspot users and uh being in boston it's great to support a local company and number four how many hours a sleep ticket every night yeah not not more than five so i mean are you what keeps you up is it the business or you got kids or what yeah i mean i think i'm committed to being a great ceo and i'm also committed to being a good dad um so you know between seeing my kids and growing the company i go to bed 11 wake up at four to get everything done i need to get so how many kids two two five and and married single yep married uh to a wife who is also an executive at a technology company so both busy and how are you i'm 41. 41. last question what do you wish your 20 year old self knew gosh i wish i knew how many times you have to say something for people to actually hear it you got to repeat it a lot of times guys there you have it numerator.com helping banks compete with uh other products call it cabbage or on deck with solutions that allow them to lend more aggressively specifically they're working about 16 banks this was built inside of eastern bank launched in about 2017 after a spin out now again serving those 16 customers average acv your one is called 120 grand they're doing north of 160 000 per month right now and revenue about about 2.4 million in terms of annual run rate doubling year over year burning 600 000 a month in cash but they've raised 17 million dollars probably doing another race here and call it q4 or q1 early 2020 to recapitalize again for the next 18 months got a team of 50 people right now no churn 25 expansion uh annually on those contracts spending up to first year acv to get the customers in the first place dan thank you so much for taking us to the top thanks so much this is a blast