Nutshell Revenue & Funding (2019)

hello everyone my guest today is joe malcoon he's the ceo of a nutshell a sales automation tool for smbs he also co-founded an ann arbor-based co-working space called cahoots and recently acquired the blind pig an iconic live music club he loves live music paddles would canvas canoes better than he rides a bike and has a severe weakness for good food and drink joe you ready to take us to the top let's do it man all right so how much drink do i have to give you before the numbers just start coming out well as long as it's negroni's it it doesn't matter just we'll do fine man come out to ann arbor we'll go drink some negroni's together that's awesome all right so tell me uh tell me about nutshell what's company do and how do you make money yeah absolutely so um i think you're pretty familiar with our segment after reviewing some of your archive podcasts um so nutshell is a small business focused crm and i think like in the realm of crms where we sort of lean is more towards sales automation and sales pipeline management um obviously the term means a lot of things a lot of folks but we've been around actually for about nine years we've been around a lot longer than i think most people think and always focus on smbs from day one we haven't lost focus on that we haven't been chasing a higher asp or anything like that and i think that might be one thing that sets us apart in a sea of products that are very difficult to set apart um we designed the product day one to so it doesn't look like enterprise software and we never want to look that way yeah okay so you obviously have a price today your asp that you onboard new folks at but when you look at historical data what are average customers paying you per month right now today so right now asp is about a hundred dollars okay per month um that yeah per month and that that takes in account a lot of historical pricing right so you know for example we've got folks who up until recently we're paying five bucks a seat on a product that we're now charging you know anywhere up to thirty forty dollars a c4 so we actually just did a price increase which was an insane process um on all legacy pricing um and so we bumped some of those up but yeah so about a hundred dollars okay wait joe tell me about that because by the way i'm a big fan of like if you're gonna make a pricing change don't be a wimp don't grant for other people ask tell them they have to upgrade if they churn it means they weren't getting value anyway so yeah i saw that right like we we took a big hit on customer churn but our net overall you know um uh mrr coming out of it was a huge success and also what it did was it closed the gap for some of those customers to our pro product you know and so the price difference wasn't quite as big uh as it once was we actually ended up pulling a lot more folks into the pro product and then here is the big thing that i think folks need to keep in mind this was a huge surprise that we didn't anticipate i wish we had we were able to offer folks the opportunity to lock in their price for an annual contract when they were normally in a monthly and a ton of people did that so we were able to get a ton of cash up front and lock folks in and it was so total like win-win-win right so basically what you're saying is offer the annual lock-in price at the same time you're saying look we are a company who will increase pricing we're increasing it right now you're going to get an increase in a year but if you lock it in now at least you get another year at what you're at we wrote a pretty great uh like um our content person wrote a really great piece on this i could send you a link later and it's really cool because it's all yeah so let me let me just jump into like a few quick numbers here so before the price increase total number of customers was what uh before the price increase uh it was about 2 800. okay and post after the price increase was done would that drop to oh um i'd say net we probably lost that's a good question i i'd say like maybe 100 150. okay so maybe 2700 customers after now we're back up to like 3 000. okay uh so today you have 3 000 customers okay and they're all paying kind of that 100 a month so you're doing about 300 grand a month yeah no um uh no free product that's about 13 000 users 3 000 logos okay so again about 300 000 bucks a month in revenue uh yeah a little bit north of there that's great okay and then let's understand growth so a year ago where were you at um so you know what i should clarify something our hp is 100 but our arpa is north of there okay what's arpa arpa is uh about 130 right now okay so that would increase your revenue you're actually doing like 390 grand a month something like that uh a little bit south of there yeah okay good so 130 arpa which is average that's basically average revenue per user historically not their average selling price moving forward so 130 across 3 000 customers what happens with us is people sign up often with one seat and then in the next couple weeks they they load their whole team on so asp is artificially low yes that's why i always like to talk more about arpu versus asp right asp is a landing the initial price point but it expands okay good so 390 and okay so january 2019 you're caught you know a little south of 390 a month what were you doing exactly a year ago um let me check chart mogul okay do you like turmoil by the way yeah well it's gonna be my answer to your question about my favorite tool i'm like i'm i'm unnecessarily obsessed with it look look i and this is not i don't want to use this opportunity to dig on chart mogul there's a shitload of room for improvement and if i sold nutshell tomorrow i might jump into this space because i obsess over it and i still see a ton of areas where i would like to see some improvement so about a year ago we were like three point uh three point two okay uh per you're talking about ar which would be about 260 grand a month yeah okay great so 260 grand now you're up to call 360 370 ish range that's a nice healthy growth most that come from expansion on historical cohorts adding seats or brand new logos uh it's probably 50 50 i'd say um our net ends up being about 50 50 both um you know once you take out the single seat customers which i know a lot of folks are cohorting out now when they talk about unit economics we're we're basically negative churn to zero on net mrr when so what's what's break that down peel that onion for me what's gross churn and then what's expansion to get to the zero great so it's so gross is uh we target just under four percent monthly logo yeah with the one-seaters that drops to about half to about two percent when you take one seater's out and then you go to like greater than five and it's negative yeah so just to be clear though without going on the cohort analysis during under each thing you have about overall your whole base you have about four percent monthly logo month what's your revenue churn three minutes okay so three and a half years so monthly and you're also expanding by three and a half monthly the same cohort so net zero yep that's great and again any other axes you're using pricing x's you're using a drive expansion besides additional seats um yeah we do have sort of a tiered product we have our starter and our pro and so what we do is we kind of proactively look through our customer product usage and we see what they're doing and the questions they're asking support and if it makes sense we'll outbound to them and say hey listen it looks like you might be able to benefit from pro and here are the features that would specifically work so their feature their feature upsells not other usage based upsells like number of contacts or things like that uh you know from the beginning we kind of had this perspective that like storage is cheap and to sort of limit it uh it didn't make a lot of sense not just storage anything yeah yeah no no joe i'm asking you a question so your current but your current kind of metric based pricing is number of seats is there any other kind of metric you drive upsells against oh oh i'm sorry i thought you were asking uh why uh storage first uh feature no no we only uh the only upgrade is by seats and product here okay got it very good and then talk to me about cac to land a new hundred dollar a month customer what are you paying fully weighted um we're uh so fully weighted with the team and everything we're in like the 800 range okay so that's i mean that's healthy eight month payback gross margin payback what 12 months uh yeah about 12 14 months and where are you spending the 800 obviously there's salaries in there but the direct paid spend where are you putting it yeah so i would say like most of our direct paid spend is on adwords which frankly speaking we've been dialing back we also competitive you're in the crm i mean those keywords are really expensive and it's just inflating over time look this whole game it's a it's a it's a spiral to the bottom you know like you know a lot of my competitors have raised tens and tens of millions of dollars and it hasn't gone to their product our products don't look any different it's gone to adwords and facebook actually we cut facebook out entirely we don't do anything on facebook where do you spend today adwords and cap tara mostly okay why why cap captain why is it performing better captain keywords can get pretty expensive too so here's what we found out we're not the biggest brand right we didn't raise the most money to get the biggest bullhorn but where we can compete like consistently is product when people are looking at our product and they're sincerely curious about the quality of the product versus others that's where we feel like we we have the most competitive advantage people who are looking at caftera are looking at product uh or they're comparing products they're not just looking for the loudest voice or the loudest brand in the marketplace so that's why we've been really successful there yeah i mean because so monday is putting a ton of money into the both these channels captera g2 crowd same thing with like fresh sales we had the fresh guy on you know they're prepping to go public here soon um what you're saying is i and i see you listed it but i have to scroll down the page pretty far i mean you've got 330 yeah i'm on captain 330 uh reviews um so how do you actually get traffic though for me i mean how many how many leads do you get from your per month i have a theory i have a theory that capterra is more important of a display channel than it is a click-through channel okay so as long as you're above the fold or slightly below it i think that that consumer is a little bit more sophisticated and what they're doing is they're reading about you and they're not clicking the contact me button or whatever it is they're going direct to your website and then we're following them through as like organic traffic it's a theory but we kind of saw it dip once in organic and as we started to track through what it might look like it seemed like it corresponded pretty closely but what like what's your give me a sense of what your exposure is skepter are we talking five grand a month or a hundred grand like 50 grand a month no no no we're uh we're probably spending somewhere near like five to ten grand on any given month okay and our adwords budgets have gone i mean we've spent everything from like ten thousand a month to a hundred and twenty thousand a month i think like right now we're probably spending somewhere in like neighborhood like 35 uh grand a month on adwords yeah yeah interesting why only captain why don't you do crowd yeah it's a great question so i think we struggled early it's it's funny too i'm an indirect investor in g2 through a fund and um and i love them i'm i think what they do and i think that team is so awesome um what we found was you your team had to be set up in a certain way to like be competitive with the way that they handled leads historically and they're now changing the model and we're actually going to go back into it and try it again but the way they were doing it before you kind of had to have a really really proactive outbound team ready to hit the lead and pick up the phone and we're actually mostly an inbound shop we've got like one sales person it's just not how we operate we're almost exclusively self-serve so we just weren't like set up to handle those leads quite as effectively as say with captera so a total team size today is what 25 okay got it mostly engineers or what's the breakdown it's half engineering and then the rest is sort of broken out we got four people on uh customer support here in ann arbor they're super awesome and good at what they do then the rest of the team is uh marketing sales and then myself and cto so everyone up there in michigan yeah we've got one we've got two remote folks but it's all circumstantial right now we just were never set up as a remote work company but i don't have strong feelings either way how did you capitalize the business bootstrap to raise yeah it's actually really interesting story um so the company was originally founded by my three of my business partners on some other efforts uh plus my cto andy fowler and um they had sold their first company to barracuda networks and they built that into barracuda's entire backup division so they built that into a 100 million dollar product line um after they kind of got going at barracuda they like want to do this side project they brought andy up to ann arbor and they funded the company with a little bit of capital out of their own pockets and then barracuda came in with a little bit of money just to kind of like align with the founders so they wouldn't get distracted um and then fast forward a few years i was hired a ceo about uh almost five years ago and at that point i invested the company the founders reinvested barracuda reinvested and then we brought in like effectively um one outside institutional investor a local fund that we're good friends with so we have very little capital income about five million preferred yep um uh it's eighty percent of the company is basically owned by myself the founders and our friends yep it's kind of our superpower right now you know we were kind of into the capital efficiency thing before it was cool and um why not leverage i mean you guys are in a great position to leverage something like non-diluted venture debt why not leverage venture debt instead of using your own money oh that's a really good question at the time so one at the time i don't think we were in the position to do that i don't think we have the the the operating history or the metrics to do it two i mean it's a little bit of what we're in the business of doing and i go back and forth on this but i like to invest in startups and part of me is kind of like look if i have the the capacity invest in others i'll invest in myself i'm like pretty comfortable investing myself and um you know that's just kind of been one of our our our sort of ways of operating in general i don't think it's for every business and frankly like i don't think that this business and this segment is a point solution i don't think anyone's going to win by dumping tons of capital on the cap table i think those guys are really really screwed to be honest um but just sorry just go back to my question for a second the you know venture debt does not go on the cap table venture debt is great for like an i'm i'm i'm i'm i'm conflating and sort of moving on a bit but i i yes that's right we weren't in a position to raise venture debt why uh because our metrics weren't there at the time that we were gonna put money in which metric i mean we're talking i mean the company was at a million dollars of ar at the time yeah um we didn't have the relationships we didn't have a leadership team we didn't so when i came into the company you have to keep in mind it was basically a side project it had nine engineers that was the company and it had like a thousand customers or so there was no marketing there's no executive leadership there was no customer support so what we said was let's put a little bit of money in how much did you put in when you joined myself personally yeah um i think i put like 150 or 200 yeah and um and so we put a total of a million at that time and we basically like let's just see what happens we actually had term sheets for like five million dollar you know sort of series a like rounds and we kind of decided we didn't know what the hell to do with that money we didn't know if we could figure out how to get the right return on it but we did have the capacity to fund the company ourselves without taking too big of a lead right so we did that and to be honest like maybe that maybe the actual honest answer your question is i just didn't cross our mind that ventured that was an option at that time yeah like i mean by the way fair answer you it just might not be something that you went down that rabbit hole on which is fine you're juggling seven thousand things i'm just saying from my mind if you know that you've kind of got this cac right and at the time we didn't have any of that those metrics yeah so let's just fast forward to today so like venture debt today right if you know you have this cac and you kind of know the channels you're experimenting with you could easily go raise 3x your current mrr so let's say that's a million dollars that's non-dilutive not you know go and go leverage it now the reason you wouldn't do that is if you didn't feel like there was an arbitrage play there where you could put that money to work and beat the interest rate you're paying on that money so here's i don't know maybe maybe we're just not good at what we do but here's the thing i figured out i can't spend more money in adwords and get the return i want i don't expand my head count and get the return i want i've actually been we're smaller than we've frankly ever been in the last couple years but we're growing at the same rate i burned a tenth of the amount last year as i did it the prior year and we grew at the same time how much did you burn last year um i don't know what are you burning today are you break even we're break even purposely break even uh we're basically taking our profits and invest it back in product okay but you're not you're not you're not in the red each month no okay that's great that's very good okay um that's great let's uh let's wrap up here we got off the track there joe but it was good conversation uh let's wrap up here with the famous five number one what's your favorite business book so i don't um i love reading uh but i'm i'm like a fiction guy um we'll say no is it fair to say that 100 years of solitude as a business book yeah that's fine number two uh name a ceo you're following or studying so i'd like to follow mark benioff but mostly because i find it amusing that um i like to pretend like we're social equals uh in the crm space so if if facebook or sorry if salesforce isn't doing business in south carolina because of gender equality issues neither is nutshell all right so that's funny i love that um number uh number three what's your favorite online tool for building the company chart mogul i mean i really have a weird addiction oh what would you so so um what would you change about it you said there's room for improvement come on number one mobile app like where is it come on like it's just and so here's the other thing i do i have this little google sheet that i keep a window open with every month and it's not sophisticated there's no intelligence behind it but all it effectively does is it takes my my transactions right like each of the transactions i update the number of them i update the value each day and it projects and it gives me a sense of how well am i doing over last month and but where am i heading right like it gives me a little bit of a future view and it's it's dumb and it's really wrong most of the time but at least it gives me a little bit of a sense of how good the month is trending to be and so i'd like to see them build in a little bit of like well what does the future look like a little bit yeah it's not it shouldn't be that hard uh full disclosure i'm looking at getting very aggressively into this space for the exact reasons you just articulated um like you have you have some interesting tools like bearmetrics profitwell chart mogul uh that are in this space but you can't just spit data out you have to give it utility value like what you just said uh 100 so what the reason i'm in it every day is not to be in it it's to update my little widget yeah yeah ideally it's most effective if you spend less time in it per day because it means it's doing what it's supposed to do well and also like someone said to me i kind of made a comment about i'm checking chart mobile too often they said well are you making decisions that often listen i'm the same way like the only notifications i have turned on my phone are my stripe notifications because that's like as entrepreneurs what we care about it's a dopamine hit well let me know if you're going to go down that path i want to talk more about that yeah we'll i'll move that offline i've got some stuff in the works i think you'll you'll latch on to all right number four um how many hours of sleep to get every night oh i get a solid seven okay and what's your situation married single kiddos yeah i'm i've married uh 13 years i have three young kids i've got twins who are eight and a six-year-old that's really really funny and awesome yeah i love that man all right and how old are you i am 41 41 last question what do you wish your 20 year old self knew um i wish i'd known back then that what inspires me is who i spend my time with and not what i'm selling yep guys spend time with people you like because ultimately that is what matters again building his team out nutshell avoiding going and raising 50 million bucks and diluting the hell out of him and his team they've raised and basically self-funded most of us actually five million bucks into the company break even today have about three thousand paying customers at 130 bucks a month to do about 360 70 80ish 90 per month that's up from 260 grand a month just a year ago so healthy growth team of 25 in michigan and then two remote folks 3.5 monthly revenue churn 3.5 expansion though also so 100 net revenue retention 800 12 month payback joe thanks for taking us to the top oh man that was impressive