How Redseal CEO Ray Rothrock grew to $51M revenue and 250 customers in 2020.

you're gonna love this interview just got done editing it i'm glad i got it live for you i'll be in the comments for the next 30 minutes hanging out answering any questions you have in fact leave a comment below about data points or what you think is going to happen to the company and i will respond to every comment additionally if you're just loving the content click the thumbs up and i will go and check out your profile as well and give your videos some love as well in the meantime enjoy the interview hello everyone my guest today is ray rothrock he joined red seal as ceo in february of 2014 it's a cyber risk modeling company prior to red seal he was a general partner at venrock one of red seals founding investors at venrock he invested in 53 companies including over a dozen in cyber security um he's on the board of checkpoint software technology and original event rocker investment and team eight both tel aviv-based companies all right ray you ready to take us to the top yes sir nathan let's go all right so let's first touch on red seal people that missed your first episode in terms of what you do and then i want to touch on the virus and how you're kind of remodeling things so what does the company do well we do a lot of things we primarily model the network uh and what i mean by that is we create a software model by which you can investigate how your network's been put together and what it's good at defending we do a calculation of vulnerability calculation or we can prioritize your vulnerabilities in a context of the network so there are really three big things we do visibility we identify all the assets that you need in that network which is believe it or not there's a lot of visibility software out there but it always misses something we always find it there's compliance obviously getting to be a bigger and bigger deal now than ever and then there's risk management and that's when we do the vulnerability in the network context and give you a prioritized list of what you need to fix and how to make it better and so our an enterprise space smb market uh mostly large enterprises with complex networks people that are migrating to the cloud people that have software defined networks and people have wired networks which believe it or not that's everybody's got one of those yep and about how many customers are you serving now today we have 250 customers okay a large port of our base is u.s government they represented about a hundred and those 250 we're in all the intel agencies all the military and most of the civilian side of the government so they're they're a huge part of our business interesting okay so how you know obviously you know about a month ago or two a month and a half ago now at this point covet hits the united states right and so you know a lot of sas seos are being impacted when you last came on the show back and i believe it was september of last year so a couple months ago you'd articulated you know 250 customers acvs in the 200 000 ish range so people can kind of back into your revenue your own private equity company so they probably can provide you some cushion but how are you thinking about the potential you know recession and virus specifically yeah well you know being a former vc uh having lived through this is my fourth uh sort of capital market crisis if you will regardless of how it got started uh one cannot take enough precaution there is no penalty to being extra careful so we have in fact uh even before this really became top level news starting in first part of march we started thinking about q2 we expect q2 to be down 20 25 we have asked our employees to take a reduction in pay which they have uh we are uh continuing supporting our existing customers and encouraging more expansion more face-to-face time uh and so uh we've tried to keep the level as we used to say in the vc business keep the bridge at the same height and lower the water so that the gap to get the ship through stays the same we'll see how that goes uh we haven't basically we have increased our safety buffer and our cash and balance sheet capabilities uh and our our investor has been very supportive they've not put another dollar in not necessary and we're going to get through it on our own so about two months ago pre-virus you obviously had projections on current cash in the bank and if we had no new revenue how many months of runway you have now post post virus how long have you extended your runway to uh we've we've uh given ourselves two quarters okay uh you know uh well without without revenue yeah it's about two quarters okay got it and so um walk me through like the communication during this time is critical for any sas seo with their team how did you have the conversation with your team to ask them right to basically be furloughed a reduction in pay well no furlough just reduction in payment okay part of my strategy was to keep everybody employed to keep everybody working on the problems to keep supporting our customer base that's really really essential so that we get through this time we'll will survive uh this time to thrive on the other side so yes frequent communication so twice a week uh one of my senior management teams puts out a memo i put out something on friday uh actually i switched to making video conferences which everyone just loved uh you know it's a little bit more personal you can see where i live and how i operate uh it's been been quite effective and that uh is really what it's all about you know transparency right now is going to be job one so uh telling everybody we expect a down draft asking you know sort of making them all part of the team let me give you can i just give you one little 30 second story so uh we're you know we have customers uh that have a lot of operations in india one very large corporate customer on the east coast the united states was doing an upgrade in india last night last night and it failed uh there was a problem and uh the phone rang at midnight and one of my tech support guys picked up the phone as he's supposed to and he did and he worked all night to get these guys up and up and running turned out our software was all good they had done a some sort of uh configuration problem on their end but it took him a while to sleep it out and make it happen that's the kind of dedication you need and it's a kind of commitment that my team has to keeping our customers up and running and as secure as possible in this environment and last night would have been april 2nd because we're recording this here on april 3rd yeah last day thank you exactly right literally i got up this morning and there was an email you know here's the case here's what happened and uh gary did a great job well so ray how many how many full-time members of the team are there today 150 uh on my payroll here in the united states canada and japan and uk but we have about 50 people also offshore in various uh organizations in india and vietnam how many 200 all in how many engineers uh here in the us about 53. what about total but 90 90. okay and how many quota carrying sales reps uh i have uh 16 commercial i have eight federal so what's that 16 and it's 24. yep so so here's my here's my question dude that memo you sent out last friday give us a little taste of i mean what did that exactly sound like like did did everyone take the same cut or do different roles take different cuts or well everybody took the same uh my goal was that we're gonna we're all gonna sacrifice a little bit in order to survive uh there are no special dispensations now you know if someone's got an issue they can bring it up and we'll deal with it but uh to my amazement interestingly one of the other people that was affected by this reduction her husband had just been laid off uh so the fact that we didn't lay her off you know she was ecstatic you know the the downside right now that the rumors and the rumors just people talking stuff there's a lot of bad news going on right now so so i figured what we you know keep people employed and keep my customers up and running you know those are two very wonderful outcomes what i mean can i ask you what cut on a percent basis did you ask everyone to take are we talking like 50 or 10 percent or uh it's it's more to the for i don't want to put the number specifically out there but it's more to the the latter not the former okay so more like 10-ish not like 50. yeah yeah yeah yeah for how long well we don't know so you just told them indefinitely until until further notice yeah until further notice interesting um so let me let me throw some other scenarios at you because i want to take advantage of your expertise being inside of other companies via your vc days some other ceos i've had on uh that are maybe around your skin maybe slightly smaller have done some other things so let me give you an example uh one of them basically took so their last vc round uh valued them at 100 million dollars they took two percent of the company or two percent of the unallocated options option pool for employees and basically said hey can we pay 30 of your salary instead of paying you cash award you stock so that when you come out on the other side of this everyone now is a part owner of the company because they took equity instead of stock do you like that approach i do like that approach and if you've got the kind of equity pool to do with a lot of vc pools of the pools are quite large but as you know i'm my my backer sdg is a private equity group and our pool isn't that big uh we have already in fact done that the problem and not the problem uh an issue with that is you don't know when it's gonna end so if if i give you something now to take a pay cut and you come back three months now well i need more because you did this three months so you get into this slippery slope thing that's the only concern i have for that strategy let me give you another strategy people are pursuing they're trying to say okay we can only make investments now we can't take the big bets with like three-year payoffs we have to just focus on what generates cash today and because of that people i ask some people like if you are laying people off what order are you doing it and the general power i'm seeing is people are laying off on ramp sales people first because they're not yet you know hitting quota producing that so that's number one number two are engineers that are working on big dream r d projects with maybe like a two or three year potential return and that and then after that it's you know kind of other stuff do you kind of agree with that pattern if people are pursuing layoffs well i mean there's only two things to do in a startup company you make product or sell product and to reduce either of those seems to me a little foolhardy if you if you if you have to i would actually reduce the engineering because you really do need that top line flowing in um uh even unwrapped yeah i mean even even so you know six months from now they're going to be ramped this is going to be a tough time so they're going to actually learn faster they're going to be a little bit more desperate in their actions uh so i think uh the sales people will actually respond better than the engineers would um yeah that's just you know based on that case you gave me that's how i would view it if i had to cut heads as a vc and one of my portfolio comes that's what i would do that's not what we did at red seal and that's not what i would ever do at red seal yeah let's revert back to red seal here for a second so has anything changed since eight you know six months ago and we chatted in terms of your target or are you still seeing acvs kind of in the 200 000 300 000 sort of range well yeah actually uh it's that's all running about the same one of the things that we've implemented and we started this research last year uh what you know i as i said we model your networks we create this software model that you can test and do all kinds of cool things with your network but what we learned along the way that the world the world has not done a good job with just basic cyber fundamentals so we have not taken our product apart but we have emphasized the steps along the way to get to that model so that uh each phase delivers value and delivers a unique report inventory for example endpoint inventory network segmentation these are all things we can do prior to that model because the model is hard to do that's that's a very complicated calculation so we have uh broken our our value journey if you will for a customer into pieces and that's what we've done and that's so far it was q1 it was very successful we actually exceeded planning q1 and are you still pricing i always ask about how people are driving expansion revenue are you still pricing your first customer back in 204 was actually apple which is cool but are you still pricing by number of routers so like 90 000 routers might be a two to three million a year contract yeah exactly they still buy the unit yeah we still buy the what is it uh buy the drink whatever that oh yeah yeah so what in terms of year-over-year growth from 2019 to when we wrap up 2020 with your virus changes included are you project i mean do you think the business will be flat are you still protecting some growth or no no we're we think it'll be flat okay uh uh sitting here today uh you know and given that i have adjusted our expense structure to uh make it out the other side and so how does the pr and i forget the name how does how does symphony respond when you come back and say guys listen we're gonna be flat this year they say please that's great survive okay so that's their general feed yeah one of the things that's happened i think for a lot of people with the virus and i've got a few other portfolio companies that their thesis may have changed our thesis has remained the same this digital resilience concept of you know being ready for the attack being prepared for the attack knowing where the vulnerabilities are and all that sort of stuff that remains and so stg is thrilled that our thesis has not been altered by the coronavirus that's a big deal let me put out an alternative here which is has spg come and said listen ray i want you to ramp up mma activity there are potentially cheap acquisitions we can go do now and we'll put extra money behind you are you ramping any of that up yeah you want to see my list yeah well tell me tell me how you're building the list how are you thinking about it the list has been in existence for a while you're right there could be some opportunities and we've had that conversation so i think once we get through q2 there's so much uncertainty right now people are their hair is on fire i think if the summer settles out the market settles down i think that's what we'll start thinking more seriously about it but there are clearly a couple of technologies we'd love to tuck into the red seal story it would be perfect for us so we're not going to do anything now that's that's just it's just too nutty right now all right but but someone would say hey during the nuttiest time is when you get the cheapest discounts or the biggest discounts yeah i'm not a you know i'm not going to take advantage of people when they're down i'm going to make sure it's a win-win yeah yeah okay fair enough but by the way i you know i don't want to phrase it as taking advantage of people there there are plenty of companies where even though they are they would sell for a much lower price today and be totally happy doing it because of the exactly because of the uncertainty yeah yeah um let me circulate back because i know my audience will be wondering to just cyber security in general right yeah it will continue to be over the next many months as the election the presidential election in the states come up you know russia interference in u.s elections like this sort of stuff can you make any comments on this i mean is it a real thing is it not a real thing do you feel strongly about how the government's prepared it's a very real thing i feel very strongly we are not prepared i actually have customers that are dealing with some of this international interference and we're seeing it in there they're seeing it in their networks uh commercial and uh government so it's a very real thing uh and you know we're all working at home and the government doesn't everything's being pushed so if the election gets crushed i'm just not sure crushed meaning calendar wise i'm just not sure how they're going to sort it out but it is a very real thing and i have you know we we have sent a lot of ideas in and so forth about how to help secure local things it it's a problem what is that what is what is a foreign don't name the government what is a foreign government right now doing that you're seeing just be extremely effective against u.s presidential candidates or current you know government employees presidential candidate information or any of that sort of stuff but what they're doing they are uh putting in um observers uh malware that system observes um primarily uh being able to uh alter routing for example uh just like what sony did you know at the sony situation they they put in malware that was had a back door that was shipping every email out to somebody else so it gives you get you get intel that way you get information and uh that's the kind of stuff we're seeing interesting and that's exactly why people are paying you right is to prevent this kind of thing yeah or to at least to identify how they're getting out so they can cut it off yeah that's interesting and we're all about pathways all right ray let's wrap up with the famous five number one you're reading any other new books besides the last one was duty by robert gates yes i am reading uh facebook the inside story steven levy just i just got it and i just started reading it very good all right number two is there a ceo you're following or studying uh the the ceo zoom uh i've been hearing a lot about a pretty interesting man yeah by the way there he's getting i mean he's gonna have to deal with this headline that you're seeing pop up which are people spying on i mean by the way my developers don't let me use zoom because they know how zoom structures their servers and they have serious security concerns yes that's why i'm studying because he's going to figure it out yeah number three what's your favorite online tool for building the company zoom right now number four how many hours of sleep are you getting i'm getting pretty good sleep uh about six and a half seven okay fair enough and situation married single kiddos i i'm my wife and i live here in patolo valley our new york adult son who's in the musical theater business uh with new york shut down he flew out here so we're getting to spend some wonderful time with him i love that so one kid and how old are you me i'm 65 65 but we had a birthday over the past six months happy happy birthday yes in december yes all right last question what do you wish your 20 year old self knew well i wish my 20 year old self knew man that the stock market would be at uh you know 20 000. guys there you have it red seal we talked with founder ray rothrock on how they're planning for the virus how they're continuing to serve their 250 enterprise accounts specifically a lot of them over a hundred of them are government accounts in the states looking right now at a lot of election interference related things backdoor pathway pathways they're on top of it additionally because they're backed by obviously private equity looking right now at what their m a flow might look like they'll start to kind of ramp up and look about at the end of q2 and some of this uncertainty dies down ray thanks for taking us to the top you bet nathan good to see you you be safe and healthy you too bye-bye you guys know i fight like heck to get these data points for you from 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