How RedSeal Served 250 Enterprise Customers With 90 Engineers and a 200-Person Team (Interview with CEO Ray Rothrock)

Nathan Latka

00:00You'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 thirty minutes hanging out answering any questions you have. In fact, leave a comment below about data points or what you think is gonna 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

00:18profile as well and give your videos some love as well. In the meantime, enjoy the interview.

Host Introduction and Context

Nathan Latka

00:25Hello, everyone. My guest today is Ray Rothrock. He joined RedSeal as CEO in February 2014. It's a cyber risk modeling company. Prior to RedSeal, he was a general partner at Venrock, one of RedSeal's founding investors. At Venrock, he invested in 53 companies, including over a dozen in cybersecurity. He's on the board of Check Point Software Technology and original Venrock investment and Team8, both Tel Aviv based companies. Alright, Ray, you ready to take us to the

00:49top?

Ray Rothrock

00:49Yes, sir. Nathan, let's go.

What RedSeal Does

Nathan Latka

00:51Alright, so let's first touch on RedSeal for people that missed your first episode terms of what you do. And then I wanna touch on the virus and how you're kind of remodeling things. So what does the company do?

Ray Rothrock

01:01Well, we do a lot of things. We primarily model the network. 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, a vulnerability calculation, where 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

01:26network, 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 you

Nathan Latka

01:26So that's really

01:46an enterprise space SMB mid market?

Ray Rothrock

01:48Mostly large enterprises with complex networks, people that are migrating to the cloud, people that have software defined networks, and people that have wired networks, which believe it or not, that's... Everybody's got one of those.

Nathan Latka

01:59Yep. And about how many customers are you serving now today?

Customer Base: 250 Customers, About 100 in Government

Ray Rothrock

02:01We have two fifty customers.

Nathan Latka

02:01Okay.

Ray Rothrock

02:01A large part of our base is US Government. They represented about a 100 in those two fifty. We're in all the intel agencies, all the military and most of the civilian side of the government. So they're a huge part of our business.

Nathan Latka

02:14Interesting. Okay. So how, you know, obviously, you know, about a month ago or two, a month and a half ago now at this point, COVID hits The United States, right? So, you know, a lot of SaaS deals are being impacted. When you last came on the show back in, believe it was September of last year, so a couple months ago, you'd articulated, you know, two fifty customers, ACV is in the 200,000 ish range, so people can

02:34kind of back into your revenue. You're owned by private equity companies, so they probably can provide you some cushion. But how are you thinking about the potential, you know, recession and virus specifically?

COVID-19 Impact and Q2 Outlook

Ray Rothrock

02:44Yeah. Well, you know, being a former VC, having lived through, this is my fourth sort of capital market crisis, if you will, regardless of how it got started. One cannot take enough precaution. There is no penalty to being extra careful. So we have, in fact, 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

03:13take a reduction in pay, which they have. We are continuing

03:20support our existing customers and encouraging more expansion, more face to face time. And so 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 in the water so that the gap to get the ship through stays the same. We'll see how that goes. We haven't... But basically, we have increased our safety buffer in our cash and balance sheet capabilities. And our our investor

03:43has been very supportive. They've not put another dollar in, not necessary.

Nathan Latka

03:43Mhmm.

Ray Rothrock

03:43And we're gonna get through it on our own.

Nathan Latka

03:49So 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?

Runway: About Two Quarters

Ray Rothrock

04:02We've we've given ourselves two quarters.

Nathan Latka

04:02Okay.

Ray Rothrock

04:02You know, well, revenue, yeah, it's about two quarters.

Nathan Latka

04:09Okay, got it. And so walk me through, like the communication during this time is critical for any SASE with their team. How did you have the conversation with your team to ask them, right, to basically be furloughed or reduction in pay?

Team Communication and Pay Reduction

Ray Rothrock

04:23Well, no furlough, just reduction in pay.

Nathan Latka

04:23Okay.

Ray Rothrock

04:23Part 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 survive this time to thrive on the other side. So yes, frequent communication. So twice a week, one of my senior management teams puts out a memo. I put out something on Friday. Actually, I switched to making

04:49video conferences, which everyone just loved. You know, it's a little bit more personal. You can see where I live and how I operate. It's been quite effective. And that is really what it's all about. You know, transparency right now is going to be job one. So telling everybody we expect a downdraft, asking it, know, sort of making them all part of the team. Let me give you, can I just give you one little thirty second story?

05:14So we're... You know, we have customers that have a lot of operations in India. One very large corporate customer on the East Coast Of The United States was doing an upgrade in India last night, last night, and it failed. There was a problem, and 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

05:37up and running. Turned out our software was all good. They had done some sort of configuration problem on their end, but it took them a while to sleuth it out and make it happen. That's the kind of dedication you need and that's the kind of commitment that my team has to keeping our customers up and running and as secure as possible in this environment.

Nathan Latka

05:56Last night would have been April 2 because we're recording this here on April 3.

Ray Rothrock

05:59Yeah. Last... I think you're exactly right. Literally, I got up this morning and there was an email, you know, here's the case, here's what happened, And Gary did a great job.

Nathan Latka

06:08Well, so Ray, how many full time members of the team are there today?

Team Size: 200 Total, 90 Engineers, 24 Sales Reps

Ray Rothrock

06:12150 on my payroll here in The United States, Canada, Japan, and UK, but we have about 50 people also offshore in various organizations in India and Vietnam.

Nathan Latka

06:23How many? So about

Ray Rothrock

06:24200 all in.

Nathan Latka

06:25How many engineers?

Ray Rothrock

06:28Here in The US, about 53.

Nathan Latka

06:30What about total?

Ray Rothrock

06:32About 90.

Nathan Latka

06:3390, okay. And how many quota carrying sales reps?

Ray Rothrock

06:37I have 16 commercial. I have eight federal. So what's that? Sixteen and eight is 24.

Nathan Latka

06:46Yep. So here's my question to you. That memo you sent out last Friday, give us a little taste of, I mean, what did that exactly sound like? Like, everyone take the same cut or did different roles take different cuts or?

Ray Rothrock

06:59No, everybody took the same. My goal was that we're all gonna sacrifice a little bit in order to survive. There are no special dispensations. If someone's got an issue, they can bring it up and we'll deal with it. But to my amazement, interestingly, one of the other people that was affected by this reduction, her husband had just been laid off. So the fact that we didn't lay her off, she was ecstatic. The downside right now, the

07:24the rumors, not rumors, just people talking and 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.

Nathan Latka

07:37What, 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% or?

Ray Rothrock

07:44No, it's more to the, I don't want to put the numbers specific that day, but it's more to the latter, not the former.

Nathan Latka

07:49Okay, so more like 10 ish, not like 50.

Ray Rothrock

07:51Yeah. Yeah.

Nathan Latka

07:51For how long?

Ray Rothrock

07:51Well, we don't know.

Nathan Latka

07:55So you just told them indefinitely until further notice.

Ray Rothrock

08:00Further notice.

Nathan Latka

08:00Interesting. So 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 that are maybe around your scale, maybe slightly smaller, have done some other things. Let me give you an example. One of them basically took so their last VC round value them at $100,000,000 They took 2% of the company or 2% of the unallocated option

08:28option 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?

Equity vs Pay Cut Strategy

Ray Rothrock

08:44I do like that approach. If you've got the kind of equity pool to do with, and a lot of VC pools, the pools are quite large. But as you know, my backer, STG, is a private equity group and our pool isn't that big. We have already in fact done that. The problem, and not the problem, an issue with that is you don't know when it's going to end. So if I give you something now to take

09:05a pay cut and you come back three months from 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.

Layoff Prioritization Debate

Nathan Latka

09:15Let 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, asked some people like if you are laying people off, what order are you doing it? And the general pattern I'm seeing is people are laying off unramped salespeople first, because they're not yet,

09:38know, hitting quota producing that. So that's number one. Number two are engineers that are working on big dream R and D projects with maybe like a two or three year potential return. Then after that, it's, you know, kind of other stuff. Do you kind of agree with that pattern if people are pursuing layoffs?

Ray Rothrock

09:54Well, I mean,

09:57there's only two things to do in a startup company, make product or sell product. And to reduce either of those seems to me a little foolhardy. If you have to, I would actually reduce the engineering because you really do need that top line flowing in.

Nathan Latka

10:13Even unramped.

Ray Rothrock

10:15Yeah. I mean, even even so. You know, six months from now, they're gonna be ramped. This is gonna be a tough time, so they're gonna actually learn faster. They're gonna be a little bit more desperate in their actions. So I think the salespeople will actually respond better than the engineers would. Yeah, that's just 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

10:37of my portfolio comes, that's what I would do. That's not what we did at RedSeal, and that's not what I would ever do at RedSeal.

Nathan Latka

10:42Yeah. Let's roll back to RedSeal here for a second. So has anything changed since eight... You know, six months ago when we chatted in terms of your target or... And are you still seeing ACVs kind of in the 100,000 to 300,000 sort

Ray Rothrock

10:42No,

Nathan Latka

10:42of

Q1 Performance and Product Value Journey

Ray Rothrock

10:53yeah, actually that's all running about the same. One of the things that we've implemented, we started this research last year, 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 has not done a good job with just basic cyber fundamentals. So we have not taken our product apart, but we have emphasized

11:18the steps along the way to get to that model so that 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 a model is hard to do. That's a very complicated calculation. So we have broken our value journey, if you will, for a customer into pieces. And that's what we've done. And that's so far, Q1, it was very successful.

11:45We actually exceeded plan in Q1.

Nathan Latka

11:47And are you still pricing? Like I always ask about how people are driving expansion revenue. Are you still pricing? Your first customer back in 2004 was actually Apple, which is cool. But are you still pricing by number of routers? So like 90,000 routers might be a 2 to 3,000,000 a year contract?

Ray Rothrock

12:01Yeah, exactly. We still buy the unit. Yeah. We still buy the... What is it? By the drink, whatever that old Yeah.

Full-Year 2020 Growth Projection: Flat

Nathan Latka

12:08So what, in terms of year over year growth from 2019 to when we wrap up 2020, with your virus changes included, I mean, you think the business will be flat? Are you still projecting some growth

Ray Rothrock

12:08No,

Nathan Latka

12:08or

Ray Rothrock

12:22think it'll be flat.

Nathan Latka

12:22Okay.

Ray Rothrock

12:22Sitting here today, you know, and given that I have adjusted our expense structure to make it out the other side.

Nathan Latka

12:31And so how does the... And I forget the name. How does Symphony respond when you come back to them and say, guys, listen, we're gonna be flat this year?

STG's Response and M&A Pipeline

Ray Rothrock

12:38They say, please, that's great, survive.

Nathan Latka

12:41Okay. So that's their general feed.

Ray Rothrock

12:43Yeah, 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 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.

Nathan Latka

13:02Mhmm.

Ray Rothrock

13:02So that's a big deal.

Nathan Latka

13:02Let me

13:04put out an alternative here, which is has STG come and said, listen, Ray, I want you to ramp up M and A 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?

Ray Rothrock

13:15Yeah. You wanna see my list?

Nathan Latka

13:17Yeah. Well, tell me tell me how you're building the list. How are you thinking about

Ray Rothrock

13:17The

13:21list has been in existence for a while and you're right. There could be some opportunities and we've had that conversation. So I think once we get through q two... 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 when we'll start thinking more seriously about it. But there are clearly a couple of technologies we'd love to tuck into the RedSeal

13:42story. It would be perfect for us. So we're not gonna do anything now. That's just... It's just too nutty right now.

Nathan Latka

13:48Alright. But but someone would say, hey, during the nuttiest time is when you get the cheapest discounts or the biggest discounts.

Ray Rothrock

13:54Yeah. I'm not a, you know, I'm not gonna take advantage of people when they're down. I'm I'm gonna make sure it's a a win win. Yeah. Yeah.

Nathan Latka

13:54Okay. Fair enough. But by the way, you know,

14:02I don't wanna phrase it as taking advantage of people. 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. Let me circulate back because I know my audience will be wondering to just cybersecurity in general, right? It will continue to be over the next many months as the election, the presidential election in The

14:24States come up.

Ray Rothrock

14:24Yes.

Nathan Latka

14:24You know, Russian interference in US elections, this sort of 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?

Election Interference and Cybersecurity Threats

Ray Rothrock

14:35It'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 their networks,

14:46commercial and government. So it's a very real thing. And 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 have sent a lot of ideas in and so forth about how to help secure local things. It's a problem.

Nathan Latka

15:17What 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 US presidential candidates or current government employees?

Ray Rothrock

15:28Don't have any presidential candidate information or any of that sort of stuff. But what they're doing, they are putting in

15:36observers, malware that sits in observers primarily, being able to alter routing, for example, just like what Sony did. You know, at the Sony situation, they put in malware that had a backdoor that was shipping every email out to somebody else. So you get intel that way. You get information, and that's the kind of stuff we're seeing.

Nathan Latka

16:00Interesting. And that's exactly why people are paying you, right, is to prevent this kind of thing.

Ray Rothrock

16:05Yeah. Or to at least... To identify how they're getting out so they can cut it off.

Nathan Latka

16:05Yeah. That's interesting.

Ray Rothrock

16:05And we're all about pathways.

Famous Five Rapid-Fire Questions

Nathan Latka

16:12Alright, Ray. Let's wrap up with the famous five. Number one, you reading any other new books besides... Last one was Duty by Robert Gates.

Ray Rothrock

16:18Yes. I'm reading Facebook, The Inside Story, Stephen Levy. I just got it and I just started reading it.

Nathan Latka

16:26Very good. All right. Number two, is there a CEO you're following or studying?

Ray Rothrock

16:30Oh, the the CEO of Zoom. Been reading a lot about him. Pretty interesting man.

Nathan Latka

16:35Yeah. Eric, by the way, there... He's getting... I mean, he's gonna have to deal with this headline that you're seeing pop up, 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.

Ray Rothrock

16:47Yes. That's why I'm studying because he's gonna figure it out.

16:50Yeah.

Nathan Latka

16:51Number three, what's your favorite online tool for building the company?

Ray Rothrock

16:55Well, have Zoom right now.

Nathan Latka

16:56Number four, how many hours of sleep are you getting?

Ray Rothrock

17:00I'm getting pretty good sleep. About six and a half, seven.

Nathan Latka

17:02Okay, fair enough. And situation, married, single kiddos?

Ray Rothrock

17:05My wife and I live here in Portola Valley, our New York adult son who's in the musical theater business. When New York shut down, he flew out here. So we're getting to spend some wonderful time with him.

Nathan Latka

17:17I love that. So one kid and how old are you?

Ray Rothrock

17:20Me? I'm 65.

Nathan Latka

17:2165. But we had a birthday over the past six months. Happy, happy late birthday.

Ray Rothrock

17:21Yes.

17:25In December. Yes.

Nathan Latka

17:26Alright. Last question. What do wish your 20 year old self knew?

Ray Rothrock

17:29Well, I wish my 20 year old self knew. Man that the stock market would be at, you know, 20,000.

Nathan Latka

17:37Guys, there you have it. RedSeal. We talked with Founder Ray Rothrock on how they're planning for the virus, how they're continuing to serve their two fifty enterprise accounts, specifically a lot of them over 100 of them are government accounts in The States. Looking right now at a lot of election interference related things, backdoor paths with pathways there on top of it additionally, because they're backed by obviously private equity looking right now at what their M and

17:57A flow might look like. They'll start to kind of ramp up and look at that at the end of q two when some of this uncertainty dies down. Ray, thanks for taking us to the top.

Ray Rothrock

18:04You bet, Nathan. Good to see you. You be safe and healthy.

Nathan Latka

18:07You too. Bye bye.

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