How Smartbear CEO Frank Roe grew to $139M revenue and 13.7K customers in 2020.

hello everyone my guest today is Justin Teague he's responsible for smart bears strategic direction and overall operation before his role as CEO he served as smart bears CEO and president when he oversaw sales marketing project product management and strategy functions as well as execution for the company he came to smart bear from bullhorn where he was CEO Oh prior to that Justin are you ready to taste to the top yeah I love it let's go all right tell us what smart bear does and what's the revenue model how do you make money yeah so we are we focus on helping companies through the digital transformation anybody that's developing a software application today to accelerate their commerce or internal processes and we're the quality tools provider behind those applications so our customers are the the bank you use and and the guys you order your pizza from as they build out their web applications or their mobile apps we provide the lightweight flexible quality tools making sure that it runs and it runs as expected and when 10,000 people try to log in at once and order a pizza it doesn't crash so it's like if someone's pushing code on like a continuous integration schedule you are part of a testing product processing process pre-release or you're the first test once it's out in the public you got no we we want everybody to be doing quality pre-release and the quality markets moves from sort of traditional QA groups into now what you're talking about a DevOps continuous deployment environment we're testing is shifting left into the developer world we we serve both masters ok and walk me through how people pay for the product is it a pure place ass yeah so we part of our disruption and we're how we're sort of being transformative is we run our entire business model off of a trial and by concept so we even even all the way to the point where we have a couple of leading open source tools in our market and so we want to create a completely frictionless buying and using experience let's say for our customers and as such they'll trial they'll buy they'll saw they'll sign up our products can cost anywhere from a hundred dollars to a couple thousand but it's a to pay-as-you-go subscription model and and some of them are pure cloud SAS delivery others are on you know desktop weight adjustments a breakdown pay-as-you-go and Sasser many people say two very different business models is it paint is it like there are buckets of subscriptions monthly that get you a certain usage and once you pass a usage special you got to go to upper bucket yeah it sort of depends on the product but yeah so we have a product called cross browser testing for example that's a pure monthly pay as you go you can take your application and instead of having some sort of labs or a bunch of phones in the background you can test it on its many configurations and devices you want that's sort of a ticket to the game and then you if you if you have to have spike usage you pay for spike usage and then we have other tools that are traditional annual subscription payments okay um I want to break more into your story and avoid going down every customer cohort so if I forced you to pick an average like what's the average customer paying you per month would you say well yeah I'll give you a better one our average transaction is about $2,500 okay monthly or annual annual so that's an annual yep that's helpful and will acquire about 7,000 customers a year that way okay very interesting that's a great book great so take us give us more the back story here when did you launch the couple old were you there when the company launched are you joined after I did join right after it so uh the company was launched by an engineer that really wanted to solve problems for other software developers and with this aunt concept of frictionless and much easier way to go grab an application deploy it and use it and when he or she do that there's about 2003 okay and that was a code collaboration product where engineers could together keep keep track of the code and and who was making changes and whatnot along the way we found very similar companies founder led passionate software engineers that were developing tools to fix problems for other software engineers in the development environment and embracing this idea that you should be able to download try and if you're getting value then I want to buy it I don't want to go through you know days and weeks of evaluation and so we've accumulated over the time a collection of products that serve this need with the same methodology and philosophy across the software tool I'm sorry the quality tools market again fast formula store how did you kind of move from C to join the company than CLO than CEO yeah so I joined because essentially we were hitting a point where great technologies but the company really needs it to scale and so how do we go take this you know we have 20 million downloads a year for example we process about 400,000 leads people that raise their hand and say hey I'm trialing I'd like to buy and so the operational efficiency of now trying to figure out how do we manage this and then expand would like to add or build more tools to our portfolio to serve this need and so I came in at the point where the investor said great products we love this you know try and buy high velocity concept help us really optimize it and make it scalable what year was that two years ago okay so you joined in 2015 SC oo or directly as CEO came into CEO oh and transferred to CEO okay and was that part of a funding round where you and AI are somewhere and they said we're not Rea putting the money in unless you bring on you know Justin yeah so we just sold to Francisco partners in in the in the in the spring I had transition to CEO before that but it was part of building smart bear 2.0 the next trend transition of our company so the initial creators I assume cashed out and now you're taking it under kind of the private equity firm practice is it a private equity firm private equity yeah so how much capital had to had the company raised before the private equity firm took it over so the company had so we acquired smaller companies along the way founder led one of them for example was as small as a million dollars it's now about forty five million dollars of our of our revenue those many of those founders are still here cross-browser testing and that I mentioned earlier in that company and so we make them part of our innovation centers which is why we have six locations around the globe but but that's sort of the genesis of how we how we got here but wasn't ourself have you raised outside capital before the exit remedy huh yeah great question each of the companies had their own sort of self funding model or bootstrapped and then a the previous investor put some funding behind it in order to buy and roll up so how much had smartbear raised just smartbear not the companies you bought just smartbear yeah I don't have the exact figure out how much smart Birds okay more than what definitely I think it was in a million-and-a-half range a lot no no not a lot the company itself was in the couple million dollar range when it was first put together with another company got it okay so there's a lot of like mergers M&A you know sell that part bring this part on kind of stuff going on yeah yeah and we're we're sort of I would say entrepreneur friendly right you can build a million dollar company get a payout you know get get a payout to us right and then become a become part of the company where we have innovation centers that are still driven by our founder led owners what do you have today now in terms of total customers on the platform so we are gonna be a 10,000 customers okay many many more users of course hundreds of thousands of users and we're approaching about a hundred million dollars yeah I was gonna say so do you think you'll break that you have about 3540 more days left in the in the year we will break it this year our targets just under yeah we'll definitely break it next year okay now what I'm doing my math on here so if I take 10,000 customers times that $2,500 a CV average you just gave me obvious that's 25 million annually and missing 75 million bucks of revenue where is that yeah well they're in so two answers one the beauty of recurring revenue so we have a we have an existing customer base that 2,500 transaction is our new software transaction our new customer acquisition and we have an expand model so we have customers that for example in the you know we have developer tools so five developers writing the next mobile application download and like it it spreads and we might wake up one day to you know two years later and find out that there's 200 users in the same account got it okay you swim if I mean if I take if I take the hundred million divided by twelve so eight point eight million ish or maybe eight point whatever eight million per month right now divide you know and divide the ten dozen customers into that they're paying much closer to like you know eight or nine or ten grand a year versus twenty five hundred grand a year on average yeah tote a verge customer pay you're right got it what you were giving me was the average year one contract value is 2,500 the average new yeah that the AB sorry they be super clear the average first-time purchased the average first transaction I see that makes complete sense so okay that makes sense no help us understand the growth so take us back twelve months where you at sixty seventy eighty million in AR what was broke what's growth over the past one month yes we we were has to had been growing in the mid-teens before that we were growing you know sorry that's organic inorganic Lea we had been able to grow faster than that we're now in the mid 20s okay got it so you were call it twelve months ago somewhere in the like 78 79 yeah you got it yeah that's great and where is most the growth coming from would you if I if I forced you to credit more than revenue to expansion versus new customers which category is driving more growth you know we have a lot of customers that what we're riding right now is the it's sort of depends on the product so API is of course are exploding in the world we own and develop two of the the leading open-source tools one called swagger and one called soap UI and so the growth right now we're seeing is as more and more of our customers and more of our new customers are facing the challenge of how do we deploy build and test these api's then we're sort of riding that wave and it's about 50/50 actually revenue isin okay yeah well I assume because of the large samples that you have with customers and the age of the company you can pretty predictably forecast what a year one customer expands to in year two what does that year one to year two expansion revenue look like typically yeah I wish it was that predictable what we we we have all of the fun retention metrics that hopefully everyone out there is tracking and one of them is core of course is a net retention and so retention includes our churn and and current employee retention plus add-ons and so our net retentions in the 115 to 120 percent range that's not it so that's sort of the easy metric but some of our customers are million dollar up to million dollar customers and they started off with $2,000 spend if you do you use logo turn it on as an indicator for yours it not relevant because of the vastly different contract sizes no we do we look at logo churn the my favorite metric is gross dollar churn because it tells me if I wake up in the morning with 10 customers fangs as $10 and I end the year how many of those 10 customers are still paying that original $10 they might have bought more stuff from us but I want to make sure they're not you know that they're happy with this what we're what they originally were using was that over the past 12 months gross dollar term we're in the right around high eighties where we're trying to get to know the attention not turn right yes you're turning 80 bucks on a hundred your screws all right yeah we focus on the positive not the negative that that's a good that's a good board meeting move let's talk about our retention so 80% everyone you know 400 bucks is in in month 1 by year 12 you've got that you know still 80 coming in right so so that send our attention that obviously doesn't include expansion revenue where all the other juicy stuff you add on top which gets you up doing about 150 percent expansion your beer right you got it yeah very cool Woody's been to acquire customers so we track car on a dollar basis rather than trying to acquire just a customer so we think about acquisition in terms of what does it take us to to acquire a dollar of new revenue or you ARR rather than a new customer and our metric is we try to stay below a dollar 25 got it so you're okay so you're willing so basically what I'm hearing you say is you'll spend a dollar 25 to get a dollar of new a bar which means you're optimizing a payback period for about 12:30 more eighteen months that's right and you're you know obviously at nine the you know mid-90s arrived mid eighties retention where we you know the customer lifecycle is a lot longer than that what do you see week because of the huge differences you probably cohort now as long as I'm sure but because the huge difference in contract value sizes how do you keep yourself honest on what lifetime value is of a customer you know you have to cut it a couple different ways we do look at it by logo then we look at it by product then we look at it by by total spend because you're right it's tough at a logo level because someone might spin up a mobile project by a bunch of our stuff that mobile project goes away but those same licenses might then be migrated to a new project is that a loss or not you know so you have to look at it a couple different ways it's more for us it's more the trend that's more important than the comfort then the industry of benchmarks yeah interesting so do you do you what do you do you have many cohorts there or like I can't just ask you so what's your average lifetime value because that's really not indicative because you have so many different plans how do you measure though tactically you know as you'd expect it's it's it's it's sort of based off of when someone buys and they deploy a product how long do they actually keep that product in deployment and in how long can we count on that dollar of ARR got it um SendGrid just went public markets are generally feeling good tax cuts are coming everyone's rosy Dozie you've got to kind of get to the 110 130 million ish ARR range to really start thinking I think start thinking about IPOs based off other CEOs I've talked to in that range how do you come up and how do you guys think about that decision yeah I mean you know we try not to focus on an outcome as much as building just a great company it's so hard to like other CEOs I'm sure would tell you you there's a dangerous trap to fall into to think you're gonna architect your outcome as much as focus on growth build a great company make sure your customers are happy and satisfied and they love what you do and what you provide and you you'll get there and for us it's a function of you know we've got these 20 million downloads how can we create a more compelling product so that the customer is compelled to sign up the actual buy after they try portion of it and then how can we continue to solve problems across the software development lifecycle and sort of expand our footprint let me ask this question differently Justin oh sure you know how to grow the company it's just a matter of cash right yeah you've got well you know how to do it you have what's the firm now that owns you guys now we're a company called Francisco partner singing so Francisco partner says hey like you know we can't you know we can either you know take this term sheet for you know 200 million from XYZ investors right or family offices blah blah blah or you know we can start looking at an you know an IPO and trying rights two hundred million dollars that way how do you make the decision which way to go on that which cost of capital is cheaper for you in terms of your energy oh man all right so I haven't had to make that decision yet yeah because you know we've been living in private equity and private equities great I don't know you know the public some of that decision frankly and I'm not trying to avoid the question is do you want a mob like what do you want to be public in today's world there's a lot of investment around private equity and that can be a great partnership opportunity for people that once you get to scale but it's all just based on the economics at the time yeah that makes good sense what do you today in terms of team size we have a we're just gonna hit about 400 employees globally across six innovation sites and we're you're kind of you're your biggest offices yeah our biggest offices are Boston so red side of Boston sorrel Galway but we have incredible talent and we have access to that talent which isn't always true in the competitive world of Boston and then and then we have Tula Russia which is one of our off-site centers around for yeah Boston rocks are very good and last question here before we wrap up with the famous five over the past month how much are you spending just on paid acquisition across all channels conferences and spend all that jazz give me an order of magnitude including headcount no not including head count just spend did you say in the last month you can meet a year a bit easier yeah we probably spend about a mmm $750,000 a quarter and it's at mostly Adwords or conferences or what we have a big day inbound demand engine so a lot of contents based you know to trial and by you know high velocity motion for us sort of demands us getting people to come to us and so that's a that's a you know our marketing team does an amazing job of navigating how do you create demand through the without the ecosystem of the developer and test community good stuff man let's wrap up here Dustin with the famous five number one what's your favorite business book ironically I was thinking about this my favorite business book is a bibliography of Ben Franklin I love sort of if you go back in time the just it doesn't matter where you go innovators happened and Ben Franklin you look back and you go it's amazing what this guy invented from ah there you go yeah I mean you know you find out that the guy invented the library you know it's like wow the Dewey Decimal System yeah all right number two is there a CEO you're following or studying right now so the other book up the book I'm actively reading right now is actually the the everything store the Amazon story so you know yeah you can't you can't do anything but admire what he's done but what I learned through that book is he's uh he was a maniacal focus on the customer and that's that's something that we're trying to get closer and closer to number three what's your favorite online tool besides your own I think about that as an answer but I'm trying to get that one all the time yeah um you know I love slack because because frankly we're a big you know diverse geographically dispersed company personally I on my phone I like this Flipboard product which is sort of accumulates news and and you know you get to subscribe to the things that you want to read rather than a bunch of junk yep number three how many are number four how many hours will sleep to get every night I'm pretty good about sleep I sleep well at night so you know I'm I don't know if it's eight but I'm approaching eight all right and what's your situation married single yeah kiddos I do I have a couple kids how many I got three boys three three kiddos in how old are you I'm 45 all right last question take us back 25 years what he was your 20 year old self new Justin you know I think my 25 year old self I don't know that change a lot but I what I of course there's I wish I had taken more risk right because the time to take it is when you're young and the implications are not quite as uh let's say dramatic but I accumulated a lot of experience going overseas living in London of different types of software companies and I think accumulate as much experience as you can early because it always you can always leverage it later there you guys have it from Justin joined the smart bear team many years after the launch it was launched back in 2003 they've grown through a variety of ways including acquisitions obviously sold recently to a larger private equity firm but growing rapidly adding 7,000 new customers annually they're currently at about 10,000 customers grew from 78 million run rate and 2016's about 12 months ago to over approaching 100 million here as we wrap up 2017 they've got really healthy gross dollar retention annually at about 80 a little over 80% they're spending on a dollar 25 to get a new dollar and a RR again hoping helping folks increase the quality of their software through a variety of different ways including pre-release with their team of 400 folks between Boston and Russia Justin thank you for taking us to the top great summary thanks man