How SmartBear Approached $100M in 2017 With 10,000 Customers and 115% to 120% Net Retention (Interview with CEO Justin Teague)

Introduction and Guest Background

Nathan Latka

00:00Hello, everyone. My guest today is Justin Teague. He's responsible for SmartBear's strategic direction and overall operation. Before his role as CEO, he served as SmartBear's COO and president where he oversaw all sales, marketing project, product management, and strategy functions, as well as execution for the company. He came to SmartBear from Bullhorn where he was COO prior to that. Justin, are you ready to take us to the top?

Justin Teague

00:26Yeah. I love it. Let's go.

What SmartBear Does and Who It Serves

Nathan Latka

00:27Alright. Tell us what SmartBear does and what's the revenue model? How do you make money?

Justin Teague

00:32Yeah, 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 bank you use 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.

01:06When 10,000 people try to log in at once and order a pizza, it doesn't crash.

Nathan Latka

01:10So is this like if someone's pushing code on like continuous integration schedule, you are part of a testing product, testing process pre release, or you're the first test once it's out in the public?

Justin Teague

01:21You got it. No, we want everybody to be doing quality pre release, and the quality markets move from sort of traditional QA groups into now what you're talking about, a DevOps continuous deployment environment where testing is shifting left into the developer world. We serve both masters.

Pricing Structure and Trial-and-Buy Model

Nathan Latka

01:39Okay. And walk me through how people pay for the product. Is it a pure play SaaS?

Justin Teague

01:43Yeah. So we, part of our disruption and how we're sort of being transformative is we run our entire business model off of a trial and buy concept.

01:56So all the way to the point where we have a couple of the 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 sign up. Our products can cost anywhere from a $100 to a couple thousand, but it's a pay as you go subscription model. Some of them are pure cloud SaaS delivery, others are

02:26on desktop.

Nathan Latka

02:27Wait, Justin, break it down for it, pay as you go and SaaS are, many of would say, two very different business models. Is it like there are buckets of subscriptions monthly that give you a certain usage, and once you pass the usage threshold, you got to go to the upper bucket?

Justin Teague

02:41Yeah, it sort of depends on the product, but yeah. So we have a product called CrossBrowserTesting, 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 as many configurations and devices you want. That's sort of a ticket to the game. And then if you have to have spike usage, you

03:02pay for spike usage. And then we have other tools that are traditional annual subscription payments.

Nathan Latka

03:08Okay. 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 I'm paying you per month, would you say?

Average Transaction Value and New Customer Acquisition

Justin Teague

03:17Well, I'll give you a better one. Our average transaction's about 2,500

Nathan Latka

03:21Okay, monthly or annual?

Justin Teague

03:23Annual, so that's an annual, yep.

Nathan Latka

03:25That's helpful.

Justin Teague

03:26And we'll acquire about 7,000 customers a year that way.

Company Founding and History

Nathan Latka

03:30Okay, very interesting. That's a great growth rate. Give us more of the backstory here. When did you launch the company? Well, were you there when the company launched or did you join after?

Justin Teague

03:30I

03:38did join right after it. So the company was launched by an engineer that really wanted to solve problems for other software developers. And with this concept of frictionless and much easier way to go grab an application, deploy it, and use it.

Nathan Latka

03:54And what year did he or she do that?

Justin Teague

03:56It was about 2003.

Nathan Latka

03:57Okay.

Justin Teague

03:59And that was a code collaboration product where engineers could together keep track of the code 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

04:29days 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, sorry, the quality tools market.

Nathan Latka

04:43So again, fast forward on the story. How did you kind of move from join the company, then COO, then CEO?

Justin Teague

04:49Yeah, so I joined because essentially we were hitting a point where great technologies, but the company really needed to scale. And so how do we go take this? We have 20,000,000 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. We'd like to add or

05:14build 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.

Nathan Latka

05:30What year was that?

Justin Teague

05:32Two years ago.

Nathan Latka

05:32Okay, so you joined in 2015 as COO or directly as CEO?

Justin Teague

05:36I came in as COO and transferred to CEO.

Nathan Latka

05:39Okay, and was that part of a funding round? Were you an EIR somewhere and they said, We're not ready to putting the money in unless you bring on Justin?

Justin Teague

05:46Yeah, so we just sold to Francisco Partners in the spring. I had transitioned to CEO before that, but it was part of building SmartBear two point zero, the next transition of our company.

Nathan Latka

05:59So the initial creators, I assume cashed out and now you're taking it under kind of the private equity firm, or is it a private equity firm?

Justin Teague

06:05Private equity, yep.

Nathan Latka

06:06How much capital had you had the company raised before the private equity firm took it over?

Justin Teague

06:10So 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 $45,000,000 of our revenue. Many of those founders are still here, CrossBrowserTesting 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 that's sort of the genesis of how we got

06:38here.

Nathan Latka

06:39But it was all self funded, have you raised outside capital before the exit of private equity

Justin Teague

06:39Yeah,

06:43great question. Each of the companies had their own sort of self funding model or bootstrapped. And then the previous investor put some funding behind it in order to buy and roll up.

Nathan Latka

06:55So how much had SmartBear raised? Just SmartBear, not the companies you bought, just SmartBear?

Justin Teague

07:00Yeah, I don't have the exact figure on how much SmartBear itself

Nathan Latka

07:03Okay, more than what, definitely?

Justin Teague

07:06I think it was in 1,500,000 range.

Nathan Latka

07:08Oh, not a lot.

Justin Teague

07:09No, no, not a lot. The company itself was in the couple million dollar range when it was first put together with another company.

Nathan Latka

07:16Got it. Okay. So there's a lot of like mergers, M and A, you know, sell that part, bring this part on kind of stuff going on.

Justin Teague

07:23Yeah, yeah. And we're sort of, I would say entrepreneur friendly, right? You can build a million dollar company, get a payout

07:32to us, right? And then become part of the company where we have innovation centers that are still driven by our founder led owners, entrepreneurs.

Nathan Latka

07:41What are you at today now in terms of total customers on the platform?

Customer Count and Approaching $100M

Justin Teague

07:45So we are going to be at 10,000 customers.

Nathan Latka

07:45Okay.

Justin Teague

07:45Many, many more users, of course, hundreds of thousands of users. And we're approaching about a $100,000,000.

Nathan Latka

07:54Yeah, I was going say, so do you think you'll break that? You have about thirty five, forty more days left in the year where you'll break it?

Justin Teague

08:01This year, our target's just under. We'll definitely break it next year.

Nathan Latka

08:04Okay, now I'm doing my math wrong here. So if I take 10,000 customers times that $2,500 ACV average you just gave me, obviously that's 25,000,000 annually. I'm missing $75,000,000 of revenue. Where is that?

Justin Teague

08:15Yeah, well, there are, so two answers. One, the beauty of recurring revenue. So 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, 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 two years later and find out that there's 200 users

08:44in the same account.

Nathan Latka

08:46Got it. Okay, so if I take

08:49the 100,000,000 divided by 12, so you're at, call it 8,800,000 ish or maybe eight point whatever, 8,000,000 per month right now, and divide the 10,000 customers into that, they're paying much closer to like $8,000 or $9,000 or $10,000 a year versus $2,500 a year on average.

Justin Teague

09:08Yeah, average customer pay, you're right.

Nathan Latka

09:11Got it. What you were giving me was the average year one contract value is 2,500.

Justin Teague

09:19The average new, yeah, sorry, be super clear. The average first time purchase, the

Nathan Latka

09:19I

Justin Teague

09:19average first

Growth Rate and Revenue Expansion

Nathan Latka

09:26see. That makes complete sense. So, okay, Now that makes help us understand growth. So take us back 12. Were you at $60,000,000, $70,000,000, $80,000,000 in ARR? What's growth over the past twelve months?

Justin Teague

09:36Yes, we had been growing in the mid teens. Before that we were growing, you know, so that's organic. Inorganically, we had been able to grow faster than that. We're now in the mid twenties.

Nathan Latka

09:49Okay, got it. So you were, call it twelve months ago, somewhere in the like 78, 70

Justin Teague

09:49Yeah,

09:54you got it.

Nathan Latka

09:55Yeah, very cool. So, yeah. That's great. And where is most of the growth coming from? If I forced you to credit more of the revenue to expansion versus new customers, which category is driving more growth?

Justin Teague

10:06You know, we have a lot of customers. What we're riding right now is the it sort of depends on the product. So APIs, of course, are exploding in the world. We own and develop two of the leading open source tools, one called Swagger and one called SoapUI. 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,

10:32build, and test these APIs, then we're sort of riding that wave. It's about fifty-fifty actually, revenue

Nathan Latka

10:32Oh, right.

Net Dollar Retention and Expansion Metrics

Nathan Latka

10:40Well, I assume because of the large sample size you have of 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?

Justin Teague

10:55Yeah, I wish it was that predictable.

10:59We have all of the fun retention metrics that hopefully everyone out there is tracking, and one of them of course is net retention. And so net retention includes our

11:11churn and current employee retention plus add ons. And so our net retention's in the 115 to 120% range.

Nathan Latka

11:19That's got it.

Justin Teague

11:19So that's sort of the easy metric. But some of our customers are million dollar, up to million dollar customers, they started off with $2,000 spend.

Nathan Latka

11:28Yep. Do you use logo churn at all as an indicator for you, or is it not relevant because of the vastly different contract sizes?

Justin Teague

11:37No, we do. We look at logo churn. My favorite metric is gross dollar churn, because it tells me if I wake up in the morning with 10 customers paying $10 and I end the year, how many of those 10 customers are still paying that original $10 They might've bought more stuff from us, but I want to make sure they're not, that they're happy with what they originally were using.

Nathan Latka

11:58What was that over the past twelve months, gross dollar churn?

Justin Teague

12:02We're in the right around high eighties. We're trying to get to 90.

Nathan Latka

12:02And

12:07that's retention, not churn, right?

Justin Teague

12:09Yeah, sorry.

Nathan Latka

12:09I

12:10was like, if you're churning $80 on a 100, you're screwed. All right.

Justin Teague

12:15Yeah, we focus on the positive, not the negative.

Nathan Latka

12:17Yeah, no, I like that. I like that. That's a good board meeting move there. Let's not talk about churn. Let's talk about our retention. So 80%, every... If a $100 is in month one by year 12, you've got still 80 coming in, right? So 80% dollar retention. That obviously doesn't include expansion revenue where all the other juicy stuff you add on top, which gets you up to about 150% expansion year over year.

CAC Efficiency and Payback Period

Justin Teague

12:39Right, you got it.

Nathan Latka

12:39Yeah, very cool. What do spend to acquire customers?

Justin Teague

12:43So we track

12:47our CAC 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 acquire a dollar of new revenue or new ARR rather than a new customer. And our metric is we try to stay below 1.25

Nathan Latka

13:05Got it. So basically what I'm hearing you say is you'll spend $1.25 to get $1 of new ARR, which means you're optimizing a payback period for about twelve, thirteen, fifteen months.

Justin Teague

13:17That's right. And we're, you know, obviously at 90, you know, mid 90, I'm sorry, mid eighties retention where, you know, the customer life cycle's a lot longer than that.

Nathan Latka

13:28What do you see, because of the huge differences, you probably do cohort analysis on this, I'm sure, but because of the huge difference in contract value sizes, how do you keep yourself honest on what lifetime value is of a customer?

Justin Teague

13:42You have to cut it a couple different ways. We do look at it by logo, then we look at it by product, and then we look at it by total spend. Because you're right, it's tough at a logo level because someone might spin up a mobile project, buy 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? So you

14:06have to look at it a couple of different ways. More for us, it's more the trend that's more important than the industry benchmarks.

Nathan Latka

14:14Yep, interesting. Do

14:18you have many cohorts there? 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 it though tactically?

Justin Teague

14:29As you'd expect,

14:31it'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 how long can we count on that dollar of ARR?

IPO and Private Equity Considerations

Nathan Latka

14:45Got it. SendGrid just went public. Markets are generally feeling good. Tax cuts are coming. Everyone's rosy dozy. You've got to kind of get to the 110, 130,000,000 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?

Justin Teague

15:06Yeah. I mean, we try not to focus on an outcome as much as building just a great great company. It's so hard to... Other CEOs, I'm sure, would tell you there's a dangerous trap to fall into to think you're going to 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'll get there. And for

15:31us, it's a function of, know, we've got these 20,000,000 downloads, how can we create a more compelling product so that the customer's 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 life cycle and sort of expand our footprint?

Nathan Latka

15:48Let me ask this question differently, Justin.

Justin Teague

15:50Oh, sure.

Nathan Latka

15:51You know how to grow the company. Just a matter of cash, You've got to predict. Well, you know how to do it. What's the firm that owns you guys now?

Justin Teague

15:51The

15:59company called Francisco Partners.

Nathan Latka

16:01Okay. So Francisco Partners says, hey, we can either take this term sheet for 200,000,000 from X, Y, and Z investors, right? Or family offices, blah, blah, blah. Or we can start looking at an IPO and try to raise $200,000,000 that way. How do you make a decision which way to go on that? Which cost of capital is cheaper for you in terms of your energy?

Justin Teague

16:25Oh, man. So I haven't had to make that decision yet because we've been living in private equity and private equity is great. I don't know, some of that decision, frankly, and I'm not trying to avoid the question is, do you want to be public? 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

16:50all just based on the economics at the time.

Team Size and Global Office Locations

Nathan Latka

16:52Yep, that makes good sense. What are you at today in terms of team size?

Justin Teague

16:56We're just going to hit about 400 employees globally across six innovation sites.

Nathan Latka

17:01And where are your kind of your biggest offices?

Justin Teague

17:03Yeah, our biggest offices are Boston. So right outside of Boston, Somerville, Galway, where we have incredible talent and we have access to that talent, which isn't always true in the competitive world of Boston. Then we have Tula, Russia, which is one of our off-site centers. Oh, sorry. Offshore.

Paid Acquisition Spend and Marketing Strategy

Nathan Latka

17:20Yeah. Boston, Russia. 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, ad spend, all that jazz? Give me an order of magnitude.

Justin Teague

17:34Including headcount?

Nathan Latka

17:35No, not including headcount.

Justin Teague

17:37Just spend.

17:41Did you say in the last month?

Nathan Latka

17:43You can give me a year if

Justin Teague

17:43Yeah, it's

17:46probably spend about $750,000 a quarter.

Nathan Latka

17:50And is that mostly AdWords or conferences or what?

Justin Teague

17:53We have a big inbound demand engine. So a lot of content based, you know, the trial and buy,

18:04you know, high velocity motion for us sort of demands us getting people to come to us. And so that's a... Our marketing team does an amazing job of navigating how do you create demand throughout the ecosystem of the developer and test community.

Famous Five: Books, Tools and Personal Insights

Nathan Latka

18:21Good stuff, man. Let's wrap up here, Justin, with the famous Number one, what's your favorite business book?

Justin Teague

18:27Ironically, as I was thinking about this, my favorite business book is a biography 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 Blindhouse.

Nathan Latka

18:44Are you talking to one?

Justin Teague

18:45Ah, there you go.

Nathan Latka

18:46Yeah, it's a good one.

Justin Teague

18:48I mean, you find out that the guy invented the library, it's like, wow.

18:52Dewey Decimal System. Dewey Decimal System.

Nathan Latka

18:54Yeah. All right, number two, is there a CEO you're following or studying right now?

Justin Teague

18:59So the other book, the book I'm actively reading right now is actually The Everything Store, the Amazon story. You know, Amazing. Yeah, you can't do anything but admire what he's done. But what I learned through that book is he was a maniacal focus on the customer, and that's something that we're trying to get closer and closer to.

Nathan Latka

19:19Number three, what's your favorite online tool besides your own?

Justin Teague

19:22I was thinking about that as an answer, but I'm sure you get that one all the time.

Nathan Latka

19:22Yeah.

Justin Teague

19:22You know, I love Slack because frankly, we're a big, you know, diverse, geographically dispersed company. Personally, on my phone, I like this Flipboard product, which is sort of accumulates news and, you you get to subscribe to the things that you want to read rather than a bunch of junk.

Nathan Latka

19:47Yep, number three, or number four, how many hours of sleep do get every night?

Justin Teague

19:51I'm pretty good about sleep. I sleep well at night. So, you know, I don't know if it's eight, but I'm approaching eight.

Nathan Latka

19:56All right, and what's your situation? Married, single, you have kiddos?

Justin Teague

19:59I do, I have a couple of kids.

Nathan Latka

20:00How many?

Justin Teague

20:01I got three boys.

Nathan Latka

20:02Three? Okay, well, three kiddos. And how old are you?

Justin Teague

20:06I'm 45.

Nathan Latka

20:07All right, last question. Take us back twenty five years. What do wish your 20 year old self knew, Justin?

Justin Teague

20:12You know, I think my 25 year old self, I don't know that I changed a lot, but 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,

20:25let's say, dramatic. But I accumulated a lot of experience going overseas, living in London, different types of software companies. And I think accumulate as much experience as you can early because you can always leverage it later.

Nathan Latka

20:40There you guys have it from Justin. Joined the SmartBear 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 78,000,000 run rate in 2016, so about twelve months ago, to over approaching a 100,000,000 here as we wrap up 2017. They've got a

21:08really healthy gross dollar retention annually at about a little over 80%. They're spending about a dollar 25 to get a new dollar in ARR. Again, helping folks increase the quality of their software through a variety of different ways, including prerelease with our team of 400 folks between Boston and Russia. Justin, thank you for taking us to the top.

Justin Teague

21:30Great summary. Thanks, man.