- $24M+Annual Revenue (ARR)
- 12/2017last updated
Podcast with CEO Ryan Carson
E-Learning, Team training for businesses
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Treehouse, $2M MRR, 80K customers, is playing the long game
Nathan: Hello everyone. My guest today is Ryan Carson. He's the founder and CEO of Treehouse. His mission is to create the future of education so he can help as many people as possible. When he's not doing that, he's obsessed with Spartan racing. Ryan, are you ready to take us to the top?
Ryan: I am. Let's do it.
Nathan: All right. Very cool. So tell us about Treehouse. What's the company do and how do you make money?
Ryan: We are an online school. We teach adults how to go from zero to job ready 100% online in about 6 months.
Nathan: And what does it mean... So like this guy named Moses Finlay 6 days ago Tweeted, he said, "Whoo, big day. I just reached 10,000 points on Treehouse." What does that mean?
Ryan: So as you learn on Treehouse you get points, and the more you learn the more points you get. And he happens to be 12, so he is a high performing person.
Nathan: So why the hell haven't you hired him yet?
Ryan: Oh, we will. His dad won't let me do that yet, but…
Nathan: It's so funny. You have a natural kind of recruiting process. Just look who is killing it on your platform and go pick them up, right?
Nathan: Okay. And so, tell me business model-wise, is it like a pure play SaaS model or what?
Ryan: Yes. So it starts at 25 bucks a month, a free 7-day trial.
If you love it then upgrade to paid. And then we have a more expensive model if you are really wanting to push hard and go deeper and that's called our tech degree and that's 199 bucks a month. And that has projects, and grading, and slack support.
Treehouse closes skills gaps
Nathan: Now, have you gotten to the point where big employers are asking for the Treehouse certification because it's ultimately what drives way more value for people, right?
Ryan: It's interesting. So we sell to over 600 businesses, have huge clients that are Fortune 100. And what's interesting is they don't care about any Treehouse certificates or points or anything.
They just wanna close skills gaps. And so they come in and tell us, "You know what? We have a skills gap. Can you help us close it?" And we say, "Sure, we can do that."
Or we help them build a talent pipeline, so companies aren't able to win anymore when they fight Facebook, or Amazon, or Google for talent, so we actually help them create talent.
Nathan: I see. So, this is not, if you're unemployed in the middle of America right now, go on this thing, get a certificate and increase your likelihood to being hired.
This is, you sell to a company who wanted to fill a skill gap of their employees they already have, and you're helping them do that through gamification.
Ryan: Well, what's weird is we do both. So we have the complete thing.
So we actually have students that are underemployed adults, you know. They're working as a barista, they have a degree often, and they want a better job. They go through the program and then they apply themselves to get a job. That's great.
That's a huge part of our business, but now we're serving employers on the other side, so we do both.
Nathan: Interesting. Okay. And give me some backstory here. When did you launch the company?
Ryan: So founded 2010. It's my fourth company. One failed, sold two, and this is my fourth.
Nathan: When did you... So how old are you now?
Ryan: I just turned 40.
Nathan: Very cool. That's awesome. And take me back year... When did you launch your first one?
Seed planted back in 2000
Ryan: So, I grew up in Colorado, got a computer science degree because that was in '96 to 2000. Internet was blowing up. It had the word "computer" in it, so I studied it.
And then got a job as a programmer, and I was shocked at the fact that my job didn't require my degree, but yet my parents just dropped 60k on my degree.
I spent four years of my life, like, something was wrong. And for every entrepreneur you talk to I'm sure they have this moment of saying, "That's broken, and I wanna fix that." And so that's when the seed was planted. That was back in 2000.
Fast forward to 2006 I started trying to fix that by doing in-person classes, so we did, "Hey, let's do a workshop on how to build a PHP web app," and sold out, exciting, grew, grew, grew...
Nathan: You're selling $100 tickets to your hour-long class kind of thing.
Ryan: Yes, and not scalable. Very hard, and eventually, started doing large conferences. You know, networked my way to getting people like Mark Zuckerberg on stage and Evan Williams.
And then I realized this doesn't scale. This is impossible to scale. It's super expensive for the attendees. We're not gonna change anything. And...
Nathan: You were putting on the conferences?
Ryan: Yes. Yes. The whole thing, and realized, "You know what? In-person is impossible to innovate and change the world so”,
“Let's go 100% online”
So, we went all in. So I sold that business and focused on building Treehouse from the ground up.
Nathan: So what was the first failure? You going door-to-door, one-on-one classes?
Ryan: No, the first failure was a web app. And so it was back in 2004 and you couldn't email large files in 2004. You could email 2 MB files back then, which is... It feels like that's the cave ages, it's like, "What?"
And so I built a web app called FlightDeck and it allowed you to send large files, and you would click to download. And I actually then... I priced it way too high. It was like two hundred...
Nathan: What did you price it at?
Ryan: It was like $500 a month.
Ryan: And it was meant for businesses. I had no clue what I was doing. I didn't know, "Oh, that means I need a Salesforce. Like, what am I doing?" And I kept getting nos and nos and nos, and I got...
I think it was $800 in recurring monthly revenue before I flat-lined, and I realized, "Either I need to change the whole thing and raise some money and get serious, or I need to move on and admit this is a failure." So I moved on.
Nathan: So, that shuts down. You launch the conference thing. You sell that. Like, was that a big financial moment for you, or you just sold it to kind of get your money back?
Ryan: No. It was... It was... You know how people say, "Did you get a boat, get a house, get a new life?" I think that's...
Nathan: Just so you know, I'm asking more to know where your mind was when you launched Treehouse, like...
Ryan: Got it.
Nathan: Did you have savings where you could take bigger risks at Treehouse or, you know?
Treehouse bootstrapped, fueled by Ryan’s conference business
Ryan: Yes. So I would say what's interesting was when we started Treehouse, I hadn't sold the events business, so we bootstrapped it.
So the idea was, "Let's literally use cash flow from the events business," and we boot that business up with, I think it's like 50 to 100 grand.
We were Ramen profitable within three... I think three weeks.
Nathan: What did do revenue-wise in its best year, the conference business?
Ryan: I think we were doing around two million a year.
Nathan: Okay, so pretty healthy, but barely breakeven.
Before Treehouse was born
Ryan: I mean, it was... It's not a great business, you know. Basically, sold it for 1X revenue barely. I think it...
Nathan: That's still pretty good.
Ryan: It was good, but this is the brutal truth here. So, I was negotiating. Had one buyer which anyone who sells a business knows that's a bad thing. And they call...
Nathan: Hope you're a good bluffer.
Ryan: They... Oh, my God. So they called me up and said, "So, yeah. We're only gonna... You're gonna get a 0.93 bolt up on the revenue now, not a 1, because you have no choice," and I was like, "You're right."
Nathan: Did you say that or did you play hard ball and say, "No, I won't go down that far. Give me 0.95."
Ryan: No, you know when you're tapped out. You know when they hold the cards and you got nothing, but...
Nathan: Didn't you worry though, about them coming back and saying, "Wow, he went to 0.93 easy. We're going to go around to 0.85"?
Ryan: No, because I knew they wanted the business.
I knew it was valuable and worth it, but I knew that they got me there. The other business I sold which was a small... I ended up selling the business where you send large files because I rebooted it as a freemium model.
So I thought eventually, "You know what? This is a decent business. If we can reboot it, do it free." And I eventually got that going but realized, "I either go big on this or I sell it." So I sold it and the guy used a classic trick on me that now I'm aware of.
He said, "I'm gonna talk to my board and see if I..."
Nathan: And you fell for it, right?
Ryan: Yes, "See if I can get you the price that you want." He came back and said, "The board said no, but..."
Nathan: But I love you. I'd love to work with you.
Ryan: "I'm gonna go back for you and I can get you X," you know, and I was like, "Okay," and I believed him. I mean then, I was young and didn't know what I was doing.
Nathan: Can you share what you sold that one for?
Ryan: It was sub a million, you know, so just...
Nathan: Okay. More than 500 though?
Ryan: Yeah. It was like, "Get out the door, you know, and let's move on."
Nathan: That's so funny. Okay. So you did that. Okay, got it. This is helping kinda understand the genesis of Treehouse. Okay, you're now in Treehouse. You launched in 2010. Fast forward to today. What's your team size like?
Ryan: We're about 80 full time people.
Nathan: Okay. All in Portland?
Ryan: No, we're very much distributed. So, we have about 20-ish people here where we have a really beautiful studio next to me where we record our video content. And then we have another studio in Orlando which is similar.
And then the rest of people work from home, so they work from a desk somewhere. We've only raised 13 million so we're really capital efficient, you know. Our competitors have raised 10X the amount we have, but we're focused on building...
Nathan: Name two of them.
Ryan: Udacity is a great one. Pluralsight...
Nathan: Is Udemy in this space?
Ryan: Udemy is, but they crowd source their content.
Ryan: CreativeLive is very much a friend, parallel... They focus just on creativity and more, sort of, artistic skills whereas we do kind of hard tech skills. And I actually know Chase. He's a good friend of mine thus far.
Nathan: If you guys want to pair out, you know, Ryan's story here with Chase, he was just on the show... Let me see if I can bring it up, back on episode 774 if you wanna log on.
Ryan: Well, there you go. Boom.
Nathan: You guys do two different things but same concept. There's a merger happening?
Ryan: Yeah, we're good friends. We work a lot together so. It's good.
Nathan: As he swivels back and forth in the chair, let's say. All right. Nervous shakes there, right? Just kidding. All right.
So, you raised 13 million, and what are you up to today in terms of, kind of, I guess... What do you measure? You measure you said 600 companies. Do you measure number of companies or number of students?
Treehouse does both Consumer and B2B
Ryan: Both. So that's why we have this really cool business where we have consumers that come in and love our school.
And then they eventually end up in businesses and then we have businesses that realize we're the highest quality, most effective way to close their skills gaps for the subjects we teach.
And so we compete on laser focused value for tech beginners, and they're...
Nathan: How many students?
Ryan: We have over 80,000 enrolled students right now.
Nathan: That's great.
Nathan: So let me ask you a question. People sign up to learn something and then the challenge is tough for a SaaS business, because, once they learn it, then they should leave if they get what they expected.
How do you keep lifetime values up and churn low?
Ryan: Thankfully for us, we teach something that always goes out of date. And so coding, unfortunately or fortunately, you have to relearn everything in 18 months, so it helps.
We accept the fact that people pause and we encourage pausing, so we have a lot of folks pausing and then un-pausing.
Nathan: Now, can I take 80,000 times a $25 price point and assume you guys are doing north of 2 million a month? Is that generally accurate?
Nathan: Ish? Okay. What is the... So, this is kind of a more of a data related question, but I'm curious… You must when you talk to investors on board meetings, the churn question, you always kind of address it.
When you get into those debates about churn, how do you help your investors and other people understand the nature of what a paused student means, that it's not a cancelled account?
Ryan: We talk a lot about the fact that this is the way people want to use apps. They want to pause when they're not using them, and we are increasing our customer base overall, because we are taking care of our students.
Ryan: We actually had this thing where we made them choose one, two or, three months, and then it would auto un-pause.
And we got a lot of anger about that because people forget like, "Oh, what? I just got charged by Treehouse," and we're like, "You told us to un-pause you." And they're like, "Well, you kinda made me."
And we said, "You know what? Indefinite un-pausing. We wanna win because we have a better school, not because we trick them to un-pause."
Nathan: That's interesting. So, me asking you what your annual retention is, is not the right question. Like, what's the same kind of data point you use to measure...
So, I guess like, how many people use you once pause you, and then don't ever come back?
Ryan talks metrics
Ryan: Not that many, actually. We have an extremely high MPS, and so we really focus a lot on MPS, and then we focus on LTV, and then we focus on, you know, CAC to LTV.
We actually are even more focused on that. We choose fully loaded CAC to gross profit LTV, which we think is not a vanity metric. I mean unlike...
Nathan: Which one, CAC or LTV?
Ryan: Well, we think people who focus on CAC to LTV, it can be a vanity metric, because you're not actually focusing on gross profit LTV.
So, how much profit are you actually driving in LTV, and what is the fully loaded CAC, which means you gotta include your marketing, salaries, you gotta include your...you know. You can't pretend, right?
Nathan: Just so my audience can do this calculation on their own business if they want, when you say a full...like, the proper LTV, you take your monthly ARPU, multiply times the number of months you think they're gonna pay, right, which is usually, you know, one divided by churn is the number of months, typically.
And then, also, most people stop there… You're saying on the end of that, they should multiply by gross margin.
Ryan: Yes. Yeah, you have to take out your costs and understand that, you know, that's not...
The LTV isn't all profit. And then your fully loaded CAC is saying, "It's not just how much I paid to acquire this person, it's also what I paid the people that are marketing to that person."
Nathan: And do you put on-boarding in the fully weighted too?
Ryan: You know, that's interesting.
Nathan: Where do you stand?
Ryan: I don't know. I need to check into that, but that's a good question.
Nathan: Okay. So do you mind me asking, what do you pay to acquire a customer fully loaded?
Ryan: We don't share that.
Nathan: You don't share. Keep it under wraps. Okay.
Ryan: But, you know, we can do it profitably, and this is the one thing everyone listening should understand, you know. Is their FCAC to GPLTV, Is it great? And if it's not, something's really wrong. And then we have to...
Nathan: That's Gross Profit Lifetime Value, guys.
Ryan: Yes. Yes.
Nathan: And then those are great metrics. Will you share the other one, what your gross profit lifetime value is?
Ryan: We don't share that either.
Nathan: You can't share?
Ryan: I can't give that to you. Come on.
Nathan: That's okay. That's okay.
Ryan: But, you know, our students love our product. The businesses love our products, so that's why we focus heavily on MPS too. We want people to love using Treehouse.
Nathan: You mentioned earlier you're really kind of capital efficient with the amount that you've raised. What do you try and optimize payback period for? When do you want like to get your money back?
Ryan: I mean, we... For our consumers we wanna make it back almost immediately. That's one.
Nathan: Oh, like, that's your goal. I mean, are you doing that now would you say?
Ryan: Close. Close.
Nathan: Okay, wow. That's impressive.
Ryan: But we're seven years old. I mean, this is the other message I wanna tell people listening. This takes time, you know, and there's a lot of pressure. If you read TechCrunch or anything to build some sort of unicorn business in three years, and the reality is 99% of us won't do that. And we have to be passionate about the "why" because...
"It's going to take 7 years minimum to build a good business"
I want to run Treehouse forever. I happen to be ridiculously passionate about it, and I...
Nathan: And a few Spartan races over the week, you know.
Ryan: Yeah, you know. Life squeezes in.
Nathan: Yeah. Okay, cool. And since you didn't get so concrete and I was, like, I asked these more general ones which are really helpful. So you have a really healthy payback period. Where do you try and keep your LTV to CAC ratio at?
Ryan: I would say you want it three plus, is considered pretty healthy.
Nathan: And you guys are in that range already?
Ryan: Yeah. Thankfully, we're north of that.
Nathan: That's great. How do you make the determination of like when you wanna go raise more capital or not raise capital?
Ryan: It's interesting. So, we have actually decided we wanna put our heads down and go into hedgehog mode. And what I mean by that is there is a distraction to always be thinking about your next round instead of building a good business.
And because we are not gonna run out of money now, we are actually gonna put our head down and focus on building a stable, foundationally strong business that maybe we never have to raise again.
But this is the trick, is that people focus on raising, but the reality is…
“No one will give you money unless you have a business that doesn't need money”
Nathan: That's right. I mean, and you... I mean, just to be clear to you, looking at your numbers, you know, you're being vague on purpose which is important, I understand for competitive purposes.
But, I mean, if you've got a payback period of like one or two months, that's like extremely capital efficient, right?
Nathan: And if the average customer's is paying 25 bucks a month, that means you're only paying 25 bucks to get the customer in the first place with a one month payback, right?
So like you've got... Your lifetime value to CAC ratio has got to be through the roof, because if it's only 3 to 1, you're assuming out to be of 75 bucks, 3 months of revenue. You've gotta be killing that, right?
This industry is tough
Nathan: So, like the other side to that is you'll always have people around you going, "Well, Ryan, why aren't you being more aggressive? You've gotta win this space. Competitors have more funding than you".
Why aren't you being more aggressive? How do you resist?
Ryan: So our competitors have raised 10 times the amount of money we have, right?
But we keep seeing competitors go out of business. And, you know, look at the boot camps. So we just saw... So, Iron Yard went out of business. Dev Bootcamp went out of business. Flatiron just got acquired.
I mean, we are staying laser focused on our strategy. We are 100% online. We're not gonna get sidetracked by competitors that raised a ton of money.
Now we have Udacity that's raised 150 million dollars I think. Pluralsight, that's raised just I don't know how much and they're gonna go public.
Treehouse is in for the long run
But the reality is either you're in a space where there is winner take all, and you better go raise a ton of money and be first, or you're running a more normal business. You know, just look at...
Okay. So we are an online school. How many universities are there? Hundreds and hundreds, right?
There's not one university that everyone goes to that's the best, and so we view this space as there's gonna be multiple winners and we wanna be one of the best, highest quality, foundationally strong because that will allow us to actually serve people for 10, 20, 30 maybe 100 plus years.
I have a such a long focus, right, and that allows me to do that. Maybe it's because I'm a little older. Maybe because I’ve run a couple of businesses. I've had a couple wins that I'm able to calm down. I don't...
I wanna be clear. I feel the pressure. It's not that I don't care or I'm indifferent. I just daily decide... I literally open my journal and it says, "What is my 'why?' To create the future of education so I can change as many lives as possible," right?
That's why I do this and that allows me to have that long-term perspective. Thankfully, my investors share that.
Nathan: That's a good thing. Now, if your largest customer came to you tomorrow and said, "Hey, you know, we'll offer you, you know, 10X your current AR," which you said, you know, call it around 24 million if you're doing 2 million in MRR.
Do you take that deal if it aligns with that journal entry that you just articulated?
Ryan: We would be very careful about changing anything for one customer or a buyer. I very much have a long-term perspective and would be willing to turn down short-term money for long-term gain.
But we're starting to see big, big companies come in and say, "We are losing the talent war. Treehouse, we need you to help us build a sustainable moat on this, because we're gonna lose."
You know, the average stay for a developer at a startup is 10.8 months. It is unwinnable, right? So…
Nathan: But see it's a... A lot of my friends who go to the Valley what they do is they stay for 13 months, just past the 1-year cliffs and get a little equity, then go do it again.
Like it has nothing actually to do with the talent. It's just they're gaming the system because that's how the system's played.
Ryan: It's crazy. So we're going outside that. So, what we do is we build a local source of talent, so we partner with the Boys & Girls Club for instance, here in Portland. And then we find an employer who is willing to invest in that talent.
And what that means is they hire an apprentice and then they pay for their education, they hire an apprentice, and then those people come up through this talent pipeline while working their normal job.
They have to support their family. They're not gonna go to a boot camp or a college. And then they are hired as apprentices, and then that talent is mentored and then it's taken up. And then eventually, 12 months down the line, those mentored, they start mentoring new apprentices.
And you take the average 10.8 months' stay and you extend it to 30 to 60 months because you have people that actually want that job, who understand they were invested in. You have to throw away the current system and just go around it.
Nathan: I'm gonna say one last thing before we wrap up with the famous five. I would love to be like head of PR with you guys because literally, what I would do is I would put together an LoI that is an offer to acquire Virginia Tech for four billion dollars.
And I would leak it to Business Insider and the headline is, "Treehouse Makes Four Billion Dollar Acquisition Offer for Major University," right? You would get so many customers free.
Ryan: Oh, my God! You just gave me the most valuable idea I've heard all week, so I appreciate that.
Ryan’s Famous Five
Nathan: All right, Ryan. Let's wrap up with your famous five here. Number one, what is your favorite business book?
Ryan: "Good to Great."
Nathan: Number two, is there a CEO you're following or studying right now?
Ryan: I really... There's many, but I really love someone like... Oh, gosh. Forgetting the name. I would say someone... Oh, gosh. I had this...
Nathan: It's okay if you don't remember. That's all right. If you come back, we'll go back to it. Number three, what's your favorite online tool besides your own?
Nathan: It's a good one. Number four, how many hours of sleep do you get every night?
Ryan: Six to seven. Not enough.
Nathan: It's still pretty healthy, though. And what's your situation? Married, single, you got kids?
Ryan: Married. Got kids. Super happy.
Nathan: How many?
Ryan: Two little boys, and I have tattoos all over my arms. You can't see me. One arm per kid.
Nathan: That's pretty cool. So they're like... How young are they? Like are they getting sleep at night or they're newborns?
Ryan: Six and nine, so we're in the sweet spot. Life is so good.
Nathan: And how old are you again?
Ryan: I am four zero, baby.
Nathan: All right. The big four oh. Take us home. Take us back 20 years, Ryan. What do you wish your 20-year old self knew?
Ryan: I wish I knew that nobody knew what they were doing, and it's okay.
Nathan: There you guys have it. People love to act like they know everything, but in truth, nobody knows what is going on or what they're doing.
He's had many... Two successes, one failure before Treehouse. Now obviously, Treehouse launched back in 2010 looking to change how education is done in the education system.
He's got a team of 80 based between Portland, Orlando, and remote. Super healthy ratios in terms of payback and LTV to CAC ratios, 13 million raised.
And most importantly helping 80,000 folks get smarter and fill skill gaps paying on average 25 bucks a month, so around 2 million in MRR there.
Healthy run rate. Healthy growth. Ryan, thank you for taking us to the top.
Ryan: Thank you very much. Take care.