How Kong Inc Reached $10M ARR with 130 Enterprise Customers and 133% Net Revenue Retention (Interview with CEO Augusto Marietti)

Introduction and Guest Background

Nathan Latka

00:01Hello, everyone. My guest today is Aghi Mariotti. He's an inventor, technology entrepreneur, and angel investor. As the CEO and co founder of Kong, the API company on a mission to intelligent broker information across all services, he drives the company's vision, strategy, and long term growth. Before this, he was CEO and co founder at Meshape, the largest API marketplace, which was acquired by Rapid API in 2017. Agi, you ready to take us to the top?

Augusto Marietti

00:22>> Yep. All

What Kong Does and Its Business Model

Nathan Latka

00:23right. So what is Kong HQ and what's the business model? How do you sustain yourself?

Augusto Marietti

00:28>> Yeah. Yeah. So Kong, it's API platforms that helps you manage, secure and govern all APIs across your companies. And it's an open source, open core business model. So we have our open source components, which is Kong API Gateway, which people can download and run-in production on top of all your APIs. And then we have the enterprise product, which is the service contract platform that manage all those open source proxy and helps you analyze and govern and

00:58>> secure all your traffic.

Nathan Latka

01:00So it's kind of open source SaaS then in that regard?

Augusto Marietti

01:02>> Yep, yep, yep, yep. Think about it like building the nervous system, right, of the cloud. In your body, you have the nervous system, which is peripheral, and then you have the central, which is brain and spine. And then in similar case, our peripheral components are the open source proxy. And then the central part, which is the brain and spine, is the control plane that is the one that we have an enterprise commercial offering around.

Enterprise Pricing and Contract Structure

Nathan Latka

01:25Yeah, very good. Okay, so help me understand on average what are companies paying on the enterprise side to use your technology?

Augusto Marietti

01:29>> Yeah, it's a 6 figures and up annual base contract value, right? So it's annual subscriptions where it goes from 6 figures and up.

Nathan Latka

01:39Okay. So I mean, is it fair to say maybe a fair average is, you know, $10 a month, $120 a year or something like that?

Augusto Marietti

01:44>> Yeah, a little bit more.

Nathan Latka

01:45Okay, fair enough. Good. And then put us on a timeline for me, when'd you launch?

Company Timeline and Founding Story

Augusto Marietti

01:49>> So Kong Inc. Was branded in 2017, August.

Nathan Latka

01:56Okay, '17. And that was, did you jump into this right after you sold to RapidAPI?

Augusto Marietti

02:01>> Yeah, it was a spin off of Meshape Inc. And obviously 2016 was kind of internally pivoting, and then 2017 was also public phasing branding and reshaped organization and sell their old asset as well.

Landing the First Enterprise Customer

Nathan Latka

02:15That's great. Okay. And so, you know, walk me through your first couple customers on the platform, not the free ones, the enterprise ones. How'd you land those first customers?

Augusto Marietti

02:22>> Yeah, that's an interesting story. So when we open sourced Kong, right, from the core engine of the Mesha API marketplace, it took a lot of adoptions on GitHub, really no commercial at that point, right? But five months after, at the end of twenty sixteen, the phone rang and it was the center of Medicare, healthcare.gov, back then was Obamacare, they're all based in Baltimore, and they were using Kong in productions, right, to power all their APIs with

02:51>> TurboTax to do the programmatic partnership transaction with TurboTax for tax credit for health credits. And then it was about end of the year and April was coming up, which is obviously the end of the season for tax. And then there is a big spike there. And so they decided to call and say, Hey, we love this. We're using production, but we need support. And that's really how we started the first commercial customer. We didn't have any

03:11>> commercial product back then, just the Kong open source. And I think in thirty days from that phone call, got quite a good value from them. That's And how they start really the first customer by only selling support from an inbound call from Baltimore on the center of Medicare.

Customer Count and Open Source Scale

Nathan Latka

03:28That's hysterical. Okay, so you signed them up. And then how many customers have you scaled to today?

Augusto Marietti

03:33>> We have about more than 130 large enterprise customer.

Nathan Latka

03:38And then go more up the funnel a bit for me. So how many total installs of the open source platform?

Augusto Marietti

03:44>> Oh, installs. So downloads is a little bit of a vanity metric, right? Yeah. Because

Nathan Latka

03:48That's why I asked customers first, by the way.

Augusto Marietti

03:50>> Yeah, that's fair enough because you get bots, you get Docker images that get pulled in from containers, Docker Hub. So it's now it's quite a bit, we have like 100 millions there right at the top of the funnels. And then we have like, I think now it's 800,000 active instances running for the one that we can track because the phone home is on and there is no firewall blocks. So there is a lot that we don't

04:11>> track anything after they put into their own cloud.

Nathan Latka

04:13100,000,000 downloads, 800,000 active instances, and then about 130 enterprise customers.

Augusto Marietti

04:19>> Yeah. Yeah. 800 monthly active instances, which we don't know, like if you decap the peak, we don't know really how many users this is, several, several, several dozen of thousands. And then it's about 130 large enterprise customers, right? The global 5,000, which is the one that we track.

ARR, Growth Rate, and Revenue Trajectory

Nathan Latka

04:36Now, I take 130 customers times, minimum $10 a month, you're doing north of 1,300,000 a month right now?

Augusto Marietti

04:42>> Yeah, it's more than that.

Nathan Latka

04:43Yeah, definitely more than that because that was a minimum value. Yeah. When do you think you break 2,000,000 a month? Do you feel like that's doable this year or is that an uncomfortable stretch goal?

Augusto Marietti

04:52>> So we are well past the 10,000,000, right? But we are obviously a 100,000,000 in ARR. So we're tripping the business this year. So we're getting, we're definitely passing those points this year.

Nathan Latka

05:05Sorry, sorry. My question was, when do you think you'll pass 2,000,000 in monthly recurring revenue?

Augusto Marietti

05:09>> Oh yeah, we don't disclose the exact dates on when we track those kinds of numbers.

Nathan Latka

05:15Okay. Well, I guess again, all I'm asking is your goal by the end of this year is to like, what's an uncomfortable stretch goal for you?

Augusto Marietti

05:23>> It's about tripling the business from where we were last year. Again, we're between 10 and a 100,000,000 run rate, but we don't disclose specific numbers.

Nathan Latka

05:33So we can understand growth rate over the past twelve months. Again, you're north of 10,000,000 today in revenue. Where were you a year ago? Were you down at like three or?

Augusto Marietti

05:43>> Yeah, we grew five times from 2017 to 2018.

Nathan Latka

05:50And then again, 2018, this exact month last year, you feel like you were down about, you said about three times smaller than you are today. So somewhere north of 3,000,000 in ARR?

Augusto Marietti

06:02>> In that ballpark, but yeah.

Net Revenue Retention and Churn Breakdown

Nathan Latka

06:05Where's most of that growth coming from? Is it coming from expanding the enterprise accounts or getting new customers altogether?

Augusto Marietti

06:12>> So last quarter it was half and half, but it was an anomaly. Usually it comes from new logos because it's still very early days, right? So we grab new logos and a lot of customers, most of the customers have been had in the last twelve months. So, they're not even at renewal time. And last quarter, for example, was the zero churn and was a lot of massive expansions because of two large customer really expand substantially. But

06:37>> on average, it's really percent, still 95% new logo. I think at the end of the year, and we end January 31, things will change, and we start to also turn in expansions. But last quarter was last twelve months average of last quarter, like for example, net retention rate was 132% and in quarter was 195. So it was a little bit strong for in quarter, but we want to stay above 130% net retention rate.

Nathan Latka

07:03Yeah. If you look at the past twelve months, have you been above 130 net retention?

Augusto Marietti

07:06>> One thirty three.

Nathan Latka

07:07And peel that onion back for me. So what was gross revenue churn?

Augusto Marietti

07:12>> Well, last quarter was zero. So on average, we churn less than that less than 7% on temps on temps of dollars value because the

Nathan Latka

07:21product Over what breaks period of time monthly or

Augusto Marietti

07:23>> Last 12 last twelve months.

Nathan Latka

07:25Okay. So 77% revenue churn over the last twelve months. If you have one thirty net, that means your expansion on average is about 37% in that cohort. Is that right?

Augusto Marietti

07:33>> Yep. Yep.

Upsell Axes and Expansion Mechanics

Nathan Latka

07:34That's great. What upsell axes are you upselling against?

Augusto Marietti

07:37>> So there are two ways, right? There is the upsell and the cross sells. Last quarter we got lucky at both in a way, but it's usually an upsell, right? Where you usually buy more of the technology, and we price by three different dimensions, which is numbers of users that use the platform, number of requests that goes through the platform, like the throughput of the traffics, and then numbers of microservices or service that you add through the

08:03>> platform. And then one of those lever usually tend to go up over the twelve months. And so that's, they buy more of those kind of

Nathan Latka

08:10Which one is most effective for driving expansion requests and throughput microservices or number of seats?

Augusto Marietti

08:16>> Well, the microservices, we just had it. It's like, so too early to say, but I think that's would be the most powerful one.

Team Size and Fundraising History

Nathan Latka

08:23Interesting. Okay, round out your team for me today. How many folks on the team?

Augusto Marietti

08:27>> Overall, globally, it's about 140.

Nathan Latka

08:30140, that's great. And then have you bootstrapped the company or did you decide to raise?

Augusto Marietti

08:35>> We raised over 71,000,000.

Nathan Latka

08:38Auggie, I liked you so much. And then you tell me you take all this dilution.

Augusto Marietti

08:44>> Well, if you think about it, our company before Kong, it was misshapen, right? So if you go back to that day, that's the whole amount because we were running a different company before, and then we have to spin up Gong. But there is like ten years of blog before we got here. It's not like start, go and race.

Nathan Latka

09:02Okay, but on the current cap table today, there are investors listed and those investors altogether have put in about $70,000,000.

Augusto Marietti

09:09>> Yeah, well, we clean up a little bit, but we clean up a little bit lately, but But

Nathan Latka

09:15you sold Meshape, right?

09:16>> Mean, you sold it to RapidAPI.

Augusto Marietti

09:19So, so No, but

09:20>> that was an asset sales though. It was faster to do through an asset sale. So we sold the product and the business, but we didn't sell it like the cap table kind of thing of the corporation.

Nathan Latka

09:29Oh, okay. Okay. So you sold an asset to Rapid API. This is basically the Snow a renamed version of Meshape is now calm.

Augusto Marietti

09:37>> I reboot. Yes. Yeah. I reboot from from the region regional cap table. We did some cleanup over time.

Nathan Latka

09:44When did Meshape launch? What year?

Augusto Marietti

09:46>> Meshape has the one that was sold we launched in public launch was 2012.

Nathan Latka

09:53Okay. Got it. So you said 2017 for Kong, it really was 2012. I mean, was the start.

Augusto Marietti

09:58>> That was the start of the corporation. Right? Even if we were doing something totally different. Yeah. From 2010 to 2016, it was all API marketplace and Meshape. And then through '16, when the first contract came in, then we we went all through call. Yeah. Yeah.

Nathan Latka

10:12How much?

10:13And then we much capital has come in post 2016 in terms of what raised?

Augusto Marietti

10:18>> So that was 18,000,001, and then we raise 43.

Nathan Latka

10:29Okay. So so $60.62, 63, something like that million total?

Augusto Marietti

10:32>> Yeah. So majority has come over the past two years.

10:35>> Yeah. Yeah. Basically, for the first five, seven years of Meshape, the business wasn't really growing very fast, we're kinda, like, you know, keeping the lights on, and and we're between fifteen and twenty employees'headcounts, and we were trying to make the money last as much as we could, which was a 6,500,000 series a. And we last for years, for a decade, almost a decade. And then and then when Kong took off, then then we started to

10:55>> accelerate the business and and raise the additional growth.

Sales Team, CAC, and Payback Period

Nathan Latka

10:59Talk to me about how aggressive we're being on new customer acquisition, right? So kind of first year ACV is north of, call it $150,000 Are you willing to spend that full ACV to get the customer for a twelve month payback? Or are you more or less aggressive?

Augusto Marietti

11:11>> So this is how the model works today. Right? We have this open source flywheel, similar to open core business like Elastic, Asher, or Confluence. They're all all the business being booked today, it all went through inbound. So somebody goes on the website and either contact us do request of them or contact sales, right? So it was driving inbound. Of course, as you grow and the numbers gets big, you need to also start to have a little

11:33>> bit of outbound and put more money in. But the margin are pretty healthy, right? We're talking about 85% gross margin And most of that was booked about inbound. So there is really not much, at least in the last twelve months, there wasn't really much a lot of marketing spend, but things will change in the future. We still have to figure it out what kind of numbers we want to put on outbound, Firehose and figure out

Nathan Latka

11:55>> the Well, imagine you've made some sales higher at this point.

11:58Of the 140, how many are sales or AEs or CS reps?

Augusto Marietti

12:02>> So quota carry and a lot are obviously in the last three months, so they're not ramp, But all in globally, it's about now 15.

Nathan Latka

12:10Okay. So you have some, like, hypothetical pro form a you hope these folks hit. You've modeled a quota attainment of, like, four x their base plus comp or something like that.

Augusto Marietti

12:20>> Four to five.

Nathan Latka

12:21Four to five X, yeah, that's pretty typical at They're your ramping up, but what do you put it for their ramp ups? Give them six months?

Augusto Marietti

12:26>> Six months, yep.

Nathan Latka

12:27Okay, so when then you model the fully weighted CAC on people they're bringing in, what do you think that is on one hundred and fifty first year ACV?

Augusto Marietti

12:37>> So you mean in the, how much the sales force will cost you in the marketing on getting those new logos?

Nathan Latka

12:43Because No, if you're

12:45>> not COGS actually, fully weighted CAC.

12:46So that includes a salesperson commission, it includes marketing dollars to get the leads, it includes anything that a sales and marketing or CS.

Augusto Marietti

12:54>> Yeah. And so then that will take about twelve months to pay back. Right?

Nathan Latka

12:57Okay. That's fair enough. So yeah, you'll you'll to get an basically to get a new dollar of ARR, you're totally comfortable spending a dollar to get it.

Augusto Marietti

13:03>> Yep. Yeah. We're about that points going to that point.

Burn Rate and Capital Efficiency

Nathan Latka

13:06Yeah, that's great. And then, look, one of things I'm always fascinated by coming to your scale, I mean, you have to be burning to drive growth. I mean, you are on the VC track, whether you like it or not, that's what you chose. How aggressive are you being in terms of burn per month? Is it like 1,000,000 per month or 2,000,000 per month or more?

Augusto Marietti

13:21>> No, less. We're trying to invest and grow, but not crazy wise. A lot though happens because

13:31>> 30% of the deals happens to be cash up fronts. Annual deals. And they're multi year sometime, like three years, right? So you might get a lot of cash coming in because we don't have a credit card business. So we might get a lot of cash coming in at the end of the quarter. I mean, the month after the end of the quarter. And that month, for example, might be free cash flow.

Nathan Latka

13:48Yeah, on a GAAP basis, you'll have on a GAAP basis, you'll have months where you're Exactly.

Famous Five: Books, CEOs, and Tools

Augusto Marietti

13:54>> But it's very, it's very, it's not the 2,000,000 bar and it's not a 3,000,000 bar and it's less.

Nathan Latka

13:59Okay, got it. So just to be clear, you're burning again on a SaaS kind of metrics model, not a GAAP basis, you're burning less than a million bucks per month to drive growth. Any plans to raise additional capital?

Augusto Marietti

14:10>> Not anytime. Not anytime.

Nathan Latka

14:13Yeah. All right. Let's wrap up with the famous five. Agi, number one, what's your favorite business book?

Augusto Marietti

14:18>> Well, there is a lot, right? There is like The Art of War, Principles, but the one I like a lot, which is more spiritual business book, is The Seven Law of Spiritual Success, which is not really business, but I applied a lot business and in my day to day. So it's a little bit of uncommon answer, but it helps a lot on business side too by having those seven spiritual advantages, I would say, or coaches.

Nathan Latka

14:40Number two, name a CEO you're following or studying.

Augusto Marietti

14:47>> Other than the usual suspects, I think Giannini, which was the founder of Bank of America, which was Bank of Italy. I studied him a lot because I grew up in Italy. So Diznez was obviously very important. And of course, you have, you know, the modern one like Jeff Bezos, but I like also Carnegie Mellon. I think Chambers was the best enterprise CEO, right? John Chambers.

Nathan Latka

15:08Yeah, yeah.

Augusto Marietti

15:09>> He built Cisco and it's quite, he built a 75,000 people family kind of thing, which is emotional draining, but he was able to pull it out and build the Cisco that it is today. So that's also quite fascinating how he did it at scale.

Nathan Latka

15:25Number three, what's your favorite online tool for building your company?

Augusto Marietti

15:29>> Definitely, Zoom.

15:32>> Yep.

Nathan Latka

15:33Number four, how many hours of sleep you get every night?

Augusto Marietti

15:34>> I'm trying to not go under six.

Nathan Latka

15:36Okay. What's your situation? Married? Single? Kids?

Augusto Marietti

15:40>> Single.

15:40No kiddos?

Nathan Latka

15:41>> I have a girlfriend, but not married. No kids.

15:44You're like, wait, I need to correct that. If she listens to this, then I'm gonna be single. All right. So not married, no kids. And how old are you?

Augusto Marietti

15:52>> 31.

Nathan Latka

15:53Last question, what do you wish your 20 year old self knew?

Closing Summary and Wrap-Up

Augusto Marietti

15:57>> Or not knew, you know, how long this would have taken? Like, you know, when you're 20, start saying, yeah, yeah, we're to be as big as Facebook in three, four years. Right? And then you're five years in and you're still figuring out how to process payroll and all of that. So it just, you know, knowing before how long that would have taken, I think we have more reality expectation, but also being naive is probably why we

16:20>> start things, right? So it's kind of a double, double's worth.

Nathan Latka

16:23KongHQ API management started back in 2012 with Meshape and then went all in on this model, basically an open source model, then sell enterprise customers on top of it. 130 enterprise customers paying north of $13,000 a month, So call it north of $20,000,000 run rate today. Scaling nicely, $70,000,000 raised. A 140 people on the team, 7% annual revenue churn, 37% expansion for a 130% net revenue retention, burning less than a million bucks a month, which is

16:48great. Again, scaling nicely, growing 3x year over year as they continue to use the open source engine to scale, spending a dollar to get a new dollar of ARR. Agi, thanks for taking us to the top.

Augusto Marietti

16:58>> Thank you, Nathan.