SEMrushrevenue, acquisition & funding

you're gonna love this interview just got done editing it i'm glad i got it live for you i'll be in the comments for the next 30 minutes hanging out answering any questions you have in fact leave a comment below about data points or what you think is going to happen to the company and i will respond to every comment additionally if you're just loving the content click the thumbs up and i will go and check out your profile as well and give your videos some love as well in the meantime enjoy the interview hello everyone my guest today is eugene levin he's one of the first investors to spot a company called sem rush after joining the company as a chief strategy officer he helped to more than quadruple company revenue and raised over 40 million dollars from tier one investors before that he was a partner at target global a pan-european venture fund that invested in the consumer internet space all right eugene you already take it to the top yeah absolutely happy to do that all right so for folks that have don't know what sem rush does what's the product do we help companies to improve their online visibility from you know search engine optimization where we became household name over the last 10 years to you know things like pay-per-click digital advertising uh social media digital pr and so on so technically we try to help people with everything everything related to our top of the funnel okay and when you came on back in may of 2018 you shared the company was founded in 2008 when did you join i joined in 16. okay 2016. okay got it so you've been there obviously three four years now at this point and uh you also shared at that point that the company had raised about 40 million bucks have you guys been able to grow with just that money or did you raise additional capital uh we we raised some money but frankly speaking we didn't touch you know this this uh this round it's it's pretty much every all on the balance sheet um we have been bootstrapped company from the very beginning uh very healthy economics and um we didn't really need extra capital we used it more as as um you know safety net to allow us uh run more experiments however most of those experiments proved to be successful so we didn't need this safety net at any point i mean more than more than 30 million bucks that 40 million is still sitting in the bank doing nothing i'm not doing nothing i think i think you know in times like this it's actually very uh comforting to have additional 30 40 million but it's sitting there in the bank basically for you to do whatever you want to do with you haven't spent it or you spent it and already returned money uh yes like sometimes you invest and they just get back very fast so so we we had a couple of those experiments when we started investing new products or writing new types of uh marketing campaigns but they paid back very fast so yeah okay so how do you let's go back to kind of like pre-virus right when founders come on the show and say like we raised a bunch of capital we didn't touch it like they say that and i can tell when they say it they're saying it's a sign of strength but in my mind i can't help think well that's pretty stupid you just got diluted for nothing right so like how do you balance the fact that like you don't need money but you still got diluted you're an xvc yeah so so the the method is very simple as company gets bigger uh technically you want to have certain amount of money on the balance sheet comparable to your revenue like monthly revenue or you know better say monthly expenses sure in case things happen you want to be able to to run the business for a while so i think when i joined we were in a situation where we had money in the bank and we were profitable but that was not comparable to our revenue and expenses so that gives you very low room for any sort of errors um so i think when people think about their their cash position um you know in in the world where you're a vc funded company and and the reality is you have like 18 months of runway and you know nothing nothing going to change that um is this reality is very different comparing to bootstrap business where you you put all your life you've built over years and you don't want to take those types of risks so you want to have a little bit more on a balance sheet in case you know hard times come to be prepared so you joined in 2016 you guys raised the 40 million in two years later in 2018. i assume you played a critical role and figure out how much to raise what was the right amount what was that actual runway number for you were you targeting 18 months of runway to cover burn 24 months what was it um no i mean we so we we thought about this in a way that you know we will have a couple months off of our runway on a balance sheet if if we have zero revenue like we can you know if there is no revenue we still can do this for you know a couple months at least okay but without this money it would be less than a month so so we we actually had very very um uh good cash management but uh you know amount of cash that we had on the balance sheet was not comparable to monthly revenue and monthly expenses i'm just trying to i'm digging here to try and understand exactly what you're saying so what i'm hearing you say is you went out and raised 40 million bucks to assume a catastrophe hit you had no new no revenue at all coming in not no new revenue no revenue at all coming in for several months you'd be able to pay all your expenses for five to eight months is that accurate yeah kind of kind of like that yeah okay i mean so 40 million divided by like five or six months that i mean basically what i'm hearing you say is you guys were burning like eight nine million bucks a month with no revenue i i mean no probably less probably less than that but i mean i i don't remember from top of my head back back in the day you know i came in 16 um it took us one one year to close everything we also didn't take all the money in one sort of transfer so um i i would say four or five months yeah that would give us four or five months of runway without any revenue okay i mean so can i take 40 million divided by four or five months i mean that you're basically saying yeah go ahead no no that i mean if you if you think about that um there are also like you see cash where it's not the same way as revenue that comes in right right like um and there are different revenue recognition policies the right expenses that you already paid for there are expenses that you paid over time but yeah i mean um and as i said we didn't raise 14 million from the very beginning so we we announced it later but um it was actually multiple different uh transactions with more or less the same group of investors so okay so well so explain to me how that works so you don't hear about that often so how much was the first tranche and why did you guys decide to go kind of the step approach so so yeah i mean technically we just wanted to be super friendly with with investors because we knew we would not spend money so so they had an obligation to fund a certain point but there was no big difference if money sits on their balance sheet or not not even balance sheet or on our balance sheet or this is with them in this case they can optimize their you know irr which is one of their main metrics and we don't really care so we could negotiate a better valiation because we are you see you see the point like for investors well so how much how much was how much was the first tranche yeah i mean i i think we cannot disclose it publicly okay but but like okay how many tranches were there totaled to get up to the total 40 million um so do do the whole thing probably three or four and what were they tied to revenue targets or just a time time-based approach just just time okay got it okay fair enough so yeah so you gotta just clarify it's it's not conditional it's just it's just we allowed them to to send money later because we we knew we would not need them yeah yeah that's what i was trying to get at okay so 40 million total raised it was in four tranches you didn't need all the capital but you wanted that contractual commitment and you said hey it's totally cool if you you know send us it in four tranches every six months not conditional and revenue targets just time based i see okay very good so talk to me about some of these experiments you guys ran that panned out like super quickly and returned a lot of cash what were some of the first experiments you ran in 2018 when you closed uh we we started experimenting with the new marketing channels we started doing more youtube uh we dramatically expanded our global footprint so we started hiring people to run marketing for um you know european markets such as germany italy spain france and so on so um it's um you know those those were the the first things that we tried but then we started investing more in product uh product takes more time to kind of show result and some of things that we started doing in 16 they actually started paying off only 18 or 19 uh you know things like uh our traffic analytics product we we've been building it for two three years it's extremely complicated technology uh so it took us quite a while to get everything running uh but now it's actually one of the fastest growing product clients that we ever had so yeah i mean that's that's kind of in a nutshell what what we started doing once we had more flexibility and could take more risks and now that some of these product lines have matured it's that they obviously attract new and different sorts of customers how many total customers are you serving now today um yeah yeah i mean i don't think we just closed this number ever but uh we have over five million registered users and then yeah by paying customers would be relatively small percentage of total registered users okay but you know it's you know it's it's obviously you know tens of thousands uh got it so the reason i'm asking last time you came on you said you had about thirty thousand paid customers so how many more than thirty thousand do you know have which you're really more okay like more than double um probably probably not you know probably not okay probably not more than double okay so fair i won't push you harder here but fair to say today somewhere between thirty thousand and sixty thousand paying customers and five million registered users yep okay how do you convert a registered use like what's the critical moment that you know a registered user has to hit to drastically increase the likelihood they can work to paid um it really depends we have multiple different funnels it depends on what problem users are coming with so for things like keyword research we'll give a certain functionality for free certain amount of data for free and then as people hit the limit uh they will you know either upgrade or you know sometimes wait another day we we limit number of searches that you can make on a on a free plan per day or we also limit number of results that we show for example for free we'll show you 10 results if you want to more than 10 you have to upgrade so so that would be sort of final for keyword research but for site audit it will be different facilitate for example we will allow you to crawl 20 pages for free so if your website is less than 20 pages you can use it for free um pretty much forever but if your website is bigger then you'll hit the limit and you know either upgrade or you know don't crawl your whole website and just limit your site audit to some sections um so yeah i mean we have we have more than 15 different different funnels for 15 different products or funnels yeah finals i mean final can include multiple products how many products do you guys have over 40 right now over 40. yeah holy crap so with all these additional products obviously you're launching them to hopefully cross sell and also bring in new customers has the average price that your average customer has paid increased drastically over the past couple years yeah i think i think if you if you look back you know to 2008 i think comparing to the first version of the product that we had uh our better revenue per customer increased uh more than six times probably closer to seven times yeah after i joined you know i i want to say i want to say almost doubled okay yeah back back in may again when you came on you said you put a target said hey you know the average customer pays somewhere around 180 on average per month i'm sure there's some way bigger there's probably some that are smaller but 180 on average has that 180 increased drastically or no so so yeah it depends on cohorts so there are two factors here um so people you know people uh come in and then over time they they upgrade another factor is that your low-paying customers churn faster than your uh you know your best customers who pay more so i think you know every check in general is a combination of those factors if you do nothing if you if you stop acquiring new customers over time your average check goes out but what's the point right so i think it's you know you need to think about this on a cohort basis but yeah i think you know those cohorts that that were you know at let's say for example 180 uh they continued growing so new cohorts they they're probably still climbing to this number well so the reason i'm asking is like one of the things that drives a lot of hubspot's earning calls is there are poo right average revenue per user and they have like way more cohorts than you but they don't obviously go into detail on every single co-worker the quick way to measure that is just arpu across all cohorts so total customers into total revenue is that about 180 today um no probably not hi by the way i i don't know why you have 180 i think i think i i don't think i told this number no you did i have i can pull the quote for you it's no but do you feel like it's higher or lower than that now uh would would depend would depend on a segment but i think overall 180 is um is quite a high number i mean if you look at our price page then we have a plan for hundred dollars plan for two hundred dollars and plan for four hundred dollars uh you can make some assumptions about distribution but you know it's hard to see average being 180 right why is 180 a hard average when your plans go from 100 to 200 to 400 180 seems like it'd be a that makes complete logical sense to me to be 180 yeah okay then why not no i mean i mean you don't usually have everyone on the missile plane right and sorry eugene come on you know you know how these numbers work your xvc rpu's total customer base divided into your total revenue obviously i know there's different cohorts that's like obvious sas 101 stuff it's important you're measuring that i'm just trying to get a general arpu number the reason i'm asking is because some of the firms like you sometimes will intentionally churn lower paying customers and go way enterprise five six thousand dollar a month kind of plans others will go and go way freemium and decrease their price significantly i'm trying to get a general trend yeah listen this i think you know if you're looking for trend this number is absolutely in the range yeah okay that doesn't answer my question so the average cut is you have between 30 000 and 60 000 customers do you feel like because if you take all those customers divided by whatever your revenue is right now it's about 180 per month uh it is it isn't a range yeah okay and are you from a strategic perspective do you feel like sem rush has more growth opportunities serving less customers at a higher price point in the future or more customers at a lower price point so i think um the goal of the business is to help as many marketers as possible in general like that's that's always have been the goal so we even even if we at some point say hey it would make a lot of sense uh to hike prices uh we would not do this because the goal is to have very very broad presence to have as many marketers as possible yes you'd prefer 10 million marketers paying a dollar a month then 10 enterprise clients paying a million a month that's that's in a nutshell yeah the the philosophy okay um but but for for for some of them uh you know they need special features and they're willing to pay for those features um so would we would we build something special for enterprise clients and sell it only to them because only they need this yeah at some point sure uh not necessarily uh our focus right now let's talk more about right now let's talk more about the team so how many folks on the team today um so we have over 800 people okay and are those all full-time yeah and remote right now yes sorry pre-virus do you do are you a remote company no okay got it you have offices all right and break that down for me how many of those folks are engineers yeah so and so we don't call people you know just engineers we we think about this as a product department and then if your role is engineer that's does how many people are writing code so so that's what i'm trying to say code is not the only important thing in the product so in product department overall we have more than 200 people now out of them how many write code probably 75 percent okay so called 170 ish people writing code how many do you have quota carrying reps at this price point or is it too cheap to pay a commission we do no we have as i said some segments of customers pay a lot of money have customers to pay more than a hundred thousand per year yeah you don't have any customers paying more than a million per year though right oh no but close maybe in the next couple years not yet all right so how many quarter carrying reps do you have so we have i think roughly around 60 so let's see okay cool and what's like the minimum acv sizes you want them focused on closing um we we don't have minimals we we had we had previously requirement to close at least annual subscription uh right now we don't have this uh whatever whatever they sell is good one of those sales reps so if they spend three hours selling someone on a 200 a month plan that is not profitable use of their time yeah right so so their incentive plan is focused on things that are more profitable um especially expansion so so we we find that if if customer sells new revenue that's good but new revenue is is subject to higher churn if sales rep sells to existing customer who is loyal very unlikely to churn then you know one dollar of expansion is going to stay with us forever and then what we've noticed is that if people expand it they're more likely to continue expanding so so that's where we now try to focus our sales teams so what is it what on a percentage basis what is expansion revenue annually today um not sure understand like can you can you sure so so so net net revenue retention in any company is made up from two is made from two components gross revenue churn and expansion right so so we we measure kind of one number like net net revenue retention and then the question is what what do you include what you don't include and we have roughly you know six seven different ways to calculate it there are also different definitions of what you call user um you know for example if you have a company like microsoft and they buy six different subscriptions for their six offices is it one customer or no but you're you're talking about logo churn on a customer basis yeah this is why people measure revenue churn it's way simpler you just take total revenue from a co-op last year and that same cohort this year how much turned and how much expanded exactly what i'm trying to say like if it depends on how you define customer because if you say microsoft is one customer no eugene it doesn't matter when you're calculating revenue churn it doesn't matter how many logos are on you're measuring it purely on a revenue basis so it doesn't matter that it's one microsoft logo it means that it's a million dollar year contract so so here we are there is actual difference uh if you let's say someone from microsoft japan let's say signs up and buy subscription they they have separate billing entity so if you combine this into one account you say have expansion for microsoft if you do not combine you say i have new guy in japan who just bought and and his email is microsoft.com but this is new guy because this is new billionaire c so it depends on definitions actually yeah but and as i said we have like six seven but in general we we are above 100 and then we also do segmentation of like uh you know if if if customers um work in a company with more than 50 employees then it will be way way higher than 100 but if they let's say individual uh freelancers with gmail account and so on they will have on average probably lower than 100 so it really depends but on average we we have one hundred percent yeah yep interesting um okay and then so from from the perspective of the virus right obviously everyone wants to be just trying to get to profitability as quickly as possible make sure they can have a long runway here are you guys profitable today uh cash flow positive okay why do you say it so specifically is there some other metric you measure where you're not profitable sure yeah i mean as as many other sas companies if you build people up front uh when you sell annual subscriptions then you get money but you cannot recognize it as revenue as a result your bottom line might be in red but your cash flow might be positive if you have your balance accurately so if you if you take 100 uh if you take a payment today for a thousand dollars for the year which is actually you know 83 per month for a customer you're saying you'll take you'll count the thousand today in this month and when you do that on a cash flow basis you're profitable but if you divide the thousand by 12 months and only recognize it over the next 12 months you might be burning a little capital yep that's that's the difference between you know gap and and uh cash flow yeah right your cash flow your cash flow profitable yep what will you guys grow out this year do you think what what will you guys grow at this year do you think um i had a number before this this crisis so which was which was what you know reasonably reasonably good uh double i would say hi double digit for a company of this size what is that 70 80 no not that high but okay okay so somewhere between 20 percent and 60 right right i mean i mean you see we have 800 people and we have cash flow positive if we grew eighty percent that would be that would be awesome but yeah yeah yeah when do you guys i mean so look i don't know what your actual obviously arr is but i mean can you break a million sorry 100 million dollars in ar this year do you think or you have to wait till next year i mean we talked about this we we did it a long time ago you broke 100 million dollars in arr recognized ar how long ago what year last year okay so that's not a long time ago you haven't been on in over a year and a half so okay so you broke that last year that's on our that's on a record that's on a recognized ar basis not on a cash basis uh yeah yeah okay so how so walk last question before you wrap up yeah i mean the difference is not that huge is maybe one quarter or so maybe a little more than one quarter the last question i want to finish with i think this is valuable you had obviously a growth target pre-virus you have to now re-engineer with your you know team what is the new target how what are those conversations sounded like how are you planning for for the next six months i think you know reality is that if someone tells you they know exactly what's going to happen and how it's going to impact their revenue they're probably not very honest so well no i want you but everyone has to take a guess you can't just say i don't know so we're not going to plan i want to know what you your best your guys's best shot your best estimate yeah so so right now we are looking at a different sound shenzhen and the the big question is like what what's going to happen with a new business and what's going to happen with existing business in terms of churn so in terms of churn we see that certain categories of our customers will be impacted materially and certain categories will not be impacted pretty much at all and uh we look at percentage of customers in those categories uh and uh apply certain uh you know certain multiples like uh you know additional 25 of them will churn versus what we would see uh you know naturally organically and from what we see is that um in some in some categories we will uh have you know 25 percent higher sure in some categories no no changes at all and those categories seem to be relatively small for us so we are talking about you know most vulnerable categories like uh very small agencies freelancers and uh and uh small local businesses so they they we see them being impacted but they're historically not the biggest part of our audience by any means we we usually work more with online businesses yeah yeah very good all right by the way have you been approached have you been approached by any bigger you know maybe public folks like hubspot and said hey we'd love to buy you guys now you we feel like we get you cheaper because everyone's everything's cheap right now so so yeah i think that brings us to the beginning of the conversation we we can you know wait wait wait this one out and we don't have to do any irrational moves um there's there's there's no need for this we uh we're still business that largely owned by founders managed by founders and you know team of uh people who they um assembled over over time uh we don't have to do anything irrational we can wait this one out any plans to raise capital yeah not in this environment probably i don't think it's a good idea all right let's wrap up with the famous five number one favorite business book uh intelligent investor number two is there a ceo you're following or studying um yeah so right now i'm actually looking at sadia nadella yep from microsoft number three what's your favorite online tool besides semrush to build the company um so right now zoom is everyone's favorite yeah right original answer there eugene good stuff number number four how many hours of sleep to eat every night uh so i changed my mind recently now i'm sleeping full eight hours mandatory that's great and what's your situation married single kids still married but you know if if coronavirus continues i i don't know how many kids i'm sure any kids yeah i have one one kiddo and how old are you uh me yeah i'm 32 32. last question what do you wish your 20 year old self knew you know i would i would say you know don't waste your time with stupid things guys there you have it sem rush launched in 2008 now have over 40 products between 30 and 60 000 paying customers over 5 million registered users broke over 100 million dollars in revenue last year hoping to continue to drive solid double-digit growth this year even in the face of the virus they're profitable on a cash basis so i have plenty of runway they can afford to write it out raised 40 million bucks many years ago but didn't need the capital used on some experiments now over 800 people on the team again obviously all remote right now looking to continue to scale eugene thanks for taking us to the top thank you you guys know i fight like heck to get these data points for you from these ceos that rarely do these kinds of shows if you want more shows like this make sure you subscribe right now we're trying to get 10 000 youtube subscribers by the end of september here 2019 and it would mean the world to me if you clicked now to subscribe additionally i've got two more great interviews for you if you want more data points from the world's leading sas ceos click and watch one of them right now