SaaS Interviews with CEOs, Startups, Founders
1266 How To Spin a Business Out of a Public Company
11 Jan 2019
Chapter 1: What is the backstory of Alpha Software and its growth?
many many years ago decades ago he got was part of alpha software group to about 25 million in sales then sold it to a larger company which he ran then ran as president before leading a spin out in 2004 of the product kind of the tech team really starting over there from scratch alpha software helping folks really non-developers build mobile apps faster and more efficiently they've got a team of 50 people between burlington massachusetts and other remote locations currently serving 3 000 customers
That pay on average called 140 bucks a month. So doing about 400, 500 grand a month right now on revenue or about a $5 million run rate. That's up from 3 million just 12 months ago. So about 70% year over year growth. They've raised 10 million bucks and again, growing rapidly with their team of 50.
This is the Top Entrepreneurs Podcast where founders share how they started their companies and got filthy rich or crash and burn. Each episode features revenue numbers, customer counts, and other insider information that creates business news headlines. We went from a couple of hundred thousand dollars to 2.7 million. I had no money when I started the company.
It was $160 million, which is the size of many IPOs. We're a bit strapped. We have like 22,000 customers. With over 5 million downloads in a very short amount of time, major outlets like Inc. are calling us the fastest growing business show on iTunes. I'm your host, Nathan Latka, and here's today's episode. Hello everyone, my guest today is Richard Rabins.
He focuses on strategy, accelerating global growth and scaling his company Alpha Software. He also served as CEO of SoftSquad International from 97 to 2001 when it owned Alpha. In addition to his 30 years with the company, Richard played a key role as co-founder and served as president and chairman of the Massachusetts Software Council.
now the Massachusetts Technology Leadership Council, the largest technology trade organization in Massachusetts. Richard holds a master's degree in systems dynamics from the Sloan School at MIT and a bachelor's degree in electrical engineering and master's degree in control engineering. All right, Richard, are you ready to take us to the top? Yes, I'm ready. All right, tell us about Alpha.
What's the company doing? How do you make money?
Okay, so in a nutshell, we're really very focused on the mobile business market. I can broaden that, mobile and web development. But in particular, if you think about enterprises or corporations, 60% of workers worldwide work standing up. not at desks. And these are people in field service. They could be nurses.
It could be restaurant workers, manufacturing, quality control, workers who work for cities and towns, et cetera. And until recently, the whole computing wave that started with mainframes all the way up to the web didn't really impact them. They still kept using... Notepads and forms primarily to record the work that they had done.
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Chapter 2: How did Richard Rabins manage the spin-out from a public company?
And then how big did you build in? What'd you sell it for back then?
We were roughly about 25 million, we had about 150 people, we sold it to a public company. And then I ended up actually becoming CEO of the company that we sold it to. And then after a number of years, as we saw the emergence of mobile, We actually bought the core business back from the public company. And so we could really focus on what was happening in Melbourne.
How did you manage to do that without the obvious kind of conflict of interest?
Well, it's actually pretty straightforward. And there is an implicit conflict of interest. You get a valuation from a recognized valuation firm.
So what, you did like a 409A?
I forget the details, but yeah, something along those lines. So we were able to buy the core business back and focus very much on the upcoming mobile market. And the reason why mobile is interesting, it's a difficult problem. Building business apps for mobile devices is a lot harder than building apps for regular devices because you don't have signal. You've got a very small screen.
You don't have a keyboard. You don't have a mouse. And typically the operator of the app has lost the use of one hand because they're holding the phone in one hand. So they've only got five fingers. And so building apps for mobile is actually a lot harder. And so now all of a sudden you get this sort of ā big issue that's arisen is... Yeah, Richard, you're in a hot space.
There's no doubt about it. Give me more, though, of the backstory here, because there's other people right now stuck in corporate wondering, I really want to spin this part of our feature set out. So you did a 409A evaluation or something like that, a non-biased part evaluated it. What did you end up buying it for to spin it out?
I can't give you the exact number, but, you know, we... We got a fair price. We bought it back. And essentially what we were buying back was some core technology and the customer list. And also we basically, the core developers who had gone with the original sale came back. So in fact, we were restarting the party, so to speak.
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Chapter 3: What challenges do mobile app developers face today?
So there's two kinds of customers. If I'm an entrepreneur and I've got an idea for a vertical market software as a service app, I'll give you an example. There's a product called Orca, O-E-R-C-A, and the entrepreneurs behind it felt that if they could build the equivalent of an electronic health records system for animals, for marine parks and for zoos, there would be a market.
So they looked at all the options for building out something that would be both web and mobile and chose Alpha because it's a very productive system. So that's one example.
Tie that back to a price point. So a customer store like that, on average, what are they paying per month?
Depends on how successful they are. The more successful they are, They need more server capacities. We let people host anywhere, or we've also now introduced the Alpha Cloud. But it ends up being a relatively small percentage of their revenue, probably less than 5% of their revenue.
So you price as a percentage of revenue?
No, we haven't priced it, but I'm just working backwards. So right now you pay per server, and a server can actually handle a lot of customers. So in this case... They've got a few thousand customers and they're able to run on, I think, three or four servers and the servers run in the order of $5,000 per year.
Okay, so is it fair to say an average contract value in terms of what people are paying you call between 15 and 20 grand a year or something like that?
Yeah, I'd say so. But now we're just about to introduce a new product called Because what we've determined, and it's very interesting, if you look at web apps, web apps... Actually, sorry, Richard, hold on one minute.
I want to learn about the new product, but let me just close out my thought on the customers here. Since the spin-out, what have you been able to scale to in terms of total customers using you?
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Chapter 4: How does Alpha Software cater to different types of customers?
No, very little. It was mainly an asset increase. purchase because in those days, software was mainly sold as perpetual licenses versus subscription.
Now, if you're doing a $5 million run rate today, that's about 410 grand per month. And you've got 3000 customers. If I divide the 3000 into your monthly, that means each customer is paying about 140 bucks per month, right? Which doesn't match up with your pricing page where you've got pricing ranging from 995 per year. I guess it does. These are yearly. These are yearly numbers. Okay, got it.
These are yearly. I didn't realize that.
Yeah.
That does match. That does match. Okay, good. So each customer is paying about call it 138, 140 bucks.
Yeah. I mean, it varies. And so, so that I just laid out one type of customer and that's what I would call entrepreneurs. We've got an idea in this case, it was a mammal product. We've got other folks who've built safety products in agriculture, school products, you know, ERP systems all over the shelf.
But then the other audience is corporate customers who, you know, they've got a sales force or service force or something and they want to mobilize these guys and they're looking for something that's powerful, that can connect to all kinds of systems of record. But at the same time, they can build very rapidly systems.
And also, there's a big push towards embracing the so-called citizen developer in companies. These are folks with domain expertise but are not developers. So that's what's driven us to the next product that is in the process of being released right now.
And I want to talk more about that in a second. Talk to me first, though, about growth. So today you're doing about, call it, $5 million a year in revenue. What were you doing 12 months ago? What was your run rate?
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Chapter 5: What is the average revenue generated by Alpha Software?
Um, it's bringing on mainly I'd say new customers and then, you know, under a subscription model, um, you've got a good product. It tends to be sticky.
So how sticky are you? What's your turn today?
Uh, I'm not going to give you an exact number, but it's very sticky.
Uh, there's come on Richard. You can't say very sticky without backing it up with people say, Oh, we're the best. We're the bubble. I mean, give me a number. You're above what in terms of dollar retention annually?
probably in the order of 85, 90%.
You're right. That is high. It's great. And that's, that's gross or, or, or, uh, or net dollar retention.
Uh, help me out. What, what do you mean? Yeah.
So if you lose 20% of your revenue, but you expand your current customer base by 40%, your net.
Yeah. What I'm referring to is existing customers renewing, not, you know, this is not taking into account, um, you know, new customers.
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Chapter 6: How has Alpha Software's pricing strategy evolved?
And so it's a little trickier to write tutorials and make it super easy because there's different paths. What we found is that when it comes to mobile, the kind of app that people want to build is ā almost always some form of data capture and dispatch. And it makes sense because the mobile worker are these people who've been historically using primarily forms to capture information.
Now they want to get rid of forms, you know, move to typically a smartphone just because they're way more ubiquitous. But that's a tougher technical challenge because you've got less space. but the benefits clearly are you don't have the double entry. You now are capturing data in machine readable form, but you're also capturing much richer data.
You know, for example, if I'm a nurse doing a evaluation of a patient, I can capture the stethoscope read, you know, there's no, I don't want to go too, too deep down here, but I think, I think, I think we, I think we get what you're launching is once we know what it is that people want, uh, this new product called Alpha Transform, we can build these apps typically in about 30 minutes.
And the skill level required is a line of business person, a person with domain expertise. That's great. That can build the apps.
You don't have to code.
Because coding a complex offline form, typically even with low-code products, you're looking at many, many weeks.
And okay. Last few questions here, Richard, before we wrap up with the famous five, what year did you leave the spin out? Excuse me.
Sorry.
What year was the spin out?
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Chapter 7: What new products is Alpha Software planning to launch?
It's just not because, um, I don't know, maybe it is there. I can't. Yeah.
Cause you, you have to, I mean, you have to file, which is why it's typically public, which is why I typically ask it. Um, but you, you've, you've made the decision, I guess.
I mean, we've raised, you know, round about $10 million. Okay. Um, and most of that money has gone into products, product development. So we're at this point, We think we're poised for some really good growth because we've invested very heavily. We've got a very strong technology base.
What's the team size today, Richard?
There's about 50 people in the company. Five zero?
Yeah. Okay, that's great.
And where's everyone based? The company, everyone's based US. It's all US-based developers. Everybody works for us full-time. Most of them are based out of headquarters in Burlington, Mass., Then we've got a number of developers in New York, Pennsylvania, Arizona, Oregon, etc.
That's great. All right, Richard, let's wrap up here with the famous five. Number one, what's your favorite business book? I would say it's a book called The Art of Pricing. The Art of Pricing. Very good. Number two, is there a CEO you're following or studying right now?
No, but I think one of the most impressive CEOs is the I think his name's Alan Mullaly. He was Boeing and Ford. If you take a look at some of his lectures and videos, very impressive.
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Chapter 8: What important lessons does Richard Rabins share from his career?
Guys, there you have it. People skills are important. Many, many years ago, decades ago, he was part of Alpha Software Group to about $25 million in sales, then sold it to a larger company, which he then ran as president before leading a spin-out in 2004.
the product kind of the tech team really starting over there from scratch alpha software helping folks really non-developers build mobile apps faster and more efficiently they've got a team of 50 people between burlington massachusetts and other remote locations currently serving 3 000 customers that pay on average called 140 bucks a month so doing about 400 500 grand a month right now on revenue or about a five million dollar run rate that's up from three million just 12 months ago so about 70 year-over-year growth they've raised 10 million bucks and again growing rapidly with their team of 50 richard thank you for
taking us to the top.
Thank you, Nathan. Enjoyed meeting you.