SaaS Interviews with CEOs, Startups, Founders
927 SaaS Security Company Hits $40m in ARR, $.50c on $1 to Bottom Line
06 Feb 2018
Chapter 1: What is RedSeal and how does it enhance cybersecurity?
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 Ray Rothrock, and he is playing in a very interesting space, cybersecurity.
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Chapter 2: What business model does RedSeal use for its services?
His company is called Red Seal, and their network modeling and risk scoring platform is the foundation for enabling enterprise networks to be resilient to cyber events. Government agencies and global 2,000 companies rely on Red Seal to help them improve their overall security posture, accelerate incident response, and increase the productivity of their security and network teams.
Ray, are you ready to take us to the top? You bet. All right. And I should add, you're doing this at scale. You signed with the largest multi-year contracts on this thing for $31 million back in 2016. We'll jump into that here in a second. But first, tell us what Red Seal does and what's your business model? Is it pure SaaS?
Sure. Our business model is perpetual and SaaS. We will sell you our software any way you want it.
I like perpetual revenue, by the way, Ray. That sounds great.
Yes.
Perpetual revenue works good, too. Anyway, we'll do it any way you want.
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Chapter 3: How has RedSeal achieved significant growth in customer numbers?
What Red Seal does is risk scoring based on the network model that our software builds. Before Red Seal, I was a VC for 25 years at Benrock, and I did a bunch of cyber deals. I did 15 cyber deals, in fact. And those times were all about prevention, detection, and stopping things. Well, in the last four or five years, the world has anything but prevented and detected everything.
In fact, most attacks are inside now. They're already happening as we speak. So my thought process from looking at Red Seal, I knew what it did because I was an investor in it originally. I said, why don't we take this and start to address the issue of investigation, investigation and remediation. The average time from detection to remediation is 200 days. That's too long.
A lot of bad things can happen to you. Look what happened to Equifax, just to throw a few names out there. So it's all about investigation. information, knowledge, that's through the modeling, and the score. We score your vulnerabilities, we score your network, and you can tell every time you run Red Seal, did you make it better or did you make it worse?
So we've taken what's a very nerdy, technical, very complex subject and tried to simplify it to numbers that executives can understand. That's what Red Seal does.
And generally speaking, you're playing in the enterprise space.
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Chapter 4: What strategies did RedSeal implement to become cash flow positive?
What's the average enterprise paying you per year, would you say? Your average ACV?
Average ACV? Well, Let me explain. We land into a deal, and then maybe over two or three years, we expand into that deal. You referred to that $31 million deal. We have several very large deals. It started small, maybe $100,000, $150,000, $200,000. But over time, you get to the scale you're talking about. It's usually $4 million or $5 million a year.
So just to map that out, Ray, it's fair to say today an average first-year ACV for you might be $200,000. And then what do you see expansion in year one and expansion in year two averages being?
We've gotten some up to $3 million. We had one go to $11 million in the fourth year. So it just varies on how quickly the product is adopted into the network.
Fair enough. And how many customers are you serving today?
About 240, mostly all global 2000 and federal. We have every Intel agency, all of the DOD, their services, and many of the civilian agencies are our customers.
Yep. Now, back in 2017, well, not back in 2017, earlier this year in February, in an article you guys put on your blog, you had mentioned your cash flow positive in the fourth quarter of 2016 to the tune of $5 million. That's $5 million to the bottom line? Yes, sir. That's a, that's a cashflow. Yes. That feels good, right?
Yeah, it sure does.
Now are you, you, I imagine, I imagine obviously the company has raised capital. In fact, first off, real quick, I have to ask this. Your last name is Rothrock. Are you related? And were you one of the founders of Enrock?
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Chapter 5: What is the average annual contract value for RedSeal?
Okay, and what was- So I've been there almost four years. Four years. And what was launch date for the company?
Launch day for the company would have been RSA 2015. Let me rephrase that. Say July of 2015. That's when we issued and showed the world our digital resilience, which is this method of knowing if you're good or not.
So you joined in 2014 and relaunched the company in 2015? What I was getting at is what was the first year the company was in existence?
Oh, 2004. The company was me and another fellow, Pete Sinclair, another venture capitalist. put the company together on the thesis that complex networks are going to become complex and firewalls would not be understandable by human beings. We were so right on one hand, we were so wrong on just how complex they would become enormously complex. So, uh, we grew the company for about 10 years.
It kind of flatlined a little bit and then, uh, the world changed. Yeah. Target target happened.
What did it, what did it flatline at? Do you mind me asking? Was it a flat line around that 20, $25 million AR mark?
Yeah. Under 20 million, yeah, 17 or 18, something like that.
Okay, and then today with 240 customers and an average first year ACV of call it 200 grand, it's fair to say you guys are past a $48 million run rate, right?
Yeah, yeah, we're- Or around there. We'll do 40 million this year. It's still kind of lumpy because some of our deals are quite large. Most of our deals are average, as you point out. But we'll do 40 million this year.
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Chapter 6: How does RedSeal manage customer churn and retention?
What's your net margin tip in a typical month?
Oh, well, like I said, it depends. Last month, the margin was fantastic. It was nearly 100%. We did quite a lot last quarter.
Wait, what does that mean? What is 100% net margin? You take 100% of your revenue to the bottom line?
Let me know. I brought in, uh, I'm not going to tell you the number per se, but I brought in twice in business in Q3 that I spent on expenses two times.
Oh, I see. Okay. That makes sense. You're pulling a lot of these.
So if I made, yeah, if I, if I, if I made $2, I only had a dollar of expense and that's at the bottom line, not the gross margin, but the net margin of the company.
Yep. Yep. You're, you're taking 50 cents on the dollar to the bottom line.
Yeah.
Yeah. That's great. Um, uh, what is the, so, okay, good. That's helpful to understand. And help me understand. I want to understand the size of your engineering team, because obviously this space is heavily reliant on engineering.
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Chapter 7: What changes did RedSeal make to improve gross margins?
What's your total team size today and how many are engineers?
We have 145 people in the company, about half are in the field and sales service and field engineering. Another half is at headquarters in Sunnyvale, and we have two engineering groups. We have a core engineering group that is 33 people, and we have an ecosystem integrations group. I can explain what that is, but they deal with our interactions with the rest of the world.
That's 14, so 33 and that's about 47, about almost 50 of the 70-ish that we have at headquarters are engineers.
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What does your churn look like annually?
We're getting renewals of about 90%. So churn's 10%.
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Chapter 8: What lessons can be learned from RedSeal's growth journey?
It was one way to cut down our burden, our support burden on these companies that really ā they were sold something that was too complicated for them, honestly. So we've done a lot of rationalization, and so I'd have to ā I haven't done the logo churn lately. practically zero. In fact, we're net growing again on logos.
I mean, I'm just thinking of anybody we've lost in the last this year, none that I'm aware of logos we've lost. But we do have people that either they don't renew immediately or they renew six months later. It's a definitional thing.
Yep. But anyway, let me ask you another question. So your ability to grow and scale, like a lot of people will say the company that can spend the most to acquire a customer is the one that's going to win. Yeah.
Now with a company like yours, when you have contracts now, this is obviously an outlier, but when you have $31 million contract, you could very rationally convince yourself and your management team that your customers are potentially worth over their lifetime, 30, 40, $50 million, which would lead you maybe to ear rationally say we could spend one third of that on acquisition, right?
How do you, how do you get to a CAC number that you're comfortable with, uh, without getting LTV, you know, being too crazy?
Wow. That's a complicated question. So that customer, uh, is DISA and it is a five year deal. Uh, so 31 million, five years. we probably spent $2.5, $3 million to get that deal over two, three years. That's pretty exceptional. So what is it? That's 10 to 1. That's a pretty good ratio. Most of our deals, the $200,000 average deal, we make a little money there.
It's the renewal or really the expansion where we make our money. I'm thinking of a financial company. We went from a couple of hundred thousand dollars to $2.7 million. Same sales guy, two-year process. I don't know, maybe that was a million dollars of expense to close and land it for two years. So I'm in a growth mode right now.
It's hard for me to say there is a number per se because we've got so many people that are expanding. And it's not a loss leader, but it's darn close in terms of that first bite of the apple.
You're willing to spend up to as much as the first year of ACV to acquire a customer. Is that true?
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