SaaS Interviews with CEOs, Startups, Founders
He got diluted to 25% at his first SaaS company, now wants to keep new thing "private"
06 Aug 2022
Chapter 1: What is the main topic discussed in this episode?
Well, so I appreciate the questions, Nathan, but some of this stuff, we're just not going to release into the marketplace. You are listening to Conversations with Nathan Latka, where I sit down and interview the top SaaS founders, like Eric Wan from Zoom. If you'd like to subscribe, go to getlatka.com.
We've published thousands of these interviews, and if you want to sort through them quickly by revenue or churn, CAC, valuation, or other metrics, the easiest way to do that is to go to getlatka.com and use our filtering tool. It's like a big Excel sheet for all of these podcast interviews. Check it out right now at getlatka.com. Hey folks, my guest today is Chris Mealy.
He's a managing partner for SPP, that's Software Pricing Partners. Founded in 1982. They do exactly what it sounds like, help you with pricing. But he doesn't just do this as a consultant or in theory. He had his own software company before, which is where he cut his teeth on this. Chris, you ready to take us to the top? I am. Thank you for having me, Nathan.
Let's talk about your first SaaS company and the pricing pains you went through and realized this was a big need. What was that software company called? It was called Companion Cabinet. So that was not always SaaS. So that started in the late 90s. mostly on premise.
And then in 08, when Amazon just started showing its creds in the cloud is when we actually converted over the market crash of 2008 and 9. And that's how we ultimately became a SaaS company. But during that journey, we hired software pricing partners. That's how I find out about them. And that's ultimately how I ended up here.
And Companion Cabinet, this was like a business management ERP solution for a specific niche industry. Yeah, it was interior and exterior products, mostly in the US and Europe. Founded, I believe, in 2002. I believe you bootstrapped until you decided to raise angel funding. Did you raise a bunch more after the angel round? Yeah. So, well, we raised a lot of angel funding money as well.
So that was maybe not typical to our Charlotte market, but that time of bootstrapping, I had really long hair, Nathan. I actually could put it in my mouth and my parents were getting worried that I was maybe not eating properly, but I went three years with no
Hey, I sold everything from my Ernst & Young career houseboat, everything, used that to start the business and actually had to supplement with some commercial acting here and there to make it work. That's wild. I'm no stranger to generic cereal. Yeah. So when you say like a ton of angel funding, I mean, are we talking like 10, 20 million in angel funding or something? Okay.
And what was that back then? I mean, was that all like convertible notes or what? Well, actually it was a mix. So it would start... So remember during the... So when we first started, it was that dot-com bust. Then we made it through the 08 market crash. And so one of the challenges in angel funding is it's not...
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Chapter 2: What insights can Chris Mealy share about his first SaaS company?
About $15 million. $15 or $50? $15, $15. $15, $15. And what did that mean for you in terms of dilution? How much did you own when all was said and done personally? Probably around 25%. Okay. So would you do anything different now today? You work with a lot of SaaS founders now today. I think a lot of people chase the capital a little too early.
I think if you can get the early access program underway, notice I didn't say beta, with software and you can get a range of deals and you can uncover early on, is this a $10,000, $100,000, $10,000, $100,000 kind of transaction? And then remember, we were going through a deployment shift there. So we were taking half a million dollars of software and kind of converting it over into a cloud model.
Chapter 3: How did Companion Cabinet transition from on-premise to SaaS?
That's why we sought out software pricing partners to understand what the pricing would look like. Would I do it again? Yeah. So we had a really magic ingredient in our operating agreement. And so if you raise capital when you need it, it turns out that you're not going to get a really good deal. If you have a large sales backlog and an exciting story, which we had,
then we could kind of set the terms in our operating agreement. And one of the terms that I learned from a lawyer friend of mine here in Charlotte was this idea of the required holders. And the required holders in the operating agreement was written in with my name on it. And so every investor and member manager position, regardless of dilution, required my name.
And I think in an LLC, it affords you a lot of flexibility. And so because- You were an LLC, not a C-corp. That's right. And so because we were able to dissect units from ownership and control, I mean, there's economic interest and then there's sort of governance, decision-making, investor and member manager decisions. we were able to divest the two.
Now, I don't know if you could do that in today's market, but in the angel network space, we were able to do that. And we had a track record that everybody, we were telling people, no, people were kind of coming back and saying, I want in, our rounds were oversubscribed. And we were kind of saying, look, here's kind of the terms of the deal. And we got what we asked for, for that story.
And that raising up the capital at that point where you get the sales and you've rung out the sales and marketing risk on the business model, That's a little bit different of a story because that story says, I'm just coming in for the operationalizing of the business and the fun ride.
And so that term would work to our advantage later because I think some of the folks probably assumed that it just worked a standard way with the percentage and who gets what vote. But it turned out that we got all the vote on everything.
understood and chris we're talking about pricing obviously what was the average customer paying companion cabinet for your software at the time it was probably about say an average transaction was probably 250 to 300 grand on-prem and then in the cloud yeah in the cloud it would have converted over a three-year horizon for the equivalent of you know call it 75 grand a year or something like that but at the company's peak how many customers were you working with um
So this would have been, it was probably about 60 to 70 SMB mid-market. And then we were strategic advisors and had a customer with Lowe's and some of the bigger pro build and home building supply companies. All right, as you guys know, I am hunting for a founder that I think is gonna grow to 100 million bucks in revenue with just them as the only full-time employee.
How are they gonna get there? Well, they're gonna automate all their tasks. They're gonna hire contractors. They're gonna have an internal learning management system for all those contractors to have high, high, high output. And the question is, how will they do it? Now, I haven't found that founder yet, but I have found people who are close, including Netcore.
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Chapter 4: What challenges did Chris face while raising angel funding?
They also use it to track, plan, and manage resources and time efficiently across all of their dozens and actually hundreds now of team members. And it's also a collaborative central space for you and your customers. So you can ask your customers feedback for mock-up feedback, have your design team edit, then get your customers feedback all in this one tool. Now they've listened to the show.
They reached out. They said, Nathan, we think folks will love it. I said, you're right. Give me a great deal. They did. You guys can try the tool for free at NathanLaka.com forward slash rocket lane. That's NathanLaka.com forward slash R-O-C-K-E-T-L-A-N-E rocket lane. Check it out today. Try it for free. So $300,000 ACV times 60 customers, I think that's like what, an $18 million run rate.
Is that about right revenue-wise? No, well, not quite. And I can't go into the details of that, but remember there's a mix, right? So SMB, mid-market, those are global averages applied to... you know, transaction sizes are different at SMB that they are in mid market. And then you can have, you know, multimillion dollar deals and enterprise. Of course.
But my question was, what was the average customer paying? And you said 300,000. So you remember using a higher, you may be using like your enterprise average, not your total customer average. Well, so this might be a little pricing, a little side. So we take outliers like your enterprise deals who buy in very large quantities and we stick them on the side.
And the averages that we look at are probably for 80% of the core of the business. But we had a few wild cards on the side that gave us good, really large chunks of revenue. Okay. So you're saying you were north of 18 million revenue, not less? No, we were closer to about 10. Oh, 10. Okay. Got it. Fair enough.
And then let's close that story out before talking purely about the new business and pricing. What did you do with the business in 2013? What did I do with the business as in my exit story? Yeah, you left. Yeah. Yeah. So, well, my exit story was a lot of fun. So I got a wife out of it, ended up being our VP of marketing.
So when you exit, it turns out you can take more than cash with you, go figure. But it was mutual. So the company was actually taken back private. The infrastructure that we built- Oh, you were trading publicly? Yeah. No, no, no, no, no. When I say taken back private, I mean, my partner, my co-founder wanted to own the business ultimately as a lifestyle.
So it was taken back during the market crash in a private scenario that he now owns that business and takes it forward under a new name that he rebranded under. Well, most people, when they say take private, I mean, it was public and someone took it private. He was just buying your shares, basically. He bought it from you. He just bought up the investors and me. That's right. Okay. All right.
So you move on. Now, you referenced a couple of times that you reached out to software pricing partners when you're building Companion, but I thought you were the founder of this thing. So help me get my head around that. Yeah, so I was a founder and my friend from Ernst & Young, he and I founded the business. And the thing with software is you spend all your time building a great product.
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