SaaS Interviews with CEOs, Startups, Founders
How Tenfold went from $5m ARR, Burning $1m per Month to 100% YoY Growth and a big exit
19 Oct 2022
Chapter 1: What challenges did Tenfold face before achieving growth?
Hey folks, hope your Q3 and Q4 is off to a good start. We just wrapped up Founder 500 in Austin, Texas. Hundreds of bootstrap founders showed up. It was an amazing time. I loved meeting so many of you.
This interview today is a recording from that session, which you're gonna love because now we have visuals, we have the founder teaching, and I made every single speaker include their revenue graphs and real artifacts in their presentations. Without further ado, let's jump in.
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 these podcast interviews. Check it out right now at getlatka.com. Please help me in welcoming Jeff Cotton from Tenfold to the stage.
Thank you, sir. Well, good afternoon. It's great to be here. I'm going to apologize. I'm a little hyped up on coffee. I just arrived a few hours ago from Brazil. So if I say bom dia and start busting out into Portuguese, forgive me for that as well.
It's actually really cool that we lined this up for me to go right after Kevin because he's actually just presented everything you're going to hear about Tenfold. Tenfold was a raving success, which I'll talk about in a second. But when I joined the company, I was not a founder. So I'm not like a lot of you in the room.
The company had just done exactly everything that Kevin just told you not to do. And so let me try to break that down so you can see a real world example. I'm going to cover three things. First, deadly burn. And I could not agree with Kevin Moore. It is not about cash. It is about networking capital. That is so true. Number two, growth. You've got to understand your demand gen model.
I think demand gen models are everything. And then I'm going to talk a little bit about the exit and where we sort of took Tenfold to. So deadly burn. This will tell you a little bit about where Tenfold was before I joined my little picture up there. is when I started to influence the board. So I actually did not join until January 1st, 2019.
But I started working with the board in 2018 when the company knew they were in really big trouble. We were averaging about $2 million a month in burn. We had raised about 14 million a year the prior two years. And by the time I joined, we had 2.2 million in the bank. with $2 million average burn.
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Chapter 2: How did Jeff Cotton influence Tenfold's turnaround?
And actually, let me cover quickly. I'm not going to cover a lot about the business because it doesn't really matter a whole lot. But we were in the CX space, the customer space. service and customer experience space. So we were an integration platform that tied phone systems and CRMs together for big inbound contact centers. So think someone like HP, right? Print printers, laptops, et cetera.
You call in, you've got a problem with your laptop. We would arm an agent with automatic information, auto display to them about you potentially calling in and even potential problems that the agent sees about a device that you may own from Dell or HP or whoever. And those were the types of customers that we have.
So this is sort of the setup here in terms of where I stepped in and a company that had really gone off the rails. It had a phenomenal idea. It had a great product. It had grown to about 5 million in revenue. And then it started to plateau and shrink for a number of reasons, which I'll cover here in a second. So first of all, I've already sort of covered some of these numbers here.
One of the things that I will highlight is a cautionary tale is focus. So when you have some of these big VCs in your company, do I have any venture capitalists here, by the way? Okay. All right. A couple. love VCs, right? I'm an LP and a lot of funds myself and VCs are the lifeblood of innovation, right?
We have to have venture capital, but you have to make sure you really are cautious, specific in what you're looking for out of a VC when you go after one. And I think before you really take on venture capital, you really have to know your business model. Your business model has to be repeatable. And when I say business model, I'm primarily talking about demand generation?
Can you reliably, repeatedly generate demand and you're truly getting on a growth curve? That to me is a marker to go take on venture capital. Once again, very much in line with the things that Kevin just outlined in terms of do you use debt, do you use cash, do you use equity, cash, etc. So that was one huge issue was focused. The with a big VC behind them with lots of ideas.
Hey, crypto's hot now. Let's go spin up a team that's going to go try to figure out how we can help customer service operations take on cryptocurrency. Interesting idea, but there are many other things that are more adjacent to the core product that we could have invested in, chose not to. Not to mention the sales motion is very different for that type of a product.
The company just started to sprawl very quickly and did not stay focused on its core product before it had reliable demand. Once again, getting to $5 million in revenue in ARR is great, but you have to have a sustainable path well beyond $5 million before I think you start to expand a product. Sales expense.
Once again, the company did not have a reliable demand generation model, as I mentioned a few minutes ago, and had grown sales expense significantly. wildly. So they had basically gone and hired sales executives all over the United States, primarily North America focused, but had a sales team of about 26 quarter bearing reps and were only generating about $500,000 in ARR sales bookings a quarter.
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Chapter 3: What strategies were implemented to manage cash burn?
To me, it is all about the people. Ultimately, you can have the best strategy. You can have great product and you're going to struggle if you don't have a great team. But if you do have to lay people off, look, first of all, you as a founder, as a CEO have to own the message. You've got to stand up in front of the team and say, look.
We have struggled, we have failed in whatever way or area in which you failed, you've gotta own that message. And you also have to treat people really great as you're exiting them.
One of the things that we did is we made sure everyone kept their equity so that they felt like they still had a piece of something, that they still had a share for the work that they had done to get us to where we were. And actually many of those people actually were paid in our exit ultimately, which was really critical.
The other thing I would tell you is, unfortunately, the company did have to do a reduction before I joined and I had to do one more. But rest assured, when I did mine, it was the last one. When you do these, you've got to go as deep as you possibly can. So the company was about 200 people before I joined. I took it to 29. And that was at 5 million in revenue.
We went down to 29 people and it was probably 80% of the 29 that were left were developers. So the point about I was the CFO, I was the chief legal person, I was the marketing, I was everything pretty much except for product and engineering to get the product where we ultimately needed it so that we could grow it again.
The other thing is with a company that had raised $28 million, got to $5 million in ARR, and had basically gone flat, we were not in a position to go rebuild a significant demand chain engine. And once again, you've heard me talk about this word a lot.
So one of the other things I felt was really critical is we needed an extremely efficient CAC model, an extremely efficient revenue generation model. And so we pivoted the go-to-market 100% towards a channel partner-based model, which in our business made a lot of sense. Because we had a lot of natural partnerships because we were an integration platform built into our ecosystem. All right.
This was another metric that I personally started to obsess about, which is burn as a percentage of revenue. As we pointed out here, the sort of dashed line is where you're at negative 100 percent, meaning you are you are burning your entire revenue. And then your entire revenue again. So two extra revenue is how much you're burning a month.
And as you can see, once again, before I joined, we were well above that. And we ultimately sort of got it into this range where we were sort of break even. Right. Most startups are burning cash. Right. That's not a bad thing necessarily. But it is if you don't have all of these reliable demand generation engines, et cetera, so that you're getting your revenue.
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Chapter 4: How did Tenfold pivot its demand generation model?
I can see who read the emails. I'm going to go get that, right? And then we had everybody with Yesware. My vendor stack was ungodly. I mean, we were spending millions and millions a year on stuff that we didn't need when a spreadsheet would frankly do the job.
So we really, really cleaned up the vendor spin and I would really caution anybody about all this free signup stuff that you feel like you can take advantage of because it really does kill you in the end. sales reps, performance. We would not let sales reps go past six months if they couldn't build pipeline and perform.
And this one's really hard because it's always hard to exit people, but this is kind of general sales culture. And I think in a startup, you really have to be all over this. You can't let people go a year. I now run a $350 million company and we let people go well over a year and that's not good practice. But in a startup, You got to do it, I think, every six months.
And if someone's not able to perform, build pipeline and show that they can produce, you got to get new people in. The last thing then that I want to just spend one more second on because I've said a lot about it, but know the demand generation model. I've run two different types of business in my life. I've run a highly website driven pay per click business.
model and in those models you obsess every single day on your metrics what your spin was yesterday how many leads you got in our conversion rates changing etc etc etc if that's your type of business you need to be on it and you need to manage it every day if you're more an enterprise or b2b type software business.
It's much more about pipeline, pipeline quality, having the proper checks in on where a deal actually is in its life cycle and understanding that deal cycle. But that to me is what you have to really own to build a reliable demand gen model. And I would not be spending crazy burn and increasing burn anything near even 50% of revenue if you do not have a reliable demand gen model.
All right, let me shift and talk growth section here for just one second. I've already hit this one. Let's keep moving. So here was the scorecard that we obsessed about. We kept this as simple as we could. We always had four metrics, and this was for the whole company.
And we set those metrics about this time, sort of maybe beginning of Q4 every year for the following year, and we did not change them. We set... those goals. One of the challenges I had was everyone felt like the company would change every 30, 60 days and it was always something new. We got to change this over here, add this over here. You need to be flexible.
This is one of the things I loved about startup land versus big enterprise, which I'm typically spending my time in, that you can change on a dime, but your top level strategic objectives really need to be set. And so we always had a customer goal that was all about customer satisfaction, loyalty, support metrics. We had a number of metrics that we would look at under that underlying goal.
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Chapter 5: What role did investor relationships play in Tenfold's success?
Because that's what I needed the internal team focused on. But of course, as a founder, as a CEO, and for those of you that have a board, you obviously do have to think about this and manage it. So what I did is I created a little council that included the two founders of the business that were still there when I joined.
because I wanted them to feel like they still had a voice and ownership in that with my board and a couple of other advisors, where we would quarterly have a strategic planning session to sort of look at the metrics of the business, what we thought valuation really, really was, not just what some math model is telling you, what's going on in the market, who are the potential exits.
So that we were just constantly keeping an eye on that. Now, in our business, maybe very different than some of what you all are dealing with, but because we went with a primarily channel distribution model, we had a lot of natural exits built into our business. And in fact, one of the decisions we made was to OEM our software and white label it so that others could sell it as their own.
And clearly in that type of a model, those are going to be potential acquirers for you down the road. I had made the call that because we were effectively a tool, I didn't believe that this really had a public IPO path. You've got to get to 100 million with rule of 40 at 100 million for you to really be on a potential IPO path. And I didn't see that with this company. And it was so valuable.
I knew that I could get 20X revenue multiples If we aligned with the right types of partners. So we chose to use that partner strategy to align ourselves with people that probably would end up buying. But once again, I'm maniacally focused on execution, acquiring customers, making those partners happy, showing that we were delivering high quality product that they needed.
And ultimately what happened is one of those OEM partners said, Hey, We really would like to have a conversation because we believe we need to own this technology. And we said, that's great. We've actually just taken on debt. Funny enough, I did not want to take on any more dilution. So we had gone and done a debt round to basically just continue to fund some working capital.
And that we were going for it. We were not for sale. But, you know, look, we have a pragmatic board. We absolutely would listen to, you know, an offer if someone wanted to surface with that. So ultimately, LivePerson did. As a result of these OEM agreements, we did offer notification rights. We did not give rofers. You obviously never want to give a right of first refusal.
And we had everyone demand it and ask for it. And in every case, except for one, actually, we did not successfully get one OEM agreement done because of not granting a ROFR. But we did grant notification rights, which, you know, is only to your benefit.
Because in the end, what happened is once you had an offer on the table, we serve those notification rights, which then triggered a competitive process. And so that worked very much in our favor. So live person service with the first offer, it triggered that competitive process. And I believe that we would not have gotten there if we had not really obsessed about Rule of 40.
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Chapter 6: How did Tenfold approach its exit strategy?
But you got to do it if you're in this type of a situation. And a couple things that I would think about. I was lucky to have supportive investors, but I was also demanding of those investors that number one, you have been here along the way. You've helped this business get to the spot it's in. And number two, we've got to do the right thing by the employees.
If we do not get a team that is re-incented, re-signed up because they've just taken a whole lot of dilution as well on this down round and they don't necessarily have the opportunity unless we re-up them as a part of this down round. They don't have the ability to participate in now future upside.
So I asked our board, maybe more like demanded our board, and they supported a complete recap of the company. So that would be something that if you're facing that type of a situation, I would absolutely make sure that you're thinking about how can you recap all of your employees, which are really important so that everyone can win.
And look, we also were successful at getting 50% of the company back in the hands of the employees. You can imagine raising three rounds of capital now. With the types of valuations that we had, we had taken a lot of dilution on, and we were probably down around 15% was what employees were holding prior to that down round.
One last thing, and probably the way to think about this more for you all is bringing on new leaders into your organizations. One of the things that I did that I think ultimately made this successful is I was not a founder and I knew it was critical to really prop the founders of the company up and keep them highly visible.
Keep giving them accolades and praise for getting the company to where it was and being central figures. Anytime we had a strategic topic or a long range planning topic, product vision, roadmap, those kinds of things. I let those guys deliver the message, present to the company, et cetera, because I needed them. It was critical to have them on board.
But really emphasizing that it was really their company really mattered. But I would be thinking about how can you get experienced operators? I will tell you now as a board member and an investor in a lot of early stage companies, this is one of the things I see most organizations struggle with the most. You need help operationally.
You need someone who's going to build structure and operating rigor tricks that help you build repeatability. Repeatability is the thing that I see over and over that people struggle with. And by the way, acquirers or PE firms or whoever is a potential exit for your business is going to that's the primary thing they're looking for. is repeatability.
And you're going to need that type of operational rigor to help you get there. So I'd be thinking about that, but then making sure that it's someone that understands what their role is and fits within that sort of founder mentality, because it's very, it's very possible to do that. And you just have to make sure that the old and the new all feel like they have a seat at the table. All right.
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