After Breaking $10 Million in ARR, Cylynt Pivots Strategy from Sales to Customer Success

Nathan:

Hello everyone. My guest today is Ted Mirraco. He’s a co-founder and CEO of Cylynt, a cybersecurity firm that provides SaaS based anti-piracy license compliance and software monetization technology for the world’s leading software companies. Before that, he was co-founder of the EDA company AWR Corporation, which was acquired by national instruments in 2011. AWR, a leading high-frequency analog design company has played an important role in the design of semiconductors used in [inaudible 00:00:27] applications. All right, Ted. You ready to take us to the top?

Ted:

Absolutely. Yeah, let’s get started, Nathan.

Nathan:

For folks that haven’t heard of Cylynt, maybe they’re not in the security space. What do you guys do?

Ted:

Basically, what we do is we started out addressing piracy, so software piracy, as I think everybody knows is a big deal. We’re honest in a specific area of anti-piracy where we’re not really concerned about music or consumer piracy, but companies that are using inappropriately software licenses for expensive applications, so design tools. So my background a lot was from semiconductors and the semiconductor industry was one of the industries that I had a front row seat to a great deal of piracy with my previous company, and we started this company, me and my co-founder, Chris Loughton. We worked together on the piracy problems while I was at AWR, and when we sold the company, became really excited about taking everything that we had learned over the years of working together and starting another company, a commercial venture to really help primarily on premise, software vendors deal with piracy.

Ted:

And since we’ve done that the company has evolved. We’re now working on usage analytics and we’ve expanded our perspective and we’ve rebranded as Cylynt today as part of a broader vision to give on premise companies, on premise software vendors the same kind of visibility that SaaS companies have, where you can see who’s using the technology, are they properly licensed, are they using all the features and the functionality and the tools and how can you use that data to really generate more revenue?

Nathan:

So I’m not sure I’m following. Can you tell me… Well, first off, what year do you guys launch the company?

Ted:

We launched it in 2014.

Nathan:

Okay, 2014. Sorry. When was AWR acquired?

Ted:

AWR was acquired in 2011 and I stayed for three years during… I was down there with you and frequently in Austin with National Instruments during the transition, and after we had transitioned the company, I left in 2014 and became a co-founder with Chris at what was then called Smart Flow Compliance Solutions.

Nathan:

Okay. And what was the sale price back in 2013?

Ted:

For AWR?

Nathan:

Yeah.

Ted:

It wasn’t disclosed. I guess the public information, there was an earn-out, it was a little complicated, but I think that the publicly disclosed number was 57 and then there was an earn-out that was quite a bit more that brought the number up.

Nathan:

I see. And then it looks like it was just resold recently for 160 million, back to Cadence, right?

Ted:

Correct, yes. So Cadence Design Systems bought it from National Instruments, yeah, for around 160. Correct.

Nathan:

Yep. Interesting. Okay, cool. So you then used that capital to seed Cylynt in 2014 with your partner. Is that accurate?

Ted:

Correct? Yeah. Chris and I… Chris is also a successful entrepreneur. He has another company called ITCA with very strong cash flow. I had income from the sale of AWR, so we bootstrapped the company for the first couple of years. We became profitable around 2018 and the company has no funding, we’re self-financed and we’re profitable and…

Nathan:

We love that. How much did you guys pump into the company yourselves personally before you turned profitable in 2018? Do you remember?

Ted:

Yeah, of course we remember. We had to write those checks. We put probably in the two to $3 million into the company over that period of time, but we were pretty close to break even early on and we didn’t invest that far ahead of the curve. But you know, we were well-run and pretty fiscally conservative through the early years. And yeah, I don’t regret that at all. We could’ve raised money at the time, but the dilution and the strings that can come with early funding, it can be very dilutive to founders so I would advise against that if you have the financial wherewithal to not have to do that.

Nathan:

And help me understand, today when companies are paying you for your technology, what are they paying you per month on average?

Ted:

Around a thousand dollars per user, per month for a [crosstalk 00:05:11].

Nathan:

[inaudible 00:05:12]

Ted:

What was that?

Nathan:

How many users do most companies have?

Ted:

Probably around 10, I would say on average. And we have about-

Nathan:

10.

Ted:

We have a couple with close to a hundred users, so they kind of tip the scales a little bit, but I would say we have about 1500 users.

Nathan:

That’s great. Across how many companies or brands?

Ted:

Around a hundred, less than a hundred.

Nathan:

A hundred. Okay, fair enough.

Ted:

Yeah, in that 80 to 100 range.

Nathan:

So take me back to your first customer you sold, and what was the pitch then? What did you sell them?

Ted:

Okay. So part of what really made this company possible was the completion of a legal case that I was involved in against a Chinese telecom company that was stealing the AWR technology, and we won a very significant summary judgment against this company and it became very newsworthy. So some of the other companies in the electronic design automation industry and the semiconductor industry noticed this, and when I left the company, I brought a lot of credibility because I was involved in proving that you can protect… Number one, that this kind of technology is being widely stolen, and that there are technical means of protecting it, and there are processes that you can put in place to protect your intellectual property. So that allowed us to go talk to some of the large players, publicly traded companies, billion dollar plus companies about what they could do about this, and we were able to get some pretty marquee clients from the very start of the company.

Nathan:

All because of the press surrounding you successfully defending AWR technology being stolen by the Chinese?

Ted:

I think it was a credibility. I think that a lot of people had this philosophy that there are people who will buy, and there are people that will steal, and never the twain shall meet, and that there really was no way to fill that gap between people who are stealing intellectual property and people who want to buy it. And there is a huge amount of gray area between those two things. There’s licensing of sec software is very complicated, so there’s inadvertent overuse, there’s blatant piracy, and there’s everything in between. And the way that you take advantage, or the way you monetize this opportunity is you need good data. And that’s really what Cylynt is all about, is telemetry data to figure out how intellectual property is being used, how it’s maybe being abused or overused and over deployed, and figuring out a way to amicably bring these clients in and get them to true up their licensing and to pay for what they’re using.

Ted:

And that was the other thing I think that was very deceptive is that a lot of clients think that this is a hostile discussion or leads to litigation, and that’s the exception. That’s not the rule. In most cases, software companies, they want to pay for the intellectual property that’s running their business, and they want to be legally licensed, so we show customers how you can do that and how you can actually have pleasant, meaningful, significant conversations that lead to bigger contracts.

Nathan:

So, Ted, let me try and repeat this back to you so I and my audience clearly understand what you’re selling. I am a founder or a company at scale, or a billion dollar fortune 500 company that sells some sort of physical on-prem device to companies. Let’s say I sell to company Y. Company Y, I install the on-prem software, they pay a license fee, a servicing fee, whatever, and they say, we’re going to start with 10 seats. So they’re paying me a license fee for 10 seats, but they don’t even realize it. But my technology takes off at their company and before you know it, 60 seats are using the same on-prem software, but they don’t even know they should be paying me for the 50 extra licenses. Your technology will ping me and say, hey, you should be billing them for 50 extra licenses because we see there’s more people using it.

Ted:

Yes. Yeah, there are all kinds of ways that things get over deployed. For example, let’s-

Nathan:

But that’s the use case. Is that the main use case that I just described?

Ted:

That is the use case, and there’s a tremendous… You know, this is why SaaS is so successful, is because with SaaS, you know what people are using and you know how much they should be paying. With on-prem, it’s still the wild west of chaos, where you might have channeled partners who are selling, there’s evaluation licenses that get over deployed and then cracked with key generators, there’s a million different ways that the horses get out of the barn, and all of this replication and over installations that take place that are outside of the EULA, and companies just don’t know how to track it, how to measure it and how to monetize it. And that’s where we excel.

Ted:

We know how to identify who’s using it, how to look at the licenses to tell a counterfeit license from a legal license from an over deployed legal license, or an educational license being misused.

Nathan:

I understand. Yep, makes complete sense.

Ted:

Educational licenses are over deployed all over the place. In fact, one of our clients, they have a very generous university policy, and it turned out that the key generator for the university was publicly available on the website. Anybody could go get a $5,000 license by just putting in their disk serial number and generate a license, so they had tens of thousands of university licenses all over the world being used commercially.

Nathan:

Understood. I think everyone clearly understands the product now, which is super helpful. So now let’s go back to the backstory. Get your first customers from the press and the credibility defending yourself via AWR. You now obviously launched this tool, you’ve bootstrapped it so far. Let’s keep flying the customer journey. So when did you pass, what’d you say, maybe your first 10 customers? Was that also in the first year?

Ted:

That was in the second year. That was in the second year.

Nathan:

Okay, so year two. 2015. And do you remember what first full year revenue was?

Ted:

Yeah. It was about a million dollars. Yeah.

Nathan:

Okay, so that’s pretty impressive, zero to a million in 12 months.

Ted:

Yes. Yep.

Nathan:

These were big contracts you were selling, even early on.

Ted:

Correct, and that kind of leads us to one of the challenges I’m sure you’re going to get to as we go through the interview, is customer acquisition costs. Now the achilles heel of our company has always been customer acquisition costs because it takes a tremendous amount of effort to get a customer onboard, because you have data privacy concerns, you have data security concerns, how do you convince a multi-billion dollar company to share valuable information about their users and licensing and all of that stuff with a startup company? So getting over that hurdle was tough in the beginning, and it was as much work to bring on a billion dollar client as it was to bring on a $10 million prospect.

Nathan:

So Ted, let’s talk about CAC. You said average customers say are paying about $10,000 a month. It’s again, one logo, but they have 10 seats and that’s what they’re paying per month, which means they’re $120,000 average contract values. What do you think you spend on full CAC to get a new $120,000 a year account?

Ted:

We spent probably about a hundred thousand dollars to get into that account.

Nathan:

Yeah, [inaudible 00:00:12:37].

Ted:

It’s expensive. Now the good news is this is extremely sticky technology, so-

Nathan:

Can you quantify that? What’s your churn annually?

Ted:

Our churn is about two and a half percent. In fact, we don’t even like to use the word churn, we use customer retention more internally ,and it’s pretty close to a hundred percent. We’ve just had a handful of unsuccessful deployments for various reasons. Customers weren’t adopting the new versions. In fact, we actually have a solution to that now, we’ve come up with some new technology to help.

Nathan:

Well, Ted, are you saying your net revenue retention is a hundred percent?

Ted:

No, our gross, our gross retention is close to a hundred percent. Our increase, our net is more like 125%.

Nathan:

So you have about three per or 2.5% gross churn annually, you expand by about 25 to 30%, which means your net is at 125% net revenue retention annually.

Ted:

Correct. Yeah.

Nathan:

Yeah. Got it. That makes sense. Now, when you drive that expansion revenue, do you have quota carrying sales reps? And if so, how many?

Ted:

Do we have what?

Nathan:

Quota carrying sales reps?

Ted:

Yes, we do.

Nathan:

How many?

Ted:

We have less than a handful. One of the things that we’ve done is we’ve really been investing in R and D, so most of the customer acquisition has really been, me and my co-founder have had relationships in this industry that have allowed us to get to the C-level suite, which is critical. [crosstalk 00:14:09]

Nathan:

Besides you guys though, how many other reps do you have today though, besides you two selling, how many [inaudible 00:14:14] reps?

Ted:

Three.

Nathan:

Okay. And how many engineers? You said you’re investing in R and D.

Ted:

Our total company size is about 40, and the sales and marketing organization is about seven. So how many, they’re all engineers? Some of them are application engineers, and some of them are software developers, so that’s the bulk of the rest of the company. Correct. Yeah. [crosstalk 00:14:41] in Ireland in our R and D facility in Dublin.

Nathan:

Okay. Why choose Dublin?

Ted:

Dublin has a tremendous talent pool, and the ability to retain talent there is excellent, so we’ve just been able to staff better, more economically, in Ireland, and it works out really well between the US and Ireland as far as language and everything else. My partner is Dutch and I don’t speak Dutch, so incorporating in the Netherlands was out of the question, and we ended up choosing Ireland just because of the diversity of the talent pool and the access to good technical resources there.

Nathan:

Understood, and sticking to your team here, we talked about three quota carrying sales reps, these are some of the hardest first hires for a company scaling, right? Is when you hire your first quota-carrying rep, what quota do you give them? What quote did you give your first couple of reps?

Ted:

Generally, what we’re looking at is about a million dollars a year.

Nathan:

Why?

Ted:

Because that’s just the target that we’ve come up with. We have experience, we’ve seen it over the years that it takes people a lot of time to learn how to sell this product, so there’s about six months worth of learning before they hit the ground running, so we want to try to set them up for success.

Nathan:

Yeah, that makes good sense. And so if they obviously earn their base, but they also hit their quota, so they full on target earnings, how much can they make if they hit their quota, total.

Ted:

Our model’s a 50 50 model, consistent with the SaaS industry. In the US, it’s usually a 150 150 kind of model.

Nathan:

So what base then are you paying typically? It might differ between, but just at a high level, what are you paying base on average?

Ted:

150.

Nathan:

Oh, so if they hit quota, then they can earn up to 300?

Ted:

Correct.

Nathan:

Oh, I see, got it. So your ratio of quota relative to if they’ve hit full on target earnings is about a 3x?

Ted:

Correct.

Nathan:

So that’s actually low. I mean, most of the SaaS companies are scaling with healthy margins and effectively, it’s much closer to like a five or 6x. Do you have plans to increase quota?

Ted:

I’d like to, but I guess that’s kind of the model that we’re at right now.

Nathan:

Are you actively hiring new sales reps? Are the ones you currently have hitting quota?

Ted:

Well, we’re in the process of planning for next year as to what we’re going to do from an expansion, so COVID has been a impact on everybody’s business, and the ability to get out and travel and visit customers has been reduced, so one of the things that we’re trying to do right now, since we’ve been very successful at onboarding some significant large clients is we’re looking at making those… We’re actually looking at investing more in customer success right now, then sales, because it’s just really… Keeping that churn where it’s at and making sure that we onboard people successfully has been really critical, and our sales growth is actually driven a lot by customer referrals.

Nathan:

And so with those referrals coming in, with the power of the tech, with your sales team, what run rate do you think you’ll hit this year?

Ted:

This year, our target is around 10.

Nathan:

And where are you at right now? Are you on track to hit that?

Ted:

Yes.

Nathan:

And what was revenue? What’d you finish 2019 with?

Ted:

Around six.

Nathan:

Okay, so it’s super healthy growth, and you’re bootstrapped, right?

Ted:

Yeah.

Nathan:

That’s great. Take me back one more year. What’d you finish 2018 with?

Ted:

2018, probably around four and a half or something like that.

Nathan:

Okay. And then, interesting. So it took you from 2014 where you were-

Ted:

[crosstalk 00:18:42] You know, we’ve been pretty consistent in having about a 50 to 70% year over year growth, so it doesn’t vary that much from year to year.

Nathan:

The point I was going to make is if you launch in 2014 and broker a million dollar run, right that year, it took you about another two, three years to 2018 to add another 3.5 million of revenue and break that $4.5 million mark.

Ted:

Yeah.

Nathan:

Yeah, interesting. How do you think you get up to like 40, 50-

Ted:

2014 wasn’t a full year, so we started mid year, so that’s where the break is off a little bit, so really you’re really looking at 2015 being our first full year.

Nathan:

Yeah, but you said you did over a million dollars in sales in 2014, correct?

Ted:

No, we started the company in 2014, late 2014, so the first 12 months was closer to the end of 2015.

Nathan:

Oh, I see, so 2015, you broke a million?

Ted:

Right.

Nathan:

I see. Got it. Okay. Very cool. And then, so where do you think you’ll… To scale up to 15, 20, 50, $50 million in ARR, is it going to be expanding these a hundred customer accounts or is it going to be going and landing new accounts all together?

Ted:

It’s going to be a combination of those things. We have a tremendous opportunity to grow within the existing accounts, which is one of the reasons why we invest so much in the customer success functionality of the company, is that with the success with these large accounts, there are more products that we can be deployed into, and there are more users that we can grow within those accounts, so we might have an account with 10 users today, next year, there could be 25 users, if we successfully execute. And then there’s also the addition of new logos, but with new logos, it usually takes about three years to take the company from an initial deployment to being very successful. Because you have to start gathering data, the telemetry data that comes in, and it just takes a little bit of time to ramp up a customer because it’s all a data-driven model.

Nathan:

And Mr Ted, on that note, let’s wrap up with the famous five. Number one, favorite businesses book.

Ted:

Well, it’s not really a business book, but five lessons by Ben Hogan.

Nathan:

Number two, is there a CEO you’re following or studying?

Ted:

I follow a guy named Rich Roll. He’s not really a CEO, but more of a lifestyle, athlete, inspirational kind of… He actually does a podcast. Your podcast and his are the two ones that I go to at the moment.

Nathan:

Appreciate that, man. Number three, what’s your favorite online tool for building Cylynt?

Ted:

Well, just recently, we’ve adopted Slack. We’ve been drowning an email for the last couple of years, and I think Slack is going to be one of those tools that’s going to help us from a collaborative perspective, reduce the email clutter and allow us to scale a little bit better, so we’re enjoying that.

Nathan:

Number four. How many hours do you sleep every night?

Ted:

Seven and a half.

Nathan:

That’s great, and situation? Married, single, kids?

Ted:

Happily married, 55 married, no kids.

Nathan:

No kiddos. Last question. What’s something you wish you knew when you were 20.

Ted:

I think that it comes back to lifestyle. I think when I was 20, I felt like I could burn the candle at both ends and get through that way, but as years have gone by, really focusing on all aspects of health, work-life balance, nutrition, sleep, meditation. Those factors really pay off big dividends when you get to 55, so that’s my advice for somebody in their twenties is that, take care of the machine, take care of your body, take care of your mind, take care of your health, because it’s a marathon, it’s not a sprint.

Nathan:

Security software Cylynt on track to break 10 million bucks in ARR this year, up from 6 million last year, serving over a hundred customers and call it a thousand seats. They are bootstrapped operating right at breakeven, or just on the side of profitability. 40 folks on the team, 33 engineers, three quota carrying sales reps with million dollar quotas, net revenue retention, 125%, and payback periods on landing new accounts at somewhere between 11 and 12 months. All right. Thank you so much for taking us to the top.

Ted:

Thank you, Nathan.

Nathan:

One more thing before you go, we have a brand new show. Every Thursday at 1:00 PM central. It’s called Shark Tank for SaaS. We call it deal or bust. One founder comes, on three hungry buyers, they try and do a deal live and the founder shares backend dashboards. Their expenses, their revenue, ARPU, CAC, LTV, you name it, they share it, and the buyers try and make a deal live. It is fun to watch, every Thursday, 1:00 PM central.

Nathan:

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Nathan:

Additionally, if you want to take this conversation and further, we have by far the largest private Slack community for B2B SaaS founders. You want to get in there. We’ve probably talked about your tool if you’re running a company, or your firm, if you’re investing. You can go in there and quickly search and see what people are saying. Sign up for that at nathanlaka.com/Slack. In the meantime, I’m hanging out with you here on YouTube. I’ll be in the comments for the next 30 minutes. Feel free to let me know what you thought about this episode, and if you enjoyed it, click the thumbs up. We get a lot of haters that are mad at how aggressive I am on these shows, but I do it so that we can all learn. We have to counter those people. We’ve got to push them away. Put the thumbs up below to counter them, and know that I appreciate your guys’ support. All right, I’ll be in the comments. See ya.