This analysis was written by Tyler Knight of Arbor Advisors.
15Five got its start in 2012 after an article in Inc. Magazine propelled them into the relative spotlight and supplied them with their initial 100 customers.
The name comes from the company’s core service offering which allows employees to spend 15 minutes writing a report that takes their managers 5 minutes to read. The report is designed to empower workers with direct access to their senior managers and managers with valuable insights on workers wellbeing, thoughts, and performance.
Nathan Latka got the chance to sit down with founder David Hassell 9 months ago in September 2018:
Using Nathan’s interview data, plus the recent funding news, I wanted to take a deep dive into the business to pull out some important data points.
Enterprise Customers of 15Five Pay 10x that of Self Serve Clients
According to CEO David Hassell, 15Five’s software allows company managers and leaders to be the best managers and leaders possible by providing them with real-time, actionable data from employees.
They most often run into market incumbents such as Lattice, Betterworks, and Reflektive. All of which until very recently were significantly more capitalized – more on that later.
15Five’s revenue model is based on a traditional pay per seat SaaS model with the average per seat pricing being somewhere between $7-$14 monthly.
Their two primary customer cohorts are split between an inbound group of retail clients that are self-serving and a larger enterprise client base recruited by a committed sales team of 15 people. The self-serve clients are high volume / low ARPU and consist of organizations that are generally under 100 total employees.
The enterprise customers generally use somewhere between 100-3000 seats, and David estimates that the ARPU in this cohort is roughly 10x that of the self-serve clients. Including some brand name logos such as Spotify, Hubspot, and Citrix, 15Five has 1500 total paying customers.
15Five Enterprise Clients Are Worth $150k Using This Calculation
As of September of 2018 15Five was close to $10M in ARR growing at a range in between 75%-85% YoY. That is very healthy growth at the eight figure scale mark, especially considering their enterprise cohort was growing well over 100% YoY at the time.
Not surprisingly, self-serve cohort churns at a significantly higher ran than enterprise at close to 12% annually from a logo perspective. Considering no customer support team in place for these clients and the smaller size of the organizations, only 12% is pretty impressive from a logo basis. The enterprise cohort churns at less than 10% annually setting 15Five up for net revenue retention well above 100%.
Low churn and significant seat expansion allows David’s team to reach net revenue retention between 120%-130%, which is well above average in a metric that is a clear indicator for product market fit and scalability moving forward.
David mentions that their current LTV/CAC ratio across both cohorts averages out to be in the 5-6/1 range with a payback period on that CAC to be less than 12 months. These metrics allow for a more aggressive strategy on acquiring customers due to the return on spend and short payback period.
Calculating LTV by finding the average number of years a customer will be a customer and multiplying that number by ARPU, David believes the LTV of his enterprise clients is $100k-$150k.
How 15Five Hit Net Revenue Retention of 130%
15Five has a sales team of 15 people including a chief revenue officer and a customer success team that all work cohesively to find new customers, make sure they stay customers, and incentivize their customers to scale seat count across the organization.
Instead of aggressively acquiring customers through various distribution channels David believes the most sustainable companies build a compelling product and rely on word of mouth for distribution.
15Five is the #1 ranked performance management software product on Capterra and they also boast a high net promoter score. Very few bought customers and a successful content marketing strategy allows the business to be very capital efficient.
Investors Own 52% of 15Five
15Five has raised a total of $42.7M since 2012 initially with three seed rounds and then a Series A in December of 2018. This $8M round led by Origin Ventures sold 15.7% of 15Five’s equity to investors at a $52.1M post-money valuation ultimately putting the aggregate investor ownership of the business at a controlling 52.76%.
The healthy LTV/CAC and other metrics certainly warrant raising capital to scale efficiently due to the profitability arbitrage of ultimately recognizing more revenue over the lifetime value of a customer ($150k) than the initial expense it costs to acquire them ($4600).
However, is that worth giving up majority control to investors?
Well, that’s a complex question, and often times just because the aggregate investor ownership stake is greater than 50% does not mean the founder isn’t still in control. Angels and other early non-institutional investors may have a separate class of shares that do not have voting rights.
Being that this round was just three months after Nathan’s interview with David it is safe to assume that $10M ARR number is still relevant. With that, we can back into an Enterprise Value to Revenue multiple of roughly 5x.
15Five Valuation Multiple Was Approx 5x On $8m Round In December 2018
Objectively, 5x seems on the low side for a company at $10M ARR scale, > $120% net revenue retention, 75%-85% YoY growth with little capital to work with, a 5-6/1 LTV/CAC ratio, in a space with high demand.
For context, The Bessemer Cloud Index which tracks the 75 most publicly traded SaaS companies currently sits at an average 11x EV/Revenue multiple. Of course, there is liquidity risk to not having access to public capital markets and extreme value placed on the scale at which these 75 companies are at.
That being said, if I were David I would not have accepted 5x, even in a minority transaction. If I had to guess, it was the relatively small equity stake gained by investors that brought down the multiple.
The $8M will be put to work in improving the product, improving marketing, and continuing to build out the sales team. Additionally, head count nearly tripled from September 2018 to today, growing from 50 to 141 people.
Valuation on July 2019 $30m Raise Was $130M
With that drastic change in headcount and David’s intention to begin deploying capital into customer acquisition I’m assuming cash burn was high enough to warrant their larger July 2019 raise of $30.7M led by Next47.
It is common that a company would be valued off of their 2019 projected revenue if the close date of the transaction is in the second half of the year. With that in mind, let’s try to project what their revenue will be in 2019 and back into the revenue multiple they received for this round.
Given that the company likely burned a good portion of that $8M to enhance growth, it is safe to assume that YoY revenue growth rate is strong. But is it 100%? I doubt it, SaaS companies going from $10M ARR to $20M ARR can fairly reasonably expect 10x in this frothy market assuming the other unit economics are equally as compelling.
With a post money valuation of $132.7M, I bet 15Five will land somewhere between $16M-$18M in ARR in 2019 which would mean they received somewhere between 7.4x – 8.3x forward looking 2019 ARR.
Was $30M too much?
I tend to advise companies to stay lean, remain capital efficient, and limit dilution by raising in increments equal to a company’s annual increase in ARR.
However, there are certainly exceptions. One of which is when you are a potential category leader in a sector that is early in its cycle, and your competitors are significantly more capitalized. The reason being consumer demand is very fluid and you need to be able to opportunistically deploy capital when it is necessary.
With competitors Betterworks, Lattice, and Reflektive receiving total funding amounts of $103.8M, $24.4M, and $103.1M respectively, I think David made the right decision by starting to build a war chest to use when he needs to, where he needs to.
Do you think they raised too much?