When you visit a site like Twitch or Under Armor and use the websites search bar, you’re using a tool called Algolia. Think of it like a company’s own Google Search.
By any standard metric Algolia is on a tear. Founded in 2012 it saw 100% yoy growth from $20m in 2017 to $40m in 2018. They also have the blessing of the Venture Capitalist Gods with $74m in total funding.
As they look to raise later in 2019, will CEO Nicolas have leverage to get the valuation he wants to minimize dilution? Lets take a look.
Is It Good or Bad That 5% Of Customers Make Up 80% of Revenue?
Algolia monetizes on a pure SaaS, subscription based model ranging from a one person development team paying $35 per month, to $100k per year enterprise deals among the Fortune 1000.
When asked about customer cohorts, Algolia CEO Nicolas said, “about 5% of our enterprise customers make up 80% of our revenue.”
With 6,000 total paying customers, about 300 (5%) are enterprise customers paying annual contract values in the $80k to $100k+ range and representing about $30m per year in annual recurring revenue (ARR).
Because 300 customers make up this top 5%, I don’t see much risk coming in the form of significant churn if one customer cancels. Ultimately, a “5% making 80% of revenue” split here feels fine to me.
Closing 6,000 Customers Isn’t Easy. How Did Algolia do it?
To close new customers Algolia has dedicated teams for their small business ($35/mo), mid market, and enterprise ($80k/yr) cohorts.
Today lead volume is so strong that 1 sales development rep (SDR) is able to fill 2 Account Executives (AE’s) calendars with meetings.
SDR’s are measured by numbers of meetings set up, and pipeline development in the form of new potential bookings. AE’s are traditionally motivated: 50% of their salary is commission based with the other 50% coming from commissions topping out at $100k+ when rep hits quota or on target earnings (OTE).
Total team size is 300 across 5 offices headquartered in San Francisco and the entire engineering team is in Paris.
That engineering team does something fairly unique related to support.
How Algolia Gets Away With No Dedicated Support Team
Your typical support ticket might look something like this:
Support intern sees technical question come in: “How do I change the CSS of your widget when I embed it on my site using your iFrame embed code?”
Not knowing how to respond, the intern forwards the ticket to the tech team.
Most tickets end up like this so Algolia thought, why not just have our engineers do tech support. You may think, Nathan, we could never do that, our developers would hate it.
I’d tell you you’re not giving your development team enough credit. They care deeply about your product and your customers. They get a slight hit of dopamine when they help a customer with a technical support question.
Better yet, developers can then build this learning into your product to decrease support tickets in the future and drive more usage, activation, etc.
This is what Algolia chose to do. They structured support by having engineers spend 2 half days each month on support.
Now, 6 years after launch and after their first $40m in ARR, they are creating a dedicated support team to deliver 24/7 support.
After Algolia lands a customer, and delivers them great support, what do they do to get customers paying more?
2 Ways Algolia Gets Customers Paying 30% More Each Year
One sign of a mature SaaS company is how strong their upsell muscle is. Can they get a customer in year 1 to pay 2x as much when renewal time comes around?
The Algolia customer cohort that signed up exactly 1 year ago churned about 10% of their revenue in the first 12 months but Algolia’s product and customer success team drove 30% expansion revenue on that same cohort. This brings net revenue retention to an above average 120%.
Expansion doesn’t just happen magically. You have to get a few things right including the table stakes of a valuable product. Secondly, you have to set up the right pricing axis. Many CEO’s think they’re selling one thing when in fact, their customers are actually buying and using something not even listed on the pricing page.
Algolia has identified their top usage metric as number of searches done per month. So if Under Armor saw 1000 searches done per month before Algolia, and 10,000 searches done after, it’s a sign that the search is delivering more value to Under Armor website visitors – something Under Armor is happy to pay more for.
The Algolia engineering team, support team, and sales team are focused on driving up this usage metric because it directly correlates to 30% expansion.
The second thing Algolia upsells are features. Pay more to get feature X added to your website search.
If cohorts pay 30% more every year, becoming more valuable as time goes on, you’d make the argument that lifetime value (LTV) is very high and that you should invest even more aggressively in growth.
But to get a new $80k/yr account Algolia pays about $80k upfront. This means more growth means more upfront cash needed to cover that year long cash gap.
Will Algolia sell more equity (Raise VC) to fund this gap?
How Much Will Algolia Raise Later This Year?
Over the last 7 years, Algolia has raised $74m to drive growth. Nicolas is looking to raise another round here in 2019 but will it be at a valuation he likes?
Many entrepreneurs over-fund their companies and then get stuck in down round scenarios.
The quick way to tell if a company is fighting a down round is to look and see if they did a Bridge round, usually less than the last funding round and sometimes done using Venture Debt, or if the time since last funding is more than 18 months (most VC backed startups raise every 12-18 months).
I like to see CEO’s who have kept their ARR to funding ratio within the 1:2 range. Meaning your ARR is equal to at least half of the total capital you’ve raised.
With $40m in ARR in 2018 and $74m raised, Algolia falls within that range. Because the company also has 130% net revenue retention, 100% yoy revenue growth, and diversified customer cohorts that de-risk the business, I think you’ll see Algolia raise $40-80m in new capital sometime in the second half of 2019 at a valuation in the $400m-$600m range.
Check back here later and see if I turn out to be right. If I am, you’ll definitely see me post it on Twitter.
If I’m wrong, forget that I made that prediction altogether 🙂
In the meantime, enjoy my interview with Algolia Founder Nicolas on Youtube or on my Podcast, The Top Entrepreneurs.