Surviving Near-Death Experiences and Going Public in London: Michael Hughes, co-CEO of LoopUp (Part 5)

Sramana Mitra: This journey of getting to profitability happened on a total of about $2.5 million?

Michael Hughes: All in all, it was a little bit more than that. It would probably be about $4 million. I would need to go and check.

Sramana Mitra: Now we are in 2010?

Michael Hughes: Yes. We’ve got to profitability. In 2011, the business was doing pretty well, but the growth rate had gone way down. With the team that we had, we hunkered down. We didn’t hire anybody else. We didn’t spend a dime on marketing and cut everywhere we could. In about 2011 as we got to profitability, we were able to invest a little bit of that money that was left over into experimenting with our sales team and doing various other things. We started to get a little bit of growth.

We were then thinking about funding this. We had our fingers burned a little bit with the venture capital community. We’ve always had this issue that when we go and talk to VCs, they are really not interested in the audio part of the market. They think it’s all over. It’s a commodity and waste of time. We’ve always been fighting this uphill battle to prove everyone wrong. We were in a situation where Andy Scott basically said, “Why don’t I just put a little bit of debt into the business and see if we can grow? If we can show that we can get the growth rate up, then maybe we can put ourselves in a position where the VC fund might be interested.”

Our growth rate had dropped to about 25% whilst we got to profitability. We took a little bit more money in. We were able to put some money behind some of the innovation that we’d made in the way that we were selling. By the time we got to 2012 and 2013, we realized that we had built an efficient sales organization that was completely contrary to the way that anyone else has built a sales team. What most companies have is they have a group responsible for generating leads. They have a different group responsible for actual selling. Then maybe they have a third group responsible for ramping people up and getting them to start using the service.

What we’ve always struggled with is getting the incentives right between those different groups to make sure that the quality of the leads were good enough to go to the sales guys and that what was being sold will actually ramp up. What we did was we took those three functions and sliced them horizontally. We created these little teams that we, internally, call pods. Those teams usually have six to seven people. They have a couple of people doing lead generation, a couple of people doing actual selling, and a couple of people doing ramp up. That entire group is all incentivized around the incremental revenue generated by that group each month.

We were able to get the incentives well-aligned and clear. Within that group, they would reorganize themselves to maximize their revenue and their bonuses, but we were able to keep the competition between the pods because you’d be sitting in a room with two or three pods. As we started to implement this approach, we didn’t have much money. We couldn’t hire expensive sales people. We could only hire the best new graduates that we could find. We had to invest very heavily into training and systems to help those people go from a smart new graduate into a productive sales person. We did a lot of integration with Salesforce with heavy emphasis on training.

Now, we only hire new graduates to go into that program. The economic success that we’ve enjoyed, particularly in the last two years, has been driven by this pod approach. As we had a little bit of money, we’re in a world now where there’s a good product and a low churn rate. In fact, our customers are more than a year old. They actually show net negative churn. They grow year-on-year somewhere in the order of 6.5% to 7%. We’ve got customers who stick around for a long time.

The theoretical lifetime of one of our customers is 15 years, which is nuts in the technology space but that’s what our churn rate would imply. We have this pod system where we’re spending about £440,000 a year on a pod. In the first year of operation, that pod will bring back £410,000 of revenue which will then go onto repeat a number of years. Our customer acquisition cost of a lifetime value is absolutely off the charts.

This segment is part 5 in the series : Surviving Near-Death Experiences and Going Public in London: Michael Hughes, co-CEO of LoopUp
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