Successful Pivot to $5M in Revenue from Chicago: Cohesive Networks CEO Patrick Kerpan (Part 7)

Sramana Mitra: How many customers do you have now?

Patrick Kerpan: We’ve got more than a thousand connected customers. We don’t get visibility in some of them because with some partners, we only get the net dollar. We used to be able to track every customer and knew every use case they were doing. We just got too big for that visibility.

Sramana Mitra: Where are you in terms of revenues?

Patrick Kerpan: We’re running at that $5 million run rate. If you go to a VC, they’d think that you have to sell $5 million again next year, but I’ve 90% recurring revenue.

Sramana Mitra: They understand that now.

Patrick Kerpan: You have to use lifetime value.

Sramana Mitra: The venture industry today understands cloud businesses very well because that’s where all the enterprise software investments are.

Patrick Kerpan: What we’re finding is we have to go and say, “Our LTV is $20 million.”

Sramana Mitra: Are you in the market to raise money?

Patrick Kerpan: We’ve got more business than we can do right now. For the first time ever, we’re reaching a point where staying up another two hours doesn’t do it. We’re starting to not make money we could have made because we can’t cover everything.

Sramana Mitra: But you don’t have enough free cash flow to be able to hire?

Patrick Kerpan: We’re afraid the market is moving too fast. Can we afford to continue to bootstrap? One of the things we’re looking at now is the Customer Acquisition Cost ratio (CAC). One way to calculate that is in a time period, the LTV of the incremental subscription revenue year-over-year divided by your sales and marketing expense.

They want CAC around two to two and a half for a maturing business. Our CAC ratio is almost four. What that means is we’re not spending enough. If you have a CAC ratio that high, either you’re putting a ton of money in the bank or you’re not spending enough. That’s the thing that has us worried. Do we have to go the route of a California-sized investment to capture the market that we think is now available? We’re still deciding on that.

Sramana Mitra: There are two ways of doing the next phase. You could raise $10 million to $20 million and put an incredible bar for yourself, or you could raise $2 million to $4 million that gives you enough cash but that doesn’t give you that high of a bar.

Patrick Kerpan: You don’t like carrying around $20 million of liquidation preferences.

Sramana Mitra: That’s my point. The thing that I don’t like about what’s happening in Silicon Valley right now is they’re force-feeding capital in companies who should not be raising that much capital.

Patrick Kerpan: Around $400 million of funding has gone into companies that have, at least, overlap with us. Almost every one of them is gone and hardly made a dollar in revenue.

Sramana Mitra: That’s the point. If you raise $2 million to $4 million and build a $20 million company, you have a reasonable chance of getting an exit that makes everybody money. If you raise $20 million to $30 million, the bar is so much higher. It turns out to be a bad deal for everybody.

Patrick Kerpan: Yes.

Sramana Mitra: Is there anything else that you want to say?

Patrick Kerpan: I want to tell you a story about the guys at EM TECH. I’m really proud of helping them. We make $350 from these guys. They’ve built a business with this SMS switching. It’s amazing that that’s the world we live in. I can help some guys over Skype build their dream. It’s been enabled by Internet ubiquity. It’s this idea that you can make networks out of software, which nobody though you could until we did.

Sramana Mitra: My last question is if you look at your ecosystem, what does your competitive landscape look like? You described the whole Cisco situation, the pricing model dysfunction, which was perfect. Is there any other direct competitor that you are watching? Where do you see this company exiting into?

Patrick Kerpan: In some ways, our most significant competitor is probably Brocade. Vyatta was in the metal business, but they were also virtual-friendly. Vyatta ran out of gas 12 months before people started talking about SDN and NFV. From what we understand, Brocade got them. They have a super smart team and good core technology. As SDN started to happen, it made them the centerpiece. The point is that they just bought layer four through seven virtualized element from Riverbed. They’re the most complete competitor from a feature point of view. I still think I like our quality and service and user experience.

There are two competitive dimensions we have to track. One of them is the Platform-as-a-Service environment like Cloud Foundry. How do we fit into that world? Then there’s the containerization world. The answer is kind of the same. If people now deliver container clouds, we have to deliver our products as container network managers. That will happen this year. I think we’ve reacted really well. Cloud Foundry itself is moving to becoming more of an orchestration engine for containers in its own right. We also fit in there. One of the biggest threats to us has been the shifting tides and fashions of containers.

One of the issues you face when you have families and friends as investors is that they didn’t really intend to put their money under my bed and let it sit there forever. That’s another issue I have to tackle.

When we started talking about making networks out of software, people didn’t get it. I feel it would happen to Sony. If you use VNSQ, what happened to Sony can’t happen to them. Instead of being a refrigerator that runs a data center edge, we’re flexible software that runs at application edge. Instead of your data center having protection, every app has protection. I think that’s going to become enough in vogue. The exit would be an acquisition exit in the next couple of years. It would be hard for the investors to not look at one of those opportunities.

Sramana Mitra: I fully understand that. I’m more trying to understand, strategically, who would be the best acquirer for the company. Based on all that you know about the players, whom would you like to work with?

Patrick Kerpan: I know who I want to work with. It’s Martin Casado at VMWare. He’s on our Board of Advisors. 80% of our customers are in the public cloud as opposed to private. If you deploy NSX and you deploy Cohesive, I cannot conceive of anything more secure than that.

Sramana Mitra: Excellent discussion Patrick. Thank you for your time.

This segment is part 7 in the series : Successful Pivot to $5M in Revenue from Chicago: Cohesive Networks CEO Patrick Kerpan
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