Sramana Mitra: What happened to the $200,000 worth of pre-orders? Were you able to fulfill it?
Zain Jaffer: No. We knew that there was a demand, but we underestimated how long it would take to build the product out. We weren’t able to do anything with that. Customers were asking when this was going to be built. There was a lot of pressure.
In some ways, we didn’t realize that we had perhaps misled investors about the level of traction we had. This wasn’t real revenue. We didn’t even know if we could service these orders profitably.
At the beginning, the unit economics just didn’t work. We did make revenue. I always believed that unit economics will work. In that first year, we became dangerously close to running out of money. We had six months of runway left.
I said to my co-founder, “We need to fail fast here. If we’re going to drag this out, we’re not going to get the traction we need. Let’s increase our spending. Let’s make more losses on the unit economics, so we can show more revenue.” It ended up working. We got one of our insiders to come in. Within a few weeks, we raised our next round, which was about $6.5 million.
Sramana Mitra: What about the product? You still don’t have a product.
Zain Jaffer: We had the product, but we were making losses.
Sramana Mitra: No one worries about losses in Silicon Valley in early-stage funding.
Zain Jaffer: We had revenue, but we didn’t have cash. Fortunately, we raised $6.5 million. That was Series A. Everything worked really well after that. The unit economics started to work. The business became instantly profitable.
In that first year, we did about $850,000 in revenue. The next year, we did $15 million. The year after that, $56 million. At that point, we had realized that the round that we raised had really bad terms. Now that we had leverage, we could renegotiate and get really favorable terms.
We raised a $17 million Series B round which turned out to be the last round we would raise. We didn’t touch that money. When Vungle exited, it was north of $400 million revenue and was extremely profitable. It took a lot of work to get that first million dollars in revenue. I appreciate what you guys do because that first million is the hardest.
Once you get that first million, the next million comes far more easily. Before you know it, you’re getting $10 million at a time. It’s unreal. The last $100 million was equally difficult but relatively speaking, it’s crazy how that first million was so important.
Sramana Mitra: In that journey, what are some of the components of customer acquisition? What were the levers of such hypergrowth?
Zain Jaffer: For us, investing in AI at that time. Ad networks existed but no one had done video advertising. No one had created a pricing model where you charge per install. We made it very easy to work with us. Rather than trying to sell them a $500 video ad, I changed the sales pitch.
I said to them, “What if I solve your biggest problem?” Suddenly the customers are talking about an unlimited volume of transactions. It was the business model and value proposition that we really nailed. We just needed to deliver. Not only that, we had to do it in a profitable way.
When we invested in AI, it was a great initiative. We were sitting on the mobile phone and we could see the user and capture user data. As we invested more and more into that, the business started to have higher and higher margins.
Sramana Mitra: Was there a particular segment of customers that were gravitating towards you?
Zain Jaffer: We thought this would be a platform for all applications. Our core customer was actually a gaming application. Our investors didn’t like that. They weren’t comfortable with the fact that our core customers were gaming apps.
They wanted Nike. They wanted the big brands to come from New York. If we didn’t get those brands, at least go get a shopping application and entertainment apps. We wasted a lot of time listening to the investor’s input there that was targeting a market for which we didn’t have product-market fit.
In some ways, we were all over the place in the early days. If we had to focus on just that one core customer, Vungle would have been multiple times bigger. We had too many customers sets. We got lucky because gaming carried 90% of the revenue. I, as a CEO, and my product team were spending an exorbitant and disproportionate amount of time on new areas.
This segment is part 5 in the series : Scaling to a $700M Exit: Zain Jaffer, CEO of Vungle
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