Background: Venture capital firms have historically been fertile ground for conceiving new startups. Businesses such as Palo Alto Networks, HomeAway, Workday and Kayak are just a few of the firms whose founders conceived or incubated their businesses while at venture firms. This is a logical phenomenon, given the constant exchange of ideas and concepts within VC firms, combined with easy access to capital combined with the presence within firms of EIRs and venture partners who are searching for the next big idea.
But how does a business evolve out of a VC firm, and what is unique about that entrepreneurial process? And what are the unique advantages and disadvantages of starting a company from a VC firm? To answer these questions, we interviewed Bob Moore, co-founder of RJMetrics, along with Jake Stein. These two entrepreneurs hatched RJMetrics out of Insight Venture Partners, the large New York venture capital firm that manages over $15 billion of capital, and which focuses on enterprise software and Internet investing.
Fresh out of Princeton and UPenn respectively, Bob and Jake joined Insight in 2006 as analysts. In this role, Bob and Jake were tasked with sourcing and evaluating new prospective investments for the fund.
As part of Insight’s detailed due diligence processes, Bob and Jake were doing deep dives on the performance metrics of new deal prospects. For example, what was the user and revenue retention, how quickly could a company recoup its customer acquisition cost, and how rapid was a company’s underlying growth? They were tasked with analyzing data coming out of a myriad of data sources such as SQL databases, Google Analytics, and e-commerce transaction files.
Because venture firms had not historically been analyzing this data at scale, Bob and Jake had to create new tools for ingesting, evaluating, and generating conclusions from the data. This gave Jake and Bob an idea for a new business: to provide modern data infrastructure and analytics for small businesses, enabling them to understand the KPI’s that drove growth of their business.
So they decided to found a company, RJMetrics, departing Insight Ventures on Friday, September 13th, 2008 to start the company. It was not the most promising start: the very next day Lehman Brothers declared bankruptcy, and the country went into recession.
How and why did Bob and Jake decide to start RJMetrics, following on the heels of their early stint as VCs? What perspective and knowledge did their roles as VCs provide them as they got the business off the ground? And what were some of the key learnings they had as they built RJMetrics, eventually culminating in a sale to Magento Commerce? We ask these questions and more in our interview with Bob Moore.
Company Overview: RJMetrics provides modern data infrastructure and analytics software to help businesses make smarter decisions with their data. RJMetrics was acquired by Magento in 2016 for a significant amount of cash.
Founders: Bob Moore (BM), Jake Stein
Year Founded: 2008
Interview with Bob Moore:
Q: Let’s go back to the early days. How did you and Jake decide to start RJMetrics?
BM: RJMetrics was actually a pivot from an original business idea. I had first started a company called Smartraise. Smartraise was an affiliate marketing company that worked with non-profits, helping them with their online marketing efforts. It was a lead generation business. That business didn’t go anywhere. But in the process of trying to sell to affiliate marketing software to non-profits, we started to learn a lot from them. They told us that what they really needed was to figure out who their most valuable donors were. So we focused on that problem: we started to create analytics to help them to identify their most valuable donors.
At the same time, Jake and I had been working as analysts for the venture capital firm Insight Venture Partners in New York. At Insight, we had been running analytics as part of our due diligence process on prospective investments. In particular, we had been running cohort analyses to understand customer patterns and customer behavior.
So we started to put the pieces together. Why couldn’t we productize the work that we work doing at Insight? This type of analytics would help the non-profits I mentioned, and could also help other companies.
Q: So at that point you left Insight to start RJMetrics?
BM: We actually started building the company at Insight. They were very supportive. We needed to figure out all of the steps in productizing customer analysis, and there was lot of work involved.
We eventually decided to leave Insight in September of 2008. We left Insight on a Monday, and Lehman Brothers crashed on a Tuesday. We knew that with the money we had we could last 6 months in Philadelphia or 2 months in New York, so we decided to move to Philadelphia.
Q: What did your early team look like in terms of their roles? Also, did you have advisors who helped shape your success?
BM: At the beginning it was just Jake and me building the company. We decided not to raise money at the beginning — Insight had drilled it into our heads that the best companies were ones that didn’t raise money. So we started small. We only grew to 4 people between 2009 and 2011.
We had valuable input from several advisors, however, including Spencer Lazar (now Partner at General Catalyst), who was at Insight at the time. Jeff Clavier from SoftTech eventually became a valuable advisor, as well as Karan Mehandru from Trinity Ventures and Eric Carlborg from August Capital.
Q: How did you grow your team?
BM: Our first 11 hires were all developers. We didn’t have salespeople on the team. We focused on building a great product.
I would say that the desperation of our wanting to build a great product led us to write a lot of code that eventually got ripped out and replaced.
Jake and I sold the product for the first few years. Our first sales hire was technically a customer success person. The person had previously sold used cars. He transitioned from customer success to sales.
Q: How did you sign up customers?
BM: From our friends at Insight, we got warm introductions from friends and former colleagues. We had an MVP at this time. Our original deals were paid pilots. Our first customers were companies like Bonobos and Threadless. After a little while, customers started coming to us. We were getting referrals and growing virally. We signed up companies like Jack Threads, Warby Parker.
We actually signed a company called Fabulous, which was originally a gay social network. We worked with them as they evolved into an e-commerce company, Fab.com, which went on to be one of the fastest growing clients we ever worked with.
Q: How large were your initial deals?
BM: The deals were small at the beginning, and grew to $20k by the time we reached Series A.
Q: How did you build your sales team?
BM: We eventually hired a VP of Sales just after raising our Series A. This person was very scrappy, and they were also good at training. At our peak, we had grown the sales team to over 30 people.
Q: How fast did the company grow in terms of sales in the early years?
BM: It took us 2 years to get to $1m of annualized recurring revenue after we started selling. We started the company in September of 2008, and we started selling in 2009. We grew as a result of viral marketing; we also did a lot of content marketing as well.
We were profitable from the beginning, so we didn’t have to raise capital until we actively decided to start investing in growth after the Series A.
Q: Which KPI’s did you track in the early days of the company?
BM: Growth was the most important part of the story. We focused on growth in monthly recurring revenue (MRR). Churn was a challenge for us in the early days — we were selling to mid-market companies where churn can be high. We used our own software to track KPIs.
Q: What did your company look like when you reached Series A, and how did that round come together?
BM: We were bootstrapping for the first few years of our company. But we got to know a few early-stage VCs, in particular Trinity Ventures and SoftTech (now Uncork). We had reached $2m of ARR and we had over 100 paying customers.
We also had very attractive return on our marketing spend — our LTV to CAC ratio was 8x. So we knew we could spend more money on marketing. So we decided to raise a round.
Q: Looking back, what advice would you give to seed-stage founders?
BM: I would recommend that they do a good job of cultivating relationships with companies that could be partners. For example, get to know people in corporate development at large companies. You never know when those relationships will become valuable in the future, whether they be for partnerships or for potential M&A.
Key Learnings from Bob Moore:
· Just because you were a venture capitalist doesn’t mean you can’t bootstrap your business. Although they worked in VC for several years, Bob and Jake chose to bootstrap their company. They understood the importance of maximizing their ownership in the early days. They made conscious decisions to reduce cash burn, such as keeping the team at four people for the first two years, and moving from New York to Philadelphia to cut costs. All of these decisions instilled discipline and focus.
· Listening to customers can help guide a pivot: Bob and Jake’s first idea, creating an affiliate marketing business for non-profits, didn’t go anywhere. But the customer discovery process enabled them to identify a more attractive market:helping non-profits identify their most profitable customers. Entrepreneurs should listen keenly to customer desires in the early days, because those learnings can help a company pivot to a better business.
· It’s never too early to prepare for a potential exit: Bob emphasized the value of building relationships with large corporate partners in advance of an exit. Acquisitions are as much about the relationship between buyer and seller, as they are about the product or performance characteristics of the target company, and it’s never too early to build those relationships.
Epilogue: RJMetrics was acquired by Magento Commerce in August 2016. The rationale for the acquisition was to combine one of the largest e-commerce platforms with a leading provider of software for data infrastructure and analytics.
As part of the deal, Stitchwas spun out to provide a cloud-first, developer-focused platform for moving data. Stitch has been growing quickly and was named one of Philadelphia’s top startups in 2018.
“At Waterfront Ventures, the Story of RJMetrics, a Company Started in South Jersey”, Jan. 29th, 2017, at http://njtechweekly.com/art/3234-at-waterfront-ventures-the-story-of-rjmetrics-a-company-started-in-south-jersey/.
A cohort analysis is an analysis of specific groups (for example, users or customers) that are bucketed into specified time categories (for example, weekly, monthly or quarterly), with the aim of evaluating each group over time and understanding key trends in the data. As an example, one might do a cohort analysis on monthly groups of subscribers to determine how subscriber retention changes over time.
“These are Philly’s Top Startups: realist 2018”, Technical.ly Philly, at https://technical.ly/philly/2018/01/22/philadelphia-top-startups-2018/