by Bruce Hadley, SoftwareCEO
Somerville, Mass.-based Spotfire Holdings, a developer of business analytics software, had 10 employees in 1997 and sales of $855,000.
Four years later, in 2001, the company had skyrocketed to 175 people and $17 million in sales, a 1,890% increase that earned Spotfire the #90 spot on Inc. magazine's list of 500 fastest-growing firms in America.
In this case, though, the postscript is the sweetest part: In 2002, Spotfire increased revenues to $24 million, decreased headcount to 150, and brought an end to the previous year's losses; the company is now at break-even.
The company began in Sweden in 1996, and moved to the U.S. in 1997; R&D still comes out of Sweden, with sales, marketing, and finance in the U.S. Approximately 25% of revenues come from Europe.
We recently had a fun and far-ranging conversation with Spotfire fonder and CEO Christopher Ahlberg about what makes his company tick.
The first question that occurred to us: How did Spotfire manage to increase revenues 41% from 2001 to 2002, while decreasing headcount by 14%?
"Two things," Ahlberg said. "We are getting more productivity out of the sales force, and we have more product offerings to match more precisely what the customers are looking for."
Moving from gee-whiz to greenbacks
"We started with a purely technical idea I did my PhD on it that was not a product at all," Ahlberg says. "We then turned that on to solving some business problems, and started with life sciences research.
"We built a path from there, first going after oil companies and their exploration areas it sounds distant from life sciences and pharmaceuticals, but there are similarities and we're now talking to semiconductor companies and the government.
"Our software helps you take large disparate databases and analyze them in such a way that the information can be put in the context of your business process. This allows our customers to embed their business processes with the analysis of their data."
An average Spotfire transaction ranges from $300,000 to $600,000 over a customer's lifetime, Ahlberg says, though some "have aggregated up to ten million dollars." The first deal is typically $50,000 to $75,000, and takes three to six months to close.
Spotfire also sells software on an annual fee basis. "We require a three-year committed deal, billed at the start of each year," Ahlberg says. "At the end of three years you own nothing, and we renegotiate and try to upsell."
The rentals cut into initial cash, but build long-term loyalty, Ahlberg says: "You miss out from a total ticket value, but you have a very solid underpinning for renewals."
On the rental deals, Spotfire recognizes one-third of the total revenue i.e., the first year's payment minus the maintenance fees. Maintenance is 18% per year, and is recognized each month. Ahlberg estimates that 75% of Spotfire's revenues are from software licenses, 25% from services.
"I've only done this one company, so I don't have a deep history to draw from," Ahlberg says, "but I can tell you the things I think we've done okay with."
Yeah, we consider a 41% revenue increase to be "okay"; here's Ahlberg's list:
"You need to build your offering from the business side. Lead with the business side, then go to the IT department and hope they endorse the solution. You have to show the value, whether it's an ROI analysis or TCO or whatever."
Tip #3: Designate a blue-ribbon team to make it happen. "We created a Market Factory Group whose charge is to take our technology and demonstrate it in a whole series of business areas. The Spotfire Market Factory Group includes the company's best engineers and the people who understand business problems, teamed up with the sales reps.
"It's not an abstract activity," Ahlberg says. "The Market Factory Group creates configurations of the product not different versions that address specific business problems. Instead of having individual presales people responding to those needs as they come up, we have a team that addresses it cohesively and proactively."
This same team also writes documentation for the individual product configurations, and works with the marketing group to create collateral.
Tip #4: Limit your demo output to genuine demand. "We can crank out fewer than 10 of these a year," Ahlberg says. "If were more than 10, we'd start splitting that $24 million in revenue into too many small pieces we'd be producing a lot of things we'd never sell. The key focus of the Market Factory Group is to look for recurring themes."
Tip #5: Get the demos out to the field in unison. "We put these product configurations on a CD or DVD on a quarterly basis," Ahlberg says, "and do a Webcast to the field to talk about it. The trick is to get it in the hands of the presales technical people as quickly and uniformly as possible."
"Early on, we had this naive view that the sales effort on a small or big customer is going to be equally bad," Ahlberg says, "but we had a couple of introductions early on to big companies. We decided to make Spotfire able to deal with very large customers in a good way."
Much of this depends on infrastructure, and much of that depends on your team, Ahlberg says. His recommendations:
Tip #6: Hire people who are local and close to your customers. "We built our sales and service organization in such a way that we can address very large customers' needs in a fairly coordinated way, whether they're in Japan or Europe, even though we're just 150 people," Ahlberg says.
Tip #8: Think locally, on a global level. "Our customers think in terms of very large deployments right away," Ahlberg says. "That doesn't mean a huge purchase order is going to pop out, but they force you to think about serving three locations, say, in the US and the ROW [rest of world]. It's your challenge to try to think about every way you can to make that happen."
Tip #9: Set up shared commission accounts. To encourage global cooperation and coordination, Spotfire splits sales commissions for big deals across the team of people who work to land it. E.g., the three people who work on a big deal will get a share of the overall sales commission based on the number of end-users at the site in their regions.
However, the sales person who actually closes the deal the one with the paperwork in his or her hand will get an override at the top end, of something like 10%, Ahlberg says.
Ahlberg says there are no plans for additional rounds, but he's skeptical about any software company's ability to go it alone. "Yeah, it's possible to do without it; Microsoft did it," he says. "But if you don't get venture money, you need to make your customers your venture investors."
In spite of his success in raising cash, Ahlberg has a few suggestions for other fund-raisers:
Tip #10: Wait as long as you can. "If I had to do it again, I would probably wait longer, from a dilution point of view," Ahlberg says. "We did not have customers when we took venture money. In that position, you're working with the VCs to establish your company, rather than having them come into an established company."
Tip #11: Make sure your software is unique and defendable. "The VCs would disagree with me on this, but when we got started we had a very cool technology," Ahlberg says. "You need something unique and defendable, and I gave them a good sense of the energy I was willing to put into it."
Spotfire's five funding rounds were, in order and approximate amounts: $500,000; $3 million; $6 million; $15 million; and $15 million. "At the $3 million stage we had references, but were not fully operational," Ahlberg says. "Still, the investors could see value coming out of it."
Tip #12: Tie your money hustle to milestones. We asked Ahlberg about the right time to raise money; his answer is to connect your need to the VC's expectations. "You need to think about the venture path," he says. "The trick is to think about it terms of milestones.
"As you're negotiating with them, say, 'We're going to take your money at this point because we've accomplished this milestone, and we're going to get another round when we get to this milestone.'"
Tip #13: Make sure half your milestones are already in the bag. "Give the VCs a set of milestones where you've already accomplished half of them," Ahlberg says. In other words, your pitch asks for $X million to accomplish the five milestones you're presenting to the investment group, but at that point you have in fact already accomplished two-and-a-half of them.
Is this deceptive? Not really, says Ahlberg: "It's all about managing expectations, and, ironically, it's all about trust. Once you show them you can deliver, you will have established their trust."
"We hired ahead of the curve," he says. "This was in 1999, 2000, and part of 2001, at the joint direction of management and the board. Instead of saying, 'Let's try to cram everything we can out of the existing people,' we'd hire a new group and say, 'Okay, let's see what we can get out of these folks.'"
Tip #14: Never hire a new sales person until all the existing ones are at quota. Call it Ahlberg's Axiom. " It's always great fun and very exciting to hire people, but taking down head count is painful," he says, "There's nothing worse."
What caused Spotfire to jump the gun? "We had too much money on our hands," Ahlberg says. "And, second, instead of doing a careful breakdown on how we can grow, we aimed for 100% to 120% growth. We should have settled for the 75% growth that we actually achieved."
Tip #15: Lead with the people who will use your app. Okay, this is something of a repeat of Ahlberg's first tip, but he obviously feels strongly about it, so we gave him the floor: "You have to lead with selling to the application users," he says.
"The IT department is getting intermediated. They're more important than ever, but the trend is that you're going to have to become very, very good at how your application is going to be put to use."
Tip #16: Look to offshore development. "It's a little late in the game for us," Ahlberg says. "It's a bit different in that we don't do offshore development for cost reasons; we started in Sweden and remain there quite successfully.
"I have no experience with offshore in countries like India, China, and so on, so it felt a little bit 'out of reach.' But I have friends who are doing it in Shanghai and all over the place, and they are doing very well."
Tip #17: Don't apologize for being small. "People are more worried about the $10 million to $50 million company that's losing a lot of money," Ahlberg says. "If you're a $5 million company that has consistently delivered and made money, people will trust you."
The Internet plays to small company strengths, Ahlberg says: "Being able to do unique things to people's business processes over the Web I think there's great future there. I don't think the future is all going to be SAP."