SM: Who is your customer base? Do you mainly have small businesses?
JR: This is a very interesting area to explore. In open source there is very little control over who your customers are. As a result, we have everything from big banks to the Men’s Warehouse. I would say the bread and butter is small technical companies you have never heard of.
SM: I can definitely understand how small companies would look for an inexpensive solution. What would be the driver for enterprise customers?
JR: It is control and better ROI. Sugar CRM is the most modern CRM application written in the past five years. It takes about five years to write 500,000 lines of code. We are fortunate that we are the most widely open source business application project on the planet today. That all grew from one tiny open source project.
SM: How did VCs react when you pitched this vision to them?
JR: On one hand, nobody had ever funded a commercial open source application company, much less commercial open source. I had to make sure they understood that we were a for-profit open source. We did a $2 million round within three months from Draper Fisher Jurvetson.
SM: Draper Fisher Jurvetson has spawned most projects which are experimental and do not have an extremely polished business model. Hotmail and Skype were Draper Fisher Jurvetson companies.
JR: They are a smart team. They understand the notion of valuation without revenue. I don’t think they were open source experts, but they did understand the strengths of our team. Since then we have raised $46 million in venture capital.
SM: What were the milestones that pushed you to take more money? What is the financing strategy of the company?
JR: We believe project-powered enterprise applications are the next generation of public tech enterprises. It has always been our mission to become a public company using a modern business model. To do that, you need to raise some capital and move faster than you otherwise would.
We did not have a sales channel. We had a very small office in a software incubator, but most of the time we were working out of our office. We took VC money to allow us to become a market leader. Now we have over 4,000 paying customers, we are in more than 30 countries and we have 170 employees.
SM: What does the anatomy of a project-powered enterprise application company like yours look like?
JR: We have a traditional engineering department. We also have project management, but there is a difference in the way we receive requirements; our requirements come from all over the world. They come from paying customers and from non-paying customers. If you were to compare our financials with those of our predecessors, we are blowing them away in terms of capital utilized to grow a company.
I think Salesforce and AOL had similar business models. If you look at their stock trends and their basic tenants of how the companies are built, that is, being monolithic and walled gardens with extreme sales and marketing costs, it is hard to deny there are similarities. Those business models were revolutionary in their time.
SM: By 2005 and 2006 you started seeing a ramp in the adoption of your code base. What were some of the milestones? How many rounds of financing did you do and what were the factors your VCs were checking you against? Were you monitoring revenue growth or user adoption?
JR: We had incredibly fast growth. Revenue was what gave us confidence as we moved forward. We generated revenue within six months of founding the company by selling subscriptions. We only do subscriptions, and we want to earn our keep every year.