Sramana Mitra: At what point did you find a monetization model that was meaningful and that could carry the business?
Mike Morris: 2004 was when we found the monetization model.
Sramana Mitra: What was that model?
Mike Morris: The model was going to customers, finding custom software development projects that needed to be built, and then using the community to build them through competitions.
Sramana Mitra: Customers were putting payment for that as reward for the competition and you would give that to the winning team and you would take commission off of that.
Mike Morris: Exactly. We do some consulting. We had a few people that would go work with the clients directly. They would bill hourly rates. The rest of it is exactly like you said. We would charge them for whatever we paid the community and then a margin on top of that.
Sramana Mitra: What is the next strategic move?
Mike Morris: In the 2005 and 2006 timeframe, we expanded past our friends and relationships and landed our first few big customers – AOL, Verisign, and ESPN. That was the defining moment for Topcoder. Those three accounts put us on the map. Each of them had its own story of how we sold them but they were all convinced of the quality of the Topcoder community.
2006 was the first big year for us. 2008 was the next jump when the crash of the economy happened. We took that as an opportunity. We saw that a big part of our revenue was from consulting services. The other half was from the community. In 2008, after the crash we cut the consulting revenue and moved it to fixed platform fees. We charged people platform fees to have access to the community and we just included our consulting services under that. We took a revenue hit but we knew it was the right move. We needed to get out of hourly billing because it was against giving back to the community. We made that transition in 2008. We took a hit in our revenue and we built it back up over 2009. By 2010, we were probably back to where we were before the crash.
Sramana Mitra: If you could help me understand the revenue ramp from 2001 to 2010 – where we are right now, how did the revenue progress?
Mike Morris: We were growing at about 100% per year from 2004 to 2008. When we cut back, we lost about 40% after the crash. Then we were back to where we were in 2008 by the end of 2010 and it was all subscription revenue.
Sramana Mitra: What was the run rate? At what number did you finish in 2010?
Mike Morris: We were close to $20 million at that time.
Sramana Mitra: Subscription revenue was from companies who were subscribing to have access to this community?
Mike Morris: Yes.
Sramana Mitra: What were the terms? By 2010 when you had this stable repeatable base, what was the mix? What was the pricing model?
Mike Morris: Subscriptions were a third of our revenue.
Sramana Mitra: Then people were paying for individual projects on top of that?
Mike Morris: The next third would be what we pay out to the community. The remaining third was fees from prize money.
Sramana Mitra: You counted in revenue the fees that you were paying out to the community?
Mike Morris: Yes.
Sramana Mitra: But a bulk of that is going to the people who are doing the development work, right?
Mike Morris: For every dollar of prize money paid, we took another dollar in fees.
Sramana Mitra: That entire one third was going out as prize money. You were counting it in revenue but that was basically just a pass-through.
Mike Morris: Right.