Successful Pivot to $5M in Revenue from Chicago: Cohesive Networks CEO Patrick Kerpan (Part 4)

Sramana Mitra: Let me understand a couple of things. You talked a bit about Boards and about lightly capitalized company. Can you explain to me what the capitalization of the company is?

 Patrick Kerpan: The corporation is Cohesive Flexible Technologies Corporation. It’s a C-Corp. It owns two limited liability companies. One has all the image automation that’s just parked and the other owns the network virtualization.

Sramana Mitra: Who owns the corporation?

Patrick Kerpan: It’s a series of investors – family, friends, angels, O’Connor family.

Sramana Mitra: It’s not institutional ownership?

Patrick Kerpan: We have one institutional investor. 75% of the money is from people who were in capital markets.

Sramana Mitra: How much total capitalization has gone into the company?

Patrick Kerpan: It’s not publicly disclosed but it’s nothing like Valley money. Not tens of millions.

Sramana Mitra: What you do is important but how you build the company is primarily what the story is about. Capitalization is a very important part of that. Lightly capitalized companies is a huge interest to us.

Patrick Kerpan: When I say lightly capitalized, I’m comparing to the $15 million to $50 million rounds.

Sramana Mitra: The point is how you put one foot before the other. You told me about how you pivoted. That’s good. I will double-click down on that subject but we do need to understand how you built this business from a financial point of view as well.

Patrick Kerpan: It’s very typical where the first amount of money that we got was around $600,000 to prove that there was something out there. Then, we raised $1 million from them when we thought that there something out there. At our peak, we did another $1.5 million. As we pivoted, we got some more money from the same investors. As we did the pivot, the thing that we’ve been dealing with is how do you drive the business where you never have much over half a million in the bank. You’re always trying to figuring out how to get the next deal. For us, that meant staying small and sometimes, getting even smaller. We reached a point where we said, “We have to get to cash flow break even.”

Sramana Mitra: What time frame from the founding of the company did you reach that milestone of breaking even?

Patrick Kerpan: We’re just now approaching that, so it’s from when we took the first money which was at the beginning of 2007. It was dribs and drabs. I’m conflicted. I now understand the Valley way because people give you that advice, which is, “Get as much as you can in your A round and run as hard and fast as you can.” Once you do it very incrementally, it keeps you focused.

Sramana Mitra: Yes, because you don’t have the luxury to not be in focus.

Patrick Kerpan: It’s hard. For us, the other thing is the subscription model. Entrepreneurs now get it.

Sramana Mitra: Entrepreneurs get it and the technology buyers get it as well. That was not the case for the earlier players who were trying to do subscription revenue.

Patrick Kerpan: I have one customer who’s just about to sign. Their subscription is growing fast enough so that by the end of next year, they’d probably be on $0.5 million a year run rate if they don’t bend the curve. Over the next 12 months, they’re going to spend well over $350,000 and on their way to $500,000. It’s a very big ERP company.

It was one of my most dangerous Board meetings. I came to the Board and said, “We signed up XYZ. They’re going to standardize on us for their cloud architecture.” Everybody was excited. They said, “How much are they going to pay us this month?” I said, “This month’s $150 but it’s going to grow.” One of the Board members was like, “You have to shut this down.” They’ve paid us over $1 million since then. You have to prove value every step of the way.

This segment is part 4 in the series : Successful Pivot to $5M in Revenue from Chicago: Cohesive Networks CEO Patrick Kerpan
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