Raj Narayanaswamy is the co-founder and CEO of Replicon. He has over 15 years of software development and senior management experience. Narayanaswamy has a bachelor’s degree in computer science from the Indian Institute of Technology, Chennai, and is an active member of the high-tech business community. Lakshmi Narayanaswamy is the co-founder and co-CEO of Replicon with a focus on strategic initiatives for global operations. Prior to starting Replicon, she worked as a software engineer for Verity (formerly known as FTP Canada). She holds degrees in computer science and electrical engineering.
Sramana: To begin, would you please provide a bit of history and personal background related to your career path to becoming entrepreneurs?
Lakshmi Narayanaswamy: I am from a small town in India. I did my undergraduate studies in electrical engineering in Chennai. After that I went to the University of Calgary in Canada where I earned a computer science degree. After graduation I began working for FTP Canada, which eventually became Verity, although I am not sure that the company exists anymore.
Raj Narayanaswamy: I come from India as well. I graduated from IIT in Chennai in 1986 with a degree in computer science. I was one of two people who decided not to go to the U.S. or pursue a master’s degree. I worked in India for about a year before I took a job in the U.K. for a year. After that, I went to Canada to work on a four-month contract in Calgary. That turned into a four-year term in Calgary. I met Lakshmi in 1991, and we got married and made Calgary our home.
We founded Replicon in 1996. It was a spur-of-the-moment decision to start the company. We were young and just decided to go do it. We moved the office to San Mateo, although we do still have operations in Calgary. We grew the company there until 2008. We also have an office in Bangalore, India.
Sramana: What was going on in the competitive landscape that prompted you to start the company?
Lakshmi Narayanaswamy: We were both working for software companies. The consumer space really started to become popular. Websites and email became consumer products. Even grandmothers had websites and understood URLs and the other buzzwords. We felt that the consumers were driving the Internet and were very comfortable using email. However, when we got to work all we saw was client/server. Companies were not engaging with the Internet technologies. There was a lot of apathy toward popular consumer applications.
We felt there was a real need for the products the consumers were adopting to be used in the workspace. Internet technologies lend themselves to group-based collaboration and communication. We felt it was a big opportunity. We both talked about it for a while, and then on the spur of the moment we decided to start a company. That is how we started.
Raj Narayanaswamy: We were young and we saw companies like Netscape go public. We felt it was simple to write a business plan, get money from VCs and then have a billion-dollar company. We were young and felt we had to do the company now or never. We both quit our jobs at the same time and just started the business. We were a bit naïve, not really knowing what we were getting into. We went looking for venture capital in the Yellow Pages.
Sramana: What specifically was your intention with the company? What was the company going to do or produce?
Raj Narayanaswamy: We changed directions many times. We did a lot of trial and error. Our initial goal was to build a work flow application. We envisioned a general purpose platform where end users could build their own application quickly. We did not get that anywhere beyond a business plan and a functional prototype that we used in our efforts to try and raise money. We talked to a lot of different people and we were unsuccessful in raising money.
We then decided that instead of describing the problem we would just build an application. We built a Web-based application using some Netscape technology that we thought would be useful. We both had very technical backgrounds, so we developed the code very quickly. We followed Jeffrey Moore’s book, so we went looking for some visionaries to buy our solution and potentially help fund us to complete the product.
We worked with Netscape, and they started promoting us on their website. We started getting a lot of interest but we had zero revenue. We spent six months struggling through that and our savings were disappearing. Right before we started the business, we applied for a bunch of credit cards at the exact same time. We ended up using most of those cards and built up a balance of $90,000. We had an office and we did a lot of trade shows.
We were taking cash advances from one credit card to pay the balance on other cards. We were using all the tricks we could to get through. We realized what we were doing was not working, and we knew we had to start making some money, so we began doing consulting work. At that time we were filling our timesheets in order to get paid. Lakshmi recommended that we automate the timesheet process that we were doing for our consulting work because it was an annoying process.
Lakshmi Narayanaswamy: We spent the mornings doing our consulting work for other companies, and then at night we built our own product. Between working on our consulting projects and building our own products at night we did not have time to deal with timesheets, accounts, and collecting the cash. It was very painful for just us two, so we figured it would be even more so for larger organizations.
Sramana: Were you able to validate your intuition? Was there an enterprise need for timesheet software?
Lakshmi Narayanaswamy: We ran our timesheet product idea by a few of our customers. We confirmed that it was a big pain point with a lot of different companies. One of our clients actually liked our concept, so much so that he became an angel investor. Once we built the product, we had to find a go-to-market strategy. We decided to not only use the Internet as a platform for our product but as the sales and marketing tool for it as well.
Our product was based on the Netscape server product. which was bleeding edge at the time, and it was very popular. That partnership with Netscape got us a lot of exposure and we were doing the try-and-buy model, which was new at that time. We focused on making the trial and use of the product hassle free. To this day we still follow that model, and we still focus on making everything as hassle free as possible.
Sramana: Who were your first paying customers?
Raj Narayanaswamy: We launched the product in May 1998. We had our first paying customer in one month. We had built our product on top of Microsoft and Netscape server technologies, and we found our customer through those relationships. In 1999 Microsoft did a big promotion for their vendors and we received 2,000 leads from that conference. We did not know anything about sales at that time, so we figured we needed to go get a salesperson who would know what to do. The first salesperson we hired handled all the inbound calls we had.
That is when we went back to consulting for our clients. We still had to wind several projects down. When we did that, our clients wanted us to do more work for them but we told them we were making money on these products. That is when one of our clients decided to look more at what we were doing and wanted to invest in us.
We did not need the money at that time, but we did take some from him. From 1996 to 1998 we did not pay any taxes. Our credit cards were maxed out, and we had to clean all of those out. That credit card investment money was the cheapest money we had. We joke that we were funded by Visa and MasterCard.
Sramana: That is a very common mode in which entrepreneurs get started. They max out credit cards and take out loans against their mortgage. What was the price point your product was selling for?
Lakshmi Narayanaswamy: The timesheet product was $29, and it was a one-time fee. We made it as easy as possible for someone to purchase the product. We wanted to gain their trust. We found that a lot of customers bought it because there was such a low amount of risk. They could just buy in on their credit card and not worry about how well it was going to work for them, it was worth the risk to see if it would fit their business. Once they saw how well it worked, they referred us to others.
Raj Narayanaswamy: It was very easy for customers to buy. There was not much of a sales process. We just had to understand the customer’s buying process. The big thing that we learned was that we needed to reduce perceived and real risk to our customers. We also found that selling through PowerPoint or trying other tricks to convince customers to buy the product would not work. We needed to arm customers with the experience so they could make an entirely informed decision.
Sramana: What technique did you find was the most effective to sell to your customers?
Lakshmi Narayanaswamy: We just tried to keep the buying process as clean and simple as it could be. We took a “what you see is what you get” approach. There were no hidden features and no hidden costs. Customers knew why they were buying or wanted to buy the product. We made it our job to make sure it was very easy for them to understand exactly what they were getting when they bought the product.
Raj Narayanaswamy: Everything we are talking about is very common now. Everybody does it now. It was not that common then.
Sramana: Who were the primary buyers? Were they businesses or individuals?
Raj Narayanaswamy: Typically they were business buyers who needed it for a specific application.
Sramana: Would they purchase multiple copies?
Raj Narayanaswamy: Yes. They would purchase multiple licenses. A typical license would cover 10 to 20 employees. Our largest customer had 30,000 users.
Sramana: Did you sell the 30,000-user client the product online like everyone else?
Raj Narayanaswamy: That is how it happened. Philip Morris bought our product for 10,000 users. Of course, they called us first to do some investigations and due diligence. After that Kraft came along and wanted a 30,000-user license. They came to our office to talk to us. Even today our largest customer is someone we have not met face to face. Today we do field sales and we will meet customers face to face. However, 90% of our revenue comes through telesales.
Sramana: Telesales is one of the most efficient ways to sell at that price point. Today it has become Web lead generation followed by telesales to close.
Raj Narayanaswamy: That is how we do it as well. We stumbled upon that approach and started doing it in 1998. It remains our business model today.
Sramana: How many customers do you have total?
Lakshmi Narayanaswamy: We have just over 7,800 customers.
Sramana: What are some of the key strategic decisions you have made that have helped you ramp to such a large customer base?
Raj Narayanaswamy: One of the big decisions we made early on was to get our other consulting business. The money there was good. I have seen that a lot of bootstrapped companies earned their money from a lot of different sources.
Kraft was also a big moment. While we received a very large deal from them, it was hard for us to support such a large implementation. While the product met their need, they had specific requirements and they wanted customization of the product. We had four or five really large deals in 1999 and 2000 where we were customizing our product for those users.
Sramana: Was there external consulting work or was that just part of the sales cycle?
Raj Narayanaswamy: It was part of the sales cycle because the product need not meet every single need for extremely large organizations. We found that these larger organizations would give us a lot of money to customize the product to their environment. We charged consulting dollars for those customization projects. Lakshmi used the term ‘elephant hunting’ for those deals, and we were good at it. We were not that good at skinning the elephant, which is what caused the pain. As a result, we pulled back from larger deals and stopped doing customization work. By nature we began focusing on SMB business. That was a big decision.
Another major milestone was our revenue model. Originally we sold the product by license fee. Our clients bought the product and installed it on their servers internally. In 2003 and 2004 we began seeing the SaaS movement, so we began offering a SaaS version of our product.
Sramana: How did you align pricing with the SaaS strategy?
Raj Narayanaswamy: It was tough. We went from a perpetual license to a monthly fee per user. Customers always wanted to compare apples to oranges. The SaaS model was $12 per user, per month. Customers viewed that as charging more for SaaS. In 2009, we decided to stop selling the licensed version of our product and offer only SaaS. As a result, we both decided to move to Silicon Valley, and we hired senior folks from Salesforce and other larger firms. We essentially doubled down on SaaS. We are still small. We have $20 million in revenue, but we have a goal of $100 million in revenue within the next four years.
Sramana: Were you able to move beyond $29 per license before you converted to the SaaS model?
Raj Narayanaswamy: Before we moved that to the SaaS model it had reached $199 per user. We had added a lot of functionality to the product by then. The $199 fee was our on-premise fee plus maintenance.
Sramana: You have $20 million of revenue now. Did you experience linear growth from 1999 through 2011?
Raj Narayanaswamy: It was mostly linear. We had steady growth with a slight bump in 2009.
Sramana: How did your customer acquisition strategy change over time? Obviously you could not continue your partnership with Netscape forever.
Lakshmi Narayanaswamy: We focused on online lead generation and had a telesales team to follow up on the leads. We used a lot of online marketing, including Google. We spent almost $3 million on advertising to get customers. Our payback period is between six and nine months.
Raj Narayanaswamy: Our cost structure is split between North America and India. There are a lot of sales support functions that are done in India. Leads need to be cleansed, and that happens in India.
Sramana: How do the leads come in? Is it all through Google PPC?
Raj Narayanaswamy: We have done Google PPC, search engine optimization, and just about every other online advertising media we can think of. Lakshmi built an entire process to track 900 keywords, and Google PPC has been a big piece for us. We supplemented with banner advertising, which just did not work for us. We also did email advertising, which worked well for us for a period before it stopped working. For no reason, we will find that consumer behaviors change radically. What worked last year will not necessarily work this year. We have to rapidly find what works and concentrate on that.
Sramana: What techniques have been the most consistent for you?
Lakshmi Narayanaswamy: We tend to be very opportunistic. We would market to accountants hoping they would recommend our software to their clients.
Sramana: You said you cleanse your leads in India. How does that work?
Lakshmi Narayanaswamy: We use a team in India to receive the leads. They examine each lead and cleanse it. The team examines the name of the company, verify the phone number and email to make sure they are formatted properly, and visit the website.
Sramana: What is the sales cycle from the point a lead comes into your system? How long does it take to close that customer?
Lakshmi Narayanaswamy: It depends on the type of customer. On the SMB side it is 45 days. On the mid-sized list it will take about 120 days. Enterprise deals take about nine months. Early on we saw that the median had to be played, so we packed our sales cycles appropriately.
Sramana: What do you do during those 45 days to move that customer along to a close?
Lakshmi Narayanaswamy: Once the lead is cleansed, we immediately put a telesalesperson on it. They call and qualify the lead and pass it on to a sales rep, who can follow up and close the sale. We still close SMB sales on the phone.
Sramana: Would you talk a bit about the financing of the company? How did you finance your different stages of growth?
Raj Narayanaswamy: Our first investment came from an angel investor who was a client. In our early stages we had a map with a pin on it for each customer. He saw that map and saw the number of pins increasing. He approached us with an investment offer. That was very early on in Canada, and he is still an investor in the company today. By late 2000 we had received several offers from companies asking to purchase the business.
We decided the market was ready for us to raise some money, so we did an investment round and raised $2 million. We raised that money mostly from angels in Calgary and $500,000 from a local venture capital firm. That investment round turned out to be a disaster.
As part of raising those funds, we brought in a CEO. Then the market crashed and we went from three employees to 40. Neither Lakshmi nor I had ever managed anyone, so we had to deal with a lot of personnel issues. That resulted in parts of the product turning buggy. There was a lot of disagreement between the investors and us. They wanted their money back during the slow months. We ended up buying out a lot of those shareholders, including the VC.
Sramana: How did you do that? How was the buyback structured?
Raj Narayanaswamy:It was painful. The company was profitable, so there was cash. The company spent cash to buy those shares back. We brought in an outside business valuator who valued the business. We made an offer to all shareholders based on that valuation. A lot of them took it and they all made money, anywhere from 15% to 30%. We did that buyback in 2004.
Sramana: Does the company ownership now remain with the two of you?
Raj Narayanaswamy:The only investor left is our original angel investor. We have built up a strong balance sheet of the past several years. We had to decide if we wanted to turn this into a lifestyle business or if we wanted to put that money back into the company to grow. We decided to invest, and we have made a lot of commitments in growth over the past 12 years. Part of that investment was physically moving to Silicon Valley.
Sramana: Why did you decide it was so important to physically move to Silicon Valley? I have been here for 16 years and I love it, but why does a $20 million profitable company move here?
Lakshmi Narayanaswamy:The transition to a SaaS company was painful, both on the technology and business side. We could not get a lot of talent where we were. We came here and saw how companies here solved the problems. We were looking for SaaS expertise and needed that new blood in our company. We needed a true expert management team.
Lakshmi Narayanaswamy:We have been internationally focused since the day we started the business. We have customers in 20 countries. We have offices in Calgary, Toronto, here, and Bangalore. A lot of entrepreneurs get a advice to focus on growing locally. For us, having a global outlook has helped us. We are getting more and more global customers who are just looking for a good customer experience and a great product.
Sramana: There are pros and cons. People can find you on the Internet, and as long as they are satisfied with the product that is good. However, there is an overhead for globalized customers. It may not make sense to localize a product for France or China if you don’t have the resources to do it.
Lakshmi Narayanaswamy:That is definitely true. We had those considerations as well.
Sramana: Obviously you have built a successful business while being married. How does that work?
Raj Narayanaswamy:It works very well when I just agree with whatever she says! Joking aside, we separated the areas of our focus broadly. I focused on engineering and operations and she focused on sales and marketing. We operated from our strengths.
Lakshmi Narayanaswamy:We had a personal coach to help us navigate our strengths and help us grow. That was very beneficial for us. We were able to lift each other.
Sramana: Did you have any major conflicts while working so closely together?
Lakshmi Narayanaswamy:Nothing major. We had small conflicts trying to ensure we did not work on the same things.
Sramana: It sounds like you both have a lot of respect for each other and you are a balanced couple. Is that a fair observation?
Raj Narayanaswamy:We are both strong minded in our convictions, but I don’t think one of us dominates over the other. It works very well and we get this question regularly. Our typical answer is that our relationship just works.
Sramana: I think whatever you are doing is working just fine. If you have come to the point of $20 million without outside financing, then you are doing something right. I hope you don’t take any more financing in the future, either.
Raj Narayanaswamy:We are being seduced by venture capitalists all the time. That is actually a question we are thinking about now. We definitely will not give up any control of our company.
Sramana: You will attract money. VCs love it when entrepreneurs have taken all the risk on themselves and left them to collect on the end. Between the two of you and your angel investor you have a high-profit, high-growth venture. Growing from here with other financing is much easier. You could do receivable financing. Those kinds of options would address any cash flow needs that you may have. I don’t see the point of VC capital at this point.
Lakshmi Narayanaswamy: Thank you. That is a slap that we both needed!
Sramana: Thank you both for taking the time to talk with me. I look forward to following your future success.