Learnings (good & bad) from Sumo Logic’s S1

Sammy is the Managing Director and Cofounder of Blossom Street Ventures. Email him directly at sammy@blossomstreetventures.com, especially seed to Series C founders.

Sumo Logic recently went public and in case you forgot to read their S1, we summarize it for you below. There are some nice learnings from how Sumo runs their SaaS business.

What Sumo does. “Our Continuous Intelligence Platform enables organizations to automate the collection, ingestion, and analysis of application, infrastructure, security, and IoT data to derive actionable insights within seconds.”

Data is eating the world. “The volume of data is growing at an extraordinary pace, which is, at best, difficult to digest and, at worst, an impediment to driving the speed of decision-making needed to compete in today’s dynamic marketplaces. Our platform scans an average of 873 petabytes of data per day and an average of 18.6 billion events per second. Our platform integrates and analyzes structured, semi-structured, and unstructured machine data, both historically and in real time, to provide actionable intelligence around what happened, why it happened, and how to resolve business, technology, or cybersecurity issues.”

Total customers actually fell in last 6 months. “Our customer count changed from 1,626 as of January 31, 2018 to 1,900 as of January 31, 2019, to 2,137 as of January 31, 2020, and to 2,130 as of July 31, 2020.”

But larger customers actually grew during that time; Sumo is becoming more “enterprisey”. “Customers that had annual recurring revenue, or ARR, greater than $100,000 or more grew from 187 as of January 31, 2018 to 234 as of January 31, 2019 to 323 as of January 31, 2020, and to 330 as of July 31, 2020. Customers that had ARR greater than $1 million or more grew from seven as of January 31, 2018 to 17 as of January 31, 2019 to 25 as of January 31, 2020, and to 29 as of July 31, 2020.”

But SUMO lights money on fire. “For fiscal 2018, 2019, and 2020, our revenue was $67.8 million, $103.6 million, and $155.1 million, respectively, representing a year-over-year growth rate of 53% and 50%, respectively. We generated net losses of $32.4 million, $47.8 million, and $92.1 million. 16% of revenue is generated outside the US. There are 710 employees.”

Free cash flow is negative. “We define free cash flow as cash used in operating activities less purchases of property and equipment and capitalized internal-use software.”

Easy onboarding, multi-tiered pricing, land and expand. We have a simple onboarding process, allowing customers to quickly realize the benefits of Sumo Logic without costly and lengthy implementation. We offer flexible, multi-tiered subscription packages for access to our platform, which encourage customers to expand their adoption. Customers typically adopt Sumo Logic with an initial use case or single project and expand across teams and use cases, creating a powerful flywheel effect.

Primary competitors are some of the best. Splunk, Elastic, Datadog.

Highly dependent on AWS. “Amazon Web Services, or AWS, is a third-party provider of cloud infrastructure services. We outsource substantially all of the infrastructure relating to our cloud-native platform to AWS. Although we have disaster recovery plans that utilize multiple AWS locations, any incident affecting their infrastructure that may be caused by fire, flood, severe storm, earthquake or other natural disasters, power loss, telecommunications failures, cyber-attacks, terrorist or other attacks, and other similar events beyond our control, could adversely affect our cloud-native platform.”

Material Weakness. “In connection with the audit of our consolidated financial statements as of and for the fiscal year ended January 31, 2020, we identified a material weakness in our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.” That said, “This material weakness did not result in any errors to the consolidated financial statements as of and for the fiscal year ended January 31, 2020 or the six months ended July 31, 2020, nor did we find any evidence of management override of entries in our financial reporting process.”

Significant inside ownership. “Upon completion of this offering, our executive officers, directors, and our stockholders who own 5% or more of our outstanding common stock and their affiliates, in the aggregate, will beneficially own approximately 38.3% of the outstanding shares of our common stock.”

Much of this share count is subject to 180 day lockup. “Based on 83,889,892 shares of our common stock (including the Capital Stock Conversion) outstanding as of July 31, 2020, we will have 98,689,892 shares of our common stock outstanding after this offering. Our executive officers, directors, and the holders of substantially all of our capital stock and securities convertible into or exchangeable for our capital stock have entered into lock-up agreements.”

Cash efficiency is mediocre. To date the business has $97m of paid in capital plus $340mm of convertibles less $101mm of cash, and generated $155mm of revenue in 2020. This is 46 cents of annual revenue for each dollar of investment. The company raised through a Series G ($109mm in 2019). The median SaaS company does 58 cents on median and 91 cents on average.

Pricing is not per user, and they encourage adoption. “We offer multi-tiered paid subscription packages for access to our platform, the pricing for which differs based on a variety of factors, including volume of data to be ingested, duration of data retention, and breadth of access to platform features and functionalities. Our subscription packages encourage customers to expand their adoption of our platform by providing them with the flexibility to ingest and analyze large volumes of data and the ability to access a broad suite of platform features and functionalities without incurring overage fees, as well as insights into their usage patterns.”

Free trials are very effective. “Our go-to-market strategy consists of self-service adoption through our website, an inside sales team, a field sales team, and a partner channel. We offer free trials that enable potential customers to experience the benefits of our platform, and we see significant conversion from our trial users to paid customers, with approximately one-third of our new customers in fiscal 2020 having been free trial users who converted into paying customers. We complement our free trials with an inside sales team focused on the mid-market segment and a field sales organization focused on the enterprise segment.”

Payback is fast, land and expand is strong. “We employ a land-and-expand business model centered around our platform offerings, which have a rapid time to value for our customers and are easily extensible to multiple use cases across a business.”

CS helps drive upsells. “We utilize the analytical capabilities of our platform and our customer success team to understand how our customers use, and how they would benefit from expanding their use of, our platform. This understanding helps us successfully upsell and cross sell to our existing customers.”

CS also helps drive product. “Our customer support organization works closely with our research and development function to ensure that customer feedback and community input is incorporated and addressed as we continuously improve our platform. We continually incorporate suggestions, feedback, and new use cases from our community and customers into our platform.”

Customer Support is tiered. “We offer two tiers of customer support. Our standard customer support tier is included with all subscriptions to our platform and includes correspondence with our customer success team and access to online support portals. Our premium support service is available to our customers on a subscription basis and includes 24/7 access to a technical account manager.”

As a result, retention is strong. “Our dollar-based net retention rate has fluctuated between approximately 120% and 130% for each of the past ten quarters. In addition, our customers that had ARR greater than $1 million or more as of July 31, 2020 have experienced a ten-fold increase in aggregate in their ARR since their initial subscription agreement with us. On average, the ARR of our cohorts grew at a compound annual growth rate of over 35%.” Cohorts are to the right.

Contribution analysis of the customer also looks good. “At the end of fiscal 2018, the 2018 Cohort accounted for $10.1 million in ARR and $19.8 million in associated costs, representing a contribution of $(9.7) million, or a contribution margin of (97)%. At the end of fiscal 2019, the 2018 Cohort accounted for $14.6 million in ARR and $7.6 million in associated costs, representing a contribution of $7.0 million, or a contribution margin of 48%. At the end of fiscal 2020, the 2018 Cohort accounted for $18.3 million in ARR and $8.2 million in associated costs, representing a contribution of $10.1 million, or a contribution margin of 55%. These metrics are illustrated in the chart below.”

The company upsells well, but doesn’t win new accounts quickly. For the 6 months ended July 2020, “We estimate that over 95% of the increase in revenue was attributable to growth from existing customers, and the remaining less than 5% was attributable to new customers, relating to a 7% increase in total customers.” A similar trend happened in 2019: “We estimate that approximately 90% of the increase in revenue was attributable to growth from existing customers, and the remaining approximately 10% was attributable to new customers, relating to a 12% increase in total customers.

Integrations are key. “We have a simple onboarding and implementation process as well as automated self-paced or instructor-led training and certifications, which enable customers to begin using our Continuous Intelligence Platform within hours. Once they adopt our platform, customers are able to leverage approximately 175 out-of-the-box applications and integrations, allowing them to quickly realize the benefits of Sumo Logic without costly and lengthy implementation.”

Covid’s impact. “The operations of our partners and customers have likewise been disrupted, and we believe this has caused delays in renewal decisions for some of our existing customers, caused customers to request concessions such as extended payment terms or better pricing, and affected contraction or churn rates for our customers. In particular, the conditions caused by this pandemic have affected the rate of global IT spending and have adversely affected demand and may continue to adversely affect demand for our platform, lengthen our sales cycles, reduce the value or duration of subscriptions, negatively impact collections of accounts receivable as a result of extended payment terms, concessions, or customer inability to pay, cause delays in renewal decisions for existing customers, reduce expected spending from new customers, cause some of our customers to go out of business, limit the ability of our sales force to travel to existing customers and potential customers, and affect contraction or churn rates of our paying customers”

Exec comp. The CEO pulls a salary of $372k, put also received $3.3mm in options and other comp last year.