CIBC Innovation Banking Podcast

Marcos Torres [00:00:00] You have to be living in the future all the time. If you're not raising your Series B as soon as you close your A, you're behind the ball. 

Michael Hainsworth [00:00:11] Hello, I'm Michael Hainsworth. The CIBC Innovation Banking Podcast explores the world of startups, growth stage companies and late stage companies that have made a big splash in their industries around the world. Accenture reports that in 2019, two out of five cyber attacks were focused on the small to medium sized business market. The hackers are on the hunt, but so is Huntress Labs. The managed cybersecurity platform for small to mid-sized business recently raised 100 million between CIBC Innovation Banking, JMI Capital and others. For many of us, that kind of walking around money would be burning a hole in our pockets. But for Marcos Torres, he's just getting started. He calls fundraising more serious than getting married. And with the days of zero interest rates behind us, tying the knot isn't as easy as it was in the swooning days of 2019. 

Michael Hainsworth [00:01:13] So for this Chief Financial Officer, what does a build and buy strategy look like? 

Marcos Torres [00:01:24] So for Huntress, the most important thing is making sure that there are clear synergies for our partners when they buy from Huntress. So when you think about going and buying something, it's not just yet one more product that we can sell to you, it's how do we bring in something that can be fully integrated with our current platform? And the value for you as a partner comes from your operational efficiency and being effectively more secure by using more of the products, and now, basically just, you know, getting a price break because you're buying two or three products. So for us, it's more about the value prop of one plus one being definitely more than two for you as a partner. 

Michael Hainsworth [00:02:08] What about the build side of that strategy? You want to expand quickly, but I can imagine there's an organic component to it as well as a growth through acquisition strategy. 

Marcos Torres [00:02:18] Yeah, a hundred percent. And that's where the build part comes in. Every time we build something, we've put ourselves very closely in the shoes of our partners. One of the interesting things about Huntress is it was built for the SMB, but not just for the SMB per se. It's not just a channel play. It is built for the channel, the specific MSP channels. So the value prop is around how they operationally provide IT services and security. So every time we build something, we make sure that the value is there for our partners and that they're really getting something out of that they're not getting from any other tool. We really make sure we understand their workflows and their cost. 

Michael Hainsworth [00:03:04] So it must be a remarkable balancing act between the strategy of acquiring the kind of intellectual property necessary to provide your clients with what they need, as well as to build it. It feels like two totally different muscles. 

Marcos Torres [00:03:17] Absolutely. When you think about the product strategy for us, there's two things that are really important to highlight. The first one is thinking about the type of acquisitions we've done. So we've done two so far. One was very small and probably didn't even come up in anybody's radar. It was Level Effect in late 2020. And that was a small startup, two founders that came over and they brought their technology and 19 months later, that became a cornerstone of our managed ETR platform. Then you look at when we bought our security awareness training platform. That's probably right around the size where we would buy. I don't think we buy anything bigger than that because at that point you're buying a product that is so mature, that it's its own thing, and there's nothing wrong with that for me or any acquirer. But for us specifically, if we can't really make it a seamless experience where that product is really having synergies with all the other products or services we have in the platform, then it doesn't make sense. 

Michael Hainsworth [00:04:17] When it comes to fundraising, you've described it to me as more serious than getting married. Really? 

Marcos Torres [00:04:24] Yes, we take that seriously when it comes to to a partnership. When you bring somebody in your cap table, it's not just money. And it's if you think about it, in the worst case scenario, it's much, much harder to get somebody out of a company. And you've seen horror stories of companies getting recapped. And it's not just what happens to the cap table or the money. There's a lot of windset. It's almost like you're cutting an arm and, you know, hoping that it grows back again. I mean, the company's never the same, so we know that can be so traumatic for a company that we want to avoid that at all costs. So really the importance is we take that seriously considering we're marrying you and divorce is not an option. So let's make sure you are the right person. You're not just money. You're bringing in a whole lot more than that. And that's what we've done with all our partners. 

Michael Hainsworth [00:05:12] Many startup founders, though, aren't able to tie the financial knot in this environment. How are you managing to do it? 

Marcos Torres [00:05:19] There's two things. One, we've always been very fiscally responsible, even during the times where you could say, you know, burn cash, you need more, you can go get it. You know, two or three years ago, that was sort of the tune that the market was singing. And we were always very careful because we keep an eye on the market. It's one of the things that we realized, there was a lot of indicators as they were just really out of whack. History does not really repeat itself, but it often rhymes. For us, that was an indication that, yes, there was an opportunity, but there was a window that was probably going to close. So we try to capitalize as much as possible on those opportunities growing the business. But we also made sure that we weren't making the good old or one-way decisions versus your two-way decisions. So we always kept the optionality to turn down the knobs and say, okay, the market change, we can adjust and we're not painting ourselves in a corner, if that makes sense, from a management perspective and where our money went, our hiring and all those things. 

Michael Hainsworth [00:06:23] And tell me about the optionality of digging your well before you're thirsty. 

Marcos Torres [00:06:29] Yes, that is our philosophy when it comes to capital. One of the mistakes that I feel a lot of entrepreneurs and management teams make out there is going out there when you need cash, when you're, you know, three months before running out of cash, six months running out of cash and not having a plan A, B, C, and D. Capital is the type of stuff and we saw it in 2008 when just your credit just dried out real quick. And that was a completely different type of crisis. But again, you have to have access to multiple waveforms of capital and have a diversified capital stack and even have very well capitalized partners that, you know, your plan A may be you go raise equity, your plan B may be, well, you have some debt that you can run on, your plan C maybe here you go raise a bridge with your existing investors. And it's not scenario A until you have to go to B or C, you have to be working all those out at the same time. And I think that's probably the biggest challenge that folks have thinking about scenario planning. Scenario Planning is look at all the very different scenarios you can see in the future and then plan for all of them. So the chances of you getting stuck in one of those edge cases that is not one of your scenarios is very, very little. You can never eliminate it. But that's the part of risk management that is sometimes scary because there's no right answer. You're never going to get 100% insurance and nothing's going to happen. But you have to minimize sort of enough that you can sleep at night. 

Michael Hainsworth [00:07:55] And I can imagine your background in private equity plays a role in your understanding that you can't just pick up the phone and see who wants to buy. You need to build relationships that ultimately lead to that capital coming in the door. 

Marcos Torres [00:08:09] Yeah, a hundred percent. It's understanding two things. One is understanding at a high growth company, the different stages that the company goes through as you grow real quickly and the things you're going to need to make sure that you have the right capital, the right partners, the right operational support to cross those chasms. And so it's not linear. It's not constant. If anything it's very changing. And part of having access to that capital, it's making sure that you are forming those relationships. And the way I put it, you know, when I talk to my team is, you have to be living in the future all the time. If you're not raising your Series B, as soon as you close your A, you're behind the ball. 

Michael Hainsworth [00:09:00] Digging the well before you're thirsty. It's a great analogy every startup entrepreneur should consider. If you don't start your fundraising until you're in the red, you could find yourself signing a stack of pink slips instead, including your own. But early stage success stories aren't considered a success because they're profitable. They're considered successful because they're growing, taking market share, and focused on building gross margins. With this mindset, Huntress Labs has doubled its revenue and quadrupled its customer base. Torres tells me, Huntress isn't a private equity play, it's a VC play. 

Marcos Torres [00:09:41] Correct. And understanding the different needs that investors have and how they underwrite a deal, how they look at their opportunities. This is not an EBDITA play. It is not a multiple play. Just on, you know, what what is a type of role ups that we can do or more financial engineering that we can do in the books, too. You'll get to a next set that gives you two or three times, especially when you look at early stage investors on your seed or your A or on your B. There may be conservative thinking, well, you know, we can get a 3X out of this company, but most likely if you go long term, you're looking at way, way, way much more than a 3X and it's about growth. It's very top line oriented. It's making sure that you're really growing and taking that market share. And if you have those fundamentals of a fast growing company on the top line and you have the gross margins to be able to pivot towards profitability, that gives investors the certainty that in the future, and it's, you don't have to re engineer the business to eventually be profitable. And that's the type of stuff that today you talk to investment bankers, that's what the market wants to see today. 

Michael Hainsworth [00:10:50] So even though you're not profitable right now and it's not an issue for your investors, you are reducing your burn rate to sort of get yourself to that next stage of the company's evolution. 

Marcos Torres [00:11:00] Yeah, of course, that is part of how we're adapting to the market and honestly, the maturity stage that the company needs. Even if the market hadn't turned, maybe we wouldn't be moving as quickly towards profitability. But even, you know, when you're in a post Series C company approaching $100 million in revenue in the next 12 months, you have to change. You have to have that level of maturity where you can say, I will be profitable in the near future. This is a different world and you got to live in this world, not in the past. 

Michael Hainsworth [00:11:34] You've managed to quadruple your customers and double your revenue. Tell me about optimizing for growth and what role being founded by three former NSA hackers may play in that success. 

Marcos Torres [00:11:45] Well, I think you really starts with the fundamentals, Michael. Part of the story that the founders will tell you and you know, how they got inspired, founded Huntress and built a product, not just what they built, but how they built it. You know, they work in very small teams, 2 to 3 people, even teams that are working on the same mission cannot share information, even being in, you know, at NSA and all that high, you know, top secret environment. But when they think about when you have to come up with something, build a tool, put together a solution, the internet is their sandbox. So when you bring that to the design of the product and even the go to market motion of the company and you think, well, who is making the buying decisions and the technology, the technical decisions for small and medium businesses. And you realize that, you know, a dentist just wants to be pulling teeth or filling cavities, they don't care about, you know, what cybersecurity you're using for it or even honestly what office suite products you're using. So it's the pains that the MSPs have as small businesses themselves. It's also solving the pains that their customers have that the MSPs are solving on their behalf. So when you really start looking at those two or three things that are super key, super important for your stakeholders, and it's a good old Amazon thing about being very customer obsessed. It just so happens that we have two customers that tend to fall into the same category but have different pains. When you really find the intersection of those pains and you can solve those in a very efficient way and at a cost that really makes sense for them and it's value, and it's total cost of ownership, it's not just how much you're paying for the license. That's where the real magic happens. 

Michael Hainsworth [00:13:31] Being customer obsessed is what led to the quadrupling of the customer base and doubling of revenue. But that's only possible if your company is capable of scaling up. That's where the profitability comes from. And scaling up means building a business that doesn't require equally scaling up costs to meet that growth challenge. Torres tells me it all starts with a target customer. 

Michael Hainsworth [00:13:58] You mentioned that dentists are more interested in pulling teeth than fighting cybercrime. Why target small and mid-sized businesses like dentists and others instead of the Fortune 500 companies? 

Marcos Torres [00:14:11] The problem with the Fortune 500 is there's only 500 of them. 

Michael Hainsworth [00:14:17] You're thinking bigger. 

Marcos Torres [00:14:18] Yeah, exactly. So if you look at the long tail, the SMB, it's just huge, and I feel when you look at the investments that a lot of VCs have done historically, there's either what we call the fly hunting, right? It's the business to consumer. You're trying to get, you know, a dollar or 50 cents from, you know, two billion customers and that gets you, you know, a huge number. Or then you go to the enterprise, right? You only have to close 10 or 15, 20 deals that are huge, and then, you're in the, you know, tens or hundreds of millions of ARR, depending what you're selling,. There's been development coming down from the enterprise down to the mid-market because there are solutions, there are investments there, but everyone has always shied away from that long tail from consumer up, but mid-market down. It's scary and it's highly risky. And a big part of us going through the MSP community is they insulate us a lot from that failure rate or those ups and downs of the actual SMBs themselves. Sorry, the MSP is the real customer to us and they may lose one customer, but they get two and we get those two customers and they really handle all the sales motion, all the growth and all the things that really make operating with SMBs really expensive. And that also helps us keep our gross margins high. We don't really go deep into remediating a lot of the problems when an incident happens in an SMB, we basically are the outsourced SOC for the MSP. We tell them what's happening, we give them a playbook. We have the ability to basically isolate a host and make sure that, you know, whatever's going on does not spread. And we even give them an option to do automated remediation with one button where they approve whatever we can do. And to be honest, sometimes that works, sometimes it doesn't, but they still get the playbook to go fix it. But that's on the MSP to do it. For us, it's just basically having and keeping those security experts focused and finding the shady hackers that are out there disrupting the SMBs. And those are the businesses that are living under the cybersecurity poverty line, where security in terms of paying for the tools and paying for the experts to keep them safe, it's just cost prohibitively. So that is the big value prop of Huntress. We actually allowed you to afford the type of security that otherwise you couldn't. And that was a premise that the founders had when they created the company. 

Michael Hainsworth [00:16:49] And I can imagine that is what gives you the ability to scale. When we spoke with Expensify, their CEO pointed out that if every time they made a sale, they needed a sales person to do that, you couldn't scale a business that way. And it sounds like in a similar vein, you've built your organization around the ability to expand without having to add yet another body sitting in a chair in an office. 

Marcos Torres [00:17:12] That's correct. And really, when we approach problems, when you think about what sort of things do you need to solve for the business, we always, always, always start with technology. Technology is hyper-scalable. So you first come to the problem and say, how can I solve this problem with technology? And then you take it all the way, as much as you can with technology, and then the next step is process. How do you put in place processes or change your current processes to further optimize where you can optimize with technology? And then the very last answer is what kind of people do you need to add? The people are the most expensive part of a software business. So if you generally follow that logic and that formula, you tend to build things that are highly scalable because technology is really the high lever here that I think a lot of people sometimes miss, that just throwing bodies at problems rarely fixes the problem itself as you're just addressing the symptom. 

Michael Hainsworth [00:18:13] Based upon our conversation here today, if there was one key takeaway you wanted for a startup entrepreneur, what would it be? 

Marcos Torres [00:18:19] Think long term. Put yourself in the future with what you're building, are you building it and is that going to work for the next year? Is that going to work for the next five years or the next ten years? If you're really living in the future, especially as leadership, because you're going to have ICs that are just doing your work today. Your job as an entrepreneur or your job as a CEO or your job as a CFO is to really live in the future and be that leader that has that vision. And part of the vision is how big can this be, but also how can this actually work? It's not just, you know, you're not just chasing a pie in the sky. This can actually happen. So having either that partner that brings you down to earth or being that person that really thinks about how beautiful and amazing this can be, you know, up until the ride, but also how does that actually get implemented? It's super key, and I feel there's a lot of failure in startups because you miss the basics of operationally, how does this work, and also how do you make money out of this thing? 

Michael Hainsworth [00:19:20] Marcos Torres will continue to ask the big questions as he drives Huntress Labs to profitability. He's doubled the annual revenue two years in a row and quadrupled that customer base to about 100,000. His continued focus on building that base for small to medium sized companies, letting others chase the Fortune 500 and using his track record to dig wells before he's thirsty, is expected to continue to fuel his success. 

Michael Hainsworth [00:19:56] This has been the CIBC Innovation Banking Podcast, where we learn the secrets to innovation, economy success from the entrepreneurs who are paving the way for the future. I'm Michael Hainsworth. Thanks for listening.