It is very rare for Israeli startups to refrain from raising any money from venture capital funds and angels. When this happens, they are usually online gambling and/or gaming companies, such as Playtech Cyprus Ltd. (LSE:PTEC) and the like, because it is easier for such companies to generate revenue and profits fairly quickly. Outside of this industry, there are very few companies without venture capital backing. One of them, recently exposed for the first time, is Cloudinary, founded in early 2012. Even after five years of activity, it has not a cent of venture capital in its bank account (other than a secondary deal involving the purchase of some shares from the founders and employees).
Cloudinary, which has developed images and media management software, is what is called in professional parlance a bootstrap company - a company founded solely with its own money, without any external financing - no venture capital - and supported by its regular business.
Cloudinary has three founders: CEO Itai Lahan, CPO Nadav Soferman, and CTO Tal Lev-Ami, all of whom recently turned 40. They first met when serving in the IDF 8200 intelligence unit. They then split up, but only for a short time. Lahan, who has moved to the US because of Cloudinary, was an executive at startups Blue Security and Collactive, and founded Newsodrome.
Soferman was an executive at Trivent, Blue Security, and Collactive (at which his path again met that of Lahan), and then worked as an independent R&D consultant. Lev-Ami was an executive at Trivent and Blue Security, and helped found Newsodrome. In mid-2009, Lahan and Ben-Ami founded Ndivi, a consultant firm for entrepreneurs, which emphasized the technological aspect of startup founding. Soferman joined them in 2012 to found Cloudinary, which has developed software as a service (SaaS) cloud software that makes it possible to process and handle images and video files on the Internet.
"As part of their work at the Ndivi consultant firm, Itai and Tal noticed that everyone who developed a new social network had to handle images on every device - stationary computer, mobile computer, smartphone, tablet - and with any resolution. In other words, they had to display the images in the best way, and make them suitable for the device on which they were displayed," Soferman says, explaining how the idea for founding Cloudinary came about. "So we later developed our software, which actually optimizes image processing and puts it on a website according to the device, and at the desired resolution."
Four months of development were enough, and the company quietly launched the software in mid-2012. After three more months, during which the software was improved, it was launched publicly, and paying customers began to emerge who were not family members, friends, or clients of the consultant firm. Today, five years later, Cloudinary has a community of 220,000 developers making free use of its software and 5,000 paying customers "who come from various vertical markets, such as content websites like Sky News and ecommerce websites like eBay, and of various sizes, ranging from small companies to companies on the Fortune 100. On the Israeli scene, Outbrain Inc. and Taboola, which generate content recommendations, are our customers, because they have to display the image accompanying their recommendations in the best way," Soferman explains.
"Globes": Does Cloudinary's software make the PhotoShop employee's work unnecessary?
Soferman: "It depends on the size of the company and the number of images that have to be processed. It might be worthwhile to keep a Photoshop employee at a website like that of 'Globes,' because the number of images that have to be handled is not very large. On a website like Facebook, however, the process will have to be automated, because hundreds of millions of images a day are involved. Regardless of the number of images, a Photoshop employee lacks two capabilities provided by our software. The first is reducing the size of the image without affecting the surfing speed on the website, and without detracting from the quality of the image. The second is responsive design - designing an image that adapts itself dynamically to the device on which it appears." Facebook, incidentally, is not a customer of Cloudinary.
Now explain how you avoided raising money from any external sources, let alone venture capital funds.
"At the beginning, we developed the software for ourselves and for customers of the consultant firm. When we did the quiet launch, we got very positive feedback, and paying customers arrived fairly quickly - something like four months after our development. It's not that we didn't want to raise money, but our experience taught us that there are advantages and disadvantages in raising money from venture capital funds. We set targets for revenue turnover and numbers of customers each year, and when we realized that we could meet them without raising external money, we preferred not to raise it. That's how it's gone ever since. Furthermore, it made us be more creative, because when you have no big marketing budget, for example, you have to think creatively. Now we already have a respectable marketing budget of a few million dollars a year."
I hear some objection in your voice to venture capital funds.
"Venture capital financing is great. It enables a company to grow even more quickly. With us, the situation was a little different. The three of us have accumulated a lot of experience, and that enabled us to develop an end-to-end solution at Cloudinary at the beginning without other people. Later, we did marketing by creating content, which doesn't take much money, and word of mouth marketing, and organic traffic was created from Google. We also wanted to do things our way."
Lahan: "We're not anti-venture capital. What happened to us took a lot of luck. We were the right people in the right place at the right time.
What does marketing by creating content mean?
"We wrote blogs in which we explained how to use our software, and how to solve complicated problems in image management. We wrote a lot of topnotch content, and when the content is relevant to someone looking for it, and Google makes the right connection, you get marketing that doesn't cost much money."
How much equity have you invested in the company?
"We invested nothing. The three of us didn't draw salaries for 18 months, and we started employing people full time only after six months of activity."
Have you been burned before by venture capital funds?
Soferman: "No, but when you bring a venture capital fund into a company, someone else other than you gets a considerable percentage of your capital, and sometimes he has interests that differ from those of the founders. A situation emerges in which the company spends more time on hiring as many employees as possible in order to grow as quickly as possible, and profitability is less important to it. We were lucky that Cloudinary made a profit from its first day. As of now, we have enough money in the bank to hire the number of people we need."
How much is that?
Lahan: In the coming year, we plan to grow from 90 to 105-110 people. We're looking for developers with experience who are as smarter as possible than us, so we select them very, very carefully."
Are venture capital funds knocking on your door?
Soferman: "Yes, we've had many offers to invest in the company. It might still happen."
What could happen that would make you raise money from venture capital funds?
At this point, Lahan stresses that the Bessemer Venture Partners fund has invested in the company, but by buying some of the founders' and employees' shares, not by injecting money into the company - in other words, through a secondary deal. "It's the only deal made in the company so far, and we'll soon do another one. It's not for the company; it's for its employees."
How much was the deal with Bessemer?
Lahan: "Less than $10 million."
Is the profit line more important to you than the revenue line?
Lev-Ami: "We believe in growth, but not the maximum growth shown by an Excel spreadsheet. We want what's right for the company. One of the problems with growth companies is that they hire so many employees after raising so much money, and it goes down the drain. We want to maintain the character of Cloudinary in the long term the way it was on its first day."
What is the company's annual revenue turnover?
Lahan: "We passed the $10 million mark last year just in repeat revenue, and we have already passed the $20 million mark in repeat revenue this year, in other words, exclusive of new customers. We have made a profit from the first day."
Can any SaaS company use Cloudinary's boostrap model?
Soferman: "Not necessarily. As I said, the three of us accumulated a lot of experience, and we have many capabilities. Secondly, when you're developing a service that the user really needs, in other words, that solves an existing problem, it's easier to educate the market to use it and easier to market it rapidly, without a lot of money."
Who are Cloudinary's competitors?
"Mainly in-house developers of the potential customer himself. Fortunately, the switch to using the cloud is gathering steam, and that makes our software more attractive to those in-house developers. We have no pure competitor, meaning someone who provides an end-to-end solution like ours. In our niche - you could call it cloud-based image and video management for developers - you could say that we're the leaders. In addition, Adobe is a very significant competitor, but it doesn't aim at the developers market like we do."
What is the next feature that you will develop for the software?
"Other than developers, every company has people who have to use software, such as marketing personnel and content and media management staff, so we have to adapt our interface for such people, who have less technological background. We're planning to launch this feature next year."
Incidentally, why did you choose to be exposed now?
"Big headlines and praising ourselves is of no interest to us. We're doing an interview now because we want to recruit more people - the best. That's the only reason."
Published by Globes [online], Israel Business News - www.globes-online.com - on August 30, 2017
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