Crunch Network

Egnyte reaches GAAP profitability ahead of potential fundraise, IPO ramp

Next Story

Here is the ‘Orange Is The New Black’ Season 5 trailer

If you rewind to late 2013 or early 2014, the market for enterprise startups, and perhaps especially for storage-centered startups, was quite different. Box raised $100 million in December of 2013 and $150 million the following July. Dropbox was on a similar tear, raising a $350 million Series C round in January of 2014 and snagging a $500 million debt facility that April.

There was money dripping from the ceiling. And in the middle of all that, Egnyte raised a $29.5 million Series D in December of 2013. The company has not raised since.

In the words of its amiable CEO, Vineet Jain, Egnyte does not “need to raise money” today, but it is considering it. In an interview, Jain detailed how that is the case and then dished on the current health of his company.

Strap on your nerd helmets, friends. We’re going 8-k spelunking.

Profitable cash flows

Early in our interview, Jain detailed a number of new performance metrics that he partially repeated in an article this morning.

First, Egnyte’s cash flow was breakeven in the second half of 2016. Presumably, that is how Egnyte is so far from its last raise and still has money to spend. (Old joke: What do you call non-dilutive fundraising? Revenue.)

But things are actually a bit better than that. Jain indicated that his company “eked” out a profit in the fourth quarter of 2016, inclusive of all costs (GAAP). The firm repeated the feat in the first quarter of 2017. Also, notably, the amount of free cash the firm generated in the first quarter of this year was in the seven figures.

A company that doesn’t lose money isn’t precisely revolutionary. In fact, every business eventually has to make money or die. In the current technology cycle, however, it’s uncommon for quickly growing companies to even generate cash, let alone GAAP profits.

So how quickly is Egnyte growing?

Growth and other costs

As you might expect, there is a tradeoff at play regarding Egnyte’s profitability: The firm isn’t growing as quickly as some other enterprise-facing startups that have recently gone public.

According to Jain, Egnyte grew 38 percent in 2016 (the company’s fiscal year matches the calendar year, praise Hetfield). The company also grew 30 percent in the first quarter of 2017, compared to the year-ago period. Those results are slower than the revenue tallies posted by Mulesoft and Alteryx, which put up greater than 70 percent and just under 60 percent revenue growth figures, respectively, in their S-1s.

Yext recently went public with a trailing growth rate nearly equal to Egnyte’s 2016 aggregate result. It is also not profitable. That means there’s wiggle room to be had.

Rule of 40

Happily for Egnyte and other firms that are not growing above 50 percent, there is a rule of thumb that balances the tradeoff between growth and profits. It’s called the Rule of 40.

In short, add your profit margin and growth rate, and if they sum to 40 or more, you are doing well. Losing 10 percent but growing at 60 percent? Congrats, that’s 50. Losing 30 percent but up 70 percent year-over-year? Not bad, 40! Growing at 25 percent and breakeven? Demerits. You are merely a 25 in a world of 40.

Jain shared that his company “continues to flirt with the Rule of 40.” That puts its comparatively slower growth under a slightly more flattering light.

I bring all this to underscore what “good” is for startups that are a bit more mature and past the days of hyper growth. It isn’t hard to grow faster quickly when you are small, but after you reach eight figures of revenue, what is good performance? Rule of 40.

External infusions

Summing quickly, Egnyte raised small at the end of 2013 compared to competing companies, and it has since kept growing while reaching profitability sans external help.

The company, according to Jain, might be willing to hit reverse on both, take on external capital, and, I presume, run deficits for a number of quarters to drive growth.

At the start of our time together, I mentioned that Egnyte now works in content governance. I did so as that service, what the company calls “Egnyte Protect,” is a new product for the firm. Protect, as Business Insider reported last year, “is the first time that the company is selling a product that doesn’t explicitly dovetail with the main Egnyte vision of providing storage that bridges a company’s existing servers with the cloud.” If it bolsters the company’s growth rate remains an open question.

Jain indicated a summer time frame for any potential raise. At the same time, given how long the company has stretched its prior infusion, I’m not exactly betting on the firm selling more of itself on the private markets.

Following for Egnyte—with or without another private capital raise—is a shot at an IPO. Jain noted $100 million in GAAP revenue as the key threshold for that particular capstone. Let’s see if the firm can get across the finish line still profitable.