Customer.io is a marketing automation platform fundraising on Republic via a crowd safe with a $400M valuation cap. The startup has already raised $4.3M+ from 1,990+ investors.

Note: It is much more than a marketing automation platform. But we'll get to that in the next paragraphs.

Much of the company's fundraising success is due to its large and loyal customer base—growing at 74% YoY, the company crossed $20M in ARR in March 2021, with 2600+ clients including Reddit, Notion, Buffer, Lemonade, Asics, and many other world-class companies.

The best part?

They got to this point with very little marketing spent, with most of the growth driven by word-of-mouth from happy customers fueling their organic funnel.

Prior to this round of financing, the company raised a total of $3.5M from leading VCs, including Kima Ventures, Oregon Venture Fund, and Techstars.

With a 5.7x ARR/funding ratio, the company has been extremely efficient with the capital raised, and it is also cash-flow positive since April 2020.

How Does Customer.io Work?

Let's say you are the owner of a SaaS company, and you offer a 14-day free trial of your app to every new user. The worst thing that can happen is that the user doesn't understand your product and lets the free trial expire without even trying it.

That's why you send a 14-days email campaign to educate the new user on your product, encouraging him to use it, and eventually convert him to a paid customer.

Usually, you would send the same campaign to every new user, regardless of how they have interacted with your app.

On the first day, you may send a how-to guide to help them set up their account;

On the next one, you send an email with a list of features of your product;

On the third day, you send another email educating the user on how your product can help him;

And the list goes on...

But what if the user already knows how the product can help him? What if he immediately creates a new account right after signing up, and he's already trying to start his first project?

Why would you send him an email on how to set up an account if he already did that on his own? You would be wasting his time.

And in the meantime, he may be struggling to create his first project and looking for an alternative.

And that's how you lost a valuable customer.

With Customer.io, you can leverage your first-party customer data to communicate with them based on how they have interacted with your app.

Marketers can then design and send relevant communication, unique to every customer, across email, push notification, SMS, WhatsApp, and other channels.

So if a user has already set up his account, no need to send him an email where you teach him how to do that. You can send him exactly the email he needs to keep using your product and get the best out of it.

Can you see how powerful the value proposition is?

Infographic: Customer.Io Data Stream

The Marketing Automation SaaS Landscape

If you ever used a marketing automation platform, you've certainly thought, "Ok Manuel, but what's the difference with all the other marketing platforms like Active Campaign, Mailchimp, Drip?"

Since I used most of them myself over the past few years, and I'm currently using Active Campaign, I was really curious to find out more about Customer.io.

So I signed up, and I immediately realized that it is not simply a marketing platform. Indeed, they define themselves as a customer engagement platform.

Before diving into the difference, we need to shed some light on one of the most fundamental concepts about business growth.

You're probably familiar with Calendly, the scheduling software giant that recently raised $350M from OpenView Venture Partners at a whopping $3B valuation.

With Calendly, you can create an online calendar and share it with your contacts to allow anyone to book an hour of your time without wasting any time on the phone.

As you can see in the gif below, once someone books an hour on your calendar, they see the message "Get your own Calendly, it's free!".

And here the magic happens.

Gif: How Calendly Works

Instead of investing a significant amount of funds into marketing and sales, companies like Calendly build organic marketing loops into the product itself, allowing them to attract, activate, and retain new customers at no cost.

This is the concept of product-led growth.

This is what allowed companies like Calendly, Dropbox, or Zapier to grow exponentially fast, without spending a crazy amount of money on marketing and with an ARR/funding ratio in the order of 80x for Zapier and 100x for Calendly.

Ok, but what does that have to do with Customer.io? And what's the difference with marketing automation platforms like Active Campaign?

As you know, I'm really obsessed with all of our startups' products. I strongly believe it is the main driver of each of our investment's returns.

That's why I spent hours and hours trying other companies' products and talking with their sales team pretending to be a potential customer evaluating their products and particularly interested in how they differ from customer.io.

You can imagine my excitement talking for 30 minutes with the Sales rep at Active Campaign trying to sell me a product I already own! The conversation was something like this:

Sales Rep: "I'm glad you're interested in Active Campaign, how can I help you?"

Me: "I'm evaluating different solutions at the moment and I'm particularly interested to know how do you differ from Customer.io."

Sales Rep: "I don't know very well other platforms, but I know how Active Campaign can make your life easier. Now tell me, what would a 10% increase in revenue mean for you?"

Me trying to escape this bizarre nightmare: "Mmmh, before diving into that. Don't you have any piece of information to share about what makes you better than Customer.io?"

Sales Rep: "All I know is that they are more enterprise-focused while we work better for companies like yours."

Me: "Ok, let me ask you a few questions about your software then. Can I integrate my customers database into Active Campaign via API so that I have all my customers data in Active Campaign and send them custom communications based on how they have interacted with my product?"

Sales Rep in evident distress: "Mmmh...we do have an API, but I'm not sure you can do that. However we have a lot of other amazing features that can help you increase you revenue. May I ask you what a 10% increase in revenue would mean for you?"

I finally understood what makes Customer.io different from all the other marketing automation platforms and why they called themselves a customer engagement platform.

Customer.io is an extension of a company's own product. You can easily integrate all your first-party data into the software and communicate with your customers through in-app notification, SMS, emails, web notification, or whatever other channel you can think of.

This is what makes Customer.io different: data integration.

  • Sales-oriented companies will go for Salesforce or Hubspot.
  • Marketing-oriented companies for Active Campaign or Mailchimp.
  • Product-led growth companies will go for Customer.io because it allows seamless integration with the product.

Now the question that obviously comes to mind is: "Isn't there anyone else working on something similar?"

Of course, after having analyzed the marketing automation landscape and realized that Customer.io is playing another game, I had to find out who are the other players in that game—Customer.io's real competitors.

It looks like the main players in this emerging market segment are Braze and Iterable.

According to a June 02 press release from Braze, the company surpassed $200 million annual recurring revenue (ARR) 18 months after crossing the $100 million ARR milestone.

Meanwhile, Iterable recently raised $200M in Series E financing, valued at a whopping $2B valuation (source).

This led us to a few important considerations:

First of all, this is a significantly large and promising market trend—Braze and Iterable's success is certainly a good indicator of what we can expect from Customer.io, especially considering the number of PLG companies increasing over time:

Infographic: Number of Public PLG Companies Over Time
Source: Open View Ventures SaaS Benchmark Report

Second, we need to assess how Customer.io compares with them. How is the product? Is it good enough to compete with competitors with much deeper pockets?

By taking a look at some reviews online, I found a common sentiment around Customer.io—it is a world-class product but best suited for early and mid-stage companies.

Well, at least this was the case until Customer.io released a premium version of the product more suited for enterprise customers.

But is it that good as Iterable and Braze?

The only way to tell is to find a company that tried all of them and get their feedback on the matter. Easier said than done, right?

Well, likely enough, I found a public testimonial from Jamie Quint, Notion's Head of Growth, on Customer.io's website.

It all started with the following tweet:

Jamie Quint Tweet: Iterable Vs. Customer.io

So it looks like the team at Customer.io reached out to Jamie and showed him that "Yes, we do support enterprise. Yes, you can use your own ESP. And yes, your event properties are first-class in our platform."

According to the case study, Notion was previously a Customer.io's client at the beginning of 2019 but decided to part ways for the same reason they returned to them in 2020–the UI and visual workflow builder.

I couldn't ask for anything more than a company leaving them, trying the competition, and coming back. That's the most beautiful proof of product-market fit I could ever ask for (in addition to a 74% YoY growth, of course.)

The last thing I would like to share with you is Customer.io's founders' response when asked about their position in the market:

Small Business competitors strip down functionality, forcing companies with advanced needs to migrate as their sophistication grows.

Enterprise-focused competitors have raised hundreds of millions in funding. They abandon growing, but early companies in need of advanced functionality.

These two approaches create a gap in the market for Customer.io to work with companies as early as pre-launch to be the first and last tool they implement to design, build, and automate intricate messaging workflows for every stage of their business.

One of the reasons we've focused on early to mid-stage technology companies is that we've seen a lot of green space in that part of the market. Those businesses also often have cleaner data and fewer barriers to be effective with a product like Customer.io.

As our customers mature, we've added things to serve them: SOC2 Type II & HIPAA compliance, Customer Success Managers, Professional Services, and Single Sign-On (SSO) as examples.

The enterprise sales process is typically longer than our current sales process. The organizational complexity is a bit higher, and the internal technical challenges to integrate are a bit higher.

Our current focus is on closing many high-velocity deals between $12k and $100k ACV with some coming in larger than that. You'll likely see us add some people focused on $100k-$1m ACV this year.

Is the product that good? A deep dive into the metrics

Customer.io YoY growth ranged between 25% and 50% for the past 4 years, with growth accelerating to 74% YoY at $20M+ in ARR in the last year (probably due to the pandemic combined with the release of an enterprise version of the product.)

Chart: Customer.io YoY Revenue Growth
Customer.io's YoY Growth Rate

What's more interesting is their net dollar retention rate.

Table: Customer.io Revenue Retention by annual cohort
Cash retention is the percentage of MRR received in the last 12 months from customers paying the company during the same period in the prior year. In calculating cash retention, multi-month contracts are amortized proportionally over the life of the contract.

According to data provided on their campaign, the cash retention rate for the 12 months ending on April 30, 2019, 2020, and 2021 was 110.2%, 106.0%, and 125.6%, respectively.

Of course, to really understand if these data are good enough, we need to compare them with the average SaaS company.

One of the most important benchmarks in the space is the SaaS survey report from KeyBanc capital markets.

As depicted below, the median annual net dollar retention from existing customers was 102.7% across 200 SaaS companies surveyed by KeyBanc capital markets.

Only 13 out of 200 companies have an annual net dollar retention rate above 125%, so Customer.io's 125.6% net dollar retention rate places them above the 93% percentile.

Another data worth looking at is annual logo churn—the percentage of customers lost during each year, calculated as the number of customers lost during a given period divided by the total number of customers in the previous period.

So, for example, we can calculate logo churn for 2019 by calculating the percentage of customers on Dec 31, 2019, who had left by Dec 31, 2020.

Unfortunately, the company only shared customer retention by annual cohort on their Republic campaign (see image below), making it difficult to compare with their peers.

Table: CustomerIO customer retention by Annual Cohort

However, I was able to get in touch with the founder to ask for annual logo churn data for the entire business (and not by annual cohort) so that we can compare them with their peers.

Chart: Customer.io logo churn over time
Source: Author's graph based on data shared by Customer.io's team. Methodology: The churn rate for each year is calculated as a percentage of customers on Dec, 31 of that year who had left by Dec, 31 of next year. For example, the churn rate for 2014 (32.20%) is calculated as the percentage of customers on Dec 31, 2014, who had left by Dec 31, 2015. *Note: The company doesn't have 12-month data for 2020, but they do have 6-month churn numbers. The percentage of customers that were active on Dec 31 2020 who left by June 2021 is 7.3%. The comparable 6-month number for 2019 was 12.5%. I calculated a 12-month churn rate forecast using these numbers. 

When comparing logo churn with peers, it is critical to consider the average contract size—while acquiring customers with smaller contract sizes is certainly cheaper, it is also most difficult to retain them. That's why logo churn tends to decrease with larger contracts size.

And that's exactly what happened to Customer.io.

As depicted above, Customer.io's logo churn keeps improving over time. That's certainly due to the company finding its place in the market. However, the main reason is that the startup has recently released a premium version of the product (starting at $12k/year) more suited for enterprise customers. With a larger average contract size, his logo churn is improving drastically.

Unfortunately, KeyBanc Capital Markets's report doesn't offer figures on annual logo churn by deal size. However, I was able to find another interesting report from Open View Ventures.

As depicted below, median retention rates increase depending on deal size: companies with an average contract size between $1-5k see a median retention rate of 83%, while companies with an average contract size between $5k-25k see a median retention rate of 90%.

Pie Chart: Logo Retention Rates Report
Source: Open View Ventures SaaS Benchmark Report

Customer.io's logo churn of 18.50% in 2019 and 10.80% (forecasted) in 2020 indicate the company is doing an excellent job at retaining its customers.

This is also confirmed by the company's above-average net dollar retention rate of 125.6%, which indicates that customers keep upgrading to larger contracts after using the product.

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