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Cleo’s Mahesh Rajasekharan: Transforming Supply Chains Through Ecosystem Integration Software – Ep.195

With Mahesh at the helm, Cleo has grown from a single-digit ARR business in 2012 to nearly $100 million in ARR today, with even greater ambitions for the future.

Episode Description

My guest today is Mahesh Rajasekharan, CEO of Cleo, a software platform for supply chain system integrations. A few months ago I asked a few friends which sales-focused CEO they admired most and they all unanimously said Mahesh. With Mahesh at the helm, Cleo has grown from a single-digit ARR business in 2012 to nearly $100 million in ARR today, with even greater ambitions for the future. He has built some of the most robust and high-performing sales and product teams I’ve seen and is a value-adding investor and advisor to many other CEOs.

Mahesh and I talk about the story of Cleo and how they drive customer value, pivot points along the growth journey, building best-in-class sales and product orgs, growth while remaining profitable, private equity ownership, and so much more. Please enjoy this fantastic conversation with Mahesh Rajasekharan.

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Clips From This Episode

Communicating with Customers

Defining Profitable Growth

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(00:04:06) Cleo and how Mahesh has evolved the business

(00:11:37) Identifying customer needs

(00:14:04) Growing and coordinating a product team

(00:18:17) Communicating with customers

(00:21:20) Building and scaling a Sales organization

(00:37:15) How the CEO role has changed


(00:42:49) Defining profitable growth

(00:48:56) Themes for companies who can’t become profitable

(00:52:17) An example of a project that wasn’t working initially but learned it would down the road

(00:54:13) Experiences as a private equity-backed CEO

(00:58:21) The most enjoyable part of the CEO role

(00:59:27) M&A

(01:03:47) Advice for software CEOs in scaling

Alex Bridgeman: I think a good place to start would be a kind of overview and outline of Cleo and then maybe as a primer like what the business looked like when you purchased it versus what Cleo looks like today and some of the change in between.

Mahesh Rajasekharan: Yeah, sure, Alex. Great to be on your podcast. Let me give you a little background first. A small team of investors and I bought Cleo in 2012, a Rockford based software company. It was focused on mid-market data movement technology with 37 employees. It is called Managed File Transfer; that is the name of the software we had. By all accounts, Cleo was a true diamond in the rough. It was a licensed maintenance model, 4 million in maintenance ARR, but thousands of loyal customers. Basically, customers loved the product, great customer satisfaction. It was considered excellent value for money and had a reputation of being very easy to do business with, all positive things. But what we saw in it was a high performing asset, which we could move to the cloud, take it up market into the enterprise and professionalize as a business. And one of the things we found out early on speaking to customers was that there was so much more Cleo could do in the sense that the larger B2B integration space was very much broken in the sense that a lot of the customers that we had sold the data movement technology had complex partner networks, they had B2B business processes, they ordered the cash and precure to pay, that required far more sophisticated orchestration and scalability than was being offered by traditional integration players. So, this gave us a tremendous view of what we can do with the business. We realized how fortunate we were to find something which is truly a once in a lifetime opportunity to establish a cloud integration platform at the perfect time when companies everywhere were undergoing digital transformation. So, we saw retail supply chains were giving way to omnichannel where you are having a retail supply chain but you’re competing with Amazon by selling through e-commerce front end, working with web front ends or web commerce platforms like eBay or working with Amazon. So, we just thought that there was a tremendous opportunity for us to build a platform to support e-commerce and omnichannel fulfillment. So that essentially gave us the opportunity and idea to take an on-premise mid-market business and build a true cloud integration software company to support digital transformation. So, if you look at the transition point, it’s 11 years for me as CEO of Cleo from 2012 to now, I would say that there are three major pivot points. Point number one, the first pivot was a month or two into the business, we realized that we had the opportunity to take Cleo from a mid-market business into an enterprise business. So, we still stayed in data movement, but we built an enterprise-scalable platform for enterprise data movement and landed some very, very marquee deals. And then from 2016 to 2020 approximately, we built a cloud integration platform, but also then from data movement to data transformation and integration. So, we ground and built a cloud integration platform. And along the way, we built a strong go-to-market engine as well, which can sell large deals, which can create leads. And now from 2020, ’21, when we had this significant recapitalization with HHG Capital, now we’re really building a network, a Cleo network on top of the platform. So, it makes it so much easier for companies and supply chain to very quickly connect, on board, and run their order to cash and procure to pay businesses on Cleo. So that’s sort of the three major pivot points. Go enterprise first, build a cloud integration platform, and then build a network on top of the platform. And along the way, we had to build a go-to-market engine, which is going to support large deals, build brand, and build the lead gen ahead of the sales engine so we have enough leads to position itself.

Alex Bridgeman: Yeah, I’m really excited to talk all about the go-to-market team and sales team you built. But in that first pivot, seeing that you could kind of create your own category and go to the cloud, what told you that that was an opportunity? What were you seeing?

Mahesh Rajasekharan: What we basically saw was that there was a lot of evolution of companies in the cloud integration space. And all of them focused on application integration. We saw companies like Neilsoft, companies like Boomi, which are all getting into a lot of attention. They’re called integration platform as a service. And at that point, we realized the bigger problem was business to business integration because more and more as companies are becoming sort of vertical businesses with vertical integration across a horizontal sort of going offshore and trying to build the supply chain moving more and more to Asia, the B2B integration became far more important on the supply chain side, but also on the digital transformation of e-commerce. We saw Amazon becoming very important, companies like Walmart, Target, and others were trying to become like Amazon with their own dot com. And as part of that, we also saw direct-to-consumer businesses essentially having Shopify and Magento front ends and taking business from customers. But at the same time, fulfillment became important. When Amazon was saying two-day delivery, everyone had to match up to two-day delivery, and then Amazon started to go into same-day delivery. And so now you have logistics companies on fire. The warehouses are now moving into population centers. So, we clearly realized in the 2015, ’16 timeframe that there was a massive need for a company to build a new category called ecosystem integration, which can serve the needs of ecommerce omnichannel fulfillment, and essentially be a business that can do real-time integration, which is very business process centric. The traditional companies were very much infrastructure software. They were only focused on endpoints. They were moving bits and bytes. But our focus was we needed a B2B integration company, which was business process focused, which was in the cloud. It can be real time. It can be dynamic and intelligent. So that gave us the idea, and we tested it out with a lot of customers, and we saw a massive interest from a lot of customers. So, as we’re building the platform, we were also getting deals. And we built a platform through three generations, and we had growth pick up from generation one to generation two, now we’re in the third generation of a platform. So that’s how we got the conviction around ecosystem integration, by recognizing the need and having customer proof points and adoption to prove this category.

Alex Bridgeman: Yeah, focusing on driving customer value in all of your product improvements and product evolutions, how did you identify what customers valued and care about? What kind of customer outreach and feedback mechanism did you build to understand what the changing needs for your market were?

Mahesh Rajasekharan: So, we have this whole, quote, idea around, internally we code name it LAER, which stands for Land, Adopt, Expand, Renew. And we look at that progression because the nature of business-to-business integration is a ton of use cases. So, once you solve a business use case, so let’s say we’re going to help a manufacturer connect with Walmart and Target, then the next use case could be to work with an ecommerce like Amazon or eBay. Then they may have to do their own direct to consumer. Then they may have to go and manage their logistics chain for inbound and outbound logistics. Then it gets into procure to pay. So along the way with customer success, we make sure that every single use case is very quickly adopted. And we also have a proxy for measuring the value we’re creating. Our sales methodology is based on quantifying the value proposition. And when we do that, then we go back and deploy the use case and then see, using some proxies, whether we’re delivering the value. And our goal is to make sure we meet and exceed the value proposition, not only in terms of making the projects go live on in time, which is important, but also making sure that we have executive dialogue during our EBRs, which is executive business reviews, which we do every three months, to make sure that we met and exceeded the customer value proposition in terms of revenue growth, profitability, speed of onboarding of their business partners. And then we will then use those success stories to evangelize the company within other parts of the customer and expand use cases. So, the LAER model, the land, adopt, expand, renew model, allows us to have C-level conversations on business metrics, which then tied to the IT use cases we would deploy. So that’s how we validated things.

Alex Bridgeman: And it sounds like it’s not just a go-to-market and customer success. There’s a product organization that is tightly integrated into this whole flywheel of customer feedback, new use cases, going to market. How have you coordinated and focused on a product team, a growing product team that’s taking on new features and use cases, and how do you get them to coordinate with success and sales? It sounds like it might be through these executive review meetings and I assume a bunch of other different ways too.

Mahesh Rajasekharan: Yes, the fast answer to this is really twofold. No company can do this without a product because at the end of the day, we are the product companies. We are solving a major customer problem, which is unmet or under met, through a solution which is highly differentiated than the next best alternative. So, it really starts with the product. At the same time, no company can succeed without developing a way to bring in a lot of customers and keep them, stay with you so they’ll expand. So, it’s really two part. And what we did sort of from a timing perspective, initially, we went in, we saw great technology, we thought we can do some tweaks, and really started focusing on sales and marketing and driving growth. But as we’re doing, as I just explained early on, we realized that we could do a lot more, a whole lot more. We can build this ecosystem integration category. And for doing that, we needed a three-pronged approach on the product side. First, we needed to build a platform, an ecosystem integration platform, which was real time, and it can do dynamic and intelligent integration across two different types of technologies. One is APIs, which stands for application program interface. That’s the real time. So typically, when you read about ecommerce, people talk a lot about APIs and digital transformation. That’s because it’s digital and it’s real time. There is another technology which has been around and it’s where billions and trillions of dollars of revenue transacts each and every day, which is EDI, electronic data interchange. What we did is we bought both technologies in the same platform and no one has done this. So that’s a platform level. Then our thinking was the platform is scalable. It’s processes billions of transactions, but we need to build a digital network on top of the platform so I can very quickly connect to customers, could be retailers, could be the ecommerce platforms, could be the marketplaces, but also connecting to the back end different ERP systems, SAP, Oracle, NetSuite, Microsoft Dynamics, so we can quickly enable digital commerce. And then the third level was we needed to build an ecosystem relationship management on top. Because at the end of the day, you want to find a way to do business easily with your customers so that you can expand revenue, so that you can expand profitability. And so, you need to build an analytics layer which is proactive in nature. So, we went about building the platform through three generations. It took us about four years, ’17 to 2021 to build the strongest B2B integration platform in the world. And now we’re building the network on top and the ecosystem relationship management layer on top to a point where we are creating, we’re really becoming the de facto supply chain execution layer to do efficient supply chain execution for companies in manufacturing, logistics, and distribution, wholesale distribution. So that’s what we’re doing. But one of the most important things, Alex, to realize is, as you’re doing it, you need to get a lot of customers. It’s not product first and then sales next. So, we’re continuously leveraging our customers who wanted to go and do something different because existing B2B integration technologies are broken. So, we saw a lot of Fortune 500 companies and others partner with Cleo along our journey, being part of the advisory board, being part of our different conferences, giving us feedback, and really jointly working with us to perfect the ecosystem integration category.

Alex Bridgeman: Yeah, I would love to dive into that aspect a little bit more, that customer feedback. So not the sales process where they go from prospect to customer, but now that they’re a customer, what are some things you’ve learned about getting feedback from customers and testing features with them and kind of pace of communications. What tips and things have you learned working with existing customers?

Mahesh Rajasekharan: Most importantly, it’s credibility. And you gain credibility by making sure the promise you make in sales is very quickly delivered through. And so, it really starts with the sales process itself. So we have customer success embedded in the sales process. And we ask sort of a three part question for our customer value proposition. Question number one is why do something? Question number two is why Cleo? And question number three is why do something now? And what it means is why do something is everything around a quantifiable value proposition compared to the next best alternative. It could be because of a process change, a product capability, could be changing performance metrics and doing different things with the people. It’s all four Ps. And we quantify that and we quantify not in absolute terms but in relative terms compared to the next best alternative. Then the next question we ask is what is it we’re doing that’s unique or better than others to unlock the incremental value? What are those capabilities? And the third question, which we actually ask ourselves is, why now, when the customer has 5, 10 different priorities any given time, why should they do the Cleo initiative? Why now? And what does it do for them? And then once we close the transaction, our customer success team and our deployment teams, and then sometimes it may not be Cleo deploying it, it could be a Cleo partner or a system integrator, but our customer success is still Cleo teams. So we partner with them to make sure the initial project metrics, which is in terms of on time delivery, how many customers and how many suppliers they’re going to integrate as well as a business metric. Sometimes we may have to get the customer connected to Amazon first because it can unlock a lot of revenue for them. So, we make sure the customer value proposition is delivered quickly. And then as we start delivering that, we build a lot of fans with the organization. And then our EBRs, which is the Executive Business Review, we try to make sure that it is IT and business, and sometimes we even try to go to other organizations. For example, if you work in order to cash which is CFO, CIO, Head of Sales, we try to get the Head of Procurement, maybe have the Head of Operations. So now we’re unearthing other opportunities to maybe solve something in the procure to pay, something to solve in the inbound logistics. So this is how we create credibility and value creation and we show those metrics, which opens up customers to share more with us as a trusted advisor.

Alex Bridgeman: So, I’d love to dive into your sales organization in more depth, but what did it look like initially? And what changes did you make to your go to market and sales teams in that first year or two of Cleo?

Mahesh Rajasekharan: Yeah, it is really crawl before you walk before you run sort of thing. Step one was basically I did really two things, very structured pipeline review, which deals are in the pipeline, what stages they are, are they accurate, and had a simple close plan, which is who’s doing what in the Cleo organization, who’s doing what in the customer organization, and what are the dates in terms of MMDDYY and made sure that there was tremendous rigor in executing a close plan. That’s all it is; pipeline to close plan. That started to accelerate sales. What the company was selling in two, three, four quarters we started to sell in one to two quarters. Then the next step was now we are exhausting the pipeline. Okay, now we needed a demand generation organization to be put in place. When we first started, the demand generation organization was all outbound. We had sales development reps who focused on calling customers. And then we created a pipeline which the sales team worked on. As part of the evolution, there are two other things we did. One was bring in a sales methodology, so everybody has the same language. So all the stages in sales force so we can track performance of salespeople and we can perform progression of the sales cycle. And then on the marketing side, we started to augment outbound and inbound. So, we started to create more digital assets, so customers started to come into Cleo. So we were trying to expose business challenges customers face so that they came to our website to find out how to solve the problem. And through that, we got the leads. And over time, we took a very vertical focus. And this is advice I’ll give to most CEOs, even in horizontal organizations, they’re nothing but a series of verticals. So, we decided very early on that we’re going to be supply chain focused. While in B2B integration applies to healthcare, B2B integration applies to financial services, we said we’re going to become maniacally focused on supply chain of verticals, which is manufacturing logistics and wholesale distribution. And even specifically within manufacturing, we started to get into subsegments and micro segments like food and beverage companies, like CPG companies, get into logistics and look at what third party logistics companies care about, what carriers care about, what do the freight brokerages care about. And by doing that, we really started to build vertical knowledge and vertical use cases, which made it easier both from a vertical go to market and selling and demand generation. So this is sort of how we evolved, and now we’re evolving more into working with system integrators and bringing on an indirect channel business, which can further scale up our direct go to market.

Alex Bridgeman: And how did the leadership team for your sales team evolve over time? Or you talked about pivot points to open our episode. What pivot points in the team composition, like who’s leading the sales team, what pivot points did you see as ARR grew over time?

Mahesh Rajasekharan: So initially I was overseeing sales, and we had a VP of Sales, but I really came in with a very clear focus on solution selling and large account selling. So initially it’s about me coming in, looking at all the deals, doing deal reviews, understanding customer value proposition, being able to make sure the methodology is followed, we implemented salesforce, implemented solution selling methodology, and I used to train our methodology to all the new salespeople. And then about four years into it as we scaled, at that point, we brought on a Head of Enterprise Sales. And I was still running sales as CEO, but I had a Head of Mid-market Sales and a Head of Enterprise Sales. And by 2016, we got to a point where it made sense to get a Senior VP of Sales who managed both mid market and enterprise. And then we started to grow into Europe, and we brought in a VP of Sales for Europe. And then by 2019, we took sort of, basically, we wanted to break the sales organization into a net new organization, an install based organization, and further look into it in terms of net new commercial segment, which is a mid-market segment and net new enterprise. And similarly, we looked at the install based business as net new commercial install base and enterprise install base. And now, as we’re evolving, we have not fully done that yet, we are now evolving into a vertical sales team. One thing to know, Alex, is as you become more and more vertical, there could be inefficiencies if you don’t scale correctly because now a salesperson can only look at manufacturing deals and cannot work on logistics deals. So, it’s just the timing where there’s enough critical mass where you can bring in experts. And one of the things we do to get around the problem is we bring in industry experts or industry black belts in logistics and manufacturing and distribution who are embedded in the sales organization. So we still have a VP of Net new enterprise sales, but he has a VP of Logistics who can provide guidance and credibility on a large logistics deal versus a manufacturing business where we bring in a VP of Manufacturing solutions who brings in the credibility. So, it’s very, very important to make sure the sales organization scales in an efficient manner, and there are different pivot points. So, we are at a point where maybe in a year or so, we’ll break into true enterprise and commercial VPs of Sales for the different industry segments, like manufacturing logistics, and do the same thing in the install base as well.

Alex Bridgeman: You said that it’s important to scale a sales team properly. What would a badly scaled sales team look like? And what are some things that you can do to avoid that?

Mahesh Rajasekharan: Most importantly, I believe in having pipeline built ahead of sales. There’s no point in hiring a lot of salespeople when you don’t have a good pipeline. So, it’s very important to build a lead gen organization which is world class. Having said that, in the lead gen organization, you have SDRs, BDRs, or junior, quite frankly. And so, we need to make sure there’s a very strong alignment between the lead gen organization and sales organization to make sure the right deals are quickly qualified and acted upon. The second most important thing is, it’s really important to hire salespeople who have the right culture, who fit into the organization. Especially in smaller companies, you need people who are smart, very intelligent, who are not depending on the street cred of the organization. For example, if somebody works for IBM or works for Oracle, they’re large organizations and they have a lot of street cred. And because you’re an Oracle rep, you get people to return your email, pick up your phone call. That doesn’t happen in smaller organizations. So, we need salespeople who are fearless, who are intelligent, with the right attitude and aptitude, who can quickly learn and who can truly differentiate themselves because of their ability to truly add value for the customer, not just report the news. We always use that slogan. It’s about not just reporting the news but creating the news. It is very easy for a salesperson to say, well, not a question of if but when. But for us, every quarter makes sense. Time kills deals. Whether you can close the deal in the fourth quarter of 2023 versus the first quarter of 2024 is huge in terms of growth rate and momentum. So, you need salespeople who are very resourceful, who are willing to tackle the issues early on, who can bring it to the attention of the company and get everybody else involved to close. So that’s where culture becomes important. Methodology becomes important. We need salespeople who can follow the methodology so that we know when they are having a problem. For example, some salespeople are very, very good in quickly qualifying a deal, and then they struggle to progress through the sales cycle. There are some other people who are very good in progressing the cycle, but they may take time to qualify. There are some other people who may get to the finish line but may not be able to punch it in. So, we need to then know how to- the sales leadership becomes extremely important. So, it’s not just the sales reps. The sales leadership in smaller software companies should be able to step in and close deals while mentoring and coaching the sales team because we also have this other dynamic where we have VPs of sales who can get deals done, but the sales reps won’t develop with them. What we really need is great frontline sales managers who can step into closed transactions, all the while coaching and bringing the salespeople along. So, that’s why I mean, it’s very, very important to build a sales efficient organization. And the metric we look at is essentially a very, very simple sales efficiency ratio, which is basically the new ARR divided by the total spend in sales and marketing. And you want that metric to be closer to one. It doesn’t have to be one, but you want it to approach one. And you need to make sure the pipeline, the ASPs, and you get the ASP, the average selling price, based on the value proposition, so you’re selling based on value. The ASPs and the speed of sales cycles time have to be managed so you have a very predictable sales organization.

Alex Bridgeman: What have you learned about hiring that profile of salesperson, that person who’s hungry, curious, smart, and can move deals through? What are some effective ways you’ve found at finding that person and identifying them?

Mahesh Rajasekharan: Quite frankly, it is not easy. I think as you alluded to, great salespeople are tough to find because they’re doing extremely well. And every intelligent organization is going to do everything to keep them. They’re going to be- going to get paid more. They’re going to be celebrated. So, we do a couple of things. One, we have built a farm system within Cleo where we look for athlete model in the SDR hires, in the sales development rep hires. So we look at people who have played college sports, been at YMCA, people who have run summer camps, athletes, with the right attitude and aptitude. And we bring them in. We do some sales competency tests, et cetera, aptitude tests. And then we really coach them very rigorously during the SDR process. Our model is very much a one to two years, you’re going to get promoted into someone within Cleo. One path is a sales path, become an account exec. Another path could be to become a customer success manager because some of them love sales, they love working with customers, but may not want to take the pressure of a sales quota. And they do a phenomenal job as customer success managers. But to your question on AEs, we actually, even when we hire, we’ve become so good in our internal analytics that there are some people we think they’ll be an okay SDR will be a great salesperson, we will know that. We also know people who can be amazing SDRs who could be okay AEs, we will still hire them. And so that’s a dominant path of the farm system. But along the way, we also celebrate sales as a function that as we grow and promote people, our competitors look at what Cleo does, and then there is this natural excitement for what we do within the sales organization in terms of how quickly we progress people, how quickly they improve their competencies. Then we start attracting people from outside. So that’s sort of second. And the third thing we do, we talk to a lot of people. We constantly have an antenna of what is the sales standard outside. We actually have a calibration of some of our competitors on where people are. And we may or may not have the budget, but we know who’s out there. And so that way, we have the relationship, we have the network, and if we find somebody great, we find a way to get them into the company as well, even if there is no role because we know great sales talent is tough to find. And when you get great sales talent, they will absolutely earn their keep. So that’s kind of how it’s sort of a three part model, which is a farm system, creating a great sales culture so people want to come and work for you, but also have this broader network of VPs of Sales, Directors of Sales, competitors in adjacent companies that we have respect for and know who they are and find ways to get them.

Alex Bridgeman: Yeah, you talked about talented salespeople, especially in leadership positions being hard to find and smart companies don’t want to let them go. How do you go approach someone like that and convince them to join your perhaps smaller company, maybe much smaller company? How do you convince them to make that leap?

Mahesh Rajasekharan: Yeah, it’s really, it gets to the core mission, core values of Cleo. We are very much focused on building ecosystem integration. And as part of that, we have laid out a value goal, which is to create 50 billion in free cash flow to our customers by 2025. We’re very explicit about the goal. We have proxy metrics to track the goal. That inspires salespeople. If you look at great salespeople, they are nothing but CEOs of the territories. And most companies don’t know how to communicate that. So when they talk to Cleo, we are looking at hiring a CEO of a territory. It’s like a franchise. You get that. So, having a customer value proposition which is exciting and celebrating salespeople and then the culture of the company, the core values are it’s all about customers, results, innovation, and people. And we talk about how you can be innovative as a salesperson, how you can provide results. And a lot of times, even successful salespeople, there is this whole coin operated mindset. Most people think salespeople are coin operated. We just keep them. We celebrate sales excellence. We think salespeople are the ones who are communicating our value proposition to the customers and the ones who become customer advisors and the ones who bring in innovation and inputs from the market, whether it’s competition from customers back into the Cleo product organization. So, I think that sales-oriented culture that we create becomes a great recruiting tool. And then people start talking about how awesome it is for salespeople to come in, be respected, their views are heard, not just a coin operator, comp plan salesperson, but a true sales professional. And we promote them, not only from farm rank to an account executive. They grow all the way to senior AEs, director of sales, getting to VPs of Sales, aA very fast, rapid growth within Cleo as we scale.

Alex Bridgeman: And thinking about your own role as CEO since 2012 to now, what are some notable changes you’ve observed or changes but also ways you’ve needed to evolve your role over time? What have you noticed over the last couple of years?

Mahesh Rajasekharan: Very much an evolution from somebody who is completely hands on, I’m still hands on, but initially it was about I was looking at two very important things, building a sales organization and really evolving the product. Because most, if you look at the mid-market software companies, they’re very much sort of a single product that works and you just incrementally grow. I came and fought against incrementalism. We’re going to create a category. So, there’s a lot of heavy lifting, talking to customers, talking to developers, really creating the art of the possible and being very involved in everything. And then I started to pivot into someone who’s going to focus a lot on hiring, getting world class talent at every rank of the organization, hiring a world class CRO, hiring a world class CFO, great CMO, great CTO. I had a Senior VP of product. Just go and aggregate talent. And as part of being an aggregator of talent, I got to know how great looks like. And now sort of pivoting into scaling the organization globally and looking into inorganic expansion and doing targeted growth-oriented M&A, I very much became an allocator of capital. And part of that is very much talent. Talent is capital. Very much a big allocator of talent and capital as part of my evolution over the last 11 years at Cleo.

Alex Bridgeman: How do you evaluate yourself for performance along each of these growth points? It’s kind of the rare CEO that can be really effective at 5 million ARR and then 50, 100, 500. How do you evaluate yourself for what skills you need to be effective today at Cleo and then maybe the next couple of years?

Mahesh Rajasekharan: Great question. Scaling is hard. And to be able to get ahead of the curve is even harder. So, one of the things I do is I constantly challenge myself by taking on things which are beyond my day to day. So, for example, being on boards of other companies. I’m on the board of Banyan Software. We are buying a business a month or more. So, it’s a different world. It’s all about how do you efficiently manage an application platform and be very successful. I’m on the advisory board of a startup. That’s a very different world where you’re not trying to create a new category. As you know, Alex, I’m on the conference committee at Stanford, the search fund conference committee where it’s all about how do you bring in PE scaling techniques to smaller companies and what people have done scaling a few hundred million to a billion dollar businesses. For example, the last two years, I’m on the Ernst & Young Midwest Entrepreneur of the Year program judge panel. So judging companies which are 3, 4 billion and really looking at companies which are public, which are scaled up, much larger companies and really looking at what the CEOs have done in that evolution. So I try to just put myself on the cutting edge and really stretch myself and make myself available but also surround myself with very strong folks. For example, the Cleo board has two CEOs who have scaled a lot of businesses. We’ve got a billion dollar plus company CFO, who chairs the audit committee, strong deal managing directors. And so having a large board, which is also going to be both support and stretch the thinking – how would a 300 million Cleo look like? And then going and acquiring talent and the org structure to get there. So, I would say it’s not easy, but it’s also a lot of fun to just imagine and visualize a much larger organization and see how you evolve to it. Do you have the talent which can evolve? Do you need to bring in new talent? Would your current processes scale or not? And having a CEO support network who’ve scaled companies to billion dollars or more that gives you a 10X from where you are, that you need to get there. It doesn’t mean you’re going to get there tomorrow, but you know the North Star is much, much bigger and have the humility to say that I need to get there, be someone who can listen and get feedback. I also have a customer advisory board which is very strong. We have multiple billion dollar business customers, their CIOs and CTOs give advice, and they’re constantly buying from Oracle and buying from IBM and buying from OpenTax and others. And so we get a sense of how those organizations- what are the good things they do that we can absorb, and what are the things that they don’t do well that we should preserve our culture, our core values and never compromise as we scale. And both are important. Preserve your core values. Never compromise. But yet, look at scaled software businesses and accordingly bring in talent and change and evolve your processes as you get along.

Alex Bridgeman: I know you have ambitions on being not just a growing and dynamic company but remaining profitable while doing so. What does profitable growth mean and look like to you?

Mahesh Rajasekharan: This is a huge learning for me over the years. It’s a great, great question. I’ve always been a growth guy. I always felt you grow the business and profitability will follow. And a big learning for me is, and especially not only at Cleo, but being on other software companies as a board member and advisor, if you don’t have profitable growth as a core DNA of the business, the profitability will allude you. And even if you get profitable, you won’t be massively profitable. So, for me, profitable growth means really focused on the unit economics of the business. It’s not at the high level, people talk about rule of 40 and I’m growing at 40 percent and my EBITDA margin is zero. It’s not that. What it is is from the unit economics, are you running a world class software business? Do you have gross margins mid 70s to 80 percent for a cloud software business? Do you have sales efficiency which is 0.7, 0.8, approaching 1? Split the sales efficiency into how does your net new sales efficiency compare to world class SaaS companies? How does install base sales efficiency compare to world class software companies? Are you having gross revenue retention, the GRR metric, gross revenue retention, in the mid 90s? Are you having net revenue retention, which is basically the gross retention plus price increase plus add-ons getting closer to 120? Those are very, very important. If those are met- and then are you growing in the 20, 30 % range? Then you sort of dive back into what you’re spending in R&D. And is it creating assets which is going to scale you on a multi horizon? Or are you spending money, which is not giving you results? So, to me, it’s about really getting the unit economics right. And then if you say, look, I need to spend a few more million on product because I need to build a one time lift, whether it’s a cloud offering or scale up the platform, that’s intelligent investment. Versus people who look at the headlines, wow, we’re growing fast and it’s okay to not be profitable. So that’s a big learning. In other words, if you make the physics of the software business have the right unit economics in terms of all the metrics I mentioned, then you’re really building a highly profitable business. Early on, you might be investing in R&D or you may be investing in building a go to market team, but on a two, three horizon, all the metrics are going to go up and to the right. So, you’ll have a rule of 50, rule of 60 software business, gross margins, high 70s, all the retention metrics are fantastic, and most importantly, sales efficiency really starts to pick up. And that’s when you just scale for forever, assuming your TAM is there and you’re continuously differentiating against your competition.

Alex Bridgeman: So it sounds like a unprofitable but growing software business, it sounds like it’s a matter of discipline around investing and setting a high enough hurdle rate that a given project is going to pay off in a good time frame. Am I hearing that correctly? Or is that, am I interpreting and understanding that correctly?

Mahesh Rajasekharan: Yes, I think when somebody is not profitable, they should ask a hard question, why? And if it is because, look, all the unit economics are great, but I’m building this great product, which is going to create so much ARR, then fine. Then you’re very clear on it. You’ve got product investment objectives. You’ve got a clear roadmap, and you’re proving it out. As capabilities come up, you should see clear metrics that you’re signing up more customers. They’re paying you more average selling price and your win rates improve and your sales cycle shrink because you’ve got a great product. If those things are not tracking, you should really ask the question, why are you putting money into product. Similarly, in go to market, people will- which is much faster, by the way, because usually most investments in sale and go to market typically yield results in year one, it may not be in the same quarter, but in two quarters out, whether you’re building a world class lead generation organization or a sales organization, you will see the results much faster than product. Product might have a one year lag, usually. So what I’m saying is you need to be very, very precise on where that lack of profitability is happening and it has to be investment and the investment should have leading indicators, why you’re investing, and you should have the proof points as the investment is happening and not just tell your board that you’re just building a product and it’ll come out in two years and it’ll do something magical. No. You’re having modules being built along the way, you’re selling. The true proof is in getting customers. The true proof in what you’re doing is in getting customers. That’s how you build brand. They inform you to make your product evolve correctly. So staying in this unprofitable realm for too long is a misnomer. A lot of people think early on, I’m going to just invest for future growth. And if you don’t, if you’re not very, very smart and very, very focused on it with clear metrics, investment metrics, profitability becomes elusive. And I’ve seen this movie play out in many, many, many companies, and my strong advice to a lot of CEOs who are hearing this podcast is really focus on the unit economics and make sure you know what is investment, and everything else should be world class. And one area of investing could be sales, could be marketing, could be product, have clear investment metrics that you’re meeting along the way.

Alex Bridgeman: You say you’ve seen this movie play out several times where software companies have this elusive desire to become profitable and mentioned that, at Cleo, you have best in class teams and track a ton of different KPIs to make sure you’re on the right track. When you look at a company that hasn’t achieved those things, is there any root cause or common cause or theme that you’ve identified for why those companies don’t manage to become profitable eventually?

Mahesh Rajasekharan: I think the biggest challenge I see with a lot of smaller companies is they basically don’t have a very clear set of metrics by which- they need to have a clear north star, what they’re going after, and break it down in terms of clear metrics that can be tracked at the department level and the company level. And I think that’s where we see a lot of misalignment, where product is working on something and the sales doesn’t know how to position it proactively and get customers, but you don’t have to wait for every single bit and bytes to be built. You want to get early customers who are going to teach you. And so those metrics have to be aligned between what kind of positioning you’re doing to get leads, what you’re doing during a sales cycle to close the business, and what capabilities are depending on to deliver. And after you delivered, how do you make sure the customer is successful, they’re going to stay, and what add-ons you can give them. It could be more transactions. It could be more use cases, could be an additional add on module. I think, to me, the challenge you see with a lot of the smaller companies is they don’t have the discipline of having a clear metrics and accountability structure. And one of the things we did early on in Cleo was we had this one page plan. In one page, we really summarized the North Star of the business, where we want to be, then we had our five year goals, three year goals, one year goal, and quarterly goals. And we had the name of the executive and initial in the quarterly objectives. And we clearly had, we tracked how we performed last quarter and what are the goals for the next quarter. And that just drove tremendous alignment, including finding out something is not working. So that’s how you get efficiency. Not only because you’re getting things done. Sometimes there are some of the things you’re trying to clear that don’t work. And we have the mechanism to find out very quickly it’s not working, fail fast, and then you do something else, then you pivot away.

Alex Bridgeman: Do you have an example top of mind for a project that didn’t work, but tracking certain metrics, you were able to identify that it wasn’t going to work eventually? Because I could see that if you had a project that maybe wasn’t working initially, but you could still have hope that it was eventually going to work, and so you might keep going longer than you might want to. What’s an example of a project where you can find out faster?

Mahesh Rajasekharan: Yeah. So when we acquired Cleo, we were in the managed file transfer business. We’re moving lots of files. And we saw the whole file sync and share business was just growing. We saw the Dropbox, the Box, and there are a ton of companies. And it looked like it’s so exciting to just share files and sync them. And we had the core technology. We were moving a massive amount of files at scale, highly secure, encrypted, and we thought we have the core technology and when all these startups are doing file sync and share, what are we going to call a file sync and share company? And it was very compelling. We were able to take it to the board. It made a lot of sense at that time based on the information all of us saw, Dr. Gartner, Dr. Forrester. And once we got in, what we realized was the world was sort of breaking into sort of this low end business, commercial and consumer, which Dropbox just became fast, started to become sort of the one stop shop. And then, which is an enterprise site, became more of an enterprise content play versus file sharing. And then we realized, as part of the metrics, as the market is changing, our buyer, our whole thesis was, our enterprise software buyer who is buying managed file transfer technology would also do file sharing. And we realized that is not the case. And so, by tracking the pipeline, by tracking the market, and by tracking the persona we’re selling to and the messaging for the persona, we realized its not going to work. And then what we did was whatever we built, we actually took it into a platform as a capability, which is available, but not something we’re going to go after as a big market. And instead, we saw the real market for Cleo was to truly build this ecosystem integration category, which is not just move the files and move the data, but transform the data, integrate the data, connect the ERP systems, create this end to end visibility, and really become business process focused. And so that massively worked. So, this is just an example of two, three years into Cleo, the file sync and share, the file sharing space looked so exciting. And we worked, we played. But we played to win, we had metrics, and we looked at market metrics, sales metrics, and product metrics, and we made the right pivot.

Alex Bridgeman: Cleo has been through a private equity ownership transition to this point and may have others in the future. What have you learned about being a private equity backed CEO versus the early days of Cleo?

Mahesh Rajasekharan: Yeah, and you might have known this, Alex, I was a Vista CEO at SumTotal Systems doing a lot of the Vista playbooks. And then Alpine was one of the early backers and now HHG Capital. If I have to look at what are the key learnings, I’d probably categorize them into sort of three main areas. Number one, our reporting is far more rigorous and better. We focus on detailed reporting and financial and operational metrics, your software, your databases, we track the RRQ, we look at all the KPIs, we look at variances to plan. And so just the focus of meaningful data and information, which is accurate, gets all of the stakeholders, my management team, their direct reports, the board fully aligned. The second thing is more data driven decision making. It’s not just gut feel. You really could get into making sure that every key decision is supported by data. And the next level of doing that is not just look at data at the headline level but now start carefully looking for non-obvious trends, not just obvious trends. For example, if the pipeline indicators are all showing growth, let’s say the net new pipeline is growing, the install-based pipeline is growing, but some of the metric doesn’t show growth, for example, we look at, okay, what is the current quarter plus next quarter pipeline, compare it over year or to the previous current quarter next quarter, if that is kind of a little flattish, we really ask the question, what could be going wrong? And it could be just a common cost variability, in which case you understood it and you don’t do anything about it, or there could be some early indicators of weakness or strength they want to work on. And the third- So that’s sort of the more data driven decision making, really dig deeper and make it permeate at different levels in the organization, not just board and the CEO and the management team, but next levels of the organization. The third thing is all about talent. And one of the things which is I would say contrary to the typical what people may think about private equity, private equity firms truly believe in talent as the only true massive leverage in our business. So, we do not shy away from paying whatever it takes to land great talent ahead of the growth curve. So, you asked me a very good question about scaling. It’s not only scaling for the CEO, scaling for the management team. And when you bring in people who operate in much larger businesses, now, they’ve seen the patterns. Of course, culture is important. So, we hire based on culture as well. But culture and expertise and hiring ahead of the growth curve allows us to truly scale more than anything else. And then to reward talent and hard work, we have placed much greater focus on management equity incentive plans, the way we do the annual goal setting, how we do tracking to quarterly basis. People know that their hard work and success is going to be richly rewarded, both in terms of bonus plans as well as in terms of the equity enterprise value creation over time. And so basically, we always remind ourselves that what got us here won’t take us there. So right now, we’re imagining a 300 million ARR at Cleo, at least 3X where we are. So we are looking at the future organization, the future leadership talent, the future organizational structure, and all the different processes are thought through. Not everything we would invest today. But we know high level how an org chart is going to look like, who are the key talent we’re missing, some companies we may have to acquire, some products we may have to build, some regions to expand. And that keeps us going. So I would say a lot of the things that PEs have taught us around great focus on reporting, metrics, data driven decision making, and most importantly, scaling in talent.

Alex Bridgeman: What are you enjoying most about your role today versus five years ago?

Mahesh Rajasekharan: I would say now it’s that the scaling fascinates me. Because we have got people who are CEOs of the business. So we’ve got really, really strong talent at every level. So now I’m looking at how to go and absolutely go and disrupt competition. Now we’re truly trying to amp up the business. We have now reached a point where we have proven the category. We’ve got nice validation from analysts. We’ve got several hundreds of customers, new customers we’ve built in the last few years. And so we know we’ve got the platform. We’re really getting the ecosystem integration network being fully built. The analytics platform is being built. So now scaling is a lot of fun. We’re growing, we’re hiring people, and we’re doing larger deals. And one of the exciting things, Alex, is now that we’ve built this 4,000 plus customer company and given the nature of ecosystem integration, existing customers are coming back to buy more. So now we’ve got this real beautiful flywheel kicking in where existing customers are buying more, new customers want to come in, we’re able to hire talent, and now we’re looking at interesting businessed to acquire. Again, part of this organic scaling, but get some inorganic pieces coming in. So it’s a lot more fun as you start aggregating more talent and people who can do things. Now, it just frees me up to do bigger things and scale Cleo into a billion dollar software business in terms of revenue.

Alex Bridgeman: You mentioned M&A a few times. Is M&A something that you looked at earlier in Cleo’s history? Or did you feel like you needed to build Cleo into the organization you wanted that was high performing before you could go and pursue M&A more seriously?

Mahesh Rajasekharan: Yeah, we truly believe in organic growth because if you want to build a category, not just a marketing buzzword, if you really want to create a multi billion dollar category, you have to really lay the rails of the category. Now as part of building the rails, you could have some technology that can come in versus you building it, but we take a very, very hard look at what capabilities we want to get in, and one of the lens we apply, Alex, is if there’s a capability we think we need to have and need to build, and if we find a company which is actually doing it, that’s almost always a good thing to go and acquire if we can do it in an efficient manner. But what we don’t like to do is look at something which is sort of adjacent, looks interesting, it may be available on the cheap and let’s just buy it. We’ll never do that. So to build a massive business, you have to focus on the category creation. You need to have the minds. You need to have the right product management, right engineering, right product marketing to do that. And along the way, if there are pieces that can be brought into the platform that somebody else has built that you wish you had built or you should be building, then you look at acquiring.

Alex Bridgeman: Yeah, you talked early on in our conversation about the power of focusing on supply chain versus trying to be the integrator for all industries. And it counterintuitively seems like the focusing on one area of the world actually allows you to build a bigger company. That feels counterintuitive, but it’s interesting to dive into more.

Mahesh Rajasekharan: Absolutely. Because if you think about it, companies scale because you have tremendous focus and because you are now becoming so important for a certain group of customers who have problems which have been either under met or under solved. Because most of us are solving things in a market where the existing status quo is bad. It’s not greenfield where nothing exists, but existing technologies and solutions do not work, in our case, they do not work in a world which is digitally transforming in retail supply chain with ecommerce with marketplaces and direct to consumer, which now requires omnichannel fulfillment and reverse logistics. Therefore, we have to really focus on which industry, which sub industry, sometimes which micro segment and which geography we’re to focus on, and within that, what problem and who is the buyer persona so that we solve their problem that can be quantified and we have a messaging that resonates with that buyer persona within the segment. And once you get that done, now, depending on the TAM, you can do a series of verticals to expand the TAM. But it’s so important to get a dominant market share. This whole idea, I’m going to get, oh, this is a 4 billion market and all I need is 1% and I’m going to create a $4 million business. No, it never works. You have to get 30, 40, 50% of a small TAM. And then you just get to the next TAM and next TAM and execute a series of verticals, which is all we do within Cleo.

Alex Bridgeman: In closing, what advice would you offer software CEOs of younger companies in growing and scaling their businesses?

Mahesh Rajasekharan: My number one advice is always begin with the end in mind and really approach your work with tremendous focus, a sense of urgency, and prioritize execution over strategy. Most CEOs, when they take over the job, they either have some kind of a private placement memorandum or a CIM, a confidential information memorandum, or a three to five year plan that they worked on with the board. That’s when they come on board. And a lot of younger CEOs sort of then immediately jump into the 90 day, 100 day plan, which is important, that you have a 100 day plan. However, your 3 to 5 year plan is sacrosanct. A lot of work went into it. So make sure you can execute to that. So do not throw it away. Break it down into five year goals, three year goals, one year goals, quarterly goals. So that’s sort of my number one thing. Have a clear North Star. Approach the job with tremendous sense of focus and urgency. And execution is key. A lot of people think it’s strategy. When things don’t work, oh, we’ve got the strategy wrong. The odds are the existing organization, existing people can do a whole lot more than what a lot of CEOs think, especially newer CEOs. Oh, I need to make a change. This is not working. I’m going to- Yes, we should absolutely go and get great talent. We should absolutely redo the organization. But there is maniacal power if you bring a tremendous sense of focus and execution, get involved, talk to customers. That’s the other thing I would say, go talk to your customers. They will tell you, especially if you’re a new CEO. Pick up the phone, call the Gartner analyst. Go to talk, travel to your customers. Ask them open ended questions on what you can do better. Not everything they say you have to do, but you have to really give them the permission to give you feedback. And then I’ll go back to the sense of urgency. What did you accomplish in the first hundred days? Measure every day, morning, afternoon, evening. And by doing that, you’re going to create so much credibility with your board that they will give you the permission to go do big things. Always focus on execution.

Alex Bridgeman: I love it. Mahesh, thank you so much for sharing your time on the podcast. I’ve thoroughly enjoyed our conversation and I’m looking forward to the next one, but thanks for sharing a little bit of time today.

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