Startup Review: Cheddar

In 2008, Mike Trotzke and Marc Guyer cofounded a venture capital firm called SproutBox in Bloomington, Indiana. The firm invested both financial and human capital in SaaS startups, leveraging their team of developers and creatives to help build each company’s product. To aid in development, Trotzke and Guyer built an internal library of billing tools called CheddarGetter. They used it to integrate billing functionality into every application they built, saving time that would otherwise be spent creating unique billing systems for each one. This helped their portfolio companies start generating revenue through their applications sooner. CheddarGetter evolved into an API, and when Trotzke and Guyer realized it could be a valuable tool outside of SproutBox, they turned it into a business.

Cheddar (formerly CheddarGetter) is a usage based billing platform for SaaS companies. Based in Bloomington, IN, Cheddar’s unique combination of real time usage tracking and billing automation revolutionizes how hundreds of companies monetize.

Cheddar is a subscription-based, automated billing API for SaaS startups and companies that don’t already have a billing system in place. The platform uses a unique, usage-based approach to billing, and it includes revenue optimization and customer communication tools that allow all billing-related activities to be completed in one application.

 

How it works:

1.     The client defines tracked items and pricing for their product.

2.     Customers and usage metrics are sent via Cheddar’s API or hosted payment pages.

3.     Cheddar dynamically bills a client’s customers on a recurring basis.

Unlike other providers, Cheddar starts by measuring a client’s users' activity. In addition to basic monthly charges, pricing can also be defined based on these usage metrics. Using its exclusive Tracked Item technology, Cheddar can accept usage data in real time — assembling a users bill dynamically. Cheddar's incredibly flexible approach allows customers to track free or paid activity, analyze billing strategies, and easily build a wide variety of billing configurations.

The Company has collected millions of transactional data points, allowing them to predict consumer behavior and optimize revenue in ways others can't. The Company’s revenue maximization engine is able to prevent many transactions from failing before they even occur — minimizing churn and increasing a client’s revenue by as much as 10%.

Cheddar automates and optimizes billing-related communications with their clients’ customers. The client controls the look, feel, and tone of their business' emails through Cheddar’s template management system. Cheddar lets their clients easily pick and choose which communications are most applicable to their customer base.

Cheddar ensures their clients’ transactions run on time, accurately. The Company helps minimize clients’ PCI compliance burden, allowing them to focus on growing their core business. Cheddar’s platform is engineered to provide security, scalability, and redundancy at every level. The Company has partnered with secure cloud provider Firehost to help ensure that critical data is always accessible and protected.

 

Problem

Recurring revenue businesses create more complexity in the process and more demand for data than traditional businesses. They require sophisticated, integrated systems for handling the throughput, capturing the data and facilitating the analysis. It’s important to set up an infrastructure in the beginning that can manage the complexity and evolve with a company, allowing them to react competitively and expand into new areas as they grow.

15% of recurring transactions fail. Many companies aren't sure what percentage of their revenue is lost, let alone why. But Cheddar knows. They know how and when to communicate with a client’s customers. Until recently, most SaaS businesses didn’t have access to the metering tools required to implement usage-based monetization–even when customers preferred it. The industry’s shift toward usage-based billing may even eclipse the decade-long move toward fixed subscriptions.

Building a usage-based billing system requires time and money, and often involves revaluating how and where a company provides value. In SaaS, for example, it can take a developer weeks or months to build a way to track usage data and bill for it. That is time businesses aren’t able to focus on building their core products, and it resulted in delays getting to market. Even worse, anytime a company wants to change pricing, developers would have to spend hours in pricing meetings.

 

Market Size

Currently the traditional enterprise application software industry is estimated at generating approximately $300 billion annually.  By comparison, the emerging SaaS industry, a subset of the overall “Cloud Services” market, generates $46 billion annually and is expected to grow to $76 billion by 2020.  Usage of traditional enterprise software, on the other hand, is anticipated to decline as companies experience the many benefits of SaaS including its lower relative cost compared to traditional software, its continuous and seamless platform technology upgrades, and the increasing trust in security protocols offered by cloud providers.

AngelList has over 13,000 SaaS start-ups in America listed with it (SaaS Startups). However, that number isn’t going to stay for long. Forbes predicts the SaaS market to be worth over $50 Bn by 2018. There is also a growing presence of SaaS based businesses outside of America such as DiscoverCloud. DiscoverCloud is Israel’s leading business software market place. They have over 3,000 b2b vendors listed with them. There is a growing trend towards SaaS businesses globally.

Cheddar currently charges $99 per month for each of its clients. Assuming that they can capture ~10% of market share (1,300 total clients) over the next several years, Cheddar could potentially bring in $128k of monthly recurring revenue. However, it’s hard to tell exactly how much money Cheddar could bring in, as they have not released any kind of data regarding their usage-based billing process internally. $1.5 million of annual revenue seems like a near term, extremely conservative estimate for the Company’s growth prospects.

 

Support

Cheddar raised its seed round of financing in August of 2017. $1.3 million was raised by an investor group of eight VC funds, led by M25 Group. Other investors include: Connetic Ventures, Warhawk Ventures, Harbor Street, SixThirty, Cultivation Capital, Little Engine Ventures, and Elevate Ventures.

M25 Group is a Midwest micro-VC firm that has created the "index fund for Midwestern startups". They invest in Midwest-headquartered, seed-stage high-potential startups in nearly any industry. They are based in Chicago, IL with an office in West Lafayette, IN. Their mission statement: M25 Group seeks to responsibly steward investors' capital by sourcing alternative investments with substantial potential to multiply.

 

Management

Marc Guyer and Mike Trotzke have been solving online billing problems together for over 15 years. The founders of the Company have an incredible track record of building businesses and helping others grow their businesses. They have, as a result developed a strong network of entrepreneurs and know exactly how their customers think. SaaS companies frequently rely on have built-in introductions to their customers and Cheddar seems poised to grow it’s customer base quickly.

In the late nineties they developed early online donation systems for political campaigns. In 2001 they cofounded recurring rent payment company Resite Information Technology, which they successfully sold in 2007. In 2008 they cofounded Cheddar's parent company, Sproutbox, which has invested in more than 25 web and mobile companies. Cheddar, launched in 2009, leverages their experience with startups and enterprise recurring billing to help subscription businesses grow.

 

Conclusion

One of the biggest things to love about this Company is its customer base: other entrepreneurs, small businesses and other people who understand how important it is to get paid. A B2B business model can frequently have significant benefits including increase professionalism and more predictable revenue streams. However, a company that targets entrepreneurs (like Cheddar) gains an extra edge – entrepreneurs have a little extra hustle and that typically translates into better business.

 

 

Peter G Schmidt