Getting to breakeven, and how we made it through the “VR winter”
A few months ago, I shared May was our first month of positive cash flow in 8 years at Sketchfab. I’m happy to share an even more significant milestone: September was our first profitable month! Getting there has been my main focus for the past 3 years, so I thought I would share how and why we got there, hoping it can be interesting for some, and helpful for others.
The difference between cash flow positive and breakeven
First, some practical detail on wording. Cash flow positive means that you have more cash coming in the bank than cash leaving the bank in a given month. Breakeven means that your revenues counted on a monthly basis (ie your yearly contracts only counted as single months) are greater than your costs counted on a monthly basis. You can be cash flow positive without being breakeven, in our case it was because most of our costs are paid on a monthly basis (typically salaries) while a lot of our customers pay on a yearly basis.
Raising our series A
In early 2015, we still had half of our seed round in the bank, essentially 1 year of runway. I was thinking of raising in Q3 or Q4, as we would get closer to running out of cash. Waiting to run out of cash is typically a terrible idea though, as it’s the time when you have the least leverage. And then we had a terrific Q1, lining up partnerships with Facebook, Microsoft and Adobe. We got whitelisted in the facebook newsfeed, we got natively integrated in Photoshop, and we were one of the launching partners for HoloLens. This resulted in a lot of momentum, press and traction in general, and I figured I should give a shot at capitalizing on this and raising our series A. Before going out for a full roadshow, I spoke with a handful of VCs I was close with and appreciated, and we raised with Matt from FirstMark, who I had been in close contact for the past 2 years. The key drivers of getting it done were a clear leadership in our space, a space that was looking extremely promising with the momentum around VR (Facebook had just recently acquired Oculus for $3bn), and the relationship I had built with Matt. Part of the vision I pitched was that with 3D capture coming to our smartphones, 3D creation was about to explode — and with VR coming to market, 3D consumption was about to go mainstream. I essentially painted a parallel with YouTube, which exploded as video capture came to our smartphones.
The VR winter
Pretty soon after our series A, it became clear that VR would take a few years to go mainstream, just like 3D capture. I had been waiting for years for Tango to ship with mainstream phones, but Google eventually killed the project. And I had waited for WebVR (the web implementation of VR support) to ship with default browsers for years, and it was still only available in alpha or beta versions of the browsers. Moreover, the sales of VR headsets were just disappointing. Going after VR on the web, we were essentially within a niche of a niche. I spent a good chunk of September and October 2016 in San Francisco, to attend a number of VR conferences, including OC3. I got out of it with a strong feeling that our “grand youtube vision” was more likely 10 years away than 12 months away. Which meant that we either had to raise a lot of money to make it through the next 10 years without revenue, or we had to start monetizing the tools and the content, since we wouldn’t be able to monetize the audience for a while. I figured monetization was the pragmatic and viable path. We would shift to a “vimeo” execution while waiting for the market to mature and be ready for a youtube.
Not raising a series B
With that in mind, I also figured that it would be worth trying to raise a series B before monetizing, because if the early results of monetization were bad, we’d be stuck without being able to raise, and without any runway left. So instead of starting to work on monetization right away, I went on the road to raise a B round in Spring 2017. Oh boy… I started with San Francisco. I would fly from NY to SF every Monday for maybe 2 months in a row, pitching dozens of firms. I then tried NY. Then Paris and London. And then Russia, China, you name it… I pitched over 100 firms. We were initially looking for 15 to 20M. Then 12, then 10, then 8, then 5… We got over 100 NOs… This was brutal. Since we were not monetizing yet, we had to pitch the consumer vision, and the math just didn’t work out. VCs were comparing our metrics to consumer metrics, and while we were doing really well for our space, it was still far from mainstream traction… We could have raised a small round with not-so-great partners on not-so-great terms. We decided instead to start monetizing. On the bright side, we still had a year of runway, and the support of our investors if we needed more cash. In retrospect, I think it was actually a good thing that we failed to raise this round. If we had taken money on our consumer vision, we would have delayed monetization yet again, our burn would have accelerated, and 12 months later, we’d still have no consumer market, with a burn that would have been out of control. A lot of companies in our space died or got acqui-hired because they raised too little or too much and ahead of the market.
Switching from growth to monetization
Switching from growth to monetization is not an easy thing to do. Most companies fail, they typically do “too little too late”. It requires to radically change your core KPIs. The good news is that we had 2 clear paths for monetizing. The first one was to start charging companies using Sketchfab for B2B purposes. While we initially started Sketchfab to help creators share their work, we noticed more and more companies were organically using Sketchfab for things like e-commerce, private sharing, configurators… It was clear there was a potential here to charge a premium for B2B use cases while offering specific features for that, and we introduced new plans and pricing accordingly.
The other one was finally opening up a marketplace to let people buy and sell 3D assets. Something a lot of people had been expecting us to do. Actually a lot of people already saw us as a marketplace, while we were “just” a publishing site. The thing is while we were on our “Youtube vision”, we didn’t want the content to leave the platform. But if we were switching from growth to monetization, this was an obvious move. Moreover we realized that Sketchfab’s content was actually even more useful if it could leave the platform to be part of other projects, like a game, a movie, a VR experience. We had the potential to be an even more central place in the 3D ecosystem: not only where everyone publishes 3D content, but also where everyone finds it. So in early 2018, we launched the Sketchfab store — the first and only 3D marketplace where you can see the content before you buy it: what you see is what you get. We also launched our download api, to let people easily integrate a Sketchfab library and search bar.
We got the support of our existing investors (thank you Firstmark, Balderton & Partech), as well as a few new ones (thank you Anorak, Kima and Brendan Iribe), and raised an additional $3M, with the goal that it would take us to profitability. We were burning about $350k a month at that point. Which means $3M is not even 9 months of runway… The race for survival was on.
Building the business
Building the business didn’t happen overnight. The store started super slow. Selling content was opt-in, and there were less than 5k assets on the store at launch (today we have almost 100k). We also made projections based on the volume of free downloads, but while we had a large volume of free downloads (north of 1M / month today), we realized people paying for content are a different crowd. On the SaaS side of things, we started from scratch. While in “youtube mode” we’d rather distribute a branded player at no cost, we started offering an unbranded version of the player, which many brands had been asking for. We also started limiting the volume of traffic allowed on our self-served plans. We were missing a lot of the features a large company would expect (multiple seats, analytics, SLA, account manager, encryption…) But our core product — the 3D viewer — was so good and so ahead of the market that we were still able to quickly close deals. We had a large number of companies already using the product, that we could tap into for upsell. And having done 3D on the web for almost 10 years, we ranked super well on google for queries around our products, and got ongoing qualified inbound. We started slowly adding and building all those features, leading to the release of Sketchfab for teams, a “google drive for 3D”. We also doubled down on our APIs, to allow more customization of the player and making it easier to build advanced experiences, like 3D configurators.
After spending 3 years in “survival” mode, we are now in control of our destiny! Getting to profitability is not an end in itself though. In our case it was a necessity to make it through given the cash we had in the bank, and it’s now an enabler of growth. While we stayed pretty much flat at around 30 people for 3 years, we have now started hiring again, about 1 person every month, on our own cash.
We were way too early when we started Sketchfab, but it feels like the market is finally coming together. 3D content is becoming mainstream on the creation side with lidar coming to iPhone, and on the consumption side, with 3D & AR getting natively supported in Google Search, Instagram, Snap, Shopify… The challenge was to be alive today, and here we are.
I should add that we managed to switch to monetization without compromising too much on growth, as you can see from our monthly signups stats below. We just passed 4M members.
Our mission is to make 3D accessible: provide the best place to publish 3D content, and the best best place to find 3D content. We now have 3 major opportunities:
- Be the market leader to embed 3D content, with a focus on product display and eCommerce. Many companies will have a digital twin of their products. With the best 3D viewer on the market, and the biggest network of integrations, Sketchfab will be the ultimate way to embed and distribute this 3D content for web/VR/AR. Sketchfab will also power marketing, storytelling, education, culture… and the long tail of short form immersive experiences from content creators.
- Be the market leader to manage 3D content. As companies shift to an end-to-end digital workflow from product development to launch and commercialisation, Sketchfab for teams will be the ultimate way to manage 3D files internally.
- Be the market leader to find 3D content. More and more tools, platforms and devices will ingest 3D content. Sketchfab will be the ultimate way to find 3D content, on sketchfab.com or through direct search integrations. This content will be a mix of official branded content from our corporate customers, as well as the long tail of user generated content ever increasing from the largest community of 3D creators, and all the new ways to capture reality. We will be the content API to populate the mirror world.
If you are interested in being part of that journey with us — as an employee, partner, customer or investor — feel free to reach out to me! alban at sketchfab.com