On Monday, Loggly closed a $4.2M B round, with Trinity Ventures leading and True Ventures participating. As you may recall from my previous post, True led our initial seed investment, which was closed 5 months ago to the day.

My relationship with Trinity goes back over a year and a half ago – well before Raffy and I started thinking about doing a cloud based log management offering. Like many other startups, Trinity was started by two entrepreneurs. For years, Trinity’s motto has been focusing on early stage companies in specific technology categories, such as cloud computing and systems management.

Loggly is extremely fortunate to be working with Trinity and their bright team, and we greatly value the market experience they bring to the relationship.

History Lessons

I met Trinity through a fairly short introduction path. My good friend and former colleague, Dakota Sullivan, introduced me to a gentleman named Matt Strand in January of 2009. Matt and I had coffee at Crossroads Cafe in South Beach where I told him I was looking to join or start a cloud computing based company. Matt figured he should hook me up with a VC buddy of his, Dan Scholnick at Trinity.

Here’s the email introducing the two of us:

Matt was right about it being a valuable connection. Over the next year Dan and I would spend time together drinking coffee, chatting on the phone, and emailing each other about ideas in and around the enterprise and cloud computing space.

It was because of my conversations with Dan that Raffy and I were able to come to the idea of a cloud based logging service. Even when it came time to start pitching Loggly to others, Dan and Noel assisted us in honing our pitch, which eventually led to us being funded by True in a seed round.

Start Small, Go Big

When you are starting out, even the smallest conversation or the shortest email could potentially be the most important one you’ve had in years. Having an idea, growing it, and turning it into a business is a complicated process. That process takes time, and doesn’t happen over a matter of days, or even weeks, but instead over months and even years.

Our relationship with Trinity has been a long time in the works. While it may have appeared to happen rather quickly, Loggly’s efforts with Trinity started at the very beginning of its life.

In as much as your idea should evolve over time, your ability to convey the idea and the opportunity it represents should grow as well. I’ve lost count of how many times Dan has told me to ‘crisp up’ my presentation, discussed with me partnership negotiation strategies, or told me how to approach feedback with our current private beta testers, but I’m sure the hell glad he did.

Without investors like Trinity and True, it’s unlikely I’d be here telling you this story. You would be well to seek out these types of investors when you are looking for direction and guidance for your idea.

Now you’ll excuse me while we get back to coding. We have beta testers who have logs in need of indexing!

Loggly just closed an A round with True Ventures on Wednesday. From start to finish, Raffy, Jon and I talked to over 20 capital firms, with fund sizes ranging from a few hundred thousand dollars to over a billion dollars invested. In all, we spent exactly 90 days on our capital raising efforts, starting with essentially nothing, and then authoring and tweaking the executive summary, financial model, and investor presentation as we went. Oh, and we wrote a crapload of code in there too. The Loggly Beta deadline waits on no man.

Perhaps it was fate that we spoke with Puneet Agarwal at True Ventures first. True has a massive amount of experience investing in and managing early stage companies. Their record of past successes speaks for itself, and their team has experience with over 100 early stage investments that have generated significant investment returns. Frankly, Raffy, Jon and I are extremely fortunate to be working with the True Ventures team.

That first meeting with Puneet was actually quite easy; we had no other expectations other than sharing what we were thinking with someone who knew the space well. That was the calm before the storm though – over the coming weeks we struggled with writing our investor deck, meeting schedules, market size expectations, investor lack of familiarity with our market, and became consumed with correctly casting the “going big” portion of our pitch.

Going Big

The best way to describe what “going big” means is to just be blunt about it. It means, “How are you going to make your idea – your startup – compete effectively in a multi-billion dollar market?” You know, how are you going to get big like Apple, or SalesForce, for example. “Say what?”

A bunch of you capital guys and seasoned entrepreneurs will nod your heads vigorously at this statement. “Yes, yes. You need to show how this gets really big!” And, for all practical purposes, you guys are absolutely right. For a largish VC, say with a fund of a billion or so dollars to invest, they HAVE to go with early startup guys who are going to go really, REALLY big. It’s not a matter of money, it’s actually a matter of time. If you have a BILLION dollars, and you invest a million in each company you fund, that’s a THOUSAND companies you need to talk to, investigate, vet, poke at, wrangle with, grow to love, etc. Yeah, no. That’s not going to work unless you focus on a given market.

You’d have to filter fast. Kick out the guys that MIGHT do a run rate of low 10s of millions a year (crazy, right?) because they aren’t big enough. Shoot for the guys who tell a good story about how they are going to turn into Twitter, or Facebook, and exit for billions. Find those guys! This results in an investor funding a bare handful of early stage startup each year, even if they say otherwise on their website.

It also serves another purpose, all those meetings with those small startups. It allows an investor to form early relationships with companies who are successful at getting through the valley of death. If an investor finds out a startup they talked to early on is doing well, has revenue coming in, is growing, and expanding to the “going big” event, then maybe they might need some more capital. Maybe it’s time to invest.

Entrepreneur Up

If you are doing an early stage startup and are going to raise capital, you need to toughen up a bit before you go out. Remember, it only takes one firm to believe in your idea, but you are going to get an inverse number of rejections before that event transpires. If you get a bad review from someone, take their advice in stride and figure out how it applies to you. Tweak as needed, and move on to the next firm to vet what you’ve discovered.

Above all, be honest with yourself and your assumptions and don’t give the investor who gave you a bad review a hard time. If you think you’ve been asked to prove something unreasonable, like how you are going to become a billion dollar company when it’s just the 2 of you and a 1,000 lines of code, then say as much to the investor. Don’t be afraid to say you don’t know, or restate what you do. Don’t be afraid to talk through how you get big with the investors.

After being asked how we got to a billion dollar valuation by one VC, I turned it around on him and asked how he knew he was going really big on his company (which exited for >$1B). His answer? “We didn’t know until we got there!”

Loggly is going to go big, of that I assure you. But first, we have a product to build, customer and partner relationships to forge, and problems to solve for storing a ridiculous amount of log files. Once we have these tasks behind us, we’ll have a great handle on how we’re going to go really, really big.

We’ve been on the investor tour for the last month and a half at Loggly. We spent about a month working on the investor presentation, executive summary and revenue model to prepare. Based on the better feedback we’ve received, we’ve continued to refine the pitch and plan.

We’ve heard everything from “you need to show me how this is a billion dollar company” (lol wut?) to “move the team slide just below the problem statement”. Bad advice aside, I remain focused on our market size and, in particular, the user conversion assumptions that go along with it.

I’ll be transparent here. I expect Loggly’s model to yield a 10-20% conversion rate to paid customer from a signed up freemium account. While I have good justifications for those numbers, posts like this, by Derek Haynes of ScoutApp, would appear to contradict my assumptions, especially with comments like “The 1% rule is the Pi of freemium web apps!”. In all fairness he has an excellent point about focusing on retention optimization, but should we so blindly ignore our conversion pipe just because of the 1% rule says we’ll get the users?

Theories != Rules

As it turns out, the “1% rule” is based on observations on other websites and expected conversion from a site visitor to a paid user. Coincidentally enough, this assumption echos the controversial content creation theory and smacks of Chinese Math.

The main problem with this approach is it completely and utterly ignores the remainder of a given site’s user pipeline. Pipelines, or funnels, are the bread and butter of any sales driven organization. While sites like YouTube may have simple funnels, sites like Loggly are a bit more complicated, and a missed assumption somewhere along the way can turn your assumed 1% conversion into a .1% conversion fairly quickly. To illustrate, here’s a short list of what we’ll be tracking at Loggly (per month):

• number of ad views on ad network
• number of visits
• uniques
• % visits and uniques from ads
• bounce rate
• content consumed (price sheets/videos)
• participation in the demo (low friction getting started)
• freemium signups
• use of a freemium account
• use of certain features in the freemium account
• conversion rate to paid accounts
• use of paid account
• logging rates
• upgrades from one paid tier to another

It’s within this pipeline that we focus our attentions to help maximize conversions from visit to paid user.  Not surprisingly, the devil is in the details.

Care and Feeding of Your Pipeline

Portions of a pipeline need to have estimated percentages assigned to them, and then you need to actively monitor those conversions from step to step when the site goes live. I’ll start with the expectation of 1 conversion from 100 unique visits to a paid account and then project assumptions about the other portions of the pipeline:

• 10,000 ad views yields 100 unique visits (1%)
• 100 unique visits yields 20 content consumers (20%)
• 20 content consumers yields 10 demo participators (50%)
• 10 demo participators yields 5 freemium signups (50%)
• 5 freemium signups yield 1 paid account (20%)

Notice this gives us our 1% conversion from unique visit to paid user, but still shows a 20% conversion from freemium to paid account. Now we do a breakdown for the intermediate steps, and find places we can optimize. Your mileage may vary, so make sure you understand your steps, and measure the effects of changes on your conversion numbers when you are able to do so!

Content is King

Based on prior experience, we know the subject material of Loggly should yield decent conversions from a visitor to content consumer, where the parties are interested in the offering. At previous engagements we were able to get 10K unique video views a month off 100K visits per month. Add in another 10% viewing pricing, examples, etc., and 20% starts to seem reasonable. By driving viewing content, we increase stickiness, educate the users about the service, and increase conversions to freemium signup.

Once the user is viewing content, we want to convert them to using the demo, and then on to creating an account later. Loggly’s demo will actually be a live demonstration of the service using the user’s own content, but it won’t require the user to sign up in the traditional sense. By flipping the signup process on it’s head, we get the user using the features first, then ask them for account information after they’ve decided they like the service. All in, and based on the frictionless signup, we expect 25% of users who viewed advanced content to convert to a freemium account.

Get Out of the Way!

Remember, your signup form is a HUGE barrier to users. If you require them to provide 12 fields of data to fill out, it’s that much less likely you’ll get a signup out of the deal. Just look at this signup form – I gave up after 5 minutes of trying to fill it out properly (picky password, clearing fields on submission, etc.), even though I’m highly interested in IBM’s offer. Most people won’t spend more than a minute or so filling out your signup form. The lesson here is to get out of the way so a user can start using your service quickly.

Finding Cash in the Pipe

Remember, freemium accounts are not the same as free trials. A free trial expires, but may contain all the features of a paid account. A freemium account doesn’t expire, and usually contains a subset of features of the paid account. By keeping the freemium account active for a longer period of time than the trial (and by keeping the cost of providing services to it low) you extend the amount of time a freemium user can convert to a paid user. While this may not show up in the first few months, over time it will have a compound effect on your conversions as users desire more features from the service.

At this point in the pipeline we are at a 5% conversion rate from visitor to freemium account, which so far seems to be a reasonable assumption. If we take the 10-20% estimated conversion rate to paid assumptions, then we arrive at a .5% to 1% conversion rate from visitor to paid account, which is within striking distance of our 1% goal.

In the next segment of this post, I’ll discuss analyzing how users use their accounts, and steps you can take to maximize conversion from freemium to paid.

Edit (11/12/09): Fixed my bullets in the second list.

I’m delighted to announce Jon Gifford as the new addition to Loggly’s founding partners. Jon will be taking on the roll of CTO at Loggly, and will acting as Chief Architect for the project. Jon hails from New Zealand, by way of Australia, and did stints at LookSmart, Technorati, Scout Labs, and recently his own startup, Minimal Loop. Jon is a search technology guru who is capable of accelerating search far beyond that of mere mortal men. If you don’t believe me, just try to go search for him on Google. Frankly, I have no clue how he does it. Trust me folks, a bunch of those those results are not him.

As for the rest of the team, Raffy is now officially our COO and Chief of Product (BTW, Swiss PMs rule), and I’ll be serving as our Geek CEO and Chief Evangelist. All three of us will be coding on Loggly over the next few months, and with a dash of a soon-to-be-announced designer, we’ll be assembling the framework needed for getting Loggly up and running in private beta over the coming months.

I’m really excited to be working with such smart and capable individuals. I can’t wait to start working with equally smart and capable partners and customers.

See you in your logs!