Rubrik S-1 - Burning the Boats in Data Security
Tomasz TunguzVenture Capitalist If you were forwarded this newsletter, and you'd like to receive it in the future, subscribe here. Rubrik S-1 - Burning the Boats in Data Security
Rubrik, a Palo Alto-based data security company, filed their S-1 yesterday. At $784m in ARR, growing 47% with 130% net revenue retention across 6100 customers, the company should be one of top 10 fastest growing software companies alongside Klaviyo, ZScaler, & Crowdstrike - in ARR terms. Half of new customers are over $100,000 in size & contract values have grown 19% from $101k to $120k in a year. 41% of new bookings derives from those new customers. But overall revenue is growing 4.5% y/y, estimated sales efficiency is 0.11, & contribution margins are negative : Rubrik sells $1 of subscription software for $0.88. How can ARR grow so quickly while overall revenue is much slower? & why would a software company run negative contribution margins? It’s a strategic imperative to metamorphose from an on-premises perpetual-license company to a subscription-software company as fast as possible.
The company’s subscription revenue increased from $385 to $538 million with a gross margin of 81-83%. The legacy business fell by 58%. Note the substantially lower margins of 44-47%. However, the most curious part of the business is the margin structure.
The tldr : Rubrik is a top 10 growth software company with higher-than-average gross margins, lower-than-average profitability, on-par cash-flow-from-ops margins, & negative contribution margins. It’s the contribution margin that sticks out. Contribution margin is the unit profit generated from a marginal license sold : it’s -12%. This means the more software sold, the more money the company loses. The contribution margin has improved from -117% in 2022, to -38% in 2023, to -12% in 2024. For most software companies, contribution margin is typically very high, around 80-90%. This is a burn-the-boats strategy which requires a lot of courage, a phenomenal commitment to the long term, & a big balance sheet to sustain the short-term losses & invest in a new product & new sales & marketing strategy to transform a massive caterpillar into an even bigger butterfly.1 The company is well on its way to becoming a pure software business & with the margin trends improving, the big bet may come to fruition. Congratulations to the entire team at Rubrik on building a massive business with a daring strategy! 1 I know, I know. I’m mixing metaphors. |
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