YMCAs: Making the Most of Serving Nonprofits

Dave Gray is the CEO of Birmingham-based Daxko Inc., one of the state’s most successful information technology companies. Daxko makes money in one of the hottest segments of the IT industry, software as a service (SaaS). The software solutions they come up with are keyed to the operations of one of the world’s most widespread nonprofit organizations — YMCAs. 

Gray graduated from Auburn in management information systems and has held management positions at Calico Commerce, a software company based in California’s Silicon Valley, and in Grant Thornton’s management consulting practice in Chicago.

The company was founded in 1998 at the height of the dotcom era, and, like a lot of tech startups, there were changes in direction. They tried different things until they landed on something that gained momentum. We ended up with a big chunk of our business serving YMCAs in the U.S. and Canada, but that did not develop in earnest until 2001. Up until then, they were focusing on university registration, applications and athletic departments, and IT outsourcing.

I joined the company in 2003 to figure out what businesses we should be in and had to make that determination fairly quickly. We chose the YMCA market, with the idea that there was enough of an opportunity out there to get the beginnings of a technology business going, and it turned out to be much bigger than that. 

We felt like nobody was meeting the needs of that market, and it was emerging as part of a more robust web technology that was becoming available. We could deal with it as a hosted solution: software as a service. We were actually staffed before that animal, SaaS, was created, but we already had the hosted model, to serve nonprofits that would not have the resources to manage enterprise solutions within their own shop.

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We generate 95 percent of our revenue from YMCAs, and we have a smaller percentage of customers who are independent community centers and museums or Boys and Girls Clubs. We empower progressive, member-based organizations, helping them get better at what they do. The YMCAs remain the core of that, but we hope to expand beyond that, within the broader segment of member-based organizations. 

YMCAs comprise a very well networked market. There are more than 900 of them across the U.S., and they make their buying decisions at the association level: Word spreads quickly. And it’s a much more complex business than people perceive from the outside. People look and see a swim and gym. It’s certainly a fitness club, but YMCAs also are the largest childcare providers in the country, and they have hundreds of resident camps. So it’s a pretty complex business, and that’s a good barrier to entry of competitors into the market. 

We have an enterprise-wide system that runs their business — from program management to swim lessons and leagues and child care to fundraising and accounting and budgeting. We have mobile apps and other products that engage their members. We have a CRM (customer relationship management) product that engages members and volunteers in online registration and giving and management of their accounts online. 

When we made the decision to focus on the YMCA segment, we had about 10 people in software, and now that number is around 200. In the last 10 years, we’ve had double-digit revenue growth year-over-year. We’re up to 700 unique customers, and in 2003 that number was about 13.

We do direct sales, and the vast majority of our sales team is here in Birmingham. A big focus in our company is on teamwork, and we collaborate inside our four walls. The direct sales force is here in Birmingham so that they are more in the flow of the business. 

Everything we do is by the subscription model. The customer pays a set fee per month for a three-to-five year contract. We have recurring revenues with great predictability. 

We’re doing business with about 60 percent of the YMCAs (in the U.S. and Canada), but we don’t have 60 percent of the market share. We’re not at 60 percent in all of our solutions. There’s tons of growth potential in new products. And there are 120 countries with YMCAs, so we’re in discussion with groups of customers in other countries, which will be part of our growth over the next several years. And we do acquisitions, as well. 

We’ve done four acquisitions in our history. We first acquired a company in the association management space, which didn’t work out as we had hoped, partially because the quality of the product was not what we had hoped for. And we were probably overly optimistic about how easy it would be to replicate our success in a new market: professional and trade associations. Sometimes it’s better to seep than to leap. Our other three acquisitions have all gone well. We acquired a consulting practice in 2011. We acquired a mobile applications company in 2012. Then just this year, in July, we acquired one of our competitors in the YMCA market.

My background is in both technology and management. I started in software engineering, then did consulting for several years, then went to work for a software business in Atlanta and then Silicon Valley. My background is technical to begin with, then product management and general management. 

Our growth financing has been a bit of both internal funding and outside capital. We’ve been profitable since 2004, so we run a disciplined, profitable business that can certainly survive on cash flow. But we have access to capital financing to do bigger things, such as substantial acquisitions and expansion into new markets. Most recently we brought in Pamlico Capital, out of Charlotte. Before that, we had private equity investors in 2008 who were, coincidentally, also out of Charlotte. When you show up on the private equity call lists, there is a lot of inbound interest. And private equity firms like subscription-based software as a service, as a business, so there is no problem finding the right ones.

We really operated on cash flow for years and skipped the venture capital stage and the mezzanine funding to growth equity stages. Now we really don’t need private capital to exist or grow, just to expedite growth. Now we’re in the traditional private equity stage — private capital investing in a business that has good growth opportunity at two to three times current performance for three to five years. 

Chris McFadyen is the editorial director of Business Alabama. 

Interview by Chris McFadyen

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