I recently joined the Venture Stories podcast with Erik Torenberg, co-founder and partner of Village Global, and Josh Stein, partner at DFJ, to discuss how the SaaS landscape is changing and where the opportunities are for early stage founders and investors.
In this episode we’ll discuss:
- Why inherently viral products still need a traditional sales motion
- The irony of 20 year old founders selling to the enterprise
- Why selling to other startups is a common crutch in Silicon Valley
- Unsung heroes at the fastest growing software companies
- Why autonomous vehicles may be the greatest productivity enhancer
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Listen now on Breaker and get the full transcript below:
Erik Torenberg: Hey, everybody. It’s Erik Torenberg, co-founder and partner of Village Global, a network-driven venture firm.
This is Venture Stories, a podcast covering topics related to tech and business with world-leading experts.
I’m here today for our first episode of SaaS Stories. I’m here today with one of our Village Global Network Leaders, Brianne Kimmel, angel investor, previously go-to-market growth at Zendesk, and special guest Josh Stein, a managing partner at DFJ. Guys, welcome to the podcast.
Brianne Kimmel: Thanks so much for having us.
Josh Stein: Yeah, thanks.
Erik Torenberg: The illustrious Venture Stories Podcast. Let’s get into it. Why don’t we start with some brief introductions and, broadly, where you guys are most excited right now investing in SaaS, what trends, or where you’re most excited right now?
Brianne Kimmel: I’m Brianne Kimmel. I was most recently at Zendesk. I focused on self-serve growth, technology integrations and built Zendesk for Startups. I’ve been spending a lot of time looking at enterprise applications, particularly ones with a bottom-up sales motion. I look for companies that sell directly to the end-user of the product. That’s where you’ll see a product-led growth strategy, where users discover the product through consumer channels like social ads, search results or content marketing, and ultimately sign up and use the product without talking to a sales person.
Erik Torenberg: Just to unpack that a little bit for you guys that may not know, previously, it was more top down? Or, explain that transformation a little.
Brianne Kimmel: If you look at companies like Zendesk or Dropbox, the acquisition channels look a lot like a consumer tech company. They’re investing in paid marketing including SEM, SEO and targeted landing pages to acquire very specific types of users.
I think what’s interesting is we’re seeing a consumerization of SaaS, which I hate the term, but business applications need to have a differentiated brand and high brand awareness so consumers choose to use your product at work.
In this shift, we’re seeing consumer trends impact the workplace much faster because employees have more power and control over the tools they use on a daily basis.
Josh Stein: That is a whole rich area we should dig into. It’s really about a change in the buyer, which I think you see reflected in the product and also in the acquisition and distribution. I’m Josh Stein. I’m one of the partners at DFJ. I started out on the operating side. I cut my teeth as a product manager at a software company in the mid-90s and was a VP of sales. I started a company in ’99, where DFJ actually led my series A, so, I’ve been working with the team there for almost 20 years. Joined as a partner in 2004, and I’ve led a lot of our SaaS investments.
I was the first investor in Box when it was three people. I was the first investor in SugarCRM when it was three people. I’ve led investments for us in companies like LaunchDarkly, Twilio, Talkdesk, Periscope Data. I’m kind of a SaaS nerd. I just love the software business and subscriptions make a ton of sense to me. High gross margin, recurring revenues.
Erik Torenberg: Totally. Let’s unpack what we’re talking right before, the change in the buyer. Let’s riff off that.
Brianne Kimmel: Yeah, that sounds great. I have a question for Josh, actually. I think what’s interesting is when you look at a company like Box, Box had a very different go-to-market than, say, a competitor like Dropbox.
Josh, you’ve been really instrumental in helping founders answer tough questions: Should we have a bottoms-up sales motion? Or should we invest in enterprise-level features that allow us to go straight for large companies?
Josh Stein: Yeah, it’s a really interesting thing. So if you go back like 20 or 30 years for traditional software, it was a long sales cycle. It was a six or seven figure license deal, you were selling to a CIO or a VP level.
Then there was this change that really came as a result of the products being delivered over the web through SaaS or through the iPhone, through a mobile app store, where much lower level people could find a technology they liked and bring it in to the workplace themselves.
It almost kind of short-circuited the traditional IT buying cycle, which was very threatening to IT and to CIOs, originally, although, they’ve kind of gotten behind it.
Josh Stein: With Box, the thing that actually was the huge inflection point for us was actually at the launch of the iPad, because all of the sudden you had people coming into … It sparked the imagination of really everybody.
You had people coming into the workplace saying, “How can I use this awesome device in my job?” It was really hard to actually get content onto the iPad, because it doesn’t have a traditional file system. You can’t just plug it in like it’s a USB drive or something.
Josh Stein: Aaron just absolutely nailed that. When the iPad was announced and then when it was launched, we were ready to go with an app. It very quickly became this way that you could get professional content on the iPad.
The trajectory of the business just absolutely exploded from there, but it wasn’t CIOs coming to us and saying, “Hey, I want to buy this for my organization.” It was group leaders, or individual contributors that were pulling it in.
Josh Stein: Then, much like you were mentioning with Dropbox, it’s an inherently viral application, because you’re collaborating with other people, so you would see this spread within organizations.
Interestingly, that was responsible for much of Box, and I would argue, Dropbox is probably like the most extreme example of getting to scale with that kind of a model, but it’s not what gets you typically to a billion in revenue.
Box, today, the way they go to market is totally different than that. It got them to the table, but it’s not what got them to where they are now.
Brianne Kimmel: I think that’s a really interesting point. I think specifically for founders who are based in the Bay Area, you can hit a certain level of traction by just selling to other startups.
I think what’s great there is that you can get early user feedback and there’s some really great points when you’re selling to a very technical audience or people who have very good understanding of what you’re trying to achieve.
I think one of the risks that you potentially run, though, is if you wait too long to start selling outside of the Bay Area, then it’s like you actually haven’t talked to any CIOs, you don’t necessarily know what’s required for enterprise.
Josh Stein: And it’s totally different, right?
Brianne Kimmel: It’s totally different. For seed stage companies, I highly recommend talking to enterprise buyers sooner, rather than later.
Before you go out to raise a Series A, you should have a good idea of what your traditional sale motion will look like: list of target accounts, enterprise pipeline and current traction outside of the Bay Area.
Keep in mind, the sales cycle is much longer so this should be built in parallel with your bottoms-up sales motion.
There are also some feature requests that come with it, so it actually starts to change how you’re building and developing your product over time.
Josh, how do you think about this for Series A companies?
Josh Stein: I would say a lot of founders, most of the founders, we interact with are product-oriented people as opposed to go-to-market people. That’s the more typical profile. Many of them, as you alluded to earlier, are quite young and they maybe haven’t even worked in a large organization, let alone sold to a large organization.
You know, Aaron, famously, was 20 when we backed him at Box. That’s not an atypical … You were mentioning the founder of Mixpanel.
Brianne Kimmel: Yeah, Suhail Doshi as well. He studied engineering from 2006 to 2009 at Arizona State, worked at Max Levchin’s company Slide for a months, then joined YC to build Mixpanel.
There are a lot of 20-year-old enterprise CEOs, which is interesting, because that’s younger than an SDR.
You wouldn’t send an SDR or maybe even an AE into these sorts of conversations, and yet the CEO is significantly younger than everyone in the room.
Josh Stein: I think a lot of the companies start with some user-driven, product-driven insight about, hey, there, should be a better way to accomplish this task, or this thing I’m trying to solve for. But then it’s almost like a filter for companies, whether they can scale to that next level is, can they transition to dealing with what the enterprise needs
For example, enterprises care a lot about security. Enterprises care a lot about manageability. If you’re selling to a General Electric or a Ford Motor Company, they might have 1,000 employees leaving and departing every day, and how you think about managing those permissions.
If they have to manually do that within your application, that’s a complete non-starter. They’re going to have Active Directory, or Okta, or whatever it is that they’re integrating with, and you have to fit into that kind of a scheme.
Josh Stein: I think the unsung heroes in a lot of these companies are the people who partner with the product founders to help take them to that next level.
At Box, that was Jim Herbold to a large degree, who joined Box when we were about $1 million or $2 million in revenue and took us to $200 million, which is almost unprecedented from a VP of Sales tenure.
I wasn’t directly involved with Dropbox, but my sense is that that Dennis Woodside had a big role there in helping Dropbox make that evolution. That’s something that we see very consistently, is the founders that make it are the ones who can bring in that talent and listen to that talent to bolster the gaps in their own knowledge.
Josh Stein: I’m really curious. I know one of the things you did at Zendesk was working on the logo and getting that. The logo was awesome, right? The Buddha was kind of cool and cute, but that’s not an enterprise-y logo, I would imagine. Was that related at all?
Brianne Kimmel: Yeah, absolutely. When Zendesk went public, the logo was a Buddha wearing a headset. Highly differentiated and loved by early customers, but long-term not the most culturally appropriate.
As we started to expand into new markets, in particular Southeast Asia and India where we faced local competition from Freshdesk, we were mindful of this both in terms of international expansion and our enterprise positioning.
I joined Zendesk to work on the rebrand where we decided to send the Buddha named “Buddhy” on a really long vacation. We had to be careful with the messaging here because we had built such a strong brand that our customers loved the Buddha.
In addition to the rebrand, we also went from one product to seven products. We had already been experimenting with live chat and other omnichannel solutions for customers, but we chose to roll out a single suite to build a stronger offer for enterprise buyers alongside the rebrand.
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Josh Stein: You know, one thing I spent a lot of time with our founders talking about is, the thing that gets you from zero to one, or let’s even, $1 million of ARR, to $10 million of ARR, is rarely just 10 times what gets …
Doing that 10X is not what gets you from 10 to 100. It’s usually a whole different set of tricks, both in the product but also in the go-to-market.
I think that’s a counterintuitive thing for founders, particularly when they’re having a lot of success. I have never seen more companies in my 15 or 20 years in the business that are hitting a million of ARR and growing 20% month over month, or hitting even $5 million of ARR and growing at 10%+ month over month.
There’s a lot of them out there, but I also see a lot of them where I can see the wall that they’re heading towards. It might be their acquisition channel is just, there’s some limit to the number of people that are searching on Google for the terms that you’re looking for.
Or there’s some limit of people that you’re going to be able to hit with the certain type of calling that you’re doing. At some point, you’ve got to figure out, what’s that next go-to-market motion that I can add?
The degree of awareness about that is radically different.
So, I think one of the things that we can do as investors and sort of advisors to these founders is, I try to actually just introduce them to lots of people who have gone through that journey, because it’s one thing hearing about it from me or hearing about it on a podcast, but when you sit down with other successful entrepreneurs and they say, “Yeah, actually, you know, if we hadn’t done outbound sales, we wouldn’t have gotten there.”
Erik Torenberg: From a market perspective, when do you look at a company and say, “Hey, I see this wall they’re approaching and we can help them fix it,” or, “I see this wall they’re approaching and we can’t help them fix it.” Besides a founder’s ability to take your advice and implement it, just from market perspective, how do you make that decision as whether to go with it or not to?
Josh Stein: We spend a lot of time talking internally at DFJ. I think one of the biggest risks right now as an investor is not that companies fail, per se, and that they you can’t even get to break even. It’s that, I think, a lot of companies, unless they make pretty pivotal moves, are going to get stuck at $10 or $20 or $50 million in revenues.
Part of the challenge for, I think, both founders and investors alike is that 10 or 15 years ago, there was a market for those companies where you could get acquired or you could even go public at 50 million in revenue.
Josh Stein: The bar to go public is much higher today. Acquisitions at that level really aren’t happening that much, and when they are, they tend to be more product-led acquisitions, where it’s more about acquiring a team and a technology, not necessarily the revenue. The problem is that the larger software companies are so big that to move the needle for them, even a $50 or $100 million revenue barely does it. If you talk to Salesforce, or Workday, or some of the larger companies, they’re looking for businesses that can be a billion in revenue in, call it, three or four years. That’s sort of the metric that they’re looking for.
And that’s a really hard metric. If you’re selling, for example, a solution to a vertical market like restaurants or insurance agents, you have to be very careful that you have a big enough that you can expand to beyond that.
One of the things that I really resonated with with Box or with SugarCRM or, I would say, Yammer or Talkdesk is that they are very broad solutions.
Josh Stein: I’ll take Talkdesk as an example. We sell a cloud-based call center solution. It’s built on Twilio, which is kind of fun, because it’s another company we’re involved with. But lots of companies have call centers across all kinds of industries, and so you’re not just limited.
Now, if Talkdesk was more specific to only doing call centers, let’s say, for the travel industry, I think that would be much tougher to scale, right? I think you have to make sure that you’re going after a broad enough opportunity. Even if it’s not what you’re doing initially, you have that kind of vision for where you’re going to possibly be able to go.
Brianne Kimmel: What’s interesting with Talkdesk too, I know, you have a two-person board?
Josh Stein: Oh, yeah. That’s atypical, but yeah.
Brianne Kimmel: That is very atypical. It’s a very atypical company. So, Talkdesk actually started as a Twilio hackathon project. I think what’s interesting is that, I would say, their go-to-market is primarily enterprise?
Josh Stein: Today, yes.
Brianne Kimmel: Today? Did they start out with more of a bottoms-up, self-serve business?
Josh Stein: 100%. Interestingly, as an analog to what you did with the Zendesk brand, Talkdesk’s original tagline was “a call center in five minutes,” which is awesome, and in fact, they can give you a call center up and running in, maybe it’s not five minutes, but it’s really close to that.
But that’s not an enterprise pitch at all. In fact, I would argue that that’s potentially a liability.
Tiago, I think, really got ahead of that and rebranded the company to compete much more against the legacy incumbents. He has a fabulous story to go do that.
So, the business of Talkdesk today versus where it started out is absolutely totally different, but I think a lot of the same characteristics carry through. For example, I think both with Box and Talkdesk, one thing that you see is the legacy competitors, like for Box, it would be, let’s say, a Documentum. Those products were fundamentally engineered to make the buyer happy, the buyer being the CFO or the CIO.
Effectively, management. Box and Talkdesk were engineered to make the users happy. Much more the way that we think of modern web design, so people don’t hate their jobs, because they’re using a product that actually is intuitive and easy to learn.
I think, as Box and Talkdesk have scaled up to the enterprise, they’ve figured out, how do we speak the language of the C suite buyers, but they haven’t lost that how do we make a product that users actually love using.
I think that that’s like a really … That’s their secret weapon in competing against the incumbents, because, it’s hard when you’re going to the enterprise, especially when you’re making that transition initially. One of the things you have to remember about big companies is they’re really risk-averse.
If you’re working for a Fortune 500 company, you might get a little bit of a pat on the back for bringing in a new technology, but if you bring in a technology that creates a security breach or takes down the operations, you’re fired, right? So there’s this hugely asymmetric risk/reward.
You’ve got to really make it easy for people to say, “I want to take this leap.” It’s got to be either a lot easier to use, offer them new capability that they couldn’t otherwise have, a lot cheaper, or some combination of all three.
Erik Torenberg: I’m curious, if you could talk a little bit about, Josh, how your job is different than it was maybe a few years ago, in terms of maybe the different types of companies you’re seeing, looking for, investing in? Maybe how this stage has evolved? Just, how has your job changed?
Josh Stein: I think it’s a really wonderful time to be an entrepreneur, truly. When I started my company back in ’99, just getting live with a customer cost us $5, $6, $7 million.
I mean, we spent $2 or $3 million bucks on infrastructure. We were buying Sun Servers and Cisco routers and Oracle databases and all that stuff. Now, you have AWS, you have Twilio. The friction is so low.
On the go-to-market side, the reason we’re seeing so many companies getting to a million of ARR, often on $1 million of capital invested or less, is because the infrastructure is cheap and the distribution has gotten so cheap.
One of my really old friends is Naval Ravikant. We used to kick around startup ideas. 15, 20 years ago, he would run ad campaigns for non-existent products just to see what the response rate was, like with Google AdWords, which a lot of people do that now. I just think it’s so brilliant to be able to do that.
When I was starting my company in ’99, you really had to build the product based on like customer interviews and hope that you got it right and they would buy it, and if you didn’t, the iteration cycle was much longer. So, the frictions for entrepreneurs are so much lower.
Now, the flip side of that is there’s also a lot more competition. Right? I think, there’s also probably more things competing for buyers’ attention than ever before. Just breaking through the noise is very, very hard. I spend a lot of time talking to founders about, how do you position yourself so you can have that kind of breakout effect? There was a moment, probably, what, three years ago, when Slack, I would argue, hit that point where you could sort of tell. People were like, “Oh, I’ve heard about that Slack thing. I think I want to try it.” They were actively wanting to try it because they had heard about it. That pull is so rare, but when it happens is when you see companies dramatically accelerate. We spend a lot of time working with companies, how are you going to break through that kind of noise? There’s so many things competing for the attention of the buyer.
Erik Torenberg: It’s interesting, too, because I feel like in the Bay Area we hear a lot about Slack, but if you leave the Bay Area, you hear a lot about Microsoft Teams.
Josh Stein: Oh, yeah.
Brianne Kimmel: I think when you go into the enterprise, the Microsoft lock-in is a real thing. You might not have it here because I think oftentimes, especially startups, mid-market companies, we’re able to choose our own tools and that’s fine, but once you go to the Fortune 500, Fortune 100s of the world, there still is such a thing as having a true relationship with Microsoft, you can only use Microsoft related products, and that’s something that’s been really hard for the Slack Enterprise team. Do you have thoughts on lock-in, and is that something that you encourage your companies to start to build and aim towards?
Josh Stein: First of all, I couldn’t agree with you more about the Valley echo chamber versus the broader world. I think Microsoft is a company that is not as much part of the conversation here in the Valley often, but from a corporate enterprise, global 2000 standpoint is incredibly dominant. The Microsoft sales force and the teams that they have covering those accounts is a formidable opponent, and I would also, I feel pretty comfortable saying that Microsoft, shockingly, is not playing fair and is bundling their products in a way that I would imagine might get them in trouble in the next five or six years, where a product like Teams is effectively free as part of Office 365. Free and from a vendor that they know they can trust and with salespeople who have been working with them for 10 or 15 years, that’s a tough thing to compete against.
Josh Stein: Going back to the, you really need to make it … You need to give them a compelling reason to take that risk on you, because if I was an IT buyer, that is the safe choice, is to go with Microsoft Teams, even if it’s not what my users maybe would prefer. But also, here, the users are reading TechCrunch and they’re more aware of the latest technologies. Your typical Fortune 500 employee is perfectly fine using Microsoft Teams.
Erik Torenberg: So what’s going to determine, just because of that example, whether or not Slack can rise above? How do you expect or predict that competition to play out?
Josh Stein: I think it’s going to be a couple things. I think the first is they’re going to have to develop their own go-to-market tactics that compete with that. For example, last fiscal year, Box did about $500 million in revenue, so we’re getting to real scale now. Box, I think, has a much more forward leaning story than Microsoft on things like AI, for example, and machine learning. We have an offering called Box Skills, which is a framework where you can plug in machine learning models, and if all of your content is in Box, as new machine learning models become available, it’s like your data is future-proof, if you will, because you have that easy framework. That’s the kind of thing that gives a lever for a buyer to say, “Okay, I’m going to make that bet on Box because they’re more forward leaning in the vision.”
Josh Stein: While the bundling can be very powerful, the knock on it is I think you also are seeing some products that they’re not investing in as much. I think the secret for a Slack and a Box is actually going to be a combination of developing your own go-to-market tactics and strategies that maybe get you on a par with those companies, and then product is really where they’re going to win and out-execute. I would love to see more of those companies coming together, like Slack and Microsoft and Zendesk, to battle some of those incumbents, because I do think, also, all three of those companies would be thought of as big companies in the Valley and very small companies, I think, in the broader landscape.
Brianne Kimmel: It’s an interesting point when you talk about more of the partnership component to SaaS, and I think that’s something that startups feel this especially. Once you start to move up market or you start to go after large enterprise buyers, you have to understand their existing workflows. Typically with that comes a lot of integrations and connector tools to ensure your customers have a more holistic view of their customers.
One of the things you have to think about is, how do we prioritize partner integrations? But I think what’s really interesting, specifically with something like Microsoft Teams, I actually worked on the launch for Slack and Microsoft Teams. A lot of these partner integrations we’ve brought in house, because it ends up being a core value prop for the business.
If you want to go to an enterprise customer, they expect you to have a Salesforce integration, they expect you to connect with all of these tools that they’re using already, and I think the Slack and Teams example is really good, where if you think of a product like Zendesk, it’s very much focused on a very core buyer, which is a customer support buyer. You’re not going to necessarily get a marketing person, an IT person, to log in and look at Zendesk all the time.
But what you can do is you can pass any tickets that make sense for them, pass it to them using Slack or using a communications tool that they’re using on a daily basis.
It becomes a more broad, internal conversation when you can say, here’s a little piece of our product, but we don’t expect you to log in on a daily basis.
Josh Stein: I totally agree with all of that. I think I would also maybe, building on that a little bit, I think one of the strengths of founders and entrepreneurs is they sometimes have a different metaphor for what something should be.
For example, CRM, it’s traditionally accounts, opportunities, etc. It’s a classic data structure that then drives the product. I think you’re seeing more innovative companies like Affinity, for example, coming up with taking that metaphor and turning it a little upside down on its head and making it a more organic and flexible concept.
Josh Stein: In communications, I would argue Slack did that in terms of thinking about how we reinvent that.
One of my more recent investments is in a company called Front, which was started by Mathilde Collin and her cofounder Laurent.
I think they had a different vision for what should the customer interaction experience be. So, less being based on a ticketing system as a metaphor and more based on, how do you think about a holistic conversation with this customer that’s both multi-channel but also a single pane of glass in terms of my interaction with you as a customer, as opposed to just, this is your ticket, I’m going to resolve this ticket. I’m trying to think of it as sort of a queue. It’s more of a, how does a group of people at a vendor come together to service a customer?
Josh Stein: I think it’s not just a more mobile first version or an easier to use, it’s actually a different metaphor for the interaction. Those are where I think it’s really exciting, because it creates white space, if you will. You’re still competing at some level with an existing solution, but you really have a differentiated advantage there, because it’s just a different thing.
Erik Torenberg: Totally. Mathilde’s obviously an awesome and inspiring founder and person. I’m curious, did they have, when they were starting this company, a Babe Ruth moment where they were like, “Five years from now, the world is going to look like this,” and some people saw it, some people didn’t, or was it more evolutionary? What’s your perspective on that?
Josh Stein: That is a great question. When I invested, they were already really off to the races. She has done a remarkable job at building that company in an extremely capital efficient way as well, so I co-led their series B-
Erik Torenberg: Which was very competitive, because right now it seems obvious. Everyone’s trying to get into that round, and I guess I just wonder, why didn’t people see it?
Josh Stein: Yeah. I think it’s an audacious thing that they were trying to do. I think when you have that new metaphor, it’s interesting, a lot of people will disagree with it early on if there’s less validation. I give the people who backed here at a seed level huge props for that. Mamoon Hamid, who led the series A I think, is someone who’s now … Mamoon and I worked together on Box very closely. I did the A, which you now call a seed, he did the next round. He did both Slack and Front. I’d say that’s a remarkable track record of spotting these new metaphors and remarkable founders early.
Josh Stein: But I don’t know the details as much with her in that. I can tell you that one of the things that we look for in maybe a little more growth, sort of, investment where we’re looking for the momentum is the dog is eating the dog food. With the case of Front, it was just absolutely clear that they were.
Erik Torenberg: How do you think about, Front, obviously, originally a French company, moved here. How do you think about building and investing in companies outside of Silicon Valley? Just how people approach it, how you think they should approach it? What are your thoughts there?
Josh Stein: It’s become very fashionable to say Silicon Valley’s not the place anymore. I have my Silicon Valley tattoo, I guess. Maybe it’s because I grew up here, but I still think it’s the best place to build companies. We’re all familiar with the challenges. Talent is very expensive, people move around a lot, etc., but I also think there’s more of the ingredients here than anywhere else. I’m constantly amazed at the amount of creativity that comes out of this place.
Josh Stein: With that said, I think having the ability to operate in multiple regions, which traditionally was very hard, but has gotten better thanks to some of these tools like Slack and Front and Box, is critical.
In the case of Mathilde, she’s French, so she has a French team.
Tiago at Talkdesk is Portuguese. We have half the company in Portugal. I think there’s this magical thing where if the founder is themselves from a different community and has those ties and really understands the culture, it can work very well.
Even if you don’t, I would say, once you get to the scale of maybe 150 or 200 FTEs, I would strongly encourage any of our founders to be looking at secondary locations, especially for things like sales, outbound sales, customer service. Development’s a little harder to pull off, but at some scale people do it. But I don’t know, what do you think?
Brianne Kimmel: I’m in a number of French and Israeli companies and I think that there are really strong SaaS specific ecosystems outside of the Bay Area. I think it’s interesting because I think when you look at enterprise software as a category, there’s been a number of really great companies that have been built elsewhere.
Atlassian’s a great example of that, where now there’s some really strong technical talent in Australia and in certain parts of APAC, and they’re all Atlassian alumni, so I’m very bullish on that region specifically when it comes to SaaS.
There’s a lot happening in Paris right now. There’s Station F, which is a huge incubator and accelerator. I’ve seen a lot of really interesting companies come out of Partech and eFounders. Front is actually an eFounders company.
I think where a lot of companies potentially come up against some challenges is once you want a true VP of sales or when you’re starting to scale certain organizations where it’s just a lot easier to potentially find seasoned professionals in the Bay Area.
I think it depends on how technical your product is, as well. I think if AI is going to be a core function of your business, then by default you’ll find some really great AI engineers in Silicon Valley.
Or, if there’s a hardware component, I think one of the interesting things that I’m seeing a lot specifically with the large frontier tech enterprise companies where it’s autonomous vehicles or drones or some of the next-gen enterprise, those are companies where you need to raise a lot of capital up front, and if you need to raise a lot of capital up front, this is the best place to do it.
Josh Stein: Oh, by far. The amount of capital here, I think, dwarfs any of the other markets. It’s a power law kind of a thing. I think the other thing that is a benefit of having a presence for companies a little bit sooner outside of here is, you alluded to this earlier, it can be an echo chamber here. One of the things we screen for is some of the companies that are seeing a lot of growth are primarily selling to other startups in the Bay Area, which I would argue is ultimately probably an atypical customer and one that could also be very market dependent if we have some sort of a downturn.
Josh Stein: I think making sure that your product also plays in other regions is a very good thing, and I would encourage founders are not so busy they don’t take the time to travel enough to other parts of the country and really understand what their customers are thinking.
I’ll give you an example of someone who I think just crushes it on this. Edith Harbaugh at LaunchDarkly is an amazing CEO that I’ve been lucky enough to back. She is on a plane constantly, flying, talking to customers, giving the pitch in different regions. I think it’s made her much more facile and intuitive about the needs of customers across a broader segment, not just the needs of other startups, if that makes sense.
Josh Stein: She’s selling software that effectively make companies more agile in how they develop and deploy software, so that’s a natural thing to sell to other companies here, but I think, going back to the point of to be a really big company, $1 billion revenue company, you can’t just sell to software companies and startups in Silicon Valley. This is a criticism of some of the companies that come out of incubators is that some of that early traction, it’s very heavily concentrated within their own network or incubator. So, making sure that … There’s nothing wrong with that, per se. It’s still traction. But making sure that the message plays more broadly, if you will.
Erik Torenberg: I’m curious. How do you break up the world? SaaS, obviously, big enterprise software, big topic. If you think about explaining to your partners or other folk, the subdomains within you could pick companies. How do you break up the world a little bit? If you were to market map where companies fit in that you take a look at?
Josh Stein: We do the typical market mapping. Obviously, there’s high level buckets, like there’s applications, there’s infrastructure. Those are relatively different. Within applications, you have different sectors, some of which we think of being much more, let’s say, heavily mined at this point. I’ll pick on one. Martech, I think, marketing tech is one that’s … There’s just so many companies going after such narrower slices. I’m sure you can build a company there, but it’s just harder, I think.
I think one of the things that impressed me the most when we saw Tiago was that he had found, I think, effectively one of the last major horizontal white spaces, where there just hadn’t been a lot of innovation, even though that’s a very large category of application software. I think on the infrastructure side, we try to listen to people who, frankly, know more about it than we do, so giving a plug for someone who I really respect, Jesse Robbins, who is the founder of Chef, is just an incredibly well thought of person in the DevOps space.
Josh Stein: Jesse will sometimes pull me aside and say, “Hey, you really need to be paying attention to what’s going on here,” and I’ve just learned to listen to him. So, LaunchDarkly, for example, hit my radar when Jesse was like, “First of all, Edith’s amazing, but also, feature flagging is going to be a thing.” We’re a little more reactive in that sense, that we’re looking for the founders to educate us on it.
Josh Stein: I think the problem with market mapping, too, specifically, is I was talking to some of our up and coming investors. There’s going to be six competitors, especially if you’re being super official about it, for every idea that you see. I think especially as an early stage VC, it’s actually a mistake to focus too much on competition too early. I tend to focus much more on, do I think this is a space that has legs? And do I really like the person? I tend to focus very heavily on the founder or the two or three founders that are involved.
Josh Stein: I think if you have those, that’s really enough at the early stage to take a bet. When I did Box back in 2006, that was coming off the heels of X-Drive and IDrive and all these things that had sort of failed. I think it would be a mistake to say, “Oh, well, that’s been tried and it failed,” or, “There’s a dominant competitor that we can’t go after.” I think at the growth stage, that’s much more relevant. I think that there is a premium, even more now than 10 years ago, for being number one in a space. I think as a growth investor you have to be much more aware of that. I’m curious, you go even earlier than we do. How much do you spend time on thinking about the competition versus looking at the individual?
Brianne Kimmel: I think to start, I think going back to what we were talking about earlier with 20-year-old founders who haven’t worked in enterprise, I think these are the types of founders Erik and I are seeing at the early stage. Oftentimes, the way that they are thinking about their product, they’re actually not putting themselves in a very specific category or bucket.
I think if you look at Front as an example, maybe if you had been an investor around the block for a while, you would put it as a subcategory under a Zendesk or a traditional customer support software. But if you talked to a founder like Mathilde, her vision is going to be very different, and actually, the features and the way that she’s thinking about the product is actually going to be much different than, say, these existing tools that people are using already. I think category creation can be especially powerful for b2b startups.
Where enterprise is different from consumer is the workflows piece, your customer will come with very specific requirements in terms of features and professional services.
Josh Stein: To that end, most of my enterprise companies that I’ve invested in have also had young founders. Scale, 20 years old. VoiceOps, 25. Lattice, I think he was 26, 27 when Jack started it. What we haven’t talked about is vertical, like pharma or healthcare or real estate or fintech. Have you guys made those types of investments, or how do you view those?
Brianne Kimmel: I’ve been spending more time on horizontal software plays and what will be the hero use cases. I’ll use Airtable as an example, because I’ve known the Airtable team for a while and I think one of the interesting things about them is that when you come out with a tool that’s basically, “we can do anything for anyone”, it’s actually really difficult to go to market.
I think what’s been really great to watch as far as understanding how they think about their go-to-market is they’ve actually developed a series of use cases which are really compelling and actually help the product grow virally.
Recently, they’ve really found a nice sweet spot in org charts. If you think about org charts, you’re like, well, is that really, what does that mean in terms of market size? Is there a need for a product that only builds org charts?
Because this is just one category as dozens of other ones that you can do, this use case is actually really interesting because it’s a unique way of starting top down. If you think about org chart planning, that’s starting at very much a director level or above. It’s also an easy way for you to add new users to the product.
Brianne Kimmel: As your org chart grows and as you’re making changes, you start adding more people to this Airtable and it becomes, really, a cool internal use case which is basically director level and above as far as who you’re selling to, but then you can start to really tackle team by team who are you adding to this chart. It’s kind of a simple use case for one template, but it’s an easy way to articulate, this is a really broad product and how do we get more people using it.
Josh Stein: I think that’s a great example, because if it was just an org chart product, I think it would be a much more limited opportunity, but I think it’s obviously a much broader product than that, but you have a use case that still pulls it in. If you have a broad product and it’s not really great at any one use case that gets someone’s attention, it’s not going to make that leap. I think a lot of the use cases for Box early on were actually relatively simple, like people wanting to replace an FTP server, but then as they start using the product, they realize, oh, it can do this, and, oh, it can do this.
Josh Stein: It gives you that initial hook, and if org charts is the kind of thing that particularly can be, let’s say, articulated easily by a rep doing a call or following up on a lead, that makes it, I think, extra valuable. One thing that we have spent a lot of time looking for in our companies is also an accumulating advantage or a compounding advantage that builds. I think additional features is one of those. In vertical specifically, we’ve done some vertical investing, specifically mostly in healthcare. I think VIVO would be probably a great example. We did not do VIVO. We did Athena Health, which is a similar one, but within those verticals, I think it can be easier to have that compounding advantage.
Josh Stein: For Athena, for example, their core product was helping doctors get reimbursement from insurance faster. They had a rules engine. This is pre-ML, where insurance companies, part of their business, basically, is to reject claims and drag their heels. They would, every time they had a claim rejected, they would code a new rule about how to make sure that didn’t happen again. When a doctor would join the platform, it would go from like 40% first time acceptance of the claim rate up to like 90 very quickly, and then the DSO, the day’s sales outstanding, effectively the receivables for the doctor, would go from 90 days to 30 days over a three month period.
Josh Stein: That was a compounding advantage that was more possible because they were in a vertical. That would be harder to generalize across, I think, a horizontal category. One advantage of verticals is that you can have, I think you can understand the customer more deeply and it might be easier to have market dominance in a vertical. But you’ve really got to make sure the vertical’s big enough to go after.
I think what I have not had any success with as an investor, although I’ve tried, is backing a company that’s in one vertical with the expectation that they will bridge to another vertical later. I think I’ve seen that happen never point never, and I think part of it is when you build a company from the beginning to focus on a vertical, the culture is so ingrained in that. The people you’re hiring know that market so well that it’s very, very difficult to pot that to a new thing.
It’s much easier to start with a horizontal product and then have vertical teams. In fact, most of the broad … Take a Salesforce, for example. CRM’s a broad solution. They certainly have account teams that are very skilled in different verticals, but the other way around never works in my experience.
Erik Torenberg: Talk more about this concept of compounding … You said compounding advantage? Is that what you said?
Josh Stein: Yeah, it’s like accumulating advantage or compounding advantage.
Erik Torenberg: Unpack that a bit more. Where do people have misconceptions? They think they have compounding advantage but don’t in fact have it? Just unpack that a little bit more.
Josh Stein: I think it can come from a lot of places. It can come simply from simple scale economy. Twilio, when Jeff came and talked to us, first of all, he had such a clear vision about where this builder economy was going and how do you enable the makers to make things faster. But the thing that really got us over the hump there was he also had a very articulate case for how he would … Even it’s a market where you think it would be commoditized over time, if you’re the largest player, you will be the commoditized. You will be the person pushing the cost curve down and forcing everyone else to play catch up to you.
Josh Stein: Andy Jassy at AWS has probably done this better than anybody else, where AWS is now generating a huge chunk of Amazon’s economic value, profits, cashflow, etc. That should be a commodity business. On paper, that is a business where you’d think that would be everyone can do it and it goes to zero. And the accumulating advantage of something like Twilio is not just that as the largest purchaser you have economies of scale in the buying process, but also developers become used to using you.
Josh Stein: If I know how to build on AWS, could I go and learn how to do it on GCP or on Azure? Sure, but unless there’s some compelling reason, like it’s a lot cheaper or a lot easier, why would I do that? If you’re AWS or Twilio, you’re locking down that cost curve, and you already have the developers locked in there, I think that’s an incredibly compounding advantage. The advantage gets stronger over time, not weaker or static, if that makes sense. Those are the things that we’re really looking for.
Josh Stein: It could be a data advantage. Actually, it’s interesting. When we backed Box, I thought the data advantage would be something more persistent across customers, where we could do analytics across different customers. That actually, I would argue, didn’t really pan out as much, but what Brianne was mentioning about, you start with one use case and bridge to the others, that has been very true. The compounding advantage, once your content’s already in Box, IT has already blessed Box and said, “This is okay, this is HIPAA compliant, this has passed our red team audit” kind of thing, if you’re now building an application, why wouldn’t you build it on top of Box rather than go bang your head against your IT and your security team to get permission to do it somewhere else?
Josh Stein: Those are the things that we look for, but at the early stage, a lot of it’s conceptual. You just have to … What I’m looking for is, does their founder articulate what could be? Are they thinking about that stuff?
Brianne Kimmel: I think one interesting thing in B2B is how to think about consumer trends and how they apply to B2B. I recently invested in a video API company called Voxeet.
With Voxeet, you can embed live video, podcasts and interactive media into any mobile app or web application.
What’s really interesting is, going back to the healthcare example, I thought of this, where in healthcare we’re seeing a shift towards telemedicine. Whether you’re One Medical or whether you’re any of these existing healthcare providers, there is a need for the ability to basically talk to your doctor from home. What that means from a B2B standpoint if you’re developing, say, a video API, then having that HIPAA compliance is really important. That’s going to unlock new opportunities.
Brianne Kimmel: I think when we were talking earlier about the Microsoft Teams example, if you want to go after the enterprise, there’s always these certain set of features where you may need to invest a little bit of time to become HIPAA compliant, but that’s going to unlock an entire new vertical for you. The question is usually for the founder, at what point do you want to do that? And oftentimes that is heavily dependent on what does that broader healthcare landscape look like?
Erik Torenberg: One question I have for you guys is how you think about white space in general. There are couple ways to ask this. One is if you were starting a company today in the enterprise space and you weren’t limited to your skill sets, as strong as they may be, if you had any skill set you wanted, where would you say, “Oh, here is a really good opportunity, I just want to see a really talented entrepreneur take this opportunity”? When really talented entrepreneurs come to you and say, “Hey, what should I work on?” Where do you tend to … I know some of it is reactive, you want them to educate you, but where are some opportunities you noticed? Brianne, do you want to start?
Brianne Kimmel: Sure, I’m seeing a few key trends that will impact the future of work in the next five to ten years.
We need more efficient ways to build software.
By 2020, there will be 1.4M more software dev jobs than applicants who can fill them. We need to solve the technical talent deficit by reducing the barrier to become a software engineer and empowering non-technicals with codeless applications.
Today, companies like Repl.it and Roblox are changing the way kids learn to code and build applications through collaborative, multi-player features. I think early childhood education will continue to look more and more like a video game.
We’ll see new classes of education, Lambda School and Whitehat are two companies rethinking technical education and modern apprenticeship with viable alternatives to traditional college.
We’ve talked a lot about business applications on the episode today, but there’s still a lot to unpack in terms of white space.
I think anything that works in consumer will ultimately make its way to the workplace. As work becomes more and more decentralized, I think we’ll see intelligent collaboration tools and social networks to connect remote employees.
Josh Stein: I have a three-part hypothesis for where I think broadly opportunities are going to be over the next five or 10 years.
The first is, I think, speed matters more and more in life and in business. Companies want to execute in a more agile fashion. Things that remove friction, whether that’s AWS or Twilio or LaunchDarkly or CircleCI or Chef, things that allow people who are building products or building things to serve customers to go faster, I think that’s going to be a winning strategy. It may seem like we have low friction now. It felt like we had low friction in ’99. We didn’t walk around going, “Oh my God, we’re living in the dark ages.” I think we’re going to see things that make it even faster over time.
I think we’re going to live in a world and businesses are going to operate in a world that is increasingly driven by data and by people who understand data at massive scale. We have a lot of bets around this kind of hypothesis, that data science is going to be a thing. I think anything that relates to how companies can store data, process data, ingest it, enable people to do with data, I’d be spending a lot of time there.
I think the third step of that is, I actually think algorithms working on data is going to be even bigger than people working with data. It’s almost trite at this point to be like machine learning and AI’s going to be a big thing, but it really, really is. I think it may be under-hyped, especially outside the Valley, not over-hyped or maybe misunderstood as being more like the Skynet, Her, sort of general AI versus maybe just algorithms and models that are helping us make better predictive decisions or being more proactive as opposed to reactive with data.
I have a 13-year-old and an 11-year-old, and I plan to encourage them to study that aspect of computer science, because I think that’s the way the world is going to run. I think we’re going to see huge, positive changes in the world where we effectively liberate people from really tasks that have a lot of drudgery to them. I think it’s going to be a huge net positive for society. I also find it very meaningful, not just in that I think it’s going to be financially successful, but I actually think it’s going to be one of the things that takes us as a world and as a society to the next level is harnessing data and machines effectively to make our lives better.
We’ve put in a number of bets in autonomous driving, which you mentioned earlier. I think that’s going to be a huge productivity enhancer and quality of life enhancer for people, just getting that commute time back. I think it’s going to make our cities more livable. I think you’re going to avoid huge numbers of accidents and deaths that happen. So, not to get too far out there, but I would say to people, focus on things that let people go faster, focus on things around data, and focus on things that have ML and AI attached to them.
Erik Torenberg: Where within the stack of autonomous vehicles have you invested?
Josh Stein: We went fully nutty and went for the full stack approach. We were one of the early investors in Tesla, which obviously is a leader in the space. We’ve looked at just about everything. The big bet that we’ve made is a company called Zoox, which is full stack, which means soup to nuts. They are doing everything from the body of the car all the way up through the software stack. Then even the consumer facing service that runs on top of that, rather than partnering with an Uber or a Lyft, they’re actually building that whole service as well. It’s an incredibly audacious undertaking. It probably has the highest concentration of IQ of any of our companies that I’ve seen, and I think they’re going to do amazing stuff with it, but in that specific case …
Josh Stein: In the frontier tech space, which I do less personally but DFJ does a lot of, we’ve done better backing entrepreneurs that are going for the full stack, change it all approach rather than incremental approaches. We’ve been lucky enough to back Elon in his last three companies, and I would say very much with Tesla, but really much with SpaceX. That was the guiding principle, which is, I’m going to reinvent the entire thing, not just retrofit a rocket. I’m going to rethink the entire design. Actually, I think he brought a lot of the principles of software engineering in terms of reusability and modularity and stuff into it.
Brianne Kimmel: I think it’s very interesting, though, to think about opportunities if you’re more of a business-minded founder, as well, or if you are a VP of sales or someone that’s really strong on business development. I think what’s interesting about a lot of these frontier tech spaces is autonomous vehicles, for example, vertical takeoff and landing, looking at even AI and machine learning, I think historically, these have been very much academic projects. They’ve come out of DARPA, they’ve been MIT projects. They’ve always been very much part of a university. I think over the past few years, we’re starting to see there are actually real world applications.
Brianne Kimmel: I talk to a lot of founders who are working on autonomous trucking or autonomous vehicles, and they’re actually looking for more support on the business side of things. Like, how do we actually package this up? How do we think about applying consumer research and actually taking this to market? I think a good example of that is a company called Voyage. Voyage is basically tackling autonomous driving starting with retirement communities. So, looking at The Villages in Florida, which is basically the largest population of retirees in America. How do you introduce something like autonomous vehicles to this generation of individuals who are potentially less tech savvy, or in many ways, just opposed to the idea of self-driving cars?
Brianne Kimmel: That presents a really unique business challenge where it’s like, we need to build a relationship with these community members. In parallel, we’re also working on some really technical problems over time, and you have these two worlds that are being married up over time, and that’s where a business-minded founder or someone who’s really strong on the go-to-market can help bridge the gap between, here are the end users who are maybe afraid to get an autonomous vehicle, and here is this really hyper technical team who is really comfortable doing the research, but this is their first time taking something crazy and futuristic to market.
Erik Torenberg: Going back to your thoughts on compounding advantage, has there been a time where you invested in a company that you thought had a certain compounding advantage and it turned out that it didn’t? Or a company perhaps you haven’t invested in but you thought they might have or other people thought they might have? When is it deceiving?
Josh Stein: Yeah. I have to think about a good example of what I mean. It often leads to a pivot in the model. When I invested in Box, it was targeted at consumers. We thought that there would be much more around consumers sharing with each other. For example, I remember talking with Aaron. It was a four-person company at the time. “Hey, it’ll be great because if people are uploading the same song or the same video, we’re only going to have to store it once.” In our database, that’s going to be space efficient, back when you actually cared about the cost of storage. As we pivoted the business to enterprise, that just became sort of irrelevant.
Josh Stein: I’ve seen in other companies where I’ve been on the wrong side of that where one of our competitors has found the compounding advantage, and then seeing how hard it is to compete with that. I would say if you’ve been competing with Salesforce over the last 10 or 15 years, it hasn’t been a ton of fun, because they’ve done a really, really good job. One thing with Salesforce now is certainly around here, most people who are in sales have used Salesforce and they’re comfortable with it. The fact that people already know your UI is a compounding advantage. What a pain to have to, in addition to all the stuff I’m trying to do to grow the business, you want me to learn a new system when there’s a perfectly good one right there that we could just buy? That’s a compounding advantage.
Erik Torenberg: So, sort of the opposite of the white space question. What are the spaces that really a talented person who is also your friend came to you and said, “I’m building a company in this space or this type of product,” you would be like, “Don’t do that”? Or, “It’s going to be hard.” You mentioned marketing tech earlier. What are other spaces and why where you say, “You know what? It can be done, but it’s really hard, overdone, crowded”?
Josh Stein: I think marketing tech, it’s like nature abhors a vacuum. It also abhors profits in adtech as near as I can tell other than Google and Facebook. That’s a space that I think is oversaturated, and part of it is there’s a lot of people in the Valley that have used those systems and platforms as an end user, and so they feel like it’s comfortable, it’s doing what you know. I don’t think enough people put in the time to really think about beyond their own experience set, if that makes sense.
Josh Stein: One of the things that I don’t think Aaron gets enough credit for at Box is, we were a year and a half, two years in and the business was actually going pretty well on the consumer side, but we started having a series of conversations that made it pretty clear that the enterprise side is where it was going to be. I would imagine that was pretty scary for him as a 22-year-old who had hired a 20-person team that was all jazzed about consumer. But I described it as, he burned the boats. He went all in on enterprise. He’s one of the best and most prolific readers I’ve ever met. He just made himself a student of the enterprise over the next three or four years. Now he’s thought of, I think, as one of the real thought leaders in the space, and he’s a sought after person of Fortune 500 CIOs to get his take on where the industry’s going.
Josh Stein: He did that by force of will. He didn’t have a 20 year career in enterprise IT. He was both open minded enough to say that, “Hey, maybe that’s where the white space is,” and then driven enough to go after it and do it. I believe very firmly, by the way, that anyone can learn anything given, actually, a remarkably short amount of time. I think if your average founder took two or three months and said, “I’m going to get super smart on the pharmaceutical industry,” you could absolutely do it in two or three months. Certainly 90% of the way there. But people get ingrained in their patterns and their comfort zones really quickly.
Erik Torenberg: For people who are listening to this and saying, “Oh, I actually do want to spend two or three months and get smart on,” do you have any preferred methods of learning? Is it just reading, talking to people?
Josh Stein: Reading, podcasts, books on tape. The biggest piece of advice I would give people is, shut off all the things that are just time sucks. Netflix, TV, YouTube, all those things are just … They’re crutches, they’re time wasters. I’m as guilty as anybody when I’ve had a long week or a long day and I just want to space out in front of Netflix, but afterwards, you feel almost empty, like I didn’t really do anything. I would contrast that to I listened to a great podcast or book on tape or read a great book and I’m always like, God, I just got four good ideas. You just have to force yourself to develop that skill.
Josh Stein: Naval Ravikant has some of the best thinking on this space. I used to be the guy that once I started a book I had to force myself to finish it and he totally disabused me of that notion. I think he has some good hacks on how you do it more effectively, but I guess it’s just making sure that you’re not getting … People want to typecast you as, “Oh, you’re a marketing person,” or, “You’ve a salesperson,” or, “You’re a pharma person” or whatever it is. I think it’s nice to reposition yourself once in a while to break that.
Erik Torenberg: How have you repositioned yourself?
Josh Stein: That’s the thing I love, actually, about venture, which is it sort of forces me to reposition myself. As opposed to when I was in product or sales, I was trying to move the ball forward a couple of yards every day. It was a long, sustained effort. But when I was running my company, I was thinking about my company and my industry 100% of the time. Now, I have a portfolio of companies that I work with, plus I have people coming in to tell me about their ideas all the time. I get to be like a tourist of different verticals and different ideas, and then if I find it sufficiently interesting I get to really dive in deep. I love that cognitive diversity that it gives me. I think it’s actually probably the most fulfilling part of the job.
Erik Torenberg: Brianne, perhaps, could you describe one of our companies, Omneky, How you’d describe it, and then I’d be curious to get Josh’s immediate feedback.
Brianne Kimmel: Yeah, of course.
Omneky is an AI powered analytics platform for enterprise creative teams founded by two Harvard Computer Science graduates.
With Omneky, enterprise creative teams can keep track of what design and messaging features drive KPIs for each target audience, and get predictive scores for ads and landing pages before launching them on live audiences. Omneky is running trials with Molekule, Curology and Burrow and others where it has shown to increase return on ad spend 8x
CEO Hikari Senju built Omneky to help creative teams generate personalized content using AI, with the end goal of creating an AI that can generate personalized experiences for everyone with minimal human input.
CTO Julian Salazar was part of the founding team of Amazon Transcribe where he launched enterprise AI products to Netflix, Intuit, Amazon AWS and more.
Erik Torenberg: How does that land on you in terms of you heard the idea for the first time, how do you evaluate what needs to be true for that idea, that company to be interesting to you?
Josh Stein: It ticks a lot of the boxes in the hypothesis I articulated earlier. I think mass personalization is related to the idea of agility. It’s sort of, how do you move more quickly? Optimizely’s a good example, LaunchDarkly with feature flagging is very much about this. I liked that it’s leveraging data, and so you’re having a feedback loop about if I show a user this personalized page, do I get a better result than if I show them the generic page? Then you can presumably iterate on that to get better and better and to find the optimal outcome for each person.
Josh Stein: I also think it’s the kind of thing that is what humans would like to do but is not feasible for humans to do at scale, but it’s a perfect thing for a machine learning algorithm to do, to iterate that in. I think the thing that I like about that company just having heard the 30-second pitch is, you should be able to show results very quickly. I would imagine you could demonstrate ROI quite quickly. Then it would be about understanding what would be the potential downsides for a developer who’s thinking about deploying that. Does it introduce a lot of latency? If you’re going to double the page load time, that’s probably going to be a non-starter. If it’s going to create security issues, that’s going to be kind of challenging.
Josh Stein: But I think high level, that sounds really interesting. The other potential thing I’d maybe want to drill into a little bit is, again, not going from … I could easily imagine that company going for $5 or $10 million of ARR, but if you talk about getting to hundreds of millions of revenue, you usually … To get a seven figure plus deal, you usually have to be able to attack an existing line item of cost, so I’d want to understand, what is the … When you’re not just selling this is something else you should have but this is something that allows you to retire this other bit of spend, what is that bit of spend that you’re retiring?
Josh Stein: It might be marketing head count or product head count, or it might be a top line story of, this is going to drive more conversions, so therefore I can spend less on my original because I’m getting the same amount of revenue from those. But really understanding that story, because I’ve yet to see a green field, $5 million software deal, for example. You have to be able to go attack something. It sounds really interesting.
Erik Torenberg: Maybe as a closing segment, you’ve described yourself as a SaaS nerd, Josh, so I want to identify some other SaaS nerds and then I want to identify where, perhaps, if you do have a slight difference of opinion with them on something broad related to SaaS? And you probably agree with a lot of them on different topics-
Josh Stein: Hopefully they’re not listening.
Erik Torenberg: Brianne, feel free to jump in if you have anything you want to mention, as well. One is Tomasz at Redpoint. Where do you see the world differently than him?
Josh Stein: Well, I’ll pick on him just a little bit. First of all, I think he’s a very smart guy. I love his focus on data. The amount of output that he generates is incredible. He has a particularly favorite chart that he likes to plot companies on years since founding, which I think is a completely useless and vanity metric, and I’ve told him so many times. I think it’s much more relevant to look at companies from $1 to $10 million, $10 to $50 million, those kinds of metrics, because there’s monkeying around with the founding year a lot in those things, and I think a lot of companies also wander in the wilderness a little bit as they find their way.
Erik Torenberg: In what context does he use that or how would he respond?
Josh Stein: I’ll give you an example. A lot of the marketing on Slack would say Slack was founded in whatever year it was. That’s complete nonsense. Slack was a pivot from Tiny Speck, which was a game company. Why do you get to pick your founding date as being some arbitrary date that you launched your product? It’s like holding your kid back in kindergarten. I think people who promote those stats, like, oh, it’s the fastest company to $100 million in ARR. Focusing on the fastest to me is … If you told me it’s the fastest company from $1 to $100, that I think is interesting. If it’s from arbitrary start date to $100, I don’t think it’s relevant because who cares if it was three founders in a garage for the first two years figuring it out? Should they be forever dinged for those two years? It’s just nonsensical to me. That’s a nitpicky one.
Josh Stein: I think the best source of broad content in SaaS is Jason Lemkin. I think Jason’s amazing. I think what he’s done on Quora is a gift to the community. I don’t agree with all the things he says, but I think Jason’s extremely good, especially on go-to-market. My observation would be most founders, not all, but most, are stronger in product than go-to-market. I wish his content had been around when I was starting out, because that, I think, is really remarkable, particularly the stuff he’s put out around hiring salespeople and managing salespeople and the mistakes people make. “Oh, well, I’ll just hire a sales VP and then they’ll sell it,” that kind of stuff.
If we have time at the end, there’s a whole bunch of little tactical things that he suggests that I think are right, and then I also have my own set that I try to impart to people.
Erik Torenberg: Yeah, this is the time at the end.
Josh Stein: I’ll give you an example. One thing I’m seeing recently at some of our companies, our companies are using things like Chorus and Gong to monitor their-
Erik Torenberg: And VoiceOps.
Josh Stein: And VoiceOps, sorry. I’m seeing that at the board level where they’re doing analysis on the text in those calls to say, “This feature is being mentioned on 14% of sales calls, and this keyword is being mentioned on 28% of calls,” and it’s actually driving product road map. It’s one of the most effective ways I’ve seen for rationalizing investment and also resolving conflict.
Josh Stein: You mentioned the engineering team sometimes wants to do what the engineering wants to do, but if you can go to the head of engineering or even just an engineer and say, “Look, 42% of sales calls are mentioning HIPAA compliance and we don’t have it yet,” that’s a pretty compelling argument if you all want the company to grow. As opposed to an engineer thinking, oh, this is just some sales guy who’s not doing his job and he doesn’t know how to sell the product we have. That’s one great little hack.
Josh Stein: I think more and more of our companies are using analytics internally to solve for keeping everyone … Like InsightSquared, for example, it’s a portfolio company, so it’s a bit of a plug for them, but I think you’d been crazy not to be using that. It does all the charts that you would ever want between the different departments, on the go-to-market, doing marketing and sales. It’ll make managing your board super easy. That kind of pre-built intelligence and analytics I think is amazing.
Josh Stein: I guess some other just thoughts, the biggest thing that surprises founders as they scale from, let’s say, $5 to $20 million is the time lag that gets involved. You’re used to saying, “Well, I need to do X revenue in a month or in two months, so I’ll start hiring people.” When you’re at like $50 million or $100 million scale, the hiring decisions you’re making now have no impact on the next six months or even 12 months. As the deal sizes get bigger, the time lag on getting people ramped and getting all the way through.
Josh Stein: The flip side of that is a lot of people fail to plan early enough. I’ve seen a lot of companies where growth slows in ways that were entirely predictable six to nine months before just based on their spending. You see this a lot with founders who have been very capital efficient up to a certain point. Tiago still is incredibly capital efficient, but he was so capital efficient that I think one of the things I tried to make him even more aware of was, that’s not always going to be the case. As we get into bigger deal sizes, we’re going to have to make longer term investments earlier. I think he’s in the process now of pivoting the business in that direction.
Josh Stein: Maybe just one last thing, just because I love this. Jason Lemkin very kindly calls this Stein’s Law, but it’s a little hack I developed for the balance sheets. I was always stressed about running out of money when I was a founder. When do you raise money and how much do you spend? What I say to founders now is two things. The first is, as a rough metric, if you have half of your ARR on the balance sheet in cash, net cash, you’ll be comfortable. If you have less than that, you’re going to be scared money. You’re going to be running scared.
Josh Stein: If you’re $20 million in ARR, if you don’t have $10 million on the balance sheet, you’re going to feel like you’re at risk. If you’ve got more than that, you’re going to feel okay. The other thing is as you start ramping, especially if you’re in hyper growth … Box went 10, 25, 55, 125 in three consecutive years, which is insane growth. We burned, as now everyone knows, a lot of money to get there. One of the things that gave us a lot of confidence was Dylan Smith, who’s Aaron’s cofounder, and I came up with this thing that we called the ripcord rule.
Josh Stein: The ripcord rule was we always knew that if we simply stopped hiring, so if we just kept expenses where they were, we would converge to cashflow positive on the cash that we had on our balance sheet. Whenever the ripcord rule came into question, we would raise more money, or we would stop spending, one or the other.
Josh Stein: There’s 100 things like that and Jason’s got a whole bunch of them on his blog, but this is stuff that it’s gold if you’re a founder. I wish I knew this stuff ahead of time, and I think it’s one of the great roles that I think investors can do, is give some of that context to entrepreneurs who are often doing it for the first time.
Brianne Kimmel: One thing that’s interesting that Josh and I have talked a lot about is founders who also shy away from paid marketing. I actually don’t view paid marketing as a bad thing, and I think oftentimes when I see a pitch deck and it’s like $0 paid marketing, I kind of almost … It’s not a negative signal but I almost wonder, why don’t we try testing it? It can be very small, incremental tests over time, but I think it’s really helpful to understand, how capital efficient is this founder, and how well do they know their business in terms of, will paid marketing actually work for us? If it does work, how do we do this in a very efficient and safe way, and is this a level we can start to use over time?
Josh Stein: Yeah. Saying that you’ve spent nothing on paid marketing is another way of saying, “I have no idea how paid marketing is going to work for me.” There’s not a single company at scale I can think of that doesn’t have paid marketing.
Erik Torenberg: We have a few minutes. Are there any other things you want to leave the founders with who are eager to build companies in this space?
Josh Stein: One thing I’d say is, I touched on it earlier, but I really believe pretty deeply that the risk has changed. When I was a founder 20 years ago, when companies failed, they just hard failed. Some people would build a product and it would never get customers because the lag was so long in the feedback cycle. If you can get your company to $5 or $10 million of ARR, assuming you’re willing to cut back and live within your means, you can keep that going for a long time, but that’s a trap of its own.
Josh Stein: I think there are going to be a lot of companies at $5, $10, $50 million of revenue, but they’re not really growing that fast, and maybe they’re even profitable or cashflow positive, and people are going to figure out, what do we do with those companies? I thought it was very interesting reading Joel’s post from Buffer, where he embraced that model. He actually bought out his investors. I think we’re going to see more of that, potentially. Although it didn’t seem like it was that great of an outcome for his investors, so there’s a little bit of a disconnect there.
Josh Stein: We’re seeing private equity becoming more aggressive, but private equity’s coming in and paying two, three, four times revenue, maybe six times at the outside. That’s a huge … Try telling a founder doing $20 million in ARR that their business is worth $60 million. They’ve probably raised $50 or $60 million. There’s going to be a lot of companies that I worry get stuck in the middle, and I think my advice to founders would be, really be open eyed about that. If you think that that’s a risk, the temptation is to say, “We’re just going to give it another quarter, give it another two quarters.”
Josh Stein: If you feel like momentum is starting to slow, I would get much more forward leaning about how are we going to think about getting ahead of that issue, because I would think about pursuing an acquisition, for example, much more aggressively than before the bloom comes off the rose.
Erik Torenberg: Is what separates the companies that have that ceiling versus the companies that don’t, is it mostly market? Or is it a competitive landscape, or is it something else? Do you have a good idea of what those ceilings are going to be?
Josh Stein: I think market’s probably the dominant consideration. Some of it, I think, is companies that for whatever reason are unable or unwilling to develop that next go-to-market motion. Maybe the product doesn’t support it, maybe they don’t just frankly have the patience to do it. Dropbox is a company that I think got the highest level of scale without enterprise sales. I was reading their S1. It looks like they got to $500 or $600 million pretty much without a lot of enterprise sales. But if you look at them now at $1 billion, they’re very heavily into enterprise sales. I think Dropbox is really atypical in that sense. I would say that’s probably the best I could think of, and it’s a highly viral, highly horizontal, very easy to understand product, and most products aren’t like that.
Josh Stein: I just think it’s maybe being … I actually think more companies also may, if you are comfortable with the idea of running a company that’s, let’s say, $20 million in top line and netting $4 million a year, nothing wrong with that, but you have to think about that from the, how are you going to build your cap table at the beginning. You don’t want to go raise from venture investors if that’s the case. You want to make sure that your investors are also aligned with you in that. I just think it’s an interesting consequence of, it’s harder to fail, but it’s actually in some ways also harder to succeed.
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