David Skok tells a story about how rethinking his sales cycle helped him generate sales of $3.5 million in one day, after doing $4 million the whole previous year. Of course that’s not a typical result, but as you listen to him explain how he did it, you’ll see how the methodical way that he thinks about the customer acquisition process can be applied to your company.
You’ll hear several stories like that in this interview as I ask David about the companies he launched when he was an entrepreneur and the ones he helps grow now that he’s a venture capitalist.
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David Skok is a serial entrepreneur turned VC. He started his first company a few months after leaving university at the age of 21, and over the next 25 years, founded a total of four companies (Skok Systems, Corporate Software Europe, Watermark Software, and SilverStream Software) and did one turnaround (Xionics). After 25 years as an entrepreneur, he became a venture capital partner at Matrix Partners, the firm that backed his last two companies.
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Finally, do you know why you should apply to the Founder Institute? Udemy got into the program and here’s an article about how it raised $1 million. Founder Institute will help you raise money. These startups applied and TechCrunch wrote about them when they launched. Founder Institute will help you get press. Startups around the world applied and learned how to launch a business. Founder Institute will give you successful entrepreneurs as mentors. FounderInstitute.com.
Here’s the program.
Hey, everyone. My name is Andrew Warner. I’m the founder of Mixergy.com, home of the ambitious upstart. You guys know by now what we do since I’ve been doing hundreds of interviews here on Mixergy. The idea is to bring on a great entrepreneur who’s had a success or a big failure to hear his story, to find out how she did it, to find out about the setbacks, to hear about the milestones, and to learn as much as we can from them so that we can go out there and build incredible companies ourselves.
Quick side note, here comes my camera back up, I’m now back in the U.S. in Washington D.C. Today’s my first interview from D.C. The interview is with David Skok. He went from being a serial entrepreneur to investing in startup entrepreneurs. He started his first company a few months after leaving university and went on to found four companies and lead one turnaround. Three of those companies went public. Now he’s a VC with Matrix Partners. David, welcome to Mixergy.
David Skok: Thank you, Andrew. It’s a pleasure to be here.
Andrew: David, I did. . . Oh, did we just lose the connection after that intro? Oh, there we go. I thought we lost the connection. I did some research on you and I found this old article from about a dozen years ago where the interviewer on Developer.com asked you what’s the common thread with all the successes that you’ve had? I’m wondering what do you see now, now that you’ve had 12 more years of success, 12 more years of businesses that you’re involved with, what’s the common thread that you’re seeing in successful companies?
David: I think it’s a series of elements. It’s a bit scary to try to boil it down to just one, but certainly the starting point for me, it’s the entrepreneur, the individual, the person. They need to have some kind of insight into a customer’s problem and the ideal thing would be if you could mix the person who’s got that business insight with somebody who’s got some technical and product insight so you can then design some products to solve those problems, I think that’s probably the starting point for great companies. I’m personally very, very focused on finding those great people that have those kinds of insights.
Sometimes there are technical people that need to be paired up with a business person. There’s that drive, that passion, that joy, they’re not people that are motived by money, they’re people that are motivated by that passion and just that love of customers and solving problems for customers or sometimes building products. They love cool products and cool things and that’s what drives them. I think that’s the starting point. To be successful, you got to overcome a few more nasty problems that hit you along the way.
Andrew: The answer that you gave about 12 years ago was focused on thinking bigger, that if you have a small problem, you have a small issue that you’re addressing with your business, you’re going to try to raise a little bit of money and you’re going to think that you’re safe and that you’ll want to expand it in the future. Is that still an issue today or are people starting to think a lot bigger and are the resources there to encourage them to think bigger?
David: I think it’s a great issue actually because we’ve got so much debate going on right now about Angels and Angel funding and we don’t need VCs anymore and you only need 200k to get a company going. I personally, when I wrote that, I think that’s a good thing to reremind me of because it was a phase in my life where I really learned that in order to get the customers to pay attention to me, the press to pay attention to me, and the really great employees and executives and developers that I wanted to get to pay attention, it was 10 times better off if I had something really big that I was aiming to try and do, that I was trying to change the world in some major way.
One of my companies that I think I had done, it was an interesting company, but it wasn’t a change-the-world class of idea. It wasn’t possible with that great of idea to go out there and get those same kind of people to join and the same kind of attention to the company. It was almost a self-fulfilling prophecy starting with the quality of the idea. I think the lesson that I learned there is that there is no reason for any entrepreneur, no matter how young they are, to think small, yet we somehow or another are mentally constrained to think small due to some weird result of our upbringing or our education or whatever, the people around us. That would be something that I think is a great idea, to encourage people to think of.
It’s very true that you don’t need a lot of capital to start a very big idea, but I do think that there’s a little bit of focus when people talk about this Angel debate versus VCs, that they’re saying, “Well, you can get away without VCs and just sell your company to Google.” To me, that’s not thinking big at all. That’s that focus on the very wrong thing, which is let me just have an exit here and make some money. I think that does not lead to great companies and is not what the whole explosion of great things in America is about. The explosion of great things is led by Steve Jobs and the Mark Zuckerbergs and guys who have a big vision and who really want to achieve something worthwhile. That’s not for everybody, but. . .
Andrew: I want to bring up the issue of Super Angels. I saw your tweet about that, that you believe that Super Angels aren’t going to do away with venture capitalists. Are you saying now that the people who think that Super Angels and Angels are all you need to build a business are thinking too small?
David: No, I don’t think that’s the case. I think the risk is that there’s this focus on what it takes to get a company started, but not on what it takes to get a company to scale. Some companies are lucky enough to hit viral growth and really have nothing more than a website and not need tons of capital because they generate enough cash. That’s very rare. The truth is that that viral effect is something that everybody wants and hopes for, but frankly doesn’t occur very often. Much more frequently, you discover a way to grow your business, but that way requires you to invest capital before you get the results back from it. I think what Angel funding does very well is it gets people through this phase of getting the product built and getting the first customer feedback and determining whether you got product market fit or not and it may also help get you even enough money to figure out what it is that you need to do to scale. But many, many companies, at that point, in order to scale, need a ton of capital. I think there’s a continuing role for a venture and a very good interlocking and positive co-working mode available between VCs and the Super Angel funds.
Andrew: I’m seeing a few companies go through Y Combinator, for example, where they end up with $15,000 or so in investment from Y Combinator when they get started. We’re talking very little amount of money. Within a month or two of being in the program, they seem to raise hundreds of thousands of dollars, over a half a million dollars within a couple of months from Angels and Super Angels, no?
David: Yeah. That’s an indication that I think that 15 grand doesn’t let you pay many salaries.
David: If you’re going to have four developers, which is a reasonable sized team to get decent product built, and have them work on that product for, say, nine months or so, you’re well beyond $15,000. I think the Angel funding of the 500k does get you through probably a year’s worth of development time and some marketing experiments and maybe a marketing hire or sales hire or something like that. Then, if you really discover the formula for success, just look at Groupon, they just went up, I’ve forgotten the amount of money they raised, but it was enormous [??] to really scale that business because in order to take advantage of what they’ve achieved, they know that each new city that they add is a major scaling point and they’ve got to get there before somebody else gets there. You need capital for that. I think a lot of businesses are like that, in order to scale, they need a lot of capital.
Andrew: Let’s go back to when you started. You said that at one point, you weren’t thinking big enough.
Andrew: What company was that and when was this?
David: I would say my first four companies, I honestly didn’t think big enough to be. . .
Andrew: First four companies?
Andrew: All right.
David: I only really thought big enough when I got to my last company, which was. . . The very first business I did was a total accident. I fell into it by a set of circumstances. A quick history of that is I was one of the very first students in computer science in the UK. The first time anybody had offered the degree and I came out with this degree that a lot of people were interested in hiring me. Unfortunately, I had a father who I hadn’t seen in years who paid for my education and he was living in South Africa and he had formed a business called Robert Skok and Sons and he wants the “and Son” to come back and be a part of it. I said, “Look, Dad, I’ll do six months with you and then at least you and I will have spent some time together, but after that, if it’s not working, please let me go and I’ll go back to the States and do what I really want to do which is go to MIT and spend more time studying computer science.”
Anyway, he put me into this machine tool apprentice training course which was really funny. Here I am with this bunch of high school dropouts that are all learning to use machine tools and they take one look at me, this guy who had just come over from England with this fancy degree and they just want to break me. They give me a piece of metal and a file and I’m sitting there filing this piece of metal for two days. Eventually, they start talking to me and we really get on very well. In the end of all of that, they put me on to a machine tool that was called an NC, numerically-controlled, machine tool. It was run by a paper tape. I soon realized that there was a lot of problems with programming that machine tool. If you were looking at the kind of geometry that you had to compute, it was beyond most people’s mathematical skills. That was very nice to have something to help you with that. In punching out the tape, if you put one extra zero in the tape, instead of going 10 inches, the machine tool, that cost $100,000, would go 100 inches and it would cause an incredibly expensive crash and a very dangerous crash.
Actually, the joke was that whenever you went to prove out a brand new tape, you’d have to wear rubber pants. It wasn’t actually a joke, it was really a reality. I sat there and I found an HP computer which was, no big screen on the thing, 27 kilobytes only of RAM, and used the plotter to plot out the geometry that I was getting this thing to define and wrote this piece of software to help automatically generate the part and then generate the movements of the machine tool and started selling this thing and accidentally found myself in business. Bootstrapped this company for several years and then turned it into CAD/CAM company.
Then there was a really big moment in this company’s history where I was sitting there, I had gotten the revenues to about 4 million a year in sales, and I had this, I guess it was a moment of interesting realization that we had this nine months sales cycle and if there was some way to look at what was going on in the customers’ minds during that sale cycle, we might be able to cut the thing down. I went through a very careful analysis of what we were doing. We were spending six months educating these people on this product, then we were spending the next three months showing them drawings from. . . By this time, we had moved to architects selling CAD systems, so architects, showing them drawings produced by lots of other architects. Then we had a financing problem, would they use a lease or a suspense of sale?
I put together a one-day event and had 600 architects come to this event. We were just basically going through every aspect of this sales cycle in this event and I think the killer part of it that was so incredibly powerful was at the end of it, we had this huge room with all of our customers who had placed all of their drawings they had done on this system, on the walls of this room, and they were available to talk to all these other 600 prospects that had come. Every aspect of the sales cycle had been carefully covered in this event. I made one mistake in that which is I forgot to print up an order form. At two o’clock in the afternoon, the first customer came up to me and said, “I want to place an order for this thing.” I did a double take and rushed my assistant down to get a thing typed up quickly and photocopied.
We did $4 million worth of business, more than we’d done the whole prior year, in that one event. The business jumped to about $3 million a month after that, so $36 million a year run rate. That was a major starting point for me, something I call building a sales and marketing machine, which I manage to use. . . It’s in my blog as an idea and it’s something that I’ve used at JBoss and other portfolio companies I’ve invested in and it’s been very successful as an idea.
Andrew: I don’t know if you said this, but the year before, the whole year you did 3.5 million in sales. That one month, you did, from what I understand, was it. . .
David: In one day we did four million.
Andrew: Excuse me, in one day, right. You reduce a nine month sales cycle to just one day, you called a seminar, you brought in every element of the sales cycle and you expose your customers to it and at the end, they were ready to buy.
David: Yeah, yeah. Never happened to me ever since, but I’ve been somewhat successful with taking other companies’ sales cycles and applying the same. It’s a simple process. It’s basically an engineer working on sales and marketing because most of the time, the sales and marketing people that I was dealing with at that time, they thought of sales and marketing as a black box where you had to have these magical skills and magical things happening. I don’t like magic. I like to reduce things down to engineering concepts and break it down and understand what’s going on here. That’s what I was trying to do was apply this very engineering mindset to what is going on in my customers’ mind here. Why are they not buying at this point in time? What did they need to have answered as an issue and an objection here before they’re likely to move on to the next step? It was great fun though. It was really one of the most amusing days.
Andrew: As a reader, that’s one of the things that I appreciate about your blog. You take these big concepts and you break them down into models that make sense and you have the diagrams to illustrate where the flaw is in the sales process or where you can speed things up. I don’t like magic either. I prefer that format for understanding how the world works and for figuring out how I can make the world work. Let’s go back and let’s dig into this story for a little bit before we move on. First of all, I’ve got a list of questions here, but the first question is what’s the name of the company?
David: It’s Skok Systems. That was another mistake I made. Never use your own name in a company. That’s one I’d learned from that mistake.
Andrew: Why not?
David: At some point in time, you may end up wanting to move on from that business and at that point in time, this is not too strongly and closely associated with you personally. I also secondly believe that there’s a level of ego involved in that statement. I’m now old enough to realize that that ego is a very bad thing and you should avoid that, pick something more professional. The company is not about you. The company’s about the team that you build. I’m now a huge believer in trying to highlight team members and take myself down a notch and put me behind the other guys. That’s one thing that I would think help there as well.
Andrew: Okay. Before we move on, you said four million in sales what you were doing, or 3.5 million. How’d you get to that level? If I just allow that statement to stand there, my audience is going to email me back afterward and say, “Hey, you missed a big part of this story.” It’s one thing to take annual sales and make them into your monthly sales, but how do you get those annual sales in the first place? So, how’d you get to that point?
David: You mean to get to the three and a half million?
David: Actually, four million just before that we had done in the prior year.
David: A long hard struggle. The essence of that is pretty much the same thing entrepreneurs go through, which is you start off selling yourself and you figure out what is working and what’s not working, then you go and hire the next sales person. You try to train them to do the same things you do. It was very slow. To be honest, the bad thing that I suffered from was I had no mentor at all. I could not turn to any person who had run a startup before and ask them, “What should I be doing at this point in time?” I guess I made tons and tons of mistakes, so it took me a long time to get from that very first sale to the four million a year level. It was actually about six years or so in total to get to that four million a year in revenue. All of a sudden, overnight, it jumped from four million to 36 million a year run rate.
Andrew: Can you talk about one of the previous milestones along the way?
David: Yeah. I think one of the really big ones is trying to. . . There’s a moment where you think you understand that you have a marketplace that has a problem. Obviously I stumbled very nicely into that first problem to go after. The second thing that happened was I wanted to expand beyond that, so I went into CAD/CAM which was a natural thing. You design the part and then you make the part. What happened to me was that South African economy was so small that the manufacturing sector went into recession and all my buyers disappeared. I had to move to another sector which was architectural. Going through that shift to move and being willing to throw away everything that we’d done, not everything, but a large part of the product stuff that we’d done that was aimed at mechanical people and now to suddenly learn how do architects’ work and really build all the features that they cared about into it. That was an interesting phase I had to go through.
I think there’s this critical element that happens in startups that Marc Andreessen calls product market fit and it’s talked about a lot. Being able to have the time to be out there with customers and the openness to listen to them is this huge thing that I’m just a major believer in, is the importance of the entrepreneur being willing to be in front of customers all the time, spending their time just listening, listening, listening and trying to figure out what you’re hearing there and then going back and building the product.
One of the most fun things for me was having a phenomenal development team. I’d come back with an idea and tell them about the idea and they were literally able to, the next day, walk back and show me that thing working. Not fully finished and polished, but I loved that. To me, that was one of the most enjoyable and satisfying experiences of my whole life was hearing something as a problem, going back to customer the next day, or not the next day with the customer, but shortly thereafter and showing them this feature that solved their problems.
Andrew: Can you give me an example of a eureka moment that came to you as you were listening to a customer?
David: Just trying to think of the right one here that would be really useful to know. Actually, my memory’s not going to serve me well enough to pull one right out of the air.
David: It’s as much of a eureka as you might want. I think that may be one of those things given a couple of minutes here I could probably think of. I’ll keep that in the back of my mind.
Andrew: If it comes up, it comes up. By the way, that is a giant watch.
Andrew: That’s a great watch.
David: My daughter bought it for me on Gilt. Gilt, as you might know, is one of Matrix’s investments. It’s a site that offers these very discount-priced merchandise. They bought this on a sale at Gilt which I believe turned a really nice thing in a great, cheap gift for their father.
Andrew: Oh, right on. They’re using one of the companies that you’re backing.
Andrew: Next company was Corporate Software Europe. What was that?
David: If I can take you back a little bit here, 1985, 1986 timeframe. The PCs come out, but corporates haven’t really adopted it at all. If you’re going to buy a PC, this is the experience that led me to start the company. I took my brother in law into three stores in London and I asked each one of them, could they demonstrate Lotus 1-2-3 to him. What I found is that these are all business land and computer land stores. They have hardware and only one of them had the software actually sitting on a shelf, but they didn’t know how to demonstrate it at all.
My personal insight was that actually it’s software that’s far, far more important than the machine. The machine is really nothing. It’s just a means to run the software. The stores were completely missing the concept. What we did at Corporate Software was we focused entirely on selling the PC software. We wrote a guide that had a review of a thousand packages which was everything that was on the market at that point in time. We had a one-page review of all the products. If you were interested in figuring out how do you connect your mainframe using a PC, what’s the best terminal emulator, we would review the three products that did that. We had reviews of the product management packages, the graphics packages. We also produced a newsletter and we gave support. We sold all of this with the software at a discount to corporations. The concept was very, very straightforward.
If you were buying your PCs from one company, you were normally buying your software from the same company, we just went in and said, “Look, take your software away from those guys, give it all to us, and we’re going to give you this great support, this great knowledge of what to buy, and great technical support afterwards at a cheaper price.” It was an amazingly easy concept to sell. That business hit 100 million in four years. It cost only about 127,000 pounds in lost cash, investment, to get the thing to profitablity. It was a piece of just, again, joy to watch something like that.
Andrew: There are opportunities to build incredibly big companies without taking in a lot of funding it seems. The Seed[?] is a good example of it.
David: Exactly. Yeah.
Andrew: Where did the funding come from for that one?
David: There was a VC who was in my first business who I’ve worked with. He and I were on this trip in the UK at the time, so we were having a discussion at dinner about this idea and he suggested you should look at this idea as a company. This guy called Rich D’Amore, who’s now at Northbridge Ventures.
Andrew: Next company I think was Watermark Software?
David: Yeah. Actually, I did a turnaround in between. I’ll give you a super quick background on that because there is an interesting, painful lesson for me there which was I got married just before that turnaround and the marriage made me, for the first time ever, focus on the fact that maybe I should make some money here and set my family up well. Everything I’d done before that was totally about passion. I didn’t focus too hard on what this company, Xionics, that I bought as a bankrupt company and aimed to turn around, what it was really doing. I didn’t particularly look at the products that hard. I just said, “Let me go in here and apply some good management discipline to this thing and turn it around.”
I discovered that, actually, it’s unbelievably important to be completely passionate about what it is that you’re doing. I hated the hardware business. I found that this company made these boards that we used in imaging systems. It’s the software that drives the solution and the hardware is dragged along if the software is any good. What was driving me nuts is that the software vendors in that marketplace were producing terrible software. I was stuck waiting for sales to happen. I couldn’t go and talk to any end customers because I didn’t have anything that interesting to them. I always had to go in behind the software guys.
Actually what I did in the end was I created Watermark Software as a skunk works project inside of Xionics and built my own software, spun it out, and went with that company, stayed on the board of Xionics and hired a guy who loved hardware who really did a great job of finishing the turnaround off at Xionics and got it public and then sold it. Watermark Software really effectively addressed this problem that I was seeing which was nobody was producing good innovative imaging software and document management software at that time. We went to market with that and we got bought by FileNet within a couple of years. That was a nice short story and a fun story.
Andrew: You said the origin was that you got married and you were looking to make some money?
David: Yes. [laughs]
Andrew: [laughs] You were kidding about that right? Because you had talked about Corporate Software Europe. We talked about your first company Skok Systems and how well they both did.
David: The scale of the problem was that my wife that I married had a husband who was probably worth half a billion or so. I was in a slightly different competitive league there, where I looked at my own earnings versus his and thought, “Maybe there’s something here that I need to better.” That was one of the drivers behind that.
Andrew: Are you still married to her?
David: Oh, yes. She’s a wonderful lady.
Andrew: You are?
Andrew: What does she say when you tell her that was the motivation?
David: She goes nuts because she said when she married me, she’d be happy to live in a hut on a sheep farm somewhere in the middle of nowhere. She had no part of this at all. She’s a great lady and is not focused on money in the slightest. It’s just a self-enforced problem.
Andrew: I think three of the entrepreneurs who I’ve interviewed here, when I did research on them, I found these articles in the New York Times about how they didn’t feel rich enough even though they were incredibly successful because they were always people in Silicon Valley who are more successful or changing the world even more. Is that still an issue?
David: Not for me. I learned this lesson so seriously at that company, which is you have to do what you love in life. The funny thing is, when you do what you love in life, you actually do end up making money because your passion generally leads to creation of excellent things. I’ve done absolutely fine since learning that lesson. It doesn’t matter to me. That was the other important thing that I learned is that the only thing that really matters is that I’m doing what I care about and what I love doing. Money’s the very worst measure.
I think whenever I meet anybody who mentions exits to me when they’re talking about startups and how much money they’re going to make, I’m very turned off by that. I really try to talk them into focusing in on what really matters here which is you have to love customers and you have to love products and building products that make customers happy. If you’re not that way, then you’re in the wrong business here. You should find some other business to be in if you just care about money.
Andrew: I thought venture capitalists were supposed to encourage entrepreneurs to think about the exit. How does that square with your job?
David: You’re right. I may be one of the only VCs who works this way. I’m so strongly clear in my mind about the fact that the guys. . . I know you’ve read this book “The Facebook Effect” that describes Mark Zuckerberg’s passion about what he wants Facebook to be. That, to my mind, is exactly what will create a big company and a major success because he’s had several opportunities there to sell that business at earlier stages and put a ton of money in his pocket, more than he would ever be able to use in his lifetime. But he’s not turned on by that. He’s turned on by bigger missions.
You will find people who are very focused on money because they may be under some financial pressure. Once that pressure is relieved, maybe they have a small win with their first company having an exit, then they go on to do something really great after that because once that financial pressure’s taken away, they don’t have to worry about school fees and mortgage payments. Now they can focus on their dream. When they start to focus on their dream, big things happen. J
ust whenever I see people who are too focused on exits, they build companies the wrong way. They start figuring out who can they sell this thing to and what might that company buy and that’s the wrong kind of thinking. I think the entire problem with that is the company buying you can smell that a mile away. They don’t want to buy companies who are just set up to be sold. That’s not what they’re interested in. they’re interested in buying the companies that have got these passionate people who really love what they’re doing and who continue to be interested in what they’re doing after they’ve been acquired.
Andrew: Is there a common thread in what’s kept you passionate over the years? What’s your thing?
David: Yeah. To me, I think it’s three things. I’m sorry that it’s so many, but first of all, I love entrepreneurs and entrepreneurship. It’s the same thing, I’m sure, that drives you to get excited about Mixergy. It is really cool listening to people talking about new ideas and how they make them into realities and the struggles that they go through and the things that finally work out well for them that make them successful. That’s awesome stuff. I just very, very much enjoy that.
Then the other thing for me is I love technology. I have always been a geek at heart. The first day that anything new, like the iPhone or the iPad, comes out, I’ve got one of those things. I’ve got first in line to buy anything that comes out that’s interesting. I also love solving customer problems. I’m really interested in what it is that makes a customer delighted. Those are the three things. Customers, products, and the whole entrepreneurial process and entrepreneurs.
Andrew: Can you give me an example? What it is about listening to customers that gets you excited? To many people, they love the job. The customers get in the way of doing what they’re passionate about sometimes.
Andrew: Help us see it through your eyes.
David: Right. When you first go and see a customer, that isn’t a particularly exciting meeting, but when a customer tells you, “I’m in pain because it’s a really a problem for me to do X or Y,” the most exciting thing in the world is going back to them with a product that you’ve built that meets their needs and seeing the expression on their face. Maybe after they’ve bought your product when they have that big smile on their face and they sit there and they tell you, “My God, my life has changed because I bought your product. I’m now suddenly able to do this amazing thing that I wanted to do before and I couldn’t do before.” That is an incredibly satisfying experience. If you’ve ever been an entrepreneur and had that experience. . . Have you ever had that experience happen to you at all?
Andrew: It’s been a little bit with face to face, but when you see numbers validate what you’ve built. So sometimes I would see numbers that say this is what the customers want and you can’t ever be 100% sure that you’re reading the numbers right so you go out there, you build it, you put it out in the world and you see that the response rates, that the numbers of people interacting with your site goes up, then that’s a feeling of satisfaction that I remember a lot.
David: Yeah. Isn’t it the same sort of great thing when an entrepreneur comes up to you that you’ve never met before and they say, “Andrew, I have learned so much from your site. You have given me something that’s valuable. . .”
Andrew: Absolutely. I keep all those emails in a separate folder.
David: There you go. They’re your customers and that’s what I’m talking about. That’s a lovely feeling. I think that’s a huge motivator in life.
Andrew: Can you teach us when to listen to your customers and when to say, “No, that’s outside of the scope of what we’re building”? Customers now have so many ways to demand things from businesses. Twitter, email, Facebook, in person, and they’ve also been empowered and expect to get everything that they ask for. How do you know when to give it to them and when not to?
David: It’s a great question actually. I think the art of that is it’s the art of knowing how to be market driven as opposed to customer driven. A customer-driven person is affected by the last conversation they had with one customer. A market-driven person is somebody who realizes that a marketplace is collecting the set of feedback from a series of customers that all look the same and realizing that this outlier is actually going to drag you in a bad direction that is going to be just a one-person need versus a market need. The best way to do that is to make sure that you’re talking to enough customers and make sure that you’re also trying to apply this filter of what is a marketplace, how do I group people that are a segment together and recognize when I’m seeing an outlier from that segment that’s asking for a feature that is not beneficial to the other people in that grouping there. That would be, I think, the essence of that.
The other important thing to note, though, is if you think about Dan Bricklin with VisiCalc, if he had gone and asked accountants what do they want when he was designing the spreadsheet, they would have said, “I want bigger keys on my calculator. I don’t like these green numbers, I want them to be brown or red.” They would never have designed the spreadsheet. I think you have to also recognize that what your customers are telling you are generally they’re at the minutia of describing a problem and you’ve got to lift yourself above that and try to recognize other things like, “What does the boss of this person really want them to do?” He may be asking them today to do the simple act here, but the reality is what he’s really asking them to do is increase the number of customers he’s getting, increase the amount of revenue he’s getting, and lower the costs.
If you can figure out, somehow or another, the customers telling you about this little mini problem down here, that’s not the big issue. You’ve got to lift yourself above that and come up and say, “What is the big goal of this business here? Can I do something that maybe actually takes away all of those things that the customer’s talking about by creating a much bigger product that’s actually clever and changes the way they work in a totally new way?” That’s a very important thing that I think good visionaries are able to do.
Andrew: Can you give me an example of how you’re able to do that? I understand concepts better when there’s a clear, specific example attached to them.
David: Yeah. The last business that I built, SilverStream Software, the interesting problem that I ran into here that I saw from customers was they were spending all their time installing [??] software on PCs in a bunch of different locations. They would tell you that the nature of the problem was I wanted to stop installing software on those machines. I came up with this company to produce web-based software. It was actually the very first Java application server. We built it just as soon as Java had been announced.
The thing that I realized there was that the transformative part of being able to build these web applications was that, for the first time ever, instead of having the person inside the company filling in that form, you could put that form up on the web and have the customer fill it in directly and do self-service. If they were registering a complaint, instead of you having to install that cert [SP] software there and have a person on the phone keying that in there, why not put the software right in front of the customer and let them fill it in themselves, or place the order themselves? Saves time for the customer, it’s actually more satisfying for them. It cuts out a massive expense inside of the business. You wouldn’t hear the customer actually telling you that specific need there, you’d have to recognize beyond what they were describing as their problem to make that leap.
Andrew: I see. Could it be, I’m wondering as I’m listening to you, I’m wondering if it’s just get the problem from your customer and come up with a solution yourself. Going back to VisiCalc, if you talked to accountants and ask them what features they’d want, they might ask for bigger buttons, but if you ask about the problems they have, they might say, “Well, I’m constantly erasing in these ledgers and recalculating everything and if there was an easier way to do all that, maybe I’d be open to that.”
David: Yeah. I think you just said something quite important there which is ask your customers to tell you the problem but don’t ask your customers to tell you the solution because they will almost invariably tell you features. They’re good at telling you how to improve an existing product and fix little issues and add features to it, but they’re not good at designing brand-new products from scratch for you, or at least very few customers are. There might be a couple visionary customers out there that are actually capable of doing more than that.
I think you’re right. I think it takes a person who has a good understanding of what new things can be achieved with technology. When I’ve thought about how to jump from one old business to a new business, the first thing that I do is I go through an inventory of all the new technologies that are available. If I was starting a new company today, I’d be thinking about what could I do with iPads, iPhones, social media as a new customer acquisition technique? What’s Cloud computing going to do and what problems can I solve with that? It’s leveraging that knowledge that you have of things that are changing in the technological world, or sometimes the business model changes, and then thinking, “Okay, I can solve this problem using those in a very different way.”
Andrew: I see. You look around, you see what tools are becoming available, what do you have access to that you didn’t have access to a month ago or a year ago and then you look for problems that you can use these tools to solve.
Andrew: Do you have an example of an entrepreneur. . . Sorry, what were you going to say?
David: I was going to say the one other really interesting change to that is it used to always be technological disruption that created that opportunity, but I’ll give you an example of a business that really didn’t use any technological disruption, they just used business model disruption. One of my investments was JBoss, the open-source Java app server. When you think about their app server product, it was nothing more than the same app server product that you could get from BEA or from IBM, but what they did was they rewrote the rules on how to sell this thing. They gave it away completely free and monetized only 5% of the customer base. That 5% was worth a lot of money, 100 million a year or so in revenue from 5% of your customer base. If you were happy with that, then you had a great business.
Andrew: How’d you meet them?
David: Just say that again, you. . .
Andrew: Oh, I was asking how you met them. Tell you what, let’s hold off on that and find out why you became a venture capitalist then we’ll find out how you made some of your investments. 2001, I think you sold SilverStream Software then?
Andrew: Why’d you decide then, I think it was the same year, to become a venture capitalist?
David: Actually, it was slightly different. It turns out, the company was sold in 2002, after I’d left it. It was a public company and went public in ’99. What had happened really that was probably the most interesting thing was the whole world had gone through the best time we would ever see in my view. We were going to go through an incredibly tough period of time at that stage. The thought of going and starting yet another company after doing five wasn’t that appealing, particularly because I could see there was going to be very tough sledding for the next few years there.
I wasn’t planning to leave SilverStream Software, but the guys at Matrix, who had funded both the last two companies, had been such great VCs, looked after me unbelievably well, came and asked me if I was interested in joining the partnership. We spent quite a lot of time talking about this, whether this was the right path for me. Honestly, the more I looked at the things that would get me excited about being a VC, they started to become the new things that I wanted to focus on.
Really what they are is pretty simple. It’s the same thing that I think you have in Mixergy which is it’s very interesting to be able to help other entrepreneurs and teach them if you can teach them or help them if you can help them. I felt like, after 25 years of doing this, that I did have a number of interesting and useful experiences. I had this road map in my mind that if you’re at this step, this is what you need to focus on, if you’ve hit this step, you should focus on that. It felt like it was very easy for me to understand. When I walked into other startups, boy, they’re facing that problem. I’ve seen an iteration of that several times over, they should be doing X. I really got excited by the idea of taking that change in life and really helping other people as opposed to going and building another one myself.
Andrew: Oh, I see. I’m looking down at my notes here to see what I wanted to follow up with you on. They’re such great VCs. What was it about them? How did they look out for you that made them such great VCs?
David: That’s a great question actually. I have to tell you a story to help bring it to life. Watermark Software, when we got funded, we got sued by Wang. Really, Wang was suing Microsoft for object linking and embedding, or OLE, and they just needed a local company in Massachusetts to get it stuck in a local court of law. They picked us and we randomly got this patent lawsuit out of the blue. It started costing us 130,000 a month in legal fees just to respond to this thing.
What happened was my other VCs panicked and frankly, we’re really looking at this thing thinking, “Why the hell did we get into this mess? This is our money going down the drain.” They really weren’t any help to me. The Matrix guys were unbelievably different. They were very calm and they were very supportive and they spent a lot of time with me looking at the problem and how I could deal with this problem. I had the clear sense that they were there for me and they were not going to run simply because times had gone bad. It’s interesting because before I chose them, I knew that the real crux of picking a VC is to figure out how they behave when things aren’t going well. Everybody’s capable of being a good VC when things are going well. They’re all cheerleaders around the table. I’d asked for a reference to find out from a company. I knew that these guys had reputation for really looking after people well. I saw it first-hand.
To take the story a little bit further here, the next thing that happens is that Microsoft, once they got this thing into a Massachusetts court, Wang said, “Let’s stop suing them.” The suit went away and we had a couple of years to build the business. We were doing quite well with the business. Then Microsoft settles with Wang, gives them $130 million in cash and says, “You can put your software inside of the Windows operating system.” The only problem is that Wang didn’t have any Windows software, they only had Unix software in those days. They came straight back to us and said, “Here’s the 10 patents we’re going to sue you with this time, or here’s a $64 million check to buy your company.”
Frankly, what happened was, behind my back, the other VCs went and said, “Ah, this looks like a great deal. This is five times our money in a couple of years here. Let’s sell the thing.” They didn’t even ask me about my viewpoint on the thing. The Matrix guys were completely different. They came back and said, “Look, this is your business. It’s your decision what you want to do. We think you guys could go public. We’re willing to back you through a lawsuit with these guys if they do decide to go after you again. By the way, if you were interested in selling, we think you should look at this company. We know you well and we don’t think that you would particularly enjoy working for Wang. It’s not your culture at all.” They were full of advice, full of conversation, but the fundamental thing was, “It’s your decision. We’re here to help you and we’re here to help you think about the thing.”
It turns out that about a month later, this company FileNet expressed some interest in buying us and we weren’t sure we wanted to sell to them. We didn’t want to hire an investment banker because the investment banker only makes their money if an actual transaction takes place. Paul Ferri, who’s the founding partner here at Matrix, offered to act as the banker when we were having those discussions. What I saw in that was we hit two points in the negotiation where the deal just wasn’t going to work and we weren’t going to be that interested in it because of the way that the funds were going to get allocated. Paul just went and solved the problems. The way he did it was with a complete focus on us, the entrepreneurs. Were we going to be happy? It required him to make the VCs somewhat less happy with the situation. For him, there was just no. . . It was totally apparent to me that the only thing he cared about was getting a great outcome for us so that the next time we did something, we were likely to want to work with him again.
David: Yeah, that’s exactly what happened. Right after that deal, I now had a lot of money, I didn’t need venture capital at all for my fifth company, SilverStream, I put four million in, my partner put four million in and we went straight back to Matrix and said, “Guys, we’d love to have you in this deal. Please join us in this series later on.” They were terrific. They were just an awesome partner in the business with me.
Andrew: Have you had a chance to do something like that for one of the entrepreneurs you backed?
David: I hope they would say that, but I would definitely not dare to say that they would do, for sure. I think the only way for you to find that out would be to speak to them and ask them what they think. I go out of my way to try to copy the philosophy of Matrix and to remember what it felt like as an entrepreneur. I think what really helps me when I’m dealing with other entrepreneurs is the complete understanding of how painful it is to be on their side of the table and how tenuous your life is when you’re going to run out of money and the business is not going that well and how important it is to have somebody who’s a rock-solid supporter at the table who is giving you confidence and reassuring you and making you feel you’re going to get through this. Certainly, those are things that I try to do.
Andrew: You’ve had some entrepreneurs who’ve been against the ropes. What have you done? Can you give me an example of how you helped them?
David: Yeah. I’m just trying to think of the. . . There’s so many ways that you can try to help them. The first and best thing that I know of to try and do is really understand their situation. It’s very easy to, VCs have this very short board meeting where they run the risk of getting the snapshot, wrong picture of the company. I would say that if things aren’t going well, the number one thing I would try to do is jump in and fully understand the nature of the problem and then see if there’s ways that I could help them.
There’s numerous things that we can do, one of them is often helping them change the composition of their management team. Oftentimes, the reason why things are going well is execution failure and that means that there’s a problem in the team. I think the thing that’s very helpful as a VC is we do so much hiring, we hire so many CEOs, we hire so many VPs of sales, we hire so many VPs of marketing. The average entrepreneur has never hired any VP of sales or VP of marketing, so they’re not sure what the hell they should be looking for and what does a good person look like verus a not so good person, how do they interview them, how do they reference check them. Those are places that we can help them a lot.
I’ve certainly found there are other things like one of the things that’s been huge is being able to help them with strategic partners. I go out of my way to try to know the key people at Oracle, the key people at SAP, the key people at Microsoft, the key people at Amazon, et cetera, so if there’s a company that has a need for an introduction. One of those introductions can make an enormous difference in the life of a company. Same thing with customers also. I try to add some customers up my sleeve. That’s harder to do because customer sets are so different for each kind of company you might back.
I also think that you really want to be a partner to the entrepreneur in the sense that when they run into trouble, my hope is that the first phone call they make is to me, that they trust me enough and they feel like they’re going to get good advice, that they want to talk with me and they want to hear my perspective and that I can just talk them through the issue from a peer level and help them see things that may not be seeing and take some of the emotion out of the thing and start breaking it down with that engineering approach that I love to bring to all problem solving. I say, “Okay, what is the real nature of the problem here? What are the alternatives that we’ve got?”
Sometimes, all decisions will be bad, but you got to make the least bad decision. I know that if you keep making the least bad decision, you’ll get a lucky break and somewhere along the line, you’ll get an opportunity to make a great decision that will really bring you out of a mess. For them, making that bad decision when they’ve only got bad options might feel like a horrible thing, but once you’ve talked them through that these are our only options, this is the best thing we can do. It’s not a great thing, but it’s the best thing, that’s the kind of thing that can really help somebody feel a lot better about themselves at that moment.
Andrew: I was going to ask for specifics but it sounds like you can’t give specifics when you’re talking about other people’s companies. Am I right?
David: It’s difficult unless the company’s already been sold. I will give you one specific example that I think was an unusually helpful thing that I did, which is when I first met JBoss, they were an 11-person company down in Atlanta and they really hadn’t figured out their sales and marketing model at all. A new guy had just joined them, a terrific guy called Bob Bickel. Bob had an idea for how he can monetize this huge in-store base that they had by selling services to them. They had very little in the way of marketing to figure out how to get these customers that they had sold. . . Actually, it’s just download, so five million people had downloaded JBoss and were using it but they didn’t have any of the names of those people.
That was the first question I asked them was, I still have a photograph of this, it’s interesting whiteboard, which is, “Let’s start at the beginning here. We want to market to these people. We need to know who they are.” They told me that we’ll never get them to give us their name. If you ask somebody on SourceForge to give you their email address when they’re downloading, that’s a complete no-no. I sat there and my simple thing that I told you about from that very first company of mine is that you’ve got to get inside the customer’s mind and figure out what is a reward that’s big enough to get them to do what you want them to do? We wanted them to give us their email address, we’re going to have to give them something back.
I looked around the business and the one thing I could see was that they were selling documentation for 27,000 a month. I said, “Let’s give them the documentation free and use that as the carrot to get the email address.” Originally, for three months we debated this. The founder just didn’t like the idea at all because this was paying so much of the bills there. Eventually, they gave in and when we switched that one, we switched on lead flow of 10,000 leads per month. That just completely transformed the business. That’s one little example there of a very. . . There are some much bigger things that are more difficult to talk about because they might compromise the companies that I’m working.
Andrew: [laughs] Okay. About one other company that you can tell. . . By the way, that blog post that you wrote on JBoss is incredible. I really hope people go over to your website. It’s ForEntrepreneur.com or ForEntrepreneurs.com, plural? I forget.
David: Plural. Entrepreneurs, plural, dot com.
Andrew: ForEntrepreneurs. How about, I know that we’re at the end of the interview, do you have a couple more minutes?
Andrew: Okay. How about telling us a story about one other company that you backed? I won’t even pick one, I’ll let you pick one that you feel comfortable talking about.
David: I’ll tell you about a company that fits another kind of an ideal, which is really the best thing that can happen to you as a VC is that you don’t have to do any work because you found such great people and they are so smart that really there isn’t that much work involved. I have a team that I’m working with that the moment called HubSpot. These guys developed and invented this concept called inbound marketing that is this whole notion of driving your customers to you on the web as opposed to interrupting them with this outbound, annoying marketing, advertising in the middle of games that they’re watching or email blasts that they want to delete from spam.
These are guys who, really the art of being a great VC is finding people like that and getting out of their way, being there to help them recognize that they’re doing the right thing. Frankly, these guys are so great. They’ve built such a lovely company. The culture there is terrific. The people there are terrific. They’ve done all the right things. The resumes of the management team, interesting enough, do not look like the standard super-professional resumes. A lot of these guys met up at Sloan School here, which is a business school at MIT. They don’t have the clear and proven experience in some of their roles.
The guy running sales, Mark Roberge, does not have a sales background yet he’s doing one of the most amazing jobs of running sales that you could imagine. That’s a company that I love and it’s a story I love but it’s really about me being not part of any major key thing that’s going on there other than really identifying the fact that they’re terrific guys and just backing them and trying to help them and be as supportive as possible.
Andrew: Really? You can be hands off. Dharmesh Shah is the founder of that company. He came here, he did an interview. Dharmesh Shah, I’m going to say his name again in the transcript, just so he can get some kind of alert on his name and come back and corroborate this. Is, Dharmesh, if you’re listening to this, is David giving you any feedback? Is he giving you any support, any ideas, is he being modest here? Come back and let me know.
Andrew: I know he prefers the transcripts of these interviews. He’s one of the reasons why I keep a transcript when I was going to give up on it. I said, “Nah, Dharmesh likes it. Let’s keep it up.”
David: Yeah, yeah. Actually, I love the transcripts too because they’re a very fast way to get to the pieces that you really care about. That’s terrific.
Andrew: Another reason to keep it up. Now I can never get rid of the transcripts. If the two of you love it, that’s all I need.
Andrew: All right. Thank you for doing the. . . One more thing. What bit of new technology do you have there that you can show off? You said you were a tech guy, I’m wondering what you bought.
David: Oh, I guess I have to show off my mandatory iPad, my mandatory iPhone 4.
David: And every Apple and them. I’m a photography nut as well, so I buy every kind of camera that ever comes out on the marketplace and love experimenting with Lightroom software and stuff like that. Video editing, I’m into Final Cut Pro, and Premiere Pro.
Andrew: I saw a video that you posted on Vimeo. You edited that video?
Andrew: That was you? Okay.
David: Yeah. Very amateur job I’m sorry to say.
Andrew: I know how long it takes to edit video even this video I know is going to take Joe, actually I don’t know if Joe can do it today or if I have to do it myself, but it’s going to take one of us a long time to do. You had music and all that, you’re really into it. Why? Personal hobby?
David: It’s the same passion thing that I told you about. I love the technology that’s involved in it. I really enjoy learning the software and seeing what I can do with it. Music is great. It’s a wonderful thing in life. If you can put images and music together and make them sync and exactly change at precise changes in the music, that’s an awesome thing.
Andrew: You’ve been married now for a while, a lot longer than me. I’ve been married less than a year. I’m already boring my wife with technology talk. Do you keep telling her about the new gadgets that you bought and what they could do?
Andrew: She just tolerates it?
David: She initially hated it but something important happened in her life which is that she started a small business, an interior design business, and she suddenly discovered that she needed my help. I brought her in PC software, I brought in Quickbooks, then I helped her create a website, then I got her onto HubSpot, now I got her doing tweeting and social media. Now she’s got an iPad that she’s going to travel with. She gets very frustrated with it, but the moment that she really understood it was when she got a business. Suddenly she realized why this stuff was capable of changing her life in such a powerful way. I got lucky with that break. Anyway, I hope your wife is. . . Maybe get her an iPad and have her watch movies or something like that so she. . .
Andrew: [laughs] You know what? That’s a plan. Now that we’re back in the U.S., I’m going to flood her with so much technology because you can just walk into any store and buy it. Something’s got to stick. We’ll see.
Andrew: All right. Thank you for doing this interview. Guys, thank you all for watching. Please, check out ForEntrepreneurs.com. I’ve been raving about that blog throughout this interview. When you go there, you’ll see why.
David: Thank you, Andrew. You are very kind. It’s been a pleasure talking to you.
Andrew: Same here. Thank you.
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