What obstacles do you run into when trying to “sell” free software and is it possible to build a business based on free software?
Andrew: Listen up. I hate to have commercials interrupt this interview, so I’m going to tell you about three sponsors quickly now and then we’re going to go right into the program, starting with Walker Corporate Law. If you need a lawyer who understands the startup world and the tech community, I want you to go to Walker Corporate Law.com.
Next, I want to tell you about Shopify. When your friend asks you, how can I sell something online? I want you to send them to Shopify and explain to them that Shopify stores are easy to set up, they increase sales, and they’ll make your friend’s products look great. Shopify.
Finally, I want to tell you about Grasshopper. Do you want a phone number that people can call and then press one for sales, two for tech support, et cetera, and have all of the calls be routed to the right person’s cell phone? Well, get your number from Grasshopper.com.
All right, let’s get started. Hey there freedom fighters. My name is Andrew Warner, I’m the founder of Mixergy.com, home of the ambitious upstart and in this interview, I want to find out why did so much change for Rafael Corrales since I interviewed him about three years ago. Last time he was here, he was running LearnBoost and he told us how he raised nearly a million dollars in a party round. I don’t think I ever had interviewed or talked to anyone who had done that before and it was an eye opener for me. But now, he’s no longer an entrepreneur. LearnBoost pivoted into cloud sharing and he’s a venture capitalist. Let’s find out what happened and what he learned along the way. He’s a straight shooter. Welcome, Charles. Ah, welcome Charles. I keep wanting to say Charles because Charles River Ventures, that’s where you, CRV.
Rafael: No. Oh. Well, thanks for having me back. It’s been three years or so. So, a lot has changed.
Andrew: A lot has changed. All right. Does this mean that LearnBoost is out of business?
Rafael: You know, right now, there’s some… It’s funny that you asked that because today they were covered in Ed Search, asking the same question. They’re keeping service up and running. It’s a free service, so, you know, people can benefit and not be paying thousands of dollars for their school software, and you know, teachers paying a smaller amount than that but out of pocket. So, they’re keeping the service up and running. And then, you know, along the way, in the three years since we last chatted, we built a data export service while we were there. So, people… You know, if anything ever happens, there’ll be a proper heads up and then people can get their data out, but they might as well use a free service while they can.
Andrew: I see, okay. So, here’s what I want to find out in this interview; why it didn’t work out, whether doing the party round was a mistake, party round where you got four different venture capitalists all invested in you, and you told me in an email recently that you’ve made some mistakes. I want to find out what those are and have you talk about those publicly. Why don’t we start with when things were going great? You guys raised money, and you got a lot of teachers to sign up. How did you get so many? How many teachers did you get and how’d you get them?
Rafael: Well, when it was all said and done, it was a couple hundred thousand teachers, students, and parents, so it was a pretty sizeable platform. More importantly, we got off to a really fast start and then it sort of leveled off.
Rafael: The fast start was a result of a couple trends all at once. One was teachers, and actually administrators, got more comfortable with their software being in the cloud. It’s nothing new for anyone in Silicon Valley or really just startups, but in education it was pretty new. The freebie model helped a lot and then, you know, the software’s really, really solid. It’s well designed, it’s super speedy. You know, the software behind it is all no JS and a lot of stuff we helped premier.
Andrew: And the idea was you were going to give people, you’re going to give teachers, cloud management software in the cloud. Excuse me, classroom management software in the cloud, which means grade books and… In fact, can you give me a use case of how a teacher would use it?
Rafael: Yeah, exactly. So, there’s several, but the main use case would be a teacher’s not using something right now and… or they’re using their paper grade book and now they can sign up for LearnBoost, start using for free, they can track grades, attendance, lesson plans, calendar, analytics, etc. And then they have parent and student accounts so that they can have communication to home be better and easier. So, that was the primary use case. What we ended up finding was a lot of folks would use one element of it and not all of it, which is fine. So, they’d say, I have something mandated by the school, but I need a lesson planner. Great, I want to use this because it’s really robust.
Andrew: Okay. And here’s the part that was surprising to me. Before the interview started, I asked you what went wrong and you were just really open, including using some names that we’ll get to in a moment. The big challenge, though, was what?
Rafael: Oh, there were lots of challenges. The biggest challenge is building a real business.
Andrew: What do you mean by that?
Rafael: You know, here’s the challenges. We’ve got a pretty sizable user base. Well, for education it’s a sizable user base. In education we got to a pretty sizable user base pretty fast.
But the reality was that if you look at any SAS freemium business, your conversion rates from “free” to “premium” are going to be one to 5% of the user base. So we said okay, it’s in the thousands–maybe tens of thousands– of people who would pay for this service. It’s still not a really robust, really large business. It’s not growing fast enough, or can’t grow fast enough, to justify continuing going after this, given we’d taken venture capital.
Andrew: So you can’t get enough teachers? And then you were still okay with the 1% conversion rate.
Rafael: We couldn’t get enough teachers, and we couldn’t see it being a big enough market. We would’ve had to have higher conversion rates than that, but it wouldn’t be a standalone business that was growing really quickly.
Andrew: Why couldn’t you get more teachers?
Rafael: There were several challenges along the way. Part of it was that, at least within the US, a lot of the software requirements are driven by an RFP process. So basically it’s a feature checklist. We tried to do things a little differently and we said, OK, we’ll try to go to schools where it doesn’t matter as much. We’ll do much better software. We’ll be focused on that, but we won’t necessarily have all those features checked off.
What we should’ve done in hindsight–so this was one mess up–we should’ve said, “OK, this is how the game is played, don’t hate the player, hate the game.” We have to have all these things checked off and then we can make it a lot better. But there was a lot of pride, there was a lot of ambition, actually, to try to change things around for the better. And so we kind of stuck it our own way. And that was a lot of what was blocking.
Andrew: What’s an item on a checklist that an administrator would look for before signing an agreement and starting to use your software? I know it’s ridiculous, but they needed it.
Rafael: Yeah. I mean there were some that were pretty crazy but it would be: “Has to have XYZ integration with our current system.” Or, more importantly, it would be state reporting. That was a huge one where people said, “You know what? Unless it has all the integrations with the state of California–it’s called CALPADS–we can’t use this product. At all.”
And so, instead of saying “Okay, we’ll save you, call it $10,000 a year, and you have a little bit of pain with your reporting requirements, your export and then submit. Actually you’d rather keep paying all that money and not change a thing.” Those kinds of challenges were prevalent where, you know when you’re trying to sell free software that there’s a challenging market. I mean, we made a lot of mistakes and I’ll get into those in the interview. That’s one of those things where you shouldn’t really have to be selling good, free software.
Andrew: What do you mean? Is it that you have to put in all this effort and at the end of it you don’t even make any money?
Rafael: That’s a good way to put it.
Andrew: I see, OK.
Rafael: A better way than I put it.
Andrew: Now, when you were having conversations with teachers, they would ask you for this. Would you tell them, “Well, if you export the data you can still submit it, and realize that you’re going to save all this money because our software’s free.” Did you tell them that, and what did they say if you did?
Rafael: Let me be clear, and thank you for clarifying. Teachers got it. They would get it. They’d say “This is way better than anything that is mandated by the school,” or “My school doesn’t have something.” The leap of faith–which the only way to discover it was to go do it–was the transition from being a teacher and many teacher product to administrators.
That was the huge transition, where we’d then get a sizable base at a school. We’d start explaining what was going on. And then they would say, “Wait a second, this doesn’t have those things” that I mentioned before.
Andrew: I see.
Rafael: But teachers would say, “This is great. I love it. I love using it every day, and I understand I can save my school money.” We’d get to the administration and they’d say, “Doesn’t matter; doesn’t have every possible thing we need.”
Andrew: So if you would’ve added it, do you think you would’ve gotten those schools and teachers?
Rafael: Oh, who knows?
Andrew: Why not?
Rafael: It’s so tough to go back, I mean who knows? The reason I share a lot of the mistakes I made was so that people learn from them. But that one’s really tough to sort of go back in time and say, let’s be revisionist. Let’s say we had checked off all the boxes. If we had done that we wouldn’t have had as great of a platform. So we probably wouldn’t have attracted the engineers we attracted. You know, all these dependencies would have changed. So that one I can’t make a prediction about what would have happened.
Andrew: How do you know if it’s time to cut your losses and move on or tough it out? You know, in the old days they would say “Never give up, keep sticking with it.” They’d tell you about Ford and the V-8 engine and how he kept telling all his engineers, “Do not stop until you get me what I want.” And they kept at it and they kept saying “No, no, no.” And he kept pushing them and he finally got what he wanted. That was the model for entrepreneurial success that everyone else followed. That doesn’t make sense in today’s world because we can adjust so much more quickly. How do we know when to adjust? How did you know when to move on?
Rafael: You know, ultimately, it has to be the conviction that founders get, working together to decide what the direction of the company is. So, you know, for us, specifically, there were a lot of pressures. Do you sell the company now or not? We had non-solicited offers along the way. We have one of the top open source companies on Github, so we have incredible firepower. Is it being misused in this market? Are we using it the wrong way? Should we even be in this market? So, it was really being honest with ourselves as co-founders, and I had two wonderful co- founders, realizing, wait a second, our goal here was to build an ambitious company. Let’s completely say that we’re starting from scratch, what would we do today? So, that was what led to that discussion. The more and more we thought about it, we realized, hey, it’s probably a great team. Everything’s in place to take a new shot on goal.
Andrew: I see, but if you were to start from scratch, you wouldn’t want to build software for the bureaucracy.
Rafael: I would do it differently, if I were starting from scratch. Again, everyone has different viewpoints. I would have done it differently. I wish I could go back in time and take all the lessons learned and do it perfectly, but no, the reality was this was my second education company. So my heart’s in education. I’m not just saying it. I’ve done five plus years of running education companies.
Andrew: What I mean is that, it sounds like what you’re saying is, if we had to do it again, if we had to start from nothing, would this be the business that we would go after, the one that these administrators in schools are asking us for? You said, no, that’s not what we would want to build. We wouldn’t want to build this Frankenstein software that did everything that they wanted. The thing is that you weren’t starting from scratch. You had all this software buildup, all this experience and relationships buildup, and that’s what makes deciding to move on so hard for most entrepreneurs and keeps us, it kept me at one time, continuing with what we built, because we have so much time in it.
Andrew: On the other hand, I don’t even know if I’m asking this question right, because that can screw us up. It makes us feel like we’ve invested so much. We have to continue, but at the same time, we have all these resources, that if you could tweak it a little bit, if you could do a little bit of a pivot, as Eric Ries talks about in his book, you could find another approach, another market, another something. Why not? Help me understand how I can decide this for myself by seeing how you did it?
Rafael: Yes, for us it was specifically, we said, we have a certain growth target we want to hit to really realize if there’s momentum here, if we’ve soaked up a lot of the really small market with no willingness to pay, and once we didn’t hit those growth targets, that was like nine months ago, that was a realization that, are we going to be succumbing to the sunk cost fallacy or not. As (?) said, what is the best possible place to try and build a change the world business? We realized that it wasn’t going to be more of the same, even a slight tweak. The reality is, for the three plus years I was there, we were doing slight tweaks along the way. It was how to go faster. It was, okay; let’s change this part of the product or that part of the platform, or this part of the approach.
Andrew: I see.
Rafael: We realized that, in reality, I think people would have pivoted a lot sooner if it was any other team. I know there’s no way to quantify that, but the reality is that there was a lot of really good execution on a lot of different fronts. The developer team that we built gets a lot of credit, but it’s everyone and down to all the non-technical folks. There was a lot of great execution. To be honest, I think we probably stuck with it too long, given what the market was telling us.
Andrew: What about this? Was there any way for you to have known that teachers had this other group of people to answer to before you built the software? Could having interviews with teachers, administrators, and other stakeholders before launching, would that have helped?
Rafael: Yes, and that’s what we did, and before starting, so, there’s a limit to customer development work. I was in on the first interview we did three years ago. We talked about the four steps of the epiphany and Eric Ries. I’ve done a few (?) interviews, and one thing is, if you are doing these interviews with folks, and they say, of course, I’d be willing to pay for it. Of course, this makes sense, etc. Then, the other thing is that when push comes to shove, and you say, alright, the bill’s due, are they going to pay you? There are a lot of forces beyond our control.
Maybe, we thought we could change, or maybe we thought we could get by, but we didn’t. If you could reduce all this down on paper and in theory before doing it, than everyone would do it, and then, we wouldn’t have breakthrough innovation. So we did as much de-risking as possible, and then, we said, we’re going for it. And then we said, we’ve done way too much good stuff to give this up. And frankly, I think we went way longer than most people would have in our shoes. But of course, there’s no way to quantify that. So…
Andrew: No, there isn’t. That’s the frustrating part.
Andrew: Yeah. I’ve got interview here in front of me and I can see. I asked you, I think, about where the original idea came from. And you said, basically I bought “Four Steps To The Epiphany.” I followed the steps in the book, I sat down with thirty to forty different teachers and administrators and people who are just experts in education. So, you did that. Doesn’t that… That’s so painful that you did everything right as far as we can tell. And frankly, you made some mistakes.
Rafael: All right, let’s be clear. I did not do everything right.
Andrew: All right. So, I just circled the word mistakes that you told me in the email. What are some of the mistakes that you made then?
Rafael: You know, it’s interesting. We had come off that first raise, we built the first product, and we built the full teacher product in ten weeks. I mean, it was just epic, great execution, and just off to the races. And then, we were preempted for our second raise, partially related to the party round. But one of the mistakes I made was I sent an email to Naval, who was one of my angel investors. He’s the founder of AngelList or the co-founder of AngelList. I said, Naval, I feel like I’m missing something. Everything is going great. And he said, come by my office, I’ll tell you… I’ll give you some advice. And I’ve been meaning to write this as a blog post, but better here than as a blog post. So, he said, there are three things you… I see companies that are off to the races, have just raised their second round. The three things I consistently see them mess up and potentially, your pitfalls are one of these three things.
So, here are the three things. One is you do a bad job of hiring or more importantly do a bad job of firing. So, the people who got you here might not be the people who get you there in terms of a bigger outcome. You hang on too late, it ends up becoming a bad outcome and then it just derails your progress. So, I said, great, none of that here. So, problem one, not an issue. Problem two, you make a really bad partnership or business development deal because you’re off to the races and now you just want to eke out more growth. And I said, great, we’re building this alone so that’s kind of a moot point. That’s not the challenge here. He said, challenge number three is that you get disrupted by other startups. So, funny enough, startups think because they’re disrupting incumbents that they themselves can’t be disrupted by other startups. But low and behold, that’s a big secret. They certainly can. And so, we were.
So, what happened specifically was we were off to the races with one approach. Which was build for teachers, they’d tell other teachers at their school, and then that gets the administration on board and the whole school tips, so to speak. Where we were disrupted was several companies decided to say, we’re going to have the teacher relationship focus on teachers to parents and students. That would get us fifteen to thirty new accounts, and then that’ll have a much tighter cycle in terms of the growth we can have.
And so, while we’re married to the semester system or the quarter system, and so it’s one teacher semester one, several teachers semester two, next year administration picks this up, they had one teacher in a classroom gets thirty students, they’re in a bunch of other classrooms, it gets all the other teachers, and then that gets the administration all in the same semester. So, they did things much faster. And so, several startups ended up disrupting us. And we gave up a really good lead.
Andrew: There’s one thing you told me about specifically, before we started. Can you say their name here in the interview?
Rafael: Yeah, sure.
Andrew: Do you feel comfortable?
Rafael: Yeah, yeah, sure. So, Edmodo [sp] is one example where, you know, they were off to the races, we had a big internal discussion about it with the company and everything. And we said, hey, our approach is working, their approach seems to be working faster, but we said, hey, with our approach, it’s much more of a sales force model rather than a yammer or a chatter model. And we thought the bigger bucks were going to be there. You know, the reality is, they had much faster growth. They and any other player in the ed tech space still has their own challenges building a real business, so we’ll see how it all plays out. But in terms of growth, we definitely dropped the ball and didn’t focus on the growth side of things.
Andrew: And, for your product, teachers had to start using it at the beginning of a semester. Could they have gone back in the… If they signed up in the middle of the semester, could they have gone back and entered everything in and caught up?
Rafael: Yeah, so that was one of the things that we realized and we decided to build an import tool for them to be able to use it. That ended up being a more challenging problem than we thought it would be. So, well, one it’s difficult to parse all this data that comes in all these different formats. So, then we said, great, we’ll have a pre made CSV for them to use. And that was kind of… that was too much friction up front. You really want to get as much value as possible out of any product you’re using initially, so that was one where it was, okay you just signed up, now you need to set this whole thing up and there was not a lot of patience for it.
You know the other side of things was, you get put in this mind set of, this is a better version of an existing product so people would say, you know what, I’ll just wait until the next semester versus being a complement instead of being a substitute which is what we were trying to do. So being a complement ended up being something where folks could use this, in October or November, instead of waiting until the end of the semester and that also contributed to the faster cycles.
Andrew: How did Edmodo solve that? How did they create a product that could be used in the middle of the semester?
Rafael: It was much more yammer. That’s what I was alluding to with the yammer sales forces bit. It was much more yammer. So, news feed, basically a classroom tool, and I end up very cleverly building around that and taking a lot of the design functionality from Facebook newsfeed and actually product from yammer too. So they were very good at basically enabling folks to get value out of this product almost right away at the middle in the semester. So it would be a classroom discussion, as oppose to, you know, here is the software record for the whole semester. So once you get in the door, then its, okay great, now I’m going to use this for my other classrooms and they built a useful product.
Andrew: You know what in a moment I’m going to ask you, in a moment, about the party round, but occur to me that a lot of other entrepreneurs would have said; I have my whole reputations in front of me. I’m in my mid- twenties. If I leave a cut, unless I have a sale, or big profits people are going to think I am a big failure. I better find someone to just buy this just so I can have a graceful exit. Just so when people talk about me they can say and he started learn boost and sold it to whoever. Why didn’t you look for something like that?
Rafael: Oh, that’s a good question. So we had, to be clear, we had lots of offers along the way. So it’s several elements to this I want to answer. One is the idea that anyone can just up and sell their company. I hear it often from all my friends are founders or former founders. They’ll say yeah I’ll just sell my company if it doesn’t work out but there’s a very finite supply of people or of companies who can buy your company and they are competing against hundreds of other teams that are saying the same exact things.
So, I don’t think, I think that it is more of an allusion for a lot of folks to be able to have that. We were fortunate, we were very lucky, to be clear, based on the team we built, a lot of folks wanted to buy us for our team. So, it was less about, hey you built really great software. That was more wow, they can build really great software, it was less strategic and much more, hey, we want to buy these guys because they’re one of the top open source companies. So along the way sort of realizing the (?) and opportunities, you know for me, I always wanted to go big and this is the same thing what I look for in investors is folks who want to go big or go home. And your right, I had to go home I couldn’t say I sold my company it doesn’t matter so much that I had offers because I turned them down, but the reality is this I think that if you execute well and you do a good job and you treat people right in silicon valley people are not going to hold that against you that you didn’t sell your company. So, you know, as I was leaving, I will get more to the story.
A lot of my investors that gave me job offers and I didn’t sell the company and we were pivoting. So, you know, it was the kind of thing where folks realized that you done a good job. You might of messed up something one key thing or you might have picked up a bad market or a combination of it but no one is going to hold that against you.
Andrew: What about the party round? What’s the, there’s a risk in raising money from four big investment companies. What’s that risk?
Rafael: Yeah the risk at least on paper is that there is a signaling problem so that if one of those four or five or three firms decides to not invest, then the idea is that they know something that you as an outside investor don’t know so you’re not going to go invest in the company. That’s the biggest risk.
Andrew: So you need to get all of them or people are going to be suspicious.
Rafael: You need to at least get one of them and (?) or people might be suspicious. So I’m talking about the perceived risk and the second perceived risk is that investors won’t be helpful to you because they don’t have enough skin in the game. So the funny thing is that people really hate on party rounds because the winners from party round don’t talk about how they won from party rounds for two reasons. One is out of respect for their investors who took a bet on them and two is why would you tell the market that you are winning. That makes no sense, so all that talk that the part round is the down side of it, there’s downside to everything sure, but there is so many upside to it as well. So I’ll tell you my personal story.
In terms of investors being helpful , yeah it was a lot less skin in the game for Bessemer, CRB, Atlas and RE, but actually they were extremely helpful because I would send out monthly updates at the beginning of the month, and I would say, it was a thank you list, and I would say thank you to X for Y. It was a bit of social pressure or social proof if you will, where folks would say, oh man, the guys from so-and-so firm did this? We’ve got to step it up. We’ve got to do that. So if you manage it properly, you can actually get disproportionately more help, and especially disproportionate to the amount of invested dollars, so that’s sort of a red herring. That’s something that people pray to, or that (?), sorry, that just doesn’t exist.
The second bit is, in terms of being able to raise again, the flip side is if you’re off to the raises, your second raise is going to happen really fast. So our second raise happened, I don’t know, seven or eight months after the seed even closed. We didn’t talk about the numbers but it was a preemptive raise, and it was enabled by the party rep because there was essentially an internal option among these four firms who saw, wow, these guys are knocking the cover off the ball. They’re really executing. Yeah it’s early but we really want to be more involved. And so it led to, hey, I want to meet with you, hey, we want to meet with you.
Start to finish the fund raise was maybe two to three weeks, which is really fast for any of the founders who are listening that don’t do a typical series A. So it was a fast process, it was wonderful terms, and it was, with people who we got to know, so it was kind of a win/win/win across the board. Now, that’s coming out in this interview, now that I’ve left the company and call it two and a half years after the race happened, after that race happened, because I had no incentive to talk about it two and a half years ago.
So the reality is that there’s a lot of folks who benefited from the party run. We never had any incentive whatsoever to talk about it. The people who were talking about it typically had an incentive to badmouth it or to bash it.
Andrew: Things didn’t work out for them, so they want to bash the way that they raised their first round, and say hey, it’s these other guys, they’re the ones who are at fault.
Rafael: Or, you know, another example from the investor’s side, there’s investors who in the past couple of years were angel investors and now they’re VCs., and guess what, the tune before was I hate party rounds and the tune now is hey, I don’t mind them. So this is something we talked about in the first interview three years ago, is that people, the (?) is pro bono, but people are going to probably talk their book more often than not. So it’s always worth digging into where someone’s coming from and what their experience is. Now is it irrational that I’m saying what I am about party rounds given my role now?
But we talked about this before the interview. I see it as a long term thing. So I’d rather be more transparent and just say what I think is the right answer as opposed to hey, this actually does not benefit me at CERAView right now.
Andrew: Right now you’re at a firm that doesn’t want to do party rounds. It doesn’t want to go in with five other companies on a deal.
Rafael: I think that’s fair to say. I think that’s fair to say because our branch is built on being investors who are very involved early on, and so we would much prefer to help a company out from the very earliest days and be the first backers. We’re typically the first investors in a company, and then take that and help them raise the next round.
Andrew: I wonder what I can do as an interviewer to get more of that story that’s not in people’s interest to share.
Andrew: You just brought up a good way to do it, which is, I wait a couple of years until it’s not so hot and we can talk about it, and no one’s going to be hurt if you bring it up. But a lot of times, I can’t even do that interview until not even two years later.
Andrew: It’s just some things maybe have to be left for private conversation, but I hate that. I don’t want insiders who happen to have friends know more than the rest of us.
Rafael: I agree with you definitely in principle. Along the way, the last two or three years, most of my friends are founders, and many of them have gone on to raise successful rounds, and many of the people who came to me came to me for party round advice because they had a lot of demand from lots of folks and they wanted (?) people in. And I told folks, you’re right, I told folks exactly what I told you in the Mixergy crowd two or three years ago. And I don’t know what the answer is. Maybe we just take it offline and figure that out because it is not fair that other folks outside the Valley who don’t have a connection in media, or whatever, don’t have access to that knowledge. So for what it’s worth, I think this can still be helpful to some founders, but you’re right, it’s less topical.
Andrew: I think it’s fine and I’m okay with that. I’m okay with not being topical, with not discussing things just at the moment that they’re going on. I’m here for a long time and I could wait a couple of years, and this is still just as true. What I’m more worried about is that there’s still certain things that I haven’t been able to talk about years later. Like I had an entrepreneur on here who I know couldn’t close the next round because the firm that invested in him in the first round didn’t want to continue backing him. So everyone else was suspicious, and there was all this talk, all these issues around that.
Other entrepreneurs have talked to me about it. I think maybe was it Naval (?) who talked to me about it in a previous interview, maybe someone else about this specific guy. But I advised this entrepreneur, “Don’t talk about it in my interview. I don’t want you to hurt your reputation in this space by being the guy who bad mouths people.”
I need to find a way to make it worth the entrepreneur’s while to be open, but also benefits the audience. I’m trying to figure it out.
Rafael: For me, bring it to the party round. The reason I hadn’t shared it before was there is no point telling your competitors, “Hey, I just raised this pre-emptive round, and I’m doing really well. So far so good.” The flip side is there’s also down sides to being associated with it, so as an entrepreneur, there were so many people hating on the party round that there was no incentive for me to say, “Oh, let me defend it” and then talk about how it benefited my personal company and then see the risk that comes associated with it and then pick a fight or not pick a fight but have to fight against 50 influential people.
So if there is a way to do it, maybe anonymously, and then you’re the one who says, “Believe me, this is a vetted source. This is a fantastic entrepreneur.” Maybe, that’s the platform that people need to share.
Andrew: That makes sense.
Rafael: Who knows?
Andrew: What other mistakes? What’s one thing that you look back and say, “I wish I’d done that?”
Rafael: I think it we’d been willing to change the adoption model, what I was alluding to earlier, and be less sales force and more yammer for our specific market, by the way. That was a mistake. That was one we covered. I think another one is that we basically thought that we could build the best possible product and then they would come. So build it and they will come. It turns out that can be true in many markets, especially the ones that are competitive, but it ends up not being the case in education.
So we talked about it briefly with repeat process. So there’s other things that feed into that. So that was another mistake was not realizing that. Another mistake that probably could have been mitigated is that we decided to expand internationally, and the international market is not ready in many aspects of education. And so that was one where we said, “There’s light at the end of the tunnel.” Let’s just crowd search for translation. And to date, and this is just the case the vast majority of the users spoke English, and they didn’t use the other language features. So that was a misfiring of resources, all for the sake of growing.
Andrew: And through it all you have to retain the talent, the people who were so excited to be working with you. The original idea looks like it’s golden when everyone’s talking about how well you raised, how sharp an entrepreneur you are. Those people you have to keep them excited when you’re pivoting, when you’re unsure, when international markets aren’t going well. How did you do that?
Rafael: Lots of things. You’re right. We were at one extreme which was we were in the top ten startup of the year with Square, which was on the list. Square is a multi-billion dollar company and Linguist [SP] just pivoted. It’s two different realities. So it was a real extreme thing. And a couple of things, one was openness, and the second one was culture. So the openness is transparency, but I would create these monthly updates. It had my metrics. It had the finances, ways investors can help, goals for the month, and then a qualitative portion once on the horizon. And I’m sorry, a product bit as well.
I would send these out to the investors the first of the month like religion, even if there was a holiday. What I would do is literally a minute later forward the same e-mails, the same exact deck, and send it to the entire company. The entire company could see, “Oh, man, we’ve got 11 months of cash. Cool. We spent this month… Why? Oh, there’s the answer.” They could see everything. And that was openness and trusting that that wasn’t going to get leaked out.
The second bit was culture. So one of the best recruiting hacks was we’d have people come by the office. They’d sit by in the office and they’d go, “Wow! I really want to work here. This is awesome.” They were infected. They had to work with us. I know it’s being a straight shooter with folks and say, “Listen, here’s where we are, and here’s what we’re trying to do. Who knows it we can get there? We’re going to try our best. I can tell you this team is extremely talented, and more importantly you’re going to have a lot of fun doing it.” And people go, “Dang, I want to be a part of this thing.”
So that’s how we were able to retain so many great engineers and we were in the Valley, so companies like Square, as I mentioned before, can pay way more. We were on a huge growth path, and really what you’re trying to recruit for was missionaries, not missionaries – visionaries, not missionaries. So if you recruit a missionary and there someone who would go out for a buck or whatever, that kind of person is coming to leave you as soon as things slow down.
Andrew: You mean not a mercenary is going to leave you.
Andrew: A missionary not a mercenary, someone who believes in the vision so much that they’d stick with it, even as they walked into work and they saw a bus that had better . . . I’m trying to think of buses that I’ve been noticing here, buses that are basically trying to hire people.
Rafael: Yeah. Thank you for the correction. That’s a very important distinction. You don’t want mercenaries, and so the culture bit is a two sided thing. One is the kinds of people who you recruited in your company and two, how you treat them in the culture you create.
Andrew: Here’s the thing though. When things start going bad, and we all have months where the numbers are down, where things don’t look as exciting as they did before, we as entrepreneurs feel down about it. We as entrepreneurs are doubting ourselves. If you share those numbers with the team, they are going to start doubting themselves the way we entrepreneurs doubt ourselves. But they won’t have as much ability to control that and fix it as we as entrepreneurs do. So we’ve given them all the headaches, all the worries, and they just intrinsically have the ability to solve it, so why inflict that on them? The only solution that we’re giving them is go run away, go somewhere else, this is too painful.
Rafael: Yeah. It’s interesting but it kind of does relate to the mercenary versus missionary, or mercenary versus visionary, whatever, interchangeable point which is that if you’re upfront with people, and they’re really talented people, this is the calculus that goes through their head. Okay. I’m a really talented engineer or designer, whatever. I know folks that are getting five offers a week. So it’s absurd. So I know I can get a bunch of offers a week. I know I can have a job tomorrow if this doesn’t work out, but I love working with this team so much, and I love what we’re going after, and I feel like a brotherhood or a family here, that actually I want to be a part of this thing. And let’s figure this out.
So while we’re focused on education with LearnBoost, that was something where it was a collective vision, and we were all marching in the same direction. Yeah, they were more aware of the challenges, but because they were more aware of the challenges, you can actually be more helpful to solving them. If you don’t know what’s going on. Then maybe you have a great idea, and you could have solved the problem, and it never reached you, the problem never reached you, and so the idea never reach the problem, and then we’re back to square one.
So I think it had definitely more good than bad. You’re right. From the CEO’s perspective, from my perspective, it was, man, I have to answer this question again, or, “Hey, this was in the update.” I talked about how we’re addressing this, but that was a minor inconvenience, and there was way more good from it than bad.
Andrew: I don’t want to leave people with this presentation that you’re a superman who is not impacted by anything and even when negative things hit you, they bounce right off of you, and you continue to do even better things with your life.
Rafael: I don’t either. I don’t want anyone to think that.
Andrew: Was there a period where you were doubting yourself, where you were unsure of yourself?
Andrew: Talk about that. What was the lowest personal period?
Rafael: Yeah. The reason I’m talking about these mistakes is because I’m not a superman, to be clear. Maybe my delivery right now is not jiving with what happened, but in terms of my personal psychology, my personal feelings, yeah, do you remember the interview from three years ago? I probably weighed 15-20 pound more. I was losing my hair. Legitimately, you can go back and compare the videos and the photos. It was two different me’s.
Andrew: You’re saying at the time you were putting on weight because you were so nervous.
Rafael: Yeah. It was like stress eating. I’d stay up late. I wouldn’t work out. This was the message to founders. You’ve got to take care of yourself first before you can take care of others. You know in a plane where you lose pressure and the mask comes down and you’ve got to put it on yourself first before you can help everyone else, that’s what it’s like to be a founder. And so I wasn’t taking care of myself, and I was doubting myself. I’d say, “Oh my God, if this fails, people will think I’m a failure.”
I had come from this background of. . . I’d skipped a bunch of grades, and everyone thought I could do no wrong. So I felt it was something that really burdened me, but then I realized something, and it clicked for me. I realized how LearnBoost does is not, it’s not perfectly correlated with who I am as a person. And once I could make the disconnect between, “Hey, let’s keep trying for stuff that’s really ambitious,” we talked about before the interview how I probably spent. . . You know, we probably stuck with it too long, to be honest.
Once I separated that from who I was as a person, I started working out again, I started sleeping better and my productivity went up. I worked less hours and my productivity went up. I remember people would go, even investors would go, “You’re on fire. This is who we invested in.” So, don’t try to be a hero and say, “I’m going to work 18 hours and I’m not going to work out. I’m going to eat, you know, McDonalds all the time so I can get right back to work.” Taking care of yourself is the best thing that you can possibly do so that you can take care of your employees and you can take care of the company, be the keeper of the [keys].
Andrew: But you were going through a period where you said, “If LearnBoost fails, then I’m a failure?”
Andrew: What else were you saying to yourself?
Rafael: I’m not as smart as I thought I was. What else? We should. . . I was too prideful, I should have, you know, fast followed one. . . I mean, we saw it early on, the difference. We should have said, “Hey, we’re willing to be more flexible.” So I felt like a dummy for that one.
You know, the other thing is that I did a lot of management by committee, or putting it up to a vote. In hindsight, if you’re the founder CEO, you’re going to get the blame for when things go bad, so if it comes down to a tough call and you think you’re right, you should probably make that tough call, as opposed to saying, “Hey, I got out voted two to one,” or, “I got out voted,” or whatever. You don’t really actually have a hedge because you’re voting with your time. The results are your time, not, “Oh, I covered my butt on this one because I got outvoted.”
So that’s why I don’t bring up specific moments where maybe I was right and someone else was wrong. It doesn’t matter we were wrong, that’s the reality. So, if you’re the CEO, you’ve got to kind of own it. That was one of those things I was doubting, where I couldn’t, in hindsight, can’t believe I didn’t own being the CEO.
Andrew: How do you separate yourself from the company, and separate yourself from those thoughts that you mentioned earlier, like, “I’m a failure if my business is a failure?” It’s not one of those things that comes in a flash, right? You have to work on that, don’t you?
Rafael: Yeah. You know, for me it did come in a flash.
Andrew: It did? OK.
Rafael: I went back to my. . . I still remember, I won’t name the person’s name, out of respect for them, but I went to my one year reunion from grad school and, you know, not even a close friend, but she had the guts to tell me this. She goes, “Rafael, you’ve put on like 20 pounds. You’re fat. You look unhappy.” And I was like, “Wow! That is so rude. I can’t believe you.” Then I got home that night and I was like, “Oh my God, she’s right. She’s so right.” And that moment, I mean, I kind of knew it, and you kind of know these things – so you’re right, it’s not a moment, but maybe it’s one that just pushes you over the edge – that was the straw that broke the camel’s back. Let’s put it that way.
Then I just started eating better, working out. I said, “I want to leave the office by this time,” on and on and on and on. All these things become accretive, and then I was on a great path again.
Andrew: I found, for myself, when I was going through a difficult period, I took up running. If I went for a run in the morning, I felt like such a winner for having accomplished it that I could walk into work feeling like I’m on a good path. I could do good things [??].
Rafael: You have more discipline than me. For me, you know, I come from a very, very modest family, and so, very frugal, wasn’t paying myself much as a startup CEO. In fact, for most of the time I was one of the lowest paid, in fact, I think I was the lowest paid. Anyway, so I said, “Okay, I’m going to have a commitment device. I’m going to sign up for a really nice gym,” where the only way I could possibly justify this is doing it for a couple months and then leaving, but also going nearly every single day.
So I said, “If I go, you know, whatever it was, five times a week, then I can kind of justify this for three or four months that I get back into shape.” And I did it, and it was an extremely expensive gym, and San Francisco’s an extremely expensive place already. Then I left the gym after I got back in shape. That was one of those things that was a great commitment device. I also told people, “Hey, I’m trying to get back in shape,” and people were supportive. So all those things, you know, it led to being a better founder. That’s the reality.
Andrew: I had a CFO who just forced me to do it. I couldn’t look at him if I didn’t, and I was surprised that he wasn’t jealous that I was going to go and run in the morning. I was surprised that he was actually encouraging me to do it, but I felt like if he told me to do it and I wanted to run, and I still didn’t do it, then I’d look like a failure throughout the day to him. That was one of the reasons. The other reason was I was in such a depressed state that I needed whatever I could get.
Andrew: I couldn’t disconnect myself from my business.
Rafael: I was depressed, too, for sure. I mean, you know, I didn’t realize it at the time. It was in hindsight I was like, I was kind of depressed, which is interesting because in the education world for a long time, and in fact until recently we had this “can do no wrong” appearance, which was always so interesting, especially now really interesting to look back on. It’s clearly not true, every [?] makes mistakes, even the most perfect looking ones from the outside. So, reconciling those two things was pretty darn tough. You know, everyone thinks you’re doing a great job and you’re like “Oh man, there are a lot of challenges here.” That’s what it’s like to be founder and CEO, and unless you’ve done it you don’t really know what it’s like.
Andrew: A venture capitalist in L.A. told me that when he got depressed what he did was he got this book, and he didn’t give me permission to talk about it publicly so I won’t mention his name, so he said he got this book, this self-help book, and he did every exercise in the book and filled it out. This was when all their investments were going to pot and that helped him. Was there anything else outside of that conversation that helped you get back on track and helped get you positive again?
Rafael: Dating. I mean, to be honest. Once you get back in good shape and you’re happy again. I’m an energetic guy normally and whatever. Getting that external validation is rationally the way to describe it. Getting that positive external validation was extremely helpful to sort of keep that positive loop going, keeping that momentum going. So that was another thing and that was, one of my co-founders, you know, bless him, he was encouraging, just like your CFO. He was saying “Hey, this is something that’s going to make a big difference in your life and I want to see you happy, and it worked, it worked. So, that was good.
Andrew: I really like and appreciate that you’re willing to be this open about mistakes. You just used the word “depression”, which, other than James Alfitcher [SP] most entrepreneurs are afraid to ever bring that word up. I’m wondering though, as a guy who is new to venture capital, who was one of, maybe THE youngest person doing the work that you do-the venture capitalist that people are supposed to look up to-aren’t you worried about the impact it’s going to have no your credibility with other entrepreneurs and the way that they look at you?
Rafael: Great question. It’s a great question, and I’ve found that this stuff, being thing candid and having been in their shoes before twice, this is my second go around, actually resonates more with founders than anything. So, founders go “Man, I’m feeling this exact same way. None of my other investors understand this” or “Everyone else I’ve talked to hasn’t been there before” or you know, they were a founder of a company that was “right place, right time” and they are 40 years old and they don’t remember what it was like. This stuff is actually, you know, I’m glad you asked. It’s really resonating with founders, just being a straight-shooter about “it is so tough.” It is so tough to be a founder CEO. To be any founder is tough, frankly, to get the help from the rest of the firm. Some firms are better than others. If it’s equal carry equal pay, equal everything, then it’s a true team.
So, if I have a challenge that I’m trying to help a founder with, then I can go “Hey, this is SAS related, or it’s e-commerce related, I’m talking to Deb-dub [SP], one of the partners here and he was the first investor in Zendesk [SP], he knows what he’s doing. I can talk to him. If it’s something related to SMB or mobile, I turn around and go to Sar [SP]. So I can do a lot of the lower level stuff that most VCs are either far out of the game from doing, or never did, the tactical stuff: how do you find engineers, how do you get through this?
I have a close relationship, but then when it comes down to all the top- level things I maybe haven’t seen yet, that’s something where I get to lean on the partnership. So, great question. The reality is that I have the resources to go help founders. It’s not that I’m the guy that has have every answer. Because that would be impossible.
Andrew: The pivot that you guys, or the company that LearnBoost made is now, it’s basically a new site, it’s cloudup.com.
Andrew: Why didn’t you stick with CloudUp?
Rafael: Yeah, so, you know it’s a lot of things, as you can sense from the interview. It was a tough journey, obviously a lot of good as well, but along the way we had realized, hey, this is something that’s not going to be . . . well, fairly recently we realized this something that is not going to be a huge business. It’s a great, impactful service, it’s saving, on average, in aggregate, certainly millions of dollars for schools and teachers around the world. But, it’s not a real business.
And so we said, what is the way that, as a team, we can aim big and try to change the world? And so, to be frank, CloudUp was something that much more something that my two co-founders were much more passionate about than I was, among the things that had we considered. And so, that was sometime, January 2013, that I said, “You know what? This is not something I’m best suited to be CEO of. I don’t have a unique insight or insights like I had with LearnBoost, so I’m just going to leave. And I’ll give up as much equity as you guys want, I’ll stay on as chairman if you want, I’ll do whatever you want.
But more importantly, let me tell my investors face-to-face.” Because 15 of the 16 investors came in with me. They came in through me. So, I flew around the country, because my investors are all over. I told everyone, except for one, face-to-face, because he was in Hong Kong, and I said “I’m leaving.” And I had planned to leave and sort of recharge the batteries for a few months. And, the reality was that a couple of them offered me jobs on the spot. That’s what sort of lead to the transition, and also what’s lead to the pivot in the first place. And so, I ended up considering several options, and my cofounders ended up doing CloudUp, and they released it a week ago.
Andrew: I see. One of the coolest things you did is, I got you software to record your side of the conversation, just in case something went bad, because we had that happen recently in the audience, and Andrew got to stop. So, got you software to record your side of the conversation, and I told you how we like it to be configured so that we get the best audio and video quality from you. And you said “Here, Andrew, here’s a screen shot that shows the way you asked me to do it and the way that I did it. Did I miss anything?” And it was just so quick and easy to take a look at. But that’s not what CloudUp is about, right? I didn’t realize it did screen shots. It’s about more than that?
Rafael: Yeah, so CloudUp . . .
Andrew: . . . CloudUp.
Rafael: Exactly, I used CloudUp to do that. I just used a shortcut, and auto-uploaded it to the service, and you got it. It’s really about sharing anything. It’s about sharing files, images, links, et cetera. So, it’s one of those things, where you look at it and you say “OK, someone’s doing this.” It’s Cloudly or Droppler would be the two closest competitors. But, they’re not focused on it full-time, and it’s not that fast. And so, the team saw an opportunity. Especially, let’s be clear, it was led by Tian [SP] and Guillermo [SP], based on an opportunity do this and it was something that suited the team that was already there, at LearnBoost. Well, so the team’s super excited about it.
Andrew: And once again they’re doing something for free. I mean, we’re talking about 200 gigabytes of space for free.
Rafael: Yeah. I mean, there’s definitely a thought process behind it, but, you know, out of respect and like for them, I’m not the CEO, so I can’t speak for their plans or what they want to go do, but there’s clearly a plan. [laughs]
Andrew: Fair enough, of course. Alright, last time, I think I ended by suggesting that people go check out raphaelcoralis.com [SP], but didn’t you switch to Tumblr?
Rafael: Yeah [laughs]
Andrew: Why’d you go to Tumblr?
Rafael: I switched to… so I realized that that website was, sorry, I was on blogger, it was blog.raphaelcorrales.com.
Andrew: Oh OK.
Rafael: People can’t spell my name, [laughs] so I got a shorter domain, so it’s rc.io, that’s it.
Rafael: Yeah, and it forwards to my Tumblr, because the reality is that I had a web presence, I had my own custom built website. Everyone was going there just to read either my twitter or my blog posts. So, I said “You know what? Let’s just beat this thing to the punch.” It’s rc.io, just forwards to my Tumblr. I blog very frequently, as you probably saw in your research, and it’s a lot about what it’s like to be a founder, to be frank.
Rafael: Yeah, I can see that now. So the big quotes, Tumblr’s really good for that.
Rafael: Alright. So, there it is. Thank you so much for doing this interview
Andrew: I appreciated it. Thank you.
Rafael: Thank you all for being a part of it. Bye, guys.