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Here’s the program.
Andrew Warner: Hi, everyone. My name is Andrew Warner. I’m the founder of Mixergy.com, home of the ambitious upstart. What that means is that we’ve got a website, one of the few websites that don’t have cat videos or I saw a popular post last week was a bulldog sitting on a couch with a remote control in his lap, that’s what’s huge on the Internet. We’ve got a website that appeals to a different kind of audience, an audience of entrepreneurs. Instead of getting carried away with all of that, is coming here every day to hear the stories of entrepreneurs who built their businesses like the guest that I have with me today. His name is Lew Cirne. He is the founder of New Relic. He started his previous company, Wily Technology, in his living room in Santa Cruz and sold it eight years later to CA for $375 million in cash. His latest company, New Relic, built a SAS app performance management suite. I’d like to welcome Lew. Welcome to Mixergy.
Lew Cirne: It’s a pleasure to be here. Thanks, Andrew.
Andrew: Lew, I was looking at your LinkedIn profile and saw that you got started at Apple working on Mac OS. What was it like to work at Apple back in those days?
Lew: It was interesting because it was a lifelong dream to work at a company like Apple that values innovation and places a premium on just building great products that delight the user. It was a very interesting time to be at Apple. It was at a low point in the company’s history. There were many doubters as to whether the company was going to succeed. The absence of Steve Jobs in the company certainly was felt throughout the whole company. So I wasn’t riding through the successful years of Apple, but nonetheless, I learned a lot about building software, focusing on customer success, and what to do well and what to avoid in trying to build a successful engineering organization and product.
Andrew: What’d you learn about what to avoid?
Lew: We were in the middle of a lot of organizational management and trouble at the time. So the result was a lot of big company decision making, lots of heavy-duty waterfall development approaches where you’d spend months and months on specification and design review, and you might write a line of code after eight months of talking about what the code will do. It was a hard environment for an individual to really feel empowered that they could make a difference for the whole company. That’s just part of being in a large company. So it wasn’t entirely where Apple specifically was, but just what it’s like to be in a large engineering organization and finding out what the advantage of being in a small company could be.
Andrew: What did you imagine it would be when you first started? This was your first job, right?
Lew: It was. I couldn’t believe I was getting paid to write software. It’s what I love to do, I still love to do it. While I run a company today, I try to set aside a day a week to write code to keep myself sane. I felt very lucky to have a job where I could work on building software with a bunch of smart people. It was what I would do regardless of whether it made financial sense in a way. There was that kind of wonderment of I have a job and it’s something I love to do and I felt lucky about that. But what I discovered along the way was just how rewarding and important it is to work with really gifted and decent people, beyond just talented people, that’s very important. Also people who you enjoy spending time with that bring out the best in you.
Andrew: Do you have an example of how somebody back then brought out the best in you? We like to just sit and work in private. But when we work with other people, it sometimes brings out the best. It brings out ideas and motivation that we couldn’t have if we’re just sitting by ourselves.
Lew: Absolutely. The people that tend to bring out the best in you are the people that are very eager to hear your ideas and want to think optimistically as to how you can make the best out of that idea and encourage you to push that forward. As a counter example, there are the types of people that can’t help but find all the things wrong with your idea or make counter arguments before you’re done finishing your sentences, and so you come out of there feeling a lot dumber than you felt when you came in on the discussion. There’s that kind of support or perspective that I think good leaders have and that good co-workers have that bring out the best in people.
Andrew: Do you have an example of how somebody did that with you? How somebody brought out the best in you?
Lew: Sure. One of the people that I worked closely with at Apple, actually we knew each other in college too, and now he runs engineering for New Relic, is a friend of mine, Jim Gochee. I just can’t imagine building software without someone like him on my team. He’s the kind of person that certainly will bring his own opinion to the table and is not going to just agree with me for the sake of agreeing with me, but when we disagree, we do it in a very collaborative way. We come out with an answer that we all feel better about. It’s just that dynamic of working with someone that you really respect for decades that allows you to, with that foundation of trust, on those rare occasions where something’s not quite working right, you work with the assumption that they’re handling it in a way that makes sense. So you find yourself avoiding those scenarios where the erosion of trust builds problems over time that are hard to identify up front but can big in the long run.
Andrew: Okay. We’re going to talk in a little bit about how you went from being a guy who just loved to code and that’s what you were looking forward to on your first job to being one who is also the boss, who’s the entrepreneur. What I’m wondering, though, is were you an entrepreneur before you worked at Apple? Did you have any little side businesses? This is pre-1992, so you couldn’t have launched an Internet company at home on the weekend the way some kids do today.
Lew: I did have a bit of a project in high school. I got my first computer in ’82. It was a VIC-20. It had 3.5 K of RAM total.
Andrew: 3.5 K of RAM?
Lew: Yes. 3,583 bytes. That was what it said when the thing was turned on. I used every one of those bytes on many occasions, learning how to write silly games or whatnot. I got into, most teenagers these days like to play games, I love to write games. I still can’t play any games, but I used to love writing them. I ended up writing a game with a friend that got a contract with the publisher but ended up in product limbo. I was at school at the time and things like that. I learned a lot about just taking a leap into entrepreneurship, but it was a pretty good learning experience for me. It wasn’t a real, fully engaged startup experience like my Wily experience was about 15 years later.
Andrew: Okay. Going back to, or continuing with the story, Wily you launched in ’98. What was the idea behind that?
Lew: The idea for Wily came out of my experience working . . . after Apple, I had two years at a company called Hummingbird and at that company, my boss, who also is an entrepreneur, that’s why I joined was to learn from somebody who had started his own company, but he was at this new company, Hummingbird. He recruited me and he encouraged me to look at this new developing technology company called Java. This was in ’96, ’97 time frame. Java was in the 1.0 stage then. It had some heightened buzz building around it, but it was still very early days for the technology. I looked it and I immediately fell in love with it because having had about eight years of professional development experience under my belt, I felt enough pain around C++ and other object-oriented technologies to know that there had to be a better way to build object-oriented software, which at the time, was not ubiquitous in software development in the mid-90s.
Java comes along and I felt like wow, not only is this platform independent and works well on the Internet, but it could be an enabling technology. It really brings object-oriented software development to ubiquity. For me, that meant that there was going to be a massive adoption of the technology. The idea for Wily was, what happens when people build all these programs in Java and they try to run them in a production environment, not just on their desktop? Stuff will go wrong. In fact, this was pain I felt personally on the project I was developing in Java.
The idea I had, I was literally driving down Highway 17, which is this winding road between Silicon Valley and Santa Cruz, and I had this idea, what if I could make any Java program self-diagnostic so that the customer wouldn’t need to do anything but apply my tool to it and all of a sudden, they can see right inside the application as to what’s going on? Like an EKG for a live running Java program. I was so excited about the idea I almost drove off the road. This is a windy road. I was a little wired. By the time I arrived to Santa Cruz about 20 minutes later, I knew that this was going to be something that I was going to bet my short-term professional career on. Within a week, I was writing code and talking to friends of my parents to see if they could put a little bit of money into funding me to develop this idea. So Wily was born in the end of ’97, with just a bet on a technology trend.
Andrew: Why’d you decide to bet your short-term career on this, as you said, instead of taking this to your boss or going to another company and bringing the idea there? Why go launch a business?
Lew: To backtrack just a little bit, I had decided after about three years at Apple, my gut said I wanted to be at the ground floor of a startup. I wasn’t sure exactly why. It was probably my subconscious, but I just felt this urge to do it. I think this is how at the time it starts. It was interesting, but it wasn’t all the rage. Entrepreneurship wasn’t like what it is today where venture funds, like Y Combinator, are doing dozens of deals a quarter, it seems, because it just wasn’t that pervasive a thing. My gut says I wanted to try it, and I knew I could learn a lot at Apple, but the company was too big for me to learn a lot about what it means to be in a smaller environment. It was a conscious decision to move to Hummingbird which was not a tiny startup, but it was a much smaller company than Apple. [interference]
Andrew: Much smaller company than Apple . . .
Lew: . . .bit more about. That was in the back of mind, and I was looking for the right idea. I had a lot of dumb ideas. I don’t think I would have had the same success if I had pursued my idea for karaoke software.
Andrew: [laughs] Did you really have an idea for karaoke software?
Lew: It came in a drugged moment in Hawaii in a karaoke bar. I said, “Software can automate this thing. There’s got to be a couple hundred dollars in this somewhere.” I didn’t pursue it thankfully.
Andrew: You had a eureka moment when it came to finding that idea that you’re willing to bank on and bet your future on.
Lew: Right.
Andrew: Was it just like that? Was it just a bolt of lightning, or did anything lead you to that?
Lew: It was interesting. I think there were a lot of things leading to it like my immediate fascination with and attraction to Java as an enabling technology really got me excited about what this could do. There were data points floating around in my conscious and subconscious saying, “This is an interesting direction to go to.” The actual idea, which technically is bytecode instrumentation, modifying the Java program with my software to make it self-diagnostic when it runs, that was a lightning bolt idea and it was the genesis of something that I thought was meaningful technology differentiation to bet the company on. Then I was really committed to trying to make this work.
Andrew: The idea of lightning or eureka moments makes me a little nervous because I can’t recreate them and I can’t help others recreate them. That’s why I try to dissect and understand how it happened. If somebody were going to learn from this and maybe try to recreate this on their own, would they be able to do it just by spending time focusing on what they loved and somehow in that a eureka moment would come without guarantees but with strong expectation? Can you say that?
Lew: Yeah. I agree. The worst thing you can try to do is force it, just like so many things in life. What you could do is create an environment where it’s more likely to happen. For me, the most exciting things have struck me when I’ve been actively engaged in solving a problem I’m passionate about. Often it comes out of right field, or certainly tangential to what I’m focused on. But if I’m sitting there just thinking in the abstract about what somebody else’s problem might be, I almost never get a lightning bolt idea out of that. The thing that you have to do is get engaged in solving a problem that you’re passionate about. I find that your mental juices are flowing and that creativity is going on and that it’s amazing what your subconscious will soak up from the environment that you’re in. I think the inspiration comes from connecting a bunch of dots that have not been connected before from a variety of sources of information combined with that active engagement in solving a problem that is usually the genesis of interesting ideas.
Andrew: I see. Okay. You had that. I can see how you’d be passionate about the idea after that experience. What happened when you took it to your family asking them to help you raise money? What was their reaction?
Lew: To be clear, my family was not in a position to fund me, but they had friends who had heard about all the good, exciting things going on in Silicon Valley and were waiting . . .
Andrew: Did your family try to dissuade you? Did they say, “Look, Lew, you’ve got a great job. You worked at Apple. You’re now working at a startup. Give it some time, bank more money, get more experience”? Anything like that come up?
Lew: No. My family’s been very supportive of anything I’ve decided to do. I’ve been blessed. Great parents. If I felt like this is where I wanted to go, they would just be 100% in my corner. Anyway, they had some friends who are the type of people that would love to go to Vegas or do other sort of things that many would consider to be risky. I went to a few of them and asked for $5,000 each of investment. They used peer pressure to round up about seven people in total to start, so $35,000 was rounded up in the first week of conversations with some people back actually where I grew up in Canada. I was in Silicon Valley, but they were near Toronto.
$35,000 to me was like an infinite amount of capital. I’d never seen that much money in my life. I felt like I could last, I couldn’t imagine how long it’d last. But all I needed was a computer and rent and Ramen noodles or whatever and I was good to go. Actually, as I did some more thought, I thought 100k could get the company through at least in its first year and to a milestone. The first 35k came in and the remainder of the 100 came over the course of about two or three months.
Andrew: Okay. In comparison, can you say roughly what your salary was? Are we talking about $35,000 was half your salary at the time?
Lew: No. I took a salary cut of about 35% from where I was now. I think I was in the 55k or 60k of salary, which certainly I felt like I was paid pretty well for the mid-90s. The Bay Area and Santa Cruz is not an inexpensive place to live in, so I wasn’t living high on the hog, but I certainly wasn’t going without basics or having a completely boring life. As a young, single guy, I was doing fine on it.
Andrew: A hundred thousand, where was that going to go?
Lew: I’m sorry? A hundred thousand . . . I was going to go to my salary, software, travel, and some consulting. So I hired an intern out of my previous college to help me build a website and do things that I didn’t know how or couldn’t do or didn’t have time to do. It was largely me on my own for the first year, but with a little bit of help from a couple of people. It got to me building the first prototype, the technology and viability and getting some partners interested in it.
Andrew: Okay. Then after you built it, what was the next thing that you did? Sounds like it was going after partners?
Lew: Yeah. I had a chance to demo it to IBM out in an office in North Carolina. I was just pursuing every avenue I could and found myself through an email introduction to somebody in North Carolina. They said, “This actually looks pretty interesting. We’re doing stuff with Java. Why don’t you come out and meet some people and do a demo?” I bought my first suit, got on a . . .
Andrew: Your first suit ever?
Lew: Yeah.
Andrew: Wow.
Lew: I had jackets and ties and pants but none of them matched. I thought, “I’m going to IBM.” Boy was I wrong. Here I am, wearing a blue pinstripe suit in North Carolina, the only guy wearing anything remotely that formal. I went out there and did the demo and it was one of the most exciting experiences of my life because I went in and did the demo to the person who invited me and halfway through the demo, he said, “Time out just a sec, I’ve got to get my boss.” He picked me up, took me to the other room, interrupted his boss’ meeting, showed them the demo, “Whoa, whoa, whoa. We got to get this other guy.” Basically, by the end of the day, the demo had been redone three or four times. I had gone up two or three layers in the management team. IBM had committed to a $50,000 license agreement, I guess. It was a $50,000 first deal with IBM where they would fund some custom development and do some co-marketing and most importantly validate that the technology has some value.
Andrew: You were a one-man shop, essentially, at the time. You’re bringing your idea to IBM. They’ve got tons of resources. Was there any concern, or what was the concern about having them take over the idea and launch it themselves?
Lew: First of all, most of my friends who gave me advice, solicited or unsolicited, all along but especially in the early days, would say, “Lew, you’re too naive and you’re too nice and too trusting.” I’m the last person that insists on NDAs before talking to people. I just assume that, moreso in the past than now, that people would be completely upfront with me. I still have that general world view, but I’m more likely to at least explore whether the person I’m talking to has competitive interest before sharing every piece of intellectual property you have. At that point in time, I was just very optimistic and looking for anything I could get to develop some traction. It worked out for me in that case.
Andrew: Okay. The other thing I was wondering as you told that story was what was it like for you to go and pitch IBM? I’m imagining that you’re not someone who dreamt of pitching IBM, you’re not someone who was spending his days preparing for the perfect pitch and reading books on pitching. What was it like?
Lew: [laughs] The context was this was at a time where Java was becoming an important strategic technology to a lot of vendors in the space and IBM being the largest. IBM in ’97, the word was getting out that IBM was betting strategically on Java as a foundational technology.
Andrew: Connection will come back in a moment. Sorry, we lost the connection there for a moment. I don’t know why. Now that we’re back, you were saying, you were giving a sense of what life was like in IBM and what their perspective was on technology.
Lew: The context was that IBM was betting strategically on Java, so I had put IBM on my short list of companies to really try to partner with and get on board with. It turned out to be a very good bet for Wily in the long term. It wasn’t by accident that I was focusing on IBM. No, I didn’t go to training school on how to pitch IBM or anything like that. What worked well for me and what I like to see when I see presentations is heavy emphasis on product, what it does, like on PowerPoint. I probably did two slides about what I was about to present them and then I showed the demo and then I answered the questions. I was, and remain, very passionate about whatever software I build, and I think that did an effective job moreso than a PowerPoint deck or slick presentation training classes.
Andrew: Okay. IBM liked it. They keep escalating it, showing it to other people. You finally get a $50,000 first deal, as you called it, to develop and co-license it. What do you do with that? What’s the next step?
Lew: I made my first hire.
Andrew: Your first hire, okay.
Lew: Yep. Raised another $100,000 from existing investors so that could get us through to about 18 months of the company’s total existence to date. Here’s where it got a little challenging. The product that I was focused on with the IBM partnership turned out to be a dud in the market. I don’t think it ever got a paying customer. We built the core technology. What the core technology does, as I said, was make Java programs self-diagnostic. In 1996, ’97, a lot of the conventional wisdom was that Java was going to be huge on the desktop. It was going to run in applets. I don’t know if you remember the word applets from the late ’90s, but it was a precursor to what Flash has been doing the last several years, what HTML5 is doing now. Applets never took off. Client-side Java never really took off. Where Java really got huge and continues to be huge today is running on the server powering most of the business websites on the Internet, most of the high-end business websites on the Internet.
Anyway, we focused on client-side Java because that’s where our partnership opportunity was early on. But the enabling technology at the core of it could be repurposed to a server-side Java. So when we were discovering that we were hitched to the wrong train with IBM, and some of our contacts with IBM shared that with us on the down low. They were like, “Look, as a company, we can afford for this project to fail, but this is your whole company. Don’t tell anyone I said this, but I recommend you look to diversify your focus away from this product.”
At that point in time, we decided, based on me and the other guy in the company, to focus on this developing technology that helps servlets that was powering websites on . . . there’s a company called WebLogic that was getting some traction in the market at the time. IBM had a product called WebSphere that was getting in development. We focused on monitoring websites on the server-side instead of the client-side, and that’s where our product interscope was born. That came to market in the summer of ’99.
Andrew: Okay. Why don’t we skip forward a little bit now to your decision to sell the company?
Lew: Yeah.
Andrew: What made you decide to sell?
Lew: It’s a good question, and it sets the stage for what I think we’ll talk about a little later with New Relic. When Wiley was acquired, we were about a 260-person company, had 500 large enterprise customers. The software was and continues to be used by large banks, large government entities. If you do online banking in the U.S., Wily software is monitoring it to make sure that online banking doesn’t crash, the pages are fast, etc. It’ll tell the IT departments in those banks why they’re slow if there’s a slow down. It’s not just banks. It’s virtually every large business Wily has presence in. The company’s doing very well, but it was a very expensive business to build.
In terms of how we reached our market, we hired a small army of direct salespeople, sales engineers, and sales reps. Very talented, capable people, but expensive people to hire who would visit the customer on site, work over a 9 to 12 month period to convince the customer to purchase a few hundred thousand to a couple million dollars worth of our software. As we looked at where we were in 2005, when CA approached us, we were always two quarters away from breakeven, because there’s this tension between growing the business faster, which helps the enterprise value of your company, versus bringing profitability in. We felt like we needed to sustain the growth. But the way you sustain the growth in a direct enterprise sales model is you hire more salespeople and because of the nature of these big ticket enterprise software products, those salespeople tend to take a year before they’re fully productive. It takes a lot of cash.
We ended up raising $43 million to date through, I think, four rounds of venture funding, great investors, great successful relationship with them all. We felt we’d probably need to raise another $15 to $20 million to go the distance. When CA approached us with an offer of $375 million, we felt like that would be equivalent of a $600 million offer two years from now if you take dilution into account. It wasn’t a purely financial decision, but it felt like . . . in that time frame also, the public markets were not, and they continue not to be a very attractive exit for a lot of companies in enterprise software. We just felt like scaling our business would be very expensive, and it was questionable how long it would take to get that same kind of shareholder benefit in the long run.
Andrew: All right. You get to 260 people. You get to large banks as customers. Revenue’s growing. How do you get to that point as a non-entrepreneur? You are an entrepreneur, but as someone who’s more of a tech guy as you told me before the interview started.
Lew: Right, right. This is probably what you hear from 80% of your interviews, but it really comes down to hiring awesome people. People better than yourself. Letting them really reach their potential.
Andrew: How did you know how to hire people.
Lew: Well, you need a balance of being passionate about your vision but not a control freak. You got to be very comfortable hiring someone and saying to them, “Look, you’re the domain expert in this and I’m going to trust you to run with this.” But still having the instincts of knowing, this is the hard part about being the CEO is empowering those senior people and trusting them, but at the same time, sensing at the appropriate time when they’re not performing or balanced on the just trust and go. I just had a natural attraction to awesome people, and they seemed to be naturally attracted to Wily. It was a great filter for interviewing. People who were really interested in Wily tended to be really good people. They saw the intangibles.
Andrew: How’d you find people who were really interested in Wily?
Lew: A lot of it was through my network. Many of them are colleagues from college. I went to Dartmouth in New Hampshire and it’s a pretty small school.
Andrew: You stayed in touch with them the whole time?
Lew: I stayed in touch with them. I worked with some of my friends from college and just reached through the network beyond that. We rarely used recruiters. It was more through the network. It turned out to work really well for us.
Andrew: The day you sold the company, how’d that feel?
Lew: It was life changing and a little odd. I was the first person in my family to go to college, so just being the founder of a company with that kind of liquidity event, everything was changing. What made it even more life changing at that point in my life was I just had my first daughter. Literally, we were going through the negotiations and signing this definitive agreement while my wife was going through her C-section. Everything in my life was just completely different from prior to that.
It was very important to me that the special things about Wily lived on and yet, at the same time, the acquirer really felt great about this acquisition. So many software acquisitions don’t live up to what the acquirer or the acquiree hopes they do. They’re really hard to do and execute, too. I felt like it was really important for CA like three or four years after the deal to say, “Look, we’re really glad we did. It was a great value.”
Similar to when I sell software, I want my customer to say, “Look, it may not have been the least expensive option on the table, but it was the best. I’m very glad I’m a customer.” I’m glad to say that was the feedback we’ve had throughout, and Wily continues to be one of the top revenue generating products within CA. I think it’s still at the top actually, new license revenue product inside CA. It’s grown, and many of the people from within Wily have developed great careers within CA.
Andrew: Talked to an entrepreneur the other day who sold his company to Omnicom, and he actually has a copy of the wire transfer that he, I don’t know where he keeps, but somewhere within view so that he can go back and think back on that. It’s inspiring. Do you have anything like that, any trophies?
Lew: I have a memory on that. My parents sacrificed an enormous amount to make all this possible, putting me through the schools I went to. Basically, hopefully, Mom and Dad, I’m not exposing too much, but they had no retirement savings, but they had no regrets either. Regardless of what happened, they just wanted to do what they could to help me reach my objectives and that was wonderful and selfless of them. The day my dad turned 65 and hit official retirement age, he did retire and it was the day that the check was deposited. They went on a cruise and had a great retirement. It came down to the day when liquidity from Wily happened was right when my dad retired. So I felt like that was a nice way to finish things there.
Andrew: I talked to a lot of entrepreneurs about their tough times and we talk about being up late at night worrying, trying to figure out how to save a company. Do you have any of that?
Lew: Oh, yeah. I remember one of my first shareholder letters early on in Wily. I lose sleep at least three days a week over Wily. As long as I’m losing sleep, that’s a good sign. There’s a couple things I lose sleep over. It’s either complete excitement over the opportunity, or it’s working hard on solving a problem, or it’s abject fear. [laughs] On a given week, probably each of those things will contribute to at least one night without sleep. I think that in starting a company, it’s the closest thing to a complete manic-depressive experience you can have, I think, of just one day you’re convinced you’re going to rule the world and your company is going to exceed everyone’s highest expectations and it’s all but a certainty. And the next day, you’re wondering how on Earth you’re going to survive as a company and personally and if you’re going to be the laughing stock of your entire ecosystem of business partners and friends.
In the case of Wily, we were founded two years before the bubble burst. Thankfully we didn’t raise a bunch of funding during the bubble, so that saved us from some serious pain. We grew through it all, but it was a tough time to sell enterprise software, six-digit enterprise software deals in 2000, 2001. I was a first-time CEO. Funding would’ve been very hard to do. We were at a stage when we had four or five months of cash in the bank. We had just had a horrible miss on a quarter, and we had engaged in a CEO search. So I’m busy trying to find the right CEO to take the company to the next level while I’ve got what felt like a rickety go-kart going down a hill really steep and everything feels like there’s no shocks in this thing and I’m jumping down. It felt like that. I felt like things were wobbling out of control. There was a lot of lost sleep in the summer of 2001.
Andrew: How’d you turn things around?
Lew: I made a decision that I’m really thankful I did. I felt overwhelmed at the beginning of it, like I’ve got a sales problem, I got to keep my team aligned and motivated, I got to worry about making the quarter, I got to worry about raising the funding. I decided to ditch all of those concerns and focus entirely on the CEO search. We had been looking for the right CEO for the company and, in my mind, the right CEO was about cultural fit more than it was about resume. I concluded that we found the right person, a wonderful guy who’s a great friend of mine to this day, Dick Williams. I think he’s working on his fifth CEO gig now, running a company called Webroot, which is going to be a success in the security space.
Anyway, I found Dick and I decided to put all my eggs in this one basket of find a way to convince Dick to join this little company and make it a success and then we won’t need to worry about funding. We’ll have a great, proven CEO that will attract the funding, and we won’t have to worry about getting the team aligned because he’s a natural at doing that. I won’t have to worry so much about making the quarter because with the right CEO in place, future quarters will be made.
It was just an all or nothing bet. If we didn’t recruit him, then all these other problems would have just gotten worse without my focus. We probably would have gotten into serious trouble, down around minimum, maybe worse. We managed to recruit him. Within weeks of recruiting him, we closed a round of funding at a much higher valuation than I ever could have gotten on my own. Things really shifted into a new gear and the company continued to grow and succeed.
Andrew: I hear that a lot. Focus on, with everything collapsing around them, entrepreneurs will just focus on one high-value action. Just do it and let the rest of the things fall to the wayside, and then everything else, once that one high-value action happens, once they get the results they need, everything else just works out.
Lew: Yeah. When you’re in the middle of the maelstrom, it’s hard to remember that and it’s important to pick which thing you should focus on. If you can manage to do it, identify when you’re in that scenario and then pick on the thing to focus. I think that’s a great way to handle those scenarios.
Andrew: Often it seems like it’s focusing on customers, on bringing in more revenue, that if they could let everything else fall apart, but if they can find a way to bring in more revenue, then that revenue will cover for the other mistakes and the business will grow. I guess in your business, the sales cycle is a little bit longer, so you can’t count on sales coming to the rescue so quickly. Is that right?
Lew: It is. There’s less predictability to it. Someone calls in sick on September 29th, you have one customer you’re trying to do a deal on, and it slips to the next quarter, that’s one of the things I don’t miss at all about selling enterprise software. The other thing about focusing on revenue, I think Guy Kawasaki said once that good sales basically trumps all other problems, right? If sales are doing well, and I’ll tell you, when sales are doing well and they have been doing very well in my company recently, yes, all the other things tend to be more surmountable problems. You don’t want to be a slave to short-term revenue as you solve strategic problems. You certainly don’t want to do work that is throwaway work for the sake of one deal, in my mind, if you’re trying to build a scalable business. You got to be mindful of it. You got to try to drive sales, but not sales at all costs, if you’re trying to build a long-term business.
Andrew: One quick question from Pedro in the audience, and then I’d like to move on to New Relic. Pedro was just asking how long did it take you to find the CEO?
Lew: That was a 13-month search.
Andrew: Wow.
Lew: The reason why it took so long, a couple reasons. One was, and I’m very glad that my venture investors are so supportive of this. I said what’s going to make this a hard search to fill is the intangibles, finding the right kind of person who loves what, is specific why it’s hard to put on paper, but it’s a feeling you get when you meet these people and you see this company, and you know when you see it. The second was the company had limited appeal. It’s not an easy company to explain what we do. It wasn’t a consumer company. There wasn’t a huge pool of candidates and we were early stage. Over the course of those 13 months, the company certainly grew and got a little more interesting. So we were more attractive to someone like a Dick Williams later on in the game. The hard part was finding a cultural fit.
Andrew: Earlier you said, I’ve got a note here on my paper to come back to it because it’s so important I’ve got to bring it up now. You said it was a good thing that you were up nights. It was a good thing that you were worried. Why?
Lew: Complacency is the enemy of any successful company.
Andrew: So being up and worried and being scared at times, that’s your way of understanding that you care, that you’re not being complacent, that you’re completely involved?
Lew: Yeah. What is it that Andy Grove said, only the paranoid survive. I think Microsoft, in the ’90s, when they were dominant, still had these, I hear these stories that their board meetings are still filled with this fear of, “We’re going to get killed next month if we don’t do something.” Microsoft in the ’90s saying that is emblematic of that. I think that’s the main reason about it, but it can’t be paralyzing fear. It has to be kept in balance with . . . if that’s the only thing that keeps me up three nights a week, it’s probably going to fall off the wayside, right? You got to have that excitement, that optimism. I can’t resist solving this hard technical or business problem. I can’t stop thinking about it. Those things also need to keep you up at night as well, I think.
Andrew: I see. Okay.
Lew: And early on, when you’re a founder, that probably happens more often than when a company’s more mature.
Andrew: New Relic, what was the idea behind that?
Lew: So New Relic really, in the short version to explain New Relic is the culmination of all the learning I had with Wily as a clean sheet of paper do-over. Wily became the market leader and still is the market leader on web app performance management for the high-end, large enterprise web apps, like online reservations at BritishAirways.com or whatever. If you activate a phone on Cingular or AT&T, then the web software that makes that phone activation work is all monitored on Wily. I talked a bit about how the way Wily grew as a business was through the large direct enterprise sales force.
When I thought about New Relic, I thought, and I still am, for some bizarre reason, very interested in the web app agent performance management problem as esoteric as that is. I felt like, knowing what I know now, what would I do differently? I concluded a couple things. One, I felt like there ought to be a more cash-efficient way to scale a business so that you can reach profitabilities at very high growth rates without hiring, in the case of Wily, 150 of those 260 employees were in sales, there are only 15 engineers writing code.
What was interesting to me at the time that New Relic was founded was that companies that were winning in the marketplace were companies with amazing differentiated product and technology. Companies like Apple and Google were and are still premium players in the technology world. You contrast that with who were the winners that really came to the forefront in the ’90s, and it was companies with the best sales forces, like SAP and Oracle. Not to say they don’t have interesting, good technology, but their center of gravity was more on the sales side and less on does the product amaze the customer. Right? I thought this is a great time to start a company whose center of gravity is on product excellence even though you’re selling to businesses not to consumers.
I decided that what New Relic needed to do that Wily didn’t do as well was make the product do 80% of the selling and deliver through a software as a service model so that our customers didn’t have to spend any time managing their management software. I decided to go after this market, but start off going for the lower end of the market instead of hundreds of thousands of dollars or a million dollars to manage 10 or 20 servers, let’s charge $50, $75, $100 a month to manage a server for those thousands of apps that don’t have management. We started doing it for Ruby on Rails, which reminded me in 2007, where Java was when I saw it in ’97. New technology that empowered great productivity benefits. We decided to do application performance management and monitor the performance of websites running on Ruby on Rails. That’s like companies like 37signals and probably many entrepreneurs that you talk to built their sites on Rails today.
New Relic launched in 2008, and within eight months, according to a survey of the Rails community, we had over 85% share of app performance management in the Rails space. We decided to expand the offering to cover apps running in Java, which we knew how to do because I had brought along many of my friends that I had worked with for over a decade from Wily. Now we’re looking to expand this even beyond Ruby on Rails and Java.
Our vision is to monitor the performance of web apps regardless of what application platform or language you’re running it in and provide you with that deep visibility that allows you to solve performance problems as they happen in production with all the data you need. We do that only in a software as a service model. What that means is very low prices, very low total cost of ownership, very easy to get up and running.
Andrew: It also means revenue grows more slowly, doesn’t it?
Lew: It’s so much more predictable. I’ll take that any day.
Andrew: Really?
Lew: Like I said, in the case of Wily, more than half of the business that Wily closed was in the last three days of the quarter. All it takes is somebody being sick on the 29th of September to push 10% of your number out a quarter. Our business is entirely subscription, and we have been within 95% and 105% of our cash projection every month for the last, since the company was founded because of that subscription base. Now, I would also say that SAS companies, up until two years ago, the knock on SAS has historically been because you don’t get that cash up front, it’s expensive to build the business, it’s cash inefficient, and it’s not going to take hold. It’s a really flawed assumption that we discovered and exposed. That’s assuming you’re using the same heavyweight, expensive route to market of hiring lots of sales reps.
If I’ve got direct enterprise sales reps earning $250,000 a year to sell a software as a service product over a nine-month sales cycle and that revenue’s recognized over three years ratably instead of up front with a license payment, that holds true. But 80% of our customers sign up through a website, no human involved. We have two sales reps in the company. We have 5,000 customers, about 1,000 of them on our paid product, and our sales team touches the top 20%, which accounts for 50% of revenue but is in a far higher velocity. Actually, we’re going to have, I think, a far more profitable model than the traditional enterprise software company, a far more scalable model despite the fact that we don’t recognize an up-front cash payment on most of our business.
Andrew: Let’s see. I’m looking at the time here, and I know that we only have a few minutes. But I also wanted to bring up the Harvard Business study that’s written about you. Can you talk about that?
Lew: Sure. The thing’s a bit about the story I was telling about our CEO search and what it’s like for the founding CEO to go through the emotional process of deciding to hand over the CEO job to a professional manager and how you go through that search and who you engage and the ups and downs of it. I had the honor of speaking at some of the best business schools on the case study, because many entrepreneurs want to know what it’s like to go through that and this case study definitely goes into the deepest inner emotions of it. It’s been an interesting experience being a bit of a guinea pig for MBAs on entrepreneurship, and it gives me an opportunity to work with some wonderful people in the academic side of business.
Andrew: Have students gotten in touch with you directly as they were working on the case study?
Lew: Yeah, a fair bit. I live about a mile from the Stanford campus, so I get to Stanford three or four times a year to build some relationships there. Of course, it’s a world-class institution for entrepreneurship. It really keeps me, I think, my energy level high and then getting to interact with these really talented young people who want to build exciting businesses.
Andrew: Do you still have late-night worries?
Lew: I’ll have that as long as I’m, hopefully, effective as a CEO. More often than not, late-night optimism and excitement over what my current company could become.
Andrew: What’s exciting you right now? What’s the excitement that’s keeping you up at night?
Lew: We’re about to double the footprint of what our product can cover in the next 30 to 90 days. Then we’re going to expand on what the product does in terms of breadth. The product is very exciting. Even at the current course and speed, we’re seeing 200% growth on the top line. You combine that with where the large incumbents are in their distribution models and how they’ve got the worse case of innovators’ dilemma because they’re addicted to their direct enterprise sales forces. I think we’re in a remarkably unique time where we can be an independent company with control over our destiny and grow profitably and have fun doing it. That’s a rarity in software. I think we’ve got a chance to do that.
Andrew: All right. Great place to leave it. Company is New Relic. Is there a way for people to . . . I guess you guys have a blog, right?
Lew: Yeah. LewsBlog.NewRelic.com and www.NewRelic.com. I guess the last tidbit I should share with you is New Relic is an anagram of Lew Cirne. That’s how the company got named.
Andrew: Oh. [laughs] I see it now that I see it on my screen, I see what you mean. All right. Cool. Thank you, Lew. Great to meet you.
Lew: All right. Have a good one. Thank you.
Andrew: You bet. Thank you all for watching. Bye.
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