Eric Tilenius recently concluded his Executive-in-Residence stay at ScaleVP to become CEO of BlueTalon. We loved having Eric with us—he brought great energy, insight and contacts to us. Eric sourced a lot of early stage companies that we will be keeping on the ScaleVP radar screen. And his network identified a small but crucial M&A opportunity that helped one of our portfolio companies expand its business in a meaningful new way. Thank you, Eric!
Eric and I got to yacking about how his insights from our side of the table will bear upon his new role leading BlueTalon in its mission to improve data access and collaboration across enterprise boundaries.
Sharon Wienbar: How did your time at ScaleVP help you assess potential companies when looking for your next leadership role?
Eric Tilenius: I certainly gained a finer appreciation for the point at which a business is prepared to scale. The partners at ScaleVP understand the rapidly changing nature of enterprise SaaS and software companies, the evolving business models that power them and the changing technologies that impact them. Seeing companies accelerate at this inflection point was clearly one of the most exciting times for the companies that ScaleVP supports. That honed my focus on finding a company that had a solid product, operating in a strong market, with a capable management team, “ready to scale” quickly.
Sharon: Now that you’ve been on the VC side of the table, what will you do differently as CEO?
Eric: I learned a lot about balancing vision and execution in a startup. While I was looking for an opportunity with huge upside, I also came to appreciate the value of continually validating the company as you go, by finding small wins and proof points early. Now, while we’re keeping an eye on the long-term vision, at any given point I want to have made tangible progress toward value-creating milestones. I also learned how critical it is to build predictable, repeatable revenue sources—that a lot of small customer wins are better than one big random one that may not be able to be replicated.
Two other business lessons were also reinforced: use great metrics to make fact-based decisions, and hire people with the specific domain expertise that our company requires. On that note, BlueTalon is hiring! I welcome talented individuals to contact me personally on LinkedIn.
Sharon: What do you see in BlueTalon that attracted you to the company?
Eric: BlueTalon operates on the cusp of the next phase of big data services — the challenge of internal and external collaboration. Box is one of the ScaleVP portfolio companies that impressed me greatly. BlueTalon strikes me as having the potential to do for database data what Box has done for business documents. By securing enterprise data and enforcing access policies across an organization and its network of partners, BlueTalon is driving productivity and efficiency for businesses in verticals like healthcare, retail, and financial services. These are complex industries, driven by massive Fortune 500 corporations that must collaborate efficiently with partners while remaining compliant with an increasingly complex regulatory environment. What a great opportunity to deliver innovation! The technical and management teams at BlueTalon impressed me by having built the leading solution for secure, policy-compliant data collaboration in such complex markets. I’m equally impressed that BlueTalon has earned the trust of early customers like Lilly, Optum & United Healthcare — all companies that see the value in data collaboration.
This column was originally published in Entrepreneur.
Angels, venture capitalists, private equity firms and mutual funds all evaluate investments on the same four basic criteria. At the various stages of a company’s evolution from brilliant-insight baby to billion-dollar behemoth, those investors will weigh your attributes differently.
When you pitch your company for funding, focus on these four topics:
Our strategy is sustainably differentiated. Demonstrate what’s special about your company and how you’ll keep that strong position. Is your offering fresh and different with a unique solution for the customer? Are your costs structurally lower or your service super fast because you invented incredible algorithms? Show that you have something different from the pack, and that is what your target market wants. Some businesses grow and thrive with execution being their main differentiator: think high-volume selling or complex logistics businesses. If execution is your pitch for why you’re different, be sure your track record backs that up.
We are the right team for this endeavor. For early stage companies, the team is the most important aspect an investor considers, as your market and product may not exist yet. What unique combination of skills and experience makes your leaders the potential winners? As you scale your business, your execution will demonstrate why you’re right for the job.
Our business model will make money. Money — profits and cash flow — are ultimately what create value. On your way to profitability, your company may become strategically valuable, and might be acquired early or IPO when public investors believe you will become profitable soon. You have to show how your business model — the costs to acquire and serve customers — will be profitable. Understand the margin structure of comparable companies, and show how you will track versus their paths.
Later-stage companies and investors focus on the financials. Public investors might screen almost exclusively on your financials, looking for expanding margins and profit growth. For younger companies, your target model and cash needed to break even are foremost concerns.
Related: Here Is How to Get a VC’s Attention
Market size. Investors want to know that your company has plenty of room to grow. “You can’t make a big company in a small market,” was one of my first VC lessons. For the nascent markets startups try to create, there is no current market size, so focus on the total addressable market. TAM measures the potential annual revenue for your industry — it is NOT an estimate of your company’s potential.
Markets can be sized “bottoms up” or “tops down.” Try both methods to check if your assumptions are reasonable. Typically, tops down-sizing crudely estimates a market by analogy or relative sizing, e.g., “Product X is a management solution for customers using technology Y. Technology Y is a $1 billion annual market, and an add-on management solution deserves 20 percent of the core target spend, so the TAM for Product X is $200 million.”
Here’s how Scale Venture Partners created a bottom’s up TAM to assess our investment in online marketing company Omniture: We counted websites by traffic volume, assigned an annual revenue potential to each size category and added it all up to over $1 billion a year of annual addressable spend. This work was done when Omniture had only a few hundred customers, not the many thousands of potential clients we counted in our TAM.
As a long-time venture investor, and previously the head of investor relations for two public companies, these four factors are the pillars of successful pitches — and investment decisions. Clearly communicate your company’s market, strategy, model and people, and you’ll be speaking your investors’ language.
During the last ten years, while venture capital was supposedly dying, the venture backed companies that went public or got acquired in that decade, achieved a combined valuation of $1.25 trillion as of Dec 31st 2013. Today, I wrote a column for Re/code explaining this. Check it out here. This companion post has the detail backup and an explanation of how the companies are categorized.
Here is the complete list
What the Categories Mean
We divided all Companies up into the three obvious sectors based on where venture capital dollars flow: Information Technology, Healthcare and Other. Within IT, we think about businesses in terms of who is the customer, broadly defined. We have observed over the years that while technologies change, customer categories are more persistent. The CFO who bought mainframe financial software thirty year ago, SAP software fifteen years ago and Workday today, is the same person with the same purchasing process, despite all the technical change to the product. The process is still sales call, product review, Proof of Concept, Considered Purchase etc.
IT Categories Based on who the Buyer Is
We see four buyers types within the overall IT industry: the Enterprise IT buyer, the Enterprise Line of Business buyer, Individual Consumers and the Components buyer. Enterprise IT and Enterprise Line of Business are fairly straightforward Categories. IT buys databases, routers and PCs and the Line of Business buyer buys applications. The total of these two buyers is the overall Enterprise Technology business. In one sense Consumer is a misleading title. Most companies in the consumer category generate revenue by selling advertising against free consumer eyeballs, and thus strictly speaking the consumer is not the customer, the ad buyer is. However, we believe the core competence in an internet consumer company is the acquisition of vast numbers of end users by offering a compelling consumer product. Once you have done that, the monetization is fairly straightforward. So, while the “buyer” is not an accurate description, practically speaking it conveys the idea that the value is created for the company by attracting and pleasing the consumer. Finally, Components companies typically sell to a deeply technical buyer, building an electronics product that will embed the component, with either no attribution or at best an “Intel Inside” moniker. Most of these are semiconductor companies.
Dividing IT up Further
Within some of these Buyer Categories we have done a further analysis. While at first it felt like overkill, we found that we wanted to know the answers to questions like, “are the big wins in Enterprise IT Hardware companies or software companies?”. Thus for Enterprise IT, we broke it out into software/services companies on the one hand and hardware products on the other, recognizing that the distinction is not hard and fast – because everyone wants to say they are a software company. The answer BTW is hardware and software exits above $1BN are about equal in quantity over the past ten years. For Line of Business, we wanted to know how dominant SaaS is ? We broke out the companies into SaaS vendors and the rest. All but 2 were SaaS. Within the Consumer market we broke the companies into Ad Supported Models, Marketplaces and a few other categories. Almost all the value has been in large ad supported consumer focused internet companies which took the number one, two, three and five slots across the entire venture industry for the past decade.
The consumer category and subcategories is where is where you see start to evidence of “disruption” of the non tech economy. Consumer internet ad supported companies are taking old media ad dollars, marketplaces are taking share away from old ways of purchasing rental houses. In the next decade here is where companies like AirBnB and Uber will show up. This is the “Digital Disrupts Analog Trend’. It shows up as companies, focused on either the Consumer or Line of Business, that are not selling technology but instead using technology to disrupt an existing business. Many consumer facing businesses have already been disrupted but B2B has not seen the same effect. It will be interesting to see if that changes.
Comments welcome, and in particular any missing names. We run this exercise internally and call it the GED, the Great Exit Database. Don’t want to miss anything.
What’s Your SaaS Revenue Model?
You’re a SaaS company with a hot product everyone wants, but you need to make money. You have great options, but you need to make the right choice for your business – paid, freemium, free trial or free forever. How to decide?
First off, your model is dependent upon who will be using your product. Secondly, you need to decide if your goal is to maximize adoption or revenue. Third, when you do a good job of segmenting your audience, you can successfully manage multiple revenue models.
Which model works best for which kind of company? Let’s run through the advantages and disadvantages of each option.
When a vendor offers a paid version of its software, it charges from the first user. An application that is available only as a paid version typically involves some configuration and set-up.
Workday follows the ‘paid’ model. Workday’s Human Capital Management software, for instance, connects to third-party software: payroll systems such as ADP, time-tracking products like Kronos and onboarding tools like E-Verify. Integrating third-party software programs take time and resources, yet Workday’s program won’t be fully functional without connections to these separate software programs.
A free trail won’t work for companies such as Workday because a user needs to buy the software for the integration to take place.
For the vendor, charging each user for its product is the most lucrative approach. But, getting customers to sign on and adopt the software requires marketing and direct sales teams, both are major cost areas – especially for a startup. A company considering the paid model will need to decide if the eventual revenue trumps the slow and expensive pace of adoption.
Sometimes, you want to give prospective customers a chance to try the product before they buy. In a free trial, a customer can use the software free for a set timeframe. You hope that, during the trial period, she becomes dependent on it, and signs on.
Free trials work best when the customer must make a “considered purchase” — she’s determined the software solves an immediate and critical need. The downside? Free trials invite a lot of “looky-loos”—prospective customers who check out the software but don’t make a purchase.
This is a smart option for high-growth companies that have an easy-to-use product that doesn’t require hardware or technology integration. This approach also helps a company find qualified leads and provides an entry point for sales.
A Freemium software vendor offers its software at no cost, initially, but upsells a paid version. This approach works best for vendors, who want to maximize reach and generate leads. Often the first users are individuals, who like the free features but want more – what’s available in the paid version. At the same time, the company’s IT department wants and interface it can access for user support. These two mechanisms move companies toward the paid version. Two of our portfolio companies – DocuSign and Box — and SurveyMonkey are establishing solid, fast-growing businesses with the freemium product approach.
The primary challenge with pursuing a freemium model is determining what users get for free and what features are only available in an enhanced or premium version.
Finally, a vendor can offer a product free — forever. It’s easy to acquire users with this method, but to survive a company must have both a large number of users and alternative revenue streams. Advertising revenue alone won’t cut it. A free product can introduce another product that the vendor collects revenue on. Spiceworks, for instance, offers free network management software but has other revenue sources with advertising, marketing services and co-selling other products. Similarly, LinkedIn’s service is free but the company sells advertising, premium services, and recruiting tools.
Case Study: DocuSign, Free Trial to Freemium
DocuSign, a provider of cloud-based electronic signature technology initially offered its solution via a freemium product. The company’s goal was broad adoption. It felt a freemium approach was the best approach was to get DocuSign into the hands of as many users as possible.
DocuSign’s pushed its freemium offering online and was, as Robin Joy, VP Online and Mobile at DocuSign, explains, “very generous”— to a fault. The freemium version gave users almost everything that they needed; users felt no need to upgrade to a paid version.
DocuSign realized that to push customers towards a purchase, users needed have skin in the game and be motivated to use the product. The company changed course and decided that all paid search-related marketing efforts would lead the consumer to a free trial. DocuSign wanted motivated buyers. As Joy explains, “People who search for our product have an immediate need and are easy to convert. The expiration date puts them at a decision point.” These users are much more motivated to pay for the product when the trial ends.
Although free trials are now the biggest revenue driver, DocuSign still offers a freemium version. This method takes advantage of Docusign’s “amazing viral element and helps grow adoption,” remarks Joy. When someone receives a DocuSign request to provide an electronic signature, the company offers to set up an account to store the signed document. Since the signer doesn’t necessarily have an immediate need for the product, DocuSign doesn’t time-limit the trial. The conversion rate from the freemium version isn’t as high as that of the free trial offered online. However, these freemium offers have generated millions of new accounts that DocuSign then nurtures through email and other marketing tactics eventually converting them to paying customers.
DocuSign has succeeded in managing two revenue models: one for reach and one for revenue. Joy admits that perfecting the revenue model is “A never-ending process. We can continually improve and reevaluate.” Her advice to vendors that need to determine a revenue model is to focus first on the target customer segment and understand its needs and propensity to buy.
What we’re seeing in the market is a focus on a free trial approach rather than a freemium model. While the freemium model gives the user a lot of flexibility, vendors struggle to determine which features should be free and for which features they should charge. Free trials, on the other hand, when directed at users at the right time, lead to engaged and loyal users.
It takes a passionate and driven individual to be an entrepreneur, but what happens after the company is launched? How does an entrepreneur go from an idea to building a long-term successful company? As part of our Scaling Q&A Series, we dive into growth strategies and successes from our rising stars.
Describe RingCentral in one sentence?
VS: It’s a cloud-based communications platform for business of all sizes.
What inspired you to start the company?
VS: My prior company dabbled in the software communications space a bit and it was apparent that there was a need for next generation communications system.
Communications is a huge market, traditionally manned by stagnating incumbents. I was inspired by the possibility of creating disruption in a giant market and building a significant company in the space.
What is the biggest lesson you’ve learned through the process of starting a company?
VS: That it is a living organism and you need to adapt. It is important to hold your own and the values that are important to you, but you also need to be flexible and open to new opportunities as the company grows and expands.
What advice would you give other entrepreneurs looking to start a company?
VS: Don’t do it (laughs). But seriously, you need to jump in with both feet, you have to believe in the company, what you are doing and what you are trying to achieve. It is really hard work and if you aren’t enjoying the process of building the company, then it isn’t worth it.
Once you get past that mark, it is important to keep the end goal in sight. Think about your goals for the company long term – what do you want it to look like in 10 years and how can you build to that while staying focused. As I mentioned above, you need to be flexible but you don’t want to be chasing the latest shiny objects. Stay true to what you want to create.
RingCentral has experienced a tremendous amount of growth? What’s your secret?
VS: There are three main ingredients to building a big business 1) a sizable, meaningful market 2) a market that is ripe for change 3) a better mousetrap than the other guy. If any of these components is missing, you don’t have a chance.
After that, you need a strong team on both the technical side (to build the product) and the marketing side (to bring said product to market). Bringing on the right people to help grow your business is crucial and worth the investment. One strong player is better than 100 mediocre players.
Lastly, there is a certain degree of risk tolerance you need to be comfortable with to go big.
Who has helped along the way?
For me, a group of advisors has been useful. You can’t have multiple hands on the driving wheel steering the direction of your company, but it is important to appreciate the past experiences and external value that your strategic partners and board members can provide. We were very selective in choosing our board and they have been helpful in providing resources, business advice, growth strategies, intros for key hires and an overall external point of view on the business.
What do you do for fun?
VS: I try to find balance and spend a lot of time outdoors, snowboarding, wakeboarding and my latest obsession kite boarding.
Has it influenced how you run your company?
VS: Absolutely – especially kite boarding, there are a lot of analogies between the sport and running a successful business. First, you need to accept that there are powers out of your control that are infinitely stronger than you and figure out how to manage that environment – knowing when to fight it or let go. Second, you need to be respectful of your environment and adapt to changing conditions. Third, you need to look where you are going and remain focused. Don’t panic, ever! Otherwise really bad things can happen. And last, but likely most important, is to have fun!
Today, we are excited to announce our investment in Sailthru. From Marco Polo’s early trade routes to today, remembering vastly different customers’ likes and dislikes is what allows any business to survive and thrive. As ancient as the practice of revenue optimization may be, it remains wide open territory with new frontiers for innovative companies to deliver even better business performance, simpler and more cost effectively. At Scale Venture Partners, we’ve seen this proven repeatedly through more than a half dozen investments in companies that sell SaaS into the marketing suite. And, we’ve seen it again in our latest investment, Sailthru.
Here’s how we think about Sailthru: Revenue Optimization = Real Time + (AI) Alogrithmic Intelligence + CRM + Omni-Channel / All-In-One
No doubt next-generation marketing is becoming more sophisticated and delivering more value by the day. Often though, it takes a very large enterprise to realize that value by spending significant amounts of money to customize various software systems and hiring dedicated teams to manage the inputs and outputs. Luckily, for the vast majority of businesses the emergence of SaaS in every category is taking the best of breed from these larger enterprise systems, consolidating them onto one software platform, and automating much of the day-to-day processes. In business to business (B2B) marketing, a whole category around marketing automation, or lead nurturing, has emerged and created several billion dollar companies in Hubspot, ExactTarget, Marketo, and Eloqua.
But in the Business to Consumer (B2C) market, Sailthru is creating massive value for consumer marketers by automating and optimizing consumer engagement and the purchasing funnel. Sailthru’s revenue optimization technology captures data across all mediums (web, mobile, social media, e-mail), stores it in a modern architecture, and markets back to those consumers in an automated fashion, across the most appropriate channel for that individual. Each marketing message, time, and frequency is personalized to that consumer and her habits. With no two consumers receiving the same marketing message at the same time or in the same place, each individual receives a personalized marketing message that is meaningful to them. And, marketers optimize revenue, engagement, and conversion.
Sailthru truly delivers on its brand name; Customers come in and come back, and marketers no longer need to integrate disparate and complex systems, hire data analysts to run complex database queries, or spend significant resources to build complex customer segments.
With such an innovative product and insightful team, we couldn’t be more excited to be working with Neil Capel and everyone on the Sailthru team. We’re also excited to be joining fellow investors Benchmark and RRE Ventures. As we’ve seen before with great companies and leadership teams like Omniture, ExactTarget, Vitrue, HubSpot, BrightRoll, DataSift and DemandBase, we see great things ahead for Sailthru.
Words You Don’t Hear in Venture; “Great it’s annual planning time!”
In the next two months, I will sit through seven annual planning board meetings. It’s a grind but an important one. Once a company has revenue, “making the numbers”—like it or not—becomes the shorthand by which management is judged. Scale is getting together with a number of our CFOs this week to talk about the best ways to make the annual planning process more effective. Going into that meeting, this is my list—written from a board member perspective—on what I would say to CFOs about how to get a board member to an informed “yes” to approve the annual plan.
Start with the Big Picture
Provide some context on what the company is trying to achieve in the next year. Spend time with the CEO on this. What—from a business perspective, not a purely financial perspective—is the company trying to achieve? The financial plan should map to these goals and should be judged in that context. Don’t assume your board grasps the big picture; spell it out.
If the CEO and CFO cannot provide two or three clearly articulated business goals for the next year, the planning process is doomed.
Show the Assumptions
Show the key assumptions that drive the plan. For example, in an enterprise software company, sales rep productivity is almost certainly a key metric. Show the average rep productivity metric for the past two years and spell out the improvement you are assuming in the FY14 plan. Do the same for all the key metrics. As a board member, the question in my mind is always this, “What do I have to believe will stay the same, or get better, to believe in this plan?” Your job is to make it easy for board members to answer this question.
Simplify the Assumptions
Keep the assumptions simple. A good plan will include lots of detail because teams need detail to get the plan right. However, to have a meaningful conversation with the board, reduce your plan to a small number of key drivers. Boards don’t like to see just the financial statements and a 10MB model. Instead, show them ten key assumptions for FY14 and, for context, provide the actual results alongside each assumption for FY12 and FY13.
Use the Company KPIs
The assumptions you lay out in the annual plan should be the same metrics that the operations/sales team uses to manage the business. That way, the team is fluent with the metrics and becomes progressively more comfortable as they use them throughout the year. If the finance team establishes KPIs but the rest of the team doesn’t use them, the budget becomes divorced from the reality of the business. The more you are aligned on metrics, the more you can push responsibility down in the organization.
You can predict costs with precision but revenue, not so much. Instead, you have to apply judgment to the revenue calculation. Board members find it helpful to understand the thought process that led to your revenue estimate. Suggestions include showing how to bridge revenue from last year to this year, doing multiple cross checks on the revenue build up, and providing some clarity around level of “slack” inserted. Every board member is trying to get a vision of how you will make your number. It’s your job to help them get there.
GAAP revenue is a trailing metric. Most companies will also use a forward-looking metric such as MRR (monthly recurring revenue), bookings, ACV (average contract value), or TCV (total contract value). Pick a single metric and work really hard to ensure that it is used consistently. Nothing is more frustrating than to have a metric in finance that the sales team simply ignores. Pick one and make it stick. If sales commissions are not based on it, it is not a real metric.
Mind the GAAP Gap
We prefer startups use metrics such as MRR or ACV because these measures take “unit of time” into account. Metrics like TCV can be distorted by multiyear bookings and you end up with a “GAAP gap”. This GAAP gap occurs when great bookings traction fails to materialize as GAAP revenue. After seeing this phenomenon many times, we’ve learned to monitor carefully how quickly a bookings metrics shows up as revenue. If bookings don’t lead to revenue, we know something is wrong with the model. Finance should always be checking for a GAAP gap.
Show a headcount chart across the key functional areas with the headcount adds by quarter. People are expensive. If revenue is not tracking, the least painful way to slow down the cash burn is to adjust the rate of new hires. It’s important to understand what the options are to manage headcount.
Show the expenses in the SEC/Accounting major categories: COGS, Sales and Marketing, R&D, G&A. It can also be helpful to see a simple list of the expenses classified by type: i.e. total salaries, total rent, marketing programs, etc but don’t provide these expense types without also showing them in the major accounting categories.
Marketing to Sales Sanity Check
You must have some simple math to explain how deals move from the top of the funnel all the way to closed deals. Don’t keep it a secret. And, make sure that marketing and sales agree on these assumptions and use them consistently. It is stunning how often I notice a disconnect between what marketing expects and what sales requires. As a high level sanity check, compare relative growth of marketing program dollars to the total volume of new sales required.
As a company matures, it can be helpful to think about the annual plan as a plan for several businesses under a larger umbrella. Some are in scaling mode, typically the core go-to-market business in North America, while others are new go-to-market initiatives, almost certainly consuming net cash. If your company is making an investment in international expansion or in a channel overlay strategy, call this out separately and explain how you will measure success.
Know Your Total Cash Needs
Any annual planning process will result in one of three outcomes on cash:
In all but the first scenario, you need as the CFO to have an answer to the following question, “How much does the company need to raise to reach cash flow breakeven?” It requires a multiyear plan. The plan will not be accurate but the alternative—no plan at all—is worse. When you end your presentation saying, “We exit this year with a $15MM burn and $5MM in the bank,” you leave the board hanging like a bad TV serial drama. State to the board exactly how much cash you need, in total.
Multi-Year Planning and Mid-Term Revisions
The big decision for most technology companies is how much to invest in sales and marketing. One reason for this challenge is that there is an inherent lag between when you invest in these functions and when the business starts generating revenue. We’ve seen a fairly consistent planning bias: companies show aggressive investment early on in the year and then taper off of investment to get to cash flow breakeven. The “cost” of under investment in sales and marketing—lower revenue growth—does not show up until the following year.
One way to highlight this issue is to do a multiyear projection as discussed above. Another way is to decide to have a mid-year check-in. If the company is tracking well, you can decide to green light more investment. If you are face challenges or if capital is scarce, you stick with the original plan.
Aim to be succinct. It should take you only 5 to 10 slides, max, to lay out the assumptions, do the revenue build up, and show the headcounts adds. After that point, you lose everyone’s attention. Once you’ve gone over these topics, show the basic financials by quarter for the planning period and perhaps a multi-year profit and loss statement covering both historical numbers and one to three years of projections. Everything else can go in the Appendix.
The list of items people could ask to see or might find useful is long. This is why some annual plan presentations take forever. Here is a partial list of information that gets requested:
I’m not saying that if you follow these steps, the annual plan review process will be painless. By taking this advice to heart, however, you will be more prepared for the questions you will receive and, likely, more confident in your delivery.
We are excited to announce our investment in Chef. The investment thesis is simple: every company in the world runs on software and—to survive—every company in the world has to run faster. This creates a massive need to speed up the process of developing and deploying code and, in turn, has led to the “DevOps” approach to developing applications. The idea behind DevOps is simple: if Development (the teams that write the code) can work more closely with Operations (the teams that run the resulting systems), they can deploy projects faster with fewer errors. This arrangement works; a DevOps-centered methodology is clearly the way of the future.
Chef Makes DevOps Possible
The Chef automation platform helps organizations switch to DevOps by enabling IT operations and developers to describe, model, and automate infrastructure as code. The Chef automation platform uses cookbooks (reusable code definitions that are written using the Ruby programming language). Each cookbook defines a scenario, such as everything needed to set up and configure a postgresql database together with all required components (templates, versions, metadata, etc.). There are over 1000 cookbooks, including those for databases, operating systems, applications, networking, and monitoring.
Armed with a cookbook, an IT management team can do everything from installing an operating system, to installing and configuring servers on instances, to configuring how the instances and software communicate with one another, simply and efficiently.
The following diagram illustrates how Chef works:
How Big is the IT Automation Opportunity?
The need to automate IT is not new. The IT systems management market has been around as long as the IT markets itself. In fact, every new IT architecture, from mainframes, to minis, to client server to web, has produced a crop of successful systems management companies. However few—or none—of them have been able to make the transition from an old architecture to a new architecture. They’ve either had to purchase to advance or have declined in relevance.
We believe that there is another architectural shift happening today in IT and so do the analysts per this Forrester Report. What’s changing now is not the underlying hardware, which has been commoditized servers for the last 10+ years, nor the interface to the end user, which will remain the browser. Instead, the shift is involves where hardware is deployed and how larger systems are put together.
Quantity has a quality all its own, (attrib. J. Stalin). The sheer quantity of servers under management, and the sprawl of those servers within the enterprise and on cloud deployments, makes the old way of running systems untenable. There are not enough sys admins alive to staff every IT company on a 100:1, servers to sys admin, ratio; existing datacenter solutions like HP-Opsware, or BMS-Bladelogic, to name two of the most successful products built in the early 2000s, just can’t handle this challenge. Throw in the need for faster change management and the problem becomes even more acute. The only solutions for this management problem are a DevOps approach and tools like Chef. Again see point #7 in the Forrester Report.
The IT Systems Management is a $9Bn/year market. We believe that a significant percentage of that market will move to a more robust—yet simpler—configuration and automation solution available from vendors like Chef. We are excited by this opportunity.
We like Chef’s team led by CEO Barry Crist and founder Adam Jacob. I will also stop to remember a core member of the Chef team, former CEO, Mitch Hill. Mitch passed away last week. I did not know Mitch—he was not CEO when we made the investment—but comments from his long time colleagues consistently describe him as a genuinely great person as well as a successful business leader. He and his family are in my thoughts as I write this. There is nothing that can be said that really ameliorates a loss like this. What we can do, however, is pay tribute and respect to the work he did to get Chef to the success and value it has today.
Scale is looking forward to working with Chef to build the systems management company of the cloud decade.
Today marks the announcement of our investment in Bill.com, a provider of integrated bill payment, invoicing and cash flow management solutions for small businesses. There are certain characteristics we look for in an investment and Bill.com proved to be a perfect fit for ScaleVP. Here is what gets me excited about this deal:
1) The need for the product
I was CEO of a start-up. The job I hated most was the job I had to do the most, especially when times were tough, juggling cash to stay alive. I would sit there at night, trying to figure out when cash would come in and what bills I could afford to pay. “If those guys pay me Friday, I can cover wages and three vendor invoices, if they push until Tuesday, I can only cover wages and one vendor. What should I do?” I would work with my CFO, write notes, make contingency plans, and then have it all upset when I had to pay an unexpected bill at the last minute.
Every startup CEO or CFO knows this dance and knows what a vital but broken process it is. Vital because while businesses are ultimately scored based on Profit and Loss, they survive every day based on Cash Flow. Broken because random spreadsheets plus sticky notes to the CFO are a band-aid, not a solution.
You might think that an accounting package or even a budgeting package solves this problem. If you have tried either solution, this is where you laugh derisively. Juggling near in cash falls squarely in the gap between accounting – which shows you what has happened, and budgeting, which shows you what should happen over the next year if everything goes according to plan. Neither product can help you figure out what bills are approved, whom to pay next week and what to do if the customer only pays half of what they promised.
2) The Bill.com solution
Bill.com solves this problem. The service allows a small business CEO, or finance team, to plan out when bills are paid, set up the approval process and then make payments as cash is received. For larger companies the service can set up internal approval mechanisms, so that individual managers, who would never get access to the accounting system, can approve vendor payments based on having verified the work done. Using the Internet, companies can collaborate with suppliers and customers to more quickly sort out queries on bills, with the result of getting paid quickly. Once a company tries the product, it will never go back to paper.
We love to invest in companies that simplify complex broken business processes. We especially love to solve problems that every business faces because that is how to build a big enterprise software company. Box made file sharing simple, Docusign eliminated the need to ever fax a signature again, and now we believe Bill.com will eliminate the need for CEO’s to stay up at night and write multiple “what if” plans to keep vendors from shutting them off.
3) The team
We like the team. CEO, Rene Lacerte, lives this stuff. A successful serial entrepreneur with a family background in the financial software business, he has lived the reality of the problem he is solving. When you talk to him about the product, it is not a theoretical discussion but a practical one about how to make the life of the CEO or CFO better. Around him he has assembled an experienced team of executives, some from his prior company Paycycle and some from other great SaaS companies like Salesforce.
4) The Timing
Now is the time for Bill.com. It is stunning that ten plus years after consumers got online banking and Fortune 1000 companies got multi-million dollar treasury management systems, most small businesses are still doing this by hand or by building a spreadsheet off the accounting system to track cash. The reason is part technology and part distribution. It is really expensive to reach small businesses at scale (pun in part intended) but we have been fortunate to have in our portfolio companies like Ring Central and Hubspot who have solved this and successfully reached thousands and thousands of SMB customers. We think we know how to make this happen and the timing for Bill.com feels right. Partnerships are key and the company is seeing strong interest from financial institutions (Bank of America, Fifth Third and American Express all invested in this round), software companies and accounting firms to distribute the product.
5) The Upside
Bill.com is really focused today on the small and medium sized customer but we would not be surprised to see them grow upmarket over time. We have seen over and over again that the “adoption cycle” for great SaaS products starts with small businesses using the product and enterprises sticking with prior solutions, but that over time, the elegance and simplicity of the new solutions results in adoption moving upmarket. In fact, we are seeing this so frequently, that is the theme of our next Scaling Dinner, taking place this week and featuring Lesley Young of Box and Zack Urlocker formerly of MySQL and Zendesk.
Salesforce has been the biggest beneficiary of this, and is now signing single deals in the multi millions. Many of our portfolio companies have seen the same upward tug and we would not be surprised if Bill.com was to see it too. The focus would probably be less on cash juggling and more on workflow and authorizations but the core engine is the same.
We are delighted to be investors in Bill.com and we look forward to a world where Bill.com ensures no CEO or CFO spends their evenings juggling cash projections on a sticky note or a jury-rigged spreadsheet, leaving more time for the important stuff…new products, new customers or even more time with the family.
This article first appeared in Entrepreneur.
As an entrepreneur with big dreams and a killer idea, walking into an investor meeting can be a bit of a reality check. VCs aren’t just going to fall over and swoon about your huge vision.
To sell VCs on your billion-dollar idea, you are going to get a cornucopia of questions thrown your way. Most questions dig into four issues for a company: market, strategy, financials and team.
While some may believe VC questions are off-base, realize there is a method to our madness: We want to know how prepared the entrepreneur is for the startup journey.
Here I break down a few common questions and provide insight into why are random inquiries, actually have logic behind them.
Q: Why hasn’t there been a big company in this space yet?
A: When VCs ask questions centered around an industry or inquire about the number of companies in a sector, they are trying to assess the market size and timing of your product or service space.
Don’t make the mistake of just saying, “This is going to be huge.” If there is a lot of potential in the market for growth, you must support your claims with facts and a reason for why now is the right time to act.
Providing detailed, specific insights into technology and societal or business-model trends that make your idea ripe now will help a VC understand why the market is, or will be, large when you are serving it. For example, when my VC firm Scale Venture Partners invested in cloud-sharing company Box, we focused on the cost trends of cloud storage and broadband, and concluded a theoretically large market was about to emerge.
Q: Can you talk about customer acquisition costs?
A: When you are talking to VCs, you are talking about money. VCs will ask entrepreneurs all sorts of questions relating to financial information, as they want to invest in companies that can become market leaders and highly profitable on moderate amounts of capital.
For growth-stage companies, a lot of diligence centers on your ability to scale profitably. Questions about sales cycles, retention rates and account expansion possibilities let us mentally build a growth profit and loss in our head. We look at your financial model to understand your business sense. We then use that information to build our own model to predict the company’s profits and our returns.
Q: Why won’t a big company copy that feature?
A: Questions about your startup’s features, advantages and uniqueness are asked to suss out what strategies you have in place to make your company sustainably different, lower cost or both. They are also used to probe your plan’s longevity.
And don’t get caught off guard, if VCs ask detailed, but seemingly unrelated questions regarding strategy. Some of the ones I have tossed out there include, “Where will you source your raw materials?” and “How did Company X gain advantage over Company Y back in 2005?” I am looking to assess the entrepreneurs understanding of her or his industry and strategy potential.
Also, if a VC asks why you decided to get involved in the market, it isn’t just about your passions. This question also presses on your unique insights on customer needs and market dynamics to illustrate an emerging opportunity.
Q: What storms has your team weathered together?
A: “Tell me about your team” gets asked in almost every meeting. In addition to your resumes, we want to understand your relationships: Are your people naturally complementary? Did the leader attract great talent, or have to hunt for it? How does the team deal with stress? Can your initial tight team also attract and absorb new talent? While you may be able to spew out anecdotes about how wonderful your team is, keep in mind, VCs also watch your body language. Your actions speak volumes greater than words.
Understanding how you approach opportunities, people and problems color every question. Venture capital is a long-term investment business. If we invest, we’ll be working together for years. Keep in mind, we’re watching how graciously you manage the meeting, get us on topic and react to stress: It isn’t a secret that every interaction is evaluative. The process helps you too, as you should be assessing whether the VC is the right partner for your endeavor.