Wednesday, November 26, 2014

Reflections on the early days at Zendesk (part 1)

Yesterday I posted a brief review of Mikkel’s excellent book “Startupland”. For me, the book is also a good opportunity for some reflections and to share some thoughts in relation to Zendesk’s journey.

The first date

When I stumbled on Zendesk in 2008 I knew absolutely nothing about enterprise software, B2B or SaaS. I had always been a consumer Internet guy, having founded comparison shopping engine back in 1997 and personalized homepage Pageflakes in 2005. If Zendesk’s website hadn’t been so beautiful and if the product hadn’t been so easy to try and use, Zendesk would never have caught my attention (and I wouldn’t be writing this post now). The nice little buddha, the logo/brand and the tone of voice of the site also helped, massively.

Interestingly, if I had been an enterprise software investor, Zendesk probably wouldn’t have caught my attention either, since the website didn’t look like a typical enterprise software website at all. Today the “consumerization of the enterprise” has become mainstream, but in 2008 it wasn’t. Apparently you had to be a consumer Internet entrepreneur looking for the next big thing on the Web in order to stumble on and be attracted by Zendesk. This characteristic – not being a consumer Internet startup but not being a classical enterprise software company either – has probably contributed to our difficulty raising a Series A later on, but more on that later.

So when Mikkel and I met for the first time, I knew nothing about SaaS and probably asked a lot of dumb questions. At that I also knew nothing about inbound marketing and customer success – topics which are now near and dear to my heart for some years – and I was somewhat puzzled when Mikkel explained to me how they’ve been getting customers. I was worried that the inbound marketing plus customer success (at that time, called “customer advocacy”) approach wouldn’t scale and thought that they’d have to do outbound sales soon to keep growing. That turned out to be epically wrong: Zendesk grew to 10,000 paying customers before starting to build a real sales team, and up until this day, the vast majority of customers come from organic sources.

Having been an entrepreneur since the age of 17 I did know a few things about starting and building companies though, and since both and Pageflakes were VC-funded I also had some experience with venture capital. So Mikkel and I were very complementary, or, as Mikkel puts it in the book:
There was a good vibe between us, even though we were extremely different. […] Ultimately, I think we recognized that we were a good balance for one another.
I remember that a couple of years later, at the first PNC SaaS Founder Meetup in San Francisco in 2012, Mikkel ended his speech saying something along the lines of: “Kudos to Christoph for investing in us back in 2008 – I would never have invested in these three guys”, referring to his co-founders Morten, Alexander and himself. My response was: “Kudos to you for taking money from me – I never would have taken money from me”. I think there’s no better way to sum it up. :-)

After the financing is before the financing

Following our first meeting, we very quickly concluded that it would make sense to work together, agreed on the terms, and voilà, a six-figure dollar amount changed hands. I was excited, but it was also a little bit scary because it was my first angel investment (aside from a few small investments that I had made many years earlier). I didn’t have a diversified portfolio, and I didn’t know if I’d ever have one because I had no idea when I’d make my second investment. I didn’t have deal-flow, and I’m not even sure if I knew the term deal-flow.

I didn’t worry too much about it though, and the mood was good. Quoting Mikkel from the book:
We now had a new direction. The investment from this seed round inspired a new mindset and created a big change in pace. Christoph helped us with a business plan and helped us build out what would be the first attempt at describing the financial model of our business. [...] He helped us think about scale—and about the possibilities.
The seed round, including the friends & family investments and my own investment, was only $500,000 though. It was enough for the founders to take a modest paycheck and to hire a few people, but it was clear that we’d need a much larger round soon. That’s when things started to become worrisome for me, since it quickly became clear that raising a Series A round would be very difficult.

This was the first part. Part two coming soon.
[Update: Here is part two.]

Startupland – How three guys risked everything to turn an idea into a global business

As some of you may know, my friend Mikkel, founder and CEO of Zendesk, wrote a book. It’s called “Startupland: How Three Guys Risked Everything to Turn an Idea into a Global Business” and you can learn more about it here. The hardcover version will be released in about two weeks, but the Kindle version just became available on Amazon and I was lucky enough to get my hands on a draft a few weeks ago.

The book is a well-written and very personal look back at Zendesk’s amazing success story, which began in a loft in Copenhagen and culminated in the company’s Wall Street IPO earlier this year. It’s both autobiography and “tips & tricks" guide: First and foremost it’s a suspenseful chronicle of the journey of Mikkel and his co-founders Alex and Morten that lets you witness some of the many ups and downs which startupland has in store for entrepreneurs, but it also contains a lot of actionable advice for other founders.

It’s an entertaining read, too, and as someone who was fortunate enough to have played a small role in Zendesk’s beginnings, reading about those early days put a smile on my face many times. In some cases, it also made me laugh out loud, e.g. when Mikkel writes about my conversation with Michael Arrington.

One of the reasons why "Startupland" is such a great read is that it’s honest and humble. When other authors write things like “I didn’t know anything about XYZ” it often feels like fishing for compliments. When Mikkel writes it, you know that he really means it that way.

I highly recommend the book to any startup founder, and in particular to all founders from Europe who consider making the move to the US.

Friday, November 21, 2014

When deers morph into elephants, SaaS nirvana is nigh

By now you’re probably sick of my infamous animal analogies. Sorry. But I just love them and want to resort to them one more time. :) Namely, what I want to talk about are deers that can morph into elephants, or more generally, smaller animals that can morph into bigger animals. (1) In other words, I want to talk about account expansions, which are the result of a successful “land and expand” strategy.

The premise of this strategy is that it’s usually easier to get a minor commitment from a customer first and then work your way up towards a larger ACV, rather than trying to get a large deal from the get-go. There are different ways how SaaS companies have successfully employed land-and-expand strategies:
  • Yammer is a classic example. Typically a small team in a company starts to use Yammer for internal communication. Then they add more and more people, usage might spills over to other teams or departments, and eventually Yammer’s sales team can come in and upsell the customer to an enterprise account. It’s hard to imagine a hotter, more qualified lead than a company where dozens or hundreds of people are using your product already!
  • Dropbox is similar, but the difference is that you can start using Dropbox even as single user. Plus, they have another great growth vector, since people keep adding more and more files to their file storage.
  • EchoSign: In this Quora post, EchoSign founder Jason M. Lemkin (one of the top SaaS experts and our co-investor in Algolia and Front) describes how EchoSign grew many departmental deployments into large, six-figure accounts over time (he also gives you the caveats).

Another way to get bigger and bigger accounts over time is of course to target startups and grow with your customers. Zendesk is extremely successful at employing land-and-expand strategies, but the company has also been fortunate enough to acquire customers such as Twitter, Uber and many others when they were still pretty small.

If your land-and-expand strategy works so well that your account expansions offset churn, then your MRR churn rate becomes negative – a state which I’ve previously described as the holy grail of SaaS. It’s hard to overstate how transformative this can be to a SaaS company. Think about it: Negative MRR churn means that even if you’re not growing, you’re still growing. More precisely, even if you stopped acquiring new customers tomorrow your recurring revenue would still continue to grow.

It’s no surprise that SaaS investors start to salivate when they see SaaS companies with negative MRR churn. Just a few days ago, Tomasz Tunguz of Redpoint highlighted that New Relic, which has filed to go public, has a negative MRR churn rate of about 14% per year. Especially for later-stage public SaaS companies, revenue churn is one of the most important metrics to look at. You cannot understand a company like Box, which is spending seemingly crazy amounts of money on customer acquisition, without understanding this metric. (2)

(1) If you have no idea what I'm talking about, please read this post.
(2) And yet, I have the impression that this metric hasn’t fully arrived in the world of financial analysts and accountants yet. There doesn’t yet seem to be a standard way of reporting it – every company defines the metric a little different, and some aren’t reporting it at all.

Tuesday, November 04, 2014

Three more ways to build a $100 million business

It seems like my recent post about five ways to build a $100 million business resonated very well with a lot of people. I also got some really good comments and suggestions, and so I'd like to follow-up with another post on the topic.

Introducing: the Brontosaurus!

A reader by the name of "Vonsydow" commented that another way to get to $100 million is by having 100 customers, each paying you $1 million per year, and mentioned Veeva as an example. True! Veeva's ACV is around $780,000. That's almost an order of magnitude higher than the $100,000 ACV of the "elephants" category, so it's a different kind of animal. I'd suggest that we call Veeva's customers Brontosaurus (or Apatosaurus, which seems to be the correct name) but I'm open to other suggestions by people who know more about biology (or paleontology) than me.

Interestingly, it seems like there are only two Brontosaurus hunters in the SaaS world, Veeva and Workday*. What does that mean for SaaS entrepreneurs? Take a look at the backgrounds of the founders of Veeva and the founders of Workday. If your background looks similar – 20+ years of experience selling enterprise software, domain expertise and an extremely strong network in your target industry – get into the Brontosaurus hunting business. If you don't have a background like this, I think it's likely that you're better off starting with smaller animals (but I'd be happy to be proven wrong!).

Whale hunting?

Whale hunting is not the best topic for jokes, but if you know me (who has become a vegetarian a few years ago) you know that I can only mean this figuratively. And the category that I'm going to talk about now just has to be named after the blue whale, the largest animal ever known to have lived on Earth. I'm talking about companies with an ACV of $10 million. If you can sell a SaaS solution at an ARPA of $10 million per year, you need only ten customers and bada-bing, you've got a unicorn.

Does that make it easy? Of course not. I'm aware of only one SaaS company which might have an ACV in the neighborhood of $10 million: Palantir, as pointed out by Jindou Lee. In his excellent book "Zero to One", Peter Thiel writes that Palantir's "deal sizes range from $1 million to $100 million". I don't know if these amounts refer to the price of an annual subscription and I don't know which part of it is non-SaaS revenue, but it sounds like Palantir's ACV could be in the $10 million ballpark. Either way, the conclusion along the lines of the conclusion of the Brontosaurus category is: If you're Peter Thiel, hunt whales. If not, chances are that you should start at a lower end of the market.

Hunting microbes

I'd like to add another species at the other end of the spectrum, too. Jeff Judge pointed out that WhatsApp monetizes its users at about $0.06-$0.07 per active user per year. That means that even if Facebook increases monetization by a factor of ~15 (which I'm sure they can do if they want to) and reaches $1 per active user per year, that's still an order of magnitude below the $10 per active user per year that I've described in the "flies" category, so another category is justified: microbes. If you're making only $1 per active user per year, you need 100 million active users to build a $100 million business. That means you'll need hundreds of millions of downloads or signups, which requires an insanely high viral coefficient. If it happens, awesome, but hard to bet on it in advance.

With that, here's the updated chart, which now shows eight ways to build a $100M business:

The y-axis shows the average revenue per account (ARPA) per year. In the x-axis you can see how many customers you need, for a given ARPA, to get to $100 million in annual revenues. Both axes use a logarithmic scale.

PS: One of my best childhood friends saw my post, and I don't want to withhold from you what he wrote me: "Mathematically, there are many more ways to build a $100 million business. The easiest one is to start with a $200 million business and lose $100 million".


* has a number of Brontosaurus as well as some whale customers. As far as I know, with few exceptions these customers were acquired at a time when was a $100 million business already. Since this post is focused on ways to build a $100 million business in the first place, I haven't included in the Brontosaurus and whale category.

Sunday, November 02, 2014

Good VCs, bad VCs

Inspired by Ben Horowitz’ excellent “Good product managers, bad product managers” post and Stefan Smalla’s “Good leader, bad leader” masterpiece I’ve tried to put together my thoughts on what I think makes a great venture capital investor. Thanks go to my colleagues at Point Nine Capital for their invaluable feedback, in particular Michael, Mathias and Rodrigo, who reviewed an early draft of this post and provided lots of great comments.

This post represents our current thinking, which may evolve our time, and some parts are still work in progress. Feedback and discussion with other VCs and entrepreneurs is very welcome.

We’re fully aware that we don’t always live up to the ideal of the “good VC” described below, but as Stefan Smalla said in response to a comment on his leadership manifesto: “Nobody is exactly like that, but it's good to move towards that ambition. Inch by inch.”

A good VC does everything she possibly can to support her portfolio companies

A good VC is truly value-add

A good VC is available for her portfolio companies almost 24/7. If a portfolio founder needs her, she will do everything she can – roll up her sleeves, use her social capital, get on a plane – to help. A good VC is sometimes a recruiter, sometimes a beta tester, sometimes a personal mentor, and isn’t afraid of getting her hands dirty. Not scalable? Screw scalability. If a portfolio founder needs your help in putting out fires, the last thing he or she cares about is how this scales from a VC business model perspective.

A good VC doesn’t only react to requests from the founders. A good VC knows the current challenges of her portfolio companies and is proactively looking for solutions all the time.

Good VCs create firms where portfolio founders have equal access to all partners and not just to “their” partner.

Knowing that there are limits to the help she can provide to founders herself, a good VC tries to leverage the knowledge and expertise of other people. In particular, she facilitates knowledge exchange between the founders of her portfolio through various forums, online and offline.

A bad VC overpromises in the deal-making phase and under-delivers once the deal is done.

“We view ourselves as a services firm. We try to earn our reputation and brand every day. We practice the art of adding value and we want to be the highest executing board member that founder has and we’re out there everyday trying to earn that reputation.”
Bill Gurley
General Partner, Benchmark Capital

A good VC is humble and doesn’t try to run the show

A good VC is aware that there is a huge information gap between founders and VCs with respect to the founder’s business. He understands that the founder has thousands of hours of experience in his industry and with his customers and intimately knows the people on his team, whereas the VC’s knowledge of the startup is often much more superficial. He understands that many if not most of the ideas he will come up with are things that the founder has already considered and knows that while he can provide great input, advice and a different perspective, he should neither try to micro-manage nor try to make decisions for the founders.

A good VC knows that managing investors can be time-consuming for founders and tries to find the right balance between being close and providing value on the one hand and getting out of the way on the other hand.

A bad VC overestimates his insights, tries to micro-manage, tries to exercise control and becomes a maintenance burden for the founders.

A good VC goes all-in and avoids conflict within the portfolio

A good VC doesn’t invest in two or more companies that are directly competing against each other.

A bad VC, instead of going all-in into one company and giving his undivided attention and support to her portfolio company, tries to hedge her bets by investing in several companies in the same space.

A good VC tries to maximize the size of the cake vs. his slice of the cake

If a company wants to bring on board other investors, whether in the same round in which the VC invests in the company or at a later stage, a good VC helps the founders to attract great co-investors. A good VC also does this pro-actively – suggesting to invite value-add co-investors to a financing round whenever he sees a great potential fit for a company.

A bad VC worries that if co-investors join a company, he will get a smaller stake in the company. So he discourages founders from working with other investors, maximizing his stake in the company rather than trying to do what’s best for the company as a whole.

A good VC doesn’t take unfair advantage of the founders she invests in

A good VC uses simple term sheets. A good VC may negotiate hard, but she doesn’t try to screw founders by sneaking in hard to understand provisions that can hurt founders. A good VC tries to keep contracts simple, knowing that in an industry where the bulk of returns is produced by the best outcomes, there’s not much value in trying to protect herself against everything which can go wrong anyway.

A good VC also doesn’t overly use leverage, which she might gain over portfolio founders in different situations throughout the company’s life.

When a bad VC negotiates a term sheet, she spends way too much time (and legal fees) on micro-optimizations of all kinds of unlikely scenarios. She may even try to fleece the founders by imposing terms that are unfair, unusual and hard to understand.

Whenever she gets leverage over a portfolio company, e.g. when the company runs out of cash and asks its investors for a bridge financing, a bad VC exploits her leverage to improve her position.

A good VC treats every entrepreneur with utmost respect

A good VC respects the value of the founder’s time at all times

A good VC rarely re-schedules meetings with founders and is almost always on time. In meetings with founders, his phone stays in his pocket.

A bad VC re-schedules meetings with founders all the time, often at the last minute. Once the meeting finally happens, he often arrives late. In the meeting, he will start to check his email (or Facebook feed) on his phone the minute he gets bored.

“If anybody is not on time I will fine them $10 a minute. That comes from my experience as an entrepreneur. When you are an entrepreneur you are living and dying with your company. You are working extremely hard and the last thing you need to do with your time is to sit in the lobby of a venture capital office.”
Ben Horowitz
General Partner, Andressen Horowitz

A good VC handles “passes” professionally

Knowing that she has to pass at least 99% of the time, a good VC has built a team and established a deal assessment process that ensures that founders get timely responses. A good VC also tries to give an explanation on why a company is not a match for her, although unfortunately time constraints may make detailed feedback impossible in every case.

A bad VC takes forever to respond to inquiries, and often she doesn’t reply at all. When she passes on a potential investment, she doesn’t try to give the entrepreneur useful feedback. A bad VC also often delays the decision forever, trying to keep her options open.

Side note: This is the area where the distance between reality and ambition is the largest for us at Point Nine. We're trying to get better, but with ~ 200 potential investments to evaluate per month, it's tough.

A good VC only signs a term sheet when he’s going to make the deal

A good VC only signs a term sheet when he’s going to make the investment. After having signed a term sheet he only bails out if really bad things come up in the due diligence, which happens extremely rarely. A good VC also tries to be transparent in the deal evaluation phase before, trying to give the founders a realistic assessment of his interest level and timing requirements.

A bad VC sometimes signs a term sheet to secure the option to invest – at a point in time at which he is not yet sure about his intent to invest. A bad VC often also conveys a misleading impression as to how close he is to making a positive decision and how fast he can move.

A good VC aligns her interests with the interests of her LPs

A good VC is incentivized by carry, not by management fee

A good VC optimizes for higher carry and lower management fee. A good VC also invests most of the management fee in a way where it leverages her ability to make great investments and helps her portfolio companies (e.g. by building a team of associates and advisors and by providing resources to the portfolio) rather than drawing a large salary. A good VC invests heavily into her fund and doesn’t view the GP commitment (1) as a burden.

A bad VC wants to make a lot of money even when she doesn’t make her LPs(2) a lot of money. She tries to minimize her GP commitment while trying to maximize her salary.

A good VC is focused, courageous, humble and desires diversity

A good VC is focused

A good VC is focused on one or more investment theses built around expertise in a certain stage, geography and/or industry.

A bad VC invests broadly across all stages, geographies and industries. Rather than knowing a lot about a few things he knows nothing about everything, which prevents him from providing effective portfolio support and from seeing the best investments in the first place.

A good VC is courageous

A good VC makes bold moves. She has strong opinions, and although she values other investors’ opinions she often invests in companies which many other investors have passed on. A good VC also isn’t afraid of admitting mistakes and failures.

A bad VC’s main driver is FOMO (“fear of missing out”). She doesn’t have the expertise or courage to think independently, but as soon as other investors want to invest in a deal she gets excited. If an investment fails, she tries to produce a PR story to make it look like a success.

A good VC is humble

A good VC knows that luck and serendipity play a big role in investing. He knows that he has to constantly prove his value and that he’s only as good as his last investments. A good VC also doesn’t have a big ego, is a great listener and says “I don’t know” very frequently.

A bad VC, after having made one or two lucky shots, thinks he’s a genius. A bad VC has a big ego and is one of those people who make Board Meetings inefficient because they love to hear themselves talk.

A good VC desires and appreciates diversity

A good VC wants to work with people and invest in founders from a wide variety of languages, cultures, color, origin, gender, religion, age, personality and orientation. He knows that “these people can open up new markets and new geographies, and create potential outsize investment returns from opportunities that others may overlook or not want to risk going after”, to quote Dave McClure.

A bad VC prefers to invest in people who are like him.

“Our Commitment to Diversity stems from an irresistible desire to explore, from a burning curiosity to learn more about the world, from a moral imperative & intellectual humility to help both others and ourselves become part of a larger, more enlightened global community and global family.” 
Dave McClure
Founding Partner, 500Startups

A good VC invests for the long-term and gives back

A good VC invests in long-term relationships

A good VC optimizes for the long run in everything she does. She knows that you “always meet twice in life”, as the German saying goes, and tries to create win-win situations.

A bad VC tries to gain short-term advantages over other people, sacrificing relationships and long term gains.

A good VC shares knowledge (but keeps private information confidential)

A good VC openly shares knowledge with startups and investors, knowing that the tech community is not a zero-sum game.

A good VC never, ever shares confidential information like pitch decks with people outside of his firm, unless the founder explicitly gave him permission to do so.

A bad VC is secretive when it comes to sharing knowledge with the community – and leaky with respect to confidential information.

A good VC wants to make the world a better place

A good VC cares about others and knows that there’s more in life than financial returns alone. Whether it’s investing in clean technologies, giving to charity, doing community work or something else – she has a strong urge to make the world a better place.  When she’s made money she doesn’t forget that as much as her wealth is the result of decades of hard work, it’s also the result of being born and raised in the right place and having had opportunities that billions of people on the planet never have.

A bad VC has an exaggerated sense of entitlement, a lack of compassion for the poor and forgets that there are other things in life.

And last but definitely not least…

A good VC delivers sustainable superior performance.

A bad VC doesn’t.


1) GP commitment = the investment made into the VC fund by the fund’s managers, often called “GPs” (General Partner)
2) LPs = Limited Partners, the people and funds which invest into VC funds