In this week’s episode, investor Matt McIlwain speaks with CEO of Accolade, Raj Singh.  Raj & Steve Singh (now a Madrona investor)  along with Mike Hilton started Concur in the early 1990s and over more than 20 years weathered economic and product challenges to build the company into the leader in corporate expense and travel.  In 2014 they sold Concur to SAP for over $8 billion.  Two years later Raj and Mike joined Accolade, a personalized medicine and health advocacy company that went public in July of 2020.  Matt and Raj talk about the need for resilience in leadership, lessons learned, how the board room is changing for good and what the big tech companies getting into healthcare means for consumers.

Matt McIlwain: [00:00:00] I’m excited to welcome Raj Singh to our podcast series today. Raj is both a great friend and an incredibly accomplished entrepreneur and innovator, having both founded and built Concur Software. And eventually, after 20 years of building that company and transforming that company a couple of times, selling it to SAP in 2014 for about $8 billion. And then, as you’re going to hear, he spent some time thinking about what was next and eventually decided to join a company called Accolade, but we’ll let him tell that story. Welcome, Raj.

Rajeev Singh: [00:00:35] Thank you, Matt. It’s great to be here. Appreciate you having me.

Matt McIlwain: [00:00:38] Let’s go back a little bit first to, to Concur. This is a company that you co-founded back in, in the mid-nineties and tell us a little bit about that journey and both the founding of it and maybe one or two of the big moments of transformation in that journey.

Rajeev Singh: [00:00:56] Sure the founding is actually a, boy it feels like a thousand years ago now. It was 1993 which is a thousand years ago for those listening. And I was lucky. I was really lucky. My brother Steve who has some tie-ins to Madrona, as I understand, and a gentleman by the name of Mike Hilton and who’s now one of my dearest friends, we’re starting a company and I was a college kid looking for a purpose. And so, they gave me a ring and said hey we’re starting a company. And I thought that’s exciting, maybe I should jump in. And then they told me it was working on expense reports and I thought maybe I shouldn’t jump in.

That doesn’t sound exciting and next thing you know it’s 21 years later and we were really lucky to have found both a category that was that was missing a leader, number one. And number two a group of individuals who founded the company to share a thought on what leadership looked like and how to build culture and mission and a business. The story of the company is, I think, the story of any company that goes through 20 years of creation and transformation which means you’re no matter what business you’re building whether it’s a dry cleaner the last for 20 years or it’s a travel and expense reporting SAS business that last for 20 years there’ll be moments during that journey where you have to fundamentally rethink the founding principles of your business. For us we lived through 1999 and the.com crash. We made a fundamental pivot of our business from the licensed software business, which probably no one remembers anymore, to the SAAS business that was somewhat controversial when we made that choice in 2000-2001. And then we started to add on capabilities and really start to think about how we could transform the travel supply chain later in our life. And each of those were transformational moments where we had to make a choice. Were we in this for the long-term, to build a great and enduring business or were we in it to make to maximize the sort of short-term returns? And every choice we made, and this I attribute to my co-founders as much as anything I was a part of, was about the long-term value of the business and the ultimate, ultimate highest purpose of what concur could be.

Matt McIlwain: [00:03:07] Oh that’s fantastic. And, yeah, it’s notable that you and Mike and Steve were with the business all 21 years, all through the acquisition of SAP. And you mentioned this point about leadership and culture. When you face that really tough economic downturn, and even more importantly the.com crash, and then made this decision to move from being licensed software to one of the very first software as a service companies. How did you all bring the culture and the company along in those decisions?

Rajeev Singh: [00:03:45] It’s such an important question because sometimes people think you just make a strategy choice, and you tell people okay we’re going this way, and everyone just comes along. And anyone who’s led and knows you don’t really get to tell people to do anything. You are constantly selling your vision and where you’re going. And the mission of a leader is ultimately to get everyone to understand why we’re going in this direction and a big part of that why is culture. What are we trying to build? We’re trying to build something long-term and sustainable. We’re trying to build something that we can be proud of in terms of the way we built it. And so, when we said, hey we’re making this shift to the SAAS business, a part of our story to our team was, one, the long-term sustainability of this company is tied to this new business model. It’s going to open up new markets and give us a new opportunity to serve the middle market, smaller companies around the world, and it’s going to allow us to stay together as a team and stay true to the values of the business that we built. Meaning the choice in 2000, Matt, candidly, for Concur was, were we going to sell our company or were we going to buckle down and recommit to the promise that we’ve made to our shareholders and to ourselves? And that was as much a part of transitioning to the SAAS business as the business model shift. And I think that was what we were selling our team. Do we believe what we said five years ago when we were trying to build this company or was that all talk? Because if it was all talk, we should sell it, and if it wasn’t, let’s hunker down and get this done and this is how we’re going to get it done.

Matt McIlwain: [00:05:22] I love that thought about this idea of when we had this decision asking people to recommit and double down on the vision and know that there’s hard work ahead and it if you want to be a part of that you know let’s, let’s recommit as a team. I really like that.

Rajeev Singh: [00:05:38] Not everyone does recommit but think when you have that honest conversation you find out who doesn’t want to. And that’s okay. There’s nothing wrong with those people, they made a choice and they’ve had successful careers. But those who did recommit knew what they were in for, and I would argue 10 years later could look back and say that’s one of the things I’m most proud of in my career.

Matt McIlwain: [00:06:00] Now let’s fast forward to 2015 ish and SAP has acquired Concur, and you have decided to move on from that and are thinking about things and ultimately land on this opportunity with Accolade. It was an existing business; it was on the East coast. You know what was it that inspired you and Mike, who joined you in that, to come on board at Accolade? And then I’ll probably follow up from there.

Rajeev Singh: [00:06:25] So I think you have a choice, like we all do. And we’re lucky, actually, let me start there, we’re lucky when we have choices because it means the world is smiling at us and saying here’s some choices you get to make. And for us we had some choices to make around were we going to go start another business, which was our inclination, but where were we going to start that business. And the choice that we really committed to, almost immediately upon leaving Concur, was that we wanted to make the next business we were a part of way closer to the human condition. Meaning we wanted the end of every workday to align around the idea that we helped the human being, or we helped people. And so, healthcare was a natural thought with a couple of notable exceptions. We knew nothing about healthcare, and it was, and it looked to be maybe the single hardest category on the planet to build and build sustainable long-term value. There aren’t a lot of success stories of tech entrepreneurs getting into healthcare and building successful businesses. And so, with those two-notable sort of question marks we thought we’re still going to give it a shot. Because that’s what entrepreneurs do, they say wow everybody else failed we’ll give it a spin. No doubt it will be fine. We were lucky to bump into Accolade. And the reason I say that is they were building something that we thought was extraordinarily unique and so when we found them, we abandoned our ideas around building our own from scratch. In part, Matt, I think, in part because we loved what they were doing, and in part because we were a little older. I wasn’t 23 anymore.

Matt McIlwain: [00:07:59] It’s interesting, you know, having gotten to share the Accolade journey with you and the team, is that you had this vision for, first of all, individual employees and their families deserve better access to information and ultimately healthcare, and you can find ways to align that with their employer. And Accolade already had that vision, had that passion, and yet there were opportunities to then deploy modern technologies into making that whole experience even better, was that kind of the core of the thesis for you and how have you pursued that?

Rajeev Singh: [00:08:34] A thousand percent and we were quite thrilled when Madrona decided to jump into that journey with us. And so, the core idea, which is so sensible to anyone who’s experienced the U S health healthcare system in any way shape or form, is that most people who enter the US healthcare system are confused by the by the incredible complexity, by the opacity and by the disconnectedness or the chasms between each of the components of the us healthcare system. And so, people needed help and the help they needed is often the information they needed to make a good decision. Accolade, it built that out, building a human relationship, which people laughed at, Matt. When we first started, people said that’s not a scalable model. How can you build human relationships at scale with millions of people? You know of course. What do you need technology, you need to be able to leverage data to, in turn, personalize every one of those experiences, and deliver them at scale? And we thought we could help there. Along with the idea that building that technology stack, building that data set that you know the idea of reaching HR buyers, and building a B2B commercial motion to acquire corporations as customers was something we knew how to do. And so, we thought that two plus two might equal more than four equation did work here and with a few bumps and bruises along the way so far so good.

Matt McIlwain: [00:09:51] You know you had a very successful IPO last year, originally planned for right about when COVID hit its initial very hard point, and you guys made some really good decisions around that and have done quite a bit since then. We might get back to that, but I’d love to, you know, this was your opportunity to be the CEO, too.  As I believe you were president at Concur, if I remember that correctly, and, you know, maybe a reflection on resilience as a CEO and what you’ve learned over the last six years in that regard.

Rajeev Singh: [00:10:27] I think it’s such an interesting question, Matt, because there’s been no matter where you are in a business you have these moments where you have to reassess where you are and what you’re dealing with and what you’re going through. And that’s true in life. And it’s true in business. And I think what might be unique in the CEO role around resilience is, is that the ultimate decision does rest with you. And there are big choices you make that have an impact on many, in my case now at Accolade 1900 people’s lives, and the and those decisions are compounded by the fact that you were the one who recruited those 1900 people. You were the one who said, hey, believe in this dream and go make it, go make. So, I think with each component of, or with each setback, or with each challenge, we have a choice to make about how we’re going to respond to those setbacks and challenges. You’ll recall, Matt, when we started at Accolade the first thing that happened is our biggest customer canceled. So, three months in we lost our biggest customer and we thought this is going awesome. And then we filed to go public in February of 2020, that seemed like a really good idea until the market went down by 30% in March. And with each one of those moments, you have choices. And here’s what I’ve learned in that process that there are things we have to recommit ourselves to in order to create that resilience. And I think it applies whether you’re a CEO or wherever you are and those are, in difficult times you recommit to the fundamental principles that you run your life by, that’s number one. And for me that meant family, that meant core values, that meant physical health and mental wellbeing. There is a, there’s an interesting dynamic that says when things go wrong, we get pulled away from our routines. We pulled away from the things that matter the most because we think we have to do unnatural things to change or to fix them. And what I’ve learned now, because I feel like I’m a thousand years old, but I’ve learned now is in those moments when things are going wrong, you double down on what you know, and you double down on all the things that got you here and you just go one step in front of the other. There’s an interesting story, and I know I’m rambling on too long, but it’s a, it’s a story I repeat all the time. I was at dinner one night with a group of business leaders and a gentleman by the name of Randy Hetrick. Randy’s a former Navy seal who founded a company called TRX in the fitness world. And somebody asked Randy who had been shot multiple times in combat, what’s it like to get shot? And he talked about a time in the field where he got shot. So, you want to talk about resilience. And he said, you know, he told the story, he said the first reaction you have is you’re mad, shot you and you want to go find that guy and shoot him. And the second reaction you have is, I’m bleeding in the middle of a field in Afghanistan and I need to get home. And then you focus on the five feet directly in front of you and every piece of training you’ve ever had in your life. Take the five feet in front of you and then you take the next five feet. And I’ve probably given that speech a thousand times to people who are wrestling with either different difficult moments in their personal lives or difficult moments in their professional lives. Sometimes you’ve got to break it down. Don’t look at the mountain look at the five feet in front of you and keep taking the five feet and eventually you get through. And my experience is you do get through it.

Matt McIlwain: [00:13:57] I love that story. And it does remind me of, hard to believe it is 13 months ago last March, and I remember two conversations we had then. And one was the conversation about, you know, should we go forward with this IPO in this very difficult environment, and you were being super thoughtful and grounded about that. The one that I’m going to remember more, all my life, was the one a couple of days later when you called me up and said, hey, we’ve got real needs in our community that are emerging with this COVID and you know what are we all going to do about it? And I’m here to want to try to do something about it. And so, in the midst of this, you were there trying to lead on starting something that came to be known as All in Seattle. And I just, you know, to have that kind of grounding, in that time, what was going through your head to be able to keep those two different, important issues and to lead on this issue of All in Seattle?

Rajeev Singh: [00:14:59] It’s very sweet of you to say, Matt, and I can’t tell you how much it meant when I called you, that you said I’m all in what do we do? What are we going to do? I think we do have at some level, a capacity in our lives to look at our lives and then look at the broader picture of the universe and say our particular travails and foibles aren’t really all that significant in the broader scheme of what people were wrestling with. And in many respects, Matt, the capacity to just focus and it was in, you remember, was every night. It was all night every night making phone calls, while the day-job was happening, was an opportunity for me to put in context that, yes, Accolade couldn’t go public when we thought and maybe we weren’t going to be able to go public at all, maybe who knows what was going to happen? But in the broader context of people not having work, not potentially getting kicked out of their apartments, potentially not being able to eat, being food shortages happening in the city already, that it was not the biggest problem in the world. It wasn’t even close. It wasn’t on the top 10 list. And I think that context is helpful in how you think about your business. I really do. I think, look I’m obsessed with my business, like you’re obsessed with Madrona. I think about it constantly. But it’s not the most important thing in the world and we have to keep it in context in order to make sure we’re making grounded decisions within our business and outside it. That’s the best way I can describe it, Matt. It was the best thing that could’ve happened to me, to be able to throw my heart and soul into something with my wife.

Matt McIlwain: [00:16:27] Yeah, I was going to say Jill did an amazing job too. Yes. As did many others our community, as did many others.

Rajeev Singh: [00:16:34] Exactly. You and Carol, Kabir and Noreen. There were so many people who jumped in. Heather Redmond, you know so many people who jumped in and really made a commitment to this. That was inspiration in a moment in time where the world needed inspiration. It was inspiration for me as much as it was for anyone else.

Matt McIlwain: [00:16:50] It’s great that you mentioned Kabir, cause that’s, I think that’s the place I wanted to go next. In that another way to both continue to learn and also to give back is being on boards of other companies. And you I have had the, really, the pleasure of being on the board of two companies together in Apptio, with their founder and CEO Sunny Gupta, and then Amperity with, with the founder and CEO Kabir Shahani. Curious, you know, what draws you to other talented entrepreneurs and CEOs that would say gosh that could be a real fit a good fit and it’d be something fun to work with them. What are some of the attributes of those other CEOs that you’ve had a chance to work with over time?

Rajeev Singh: [00:17:35] With those two guys for sure, off the top, integrity right off the bat. Life is too short to work with people who you don’t enjoy and who you don’t trust and know who are waking up every morning to do the right thing and to take care of their people to build a real business the right way. And Sunny and Kabir hit that off the top. The other thing you talked about resilience, Matt. You know, if there was one word you would use to describe both Kabir and Sunny, would be tenacity, relentlessness. Like those guys are never stopping, in fact, I get a ton of energy, I go to Kabir’s board meetings and I won’t lie to you I come by walk out of there not only fired up about his business but also fired up about mine, for some reason. And, and that tenacity just indicates someone who’s not going to fall down at the first setback because we know building businesses is all about setbacks. And here’s the other thing that I love about those two guys and this will sound weird, I think, as it relates to how I make my choices. They have fun. They love their work. They’re not complaining about the bad, you know the hard parts of the job, they’re relishing the fact that they get a chance to do it. And I just love that mentality. That this is supposed to be fun. Like you’re supposed to enjoy this. And I’d rather do that at whatever scale I’d rather do that with people that I like. High integrity people with this kind of character who are having fun. I’ll take that any day. It doesn’t matter to me the size of the business, it, those are the attributes that probably really appeal to my heart.

Matt McIlwain: [00:19:02] No that’s fantastic. And I just would chip in on you know that they’re both such curious and humbly curious learners and they’re really good at something I, you know, I like to call triangulation. Taking all the different data points and trying to bring those altogether. And, as you were saying earlier, you know, sometimes as the CEO, you do have to make ultimate calls on things and being able to be good triangulators, good listeners, and then make those calls and then help the team, you know, follow around those decisions, is both things that Sunny has done many years and now Kabir as Amperity’s growing. You know one of the decisions that both Kabir and you made last summer was in thinking about your boards. And you guys both had you know a lot of diversity in different respects on your boards, but you know wanted to be intentional about ethnic diversity, in particular, having a member of your board who is black who came from a BIPOC background.  And you took on this board challenge. Tell us a little bit about that from your perspective.

Rajeev Singh: [00:20:04] As the world evolves, we take on new responsibilities as business leaders, Matt, that weren’t necessarily presumed responsibilities of business leaders 25 years ago. Meaning that I think in 2021 we do, increasingly as business leaders, have a responsibility to speak on topics that matter to our employee base. Because our employee base very much is expecting us to not do more than make a profit, but to make a profit consciously, that the idea of conscious capitalism and building businesses the right way matters. And I love that by the way. I think that’s fantastic. And so, the idea of creating diversity, but ensuring that diversity isn’t just at the lower levels of the business, but it’s at the very tip top of the business at a board level and then a senior management level is something that I think every business gains from if they’re willing to make that commitment. And so, when Brad Gerstner and crew came out with the board challenge, and I know you were you were instrumental in kicking that, in getting that thing kicked off, when they came out with that board challenge, Matt, I remember talking to Brad. He said about three sentences and I said yeah, I’m told this makes so much sense. And it was a great impetus for us to commit to the principles that we already believed in. And we were lucky enough to bring on a woman by the name of Cindy Kent, who’s the president of Brookdale, senior living.

And she’s been spectacular. And she comes from a different background than many of our other board members, and yet brings the healthcare expertise coupled with that different background that has already really shed extraordinary light on our boardroom. And so, I think there are moments like these that are going to continue to face business leaders in our, in the United States over the course of the next three to four years.

And I just encourage them to wade in and make these conscious choices and make sure that they’re consistent with your belief system. And I think your employees are going to embrace that belief.

Matt McIlwain: [00:22:05] No that’s, that’s really well said. And I do think that there is a kind of this embedded word of kind of intentionality, too, that, you know, you had your core values, you were living them out in many respects, but in some areas, there was an opportunity to be more specific and more intentional and you followed through on that, which is just fantastic.

Rajeev Singh: [00:22:24] Don’t you think, Matt, a part of this is, if we have the platform and we can give other people the example of, hey, you can do this in your business and the outcome is going to be positive. That it’s one thing to do it’s another thing to commit to something like the board challenge publicly. And in some ways, give others who might not have the same situation we do the cover to go commit the same way. And that’s that is that point of intentionality. It’s not just doing it’s saying I’m going to; I’m going to say out loud that I’m going to do it. And in, so doing, give other people some room to follow suit.

Matt McIlwain: [00:23:05] I just, I definitely think there are our roles in situations for that help. And this was certainly one of them and it just it meant a lot to me and to Madrona, as well, that you and your team decided to accept that challenge.

Rajeev Singh: [00:23:18] And here’s the best news of the whole thing. Not only did you do all that, but your business also got better and there’s a way to build a business that continues to improve, and it continues to improve the society around it at the same time. That’s possible.

In fact, like, you know, I worry sometimes that there are indictments of capitalism out there, and yet I’m such a huge believer in the system and a believer in the idea that capitalism done well for our communities for our society is the future.

And I think it’s what this, you know, you’ve got a 25-year-old. It’s what this next generation of people coming out of school wants. They want to know that they can go build something, go build their lives, go build their careers, but do it in a way that makes the world better. And I just, I love the push that we’re getting from that generation.

Matt McIlwain: [00:24:05] I think that’s a said. And it brings us back to why you and Mike decided to help lead Accolade. And that, you know, you were caring about how do we make people’s lives better in a very tangible way. And make a difference through business, through capitalism, as you say, tell us a little bit more about how the technologies you’ve been deploying over the last five six years, whether that’s, you know, the mobile interfaces or the early applications of machine learning are actually leading to, better patient experiences, better alignment with the health service providers that you all employ and ultimately better outcomes.

Rajeev Singh: [00:24:47] I think if there’s one word that I probably wouldn’t have described it this way, six years ago, Matt, of as I really started studying healthcare, but that I think is the, or the most important word, in how healthcare will evolve over the course of the next 10 years, it’s personalization. That we have a system today that kind of churns people out transactionally, deals with their condition or deals with their particular transactional need in that moment, and yet we have enormous amount of data that’s available to us about all of their contextual needs. And so, you know the unfortunate reality in our country is you know, some number like 30, I think at the numbers, 35% of the people who are wrestling with one chronic condition are actually wrestling with two or three, two or three.

And so, managing their diabetes isn’t necessarily good enough, if you don’t know that they’re also wrestling with hypertension and depression. And so, the capacity to collect the data set required, which is something we’ve worked enormously hard on at Accolade, and then the leverage that data set using AI so that we can make recommendations.

But today we have frontline care teams or claims and benefits specialists, nurses, and pharmacists, and we just added primary care positions to our service delivery engine, to be able to use that data to put and use AI to put recommendations in front of our care delivery teams, that say, this is exactly what Matt McIlwain needs in this moment, or at least this is a really good recommendation for you to take up, that you don’t have to search through all of his medical records to figure out. We’re going to use computers in the way that they’re supposed to be used to give you the data you need to get you to the right outcome faster and in a highly personalized way. And I think that same concept exists in all the gene coding work you’re seeing. The same concept exists in all the blood work that we’re seeing. Like there’s so much work happening that says I can know more about this individual and stop treating their condition. They came in and told me their shoulder hurt, and I treat that shoulder. I know so much more about that person. How can I help really get that to the exact right spot?

Matt McIlwain: [00:27:02] Yeah, no, that’s really well said. And in a lot of respects, you all are trying to create a personalized experience for sort of the whole person, you know, for the macro biology, if you want to say it. And of course, it’s not just the biological makeup it’s environmental, there’s so much more. And yet, as you hint at there, you know, one of the things we’re excited about is the microbiology and the micro and in the core chemistry level, what we can are only beginning to understand and see around single cell sequencing and the leveraging of DNA. Seems it’s that personalization theme is going to play out over the next set of decades.

I mean, we really truly are only in the beginning days here.

Rajeev Singh: [00:27:44] And this is the macro hypothesis that ultimately you have to take all that information and to get human beings to act on it. You must have a relationship with that human being that engenders trust. Because once we know all these things, can we leverage the human relationship or the relationship that we’ve built with them in order to get them to act on their health and their needs?

And this is one of the most confounding parts of health care in any country, not just the United States, which is oftentimes people understand what’s best for them, but don’t act in that manner. Because of the complexity of getting to that outcome. But if our hypothesis is let’s gather all that information, let’s understand where they need to go and then let’s hold their hand and get them there.

And today it’s with one set of data, but tomorrow to your point, I think the data is going to be dramatically larger.

Matt McIlwain: [00:28:40] And that kind of leads me to one last topic, I think that our audience would be interested in your perspective on which is, this set of opportunities in healthcare have not gone unnoticed by the big tech companies. And it’d be interesting to hear, you know, especially with, Microsoft in light of their recent $20 billion, you know, announced acquisition of Nuance, or Amazon with things like Amazon Care and PillPack, or Google with Verily. Just a little bit your perspective on how those different players is approaching the healthcare market and, you know, how they might compliment some of the things that you all are doing.

Rajeev Singh: [00:29:19] Yeah. I get this question often. There’s a, there’s a question as you know, which of these guys are competitors or future competitors and which of these guys are partners? Here’s the way I think about it. First of all, it certainly has not, it’s not gone unnoticed even in the past, Matt.

I mean, it’s 20% of GDP in the United States and is 10% of GDP around the world. And so, if you’re going to be a company at scale like Amazon, Microsoft, and Google, you have to play in healthcare and it’s, it is a vertical that you have to pay attention to specifically. Meaning you can’t build generic solutions for the vertical.

I think Amazon is approaching the space in much the same, brilliant way that they approach everything that they do cost, utility, and availability. And so, and with an obsession around the customer experience around the individual transaction. And so, to me, Amazon Care, PillPack and the wide variety of things that they may do are going to be a focused-on cost availability and transactional customer experience. We think that’s really smart. And to the degree you can reinvent individual components of the experience, those will be valuable components of the experience for individuals. We do think we believe differently that healthcare is longitudinal and that the individual transaction is important.

But unfortunately, unless you understand the breadth of that individual’s needs, you’ll struggle to really have an impact on trend line. You can improve the consumer experience and you can lower the cost of the transaction, but healthcare is a long-term journey, and the long-term cost of that individual won’t necessarily alter, unless you really understand that context.

I think Microsoft and Google are playing more of a data game. And enabling this personalization capacity via data. Now, I think Google’s playing in a number of investments as well, but fundamentally I think that both companies are taking a platform story that will enable companies like Accolade, or others, to leverage a broader data set at scale and less expensively, to go deliver their personalized service.

And I think that’s a super smart strategy that will yield value on a broad basis, particularly for the larger players in the space who aren’t necessarily technically adept enough at getting that data themselves.

Matt McIlwain: [00:31:36] That’s a great framing. And I agree with you that, you know, both on the kind of the operational initiatives, as well as on the investment side, I would imagine that all three of those companies will continue to increase their presence in healthcare more broadly.

Well, Raj it’s just been a delight to spend some time with you here and it to hear a little bit about your journey and your perspectives on a variety of topics. Really want to thank you for spending some time with me today and look forward to seeing you both in the boardroom, hopefully in person soon, as well as at the Seahawks games in person when the fall turns come around.

Rajeev Singh: [00:32:17] Oh man. Can you imagine? I can’t wait. Matt, thank you so much for having me. It’s always a pleasure. We could do this without the recordings and the video, anytime.

Matt McIlwain: [00:32:27] Okay. Thanks Raj. Appreciate it.

 

In this episode of Founded and Funded, Anu Sharma continues her deep dive into commercial open source projects and talks to Jeremiah Lowin, the founder and CEO of Prefect, a dataflow automation platform that is trusted to build, run, and monitor millions of data workflows and pipelines. Jeremiah talks about how he and his team built this open source community from zero to 5,000, and how the community helps the team at Prefect reach their users and intentionally break out of internal echo chambers that often trap early stage products.

To hear the full interview which goes in depth on data workflows, airflow and Prefect – download here.

Transcript (this is machine driven transcription so expect some typos)

Anu: Hi, I’m Anu Sharma with the Madrona Venture Group. I recently spoke with Jeremiah Lowin, who’s the founder and CEO of Prefect. IO. Prefect is an open-source software company that helps customers manage their data workflows. Data workflows help transform data through a series of steps and are often used by data engineers, across companies. Jeremiah came up with Prefect while he used to still work in risk management. As he built Prefect, he discovered others wanted to use it too. Now the team has an outstanding customer list and recently landed a CDC as well as a partnership with Microsoft.

In a previous episode we spoke with Joe Beda from Heptio about how open-source software can help create a thriving ecosystem around a core project. In this episode, Jeremiah speaks about how Prefect has focused on building a rich community around an open-source project. This community helps them build a far deeper understanding of their users and customers. This episode is a part of a longer conversation you can download from Madrona’s website, just search for prefect. That’s P R E F E C T.

In this shorter version, we dive right into how open-source communities help break out of our echo chambers that might trap us as we iterate on the product. Enjoy the show.

And you were just beginning to get into why it was important to not speak to yourself and get into an echo chamber. Can you say more about that?

Jeremiah: Absolutely. This is a complicated thing because I believe that open source has become very similar to how social networks would be pitched or described 10 years ago. Where you would hear these ridiculous business models like, oh, we’re going to start a social network.

And if only a million people sign up, then we’ll have a great business. And it’s like, well, yeah, obviously that’s how business works. The question is how you get the million people, not what happens after their there. Open-source pitches today have very much the same tenor when I hear them. It’s well, after we get the community, then, then this will take over.

After we do this, we’ll hire the, the dev advocates. And it just doesn’t, this is the hard part, which is you have to build that community. You have to give that community a reason to exist, and you have to do it while giving away something for free, in the open, which is a relaxation of the control that a startup with otherwise enjoy, the editorial control.

There’s a list of reasons that building in the open are strictly worse. I think that that’s an important, maybe a controversial thing to say, but from the point of view of a startup aiming to build a successful product, you would typically want to do that with a very strong product vision editorial hand on the rudder.

Not in the open where you’re in progress designs, that you don’t have time to explain context for, can be viewed and adjusted and critiqued. So why do we believe so strongly that this is a good thing, therefore? Well, it’s because you can tap into this diversity of opinions and use cases and problems. If only you can find the spark to get this thing started.

And that is, that I think is the big challenge is how do you start a community? Forget that it’s open source. How do you start a community from nothing? How do you get people together to care at all about this? And I think that there’s a unique opportunity for companies, for commercial open-source entities to do so.

Now there’s an easy answer there, which is sure, just dedicate resources to it. And we see that in the largest open-source communities. We see that in the TensorFlow ecosystem, for example, which is an open-source ecosystem, but of course, with millions of dollars being pumped into it by various stakeholders and it’s very much taken off and it’s self-perpetuating.

But on day one, what does that look like? How do you, how do you get people to buy into this? And there’s a line that Danny Meyer actually says, the restaurateur, and he was talking about the hospitality business. And he’s talking about how do you elevate an interaction away from being a transaction and into being a hallmark of an experience of, you know, the start of, of a longer relationship. And he has this line, which I, which I just love. And I think it’s absolutely true. He says, people will take as much interest in you as you show in them. And that is something that we see born out every day in our open-source community.

It’s a, it’s a value that we try very much to hold on to. If we do not show deep interest and to us, just to be clear, that means in bringing the use cases and us delivering a solution. If we do not show that interest, what right do we have to expect anyone will show interest in us?

The only way that we can do that is through a misguided belief that tech is a pure meritocracy and we’ve built the best product possible just in a vacuum.  We don’t want to believe that we don’t want to rely on that sort of hubris. So instead, we want to engage our users. And what I think is very interesting is we view our open-source product.

Well, as a product, we view our product as a product is what I was about to say. We view it as a product in the same way that a company would view any commercial effort as a product. We treat it as a business, we treat it as if it has revenue, we treat it as if it should have resources allocated to it. This turns out to be a bit of a contrarian, maybe even controversial approach, but it means that we are able to make commitments to it in the same way that every startup makes commitments to its commercial product. And so, what I mean by that is if you look at many commercial open-source companies, you’ll see this intense focus on the commercial product.

And then you’ll see this effectively side project, the open-source side project with a hope that it becomes huge, but projects don’t become huge, except by accident. Products become huge. And so, whereas every entrepreneur can probably recite do things that don’t scale and go off and do that in how they make phone calls to their customers.

You see very few of the same people doing the same in an open-source context where you also need to do things that don’t scale. And an early thing that we did that doesn’t scale at Prefect is we invited our first hundred users of our open-source community into the community. We gave them reasons to come in.

We formed user councils. We held, oh, gosh, I think we had a happy hour as we flew around the country and we met with them in their offices to learn about their use cases. We made this unbelievable effort to get to know these people who we had no commercial relationship with. We just thought that they were the bedrock of the type of open-source community we wanted to start. And we wanted to get to know them, and we’d made this commitment and this effort. The next thing we did that doesn’t scale is as the community grew beyond our ability to go meet every single person, we made a commitment to answer their questions very, very quickly. I think originally, we said 15 minutes is the maximum time a question can sit. I think now, just because of the realities of a 5,000-person Slack community, growing a thousand people a month, I think we’ve, we’ve relaxed that down to 30 minutes now, but the idea is the same. We make this commitment to a completely free community. If you don’t decide to purchase an escalated support contract from Prefect technologies, you get what we would call community support. And we caveat that, we say, but it’s a really good experience because it’s still our entire engineering team, our dedicated support team, in the open, doing their best to deliver solutions. It’s, it’s a good product, but it’s a good product because it doesn’t scale.

And, and our effort therefore is figured out how do we scale it? How do we take it from that first hundred users? I remember speaking with, with Chris White, our, our CTO, as we started to cross, I think it was around 700 or 800 users. And just saying, I don’t know how we’re going to be able to keep this up.

And then here we are, you know, getting closer to 5,000 and we’re still doing the same thing. And it’s, I won’t say it’s easy. I have people on my team would murder me if I suggested it was easy, but it is rewarding, it is time well spent. So, this cycle is a difficult one. This is our path through it.

And it’s worked well.

Anu: Open-source projects and communities optimize for sometimes users and sometimes for contributors. Do you have a sense of what you want to optimize for, or maybe both? How do you organize the community to productively contribute and maybe even co-own what you’re developing as a product?

Jeremiah: It’s very challenging. We do not ever assume we will get a single contribution. And contributions are not necessarily the metric we optimize for. I think that there’s a meme that you’ll hear sometimes about open-source commercial open source, which is, oh, you’re doing that because it’s free R and D or it’s free engineering.

And this couldn’t be farther from the truth. You sometimes get very high-quality submissions and extraordinary functionalities, yes, from someone in the community. But you can’t bank on that. And you really can’t bank on that aligning with your product objectives, that it’s necessarily going to align with the objectives of someone in your community, which may or may not be your product objectives. It’s a horrible thing to bank on. Uh, and we don’t. And so, while we have, of course, it’s, it’s an open-source product, so the opportunity is there to collect these use cases. We focus much more on the network effect of discovering best practices for our own products. Funny thing to say, but because we meet people where their tools are and because we’re a framework and because in our commercial product, we, we by design never receive our customers code or data.

So, we actually can’t find out what people are doing with our tool, unless we have a good relationship with them. So, we focus very much on this network effect and the metric that I am most interested in, in our community, therefore is, the number of times someone who doesn’t work for Prefect helps someone in the community.

That to me is the, is the sure sign that people care sufficiently to assist someone with a tool that delivers a common, a common purpose, a common benefit. As we see contributors, and we do, it’s wonderful to see the growth of contributors, don’t get me wrong, but we are a commercial open-source company, we are paid to produce this product, we don’t try to extract that from our community. And I think it’s a bit of a warning sign when folks do. When people use it, when people open issues and yes, including bug reports, including their frustrations, including those problems, those are the best things that can happen to us, because those are the moments that we actually advance our understanding of our product, of its usage, of, of its shortcomings of its frustrations.

I could tell you right now, probably 200 different ways that people say Prefect created a friction for me on the way to delivering some solutions. Great. I have this list now where we can go through and check it off and make sure that our process is as smooth as possible. Whereas if we, you know, this is the flip side of the distribution model of the open-source distribution, while we can get our software to people in a certain way, we can also solicit their feedback in a very specific way, in a very public way.

And one of the things that we do the most important thing in the community is to make sure it doesn’t evolve into toxicity, and it doesn’t evolve into one of these horrible situations of, you know, one person’s unthanked and this person’s ungrateful. And we have this rule, sort of, above our code of conduct, if you will, that we assume positive intent on the behalf of all participants in our community. If you want to come into, into the community and complain and say, everything is terrible, you’re just, it’s not a great way to get help. If you come to us and say, I’m trying to do X and Prefect, doesn’t do it, and I’m trying to understand why. That’s a great way to get help because we are desperately invested in making sure that our product does everything that it should. And that positivity is contagious. And I think it’s when you don’t actively seek it the community devolves, because it is a network effect.

It is bigger than any person in it and it compounds at the, at the worst rate. So, keeping that as high as possible is just a critical part of this.

Anu: Outside of building a community, you’re running a company and growing at, I don’t know a breakneck speed, seems like. How do you make sure you’re staying on top of the decisions, both in terms of speed and quality for the company, but also for the community? Maybe, I don’t know if you tie them together?

Jeremiah: I wouldn’t say we tie them together explicitly, but we apply very similar frameworks to both. We were very fortunate when we started Prefect. We started the company because people tried to buy a prototype, which meant that the normal goal of a very young company, of can we determine product market fit, in many ways was satisfied.

Now the products that we had at the time, remember it’s a prototype, so we still had to develop that product and assure that it continued to meet that objective, but just this enormous de-risking that just took place at the company’s birth, which is just incredible. And so, what a luxury, so instead we focused on building our company side by side with building this product. And this is where, you know, for, just for example, we have this advisory board, which is very large, and this is a model that we learned about from Keith Krach and Marc Carlson, who are the CEO and CCO of DocuSign most recently, and this is a model they successfully deployed there to scale DocuSign to, you know, the height it is at today and at Ariba before that.

And it’s, and it’s all premised in this idea of building frameworks and avoiding what, in my finance days, we would’ve called pin risk, which is the idea, you know, as an option approaches expiration, especially, you know, just for example, if it’s a binary option, but even if it’s an option that’s near its strike price, you have to really worry.

If it goes a little bit up, you’re going to be in the money and it’s going to convert. And if it goes a little bit down, you’re going to have nothing. And so that’s called pin risk cause you’re getting close to the pin. So, we seek to avoid pin risk in decisions and in people. And I find it insane when startups spend a lot of money to hire a very small number of advisers because the pin risk that they’re taking, the belief that they must have that their problems will align exactly with their advisor’s experience, as well as their advisor’s willingness to help them in a necessarily difficult time, it’s not a very favorable position to put oneself and it’s certainly not a position you would pay to put yourself in.

And so instead, what we’ve done is we’ve tried to build this incredible diversity of opinions. This like constellation of people, some of whom are very obviously related to our business. They have experience in open source and technology and finance and healthcare. And some of whom on the surface looks like they have nothing to do with our business. They work in completely tangential fields or in sports or places that don’t look like they’re exactly the same, but they have deep experience in communication, in product design, in marketing, in outreach and communications, and in this host of other things. And everyone’s sort of joined by some interest in decision-making through data. That’s sort of the common denominator. It’s how we bring everyone together. And I think we have, I think we’re approaching 50 advisors now and we intend to keep growing that and we have these phenomenally incredible dinners, and we haven’t because of COVID, but pre COVID, we have these incredible dinners and just this vibrant conversation. When COVID happened, I got on the phone with 40 different people. I got this constellation of opinions and the important thing is we never need anybody to be right. We only need that opinion to fuel this framework. And then we as a company take on the challenge of running that framework.

And again, this is me talking my risk manager book just for a second, but our objective as a company is never to make the best decision we can. Our objective as a company is to never make a bad decision. And so, the way we think about that is given a hundred options, our framework is designed to eliminate 90 of them not to pick one.

So, we leave 10 options and then we pick one of those 10. And the reason we do that is we have this very sort of iterative fail fast philosophy. So, we’re going to pick one of those 10. It’s almost certainly not going to be exactly what we need, but when we do discover where it falls down, we’re going to come back to the starting line and we’re already going to have only nine options left, instead of having to come back and see all hundred. And obviously I’m sort of oversimplifying, but the result of this is that we can move very quickly, with very high confidence under extremely limited information sets because instead of focusing on picking the best outcome, we just focused on getting rid of the ones that are obviously bad. This can be a little bit of a confusing thing for people to get used to, especially in a startup culture that’s usually characterized by outliers and best decisions. In a very funny way, I think we could joke that it is probable that if you look at Prefect’s history at any given moment, in retrospect, it will always look like we made a slightly suboptimal decision.

And I view that as a win. And that is crazy to me because it means that long-term, we maximize the chance of survival, even if at any one moment we didn’t spend the extra, whatever it would have been to be exactly optimal in that moment. And that’s something that we are not only comfortable with, but that’s also a known consequence of the approach that we are taking. Is this guaranteed to work? Absolutely not. And it takes a lot of effort. It takes a lot of effort. We have to put some rules in place around how this, how this becomes possible. One of them, one of the earliest ones is a rule against something called inertial thinking, which is the idea that no idea can be justified simply by the fact that we are doing it already.

Everything must be constantly reevaluated and that helps us again, avoid bad decisions. Because whatever was the right decision at any given moment, if we could live in a world where we magically pick that, it would be insane for a company changing and growing as fast as us in a world that’s growing and changing, it would be insane to claim that that decision was optimal in the next timeframe as well.

This has been such a core part of how we evolve the company and how we move with confidence even when we don’t really know very much about the world.

Anu: Fascinating. In fact, in my previous role, I used to admire a leader and the worst answer I could give him was, when he asked a question, was this is how always been done.

Could you share an example where you converted or used this framework to make a decision? Just kind great example of how.

Jeremiah: We use this, I mean, we use this for almost everything. It almost seems silly like that I can’t even think of like a major example. One of the goals of this framework is actually never to have to make a major decision.

One of the goals is always to make a series of very small decisions so that we can fail as quickly as possible. So, it’s funny on the one hand, almost everything we’ve ever done falls into this framework. And on the other hand, it’s hard to think of like a single big bang example, but going through COVID actually would be, would be such an example.

I don’t have to tell everybody what an extraordinary period of time that was. I think it’s very easy to say that no business could claim that business was the same as it was 52 weeks ago, as we record this, right? As we went through mid-March and the realities of the pandemic set in you were insane if you just tried to continue with whatever strategy you had in place. It didn’t matter if you were a giant company and changing was hard, or you were a tiny company and resources were scarce.

You could not claim credibly that you were going to operate the same strategy to the same efficacy. Maybe you would do better, maybe you do worse, but it was not going to be the same. And so, this was a moment where certainly nobody knew anything. The future was impossible to predict. And so, we decided to adopt a framework that was kind of terrifyingly draconian.

We made a series of assumptions, almost all of which were wrong. Just to show you how effective this framework is, we decided that we had no customers, nobody was going to spend money on anything. We decided capital markets would be closed for at least 12 months. I’m trying to remember what else, what else we, what else we came up with.

There were six rules. I don’t remember them off the top of my head. Those are that those were the two scariest ones and we prepared for that world and we prepared for it in a way where we would be excited to be wrong, obviously. And of course, we were very wrong, but. But this was a case where I think fundamentally the framework that I’m describing is about the preservation of optionality and reducing the cost of failure.

And this was a case where we didn’t know anything. So, we made, we grounded ourselves in a way of thinking where the more wrong we were, the better the outcome would be. So that again, we weren’t pinned to our own beliefs. We had what I would call right-way risk and, and we also set up frameworks in which we would experiment rapidly to move forward so that we would speak with, you know. That was the point where we open-sourced a big chunk of our stack actually, at the end of March of 2020, we open-sourced a big part of our stack or that had previously been proprietary.

That was one of those decisions was like, whoa, we should have done this from the beginning. But it’s a very, very, very weighty, and difficult decision to make. We made it in that moment because it complied with the new reality that we observed. It was the right way to get our software in the hands of people who were not going to pay for it, in our assumption, but who would be benefited by having it, in our assumption.

And that was the beginning of a really incredible run for our open-source product. But again, it was rooted in a decision framework that was optimized around this objective of reduce the cost of failure, maximize the probability of survival and to iterate as quickly as you can.

Anu: That was a one-way door. Open sourcing the product at the end of March, obviously a tough one to make, and we, coming from Amazon take one-way doors pretty seriously. Do you ever fear walking into a one-way door unintentionally through a series of small decisions?

Jeremiah: That’s a fabulous question. No, I think that generally speaking, one-way doors are well enough marked. When, when you really get to a point that something’s irreversible you, you generally know you may find yourself there slightly by surprise, but, but you rarely cross that threshold by surprise.

You need to, you need to commit to that. And I think the interesting thing there is the scary thing is not so much the door, but obviously the, the one-wayness of it, right? It goes without saying. Open sourcing our product was something, you know, we, we had all these very frustrating, at the time, pushback where people would say things to the effect of, well, I know you have to run a business and that’s why you do this, but we really wish it was open source.

And what we want it to say at the time, for, at the time we had no commercial product, we had no revenue, we were just building this thing. We said, no, no, no, it’s actually not that, there’s nothing to do with a business decision right now, it has to do with, we don’t yet understand whether or not this is a good thing to do, whether or not this is a good decision in line with our product vision, and it is irreversible. And those two things coupled together, led us to take the more conservative approach. To give some context for that, I think that the strategy of open sourcing a product and then hoping your community doesn’t notice as you monetize them is a disaster from a sort of just an antagonistic business kind of standpoint.

We strive to never have antagonistic business models, and that means monetizing our community is sort of contrary to our philosophy. It also means that we can’t release a product and then try to convince people to, you know, upgrade I guess, or I don’t really know how people justify that. The other business model that we hate is releasing an open-source product and then just hosting it because we don’t think our, we don’t think our insight is knowing how to host things, right. Amazon knows how to host things. So, if you want to host something, take our product, take it to Amazon, ask them to host it, pay them to host it. Don’t pay us, pay them. Our job as a startup and as a company is to figure out what our unique insight is, what our edge is, and then turn that into a commercial product.

And so, if our unique insight was just building workflow engines, then to be honest, we might not open source it. Fortunately, that’s not our unique insight. We happen to be really good at it. But our unique insight is that we understand how to use the metadata of workflow engines, or rather of workflows, to deliver a meaningful analytic and insurance product over an entire organization’s workflows.

And so, our commercial offering is that. It’s the manifestation of this insight we have into what you can do with workflow metadata. Whereas our open-source product is this most full-featured workflow engine you’ll ever see. Because that’s at the end of the day, not something we charge for, we don’t extract a value for the fact that we’re good at that. We empower people through that.

Anu: Thank you so much. This has been a fabulous conversation. Any closing words?

Jeremiah: No, just thank you so much for having me on. I enjoy we’re recording this late on a Friday afternoon and you get me at my most rambling, but it’s a very fun space to explore. And we have a lot of hard-won opinions here. Some of which are we acknowledge are a little bit, a little bit contrarian, but have proven their efficacy over the last few years.

Anu: Love it the best way to close a Friday afternoon. Thank you so much.

Jeremiah: Absolutely. Thank you very much.

 

Going back to the archives to bring forward one of our most popular episodes which is a deep dive on Hope Cochran’s journey to investor, public board member and colleague.  She tells the story of being overlooked at her first job which spurred her to take a post in a small European country in her early 20s to take on a huge challenge.  That spirit of adventure and ambition set her on the road to entrepreneur, CFO, and founder advocate.  Dan Li, who is now a CEO of a new stealth company, Plus, sat down with her to learn her story.

If you like this episode, check out Founded and Funded on the podcast platform of your choice! (Apple, Google, Spotify, Stitcher, Amazon)

Transcript (this is machine driven transcription so expect some typos)

Dan Li: I’m really excited for our interview today to get the inside scoop on one of my mentors here at Madrona, who is an amazingly accomplished operator now turned VC.

Running through a quick bio, Hope Cochran joined the team at Madrona in 2017, after moving back to Seattle from London, where she was CFO of King Digital.

Hope was brought on as CFO of King to help the company go public. And then she ushered the company through their $5.9 billion acquisition by Activision. Before that Hope was also the CFO of Clearwire, Evant and the founder of SkillsVillage. She’s on the board of some public companies as well, like New Relic, MongoDB, and Hasbro.

So basically, she is pretty awesome. But today, we’re not going to spend time talking about awesomeness. We’re going to try to spend some time discussing those moments of truth that got you from here to there.

Recently, Hope and I were on a little field trip to visit a company and we were asked, so what really gets you up in the morning? This is particularly topical today because we’re talking about Hope enjoying getting 4:00 AM calls, because those are the ones that you really need to answer. So, while I was thinking about my answer to this company and about how cool it is to meet with new startups and inspiring founders, Hope cheekily answered something along the lines of, there’s an enormous constellation of people all around me that depend on me every single day.

So that’s definitely how I feel working with you now as well. And specifically, I feel like your ability to deal with rough times while remaining calm is a skill that’s probably been developed over a pretty long time. So today for this interview, given all of the success you’ve had in your career, I thought it’d be really fun to go back in time and talk about some of those moments where everything went wrong and how you went from chaos to success.

Hopefully, that works with you.

Hope Cochran: That would be great. I have a lot of content in that area.

Dan Li: Great.

Okay. One of the things that I think is great these days that you can go up and look up senior executives, LinkedIn profiles, and they’ll just say stuff like CEO, 2015 to 2019. It’s great. It’s like their whole career began when they became CEO a few years ago.

And it’s that’s not how LinkedIn works. And if you check out the CEO of Microsoft, it might look something like that. Anyway, I love that your profile really shows each of these transitions between different experiences and your career beginning at Deloitte and a few years later, starting a company. It’s really great for those of us coming from a professional services background, as well, and seeing that we can one day do something useful. Can you take us back in time a little bit and talk about how an opera singer and music major ended up joining an audit firm?

Hope Cochran: Absolutely. Yeah, that was an interesting choice in my college career was to choose to do a double major both in econ and opera.

And I laugh back to that decision because as I think about that, I really did it because I am by nature cheap. As I embarked on taking music lessons, I could not imagine, not taking music lessons. And if you joined on as a major, you got to take them for free. So, I signed up as a music major and took all of my music classes for free.

And then felt guilty a couple of years in and realized I actually better complete the major. So, I ended up graduating with the econ and the music major. And the only reason why I think this is pertinent is because as I think about my career, I do think the econ major got me interviews and therefore it was impactful in getting my first job. But as I think about my career, it’s those skills that I developed singing that I really feel like I utilize every day. You mentioned that I’m decently good at being calm in chaos, and I’ve been through a lot of chaos. So, I think I’ve developed that skill over time.

But I actually think I learned the basics and fundamentals of that by being on stage, because you have to learn to handle every crazy thing that’s thrown at you. Like it’s just part of the process or it’s part of the plan. So, when I think about the music degree, practice makes perfect, making sure you’re prepared for everything that you do.

Also, when things do go wrong, handling it calmly and working through it, like nothing was wrong. And so those are some of the skills that I really take with me throughout my entire career. And so that was a pivotal part of my journey. And you’re right to point out. I started at an audit firm which, that sounds boring, but you can learn great skills in an audit firm.

You learn how to manage your time. You learn how to manage your career. You learn how to be in lots of different situations. I saw a lot of problems. I got to figure out how to fix them and you get a lot of responsibility at a young age. So, it was actually a great place to start out. One of the things that was unique, in that, is I went to Ljubljana, which is in Slovenia, for a year and took on that challenge to help that country get their accounting principles in place and work with them. And that was a great learning step in my journey to then take back to the United States. One of the things we think in the United States is that the accounting laws are complex and overly thought through. And when you’re in a country where there actually, just at nascent stages and not thought through, you realize how quick they are to be ineffective. And so, I appreciated the complexity of the environment that we’ve created here in the United States.

Dan Li: That’s funny. So, I think a lot of people wonder when’s the right time to make that leap, or they’re already on the other side and they’re wondering if they made the right choice. You’re working in Lithuania and doing, I think some professional opera performance on the side, as well at that time. How does that turn into I’m going to start a company?

Hope Cochran: Yeah. I tend to be a person that tends to run towards a new adventure.

That’s just part of my DNA, so I don’t do things twice very well. And as, I looked at every step of my career, it’s always been something I haven’t done before. And when I started my company Skills Village, I was actually with PeopleSoft at the time. And I had a friend who had a great vision, and I was excited about that vision and leapt into it.

And quite frankly, leapt into it without a lot of forethought. Like we didn’t do a ton of research. We just trusted our gut that we knew that this was an opportunity that no one had filled and that we had the technical and business skills to tackle it. I look back on that with such amazement because we had such naivete, like we just thought we could get it done, which I think is a really important trait to an entrepreneur and that they think they believe in themselves and they believe they can climb every wall.

But I remember raising that first $3 million from a venture capitalist with an ID on a PowerPoint. And I look back on that moment, like, why did he give me that money? Like I didn’t really have much in terms of my background, but somehow, he believed in me as well. One of the moments I think through in starting that company is when you’re negotiating a term sheet, there are a lot of technical terms that you just don’t know unless you’ve learned them.

And I remember having to negotiate real time with him. And I had no idea what preferences were or what different terminologies were in the term sheet. So, I pretended I had to go to the bathroom, and I ran into the restroom and I called my lawyer, and I took copious notes really quickly.

And I went back in there, from the bathroom, and I went in there with all the confidence in the world that I knew exactly how to negotiate this term sheet for the first time. And he was very kind. So, I look back on that moment as I thought I was great, but really the person across the table was fully aware that I didn’t know what I was doing and helped me through that process.

Dan Li: Cool. So, it sounds like you had a great co-founder, you were able to raise some venture money. A couple of quarters after raising the $3 million, were you thinking, oh, this is great, or was it more of a, oh no, what have I done?

Hope Cochran: I remember, um, right after we raised the money, we, the first thing we needed was offices and I had to go figure out how to get an office and how to get desks and how to get chairs.

And so, we went to Costco and Home Depot. And I just remember that moment of, oh my gosh, what am I doing? I am spending someone else’s money, so we can pursue this idea and it is a moment of truth and a moment of fear, but we did believe in our ideas. So, we grew that company from the two of us to a hundred employees.

It was eventually bought by PeopleSoft. And as I think back to that. From the outside, looking in, it all looked like a success and yes, the investors are happy and all of that. There were so many moments in that journey where it should have all fallen apart and fallen apart because of decisions and things I did.

And so that’s an, and I do think that part of your journey is luck. And part of your journey is fortitude and courage of which I think I had both, I think I had luck and I had perseverance and fortitude. I think about things like I had a marketing manager who went to the local ball game and he committed $250,000 of marketing money.

To market Skills Village at that ballpark. And we didn’t have 250,000. I mean we did, but like I had every single dollar planned out and he came back so proud of himself and I was just panicked. And somehow, we had to rework the budget, we had to rework everything because I couldn’t get out of that contract.

He signed it; it was legal. And I had to tell my board, I was embarrassed. I remember another moment where we needed a new office space, and it was the Bay area. And I signed a seven-year lease at astronomical rates, and I didn’t think twice about it. But when it came time to be acquired, it was that lease that was the noose around our neck. Meaning the amount of money that was committed and the company buying us didn’t need that space. That became a material issue in the acquisition that made the acquisition almost fall apart. And so now I look at those leases differently. How did I get out of that mess?

I went to that landlord on my knees. And I begged for him to give me forgiveness and he was kind, and he did, and I don’t know why he did. He had no reason to do that. Wow. But he saved that acquisition. And again, looking from the outside in that acquisition looked positive and everything was fine, but there were so many moments that it shouldn’t have happened.

It also was in 2001, when everything had crashed and the company had asked that was acquiring us, that we pay all of our payables right before the acquisition happened. And then the market crashed, and I was left with no cash. Like why did I agree to pay all my payables before the acquisition happened and leave myself with no cash? I did because I was naive.

And once again, someone was helpful to me and I was lucky, and it all went through. But, I know, and I would say it went through because we did create a great product with great IB. Like ultimately the company had value and that saved at all. But I think of so many moments in time that I made personal mistakes, that really could’ve killed the whole thing.

Dan Li: So, what’s it like that day you wake up and you get the message from PeopleSoft saying that because of this, lease this, we don’t think we can do this deal. Do you call someone, do you make a checklist of things to do next? What’s the process?

Hope Cochran: My method has always been to pursue five avenues at once.

So, I become a bit of a whirling dervish. And I deploy all my resources in all different directions. And I would say that I’ve had to do this on lots of different occasions, whether I’m pursuing raising debt for a large company, I’m going to pursue lots of different avenues. I’m never single thread, anything.

I always have lots of different ways to approach it with the hope that one will come through. The moment of that day, when that happened, I won’t forget it. It’s, we have these moments in our lives that are very memorable, for some people it might be an earthquake or something for me, it’s the day that the lease almost killed my deal.

And yes, I do remember that in all panic. I remember calling lots of advisers reading the legal documents itself. Was there any out I could find? And then ultimately like writing down a message that I could give to my landlord and really going and talking to them and crafting that message really carefully and just hoping I would catch him on a good day. And that’s ultimately what won.

Dan Li: That’s amazing.

Hope Cochran: Yeah.

Dan Li: So, after the startup got acquired by PeopleSoft, instead of sitting back, you went and took another CFO role, cause you wanted to do it again with a company called Evant. How’d you get connected to them. Did you know the team already?

Hope Cochran: I didn’t know the team already. That was a venture capitalist at Kleiner Perkins who reached out to me to come in. And he was really frank about why he was changing out the management team. They had just replaced the CEO and they needed a new CFO. And the company was a ten-year-old startup, meaning that it had been through lots and lots of rounds and recapitalizations, and it had to be reborn.

Basically. And so that’s a very different journey. If you look at my journey and I always say the only consistent theme is a lot of change and a lot of chaos, and that goes in growing and downsizing them. So, I’ve done both sides and that’s what Evant was, and I went into it, eyes open that’s what I would have to do, but I had not done that before.

And when you get in there and you start meeting people and you like them, and you understand how it got to where it is, you gain a lot of sympathy for the process. And I had to look at even the GNA team and realize I had to reduce it by half. I like to be liked. I think we all like to be liked, but that was my job and that was painful.

And it also gave me a different lens on how to grow a company. Meaning growth is fun and good, and you have resources and want to spend it. But if you hire too many people, if your space that you get is too big, it does not lead you down a good path. I tend to know, as a CFO, like crowded offices where everyone’s too busy. Because when you have a crowded office there’s great buzz, people are excited, there’s great energy. And when people are too busy, they don’t have time for politics. So, they don’t worry about their title, or if someone’s doing part of their job. They’re happy for the help. And so, I tend to now approach growth with a different mindset because of the Evant experience.

And yes, I had to make really difficult choices. I think when you have to make those difficult choices about who to keep and who to let go and how to reshape the business, you have to keep in mind that you’re actually helping people’s career. So, look at the talent you have in the organization. They are not being helped by the fact that there’s too many people or that you need to prop up those people that are trying and have talent. And that’s ultimately the benefit of what you’re doing. And just to go back to Skills Village for a moment, one of the things that I did wrong as a young CFO was trying to keep people along for too long. I can coach them; I can train them. When ultimately, if I have a population of 10 people and I have one person that’s not carrying their weight, I’m actually hurting the nine.

So, while I’m avoiding a difficult situation with the one, I’m creating a difficult situation for the nine. So, I have learned in my career to act much faster than I did in those years. And Evant really brought that home to me because I had to make the choices quickly. And when I did, I saw how much healthier the organization was almost right away.

And it was a very painful process, and I would hope to avoid the painful process. But if you have to do it, you are actually benefiting the rest of the organization and yes, you might not be popular, but ultimately, they’re usually grateful.

Dan Li: So, were a lot of the decisions that you had to make at Evant relatively obvious on the key areas, or you had to downsize, or how did you end up coming to all the different decisions that you made there?

Hope Cochran: Yeah, you always think they’re obvious until you start getting to know the situation and then things get complicated because you look, and I guess it is nice to have a little bit of a third-party perspective, because I do think it’s more obvious then, but you can’t then make the changes without really understanding how it came to be.

And, once you understand that you say, oh, this person has this history and this person understands this nuance and that nuance, and it all becomes mucky and hard. And that was clearly the case and you want to be respectful and kind to people as well, so it’s always a very hard process. We did understand that we needed to take the product a different direction, and so that led a lot of the changes, which is always helpful. If you can think in your business, I’m not just downsizing it, but I’m actually refocusing it. I want to get this business objective done, like start with the strategy and figure out how you’re going to get there versus just say, oh, we have to cut costs.

I don’t think that any CFO is ever going to be successful in a, oh, we just have to cut costs, mentality. They really need to think about let’s identify the three or four big objectives this company needs to accomplish. Let’s protect those and make sure that those are shored up and anything that doesn’t directly align with that is what we then need to address in the downsizing.

And that also just enables the message to be a lot better and sets up the company for success.

Dan Li: Makes sense. So then after a lot of that turnaround work was done, what eventually happened to that company?

Hope Cochran: Went through a sales process, which was the intention, and we sold it to another ERP company.

And, in that one, we were just happy that the investors recouped their money because it had been a 10-year journey. But I think, everyone was happy with where it landed.

Dan Li: So now we’re going to get to the really good stuff, billions, and billions of dollars. Apparently Clearwire raised about $9 billion during your tenure.

That’s a lot of money. How do you spend $9 billion?

Hope Cochran: Yeah. So Clearwire was a company that was born out of the premise that someday people would actually use more data over a wireless network than voice. And so that seems to be true today, right? So that was in 2005. And as we look at our usage on our mobile devices, very few of us actually talk on them.

We actually use data. It was a very valid premise. The intention was to take some spectrum that the company owned and make it valuable because it was perfect spectrum for data. Now telecom is an industry that just requires a lot of money. So, in order to make the spectrum valuable, the path to doing that was get it used.

So, in order to get it used, we had to build a network. Building networks are expensive. There’s a reason why there’s only so many big cellular networks in this country today. It’s because it costs billions and billions of dollars to build them. And data networks were even more complex because the towers need to be closer together, so you need more of them. We went back and forth between raising money to build the network, then also raising money to buy more spectrum. So, we basically pulled spectrum together, made it valuable and then built networks on top of it to show its usefulness. And ultimately that company was bought by Sprint for $14 billion.

And is the primary reason, why, or I shouldn’t say the primary reason, but one of the key reasons why the T-Mobile Sprint potential acquisition is being discussed today. Because that particular spectrum is so valuable in regard to being able to roll out these new data networks, specifically 5G.

Dan Li: Got it. And was it quote, unquote obvious in this scenario again, that this would be a bet that played out?

I don’t think that people always had a lot of optimistic views on data versus voice and whether data over the networks was going to be a big thing.

Hope Cochran: I wish more things in business were obvious. I can’t think of anything that’s been obvious. You have to take a leap if it fits all of the right decision criteria.

And I think that is something that we have to think about is we take bets and now on the VC side of the table. How do you decide to invest in a company? You have to be grounded in your own decision process, and remember why you made the decision because we, we try and be analytical, but there’s always two sides to every equation and it’s never obvious.

So no, it wasn’t obvious, but yet all the proof points seem to make sense and seem to indicate that’s where it would lead.

Dan Li: And was there some point, I don’t know, after a billion dollars or $3 billion, where you have a ton of money in the bank, you’ve got customers and contracts, a great team, you think maybe it’s going to be smooth sailing from here?

Hope Cochran: No.

So, we never had billions in the bank. I guess there was like little moments in time when we did, but we would raise several billion every year. And then we would spend that money rolling out a network and we would be getting down to the dribs and drabs and raise another couple billion so we could do it again.

So, it was a constant cycle and that was an eight-year process. And by the end of it, we really were in a situation where we were in the throes of being acquired by multiple different entities. And we had a lot of debt on the balance sheet and if we weren’t acquired, we probably would’ve had to default on that debt.

So, it was a definitely a nail-biting experience, and that’s not uncommon in telecom, I have to say. Telecom is a big game of poker. You have a lot of debt and you basically have to be able to create revenue to then pay off the debt. And in order to do that, build the network. So, it is a high stakes game.

But I had such an amazing crew to work through that with, and I am ever grateful for that team. John Stanton was our leader of the board at that time. Brilliant strategic mind. And so, he led us through that process. So definitely that was such a learning experience for me. And I’ll just say that in all of these situations, whether it’s you’re an operator in a company or a board, the one thing I will say that I have done well is chosen the people around me. Your reputation is never your own. I would love to say that these successes have been mine, but they haven’t. They’ve been the people sitting at the table with me. You never make a decision in a vacuum. You are influenced by all those around you.

And in every situation, I’ve been in, there have been moments that have been very stressful, there have been moments where people’s personal issues have come out, whether it be financial or home life or whatnot. And you really get down to the core of who the individuals are and how they make decisions in that time influences how the company will move forward, how your career will move forward. And I have been so fortunate to be surrounded by high integrity, fabulous people, and all of these situations that I feel like as my failings came out, they were there to catch me. And as their failings came out, I caught them. And I really think that has been a key to my whole journey.

Dan Li: That’s awesome. So, at Clearwire what was that 4:00 AM phone call that corresponds to the landlord or the downsize, or the announcement?

Hope Cochran: There was many, but I remember one specifically and it’s quite technical, but it was the day SoftBank announced that they were buying Sprint.

And the reason why that was important is I was at a big conference and I was speaking all day. I think I had 14 investor calls lined up that day, as well as a big public speech. And the reason why SoftBank was buying Sprint is because, while I’m sure they were excited about the U S telecom, but they also wanted this asset that Clearwire held because Sprint owned a portion of that asset through an ownership percentage of Clearwire. And so, all of the sudden it was exactly 4:00 AM, my phone started ringing off the hook and everyone wanted my opinion on this particular acquisition and our stock I think tripled at the opening. Because everyone felt it had big implications for me and I was in a very public situation with every investor and all eyes on me.

Dan Li: So, you have a day of investor meetings lined up, and these 4:00 AM calls are asking you what’s going to happen.

Hope Cochran: And to be fair, I knew SoftBank, but I didn’t know them all that well. So, I basically spent an hour cramming on all SoftBank related items.

And knowing that any word I said would end up in lawsuits if it was incorrect, so I had to be incredibly accurate with my words. I was on the phone with lawyers all morning so that I wouldn’t miss step. And we went through about three hours’ worth of meetings in the morning and the stock continued to run and we, ultimately made the decisions, the lawyers made the decisions that I needed to leave the building. So, I did leave the building because I was too surrounded by investors and the liability of what was happening with the stock was too strong. So, we got up and walked out and it was like my little moment of rockstar in a little tiny world.

Like no one really cares but we cared. And we walked out and ultimately that was the beginning of what led to SoftBank buying Sprint, and Sprint then buying Clearwire, because SoftBank didn’t need the asset we had. Now that was another year and a half down the road because it took that long, but that was the thing that kickstarted the process.

Dan Li: What a cool story. How did the eventual acquisition play out and then what did you decide after that?

Hope Cochran: How the acquisition played out is a very long and complicated question of which I think we would bore the world with, but it was a very curvy road. It was on and off and there were other players that came in and tried to acquire the entity. Ultimately it was purchased in 2013 in the spring. And, as a CFO, especially when you’re a public company, CFO, it’s pretty common that that’s the end of the public company CFOs journey with that entity.

So that is when I then decided to take a role in London with King Digital, and we moved the family over to London and I was the CFO of King Digital for my next adventure. And, King Digital makes the game Candy Crush, for those who might not know. But many people know Candy Crush. In fact, 500 million people play Candy Crush every month.

Dan Li: And what level are you on?

Hope Cochran: I don’t even know, I’m basically right at the end. They come out with 15 levels every week. So, you have to really stay on it.

Dan Li: There’s like a huge proportion of the user base, that’s on that last level, right?

Hope Cochran: There is, yes. And one of the things that we love to talk about at King is that 50% get there without paying anything.

Dan Li: Wow.

Hope Cochran: I know. I don’t know how they do that. I admit that’s not me.

Dan Li: So, the way I understand the King story, it’s a company that’s doing really well for several years, making tens of millions of dollars and then one day, boom, Candy Crush. Huge phenomenon, like what we’re seeing today with a Fortnight, and just overnight success, everyone’s talking about it, everyone’s ecstatic, we read about it everywhere, everyone’s playing it. Is that what it felt like on the company side?

Hope Cochran: It did. It really did. So, for 10 years and it was the 10 years I wasn’t there, it was making about 60 million in revenue based on smaller games.

And then one of my favorite stories from them was that over Christmas break, they were getting in their daily reports from the network. And they basically didn’t believe the numbers because the numbers were too big. So, they just ignored them. And they came back in January to really do a deep dive, to understand what was happening with their analytics.

And they realized they were accurate, and Candy Crush had taken off. The company went from 60 million in revenue for a year to 2.4 billion in revenue the year after due to Candy Crush. And approximately 800 million of that was cash to the company. Huge cash generated. They basically saw that they had an opportunity here and they wanted to get the company public.

And that’s when I joined on, when I joined on, as the CFO, they had already filed their documents to go public. So, I was coming in when it was already underway and had to get the company ready in about three months to then enter the public markets.

Dan Li: So that’s probably like a slow lethargic process with lots of controls.

What were those three months like?

Hope Cochran: The thing, the first thing I learned and again, I’d put this in the failing’s category, because I probably should’ve learned this before I joined, was that hiring in Europe is not a quick process.

Dan Li: So, actually it wasn’t a quick process.

Hope Cochran: Yeah. It was not a quick process. And I had a very light finance team if we can call it that. So here I was about to take your company public. I really had no team. I had no staff and what I realized in Europe is anyone that takes a job has to give three months of notice to its prior job or six months. And I was taking this company public and three months, so that was not going to work. So, the good news is I had just sold a great company in Seattle, Washington, Clearwire to Sprint. And I basically called everyone that worked for me, and I said, please move to Europe tomorrow and do this with me again. And so, I was very fortunate to have fabulous, talented people who like jumped on planes and came over and together we joined hands and got this company ready for the public markets.

Dan Li: Wow. In those three months, what were some of the things that had like the longest skating times or the toughest to get across the line?

Hope Cochran: Yeah, there were everything from like building the company’s financial models, which they didn’t really, have to figuring out the data analytics because the data analytics had never had any structure to them before, so they had been pulled, differently for every month for the past few years, and I needed consistent data if you’re going to go out publicly. So, I had to rework the data analytics and then, too, we were incorporated in Malta and you can’t bring a Maltese company public in New York. That’s just not going to fly, so I had to reincorporate it into Ireland. And that just takes time.

Dan Li: That’s so cool. This sounds like one of these times we’ve talked about this acronym a few times, FTJ that you use with your kids, and that stands for finish the job. This sounds like one of those times you could have started making FTJ your motto but tell us about that. How’d that come into play?

Hope Cochran: So FTJ is something I learned as a high school camper. So, I’ve been very involved with Young Life, my whole life. And I worked at their camps over the summers, and you get exhausted and tired. And I remember one of my leaders always using this phrase FTJ, which was, you don’t get any credit for something if you do a really good job, but then you actually don’t finish it. And I think this pertains to so much in our careers. Meaning, you could do a ton of research on a topic, but if you don’t produce the document in a professional way, for someone to read, they discount the work that you did. So, you need to spend that extra energy at that moment when you’re tired to complete it in a professional way that you would be proud of.

And that’s where I say FTJ, last night my children were doing laundry and they washed and dried the clothes but didn’t fold them. I don’t give them any credit for doing the laundry. that’s not FTJ, right? Like it, it just pertains to every little moment in life. Yes. Taking King public was clearly a big FTJ moment, but that one was like really big.

I actually think it’s more pertinent on the little everyday things in life where you just get things done and you finish them, and you finish them. In a way that makes you proud that you produced a positive and professional outcome.

Dan Li: That makes sense. Speaking of kids, one of the topics I do want to bring up here is having kids and starting a family.

Fortunately, and unfortunately, a lot of career growth happens at the same time that people are thinking about having kids. How do you generally think about this balance of spending time with your companies, the management teams and the board members versus your kids and your family?

Hope Cochran: I always muse about this.

We have, what, 90 years on this earth, I don’t know what the average life expectancy is. And really 20 of them, are killer, meaning that they’re the 20, when your job is taking off and you’re having your kids, they all happen in your late twenties, thirties, forties, and there’s this crux of everything comes down at you at once.

And so how do you manage through those years? I think number one, recognizing that it doesn’t have to be a straight line, is important. And number two, having a few little rules that can help you get through there. Like I would say in general, yes. I have had a very busy career. I also have three children that I want to parent well and do all the right things by. Probably my social life has not flourished as a result of all of that, meaning I’m not going out at night.

And so, you just make choices, you make choices about where you spend your time. I’m also very big on, I don’t try and strive for this balanced life that people talk about being balanced. I think, I don’t know a single soul that would say, Oh, I feel so balanced today. Whether they have kids or don’t have kids, that’s, what does that even mean?

So, I really look for what I consider an integrated life. Meaning, what do I have to get done today and how am I going to get that done? And it might be that, yesterday I took my fifth grader to look at a new school. And so, from 11 to one, that’s where I was, and I cleared my calendar. So that could happen. That was the priority of that moment. So, as I look at each day, I look at it individually. And how do I prioritize my days such that it is in line with, I want to say my objectives, but the things that are important to me.

Dan Li: So, on this topic of the moments of truth and the 4:00 AM phone calls and the doubt, did you ever have doubts about how you were prioritizing time at work versus time with your family?

Hope Cochran: I think every parent has doubts. It never feels like you can give enough. And that’s just part of the journey. I wish there were a good answer to that. I think you’re always going to doubt. The one thing I will say though, is I do feel that for the times that I was away because I was on work trips or whatnot, my kids know that I am their mother and that I love them. And if there’s something they need, they call me, they don’t call a nanny. They don’t call my husband. They call me like that role as a mother is never removed. And that has been comforting to me over the years. Cause I think when they were little and I didn’t have that perspective, I worried that, they turned to someone else because I wasn’t there when they had a nightmare and, no, that’s never happened.

I am very close to all of my kids and, you never say your journey as a parent is over. So, I don’t know if I’ve done enough, but you have to give yourself a little forgiveness.

Dan Li: Yeah. So, let’s talk a little bit more about what you’re working on today. We spend a bunch of time together at Madrona looking at companies and sometime in the gaming world and the FinTech world. Obviously, you’ve done a lot of stuff in those industries, but these days you’re in the investor seat, advising lots of founders and early-stage companies and company building. And I think the thing that we hear a lot today, and people like to tell potential founders is this, yes, go start a company, dropout of school, leave that job at Microsoft. What’s the worst that can happen? It’ll be a great learning experience, no matter what. Do you agree with that advice?

Hope Cochran: That’s an excellent question. I’ll first say that I love working with young companies and I love joining the entrepreneurs on this journey. I feel like they’re so courageous.

It takes a lot of courage to jump on this train and try and build your own company. So, everyone that I meet with, I walk in with humility and humbleness, and just want to be helpful to them in terms of leaving colleges. I don’t know. I think everyone has to have their own journey, leaving schools or pursuing something.

I do think there is no cookie cutter approach. I think every journey is unique. If I were to have one word of advice for my children. So that’s always where it comes down to the rubber meets the road. I probably would like them to finish school.

Dan Li: And which school is college or high school?

Hope Cochran: I have ambitions for them for college. But would I be open to listening to why they want to take a different fork in the road? Of course. So, I do think that in today’s day and age, there’s lots of ways to approach this. Back to what we were saying earlier, where like the crux of busy-ness happens in these twenties, thirties, and forties. That road doesn’t need to be that straight either. There’s different paths and thing. We need to create a work life that fits different lifestyles and journeys. And this is in that vein.

Dan Li: And going back to FTJ and finishing the job, you’ve been at a bunch of companies where the job has been finished, whether it’s an IPO or an acquisition from this side of the table, what do you see as the most common reason that startups or entrepreneurs end up failing?

Hope Cochran: Clearly, assuming, they have gone on a journey where the product is a good fit. So, we’re going to put that aside cause we’re, you don’t start a company if you don’t think there’s a good place in the market for what you’re building. So, let’s assume that’s happened. The number one reason, I see things fail is people. And what I mean by that is relationships, dynamics. I think the founder dynamic, or the co-founder dynamic is so hard. And people should never underestimate that. I definitely felt that my co-founder and I did really well together, but when you are embarking on a journey to start a company, Life happens.

Meaning are you both at the same financial place where you can put in this, financial resources or take lower salaries? What are your needs at home? Do you need to be home more than your co-founder? All of these things become very stressful and very important to work through. I would also say that just having the ability to emotionally support each other.

So, starting a company is really hard. And I don’t think people understand that unless they’ve done it and being able to be support crew for each other when one is feeling down, and the other one can help each other. I think this relationship is so important as companies are getting off the ground.

Dan Li: Yeah. And you’ve talked about this, the support network and the people and advisors around you that are helping you make decisions, and you have a great network of CFOs that you rely on and organize events for. How do you go about building that if you’re still earlier on in your career or just getting started with your startup?

Hope Cochran: Yeah. I don’t know that I ever had any formula. Like I said, I didn’t have a lot of extra time, so I wasn’t good at going to events or networking. I think it was really just about making sure that the people I was choosing to partner with were people that I wouldn’t mind raising my children. Meaning, I had to really love them and make sure that our values aligned and that the level of integrity was there because you do end up in really difficult, stressful times with these people and you have to be able to ride that journey together.

Dan Li: What’s your least favorite part of the job at Madrona? And then we’ll do most favorite part afterwards.

Hope Cochran: Yes. My least favorite part is really clear. And that is, I always say I was really fortunate, I married my high school sweetheart, and that’s still working out, so I’m good.

Like I haven’t had to break up with people. It’s not a skill that I have or that I’m comfortable with. And I think that reality of venture capital is you meet so many companies. And as I was talking about before, like I find these entrepreneurs so brave and courageous, and I just love their desire to embark on this journey.

And I just hate how many no’s I have to say. And often I’m saying no, not because it’s a bad idea or because I don’t believe in them, but for whatever reason, it doesn’t fit the Madrona structure, or maybe it shouldn’t be backed by VC. It should be backed in a different way. And so, I always find myself like wanting to then help them.

And I get myself completely overscheduled because I ended up helping all these companies, but I’m really awful at breaking up.

Dan Li: And then what’s the, what’s your favorite part of the job? I’m guessing it’s going to be related.

Hope Cochran: My favorite part of the job is finding that company and digging in with them and helping them build something. That’s what I love doing.

Dan Li: Yeah, definitely the best part of this job.

Hope Cochran: Absolutely.

Dan Li: This has been such a fun interview. I love hearing all these stories. So, one last question for you. If you were someone five to 10 years out of school today, interested in the tech and startup world, asking for a friend, what would you do?

Hope Cochran: I would, I, one of the things that my career lent itself to, which I didn’t really contemplate at the beginning, but has really done me in good stead is I’ve gone from tiny companies to big companies, to tiny companies, to big companies. And that actually has been incredibly useful. So, I clearly love starting things and building them, but also seeing how that plays out in a healthy big environment helped me build things in a healthy way. And so, having that perspective of being in a big company, like a Deloitte and Touche, which sounds really boring, but actually I learned great skills and then going to a little startup, and then going into PeopleSoft where it was 5,000 people and it was led in a really effective way.

And then I went and started my own company and I thought, I really like how they did this and I’m going to build it to that. I had a vision of where I was going to go. So, I think getting those different experiences and seeing all different environments is really important. You can learn a lot from a company with a great culture, and you can learn a lot from a company with a bad culture.

You can learn a lot from a great manager, and you can learn even more from a bad manager. Your career is your own. It doesn’t matter if you have a good manager or a bad manager, you’re in a bad culture. A good culture is to take those learnings and then apply them to whatever you’re wanting to build.

Dan Li: That’s awesome. Thanks Hope. Really enjoyed this podcast.

In this episode of Founded and Funded, Madrona Managing Director, Scott Jacobson, and co-founder and CEO of Knock, Demetri Themelis, team up to talk about Knock’s fundraising journey. Deciding when to raise and who to raise capital from is a big decision for any startup founder and company. Listen in as Demetri and Scott talk about Knock’s decision to wait to raise venture capital, their early days of establishing product and market fit and more.   And, then Demetri turns the tables and asks Scott about his thoughts on how founders approach term sheets and fundraising.

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Transcript (this is machine driven transcription so expect some typos)

Erika Shaffer: Welcome to Founded and Funded. My name is Erika Shaffer with Madrona Venture Group. Deciding when to raise and who you want to raise from is a big decision for founders. In this conversation with Demetri Themelis, the co-founder and CEO of Knock, and Scott Jacobson, Managing Director at Madrona, they talk about Knock’s decision to wait to raise venture capital.

Madrona led Knock’s first institutional round, which was their Series A in 2019. But this is well after the company had established their market and product, and Demetri talks about those early days.

Knock raised a Series B financing of 20 million in early 2021. Knock had originally planned to raise their B round early in 2020 and the company had a lot of interest and term sheets on the table. Scott and Demetri talk about navigating through 2020 and how the raise actually ended up coming together.

And then Demetri turns the tables, just a bit, and asks Scott about the approaches that founders take when looking for financing from venture investors and his thoughts on their approaches. Knock is a CRM for multifamily managers. In regular language, that means large apartment buildings that are often owned by ownership groups and professionally managed.

Knock, like many companies, scaled back right at the beginning of COVID 19. But as people were stuck in their apartments, the communication between tenant and manager became increasingly important. An area that Knock excelled. And Knock had their best year ever.

We pick it up with Scott and Demetri.

Scott Jacobson: All right, Demetri, great to see you. Thank you for spending time with us today. Yeah. I know we’ve got a lot of ground to cover. Why don’t we just start with the very beginning of the origin story. Tell us a little bit about how you and Tom got started with Knock.

Demetri Themelis: Good. Thanks for having me, Scott. Yeah, the origin story of Knock. Myself and co-founder, Tom Petri, we’re both graduates from University of Washington. We graduated with finance degrees in the middle of a financial crisis. So really prescient on our parts. I think that both of us, we’d been friends at University of Washington and colleagues at a big Swiss bank, UBS, and became really fast friends. And the kind of global economic conditions at the time, a career in banking didn’t seem like it had a lot of much of a future. And so, we’d constantly talk about striking out on our own and starting a business together. And five years into our careers we both felt comfortable taking the plunge and quit our jobs to found a company. The pain point that led to the idea, that led to the company, that is now Knock was started from our experience as renters. So, we had both been renters in really competitive markets around the country, in Seattle, in New York City, San Francisco, and our experiences as renters was like, like most people, rather painful.

We felt like the customer journey for a renter looking for a new apartment, communicating with landlords and property managers, moving in, and ultimately continuing that relationship with your landlord or property manager as a resident, there was really nothing about that entire customer journey that was modern or positive in any way. And so, we thought that there were many opportunities to modernize that customer experience. And that was really the pain point that got us started.

Scott Jacobson: [00:03:58] All right. Great. So, you decided you, you found a pain point, you started bringing on landlords as customers. You build some software to help them manage that process, started charging them money, and then ultimately decided to raise capital from what we would call, in the business, strategic investors, in this case, actually your customers. And the seed capital came from big multifamily owners. Tell us about how you made that decision. If you had it to do over again, would you make the same decision? Tell us about that journey.

Demetri Themelis: [00:04:30] Yeah very early on, when we started meeting with property management companies and showing them demos of software that we wanted to build, we hadn’t even written a line, lines of code yet, but we’d ask for meetings, ask for feedback and we’d show them mock-ups and design ideas. And after 20 or 30 or 40 of those meetings, our mock-ups were getting pretty well-developed and they were, they looked like real, fully developed products, even though we hadn’t written any code.

And so impressive that by like the 20th or 30th meeting, a lot of those property management companies asked us, hey, this is pretty cool, how much does it cost? Or, hey, this is pretty cool, who’s funding you guys? And so those conversations started pretty organically. And I don’t think it was with a whole lot of intention at the time, other than well, gee if you’re a potential customer and you want to invest in us that, that sounds like pretty good alignment.

And just so happens that real estate owners happen to be pretty deep pocketed and often times are involved in making angel investments themselves.

And so, I think it was a pretty good fit.

Scott Jacobson: And looking back on that, was it all goodness, was there anything you’d, hadn’t expected by having your customers or investors that, that if you know somebody who’s listening to this might want to think twice about?

Demetri Themelis: There’s some pretty funny stories about people who ignored me for my meeting requests like 13, 14 times until I finally showed up at their office with a six pack of beer. And I said, I’m not leaving until, you take a meeting and by the time we got halfway through the beers that you are asking if they could invest in the business.

But no, generally speaking, it’s been great. I think having customers as investors is a tremendous benefit and I think maybe the caveat is that we didn’t have one dominating investor who was totally funding our business.

And they also were our biggest customer and therefore con controlling our roadmap or trying to control our destiny. In this case, the customers that invested were, several individuals that were made up a portion of our investors. And so, they, collectively, they were, a big chunk of our seed capital, but none of them individually were, in a, in any position to try to, with intention or without, try to dominate our roadmap or how we were building the business.

They were really there to help.

Scott Jacobson Got it. So, you built a pretty compelling, call it single digit millions of dollars, ARR business, on the back of investments by strategics and customers and had a really good thing going. Why did you decide to raise venture? Why did you decide to veer on your financing strategy?

Demetri Themelis: Yeah, Tom and I were both very apprehensive to go to the venture capital community to raise money early on. I think we both, whether we’re right or wrong, this, it was our first time founding a business, but our preconceived notion at the time was that venture capitalists, they’re all about growth. And so, from the moment that you take their money, it’s going to be, are you making my money? How is my return looking? How’s my return profile looking? And I think we were pretty nervous early on that until we felt really comfortable that we had great product market fit, that we wanted to make sure that our investors were going to be patient with us while we figured out product market fit. And so, once we got to a point as a business where we felt that we had achieved product market fit, then our goal was to grow as fast as possible.

And so, we went to the source of capital where our idea of venture capital was that you would want us to grow as fast as possible. And so, we wanted to make sure that like our goals at the time we raised venture capital aligned with our ideas of what a venture capital investor would bring to the table.

And so that’s why we waited as long as we did to approach the venture community. But we were actively trying to stay off the radar of the venture community early on.

Scott Jacobson That’s a, that’s probably good counsel. Now that you’re on the other side of that, what preconceived notions did you have that or that have been born out? And what did you think that maybe you’d have a different opinion about sitting here today?

Demetri Themelis: While we work with Madrona and here, we are in Madrona’s founded in funded podcast, but not to blow too much smoke, but it’s been an awesome journey. And I feel like any horror stories or ideas that you have about venture, like kind of the greedy venture capital partner, coming in and changing the way you run your business. Like we’ve experienced nothing of the sorts, just like 110% support from everyone in the Madrona family. And I can’t really think of any facet of our business that hasn’t been positively impacted by Madrona’s participation in our business.

And when you guys led our Series A and joined our board, we didn’t know how to run a board meeting and we didn’t know how to behave as a portfolio company. And so, everything was new for us, but it’s really just been an awesome experience. So, I don’t know, maybe we just got like really spoiled and this is how it every Founder or portfolio company relationship is like with their venture partner. But I guess like any nervousness that we had, that was definitely, quickly removed and that preconceived notion that our interests wouldn’t be aligned, was quickly shattered, and replaced with, these guys are truly our partners and are wanting to help in every way, in any way they can.

Scott Jacobson: Yeah, that’s great to hear. I appreciate the that you feel that way. And we do the same, I think it’s interesting as an investor and, and maybe I’ll make it specific to Knock. I think it’s fair to say that we all are interested in building really fast growing and great businesses. And rolling up our sleeves and helping each other, figure out how to do that. And ultimately the way to have the biggest impact is to go build a really big business. And I know that you and Tom have that ambition and are well on your way to do that.

I remember when we sat down, a couple quarters in, the question I asked you is what are those limiters to growth? If we wanted to grow at 3X or 4X or whatever it is, like what are the, as an investor, you never understand the business nearly as well as the operators, the people in the seats do.

And what you’re really trying to understand is what are those things? And if there are natural limiters and those are just the, the pace at which a company’s going to grow, then that’s the answer. But if there’s roadblocks or things you can get out of the way that can enable that kind of growth, why wouldn’t we all want to do that? But to do it in a way where the wheels don’t come off. And I remember in some of the early conversations you and I had, that was really what I was trying to get my head around is, when you’ve got great product market fit, and I should mention, when we did diligence in the process of making an investment in Knock, customers love the products, it’s a great product, in fact, I’ve shared this with you. Several customers said they’d pay 2X or 3X, what you were charging them, which we love to hear as investors.

But when you have great product market fit, that is the question, right? Which is, what do we need to unlock as a business to get to a much broader segment of the market, not just to build enterprise value, but because you can have real impact on customers. And I think that’s been a fun journey for us and it’s something we continue to ask each other and try to figure out what are those impediments that we can remove and, or investments we can make to increase that philosophy.

Demetri Themelis: Now that we’re talking about it, one other story that I remember from the weeks leading up to Madrona’s investment in Knock was we were getting to know each other and I can’t remember if it was at your office or at a, at our office, but Tom and I had a question that we were debating whether or not we should ask you.

And the question that we were debating was how would Madrona feel if after six months we decided we wanted to sell the company? And, our debate was well, does that send a sign of like weak, weakness or that these guys aren’t committed to building a really big business and like taking a path, to some, big IPO someday.

And is that a signal that we want to share with a potential investor who’s considering investing in our business? And ultimately, we decided that we did want to ask the question because we wanted to see how you guys thought about that. And I don’t know if you remember Scott, but your answer to the question was like, we’ve invested in a lot of companies and sometimes the founders have decided to sell their businesses much earlier than we think they could or should have in order to maximize value. But ultimately, we would never want to get in the way and try to block a transaction because often times, even if we felt like they left money on the table, or there was growth that was, not realized.  But a lot of times those founders, they start other businesses.

And then because we have such a positive relationship with them, or didn’t create contention, we’ve ended up invested in their second businesses and then those have become, the great success of the next fund or the next story. And I just remember that was something that was funny.

Like even, it’s funny thinking about it now that we were even nervous kind of asking those kinds of questions, because we weren’t sure what kind of signal that would send. And that, the answer was so like obviously supportive of us as founders in our business is just funny to think about.

Scott Jacobson: Yeah, I probably said it was okay to for six years, maybe would be okay, but not, to maybe not six months, but I definitely, I do think that is, the best entrepreneurs you ended up working with two, three, four times. And. Yeah, the first one might be a devil, but that gives everybody the opportunity to go for the home run the next time, for sure.

All right. Let’s get back to, let’s get back to business. So, you raised the venture round, the venture capitalists aren’t as evil as you thought they might be. I think you tripled the business or roughly that in, the sort of first go round that we had together, great product great market fit, and it was about time raise capital. And this was in see the early kind of I think you came in actually in and pitched Madrona the update December of 19, 2019. And then in January we set out to raise a B round and maybe just give us kind of the high level on that. Obviously, nobody knew we were three months from a global pandemic talk a little bit about the series B fundraise journey.

Demetri Themelis: yeah. It started out, fantastic. I think we had, we had a great year of growth behind us. Like a record year of growth behind us, was the first time we were raising a round a financing with a venture partner already invested and already on our side with a strong board member.

And starting the process we were in as strong of a position as I think a company could possibly be, all of our SAAS metrics were in great shape and we were getting great feedback on our deck and our story, so we were really excited, to, to raise money again and put together a, an awesome growth round.

I remember in the middle of the, in the middle of the process, we were taking our time and, meeting with lots of different firms and we were flying to Los Angeles and flying to San Francisco and meeting with all kinds of different companies and sharing our story and gathering feedback and ultimately, several term sheets. And coronavirus started to unfold, and it was really interesting.  I was giving an update to one of our angel investors, who’s a really successful Seattle entrepreneur and angel investor, John Keister. And I remember it was, I remember I was in a phone booth and talking to him and he said get your round done quickly because you know, Corona virus and I, he goes election year and coronavirus. And I remember when I got off the phone with him laughing thinking, I said, Hey Tom, I just got off the phone with John. And he said, we should get this run done quickly because of coronavirus. And we had a laugh about it thinking like, okay.

Meanwhile we’re getting so much interest in our business and as it turned out, John was right. No, we, we certainly couldn’t have predicted the impact that COVID would have on, on the capital markets and, within a matter of weeks, the public markets totally deteriorated and shortly thereafter, the private markets totally deteriorated.

And we had to really alter strategy and instead of chasing a really big round, when the venture markets and the valuations just really weren’t as strong, we ended up totally changing tact and doing our B led by Madrona, an inside led round.

And we changed our operating plan to really use that capital to operate and, buy time and put as much space between where, where we could be in a, in the pandemic and approach the capital markets again, when things were more normal for a bigger growth round.

And so, it really was an interesting time to raise money. And I think the two big lessons for me are there’s that school of thought that says, raise money when you can, not when you have to, and I think that was definitely evidence for that school of thought being correct.

I think the second thing is just the importance of who’s on your cap table and the strength of the partner and their reputation. And in our case, just like you guys didn’t even hesitate, and you said, hey, like the markets are changing. No, we’re not sure about what path we want to take with fundraising.

And our business was doing fantastic. Like we were having a record quarter and ultimately, COVID, I think really validated our business. But it was awesome to just see the support that came through from you guys who have been through many ups and downs and it was just unwavering.

So those two old, old school adages are raising money when you cannot, when you have to and make sure the people that you’re investing, are going to ride out any storm with you. Like both of those were really validated last year.

Scott Jacobson: I think as an investor, just to, to take the other side, when you’re looking at a business from the outside and, there’s a shock to the system, and maybe you have a public portfolio, maybe that’s way down.

And even though you’re hoping that this is a counter cyclical business that should perform well, it’s never been tested. And I really liked these founders, but I don’t really know them. That’s that is, I can understand, how, sometimes fear overcomes greed in the context of that environment.

But as a board member, who’s, gets the opportunity to see the ins and outs of the business. Every day, you have an information asymmetry, you have an information advantage relative to the investor because you do know the founders, you do know the management team, you know how they handle adversity.

You have a trust-based relationship, and you understand the ins and outs of the business, or at least the best you can as an investor. And, I think that, at least in this case, that gave me and my partners a lot of confidence that we wanted to double down, independent of the capital markets, but also to help try to figure out how to navigate, right? Because on the one hand Knock is a product that helps multifamily with occupancy, and there’s nothing more important than occupancy in the context of potential vacancies that happened in, in dislocated markets, but also, it’s a CRM product that helps building owners talk to tenants.

And, when you’re locked in your, or you’re not going out much, that’s actually a really important product. And we had a lot of confidence in you, but also felt gosh, we have an information advantage sitting on the inside of here and it’s just the right thing to do.

I appreciate the, we were there for you, but I think we also have information asymmetry that made it an easy decision for us. So, let’s talk about, what it was like navigating not necessarily from a, so you raised a small round, then you get intended as you mentioned.

And, we had a growth plan as a business that was more aligned, the size of that raise versus a bigger raise. But why don’t you just talk a little bit about navigating the company in a completely remote environment, but the pandemic, navigating with customers, that w what’s the last 12 months been like in that sense?

Demetri Themelis: Yeah, I think talk about looking at it from two perspective.  One from like the company’s perspective and operating a business in the pandemic. And then the second from our customers and our product and how we managed things that way, in the market that we serve. To the first, coronavirus it was a big curve ball, of course, for everybody, I think, for us, I think it was the first real adversity that we’d faced as a company, not to say that we hadn’t been through all kinds of growing pains and challenges and, all the usual things that I think a company struggles to find product market fit and start to achieve early scale.

But it was really the first true adversity. And as we did the prudent thing of changing our operating plan from totally growth oriented to more of an efficiency-oriented path, and operating like, optimizing for operating efficiencies, one thing that was really interesting to me, and I’m still thinking a lot about is the, the cultural change that, that, had to the organization. Where when you hire a group of people that are joining a company and all you’re talking about is, growth, and now, you’re in a pandemic and you’re telling everybody, man, your battle stations, we’re very fortunate, things are going well for us and all the signals are positive, but we don’t know what the future looks like.

So, we’re going to be more cautious in how we invest and what kind of culture that is to work for and recruit in, what that kind of feels like in an organization. And so, I think overall, our team responded really well and that’s probably one of the things I’m most proud of over the last 12 months is that we were able to shift our culture from, myopically focused on growth to total focus on efficiency and not to say that those wheels didn’t come with challenges, but we responded really well.

And ultimately, put up a best year ever for us. So, I’m super proud of our team the way we changed, but I think it really was a reminder of how the culture and how you describe what your company is focused on and what your goals are impacts the overall working environment.

And when that changes, not every one of your employees is going to be up for that kind of that switch. And so that’s something that was really interesting.

Scott Jacobson: I was going to just chime in about the growth versus efficiency and it’s I think there’s a lot of companies out there, for whom growth is a mantra and they don’t think about things like unit economics, or how long does it take to payback customer, lifetime value of that customer?

And that’s not the case here. You can be in growth mode with a fundamentally sound business with really great unit economics and make aggressive, growth investments, but also see a good return on those investments. And when you have a fundamentally good business and then you hit some headwinds or at least you hit some uncertainty choppiness in the water and say, hey, let’s pull back.

But it’s easier to pull back when the core is strong, then when, than when it was growth to hope to get at some point in the future to a reasonable unit economic model. And so, I think that an important element of your business. I do also think to your point, which I loved about the mindset shift and whether people can make the transition or not.

There’s also the challenge of making the transition back to, hey, let’s go be aggressive, right? Because you’re in aggressive growth mode, you’ve got a great product, you’ve got a great business, you get smacked in the face, and you say, hey, hunker down. And I think resilient, not just founders, but teams, early-stage company teams are actually pretty good at that. But then, once you slam on the brakes or even, just pump the brakes, deciding that you want to push the accelerator hard, it’s not always a natural kind of thing, but I think maybe now’s a good time to talk about the next fundraise as like at least an external signal that, hey, we’re ready to put our foot on the gas.

Demetri Themelis: Yeah. So, as I’d mentioned, we ended up putting together, through it all a best year ever. We had known that like multifamily in general, it’s, long-term housing, it’s a shelter, it’s a basic human need. We expected that the category would hold up pretty well compared to retail or office.

When you have hundreds of people living in an apartment building, it’s high density, living area. There’s a lot of things you need to manage, but you can’t just shut it down like an office. This is where people live. And so, we knew our customers were going to have to continue to operate and stay open through the pandemic.

And I’m really proud that we were able to support like all the changes that they needed to make and help them adapt to operate in that environment. It was great. And the result of that was, as I mentioned, like we think we really validated our value to our customers and, that was rewarded with what are our best year ever in, in every way from a growth standpoint.

And so, as we started, as we were finishing the year, the 20-year 2020, and we started to do our forward-looking planning and budgeting process. And we were starting from a blank slate and thinking about the future, we know all of our signs and signals from our business and have been very positive.

And the markets had recovered tremendously probably faster than, than anybody expected. And we had the idea in our head that, our story hasn’t changed, our results have been strong, we don’t need to raise capital right now, but we also know that it’s sometimes it’s a good idea to raise money, even when you don’t need it.

So, let’s go out and raise a raise a round. And that was the thinking that got us into the mindset of that we’d even want to raise a round right now, when we still had a fair amount of capital from the series B that we’d closed earlier in the year.

Scott Jacobson: So, if I remember right, this is late December, you always have this consideration as a board and as a management team, when you go do a fundraise, hey, we can go do the traditional, let’s go talk to 15, 20 plus investors.

Or you can do a more targeted raise. And I think in our case because we had narrowed it down or whittled it down to a relatively small list, when we’re going to have externally led financing back in the beginning of the year, how did you decide that was the right thing for the business, how’d, you narrow in on ultimately who you decided to bring in as a new lead?

Demetri Themelis: So, a couple of motivating factors for that approach. As you said, in the past, we’ve, and I think it’s the right approach most of the time, is to cast a wide net and talked to a ton of people and make sure you find the best possible fit and have as much data points as possible into making sure you’re going to get the best financing deal as possible.

In this case we changed that approach and we went for more of a targeted approach and there were two, two primary drivers for that. Number one, as we talked about, it was, not 12 months since we had gone through that process and we’d gotten pretty deep with a number of folks that we felt like we had a really great chemistry with and possess some really great strategic qualities as potential investors in the business.

And number two was, come to find out, that fundraising is, it’s a pain in the ass. It’s a full-time job for not just, like the founders, but for the finance team and for a lot of people. And it’s fun to tell people about your business and I like selling and I like telling our story and there’s part of fundraising that’s pretty fun. But it’s also a full-time job. And right now, like I want to spend all my time with our customers and our team and growing our business and keeping all of our energy on keeping and building our momentum there. And we opted for the kind of targeted approach as opposed to marketing, starting with a big list and marketing that, and whittling our way down.

And we went to a few folks that we got really deep within the last round, who we really liked, and said to them, hey, we’re we don’t need to raise money right now, but we want to. And if you have a pretty good understanding of our business from the last time that we spoke.

So, if you’re interested in getting ahead of the crowd, cause we’re going to raise money. And if we do, it’s going to get competitive. If you’re interested in getting ahead of the crowd, here’s what we, here’s what we’ll need to make a deal work and offered that to a few people that we really liked.

And we were very fortunate. We had a lot of interest and ultimately got a deal done with the I kind of the ideal partner for our next round.

Scott Jacobson Yeah, it’s in the, on the other side of that table, it’s giving somebody a preemptive opportunity, and sometimes investors will try to create preemptive opportunities for themselves. And sometimes they can be invited to create preemptive opportunities, which I think you did a nice job of creating for the company.

And as you said, sometimes minimizing the time you spend raising capital, even if you might raise it at a slightly lower price than if you did a big process, and you save yourself all that time and energy and effort that you can pour into the business, which probably is the enterprise value maximizing thing to do sometimes.

Demetri Themelis: One question, Scott, I think a lot of founders have, and we certainly have had in, in rounds in the past was, should the company tell investors what terms you want the financing to be at? Or should you let the investors tell you what they think your business is valued at? And I’m, I’m curious, I think a lot of times in the past when we’ve started a big process and a big round, we’ve talked to lots of firms and waited for term sheets to appear to let the market tell us what our company’s worth, for that, at that particular point in time. In the more targeted approach, going to investors and saying, look like this is exactly what we’re going to need in order to make a deal work.

We did that was a bit different for us from putting your investor hat on, like, how do you feel about companies coming to you with a target valuation in mind and letting you know this is the, this is what the deal, this is what the deal needs to look like in order to work versus waiting for you to make the first move on valuing the company.

Scott Jacobson: Yeah. I think it’s an effect. I think it can be an effective tactic in a buy it now context. If you say, if you come to an investor and you say, listen, we’re only talking to you or we’re talking to only a few people, which hopefully is the truth. And we have a valuation in mind and we’re not going to go do a broader market check, if you’re, if you can meet the buy it now price. You’re, what you’re saying is, hey, I’m willing to trade price discovery, right? Because I can go out to the market and I can find out that all the people think the company’s worth a lot more than the number I have in mind, or I could find out that it’s less.

But I’m willing to trade that the value of that price discovery, in order, in exchange for simplicity, and I already liked you and all that. And I think that’s a perfectly valid strategy.  The, the downside or the potential risks of that strategy is if you’re way off base with your expectation, that may make people less excited about, as opposed to, instead of hurting your feelings and saying, gosh, you’ve got, unrealistic expectations.

I might just say, hey, listen, we don’t need to be preemptive, we’ll be happy to jump in when you run the full process or something like that. And yeah, there’s a downside risk just around if that price is too high, and how somebody might think about that.

But I think it’s relatively low risk. I think the bigger question for the entrepreneur is how much one, do you have conviction around it and investors such that you would give them a buy it now price, like it’s hey, if this investor were in, this is the right amount of dilution for us, it’s the right amount of capital we can take, and we’d love to have them round the table. To me, then that’s a relatively easy decision. But you’re giving up the opportunity to meet other investors you might like more, or might have more chemistry with, or at a higher price. And so, as an investor, I’ve got no problem with it. I always ask entrepreneurs if they do have valuation expectations or what their valuation expectations are, because I don’t think either of us wants to spend a whole lot of time getting to know each other, doing diligence process, et cetera, if we have very different views on, on, on price. I think it can work anyway. I, in, in any transaction, it’s worth whatever somebody is willing to pay for it. When you sell your house, you don’t put it up for auction, you have a list price. That’s okay. I think it’s fine for entrepreneurs to tell, venture capitalists, and others, this is what I think the business is worth. The same could be asked about, M&A transactions, do you say, Hey, this is the price we want, or do you say you tell me what you think it’s worth and there’s validity to both approaches.

Demetri Themelis: Yeah, I think that makes me think of another, another question, a lot of founders think over is, you know what should I be shooting for? The highest valuation possible or is, is that the important thing too, is that the important metric to be optimizing for in a fundraise?

And I think it’s so interesting how many founders seek to find, that, get the highest valuation possible in a financing and try to minimize dilution, as a result. But one great piece of advice that we had early on was to always be thinking one round ahead. And I think that’s been really helpful for myself and Tom, as founders, as we’ve navigated financings, and to think about, not to think just about the round that you’re trying to get done, but the round ahead, and ultimately your valuation and a financing is it’s just a paper mark.

It’s not your exit valuation, the one that really matters. And if you train yourself to start to think one round ahead, that’s been really helpful for us to, because you’re not getting so caught up on necessarily getting your highest valuation possible, but one that’s truly in a, there is a market, there is a range you want it that’s fair.

And you want the investor that’s joining to help, you want them to be feeling really positive, incentivized, to help add value from the mark that they’re investing in. And anyways, it’s just another thing I feel like a lot of founders don’t always think about is that round ahead mentality.

Scott Jacobson: Yeah. I think that’s good counsel. Valuation, as you described it, definitely is a vanity metric in some measure, although it is it is an estimation of other, people’s either view of where they think you are today or where you can be in the future. And so, there’s some good, there’s things to feel good about when you get a good valuation.

Yeah, my, my view on it is the capital markets are what they are and in some cases the valuations will be higher, and multiples will expand, and it’ll get, a higher valuation. You might get other cases and somewhat independent of whether valuations are what you would consider to be reasonable or not.

If you have the mentality of every dollar demands a return, and, if you got $30 million in the bank at a $300-pre because the valuations are extremely favorable to the founders, then you treat that $30 million like it’s the last round you’re going to get. And you grow into that valuation and you make sure that you spend those dollars wisely.

So, I certainly don’t begrudge founders of the capital markets and, those are going to rise and they’re going to fall. But I agree with your point that, valuation is one of many inputs that you should think about when you’re deciding, ultimately, who to take a term sheet from. And I’ve seen many founders, you guys certainly fall into this category, where, you know, the highest price, wasn’t the one that won, and, within reason, because there’s lots of other important things when you’re talking about building a company over the long term, so I agree with that.

Why don’t we talk about the future for Knock? So, you’ve got, you had a good balance sheet before you decided to raise this incremental round of capital, you raised another $20 million. That’s a great place to be as a business. How do you think about this next vector of growth for the business?

How are you thinking about the go forward?

Demetri Themelis: Yeah, definitely. There’s two really cleared growth vectors for us. So, we, again, we sell our core product today as a CRM and we sell it into the multifamily real estate market. And so, for those of you that aren’t familiar with the market, there’s, let’s just say about 20 million apartment units out there in the United States that we’re selling to. And of those 20 million apartment units that could use a CRM, we’re currently servicing about 1.5 million of those apartment units. And so, Knock can grow by adding more apartment units to our platform. So, when we think about growth, we want to bring in new management companies and ownership groups. And those management companies and ownership groups have portfolios of properties and those properties, each have some number of units. And so, as we bring on units, more units that use our platform, our revenue grows as a result. And so that’s something that we’re always focusing on growing fast.

The other really exciting thing is, if you think about the assets that we’re serving themselves, on a large apartment community, it’s really like a city. You’ve got, 200 or 300 homes stacked on top of each other. There is an awful lot, there’s an awful lot of complexity in making that city run and keeping the lights on so to speak. And so, there’s an awful lot of technology that’s used in order to help manage that complexity and all of those different various operations.

And so, every apartment building out there. And you don’t think of them as businesses, but they are businesses and renters are their customers and they have to successfully attract renters, convert them, and retain them.

And operating that business, there’s just a lot to do. And there’s a lot of technology used to help make their operations as efficient as possible. Our belief is that there’s all kinds of other interesting technologies that kind of sit adjacent to a CRM that we plan to bring to market and build out what we call the, an intelligent front office.

Maybe a simpler way to think about that is like the tech stack within, for our customers. They really, they’ve not there, there really isn’t a, like a dominating top of the funnel tech stack like you might see in other businesses, so we want to really build that out for our business.

So, to back up again, there’s two big growth vectors for us. There’s, adding more units, but then there’s adding more modules and increasing the price per unit that we sell to our customers. So, I hope that provides a little bit of context for anybody on just how we think about growth.

Scott Jacobson: Demetri, thanks for spending time with us today. It’s really fun to relive some of the old stories and to hear about how you’ve thought about fundraising and company building. And just say, I wanted to say how much I’ve enjoyed the journey thus far and looking ahead.

Demetri Themelis: Thank you very much for having me Scott and the feelings totally mutual. Love working with you guys. And I’m very happy that they say there’s a lot of money out there and it’s all green, but I disagree, it’s like having the money from the right partners is really everything.

And we feel very fortunate that we landed with Madrona as our partner for this journey. And definitely looking forward to the next chapter and those after that. So, thank you.

Erika Shaffer: Thanks for joining us for Founded and Funded. If you liked this podcast, please subscribe. And share it with your friends.

In this episode, we team with Madrona Partner, Anu Sharma who hosts her own podcast, Traction, as she talks to the founder of former Madrona portfolio company Heptio, Joe Beda.  Joe is also more well known as one of the creators of Google Compute engine and Kubernetes.  He and another Kubernetes creator Craig McLuckie formed Heptio – a company Madrona backed at day one – to help enterprises adopt Kubernetes.  VMWare purchased the company and Joe is now ‘doing cloud native stuff’ at VMWare as his linked in reflects.   Joe is a thought leader in so many ways and in this frank conversation with Anu, who brings her own extensive experience at AWS to the table, he talks about open source, open core, open extensibility and how startups should think about building companies around, attached to or based on open source software  – and their communities.  Turns out this has more to do with ordering a hamburger during these COVID times than you may imagine.

Transcript (this is machine driven transcription so expect some typos)

Anu Sharma: Joe, it’s great to have you on the show. Welcome

Joe Beda: I’m glad to join you.

Anu Sharma: Joe. Open source means different things to different people. What does it mean to you?

Joe Beda: You know, I think open source is fundamentally a positive sum game, and I think this is what’s so great about our industry in general is that it’s really one of the imaginations of how can we have folks come together and do something that wasn’t possible before? And I think open source is really fascinating in my point of view, because it gets a lot of folks that care about something that are coming from different directions, with different expectations and different needs.

They find common cause and create something that wouldn’t have otherwise been created. And so that idea of like I bring something, you bring something, somebody else brings something and we create something that’s greater than the sum of the parts. That really that positive sum game is really what open source is about for me.

Anu Sharma: So, you’re hinting more at the community aspect of open source rather than the open-source aspect of open source. It’s not the code being open source that makes that’s the material aspect here.

Joe Beda: Yeah, I think community is fundamentally what’s at the heart of open source in so many different ways and it really comes, and the more senior I become as an engineer the more I recognize that the hard problems aren’t technical. And so, a big part of this is that you end up with a set of folks that feel ownership over that project in certain ways.

And when somebody feels ownership and when it evokes an emotional response that actually creates, community that creates things that aren’t possible before, when you think about great branding, right? Nike, Apple, these like these top-level brands, they evoke an emotional response and the people that are actually buying those products, working with those companies, they feel a connection there.

They feel ownership over that brand. It becomes part of their identity. And I think open source is a way to do that, both to motivate people to come together to do great things. But I also think there’s opportunities to make sure that you can in a smart and respectful way, use that to your advantage as you’re looking to build a business.

Anu Sharma: One of the ways I think about open-source projects is it solves a problem. A user probably had the problem, approached it in a solution mindset and wrote up software that could solve the problem. And then there’s a different aspect of the productization off that solution which requires documentation, the usage aspect of it, the buying aspect of it, but also the consumption aspect of it. Uh, I don’t want to host it for example, and I just want it to be completely operated and managed by somebody else. And that’s, that’s a whole fully more productized version of it.

How do you think about the separation between open source and the commercial product that comes out of it?

Joe Beda: Well, I think that the words that you’re using there, and I think they’re so close that they sometimes confuse us is project and product. And. And I think oftentimes when folks get really enmeshed in this world, they start to confuse these things and they view the open-source project as the product in and of itself.

Now, I think this is exacerbated because we’re seeing open-source projects become more product like. For instance, um, Joyent started the node ecosystem. And the reality is that you can go and download node and you get documentation; you get an install experience. It feels very much like a product.

And I think that’s part modern open source where it, these lines are starting to blur, but at the end of the day, it’s still just a project, right? It’s not, a product in my mind is something that has a skew, and you pay money and, for goods and services, right?

Like that is a product. And a project really is, you know, there’s still an amount, a, you know, a certain amount of like, you’re on your own here, take it or leave it type of thing. Um, and so I think, you know, part of this is, is a product is the value that you’re adding on top of the projects that you can bring in and charge money for it.

And there’s different things that you can actually, and I think it’s worth talking about what are the size of the modes that you bring, as you start adding that value. And I think that the easiest thing to think about is, is, you know, some support and documentation and trusted builds and that type of thing.

And I think it’s very easy to say, well, we’ll take this open-source project. We’ll provide support. We’ll have a, you know, 24, seven on-call. If you hit problems, we’ll provide extended documentations, and we’ll all wrap it up in a bow for you. And I think that’s the traditional distribution model. And I think this comes from sort of the Linux distribution world where a Linux distribution, you know, I had a former Red Hat employee that, that worked for us call it, walking over broken glass as a service, right? Because the traditional open source is you take all the different projects that maybe some of them have versions, maybe some of them, you know, have, have bugs and they all are built in different ways. And you’re bringing all this stuff together, doing some cross integration tests and say like, here’s a set of things based on open source that we’ve brought together, can work together and we’re going to support it.

And so that’s the traditional sort of open-source support model. And there’s a lot of value to be added there. And, you know, but one of the problems there is that the crappier the open-source projects are in terms of user experience, the more value you’re bringing as we look at these more modern projects, right?

Like it’s very hard to build a distribution over something like node because the project is so darn good that the level of value there. And so, and in that world, what we see is we see companies like Sneak start to come up where now what they’re doing is they’re helping you to, hey, you’re just not using node, you’re using the node ecosystem. The node ecosystem is big and hairy. How can we actually provide a level of, you know, intelligence and thoughtfulness around making sure that as you bring that stuff together, you’re bringing it together in a responsible way. So, they’re starting to fill in some of those gaps around security and compatibility and, and sort of hygiene that you often would use to buy through, the Linux distros.  Next level of, of value is that there’s features that you can get when you, when you buy the product, and those features aren’t available when you’re talking about the project and right.

And I think that’s where we get into sort of like, you know, what we were calling previously the difference between open core, where only one company can deliver those enterprise features. Whereas I think open extensibility, there’s a level playing field for multiple folks, open-source projects or, commercial companies adding those value-added features.

And then finally, I think, the last level is the hosting experience around this open source. Where especially when we’re moving into the cloud world, distributed systems, software is not, you know, a static thing, right. I think, you know, old open sources like lib PNG, I can decode PNGs without having to write my own decoder.

Right. Modern open source is Cassandra or Kubernetes or what have you. These things take a certain level of complexity, a certain level of skill and, you know, and dedication. They’re living, breathing things that somebody needs to be on the hook for. I think anybody who’s ever administered a database knows this, right?

Like, like you don’t just launch, you know, launch a database and be like, okay, it’s good. Done step away. Right? No, you need a DBA. You need somebody doing backups and testing those backups. That’s real value that’s being layered on top of this. And so that’s another place that you can create a product out of the project.

And so, I think we’re seeing different companies look across these different ways of monetizing and really constructing both the open source to allow for this stuff, but also, you know, playing around with the different models for how they can start adding value and turn product from project.

Anu Sharma: And going back to the time when you’ve been, you founded and built Heptio, could you wind back a little bit to how your experience has been in building a business around open source?

Joe Beda: So, a little bit of my history here is that I’ve been in industry for 25 years or something now. And while I was at Google, I started Google compute engine and then started Kubernetes. I left Google and then co-founder Craig McLuckie and I started Heptio as a way to take Kubernetes, open-source project founded in Google, but how do we actually start building a company around Kubernetes and really take it to the next level and bring it to customers. And thank you Madrona for being great investors and working with us through that journey. We ended up selling Heptio to VMware and we’re continuing that, that journey and that mission inside of VMware on a somewhat larger stage. The thinking about open source and establishing Kubernetes in general, I think a big part of getting open source out there and building that sense of ownership is releasing it and engaging in building that community probably earlier than when you’re comfortable.

You really need to get this stuff out there when it’s still half baked, when there’s still a lot of things to be done, when there’s big decisions to be made, because then you can involve your community. As you look to make those decisions, you can let them help shape you. And so, this really mirrors the journey that I see a lot of startups go through in general.

This idea that if you wait too long to release your product, oftentimes, you get in your own head and you don’t listen to folks. When you see healthy startups, they have an early customer base. They have a user community for their products, which mirrors the user community for open-source projects.

And they really get this really tight flywheel feedback loop with their early customers that really helps to accelerate and home in on that product market fit that is so critical for startups to be successful.   Starting Heptio, we were in a little bit of an interesting situation because the project was already up and running, and successful, and was really finding a lot of traction. So, it was really, our problem was how do we actually construct a business around this open-source project after the fact, with the reality that, you know, a lot of the patterns, a lot of the technology was already in motion and set there.

Now, I think luckily enough, the way that Kubernetes was involved, and I think being part of that, I think we steered it that way, is that there’s parts of Kubernetes where it’s fundamentally extensible and there’s opportunities for us to build up and around on top of that to start building more products that compliment Kubernetes. And I think, that’s one of the keys, and I think we can probably get to this a little bit later. What are the different avenues for commercialization of open source? And I think one of the key things is to actually build the open-source projects so that it’s usable by itself, but it also has extensibility points that create opportunities for you and others to be able to work on top of that and start really bringing that next level of value on top of that open-source base and foundation.

Anu Sharma: Yeah. We spent a bit of time at ourselves on a couple of open-source projects at AWS, where we thought a lot about how to open source a project while still leaving enough room for the community to contribute, to bring in, as you said, their sense of ownership into the progress of the project. How did you think about which areas you wanted to leave open for extensibility?

Or was there a certain principle that you went into it as a tenant, for example, on, we want to leave this extensible and this is why we’re designing it this way?

Joe Beda: I think this is where things get really fascinating because product planning and business sort of planning and strategy starts to meet technical architecture and starts to, you know, so there’s this puzzle of we want this project to be useful enough that it will attract a user and a developer community that aren’t necessarily customers of ours, and we also want to make sure that we have room to find the right customers who maybe don’t have the energy, the time or the wherewithal to get involved in that community so that we can bring them value and build that next level on top of things. Now, with respect to Kubernetes, I don’t think we planned this from the start, but one of the things that we saw as the project continued and evolve is that the project itself was becoming a gatekeeper for new features.

So, everybody was showing up saying, I want to put this into Kubernetes. I want to put that into Kubernetes. And really it was overwhelming the project. We couldn’t keep up with all the ideas and the things that people wanted to do and build into Kubernetes. And frankly, it scared us, because, like we want to embrace that. We don’t want to say no, but we also can’t say yes to everything. And so, I think a big part of our evolution there was recognizing that if we don’t want to say no, but we can’t say yes, is there a third option? And so that third option really is, yes, you can do that, but you’re going to have to build it on top of using these plugin mechanisms.

So, we really let that community help to guide us in terms of what are things that people want to do on top of Kubernetes, and then what are the ways that we can provide a way for them to do that without the project itself, becoming a gatekeeper where it’s you must go through us to get something integrated into the core.

And I think when you look at sort of the way that this market has evolved, and for those not super involved in the Kubernetes cloud native world, you can go to the cloud native computing foundation and they have this landscape slide. And VCs love these things because they’re mapping all the different companies and you’re like, which one should we go and talk to?

And you check them off when you’ve met the founders and stuff. But from the point of view of, from my point of view, that’s a thriving ecosystem and it’s chaotic and it’s somewhat overwhelming. But it’s the sign that, that platform, that accountability mechanism has created enormous amount of opportunity outside of core Kubernetes.

Now from the customer point of view, that is also overwhelming and scary. And we’ll often see customers look at that and their eyes go wide and they, they start getting some cold sweats because there’s so much there for them to understand. But that’s also opportunity for vendors to be able to bring this stuff together and provide a curated introduction or view onto that world.

And that’s very much the point of view that we were taking with Heptio and what we’re continuing to do with VMware and VMWare Tanzu.

Anu Sharma: So, at this point, the project has evolved into a successful community, you’ve built a platform that is thriving with a vibrant ecosystem. As part of the company, when you’re building new features and new technology, how do you think about what goes into the open-source repository and what is part of what you believe is the company’s resource or asset?

Joe Beda: It’s, I think this is a place where you have to have a theory and you have to test it. There’s a couple of rules of thumbs here. And I hesitate to even say these things because for every rule there is a counterexample of it. But a couple of things that I think about when I look at this number one is that developers don’t pay for stuff.

I think once you start getting into more operational roles, and I think that’s what I would view paying for cloud services start to be, then I think those rules start to change, so it really depends on your definition of developer. But the reality is that a typical developer sitting in an enterprise, they would rather spend their weekends writing code, then figure out the purchase order process of their enterprise.

And companies make this hard on purpose to spend money for a lot of their, a lot of their developers. And so often times what you find is that this distorts things where the people who do spend money in enterprises, the people who are your buyers are often not your users. And so, when you think about that user versus buyer dichotomy, it really comes down to what are the features that are critical for users?

Put those into the open source. What are the features that are critical for buyers? Those are the things that you want to actually make sure that you reserve and that you think about building a business around. And this is and this is where it gets more subtle here because these groups don’t operate independently, right?

If you get a lot of traction with a set of users, and now the buyer, whether this be the head of IT or some, some business unit GM, or what have you, those folks have the engineers that they trust. And they’re going to go to them for spot checks in terms of whether the technology that they’re looking at buying is viable and healthy or not. And so now what you want to do is you want to go in there, establish a relationship, establish a brand, establish that ownership and that emotional attachment, and then be able to say okay, we can both maintain that experience that the users love. And then also go through and provide the set of features that are absolutely critical to the buyers on top of that.

And it becomes a reinforcing action from both sort of bottoms up and top down when you think about your sales motion.

Anu Sharma: Yeah, and there are parts or features that are clearly buyer side. There are features that are clearly user side. And then there are some in the middle. For example, you can think of, authentication SSO and maybe SSO falls more on the buyer side, but authentication almost as a core feature of your application, if you’re not authenticating, you’re lacking core security features. How do you think about that element? Is there a gray area in between and how you, how would you disambiguate that?

Joe Beda: There is a gray area in between. And honestly, I’m conflicted about this because I think, it’s not unusual. And I think I saw joke on Twitter, earlier this week where it’s SaaS, it’s you have the free version, you have the solo version that’s 50 bucks a year.

And then you have the enterprise version that has SSO and it’s “call us” and, “call us” means that it’s significantly more expensive. And that’s the common pattern that we see because some of these features, whether we’re talking layering features on top of open source or whether we’re talking about like coming up with the addition’s breakdown strategy for SAS.

Some of these features have outsize utility for the people that have money. So, the idea is that what are the critical features for the folks that have money, who can pay you for it? Those are the features that you want to charge a lot for. And I think as a developer, and as an engineer, it’s somewhat offensive where the value of a feature is not always proportional to the complexity of the implementation of that feature.

And so, breaking that assumption like I’m convinced that you can make millions of dollars with the right bash script. It’s not about, it’s not always about coming up with groundbreaking new, hard technology. It’s really about solving the right problem in the right way for the right person.

And if you can do that, then you can start to do the segmenting and actually come up with the right the right features to actually have for your enterprise edition and all that. And I think, you know, also as an engineer, we find this somewhat offensive. You’re charging how much for what? And I think, but it costs a lot of money to run a company.

It costs a lot of money to be able to actually create and support some of these projects. And I think that, part of building a business is recognizing that you’re going to be giving up some value. You’re not going to be capturing all the value that you create, but in doing so, you’re making a deal where, you know, you can, can capture more reliably, a smaller part of a larger market versus, the entirety of a smaller market.

And that’s some of the trade-offs that I think you make, as you think about whether you’re doing a free edition for SAS or you think about whether you’re going to start getting involved in open source and put real money, real time, real effort, real engineering behind that.

Anu Sharma: You started to get a bit into the monetization bits with buyers. You’ve probably thought about this a whole lot on all of the different options that you have in front of you for monetization. How would you consider that? Of course, how did you think about it for Heptio and how do you think about it now going forward, if you were to start a new project?

Joe Beda: I think looking at Heptio, I think I definitely learned a lot as we’ve gone through, and I think, my thinking on this has gotten a lot crisper than I think we were fumbling our way through with Heptio to be honest, in some degree.  So, the first thing to recognize is that they’re different types of open source.

And fundamentally I started out saying, what excites me about open source is this community people coming together? And I think fundamentally when you look at a project, there is an unspoken contract between that project and its community. And you establish that early on and you set expectations with your community.

And as you set those expectations that defines your degrees of freedom in terms of, hey, here’s the stuff that we’re going to be doing to be able to monetize this stuff. And I think one of the worst things that you can do is to unilaterally redefine that contract with your community as you go.

And so, I think a lot of the places where we’ve seen companies struggle with open source is where they’ve had some implied contract or relationship with their community, and then the situation changes and they’re like, we’re going to change the license because we need to be able to monetize. Or we’re going to exert control that we hadn’t been exerting before, because technically we can do that, but because we haven’t done it before, and because of some of these sorts of statements that we’ve said, now, all of a sudden, we’re changing that contract with our community. And so, I would say that the contract that you have with your community, both, will influence the growth and the level of ownerships that people feel with your open-source project.

And it will also, constrain and enable the monetization motions that you can bring relative to that open-source project. And so, I think looking at different types of open source, I think that there’s on one end of the spectrum, there’s what I would call, throw it over the wall open source where it’s like, hey, I’m writing code, but people can read that code.

Maybe even it has an open-source license, but I’m not accepting any contributions. I’m only interested in a user community. I’m not interested in a collaborative sort of contributing community. And sometimes people will call it open source, even if the license is relatively restrictive as they do that.

I think a great example of this would be Android, right? Android is open source. People can take it and do other things with it as noticed by the gazillion Android derived phones that you know in, in far East. But there’s still a core of that, that is, the fundamental Android experience is tied to Google services and it’s very clear that the next version of Android is being enabled by Google.

And the set of flowing back into that code base is very limited. At the other end of the spectrum is what I would call open community, and open governance. And this is what we see a lot with things like projects in the CNCF or the Apache foundation. This idea where you want projects, where the direction and the roadmap of the project is driven by the community itself. And oftentimes you’ll see these things be places where multiple vendors come together. There are things like elections for decision makers inside the process. And so, it’s very much that community is driving where that thing goes. And I think from my point of view, a healthy sign of a project that is open governance is that if any single vendor, even the most critical one to that project, if they were to step back and say, you know what, we’re not interested anymore, the project would still be viable, would still have a life beyond that vendor stepping back.

And in the middle there, what we have is this emergent of what I would call open core projects. And I think this is where I think a lot of folks get very confused. And there’s a lot of companies exploring redefining some of these contracts and looking at this sometimes to great effect sometimes by, ham handedly, redefining that contract with their community and creating a lot of problems for themselves.

And so, I think there’s a way that we can start slicing this more, finally, that I think is useful. Open core often times what you have is a single vendor driving a project. And they reserve for themselves, the right to offer the enterprise edition of that product that has extended features.

And so, if you are a member of that community, fundamentally you can use the open-source version. But if you want to contribute to that open-source version, something that will start to conflict with the enterprise version, they’re going to put a stop to it, close to PR and say, no, right. And we’ve seen this happen with a lot of companies. Now where things get really hard is when like the original license, was very liberal and then going forward, they’re going to be changing license for the contributions they’re bringing to the project. They still own the trademark.

Those are the things that can create a lot of turbulence and can help to really damage communities. Now slightly on the other side of that is something that, we’re still workshopping the phrasing for, this is what I would call maybe open extensibility. And this is I think, where we look at where Kubernetes is. Where the open-source project is open and it’s a level playing field. You may set limits into what goes in that project. So, if somebody comes with a PR saying, we want to add XYZ feature, you may say no, but instead of saying, no, it’s impossible, you say no, but here’s the extensibility mechanisms that you can use to do it yourself.

Perhaps in another open-source project, perhaps in a proprietary thing. So now as a company you’re sponsoring that open-source project, you’re building it, you’re building the extension mechanisms. You’re then using those extension mechanisms to build your commercial products that are complimentary to the project.

But fundamentally it’s a somewhat level playing field between you and other folks because those same extensibility mechanisms could be used by your competitors, or it could be used by complimentary open-source projects. It’s a little bit riskier, but I think it also, from the point of view of business, but also, I think it stays true to a lot of more of the sensibilities and the ethos that a lot of your contributor and user communities will be expecting out of that open-source project.

And so that’s, I think in my mind, the sweet spot is to actually do that open extensibility, but I think it’s worth recognizing that there’s a whole host of models along that spectrum, that, that really come into play.

Anu Sharma: I love it. Open extensibility. And that, as you said, opens the room for more risk, more competition. How do you think about competition? Somebody using the project that you have created, that you feel ownership for, but also then I guess throwing a chip in and saying, I also feel some level of ownership, I also want to build a commercial product. How do you think about competing with them?

Joe Beda: As a company you always like, and I’ll probably, again don’t misquote me on this, but companies love to be monopolies. Like your dream as a company is to have huge modes and to have something that’s so unique that you own a hundred percent of a growing and thriving and critical market.

That’s our dream, that’s not always in the cards, that’s really hard and that’s super risky. And so, I think a big part of the way to view this is, again, I think, would you rather have a smaller part of a large and thriving ecosystem or a hundred percent of something that’s rather small. And clearly, the answer is why can’t I have both. But that’s not always what you’re going to get to. So, I think there’s a strategic decision around, we want to create something, a movement in a rising tide that we can then participate in. That is very difficult to do, if you don’t have a community aspect, if you don’t have that ecosystem to be able to build and build around. There are tons of companies that have Hey, I want to rebuild a windows office, like duopoly type of thing, and it’s yeah, that’s great work if you can get it. But a lot of people have tried and broken themselves against that particular type of goal.

Anu Sharma: And to that point, you might’ve noticed the recent flurry with a bunch of different open-source projects and commercial companies and for projects from other competitors, how do you think about disambiguating some of the narrative there. What would you say in terms of clarifying perspective?

Joe Beda: I would say that a lot of these things are, the fundamental cause is that the way that the communities for the open-source projects were structured was incompatible with the business models for the companies that were sponsoring them. And that’s the type of thing that you can paper over for a while, but you’re going to have to solve that. Either the company goes out of business because they don’t have enough of a business to support that project, or they go, and they redefine the rules and they run the risk where the community will revolt on them. And it’s a problem that I think, you very much, as you engage in open source, you want to make sure that you know how this is going to play out and that you have a game plan there. And I think, to be fair to some of these companies, there’s an emergence of other motions that they probably didn’t foresee like this idea. And I think this is especially common in startups built around open-source databases, where a lot of the monetization comes from being able to run these things and actually bring that experience, the full experience to it. And they found that them being the sponsors of the open-source community did not give them enough of a leg up when it came to be able to manage these things and run these things as a managed service. Oftentimes others are maybe better prepared to make that be a feature of a larger platform versus a standalone product.

And so that’s a really hard situation for everybody to be in. The point of open source is, you take this risk where you put it out there. Other people can do stuff with it, and sometimes they will and sometimes they may actually take it in a way that’s inconvenient for your business. And so, I think that’s something that you got to be, you got to be thinking about and working through as you go. Yeah, I think and some of this is understanding, like where is IP critical and where is IP really secondary to the larger experience that you’re delivering?

And I think one analogy here is I think we’re all sitting at home with, COVID not with COVID, but like quarantine because of COVID. I hope we’re not all sitting at home with COVID and like I’m ordering a lot from restaurants. And it makes you think about where is the value there when you’re doing that?

Because if I have a hamburger. I can make that hamburger at home. Actually, I’m getting pretty good at it. And it can be a good hamburger. And it’ll be a heck of a lot cheaper, right? The IP for making a hamburger is not the fry sauce is a ketchup in tomato, ketchup and mayonnaise mixed together.

Right? There’s this secret sauce is not that secret is in when it comes to a hamburger. So, the IP around this is actually relatively low. But yet there’s still real value for me going to a restaurant and having a hamburger and having somebody do that for me. And there may be complimentary IP Hey, they make this great cocktail and I have no idea what the proportions are, what goes into it right. There may be other, IP that I don’t get, that’s complimentary to that main thing, that is the hamburger. And I think we see with things like delivery services. It’s like somewhere in the middle and it’s the worst of both worlds to some degree it’s more expensive and it’s not as good at being at the restaurant or making it yourself.

So, I think, there’s definitely some lessons to be taken from an analogy like that.

Anu Sharma: I love that analogy. And you know, one of the aspects that we struggle with and hear from engineering leaders in some of our portfolio companies, but even some of the larger ones, is how do you evaluate open-source projects? And of course, maybe an extension to that question is how would you advise investors evaluating open-source projects?

Joe Beda: I think valuing and evaluating open-source projects from those different angles is I think very different. The, I think any engineering org should be thoughtful and responsible as they take on dependencies. And I think we’re starting to see this as we look at, more focused on the supply chain in general, and the risks that you take on board as you look at, sort of like, oh, I’m taking a dependency on this, so this node library. It’s everything from that to I’m buying this vendor product, that’s going to be, you know, where I’m committing to only running on this particular cloud. I think, it’s really important that as you make those decisions, whether you’re buying something, whether you’re building on open source, whether you’re building a component yourself, that you’d be really thoughtful about understanding the pros and the cons and the risk about that.

I think oftentimes in my end of the business, people will talk a lot about lock-in and how like lock-in is bad and, and open source is a way to avoid lock-in and I think, to some degree, there’s true, but I think that’s a somewhat simplistic view. I think the right way to view lock-in is vendor risk.

If I take this bet on this vendor, what are the risks that I’m taking and what are the benefits that I’m getting for that risk? And I think when we look at open source, there’s a different set of risk and benefits from it. Some of the risks may be that I have to run it myself versus having a trusted person.

Some of the risks may be that like, I’m going to have to buy support from somebody versus being able to, and that’s going to be part of the cost. But some of the benefit here is that I have more degrees of freedom. I can always take the source code and build up a team to dig into it.

I can always run it in a way that’s off label because it’s me supporting my own thing. And so, I think there’s a different sort of risk benefit analysis when it comes to open source. So that’s from the point of view of a user getting involved with open source. And I think also some of this is, open governance with a healthy project.

And what happens if that single vendor that’s sponsoring it, steps back, will the project still have a life beyond that? That’s also some of the things that I think folks should take into account as they’re evaluating, taking independency on an open-source project.

From the point of view of an investor, what I would do is when I’ve, advised and looked at folks who are building a business around open source, they should have a very strong thesis for how they’re going to build a commercial compliment to that open source. I think it’s very tempting and I think, to say, hey, I’m going to write a bunch of code. I’m going to get a bunch of users and then magically I’ll figure out how to monetize those. Now in the consumer world, you can do that, right? You get a hundred million people doing anything. You can find a way to monetize it, right? In the enterprise developer, open-source world, you can get everybody to some definition of everybody using your product and it will then be project and it’ll be very difficult for you to be able to monetize that. So, it’s without that theory, without that thesis, without planning for that, I would say, it I would have a hard time investing in a company that is that is basing something on open source.

Conversely, if they view open source through a very evolved smart lens, then you’re like, all right, these are folks who know how to build community, use that community to boost their business while staying true to that community. I think that’s, skills around that are something that’s pretty rare and something that should very much be valued.

Anu Sharma: A hundred percent. That’s what BC as well, and excited for open source in general for the next decade or more even. And we’re continuing to see a whole bunch of new projects that require that kind of balance between community and managing expectations, of course. And, but more importantly ownership along with building the commercial business model and scaling that to a multi-billion dollar business, hopefully.

That’s that was great, Joe. Thank you so much. This was fantastic. Really appreciate you taking time and enjoyed our conversation.

Joe Beda: Thank you so much for having me on.

Anu Sharma: Thank you.

Erika Shaffer: Thanks for joining us for Founded and Funded. If you enjoyed this conversation, please share it with your friends and subscribe. It’s available on all the platforms and we really enjoy making these and bringing them to you. And please send us ideas foundedandfunded@madrona.com. Thanks very much.

Strike Graph, a company started by two tech guys, and funded in mid 2020 with just an intern, is now growing and serving customers.  It is also two thirds women or gender diverse.  The road to getting there was clear to CEO Justin Beals before he even incorporated.  In this deep conversation with Hope Cochran and Elisa La Cava, Justin talks about the whys and how he set out to build his company this way and what this has meant for their success as a team.

 

Transcript (this is machine driven transcription so expect some typos)

Erika Shaffer: [00:00:00] Welcome to Founded and Funded. I’m Erika Shaffer with Madrona Venture Group. Hope Cochran and Elisa La Cava sat down with serial founder, Justin Beals, to talk about how he set out with intentionality to build the Strike Graph team from scratch to honor and promote diversity. Justin has seen from past experience, with other startups, that diversity of backgrounds and of thought promote a unique team environment that everyone can own and feel a part of.

We all know how being part of a team working toward a common goal is a powerful element of both enjoying work and being successful. Strike Graph received seed funding from Madrona in mid-2020 and was a Madrona Venture Labs incubated company.

I’m sure you will enjoy this discussion of team building and how to find the people who will propel you to growth.

Hope Cochran: [00:00:57] Hello. Today, Elisa and I are here with our friend, Justin Beals. We have been able to work with him over the past year or so as the CEO of Strike Graph. And have been inspired by him along the way, so it is great to start today off with a conversation with Justin. Justin is the CEO of Strike Graph.

Strike Graph is a security compliance company. A software solution that enables your customer to prepare, obtain, and then maintain their security certificates. Having the SOC two certification, for example, can help your customer sales cycle go faster by removing the security concern from their software.

But this isn’t Justin’s first rodeo as a CEO or product expert. He has an impressive career building companies from the ground up with Roundbox Global, that he founded and grew. He focused on the ed-tech space. And then later became the CTO of Koru that applied machine learning and leading assessment science to measure the things that matter most to the employee performance.

But what is inspiring and clear as you get to know Justin is that he approaches everything thoughtfully and with intention. One of the clear intentions that he set is to create a culture and employee base of talented and diverse individuals. And his views are not that this is just an important thing to do, but it is a key element of the success of building a high functioning company.

This is not something that happened overnight, as he will tell you, but with decades of focusing and working on it. Currently at his company Strike Graph, he has built a team, one that I am proud and love working with, that is two thirds women and are gender diverse. And this is not just in the traditional areas of marketing and HR, but 55% of his engineering team identify as female and 30% of color.

What I love to see is that I get to work with them. I don’t think, oh, this is a female CTO. I think this is a talented individual who’s getting stuff done. The team is full of talent, grit, and a focus on completing things. And one that I love to work with. So welcome Justin.

Justin Beals: [00:03:11] Thanks Hope. And thanks, Elisa, I’m really glad to join today.

Hope Cochran: [00:03:15] Before we jump into the topic at hand, you have become an amazing leader. And I would just love to hear about your leadership philosophy that I know you’ve honed in over time.

Justin Beals: [00:03:25] Sure. I was given the opportunity. I think that’s the way my family would have described it. I would have called it the chore of being a leadership or supporting in leadership from a really young age in their community, the religious community. And so, I hated every second of it, but I was the one that went every Sunday. And so, you wind up being the one, the troop leader for boy Scouts. I and I’m lucky in a way that I’ve gotten a chance to really go through the painful process of learning something about it and the time to do that. My philosophy is really service leadership.

I know that’s a hot phrase right now, and it’s maybe hard to define, but through just the experience of trying to be successful as a team, what you realize is that a leadership role is always in service. You’re in service of your colleagues, you’re in service of your customer. You’re in service of the mission of the organization.

And you have to set the right example. That example is the leadership that people need to see, and it doesn’t come across as dictatorial. Often times it comes across as doing the work side by side with the team and showing that you’re also not afraid to get engaged and get involved. The art of my philosophy of leadership is that it’s very hard to manage the balance between your self-confidence, like I can go and be a leader I can accomplish this thing, or we can, and as well have this really intense humility. This ability to be constantly open, aware, and listening, confronted with the challenges, taking on the hardest parts of the problems that your team is encountering. And so, it’s not an easy role to play and it requires immense strength, like just, the thing I grapple with on a daily basis is knowing like, not micro-managing my teammates, giving them the freedom to do what they need to do, but also know when it’s time to take a decision. Because for the team to effectively meet their goals, they need a clear direction.

Yeah.

Elisa La Cava: [00:05:34] I’m so excited to be here, Justin. This is Elisa It’s so interesting, I, another way you’re setting an example and kind of building this strong team. I remember at a board meeting recently; we were all talking about how quickly the team has grown in the past few months. And your response to that was I’m really big on building habits.

And I thought that was a really interesting thing to say. And I’d just love for you to elaborate. What do you mean by building habits or specifically what habits are you helping cement in your team at a foundational level, given how quickly you’re growing and some of your leadership philosophy?

Justin Beals: [00:06:07] Yeah, this is probably some of me coping with my own inadequacies, but I find it very hard to build like a super long-term strategy, way out in the future and yet not have an incremental and effective method of reaching there. You have to climb the ladder, you have to climb the mountain and you’re not going to get there by imagining what the top looks like, but by putting one step in front of the other and you almost have to forget or be able to let go of that larger end goal to work in the increments. One of the challenges in engineering is really scoping the time it takes to deliver something. And the number one thing you can change about being precise in your prediction is reducing the amount of time or amount of work you’re scoping. So, it’s these incremental habits that matter. In our company and especially with COVID, the daily standup is critical.  I need to show up, and this is my opportunity, to that leadership question, to show what I’m working on alongside my team with them.

But then a regular planning meeting once a week is critical and it’s always on the books and we always show up and it may not be the best planning meeting.  We maybe could improve the rigor with which we do it. But the fact that we can have that habit on a regular basis is critical.

And then it comes down to even communication styles, being clear and transparent as a habit. And the feedback, as a habit, is critical as well, because otherwise we’re not getting that loop going where we’re learning and improving.

Elisa La Cava: [00:07:42] I love it. It’s so exciting seeing your team work together from our vantage point. And one thing I’ve also noticed when we have our meetings together. If it starts at 8:00 AM, every single person is online, video on, ready to go at eight, like on the dot, and you are like, we are starting the meeting and it’s like full jumping in as a full team, every single time, fully prepared.

And I think that’s so incredibly impressive and a testament to how coordinated the leadership team is. And in being productive and working together and getting to the point and making those plans and probably making the most of your daily stand-ups as well.

Justin Beals: [00:08:20] Recognizing that example, right, Elisa, that you set, like if I’m there five minutes before the meeting starts, I find my team shows up too.

Elisa La Cava: [00:08:31] So my next question is flipping this on its head, Justin. And you are a CEO now you have been in leadership roles at companies for a very long period of your career. But thinking about the moment leading up to being CEO and founder of your own company who is someone, in your career journey who has inspired you, inspired your leadership philosophies and someone who or even, a peer or mentor who’s helped you hone those capabilities since you’ve founded Strike Graph.

Justin Beals: [00:09:02] Yeah, I think that’s a great question.  One thing I wouldn’t say is that I’ve been super inspired by the business world, necessarily. I really appreciate the achievements of Steve Jobs or Elon Musk, but I have my criticisms as well. It goes both ways. I think more when I think about as a community of inspiration, it’s really the inventors and the scientists of the world that I find affinity for my motivations with. I really believe that the best part of living is in the boundaries.  The boundaries of what you think you’re capable of, the boundaries of the relationships that we live in, and exploring those, and what we know about the world around us. And those individuals that are a little unafraid to question and lean in and test those boundaries are learning and living at the edge of their own context.

It’s really exciting and amazing. I think that I’ve had people along the way that certainly inspired immense confidence that I didn’t have. The first person to ever give me a contract at Roundbox Global for more than a hundred thousand dollars was a gentleman named Troy Viss. And he was a creative director at McGraw Hill, and he believed in me and no one else did. He thought I could get it done.

He actually baked our services company, Roundbox Global, off of a really massive services company and we won the contract. And that little moment with Troy, was an immense confidence boost. And all of us probably have those stories where someone that didn’t have to believe in us believed in us a little bit and gave us a chance and our whole world changed.

And I hope I’m doing that every day for my teammates. I hope that I’m giving them the opportunity to fail, but the confidence to go try.

Hope Cochran: [00:10:57] That’s really inspiring, Justin. And, as you think about giving them the confidence to try, you have really built a unique team and I see it firsthand at Strike Graph, but I know that this is your at least third time. This is not new for you. This is, as Elisa pointed out, a habit that you have formed. I’ve also, you and I have also talked about the fact that building this diverse team is vital to the outcome of the business.

And that you think that it’s an important element of a successful business outcome. So, I would love to hear from you why you think that’s such an important element to the outcome of the company.

Justin Beals: [00:11:36] The reason that this is so important for a startup, especially, but in any new venture. I think even if you’re in a large organization and you have an internal startup, you’re starting a new team, now you’re going after a new initiative, is that you want that group of individuals to bond around a new identity.

What we do is a team sport. When we build product, as we build an organization, that’s delivering a service, as we put together a marketing plan, that’s all collaboration, that’s all team driven. And for it to be successful, it has to operate that way. But you need a team identity to belong to, to negotiate that collaboration. And if the identity of the team is homogenous because they all come from the same background, you wind up not being able to bring a unique identity but living by the identity that homogenous environment brings. And so, when I want to build Strike Graph, Strike Graph is going to provide a unique service and it needs to differentiate itself and its teammates need to feel differentiated themselves from the other teams that they’re competing against.

So that’s why I think bringing in a diverse team gives me the opportunity and that team to craft their own identity. And so that’s critical in a startup space. The second thing that happens a lot when you build a diverse team, is that when you bring a group of people from a diverse set of backgrounds together, they actually tend to drop off the bad habits of their specific cultural affects or backgrounds.

They can build new, good habits around the new identity. And so, it’s a liberating opportunity to leave your bad habits behind and bring good new habits or your better habits to the larger team. And so, diversity diminishes the opportunity of one cultural or specific set of experiences driving that group identity or those group habits.

And really, it’s all about effective collaboration. That’s both to efficient collaboration, like how can we efficiently reach a decision as a team, and effective, like how can we reach the best decision as a team? And optimizing for both of those requires having your own identity and mission clearly understood and then leaving behind the old habits, so you can create the new effective ones for crafting the right next solution to build, the right next marketing message, the right next demo for a product.

Hope Cochran: [00:14:16] That’s wonderful. And one of your first roles as CEO that you chose yourself was building Roundbox. And you often refer back to that and say people were my product. And I actually feel that way in all companies today, people are our product because software is one thing, but it’s only created by the talent and the people around us.

You had a drive to create that environment and to create that company and to bring those people together. What was that drive that you had, as you set out to build Roundbox?  What inspired that?

Justin Beals: [00:14:55] Yeah. I think the inspiration to build a company was a little twofold. One, is that I wanted to build a tribe, a group of people that I really enjoyed working around and I had some jobs that weren’t great, or some cultures that weren’t very accepting and thought there’s got to be a more collaborative, beautiful way to work every day. And really just set on the path to find that. Another factor that affected it is, my college degree is actually in theater, and to me a start-up is very much like putting a play on. And so, you get this crazy cast of characters together, you have an idea of this production, you’ve got to put on, there’s a deadline, you’ve got to launch it on the server and then you suffer the financial outcomes of your goals.

And I loved that habit.

Hope Cochran: [00:15:42] I have to just interject here that you and I have this in common because my degree is in music. And I always say that music is what I use every day, not my econ degree for the exact same reasons. Practice makes perfect. Bringing a diverse group of people together and trying to unify them and put something on is an incredible challenge.

And these are the skills that I use every day. So, I love that we bring this similar philosophy to the workplace.

Justin Beals: [00:16:09] There’s a joy in sharing, Hope. Sharing yourself, sharing of someone else, getting it back and forth. It’s, it’s enlivening. Yeah. Roundbox, specifically, was an interesting journey. I had a number of failures and this was the next kind of iteration of trying to found a company. I didn’t really have access to capital, it wasn’t my background or a community at the time. And so, we had to bootstrap it, which means that services company almost always. I really think that most founders should go through one bootstrapping experience of a business. There’s no better teacher of what is necessary from nice to have than having immediate financial issues as you roll out your company.

And so, it’s a great training ground. The other thing though, is as a services business, you’re billing a customer for every hour an engineer spends working on their software and they’re really communicating to you a vision of what they want to change about their company or the product for their customers.

And you’ve got to connect those things. I think it’s liberating to really perceive a company so precisely as the people that do the work are the product that we deliver. There’s a disintermediation in the enterprise SaaS sometimes, where you’re like, oh we hire great people to build a product, but we don’t talk to them that much, or as little as possible, so we can afford to charge as cheaply as we do. But it is a critical day-to-day understanding of the people working on the projects.

So, I remember having this really interesting conversation with our, one of our software development centers in San Jose, Costa Rica. And I was speaking with about 90 engineers at an all hands for Roundbox. And I remember telling them that, while we produce code, while we manage massive software systems for enterprise education delivery, and we really support incredibly complex technology. Our true business, the work that team is engaged in is relationships. It’s our relationships with our customers that had to be healthy for Roundbox to be successful and grow as rapidly as it did. And if those relationships aren’t healthy, there’s no chance of us having an effective delivery. And so I told them we’re in the relationship business, not the technology services business.

Elisa La Cava: [00:18:33] So Justin, one thing I’d love to do is talk about team building again, because I think that’s such an incredible topic. Many people and leaders struggle with sourcing unique and diverse candidates.

And we all know when you have limited capital resources each head count is vital. And what I think is notable is in the period that you founded Strike Graph, over the past year or so, you’ve gone from zero to 22 employees, notably two thirds of your company is women or gender diverse. And overall, you have 30% people of color.

This is an incredibly diverse and talented team. And I think one thing a lot of people struggle with is achieving these kinds of goals as fast and as intentionally and as successfully as you have. And so maybe you can share with everyone what’s one of your secrets. How do you find these people?

Where do you go to source candidates like this for your company?

Justin Beals: [00:19:28] Yeah. As you say it, Elisa, I’m really proud, actually. The accomplishments and putting together such a diverse team really comes from the team itself. So, I want to laud praise on their shoulders cause it’s not just me that achieves that, that outcome. But what was important, for me as the CEO and founder in getting there is the first three hires are a critical decision.

And I think this is true, no matter what outcome you’re optimizing for in your team building, because those first three hires are going to make critical opportunities for the next 30 for the next 60 and the next 90.  Think about them. I build in my mind a model of the perfect candidate – for the role, that first role, our first CTO, our first VP of sales, our first head of customer success – and it’s not just, I want five years of customer success experience, or I want someone that has been an engineer for 15 years. It’s actually, I wonder if they would have experience in this type of architecture, or I wonder if they have a deep interest in the psychology of customer purchases.

One time I made a hire of a PhD to a computer science position, a software developer position, because we were doing research into the scientific area that they came from. And even though they wanted to be a software developer, I was looking for that third, fourth, fifth skillset that they came with.

And you’re playing Moneyball, with talent, you want six different things that they’re capable of doing. One of those things that you want is a diverse cultural background. That diverse cultural background brings different types of experiences and different ways of thinking and pushes that three-person collaboration, because that three-person collaboration is how the next group of people, as you scale up, are going to collaborate.

They are setting the tone, the deep-seated cultural architecture of everything that will follow. Pragmatically, just to go find them and get them on board. Once I’ve got in my head who that perfect candidate is, I go search them on LinkedIn. And I am known for finding three or four people and writing them a direct message from the CEO and saying, I think you’re a perfect candidate for us.

I haven’t posted a job description, but you have these skillsets, and they are exactly what the problems we are trying to solve. I think you would get great joy out of solving those problems with us. And typically, I send three messages out and somebody responds, and we go through an interview process and it’s been incredibly successful.

The other thing I think, Elisa, is this is why networks matter. This is why your long-term business relationships matter. Because I can tell you that I started recruiting the first three hires for Strike Graph before we ever incorporated Strike Graph. I had meetings with them, I told them what I was working on, I talked about the types of things that we would like to build, I gathered their feedback and interest and I tracked them the whole way.

Elisa La Cava: [00:22:47] I love that.  I also wanted to touch base on another point you’ve made before about looking for people in candidates who want to join your company, who are reaching up.

Can you tell us a bit more about what you mean by that?

Justin Beals: [00:23:01] Absolutely. I think that’s one of the critical traits for any startup that you’ve got to look for. When you find someone that has been overlooked, for whatever reason, the color of their skin, the gender, diminished or demeaned from typical communities that they might work in, you’re finding someone that wants to achieve, but no one has unlocked their ability to go and see what they can do. You want to give them an opportunity to operate within their boundary. And that’s your job as a CEO is to unblock the talent to deliver everything they can. Not to tell them what to do, but to give them the best opportunity to even outsize the deliverable that you expected of them.

And so that grit, it’s really important to me. And I think that nontraditional candidates are a great way to source that grit, because if they are exhibiting courage, to go and try, they just need a vehicle to travel in. And a startup is that because the one thing a startup can give employees is an opportunity to grow quickly and opportunity to work on new problems and opportunity to do things that, bigger company might have more clearly delineated in roles. And when I have a developer that says I’m interested in dev ops, I’m like, great. We have a lot of dev ops problems. You can get a chance to grow in that way.

Hope Cochran: [00:24:32] Justin, I love this concept of unlocking their potential and finding people who want to reach up, but just haven’t had that opportunity. You and I have talked about some of the ways that you find these candidates. And you’re very intentional about looking for them. Can you walk us through some of the ways you’ve done that? It doesn’t happen by accident.

Justin Beals: [00:24:57] Yeah. So, I think the first step is to understand the context that you’re operating in. So, for example, with Roundbox sometimes we operated in new international contexts – Chile or Costa Rica. And so, geography was a really important limiter to what we were looking for. When you understand the limitations of your sourcing or who you’re going to hire, i.e.., they need to be in the Seattle area or it can be more international or they need to have at least this baseline certification, then you can start to get very creative about where you source it from.

And you need to understand that you’re competing for talent. You’re buying talent, you’re competing for their interest in you, their ability to come work for you and you need to go find them. Now, if you buy the most expensive talent possible, as it gets more expensive, I find there is more and more variation in the actual success of that talent when you bring them on board. But if you look for the places where others are overlooking talent, you will find amazing, talented individuals that are looking for a real opportunity to do that reach up, to climb a ladder, to learn more and grow. And so, I tend to find the educational institutions that are in the area, that are teaching the types of skills we need as a baseline, but are reaching into lesser served communities, people of color, historically black colleges and universities. My own college, Fort Lewis College had an attendance of 30% first nations, native American population. It’s great environments like that.

And here in Seattle I’ve worked closely with the ADA Academy, which focuses on women in coding. And so, these are just really exceptional educational institutions. The talent is high class. I spent time learning about these educational institutions so I could rely on what the students learn, and they’re just an amazing source of talent through and through. That’s that exponential effect because once you bring in one person from the local community college, new graduates are coming out all the time and interested in the opportunity that they’ve seen someone else achieve.

Hope Cochran: [00:27:06] Yeah. I just want to emphasize Justin cause it’s something that I’ve been so impressed by in working with you. When you started Strike Graph, you didn’t say, hey, I’m going to go check out this college and form a relationship, you had formed that knowledge and relationship with those institutions’ years ago.

This is a process. This is not something that just happened because you decided one day that you needed candidates. You have been working with ADA now for years. And as a result, we have some amazingly talented engineers in your organization as a result of that relationship. Same with the colleges, you know where to go because you have done the background work. I just think that’s so impressive. This doesn’t happen opportunistically or by mistake, it was with well laid plans, so congrats to you on that. I think in general, one thing we can’t overlook is you have built this company during the time of lockdown and COVID. And we all talk about how bringing on new hires during COVID has been the challenge.

Your entire company has been new hires and you have built an entire company during this period. So, as you have brought together this amazingly talented and diverse group, can you talk a little bit about also the challenges of doing this in this unique time period?

Justin Beals: [00:28:29] Sure. I’d be happy to. With compassion, this is a really hard time. And one thing, when I’ve been knocked down in business, it’s generally been something chaotic that I never could have predicted happening. And this is chaos in a lot of ways. And I want to respect that I’ve talked to colleagues that have had a horrible year in business.

It’s been really awful. And colleagues that have been very successful because of the chaos. And it’s very hard to predict. I will say that I started Roundbox in 2000 when the internet, no one liked it much anymore. It’s actually a little bit liberating to start a company in some form of downturn or crisis because you can grow as everything starts coming back, which is helpful.

You’ve mentioned the network being really valuable and it is probably my greatest pride, is all the amazing people that I’ve had a chance to work with and learn with, and the future opportunities that I want to create to work with them again, if I’m not already. That network was super important to getting a company off the ground with COVID. And I think, and I’m not sure if this has been your perception, that talent is looking in this COVID time for a team that they can work with and rely on since they can’t go to the office as well. And so, the, their networks have been more valuable to them in selecting a new position or looking for a new opportunity. And I took advantage of that, of course in building a strong team ourselves. Those habits that we mentioned daily, stand up. Planning meeting, writing tickets in our JIRA board, making sure that we’re keeping each other healthy and on track. It is, I think also critical in, in these COVID times. And then the final one is you have to express an outsized empathy. I used to say, a lot of remote teammates over the years, I used to say that you need go see each other every quarter to humanize each other again. So even though you’re on the phone, you remember that you’re talking to a person on the other line and even I get off base with that. It’s hard to remember the humaneness that, that we need to engage each other with when it’s just over a phone or video. We can’t do that now.

And we can’t make those physical connections. And so, I’ve intentionally tried to have moments with all our teammates that are not about work, but just about life. So, we can connect over the water cooler and continue to build a human relationship. Something beyond just the work that we do and enjoy each other in that way as well.

Hope Cochran: [00:31:10] Thank you. Justin, every time I work with you interact with you, I’m inspired. I’m excited to build this company with you. I’m excited to have that opportunity. And I’m just excited about what we’re going after together. So, thank you for letting Elisa and I be part of your journey.

Justin Beals: [00:31:30] Hope and Elisa and Madrona Venture Group and Madrona Venture Labs, our incubator, I have grown over the last year immensely, so I am not static in this process, as well, and all of you have been critical mentors for me, and I’m eternally grateful just for the opportunity to work alongside you and to achieve some success in and go after the next boundary.

Elisa La Cava: [00:31:53] Thank you, Justin.

Erika Shaffer: [00:31:57] Thanks for joining us for Founded and Funded. I hope you enjoyed this episode.

The path to building a company (and getting venture funding) can be varied and long and winding.  In the latest Founded and Funded we talk about two of the paths – Startup Studios and Accelerators.  They each offer different benefits.  Madrona investor, Elisa La Cava sat down with Madrona Venture Labs’ Mike Fridgen and FFA’s Leslie Feinzaig to dig into the differences and the types of companies that benefit these types of programs.

Transcript (this is machine driven transcription so expect some typos)

Erika Shaffer: [00:00:00] .
Welcome to Funded and Funded. I’m Erika Shaffer and I work at Madrona Venture Group. In Founded and Funded we want to tell the stories of founders of venture funded companies. In this episode, we’ll look at how companies get to be venture funded. Two different tracks to that, or joining a startup lab, which is sometimes called a startup studio or joining an accelerator.

We sat down and talked with Leslie Feinzaig of the Female Founders Alliance, which runs an annual accelerator called Ready Set Raise. And with Mike, who runs Madrona Venture Labs, a startup studio that is the innovation arm of Madrona Venture Group. They both sat down to talk with Madrona investor Elisa La Cava.

Elisa La Cava: [00:00:52] Hi everyone. My name is Elisa La Cava and I am an investor at Madrona Venture Group, and I am beyond thrilled today to have two incredibly important people in our Seattle ecosystem on the Founded and Funded podcast. First let me introduce Leslie Feinzaig.

I actually met Leslie when I first joined Madrona two and a half years ago because attending an FFA pitch event was one of the first things I did in my role, as an investor in the Seattle area and meeting some of the first entrepreneurs you worked with in your Ready Set Raise program. So I have been a big fan of Leslie and what she’s been doing for the past two and a half years since I’ve been in my role.

And I know Madrona has been a supporter of FFA. For the full three years that you’ve been doing this program. So this is incredible. But more about Leslie, cause I know you all want to know about her. She is an entrepreneur and investor. She is the founder and CEO of Female Founders Alliance, which we call FFA. And it is a national community of founders, executives, investors, and supporters that collaborate to help under represented founders succeed. And her accelerator Ready Set Raise is three years old and it has been dubbed the Y Combinator for female founders by Tech Crunch. So welcome, Leslie.

Leslie Feinzaig: [00:02:11] Thank you for having me. I’m so excited to be invited to the Madrona podcast.

Elisa La Cava: [00:02:15] Yay. We’re so thrilled to have you. Okay. So I’d like to introduce our second guest, Mike Fridgen. He is the managing director of Madrona Venture Labs, which we will also be calling MVL. So we have MVL and FFA. And he has been managing director of Madrona Venture Labs since 2015. And it is the incubation program of Madrona Venture Group. And Mike has an incredible story, career, as an entrepreneur himself , founding companies since he was in college . Notably, he was part of the founding team at Farecast, which sold to Microsoft. And he was also a founder and CEO at Decide.com, which sold to eBay. So welcome Mike.

Mike Fridgen: [00:02:58] Thank you so much. This is going to be fun.

Elisa La Cava: [00:03:00] Yeah. So the topic were, today is labs and accelerators and this wild world we live in entrepreneurship where people decide to start a company, they have this idea. Maybe they have a co-founder, maybe not, and they decide to start a company and then suddenly think, okay, How do I do that? What’s next? How do I get the resources? Make the network, meet people, understand what the steps are. I need to take both fundamentally to build my business. But also to get customers to, hire your first recruits for your leadership team to get outside funding, if you’re looking for outside investors and there are tons of different ways you can do that.

And so we’re going to talk about two of those ways, which you are both experts in, which is the labs model and the accelerator model. So maybe I’ll just start off with an open question. What the heck is the difference? And what are they?

Leslie Feinzaig: [00:04:02] I think you should go first, Mike.

Mike Fridgen: [00:04:04] Okay. Happy to do it. So I say the difference in a word is the stage. So startup studios began with founders at the earliest possible stage. This is day one with an idea and at MVL there’s really two paths. One is , the path is where it’s our idea and we’re recruiting founders in. And generally when we get to that stage, we’ve done deep market analysis and research.
We’ve talked to dozens of customers. We’ve pretty, sold this idea into a set of investors to see if there’s a market for it. We’re really building conviction that there’s a product to build, there is a real burning problem to solve and the customers want it. And at that point we move forward and we recruit a founding team and we start with the CEO to begin a journey of further validation, then building traction, and then ultimately fundraising.

So that’s one path. A second path is when the founder has the idea, but it’s still very early, it’s at a conceptual level. And we’re going to then engage with that founder to go through our process. To really get it to the next level and ultimately get it to funding and on their way.

Elisa La Cava: [00:05:10] That’s exciting. And we can come back to this later, but the difference between having an entrepreneur who has that concept and then knows to come to you and the MVL team. Versus you and the team coming up and developing and vetting this concept, but then realizing I need a founding CEO. I need to reach out deep into my network and find someone who I think would be incredible at taking the helm of this idea that we’ve already started and launching it from there.

So I would love to, we can circle back later into kind of the process for how you get in touch with these two different profiles of entrepreneurs. Super, incredibly interesting. But before we go any further, Leslie, what’s an accelerator? And how do you think about that in context of what you’re doing differently with FFA?

Leslie Feinzaig: [00:05:59] Yeah. The, let me tell you the bad news is that the word accelerator now means a ton of different things to different people. The first piece of advice that I have for any founder out there is that when you see something described as an accelerator that you double click and go research what they actually mean because it can be like a traditional pitching and fundraising.

Like we are a traditional accelerator we’re pitching and fundraising accelerator. We were modeled after Y Combinator and Tech Crunch and TechStars rather. But there’s also development accelerators, there’s sales accelerators. There’s programs that call themselves accelerators, but all they really do is introduce you to people and you don’t actually accelerate anything.

So it really has a lot of different meanings. I’m going to talk specifically about these pitching and fundraising accelerators that are designed to help a company raise their first round of capital. That’s what Ready Set Raise is. You come into the program and in a few short weeks, we equip you to give a pitch, that is we call it the perfect pitch. And then we put you in front of hundreds of investors nationally. Try to match you as much as possible. We develop a mentor network for you and give you the relationships that you’re ready to walk out of that accelerator and ready to have a very successful fundraising season. So it, it’s less about, it’s less about a short MBA where you learn about sales and marketing. Although we can do all that stuff. It’s more about accelerating your capacity to first to raise that first round of capital and getting your company ready to do that.

Mike Fridgen: [00:07:33] I think it’s so helpful that Leslie points out that accelerator can mean a lot of different things to different people in different organizations, and it matters so much who you’re working with. And it matters so much like the team that’s surrounding you to support you. And when I think about accelerators in terms of stage, I think it’s at a later stage. So this is generally where the founding teams in place, there’s an early product development, product developed. And in some cases they’ve even raised some funding, but they’re looking to take it then to the next level. Most accelerators generally work within a three month time horizon. So something within that range, when you’re talking about a startup studio it’s much earlier, so you’re really at that earliest point and working over six, nine, 12 months before you’re getting to the funding stage, just to help clarify some of those differences in terms of timing and in terms of the idea.

Leslie Feinzaig: [00:08:23] One of the great ways of judging that is we if you are not ready to raise a round, you’re not ready for our accelerator. And that’s a key thing for people to, to be introspective about because just because you need money doesn’t mean you’re ready to raise money. And I mean that in, in the sense of where the business is, there has to be an investible story and we’re going to help you pull everything together to tell it and fundraise successfully versus an accelerator, ours is not the place where you come in to figure out your business.
We assume that you did that on your own already. Versus if you go to a lab, you’re going to have a lot more time, a lot more support to figure out the operating company itself.

Elisa La Cava: [00:08:57] I love what you just said. Leslie, you said just because you need money, doesn’t mean you can raise money.

Leslie Feinzaig: [00:09:03] Which sucks, just to be clear, because when you need money you need money. But the truth of it is it’s in the long-term. Not good for you to get money when you’re not ready for it.

Elisa La Cava: [00:09:14] Right. And when you are ready to bring on outside funding, investors are investing, explicitly because they hope to get a return on their investment at some point. And you have to be in a position to prove that you’ve, de-risked certain elements of your business to be able to deliver on that promise of return one day . Oh, go ahead, Mike.

Mike Fridgen: [00:09:32] I’m just going to say again, I think this was really helpful because so many people have these questions about the differences and how to think about these different models. I think w it’s just such a great point that they have to be ready to raise, and she doesn’t have confidence that, you’re going to be in that spot.

Then it’s just going to give her reservations. Cause she wants to put, people are going to be ready in front of investors and have this be a successful model. And similarly we’re looking for a set of traits around the CEO really early. One of the things that I was going to share though, that I think would be helpful.

Is that also within the studio model, there’s a set of doers that surround the founding team. And what I mean by doers, people actually co-building with you through each phase.

Elisa La Cava: [00:10:11] Maybe talk more about this Mike, because how does it change if it’s an entrepreneur coming to you with an idea versus your team building the idea and then hiring an entrepreneur in.

Mike Fridgen: [00:10:23] In both case, if we have conviction that this is something that needs to exist in the world, this is a real problem. And we are going to partner with the CEO, whether it was our idea or their idea to go build it and to go serve customers and to go create evidence and proof that we can then, without traction, go to investors and make a compelling case to fund it and that we can then take it forward. And what I mean, doers, with our team, we’re a team of former founders across engineering and data science and product and design, et cetera. And so when we work with the founder, we call it swarming.

We really swarm around the founder. And so you’re fast tracking your development. You have a team of people who’ve done it and they can help you take the shortcuts to get that product in market and have it land successfully. So I think those are two differences because the models are different too.

You’re going to, to be clear as an entrepreneur, you’re going to give up more equity generally in a studio model, and that doesn’t make sense for some founders. Some founders are ready for investment and accelerator is more suitable to them, and it makes more sense financially for them because they’re going to, they’re gonna, give up less of a trade off around equity.

Leslie Feinzaig: [00:11:33] To that point, it’s worth mentioning that traditionally one of these fundraising accelerators is going to take, I actually forget what the latest the terms are, but somewhere around 6% of the business and they pre value your business. So you don’t get to negotiate what chunk of equity you’re going to give up and for how much money. We just by virtue of how we started as a bootstrapped company ourselves, right? We’re bootstrapped accelerator. We started off by making it equity free, so we actually don’t take any equity in the companies, what we take this investment rights. So that, that down the line, when you are raising your round, on your terms, on the terms that you set with your lead investor, then we can participate in those terms.
And we are very strict about not negotiating that, so we do take those investment rights and we have the right to invest in you down the line because we believe in every company that comes on board. But like Mike said, that is actually a much like whether we invest on the spot or later on, like that’s a much more traditional participation in the company versus if you go to MVL, like you are co-building that company with an entire team of people, we’re not doing that for you. We assume that you built your business on your own. And we’re going to put the equivalent of the world’s most bad-ass advisor group working for you for free, right? Need to spiffy up your model. We got you. We got your CFO on hand. You need to build that deck beautifully. We got you. We can put the right people in front of you. We’re going to work with you endless hours in a short period of time, but we’re not actually going to do any of that for you. We’re going to put the right people in place that you can do it yourself.

Elisa La Cava: [00:13:10] I love that you bring this up, Leslie, cause this was my next question is that next level down, what would an entrepreneur exactly get or receive in working with a lab or an accelerator? And I love how you frame that saying, if you need specific help, we have people we can connect you to, to flesh out your model, your financial model to go through your investor pitch deck and help you craft that story , to give you access to a number of different advisors who can coach you, but you still have to do all of the work.

And so I’m curious, is there anything else you’d add in terms of specifics for you know what entrepreneurs can hope and look forward to receiving in working with a group like FFA.

Leslie Feinzaig: [00:13:55] I’m channeling my COO here. And what we like to tell entrepreneurs is that you get what you put in. We are not here to do for you. We are here to accelerate you. So the way to think about it is like, whatever work you put in, we’re going a 100x effort by putting you in front of the right people. I don’t know if a100x is the right number, but like we’re going to, we’re going to accelerate and amplify all of the things that you are doing on your own. Need to hire? Let me put you on my 20,000 person newsletter. Need to get on, need to get your press release? Let me put you in touch with whoever at Tech Crunch, GeekWire. Need a specific area of expertise? Opening up our Rolodex. We’re just going to open up all of these network opportunities and to some extent, the people that are really great at supporting startups and all of this stuff can’t support every startup, right? So we become for them and actually for you guys , for Madrona Venture Labs and for Madrona Venture Group, we become like the curators of who they should be supporting.

Like we bring you and say, we just selected these eight companies from 400 of the country’s most promising entrepreneurs. These are worth your time. The primary outcome that we look for in the companies is a successful set of fundraises down the line. So it’s not just about raising our first round.

It’s about setting yourself up for multiple like, for getting on the path successfully for the long term and having a great outcome for your investors. That frequently looks like getting ready to start a round and closing and successfully, but , as it’s turned out we end up having a long relationship with some of these companies, right? Like either I will get on their advisory board or on their board, or, I don’t have the capacity to get everybody’s boards, but they’re, they’ve been recruiting from our mentoring network to put people on their boards. They’ve been recruiting from our mentor network to hire actual employees and C-levels into their companies by introducing each other to investors down the line, lots of media sharing, lots of like stuff that you just share with founders. They’re also a great founder cohort support, right? They actually, even right before we started recording this podcast, I had my monthly Ready Set Raise community check-in where we get all the founders together once a month from all the cohorts and just talk about what’s going on and celebrate each other’s wins. Nobody understands what you’re going through better than somebody who’s going, who’s walking the road with you. So you get that, that Vistage, like network for life.

Elisa La Cava: [00:16:12] And you’re building the power of that network over time with each additional cohort, which is amazing.

Leslie Feinzaig: [00:16:16] That’s exactly right. The, the students become the teachers. These founders are even taking us like the Female Founders Alliance ourselves into their fundraising journey. So all of a sudden we are, our investor network explodes, and we are able to, Hey, you invested in this company, let me show you these five others that came through our accelerator, because I think that you’re going to like that.

So really amazing things have happened. And I talk it up to the fact that there’s a little bit of, if I just survive a little bit longer, right? This is going to absolutely explode. It’s only been three years and we have so much. There’s so much big announcement stuff coming down for the companies that have participated that it’s almost daunting to imagine where they’re all going to be next year.

Elisa La Cava: [00:17:04] And, you bring up kind of another point that we’ll dive into in a minute, which is the fundraising journey. Which is , deserves chapters of its own. But Mike, I wanted to quickly, get back to the labs model and just get the next level down when going back to the original question I just asked Leslie on what can founders hope to specifically get help with in lock step with you and your team.

I know you mentioned creating evidence and proof and you have this kind of swarming process you do, but what does that actually look like?

Mike Fridgen: [00:17:36] Absolutely. So really when you’re talking to day one founders and what they, when we asked them, what are they looking for? What do they value? There’s really two things. It’s de-risking and fast-tracking building a venture scale company. That’s what they’re looking for. And again, I’m talking about day one, I’m talking about really early because there’s other options.

And other options to bootstrap, which can be a lonely, expensive process over a long period of time. And the idea of coming in MVL is really de-risking and fast tracking. And part of that, is the team. Working with the team to vet the idea, using a proven process that’s been used from, by founders. And, our team has been doing this for decades, but then also over the last dozen companies that we’ve built, we’ve continued to refine this validation process. So that’s an important part. The second piece is we mentioned getting to actual traction and building. We have a process around doing that quickly and access to an incredible network within the Seattle area, not only our personal networks, but frankly Madrona’s deep network in our community to have access to companies and talent.

So when we are building and maybe we just started with the CEO, but we’re out in the market and we’re bringing on an incredibly talented CTO and, lead product, head of design, et cetera. We’re forming that team together, leveraging our network, as we’re working with customers, as we are building that product out. And then ultimately getting to funding, where we’re, de-risking that process all along the way as well. With us, we start talking to investors incredibly early and we make them part of the conversation, so by the time we’re raising there’s a lot of familiarity there and there’s a lot of lean in and interest in leading the rounds and participating in the funding round.

So that’s all part of the mix when you think about de-risking and fast-tracking what might take two years to bootstrap in your garage, you can do over a six to nine month period with people who are focused on your success and have been doing this on a repeated basis throughout their careers.

Elisa La Cava: [00:19:39] okay. Amazing. You just make me think about the sheer number of entrepreneurs and companies who are hoping for help growing their businesses or for raising outside funding. And, you look at MVL and FFA and you have limited resources, namely your time, in how you choose to allocate what kind of companies and what kind of entrepreneurs you’re able to help.

So, and Leslie, you mentioned earlier a stat on 400 people applied to your most recent cohort which means most entrepreneurs and companies don’t fit your program. So can you talk a bit more about what, what doesn’t work with your models?

Leslie Feinzaig: [00:20:22] This a really tricky thing because we don’t want to discourage people from applying. We in fact, want to encourage people from applying. We think that there’s great benefits in going through an application process, because we’re basically asking you to describe your pitch in, in, in like long form.

So as you’re preparing to go into a fundraise, even going through an application like this is good. Second , specifically with women and specifically with women of color it’s important to encourage entrepreneurs to just try, because if you don’t try, you are undercounting yourself, right?

Like you’re immediately assuming that you’re not going to be the one that makes it through. We have more than one example of companies that did not, were not selected one year applied again and were selected the next year. And the companies that we like from there, we end up building relationships with. So who is it for? So the first thing to know is usually when you’re not accepted into a program like this it’s less than there’s something wrong with you or your company. It’s more that there’s a company that fits the program a little bit better. So we’re going to end up selecting companies that we believe we can accelerate the most.

LeslieFeinzaig: [00:21:38] Does that make sense? The best use of my time or the best use of flexing our entire program’s muscle on someone’s behalf is somebody who is absolutely ready and is just missing, it’s just missing that, like that rubber stamp of de-risking. So, very frequently, it’s just somebody who is a little further ahead, who has better chance of opening and closing around at the end of the accelerator, at the moment in time that they’re applying . Who is this not for?

The one thing that we encourage people to do before they apply is to find true evidence of demand for what they’re building. And Mike was talking about how much work, imagine how much work Madrona Venture Labs spends validating those ideas before putting people and money against them.

Think about your own idea in the same way. So we generally don’t admit idea stage entrepreneurs. We admit people who maybe they haven’t built their product because it’s expensive to build something, but they have hacked the backend and demonstrated demand. That might look like a waitlist, that might look like some LOI, some letters of intent signed with possible B2B customers, that might look like a big pipeline of people that you have relationships with that have demonstrated interest in working with you.

So it has different ways, but like show, you need to show us that people that are not your mom and dad and brother, and sister want to buy the thing that you are selling. And that they want to invest their time with you. And it’s not a survey. Like it’s not it’s not the results of the survey. Tell me that 70% of people want to do X. No. It’s like a real signup.

So that’s one category of I don’t want to say don’t apply, but I do want to say, go find evidence of demand that you can demonstrate to us before you apply and you’re going to have a much better chance of being admitted. And, hey, by the way, you’re also going to have a much better chance of raising capital if you have demonstrated evidence of demand.

And the second is we get a lot of applicants who have been at it for a really long time and bootstrapping for a long time and you get into this catch 22 problem, or you are successfully bootstrapping, but also not growing at a pace that, that makes it interesting for investors. So when you think about moving away from a bootstrap for X number of years , not weeks, not months, years to I’m going to raise venture capital. The problem that you get into there is that you don’t have velocity and investors look at it and the investors want to know if we put money into this, is it going to catch velocity and like really take off?

So frequently we get applicants who are like, this is my last ditch attempt because nobody wants to invest in, okay, but I can’t help you. So if that’s you, if you have the five-year trajectory, the thing that we want you to do before you come apply is find evidence of velocity, throw out a new program, right? Get, get a new hire and build in something that demonstrates that you are picking up speed and that there’s a reason to invest in your company now. And again, that kind of goes back to the difference between needing money and being ready for money. If you don’t have, if you’ve been working for a long time and you don’t have any kind of, what changed this year to make it a good investment now, versus it was five years ago? Then it’s going to be really hard for us to get investors excited or to help you execute a round successfully. And I know that it hurts to hear this and I’ve bootstrapped companies myself, so I definitely appreciate how much work it takes. But the more, the more I have developed my own journey and startups and venture capital, the more I realized that this is not about good businesses. This is about venture capital investible businesses. And those two are not necessarily the same thing.

So you might be building an excellent business that needs a different type of capital. So those are some of the things that like, we really want you to think about and look at before you apply, because they’re going to help you make that application a lot more successful. But having said that I, it’s very important to us that people don’t hold themselves back from trying and learning what they can.

We also, unlike I think every other accelerator out there, I don’t know anybody else who does this, but we actually give people feedback, if they ask for it. Every single person who gets rejected and wants to know why, we will gladly, it ends up being a huge time suck for the team, but we will gladly sit with you and help you see it from our eyes.

We, we have an interim step where we ask people to do a self evaluation. So that we’re not just going in blind and like telling you, hey, these like 70 people who you’ve never met think that you’re too early and that’s meaningless. So we ask you to invest in yourself first by, what do you think happened?

And then we confirm or deny some of the things that you’ve and we’ll add some color from the comments that we get on your on your application. So even for that there’s a huge value add in like putting your story down on paper and getting it reviewed by a very large group of like really smart people who do this for a living. And it allows your team to have a very structured way to give that actionable feedback at volumes,

If we’re not, if we’re not helping founders, then what are we doing here? You know what I mean? There’s a natural tension for us specifically for the female founders lines, there’s a tension between how selective venture capital tends to be with how inclusive we need it to be. And so this is why it’s important for us, but like Ready Set Raise is one part of what we do, but it’s not all of what we do.

So any company that does not get selected for Ready Set Raise still has access to a hundred percent of the rest of our programs, many of which are either free or like incredibly cheap. So like our goal is to accelerate the success of every founder who wants to do it. We don’t go so far to do that for you. You have to do it yourself. But we will enable it as to the best of our ability. We just can’t let go and go that deep with like every company you will hate the image of me on zoom after a while.

Elisa La Cava: [00:28:04] Yeah. Mike, what about you with the lab model? Who doesn’t fit working with a lab model?

Mike Fridgen: [00:28:10] The way I was thinking about this for us is it’s, everything is about idea and founder selection. And when you think about, from an idea standpoint, we’re really focused. We’re focused in AI driven applications. We’re focused in RPA and automation. We’re focused on future of work. We’re focused on things where our core MVL team has a track record of execution and experience, Madrona has an investing history and where Seattle has unique capabilities around talent and such. So we’ve narrowed our world around ideas selection. We have a process for vetting ideas within those areas. And then the next piece around founders, this is everything.

So you have to get the idea, right and then you have to put the right founder in that company for it to reach its, meaningful scale and see its full promise through. So we have six things I’ll go through them quickly. We look for in our, this is our founder framework founder selection framework.

One is domain insight. So do they have deep insight in the domain that they’re operating in related to that, are they obsessed about the problem? We have two great examples. One in Brian Camposano who joined us in a company called Stratify. He had been a CFO, he had experienced problems around budgeting and forecasting and Stratify specifically solves that. It was a perfect fit and match.

Another example is Justin over at Strike Graph, the CEO who had problems with SOC two compliance with his business and was driven to go solve that for others in a similar spot. So domain insight, and then obsessed about the problem. And then along with that is a real bias for action. And this is something we tease out, especially in a world where we’re talking to founders who have a long history working in larger companies. The pace of a smaller company is just much faster.

And some people are wired that way. They’re just wired as entrepreneurs and they’ve operated that in every context in which, in their careers, but others haven’t. So we really try to tease out that next piece which is bias for action. And then what goes well with that is rate of learning. You’re taking action and are you humble and grounded that you can learn quickly? You can take from all that effort the right takeaways to, to adjust your business. And then the last one around the core set is strategic judgment. Do you have vision for where to take your company?

And I’d say the most important thing and it’s wrapped in all of those components is, force of will, ambition, drive. We don’t talk about this enough. The people are building meaningful companies have a calling to do it. It is their mission. They can’t not do it. Because these are not people who are doing the math. If they were doing the math, the financial opportunity cost doesn’t make sense, personal sacrifice doesn’t make sense. Probability of success, super low. So people who are doing the math should run, not walk, from doing this. It doesn’t make any sense for them. So you have to be a little crazy, you have to have a calling, and all those other attributes are nice, but if it’s not wrapped in that ambition and drive, it really, isn’t going to amount to much.

Leslie Feinzaig: [00:31:19] Mike, this is all hitting a little close to home. I like to tell people about, you have to be crazy to do what I do. I feel like anybody who’s building something huge, you have to be crazy to live this life. That’s why I’m not scared of people seeing our deck and sure you want to copy it? Like you think you can, you think you can live like this, please? Let’s do it together.

Mike Fridgen: [00:31:41] And this is where it goes back to Elisa’s question around who should not do this. If you’re not crazy and that doesn’t sound like you that’s okay, but you probably shouldn’t do this. I think that to me, that’s the kind of like the long journey to that answer is yeah, if that’s not, you don’t put yourself in that situation. And if you can’t not do it, if you know all of that, you know what doesn’t make sense on paper and you’re still called then it’s, you should go do it. You should go through your life into it.

Leslie Feinzaig: [00:32:07] There is a pace to a venture backed startup that is different from the pace of a business building. So I come from a family of small business entrepreneurs and I think that there’s a lot of people who feel the calling to build a business to create value.

And like to encourage as many people as possible from doing it. And maybe once in your career or twice in your career, you can try to go this kind of high velocity route. But it’s not to discourage people from starting companies. I think that starting a company can be one of the most rewarding things that you will do with your life – create jobs and create value and build products and satisfy customers and make people’s lives better. I think that building a company is one of the coolest things that you can do with your life. And I want more people to do it and more people to try it.
Going down the venture capital route, you have to be willing to kill that company. That’s you have to be crazy enough to grow that company so fast that you would be okay if you failed, but you’re not going to stop trying, like you would rather fail than not try hard enough.

And that is not something that is comfortable, that it’s certainly something that you’re dramatically underpaid compared to the level of work that you’re doing. And as you’re describing the journal venture labs, I’m like, oh, imagine building a startup with health insurance from day one. What is that like? Oh my goodness. Crazy. But like an office space that is nice and people like their snacks there. That sounds amazing. Most of our lives in the early days are like spectacularly unglamorous. And it’s worse because every, like you got one article and everybody thinks that you’re flying high, but actually you’re like eating crap all day, right? ,Like you’re cleaning desks and like sucking up to people and writing 15 different blurbs about yourself, all of which give you imposter syndrome. So you really, you got to want to go big and I hope that you do. Hope more people do. It’s fun. Try it.

Elisa La Cava: [00:34:07] So when people go through your application program, or Mike, they, get in contact with you and you decide who to work with. Now, you’re surrounded, especially with Ready Set Raise, you’re now surrounded by eight different teams of people who, to your point, Mike and Leslie, are ambitious are driven, are, you have everything you’ve learned about them checks those boxes of how much they want to build this company and need to build this company and are willing to break down walls to do it. And so one thing I thought would be fun to share is show off something that has been successful for a team you’ve worked with either at MVL or FFA.

What’s an example of great success you’ve seen of someone who’s gone through working with your teams and your program and has achieved their goal? And how you know, or how have you personally really helped an entrepreneur get past a roadblock that they were facing?

Mike Fridgen: [00:35:02] I’m happy to share a story. Daniel Perrone who is a co-founder and VP of engineering at Chatative. So I’ll tell you where the story ends. Chatative just sold to MailChimp. It was a successful outcome and great for the team and shareholders, and that’s all wonderful, but I’ll tell you this is a company that had many near death experiences and for Daniel coming in, working with the MVL team in early 2016 there was a ton of uncertainty as multiple factors unfolded over time around, product and customer and the team and, a market around conversational commerce and messaging that really took some time to develop. A lot of companies didn’t make it that were funded high flyers over the years. But Daniel was really the heart and soul of this company and keeping it together, keeping a great technology team together, delivering a high quality product over time. Gaining real traction and ultimately to the outcome that company has seen just recently. And, and what it really highlights is that it takes, it does take a village. It takes a lot of people around the table who cared deeply and passionately , are passionate about making the company work.

Like it really does. It’s more than just the CEO or the board. It takes multiple people. And for this business, Daniel really brought everybody together through, everything we talk about the trough of sorrow, the near death experience and got this company to the other side. So he’s a recent success story, but it’s not something you read about or will see. We saw him when the times were darkest, have the biggest impact and keep the company moving forward.

Leslie Feinzaig: [00:36:44] That’s it’s like the trough of sorrow is like, just imagine it sounds like a thing in Game of Thrones, but it’s a real thing that every founder goes through and it really is that dramatic. That’s right. Get yourself a good founder therapist.

Let’s see, so some success stories. It’s just like such a huge privilege to go through this journey with founders and like seeing them come out the other side.

There’s a few notable stories. We had one company from the last cohort in 2019 that it’s a sexual health, so like a sexual wellness company. It’s super cool, huge growth, but a tricky space to fundraise and the founder is an unapologetic. This is a sexual health company and this is what healthy sex looks like. And she just closed $1.2 million and she did it $25,000 at a time. Can you believe what that takes like? That is a crazy person. That is what crazy looks like to not stop and raise $1.2 million $25,000 at a time. That is insanity. I’m incredibly proud of her, that she closed it and her growth is like just amazing this entire time. So that’s one that, that we just learned about.

There was another company in the accelerator last year, that was a local company here in Seattle, technically in Tacoma and Her experience. So this is the company called the Give In Kind, the founder is Laura Malcolm. Laura had bootstrapped this company for four years by the time she got to Ready Set Raise. She started the year like, 2019, she started the year, I’m going to forget her metrics, but like tens of thousands of users, 20% month over month growth. Reliably every month without spending a penny in basically anything. She moved her company to , she moved her company to Thailand, twice, to save on the costs of rent and childcare and development. This is how crazy she was.

And she came back to Seattle early 2019 with these amazing metrics. She started fundraising. She was trying to raise $500,000 on a 3.5 million valuation, which if you know anything about how far this company had gone, is like an insultingly low amount, and she couldn’t even raise a hundred. There was just like, nobody would give her a break. She came through Ready Set Raise and this was almost purely like a change in how to tell your story, drilling down in your business model so that you can demonstrate how it grows and how big the market is.

She ended up raising three times as much as she was aiming for, so she ultimately raised $1.5 million. Madrona participated in that round. I invested in that round. She like doubled or tripled her valuation. Six months later, she raised another million dollars as a bridge, because guess what? Her company was built for COVID and exploded.

And now she’s gearing up to raise her next round. She recruited from the accelerator, and ended up on Tech Crunch, the Today Show, like Digital Properties, like just all kinds of incredible goodness. And a lot, a big part of that was going through the journey with us, which, it’s just one of the most impactful, turnaround stories that I’ve had the privilege to be a part of. And, when you think about what that company does. So this is a company that enables people to support others through in kind help. So what do you do when somebody dies and you want to send a telegram or flowers? She has a marketplace so that you can send things that actually, that are actually helpful and not just, taking up space. So this year through COVID and through her growth, they powered 1 million instances of people helping each other. It’s just mind blowing to have been a part of that.

So that, that’s probably the certainly the most public story, because it’s all out in the public domain. There’s a lot more than I can’t talk about cause it’s coming up later, but that’s a very prominent one that I’m very proud to, I’m very proud to have co-invested with you guys.

Elisa La Cava: [00:40:45] Yeah, it’s such a powerful story. And you hope every company can find breakout success like that, with the help of such a powerful network that both of you can help bring. You touched on COVID. We are in a global pandemic. Why would anyone in their right mind try and start a company right now?

Mike Fridgen: [00:41:06] Yeah, I think this is a great time to start a company. I think there’s three reasons. Okay. So one is talent. If people are so compelled to start a company right now leave their comfy jobs and all the things that come with that, they must be real. They must, they must want it deeply, right?

This is not wantrepreneur time. This is like for the real people who are driven. And can’t cannot do it. So you have, I think for that reason the real strong founders step up in these moments. And I think also, this is also a time of people are drawn to mission.

I think a lot of you can tell just in our community and in our world, so doing something that they really love and believe in, I think there’s , people are putting more stock in that personally, willing to Millie to make those leaps. Second is opportunity. During these types of moments, people change behaviors.

If you go back to the 2007/2009 timeframe, that’s when Airbnb was built. They just had this massive IPO. They’ve totally changed the face of lodging. Go back to that moment. What was happening. People were looking to save money on lodging, as a consumer, people were looking to make some extra money, renting out an extra room in their home.

So there was a moment of change and a company seized that opportunity. And if, if you can go back and listen to their story. Talk about near death experiences. I mean that they had a very tough road, but they caught a moment of a behavioral change and they had a model that really added value within their marketplace, both sides of the equation.

And certainly we’re seeing that with more remote work and work will never be the same for us. So are we seeing massive behavioral change right now? Absolutely. There are new opportunities. We couldn’t have imagined a year ago. And then the third thing I’d say is there’s less competition. You have incumbents retrenching it’s again, there are fewer people taking the leap and trying to build companies.

So I think there’s this real sense of if you are passionate about a problem and you put your head down and in this, the next couple of years through this pandemic, as we come out of these things are building a great product, finding product market fit, demand will come back. So those, so then you’ll see the benefit of everything coming back your way as we emerge out of the pandemic.
So I think for the right founders and the right ideas, this could be a better time for, for some for some companies to be built.

Elisa La Cava: [00:43:23] Wearing my investor hat, there is so much optimism and energy in the private capital markets right now in terms of investors, venture firms wanting to invest and put a lot of money into new startups, against all odds with how crazy 2020 has been, I’ll throw out an interesting stat.

So much capital is going towards new startup creation, but there’ve also been a lot of reports talking about the lack of improvement and even backwards slide in fundraising that supports women entrepreneurs, black entrepreneurs, people of color leading these startups.

And so I’m curious, what is your approach, in the worlds that you live in labs and accelerators, how do you think about attracting founders and incredible teams to your programs and even how do you access founders outside of your networks? How do you reach this incredible population of people you may not be connected to now?

Leslie Feinzaig: [00:44:26] I think when we all went back to zoom and these open networks closed themselves and you have to like book time with people , you know, we also closed avenues for it, it the clique became more cliquey on a nationwide basis, number one. Number two, the entire economy has suffered a woman’s recession, right?

So like we see it in the economy at large that really the big losers in 2020 were women. And that’s partially because of the sectors that were most effected in terms of unemployment, but it’s also partially because we are, we are still the primary caretakers of our children and all of our kids came home.

I can tell you what it’s like to try to run a full-time business, while caring for two toddlers full-time in the household. I am lucky to have a partner that, that is an equitable partner in my house. But even then that was an untenable situation and I’m not surprised that we’re coming out of the next of the past few months of COVID with these very dramatic inequities.

And so the fact that venture capital has retrenched. Is both sad and also a huge missed opportunity for every investor. Okay. I’m off my soap box now. All of that said, I think of like the female founders lines.

Our purpose is to be the conduit of great deal flow for everyone. That’s what we want to do. Like we want every investor in the country to come work with us and to put companies in front of them. I don’t, I don’t, I don’t even know how to answer the question. How do I get away from my network?

There’s 2000 verified companies in the Female Founders Alliance already and thousands more people who are at idea stage or at like founder curious stage. So need the deal flow? Please. Come help us, come work with us, like we, nothing makes me happier than finding rounds that are being led by external investors for people who have been in our community for a long time.
So that’s our reason for being and, and that’s my open invitation. So, what I would like to see is for, for these VC firms to build systems so that they can bring diverse women, non binary people of color, so they can bring these founders into their traditional process and invest full-size rounds equitably. If you’re not. Making like building a real process to evaluate these companies and make them a part of your primary deal flow pipeline, then you’re not actually making a big change.

Elisa La Cava: [00:47:07] Very well said, Mike and Leslie, thank you so much for being a part of our podcast today. It has been incredible to talk with both of you and we’ll continue the conversation.

Mike Fridgen: [00:47:18] Thanks so much.

Leslie Feinzaig: [00:47:24] Thank you so much for having me. This has been super fun. This is like the most social life that I’ve gotten in weeks. So let’s do it again sometime.

Mike Fridgen: [00:47:27] Let’s

Elisa La Cava: [00:47:27] Awesome. Thank you.

Erika Shaffer: [00:47:29] Thanks for joining us for Founded and Funded. If you want more information on either Madron

Last year (yes really!) and this year we had discussions with people who know Madrona well, founders, early team members, and people like Ed Lazowska & Hank Levy from the Allen School at the University of Washington, Steve Yentzer from DLA Piper, Paul Kwan from Morgan Stanley and a host of others.

We turned some of those conversations into this podcast which kicks off our 4th season of Founded and Funded.  The Madrona co-founders did not set out to create a venture firm – this podcast tells the story in their own words.  Tune in to hear Tom Alberg, Paul Goodrich, Matt McIlwain, Greg Gottesman and Jerry Grinstein talk about the early days, weathering the ups and, pretty significant, headwinds – “near death experience”  is a phrase that is used.  Thanks for listening and advance apologies for the uneven sound quality!