Are you a founder or would-be founder? Madrona Investor, Ishani Ummat, sits down with Shirish Nadkarni, serial entrepreneur, now angel investor and author of FROM STARTUP TO EXIT, released by from Harper Collins in August of 2021. Ishani and Shirish talk about starting a company, finding your co-founder, product market fit and how to choose your investors.
Transcript (this is machine driven transcription so expect some typos)
Erika Shaffer:Welcome to founded and funded. I’m Erika Shaffer from Madrona venture group. Today, we hear from two new voices. Ishani Ummat, an investor at Madrona who came to us in early 2020, from Bain & Company and who has worked on numerous investments and initiatives at Madrona since. In conversation with Shirish Nadkarni.
Shirish is the author of the newly released From Startup to Exit book. Shirish has a special relationship to Madrona, which backed his first startup called TeamOn in 1999.
In this conversation. Ishani and Shirish talk about his road to entrepreneurship from Microsoft, how to choose an investor, and his 40, 20 10 rule. From Startup to Exit is on sale now, which is August, 2021. And it is a great how to guide for first time entrepreneurs. Listen on.
Ishani Ummat: Shirish, thank you so much for coming in today, it’s so nice to be with you in person.
Shirish Nadkarni: Hi Ishani, nice to be here.
Ishani Ummat: Congratulations on your book. So exciting to see you publish a book from this sort of illustrious career that you’ve had, it’s called [From] Startup to Exit. Is that right?
Shirish Nadkarni: That’s correct, yes. [From] Startup to Exit an insider’s guide to launching and scaling your business.
Ishani Ummat: That’s so awesome. I’m excited to get into some of the journey that you’ve had some of the anecdotes around that today. First of all, though, where can, when and where can we find your book?
Shirish Nadkarni: So we launch on August 24th you can buy it from Amazon, Barnes & Noble or really any bookstore. If you’re here based in Seattle, we have a great bookstore called Elliot Bay bookstores that you can purchase it from as well.
Ishani Ummat: We’re big advocates of our local bookstores, so certainly make sure to check that out for all of our listeners. Let’s start with back to the beginning. Like so many others here in Seattle, you started your career at Microsoft and, perhaps fewer of those people who started have ended up on this journey through many different companies, starting many ones and ending up as this, an angel investor, and then publishing a book about it.
I’d love to just go back to those original days. Microsoft is such an interesting and dynamic place. We’ve come to know and love the company here in Seattle. But making the transition from a big tech company into entrepreneurship and starting your own business can be pretty daunting for folks today.
What about working at Microsoft made you want to be an entrepreneur? Was there a moment where that catalyzed this; hey, I want to have this entrepreneurial startup experience rather than staying at a bigger company?
Shirish Nadkarni: Yeah, first of all, I was very fortunate to have joined Microsoft in it’s very early days. This was in 1987, when people were actually using MS-DOS. I don’t know how many people know about MS-DOS versus windows. Microsoft was really a startup a t that point. So I got great kind of experience working at Microsoft, launching email software on the PC and the Macintosh. And then I got to work on MSN.
I drove the strategy for msn.com and one of the things that we felt was really important for us to have was a web-based email offering. And at that time, I noticed that Hotmail which was founded a few years ago at that point was really successful and gaining a lot of traction.
And so I met with Sabeer Bhatia the founder of Hotmail and then quickly decided that we needed to acquire the company. But really what inspired me to become an entrepreneur was the fact that here what you know, two young adults 26 years of age who had built this amazing piece of web-based email, that you could access your email from any location. And that was really inspiring for me.
And I realized that the internet really had changed the model for startups. In the old days you had to not only develop your software, but you had to then, publish it on floppy disks and find distribution from egghead and so forth. It was not really easy for a startup to get going.
Whereas the internet really changed all of that and made it possible for a young entrepreneurs to build a piece of, SAS software and make it available through the cloud on the internet. So it was a lot easier to get started. And so that inspired me to, Dig that vision and really see if I could, provide a business email solution that would provide enterprise grade email and calendaring functionality for small to medium businesses. And that was the Genesis of TeamOn.
Ishani Ummat: Yeah, that, so precious, right? The vision for being able to access your email anywhere, anytime. But at the enterprise level, right?
Pretty different from the Hotmail product in its end user. But actually the underpinnings of that are quite similar. At Madrona and many of the other, large VC firms we think about these technological shifts, these major technological shifts, a step function changes, right?
What underpins what these technologies create, can be the underpinnings of massive new businesses and a pretty significant rise in startups. And okay, you have this passion for email, right? You work on the Hotmail acquisition. You take a little sabbatical, take some time off, reflect on things and come back energized and see an opening in the market, for sort of enterprise email. And the product, really great. We’ve talked about in early days, I can totally imagine who would use email every day. And who would think about using email even multiple times a day? Seems like it could have been, that could have been dissonance around; okay is this a weekly product? Is it a monthly product? But everyone was on the phone. People would re record rerecord voicemails. Finally get it right. And leave a voicemail. But no one was really using email all that often. So of course, we’re looking around that corner to the next thing you came up with this idea, I saw a market opening, built a great product and raised some VC funding and including from Madrona. ‘
Shirish Nadkarni: That’s right. This was in the heavy days of the internet.-boom, the .com-boom. I raised $15 million , a number of VCs, including [00:06:00] Madrona ventures here locally. And did that, with just a beta product. It was quite amazing. And I was lucky to have raised lot of funding at that time.
Ishani Ummat: Yeah and even in today’s world of massive rounds, $15 million is a pretty hefty amount. And thinking back to, that era of the .com-boom, you, must’ve done such a great job of conveying the vision for the company and Hotmail paving the way in terms of understanding the product at a conceptual level.
But I’d love to talk a little bit about some of the lessons you would share and you learned from that experience. We live in a world of product led growth now. And there’s these big terms, “product market fit”, “customer validation” they’re tossed around quite a bit. And there’s a lot of lengthy theories out there on what exactly it means to have “product market fit”. How do you measure that? What markers suggest that you might have it? Folks might be familiar with Rahul Vohra’s Superhuman’s Playbook, that’s really gotten a lot of traction lately, which is just around this idea of how would you feel if you could no longer use the product. And when customers say that they’re very disappointed or disappointed, maybe you have something that people might be interested in and would be upset if they couldn’t use.
So there’s a host of other ideologies that become popular in the product market fit front. And how to think about and measure it. But thinking back to those early TeamOn days, what do you wish on this front measuring product market fit, thinking about it that you had done differently?
Shirish Nadkarni: Yeah. When I, you know, thought of the idea of TeamOn and the notion of web-based enterprise grade email. I was convinced that this is going to change the world. And so I did really no virtually no market research. And in a sense, I was taking a bet that as you said, the technology shift.
That’s really what enables new startups to come out and change the world. And so I was making a similar bet that email would become prevalent in a kind of cloud-based environment. But I wish I had conducted, customer interviews to find out if the market was ready for our product. And it took a long time for cloud-based offerings to really gain acceptance because companies were not really willing to keep that data in the cloud. They were, they had concerns about security cloud based offerings. And I think that’s what ended up for us making it difficult for us to be successful with the original vision for TeamOn was that email is really sensitive data. You have sensitive communication, sensitive documents being shared across, individuals in a company. And I think at the end of the day, at that point the industry had not really migrated to a point where they felt comfortable with, cloud based storage of sensitive information.
And so we had to pivot and ultimately we pivoted to a mobile version of a TeamOn the idea was that you could access your email, your existing email from any internet enabled phone.
Ishani Ummat: Which is such an important part of the startup journey, but, hearkening back to the original vision, you were just too early. And I think sometimes when we are on the cutting edge of what’s going on and looking at these broad technological shifts and specific applications, sometimes we forget that we have to bring the rest of the market along with us. So what a good journey and what a good learning set of learnings for you in in the startup journey and how to, respond to a market need, but then also where exactly it’s taking you and how exactly it’s playing out, maybe a little different than you would have anticipated early on. It’s a good learning that most of our founders go through at many given points in time.
Before we talk about the next journey that you had, I wanted to talk about briefly, early in your book, you mentioned that recruiting your technical co-founder took you several months. It’s one of the biggest challenges. LinkedIn didn’t exist back then, there was no teal fellowship, no on-deck fellowship, none of these Twitter, different types of ways to build relationships and find people that might be interested in building the same products or same types of technology that you are.
Given all those things exist today, it’s still a big topic and it’s still a massive challenge. I talk to founders about all the time. How talk us through how you found a co-founder, how did you approach the process and what parts are still relevant for entrepreneurs today?
Shirish Nadkarni: A tough time to recruit people, even though, as I said, the.com- boom was happening and a lot of people were leaving established companies to join startups or start companies. I first obviously went after people I knew at Microsoft and many of them were excited about what I was applying to build. But they just couldn’t get themselves ready to leave Microsoft, where they were getting a nice comfortable, you know, paycheck and healthcare and all that. In my case, finally, what happened was I was introduced to my co-founder Shaibal Roy through a common acquaintance. He had a lot of expertise around email but unfortunately he was based out of the bay area and he was working at Netscape at that point and still was also hesitant to leave the company.
So we arrived at the arrangement where I would work with an outsourcing company to get the software developed and he would work part-time in the bay area and guide the outsource development shop in developing software. And that he joined the company. Once we raised the Series A and that’s what happened we raised $15 million and obviously that made him comfortable enough to move from the bay area and come get to Seattle.
Ishani Ummat: That’s great. Fortunately for a lot of folks today, we live in a world where remote work is possible. Folks are building remote first companies and instead of having off-sites, having on-sites for the first time. But I think that problem and challenge of leaving a comfortable job in a position, whether it’s at a big tech company or even a later stage startup to go start your own venture can still be so daunting and still be a big decision for folks to make. So I would say that’s part of, one of the challenges that still remains for a lot of entrepreneurs looking for co-founders to come and join them.
Shirish Nadkarni: Yeah, and it’s difficult these days because especially here in Seattle where you have all the big companies, whether it’s Microsoft, Amazon, Facebook, Google. And the amount of compensation that they’re providing is amazing. So you really have to, one of the things I emphasize in my book is the fact that the founder has to be really a visionary and a great sales person, not in a traditional sales person sense, but somebody who can really excite people about their vision. I think that’s an essential skill that a founder has to have to successfully recruit folks to join the company.
Ishani Ummat: Absolutely! And I think that’s part of the skill set of pitching to investors too, is having the conviction and then being able to convey that conviction to a broader group of folks, whether that’s someone who’s going to join your team and having that recruiting capability is so important. Backing that recruiting capability is the venture funding. And so that’s something, absolutely, we all look for and hope to see in many of the entrepreneurs coming out of Microsoft, Facebook, Google, etc.
Okay. You start TeamOn, you have a great exit there from the email company, and then you go on to start a new company, right?
So this started your serial entrepreneur journey, a company called Livemocha, both inspired by and then acquired by. So you mentioned that, a year and a half into Livemocha Series A, one of your VCs instructed you to work with an investment bank and sell the company actually at a valuation of $100 million, even though you had a little proof of monetization and your acquire, wasn’t interested in paying that price. That’s the canonical example of don’t work with venture capitalists. Right, like, that’s what everyone’s terrified of. Then they weren’t happy with the proposed price and then to me, that seems so absurd, you know, coming from an objective point of view, but it’s true that I talk often with entrepreneurs who are nervous about giving up control of the company for fear of this type of situation playing out.
Inherently, and always there are going to be some bad actors out there, and so that’s a nature of the deal. Largely, in my perception of the world this often comes down to misalignment. A fundamental misalignment between an investor and an entrepreneur, or the, a mismatch, if you will.
How would you advise founders that, you work with now on the angel side of things to avoid this conflict with their own VCs or folks that they might be thinking about taking money from?
Shirish Nadkarni: So that’s one of the things that I really talk about. My book is you have to be really careful about who you pick as your partner in terms of the VC firm. So not only do you need to do due diligence about the VC firm that you want to partner with, but specifically who is going to join your board.
Unfortunately in my case while the individuals who joined my board were really smart individuals, they were fairly inexperienced as venture capitalists and they didn’t really have good, they had good operational experience, not really in the startup world.
And I didn’t really get good guidance, good advice from my board members. So it’s really important for you to, have a discussion with your VC firm, understand who is joining your board, do the due diligence, just as much as they are doing due diligence on you to really make sure that there’s a good fit and they have the world of experience that you can count on to make important strategic decisions in the future.
And then if you receive acquisition interest you really have to, as a board figure out, you know, how you want to respond to that interest. How’s the company doing? Is the company really doing well? In which case you may not want to sell the company or sell the company only at an astronomical price that makes it compelling for you to consider.
It’s very important that you don’t waste, the time, the precious time, each founder has, can only focus on a few things and, we want to make sure that as a board, that the founders are really focused on making the company successful and that you don’t waste their time on unnecessary pursuits that may end up not being very successful.
Ishani Ummat: Yeah, it’s a really good point that M & A is a whole separate topic that we could talk for hours about as well and that process gets really complicated quickly and we’re seeing more of that with the rise of SPACs and that whole advent, but coming back to this mismatch point and being, having alignment on your board.
Such a critical part of building a company is prioritizing the right things collectively. And I think first time founders, serial entrepreneurs in general have so much to learn from, about creating a board and their board members and putting the right people in that room together to help drive the business forward, create alignment, and make collective decisions. But it’s hard. It’s a really hard process to understand who the right partner is for the long journey are going to be.
One of the things I’ve seen more recently, is founders actually, while they’re doing the fundraising process. And in those sort of third or fourth conversation with investors actually hold a mock board meeting. And I really liked that because it you’re right. It is such a two-way street where you have to figure out, hey, is this the right fit for the investor? And is the investor the right fit for the entrepreneur? And the mock board meeting is such a good way to test that because saying, hey Shirish, how are you going to be, if you’re on my board, what is the type of interaction? What are the questions you’re going to ask me? What rapport can we establish? What are the directions you’re going to push on? Where might there be tension? Can be sussed out so nicely in a board meeting or in a mock board meeting versus just a formal one-on-one pitch, right?
Shirish Nadkarni: Yeah. I think that’s a great idea to test out if there’s compatibility between you and the board members. The other thing that I would emphasize is that really the board meetings while, there’ll obviously be discussion around operations, situations and how you making progress and all of that, most of the board discussions should really focus on strategy.
What are the strategic decisions, important, strategic decisions that the company is making and are they making the right decisions and investments? And you’ve got to do that on a quarterly basis so that you make sure that you’re all in. But your board and you making the right decisions moving forward, that’s really the level at which the VC should really be or the board members should really be operating, not getting into the nitty gritty details of the operational performance of the company.
Ishani Ummat: Yeah, totally. And I think, there’s certainly both sides of that argument. I, 100% having strategic alignment in the board meetings themselves and with the board members and when you have to have those quarterly meetings that making sure you’re focused on the strategic aspects of the goal.
As a junior investor, we also try to spend a lot of time in those details, those operational details outside of the context of a board meeting. And I think that’s also where folks maybe don’t quite utilize their investors, as much as they could. Having a board observer or someone who has been in those meetings, but also can get into the details with you and say, hey, let’s test this operating model, or what might pricing look like and how can we go figure out a bunch of different pricing options? And what have I learned from pattern recognition around seeing the companies that I work with and how can I bring that to you? Is another really good way to take advantage of the fact that, hey, you have this group of people that are eager and willing to help beyond just writing a check.
Shirish Nadkarni: And I was fortunate that at least one of my company that I had the opportunity to work with other members of the VC firm who are willing to roll up their sleeves and really get into some operational issues and provide their expertise.
That was a really valuable resource. So you should, as a founder, really understand. What resources is the VC firm providing to help you with operational issues, with recruiting, with business partnerships and leverage the hell out of that relationship for your business.
Ishani Ummat: Totally! And it’s something that we at Madrona and many of our peers always try to make really clear when we work with companies where we start the journey together is that it’s more than capital.
Shirish Nadkarni: Yes, I remember actually, when TeamOn working with Matt McIlwain when he was, an early partner at Madrona back in 2000, it was, we had some pricing discussions and I remember, to this day he offered some really good advice to help me think through my pricing challenges.
Ishani Ummat: That’s so great to hear, and I’m sure that advice has been amplified by many more years of experience since then. So for folks that you know, are looking for, to work with hands-on investors, that is an awesome way to be able to utilize them. So let’s talk about what happened after Livemocha.
Shirish Nadkarni: So after my mocha I launched a third company called Zoomingo, this was in the mobile shop space and the idea was to take all the information that you would typically find on your Sunday flyers. Of course these days nobody gets a newspaper, but in the old days, people would get the Sunday newspaper just so that they could get all the flyers from your, Macy’s or Nordstrom’s telling you about all the great deals that are happening.
What we did was built a mobile solution, which allowed you to access all the great deal information by zip code. So based on where you’re located, tell you, Pierce, Bellevue square mall next to you and hear all the great deals being offered by Macy’s or Nordstrom’s around you.
We did pretty well initially. We got to number 15 in the shopping category as an app, we had over two half million downloads but the space got super competitive with big, much bigger players entering the market with coupons.com and others. And so our growth flattened out and that’s the death nail for any startup it’s you have to show hockey stick growth otherwise it’s very difficult to raise funding. So unfortunately that was one where we didn’t really have a successful outcome.
Ishani Ummat: Yeah, but so much learning along the way. And again, this kind of precious product motion where you identify, you have a life experience that informs you starting a company because it’s such a big pinpoint, where’s there going to be a sale? Why do I always get this paper in the mail? And then turning that into a new technological shift has created an opportunity for us to build a company around it. So again, those, thematic learnings really shining through and every time I’m sure you got so much better, learned so much from the last process.
Shirish Nadkarni: Yeah, absolutely. One of the things that we were highly focused on with Zoomingo was in terms of achieving product market fit was really tracking our retention. And the way I talk about it in my book is to crack cohorts of users and track the usage from day zero to day 30 and beyond.
And there is a magic rule that I talk about in my book, the 40, 20 10 rule. So you want to see 40% coming back on day one, 20% on day seven and 10% on day 30. And if you achieve that level of retention, then you can get to becoming a top 5,000 app. We got very close to it, but we didn’t quite hit that mark and then that’s one of the reasons why we didn’t see the hockey stick growth that we wanted to see.
Ishani Ummat: It’s such a good early building early hygiene around being able to collect, track, and then report those metrics is such an important part of company building that I think people sometimes under appreciate that, oh, in this era, of product lift growth, then you have to understand how that product is interacting in the ecosystem. And so that’s such a well-taken and a good point. And obviously from the investor side of things, I’m always looking at metrics. And that level of hockey stick growth. And obviously there are deviations to that model and to that narrative of continually growing so fast and outsize growth, but I think it’s this responding to what you’re seeing in the market, being able to track those things, lets you say, hey, let’s make this adjustment and then you get back on track.
So now fast forward you are, you’ve had this sort of incredible foundational learning and career at Microsoft. Now started three companies and had various outcomes and exits from them. But again, so much learning along that journey. And today you sit as an angel investor through one of the local organizations, TiE. You’re giving back to that community and those, the serial, and set of entrepreneurs that are in their local here in the Pacific Northwest, which we love with our sort of vision of giving back and building the Pacific Northwest tech ecosystem.
We’ve also done a lot of work in build and helping build that angel community through meetups over the years, which I’m sure you’ve attended. And our pioneer fund most recently, we ran a survey for an angel investors locally in Seattle. And then in your book, you did talk about this idea of these technological shifts and whether that is from the entrepreneur or investor side, I think an incredibly important component of what you have to believe for starting or investing in a company.
Shirish Nadkarni: Absolutely. I’m a big believer in the opportunity that technology shifts or platform shifts enable and how you can use that, disrupt existing incumbents as well as build totally new solutions that can leapfrog what incumbents are providing in the marketplace. So that’s where I look for at now as an investor is, are you taking advantage of some technological shift that you are the first to really adopt and use to disrupt the existing players in the market?
Ishani Ummat: Tell us a little bit more about that, what are the technological shifts that you’re excited about? Who are the types of entrepreneurs and what are they taking advantage of in Seattle today that you are getting most excited about and seeing a lot of energy around?
Shirish Nadkarni: Yeah. So I invested in a number of companies here locally that I’m really excited about. There’s a company that I was an early investor in called Ally which is it also received funding from Madrona ventures. And they are a SAS solution to manage OKRs or Objectives and Key Results, the company’s doing phenomenally well. And I see them applying AIML to provide more insights and actionable actions. Individuals and so forth.
There’s another company called Bloomz which is an educational space. It’s a communication platform for teachers to communicate with parents. They are in over 25,000 schools across the US. They recently won an RFP for the state of Texas to be the sole communication platform for schools in the state of Texas. So I’m really excited about them.
Then I was excited to see I was an early investor in Safari, they announced the acquisition by Microsoft. And again, they’re applying AIML, which is again, the technology that I’m a big believer in to provide actionable insights on spend data within corporations.
Essentially I’m looking for companies that are either taking advantage of AIML or moving legacy software to the cloud. Those are some of the types of technology platform shifts I’m looking for.
Ishani Ummat: So nicely dovetails with many of our investment themes here at Madrona. We’ve focused so much on infrastructure, intelligent applications, cloud, native applications, and now this sort of next generation of artificial intelligence machine learning (AIML), natural language processing, unlocking new use cases in different verticals that we may not have thought of before. One, we’ve spent a lot of time on recently is in the life sciences, for example there are countless examples that we could go on and highlight.
It’s been so nice to hear your story Shirish and congratulations again on launching your book.
And we’re so excited for it to come out in a more public way.
Shirish Nadkarni: Thank you very much. Great to be here.
Erika Shaffer: Thanks for joining us for Founded and Funded. If you’re interested in checking out Shirish’s book From Startup to Exit, you can look in the show notes and there will be a link to the Amazon page.
Till next time.
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