So what is a pre-nicorn? Though I’m fairly sure Jason randomly made up the word, it is a nice, concise term to describe rocket ship companies on course to cross that $1b mark.
Valley babble aside, though, there are some great lessons here as Ben Uretsky, CEO and Co-founder of DigitalOcean; Eoghan McCabe, CEO of Intercom; and Tiago Paiva, CEO of Talkdesk share what their journey in becoming a pre-nicorn (and eventually a unicorn) has looked like. How did they manage to differentiate themselves in a saturated market? What pitfalls did they run into? What were their approaches to raising capital? And when is going after the big guys actually a great idea?
Check out the full transcript below!
If you want to see more sessions from 2016, we’re releasing a new one each week. Subscribe here to be notified. And be sure to grab your tickets to the 2017 Annual NOW.
TRANSCRIPT
Jason: Let’s continue the conversation. I’d love to hear what Ben Uretsky from Digital Ocean says. I’ve met a bunch of people here who loved Digital Ocean and maybe passed up a deal and now it’s an epic company. Is Ben back there? Do we have him? Let’s welcome Ben from Digital Ocean.
Jason: Thanks for coming, Ben.
Ben Uretsky: Definitely.
Jason: Does any of this conversation resonate with you or you just don’t care, because you just beyond all of it…?
[crosstalk]
Ben: Yeah. I wasn’t listening to a single thing.
Jason: You couldn’t hear anything.
Ben: I was back stage pitching the company.
Jason: Let’s talk about a little bit about Digital Ocean. Let’s tie it into the larger conversation. When was Digital Ocean founded?
Ben: We founded in 2011, but incorporated in March ’12.
Jason: Digital Ocean as its current company was founded in 2011, or is that it’s prior, Rackspace… When did Digital Ocean change?
Ben: There’s a little bit of a background story. I started my first business in 2003. It was called ServerStack. We competed with Rackspace head to head. It was a good lifestyle business, bootstrap company, grew to about 20 employees, six million in annual revenue.
In 2011, I stepped back and said, “It feels like I’m working for the man,” but I was the man. The business really wasn’t going anywhere. That gave us an opportunity to really figure out what are we going to do if we actually could start all over again.
In the first company we learned a lot of really important lessons. I think the biggest one, actually to technical and developer minded people, is the importance of sales and marketing. We struggled a lot because our value proposition was support and Rackspace owned that message in the market, so we weren’t really able to make any traction.
We knew how to run the business operations, obviously if you’re a bootstrap you’re making your bills month to month, and we knew how to run the technical infrastructure, as well, because we had a really high customer satisfaction.
What we didn’t know how to do is actually how do you differentiate in the market and it was a tough problem. We turned to some really awesome books, “Blue Ocean Strategy,” “Innovator’s Dilemma,” “Positioning The Battle for Your Mind,” and really created an education around, how do you market and how do you position a business?
We took everything that we knew from the first time and decided, “OK. What are we going to keep and what are we going to create?” What we realized…
Jason: You said, “Competing with Rackspace is hard. Let’s compete with AWS, that’s easier.” [laughs]
Ben: Exactly. You’ve got to go for number one, always. AWS is obviously a great business. I think they’ve done a fantastic job at promoting cloud computing, create a new paradigm. Today any developer knows that cloud is the way that you build your applications. We figured, “Hey, this is one of the largest markets out there.”
I like to say if Amazon sells everything in the world from A to Z and AWS is the most profitable division then we’re obviously in the right business.
We sell cloud infrastructure just like AWS. The big difference for Digital Ocean is that we focus on the developer and the user experience. Early on, we realized, we’re never going to have more engineers or be able to really outdo the competition head to head, so you have get really smart. Part of that was, what position is the business going to take.
We realized that by focusing on user experience and design but not in a superficial sense while, I think the website has great look and feel to it, it’s the control panel, it’s the API, it’s all the documentation that we put together that creates the value proposition, which is Digital Ocean is the simplest way to run your cloud infrastructure, and actually an experience that you love.
Over half of our customers come from a word of mouth recommendation. Because people come to the site, they’re so pleased with the product that we’ve built. They actually fall in love. Simon Sinek has this great piece with, “Start with why.” We do it to simplify innovation.
Jason: Digital Ocean is founded in 2011. Sorry… 2011.
Ben: 2011, 2012.
Jason: 2012. Gets going in 2012. Now we’re getting to nine figures in revenue, rough and tough. You can say whether we’re getting to or passed or you can smile.
Ben: It’s any of that, but…
Jason: What’s that?
Ben: We’re in the ballpark.
Jason: We’re in the ballpark. That’s a pretty good ride. That’s pretty good. Because I don’t even know this, but then I want to ask questions about the business. Quickly tell us your funding history so we can tie it to Monday. 2011, even 2012, how many rounds, who did it, how much…
Ben: We did three rounds. The first round was a seed round with IE Ventures in New York, which is great. That was the summer of ’13.
Jason: What’d they put in? You self funded or bootstrapped until then, right?
Ben: Yeah. The first business was incubating Digital Ocean. So it’s this really…
Jason: The classic challenge of spinning it out from an agency or a different business. You let those guys run it? You let the other partners run it and you left or how did you manage…?
Ben: No, everyone was in the same office. We were…
Jason: It’s all the same.
Ben: DigitalOcean was just another managed customer of the first business.
Jason: That funded the enterprise up until IE Ventures invested.
Ben: Exactly. I, I think astutely said, “You either have to sell this company or we need to merge it because your attention need to be 100 percent focused on Digital Ocean.” It was impossible for us to sell the business because so much of the resources were pooled together. We decided to merge the two business together.
We did raise the 3.2 million seed round in ’13. Then nine months later, we closed the 37 million round with Andreessen Horowitz. Last summer, we raised an 83 million series B with Access Industries.
Jason: It wasn’t even on my question list, but when I hear it that way, it does sound a little breathtaking, doesn’t it? You never raised capital before this.
Ben: I didn’t need to. We had a profitable business.
Jason: I want to ask you a specific question. What are the Zen learnings from that process?
Ben: From the fundraising process?
Jason: Yeah.
Ben: I’d say, what was great is, it was a tough pitch to deliver. What I mean by that is, very few investors were able to believe the story and the vision. Those that believed signed on and we knew that they trusted us, they believed in everything that we stood for, and we were joined at the hip.
Peter Levine has been a fantastic board member, really strategic, really helping us out. That’s the thing, is you don’t have to question their loyalty because we got rejected. They’re like, “Developers are going to love your product.
“You’re selling to developers. You’re going to compete against Amazon. This is the exact thing that venture doesn’t invest in. This is a horrible business.” Those that can actually see the other side are great partners.
Jason: For sure. Talk a little bit, we had echoes of this conversation yesterday. We had Lew Cirne from New Relic, and then we had Jay from Atlassian talking about it. You’ve had a similar path, maybe even faster from an error perspective. You’ve gone from self service product that people love.
First time I heard about Digital Ocean is we have a little bit of software at SaaStr and our developers that were using Digital…I’ve never heard of Digital Ocean. He’s like, “Now we’re just using it. You don’t have a choice.” When I hear that, that’s when we switched to New Relic from our own hack, that there’s something cool going on here.
Now you’ve got bigger customers. Now you’re building your first sales team, right?
Ben: Yup..
Jason: Now it’s nine figures in revenue. Tell us a little bit about going up markets, so to speak.
Ben: It’s a new beginning. It’s a new journey for us. Initially, when we started, it was all about a land grab strategy. “Let’s get out there and self service on demand, let customers sign up.” We’re doing nearly a thousand new customers a day at this point.
Jason: A thousand new customers a day?
Ben: Yeah.
Jason: That’s a lot.
Ben: It’s the individual developer that…
Jason: It’s an account.
Ben: They choose it because it’s the simplest way to run cloud infrastructure. Every company here needs to run their application somewhere.
AWS was a standard. Now there are alternatives. It’s great. What Digital Ocean allows you to do is we just let you do it faster, let you close that deal faster, earn your commission faster, develop your app faster because what you don’t need to spend time doing is figuring out, “How am I going to manage all of this stuff?”
The interface makes sense. The API is super simple to integrate. One call API for creation, snapshot, launching in a new region, backup, whatever you want. It’s like Scribe for cloud infrastructure. It’s just beautiful.
What we saw is, we have this great organic traction and ideal customers were signing up and spending tens of thousands, if not hundreds of thousands, of dollars per month within two or three months of sign up. We realized, “Wait, there’s a huge market out there that we haven’t even begun to penetrate just yet.”
What we have is the brand loyalty of the individual developer that works at these companies that we can trade on by saying, “You already love this for your personal use. Let’s get serious. Is Digital Ocean ready for your production use case?”
That’s what we’re developing our product roadmap, is to bring out all the features that larger production apps need, like storage and advanced networking and metrics capabilities, and really growing into the infrastructure as a service provider that we started out on.
Because our initial MVP product Droplet was so successful, we were heads down scaling, growing the company to 600,000 developers to date over the last several years. Now, we’re finally matured our supply chain processes and really figured out, “Let’s focus on the future,” because everyone wants that 10x. The next 10x is a billion in revenue.
Jason: [laughs] It’s a big x.
Ben: We figured a sales team was a good way to get that. Then we called up Jason like, “Hey, what should we do about the sales initiative?”
Jason: I wanted to ask you a different question . Let me get one more question and then let’s bring out Eoghan from Intercom, and let’s get come back to some questions. When I hear the story fresh and I think about the time, it sounds like a Cinderella story.
I go off, I build this bootstrap’s competitor, and then I figured it out, then boom, I go from nothing to nine figures revenue a couple of years. What were a couple of biggest bumps that you really saw? What were the hardest things that you had to learn to scale a business?
Ben: I think growing as a leader was the most challenging thing. How do you act and be as a CEO for a 200 person company and grow? I’d like to almost shift that question a little bit and share a little bit of wisdom with the audience.
I think what allowed us to really grow that quickly is counter wisdom in some ways. It’s contrarian. We created a lot of constraints. We said, “We have to go away from a sales model initially and allow the product to sell itself.” How do you do that? You have to be extremely differentiated in the market where your position allows it to be sold on its own.
We wanted to keep the recurring revenue dynamics. We wanted to stay within an industry that we knew. We wanted to be able to grow at more than 100 percent year on year.
When you look at all those things, you have four or five different constraining factors. Then ultimately, we said, “If our position is simplicity, who will that actually ring true with? Developers. That’s a niche.” The tighter that you can get your focus, the smaller the market segment that you actually attack, the greater your likelihood for success.
Now our story is, “Hey, we’re beginning to move up market and we have Atlassian and Salesforce and Zendesk as customers of Digital Ocean. Sure, they’re not running their entire enterprise workload, but they are beginning to tinker and seeing where they can deploy it.
Jason: Now that you can just squint and start thinking about that crazy billion dollar number, and you talk about having little silos at Atlassian and Salesforce, do you want to do what Atlassian talked about yesterday, stick to your knitting and not try to go more enterprise, or do you want to do what you talked about and you want to go and take all of it…?
Ben: Developer is the new enterprise.
Jason: What’s that?
Ben: Developer is the new enterprise.
Jason: I like that. I don’t know what it means, but I like it.
Ben: What I mean is…
Jason: I hated D to D. “I might to do D to D investment” but I like, “Developer is a new enterprise.”
Ben: Salesforce, no software. Who builds the software? It’s developers. They’re all about cloud. Cloud is all about developers. Developers are making the infrastructure decisions. They’re making the application decisions. it’s not the CTOs, the CIs that are necessarily controlling that spend.
That’s what we’re seeing, is this organic penetration into the enterprise by developers that first start out with a weekend hobby project, and then they come to work and they’re like, “Oh, my God. It’s going to take me a week to provision a system over here? I’m just going to sign up for this five dollar droplet instead.”
Jason: That’s what we did. Eventually, it’s OK to take a week because Salesforce is thinking in terms of years, in terms of their infrastructure.
Ben: Sure. We just have a few developers from there. It’s not like the entire business.
Jason: Do you want them all?
Ben: Of course. We want to win…
[crosstalk]
Jason: It’ll be all company at a billion to get all of them rather than to get a couple of guys.
Ben: I think our philosophy is actually really simple. We want people to choose the right tool for the job. As large as that market is and we believe that developer market is just enormous in size, so we feel it’s a great bet.
The enterprise bet most likely, for being real, is a larger market pie, but developer is what we’re about. Those developers are the ones that are actually building the applications, and those applications run on Digital Ocean faster and better. That’s why they choose us.
Jason: It’s cool. Let’s keep the conversation going but I want to make sure we get some time for Eoghan too and Tiago. Thank you, Ben, let’s slide over a little bit and then we’ll try and have some joint conversation together.
Ben: Sure.
Jason: Guys, seriously, if you don’t go from 0 to 100 million in three and a half years, it’s OK. It’s OK. Eoghan, are you back here?
Danielle: Is that whiskey?
Jason: My good friend, Eoghan McCabe, CEO of Intercom. Let’s welcome him here.
Eoghan McCabe: Thank you.
Jason: How many of you guys use Intercom? Anyone? Show of hands? Raise? I think we’ve got about, I’m guessing 15 percent penetration.
Eoghan: That works, that’s a start. Upside still.
Jason: A couple of things I want to ask but first of all, tell us a little bit about what Intercom really does, because everyone’s heard of it but not everyone uses it. Give us a little background.
Eoghan: Pretty straightforward, we set out to solve the set of problems that you might put in a bucket called customer communications. We sell to Internet businesses.
Really, anytime an Internet business would want to connect with their customers, whether it’s for customer support or marketing use cases for selling purposes, for product feedback, we are there to try and better solve those problems.
We have a set of products that work seamlessly together on this Intercom platform with the primary goal to create this one place to connect with your customer base, as opposed to using the separate disconnected siloed old school enterprise software tools.
Jason: The magic. Intercom is the 11,000th tool to communicate with your customers, right?
Eoghan: Right.
Jason: Everyone builds great software. Not everyone, but we can. What’s the magic? Just tell people. Because Intercom is one of those ones…Digital Ocean for me, I hear that my team uses it. Intercom is a little bit different. I turn around and everyone’s using Intercom. Honestly, what’s the secret sauce?
Eoghan: What we set out to do was never to create a better help desk or a better email marketing product or a better live chat product. We took a couple of steps back and said, “Can we think about this a little more holistically?”
The conventional, traditional way that businesses will talk to their customers is that the sales team will have their set of tools, the support team will have their set of tools here, the marketing team and the product team, etc. No one really on the same page about the one customer base.
The magic of Intercom, and there’s a lot of great things about Intercom, but ultimately it’s that these products all work together, everyone one is on the same page, there’s one view of the customer such that you can provide a far more wholesome, holistic, seamless experience to that customer.
Jason: OK. Couple things I want to dig into before we do. Let’s do what we did with Ben, because today is money day. Remind me, what’s the funding history of Intercom?
Eoghan: $66 million raised.
Jason: Did you start here, or were you in Dublin when you came out to America?
Eoghan: I was in Dublin the first five, six, seven years of my career. Moved here right before.
Jason: Before Intercom. But you started Intercom here.
Eoghan: Yeah, yeah.
Jason: OK. Then you raised $700 million? How much did you raise?
Eoghan: I banged my head against a wall for five months and scraped together 500K.
Jason: 500K. All right. A good old fashioned angel round.
Eoghan: Someone else showed up and gave us another 500K. That turned into a million dollars. That was the first seed round.
Jason: OK. It was the classic seed round, at a standard valuation.
Eoghan: Right.
Jason: Then what happened? Who invested next?
Eoghan: We added a little more to that seed. Then Mamoon Hamid, from the Social Capital Partnership, invested in our Series A. Ethan Kurzweil from Bessemer invested in our Series B. Marc Jacobson from Iconic invested in our Series C.
Jason: How much were they, just a ground figure.
Eoghan: Let me think. Was it 6, 23, and 35.
Jason: 6, 23, 35. OK. From my perspective Intercom went from a great founder who came here, struggled to put together a seed round. Then from an external perspective you blink an eye and this company’s super hot, it’s raised in at impressive valuations.
What happened? Let’s use this as a case study. What made the company hot? I met you the first time, and I’m, like, “This is an amazing CEO doing something interesting.” I don’t even know what it does exactly. I know Intercom. But what made it blow up from a money perspective?
Eoghan: The story isn’t that instructive for most folks, I don’t think. I’m happy to share it, but hopefully it…
Jason: From a marketing, founder perspective what made you hot?
Eoghan: Hopefully it will add a little more reality to the situation here. The truth is…well what is hot? Hot means that people talk about you.
Jason: People talk about you.
Eoghan: Specifically, people in this industry are talking about you, in this echo chamber. If you sell to this damn industry, and you have thousands of customers in this damn industry, this industry is going to be talking about you.
If you sell to the, fucking, plumbing industry, maybe they would be talking about us, but we would not be hot in this community. Just like us and Stripe and Slack, we sell to the folks that talk about us, who are the people the investors invest in and talk to and listen to. That’s how you get hot in this industry.
That’s not actually that instructive, but that’s the way it went down.
Ben: We actually used Intercom early on as well. It speaks to the fact that that the digital market is so complex. I mean that in the most broadest sense of the word. You’re saying you’re able to build a bridge between sales teams and marketing teams, and customer support teams.
You have everything in an integrated environment, but yet you’re also able to maintain real time communication with the customer, which is really difficult to achieve.
The problem for us is we were getting so many users that we actually had to remove Intercom, and just said, “Look, this is not a scalable strategy at this point when we were unable to really differentiate our cohorts early on.” But we loved the product because of its deep integration allowing you to bridge that complexity gap.
It really resonated in many ways with the way that the Digital Ocean looks at the landscape.
Eoghan: Nice. Thank you. Look, we built the damn good product, but we were only getting started. There’s so many things we need to fix. But the point was that what we built was popular in this industry. If you’re going to look at this industry and say what’s talked about, they’re the things that they’re familiar with and that they use.
Jason: Familiar with, yeah. A couple things I just want to touch on. When we were chatting a little while ago, I guess, it’s obvious, but I hadn’t thought about it, is we were talking about timing. It seemed to me that Intercom, and I think it’s true of Digital Ocean, roll back too many years, it doesn’t make sense.
Eoghan: Right.
Jason: I sort of got it. I ascribed it to markets. But you made an insight, which it was really like Zendesk and Marketo that blazed the path for you. That if Zendesk and Marketo, people wouldn’t have known to search for next generation products.
What are your Zen learnings to founders here?
Eoghan: If you studied the concept of positioning. When people talk about positioning they talk about positioning things, or products or brands against other things. There needs to be some starting point, some foundation. They need something to grab on to first.
Intercom was only relevant in the context of the things that previously existed. We were a better solution for talking to customers relative to the previous incumbents. If those things didn’t exist then we didn’t have the foundations to position ourselves against.
I’m not saying that we had expert messaging and marketing. We actually didn’t and don’t. But the product itself was in contrast to what previously existed.
It cuts both ways. I wanted to say a big part of this is knowing what came before. You need to be a student of the landscape that you play in, the world that you play in, you need to be a student of that.
If I look at some of my heroes in this space, the Aaron Levies and the Patrick Collisons, they’re very much historians of technology. At the very, very same time, which goes in direct contrast to this first piece of advice, is that if you’re too bogged down and here’s how these things work, you don’t get the opportunity that naivety provides, which is, “Let me just solve this from scratch, let me solve it from first principles.”
Our story was one whereby we looked at the pre-existing tools. We previously ran another SaaS business, and we had the problems that we set out to solve. We said, “These tools suck. We want to do better. We want to solve our problems.”
As we matured and got traction and we started to grow up I learned more and more about the landscape such that I was able to position us against what existed.
Jason: Yeah. We’ve had an interesting thread of product centric companies. We’ve had New Relic, we’ve had Atlassian, we just had DigitalOcean. Then we had Dharmesh from HubSpot yesterday, who talked about all the dumb, non obvious things he did. Dumb was in quotes.
He had the funniest ones, which was, “Stick with SMBs” When he went to raise money everyone told him that he had to go enterprise. They didn’t. We chatted about that and why. You’re selling initially to developers, product folks and more. You’re in this weird quadrant. You’re doing SMBs at a low price point. Now you’ve added sales to the mix.
Of the 2X2 matrix that VCs don’t like you’re even worse than HubSpot. But you’re killing it. What are your learnings?
Ben’s gone upmarket. He done it organically, and now he’s doing it strategically. How have you made a low price point with human beings work for you? Why does it work?
Eoghan: There’s a couple components. One is, let’s talk about how is that even a viable business independent of sales and market economics. Then we’ll talk about sales and marketing component. The first is, the market for software is just bigger than ever before.
Jason: That’s the shocker, right?
Eoghan: Yeah. It’s just fucking massive. Just so big. Bigger than when even HubSpot…
Jason: Mark and I did not know in Palo Alto the market for software would be quite this big today. Maybe you knew. I did not know.
Eoghan: It’s just so damn big. Specifically, if you want to see the future there you’ll look at the new generation of Internet businesses who are the SMBs. The SMB space, even before they mature into mid market, the SMB space has just exploded. Internationally too, you know what I mean? Only half of our customers are in North America.
All over the world people are much more easily starting, what you would call, an Internet business, and there are SMBs and whatnot.
First of all, that market is pretty damn big. It just wasn’t a viable a market before. That’s the first component.
The second component is that I don’t know that it was ever the case that selling with humans to SMBs wasn’t ever not viable. It’s just that no one really tried it. If you think about it, SMBs are going to spend less.
But in this new generation of product first business, product first companies, you’re creating high quality products for product first folks, people who are actively looking for new products. They’re literally on websites called Product Hunt. They’re hunting for products. They’re actively coming to you, grabbing stuff, trying stuff.
Jason: Yeah. It’s all inbound.
Eoghan: All inbound.
Jason: Almost all the leads are free. You don’t have to nurture them. They come from the brand.
Eoghan: Right. All free. I say free, because really you’re going to invest a lot more in your product in these circumstances. Already the economics starts to help there. But they’re being acquired by the end user. They’re product savvy, they know what they want.
They need substantially less help, or put another way, they are very much pushing themselves into the company as opposed to being needed to be pulled in by a sales team.
When the tables turn there you get folks who are coming to a company or a product like Intercom or Stripe or Slack where people know the product is interesting and hot, or maybe better or different than the others. They’re already ready to try.
They go to the sales team and say, “Hey, I want to try it. Hey, I want to buy this.” In the old world, the salesperson would say, “Hey, we know you’re an Internet business. You probably have this, this and this problem, let me tell you about our solution.” Very fucking different. Half the battle’s already done, if not 80 percent of the battle.
Then at some point where you do have humans involved, these humans are going to be working faster with a lighter touch. You’ve got very short sales cycles.
Jason: What’s the sales cycle?
Eoghan: It’s 30 days, the average.
Jason: 30 days.
Eoghan: Around a month. It’s, like I said, far more lightweight. It’s substantially less games of golf and a lot more chatting online.
Jason: Two questions, and then let be bring Tiago out, so we get more questions for the group. What percent of the revenue today goes through touch, goes through a human being?
Eoghan: It’s now 50/50. That’s been expanding rapidly. We’ve cracked the uni economics there, so still we can afford to send a lot of people to sales. My vision for sales is that we have… they are there available to talk to everyone. We see it very much as a value added function.
Part of what you buy into with Intercom if you’re working with our sales people is smart, high EQ humans who can understand and listen to your problem, who can frame the product in a way that is going to get you most value, who can point you in the right direction.
They’re there to serve you, not to shove shit down your throat, you know what I mean. Very, very different.
Jason: Leads come in. A lot of those deals are 4K, 5K ECV effectively.
Eoghan: A little less.
Jason: A little bit less. 3K, which is at the edge, but it’s a discussion, a demo, and then a close. They’re going to close, 10, 12, 15 deals a month, something like that.
Eoghan: Absolutely, completely.
Jason: That’s the math.
Eoghan: A lot more. It’s super, super, high volume.
Jason: Last question on this. Now you’re doing tens of millions in revenue. We don’t need to get into specifics, but tens. You’re thinking out at a hundred. At a hundred, how much of this revenue goes through human beings? Does that 50 become 70/30, 80/20?
Eoghan: I think it gets even higher than that.
Jason: Even higher. You’re going to have hundreds of sales reps in 24 months.
Eoghan: Right. Absolutely and completely. There’ll be along the full gamut of reps and individuals. It’ll be folks, they’re available at the very low end to just answer simple questions, point you in the right direction, chat online, chatting with multiple people at the same time.
We will never force anyone to talk to sales, give or take. But we will always be there and available. We make ourselves very available. You can always hit the little chat thing and just start a conversation.
Jason: Part of the DMV there.
Eoghan: Very, very, very available.
Jason: All right. Eoghan, this amazing. Thank you very much.
Eoghan: Yeah. Thank you.
Jason: Just slide down. We’ll have one more conversation, and then we’ll open it up.
Jason: All right. Tiago, are you here? All right. Our final pre-nicorn. Welcome, Mr. Fortune 30, Under 30. Tiago Paiva, thank you for coming. Tiago founded Talkdesk. I want to do a little bit different conversation here because Tiago graduated.
Last year you were here at a Hack Together event, which was pretty fun. You were on our 20 percenter group, right, which was going from 1 to 10, growing 20 percent ish month over month. We gave a little latitude, but hyper growth. Now you’re like Eoghan, you’re into the tens of millions of revenue, you’re squinting and seeing $100 million.
What’s changed in the last year? Last year how many employees did you have, 12 months ago?
Tiago Paiva: 12 months ago we had 15, 20 employees.
Jason: 15 employees. And you were doing, I’m going to make it up, $3 million or $4 million or $5 million in revenue. How many employees do you have today?
Tiago: Almost 200.
Jason: 200. OK. You started in Portugal. What’s the US-Portugal ratio now?
Tiago: Almost 50/50.
Jason: What’s it at Intercom Eoghan. How many you got in Dublin?
Eoghan: 50/50 also.
Jason: 50/50. I see a pattern for some people.
Eoghan: Yeah.
Jason: What are the biggest learnings becoming a pre-nicorn. What’s changed most in the last year? What were the biggest challenges?
Tiago: The last year the biggest change we had in the company was we went from selling mostly to SMBs to now sell more to mid market enterprise. Once you do this you have to change a lot of things in the company. Not only the product, but also the leadership. You also have to hire people that have different skills that can actually sell and go into these bigger accounts.
To do that we had to hire new people, we had to change teams, we had to change how we go to market, we had to change pretty much everything we do in the company.
Jason: Everything.
Tiago: Everything.
Jason: It’s a fast change. Let’s go back. Let’s go back to the history of the company. You come out of the Twilio Hackathon. I can help a little bit on this one, because I know it, you’re in 500 Startups, you get a couple nickels from 500 Startups. Some good money. Thank you Dave and team. Then you get a half million from an angel off AngelList, right?
Tiago: Yes.
Jason: Did you ever meet him in person?
Tiago: Once.
Jason: Once. All right. Bless AngelList. Some billionaire great guy, who I talked to in London, found Tiago off AngelList and just wires you half a million dollars. [laughs]
Tiago: After one Skype call.
Jason: After one Skype call. One Skype call. It’s a good story. I like that one.
[applause]
Eoghan: I’m not sure if we should be applauding or concerned.
Jason: Concerned. You take that half a million and you treat it like the last drink of the night. You get the company up to about a million something in revenue on that. Cash flow positive, it’s the hard way. You’re the VP of sales, the CEO, VP customer success. Every single customer knows Tiago personally. He’s visited them in person.
Then you raise $3 million, then you go on and then you raise $22 million from DFJ and Salesforce. That’s the funding history.
Tiago: Mm hmm.
Jason: You did it in a middle path, which is you took a modest amount of dilution. I’m sure Mark agrees with me, every share does count. It does add up. What are your learnings on the middle path?
You’ve taken a modest amount of dilution. You could have raised $100 million, $50 million, $80 million. You could have raised zero, because you were cash flow positive. You’re kind of the middle path. When does that work and when does that not work?
Tiago: The way we saw it was, we could have raised much more money than we did. We are very lucky that our customers, most of them pay upfront, they have one year contracts. We have a lot of cash coming in every single month. That allows us to be not cash flow positive any more, but very healthy.
What we decided was let’s take less money now and it will last us for 18 months, 24 months, if things go south. Then after a year, a year and a half, we’ll go back and raise the next round. That allows us to, every single round, have less dilution and be able to raise more and more money.
The disadvantage is if things go really bad then you are in trouble, because you don’t have enough money. There’s all this risk in doing this middle path. It worked out for us so far. But it’s not necessarily recommended for everyone.
Jason: When you and I first met, I’m guessing, TalkDesk was something like 15 or 20 bucks a month for a cool product, that had a limited functionality set. Now you’re doing six figure deals with $100 a seat per month. That’s a lot of change in 18 months. You go from no sales people. How big is the sales team all together today?
Tiago: I have 45 people now.
Jason: 45. What do you want it by the end of the year?
Tiago: 125.
Jason: 125. OK. Ben’s going upmarket now at 100. Eoghan came into decision he wanted to have a sales team. You embraced it once you’d proven it yourself as the founder. But everything has to change.
Now you’ve gone through two different segments of customers. How do you focus? You started off with pretty small and techie. Then you have classic SMEs. Now you are enterprise. How do you know how to focus on which of these segments?
Tiago: Our customers just took us upmarket.
Jason: The customers dragged you.
Tiago: When we started I was in Portugal. I was the only sales person. I had no choice rather than sell to small companies with two or three people. Honestly, I couldn’t sell to any big companies at that point. Even though we got a few big customers very early on.
Then once these customers grew, they started growing. Some of them went from four people to 200 to 300, and they kept using Talkdesk, we had to evolve as a company to support them.
Then we very early on we realized where we’re actually going to build a big company on these bigger customers. We never focused on the bigger ones. We focused on the middle tiers.
Now we have a lot of SMBs. We still have a team that handles SMB, we have a support team. But our focus is on the mid market. We also have enterprise customers, but our focus continues on the mid market.
Once we know that mid market we actually can take everything and we can become the number one on the mid market then we start to focus on the enterprise. It’s step by step. The customers will drive you to more and more markets.
Jason: One interesting thing about Talkdesk. Let’s go back a little more than a year, when you were in the 20 percenters. My 20,000 a foot story of DigitalOcean is it’s me as the customer. Cool customer, developer uses it, goes upmarket, people love it.
Intercom, combination of product focused folks, and looking for next generation product. Talkdesk, god, another call center software. I mean good god. We’ve been doing call center software for so long, right? How the heck, what was the magic of Talkdesk getting you to a million?
You actually don’t have a hundred competitors, but if you think about the space broadly, it seems big, a lot of folks, kind of boring. What’s the secret sauce that created that revenue?
Tiago: What we realized very early on is that, yes, there’s a lot of competitors. I think we have 200 or 300 competitors. But if you think about it, when you’re thinking about the mid market and the SMB there’s really nothing there. Everything very difficult to use, very difficult to install, and very expensive.
When we came to our market in the SMB at that point that you could actually set up a call center in five minutes. You sign up on a website, much like Intercom and Salesforce, and Zendesk.
Jason: But it’s more than just ease of use. Lew Cirne was talking about yesterday, in 2007 you can have New Relic be as easy to use for the iPhone. We all get that right now. I agree with you.
But it’s more than that. Was the magic the integrations, like Slack? What was the magic that made these customers trust some guy in Portugal they’ve never met before, that had never done this before?
Tiago: The integrations and easy to use were definitely the two things that drove everything.
Jason: What was, and maybe you don’t even know, because sometimes we don’t know, what was non obvious about it? Was the fact that you wanted these seamless integrations to work? What was the piece that you either saw or stumbled into, because sometimes we stumble into it, that Sockdesk, or Rockdesk, or Schnockdesk didn’t see?
Because there’s a lot of great entrepreneurs out there. What was that connection?
Tiago: I believe in the beginning what we realized was when you come into an old market like the call center market, and you come with something new, people will just love it. When we launched, everything being Web-based, we were the first call center actually everything is on the Web. You don’t need hardware. You don’t need phones. You don’t need anything.
Plus, integrating with everything from Intercom, Salesforce, Zendesk, and you get all that information when you are making a phone call and you are receiving a phone call. That was game changer for most of these small companies that had access to nothing back then.
Jason: I gotcha. Let me dig in just a little bit more. Then, let’s open up the discussion. We’ve got Eoghan from Intercom, which has stayed stubbornly SMB and is killing it.
We’ve got Ben whose customers took him upmarket as they just deployed more and more software and used more. Now he’s doing it strategically. You did it aggressively. You drove your price point up four or five x in the course of 12 months. Leo, from Buffer, downstairs, yesterday was saying, “Do that when you add functionality.”
Randomly adding pricing can work, but bring out new functionality. What did you learn? Everyone would love to go and quintuple their pricing tomorrow. That’s the easiest way to hit the plan, but it’s not that simple. What enabled you to quintuple pricing in a year?
Tiago: I think adding functionality was definitely something we had to do. The product evolved. Once you start having the functionality that other players in the enterprise place have, then you can start matching their prices.
Jason: Got it. Competitors that were much more expensive. You started off cheap, and your goal was to not be cheap once you closed feature gaps.
Tiago: Correct. The second thing is actually when you have the demand from the customers to do this and that, you can leverage that to increase the price. Then you try with a few customers. If it works with a few, it will work with a few hundred as well. They’re probably going to increase the price sometime soon, in the next couple of months.
It just keeps going. As you keep adding more value to the customer, they will be willing to pay more, especially when you are selling something as critical as Talkdesk, price becomes an un-issue, most of the time.
Jason: Have you gone from a semi mission critical application to a truly mission critical application? Is that part of it, being the heartbeat of a company?
Tiago: Yes. We are completely critical. We cannot have one minute of downtime.
Jason: Not one minute of downtime.
Tiago: Not one minute of downtime. We need to be 100 percent up. We need to have backup servers, backup telecom servers. We need to have backup for everything, which is a big challenge last year, as well.
Jason: It’s a big challenge, but you can charge for it.
Tiago: We can charge for it.
Jason: You can charge for it different kind of solution. We’re over on all of it. Let’s open it up a little bit to the team. Mark, what are thinking about the pre-nicorns here today? Do they look good? Would you do most of them at 700 or 900 pre. What are you thinking? What’d you say? 3.5 per deal, isn’t that where we started?
Mark: My capacity for great questions has gone down dramatically when the lady keeps filling these appletinis…
[laughter]
Mark: I would just say, “Hats off, huge congratulations,” just hearing the stories is phenomenal. I just have to blame all of your investors for not calling me harder, earlier on, although Roger Ehrenberg is always going on and on about you guys, so I know about you guys early.
Eoghan: I tried my best to get a meeting with Mark for that first 500K.
Jason: He didn’t…
Mark: For fucks sake.
Jason: It happens. How many people read that blog? I’m guessing you get a little bit inbound.
Mark: Yeah. It’s hard to manage it’s, like, 400,000 a month. I love hearing all the stories. I love seeing you guys go from early stage companies now getting traction. I would ask having raised all this capital what pressure are you now feeling at the board level or what kind of scaling up or leveling up of your teams have you done?
Ben: That’s a great question. I think for us while we have a tremendous amount of capital, $123 million that we raised to date, it only helps to underscore the market opportunity that we see, AWS nearly $10 billion annual business that’s growing, nearly twice in size year over year. That speaks to the ability for us to see a large market for us to really own. We feel actually well equipped with the capital that we have on hand.
Also, while we do a tremendous amount of R&D and software development, we also run the infrastructure, so there’s a very heavy cap X component to the business, but we don’t use any equity dollars towards that, and have structured that to care of the servers that we deployed.
As I said before, the investors that have come onboard for Digital Ocean really see the vision for the business. They believe in the developer ecosystem so we’re not necessarily feeling pressure, but instead are all excited about the opportunity and how do we move faster the same way we enable developers to build faster with Digital Ocean, how can we grow our company…
Mark: What have you done with the executive team? Was there a challenge that once you have this capital…The challenge for capital is once you get a large amount of money they expect faster growth. They want you to keep your foot on the pedal. What has that done for company culture team?
Ben: I think the company culture has remained consistent throughout it. Although, this year my primary focus is to continue to build that senior leadership team. I think obviously your point is very valid. I’d say that the business is going through a transition from that startup early stage environment into now a growth company.
We have a really solid revenue base from which we can begin to work on. At the same time, there are new avenues and new opportunities that we’re just opening up with sales.
Then once again, the products that are coming out of the pipeline this year will begin to accelerate as well. We’re hiring five senior people to the team this year. We’ve done all of this without a VP of engineering or a CTO at the business. I’m fairly technical myself, but certainly looking for some help there.
Same with sales and marketing as we looked to take it to the next level. Even with product, my co founder and brother Moisey who has the strategic vision for the business, we’re looking for really strong operator to help mature the team. We have 10 product managers. I think a really healthy ratio between PMs and engineers, but we don’t necessarily have been there and done it and how do we continue to scale that eng team alongside?
Mark: I would just point out one thing. This is the area that I struggled with the most. I’m a startup guy. I’m not a scale up guy. You go from a world in which you’ve got tacit knowledge. You know how to sell, you know how to objection handle, you know what the competition is, you know how to price.
Once you start adding 10, 15, 20 reps, once you start adding product management, once you lose complete grip on the roadmap because it’s being driven by so many people, it’s important to bring in really process minded people, and often the people who start companies are not those people.
A, that’s a big challenge. I ran into it. I sucked at it. I still stuck at process. Two is it really starts to change the culture. I would just say as a small bit of advice is pay attention to the culture change and invest in culture because you get the old guard who feels like things are different than they used to be around here and there’s a lot of angst that goes with that.
Then you can also run the opposite problem, which is the new guard comes in and they want to do everything like BigCo, and you start getting BigCo behavior, everything from travel policy expenses, overpaying salaries, and all of that. I just…
Jason: Eoghan you’ve had that experience recently.
Eoghan: Yeah.
Jason: You had to bring in the next level manager…and learn about that transition, and talk about it, right?
Eoghan: The first thing is like self awareness is a super power for founders and CEOs in that growth stage. If you’re not aware about the things you don’t know, you’re liable to either continue to try and do those things you’re not good at and fuck them up, and then additionally probably not hire the people that are going to be better than that and help support you.
Self awareness is the first step. Anyone who thinks that they’re self aware, they’re probably definitely not self aware. We probably could be all a little more self aware but just learning more about your strengths and weakness is step zero in this whole growth phase.
When it comes to actually bringing in new people, I think a lot of people try and find a silver bullet, they try and skip a step, they try and take multiple steps in one go. We’ve always had a philosophy of just taking the next logical step, building the teams up slowly partnering with leaders early, growing those leaders.
If you try and bring in that all singing, all dancing SVP Sales, CMO, CFO early days, you’re going to get exactly the experience you’re describing, which is that you’ve got a new guard and it’s like a step change. I think that there needs to be a step change. I think when you do this well, you take baby steps towards improvement rather than try and fix things overnight.
Mark: Can I ask both of you guys to talk about distributed teams because that’s something that’s really tough. We have a number of companies that have US and Europe, where a lot of R&D and product done in Europe, a lot of sales and marketing done in the US. How are you guys dealing with that issue?
Tiago: It’s a challenge. As a team grows, it’s a challenge, a communication challenge mostly. Right now, we have 80 something people in Portugal, and they are mostly engineers. We have the product team, the sales team, the marketing team, everyone in the US.
What we are trying to do, and we haven’t completely solved that issue, is we try to have the management team next to me. That’s something definitely needs to happen, the director of engineering, the VP of engineering. Then we are hiring a strong management team in Portugal.
For that, we bring people from the US, we bring people from Berlin, we bring people from the UK, and then we try to fly them one side to the other as much as we can. I try to go there every six weeks. The directors and managers come here very couple of months. We haven’t figured out the solution but it’s definitely improved with all these things we have put in place last year.
Jason: The one that I find the hardest is the product’s here as you’re scaling the enterprise but the engineering is 11 time zones away. Do you have any of that, Eoghan?
Eoghan: We have product and engineering together. We’ve had two offices from the start, which is a little weird so we grew up with two offices. Big part of the secret sauce there is we had strong leaders from the beginning. In fact, I was a remote CEO for a while. Three of my co-founders were in Dublin.
We grew the offices together, which is the first component, we didn’t have to open a new office, which is a big experiment and a risk.
What we’ve tried to do is never split either individual teams, don’t put engineering in two places, and keep the teams that need to work most closely and intensely together and in an ad hoc fashion in the same physical location, kind of a no brainer.
I think the big thing here is, if you’re going to go into this thing, this idea of remote offices or remote people, which basically everyone is going to, I actually don’t know of a tech company, especially a SaaS company, which is simply based here. I just don’t know them. There’s one. When you want to get to 100, 200 people, I think it gets hard. Let’s see. It’s not impossible but it gets really, really hard.
I think what you need to do, if you’re going aggressively into it, go into it with eyes wide open. Know it’s going to be so hard, there’s going to be real problems, and I think really lean into it and try and find what are the magical benefits this is going to bring and how do you embrace the fact that yes, we are one company over two offices but they are different offices, different cultures, different places, different functions. And can we celebrate what’s different about the offices?
Really, lean into those problems and embrace them early on. It’s going to be a pain in the ass but anyone who does it, they agree it’s a net benefit over time, because of the talent that they can get.
Danielle: Can I jump in with the question?
Jason: Please, yeah.
Danielle: There’s been in a lot of discussion. I know that you guys are pre-nicorns so you don’t have to technically think about this yet but a lot of discussion about if these unicorn companies should be going public. I’m just curious.
What are you guys doing as CEOs of these companies now to prepare for that possible eventuality? Maybe it’s still way out in the future but are there things you’re doing now yourselves to keep that option open and be prepared to lead at that level if that’s where you’re headed?
Ben: I think that’s the job of a CEO, is to keep as many options open on the table, and so we’re constantly maturing and growing the business. We just switched to a Big Four auditor specifically so that if we do want to go down the IPO route, it’s available to us. I think our revenue allows us to really make that a consideration.
On the other hand, I think when you build a really strong business model, there’s actually less pressure to go into the public market. If you can generate actual profits from the business that creates the healthiest type of company.
Being based in New York City, we deal with that reality a little bit more so, and have never been ones to create these fantasy revenue models or, “Let’s drive up our user count and then figure out how to monetize later on.”
We had a very pragmatic approach to pricing the product. We actually didn’t even look at the competition and just focused internally what would it take for us to deliver this service created a healthy margin. Now we know that, hey, every single unit that we sell is fundamentally profitable to the company. I’d like to sell as many units as possible.
The surprising thing is that when you introduce rapid growth, you can actually dip into working capital and not perhaps be able to meet month to month obligations, especially if you’re billing in, A, arrears rather than upfront and, B, you say, “Hey, everyone is billing the first month because it’s reflective of our value around simplicity.”
You have a real cash shortage by the end of the month. That’s why you bring on board world class investors, because you need some help.
[laughter]
Eoghan: I think from my part, I have been trying my best to learn from the recently public SaaS companies. There’s a lot of lessons to be learned, some of them especially around the expectations that they set with their staff as they’re bringing them on.
It’s very, very tempting to paint these pictures but the 50, 100 billing potential opportunities, you pick your favorite company, most of them are not going to be SaaS companies and paint this bigger idea of what the outcome could look like.
Jason: Bigger.
Ben: A lot of recent public SaaS companies, I think they’re not suffering the consequences of their employees having certain expectations about what the stock could be worth and pitching people very aggressively on stock. It is part of the way that this world works. I’m a big believer in everyone in a company sharing the wealth that is created. That is something that’s on my mind.
Again, a lot of the recently public SaaS companies, they have some disappointed, is probably the mildest way to put it, employees when they’re thinking about, “This isn’t really what I signed up for.”
Jason: Let me synthesize Mark and Danielle’s question. I think the average pre money the last round of the panel without disclosing anything, let’s call it 500 pre. If you’re raising that 500 pre, you’re kind of saying we’re going to build a $5 billion company. You don’t have to. You do the best you can.
These are great COs. Then we look and HubSpot’s worth 1.3 and Box is worth 1. We can go down the list. How do you know you’re building a 5 or 10 billion dollar company when there are 2 SaaS companies worth more than 10?
They’re Salesforce, which is, what, worth 40 billion, which would all be a great outcome, but it’s not Facebook, it’s not 500 billion, Workday’s worth teen. How do you guys know that you’ve already built [laughs] a 3, 5, 10 billion dollar company?
Ben: I think while the ground is shifting beneath our feet, no one knows what we’re building. You know what I mean?
Jason: There is an implicit promise, right?
Ben: Yeah.
Jason: Whatever was said in the all smiles meeting, you have to prove you’re going to be able to try to build a $5 billion company.
Ben: The only thing I would say, to my earlier point is that software is bigger than ever before. 300 is the new 100.
Jason: I like that.
Ben: You can get to 3, 4 hundred million dollars in ARR you’re going to have a very valuable business in any market.
Jason: Tiago, you got to be one of the most driven CEOs I know. How do you know you’ve already built the $5 billion company? How do you know that in your heart and soul already? Mark and I are all worried about, “You raise a 300 pre. Oh, my God. I got to deliver.”
We were founders a generation ago. This stuff stresses us out, man. No one up here is worried. As crazy as it sounds, you know you built a 3, 5, $10 billion…How do you know this?
Tiago: I think the first thing is we focus very little on valuation. For us we only have fundraising, that’s an important thing. After that, that moves on. When you think about building a business for 10, 20 years and you know you need to execute to actually accomplish that goal, it doesn’t really matter how the markets are now or what the VCs think now or they will think in six months.
If you keep building the business, if you bring to $1 billion in revenue, at some point, you will have a 10, 20, 30 billion dollar business.
I think it’s about focus. For me, it’s obvious. I see it. I see that Talkdesk will be a billion dollar revenue company sometime in the future. I just need to execute and prove everyone that I’m right. That comes down to that.
[laughter]
Tiago: You focus on that. You build a great team. You build the right leadership in the company, which I think is the most important thing, it’s the right leadership at this point. Big markets, great product, right leadership, and you will become 10, 20, 30 billion dollar company.
Jason: Magically, right?
Mark: Can I jump in with one thing, Jason, which is a little bit self serving, but not just for self serving reasons? On my blog, “Both Sides of the Table,” I linked to a really good article two blog posts ago, written on “TechCrunch,” which showed one really important thing.
In the last few years, the enterprise value on a go forward revenue multiple got completely out of whack with any, both public valuations and historical norms. I think two years ago, it went up to 12 and a half times forward sales. The gentleman who wrote about this on TechCrunch, that I linked to on the blog, basically said on Black Friday, you had a reversion to the mean.
A reversion to the mean meaning if a data point ends up higher than the historical norm, eventually it comes down to the mean. What he was saying is that forward revenue, if you look through history, on average, is about four to four and a half times next year’s sales. I have a very easy question for you. How do you get to a four billion dollar market cap to a billion dollars of fucking revenue, right?
That’s the answer. You have to ask yourself, “Are we building companies capable of doing a billion dollar revenue?” If you have a large enough market, and you can grow into that market, you can build that size company, for sure.
Jason: I think we’re just about out of time. Any last burning question you’ve got, Danielle, or are we good for today?
Danielle: You nailed it.
Jason: I think this was epic. This is the A-list we’ve got left here. Thanks, guys.
