Even if M&A isn’t on your mind (and, really, it shouldn’t be very often), you do need have potential exit strategies on your radar. In that vein, it’s never too early to build relationships with high-level folks at companies you may want to get acquired by (I remember tagging along with Jason to meetings at Adobe in 2007 – 4 yrs before they acquired EchoSign). Both John and Jason agree that doing so takes years – otherwise it’s about as effective as popping the question on your first date.
In this session from SaaStr Annual 2016, Jason Lemkin chats with John Somorjai, EVP Corporate Development at Salesforce, about what all founders and CEOs should understand: corporate venture and M&As.
Check out the full transcript below!
Jason Lemkin: Thanks everybody for coming back, making up a little bit of time. We have a real treat here, John Somorjai, a good friend of mine from Salesforce and Salesforce Ventures. Have a seat, John. Thanks for coming. John pretty much knows about everything there is about corporate venture, M&A, and everything. I think we met probably 10 years ago, right?
John Somorjai: Yes, when you were at EchoSign.
Jason: EchoSign. Salesforce probably had about a two billion dollar market cap back then. I think the biggest acquisition that it done was maybe 18 million or something?
Jason: Sounds about right, right? We fast forward a few years and Salesforce is doing six billion in revenue or something, what it is? You invested 500 million dollars in capital, which is as much as anyone else in the entire industry.
You’ve done M&A, everything from one million to billions with ExactTarget, several hundred million. You’ve done everything in between, including kicking off an acquisition you closed, just this week in Germany. A lot of change.
There’s a million things I want to ask you, but at a high level, what’s happened the last couple years? What’s all this energy and acceleration? You’ve been doing this stuff in enterprise software for your whole career, so what’s changed these last 10 years?
John: I think in many ways, the world has been moving to SaaS. It’s just so great that you’re having such a large conference this year. Cloud computing in the enterprise sector has taken off, over the past few years, in an exponential way. We’ve seen also the rise of mobility, which is a big thing, where people can manage their businesses from their phones.
We actually manage our entire venture portfolio through our Ventureforce application that we built on Salesforce. Just the general connectivity that you have, the increase in the Internet of things, that all these devices are talking to one another, it’s really the perfect position to be in, when you’re a CEO of an enterprise, cloud computing company today.
Jason: I want to spend half of our time talking about investment. At a high level to that, what gave Salesforce the conviction to deploy 500 million dollars in capital into other companies?
John: It started back in 2009. It was right after the financial meltdown, when a lot of companies were having trouble raising money.
The cloud was still not fully accepted by a lot of large companies. We felt the need to really build an ecosystem of successful partners around us that would have pre integrated apps, that would be consulting partners, that would be building on our platform.
We put a little bit of money to work, in some companies at that time, that have since grown up to be huge businesses in their own right, like DocuSign, HubSpot, Box. That was sort of the 2009 class. We found that we were actually quite good at investing, because we understood what our customers wanted to buy.
We couldn’t deliver all of that. We needed partners to deliver that. As the investment program grew, we decided to become a little bit more aggressive with it. We felt that we were making good decisions. We were helping these companies grow faster. They were then able to service our customers more effectively.
Jason: Obviously, you get a lot of visibility from Salesforce itself, from the customer base and even usage. Have the goals changed from ’09 to 2016, in terms of what you’re trying to get out of these investments?
John: The goals are still the same in that we’re strategic investors. That’s very important to know this. We invest in companies that are partners with Salesforce. There’s some strategic rationale to the investment. We won’t just invest for financial returns, but the investments have to make sense financially, otherwise the board wouldn’t support the program.
We’re strategic investors first, focused on building an ecosystem. We make sure that all of our investments have some reasonable financial return from them.
Jason: Let’s chat about that, because it can be hard to see as a founder. Let’s talk about how closely connected versus attenuated, that relationship…
I think to get funded by Salesforce Ventures, at least a little bit, you need a champion on the business unit side, someone that’s running something important to say, “Listen, I may not need to integrate this product today into core SFA, but this is important to our business.” How does that process work?
John: Every investment requires an executive sponsor from a business unit. That’s actually important for the company that’s taking money from us because it means they’re going to have an internal champion who is raising their hand and saying, “This company’s important and I’m going to help them.”
Once we get that champion, we go through our normal due diligence process. We co invest with other VCs. As the round comes together, we’re able to close those investments fairly rapidly. Our investment committee is only three people, so we can make decisions pretty rapidly.
Jason: Help founders understand that. So I need a champion, which is probably typically at the VP level or above, as a rough rule of thumb?
Jason: But is the champion really bringing the investment in or do they sometimes validate it when your team brings it in? Is it always sourced by the business owner?
John: It’s probably 50/50. Half is sourced by my team. Half is sourced by the business sponsor.
Jason: There could be two scenarios. One is I already have a relationship with Salesforce. If I’m interested in getting money from you, should I ask my sponsor for an intro? Will they do it organically? Let’s go through each of those channels. I already have a champion and it’s VP, maybe even director and above, but it seems to be working.
John: Yeah, I think all they need to do is make an introduction between the company and Salesforce Ventures.
Jason: If I’m interested, just ask my champion. It’s that simple?
John: It’s that simple.
Jason: What if I’m interested in Salesforce, and it’s strategic, but I don’t have a champion yet? We could talk about Talkdesk. Tiago was up here. I maybe had a champion before, but the champion may have happened during the investment process. I don’t know the answer.
John: I think that is actually what happened. The second passage is really to just come to us directly, either through our website or through a contact you may have with one of us, through a VC like yourself. We get a lot of intros directly from the venture capital community.
Jason: So the VC sees something that he thinks will be interesting to you and your team, makes the intro. You make an initial evaluation. Then you socialize it with a business champion internally, which can happen in a week. It’s not a long process. That’s how the sausage is made internally.
John: Exactly, it is a pretty quick process.
Jason: Now let’s go back on the scale. How many investments a year, have you made the last couple years? Is it going to change in 2016?
John: We’re roughly doing between 10 and 15 investments a quarter, which are a combination of follow on investments and new investments. Typically, they’re new investments. It’s actually a pretty high level of investment activity, considering we only have six people full time in the venture program.
Jason: You might be doing 15 or 20 new companies a year.
John: More than that.
Jason: That’s more than any VC firm, almost any.
John: We don’t take board seats, so I think that’s one of the key differences is that we have more bandwidth than a typical VC would.
Jason: I want to ask a little more about that. You’re doing these 20 or 30 investments a year, but they’re very different sizes. You’ll do some that are relatively early, where maybe you’ll write a half million or a million dollar check. Then you’ll do some that are clearly big.
Apttus was what, four, I don’t know if it’s disclosed, but many tens of millions of dollars. Do you do two or three different sizes? Do you think about them differently?
John: If you look at all of our investments, and we have about 150 active companies in our portfolio today, roughly half of those were actually Series A investments. Probably another 30 percent were Series B investments. It’s really a relatively small percentage that were the later stage.
With the later stage investment, that’s something where we have a lot of conviction with how that company’s been working with our customers, and working with our team. We’ll feel better at that point about writing a larger check. It still has to make financial sense. I think that’s where you’re starting to see some changes in the private markets, especially over the last three months or so.
Jason: Let’s go through a scenario. Let’s say I’m a pretty successful company here. I’m doing millions in revenue. I have some connection to Salesforce. It almost doesn’t matter what it is. I have a lot of customer overlap. I have technology overlap. I have something. I don’t necessarily need money. I’m not worried about money.
Why should I reach out? Why should I take money from Salesforce Ventures? What should I be thinking about as a founder? If Salesforce is interesting to me, so connect that with Salesforce Ventures.
John: If the Salesforce customer base and Salesforce itself is strategically important to your business, it absolutely makes sense for you to try to get an investment from us, because we will help you. The whole point of the program is that we don’t just give money and go away.
We really try to give advice and we try to coach people along the way. We’ve learned a lot from the mistakes that we’ve made over the years, and make sure that we are educating our portfolio companies on the things that they should do, and the things they shouldn’t do, and the things that they should look out for. We put them in front of executives.
We make customer introductions for them, so there is a lot of reasons why you would want to take money from us, and it doesn’t preclude a competitor, for example, from buying your company down the road, so we’ve had 35 exits from our portfolio and five IPOs. Of the exits, we have several cases where competitors bought the company.
Jason: Got it, so you focused a lot on minimizing any perceived downside? That’s the number one downside to a founder, right?
Jason: It’s goodness, then I’m handcuffed if our interest should diverge down the road.
John: We asked for two things which are non negotiable for us that we need to have regular information rights so that we know how the company is doing, because we have to mark our portfolio to market every single quarter with Ernst & Young.
One of the challenges is we do not have a separate fund. We invest off the balance sheet, so everything we do, it’s now publically disclosed. Actually, you can see it in our 10 Q.
We have to make sure that we understand the value of each company every quarter. The second thing is we ask for notification rights, so in the event you do decide to sell, don’t let someone else make a preemptive bid on the company but you have to let us know what’s going on and we’ll make a quick decision whether we want to participate in the process or not.
Jason: Let’s talk a little bit that nuance on the balance sheet that you brought up, so my guess is that in SaaS you have the biggest portfolio. Probably in corporate venture over all, it’s probably second to Intel or something.
I don’t know the numbers, but you got to be in the top one or two, especially if you define it. The knock that you’ll hear from VCs is it’s a fair weather strategy, which is it’s great, but if the market’s bumpy, then corporate VC will evaporate.
Unless, there’s a high synergy, let me buy the shares. [laughs] Because I want to own more of the company. Obviously, there’s always an interest in the advice. Does that matter? Should founders think about that? Does it not even matter because I’m not looking for a second check anyway or how do I think about that common question that comes up?
John: I think we’re different because we’ve been so disciplined about being strategic investors, and so we truly are only investing in companies who are in our ecosystem. Our goal is to help them. We’re not fair weather investors.
The markets have ups and downs. I think, right now, we are going through a turbulent time, that happens but if you look at the long term trajectory about where cloud computing is going, this is the future of the industry, and we are going to be there.
Jason: Let’s tease that out a little bit. I think there’s a lot of VCs the last couple of weeks have been writing and talking about how we have to batten down the hatches, winter is coming. I don’t personally believe in any of this but we can chat about it.
But it’s certainly become at least a half group think. What have you and your team thought through the last couple of weeks? Do you see any strategy change for 2016 at all?
John: We’re certainly encouraging everybody to conserve their cash as much as possible, get their burn rates down and, I think, that’s what all these VCs are saying.
That should always be your strategy no matter what, to make sure that you are focusing on a path to profitability, because as you’ve seen with some of the companies that have gone public and continue to have these enormous burn rates month after month after month, it’s not sustainable. You have to balance somehow the growth with your spend.
Jason: You have enough portfolio companies… Do you have any like Zen metrics learnings from that, or advice because manage your burn, it’s always good advice. But what we learned in ’08 and ’09 is you’ve got to spend something, man. I was on a panel in January ’09 with the CFO of NetSuite, CEO of Eloqua then, and CEO of Exactly and everyone said, “Hooray, we’re cash flow positive.” [laughs]
It’s January ’09, the worst…and what they did, they spent nothing on sales, so if you have net negative churn, if your existing customers grow 130 percent by revenue, you can go cash flow positive in a nanosecond if you do it, but that’s the wrong answer.
John: It is the wrong answer and you have to invest in growth, for sure. Sales is critical. One of the mistakes that we made during the financial turn ourselves is we didn’t invest as much as we had been in building our sales capacity.
Jason: Everyone acknowledges that.
John: Yeah, and so I think that if you have low net churn, which is important, and your customer acquisition costs are reasonable, there is no reason why you shouldn’t be investing more in sales.
One of the things, especially, if you have a product focused founder, engineering focused founder, is they tend to always want to perfect the product and get it perfect before they ramp up sales, and often times you’re too late.
You might have missed the market by that point, and so you have to always balance the product innovation with making sure you are investing in your sales capacity.
Jason: Let me try and ask because there may not be a metric. To boil that down, there’s trade off between growth and maybe being a little bit more conservative with capital when markets have volatility.
When you invest, do you look for 24 months of runway? Do you do a sensitivity test against the model? Do you less worry about that than just investing in great companies? Is there a metric around runway or anything when you invest?
John: [laughs] There is no single metric that I can give you about that but we look a lot at all the typical metrics that a VC will look at especially around customer acquisition cost and ARR, but we also focus a ton on attrition because I have to switch and put my M&A hat on. I know we’re getting there.
That they are spending all this money to bring in customers, and then they are losing them at the end of the day. That is an unfortunate realization that most companies, they focus on product and they focus on growth, but they don’t focus on making their customer successful, and in adoption, driving adoption of those customers.
Jason: Let me learn from that. I have to tell you, I’ve gotten Zen about this because all the companies I work with, I see no attrition issues. What I mean is, they go down certain routes based on their deal size.
When you sell big deals, if you know what you are doing, you have net negative churn. You sell the very small businesses, you have churn. If you do the SME thing, if you do it right, it’s usually like zero.
Like RingCentral is zero. HubSpot, it’s 100 percent net right, so why do you see these companies that are in SaaS, this is B2B. I’m not buying users. I’m not buying eyeballs. How do they flush all this money, and have these huge churn rates? I’m not saying it doesn’t happen. I just don’t see it. What are they doing that’s so wrong?
John: It’s amazing to me how many companies I meet with who don’t know their attrition rate. Because I get that speech all the time, “Oh, we have no attrition. Our customers are happy.” Then you ask them what their attrition rate is, they’ve no idea.
Jason: They don’t know. [laughs]
John: That tells me that they really aren’t watching it and it is one of the most important metrics that you have to focus on. I know that when you are going to your board meetings, you are preparing for the board. They don’t focus on that, but you have to as a CEO. I think it’s just critical. Then there are a lot of companies that provide that as a service to help you.
We invested in one, Gainsight, and I think Nick is speaking at this conference, and that is a service that they provide that helps customers manage their attrition and it gives people an early warning system as to what customers might be coming up for renewal and they’re really not using the product.
Jason: I want to switch a little bit to M&A and I want to talk at a high level not even just about Salesforce. The one last question on ventures. Rough and tough, how close should I be to Salesforce to want to get investment from Salesforce Ventures versus how attenuated?
I know you can’t say, but you’ve done enough investment. When should I not waste my time versus…if I have a great VP relationship, the answer is yes. When does the edge of the bubble fade away and I shouldn’t want to get Salesforce’s money?
John: I think if you come to us with less than three million in ARR, it’s hard for us to really get conviction around that, because we want to see more customer traction and it’s just going to help in terms of our ability to sell the deal internally.
Jason: I just got up on AppExchange last week and I’m new.
John: Too early.
Jason: Simply put it’s too…no matter how cool I am.
John: It’s way better for you to come to us with a story where you can say that you’ve proven it. You’ve proven, “I’ve this is many customers of Salesforce who are using our product and they’re really happy.” Then when we do our diligence checks, we call those customers.
Jason: It’s easy.
John: It’s easy.
Jason: Good. That’s helpful. Let’s talk about M&A at a high level and we can talk about Salesforce in particular as much as you want or not. You’ve been doing SaaS M&A at a senior level, as long as anyone on the planet. I know this is nuts and bolts stuff but can I sell my company to Salesforce or does Salesforce only buy companies?
Jason: You can use some examples or you can talk a high level but I’m confused. I think it’s hard to sell your company but it has happened by the same token. What’s the zen answer here? What’s the high level answer for founders?
John: I guess the short point is companies are typically are bought not sold.
Jason: They’re bought.
John: Usually if you’re selling your company affirmatively, it typically means that there are issues and that really you need to sell. If you have a pre-existing relationship with Salesforce that’s really tight and close and an investment certainly helps with that.
It makes our decision process so much faster and easier because we know the company. We know the team. We understand their business. We like their culture.
There’s just a lot more rationale that we can take to our executive team and to our Board that will explain why this makes sense. Typically, most of the companies we buy actually have been us getting in front of the process. SteelBrick is a great example of that, which we just bought this month. We had invested in SteelBrick twice.
Jason: Let’s walk through that a little bit as a case study. You’d already invested twice.
John: We knew the team very well. We really liked what they were doing. They were growing rapidly. There was a window of time where it was the right time to buy them before they would take another round of funding, where we really felt we could maximize their sales in our current fiscal year.
Jason: I’m confident Goddard didn’t drive up to Marc’s house down the street or fly to Hawaii and say, “Will you please by my company?”
John: That’s right.
Jason: That doesn’t happen, right?
John: That did not happen.
Jason: At even a higher level does… two things, one, does having an exit strategy even make any sense? Because the way these things happen is so unpredictable. Should founders even have an exit strategy?
John: You have to have an exit strategy because I think that most companies, their exit will be M&A or they will shut down.
Jason: Let’s say I am starting the 98th CPQ company. I have an exit strategy slide. Sure Salesforce could do it but that’s an aspirational exit. What are the odds that it happens? It’s so low.
John: Well, it’s low that any one buyer would buy multiple companies.
Jason: Or even any category. Let me ask you, what I learned at Adobe after we were acquired is the “list” and maybe you don’t have a list but the list of targets and different verticals was different than I would have expected. There were names on that, and having been in the industry made total…I knew the founders.
Then there were some that, they did make sense but I was shocked. What I learned from that is you don’t know…as a founder you may think, I have the most synergistic product in the world to Salesforce. The amazing thing to me about SteelBrick is, it was dropped into Salesforce the application in 30 days. That’s kind of cool.
John: They built on our Lightning Platform.
Jason: It does help?
Jason: But there are 1,000 cool companies Salesforce could buy for every one that does and they all have synergy, they all have a Salesforce integration and customers. That’s why it’s hard for founders to understand when M&A would even happen, isn’t it?
John: I think the single best thing you can do is build a relationship with the executive team at Salesforce or whatever company that you’re aspiring to be acquired by. You have to have that pre-existing relationship. I think the best analogy is that you have to date before you get married.
This is the challenge with the company’s selling process is that an investment banker will show up and say, “We are selling this company. You’ve got two weeks to bid.” We’re like, “We don’t know them. We’ve never met the team.”
They don’t know anyone at Salesforce or if they do it’s a very low level person. You really have to develop…those executive relationships are just critical for you to have a successful exit.
Jason: Ideally over years.
John: Over years, absolutely.
Jason: As early as you can possibly grow those relationships.
John: There are no shotgun marriages.
Jason: My learning is, when you’re a founder and you’re totally busy and someone from a company like Salesforce that’s senior or maybe even mid level, you’re not sure it’s a good use of your time or there is someone on your team but it’s not you, take the meeting, build the relationship.
John: Absolutely. I think it doesn’t matter what level you’re meeting with, you really do to need to meet with all levels because you want that word of mouth buzz about you happening at the company. Building all those relationships across the board is super important.
Jason: I don’t how it works at Salesforce, I should, but when you’re a founder and you hit some traction, a lot of folks on the corp dev team will reach out to you or sit in on meetings. What should I make of that? Does it mean anything? Obviously build the relationship, there’s no downside, but when it’s not you, how many folks on your team are broadly defined?
John: On the M&A team eight people.
Jason: Eight people.
John: Then in the Ventures it’s about six.
Jason: What does it mean when someone on your team meets with me as a startup? Just to help people ground it because sometimes they don’t know the answer.
John: It’s not that it means nothing but it probably means less than you might think it might mean.
John: What we are often tasked with doing is, one of our business unit leaders will come to us and say, “We need to better understand the space and all the companies in this space. Can you guys go out and do an assessment of all the companies, their pros and cons?”
It helps them think about future M&A path. It may not mean that we’re ready to buy in that area today but you certainly want to be on the list for a consideration.
The meetings are actually very important to take and whoever you’re meeting with from corp dev in any company, I think the best thing you can do is actually try to be open and transparent with them. The worst thing you can do is just hide everything and not give out any information.
Jason: Be totally transparent.
John: You just get crossed off the list if you’re not transparent.
Jason: Yeah. There is downside, if you’re not transparent you can get crossed off the list. You’re literally…
John: Well, it also usually means you’re hiding something and you’re embarrassed about something and you’re not…I mean honestly your revenue…I cannot tell you how many times I go into meetings and the company will not tell me their revenue.
I’m like, “Who the hell cares? There is nothing confidential about what your revenue is. And so don’t act like it’s more important that it is. Don’t be that that person.”
Jason: I feel like we just got going. The last question I want to ask you, there was some small M&A event we were at a couple of years ago. It was right after ExactTarget and I don’t want to quote you out of context, but I think then you said, it was Salesforce’s best acquisition. It was big, it was meaty, it was accretive.
Any learning since then, best one or two acquisitions that you can think of that moved the needle and what that means changes, the stage changes.
John: ExactTarget was an incredible acquisition and it really created a whole marketing cloud for us, which is a very, very sizable business.
Jason: Huge business.
John: It also brought just a ton of talent and expertise in the marketing space and we’ve been fortunate to keep most the leadership team there. It’s Scott Dorsey who you saw earlier. He was an amazing CEO. He built an incredible team and a company. We’ve been able to keep those folks in and it’s really revolutionized what we’re doing in marketing.
I think another example is RelateIQ. It’s been Steve Loughlin and his team and what they’ve done for us in our SMB sales. Alex Dayon, who is now our Chief Product Officer, came from an acquisition we made in 2008. His company InStranet and that’s the foundation of our service cloud. Those are three great examples.
Jason: Oh, wow. I hadn’t thought of that.
John: EdgeSpring is another one, the analytics cloud. We’ve had many examples and I think if you look at every single one, the talent has been exceptional and they’ve really meshed well with our culture.
Jason: Talent and culture.
John: Talent and culture really are number one.
Jason: That’s super cool. Thank you, John this was epic.
Jason: Thank you everybody, thanks to John for coming.