Tom Bogan, CEO of Adaptive Insights, a Workday company, will review the key principles to building a successful SaaS company. From team to vision to metrics to funding and more, these principles provide the framework for high-growth, high performing SaaS companies.
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Tom Bogan, CEO @ Adaptive Insights
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And, how’s everybody doing this morning? How SaaStr so far? Good? All right. So, let me check the audience. How many founders in the audience? Show of hands. Wow. Awesome. How many CEO’s? About the same. Fantastic. So, I’m going to start with just a little bit about my background and we’re going to talk about some lessons I’ve learned in building SaaS companies to scale. So, I’ve had the opportunity to be part of three SaaS companies that we’ve built to 100 billion plus. I’m going to share some lessons. So, early in my career, I started in technology a long time ago, and had the privilege of being President and running Rational Software in the early 2000’s and, as you may recall, we sold that. We built that business to about $800 million. That was perpetual license software. We sold that to IBM in 2003, and it was a fantastic experience.
I then went to Greylock Partners and spent six years in the venture industry. And, during that period of time we began to see the early phase of cloud and SaaS companies, and we saw the change in the business model and had conviction that it was a powerful change and would really fundamentally alter the way we thought about software companies. The way we built value. And, as you all know, that was really foundational for the class of companies we build today because the subscription model meant that we had to focus on things like customer experience, customer success. That was critically important as we built those companies.
So, I had the privilege to be an investor in a company called Aptio. We were the founding investors, worked with the management team there, went public in 2016 and you may have seen, we just sold that. We got to over $200 million, and we sold that to Vista partners. That was a deal that was completed a couple of weeks ago. Also, had the opportunity to be a board member at a company in Boston called Acquia, which again, a SaaS company built to scale.
But, the most relevant experience is really my experience at Adaptive Insights. And, I had joined Adaptive as CEO four years ago, moved from Boston to Palo Alto at that point in time and, really, we’ve had just an incredible experience. You may have seen we were actually in the process of going public last June. We were three days away from IPO, two days away from pricing, and we were acquired by Workday, which is an extraordinary company and extraordinary team. And, by the way, I don’t recommend doing an IPO and M&A concurrently. That’s not something for the faint of heart, but we have an incredible team.
But, I want to start my story really with a different experience. And, it’s really a company that I was running in the mid 90’s and we are based in San Diego. You may recognize San Diego Harbor here. It’s probably the only gloomy day in the history of San Diego, but there’s a reason I chose this picture. This is mid 90’s. I was driving in to work one day, and I picked up a message a voicemail from our CFO. And, she said that she wouldn’t be coming into work that day. And, over the course of the next several hours, we discovered why. Because when I got to work and we began to understand what was happening, there was several hundred thousand dollars missing from our bank account. She had committed to pay the bank back some money on some term loans we had that day, which we hadn’t realized.
And, by the end of that day, worst day of my business career. By the end of that day, we realized that we were bankrupt. We couldn’t pay our creditors. We had to lay off the team without severance. We eventually got the company sold, but it was a terrible experience, as you might imagine. So, at the end of that day, as a leadership team, we gathered and we said, as horrible as today is, there are lessons that we will take from today. And, it’s those lessons that will be with us for the rest of our careers and will form the foundation for the good things we do going forward.
And, that’s really the first lesson I wanted to share, which is we have to embrace things that don’t work out. It’s important. When I think of that experience, and I think of myself as a leader, I didn’t lead as effectively as I might have because there was part of me that feared failure. And, you have to be willing to accept mistakes if we’re going to be able to accomplish and do great things. And, it’s an important lesson. I share with our team, I tell our team that we can’t fear failure. We have to be willing to take risks, to make mistakes, but we also can’t fear success. Too often people will set targets that are really achievable because they want to make them. They don’t want to fail, right? So, we have to both not be afraid of failure, and we also have to not be afraid of success.
The second lesson, and I will say upfront I think this is the most important, and it’s about team. You know, in the venture business there are two maxims that we learned early on. The first was if you had a great trend, if you had tailwinds in the business, that really helped. But, the primary differentiator between success and mediocre or not so great outcomes is team. Because team will find great markets and team will find ways to solve problems.
So, my experience at Adaptive, I’d like to share with you. And, by the way, at Adaptive Insights, we’re a cloud based company. We make budgeting and planning software selling to a lot of technology businesses. I’m sure many of you in the audience, so thank you. But, when I arrived at Adaptive, we were about a $40 million business, and we realized that we wanted to scale and grow the business. So, in selecting team members, my design focus is we want a team that can lead a $500 million business. We want a team that has seen scale, that has been where we want to go, and we thought we had ways to get to 100 million. But, when we thought about that team, it really was a set of skills that would be able to lead us beyond that, that would anticipate and understand the problems that we would face.
This is pretty obvious, but it’s important to emphasize building a team isn’t just about skills, it’s about fit and culture. And, when I think of skills, skills aren’t absolute. Your team has to fit together. We all have strengths and things we don’t do so well. And, it’s a question the way that all fits together. It’s kind of like a puzzle. As you are leaders and building your teams, it’s about the way we put those teams together and have complimentary skills. We screened as hard for culture as we did for skills. I had to replace four leaders at the executive team, and I interviewed more than a hundred people. It took us 15 months to fill that team. And, I think we got most of that right. And, I can tell you as we continued that journey over the next two or three years, that was an extremely important part of what we did.
All right, let’s talk about funding. I’m going to get most of the audience. Who’s raised money? Right? Virtually everybody. Most of the audience. Now, what I’m going to say here is a little controversial. So, I think most people when we do funding, we’re always trying to raise at the highest valuation. And, of course, that’s important. I would suggest to you that it’s more important, you have to be sensitive of course to valuation, but it’s more important, who does the funding? I think it’s the reputation of the firm, that matters, but it’s also the individual from the venture firm, if you’re raising venture, who’s going to be on your board. It makes a huge difference. Because the board is part of your team. You’re constructing a board team as well as the leadership team, and I would suggest that taking the highest valuation isn’t always the right thing to do.
Of course, we’re sensitive to dilution, and we’ve got to manage that appropriately. I’d also suggest that structure in financing rounds is not something I’d recommend. I think that structure is a way to not accept the valuation the market’s willing to pay you, and structure creates different motivations in different outcomes. It creates artificial outcomes depending on where your investors are in that hierarchy. So, when I came to Adaptive, all our previous rounds had participating preferred, and when when I joined, we did a straight preferred round. It turned out it worked out for us. We cleared the hurdles associated with the prior rounds ultimately with valuation. But, I think that, as leaders, when you think about funding, I would suggest it’s important to give consideration to who the firm is, and then particularly, who the team is that’s that’s doing that funding.
All right, number four is culture. We all understand the importance of culture. Where there used to be an expression that culture trumps strategy. So, I’m told by my team it may not always be politically correct, but culture certainly is more important than strategy. I think Peter Drucker used to say culture eats strategy for breakfast, and culture is what you want. It’s the way you want your team, your organization, to behave in certain circumstances.
One of the things, and I think this is particularly true when we think about M&A, culture is probably the most important factor in determining whether M&A is successful. I think I’ve been acquired now six times. Four as a public company. I think on the buy side, I’ve been involved in probably more than a hundred transactions. And, if there’s one constant in terms of the deals that worked versus the ones that didn’t work, it really is about culture.
So, at Adaptive Insights, our culture was very much customer success oriented, team oriented. We value transparency, we value accountability, and the Workday culture is very much aligned. And, I think in the six months we’ve operated together, we found that that provides a strong foundation for the way we can operate are two businesses together. So, I think, your responsibility as leaders, culture is one of the most important things that you do.
So, number five really is an extension of this. It’s about trust and transparency. And, conventional wisdom is that we often don’t want to share the hard messages with our team. That, very often if we’ve got something that’s difficult, the team may not be able to absorb it. It’s a fact when there’s uncertainty, people fill in the blanks with bad information. They assume bad outcomes. I’d suggest to you that we’ll do far better if we give people the information.
I’ll give you a couple of examples. I talked about that company in San Diego. After that happened, we told the team exactly where we were, what the challenges were. We said our future’s uncertain. We’re not sure whether we’ll be able to sell the company. And, the reality is that although that unsettled a few people, most people stayed. Most people stayed for that ride and were able to get us all the way through.
At Adaptive Insights, when we were going through leadership changes, we did an all hands at the beginning of that year and at the beginning of that 15 month process. And we told them, here’s what we’re going to do, and there is going to be uncertainty over the course of the next several months. And, some of you will have new leaders. But, by doing that, we built the trust so that when times are challenging, you’re able to rely on the fact that your team believes that you’re willing to be honest with them, to give them hard messages. So, my colleague Robynne Sisco, our CFO at Workday, has a great blog this morning that if you get a chance, look at it. This wasn’t planned, but when I read it, there are a lot of very similar messages that Robynne shared.
Let’s talk about a founder’s culture. I think over half of you were founders from from when you raised your hands at the beginning. I think, and you remember as founders, when you were starting your companies, you with a small team, you gathered in a room, you talked about what you wanted to create. The vision for your business. What you wanted it to be, what you wanted behaviors to be, how you were going to go to market, what your product market fit was? All those critical things that have made you all successful. Well, we need a founder’s culture at every stage of our journey.
When I joined Adaptive, I said to our team, we are all founders of the $40 million Adaptive, trying to build the $100 million Adaptive. I joined Rational Software. We were 100 million, and we were founders of that company trying to build the $800 million Adaptive. We want that same connection, that same commitment that all of you have. You want it to be instantiated in your entire team. I think this notion of the commitment, the belief that founders have is a really, really important part of what you do as a leadership team.
Setting goals. It’s one of your primary jobs as leaders, and I believe in a philosophy that we have aggressive, but realistic goals. Aggressive, why? Science shows that if we commit to stretch goals, we accomplish more than if we commit to goals that are less aggressive. How many of you follow a process called OKR? Objectives, key results. So, a fair number. It’s increasingly popular. There’s a great book by John Doerr, Measure What Matters. If you have a chance, take a look at it. It really reflects his experience at companies like Intel and Google and others. And, in the book, he discusses how if we set more aggressive goals, if we set stretch goals, we accomplish more. So, goals need to be aggressive.
But, why realistic? Realistic because if we have goals that aren’t sustainable and we as CEO’s say, hey, this is what we’re going to, and the team doesn’t believe that’s possible, we fail. Because the team can’t commit to it. So, there’s a real balance here in terms of the way you set goals for your team. Personally, I believe if I’m setting bookings targets for our company, I believe we’ve done a good job if we hit about three out of every four. So, the notion of having goals is I think really important.
Stretch is good, but it’s got to be balanced, and I think that’s important in all aspects of your business. And, whether it be balancing say investment versus growth, or balancing investment in go to market initiatives versus product initiatives. It’s your job as leaders to strike that balance. I’m sure most of you … who’s familiar with the rule of 40, right? Probably many of you. So, there’s this notion that as we build SasS companies, the combination of 40 between revenue growth and operating income or margin is a magic number.
And so, if we’re growing 50 percent a year, we can burn about 10 percent a year. If our growth isn’t as robust, if we’re growing 20 percent a year, then we are expected to return about 20 percent in terms of our operating income or operating margin. It’s a good way to think about how you balance your investments and it’s a good guide to to determine if you’re in balance. Now, we all know we get paid a lot more for growth than we do for profitability. So, there is a bias there on the growth part of the curve. But, it’s a good way to think about how you balance your investments, whether you have to raise an additional round, whether you need to consider fundraising and it gives you a framework in which to think about it. So, that’s balance.
I’ve got two more, but let me start first with a personal story. So, I started in finance, and so, early in my career I had the opportunity to work for some just amazing people. So, I was a very, very, very young person in finance, and I was working for a CFO. We were a public company. We were about $400 million, and we had 500 profit centers in this company. And, my boss came to me said, “Hey, I want you to do the budget for the company. I want you to lead the budget for the company next year.” So, I guess a pretty good indicator of what I do now I suppose. But he said, and this is a long time ago. So, this is before we had spreadsheets and he hands me a binder. It’s about this big, and it’s got this manual handwritten spreadsheet for every profit center. 500 of them with all the regional district rollups.
But he said, “I’ve got this other thing. I just heard about it. It just came out.” It was the very first spreadsheet. Probably many of you haven’t heard of it. It was something called VisiCalc. And, it ran on the first popular personal computer, an Apple II. So, our company was based in downtown Boston. In this picture you see Faneuil Hall, if any of you are from the Boston area. And, we’re at 60 State Street, which is that building you see in the background there.
So, a Saturday afternoon, I drive into work. I’m the only one in the office. And, I spent 10 hours going through VisiCalc and Apple II trying to figure everything out. At the end of 10 hours, I stood up. I was in this room that overlooked Faneuil Hall. I’m the only one there. I say out loud, I say, “This will change the world.” And it did. It changed everything we believed and we knew about the way computing was done, about the way business applications were done. It changed everything about the way we were going to work. What I didn’t understand in that moment is it would also change the arc of my career in a very fundamental way. And, the last two points are related to that.
And, the first is the megatrends matter. When you attach yourself to high growth, impactful areas that are driving fundamental change, your probability of success goes way up. So find those. Cloud is one. That’s why you’re all here. But, find those areas, and when you attach it, it’s easier to get investment. It’s easier to have success in your business, and it’s important to identify those fundamental shifts.
The last is the most important. You create these incredible visions for your company when you connect that vision to your team’s personal purpose. For me, my purpose in my career was evident in that moment as I looked out that window, looked down on Faneuil Hall, I knew how I would spend the rest of my business career. When people attach their personal purpose to your vision of the company, you can create amazing things. Everybody wants to join you in changing your portion of the world. We live in the most amazing time driving fundamental change. You’re creating the next generation of change. Your team wants to join you. Thank you for the opportunity to be with you this morning. I’m so proud of what you all do and enjoy the rest of SaaStr.