Join Rene Yang Stewart, Co-Head and Principal, Vista Equity Partners, and Monica Enand, Founder and CEO, Zapproved, as they discuss growing a company from product market fit to scale. Vista Equity Partners invested in Zapproved in 2017. Hear perspectives from both the investor and founder as the company scaled.
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Rene Yang Stewart | Co-Head and Principal @ Vista Equity Partners
Monica Enand | Founder and CEO @ Zapproved
FULL TRANSCRIPT BELOW
René Stewart: Hi Guys.
Monica Enand: Hello. Thanks for sticking with us this afternoon.
René Stewart: I know, I know that we are what is between you guys and parties and happy hour so we’ll try our best to make this interesting and educational. I’m René Stewart and I’m a partner at Vista and I Co-Head the Endeavor Fund. With me today is Monica Enand, Founder and CEO of Zapproved. We’re here to share with you guys some perspectives on the journey that a company goes through from a fund raising standpoint as well as some of the operational challenges as a company hits product market fit to all the way scaling the business.
René Stewart: A little bit about myself. I’ve been a software investor for pretty much my entire career. I grew up in the heart of Silicon Valley, so I’ve seen kind of the ups and downs, and ebbs and flows of what this great town has to offer over the last few decades. On Vista we are the largest, most prolific Enterprise Software investor in the world, with over 45 billion dollars of cumulative capital raised. Most people know us for some of our largest deals, like the Markettos and the Mindbodys of the world, but we actually invest all the way down to the growth stage. So, I Co-Head Vista’s growth fund, which is a 500 million dollar fund that partners with founders and CEOs who are running five to 20 million ARR businesses, and we provide the capital, the support, the tools, the knowledge to really help them grow to 50 to 100 million dollars in a sustainable and predictable way. With that I’ll let Monica introduce herself and share a little bit about Zapproved.
Monica Enand: Thank you so much, René, I’m so happy to be here. My name is Monica Enand and I’m the founder and CEO of Zapproved. Zapproved works with corporate legal departments. We help them respond to litigation. In addition to being the CEO and founder of Zapproved I have a few other activities. I’m really lucky to be part of a high-growth start-up, on the Board of Auth0. It is an identity as a service company, actually in Bellevue. I serve my local community in Portland, Oregon by being the Chair of the Board of the Technology Association of Oregon.
René Stewart: So, Monica, you have, obviously, taken a company from figuring out product market fit to now a company of scale. Can you walk us through a little bit of the fund raising journey from literally the first dollar that you raised to your most recent round.
Monica Enand: Yeah. We founded the company in 2008, which many of you who were around then know was a pretty difficult time to start a company. In some ways I think it made us a stronger company. But, the fundraising in 2008, 2009 was pretty difficult. So, we decided to pick one thing, have it be nondiscretionary spend, and litigation is typically a counter recessionary phenomenon. In that recession it actually did go down, but we decided to be the best at one thing in that litigation space. We were able to raise Angel Funds. In 2009, we raised a million dollars in 2009 and used that to get some early traction with customers. Kind of based on the first say 15-20 customers we were able to raise another Angel Round in 2010. That one was actually … The first Angel Round was tough, hard. I must have gotten rejected maybe 50 times to 100 times for every one small check that I got. It took a long time.
Monica Enand: Based on the success we had with the early traction, in 2010 raised a million and half, kind of more of a Super Angel Round, got more expertise around the table, was able to get the founder of Battery Ventures, one of the first initial partners at Sequoia. Also, Steve Singh, who at the time was the CEO of Concur, a great SaaS company. He’s the CEO of Docker now, was also one of the sort of Super Angels, did larger chunks in that second round. Then, frankly, we … Based on that we hit cashflow break even and we started growing organically and getting great traction with our customers and kind of cruised for a while just growing organically.
Monica Enand: In 2014, based on … We were sitting at a trade show actually in New York that we go to every year, and sitting with all of our customers back-to-back in meetings and realizing that something had changed in the environment. We were serving the legal teams who were, frankly they are late adopters. They were late to the Cloud, late to suffer the service, but they were starting to say, “Hey, we have Cloud initiatives and we need to go where the rest of the corporation is. Based on that, sitting with kind of a couple hundred corporate customers, really high retention rates, good growth in our revenue, we decided to raise our first Institutional Round in 2014 and expand our product line. From 2014 to 2017, we actually spent time just getting traction, building out that product line and getting traction on the expanded product line. Then in 2017, actually partnered with Vista Equity Partners based on the success to really kind of say, “Okay, we’ve really hit … We have a larger market, we have a larger product offering to give to our customers, let’s scale this thing.”
René Stewart: These days there are just a plethora of options, financing options. There’s Angel, seed. There’s venture. There’s even venture debt. There’s growth equity. There’s private equity. There’s so many options, and you’ve kind of raised capital from a lot of those different choices. What was that journey like, and how did it differ from say the venture to the private equity realm?
Monica Enand: I’ve been lucky to be part of some great companies that have done ven … You know at Sierra we have Bessemer, Trinity, Meritech, Sapphire. I was part of a company before Zapproved, had Bessemer, Redpoint, the top-tier venture capitalists that I’ve really enjoyed working with and I have great respect for, but when it came to Zapproved … I think it really depends on your business and your aspirations for the business. I started to realize, I think maybe because we started in a recession and every, … Look, every founder knows that every first 20 customers are hard fought, hard got, lots of blood, sweat, and tears to get those 20 customers. As the company grew, and so many early customers had taken a risk on us, I kind of decided that I was not interested in a lower probability/higher return. I was interested in high probability of return and high probability of success.
Monica Enand: I personally am at a stage in my career, you know, where I’m not going to do 10 more startups. Even then I don’t have a portfolio of company, of entities, that I’m working on. I have just this one and I really needed it to be successful. That’s why working with Vista, working with our K1, who is our institutional partner, really was a good fit for us, because of our market, and because of how it grows, and because of the probability of success.
René Stewart: I think one of the things that we see, and a lot of founders approach me and ask, “How do I figure out what type of investor to take on?” I think some of that has to do with just your pure size, so usually the rule of thumb, and this is general kind of … I’m, obviously, being generic here. But usually when you get to that first million of ARR you’re just raising Angel and Seed Round. Once you cross that million dollar threshold that’s where VC is really an option. Then, it’s when you hit five, I’ve found … I don’t know if you saw this to be the case, but when you hit five that’s when your options really open up. You can continue to raise more VC. You can raise growth equity and then private equity, like ourselves, would be interested. When you get to that stage and you’re trying to figure out, “What do I do? What are those options should I pursue?” I think it really comes down to two big things.
René Stewart: The first is the fundamental characteristics of your business. So, if you are at five million of ARR, and you are doubling, tripling, quadrupling in growth I would argue that VC is probably your best path in terms of being able to provide you the capital and support that’s well aligned with your goals. However, if you’re growing respectively, but you’re growing less than 100%, you’re growing 50, 60, 70% chances are growth equity and private equity is probably a better option. A lot of VCs won’t even consider a business that’s sub 100% in growth. I think private equity is a better-suited fit for that type of growth.
René Stewart: The other thing to think about is really your risk tolerance profile as well as what your ultimate goals are. So, if you want to become the next Facebook, Box, Slack, and you have those aspirations, and you have a high appetite for risk then venture is really the best path to support you to get to those aspirations. However, if those aren’t your aspirations, and you’ve built a great business; you want to build a great sustainable business where you don’t want to have to worry about running out of cash. You don’t want to worry about having to fund raise every 12-18 months, then I think it’s good to consider the private equity model, because that business model seems to be better suited for the outcomes that you’re trying to drive. Would you …
Monica Enand: Yeah, and I think for me it was kind of soul-searching journey, because there is this allure of the home run and go big or go home. I think after a little bit of experience with that and sort of all of the sacrifices that early employees, early customers make, for me it was I looked at the Midas List. You say, “Okay.” When you look at kind of the top venture funds it’s really one or two companies that return the fund. That’s when it was like, “Okay, if you can be that one or two that’s great,” but if you’re really focused on absolutely succeeding and sustainable growth at a more reasonable pace to ensure absolute success for all those early stakeholders then I think the model works really well.
René Stewart: I think one of the other key differences between venture and private equity is the stake. So, in the venture world you are giving up 10-20% of your stake each time. In the private equity world you’re giving up potentially 51, 60%, 70%. Now, you’re getting some liquidity but you are giving up what is sometimes perceived as control. Monica, I know you went through that journey and that was not an easy journey for you. How did you ultimately get comfortable with kind of “giving up control?”
Monica Enand: Well I think, you know … You probably heard the story many times of when your colleague approached me the first time and I said, “There is no way I will do a deal with Vista. I’m just not going to do that,” and I kind of held to that for a little while. Then, after getting to know the Vista team, getting to know the model … First of all I didn’t understand that Vista is the most active … PitchBook says that Vista is the most active software investor. I didn’t know 380 transactions and zero losses. I just don’t think I understood what the model was, and I had a lot of misconceptions, frankly, about being spreadsheet oriented, or thinking that you guys would know how to run my business better than I would. Kind of those things.
Monica Enand: After that journey of kind of learning more about Vista and learning what kind of track record Vista had and realizing … You know for me personally I decided, “Look, I want to be the best software CEO that I can possibly be,” and the best run software businesses are in the Vista Equity portfolio. I mean, there’s a track record of consistent best-run software businesses. It’s not just working with … I love working with you guys, obviously, but we also get together as CEOs all across the portfolio. Just this last weekend spent some time together at a retreat. What I learned from that network, and the sharing that goes on in that network I think because of the dynamics of the investor base, it’s pretty remarkable.
Monica Enand: So, it took me a while but I think I realized … Look, control is kind of a fictional thing in some ways. As long as you’re doing well, as long as your company is succeeding you’ve got control, and control on paper is kind of … I don’t know. For me it was, “I want to figure out the best way to make the company as successful as possible,” and decided that that was a really good option.
René Stewart: What are some of the things that you look for in a partner?
Monica Enand: I kind of talked about my misconceptions about Vista, but I really wanted somebody who was going to be able to be in the trenches. It’s hard business. I used to think that, “Oh, that early stage stuff was really hard and that scaling stuff. I mean, come on lots of people do it, it’s got to be easy.” The truth is it’s hard at every stage. It never actually gets easier. I wish someone would have told me that, although I probably wouldn’t have listened. I think having people that … When you’re in early stage you’re kind of a unique snowflake, because you have your own product. You’re trying to find product market fit, and there’s pricing, and there’s all kinds of competitive landscape dynamics that are unique to you. As you’re trying to scale a lot of the problems that software companies hit are not unique snowflake problems. They’re really common. As I talk to the other CEOs, even at the Vista retreat this past weekend, we’re hitting all of the same problems, and what they’re trying to solve is the same.
Monica Enand: I think I look for a partner with a track record, and some expertise, and some willingness to roll up … If you were wearing sleeves I know you would roll them up with me. You have on many occasions and kind of be in the trenches and really kind of help me get through, and the transparency … I don’t even think our … Our Board meetings don’t feel like Board meetings to me at all. They actually feel like working sessions, like where we actually just come in with the hardest issues and everybody sits around the table and kind of throws out, and we kind of beat each other up and best idea wins. Everybody’s bringing their different experiences. That’s what I love about the partnership.
René Stewart: Just switching gears a little bit, maybe talk a little bit about your business journey. What were some of the key milestones that you hit and some of the step function changes that you experienced as you were growing your business, whether it’s hitting kind of number of employees or ARR.
Monica Enand: Yeah, I think there are a number of them, and it’s funny when you stop to look back on it. Like I said, as a founder the first 20, 30, you know we’re kind of an enterprise sale, larger price points, so we’re 20 or so customers were me on a plane, every day calling everyone in my network trying to get whatever meeting I could. I think realizing getting from there to repeatable, sustainable sales process where you have a sales team that’s actually delivering and closing business without you, for the most part, was definitely a big change.
Monica Enand: Then, kind of in the last the scaling is learning the levers of the business, learning the leads, learning all of the metrics around, “Okay, this is how much we need to put in to get this out and this is the time frame,” and kind of learning how to instrument the business was definitely a big change. A change for me from kind of looking at the business from more of a dashboard view of those metrics then really being in the trenches. That’s a big change. That was definitely.
Monica Enand: I think the other thing is the number of employees. For me once we hit over 100 employees, and I didn’t interview every single one and I didn’t know everybody very intimately, and couldn’t sit in a room with all employees all the time, fairly smaller room. The communication changes, the structures that you need to have changes, those were the big things.
René Stewart: Got it. What about on the people side? In software businesses we all know people are your greatest asset. We also know that without a really strong management team and leadership team it’s hard to scale a business. What were some of the lessons that you learned. What did you get right and what were some of the things that you underestimated along the way?
Monica Enand: Yeah, lots of things I underestimated along the way. In the early stages you need a team that really Jack and Jill of all trades, people who can wear multiple hats, really flexible kind of master-of-none, really flexible in what they can target. I think we did that right. I also think, because maybe when we started we were really willing to listen to customers, willing to pivot, agile, willing to change, make whatever adjustments we needed to make to grow the business. I felt like our team was really good, low ego, collaborative, good perspectives and talents. As we scaled I think I was slow to figure out when people were struggling and when people needed help, and when we needed to make changes, a little more infrastructure, and the people that … Obviously, we’ve all heard that the people that get you here are not necessarily the same skills. Sometimes that can be the same person because they can change, but sometimes it’s a different person that gets you to the next level. That was definitely a tough part of the journey for me.
René Stewart: I think one of the other things that we’ve seen is just, in hind sight I think you always kind of … At least from our perspective you always feel like you could have made a change sooner.
Monica Enand: Oh yeah. It’s never the case that you make a change and you go, “Oh, I could have waited six months to do that.” You never do that, you wait until it’s completely obvious.
René Stewart: What about … If we were to kind of … If your younger self was really sitting in the audience today wanting to start and found a company what advice would you give to your younger self?
Monica Enand: Well, one thing I try to do is not look back and not really kind of live with any regrets, I guess. I think there’s this disease that entrepreneurs have, or high achievers have, where they’re always kind of beating themselves up. One of the things that’s been happening to me recently, especially after this latest partnership and the kind of aggressive growth that we’re targeting, and realizing that every time I come upon something that I need to change I spend all this time kind of kicking myself for why I didn’t know that before, like why I didn’t realize that person was struggling, or why I didn’t know I needed to make that change with our sales model, or with our pricing, or with our product. Now I’ve kind of realized instead of kicking myself for all the things I wish I had known earlier, instead I’m going to view it as, “Hey, that’s a really good month, quarter, year,” because if I feel like that then I’ve obviously learned a lot and grown a lot over that period of time. That’s all you can do to make your company better.
Monica Enand: My advice to earlier-stage founders would be just don’t kick yourself so much. It’s all a journey and you have to just kind of keep looking forward and keep being kind of grateful for what you’ve become and what you learn along the journey.
René Stewart: Got it.
Monica Enand: I was kind of curious in working with founders what have you seen as the common mistakes?
René Stewart: I think the team one is a common one that we see, is just recognizing that there are different leaders that can help you grow the business at different stages. The other one that I’ve seen is really just around being vigilant around having visibility on the metrics of your business, the KPIs essentially. I feel like it’s never too early to figure out the right metrics to track for your business, because ultimately the financial results are always lagging indicators. They are never the leading indicators. Instead … Every business is a little bit different. There’s probably overlap but really taking the time to figure out what are the leading indicators, whether that’s leads, whether that’s your pipeline build, whether that is adoption, whether that’s overall engagement. Those are going to really be the trails in the sand to help you figure out, “Is my business going and headed the right direction?” You can never do that early enough.
Monica Enand: That’s definitely something I’ve learned from you guys. I think maybe because we started in 2008, and we were kind of capital efficient, and just trying to survive until the next day, we didn’t lay a lot of that infrastructure, especially around the finance and HR functions operationally. We were really focused on sales, and product, and marketing and not that kind of underlying infrastructure. I think I’ve learned the hard way that I waited too long for that.
René Stewart: When you were raising say your first institutional capital, what kind of metrics, and what characteristics, did you feel like investors dug into?
Monica Enand: It was kind of a funny experience, because in 2008, based on like trying to raise Angel capital, and it being so difficult and thinking, “Gosh, no one will ever really invest,” I kind of had this mindset. Then fast forward five years and we’ve got hundreds of logos, the logos are some of the biggest companies in the world. We’ve got legal … Like I said, they’re late adopters, not quick technology changers, so we actually have a really low turn rate. We have a high retention rate, and then growing pretty significantly in a bigger opportunity with a segment of the business that hadn’t been disrupt, a segment of the corporation that really hadn’t gone through this same disruption that others had. I felt like the belle of the ball when I went out for institutional funding. I was like, “Guys, I’m like the prettiest girl here. Everybody wants to …”
Monica Enand: It was really … What I realize was … “Why was that?” It was all about kind of … For us it was all about churn. We have a really low churn and then we have negative revenue churn, net churn or not negative, revenue churn. So, we’re able to grow our customers in the revenue side more than we lose them. That, I think, really changed the dynamics of the conversations that I was able to have with institutional.
Monica Enand: I know when you guys are looking at companies, what are the main kind of characteristics that you’re looking for?
René Stewart: Because we are fundamentally a private equity business we don’t have the luxury of relying on that one or two successful investment that returns multiples to the fund. Instead, every one of our investments needs to be successful. We bat 1000. If we want to keep batting 1000 that means we have to inherently invest in highly predictable businesses. For us what highly predictable means is I’d say some quantitative things. It’s recurring revenue, and for us best in class of recurring revenue is greater than 90%. You guys were north of that.
René Stewart: The second metric that I focus on is churn, so it’s really gross retention rates. I consider best in class, enterprise SaaS gross retention rates to be greater than 95%. You guys were greater than 95%. The last metric really is around unit economics. I know a lot of people out there look at LTV cap ratios, that is an industry standard great metric to look at. I think it’s easy to play funny math sometimes with some of those numbers, and so I like to keep it simple. I focus on gross margins. Industry standard and best in class gross margins are over 80% fully loaded. When you have greater than 80% gross margins it really allows you to create operating leverage as you scale larger and larger. You guys were close to 90% gross margin. So those are kind of the three quantitative metrics that I focus on.
René Stewart: Qualitatively there’s kind of two core ones. The first is really product superiority. At this stage you guys are disrupters. You’re not the incumbents and the only way you can disrupt or create a new category is to have product superiority. Then the second just comes down to teams and the leader, ultimately. We like to partner and work with CEOs who are intellectually curious and who are life learners, so they kind of check their ego at the door and they’re here to learn and grow alongside us. Then, the other piece is really people who can lead through change. As a growth business you are going to go through so much change, good change, bad change, all of that change. It’s going to be very difficult to scale if you can’t kind of lead a team and lead your entire company through the ups and downs of change.
Monica Enand: I think there is a kind of a misconception. You actually work with quite a few founders don’t you? I know that many people ask me when we did the Vista transaction, I got asked all the time, “You’re not still with the business are you? You’re not still operational?” I was like, “Heck, yeah. This journey is just beginning. What are you talking about? The best is yet to come for Zapproved proved.” I want to be on this journey as long as I can and as long as I’m serving the company. Is that what you find in most of your companies?
René Stewart: Yeah. I would say we’re here to back founders. We want to back passionate founders, and we want to provide them the support system, the tools. A lot of the founders we’re working with are first-time CEOs. For first-time CEOs this is the first time they’ve been on that journey. My advice for first-time CEOs is really take advantage of your network. Don’t be afraid to ask lots of questions. Ask your peers. Find advisors and then ultimately find a partner, whether that’s a VC partner, growth equity partner, or private equity partner, that can really support you in that growth. That’s all I’ve got.
Monica Enand: It looks like the DJ is about to start this. The music.
René Stewart: All right. I think it’s time for your guys to party. Thank you so much for joining us.
Monica Enand: Thank you.