Ep. 394: Where is Venture Capital today? And how do you hack it? SaaStr CEO and Founder, Jason Lemkin, sits down with Sunil Dhaliwal, General Partner at Amplify Partners to discuss.

 

 

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This episode is sponsored by Secureframe.

 

 

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Jason Lemkin
SaaStr
Sunil Dhaliwal

Transcript:

Jason Lemkin:

Hey everybody at SaaStr. I wanted to have another fun, informal conversation with, one of, I think, the most insightful and smartest cloud investors, Sunil Dhaliwal. GP and founder of Amplify Partners. Interesting for a couple reasons, but Sunil’s been investing in cloud internet since before almost anybody. You’ve spent almost your entire career in venture, back when an $800 million exit might be exciting, before any of this stuff was hot. Is that fair to say?

Sunil Dhaliwal:

$800 million exit would be insane.

Jason Lemkin:

Would be insane.

Sunil Dhaliwal:

I was at one of the biggest firms around and I think we had a $200 million fund and people were like, I can’t believe we’re running $200 million in venture capital.

Jason Lemkin:

Crazy. So, not that many people have started so early in the career, so long in the space, and great investments that we know like Datadog and Fastly, and good at it. Beezer Clarkson just tweeted out that at least one of the Amplify funds was one of the top performing in the Sapphire portfolio, so that’s a good thing. But, even more interestingly, I got to know Sunil a bit informally, and I loved his somewhat skepticism of things in the industry and his founder centric view of things, which aligns with my values. So, his insights I find very helpful. As an insider that’s also founder centric, that’s a way that I think we all can learn. So, I want to dig in on a few topics. He did just raise a $375 million fund. I don’t want to do too much inside baseball, but it’s a lot of money when back in the day at bat or whatever, 200 seemed a lot.

Jason Lemkin:

So, we’ll talk about that. We’ll talk about fundraising during a pandemic. I want to talk a little bit about how ventures change and then I want to talk about investing in the competitive space, because we love Datadog. As one example, I want to use the BitQuick quick case study, but with 20, 100 vendors in this space, how can founders compete in general and with VCs in a crowded space, but maybe let’s kick it off, talk about 375 million, is that a lot of money? What does it mean to a founder? I read the press release, you guys have raised your fourth fund. As a founder, what should I take away from that headline number? What does it mean to me?

Sunil Dhaliwal:

Yeah. I think the headline numbers are confusing. I think you always want to put a little bit of context around them and then they’ll probably give you some actual data, as opposed to just looking at headline numbers. For us, the thing that’s always mattered has been: How much money is each investing partner managing? And, you go in the wayback machine to 2012, when I started Amplify, Amplify one was me and $49.1 million, call it 50. One person, 50. Over the course of that fund, I recruited in, who is effectively my co-founder, he runs Amplify with me, is Mike Dauber. Mike and I together raised fund two, and that was 125 million, so call that 60-ish and change, 62. Then, over the course of that fund, we had promoted up David Byer to partner and recruited Lenny Pruss away from Redpoint to join us.

Sunil Dhaliwal:

We’d known Lenny from long way back. So, when fund three went out, we were four people and 200 million bucks, and magically we were back at $50 million. Our current fund is actually 275, we’ll come back to the [inaudible 00:03:26] a second, but 275 is now divided amongst five of us, with Sarah Catanzaro also joining, or being promoted up to partner. So magically, we have stayed right around 50, it’s 55 million this time around, so we’ve stayed 50 to 60 per person. What you asked was: What should a founder think about that? I don’t know if they should think anything of it.

Jason Lemkin:

Yeah. That’s the question. It may mean less than you think.

Sunil Dhaliwal:

Yeah. I guess, if my strategy was to show up and to try and lead an $80 million round and write a $50 million check to do that, and you’re like, “Wait a second, 275 divided by five people, your piece of that’s probably 55. This is the only deal you’re going to do the whole fund?” [crosstalk 00:04:09] to go do that round. But, what we always wanted to do is say, “We’re a series seed and series A firm. When we’re going to show up and write these checks, that over time, are going to be 2 million, 10 million, whatever.” Then you start to think about having 50-ish million dollars to deploy over the course of two and a half, three years as probably a more rational number. When you’re talking about seed and A investors, for us, that felt right, for other people that are maybe micro funds, that seems like a ton of money to manage for a human, and for people that are maybe more A, B, C investors, they might go like, “I could go through 55 million bucks in a year.” So, depends on the strategy.

Jason Lemkin:

Yep. Let’s just press on one thing on that. Let’s say I’m a founder, let’s say I want to raise a million or 2 million or $3 million, and those are more different than they sound. They could be stage dependent. So, now let’s just break this down for a minute. Your first fund was 50 million, 49.9, for one to 3 million, is a $30 million fund too small? Is 375 too big? So the interesting learning for founders is 375 is not too big, and why. How do I know how to do those boundary conditions when a fund’s too small or too big to raise X millions?

Sunil Dhaliwal:

I’ll do the quick fact clarification just to make sure we have [inaudible 00:05:28] and I’ll jump back. So, our fourth fund is 275, and then we raised a separate vehicle alongside of it, that’s another hundred million. But, we only use that to do growth investments in our existing portfolio.

Jason Lemkin:

Yeah. But, as a founder, I don’t care. 375… But, I’m with you. For inside baseball, it’s a big difference, it’s 275 and a hundred’s extra money for the winners, for the next Datadog.

Sunil Dhaliwal:

To that end, you could say, “Look, if I got a billion or a hundred or 50, why do I care as a founder?” The thing [crosstalk 00:05:58] about as a founder is two things: One is, how meaningful is this check going to be to that firm? And I always tell people to be really skeptical of the $2 billion, $5 billion pool of capital that’s like, “We can give you a million bucks.” They can. And if what you’re looking for is money to literally write you a check and get out of your way, that’s a really good setup. Friction could be low, they might not give a shit. They’re not going to spend any time paying attention to you. But if you’re looking for engagement, that might not be the right strategy. In most cases, our experience, it is absolutely not the right strategy. So, I think there’s this engagement continuum where you have to understand how material a check is going to be to that firm you’re taking money from. If it’s not that material, you should think carefully.

Sunil Dhaliwal:

You also should think carefully if like, hey, is this the biggest thing you’ve ever done? If we hit a single hiccup, are you all going to freak out? Because, the entire outcome of your firm is riding on our one investment? There’s a balance. So, I’d say that whole thing is one continuum to look at, is the how well sized am I from a criticality. The other thing to think about, and this is inside baseball, that’s really important is: You should understand what that investor’s posture is on following on. Because, if I’m just doing $275 million fund for seed round and A round deals, you might go like, “Man, if you’re only writing $3 million checks or $4 million checks on average, does that mean you’re really going to do 90 deals out of this fund?” And the answer is: Absolutely not. That’s not how we do it. Because, we reserve really aggressively and want to drive in more money and Bs, and Cs, and Ds and whatever. We put a lot of money into our companies over time, as is our design, and that changes the math too, and you got to know that about your investor to think about how you should or shouldn’t be counting on them for the future.

Jason Lemkin:

Let me ask you one follow up on that, because I think it’s an interesting thing for founders to think about. You talked about, in essence, how much risk a fund would be taking on your investment. If it’s a token amount of the fund, they’re going to leave you alone, but they’re not going to help. That’s true. If it’s too much, it also can create some stress. What about, as someone who’s gone from your own solo GP fund in 2012 to a team, how does a founder think about a new partner? Because, on the one hand it’s exciting, and what I see a lot today is founders often bond with a new partner. I just came out of Stripe, I just came out of Datadog, I came out of Fastly, I’m an engineer, I love the guy that was the CTO of Fastly who [inaudible 00:08:34] making it up. I want him or her. Yet, what if it’s their biggest check? There’s pros, but there’s: How do I decide? If I get picked, do I want the more experienced partner, the new partner? What are the trade-offs there? The honest trade-offs.

Sunil Dhaliwal:

I think that’s going to be very firm specific, and I don’t want to hedge too much, I think you are right. One of the issues you’re pointing out is: People who are maybe newer in their career, don’t get all the latitude that people who are more senior in their career, or maybe more senior in a firm, have when things are going not as great as they should. There may be a shorter rope, so to speak, and that’s very reasonable and it’s real. I think there’s a lot of great investors that are learning what they’re doing, but they don’t have the full trust and credibility to do everything on their own. To some people, that can be a risk to manage.

Sunil Dhaliwal:

As you pointed out, sometimes, and we believe this deeply, I believe Amplify’s single greatest asset is that Sunil and Mike have zero monopoly on the truth and we actually believe that our younger people are far better at spotting new stuff and avoiding the perils of pattern recognition that will make me a dinosaur sometime relatively soon, and by that, that’s like 10 years, not two years. But, that matters, so there’s a balance there. The people who are going to be believers and see around corners, they may not have all the scar tissue from 20 years of doing this and that’s valuable, that can be your best friend as a founder. But there is this trade-off.

Sunil Dhaliwal:

The thing where I’d say it’s firm specific, though is: There are certain firms that run things different ways. Amplify doesn’t have attribution for deals. We refuse to focus individual track records out to our LPs. A hundred percent of our economics are shared, meaning: Not that every person has the same compensation in the fund, but it’s not that if your deal does better than my deal in given fund, that you’re going to get juiced up and I’m going to get juiced down. We create a lot of incentives so that we have to win or lose together. People that do that really well, I think what you’re going to find is: You get the support of the organization, rather than the support of an individual. I think founders can figure this out when they’re going through deal processes.

Sunil Dhaliwal:

If you ever have a partner, who’s like, “Okay, great. I really like this. I’m going to take you in to meet my partnership. I need two hours with you before that meeting, and I’m going to tell you who’s who and which person is going to fall asleep and which person isn’t going to get it and how you’re going to stage manage all these individuals.” I always walk away from that going like, “This is really clear you’re on your own and these people are just obstacles to be overcome. You will never talk to them again in your life. They will never know who you are. They might not even recognize you at the holiday party.” That’s a good signal that you really need to be focused on: Who’s my sponsor and how much do I trust them? Other organizations, you’re like, “Yeah, I’ve had four meetings and I’ve met literally everybody and I get random interests from this person and this person is telling me [inaudible 00:12:04]” better signal that you’re not solely putting your chips on an individual, but it is hard to figure that out without a little bit of effort as a founder.

Jason Lemkin:

Yep. Let me just summarize it, and let’s talk about what fundraising is like in COVID. Forget about Amplify, but industry-wide, because you deal with this with your portfolio, would you rather have a seasoned partner that can lose the money? Listen, you’ve got a pretty good track record. You don’t want to, but you could write off a $10 million investment, it’s not going to sink you personally. You’re up. I think once a partner is up nine figures or more, you can write off 5%, 10% and maybe they’re cross funds, but it’s okay. Would you rather have that person, not you, but that maybe his [inaudible 00:12:54] a little bit, or used to be [inaudible 00:12:55] before COVID or is less available, would you rather have the up and comer that maybe will leave and found their own Amplify? It’s possible these days. Which one would you, just for fun, binary, which one would you pick today?

Sunil Dhaliwal:

Yeah. I’ll give you the answer and then I’ll give you the rationale. I would always take column B. I really would.

Jason Lemkin:

The up and comer.

Sunil Dhaliwal:

But it’s not because they’re the up and comer. I think that’s a little bit of the false choice. What I think is inherent in what you’re asking is: Would I take the person that I love and really want to work with, because I believe in them and they believe in me, or would I take the safe choice that I think: I’m going to manage some risk and I’m going to align with what I believe to be the most powerful individual. I think that’s a losing game.

Jason Lemkin:

That’s a good insight. Take the believer over the power center.

Sunil Dhaliwal:

If you’re an early stage company, at the end of the day, you need someone who will work their ass off and irrationally believe at the same time, and I don’t think there’s a more powerful combo when you get that individual on your side. A good investor will be there to buck you up personally when things look horrible. They will remind you why they put their ass on the line and their money at risk to believe in you. They will fall asleep thinking about your company and wake up thinking about your company, and hopefully not in a bad way, in a good way. That all comes with someone who is a passionate believer. So, I would strike up and comer, but I would replace it with like: Would I rather have that person who’s just all in on me and my company? I personally would take that every time, because I think that at the early stages of a company, that is literally what matters.

Jason Lemkin:

Yeah. Maybe even later, because when capital comes more fungible, maybe I do want the one that wants it the most, but that’s a good insight.

Sunil Dhaliwal:

I actually [inaudible 00:14:42] I think when, and this is maybe a broader conversation in how one raises capital and what’s the value of different capital at different stages, obviously, if you can get the whole package, they’re the most senior person with the biggest stick and they’ve got like 8 billion Twitter followers and a cult following around the industry, and they are absolutely irrational believers in what you’re doing and want to make you successful, that’s a great combo to have. But, if you’re making trade-offs, I think the place where you make trade offs away from irrational belief and into some of those other things, it’s easier at the later stages of a company when you’re like, I got my business, I know what I’m doing, and we need to focus on scaling and executing in ways that it’s going to take my team doing it, not you doing it, what I really need is the capital.

Sunil Dhaliwal:

I always say: The capital you care the least about is the person who buys all your shares the day you sell your company. You don’t really care who that human is, you care about the price. When you’re doing a follow-on offering in the public market, you care a little bit, you don’t want them to be someone who’s going to stick their nose into your business and screw it up. Maybe when you allocate IPO shares, you care a teeny bit more, because presumably they’re longer. You keep tracing that continuum back to the earliest stages. At the earliest stages, you’ve got to care the most. They’re going to be closest to you, they will have an outside [crosstalk 00:16:09] influence over the life of the thing. So, yeah, I would always be going, “Man, really go for the believer early. Really get that person who’s just all in on you and your idea and is just going to go for it with you.” Whereas, in the later stage, capital will look just more like capital. The further out you go, that becomes more true, and there’s certainly a continuum, but I do believe that and that’s been informed by a lot of experience.

Jason Lemkin:

Yep. Let’s transition for a minute about a topic that I’m confused about, even though I’ve seen it, is: What is fundraising really like during COVID? We were chatting before, certainly it’s hyperactive. Deals are getting done faster than ever. They’re getting done [inaudible 00:16:53] Zoom. I actually think they’re getting done with less diligence, not no diligence, but you don’t have the four weeks of in-person meetings, they’re getting done in days. We have a joint investment that was a sleepy company before that got four term sheets in days and it’s happened again and again. But I also, and I want to hear your thoughts, but what I also see when I look at the hyper investment in my portfolio, which is smaller than yours, I also don’t see a lot happening with folks they never met before, with companies they haven’t heard of, unless they’re tiny checks. Tiny checks at demo days, fine, throw the money in, but is it easier for the well-known and the hot, and harder for the rest? How do you break in to funding today in a global pandemic? What do you think on these topics?

Sunil Dhaliwal:

I’ll give you some observations about what I’ve seen and then maybe we can circle back and talk about what I would do if I was a founder in [crosstalk 00:17:44] environment.

Sunil Dhaliwal:

What have I seen? Right out of the gate, everybody stopped. Everything just stopped. I think every one of us that had lived through 2001 and 2002 or 2000, 2001, and then again, lived through ’08, ’09, we immediately pulled out our playbooks and we’re like, “Here it is, this is the downturn we’ve been waiting for.”

Jason Lemkin:

This is how you do it, cut everything, the world’s over.

Sunil Dhaliwal:

Like always, I think what we learned is: Every adjustment, correction, problem, is different than the last one. There are some lessons to learn, but for the first few weeks, nobody did anything. Everyone was just like, “Prices are going to come down and things are going to get difficult, reign our cash in, focus on the portfolio.” And that happened.

Sunil Dhaliwal:

Then there was this next phase, where a bunch of people, and Amplify was included, we raised a very small, opportunistic vehicle. It was big enough to go do five or six deals, where we looked at our existing portfolio and said, “These are all great companies. All of these companies probably have management teams that are a little bit more defensive and want to have more runway, and we normally wouldn’t have opportunities to give them capital in any normal environment, because it would be outside investors pushing in and they don’t want to take the dilution.” And we just showed up to five or six companies and said, “If you can take more, we got it for you.” And we closed five or six inside deals in a very short period of time. That speaks to what you’re talking about, which is: If you know them, if you have that relationship and you have that belief and you have that trust, both direction, deals got done.

Sunil Dhaliwal:

People in the market [inaudible 00:19:25] wanted capital, and people who were [inaudible 00:19:27] capital [inaudible 00:19:28] like, “I want to go focus on the best assets that are out there.” I think you saw this all the way up to Silver Lake Partners writing a huge check into Airbnb saying-

Jason Lemkin:

Exactly, that’s the canonical example. As long as I got a great deal, I’m in.

Sunil Dhaliwal:

Yeah. It wasn’t even a great deal, well, they got a great deal, but I think a lot of people looked at it, and we talked about this too, was: When I remember past downturns, past downturns didn’t create fire sale prices for amazing companies. Amazing companies went from being horrendously impossible nosebleed valuations to like, all right, I guess I could live with that.

Sunil Dhaliwal:

Getting into a great company with an, I guess I could live with that-

Jason Lemkin:

Still a win, it’s a win. Yeah.

Sunil Dhaliwal:

I think a lot of people started behaving that way. We did this big survey of all the growth investors, the C round, D round investors, thinking about this for our own portfolio saying, “What are you going to do?” and it very quickly came down, this dynamic you described, which is: For management teams that we’ve met before, we’ve had that face to face, we’ve seen the business over some period of time, those are the companies that we’re going to feel comfortable running a virtual process. Then we asked a question like, “Could you ever do something entirely over Zoom, from first meeting to close?”

Sunil Dhaliwal:

Everyone was like, “Oh, hell no.” Even the ones that were like, “Oh yeah, we would do that.” We asked the question like, “Okay. Has that happened in your own portfolio? Any new investors showed up for your companies?” And they’re like, “Oh, no, it hasn’t happened to us yet, but maybe we would do it.” That was maybe April, May, we’re talking about, I was certainly surprised by the fact that even that has gone even more liberal than that point of view in July, August, September, where it feels like, when the public markets rebounded and [inaudible 00:21:18] activity took off and the capital interest in the innovation economy was as strong as it ever been, I think all those same dynamics came back.

Sunil Dhaliwal:

I do think it’s still harder to raise capital with people you haven’t met before. No doubt about that. Whereas, at the beginning of COVID, the answer was: No chance in hell. I think it very quickly changed over the summer to: If you’ve got a good business, your business will speak for itself. And people are getting more comfortable with the idea of writing those checks to people where processes are virtual than they ever have. Just like a whole bunch of people said, “I’ll never hire remote.” And all of a sudden they’re like, “I guess, I could hire remote.” I think you’re seeing the same thing in some investor behavior. The takeaway for founders, maybe the most salient piece here is: Never worry about getting to know folks too early. Getting to know folks doesn’t mean you got to walk them through slide deck after slide deck, and turnover pipeline and customers. There’s a different way to get to know people where they want to know who you are too.

Sunil Dhaliwal:

They want to stay in touch. They want to know that you think you’re going to add four customers the next quarter. Then, when you come back to them N number of months later and you didn’t add four customers, you actually added six, there’s nothing that inspires more confidence in a prospective investor than you telling them where you are and what you’re going to do and then seeing you go do it. That is more valuable than it’s ever been, because you can’t rely on: I’ll get a whole bunch of people in a room really quickly and we’ll all just decide on something.

Jason Lemkin:

It’s a good insight. No one likes to get spammed, but I love getting that monthly investor update from a founder I met, whether virtual or not. That great investor update, and you see it. That was always a winner before COVID, but you’re right, everyone should do that. If your post-metric and you meet whoever, Sunil or Jason or Eileen or Hunter, whoever, send that monthly investor update. They can unsubscribe. Maybe don’t do it in MailChimp, I love MailChimp, do it yourself and send it, but they’ll tell you if they don’t want it, but they want it. They’re going to open that email, send it in Mixmax, they’re going to see it. It’s wonderful. Even over three or four months, it does build a relationship, even if you didn’t see them in person. That is the best hack of all. And send that monthly update the first of each month with confidence, and it’s going to get opened.

Sunil Dhaliwal:

I think there’s another piece to just sending metrics, which is: Don’t be shy about setting some expectations, making some claims about where you’re going to go. [crosstalk 00:23:57] really you’re going to say, “In the next such period of time, we confidently feel like we’re going to get these things knocked down.” Just the simple act of telling someone what you plan to do, and then actually, in hindsight, having delivered it, there’s no greater credibility builder, to me, than when somebody actually is willing to put those stakes in the ground and then delivers what they say they’re going to do. Because, it’s very easy to have a bunch of arrows against the wall and then go, “Oh yeah, that was our target.” Paint some bulls eyes around all those arrows hit. But, when you actually go out there and say, “This is our plan.” and then you deliver 90% on this metric and 120% of that metric and are right on target on this other metric, as an investor, you get a lot of confidence that what you’re telling me is not a story just meant to get me excited and show up, but you’re actually showing me that the business is doing what I said it was going to do. That’s a huge deal.

Jason Lemkin:

Yeah. That’s a good insight. A related point, and then I want to spend our last couple of minutes talking about Datadog in crowded spaces, but the other reminder, based on what you said, and why I love that monthly email, we, before I had invested, when I was a founder, sometimes I feared I was almost wasting VCs’ time. I took my time seriously, but you’d roll up to Sand Hill and you’d wait for the receptionist, and he would get you a Perrier, then you’d wait 20 minutes in the conference room and plug in your laptop, it wouldn’t work. I felt like I was wasting, a little bit, wasting Battery’s or Sequoia’s time, but that’s wrong.

Jason Lemkin:

If an investor that has been doing this more than one week takes their time out to spend an hour with you, even a half an hour, they give a shit, they care. They’re going to remember that meeting, probably. If you send that monthly update, there’s going to be a connection. No one’s wasting their time out there. The VCs do care. They may only care about you as an object to make money, but remember they care. No one’s wasting their time out there. That meeting never happened, that Zoom is going to end in five minutes if they don’t care. So, take advantage of that. Show that you hit the goals you set out and the interest will remain.

Sunil Dhaliwal:

I completely agree with that. One of the great tools in the entrepreneur’s favor is: The update is asymmetrically in your favor from a time invested point of view. I can write the update once, I can deliver that to 25 people rather than taking 25 meetings, and of those 25 people, if 10 of them never open it, god bless, you just figured out 10 people not to spend a minute with.

Sunil Dhaliwal:

But for the 15 that do, and the five that write you back, and the two that are like, “This is really cool. Let’s catch up in email.” What a fantastic way to optimize your own time and your own outreach to really think about who gives a shit. Because, I always tell people, this is a truism I throw around a ton and I believe it’s true of all sorts of early stage fundraising is: It is a search problem, it is not a sales problem. You rarely are going to go in and pitch your heart out and overcome objection over a projection to get someone who doesn’t fundamentally believe, or isn’t fundamentally primed to be excited about you to overcome that inherent bias to the negative. But, what you’re really trying to do is identify the people that gravitate to what you said, who are like, “Oh, that really makes sense. I really love that idea. Tell me more about this.”

Sunil Dhaliwal:

You know those interactions, you’ve been in them. As an investor and as a founder, I’m sure you’ve been in these meetings where you get this dialogue. There is nothing more important, I think, in a fundraising process than getting to that moment. [crosstalk 00:27:38] engagement. If you think about how you get to engagement, man, it sucks if you’ve got to do 25 one-hour meetings with, in pre-COVID days, the travel time and the laptop set up time. But, right now, if you’re keeping a whole bunch of people drip-fed and updated on your company, you get way more efficiency in your time to figure out the three or five or seven that actually give a darn. That’s way in your favor as a founder, and people should not be afraid of using that as a tool.

Jason Lemkin:

[inaudible 00:28:09] it’s way in your favor. In this digital world, you can… There’s so many signals, if these investors you keep warm, are interested. Even just opening that email. So, you’re right. It’s so much better than schlepping up and down or flying to the Bay Area. Losing a week. I may meet some customers, but boy, I’m going to fly out from Belgium to meet a bunch of [inaudible 00:28:28], you blow 10 days doing that.

Sunil Dhaliwal:

[inaudible 00:28:30] do you do with a week of your time? I had seven VC meetings. That’s insane. You killed a week.

Jason Lemkin:

Yeah. I couldn’t meet with my customers because I had to do… Oh my, I want to cry when I hear that. All right, last one. Let’s talk just for a minute about Datadog. The reason I want to talk about Datadog is you invested early, and there’s a lot of great things about Datadog. The reason I find it interesting as a case study and we highlighted it at our first SaaStr Europe in Paris we did it, with Olivia, but it’s such a beloved product. Obviously it’s done incredibly well in the public, and better than we thought.

Jason Lemkin:

I remember talking with some folks right before Zoom went public and they were thinking it would be worth 4 billion and it’s worth a little bit more today. We can check right now. I don’t know what the expectations were on Datadog. The growth is top 3%. This one is another one that outperformed. But, what’s fun about both of those is they’re iconic. If you talk to developers, especially we talked to folks that have put significant products into production. That are stressed about. The next generation loves Datadog. Don’t they? They just love it. All the founders, all the CTOs, they love it, but yet it’s a crowded space. It is a crowded space. Certainly, probably when you invested. So, what are the learnings for founders, in both winning in crowded spaces, and why did you invest in a crowded space?

Sunil Dhaliwal:

Yeah. I think what’s a crowded space or not, is going to shift based on your perceptions at the moment and the perceptions in hindsight and who do you define as your [crosstalk 00:30:05] and all that stuff. So, let’s continue down the path to answer the meta question, but in a lot of ways, and maybe this is the right answer for the meta question: I didn’t look at Datadog as the most crowded space in the world. What I looked at Datadog as was: These are founders who deeply understand their domain. They have lived this problem, Olivier and Alexi ran engineering teams, and in their context of running engineering teams, they knew the tools that they wished they had, or they had to build for themselves as this emerging thing called the cloud was showing up.

Sunil Dhaliwal:

There was no systems management tools. Basic stuff that they had relied on in the client server world or the end tier world, you just didn’t have those tools. So, they found themselves making them, or at least really understanding what the gaps were. So, it’s a thing that we believe deeply in, which is this founder market fit, this idea that you, as a founder, are in a prime position to understand what the customer needs, maybe because you’ve been the customer, maybe because you’ve worked on similar solutions. That was number one. It really was a bet on individuals that we thought got the problem better than others.

Sunil Dhaliwal:

The other thing was: There was a catalyst. They just didn’t go out and say, “Zoom sucks.” Making this up, the 2020 version. “Zoom sucks. Zoom would be better if it had these three features.” That can be a successful company, but it can’t be as big of a company. What would have been, I’ll make this up: If all of a sudden in 2020, Zoom magically only worked on a desktop. And somebody was like, “I think this video conferencing thing can go way beyond that.” And the catalyst here is like: We think mobile is going to take off. And what if there was no product for mobile, we could go make it for mobile. There was a catalyst there. In the early days of Datadog, the catalyst was really clearly: If you go to the cloud, as soon as you decide to stand up your first cloud instance, all that old tooling, the monitoring, and the performance management, and ultimately the logging and other things [inaudible 00:32:28], it’s gone.

Sunil Dhaliwal:

That entire stack, forget it. If your new world is going to be built off of cloud, you’re going to replatform all of these key building blocks to support you as an ops and infrastructure person. So, not only do we feel like these people have the right answer for what the product should be, but the belief was: There was going to be this poll, that if they got it right, that at that moment people were going to show up, they’re going to flip on their cloud instance, they’re going to go, this Amazon thing’s really cool. What’s the first thing I need to do to make my life easier? Well, I got to have a monitoring solution.” In hindsight, when you think about why it’s bigger than anyone ever has expected, I think there’s two or three reasons. The first is: It’s the best proxy for AWS growth in the private markets.

Jason Lemkin:

That’s a fair insight. It is a proxy. Yeah.

Sunil Dhaliwal:

It is a very good proxy for that. So, they already got so much pull. The second thing, and you highlighted this when we were talking offline about how excited your team was about something like New Relic: They were very smart in understanding a very consistent product experience and having a very good relationship with a buyer that allowed them to extend into a few other product categories [inaudible 00:33:39] natural extensions. So, monitoring went to APM. So, when they launched and went after New Relic, it’s been a huge hit to the New Relic market cap and a big opportunity for Datadog. Then they went after logging with Splunk. Another reason why they’ve grown is not just because the market size is so big, and the market growth is so big in cloud, but because they have found really nice ways to extend into adjacencies. This is a big company move, this is not a small founder move. Small founders should not be thinking about this in the first couple of years of their company-

Jason Lemkin:

Sure. But everyone gets there to build a billion [inaudible 00:34:16], everyone has multiple products, we’ve learned. So, you’ve got to do it.

Sunil Dhaliwal:

Then, I’d say the third thing, which was absolutely unclear at the time, or unknown, is: You just have founders who turn out to be execution animals. They are just really, really good executors and hires and product thinkers. They wake up and they fight to win every single day. Datadog is a very execution oriented culture and they have taken the hand of cards that they were dealt and did every single thing right, not everything, but they’ve made the right call, made many more times than they have made the wrong one, and that’s… I don’t know what their market cap is now, 30 something billion dollars, it’s an insane amount of money, especially for guys that probably raised their seed round at something like a four or five cap. They did every single thing right along the way in building a really efficient, scalable business.

Jason Lemkin:

Yeah. And maybe we could break on this, this is good… I forget what term you… That insane commitment, it just turns out that’s what builds the decacorn and the unicorn. It’s not enough, but it’s next level. If you want to go join a CEO or a company, look for that insane commitment. It really is true. It’s not a trope. And you talk about, I think your term was founder product fit, or what’s the term that you use?

Sunil Dhaliwal:

Founder market fit.

Jason Lemkin:

I like it. But on the other hand, I almost feel like it’s table stakes. Like I just know. If you don’t deeply understand your market, even if you weren’t an engineer in the space, if you don’t deeply understand the market, at least after 10 customers, it’s a no. So, I’m with you. But, if you have to combine that with this insane level, next level commitment. It is so hard.

Sunil Dhaliwal:

I think there’s a difference there between when you’re writing a pre-product, pre-customer check, and when you can actually talk to customers. Because you’re right. Our mutual investment in [inaudible 00:36:25] is not a place where [inaudible 00:36:27] and Alex we’re like, “We have lived the customer support problems so deeply and insanely.” But once they got to the point where they had enough interactions with customers, they understood it as well as anybody.

Sunil Dhaliwal:

Before then, I would say there was a question as to how perfect they were for that domain, and they’ve really built that experience. But, I think a lot of times when you’re looking at particularly really technical products, putting yourself in my shoes, particularly really technical products, and very early, before you even have a beta product built, you do have to have a really deep level of confidence that those founders really have an understanding of the customer they’re going after and the problem they’re trying to solve, for certain domains. At least for us, that has been a big recipe for why some of these companies have worked extremely well, and in some of the ones in the portfolio that are still growing, why we think they’ve got this unfair edge. That is our approach, it’s not everyone’s approach. There’s no monopoly on ways that you can be a successful [inaudible 00:37:32] one learning over 20 something years [inaudible 00:37:35]. So yeah, for whatever it’s worth.

Jason Lemkin:

Well, Sunil, this was great. We went really long, but I learned a lot. Congratulations on the new fund, no pressure. You only have to turn the 275, plus the hundred, let’s see, let’s do some quick math. If you want a top decile fund, how many unicorns did you… We don’t even want to think about how many unicorns do you need in that fund.

Sunil Dhaliwal:

We got to return a billion, if we’re owning 15%, so here’s to creating somewhere like eight plus billion dollars of market value.

Jason Lemkin:

Eight in one fund alone. You have to have eight unicorns to really hit the top decile performance. [inaudible 00:38:11] it’s so much easier to be an investor than a founder, but eight unicorns per fund is not easy. It is not easy. All right, with that, we’ll break. Thanks for taking the COVID break, Sunil. We’ll chat soon.

Sunil Dhaliwal:

Awesome talking with you, Jason.

Jason Lemkin:

Bye.

 

 

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