Join Qualtrics Co-Founder and CEO alongside SaaStr Founder and CEO Jason Lemkin as Ryan reflects on the survey software maker’s acquisition by SAP this year. The company was acquired this November in an $8B deal ahead of its planned IPO.

Here are some of the key points:

  • How targeting the academic market prepared him for enterprise
  • Why press isn’t something he stressed when scaling and neither should you
  • His strategy for entering into other markets and addressing TAM with investors

Also, don’t miss out on the lowest prices EVER on SaaStr Annual 2020 tickets.



Ryan Smith–  CEO and Founder at Qualtrics

Jason Lemkin – CEO and Founder at SaaStr

Opening Video: I’m Ryan Smith, R-Y-A-N S-M-I-T-H, co-founder and CEO of Qualtrics. What we do is we help companies close the experience gap. We wanted to automate research that was being outsourced and then we wanted to take it to the world. We’re operating out of the basement and closing Sabre and Travelocity for $75,000. And we’re sitting at the airport going, “Do they know that first of all I’m really young, second, that I’m in a basement?” The one thing that my father my gave me, number one is there’s nothing he wouldn’t do. And our big guest of the morning just pulling off a big deal, SAP CEO Bill McDermott and Qualtrics CEO Ryan Smith. I’m more excited about the future than I have been about the past. We’re just getting started. We’re already to the point where most companies never get to. It’s going to change how everyone thinks about cloud and SaaS for ever.

Jason Lemkin: Let’s welcome Ryan Smith.

Jason Lemkin: Thanks for coming back.

Ryan Smith: Thanks for having me, man.

Jason Lemkin: Good to see you.

Ryan Smith: Good to see you. That picture of me in a robe, that’s way back.

Jason Lemkin: When was that?

Ryan Smith: You’re digging deep.

Jason Lemkin: Digging deep? Well, when it’s on YouTube, it’s on YouTube forever. I think it’s a problem.

Ryan Smith: That’s for sure. That’s for sure.

Ryan Smith: This is impressive, man.

Jason Lemkin: It is?

Ryan Smith: You’ve come a long way.

Jason Lemkin: Now it’s pretty big, isn’t it? SaaStr is getting there, isn’t it?

Ryan Smith: SaaStr has arrived.

Jason Lemkin: Yeah. All right. So we added the slide last minute, literally backstage before he came on, but Ryan and I did an event traction with Lloyed Lobo in like 2015, and it was probably in the upper right. This guy who turned down … Does that sound about right?

Ryan Smith: Yes.

Jason Lemkin: 500 million?

Ryan Smith: This was pretty funny stuff, but yeah, that’s-

Jason Lemkin: That was 2015. Last year you were kind enough to join us last minute, and Qualtrics was worth a stunning $2.5 billion, and then you blink an eye it’s $8 billion.

Ryan Smith: That’s what happens in SaaS, right? The whole world’s waiting for you to just let gravity set in and fall, and if you can just hit that next checkpoint without crashing, it’s compounding. It’s like compounding interest.

Jason Lemkin: That’s what we’re talking about [crosstalk 00:02:28] right? And how long did it take you to figure that out? [crosstalk 00:02:31].

Ryan Smith: Probably about 17 years.

Jason Lemkin: 17 years? It’s funny, we were laughing a little bit about this backstage because it’s literally the same headline, the same headshot done four times, but it is also representative of compounding, right? You do it right and you can rewrite this headline in a few years and the number goes up.

Ryan Smith: The backstory here is we turned down an acquisition offer for $500 million in 2012. And we were about a $50 million sales run rate, but I’d never done a media interview.

Jason Lemkin: Oh, I see.

Ryan Smith: So the first media interview or press release we did, we said, “Hey, we’re raising a series A round, and Julie Bort from Business Insider got on the phone and was like, “How old are you?” And I was like, “Well, I’m 30-something years old.” She was like, “Do you know how much money that is?” I was like, “Well, yeah, it’s $500 million.” “You just turned that down?”

Ryan Smith: And so she literally wrote that article, and she scared me, because I had doubts. I was like, ‘What am I doing? I raised a series A, I turned down the money.’ So when we were going out to raise, we raise at a billion our next round, the first person I called was Julie and I was like, “Hey, you remember when you told me that I was crazy and this is what happened? Here’s a billion.”

Ryan Smith: So when we raise at two and a half, first phone, call Julie again. When we sold, first phone call, Julie again [crosstalk 00:03:46] And she, to her credit, literally just put the same headline on Business Insider.

Jason Lemkin: Now, when they make you CEO of SAP, are you going to call her first or [crosstalk 00:03:56]-

Ryan Smith: Yeah. 100%. 100%.

Jason Lemkin: Right. That’s at least eight years out.

Ryan Smith: Yeah, yeah. I’ll be translated to German.

Jason Lemkin: We’ll talk on, but you’re obviously super inspirational here. Did they already say Ryan’s going to be the next CEO of SAP? They say this when all the deals happen.

Ryan Smith: They don’t really say that.

Jason Lemkin: They don’t say that at SAP?

Ryan Smith: I don’t ask, and I’ve never tried to be. I didn’t even want to be the CEO of Qualtrics, but my brother, we’re sitting in Sequoia’s office, we’re both there, and like someone’s gotta be the CEO. And I was like, ‘Actually I think there’s a bunch of companies that have half a CEO right now.’ [crosstalk 00:04:32] multiple companies. And my brother, no one’s talking, and the whole Sequoia partnership’s like, “Well, which one’s it going to be?” And Jared’s like, “I don’t do media. I’m out.” And he doesn’t do media, maybe one media article. And so that’s how I became CEO.

Jason Lemkin: And what did the deck … Actually, we might have that on the next slide, let’s look. This is back then. This a little earlier than that. Let’s go to this. You went to Sequoia, because I haven’t heard this story.

Ryan Smith: Yeah.

Jason Lemkin: And you’re raising … What was the round? 500? [crosstalk 00:05:02] a quarter million?

Ryan Smith: Yeah. Yeah, we raised $400 million, $350 million with Sequoia and Excel.

Jason Lemkin: So you’re going in, you’re at 30-something million run rate. And the team deck doesn’t say who the CEO is?

Ryan Smith: No.

Jason Lemkin: What does it say?

Ryan Smith: It just says we’re the founders.

Jason Lemkin: The Smith brothers?

Ryan Smith: The Smith family. Yeah. That’s it. We called ourselves a team of four, actually, who operate and make decisions, and it’s just how we rolled. Jared started, this is in 2002, he’s got the Antonio Banderas look going on there. And then he took off to Google, which was really weird.

Jason Lemkin: [crosstalk 00:05:34] did it break your heart or were you-

Ryan Smith: No. I don’t think we thought we were going to do a startup. I remember debating for a week and a half whether to buy that sign there, it was $50. And my dad had operated in and had a massive bust.

Jason Lemkin: Yeah. He had scar tissue.

Ryan Smith: It’s major scar tissue.

Jason Lemkin: I [crosstalk 00:05:57] a little myself.

Ryan Smith: Yeah. I mean in most people who haven’t been through that, it’s not fun when every single budget’s cut. And you don’t matter, and we operate. And so Jared took off and he ended up running Google China and a third of the world’s Internet search. And then I convinced him to come back in 2009, and the rest is history. We’ve been working together ever since. We’re working together now.

Jason Lemkin: One thing on the slide, because we’ll talk about it in the next one. What is survey product [crosstalk 00:06:28]-

Ryan Smith: That’s who we were back in the day. We were the survey pros. And we won the domain name, but we got in a lawsuit.

Jason Lemkin: Oh, somebody had the trademark already?

Ryan Smith: Someone had the trademark on it, but they didn’t even know how to rule [crosstalk 00:06:44] yeah, yeah-

Jason Lemkin: … the survey pros.

Ryan Smith: And so we had to switch and we chose Qualtrics, and it was the best thing we’ve ever done because everything we ever wanted to do, pivot the company or get away from surveys, which in 2007 were like, “Whoa, this is way bigger.” We could do it under the Qualtrics umbrella.

Ryan Smith: And so everyone would get after us and say, “Well, it’s not descriptive. I don’t know what it is.” Reality is people don’t know what anything anyone’s creating is. For the first 10 years when we didn’t do one media interview and we got to 50 million in sales. Think about that. Not one media interview, not one press release. Then I feel like we put on a clinic the last six years. I’ve been on CNBC 13 times, been in Forbes, Fortune, you name it.

Jason Lemkin: Yeah. And what was the goal of it?

Ryan Smith: Just you were supposed to do it, right? You were supposed to get out there. You could recruit, you could do fundraising rounds, you could do all this stuff and then you would have arrived. We closed the deal with SAP. I get on the phone that night. It’s myself and Bill and all the investors, first phone call. “Hey Bill, you just spent $8 billion on a company that no one’s heard of.” And I was like, ‘What the hell? 300 articles about our IPO out there and no one’s heard of us.’

Ryan Smith: And so I think that as founders, and it might be helpful, there’s this whole rationale of fundraising and marketing that you’re going out there so people will know who you are. They’re not going to know who you are. So just go build a good business. You’ll be happier.

Jason Lemkin: But it does help for recruiting and other things as you scale, doesn’t it? You don’t think so?

Ryan Smith: I think so, I think a little bit, but I think it’s overrated. I wouldn’t raise a round just because there’s this hope that people know who I am.

Jason Lemkin: Yeah. What about bigger partners and things like that? Did it help to have that impact?

Ryan Smith: Ish.

Jason Lemkin: Ish? I’m just continuing to be a student of brand. You have a face transition, you have a mini brand, and then you have a brand, and then once you have a brand investing in it, it actually is more important than we realize. We think it’s silly in the beginning as founders. Right? But then this Qualtrics brand is so important that what you’ve got to think about, what can you do to support it?

Ryan Smith: Yeah. In brands, absolutely. It’s worth every ounce of investment. But I think I wouldn’t make decisions solely around that. It’s like making your whole life decision around avoiding taxes. It’s not a good strategy. Right? So you’re going to have to do it, it’s important, but at the same time, it’s the same with brand. Go build your brand. But I think brand and marketing are different, where I see a lot of companies raising around and plugging their cap table into the marketing engine.

Jason Lemkin: Yeah. Well, that’s happened today.

Ryan Smith: Yeah. Which is like, okay, that campaign was worth 5% of your company? When’s that ever been effective?

Jason Lemkin: Well, wait until you’re at a scooter company, my friend. I have a new set of skills that you’re not-

Ryan Smith: I run over those scooters. I haven’t really run a scooter company yet, but maybe in the future.

Jason Lemkin: So this is a fun chart. I stole a bunch of slides from Alex Clayton at Spark Capital from his Medium posts. Thank you. But I think this was from your perspectives, right? And we could talk about this for the whole session, but Qualtrics is, I still consider it a bootstrap company in my definition, because bootstrapped is do you hit escape velocity without capital and whether you’re like Qualtrics or Atlassian or others and you choose at escape to raise money for whatever reasons, secondary acceleration. But you did it the hard way. Right?

Jason Lemkin: And so now I’m troubled reading, squinting, but it actually wasn’t a rocket ship in the early days. So it took him 10 years to get to 30 million in revenue. And the first couple of years was as close to zilch. Right?

Ryan Smith: Yeah. I mean we targeted the academic market, which is a horrible business model. You have PhDs who are all power users. They can really spend all day in your system because they have nowhere to go.

Jason Lemkin: And what’s their budget? [crosstalk 00:10:40].

Ryan Smith: Zero. They have no money. So you’re not running your MBA exercise and saying, “Hey, let’s do a startup. Let’s get our swag and all of our backpacks and go target the academic market who’s not going to pay us anything,” and no one would ever invest in that period of time. But it’s actually funny because in hindsight, it was the most brilliant thing that we did. And everywhere I go, and we are on the road show and everything, it was “Wow, that was the most brilliant model I’ve ever seen, because millions of academics use Qualtrics and then took it with them into the workforce.” And that’s happening every single year.

Ryan Smith: And so as we grew, we actually learned to develop great products in that phase because if you’ve got to develop a product where a PhD or researcher or calls in, imagine the support system you’ve got to have on the other side to support Dan Ariely who is a behavioral economist and he’s calling in because he’s running his projects on Qualtrics, or Dan Pink, the author, and they’re all doing that. They’re really smart people. So your product has to work. And that was what prepared us for enterprise.

Jason Lemkin: Now I want to talk, there’s a lot of benefits to doing this way. We’ll talk about dilution and capitalism [crosstalk 00:11:59], because it’s a topic we’re both interested. But let’s step back for a minute. We can talk about burden lime and all these funded company, we can do it in SaaS. Everyone would love to bootstrap. If it were simply a binary choice, shall I sell 90% of my company or zero? I think we can all make the same choice.

Jason Lemkin: But looking back, you started in 2002, and it was a terrible time to start, but also good because there weren’t 10,000 companies each year out of Y Combinator and EF and others. Would that playbook work today? The question is do you have enough time to go out in the desert for three or four years if there’s 48 other survey pros or Qualtrics out there today?

Ryan Smith: I think if you look at this, this is a great way for those who are new and the tech, if you look at 2002, we were in the shadow of the .com. Everyone was still [crosstalk 00:12:48] anxious, right?

Jason Lemkin: Yeah.

Ryan Smith: Then we had like five years of really good time, and then it hit again.

Jason Lemkin: Hard.

Ryan Smith: Hard.

Jason Lemkin: Hard.

Ryan Smith: And everyone who had raised capital, they were all in the fetal position. And we were bootstraps-

Jason Lemkin: Everyone stopped hiring salespeople.

Ryan Smith: Yeah. Which never happened. [crosstalk 00:13:09].

Jason Lemkin: Hiring salespeople-

Ryan Smith: Ever. Right?

Jason Lemkin: Yeah.

Ryan Smith: And so we went through and it was my father and my brother, they’re like, “Hey look, we’re not doing this if we’re going to have outside bosses.” And actually the amount that we would have given up was, it was expensive. I mean, I’ll just tell you from 2009, ’10 and ’11, every year we waited, our valuation went up $100 million back then.

Ryan Smith: And so basically the longer you can spread it out, the more money you end up with for your employees. And aside from the financial side, I will tell you this, is your cap table is your number one asset as a founder and as a company. If my kid was joining a company, the number one thing I would say is, “Hey, great, that’s a great market. This is all what’s going to … What’s the cap table look like?” Because I’ve watched in the areas that we compete in, I’ve watched really smart people, really smart founders just get lapped by us because they had a bad cap table.

Jason Lemkin: And you say that, but let’s dig in for a second, because what do you really mean by that? You mean overwhelmed by too much capital? Because there’s all these stories out there, but when you really [crosstalk 00:14:28]-

Ryan Smith: If we would have had capital, we would have never gone after the academic market. Actually, sometimes, an influx of capital can make you take the shortcuts, and you need the scar tissue to run a business in the out years that you can only get from the suffering in the in years.

Jason Lemkin: Well, that is true.

Ryan Smith: Right? So we know as a company that we could pivot from the academic market to the corporate market. We couldn’t buy it. We had to pivot. We had to go through and stand this up in an efficient way that worked in scale. So when we got to 2016, it was in our DNA. We had it, we knew we could innovate. We knew we didn’t have to follow the rest of the markets that we’re going this way. No, we’re going that way. Why? Because we didn’t follow ’em in academia. We didn’t follow ’em when we went into corporate.

Ryan Smith: And then when we went into enterprise, we did it a different way. If we would have just bought our way through, I don’t think we would have had that confidence or DNA to pivot the whole company and create this new category of experience management, which is really what SAP wanted.

Jason Lemkin: Yeah. But let’s step back because there’s an interesting thing that a lot of founders think about, so I should know this. So Qualtrics doing plus or minus 500 million at the time of the deal, right?

Ryan Smith: 500 million in sales. Yeah.

Jason Lemkin: Okay. What percent now is from that academic market, that original market, I should have pulled this up and read-

Ryan Smith: We don’t release it, so you wouldn’t have found it, but it’s still a heavy, heavy piece of the-

Jason Lemkin: But it’s a minority, right?

Ryan Smith: Yeah. It went from 100% of the business to 10% of one [crosstalk 00:16:02].

Jason Lemkin: 10%.

Ryan Smith: Yeah.

Jason Lemkin: So the question is, this is a question for founders because you’re talking about this, when you’re doing well in a small market, it can be exhilarating but also frustrating. You see these other TAMs, you look around and you see Dropbox and folks … How do you know when to stick with these smaller markets and dominate it versus move across this chart? How did you know-

Ryan Smith: Well, it’s a timing thing. I mean, the academic market is not one that you look at and you say, “Hey look,” I mean, what do you do? Look at Blackboard and be like, “Okay, that’s the holy grail?”

Jason Lemkin: Yes.

Ryan Smith: Right? And we always had a goal that whatever market we were going into, we wanted to be number one at. And we wouldn’t go into the market if we didn’t believe we could be number one.

Jason Lemkin: That’s the question. Be number one. Yeah?

Ryan Smith: And if you look at what we’re doing right now with the experience management platform, customer experience, we believe we’re going to be number one, we believe we are. Brand experience, measuring people’s brands, employee experience, it’s been $10 billion in acquisitions in that space and we’re kicking butt. We’ve already created a unicorn in both customer and employee, and then product. And we’re doing it all on one single platform instead of all these different systems. And so we won’t go into one of those verticals if we don’t believe we’re going to be number one and we’re having real conversations with ourselves. We’re not drinking our own Kool-Aid saying, “Hey, we’re going to go do it.” No, literally can we be number one? And we went into employee experience. I was like, “I don’t know if we can be … There’s been $10 billion worth of acquisitions. What are we going to do that they missed?”

Ryan Smith: And sure enough, we’ve had two of our competitors sunset all of their technology and move everything over to Qualtrics, which if you would’ve told me three years ago-

Jason Lemkin: You can’t predict that, right?

Ryan Smith: Can’t predict that. And so I think it’s just plowing away and staying focused. We had a goal to focus on 250 universities, and every time I’d call my brother, when he was at Google, he’d be like, “Ryan, you’re all over the place. Every time I talk to you, you want something different. Do not call me unless you’re going to talk about the 250 universities.” And he literally put me in the box. And guess what entrepreneurs, they’ll get out of the box. So I got to 250 universities. It took two and a half years. And once that happened we hit the tipping point and it went. But I see the same thing now.

Jason Lemkin: So in 250, what was the revenue roughly? Just try to remember back then.

Ryan Smith: Like 18 million bucks.

Jason Lemkin: 18 million. [crosstalk 00:18:16] So let me roll out, because founders struggle with this, their TAM in the early days. Let me get your opinion. You can pick any AR number you want, but if you’re at a million in revenue or two million, and you’re growing double digits, is your market too small?

Ryan Smith: A million in revenue?

Jason Lemkin: Growing 10% or more a month? I mean, if you’re tripling or quadrupling, should I worry about my TAM, if I can go from one to three or one to four in a year? Does it matter?

Ryan Smith: No. I mean, look, I always look at those young companies that if you’re not doubling every year, something’s wrong.

Jason Lemkin: Yeah.

Ryan Smith: Right? So if you’re not doubling your market every single year, that’s what we did. We went from one, one and a half to three to, to six to 12, and that was my goal. And we always hit it. But there were times where we could have grown faster if we would’ve executed better. So trying to understand the execution or the market, what I look at in the market is like, okay, I just sold Kellogg Business School. How many Kelloggs are there? How many are globally? [crosstalk 00:19:12] What’s it going to take to go through-

Jason Lemkin: A small TAM.

Ryan Smith: … let’s say it’s a TAM, and then where are the adjacent markets? But the problem with TAM, like I’ll give you a great example. We went in the academic market. I said, “Whoa, we’re selling a research platform to a university. Let’s go to the CIO.” CIO was like, “Yeah, this is cool,” but wouldn’t buy it. I was like, “Well, let’s go to the institutional research department.” Their institutional research department was like, “Yeah, we know ‘research’ is in our title but we’re not going to buy it.” And I’m like, “Whoa, this doesn’t make sense. Let’s go to the business school, because they got all the money.” So then we went to the business school and then they wouldn’t buy it.

Ryan Smith: And I’m like, “Three months, six months, nine months, I’m already nine months into this program and having found the buyer yet. It’s rinse and repeat.” So then I called faculty members in the business school. Well, they bought it, convinced the department to buy it, convinced the business school to buy it, then we got institutional research and then I show back up to the CIO and I’m like, “You want to do this the hard way or the easy way?” And then we sold all the universities.

Ryan Smith: So part of the TAM problem is you would’ve looked at that CIO and not realized that you could have gone all the way up through, and that’s how it happened. And I think Excel and Sequoia totally shorted our TAM.

Jason Lemkin: I bet. Right? I bet.

Ryan Smith: Yeah. 100%.

Jason Lemkin: Yeah. It’s a [crosstalk 00:20:31] market.

Ryan Smith: What I would ask, the question is, is the TAM growing and at what rate?

Jason Lemkin: Yeah. Or can you redefine the TAM based on what your software does?

Ryan Smith: Yeah. And then what are you going to get? Because people are like, “Oh, it’s a $50 billion research TAM.” And I was like, “Yeah, but Nielsen isn’t going away.” Right? So it’s like, just how much of that are you going to get? When I went and presented to the VCs, I was like, “Look, here’s the TAM. I don’t care about it. This is how much we’re going to own.” And I got it from 50 down to like a billion and say, “Hey, this is realistic.” And they’re like, “Wow, no one’s ever present it that way.” I was like, “Well, what you’re going to present to me isn’t going to be right.”

Jason Lemkin: So you can win a TAM argument with VCs is learning, right?

Ryan Smith: Yeah. I mean, look, everyone wants to know what VCs care about?

Jason Lemkin: Yeah.

Ryan Smith: Cash. It’s the universal language. You got cash, they’ll invest in you.

Jason Lemkin: So this chart I love, but I want to hit some other stuff unless you want to talk about this nice growth here. We can hit some other fun things in terms of [crosstalk 00:21:34]-

Ryan Smith: I mean … Yeah. It’s compounding interest and the whole world’s sitting back, like I said, waiting for gravity to set in and when that’s going to flip, and if you can maintain, I mean, we grew it 47% last year, 500 million in sales. So everyone’s like, SAP paid a lot of money for Qualtrics, I was like, “Well, did they?” [crosstalk 00:21:53] Fast forward to-

Jason Lemkin: In two years it’ll seem cheap, right?

Ryan Smith: Very cheap.

Jason Lemkin: I think it’ll seem cheap here. That’s the magic of compounding. Let’s hit that in a minute. I want to get one thing in here and then let’s talk a little bit about MNA, make sure we have enough time, but this is the SAP sales? Sales are [crosstalk 00:22:09]-

Ryan Smith: Yeah.

Jason Lemkin: … 100,000 strong? One million sales reps? How big is this SAP? And how do I get access to them?

Ryan Smith: Yeah, yeah, yeah. So one of the things, it’s interesting is, I didn’t know a lot about SAP, right? I knew every other CEO, I knew what their companies could do, I’d recruited people. But when I met Bill, it was like, “Hey Ryan, I’m really passionate about your vision and what you want to do. I want to go and power that and we would love to have it.” And I’m like, “Well, what do you bring to the table?” And he’s like, “Well …” “Outside of a check, what do you bring?” And it was like, “I bring the ability to go to market globally.” I was like, “Well, we have a good engine.” They’re like, “No. We have an engine.” And I was like, “Okay.”

Ryan Smith: So two Thursdays ago, I was in Vegas at our sales kickoff for North America and there was 8,000 sales reps in the room. And I was like, “Holy cow.” I got on stage and it’s like four times the size of this. And I was like, “Wait, all of you are selling our products that we’re developing?” And that was really why we did this. We have this category of experience management. We think the whole world’s going to be competing on experience, and we want to get it out there. Our developers want to develop products that everyone’s going to use. And so this was a compelling event, and everything’s been as advertised so far.

Jason Lemkin: And related to that, this is a topic that’s probably more fascinating to me than some folks, but this is an incredible sales force. But how do they sell another product? Do you know the answer to this yet? Because this is what I learned. Sales reps, they can only sell so many products. So you [crosstalk 00:23:36] bolt on this rocket ship, but how do they tack that on to their inventory management system, their ERP system and sell it all together?

Ryan Smith: I think with most companies, this is a longer discussion, but most companies you’re bolting on something here. The cool thing about SAP and Qualtrics is we’re here. So you’ve got ERP, which they’re doing like 70% of the world’s products come out on, but they don’t have something to measure the experience of that product when two-thirds of the products fail. So now they have Qualtrics.

Jason Lemkin: They have an upsell.

Ryan Smith: Yeah. [crosstalk 00:24:06] And it’s part of that vertical, where like 90 million people are on success factors. But there’s nothing to gauge that’s easy for the employee experience. Well now that’s there.

Ryan Smith: So it’s actually out of everything. It’s not like they’re going back to sell [Areba 00:24:22]. It’s right there. And it’s really … This is why we did it because most companies I who had expressed interest, we were kind of the runaway bride when it came to selling us, but most companies, they were one dimensional. They were only marketing, or they were only sales. And SAP has product and employee and then the CRM and everything else. And we’re like, “Whoa, we have product, employee, customer.” And so that worked.

Jason Lemkin: I want to talk about MNA but let’s go back to this slide and talk about something different for a minute. I think people don’t get it if they haven’t done it.

Jason Lemkin: So eight billion, this number doesn’t come out of nowhere, does it? It sounds like a lot of money and it is a fair amount of money by historical standards, but your IPO hit a certain number, right? There’s a comp out there and you’re days away from IPOing, and who’d you have? Goldman, Morgan Stanley-

Ryan Smith: Morgan and Goldman.

Jason Lemkin: Oh, it’s either Goldman or Morgan or Morgan or Goldman. It’s one of them. And they’re looking at the comps and they’re saying you’re worth 5.68234 billion. And this is just a premium, isn’t it? At some level it’s that simple, isn’t it?

Ryan Smith: Yeah. And they did a great job, and we would have had a wildly successful IPO, and we were all in on the IPO. That’s what people don’t understand.

Jason Lemkin: I was watching. I was hearing. [crosstalk 00:25:33] I was hearing from Twitter.

Ryan Smith: I was not running a dual track. I invited 300 of my closest friends to take mortgages on their house to go buy into the friends and family. And then I was like, oh J/K, it was like a pump fake and everyone went flying by and then we later … But that’s just what happened. And we’ve always done unconventional things at Qualtrics, and this was just one more unconventional thing that we did, and we’re going to keep running it, which is also unconventional. Everyone asks me, “Ryan, what are you going to do next? You’re check just came in. What’s going on?” I was like, “My wife only let me do one tech company. This is. I’m either going to have to tell you all goodbye or …

Jason Lemkin: It’s a generational company.

Ryan Smith: It’s a generational company, and my goal was to get Qualtrics everywhere and this is the best way I’ve seen to do it.

Jason Lemkin: So eight billion to some folks on reading Business Insider may seem crazy. It’s not. It’s a premium to IPO as it should be, because if you’re going to take something off the table, you can’t pay under market. Right?

Ryan Smith: Yeah.

Jason Lemkin: It’s actually fairly … But let’s do the second math, which is even less intuitive. Let’s talk about the dilution related to that. So an $8 billion acquisition is equivalent to how big of an IPO?

Ryan Smith: Probably 11 or 12.

Jason Lemkin: 11 or 12. It’s just an interesting thing to think of, and this will also be true with your series B, in your series D, in your series E if you do them, because you’re going to sell a quarter of the company. Well, you’re gonna sell 15% of the IPO plus the other taxes associated with it.

Ryan Smith: Yeah. I mean, I always looked at our IPO as our series D round.

Jason Lemkin: Series D round? Yeah.

Ryan Smith: And everyone’s like, “Oh okay. I’m going to raise here. I’m going to raise here. I’m going to raise here.” There’s two things that are happening that scare me. If I look out at tech and I watch a lot of companies I advise, there are two things that scare me. Number one, founders and companies are not thinking it’s long enough. It’s going to take longer than they think.

Jason Lemkin: All of them, right?

Ryan Smith: All of them.

Jason Lemkin: Everyone.

Ryan Smith: All of them. Nothing we’ve ever done has been shorter than we thought. And we’ve seen this, and I’ve got a great peer group in Utah. And you’re going to hear from Erin’s [Scan 00:27:33], who we’re the same cloth. I mean it’s like 12 years we’ve been going. It takes longer than you think. And everyone’s going to be like, “No, no, no.” And I’m like, “Just watch, because all it takes is one little hiccup in 2007, ’06 and ’08.

Ryan Smith: I mean, look, here’s a prime example. Look at November this year, right? We’re ready to go on the road, the stock market crashes a little bit, we show up in New York, we are the only company on the road.

Jason Lemkin: Oh, is that right? Yeah.

Ryan Smith: Everyone’s stopped. And all it takes is one little hiccup and then, okay, we lost a year. No one’s going to be pumped.

Ryan Smith: The second thing is, you talked about however many unicorns there are. There’s a myth that I didn’t know about and I’ve learned. When you get over $1 billion or $2 billion, there’s not that many companies that can acquire you.

Jason Lemkin: That’s for sure.

Ryan Smith: And they don’t buy all the time. So if I look at it now, SAP is not buying anything for a while. We took all their powder.

Jason Lemkin: They go through waves, right? SAP bought Success Factors and Concur and then digested.

Ryan Smith: And they have to digest. Adobe just by Marketo.

Jason Lemkin: It’s a lot to digest.

Ryan Smith: It’s a lot to digest.

Jason Lemkin: A lot to digest. Right.

Ryan Smith: And you’ve got to go to an outside public board and say, “Hey, this is why we’re going to do it.” So if I’m a founder and I’m running, I need to protect my cap table and say, “This is going to take longer than we think. Don’t get emotional. Just play the long game.” And number two, prepare to go public and be perfectly okay with that and build your company to be able to do that.

Jason Lemkin: How early do you mean prepare to go public?

Ryan Smith: Just know that there’s no other option.

Jason Lemkin: Well, that is an important insight, right?

Ryan Smith: Yeah.

Jason Lemkin: I bumped into like five founders at registration this morning asking me about potential MNA for companies they don’t really know. Like that doesn’t help does it?

Ryan Smith: No.

Jason Lemkin: Prepare your only option, is to IPO. It may take 20 years, right?

Ryan Smith: However long is, if you’re not building a company that can stand up and go public, then mo one’s going to want it anyways. And there’s going to be an outlier to where you’re going to point to and say that. But no one ever really … I mean SAP came in because we were ready to go public. They’re not going to move without a compelling event. And that was great and it worked out for everyone.

Jason Lemkin: Let me just make sure I got this one point because I know we moved it around, but I want to hit that dilution one. Where did we have these statistics? Let me flip through. I think this one didn’t move, but I want to hit your, or we’ll just talk about it.

Jason Lemkin: This one, because I know it’s a passion. Let’s hit these two topics because we’ll run out of time. But somehow this took 17 years, right? And for all intents and purposes, the founders alone maintained almost the majority of the company, put together the rest of the employee board, the team owned the majority of this company, right? And so you have a lot of thoughts on this. And it’s not just raising money. I was on a board with John Doerr a while ago, you know, the legend of venture capital, he modeled 6% dilution a year. And when he tries to figure out what the valuation of … As founders, we think it’s 30 pre, he’s like, “No, no, no, no, no. I got to figure out how long my money is and I’m getting inflated by 6% to 7% a year. Plus he’s doing his own [RATH 00:30:56] and it’s going up. So how do you manage a cap table for the better part of two decades like this?

Ryan Smith: We didn’t give away stock. I know that’s weird here, but we didn’t give away stock till 2012.

Jason Lemkin: Oh, since 2012.

Ryan Smith: Yeah.

Jason Lemkin: And did you pay up more or are you just created the best work environment ain all of Utah?

Ryan Smith: We just created a great work environment, and people had to buy in on the mission, and I think that was part of it. I mean, one of the things that I’m really proud of is that there’s $8 billion and only $30 million of it went to people who weren’t in the building at the time of the transaction. [crosstalk 00:31:29] People got paid.

Jason Lemkin: … to people who weren’t in the building myself and I didn’t sell for right billion. You beat me on that one too.

Ryan Smith: And I see a lot of people and so some people are like, “Okay, why did the founders have so much? Well, we were phenomenal stewards over it. It’s not that we wanted it all, it’s just our job, once again, think you’re going to be doing it forever. Right? Our jobs are to protect that. If you look at Mike and Scott at Atlassian, same model. If you look at Larry and Sergei, if you look at Gates and Allen, it’s the same thing where it’s the one commonality that they have. I wouldn’t even invest in a company if we’re raising a series A, if they didn’t own 20% or more.

Jason Lemkin: Yeah. My rule, they gotta be double digits by IPO.

Ryan Smith: Yeah. 100% because the staying power, and they’ve got to care more than I do. Right? And then I think if you look at it, you might look and say, “Whoa, they’ve raised $400 million. They didn’t put any of it in the company.” Are VCs returned more than, I mean, I think it was a top three in Excels portfolio maybe number one in Insights, they both [crosstalk 00:32:36]-

Jason Lemkin: I know Excel is talking a lot about it on their roadshow.

Ryan Smith: Yeah. Yeah. They took over $1 billion out. So they won. I think the founders did pretty well, and we created more millionaires than any company I’ve seen.

Jason Lemkin: Yeah. This is a learning for me over time. If you’re going long and we’re talking about generational companies, your employees love you, team loves you, but when the capital walks out the door, it’s tough, right? What do you want to have when the exit comes, you want as much of it concentrated on the folks going long, right? So I’m all into, especially for founders, like a decade vesting schedule for founders, right? Because there’s nothing worse than when your co-founder leaves a week in. And you found a way to do that, right? Just to concentrate that on the folks that were there.

Ryan Smith: And what’s interesting is with SAP now, it’s pretty clear that outside of about six or seven people, every single person in that company will make more money over the next five years than they did the prior 17.

Jason Lemkin: So there’s power laws there too.

Ryan Smith: Power laws, massive power laws going forward, which is what’s exciting and why we’re all pretty excited to go do this.

Ryan Smith: I mean, just think about it. I think it’s something to think about, is what does your cap table look like? When we raised our series A, we never thought we were going to raise another round. You’re going to race. Once you’re on that track, you’re going to race. So what does it look like? I see these companies that are like, okay, I’m raising my series F and they’re 150 million in sales plus the IPO round and all of that. If you offered someone in the series C 1% of the company, they might end up with 10 basis points by the time they get there. Right?

Jason Lemkin: Yeah. It can be rough.

Ryan Smith: It can be rough. So you’ve got to manage that carefully.

Jason Lemkin: So just two things I want to hit because we’re running over, but this is always fun. Two things I want to talk about. Maybe not this one. It’s not here. I’ll jump around too much. But two last things. In terms of building generational companies in decades, revenue retention, because I hit on it before, but this is so hard to understand in the early days. At 500 million in revenue, you’re retaining 120-some odd percent of your revenue from the S1, right?

Ryan Smith: Yeah, across 10,000 customers.

Jason Lemkin: 10,000 customers. And again, you said this to me backstage and I brought it up. That meant if you don’t close another customer ever, but you keep your customers happy, you can eventually build a many billion dollar company without closing a deal. Right? And this is the power. And any quick lessons beyond getting that number as high as possible, what are the zen lessons on this net negative turn in this and this positive revenue retention?

Ryan Smith: First of all, you got to have good products that people want to use. That’s the ultimate thing. We can market ourselves, we can say, “Hey, Qualtrics is this or that or it’s over hyped or this or that.” But if you’ve got 10,000 brands and 122% net retention and then the enterprise, it’s 140, that means that you’ve got a solid foundation where people are living and it’s mission critical to them. And we had triple digit growth through 2007, ’08, ’09, and no one knows what’s going to happen in those environments and where they sit on the pecking order of budget cuts.

Jason Lemkin: You didn’t know.

Ryan Smith: No. I didn’t know.

Jason Lemkin: How mission critical are we?

Ryan Smith: I thought we were in trouble. And then I was like, “Whoa, all their outsource money’s now going on Qualtrics and they can do more with less.”

Jason Lemkin: No one canceled the products they really relied on in those days today.

Ryan Smith: People did, but I was amazed. I mean, I’ll give you a great example. Sears was in bankruptcy and in Kmart, they were all using Qualtrics even up to the last couple days. And I was like, “Wow, this is phenomenal.”

Jason Lemkin: That’s the story. Right?

Ryan Smith: Because they were trying to figure out experience data and how they can maybe pull out of it without just looking at the operational numbers, like what do people think, how can I go? And so I think that was what we’ve benefited from.

Jason Lemkin: All right. So the answer’s great. I want to do one last just fun question. Let’s flip back to my mic drop slide of the crazy deals of my journey in SaaS. This one, quick, we don’t have time. This is the leaderboard for last year. It’s not a competition, is it? Not even close, but it’s still fun to be number one.

Jason Lemkin: GitHub was a cool one too, wasn’t it? Just as a student of SaaS, GitHub’s pretty cool.

Ryan Smith: Well, GitHub, we raised a series A in 2012, it was the largest series a since 2008, GitHub came out a month later and raised 100 million, and that was then the largest series A and then all hell broke loose in fundraise-

Jason Lemkin: There are some interesting parallels, but on this one, I put together a slide as a student and founder that that my mic drop deals and there for different reasons, right? Trello come in and we all love Trello, Michael’s been here but then all of a sudden 450 million for 10% of Atlassian’s market cap.

Ryan Smith: It was unbelievable.

Jason Lemkin: That’s a big bet to add [crosstalk 00:37:06]-

Ryan Smith: I was with Mike when he was going out to do that and he’s like, “I’m all in on Atlassian.” And I was like, “That’s a good-”

Jason Lemkin: That’s a smart bet if he was all in, right? Take all stock, my friend.

Jason Lemkin: And then I made this slide and then Qualtrics at the end, and then this 20, 30 year old company, Ultimate Software from the old HR days, gets bought by PE, private equity for $11 billion. Was it even this week? I mean the pace, I’m overwhelmed with the pace.

Jason Lemkin: Is this chart going to keep going up into the right? Is it going to plummet? I mean, how many $11 billion to $20 billion SaaS deals can we do? $40 billion? When does this end? It’s a cycle here?

Ryan Smith: Well, 15, it’s got to be the new number. I mean as market caps keep increasing, then I think the number goes up.

Jason Lemkin: So this isn’t going to keep going up [crosstalk 00:37:53]-

Ryan Smith: Yeah. If the market caps keep increasing. Like if you look at like Adobe or SAP or whoever else, if they’re going to $200 billion, $300 billion SaaS companies, then the low or the high bar that they could do actually will go up as well. So if the most they could do was a $7 billion acquisition of your Microsoft and GitHub and they keep accelerating, it’s going to be 14. Now they can do a lot more because they’ve done LinkedIn and others like that, but I think that that’s going to continue. When you’re having to give up 10% of your market cap, you can only do that once or twice.

Jason Lemkin: All right. One last fun question and then we gotta break. So on the slide, if I somehow build a billion company, a billion company, and I’m growing 50% a year or more, should I sell? If I can get $1 billion for my startup or should I keep pushing on?

Ryan Smith: Eeryone wants to run through these. We teach a little case study about when we turned down the 500 million at Qualtrics, at Stanford and everyone’s like, “Oh, what was in that decision?” It was really me getting in the car with my wife and she’s like, “Ryan, you don’t need a bunch of money and I don’t want you home more.”

Jason Lemkin: That is a decision though isn’t it?

Ryan Smith: Let’s just go … yeah, and so I think everyone thinks it’s this math equation. We wired our money last week, nothing changed.

Jason Lemkin: Nothing changed, right?

Ryan Smith: There was no emotional reaction. The only emotional reaction I had was we created wealth for a ton of people. It’s the only thing-

Jason Lemkin: That’s wonderful, isn’t it?

Ryan Smith: That’s the only thing that hit home.

Jason Lemkin: Yeah.

Ryan Smith: And so if you think that you’re going to go through and all of a sudden, “Okay, I’ve arrived,” you’re going to be seriously let down.

Jason Lemkin: You will be.

Ryan Smith: Because it’s about building, it’s about the journey, it’s about being in tech, it’s about building software that people are gonna use, it’s about creating, it’s about giving back. And I just think that it’s really about changing the world. And I think that you’re either changing it or you’re not, and this isn’t going to matter. We’re super fortunate to be working in tech at this time and we just got to realize we could have been born in the Wild, Wild West, doing something else like that. And so I’m just trying to appreciate every minute of it.

Jason Lemkin: All right, Ryan, this is amazing. We’re way over, but thanks for all this, again, and come back.

Ryan Smith: Good to see you.

Jason Lemkin: Terrific. Yeah. Thank you.

Ryan Smith: All right. Take care.


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