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When it was really tough in the beginning, what I would tell the team and the others is, “Man, if we were just doing twice as well, we’d be killing it.” And there were those like, “Ahh, we’re not doing twice as well.” Like, hold on. It’s recurring revenue. It can be done. I know you’re disappointed that we only closed ten customers this month. But what if it were 20? And when you did the math on the spreadsheet, if we had 20, we’d be building a unicorn.

Jason Lemkin is Managing Director at Storm Ventures, an early stage VC known for it’s work with SaaS Companies, as well as CEO of the world famous SaaStr blog. Jason joined Alex Theuma on The SaaS Revolution Show Podcast, available now to listen to via SoundCloud or iTunes. Below is the lightly edited transcript from the conversation.

 

Jason, you are a fountain of knowledge on SaaS and write prolifically about it on your famous blog, SaaStr and also Quora. Is your knowledge wholly attributed from the experience you gained in founding and exiting EchoSign?

Well, you know, it was in the beginning. I sold EchoSign almost four years ago this week. It was a much more challenging experience than when I sold my first startup.
And the zen learning was that we sold just when it got good. This was four years ago. We sold at a $1 million a month in MRR, or $12 million in ARR. And that’s a good inflection point, at least it was in the day in terms valuations and economics. But it’s the world’s worst time to sell your SaaS company, it turns out. Because it’s just when it all really comes together.
So somewhat cathartically, four years ago, I started sharing all my learnings, all the things I screwed up, all the mistakes I made. But I’d say since then I’ve invested or worked in over 20 SaaS companies. I probably worked informally with over a hundred and I would say the learnings are informed by a hundred of the best SaaS companies out there at this point.

What Is the founding story of EchoSign from initial idea to first customer?

Boy, it was so long ago in internet time. That’s 10 years ago. So let me not share the parts that are less relevant today because the biggest difference between SaaS today and 10 years ago is the markets are literally a hundred times bigger, in some cases bigger than that. So that would be the case for some SaaS entrepreneurs today too, right? They’ll be penetrating new markets that are tiny.
But back then it was so long ago. But the things that are relevant are sort of two-fold. One is obviously looking to see the future, what would happen in SaaS.
EchoSign, it was a long time ago. But in the day, it was the first 100% web-based solution in its space. Our competitors were based on Windows plugins, as crazy as that sounds today. And it was a vision that everything in business will get webified and that contracting was sort of a core part of that. So that was the right vision.
And the Uber lesson from the first year was stick with it. We had a lot of internal drama. It was tough. We had crazy expectations. Back in 2005, our plan had us sitting over $2 million ARR our first year, from launch. Now, you can sometimes do that today, but man, in 2005 it was tough. And the fact that that we didn’t quite get $2 million the first year created lots of drama, but man, we did great.
We had huge enterprise customers like Dell and CBS and BT and GE. And we had Bitmark and it’s small. We actually did far better than we thought we did. And the zen learning is just keep at it, listen to your customers.
And here’s the key. Like just keep at it and for every one customer you get, you can get another ten just like it. Right? The first time you get a Dell, do you really think Dell is the only customer in the entire world that will buy your product? No. It turns out they’re not that different than nine other companies.
Or the way I boil it down to is if it’s tough in the beginning, break it up into the two X chunks.
When it was really tough in the beginning, what I would tell the team and the others is, man, if we were just doing twice as well, we’d be killing it. And there were those like, “Ahh, we’re not doing twice as well.” Like, hold on. It’s recurring revenue. It can be done. I know you’re disappointed that we only closed ten customers this month. But what if it were 20? And when you did the math on the spreadsheet, if we had 20, we’d be building a unicorn.
And all I really needed to do was actually recruit an even better management team. And then of course we could’ve done twice as good. Right?
And that’s all I do as an investor now, help you do twice as well. That’s all I try to do.

Do you sometimes wish that you haven’t sold EchoSign to Adobe?

Everyday. But the truth is I’m not sure I can give back the money. That’s between us founders and the 7,000 people or the 700,000 listening to this. But I do every single day.
And when I sold my first company for $50 million after 12 months, it was an amazing journey. But really it was so hard to get to the next level. We were going to need infinite capital. It was 2004. There were no VCs around anymore. It was the right decision.
And so the real advice I just give to people, I don’t regret it but I lament it every single day. Because it’s just when it gets good. So these days when it gets good, just take a pause.
And my big advice is bring in help. When it gets hard when you have something, bring in the COO or a great VP of sales, a great someone to help you, a new investor or something, a mentor or an adviser. Because once you get to that initial scale like it just gets… the sales never gets any easier per se. The dials, the gages and Salesforce go back to zero the first day of each month. You got to sell even more than last month. That’s the hard part of SaaS.
But once you have a brand, once you have that second order revenue, the referrals come in and the word-of-mouth. I mean, it took us almost two years to close Google and then it took like 6 months to close Facebook after that. But then it took like 30 days to get Twitter. It just gets easier.
So that’s the part that I lament is sort of selling once it got “easy.” And I put “easy” in quotes because it was hard work, but I didn’t see how once you have something it just builds on top of itself and SaaS. That I didn’t have the personal experience to see.

So you mentioned your first startup, NanoGram devices exited just after 12 months of being in business. I would view an exit after 12 months for $50 million as a success. But if we look at, let’s say, Re/code, which recently exited after 18 months, being acquired by Vox. Some commentators were saying that exit couldn’t be considered a success. Is having an early exit black and white, either a success or a failure?

Well, it really depends on the economics. I’m assuming with Re/code that no one made any money. It was an all-stock deal into another private company for a relatively small amount of equity in a private company. So they may end up becoming bajillionares, but I don’t think they made any money.
I think the key to an early… if you’re going to do an early exit, here’s my rule of thumb for an early exit. The ideal one is 10x the amount of capital invested. So if you sell for $50 million and you raise $5 million or less, everyone is going to do really well. 5x is sort of okay, if you sell for 5x or less the capital being raised. Then you have other ones.
So there’s a lot of drama in the SaaS world of Get Satisfaction. Like the founder was mad. Get Satisfaction sold for like, I don’t know what it was. $40 million? After raising like $50 million. Less than 1x. If you sell for less than you raise, it’s never a happy story.
So early exit, 10x capital raised.
Here’s my rough math. If you’re ever offered 10x the amount of capital that’s been invested in your company, think about it. Like think very rationally about it. By all means, say no, but think about it. But 10x is the moment where you should take a pause, think about what you want to accomplish, think about if you have another one in you or you don’t. Because 10x the capital investment is a pretty good exit.

Earlier you mentioned mentorship. Bringing someone in that has experience. Let say like Parker Conrad bringing in David Sacks as COO of Zenefits. Would you say David has also been acting as a mentor as well as COO?

I don’t know. I mean, I know Parker reasonably well and I’ve known David a little bit for years. I think David is he’s an A++++. He definitely owns a huge amount of company from product across the board.
Mentor, I don’t know. What I do know, I mean, Parker is less experienced than David in the grand scheme of things, but Parker has been around. It’s his second startup. So what I really mean is sometimes we want a mentor, but I actually think the mentor is better off external to the company.
An internal mentor can be actually a very annoying situation. People don’t really enjoy their CEO when someone comes to their cube or their desk or their office and tells them how to run the company. They tend to hate that. Your mentor should be external.
What David is doing is bringing in that extra help. Zenefits just blew up. I mean, Parker recruited David, so let’s assume they did 1 to 20 last year. I was actually doing the Salesforce live show with Parker when he whispered in my ear that he just recruited David. So let’s assume that they were doing like $12 million in run-rate. Right? What David enabled the company to do is scale far faster.
That’s the key. That’s what you want to do with that $10 or $12 million run-rate or $5 million or wherever. Just get that one superstar veteran to the company in whatever role: COO, President, even COO or sometimes VP of whatever. That super-experienced veteran that can just take you to the next level. That’s what we want.
But I think it’s more a wingman or a colleague. The mentor should not be internal.

And for example a company I invested in that seems similar to a company called Talkdesk. So I invested a year ago in Talkdesk. It was doing a million in ARR. 12 months later it will exceed $10 million. So that’s not quite Zenefits growth, but for something that actually people pay for it’s pretty epic. Right?
And a good friend of mine, Gadi Shamia, joined as COO to help the CEO own more. And what did Gadi do? Well, in his first 60 day he hired people and half the management team. That’s the kind of help that Tiago who’s one of the most amazing CEOs I’ve ever met, but having that extra help is sort of incalculably helpful.
And I wish I’d done that. I should have hired my David Sacks or Gadi Shamia, whomever, at $10 million and then I could have scaled much more quickly and much more successfully than doing it all myself.

Is it correct then that you didn’t have a mentor whilst at EchoSign? And was that because you didn’t need to get early VC money because of the money you made from selling NanoGram? Would you say that not having a mentor hampered you in any way?

I definitely could have used someone as good or better than me helping me back when I was less experienced. The problem I had back in the day was the “mentors” that I would meet in 2006 and 2005 were guys out of Intuit or Oracle, and that just wasn’t what we’re doing. The beauty today is there are the David Sacks of the world and guys like me and others who’ve done it repeatedly. But we just didn’t have that back in the day.
So, I should have found one anyway. It’s a failing of me. While I was probably a very good, but not a great CEO.
But the good news is there are more veterans out there today. So go find one. Get that help because there’s 10x or maybe a hundred times more of them than there were x years ago.

You’re a two-time founder and CEO. Is experience a prerequisite to start a SaaS company?

Well, absolutely not. I’ve done eight VC investments and 12 as an angel, so I’ve done 20. I think only a couple did they have any SaaS experience. And of the 20, 19 are doing really well. So I’d say no.
Certainly, the more Enterprise you are, I mean, truly Enterprise, selling large deals, complex solutions to big companies, the more you need Enterprise DNA out on the team. And if you don’t have it, like Aaron Levie of Box, he didn’t have it. He founded Box when he was a freshman or sophomore at USC. Then you need to get that DNA onto the team earlier. You need to force yourself.
If you’ve done it before, you’ll almost automatically you’ll be like Workday. You’ll just recruit an Enterprise team. So if you haven’t done it before, you’ve got to do one of two things. You either got to come up from the bottom. Start at the low-end, SMB-type like Talkdesk did, for example. Or you’ve got to aggressively seek out that expertise on your management team early. One of the two.

Can you tell us a little bit about why you started SaaStr?

For sure. Well, it started after EchoSign was acquired by Adobe and they made me a corporate vice president. There was a very restrictive social media policy. You know, in order to tweet or to blog or anything that had to go through corporate PR, which was like a 30-day turnaround. So I decided like a 30-day turnaround on a tweet wasn’t going to work.
So I did two things. One, I wrote a hundred blog posts about the mistakes and learnings I’ve made, but I couldn’t publish them. And then it turned out the social media policy didn’t talk about Quora. So I just started answering questions on Quora.
So how do you sell a low-end product? How do you hire a VP of Marketing so you’ll get leads and not blue pens with your logo on it? And I just started answering questions on Quora because it was allowed.
So I built up, I answered sort of a bunch of questions in Quora and a few people read it. But they were sort of the folks like me, they were founders trying to learn. And then when I left Adobe, the first blog post on SaaStr was the day after I left Adobe. So that’s kind of the story.
So it just started off as one founder who had nothing left to hide. I didn’t have to pretend anymore. Pretending is always, you know, we all kind of have to fake it until we make it. But for better or for worse, I’d sold. So I might as well just share back all the stuff that I learned so that everyone else could do even better.
So it was a cathartic journey. In fact, it’s horrible. Like it’s the worst title ever. But the working title for SaaStr was CatharSaaS.

Okay. It’s pretty bad.

Pretty bad but you get the idea, right?

What does SaaStr stand for? Why the T-R after SaaS?

I’m no longer going to answer that question. I have to keep some mystery in the relationship after all these years.

SaaStr Annual is coming up in February. What can we expect from that? Who should attend, and why?

Everyone should go that has something.
So we did the first SaaStr Annual just this February. We had almost 2,000 folks show up and it was totally ad hoc. It was sort of unplanned, unscripted. And we really had some of the most amazing content I’ve ever seen. Because it was just the stuff I wanted to do, talking with whether it’s David Sacks, like we chatted about, or Aaron Levie, or Stewart Butterfield. Not about the fluff but actually how you scale these businesses.
So basically were going to do that again but about three times the size and it will be three full days in San Francisco. And as big as it was last year, we’ve already sold almost three times the tickets as of last year. So it will be the largest, non-vendor SaaS event, hopefully on the planet.
And the real idea… I want especially, my learning was I thought it would just be this year people like from the Bay Area would Uber in, but almost half the people flew in from all across world. Because the further you are from the Bay Area, in some ways it’s the less interactions and the less things you know.
So the real goal for this year is for folks to spend the week. So come out for the whole week and take your other meetings, meet your other partners, do the other stuff you’re going to do in tech in the Bay Area, and then come to as much of the three days as you can take it and tolerate.
But it should be great. It’s designed to be totally fun, totally founder-centric. The largest non-vendor event in the world.
But it’s not really designed for folks that have nothing. It’s not for folks with no customers. That’s something else. This isn’t lean startup or 500 startups, all these things which are great. This is for folks that have ten customers, 100 customers, 1,000, to learn how to get to the next level.

You mentioned some of the people that were speakers at this year’s SaaStr Annual, like David Sacks and Stewart Butterfield. What about next year’s? Is it a completely new lineup of rockstars from the SaaS industry?

It will be mostly new. I mean, we’ll have folks that I think are amazing. Like we’ll hear from Lew Cirne on the real story of New Relic, and how you scale revenues to hundreds and millions in just a few years selling to engineering and developers.
We’ll hear from Phil Fernandez of Marketo, how you work in the most competitive part of SaaS, which is marketing automation. And Marketo is the largest and most successful player. So that will be fun. We’ll hear from lots more up-and-comers and others.
We’ll do a re-check in with Zenefits, because that one was so popular last year.
So here’s some of the speakers again. Parker will come back, and we’ll chat about what going from $20 to $100 million in 12 months was like versus 1 to 20 the last time. So we’re not going to do anything over again, but some of the speakers that we’ll check in with again and see how they’re doing 12 months later. Because operationally that’s very interesting in SaaS. We thought it was going to go this way. How did it really go? What were the mistakes we made last year?
So expect to see about 80% new speakers on things that we chatted about, like New Relic and Marketo. And about 20% will be sort of interesting updates from folks from last year.*

Which SaaS companies that you are not invested in most excite you and why?

Wow! I can’t pick too many favorites, but I would say if you count it as SaaS, I’m really interested to see the future of GitHub. See how the paid portion goes. It’s just fascinating to see something go from an ad hoc tool to something that’s more enterprise and to see all the changes going through. So I’m going to pick GitHub for today.

A question from one of our writers at SaaScribe, Mark Power. He’s asked me to ask you ‘Is Slack’s pricing model ultimately destructive for the SaaS industry and the companies who will follow?’

Listen, I’m using Slack right now. I’m a relatively early Slack user. I’m a fan. Stewart Butterfield spoke at the last SaaStr Annual and he was an A+ with David Sacks. I mean, that was just epic, seeing them together, Yammer and Slack.
But let’s be clear. Slack is, I love Slack. But Slack isn’t what it appears to be. Slack is not Enterprise software. Slack is not primarily used in the Marketing Department or whatever of Fortune 500 companies. Yammer was enterprisy, and we could chat about Yammer.
Slack, and I asked Stewart this in February, Slack, at least until now, is primarily used by folks building software. The magic of Slack is its integration with GitHub and CircleCI and Rainforest and 20 other tools. The magic isn’t the fact that it’s the 11th chat tool. It’s this epic way to kind of build software, build products together as a team. And that may change over time. But that’s Slack’s secret sauce
So Slack to me is a vertical play. Verticalization of SaaS is very interesting. And because everything is a hundred times bigger than it was just a few years ago, Slack can be 10-20 times bigger than the HipChat, maybe 40 times bigger than HipChat. That’s really what we’re seeing.
And so if you’re using a tool for your product and developer team that you want the rest of the company to use and you want it to be low-friction, of course you want it to automatically de-provision seats no one’s using. Because otherwise it creates friction on the sales process. It’s not as revolutionary as it sounds.
And if the day comes in 2017 when Slack is primarily selling to functional businesses, large companies, I don’t know whether we’re going to see auto de provision seats anymore because it doesn’t work for Salesforce.
So a lot of these stories are little bit apocryphal. And that’s why if you go back and watch the video at the SaaStr Annual of David Sacks and Stewart Butterfield, one of the first questions I asked for David because the whole Yammer business model is apocryphal, I asked David, when did you start seriously selling this product? I think he said in 8 months. As he said, if you watch the video, Yammer as a freemium product was great for marketing awareness on top of the funnel, but they just sell to CIOs and higher up in the organisation to close real deals. That’s an apocryphal business model and slack is an apocryphal business model.
So let’s be careful when we read random blog posts and tweets about how companies really scale up. Most of the time it’s not true.

So I read on the the Reddit AMA that you did some time ago, that you have no known or unknown hobbies and just talking about SaaS really and spending time with your family. Have you got no hobbies because you’re too busy to have a hobby? Or you just love SaaS too much that SaaS is ultimately your hobby?

I don’t know. Most of the great founders I know, and I consider myself only very good for the reasons we discussed, a lot of them their hobby is their job, is their startup. I had plenty of hobbies when I was a startup executive, but when the crap hit the fan, you drop everything to make this thing a success.
And your team becomes your family. And your hobbies are often things that you do with your team and with your company. You need your private life, of course. But I really don’t know many SaaS founders that golf. It just doesn’t work once you have something.
So for me, the hobby is kind of trying to rinse, wash, repeat this model and having fun in sharing these learnings. And that’s what I enjoy. I don’t need to take up droning or all of these other things. It just bores me. I just want to get better and better and better at my art and my craft.

Jason Lemkin was interviewed by Alex Theuma. Listen to the full, unedited interview on iTunes

*check out the amazing full lineup of SaaS Rockstars at SaaStr Annual 2016

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1 comment

  1. Lean-Marks

    Jason is a wonderful inspiration and his teachings are very valuable for all the entrepreneurs looking to better understand the SaaS world. We are happy to add this great interview to the best SaaS news digest, on news.lean-marks.com.

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