Episode 8

Hooked

Hosted by Okta's Frederic Kerrest and Epic Magazine's Joshua Davis
You always need another (cash) hit. In this episode of Zero to IPO, we discuss the rush that comes from getting an infusion of $30 million in capital, and the despair that follows when you realize it isn’t enough. Fundraising is essential to every entrepreneur’s success, and it can be addictive — the further you get from the last round, the more you need the next one. Join us as Aneel Bhusri, Josh James, Julia Hartz, and Fred Luddy tell us how to navigate capital raises and what it’s like to be “hooked.”

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You’re starting to get comfortable — dare we say, content — with your company’s progress. Hate to break it to you: it won’t last. The moment you realize that you’re settled in and basking in your glory should be a clear signal that it’s time to start reinventing yourself. In this episode, we talk to entrepreneurs who have mastered the art of keeping it fresh. Sebastian Thrun, Parker Harris, Melanie Perkins, and Marc Andreessen all share how you can continuously evolve and challenge yourself, your companies and your industries.

Guest List

Aneel Bhusri

Cofounder and CEO of Workday

Josh James

Founder, CEO, and chairman of the board of Domo

Julia Hartz

Cofounder and CEO of Eventbrite

Fred Luddy

Founder of ServiceNow

Transcript

Aneel Bhusri
If you see something that is 10% better than what's already in the marketplace, customers are going to buy from the existing vendors. You got to be 50% to 100% better.
Julia Hartz
Capital can actually make things complicated. It's mo’ money, mo’ problems. You do unnatural things.
Josh James
Yeah, it's like, I start raising money and then the product didn't sell as fast as we wanted to, so got to go raise some more money and then product still wasn't done. Got to raise some more money. But good things were happening along the way.
Joshua
Welcome back to Zero to IPO, a podcast where we look at what it takes to take an idea, Freddie, all the way to what?
Frederic
IPO.
Joshua
To IPO.
Frederic
Yes, I won. I got it right.
Joshua
Yeah. It's not that surprising, given the title. I'm Joshua Davis and this guy over here ...
Frederic
I'm Frederic Kerrest.
Joshua
He's the COO of Okta.
Frederic
And I'm not sure what he does, but he's in the studio with me. He's the co-founder of Epic Magazine and Contributing Editor at Wired.
Joshua
You figured it out. It only took eight episodes. Well, today on the episode, we're going to be looking at a difficult point in a company's growth. Difficult but key. It's the point when you have taken on VC funding.
Frederic
You're hooked on the capital.
Joshua
You're hooked on the capital and the capital expects a return, Freddie, right?
Frederic
That's right. You're not talking about the angel round, Josh. You're not talking about friends and family. You're not talking about your parents, who are going to love you whether you succeed or not. You're talking about professional investors. Folks who are money managers. They get money from large LPs, limited partners, and their job is to invest it in companies like yours and find outsized returns over the next two, three, five, 10 years. They are in the home run game. If you look at a VC portfolio, if they make investments in 10 companies, they assume five or six are going to go out of business, and they hope two or three might return the money. But what they're looking for is the grand slam. They're looking for the 10X, the 50X, the 100X. They're in the home run game.
Joshua
Today, on the episode, we're going to drill down into this complicated stage in a company's growth. We've got folks who have been the entrepreneur, who have taken the money. We also have folks who, at the same time, have at another point in their career been the investor giving the money. You're really going to get all the perspectives around the table today.
Frederic
We've got Aneel Bhusri from Workday, we've got Josh James from Domo, Julia Hartz, the CEO of Eventbrite, and Fred Luddy, the founding CEO or ServiceNow.
Joshua
First up this week. Aneel Bhusri.
Frederic
Aneel Bhusri is the CEO, Chairman and Co-Founder of enterprise software giant Workday and a former partner now adviser at the legendary venture capital firm Greylock. He's invested in everything from Domo to Okta and currently serves as a board member of Intel. How do you stand out to someone like Aneel? We'll let him tell it first from his perspective as an entrepreneur and then from his perspective as an investor and why he left one for the other.
Aneel Bhusri
We did a raise with Allen & Company. We did one-
Frederic
What year was this?
Aneel Bhusri
This was 2011. We did a raise a year before we went public with basically public market investors. You know the Allen & Company guys. They're fantastic, and they introduced us to Fidelity and T. Rowe and Jeff Bezos, which is one of my great experiences of my life. To meet and spend time with him. So we actually did a pre-IPO round with IPO investors.
Frederic
That must have been one of the first times that that was happening. Now it's common place.
Aneel Bhusri
Now it's common place, but it was early then especially for an enterprise company. Henry Ellenbogen ended up being a board members attendee and he really helped us think through how to get ready to go public. Going public, it is a big deal in terms of dealing with a new constituency, public investors. And he really helped us understand what we should be sharing, how we should work with them to make sure they felt like real partners in the business.
Joshua
What does that look like? What are some of the high level takeaways?
Frederic
That's a pretty good advisor to have do that by the way.
Aneel Bhusri
Take away is just figure out the metrics that really drive your business and help the investors understand how you're going to run your business based on these metrics. Help them understand your timetable or profitability. Be out ahead of how you're going to run the business. Don't surprise them on a regular basis. The surprises happen anyways because ... And we all try to run the business on a quarterly basis, but it's hard at times, right? He helped us come up with the model that we use to really manage the expectations with Wall Street on what we would execute like as a public company.
Joshua
Let's talk about raising money. We've talked to people who haven't taken money. Bootstrapped it for a period of time.
Frederic
You're the ultimate expert at understanding all the different sides of how this works. You did it as a very successful investor. You did it as someone who backed a bunch of companies who then ended up going public themselves. What's the number one misconception that people have about raising money in enterprise software. Let's start there.
Aneel Bhusri
About raising money in enterprise software?
Joshua
Does it have to be enterprise software?
Frederic
No, no. Fine, fine. Just software in general.
Aneel Bhusri
I don't know about misconceptions but I would say that what I was always looking for was disruptive technology. If you see something that is 10% better than what's already in the marketplace, customers are going to buy from the existing vendors. You gotta be 50% to 100% better. You gotta give somebody a massive improvement on value proposition. That usually comes out of disruptive technology. So there are businesses that have been built and have done well without disruptive technology, but if you look at the ones who have really scaled and turned into large companies, it's all been around really unique disruptive technology. Whether it's data domain with a different storage algorithm. Pure Storage bringing flash down to a price point that was better than [inaudible] but a lot more performance because of brilliant software. Okta reinventing the world of identity. Cloudera inventing the world of big data. These are all just big heavy problems to solve. I think that as both an entrepreneur and as an investor I've always thought if it's not really hard to do, it's not worth doing.
Frederic
Because that was going to be another question. You had so much success early on before you even started Workday. It could have been a nice life. Just to sit there and be like ... I know you're a very accomplished and avid golfer. You could have just spent more time golfing. There's just a lot of things you could have done before saying, "Hey, I have an idea. I'm going to go build another giant Fortunate 500 company from scratch."
Aneel Bhusri
I don't think it would have happened if it wasn't for my relationship and friendship with Dave Duffield and the Oracle takeover. I never really sought out to be CEO. I just really loved working with Dave. He is an amazing guy. He's been my mentor and business partner now for 25 years. We joke about we've never had an argument. We just never had. We have our Chardonnay dinners where we sit down and we talk through the issues. If we don't agree, we get to our second bottle of Chardonnay. By then, we always agree. But he's one of the great entrepreneurs in the history of this industry and one of the nicest human beings. During the hostile takeover, the board brought Dave and I out of retirement. Dave out of retirement, me from Greylock and we had so much fun working together at PeopleSoft during a hostile takeover that when it came to an end, that just didn't seem right. We got to keep this going.
Frederic
What was animating it perhaps as much of the idea of the business was just your friendship.
Aneel Bhusri
It was more about working with Dave than it was about the idea. I mean the idea to start a company with your mentor and this legendary guy, who happens to be your best friend, that's not going to come very often. That opportunity is not going to come very often. I told my friends at Greylock, "I got to go do this. I just have to do this. This is important to me."
Frederic
You were already just so successful at that point. Was there any ... Did you have any concern or fear like, "What if this doesn't work? What if I'm not ... What it ..."
Aneel Bhusri
Nah.
Frederic
Never? Just ... Didn't even cross your mind?
Aneel Bhusri
Definitely crossed my mind. I'm leaving a pretty cush job [crosstalk]. I mean let's be honest, I have a lot of friends who are venture capitalist. They do not work as hard at as entrepreneurs. I don't think even the venture capitalist would argue that. My friend used to tease me when I'd be having a breakfast or a lunch with an entrepreneur, "Is that your work?" I said, "Yes, it's hard." I forgot. No, actually that was pretty cush.
Frederic
Especially in 2007. The Fortune 500 customers were not coming. There was never a day where you're like, "Oh, man."?
Aneel Bhusri
I enjoyed my time at Greylock. I love my partners at Greylock. Dave Z is one of my closest friends. Legendary investor. Reid Hoffman, very close friend. But I'm more naturally an entrepreneur and operator. While I enjoyed that time, I had more I wanted to do, then the Workday opportunity presented itself.
Joshua
There are a couple things, Freddie, that I think are particularly interesting about what Aneel said. The first is this idea of controlling the narrative when you're talking to investors and showing them the metrics that are important. And saying, "Look, of course, a PnL is important, but there are actually other ways to analyze and judge the business."
Frederic
Not only that Josh, but you have to show them what these new metrics are. PnL's been around as long as there have been businesses. You're innovating. You're creating something brand new. You've got all these new metrics. You have to explain to them how to think the way you think. If you do it right, this can be a huge asset because you are helping educate a set of investors on a new market that you're creating, which by default means you become the source of truth on what's going to happen in this market and how people should think about it.
Joshua
I will say Freddie that it sounds a lot nicer to be the one giving the money away than the one asking for it. You think about a cushy job giving away money, which is what a venture capital does. They've got ... They don't have to worry about keeping the lights on in quite the same way. And making payroll and all these crazy things that an entrepreneur does. And yet, here he is again starting all over as an entrepreneur.
Frederic
It's great to see Aneel leave what we call the dark side and come back to the light. It just goes to show it's not all that bad to be an entrepreneur.
Joshua
We've covered how to find the right VC and how to get their attention, but now let's get into some more of the nitty-gritty.
Frederic
How much money should you be asking for once you get in the room? The first round? The second round? You're third round? How should you spend it once you get it? Once you start getting VC funding, are you painting yourself into a corner?
Joshua
Our next guest doesn't think so. Domo founder and Omniture, co-founder, Josh James has never shied away from raising as much money as possible when building up a company. So how does Josh do it and why does he do it? As it turns out, it might, at least in part, be paranoia. Let's look at some of the nuts and bolts stuff here. VC funding. The blessing and the curse of it. Talk to us a little bit about the analysis. Once you accept that money, can you ever stop? Is the die cast? Is your future foretold at that point?
Josh James
I don't think so. You might be asking that reference to us. That's not why we kept raising money. But we made a decision early on that when I realized this wasn't going to be just building a dashboard that you could put on your phone and get your data and it would magically happen because everyone's storing their data in their boxes and they can just easily pipe it in. As soon as we realized how hard it was going to be, it was like all right, well what I don't want to have happen is I go slow and then the big companies come in and we end up being insignificant. That's the worst possible case scenario for me.
Joshua
That was ... You were really worried about that? You thought that could happen?
Josh James
Yeah. I'm probably more paranoid than I should be about that kind of stuff, and I try not to be too worried about competition, but yeah, I definitely think about it a lot. I was like, "All right, let's start raising money." And then the product didn't sell as fast as we wanted it to. So, we got to go get some more money. And then the product still wasn't done. So, got to raise some more money. But good things were happening along the way. Instead of cutting the profitability and then saying, "Here's what the company is." We still kept on getting really encouraging signs. I mean I literally have the CEO of a Fortune 50 company that logs into our product three to 17 times a day. And I know him, and I know how he uses the product. It changed the way they run their business. Seeing that kind of stuff makes it so that you can be, "Okay, we're going to bet more."
Frederic
I think you need to charge that person more.
Josh James
Yeah, we need to charge more. That's true. We need to [crosstalk]
Joshua
Charge per use.
Frederic
That reps quota just went up.
Josh James
Thank you. Hear that, Mark?
Joshua
This idea that ... I wasn't actually asking specifically-
Josh James
I know you weren't.
Joshua
But it's this idea that I think here in the valley when you're starting out you're like the only thing you want is to get a VC to believe in you. But at the same time, that comes with trade offs.
Frederic
Well you know because there's some previous VCs that you had at Omniture who you thought were very valuable and there're probably some that you thought were a little less valuable. I know that some of them that were very valuable you said, "Hey, I really would like your help and support in starting Domo and getting it going." Clearly there are partnerships that can be very valuable to you.
Josh James
Yeah. I really like having a VC involved, at least for me, because they A, they know things you don't know. B, they harp on stuff that bugs the heck out of you but generally you need to pay attention to it and figure it out. As long as ... It seems like most term sheets nowadays were a lot better than they were 15 years ago. Balance of power is more equal. I think as long as that balance of power is equal, it's a really positive thing. I've had companies that I've run, or I've been co-founder of that we've never taken any VC funding, and they're doing really well. That's a way to do it. But Omniture, I had to raise the money, or I couldn't grow. Domo, we could have ... I could have started it and kept it small and just did one piece of technology at a time, but we felt like the platform required investment. I think as long as you need it and you're going to get a good return on it ... One of the things ... For one thing I think's funny is the worst thing is to take the delusion and then not go after it. You got to [crosstalk]-
Joshua
Just sit on money.
Josh James
That's the dumbest thing I've ever heard of. You got to make the choice one way or the other but keeping that discipline is definitely hard once you take that money. To be as disciplined as you are when it's all your money. That's definitely more difficult.
Frederic
Not all entrepreneurs are on the same page as Josh when it comes to sitting on money.
Joshua
Was that true for you, Freddie? Did you say, "You know what? People are offering us more money but we're not going to take it."?
Frederic
It's actually a pretty funny story. When we raised our Series A, Josh, we went down and talked to a couple of our existing investors from the seed round and they said, "We'd love to catch up with you." And we went down there and we said, "Look, we'd love to raise seven million dollars for a Series A. They said, "Well that's great. We really like what you're doing. What could you do with more money? Come back and see us in a week."
Joshua
That's some pretty nice question.
Frederic
It was great. We went down the following week, exactly seven days later and said, "Well, we'd now like to raise $12 million." But we'd increased the pre-money evaluation such that for $12 million dollars they were getting actually the exactly same ownership percentage as they were for seven million dollars a week before.
Joshua
Did they catch it?
Frederic
Yes, they did. One of the investors just started laughing and looked at me and said, "How did you create that much shareholder value in the last week?"
Joshua
In the last seven days.
Frederic
In the last seven days. So, we split it in the middle and raised $10 million dollars Series A. Julia and Kevin Hartz, Josh, they are the power couple who co-founded the online now supergiant ticketing company Eventbrite. In the early days of the company, they actually raised as little money as they possibly could to get the company up and running.
Joshua
Here's Julia to tell us what happened.
Julia Hartz
There's great virtue in being incredibly scrappy and I don't know that Eventbrite would have made it had we poured a bunch of money into it. One of the reasons why we did that though is because Zoom needed an intense amount of capital right of the bat because in order to get ... I mean this is online international money transfer post 9/11. In order to get the licenses to do that, you had to have millions of dollars on your balance sheet. So, they needed to raise money right away and a lot of it. Sequoia really [inaudible]. Kevin had this academic decision of, "Hey, why don't we try it the other way?" And so we didn't have a ton of money but we just were really judicious about how we spent it. I don't know that we would have created the business model we have today if we had surplus cash to spend on acquiring customers.
Joshua
What might it have looked like had you had that? What would have been different?
Julia Hartz
It would have been a sales driven model. The brilliance of the Eventbrite model is that 97% of event creators sign up on their own. They're driving over 50% of the revenue, so this is not [crosstalk]
Joshua
It's not advertising based.
Julia Hartz
It's not all just free creators and it's not ad based and our transaction revenue model means that our interests are aligned with theirs. We only make money when they sell tickets.
Joshua
And as they get better and better and grow more and more and there things are more and more successful, that aligns with how you end up being successful.
Julia Hartz
Exactly. And the average net revenue per ticket is three dollars.
Joshua
Is that right?
Julia Hartz
Being able to offer this scaled service at a very affordable price meant that we were able to amass the largest number of creators and events on the platform in the world. I don't think we would be where we are today if we were flushed with cash. It's hard to say because obviously you don't know, but and a lot of it comes down to founder DNA but I just think that was a major difference in the model and a huge competitive advantage for us today because there is no other scale ticketing platform that is fueled by self-sign on growth.
Frederic
That's two things. First of all that means that the products that you're designing are very clearly for the right users because you're doing it because they are the ones that are requiring on and requesting them and going back and forth. Number two, you're not getting any false positives. Because with a sales early on especially, it's like, "Well, who's listening to me? Who did I talk to? Who did I happen to get on the phone?" And then you could end up having actually this diagram of who you think the customers are that's actually different than who your target customer should be.
Julia Hartz
Exactly. And I don't want to demonize capital because obviously Sequoia came in and made a huge difference in turning an idea or a business into a company and a scaled vision. Certainly along the way people like Lee Fixel at Tiger and [inaudible] at Sequoia and Henry at T. Rowe have been super influential in helping us get to that next inflection point of scale. But I think at the beginning, you know we ... There's just this ... Capital can actually make things complicated. It's like mo’ money, mo’ problems. You just do unnatural things or you grow at all costs and figure you're going to figure it out later and one of the things that I'm most proud of, especially sitting here thinking about the future is we have a very durable business model. And I do Pilates so it's all about the power core. Eventbrite has social media power core that's not easily disrupted. That's really in our business model and how efficient we can run our business and offer low prices to event creators and help them be successful.
Frederic
Because if you put too much capital in the system too, do you think that sometimes it might generate bad behavior? Or you might get used to the wrong things? Or it might not create the right discipline that you need in other things?
Julia Hartz
Absolutely. It's human nature. If you looked at our gross profit or in the early days I guess we didn't have much gross profit, but revenue. If you looked at any sort of efficiency metric per person, head count for us is the majority of our opex, and you mapped it to the points in time that we raised capital after our first institutional round, our efficiency dipped in the quarters immediately after. That is just ... I'm not saying Eventbrite is exceptional one way or the other on that. I think we're pretty much the norm. Human nature is to become slightly less efficient when you have more capital. I guess the worry that I have or what I see ... Kevin's very, very involved in early stage investing. I just get worried about the rush to grab the capital while the capital's there. Then I also ... I get very interested when the market head fakes to see who flinches. Because you can really see, especially in our world and on the competitor front, you really see who doesn't actually have depth to their business and who is trying to just drive top line growth with no profitability on the horizon or durability in the model.
Joshua
We, with other guests on the show, have talked about the idea of getting addicted to the capital where once you start taking VC money, they're going to expect you to do something with it first of all. And second that there's going to be another round, and another round, and another round until there's some kind of exit. To what extent did you feel like you were getting on that treadmill?
Julia Hartz
Well, no. We totally did that. I'll be the first to say that we had this virtuous first three years and then we got turned down. 27 no's in 2008.
Frederic
Not that you counted. But if you had counted it would have been 27.
Julia Hartz
27. 27. And that was an experience. One that I would definitely want for every entrepreneur because that really deepens ... Either deepens your conviction or totally guts you. For us, it deepened our conviction that we ... Why did it deepen our conviction? Well, we felt that we were on to something that people couldn't see yet and we also knew it was an incredibly terrible time to raise money. But we figured if we could survive in 2009, we would really show that durability and that staying power. And we did. We had one of our best years in 2009. Obviously early days, small base. But we really dug in. The next time we had a year like that was 2017 when we had stacked hands at the end of 2016 and said, "This is it. We're going to run profitably." As I like to put it, it's not cute anymore to not be profitable. What happened between 2009 and 2017? We raised a bunch of capital. We raised from Sequoia. That's like getting the seal of approval. Right? Then all of the sudden everybody else who said no was like, "Wait a minute. How can we get in?"
Frederic
What did we miss?
Joshua
What did we miss?
Frederic
Oh, what are you doing next week? We'd love to have you come in. Actually, I'm going to be in your neighborhood. Why don't I come to your office now.
Joshua
We didn't mean no.
Julia Hartz
There's this follow on effect to having a firm like Sequoia invest in your business.
Frederic
Of course.
Julia Hartz
I believe that's as important today as it was back then. Then there's the monster rounds. Right? And there's for us it was thinking about how do we go from predominately domestic to international? How do we start to drive a marketplace dynamic? Then as we started to get closer and closer to the profile of a public company, then it was about well, who sees Eventbrite as a potentially successful public company and would like to get in earlier than when we go public? There were these different phases of capital raise but ultimately we raised about $200 million in capital along the way. We raised technically more than that, but that was the last traunch literally a Series G because the Hartz's had done A through B. But a Series G if you will, it exists, we raised to acquire Ticketfly, which was our largest North American competitor in music. Had I done it all over again, we would have raised less capital to be honest.
Joshua
Why do you say that?
Julia Hartz
I think that scarcity breeds creativity and frankly faster innovation. And so I don't know how much less I would have raised, but I certainly see now that we are making something novel, which is called free cashflow. The brilliance of the model, and I think that with more capital we actually weren't making the model much more brilliant. We were expanding faster, which of course put us on track to be generating the revenue that we see today, but in terms of that power core that I talked about, I don't know that capital was the way to the path to prosperity for us in creating a durable and defensible business model.
Joshua
You said that efficiency went down after each round.
Julia Hartz
After each round you can see the two quarters following, efficiency went down because we hired more people. I don't feel that headcount is a marker of success. Anyone can hire a bunch of people. I think what you do with the people and how scale the company, I think it's cooler to have fewer people and be doing bigger things. I have this love-hate relationship because of course being a people person who has helped to build this culture, I obviously fundamentally believe that recruiting is the most important thing you can do. Or you have to do to be successful and build a great company. But I also feel that headcounts' not a measurement of success.
Frederic
It's not a proxy.
Julia Hartz
No.
Joshua
To me it's fascinating Freddie that we're hearing completely opposite perspectives. You hear Josh James talk about raise as much money as you can. You hear Julia talk about raise as little as you can.
Frederic
It seems like you should be doing whatever you think is best for your business. This is again about being genuine and being true to yourself and what you believe as an entrepreneur for you, your business, your market, all these things.
Joshua
Julia says, "I don't know that we would have created the business model we have today if we had surplus cash to spend on acquiring customers." No over raising helped her build the business.
Frederic
I think it made her focus. It made her really key in on what mattered to whom and how and what business problems they were going to solve.
Joshua
How do you know as an entrepreneur when you should say no to a ton of cash? Especially when people are ready to give you more?
Frederic
Well, it can't be easy Josh. Our last guest is a master of saying no. We've heard from the great Fred Luddy a few times before on this podcast. Today he's back to talk about cold hard cash and why he walked away from a billion dollar plus acquisition offer before his company ServiceNow went public with a little guidance from Sequoia Capital's Doug Leone. And here's a hint, it's because his company was worth much more.
Joshua
Before IPO, you had an acquisition offer at $2.5 billion. And you said no.
Fred Luddy
Yeah, well it wasn't quite that rich. That story's gotten embroidered several times. It was $1.5 billion.
Joshua
Okay. So you had an acquisition offer of 1.5 ...
Frederic
You had a number of acquisition offers including one that was north of a billion dollars.
Fred Luddy
We had many unsolicited term sheets. Our business was never for sale. In fact the first time, and I think this is very good advice, the first time we were asked what our exit strategy was, we didn't know what an exit strategy was and we didn't know what the answer should be and our answer to this unknown question was simple. We plan on having happy customers and making a reasonable profit. We think everything else will take care of itself. I think that that is the right answer for exit strategy.
Joshua
You didn't know what a billion dollars was.
Fred Luddy
I still did not, at that point, know what a billion dollars was until this offer came in.
Joshua
This offer comes in north of a billion dollars. Let's say north of a billion dollars, that's an unbelievable amount of money particularly because when you started you're looking at you had two million dollars of revenue. [crosstalk]
Fred Luddy
When I started-
Joshua
And then four. And then [inaudible] comes in.
Fred Luddy
When I started, I had 36 months of runway until the plane went off [crosstalk].
Frederic
And now someone was saying, "Here's north of a billion dollars." And you say no.
Joshua
For your business.
Fred Luddy
I didn't say no. I owned 36% of the company at that point. That was Christmastime 2010.
Joshua
Would have been a good Christmas bonus. That was not lost on you.
Fred Luddy
I thought about, well, what do I need? Again, this guy doesn't know what a billion dollars is. What can I do for all my family. Right? All of them.
Joshua
And then all your friends.
Fred Luddy
And I thought, I had $35 million dollars at Peregrine and it went to zero. So this could also go to zero.
Joshua
This is a bird in the hand.
Fred Luddy
Yes. So I very much wanted to take it. And we got on several board calls and this, "Oh, it's your company. We'll do what you want." And Leone ...
Joshua
From Sequoia, your venture capital backer. Your largest backer.
Fred Luddy
Yes. Yes. He's an excellent French speaker. And he said, "Fred, you're getting fucked." "Excuse me?"
Joshua
They're giving you over a billion dollars and you're getting fucked.
Fred Luddy
He repeated it.
Joshua
You're the largest shareholder at that point.
Fred Luddy
At 36% I'm definitely the largest shareholder. So, what happened in the ensuing hours was-
Joshua
All on the phone by the way.
Fred Luddy
There was several phone calls, some with more people than fewer. I was walking my son. He was born in 2008. He could barely walk, so I'm walking him with his little ... He's holding my little pinkie. We're out on a horse trail in Rancho Santa Fe and Leone calls me and goes, "Fred-"
Joshua
You're on the phone. You're on a cell phone.
Fred Luddy
Yeah. I'm talking ... I've got my son, I have my blackberry. Calls me on the blackberry. He says, "Fred, if you just need a check for $100 million dollars, I'll write you check for $100 million dollars. Do not sell this company. Do not sell this company. It's a 10 bagger." "What's a 10 bagger?" "$10 billion dollars, Fred. $10 billion." And then that-
Joshua
A 10 bagger. Have you heard that?
Frederic
Yes. I'm working on it.
Fred Luddy
And then Pat Grady puts together why it's a 10 bagger.
Joshua
And who is Pat Grady?
Fred Luddy
Pat Grady is a super bright guy that works at Sequoia.
Frederic
He's been on my board for five years and has been instrumental in our success.
Joshua
He just keeps saying, "10 bagger."
Frederic
That's what Sequoia does.
Fred Luddy
It's probably 100 bagger now, but I've been out of the business. But anyway what they did was they said, "Here's the enterprise software world. Part of it has tipped to SAS." Right? Sales force was on one side of the tipping point. I forget who else was. And part of it's about to tip. HR is about to tip with Workday.
Joshua
All these sectors of big companies are going to move into the cloud. That's what they're saying.
Fred Luddy
Correct. Correct.
Joshua
And you are ideally positioned.
Fred Luddy
Yes.
Joshua
So don't cash out now.
Fred Luddy
Correct. The thing is that there were a lot of parameters around that but at the end Doug was right. I was resentful because I thought, "Well, this guy's worth billions of dollars. It's pretty easy for him to say that." Right? I was broke. I've been broke many times. I've had cars repossessed. I've had my electricity turned off. That's not a pleasant feeling. He flies down to meet me in his Gulfstream. The thrill for me is driving out to meet him at the Gulfstream. At his Gulfstream. So we live in a different planet.
Joshua
It's between you and Doug.
Fred Luddy
It's just between me and Doug.
Joshua
And this is all over one afternoon.
Fred Luddy
It was a very short period of time and it was Christmastime. It's a hyper, hyper emotional time. Right? And I've got my two-and-a-half year old son and walking along the horse trails. Eventually just decided, okay, I buy into Pat Grady's thesis, I don't need $100 million dollars because I don't know what I'd do with it. I had loftier objectives than that at that point honestly.
Joshua
When you say loftier objectives you mean in terms of your ambitions for your own life.
Fred Luddy
Correct.
Frederic
What was motivating you?
Fred Luddy
What was motivating me?
Frederic
Yeah. Or what was ... You said you had loftier ambitions. What were you ... But you bought into Pat's theory.
Fred Luddy
There were two things. Number one was this can be something. Again, I'm not a great believer in technology companies as investments because I've watched so many people invested, especially in hardware. Hardware companies, they're like fruit flies. They have very short lives. And to build an enduring technology company, one that lasts over 10 years, that's a huge deal. You can be a Zenith in year three or four and you can be gone, absolutely gone off the face of the planet in year five or six. So I was acutely aware of this as well, but Goldman Sachs had written some paper where they said, "On average we think that SAS, business in the enterprise space, are going to keep their customers on average 17 years." How they knew this when SAS just started, I have no idea. But that number stuck in my head and I thought, "Wow, we still have our original customers, so that's right."
Joshua
And Grady had said that to you.
Fred Luddy
Yes. And so we thought, this can actually build into a corporation of enduring value. What a great thing it will have been to have been part of building something that has enduring value.
Frederic
As opposed to being acquired and just becoming a piece in somebody else's world.
Fred Luddy
Yes. Yes. Just being, "He's the lucky guy next door that doesn't have to mow his own lawn. I don't know what he did but he must have done something at some point." And now, you're part of a company where people are happy that, "Hey, we use ServiceNow. My friend works at ServiceNow."
Frederic
I'm a very happy ServiceNow customer. And you were willing-
Fred Luddy
That was a paid announcement.
Joshua
But that's a tough calculus that you made that decision on that day. Where you're like, "I'm going to risk it all."?
Frederic
Again.
Joshua
Again. Granted it seemed like things were going very well. But you never know.
Fred Luddy
You never know.
Joshua
You never know. It could have gone to zero, it could have gone down. That opportunity could not have come back.
Fred Luddy
It was a decision I resented.
Joshua
You weren't happy about it.
Fred Luddy
No, I wasn't happy about because I still had bills. Right? I still had payments to make. I still had a mortgage.
Joshua
You just walked away from $100 million dollars in cash.
Fred Luddy
Yeah. My sister's still living in her rental condo. And she is working at the company at the time. She had stock as well. Right? Our lives didn't materially change with that decision. We knew that they could have but they didn't. I had announced this by the way to my entire family.
Joshua
They knew. They knew you made ... First of all it's Christmas, so you're all together.
Fred Luddy
Yeah. That's what you say.
Joshua
Congratulation. You're not getting ... My present to you.
Frederic
Here's my present to you. You're not getting the company sold and your cash.
Fred Luddy
'Again, greatly relieving you of significant tax burden. That is the kind of brother I am.' And so, yeah, we went forward. But I was very, very resentful. Then we started thinking about now we're going to be going into the IPO. So Frank was hired to do the operational effectiveness but get the company public.
Frederic
2010 and you went public in 2012.
Fred Luddy
We went public on June 29th of 2012.
Frederic
What's a 10 bagger, Josh?
Joshua
I'd never heard that before.
Frederic
It's $10 billion dollars, Fred. It's $10 billion. That's awesome.
Joshua
For me, I'm actually imagining 10 bags.
Frederic
That's when I give you $10, and you give me $100 back. That's the typical 10 bagger.
Joshua
That's your version of it.
Frederic
That's my version of a 10 bagger.
Joshua
Fred Luddy's version of it is $10 billion dollars.
Frederic
That's right.
Joshua
The question that we've been struggling with in this episode is whether or not to take money, how to take money and how much of it to take.
Frederic
I think Josh what gets lost in the echo chambers of Silicon Valley and beyond is that venture capital is a great way of building your technology startup, but there are other ways. People forget that. You can for example build a cashflow business, or you can build a business and raise just a little bit amount of money with the goal to sell the company a couple years down the road. If you are looking however to build a long-term independent sustainable impactful technology company over years and years and decades, venture capital is often times the preferred way of going about that.
Joshua
One of the things that always surprises me about Silicon Valley is that you have all these businesses that are losing massive amounts of money, and they're fueled by round after round of investment. So I do think that it's important to keep in mine, hey, start and run a business that can make money. That's one solution. No?
Frederic
No. Totally disagree. No one's going to be interested in that.
Joshua
Well, on that note, this is has been Zero to IPO, a podcast about how successful entrepreneurs got from that first big win to all the other big wins after it. Special thanks to our guests Aneel Bhusri, Josh James, Julia Hartz and Fred Luddy for taking the time to talk with us today. And to the Martin Trust Center for MIT Entrepreneurship for collaborating with Okta to bring this podcast to life.
Frederic
If you like what you've heard and want to know more, check out exclusive in-depth stories from each episode on fastcompany.com. Hear the next step in taking a company from zero to IPO. Make sure to subscribe and give us a good rating on iTunes, Spotify, Stitcher or wherever you listen to your podcasts. I'm Fredric Kerrest.
Joshua
And I'm Joshua Davis. We hope you'll tune in for our next episode, Keeping it Fresh.
Speaker 7
It's not good to have a business model where you give everything away for free. And that's it. Don't recommend it.
Capital can actually make things complicated. It's like mo’ money, mo’ problems. You just do unnatural things or you grow at all costs and figure you're going to figure it out later
Julia Hartz, Eventbrite