Floodgate and tEQuitable

You're listening to Zero to IPO. I'm Joshua Davis, the co-founder of Epic magazine.

And I'm Frederick Kerrest, the Chief Operating Officer and co-founder of Okta. As you know, we're dealing with a global pandemic and we're excited to bring you more episodes of Zero to IPO, but we had to figure out how to record in isolation.

So if it sounds like we're all in different rooms, it's because we are. This episode was recorded in May while we were all sheltering in place for COVID-19. Now we can get on with the show.

Welcome back to another episode of Zero to IPO.

And we have two awesome guests with us. Good morning, Lisa. Good morning, Ann. How are you today?

Good morning, good morning.

Doing great. Can't complain.

We're going to have a very lively conversation about a wide range of things that I think will be applicable to our audience. Let me introduce our first guest today, Ann Miura-Ko, who is a pioneering tech investor at Floodgate, and among many accomplishments, has a PhD in math modeling from Stanford, where she also teaches entrepreneurship, and I think is going to have a lot of insight to share with all of us today about what it means to start and run a company, particularly in difficult times.

I certainly hope so. I've started a venture in 2001 and then again in 2008. So I do have some memory and recollection of hard times.

Our other guest is Lisa Gelobter, who is the founder and CEO of tEQuitable. And we're going to learn a lot more about tEQuitable today. But Lisa has a fascinating and varied career leading up to the founding of tEQuitable. You were the Chief Digital Officer for the Department of Education. You've worked at a bunch of big companies. You've worked at government, which is the biggest company of them all. You were the Chief Digital Officer at BET Networks. You were also one of the senior management team for the launch of Hulu. So when you started this company, you had a lot of experience navigating corporate environments. And so why don't we just dive in and talk about how that experience informed the founding of tEQuitable and why you did what you did?

I've been fortunate enough over the course of my career to work on some pretty transformative technologies. So whether it was Shockwave, which was the first time the web moved, whether it was helping with the launch of Hulu, it's been a hell of a journey in terms of making change, but it was really at the White House where I came to understand that we really could harness technology to solve what had been previously thought of as intractable problems. I wanted to focus on making improvements right here on our home planet to solve the issues for the underserved, the underrepresented, and the underestimated. So that was how it all came to be.

Well, let's get into the details of it. Tell us what tEQuitable is. How did it fit this desire on your part?

Yeah. So tEQuitable is really about using technology to make workplaces more equitable. And our mission is to create work culture that works for everyone. And in order to do that, we've created this platform that is independent and third party and helps people address issues of bias, discrimination, and harassment in the workplace. But more generally, helps folks with interpersonal conflict, workplace misconduct, those kinds of things. So, we do two things. One is we provide a sounding board for employees where they can, when they're feeling uncomfortable in the workplace, and they can come and explore their options, get advice, and basically figure out what their next steps are and how to move forward. And then on the flip side, while people are using the platform, we actually gather data that we anonymize and we aggregate, and we use that to identify systemic issues within an organization's culture. We create a report for the management team with actionable recommendations.

So for us, again, it's really important that we work on both sides of the equation, where we are empowering and supporting employees, but we are also helping companies identify issues and address them before they even escalate. So we're trying to create this virtuous cycle, and again, getting to the systemic issues.

A lot of what you have done with tEQuitable is create something that was needed, but that maybe people didn't know they needed. And certainly now they may not even know that the solution is out there for them, which I think will resonate for a lot of our audience members who are creating something to solve a problem that most people, as you said at the beginning, is intractable or people think, "If it was easy to do, somebody would have done it." Right?

I think that's exactly it. So for me, the thing that's been, again, really gratifying is that even where just talking to folks, people are like, "You're the first vendor I have ever spoken with that is solving a problem that I have today. I know exactly what this problem is, but I didn't know ... Where have you been all my life? I didn't know a solution like this existed." Once I've talked to somebody for five minutes, they're like, "Oh my God, I totally get it. This makes perfect sense to me," but I got to get that five minutes because they don't even know that a solution might exist. That's actually one of my big questions for you all, which is what are some of the factors that go into when you're creating a new market and how do you get people to even be aware of that situation?

So let's dive into the question of category creation, doing something that doesn't currently exist. Freddie, I know you probably have some thoughts on this and I also want to hear from Anne about it, but Freddie, why don't you share some thoughts?

Yeah, sure. Happy to do that. So I think that the category creation that we're talking about here is very interesting. It comes, first of all, from you have a background understanding. When you think about this, Lisa, there's something that you've seen that you've experienced, that you know. What you said was, "Hey, when I talk to people for five minutes, they say, wow, where have you been all my life? This is exactly the kind of problem I have," yet 10 minutes earlier, they weren't out looking for you. And then, there have been, and I know just because I went through it even just a couple of weeks ago, I went through my annual certification of going through the 20 minute discrimination training that we have to, I think by law in California as managers, and going through perception of bias and a lot of the details that you walked through so eloquently. So that category does exist, but it's a very rote training.

So it's a combination of three things. First of all, there's specific insight Lisa has. Second of all, there is a pain in the market, but people have problems putting their specific finger on it. And third of all, the way that the problems are being solved today are very formulaic. Now, Ann, of course, is going to give us the more meta and macro and academic and intellectually correct version of what category creation is, other than just these data points that we have here.

I don't know about that. But the interesting thing is even in venture capital, Floodgate has participated in category creation. So when we got first started, the typical first round of financing was $5 million at a $5 million pre-money valuation. So they used to call it five on five. You'd sell 50% of your company in the first round of financing. And when I got started with Floodgate, our observation was, man, he cost of starting a start-up has suddenly significantly declined because of cloud infrastructure. This is roughly when Freddie was getting started with Todd and Okta too. And because of that, we said, "Well, entrepreneurs are going to need a lot less cash. And so 500,000 is the new five million." And when we looked around, there were maybe three or four other venture firms that were thinking about the strategy.

Now, you know a category creation has gone right when there is an explosion of similar types of companies. And now there's over 800 micro VC firms 10 years later. So what's interesting to me is we wanted to create that position because we saw a need in the market. And what I love about the way you're already positioning it is it's not just a set of services. This is something that the company can run with. It's not static training, it's dynamic, and it provides it from all sides. And so it feels like there's something here in the sense of it's not just a service that's needed. There's new position that you're selling into, and it's more across the board of the entire organization. Those are signs that you do definitely have a new category. And then the next question is how do you position that so that it's not just put into the same category as training software, compliance software that allows you to then stand out?

What is the category called or what do you call it? It's not compliance, I don't think.

Well, maybe it's actually something like instead of just human resources, you're actually broadening what human resources is to cultural resources or culture resources.

Ann, that's good.

What I liked about, like something there where you're expanding the capabilities of an HR organization to extend into culture, which is something that they are already responsible for.

Think about the term human resource. This has historical connotations when it used to be we had other resources called machines or factories, and then we had these other resources called human resources. So there is the Chief Human Resources Officer. We've actually changed that. I think you've seen that change a lot over the last five, 10 years, and I think that's only going to accelerate into actually Chief People Officer, because human resources, turns out they're actually people, and actually 60 cents of every dollar that we spend on Okta is on people.

One other way to add to that is we have this new position now called customer success. And so it might be like people success or employee success.

Yeah, totally.

So, that might be actually a way to think about ... I love these terms where it's about empowerment.

What do you think, Lisa? What do you think about cultural resources and employee success?

People success. There's a new category. It's called people's success.

So yeah, I mean, I really love the idea of people success or employee success as a category.

What do you call it now, just out of curiosity? What do you call your category?

I don't think we had defined a category yet, truthfully. I mean-

Well, now we have Ann to thank.

Yes.

We just did it. We just did it.

It sounds like a big category as far as I'm concerned. There's definitely tens of billions of dollars there.

I think it's great. I mean, I think this is an amazing thing about these kinds of conversations, that you're like, "Oh, well maybe if we're doing something that nobody has seen before, maybe we have to think broader than just us, that there's this entire category, and we, being the first people there, get to call it what we want."

So I want to tackle another component of what tEQuitable is dealing with at the moment, as are many, many, many millions of people, which is how to navigate an economic downturn. There is this question, particularly in tech, of move as fast as you can, a first mover advantage. We talk a lot about that in Silicon Valley and winner take all, dominate the competition, but there is a flip side to that, which is you run out of cash, you run out of cash. So I do want to get into that. And under normal circumstances, one modality may apply, and in a downturn, another modality may apply. And so, Lisa, I wonder if you can talk about the challenges as you see them from where you're sitting.

Yeah. I think it's a really interesting question. And I'm happy to even talk a little bit about the lead into getting here. So last spring, I had a conversation with a bunch of our investors. And the pressure that you get in being a VC-backed high growth start-up is spend, spend, spend, spend, spend so that you can get to your next race. You can get to your next round. And-

But that's not how you were thinking about it?

Well, no. So I've run a $20 million business. I've been in industry for 30 plus years. I know that you run a business, you need more money coming in than going out. That's just the way it's supposed to work.

Don't say that. That's not true. That can't be true.

And basically I had investors, one in particular say, "You're not spending enough." And I was like ... I got to a place where I felt comfortable with my choices. I was like, "I'm not going to set money on fire."

So what was your reaction?

I listened. I mean, again, I spoke with several of our investors and I really came to think about what it means to me to run a business, what my values look like, the things that I think are going to drive a successful business. I just, I didn't understand the concept of my goal being to raise my next round. Well, first of all, I'm a black woman from a low income background. And despite my pedigree, I don't know that I'll be able to raise another round. That might not be a thing. I had a hard enough time raising our seed round. So that doesn't feel like the right end goal for me. So slow, but steady growth towards profitability. And after several months of discussion, I got really comfortable in being centered around that. I will also tell you that a month ago, that same investor called me up and said, "You should be really proud of yourself, having run your company so lean." I was like, "Oh yes, yes. Oh, you're saying I was right and you were wrong. I'm totally comfortable with that."

But I got in the zone. I felt very comfortable and grounded in the choices that I made. And again, we are, knock on wood, fortunately, really well situated to last out any kind of recession. And so I'm glad that that was the choice that I made. And I think, Ann, you have a whole concept of how, not only is the shift in VC going to be toward this model, but it should have been this all along.

Lisa, you have a huge advantage, to be totally honest, in that you've always had what I would call an anti-fragile mindset. We talk about our companies becoming the most anti-fragile when they are profitable. They no longer depend on any set of investors for survivability because they actually own their own survivability. And you've always had that mindset, which is such a hard muscle memory to suddenly gain out of nowhere.

Yeah. Turns out there's some upsides to growing up poor. You know how to save for a rainy day.

It's huge. And what's really interesting is that the press doesn't give enough credit to companies who do that. It's just not a sexy story. And so the press has been really into covering these mega rounds. And instead, you look at companies like Qualtrics, where Ryan Smith sold the company for $8 billion and managed to own 50% of it because he hadn't fundraised that much. Or Viva Systems that went public and is now worth $20 billion plus, only raised $7 million the entire time that it was private. And in all of these companies, it's extraordinarily powerful not only for the founder, but also very empowering for all of the employees to know that their shares actually matter.

The other thing I would say is in this kind of market, we've been telling a lot of our portfolio companies that you are moving from this mindset of growing to get to the next round, like what you just mentioned, to something that's not as time-based because before it was, "Hey, if you survived 18 months and you hit a bunch of great growth milestones, you're probably going to raise your next round." And now it's, "We don't actually know when your next round will be, because who knows when these VCs will become active enough to really provide a funnel for you to get the cash that you need." And so we're telling our start-ups, "Hey, you need to get into a mindset of not outspending your competitors, but really outlasting them." It's a very different mindset. It's a different set of employees potentially who need to work for you. And so that's the set of advantages that you have right now. You already have what we call this intelligent growth mindset. That muscle memory, now everyone's playing catch up.

So it's a great equalizer in some sense, but at the same time for you, the added challenge is still, "Hey, I'm trying to create this new category." What I would say right now though, is we're sitting here in May and people have been in shelter in place for what, a couple of months. I think we're still in this transition period where people are just getting used to, is this just for a little bit, is it for a while? And how do I operate within this frame? How do I actually make decisions and have business meetings when my children need to be homeschooled? So now I think, I would say in the next month or so people are going to start coming out of this fog and start to think more on a future basis. And I think Freddie could probably talk more about this in terms of how do you actually become operational and forward thinking, not just plugging in all the holes? And it's in that timeframe that the customers will be more ready.

I think aggressively going after them in the last two months was probably really, really difficult. This will get easier as people normalize in their work schedules.

Certainly I think that there's a lot of disruption that has happened over the last couple of months, not just here in the United States, but around the world. We haven't talked too much about international business and so forth, but obviously this type of challenge or opportunity that you're addressing going after, Lisa, is a global one. So I'm sure that certainly some of these changes I think are going to be seismic shifts that will happen to the way that much of the world is going to work. You already have a lot of Chief Financial Officers, after they deal with the frowns that are related to their lost revenues, they start to smile internally when they think about paying less costs in real estate and so forth, as everyone's going to potentially start working more remotely. Certainly, at Okta as an example, we are a work remotely, a remote work company now.

I think we have the luxury of the folks on this podcast right now have been in the workforce for some time. And why that matters is because we have seen downturns before, whether it was 2000 or whether it was 2007, '08, '09, or even there was a mini one in the mid 2010s that happened. So all of these blips, if they're either small, medium, or large ones, these things are things that you have to go through as an investor and as an entrepreneur. I think two of the terms that I really liked that clearly, Lisa, you epitomize, that Ann, that I noted were the anti-fragile mindset and the intelligent growth mindset. I wish those were things that were used more commonly, and as you said, I wish those were things that the press was excited to write a lot of feature articles about. So maybe we will see that in the times ahead, but I think just being flexible and agile and supportive of your customers is a big thing right now.

I have two questions actually. Well, specifically one for you, Frederick, which is, so Okta, you started it in 2008, 2009, when it wasn't a downturn.

Yep.

What did that look like? How did you become a growth business in that moment?

Yeah, well, we certainly did not become a growth business in that moment. I mean, it is obviously a very difficult time out there when you look around, when you read the news, when people celebrate because we only lost three million jobs in the United last week, that's kind of a weird time. That being said, I think it is a great time to be an entrepreneur. There is going to be a lot of disruption, there is going to be a lot of dislocation, there is going to be a lot of new opportunity. There are going to be a lot of businesses and industries that are going to be reinvented. There are going to be a whole bunch of services three, five years from now that we can't live without that don't exist today. And so I think those moments for entrepreneurs are-

Like tEQuitable.

Like tEQuitable. I think those moments for entrepreneurs are very exciting moments. So I think there is going to be a great building moment. I think this is a very good building moment right now for those who have the luxury and the opportunity, again, to pick their head up and aren't worrying about paying rent tomorrow. They might be worried about paying rent later on this year, but at least not tomorrow. They can take some time and think about what some of those opportunities are and build on those.

As a seed stage investor and as a venture investor, the thing that matters most is what is that insight that you have, that is what we would call non-consensus, but right. And so Freddie, when you and Todd came in, the thing that I thought was non-consensus was A, whether or not there would be all these SASS apps out there and what would happen in that world where there were a ton of SASS apps. And it's unthinkable today for everyone to say, "Well, that must have been consensus." It wasn't at the time. And I thought the fact that you guys came from a unique perspective, having been at Salesforce, to know what the future looked like. We often say, "We want to see founders who are living in the future," and then they take us into that future and say, "Why is this needed in that future vision?" And then they backtrack from there and say, "So the first step looks like this."

And Lisa, I see you living in a future too, of a world in which employees are empowered and are successful and have wonderful cultures where they feel comfortable working and they are empowered to make the right decisions for the organization as a whole. I think that then you backtrack into what is the product today and what will it be in the future? That's the recipe for success. And to me, the fundraising strategy is merely an enabler of it and in many ways, the press has created this weird situation where it's become a milestone, and how much you raise is bragging rights. My hope is actually this reset allows us to think about what are the actual milestones really necessary within a business. And when we look over the hundred or so companies that we've been involved with, the ones where they are actually making significant product and category design and customer success milestones, not just the fundraising milestones, those are the ones that are ultimately successful and have great exits and have great performance for investors, but more importantly for the founders and the employees.

You have to have a vision and you have to have a plan and you have to have a program. I think that you very clearly enunciated what that looks like. So that's why I think it's great when we can get the perspective of someone who works with hundreds of companies, because you've seen what awesome looks like. And I think that founders who are in this program of being able to say, "This is where I see the world going five, 10, 20 years from now, and this is what it'll look like, and so this is where we need to start today. And these are the first steps." And they still make financial sense by themselves, by the way, et cetera, et cetera. So if you need to be able to think big enough, I think the trick is having the big enough vision, which clearly it sounds like you have, Lisa, but also understanding that what is it? The journey of a thousand miles starts with like the first couple of steps or whatever it is.

And so understanding how you can also tell that story of like, "Here are the steps that I'm going to take this seed round and convert it into the next round of capital and get the customers going," that's also important storytelling. So that's a very good perspective and I'm sure very true for all of those who've created very large out-sized success businesses.

I want to thank both of you for sharing your experiences and your insights with us.

Thanks for having me.

Yeah, no, this has been fantastic. I really appreciate all of y'all's insights and especially the naming of the kind of creation.

Which one are you going with, by the way, because I think there were people resources, and then-

People's success.

... people's success.

It's people success or employee success.

Cool. I just want to add too to what Josh said. Thank you very much, Lisa. Thanks a lot, Ann. We greatly appreciate it. Very valuable. I've certainly learned a couple of things that I know that many of our listeners hopefully will as well.

Thank you.

So Freddie, I think there's a lot to unpack and learn from this episode. There's two things in particular that come to mind for me. One is the concept of having an anti-fragile mentality. This concept that when basically the shit hits the fan, you have to be prepared for it, not just financially, but mentally as well, to be able to get through it. And then the other thing that Ann really emphasized was this concept of category creation. She said it was as important as product and organization.

What I really liked from the conversation today was hearing from Ann in particular around how she can identify very successful entrepreneurs. She said what's most important is when she could talk to someone who is basically living in the future, someone who can explain to her what is going to happen five, 10 years down the road, who can explain why that's going to happen and then who can backtrack into, and so the next step to start going are the things that I'm going to do next. I thought that that was very well formulated and I think could be very instructive and informational for a lot of entrepreneurs as they think about their big vision, their big journey, and of course their category creation.

So, there you have it. Another great episode of Zero to IPO. Thank you to our listeners for joining us. You can find us on Stitcher, Spotify, or wherever you find your podcasts. And we look forward to being back in another episode of Zero to IPO.

Thank you. I'll speak with you soon. Take care