David Schneider: Why the Worst VCs are "Seagull VCs" & VC Value Add - Is it Real? | E1200
11 Sep 2024 (8 days ago)
Intro
- People buy products for three reasons: to make money, to save money, or to avoid negative publicity.
- When choosing potential board members, relevant experience is more important than the number of boards they have served on.
- Listening to the podcast has been beneficial in becoming a better investor.
Highlighting Key Achievements from an Operating Career
- The speaker joined Data Domain when it was earning $1 million in revenue and helped grow it to $1 billion before it was acquired by EMC.
- The acquisition by EMC was hostile; Data Domain had initially planned to be acquired by Network Appliance.
- EMC ultimately outbid Network Appliance for Data Domain, with the final bid being roughly double the initial offer from Network Appliance.
Biggest Takeaways in Hindsight from David’s Career
- The initial product was similar to a paid beta version, possessing some desired features but ultimately needing refinement based on customer feedback.
- Customers emphasized the importance of fast data recovery as a primary concern, highlighting the need for efficient recovery processes.
- The product's integration with existing technologies was designed to be straightforward, allowing for seamless adoption without requiring customers to overhaul their systems.
Is Adding or Removing a Line Item Key to Successful Tool Integration?
- Companies need to be able to articulate what they are adding to a budget and what they are replacing.
- There are three reasons why people buy products: to make money, to save money, or to avoid negative consequences.
- Founders who can clearly articulate the value proposition of their product are more likely to be successful.
How David Approaches Competition When Investing
- Existing spend areas are easier to unlock dollars from than creating new spend categories and budgets.
- Not all competitors are created equal, and some may already be failing in the market.
- Identifying the target customer, understanding their issues, and using customer success stories are crucial for driving sales team effectiveness.
Balancing Transparency and Morale as a Leader
- Leaders should address issues directly, as people generally sense the truth.
- Leaders should empower individuals closest to customers, problems, and technology to contribute solutions.
- Empowering employees can involve including them in meetings and fostering idea generation, as demonstrated by the example of a sales engineer who spearheaded the development of a billion-dollar product by listening to customer needs.
ServiceNow's Success Highlights
- ServiceNow experienced significant growth, starting from approximately 80 to 90 million and reaching a much larger scale.
- The company prioritized rapid decision-making and speed in its operations, even if it meant addressing technical debt and infrastructure issues concurrently with growth.
- A key lesson learned was the importance of cultural fit in hiring, as bringing in a senior leader from a company with a different performance culture proved unsuccessful.
External Hires vs. Internal Promotions: Founder Advice
- It is important for companies to support and mentor young employees in crucial roles, such as CRO or VP of Marketing, to help them reach their full potential and succeed in their positions.
- There is a concern that young professionals today may not possess the same work ethic and willingness to make sacrifices as previous generations, with the exception of some founders.
- The speaker believes that there are individuals who are passionate about supporting founders and view their role as a partnership, working tirelessly to bring the "artwork" of engineers and the company to a global audience.
Hiring & Ramping 180 People in 90 Days
- The company doubled its revenue in a quarter by eliminating discounting and effectively doubling prices.
- The company's goal was to go public within 18-24 months to provide liquidity for investors and increase market visibility.
- During the IPO process, Gartner, a technological research and consulting company, projected that the company's market would be capped at $1 billion.
How Important Market Size in Investment Decisions Today
- Market size is difficult to analyze when technology transitions from on-premise to cloud-based, as easier technology expands markets.
- Market timing is crucial, as being too early can lead to failure, and understanding the existing problem being solved is essential.
- Validation of a founder's reasoning for a product's timely success is crucial through research and external party consultations.
How Sales Leadership Sharpens Diligence & Referencing Skills
- Sales leadership experience can enhance the due diligence and referencing process by developing skills in asking probing questions and uncovering deeper insights.
- Effective questioning involves going beyond superficial answers and delving further to uncover the truth, often revealed in the second or third question.
- Active listening and embracing silence during interviews are crucial for eliciting valuable information and understanding motivations.
Biggest Mistakes Made at ServiceNow
- ServiceNow created a lower-priced product called ServiceNow Express to compete with competitors in a lower market segment, but the product was not easy to use and did not meet customer expectations.
- The company realized that it was more effective to focus on its core strengths and target market, rather than trying to compete in a market segment that was not a good fit.
- ServiceNow's customers began using its product in new ways, which led the company to develop new products and expand into new markets, but only after it had achieved significant success in its core market.
Lessons from Tackling the Multi-Product Challenge
- ServiceNow launched four new products simultaneously, aiming for each to reach $100 million in revenue within three years.
- The company's sales model emphasized a "land, expand, retain" approach, with each sales representative responsible for the entire customer lifecycle.
- Customer success teams were initially deemed unnecessary due to a high renewal rate and a belief that their functions could be absorbed by other departments like support, sales, and professional services.
Given Advice to David on Entering Venture
- Many powerful people advised against entering the venture capital industry.
- It took a couple of years to determine if investing was enjoyable, with an initial focus on securing deals quickly.
- Due to high entry prices and revenue multiple compressions, series B and C investments from that period might not yield positive returns.
Reasons Why Businesses Plateau
- Businesses that sell primarily to young technology companies have limited future opportunities.
- Investors should consider if a company has gone through a renewal cycle and if the Annual Contract Value (ACV) has grown, shrunk, or remained stagnant.
- Companies that raised funds at high prices in 2020-2021 and have since plateaued may be worth more if they are liquidated or if they use their remaining cash to pivot to a new product or service.
Is Feedback to Founders Still Valuable?
- Founders should control the board meeting agenda and clearly communicate their priorities to board members beforehand to ensure productive discussions and avoid distractions.
- Founders should have direct conversations with board members before meetings to address concerns and determine whether specific topics need to be discussed during the board meeting.
- When selecting board members, founders should prioritize candidates with relevant hands-on experience rather than solely focusing on the number of boards they have served on.
David’s Top 3 Board Members Likes Working With
- Doug Leone is a phenomenal board member to work with because of his wisdom, practicality, vast network, and ability to guide without dictating.
- Anil Busher's advice to prioritize customer understanding by having extensive conversations with them before product development is invaluable.
- Khosla Ventures distinguishes itself through its innovative and entrepreneurial approach, constantly seeking to improve its services and differentiate itself from traditional growth investors.
Quick-Fire Round
- The most important lesson learned from extensive business travel is to prioritize face-to-face interactions with customers and employees to foster a strong company culture.
- Effective feedback should be direct, timely, and focused on improvement rather than using the "sandwich" method.
- A key takeaway from working with Bill McDermott is his deep understanding of enterprise software, salesmanship, and strong relationships with industry executives.