VC Roundtable: Recruiting Secrets, Second-Time Founders & Product-Market Fit Myths | E2143

29:57One of the themes we talk about over and over again on This Week in Startups is making sure you do your chores. I'm no expert on these things. I have some experience. Stephen Estes from CLA is an expert. Let's talk about being cash efficient. Tell us about efficiency and what you see in the top tier startups in your practice. We're seeing kind of an interesting trend out there where companies aren't needing to raise quite as much as they had in the past. You really have to be careful as a founder to only take on as much money as you really need. You've got to do the forecasting, you've got to do the modeling, and you've got to dial it in and get it right.

30:33Otherwise, you're going to end up either not raising enough capital to get to where you're going, and you're going to have to go get venture debt or go back, have an extender to the round, or you're going to give up too much of the company because you just didn't recognize how much money you actually needed. Yeah, very important to get this stuff right, folks. And that's really a bummer when startups don't do things in a button-up way. Always have a great partner, a good partner to have on this adventure. while things change? My friend Steven over at CLA. Visit claconnect.com slash tech. And don't forget to mention that your boy, Jake, Al sent you.

31:05That's claconnect.com slash tech. Start today. Yeah, look, the things get interesting more when you start asking questions of who do you bring in when? What should your salesperson look like? And the answer, the short answer is never suits. The short answer is catching talent on their way up and higher for smarts, higher for hunger, and a bit of experience. I'd rather have that than a whole bunch of experience and all the downsides that go with that. But plugging in this outside talent, imagine you have four founders, even in Wiz, just imagine. You have a close circuit. By definition, you have four people that are like brothers.

31:55They were at Adalum. Now, how do you integrate outside expertise to that so they feel part of that team? That takes conversations. That takes skills. That takes the board being aware of that issue. That takes the four founders being aware of that issue. trust between the founders and the board, because that is not an easy thing. And when you make a mistake, you recognize it quickly and you move on. And it's really that simple. I think unpacking, there's like an important piece to unpack that you said there, Doug, which is, and having been on a couple of boards here and seen this movie, there's some incredible salesperson.

32:31They look incredible on paper. They show up, they've had four top tier jobs. They've got the cufflinks, they've got this polish, but they're not hungry anymore. They're negotiating their exit package on the way in. That's their focus. But this is critical. The person is coming up. They've got enough experience, but they still have the hunger, and they're not just delegating work and maybe more concerned with the accoutrements of the executive position. Yeah. So I've been shocked by people that can sell$8 million a year at a major tech company and can't sell$500 ,000 a year for a startup. That is one of the problems.

33:14The other problems of people that have sold widget versus solutions. A widget is a straightforward sales, a solution. You have to understand the bigger picture. I've been shocked at that. And so those are the mistakes that we tried not to make. And the other thing is, what does your first VP sales or head of sales, as we call them early on, look like? Is he someone that has managed 200 million or someone that's managed 30 million? You can't get the person that's managed 200 million. Because that person, you have no customers. You may have three customers maybe. And so there are these steps you take.

33:50At Snowflake, the first person they hired who was a fairly low-level sales manager ended up running all of sales. And it rose. And it's our hope when we hire these people that they go all the way. But often they have to make a stop and become a regional manager, maybe stop there to get some experience. We hire someone over them. So those are the things we we get to do. And to convince our founders, that's how you should build a team. And we do that often. Gilly, tell me a little bit about secrets to recruiting you've learned the hard way. People who look great on paper or, hey, they were at whatever company, Microsoft, Salesforce, whatever, they were selling all this stuff, but it had more to do with that company and their product market fit than maybe the grid of that individual salesperson.

34:42And then also, I think it's a really interesting topic of integrating people into the team and making them feel that they're part of the team, even though they came from the outside. Maybe they weren't part of the formation of the company, but you got to make them feel that they're really part of something. It reminds me of Kevin Durant coming to the Warriors. He never quite felt like he was part of the core, right? Yeah, absolutely. And, you know, I'll take even a step backwards and mention that many of those cybersecurity, all those cybersecurity companies that Doug and I invested together, and I think those are seven companies by now, they all started in Tel Aviv with an office that's mostly R &D.

35:26So for many companies, when you build an office, you build actually the DNA. You have a center of gravity for that company and you build your DNA once. And once you have 50, maybe 100, maybe 200 employees, most of them in the office, you've got the company's DNA. for those companies that are coming out of Tel Aviv you have to do this DNA build up twice because you build the DNA in Tel Aviv maybe you've got it right but then you need to build another office maybe in New York maybe in San Francisco, maybe another location so you've got to go through that exercise twice which makes it riskier and definitely more difficult and there are many reasons why I've seen new hires that have done amazingly well in previous lives and didn't do well.

36:26Maybe they were younger and hungrier. Maybe they work with a different set of founders that brought different set of qualities to the table. I think when it comes to hiring, especially the first line of executives, it goes back to first principles. How high energy, energy is so important for early stage company because you're going to fail a lot. Early stage is all about failing, learning, and fixing. so high energy high intelligence and terrific teamwork and if you go back to those first principles you have a higher likelihood to do well Doug you wanted to add something to that so I hate giving away my secrets on these podcasts I've known you for a long time Jason For example, when I'm recruiting against a Google, I say to the candidate, my God, working at Google is fabulous.

37:47I said, the food, have you seen the food at Google? It's world class. Ranch, meat. Have you seen those colors? It's always red, yellow. They have those beautiful colors. They have bicycles. The campus is a blast. They pay a lot better. It's not a thing you can do to drive the price of that stock by one penny. You're a small cog in a large machine. Let me tell you about our company. In our company, the food stinks. It rains. When it's sunny and outside, it rains even indoors at times. We don't pay that well. Yeah, you're going to get stock. But if you have an idea at 10 o 'clock, we could implement it at 1030.

38:24And you can change the course of the company. So go look in the mirror and tell me what kind of human being you are. And if you're interested in a job, come talk to us again. And that's how I recruit against the big companies. I force these people to have it come to Jesus with themselves, whether they're just are done in life, basically, or they want to do something. Missionary, yeah. Or mercenary, yeah. Like if you're just going there for the food and the steak and getting your RSUs, they really have. It's so interesting how big tech has created this rest invest culture, even lampooned on the HBO show Silicon Valley with the Hooli company.

39:04And it's like, and Google was such a intellectual powerhouse, but when things get big, it is to your point, like, how do you make an impact? If you're going to go work at Facebook for Zuckerberg, he has to offer you these crazy incentives as AI versus going and working for Elon or, you know, some other company that's got grit and is just starting, you know, from the beginning. Yeah. Yeah. That's exactly right. Look, a new hire can shift the trajectory of one of our little companies. for the better or for the worse, but they'll have impact. Yeah. I want to talk about revenue quality. I know it's like a kind of a boring subject, but it is one of the things I've seen is so profound.

39:47We have these companies that appear to be rocket ships. They're getting elevation and looks like they're going to get to orbit. And then all of a sudden it explodes, goes off. And you're like, what happened? And you look at the revenue quality and churn, not profitable, et cetera. Doug, how do you assess the quality of the revenue of a company and if that needs to be fixed at the early stages? And I see it today with AI, and I think we saw it with apps for a little bit. People would sample a lot of different products, but they didn't actually use them. And AI, I'm seeing this all over the place.

40:24People will spend$300 or$400 on an AI product for the year, put it on their corporate card, and then They never use it. So there's many answers to that. First of all, there are transient markets like we saw with these apps where things exploded. The internet got so big, you have enough people trying things that look like momentum. And if you probably had an AI engine analyzing the quality of revenue, you probably would have been told that. But even if you had a brain, you could have known that. The other, though, that we found in the enterprise where Gilly and I spent a lot of our time is these companies that sold to other little tech companies.

41:00The company formation was so rapid for such a long time that companies got revenue by just selling to all the other little companies. And as long as the venture investors were funding and so on. Now, superimpose that to the fact that you start usually at the low end, the mid-range, and then you get pulled up market. In order to sell to the enterprise, you have to earn the right to sell to the enterprise. And to me, revenue quality starts being interesting. Even if you start at a lower end, by now you get dragged up. I remember when we looked at Figma. Figma, yeah, it all started with credit cards, people buying it.

41:36But now you saw people saying, I want 5 ,000 licenses. Can you send a sales rep over? Holy cow, we didn't have a salesman. It was PLG. We better hire some enterprise sales reps. And so, yeah, you've got to be careful in the enterprise at the low end selling to other tech companies or people trying things for the heck of it. And you've got to look for those leading indicators. You know, a few companies sticking their neck out and wanting to spend a lot more money. And then you know that you have something. And then the low end becomes a lead gen vehicle. It doesn't become revenue. It looks like revenue, but it's really lead gen for everything else.

42:13Yeah, Gilly, it seems like founders, sometimes they learn the wrong lessons. They're hackers. And, you know, I won't mention any specific, you know, startup accelerators, et cetera. But I remember we had to learn this lesson as pre-seed investors when they would show us their first 10 companies. We'd be like, oh, that's pretty promising. Then we said, well, can you just in the Google sheet, when you send us the 10 companies, what date they started, you know, where they, did they use the product and how did you source them? And, you know, we had one company was like, yeah, these seven came, were our, in our accelerator.

42:46And these three were our fraternity brothers. And we're like, have you tried to sell to somebody on LinkedIn, like a cold email? Or did anybody Google you and find your product? And yeah, so the sources of the company, the customers was how we unraveled this little gamesmanship that was occurring. But maybe some thoughts on the quality of revenue, Gilly. So maybe I'll add two insights to that. Because I thought that Doug's answer was perfect. One is most of the companies, all of the companies we invest in, in cyber security, are B2B software companies. And they're all approaching new markets, solving new problems.

43:36So you can go up market, down market, enterprise, SMB, you know, everything is open. And our recommendation is always to start with the more difficult, longer journey, which is to sell to larger organizations. So just go right to the pain, go right to the hardest task? Go to the most sophisticated buyers and users, because if they buy it and if they use it, everyone else would follow. And that's why you see the first deal of Sierra. It was a company that bought it for$400 ,000. The second deal at Wheeze was a million dollars. The third deal at Island was half a million dollars. So those are large organizations, sophisticated users, and they do a lot of diligence before they add a new product to their arsenal.

44:42And that is terrific for the founders, although it looks more difficult on the surface. And it's great for investors to build confidence in the team and in the product. The other insight is that in many of those companies, once they get to 10, 20 logos, So it's not about the first few deals, but once they get to some number of deployments, you know, RRs at the board is that first slide would be usage, not ARR. Show us usage. And if you see the usage graph going like steady, not growing, that's a major red flag. so usage adoption stickiness in that stage super important we have a company we have a company called Zafrin that the first few customers are all four five hundred thousand dollars a lot of it happens because it's the founders who sell those deals and then you start bringing the mere mortals the sales reps suddenly you may see the next ten deals being 150k because now the you know One of the things that we look for is a repeatable sales model.

46:00When is the first deal the founder doesn't have to be involved? And it turns out the founders are often the best salespeople. Yeah, there's an authenticity and a transference of enthusiasm when the founder's in the room explaining why they made something. You feel the enthusiasm just go right across the table, or nowadays the Zoom, to the customer where they're like, I want to be part of this. I want to be part of this new paradigm, yeah? and how do you get salespeople to have that same level? I want to talk a little bit about sort of our jobs as investors and the game on the field. The number of, and it seems like it's because of AI, but obviously cloud computing over the years, WeWork and office sharing, everything has made the cost of starting a company go down and the skill levels going up and the ability to get the first product at the door.

46:54So what are we seeing in terms of team size, Gilly, and what it takes to stand up a product today versus 10, 20 years ago? But even in the last two years with AI and these AI solutions coming, it feels like, my Lord, some companies are getting to their first million with just a handful of people at the company. So are you seeing that as well, game on the field? Look, I think we are still really early on in the cycle. but the trend is there and we would see companies getting to milestones like the first 10 customers, the first million dollars, the first hundred million dollars of ARR with lower number of employees and it would not just be for you know, building products.

47:52It's everything around that. It's, you know, the design, the customer success, support, BDR, and maybe five years into the future sales. So I think that the day where we would see the one employee company with a million dollar ARR is very, very soon. I think the time we would see maybe the less than 100 employees, company with$100 million of ARR is probably... Yeah, it's happening. Yeah, some of these products are catching fire. It's behind the corner. Yeah, some of these co-pilots like Cursor had hit pretty crazy revenue numbers with even more than a million dollars per person, Doug. And you've got enough history in the business to have watched this trend.

48:46And Google, Microsoft, Facebook, YouTube, just Instagram, you guys were investors in that as well. Large number of users, large amounts of revenue coming in with a small number of employees. Yeah, maybe that's going to happen in consumer. And we've all heard what Toby at Shopify said, I won't give you any tech headcount unless you can prove to me you can't be done with AI. But that's a mature company. I actually have a contrarian here. Yes, we can do more with less cost of cloud computing, blah, blah, blah. But we also have to run a heck of a lot faster than we ever had to. There used to be a time, I don't want to update myself here, where we could build a product, get our first few customers, take our time, hire two salespeople, get the U.S.

49:32profitable. Maybe we'd go to Europe. Can't do that anymore. Because if you do that, it's going to take you three years. You'll have 23 competitors. The speed of company building has gotten so fast that we have to high, high count. And also, if you're selling to the enterprise, the enterprise is not interested in a one-man vendor. The enterprise wants to see bodies, wants to see support. Try dealing with purchasing. You know, like after you've sold your product, now you've got to go fight another war with purchasing. Try doing that with an AI agent and see how far that goes. So I think we've got to segregate the B2B and B2C.

50:07I think we're going to see some of these smaller companies in B2C before we see them in B2B. And yes, once you reach the scale of Wiz or Sierra, now we can talk about efficiency in engineering, in R &D, and so on. But when you've got the first three guys working until midnight trying to build a product, I don't think an AI engine is going to help you that much. That's just my view. Yeah. Let's talk a little bit about this concept of overfunding companies. It happens every five, 10 years. New entrants come in, venture tourists, Doug. They start dumping money on top of, you know, companies that we've, you know, really been thoughtful about building.

50:49And founders, of course, look at it and go, hey, Doug, Gilly, I've been offered this crazy, you know, check with no board seat, no information rights. I've never heard of this firm. Or maybe they do public socks and now they're dipping into privates. and that created quite an overhang in the SaaS space. Yeah, Gilly, like where we had maybe companies get overfunded and then you have some members of the board who invested at $2 billion and the other ones invested at$200 million and the companies in between those two sort of realities. And then it becomes a lot of hand wringing and pain and suffering.

51:29Maybe where are we at in that part of the cycle? It seems like people are getting super excited again just this year. Yeah. My view is that the venture business is a complex business. And if it was easy, then everyone would do that. So some of the complexity is to keep the balance between the need for speed and then not throwing too much money on a company. And that's a fine balance because my experience is that in order to build a large, important, sustainable business, definitely in cybersecurity, which is my focus, that's an expensive exercise. It's expensive. You need to build massive amount of code and products, army of people to sell and support the product.

52:41It's an expensive exercise of money and sufficient capital for the company early on. that's really important. But you're right, there are tourists, there are all kinds of unhealthy situations. And again, it goes back to the same elements I've touched earlier, which is, you know, having a honest, transparent conversation with the founders,

53:20And they may have all type of temptations. And you simply address that through a conversation. And if you build the trust, and if you are fair as an investor, the founders would listen. Doug, we've seen this movie over and over again. So you're going to find my answer sarcastic. First of all, the sham of the scam that is called venture capital. Let's take a look at this. We raise money for which we get paid fees for the pleasure of investing the money. If we lose the money, so what? And if we make money, we get to keep somewhere between 20 % and 30%. You wonder why the balance between greed and fear always lean towards greed.

54:16a much more fair review would be here's the money no fees and you have to match dollar for dollar what you raise with your own money now you would see the greed and fear balance so already you have this this proclivity to lean in because of the compensation structure point one point two we have seen every generation and by the way i know my partners or certainly in sequoia market he won't be happy that I said all that, but who cares? You know, I'm old enough that I can say that. Second, we've seen every wave to be stronger and stronger. If we just look at the internet wave, 1995, when Netscape goes public, 1999, two great companies get built.

55:02Then, oh my God, the internet is a fraud, nine, 10 years, death, and then here we go again. Mobile, there wasn't a 10-year gap. There was a two to three or four-year gap between the head fake and reality. And I think AI is going to give us even a smaller head fake. So I think the opportunity in front of us is huge. So you have a proclivity to lean in by the money. And the fact that we know each wave is bigger, is quicker and quicker and bigger and bigger. And so I think we're in for quite a show, actually. And the trick is to pick them though, right? Because if you invest in everything, you're going to get nailed.

55:46And so like everything else, it's a pick them business. And we do know that if you pick them right, chances are it doesn't matter which round you came in. But I'd also urge all your listeners to think about all the dead FMV, all the dead companies that exist. Think about the thousands of companies that have revenue run rates, 30 million growing to 33 million who are being carried on their books, maybe at 120 million value, and they're really worth nothing. And so as you think about leaning in and doing something silly, like some venture investor did four or five, three, four years ago, I won't name any names, who had a theme investing in everything, you're going to get nailed.

56:26And so there's all these great forces. And the trick is just being the right one. There's two or three or four investments a year that matter. And being those, then you'll do just fine. Yeah. And that is over-indexing on the companies that lose, even though your reputation is kind of built with those founders, right? We talked earlier about second-time founders, kind of a sweet spot, you know, and serially investing in teams. Your reputation in some ways is made equally by the companies that don't make it, but obviously the power law defines, you know, by definition is one or two companies per fund determine the fund's success.

57:06Look, the real tough thing is do what Gilly and I do. And that is pick them early, find them early. I mean, it's easy to find whiz at the $10 billion round. It was a made company. And the question on that point was, am I going to make twice our money or six, seven times our money? And nobody knew. And you buy yourself either a poster or a small return and a poster. The real trick is getting there as early as you can. Yeah. And that is a function of your reputation, your deal flow, how many companies you meet with, and your ability to actually identify talent. Yeah, Doug? Yeah. And I might add a little luck.

57:47A little luck does help. I made a trip to Israel. Yes, I may have been a fake Don Valentine, but that trip to Israel is what eventually got Asaf to say, I'd like Doug on the board. So there's all this serendipity that has happened throughout my life. The Ron Conway call on Google, you know, Ron and I became friends. God knows from where we share maybe one glass of wine, white wine, too many. But that led to a Google call. and so these things happen and you just got to do the right thing for years make sure you you you do the right thing by others and if you do that chances are you're going to get some calls at the right time it really is like your reputation and the effort you put in saying yes to a couple of random things works i was at a party once uh not to make it about myself and somebody said you got lucky investing in Uber.

58:48And I said, yeah, you're right. And Travis was standing next to me and he said, I'm going to stop you right there. You don't know this, but J. Cal helped me on my first two companies, Scour and Reds Moosh. And whenever I needed help, he always picked up the phone and he always took me out to dinner and talked to me about my companies. All of that is why he got that investment. Exactly. And you just don't see it. And you and I, Jason, that's how relationship you needed a little help i gave you two hours of my time maybe an hour and now we have a relationship and uh that's the way it's and and gilly the same way yeah you know gilly and i are now friends but that friendship was built by helping one another out it's uh i want to talk about firm building specifically because you know i have this podcast for selfish reasons i love to talk, but it's also a great way to learn.

59:41And here I am, I got my own firm, I'm four funds in, and we all seem to be getting earlier. Earlier seems to be the focus. It seems to be getting very crowded. Obviously, Series B is bonkers. Series A also getting very crowded. People want to take the whole round. So we're all moving earlier. Sequoia has experimented with ARC. I'd like to hear how that's going. I know, Gilead, your firm, you do some incubation. Maybe what have we learned about going earlier and maybe creating some programs for folks? Gilly, I'll start with you. So first of all, we don't do incubations. Okay. We are dedicated to investing seed investors.

1:00:27We are the first Czech with amazing teams that we believe can build important cybersecurity companies.

1:00:42And we started CyberStarts in 2018. It was super small, super humble fund. We started with, the first fund was$50 million, really small, solo GP, and then invested in, I would say, nine teams out of those$50 million. And many people thought that my approach is complete craziness because you've seen a grown-up writing large checks, multimillion-dollar checks to young fellows without asking them, what do they do? and then three years later the world found out that those nine companies valued at over 25 billion dollars that was a major branding event for CyberStart so that's really helped CyberStart accelerate and build into a bigger operation and today we have four GPs, four general partners on the ground in Israel and two operating partners in the US.

1:02:08We've raised multiple funds, more than$700 million. Talk about deal flow. How did you get those first nine and then how do you get deal flow now? I mean, one of the things I've read is that early success in venture capital is a predictor of later success because the founders and the LPs all chase the people who have early success. So there's some manifest destiny there, I guess, or some self-fulfilling prophecy. But the first nine, how do you source those companies? And then today, I'm sure the success of Wiz and Island and other companies drives founders to come to you because they want to have the investor who did Wiz, yeah?

1:02:45Yeah. Yeah, and again, keep in mind that in our business, we are always as good as our next investment. So having a wonderful portfolio, that's great. No complaints. But you always, you know, if you feel too comfortable, you already lost the game. So the, you know, at CyberStarts, the first batch of companies. It was simply through the network of entrepreneurs I've already knew by then, spending nearly 10 years with Sequoia and being an entrepreneur and founder of two cyber companies beforehand. But they were mostly younger guys and girls out of 8 ,200 looking to build their first business. And there weren't, you know, 2018, keep in mind, cybersecurity wasn't cool.

1:03:51No, the opposite. It was this boring office within IT. Nobody cared about cybersecurity. So if you were, you know, a 25, 27 years old individual with a desire to build a cybersecurity company and you had a vague idea of what you like to be, you didn't have many options. So they found me. And I helped them to build those businesses. Now it's a little bit different. And, you know, we are very lucky to get many entrepreneurs call us, but we still, you know, As I said, we don't get ourselves too comfortable. We work really hard to get ourselves in front of amazing founders. Doug, maybe you could talk about this getting earlier and earlier.

1:04:49Sequoia's got a reputation of backing people before the product launches, doing Series A's, and obviously later stage funds now. Maybe a little bit about the ARC program and just how getting earlier is important today. Maybe it's always been. so many roads to heaven uh you can make money at every stage we vertically integrated we had a c fund a venture fund a growth fund and a public market vehicle seed we've done number of seed palo alto networks was a seed doordash was a seed uh and many others series a whiz island uh and so on series b sierra kind enough gilly gave me the call and so many others growth just quickly, you know, Zoom, Snowflake, and even public, Shopify.

1:05:36We made as much money in Shopify in the public market. We held that thing for, you know, we made a ton. But when you get there early, you have a shot investing in every fund, one, and two, you have a shot of really helping the founders set in the right footing. Unfortunately, the venture people, the venture industry has a lot of people, not everybody, but there's a lot of people that don't really have as much experience as you'd like. Let me just leave it at that. So we do want to go early. The ARC program has worked quite well for us. We've decided to limit it, though, not to go en masse, not to have hundreds of companies, because at the end of the day, they all have your brand.

1:06:21those are all founders that expect your help like like you can't say to an art company okay we're only going to give you an hour and a half that conversation is not a brand augmenting type of conversation that destroys your brand and so we keep it tight you know whether it's 15 20 companies a class but that's worked well but we do try to be the first money in uh the first of seed or otherwise. And if we can't meet that, then we want to be the first series A money. Because once you get to series B, now the ownership comes down. Look, the ownership has come down already a whole bunch. We used to own 30%, then 25, then 20.

1:07:00Now series A may get you 15 points. And so it's really brutal. The venture industry was a niche business. Now it's a broad-based business. And everybody and and their mother and father is a venture investors. And so the thing we know is to ingrain ourselves in the entrepreneurial tap community and get there either, as I think of it, through a sales force, our own partners, or an indirect channel. You can tell I'm a go-to-market guy. You are an indirect channel, Jason. You call it things. Gilly's an indirect channel. And so we have both a direct and indirect channel, and we try to get to as many things as early as we can.

1:07:40And when we either miss them or make a mistake, at the series a we try to pass in the most elegant ways because we may want to catch them uh one round later uh and so on amazing all right listen uh great job gentlemen uh let's do it again in a year i'm going to book you both and we're going to check in uh both on your uh very uh modest retirement doug this isn't retirement you're working just as hard you're just as engaged It's a bad word. It's a bad word. You're just as engaged. And look, you look young and you look energetic. You look vibrant. I think it's great that you're still in the game.

1:08:19I don't know about this. It's so weird that a lot of the firms have this forced retirement at a certain age or these weird rules because we're all living so much longer and cognitive function is continuing on. I don't know. And there's all this wisdom to be passed down. So I just love the fact that you're still in the game. And Gilly, it's great to get to know you. And I'll look forward to seeing you in the region the next time I'm over there. And we'll see you all next time on This Week in Startups. Bye-bye.