The era of capital-efficient growth is upon us
David Peterson

Hope everyone had a restful holiday and happy new year!

As I’m wont to do, I spent a lot of the holiday thinking about growth. Specifically, I was reflecting on the fact that, for most of 2022, investors have been advising founders to cut burn on the one hand, and grow, grow, grow, on the other.

That’s harder said than done, of course. As a former bootstrapped founder, I intimately know how challenging it is to grow financed by revenue alone. And it’s especially challenging when there are so few examples of companies executing on capital-efficient growth strategies in the startup world to learn from.

That’s why I was so excited to listen to this conversation with Zoom CEO Eric Yuan and Veeva CEO Peter Gassner about capital efficient growth. Veeva and Zoom have nearly opposite business models (Veeva sells multi-million dollar contracts, Zoom sells small contracts bottoms-up). And yet, they both went public after raising vanishingly small amounts of external capital.

So, are there any secrets we can glean from Veeva and Zoom’s stories?

Perhaps not secrets, but…modes of operating? Absolutely. In the conversation, Peter and Eric identified a few attributes that enabled them to be so capital efficient:

Mindset. It wasn’t easy for either Veeva or Zoom to raise external capital. Investors told Peter that vertical markets were too small, and Eric that video conferencing was too crowded. This forced them to execute as if they’d never see another dollar, which was more challenging, but also much safer. As Peter said in the interview: “A cash-generating business is always valuable to somebody. At some point, a business that’s not cash generating is going to be valuable to nobody.”

Product excellence. Both Peter and Eric kept coming back to this point, and I think if they were editing this newsletter, they’d ask me to bold it, highlight it and underline it. Whether selling top-down or acquiring customers bottoms-up, providing an excellent product that customers love is a prerequisite to pulling off capital-efficient growth. This is somewhat obvious for bottoms-up companies which rely on the product to grow, but an excellent product is more efficient to sell top-down as well, because fewer sales people are needed per dollar of revenue. So, product excellence must be an obsession. Ensure you have a team that can build a superior product, and empower that team to do so.

Focus. Don’t do anything, or hire anyone, that’s not moving the ball forward on building an excellent product or acquiring customers. Those are the only things that matter. On customers, be utterly and completely focused on building the right product to make customers successful. (Peter mentioned that Veeva never did customer satisfaction surveys early on because “you can hide behind metrics” and he wanted to hear exactly how every customer spoke about the product.) On hiring, Peter and Eric suggested thinking about each person as a distinct investment that needs to be judged based on its return. Is hiring that person going to be ROI positive? How will you know one way or the other?

There were a few interesting tactical points from Veeva and Zoom’s stories that I wanted to highlight as well:

• The downside of multi-year deals. You might think, especially if you’re trying to grow in a capital efficient manner, that getting as much cash upfront would make sense. Not necessarily, according to Peter: “I was always optimizing for the long term value, which is the annual value per customer. If I had to give the customer terms that would lock them in, I thought that’s actually shrinking my market because they’ll pay less if they’re locked in. That’s one thing. The other one, I didn’t want us sort of getting lazy. I wanted us to earn the business every year.”

• The benefits of promoting from within. Both Veeva and Zoom recruited some established “external superstars,” but they mostly filled their executive teams with internal “up and comers.” There were a few reasons for this. One is team dynamics. The chemistry of the executive team is much more important than the skills of the individual players, and it can be easier to build that team with known quantities. (And having a mix of experienced external players and internal “house talent” is very valuable.) Another is alignment. There’s something special about giving somebody a chance to do something they haven’t done before. They’re more fulfilled, and they pay you back in loyalty.

• Accelerating your growth by building a product portfolio. Peter and Eric both agreed that building a portfolio of products was integral to changing Veeva and Zoom’s growth trajectories. Veeva’s approach, in particular, is worth learning from. Peter specifically decided to build a new product that was clearly not an add-on to their first product. This may seem counterintuitive, but his argument is as follows: your first product’s footprint will naturally expand. You won’t need to plan for that. By adding a new product to the portfolio, you’re trying to change the growth trajectory of the company. That will only work if your new product is different enough to be truly additive.

I’ve listened to this conversation a handful of times now, and these are the points I keep coming back to. Now, none of these are that surprising. I can’t say that any secrets were revealed. The reality is that growth is hard work, and capital-efficient growth is even harder. But I find solace in their stories and inspiration in their success, and I hope you all do too.

Until next time,
David

EVENTS

Feb 8 / Lessons Learned From Investing Early in Over a Dozen SaaS Unicorns Including Salesforce, SuccessFactors, Box, Gusto, SalesLoft, ServiceMax, Veeva, Bill.com, Doximity, Yammer and Zoom Among Others
Jason Green, Founder & General Partner, Emergence Capital

Mar 8 / The Evolution of Collibra’s Product Positioning & How They Created a Category
Stan Christiaens, Co-Founder & Chief Data Citizen, Collibra

FROM THE BLOG

The Tech Recession of 2022
What lessons can we learn from the successes and failures of the 2010s?

No One is Having Fun Right Now
And that’s okay.

It’s Never too Early to Build your Growth Model
What are the specific mechanisms by which one user turns into many, and an initial investment turns into revenue?

How to Think About Revenue Quality as an Early Stage Founder
What does “quality revenue” mean when you don’t have much revenue at all?

EUROPE & ISRAEL FUNDING NEWS

Netherlands/Design Marketplace. Creative Fabrica raised $61M for its marketplace for digital files like print-on-demand posters, fonts and graphics.
Israel/Automotive Components. Opsys Tech closed $36.5M for its True Solid-State Scanning LiDAR solution that will drive the adoption and commercialization of autonomous and semi-autonomous vehicles with safety and performance.
Spain/SME ERP. Digitail raised $11M for its all-in-one cloud veterinary software.
Israel/Financial. 40seas raised $11M for its fintech platform for cross-border trade financing.
UK/Industrial Materials. Nationwide Engineering raised $9.65M for its low-carbon cement alternative called Concretene.

WORTH READING

ENTERPRISE/TECH NEWS

How MSFT will use ChatGPT. If the biggest news in tech right now is OpenAI/ChatGPT, the biggest news in OpenAI/ChatGPT is the (very complicated and highly structured) $10B investment that Microsoft is considering. The Information is out with an analysis of how the software giant might start incorporating the technology into its product lines. “Inside Microsoft, a slew of executives has been involved in trying to integrate OpenAI’s software into Microsoft’s products since 2019, according to someone familiar with the situation. Kevin Scott, chief technology officer and executive vice president of technology and research who reports to CEO Satya Nadella, has played a key role, the person said. Microsoft has also incorporated OpenAI’s software into some of its apps for enterprise customers, including Power apps that help them make their own business apps. The company also resells GPT-3 and Dall-E 2 to enterprise customers alongside its Azure server- and compute-power rental business. Eric Boyd, corporate vice president of the AI platform, leads that business, and one of his direct reports — Mikhail “Misha” Bilenko, vice president of AI platform and data science — runs a team focused on building new enterprise services that reuse OpenAI models.”

Taking their tweets and going home. Twitter has intentionally ended third-party app developer access to its APIs, and developers are not happy. “To say that Twitter’s actions are disgraceful is an understatement. Whether or not they comply with Twitter’s API terms of service, the lack of any advanced notice or explanation to developers is unprofessional and an unrecoverable breach of trust between it and its developers and users. Twitter’s actions also show a total lack of respect for the role that third-party apps have played in the development and success of the service from its earliest days. Twitter was founded in 2006, but it wasn’t until the iPhone launched about a year later that it really took off, thanks to the developers who built the first mobile apps for the service.” Call it a lesson in platform-dependency…

Personio edges closer to an IPO. Sifted reported that the German HR tech giant is moving closer to going public. “The HR tech unicorn hasn’t yet selected a location for its IPO, but Renner says Germany “would definitely be an option” — if changes are made by the government to make listing in the country easier and more attractive.”

HOW TO STARTUP

37Signals left the cloud, and blogged about it. Fernando Alvarez from 37Signals wrote about the company’s decision to “leave the cloud” in 2022. The post provides an accounting of their cloud spend, and how they hope to operate going forward. “Getting this massive spend down to just $3.2 million has taken a ton of work. The ops team runs a vigilant cost-inspection program, with monthly reporting and tracking, and we’ve entered into long-term agreements on Reserved Instances and committed usage, as part of a Private Pricing Agreement. This is a highly-optimized budget. So that’s how we spent millions on the cloud in 2022! In 2023, we hope to dramatically cut that bill by moving a lot of services and dependencies out of the cloud and onto our own hardware. We don’t operate our own data centers, but work with our friends at Deft to lease rackspace, bandwidth, power, and white glove service. That isn’t cheap either at our scale, but it’s far, far less than what we spend on the cloud.”

Who’s buying (you)? Tomasz Tunguz with a (very useful and timely) list of the most acquisitive buyers in software.

HOW TO VENTURE

True leadership. Usually, this section of the newsletter is where we put links to content about the art and craft of venture capital. Today, we are linking to Adam Fisher’s passionate defense of Israeli democracy in the face of an ominous set of measures proposed by Israel’s new government. On Saturday night, over 80,000 people streamed into the streets of Tel Aviv in protest. A few days before that, Adam — who is a partner at Bessemer and easily one of the most impressive and successful venture capitalists in the country — was among the first in a growing list of Israeli VCs and technology executives to publicly commit themselves to opposing these measures. Regardless of your connection with Israel, his words are worth reading — and are a reminder that when you reach a certain level of success in any field, it is incumbent upon you to stand up for what you believe is right. Thank you, Adam. “For all its might, Israeli high tech is entirely dependent on the influx of foreign capital and access to foreign markets. Even if the calls for sanctions on Israel are repeatedly thwarted, foreign investors will grow wary, choosing to make smaller allocations to the country and demanding larger discounts on the investments they do make. It took decades to build the industry that now drives the Israeli economy, but this one reckless decision can set it on a path of decline. This reckless step will set in motion a cascade of contentious decisions that will be impossible to defend without an independent judiciary. Today it is the judiciary. Tomorrow it is the Bank of Israel. Tyranny of the majority is arbitrary rule. Arbitrary rule is not only uninviting for businesses and investors, but also deters them over time.”

PORTFOLIO NEWS

Groundcover and its next-gen observability stack were recently featured in Forbes. Groundcover also launched on Product Hunt their OSS project, Caretta, a stand-alone network mapping tool based on eBPF.

Datos Health was chosen to deploy Hybrid Care Models across all 24 hospitals of the Ministry of Health in Israel.

DUST Identity was recognized on Built In’s 2023 Best Places to Work in Boston list.

Forter’s CEO Michael Reitblat shared how the crisis in 2020 prepared them for this year. Forter also appointed Ozge Tuncel Ozcan as Chief Customer Officer.

Sisense unveiled their integration with ChatGPT.