Thursday, July 31st, 2014

Building the Enterprise SaaS Startup: An Interview with #BoxWorks Speaker Jason Lemkin

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After serving as co-founder and CEO of EchoSign, BoxWorks speaker Jason Lemkin became a managing director at Storm Ventures, where he has invested in numerous early stage companies in the enterprise space including Marketo, MobileIron, and more. He’s also prolific on Quora, where he regularly shares his thoughts on the enterprise market, VCs and the SaaS business model. Recently, we sat down with Jason to get his thoughts on trends for the enterprise, seeing the future, and the importance of hustle.

Jason Lemkin headshot
As a founder, how does building a product for the enterprise change the way you approach a startup, particularly at the beginning? What do you need to focus on getting right first?

What’s different in the enterprise is you have to focus on a Minimum Sellable Product, not a minimum viable product. It doesn’t matter if an enterprise product does something neat, or even useful. What matters is if someone will buy it. The MVP concept from B2C and freemium does a slight disservice in the enterprise. If they’ll use it, but they won’t buy it — it doesn’t really exist.

Over the last few years, we’ve seen a pretty clear trend towards platform solutions and critical business applications playing nice with the larger B2B ecosystem. How much should new enterprise-focused founders think about fitting into this ecosystem?

A few thoughts.

First, for a start-up, if you get it right … a platform can be a great accelerator. If you can get behind Box, behind Salesforce, behind Marketo … and get just 1% or 2% of their customers from their platforms … you can get to millions in revenue right there.

At EchoSign, we were in the first class on Salesforce’s AppExchange. Even back then, we were able to get several million in revenue in the early days just from attaching to Salesforce.

Just getting 1% of a $200m company’s business and customers can get you your first $2m in ARR right there. Only a handful of apps can pull this off. But if you are one, it can really work to get you to initial traction.

Second, at a more strategic level, you need to think about what a platform can do for you, and who owns the Customer of Record. Salesforce works great as a platform … for Salesforce … because almost no matter what you do, Salesforce owns the customer of record. Box is more unusual, in that you can leverage Box and still own the customer of record yourself. Contrast that with Workday, which is a relatively closed ecosystem. Because Workday doesn’t want you to end up owning any of the Customer of Record. They don’t want you becoming the front-end, and Workday just the repository.

Third, at an integration/API level — integrations are no longer optional. They’re table stakes. You have to integrate with everything else your customers use. Enterprises don’t want silos. They want one seamless system. Even if multiple vendors constitute that system.

Today, it’s a huge strategic asset if your dev team can release 10-20 integrations a year, like clockwork. And not struggle to just get “one more integration” out the door.

You’ve said before that as a founder, “you cannot quit” and “if you allow optionality, you will fail.” That approach is different from a lot of traditional advice to entrepreneurs about failing fast. As a founder, if failure isn’t an option, how do you responsibly manage your team through hard times?

Well, you will lose the nonbelievers. As painful as that can be if they are good — it’s part of the journey. If you’re the only nonbeliever — then it will be game over.

But if you are a great CEO, with a great vision, and you have at least a few customers — even if it’s just a handful — people will follow you. Not everyone. But at least some will follow a great, inspirational leader and connect the dots. They’ll believe and connect the dots from say 10 customers doing just $1,000 in revenue, to 1,000 doing $10,000,000 in revenue.

To keep your team, you do need to do two things. First, in the early days, you have to close at least a few customers. To show them you are adding value, even if the revenues are immaterial. That will be enough, for a while, for the believers. If you don’t have any, get the heck out of the office, off your iMac … and go close some. Whatever it takes.

Then you have to drag the company, and do whatever it takes, to get to Initial Scale, to say $1.5m in ARR, in recurring revenue. Because once you get there, you’ll have revenue that truly recurs. You’ll know where the next 100 customers will come from. You’ll have a mini-brand. Until then, it will still be hit and miss.

If you can drag the team up the hill to 10 customers first, and then to $1.5m in ARR … you’ll make it.

Since leaving Adobe, you’ve moved over to the VC side of things. Now that you’re on the receiving end of pitches, what have you learned about building companies that you didn’t know as a founder?

Not that much. Successful founders just know so much more than VCs, at least at an operational level.

But one key thing you do learn, that I have learned, is how to benchmark companies. The difference between Good and Great. How to see a Box, even back in ’05.

What I’m personally looking for is just the combination of two things: (1) founders that are better than me, and (2) early metrics that are even better than EchoSign. If you have a founder that is better than me, AND with even better growth potential than I had … then I know that’s a winner. No matter what your product actually does. I did pretty well. EchoSign and the Adobe Document Web Services hit $180m in ARR last quarter.

If you’re even better, I’m in. Period.

And there are so many great entrepreneurs these days.

Back in the old days, say ’05 and ’06 when Box and EchoSign and others were getting off the ground … there just were so many of us. So many interesting new SaaS apps. Now there are 1000s.

So the competition is fiercer than ever. The products have to be much, much better than ever. But if you hit it — you can scale faster than ever.

All the companies on the start-up panel I’m moderating at Boxworks have scaled even faster than we did.

On Quora, you said that as a VC, “meeting with founders and entrepreneurs that are better than you is amazing.” Are there any common traits of these founders or their companies? What really sets their stories apart?

There’s one common trait. They can see the future.

The almost-great entrepreneurs, the merely very, very good ones, can see the present very, very clearly. They know everything about the competition, the market, the customers, the features, everything. There’s nothing you can ask them about today that they don’t either know, or know that they don’t know.

But the truly great ones can see the future. They can tell you exactly how the market will look in 3-5 years. They may not be 100% right, or even 70% right, but they can see it. Aaron Levie could see the future, even back in ’05. He couldn’t forsee mobile entirely, he couldn’t forsee exactly what enterprises would want in content management in ’15. But he saw the future of ubiquitous web storage and web content. Parker Conrad, CEO of Zenefits, on our start-up panel … can see the future. Selling insurance on the web isn’t that interesting to me. But the future of HR services, circa ’19? Very interesting. Eoghan from Intercom, he can see the future.

I want to work with, invest in, and partner with founders that can see the future.

What are some of the most exciting trends you see emerging in the B2B world in the next 3-5 years? Are there any specific unsolved problems you’d like to see enterprise startups address?

The good news is we’re just in the second inning. CIOs are just now migrating the majority of their budgets to innovation, vs. mere protection. And smaller businesses are just being to adopt systems of record and spend real sums on SaaS.

Even spaces that are large, they are now so large, they can welcome new entrants. Salesforce is on its way to $10 billion in ARR. That creates $1-$2 billion in room just at the bottom of the market to compete, the segment of the market that is too small for Salesforce to address. That’s 10-20 IPOs right there. We already saw one with Zendesk this year, and many more are to come.

No spaces are locked up. Find a way to deliver something 10x better than it’s delivered today, in a reasonably large market, and today, that’s a $100m ARR opportunity.

Do you have any other advice for founders looking to target the enterprise market?

Yes. You have to hustle. There are very few lifestyle businesses in the enterprise. Customers may come to you, but you also have to go to them. Get on jets. Listen to them. Solve their problems.

If you just want to build software, but you’re not willing to hustle, try games or the Appstore, or maybe at least freemium.

Selling to the enterprise is about solving an enterprise’s problems. The reason Box can work with the Fortune 500 isn’t because Box lets you store files in the Cloud. Box can work with the Fortune 500 because it solves a large problem in the enterprise — controlling and collaborating on cloud content.

If you solve a large problem in the enterprise, you can charge tens of thousands up to millions of dollars a year.

But you will have to hustle.

CEOs that don’t hustle in the enterprise, don’t win.

 

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