Acquired - Capital-Efficient Growth (with Zoom CEO Eric Yuan & Veeva CEO Peter Gassner)

Episode Date: May 19, 2022

We sit down with the CEO founders of two of the most capital efficient success stories of all time — Zoom and Veeva Systems — to understand how they grew to billions of dollars in revenue (and tens of billions in market cap) on very, very little capital invested. With the fundraising environment changing rapidly, we couldn’t think of a better topic to discuss or better sources of wisdom for founders, operators and investors all to learn from. Very special thanks to Jake Saper and our friends at Emergence Capital for inviting us and putting this conversation together at their 2022 CEO Summit!This episode has video! You can watch it on YouTube.Sponsors:ServiceNow: https://bit.ly/acqsnaiagentsHuntress: https://bit.ly/acqhuntressVanta: https://bit.ly/acquiredvantaMore Acquired!:Get email updates with hints on next episode and follow-ups from recent episodesJoin the SlackSubscribe to ACQ2Merch Store!Links:Peter’s great Medium blog‍Note: Acquired hosts and guests may hold assets discussed in this episode. This podcast is not investment advice, and is intended for informational and entertainment purposes only. You should do your own research and make your own independent decisions when considering any financial transactions.

Yes, it is very appropriate to be on here on Zoom with you recording these before going into the interview with Eric. If only we had our notes on Viva. Although I think it's a little bit out of our strike zone in terms of like perfect market. We would be the only podcasters in the world using Viva. Peter is very focused on clear and correct target markets. Yes. Welcome to this special episode of Acquired, the podcast about great technology companies and the stories and playbooks behind them. I'm Ben Gilbert, and I'm the co-founder and managing director of Seattle-based Pioneer Square Labs and our venture fund, PSL Ventures.

And I'm David Rosenthal, and I am an angel investor based in San Francisco. And we are your hosts. Today, we have something very unique to share with you all. It is common for top venture capital firms in Silicon Valley to get all their CEOs together once a year in one room for a CEO summit and speak frankly with them. It is uncommon, however, to allow anything discussed to be shared publicly. Well, today we are doing just that. The good people at Emergence Capital, in particular, friend of the show Jake Saper, invited David and I to interview two very heavy hitters at their CEO summit last week, Eric Yuan, the founder and CEO of Zoom, and Peter Gassner, the founder and CEO of Viva Systems. I think this is the first time that any content from any venture

firm CEO summit has been specifically created for podcast public consumption. It's so cool. I think Peter has never done a podcast before. I think that's right. And he's built a $20 billion company. Yeah, the Viva system story is amazing as you will hear. We talk about they raised $4 million. That's four, like one after three and on just that $4 million that they didn't even consume all of that capital. They've now built a $2 billion revenue business with incredible margins. It's such a cool story. And Peter is on the board of Zoom. And so as you'll hear, he and Eric know each other very well. And it's a super different company that we normally talk about too. It's vertical specific. So it's just in the life sciences industry. They sell

high dollar software to pharmaceutical companies and I think biotech as well, right, David? Yep. Yep. So the topic that we discussed with both of them is capital efficient growth. And that's something we felt would be super valuable for all the CEOs in the room. And obviously, that means that we think it's going to be really great for everyone to be thinking about right now. So rapid scaling on very little capital is something they obviously both know a lot about. David mentioned the 4 million total funding that Viva raised before going public. As you remember from our Zoom

episode with board member Santi Subotowski, also an Emergence Capital partner, Zoom raised $30 million from Emergence and another $100 million from Sequoia afterwards, and they never touched the vast majority, if not all of those funds. I think they didn't touch any of that $130 million. Eric had raised, as you'll hear about, he'd raised some money from angels along the way and that funded product development, but none of the venture money was consumed. It's crazy. So if you're excited to learn about how these companies managed to pull off enormous impact with very little capital to do so, you are in the right place. And if you want to discuss these topics with us after you listen, you should come join

the rest of the Acquired community. I think we're 12,000 strong now, David, at acquired.fm slash slack. You should join us. It is always a riot. This will be a great one to discuss in there with the community and other founders, and including Jake Saper himself from Emergence, who's active in the Slack. It's true. Okay, listeners, now is a great time to tell you about longtime friend of the show, ServiceNow. Yes, as you know, ServiceNow is the AI platform for business transformation, And they have some new news to share. ServiceNow is

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across every corner of your enterprise. They boost productivity for employees, enrich customer experiences, and make work better for everyone. Yep. So learn how you can put AI agents to work for your people by clicking the link in the show notes or going to servicenow.com slash AI dash agents. All right, listeners, our next sponsor is a new friend of the show, Huntress. Huntress is one of the fastest growing and most loved cybersecurity companies today. It's purpose built for small to midsize businesses and provides enterprise grade security with the technology, services and expertise needed to protect you. They offer a revolutionary approach to manage cybersecurity that isn't only about tech, it's about real people providing real defense around the clock.

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So now on to our interview at the Emergent CEO Summit with Eric Yuan and Peter Gassner. So to set the stage, I thought maybe could each of you please give us a brief overview of your fundraising history up to and including Viva and Zoom's IPOs, which ordinarily that would take like an hour. This is going to be pretty short. This is going to be very short. Private financing history. Go ahead. Are the simple angel investors when we just started and then emergence about 15 months in so angel investors I think that was 3 million and emergence was 4 million we never actually used the emergence 4 million but I thought I thought we might at the time and we got in 2007, in February,

and we raised in about 2008, maybe March or so. So that was the environment at the time. Another very simple time to be fundraising and company building in. Yeah, it was hard to even open a bank account because it was the whole know your customer thing and financial crisis so everything's hard. And I think probably most people here know this, but for

folks listening on the podcast, today you're doing about $2 billion in revenue at Viva. Yeah, we're doing about $2 billion about 30% profit or so. Amazing. Eric, could you share your fundraising journey with us? Sure, sure. I started the company in 2011. First thing I did, I opened up a Wells Fargo bank account.

I thought it's very easy for me to raise capital. That's why I opened up a bank account. Unfortunately, it took me several months. No VC wanted to invest in me. Unfortunately, I do not know my brother, Sandy an emergency capital otherwise life would be much easier and finally and Talk to some friends and it reads the the three million seed funding. That's how we started and for when it comes to a Ron I try to talk VC again and Again, nobody wanted to invest us either. So and You know, we talk to the friends to friends and get another six million,

and that's how we started. Yeah, it's very hard. And nobody wanted to talk to you at that point because most people assumed video conferencing was either a settled frontier or a race to the bottom. Am I thinking about that right? Absolutely right. That's a thing.

Everyone mentioned, Eric, you are crazy. The world does not need to have another video conference solution. And another VC friend, Eric, you are crazy. The world does not need to have another video conference solution. And another VC friend, even, is a great friend, he told me that, Eric, I have a check for you, as long as you do something else. Good news, I did not listen, and I was very stubborn. I should share with you a story.

And once I was told by a big VC, I do not want to mention the name. For sure you guys do not like them. He told me that, Eric, I do not think your strategy works. Look at Skype, look at Google Home, look at WebEx, it's dominating, right? I debated with him a little bit. I failed and I cannot convince him. On the way back, I told myself,

I'm gonna change my Windows screen saver, back then I still used Windows machine. I changed Windows screen saver. You are wrong. For several years. And just to make sure I have my facts straight, I believe you raised a $30 million round led by

Emergence and then another $100 million round after that. And similar to Peter, you did not dip into any of that $130 million. Is that correct? To build the business? For me, actually after the $30 million from Emergence Capital, I think we are on

the right track. To be honest with you, actually, we are on the right track. You know, to be honest, with you actually, we even do not need to raise a serious D actually because at that time, you know, I think with that 30 million, I think the company

completely into a, I feel like a different game. So, yeah. Wow. That's one thing we wanted to ask is a difference between your two companies.

Peter, you obviously, once you got to cash flow profitability, which was immediately, basically, you never raised another round. Eric, you did make the decision to raise some more capital even after you were generating cash. And Peter, you were on Eric's board when that process happened. Why did you make that decision? Well, for Viva, I didn't raise more

just because I thought I don't need it. You know, it's just that simple, right? So, and then as far as for Eric, right, when you're on the board, right, that's really Eric's decision, so, you know. So, yeah, as I mentioned earlier, I offered to raise a certain median from emergency capital.

At that time, seriously, we had no plan whatsoever to raise another round of capital. The reason why we still moved forward to have a series of digs, because I thought our economy will go down dramatically. This was 2017? 2016, 2017 timeframe. I was completely wrong. But anyway. It had been the seven year bull run. Of course, the end was near, right? 2017? 16, 17, high frame. I was completely wrong. So, but anyway.

It had been the seven-year bull run. Of course, the end was near, right? Yeah. So, and long story, but anyway, so. Yeah. I think that raising that money at the time, I thought, man, maybe we don't need to do it. But also I thought it doesn't matter, right? What matters for Zoom is the great product

and the customers. Whether you take some more money, you don't take some more money, right? It's all fine. It would all work out. That's right. Yeah. So as we were preparing for this interview, our first thought was if we just had one of you up here and we were interviewing you about capital efficiency, it'd be easy to chalk it up to business model and cash flow cycle. You know, multi-million dollar contracts up front on, you know, in the case of Viva or in Zoom, customers flocking with their credit cards for a, you know, a self-serve experience. These are two completely different models. And so I think one of the things that it illustrated to David and I is capital efficiency is a mindset and culture thing more than a business model thing.

And I'm curious to hear both of your reactions to that, but also what are the things that enabled you uniquely more so than 99% of startups to be so capital efficient? I can take that one. I guess I've seen a little bit of Zoom and a little bit of Viva. I would say probably it starts with a mindset, you know, just run a profitable lemonade stand. From my point of view, for me, it was their safety in that cash generating business is always going to be valuable to somebody. At some point, a business that's not cash generating is going to be valuable to nobody right you might be able to sell it before it becomes it you know not valuable but you can only there's only there's security in long term uh you know so it starts with the mindset i think eric shared that and then uh you have to have product excellence too too. And that's something I think Eric and I share. We're both product people. I think also we both worked really hard.

We work really hard now. I think especially Eric, probably in the first five years, I worked really hard. You didn't see me working really hard, but I saw you working really hard. So worked really hard, worked really focused. Anything that wasn't related to the product or the customer was just BS, you know, and just don't do it. Like, first five years, I was not at a conference like this, for example, right? I was just maniacally focused. And then the market really helps, too.

And that's something you just have to get lucky on, right? It was the right timing for Viva. It was the right timing for Zoom. Maybe if you started Zoom five years earlier or five years later, it would have been hard, hard. So product excellence, real focus, mindset, and then you have to have some luck in your market. I'm sure there are some things that I could have tried to do, or Eric could have tried to do, and it was, we might have picked a bad market and then and then it just wouldn't work and that's I think you you have to so we're outlier right and so is

Eric you have to pick something that most people think is going to fail to be an outlier otherwise by definition you're picking something that most people think is going to work and therefore a lot of people are picking it therefore you're not an outlier. So just like Eric, you know, most VCs, all VCs, except for emergence, all VCs of any kind of note, except for emergence, turned this down, right? And ours was really simple. Vertical specific software, that's a small market, and it doesn't work, right? That's what they would say. And I was encouraged by that, because I thought, well, it has an opportunity to be really good because it's something non-obvious. Well, one thing that I want to double click on that we were talking about beforehand.

Yes, like you need to be non-obvious to have a chance of a great outlier outcome, but you also need to be correct. But I think what you did, what you both did was not, hey, I'm going to pick some random idea that other people think is crazy. You know, I know Viva has as one of your core values, clear and correct target markets that you have written on the wall. What did each of you do, you know, ahead of time that led to you to like really genuinely believe, yes, the world thinks this is crazy, but I really think this is going to work? I'll go first. It's real easy. I talked to three or four potential customers

for our first product, and they all said, we don't need that. That's not interesting. It's not a good thing to do. But I wasn't listening for that. I was listening, are they emotionally attached to where they're getting their product now? Are they emotionally attached to those people? Do I feel like they're getting value out of that thing? And I could tell in their responses that they weren't attached

and they weren't getting value. So yeah, all four customers said it's a bad idea. They're all customers now though. Let me understand the Peter formula to build a business. Ask a customer if they want your product. They say no. You dig deeper and say, what are you using now? And they say, oh, yeah, because I have a solution for this, but they just don't love it. So you build for them anyway on the bet that you can be better than their current thing. Yeah, you have to listen to what they feel, not what they say.

They would say, yes, we're very happy with this solution, but then you dig, oh, tell me more, why is that? What is it that you get out of it? And it's like, oh, well, uh, and that's when you know. That sounds like the video conferencing market circa about 2015, 2016. So for me, it's very straightforward because I was a regional founding team member of WebEx.

The two years before I started the company, I knew actually WebEx really sucks. Did you try and tell Cisco that? I tell my team. I do not dare to tell others. Anyway, Skype also not reliable. Google has done no work. Every day I spend a lot of time talking to every customer. I know if I can build a better solution,

I think at least I can survive. I never thought about everyone is going to standardize on Zoom platform. But at least I know for sure is, if customer, they do not like something, if you can build something better, you have chance. Eric, did you think from the outset that you were trying to build Zoom as a big company, or did you just think that you wanted to build a profitable company to survive, and then

you would sort of see where it went from there? I think two things. First of all, at that time, my passion was very straightforward, because WebEx is more like my baby, right? I feel like I worked so hard for so many years. I let the customer down. I really wanted to fix that problem, but Cisco did not want me to start over. I had no choice but to leave to build Zoom. That's the number one reason. After I started the company, I realized, wow, it's so hard to raise capital. By the way, the money that they give to you,

don't think about that as money. You know, that's a trust. You know, every dollar matters, right? That's why every day I was thinking about how to survive, how to survive, how to survive. Even today, seriously, I still think about, I woke up at night, you know, how to survive. You mentioned people in your team.

When you started Zoom, you were a solo founder, but you brought a large number of people with you. One of the first operational topics we wanted to dig into around this topic of capital-e efficient growth is hiring and people. That feels like such an important part of the culture and DNA of having people who are going to get on board with, yeah, there's not going to be the spiritual equivalent of kind bars and exposed brick in our office here. How did you select for, maybe both of you, but Eric to start because you brought so many people with you from WebEx. How did you select for, maybe both of you, but Eric to start because you brought so many people with you from WebEx. How did you select for the people that you brought? So all of them are very good engineers, right?

Except for me. So I did not write any code. And on DeWine, we had around 25. Very soon we get another 15, total of 40 people, and myself included. All the people, they all write all kinds of code. And this was all funded with angel money. Yes, exactly. But I know actually, you know, we come with a run rate probably less than two years.

That's why later on we had a Series A. But we only have engineers just get the product done. And I'm more like a product manager, UI designer, and also the facility guy, everything else. Seriously, on day one, I bought and used the furniture, assembled everything by myself, and also write it on the company culture and value. That's pretty much what I did. So I would say, even for the first several years,

after product ready, and some investor mentioned, hey, you already have money in the bank now, why not build a marketing team, look at your competitors, they spend a lot of money, and all the billboard and one-on-one. At that time, I said no. For the first four years, we do not have any marketing team. Only until 2015, we started building up a marketing team. So we have to be very disciplined. To just highlight this,

so you started the company with 25, quickly growing to 40 people, but those were 39 engineers and you. No product managers, no marketing, no sales. That's the reason why I know how to use QuickBooks. I never know how to use that. So seriously, I had to learn how to use that. So it sounds very easy to say don't buy billboards. You got to get your customers somehow.

How did you get the snowball going? A little bit of luck, because seriously, and luck doesn't play a role, because several weeks before we launched the product, seriously, we had no idea how to get a first customer. Luckily, the very famous reporter, Walter Mossberg, he evaluated our service. And we were so nervous.

He's very straightforward. And the good news, he did write down a very nice article published in Wall Street Journal. And also he personally recorded the video. And overnight, we got 50,000. 50,000 users from that article. But most of them, they left. You know, after several weeks. But those who stayed, I imagine that was the kernel of the virality of telling their friends,

who told their friends, who told their friends. Absolutely. I maintain a very good personal relationship with them. Either VIP account or send them a small gift. Some of them they canceled, back then only 999. I personally send them an email. Why you cancel our service? What if we can do different?

And yeah, we still maintain a relationship even today. We had, so one of the CEOs wrote in and asked us about different metrics to track. Did you have a North Star, after you had those 50,000 people, where you realized, okay, I'm holding something in my hand and the sand could slip through my fingers, but is there something I can measure to see

if this 50,000 can turn into something? What were you paying attention to? To those very early, very loyal early adopters. Even 100 are good enough. They are the early, I would say, most loyal users. Double down to make sure they are happy. If they are very happy, guess what? Network effects. They are going to bring a lot of new users. So that's why. Even 49,000 users left,

as long as 100 still stayed, we double down on that. So that's a strategy back then. For Peter, on the hiring and people and organizational front, you had a very, very different type of business. Your customers don't buy with credit cards. Right. They buy multi-million dollar deals, cash up front in a year for a year deal.

You need a sales force to sell that, which usually means you need a lot of cash comp to compensate that sales force. How did you think about the right people to hire as you were building and how to compensate them? Yeah. I think one thing Eric and I have in common are, you know, in the early days, there's no wasted people, like no optional people, no wasted wasted people because it just adds a it'll burn through your money and it'll just make your decision making smaller and sorry more complicated it's like sand and machine so no wasted people and for us yeah we needed because a long sales cycle so we needed sales right away right so yeah i was the first salesperson, right? I started selling before I signed the articles of incorporation. Show up at the customer.

Hey, I think you should buy something for me, this thing that I'm going to make. Well, have you hired anybody? No. Well, okay. Well, can you show us a demo you're going to do? No. How about a PowerPoint? No.

Okay. And then come back a month later. I got a PowerPoint now. Have you hired anybody? No, not yet. And then just keep selling because it. I got a PowerPoint now. Have you hired anybody? No, not yet. And then just keep selling because it's a relationship-based business. Funny story, the first customer who bought,

small customer, actually somehow through a relationship with my co-founder, we got to this guy. He was the CEO. He wanted to buy some software for this small department just because he was really peeved

with his IT team. So this guy had no idea what we're selling. He's like, I know that my IT team doesn't want you, so I'm going to make a point and show them that I'm actually in charge here. So that's how we got our first sale. And you could barely log into the system at that time. Could you, could you, that's amazing.

I didn't know that. But then you got to hustle, right? Then just like Eric, right? Then you got to hustle. Oh my God, this customer wants to buy something and then you're working super hard to make them successful. And Eric, I'm not sure I never asked you about this,

but we never had customer satisfaction surveys for Viva in the beginning. I always thought if I talk to those early adopter people, I will know, I will get the feeling. And if I have some survey, maybe I won't get the feeling. Totally, you're right. I agree with you.

You just, you can hide behind, when it's small, you can sort of hide behind metrics sometimes and it doesn't work. But if you actually talk to the human and you figure it out, you'll know what's going on. Can you tell us also the story of landing your first big customer? The big customer.

Which I believe is probably the deal that really made the business yeah uh there was a set right there was the first like the guy who was just peeved at his it team and then worked up to the next size deal and the next size deal and it was always a step function right and so the first multi-million dollar annual deals were a big customer Pfizer and it was just hand-to-hand combat there was a partner at the time actually salesforce.com actually at the time said I'll you know send a note that Viva will never win this deal and I replied back I said we we will win this deal and they sent it to you during the bake-off yeah they didn't want to even come in the meeting with us right they were like oh we're gonna go with this other system integrator or

something like that so I sent an email back I said we will win this deal why because we have better people that'll work harder and we're Pfizer's only shot at greatness and I think they want to shoot for greatness. And I remember there was this big meeting with Pfizer. There was a guy in there in charge of it, and we had a certain amount of people in the meeting, and the guy stood up for Pfizer. He said, we have more people in this meeting room than you have in your company. Why should we buy anything from you? And I just said the same thing. We're your only shot. We're going to make something great and we have the best people.

So it seems simple to me. And then we got lucky. And we won it. And then I remember after winning it thinking, oh, my God, now what? You know, now how are we going to make them successful? So the whole company got a bonus when that customer was what we called live and happy, which didn't have a formulaic metric. It was based on interviews. So did you use the invoice from that customer to then go fund product development?

Yeah. I thought, oh, we've just raised a $3 million round of capital here. It didn't cost us any dilution, right? The check came in. So that's exactly what happened. Yeah. Do you think that's still doable today? Like, I imagine there's lots of folks out there that are like, well, I would love to

go invoice a customer and get cash in the bank. And what situations is it possible to fund your product with customer revenue versus not? I think it's, first of all, you can't be wasteful. Every person has to matter. I would almost think about, oh, we're hiring that person. Let's say we have to pay them $100,000 a year. I came from, my father was in the business of metalworking and machinery.

And I remember him. He would like, oh, I got to buy that lathe. How much is that lathe going to cost? Is it worth it? So I would think of people like, I'm buying a million-dollar machine because I got to pay them $100,000 a year. Is that million-dollar machine worth it or not? So frugal. And then make a really excellent product because that's the best way you can lower your cost of sales.

So like Eric's product, you probably all notice it, that it's easy to use, but he made it easy to consume the whole product. So he didn't have to convince a bunch of people. So that's how to do it. Excellent product, get a good price, easy to consume. You don't have to spend your money on salespeople

because you have a differentiated product. Because salespeople, that's where it's really, really expensive. You didn't have Because salespeople, that's where it's really, really expensive. Right. You didn't have any salespeople. By the way, I read Peter's S1 document many years ago. At that time, I still remember, wow, my god, this is being modeled so awesome. But in our case, our first paid customer, largest paid customer, only 2,000 a year.

So we cannot use that to fund the new product development because most of users pay us only for $999 a month. So that's really hard. But I do think for all the founders, the business model is very, very, very important. If you can figure out how we do something similar to what Peter and Viva does, that's the best. Do spend time on that. Not only for product, but also the business model. As Peter mentioned, product excellence and how to sell the product and how to leverage big enterprise customers is very important to build a long-term sustainable company. In our case, actually, I can tell you today the biggest challenge

is our online business. It's very profitable, however, it's very hard to predict. They come today, next two months they might leave, they cancel the service. This is not a great business. But the enterprise portion is very good. That's why I learned a lot from Peter, how to manage a big enterprise customer. We met at an Emergence event way back when that's how we first met, Eric and I. It was smaller at that time. Hopefully there'll be some more connections like that today. One thing I want to highlight on this topic of contracts and funding development, because I think it's really counterintuitive.

Again, the topic is capital efficient growth, you would think that what you would want to do with the Pfizer deal, for example, or Eric, when you started selling enterprise contracts is multi-year deals. Let's make this contract number as big as possible. Let's get as much cash up front. Let's lock people in for two, three, four years. That's not what you did at all, right? Yeah, we didn't do that because I was always optimizing for the long-term value, which is the annual value per customer. So 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. Then the other one, I didn't want us sort of getting lazy.

I wanted us to earn the business every year. So it was just sort of like that. The driver was really optimizing to the long-term value. Yeah, which makes so much sense now thinking about it that you would have had to have given a, I don't know, 30% annual discount or lock in the price, then raising prices is harder later. And that's unique to us. I think we're selling in a very confined vertical.

So it's not really fair if there's two companies and one's paying 30% less than the other and they end up knowing about it and feeling bad about it. So that's something specific to this confined market. And to put some shape around it for folks that don't know Viva's business as well, you've a couple thousand customers

of which there's a hundred or so that are your like really big customers. And there's basically no one else out there who could be a customer without you expanding the market. Right. We sell into a defined set of customers, life sciences industry, there's kind of top 20 and then there's another thousand or so that are doing smaller things. And we've just expanded our product footprint. So when we sell to a customer, we might have 20 things that we can sell to them.

They start in this area, they start in that area. So Gordon calls it layering the cake, right? We have a lot of different layers to the cake that are all into the same customer. We leverage relationships. It's fine for us to spend $100,000 a year maintaining free relationships and just putting into developing relationships. That's not wasteful.

So because we have a lot of, we're showing up the door with $100 million worth of product. So if you have a relationship, it's worth it. Like a bank, investment banking, it's worth it to invest. So it's a different type of business. Eric, for you, I'm curious, maybe you can talk to us both in the beginning days and then also now at Zoom. How do you think about pricing and account strategy? Yeah, so our case is a little bit different.

Ideally, when you start a SaaS company, either focus on vertical market or focus on departments. That's probably the best business model. Unfortunately, you start from building up a horizontal collaboration solution. It's really hard, because a lot of other competitors are there. So our strategy- Including free competitors. know, a lot of other competitors are there, right? So our strategy... Including free competitors. Exactly. A lot of, you know,

free solutions. So our strategy, you know, more like, you know, you open up a new restaurant business, right? So, and you have

a better service, right? And a better price and a better food. That's pretty much even today. You know, we want to make sure our product is better

than our competitors. Make sure the pricing is also better. want to make sure our product is better than our competitors. Make sure we make the pricing also better. And also make sure we offer the best service. So you look at any time, our product always, always at a better price. Across the board, any product compared to any competitors. So life is about trade-offs. And if you're telling a customer, oh, we're better, faster, and cheaper, what has to give?

Is it something organizationally? Is there something... Efficiency. Efficiency. Yeah, exactly. You know, say like a customer, they are probably going to spend a lot of money on marketing. You know, what we can do to level the network effects, right?

You know, they hire like 100 sales rep. What we can do to have 50 sales rep, you know, can deliver the same effects, right? You know, they hire like 100 sales rep. What do we can do to have 50 sales rep can deliver the same value, right? So that's why it is very important to have internal efficiency. Which is so funny. That efficiency translates to capital efficiency, which translates to gross margin,

well, not gross, to operational margins, which translates to cash flow, which is the whole point. Yeah, give you more flexibility, right? Yeah. But I would say the key also is just the product excellence, right? Yeah, totally. And that comes from the core set of engineers you hired, I think. And then also, you were especially very focused in the early days, right?

Totally. You were not thinking about something else, right? You were thinking about video conferencing. And I would say, you know, that's why I got to know Eric. I got to know Eric. I thought, that's a pretty focused guy. I bet his product is good. And then I tried out his product.

I'm like, oh, this is really good. I want to join his board. So I think that's always the product excellence can make you more efficient. Your sales cycle is more efficient. Everything's better. If your product was twice as good as WebEx, right? If your product was only 10 times better. 10 times better.

But I guess my point is if your product was only 20% better, it wouldn't have been enough. It wouldn't have mattered. You're so right. That's why I always like this restaurant analogy, right? You know, you stop by a restaurant, a brand new restaurant, if food don't work. Even for free, you do not want to stop by anymore, right? So, again, you know, I think back to Peter's point,

it's extremely important. Everything starts from one thing, the product. Product excellent, that's a foundation. You can optimize a lot of things. If a product does not work, forget it. Everything else, just double down, triple down on product. That's the number one thing. You know, put it right on.

And that's a lot about people, right, Eric? About which people you put on the product. Yes. Eric was very particular about getting the best people. Yeah, so people, we can come back to that. You know, I remember when we talked about with Santi on the episode we did on Zoom's IPO years ago now, you know, your named executive officers in your S1 were not like you think typical, oh, here's high-flying SaaS company. There's going to be a VP of sales from Salesforce. There's going

to be a chief marketing officer from HubSpot, you know, whatever, like nothing wrong with those companies and those people. But I think at both of your companies, the people you brought in as leaders were up and comers. They weren't, you know, the established superstars. Yeah, I think you, I always wanted to have some people with some range, you know, they could get very handson, but also grow into managing. I guess I've always thought to try to get people to do something that they haven't done before, so they would have a little bit more mojo,

have an opportunity to do something that they haven't done before. And the team is very important. The chemistry of the team is much more important than the skills of the individual players. In a lot of ways, that comment reminds me, there's a parallel between you not signing multi-year deals, where you're forcing the product to earn the customers, and you promoting internally, where you're keeping people hungry and forcing them to do their best work to earn that job. Well, it's more thrilling when you can give somebody a chance to do something that they haven't done before for me and for them.

There's more fulfillment. Otherwise, it's why you're doing the same thing you've done three times and what's the allure? Well, I can get rich. Okay, just at some point, that doesn't keep you going at the end of the day. I imagine there's an element of compensation to this strategy too, which translates to capital efficiency.

No, not really, no. I was thinking of equity versus cash, but... I don't think so. I never really made any kind of decision on people based on that. You've got to get the right person and then pay the right compensation for the right person. But always the right person first and then figure out the compensation.

Peter, right on. Actually back then when we tried to make an offer to some executives, at that time the feedback, why not hire someone very experienced and seasoned leaders from all sides is really not about a calm package because when it comes to hiring at Zoom, we really like to hire those people with a self-motivation and a self-learning mentality, including the senior executives. And they can grow themselves along with their company growth. And plus, they are very loyal.

I think that was our philosophy. I thought that's the best philosophy. After COVID, I think I was wrong, actually. There's a big flaw also. Because when business autogrows your team, and guess what? The executives of your team, they are not ready. Usage like 15 times, 20 times more. Revenue, like seven times more. You know, our team, even not myself included, even not twice better. This is one challenge, right?

I learned, that's a mistake. Another mistake is we think all those executives or KT members, they can learn along with the company growth. However, the pace is different, right? You know, in some ways can learn quickly somewhere very slow right that's why also that's another flaw right that's why looking back i feel like ah you should have a mixed you know team structure right someone you know they have a potential they can go grow themselves somewhere else you have to hire some seasonal leaders you never know

right in case you know your son in your business is going to take off. At that time, your team is not ready. That's a challenge we're facing today. So you need to have some members of the team who have experienced scale bigger than your company,

but other people that you're developing. Exactly. That's a healthy mix. Back then, prior to Panamik, I was too stubborn. I should learn more from Peter.

I think everyone, you have to have a potential. You do not have a great background. Actually, looking back, that's too stubborn. I should learn more from Peter. I think everyone, you have to have a potential. You do not have a great background. Actually, looking back, that's not right. Interesting. Maybe a mix would be better. Mix is much better. Do you think that applies even,

do you think you should have done that even in the early stages of the company? Not early stage, right? You know, for the first four years, no need. But down the road, you already see the market fit, right? The product fit. You want to scale your business. At that time, you have to change your philosophy.

There's another, I just keep, these parallels keep popping up for me where Zoom is one of the greatest product-led growth companies of all time. And yet here you are talking about the beauty of predictable revenue that comes from enterprise contracts. And it's the same thing. It's not that experienced people are better or that in-house talent is better. It's that you need that mix.

Totally, yeah. A healthy mix is very important, yeah. So one of the last sort of disciplines within a software company that I want to talk about operationally in this context is marketing with both of you, but particularly with Eric. We were chatting with Santi and with Peter. We sort of asked this question. We're like, you scaled, once you had the product develop, you scaled with such beautiful capital efficiency, but you did spend money on marketing. I mean,

you joked about the billboards, but there are Zoom billboards now. I asked them, how did Eric and Zoom think about spending money on marketing? And well, I'll let you tell the punchline, but how did you think about it? Yeah, even today, every Tuesday, we have a three-hour staff meeting. This morning, the first topic, read about reviewing our marketing, competent marketing programs, even today still. I think it's very tricky. The reason why is you do not have, I would say, sort of like a formula.

When to spend more, when to spend less. It's not like that. As a founder, you know, you have to spend time on marketing as well. Do not always focus on product or the sales. Marketing also is very important, right? However, when to invest in marketing is very tricky. Every business is different.

In our case, we specifically, you know, made a decision. No marketing team for the first several years. You know, because this is not something new, right? This is a product or, you know, this is very, very, you know, mature market.

Everyone understands video conferencing. You know, if your product works, you really don't have a marketing team, right? We try to prove that point.

You know, after that, after we have paid a customer, a lot of customers, a customer told us, Eric, I never heard about Zoom,

but I tried to report it. The report works. Why is that? We received a very consistent feedback like that. I know that's a signal. Then we doubled down on that. Then 2015, we created a marketing team. And also, even after that, we also measured every

marketing program spending. Early on, I spent a lot of time trying to understand. I'll give you one example, like SEM. Every company, you spend money on SEM. First time I send a check, oh my God, this is the price I paid Google. Oh my God, this is the largest check I'm going to send. Do you remember how large that check was for a contact? That's more than $200,000 a month.

A month? Oh my goodness. It's crazy. That's why I say I wanted to deep dive to understand. By the way, the marketing team is all very well educated by Google. More like they talk about our way. You give me $1, I give $1.50 back.

Let's do that. It's pretty cool, right? But I tell them, no, you should have $3 back. Why $5.45? Well, I particularly want to ask you about the timeframe you wanted that money back. How to optimize that, right?

And again, marketing is very important, but quite often very creative, right? If you do not know how to measure that, do not spend. The stories we heard were, you know, most founders, CEOs, marketing teams think about CAC to LTV with marketing, you know, and there's more complexity to it than that. But I'm going to spend a dollar, I'll get $1.50 or I'll get $3 back. If that pays back within a year, I'm doing great.

Don't believe that. That's a mistake for all the SaaS companies. It's not $1.50 back, not $3. It should be $4, right? It should optimize. Just went up in the last minute. Yeah. That's a common mistake, I think, for most of SaaS companies.

And Eric, how fast should it pay back? I would say as big as possible, right? Every brand is different, but you've got to optimize and keep optimizing every day. Do not feel satisfied. Oh, give $1, get $1.50 back. No, optimize, got to get $2, $3, right? You have to optimize. This is one example, right?

For every marketing dollars. However, if it works, you'll have a double down. I remember, you know, first time I had a, you know, the billboard in one-on-one. You know, many customers shared very positive feedback with us. They feel like, ah, early on we decided to deploy Zoom. I saw the billboard. I feel like you guys are a bigger company. We made the right decision, right? To better-

It was more about validating the decision then. Exactly. And plus the employees feel very happy. They say, oh my God, Zoom has a billboard now. After that, I realized, why not double down on that? I told our team, how many billboards do we have in one month? There's one. I said, no, three. It works. Yeah. So that's why you have to know when to double down, when to take a step back. You know, if you know how to effectively measure that, that's very important. Well, we spent most of today talking about how to build the castle and how to have a profitable castle. I'm not sure if that really extends.

But now let's talk about defending the castle. I'm curious, maybe let's start with Eric and then go to Peter since we've been on a good Zoom streak. Where do you see the source of Zoom's defensibility as a business over the next 30 years? Yeah, so, you know, I think it's more like a sports, right? We need to focus on both offense and defense, right? Both sides, right? So I think back to the period of porn, you still needed to, even your product works today, even better than any other competitor.

You have to be paranoid, right? You have to keep thinking about what you can do differently. Keep innovating, keep innovating. Either the new services or new features, right? That's the most important thing, right? By doing that, at the same time, you also need to think about what's next, right? From our perspective, right, we started

from unified communication. The next step will be not a unified communication. It's a collaboration platform. At the same time, how do you build multiple new departmental applications? You also need to play offensive as well. The better offensive play is probably for the defense as well. So that's our strategy. Peter?

Very similar. So product excellence is you can get there, but you also gotta work hard to stay there, right? And keep reinventing yourself. Also, you do wanna expand to different areas because if critically, and I think something that people don't realize, if you get a high market share in an area and you don't expand to another area, what will happen?

Just because of the nature of your company and the creative people, you'll do more stuff in your established area than you should. Right. And that creates its own set of problems. If you do more stuff and, you know, if Eric is constantly rewriting his codec unnecessarily, it's disruptive. You've got to expand to give yourself a creative outlet. This may be more particular to us. I don't know, but we also have a goal that we set out about five years ago to be the leader in light. That was our code name for it. If you get to be quite dominant, arrogance is your... There's a few things that will knock you off. Arrogance is your, there's a few things that will knock you off.

Arrogance, the customers will get turned off over that and they'll naturally find an escape hatch. Also, we audit for integrity of the leadership team because when you're quite well established, that can throw you off. Integrity issues in the leadership team, so we audit myself and others and also energy in the leadership team because these are things that you got to audit for them because if you if you wait for the results to show those things it's too late so you know determined to have product excellence have a goal to be the leader in life we actually tell our customers about that and that holds us to a higher standard so we want to be the leader in life. And then they bring that up sometimes. Like, hey, that's not the leader in liked. Oh, God, why did I tell you that?

You know? But I mean, it's a way to be, set yourself out there, right? Not only do we want to be the leader, we want to be liked. Product innovation as an outlet. And then avoid that arrogance. You talked about- But I think related to this question, I want to share with you a conversation I had with Peter.

I think probably can help some of the founders here as well. I think I forgot which quarter, a year before we went public, and I look at our growth plan. I realized, wow, we wouldn't have one service, right? If we have another service, it also can monetize. You know, the growth trajectory will be very different. At that time, Peter told me that, Eric, that's sort of like the ideal case, but that decision should be made two years ago or three years ago, right? If you wanted to have a new service,

you cannot have a new service today, right? You need to think about trying to make a decision two or three years before that, right? I clearly remember that conversation. Looking back, that's the biggest mistake. The reason why, because you have one service. At the same time, how do you think about what's the next service? Always plan ahead. This is probably the better way, back to your question. Always think ahead and build another service. That's exactly what I was going to ask as a follow-up. Peter, I know you, Viva

launched a second service after the first CRM service around CMS, content management. When did you start planning for that second product, and then when did you launch it relative to your first product? That was, we started

thinking about it at the first part of 2010. I remember Gordon and I and others started thinking about it at the first part of 2010. I remember Gordon and I and others started thinking about it at the first part of 2010. So we had 150 people in the company or something like that. That was four years into the company, three, four years. So three and a half, yeah.

And then we made our first hire in the fall of 2010. And that's when we started going. So I viewed that as critical. It was a turning point. I thought, hey, I could have a single product company, do really well of that, maybe go public, but then it probably has to be sold to somebody or something like that. Or I can try to make it a multi-product company. And the decision was to pick something that was clearly not an add-on to our first product.

Like it was clearly so far away from our first product. I was worried that our second product would maybe become an add-on to our first product. And so I just picked something that was just way out here, just way, way different. Sold into the same company, but different buyer, different product, different code line, different everything. So I thought this is the way to become a multi-product company. And it'll either make us or it'll break us. And I thought the odds were more likely that it was gonna sink us. That's so counterintuitive,

because normally you would think you'd wanna give the same sales rep something that they could sort of bundle in for an incrementally higher ticket price and leverage what assets you already have. But that you will do anyway. Like if you don't go out of business, gravity will take you there, right? It's as you go along, it's like,

oh, well maybe we should make an add-on along, it's like, oh, well, maybe we should make an add-on product or not. Yeah, duh. But if you get confused and you think that add-on product is really going to float your boat, it's not. Your new product, if you have a chance, it should be way out here and maybe have the potential to be bigger. So that's, but it's risky. What's the scale of the two revenue lines today? The second one is a bit bigger, but the second one has also quite a bit more potential. You know, maybe it's a 5X or 10X potential, but it was risky, right? We debated that at the board level because that could have sunk the company because our rocket ship on our first product was

going up and we had to take our eye, I had to take my eye off that ball to start this thing and it did cause that first thing to suffer, but overall the trade-off was worth it, but it could have worked. It was risky. Our most recent episode

was about NVIDIA, which had a tiger by the tail with gaming, as everyone knows. They totally took their eye off that ball to start building for life sciences, for scientific computing, for what became neural networks and machine learning. And boy, was it a good thing they took their eye off that ball. You know the hidden thing there? You need a CEO that was an engineering type that went to Oregon State University.

Because that's what me and Didi and Diva have in common. I don't know him, but we both, there are very few of us Oregon State Beavers as CEOs, let me tell you. That's an amazing comment. I know Jensen well, actually. Look at the Nvidia stock price. It was flat 10 years in a row. Before they took off. That's such an amazing story. I mean, the conviction, really he had to persevere through that decade is amazing.

It's hard work, right? He's a hard worker too. He's a very hard worker. He is focused. Yeah, there's no... I remember when starting Viva, the first time I started a company, I asked a friend who had started some other companies,

because I realized about three months in, God, this is really hard work. I'm working every day really hard every hour. So I asked my friend, is there any way to do this without working that hard? And he very quickly said, no, there's not. So isn't that true, Eric? Good news, I do not think that's a work,

because we all enjoy that. This is a part of life. Otherwise, what can you do? Are you going to play golf? No. There's no shortcut. Exactly, no shortcut. We want to thank our longtime friend of the show,

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end every Acquired episode, which is with grading. And for companies that are in the middle of their journey, like both of yours, we like to ask it as a little bit of an open-ended question. What makes the future of Zoom and Viva an A-plus? What's the scenario where it goes incredibly well? Paint that for us. And what's the failure case? Oh, let's see. I don't spend any time thinking about the failure case, honestly. I'm just not wired that way. A-plus is we really help automate this big industry. It's a $2 trillion industry. And if we can help to automate it and be that trusted partner that is essential to that industry, and using that word very specifically, essential, and appreciate it. There's not been anything like

that before, where you're automating a whole industry in a meaningful way, right? Essential. You're going to be a life sciences company. You've got to use Viva. And man, you like that before where you're automating a whole industry in a meaningful way right essential you're going to be a life sciences company you got to use viva and man you like that you so that would be a big success and then we have a bit of a social mission too to prove that you can you know you can be a good company profitable etc but also be a good contributor to society and and the employees so that would be success and you were the first public company to convert to a b corporation to a public benefit corporation but that's just the more the formality of it is you know the way we've operated the company is always like that so that's success essential appreciated really automating this industry and contributing to a good,

you know, being an example of a good employer so that other people could copy it. Love that. Yeah, so in our case, I would say that's a good question. A plus scenario would be, you know, Zoom will be a very successful platform company. We are going to introduce multiple new services and people can count on Zoom to achieve more. At the same time, we can also grow our revenue every year. That's probably A-plus scenario for many years to come.

In terms of affiliate scenario, I would say maybe you go back and use WebEx. That's affiliate scenario. Peter, right. And I did not think about the failure scenario, but we just think about it, be very optimistic, think about the future. Otherwise, seriously, you know, we're all founders, right?

The CEOs, we all feel the huge pressure. But sometimes you cannot be, you know, too paranoid. Otherwise, every day you think about too much about a failure case,ure case, guess what? You do not dare to move forward. That's why I say, do not think about that. Next time, do not ask me this question.

So only the paranoid survive, but don't let it consume you. I think you're paranoid about not doing your best. I think, Eric, you put a ton of pressure on yourself. You don't feel good if you don't do your best right I think Eric you put a ton of pressure on yourself you you you don't feel good if you don't do your best right oh I think that I see that in Eric well thank you all thank you for being here in the room with us and mostly thank you to both of you thank you to emergence for facilitating

this making it happen yeah but some you emerging capital thank you, thank you to Emergence for facilitating this, making it happen. Yeah, but thank you, Emergence Capital. Thank you, Sandy. Thank you, all of you. I really appreciate it. Thank you, my great mentor, Peter. Yeah, thanks. Wonderful. Thanks to that group.

Thank you. Thank you. Well done. Thank you. Thank you, Peter. All right, listeners. Well, thank you so much for joining us for this. I actually cannot imagine a more useful topic right now than dissecting how to build great companies on little capital

based on the era that we're going into. I think, you know, David and I don't need to debate this endlessly like you can hear the drumbeats on Twitter of how much the market is changing, but the reality is it is. Everyone has to play the game on the field. Peter and Eric, it's just unbelievable and impressive what they have built on so little capital. They're two of the greatest of all time, literally two of the goats at this, which is so funny. You know, now everybody thinks of Zoom as the, you know, pandemic, you know, high flyer. And it's like, I was just thinking every time for the last few years, like that people would talk about

Zoom in whatever context. Do you people realize how much cashflow this company is generating? And it's all because of, you know, this DNA and mindset and everything we talked about with them. And after spending time with Eric, I mean, it feels to me like the amount of time that he spends thinking about, oh, no, the stock was going crazy. And oh, no, now it's going down is like approximately zero. They're thinking about how do you build a great company and how do you generate happiness for customers, build a profitable enterprise and grow that profitable enterprise. And it was a nice, refreshing viewpoint to get to spend time with him and Peter. Well, if you want to chat about this with us, we would love to do that with you. You should join the acquired community slack at acquired.fm slash slack. 12,000 smart, courteous, and kind people have done so before you, so you

would be in great company. We also have our limited partner show, and if you want more Acquired between now and our next special, which we have recorded and is awesome and we are very excited to release, you can search Acquired LP Show in any podcast player spotify overcast apple podcasts anywhere you listen to podcasts and find that there we have a job board acquired.fm jobs where we curate the most interesting jobs that we think we should make available to the acquired community huge thanks as well to our friends at emergence for making this possible that's That's so true. I'm so happy I'm wearing my Emergence capital fleece right now. You got to rep the swag with pride. You got to rep the swag. Seriously, I was thinking as you were saying that, I mean, I know we talk about the Slack at the

beginning and end of every episode. It really is like, it's not just like, oh, you should join the Slack because you like acquired like, you know, if you're listening to this, you are probably a founder, an employee, an investor, you know, working at companies of any size where this is relevant. And so is everybody else. And people are like this community is amazing. People are talking about this in Slack. Jake from Emergence is right there in Slack to talk about this. People DM each other.

There's so much vibrant discussion. Can't underline it enough. It's such a great part of the acquired community. And if you're not part of it, you should absolutely join. That you should. All right, listeners, we'll see you next time. We'll see you next time. Huh