Live from the LAUNCH2013 stage, @jason talks with @davidsacks founder of @yammer.
NARRATOR: Distribution provided by CloudSigma. The cloud that adapts to you. Visit CloudSigma.com/ThisWeekIn for a free $200 credit. Today’s episode of “This Week in Startups” is brought to you by New Relic. Visit NewRelic.com/TWIST, and see why thousands of developers worldwide do not deploy without it. And by Snapterms. Online legal protection made simple. Visit Snapterms.com and enter the code TWIST for ten percent off.JASON’S AD: Hey, everybody. What a great episode we are having here of “This Week in Startups.” I just love doing the show. I love learning and having great guests. One of the products that I use in my companies, all of my companies is New Relic. New Relic is the most awesome web and mobile app monitoring system. It makes all of your apps so much faster because it monitors to real time user experience. Here, you see it on my screen. I may just pull it up here. You can see the browser load time based upon the page rendering, and the network, and the web application, and the request queuing, and memory cache. How is the database doing? How is Ruby doing? If things are out of whack, and you have a hundred millisecond delay, I get these automatic emails to me, and I just hit reply. The team is on it. I am, “What’s going on?” You could do code level, app performance, as you see here. Which parts of the code are taking the most time to execute? What percentage of the time? What is the response time like? How much of the CPU we are using? All great stuff to know. This really brings this responsiveness. Remember, Marissa Mayer and all the Google team were, “Speed is the best feature! Speed is the best feature! If you add speed, you increase usage.” Increase speed, reduce lag – increase usage. Just make it faster, people use it more. Everybody knows that. It is just 101. But you need to have the tools. And you know what? Leaving in the hands of just a sysadmin, and not having this kind of tools, you need to have a collaborative environment about this. That is what I love about, getting resources to send by email. Everybody can see it. You can obviously monitor server resources too. You can see, “Oh! This server that is running Ubuntu, gets this much RAM, and this type of CPU. Here is how it is doing. Here is the network I/O card. Maybe something is wrong with a pop. Something is wrong with the router.” We were going to know quickly. They have got 40k customers, and it includes just everybody: Skullcandy, Spotify, Nike, Zillow, and Vonage. I mean these are the people running very large websites. They are relying on New Relic to keep them optimized. Developers across the spectrum trust their critical performance to New Relic. If you want a super powered visibility into all of your web and mobile apps, sign up today, and you will get a free “This Week in Startups” T-shirt. Just go to NewRelic.com/TWIST. When you go to NewRelic.com/TWIST, you just click, and you will get this free fan made T-shirt. It has a samurai sword there. I am always saying, “Be a samurai, and fight through all the problems in your startup.” That is right. Just go to newrelic.com/TWIST, and you will get this gorgeous TWiST T-shirt that was designed by one of our superfans. See! It is TWiST, “This Week in Startups” with the samurai sword as I am always saying, “Be a samurai.” It is a gorgeous nice weighty T-shirt from American Apparel. It is not a cheap T-shirt. This like 20-30 beans. You are going to get it free, just by signing up. Super fast, super easy, no credit card required. That is always the sign of a confident company. They just let you try the product without trying to twist your arm into a contract, like some of those other companies do. Go to NewRelic.com/TWIST. I really appreciate @NewRelic supporting the program and supporting entrepreneurs. They make a great product. They support the show. They support founders. They have a reasonably priced product. Doing a T-shirt was a classy move. Thanks to my friends over there at New Relic. I really appreciate the support on behalf of the entrepreneurs featured on the program and everybody who is watching it, learning how to build better startups? Tools like @NewRelic are critical to building better startups. Let us get back to this great program. Thanks, New Relic.
JASON: Hands down, without question, the biggest success in the history of the event in the past six years now has been Yammer. They launched on stage here just under four years ago. The founder told me in the rehearsals that he was going to win and that his team had set their sights on winning. He was, at that time, a very successful executive, but he took the competition seriously. He put serious effort into it. He inspired his team to greatness. They did win. And of course, a couple of years later, they wind up winning amazing traction in the market. It was just a fantastic ride, excellent to see. Please, welcome David Sacks of Yammer.
DAVID: Alrighty. Hey! Good to see you.
JASON: You are back on the stage. I think you remember this stage.
DAVID: I remember it very well. You are right.
JASON: Remember the room. This is the room.
DAVID: This is the room. Yes, exactly. We actually launched on stage. We did a countdown, we press the button, and the site went up. That was September 2008.
JASON: Wow! We are sitting here five years later. The company has been sold. How do you reconcile this? Let us go through it, the actual five years of Yammer existence, and now to this tremendous exit to Microsoft. I think the numbers are public now. $1.2B or $1.3B exit.
JASON: People were extremely critical of it, when you launched. There were people, who were on the judging panel, dismissed you. Just like, we saw today. People are getting creamed on the panel. The panel is saying, “Hey, it is not going to work. It is too simple,” whatever. Do remember the reaction of the judges?
DAVID: It was pretty mixed. There was only one judge, I remember being enthusiastic about the idea. That was Marc Benioff to his credit. Then, he became a competitor.
JASON: He launched Chatter.
DAVID: That was less fun.
JASON: He was a really big fan. So much that he copied it pixel for pixel.
DAVID: Yeah. He was one of the first people to see that social was not going to be limited to the consumer space. That is going to want to come inside the enterprises as well as a business solution. That is what Yammer was trying to do. I think the reason, why people were dismissive of it, is that they thought that social networking was just a plaything, a toy. It was just for people’s personal lives. What did you have for lunch? It is sort of personal news. Our view was that it was a form of communication, that it could be harnessed for business productivity. So that was a simple idea, but people were very dismissive of it at the time.
JASON: And as an entrepreneur, when you got that sort of mixed to lukewarm at time reception, did that impact you and make you think for a moment, “Hey. These are judges. They have had some success. Maybe my vision is off?” How did you fight through that?
DAVID: Well. As a result of the conference, we got 50k users and 10k companies’ networks in one week. So we felt like the LAUNCH has been a tremendous success. Then, by the way, we won the event. Enough people liked it that we felt really good about it. So, you do not really worry about the naysayers, you worry about, are there people who see what you are trying to do and appreciate it? We had enough of those that we feel really good about it.
JASON: Now, people do not know this today, but Yammer was not the first idea of the company. There was a product that came before Yammer and you pivoted into Yammer. Tell that story.
DAVID: Right. So you are referring to Geni, which was creating a virally growing family tree. The idea was to layer a family social network on top of it. Actually, we sold Geni the last year to MyHeritage. So it is still a product that I love and believe in, but essentially what happened is that when we launched Geni, one of the first things people said to us is, “The virally growing family tree is a really cool idea, could you do that with an org chart? Could you create a virally growing org chart?” That planted the seed. They got me thinking about, “Well. This family social networking is pretty interesting, but with corporate social networking, it will be an even better idea.” So that idea started to kind of percolate, and it came together really throughout 2007. By January 2008, we were actively coding it, and then we launched in September of that year.
JASON: When you get off the stage and you have gotten all the kudos, what happens then? Did you have a ton of interest from venture capitalists? You already had financed the company pretty heavily from Charles River Ventures, I guess. Was another investor early on?
DAVID: Founders Fund and Charles River had invested in Geni. We started Geni in the middle 2006. We launched it in January 2007. By the end of 2008, we were in the middle of the financial crisis, and raising money was really hard. I am not sure that without winning the conference, we ultimately got the fund-raising done. What happened is that Charles River essentially doubled down on us. So they add a lot of conviction. George Zachary, who was the VC there, who was on our board, he was always very positive about this idea and very enthusiastic, but we went out and kind of tested the market. It was a really hard time for raising money. I mean I think if George had not stepped up and Founders Fund had not participated as well, it would have been hard to get us off the ground.
JASON: So it could have not happened?
DAVID: It could have not happened, for sure.
JASON: Wow! What do you take away from that as an entrepreneur? What is the lesson there?
DAVID: Well. You know that there is nothing you can do about the fund-raising environment. I mean George has compared it to sunshine. You make hay while the sun shines. I tend to think that entrepreneurs raise money while they can, because you cannot control the macro environment. Under normal circumstances, I think Yammer should not have trouble getting financed, giving that it won this event. And enough people liked the idea and it had some good early traction, but you do not want to get caught in a situation, where there is like a recession or something, and all a sudden, you cannot raise money. So take the money while you can.
JASON: Yeah. You get off stage, and then the hard work begins. You got some users. What were the next three or four years like, leading up to this tremendous exit? I remember at some point, you and I were driving in a car somewhere, and you said, “Yeah. We made a million dollars this quarter.” Then, we were driving in a car six months later, you said, “Yeah. We made three million dollars this quarter.” It was only within a couple of months of each other. You are kind of in shock how the revenue had ramped up. What was the revenue ramp-up? How did you actually get that? Because today we heard a lot of people saying, “How are you going to make money?” to companies just like yours, when you launched. What was your focus? How did you get that revenue?
DAVID: I would say that the biggest area where we have to learn over that three-year time period was enterprise sales. I did not really know anything about it. My background is more in product development. So we have to learn how to do enterprise sales. When we started the company, we had this somewhat naïve view that if we just went viral, that companies will pull out their credit card and buy it. That works for small businesses, that works for individuals, but it does not work for enterprises. That was something that was a little bit surprising to us, it turns out that enterprises were the ones, who responded to Yammer the most, because it stands to reason, if you got a thousand employees, you have the biggest need for an internal company social network, you have the biggest sort of internal communication problems. So we have to learn how to do enterprise sales. It is the short answer to that.
JASON: How did the Microsoft’s exit come about? I mean I am assuming a company, that was on an incredible run rate, like you were at this moment of time, went enterprise, and bottom-up enterprises become so huge, must have had offers beforehand. What were the offers like, leading up to Microsoft? What was the first time you got an offer? You do not have to say from whom.
DAVID: Yeah. There are always some people who are kind of circling around and kind of sniffing around. It just never materialized. We were pretty heads down, focused on the company, and we were not looking to be acquired. I mean that is really the key thing is that we never did anything to generate any interest, or to shop a company, or anything like that. When Microsoft came to us, we have never really talked to them before. They came to us because of what they saw us doing in the market. I am not the first one to say it, but I believe that companies are bought, not sold. I generally do not think you get a good exit if you are out there trying to sell yourself. I think what has to happen is you are doing something interesting enough in the market that people come to you.
JASON: What was that, which Microsoft saw on the market? Were their own clients using the product? Was there something in your product that they felt would be disruptive to their existing businesses? What do you perceive to be that thing that made them notice you?
DAVID: Well. I think it started with the feedback they are getting from our mutual customers. So Microsoft is in virtually every enterprise and, all of a sudden, they see Yammer exploding in a lot of their customers. They hear good things from those customers about the tool. Then, Yammer represented a few themes that I think are important to Microsoft: the consumerization of IT, the viral freemium model, moving to the cloud, bringing social into the workplace. These are all themes of intense interest to Microsoft right now.
JASON: During that time, you had raised a lot of money. It was, I think, two or three rounds of financing.
DAVID: I think there was like five, probably. We raised $142M over…
JASON: In four years?
DAVID: … basically, in three-and-a-half years. So right after the LAUNCH conference, we raised that first round from George. That was five million dollars. Then, the next round was a year later that we raised $10M from Emergence Capital [Partners], who are kind of specialists in enterprise SaaS. Then, we raised $25M, like the next year from Mamoon Hamid, who has been at USVP [US Venture Partners] and later joined Chamath, and then Chamath put another $15M.
JASON: Wait! Mamoon, who was at USVP, invested at USVP. He left to join Chamath at Social+Capital Partnership, he then invested as a partner of the latter.
DAVID: Yeah. They topped off, kind of.
JASON: I guess that is very complimentary of you as an entrepreneur that somebody moves from one VC firm to another, and says, “We are going to invest again at a higher valuation, and get in here.”
DAVID: Yes. I mean our board members were happy. They were seeing good things from the inside. I think the ones, who did the best, were the ones who kept doubling down. Then, the final round was three months before the Microsoft deal. We raised $85M. That was the first round where I would say it got kind of easy to raise money, but honestly prior to that, we never had more than one or two term-sheets per round. I give our VCs a lot of credit for believing in what we were trying to do because we had some proof, but it is not like it was obvious to everybody else until basically last year.
JASON: The people, who put money in last, they then saw you sell the company three months later. What kind of return did those people get in 90 days?
DAVID: Well. They more than doubled the money in 90 days. They were all pretty happy. On ROI [Return On Investment] basis, this is probably the best anyone is ever going to do.
JASON: A hundred percent in three months would be 400% in a year.
DAVID: I think there was even a little bit more. There was 120%, or something like that.
JASON: So 500% a year, that would be great. Anyway, so they put in $85M in one-month. Three months later, they get back $200M, or so. Pretty good return for them.
DAVID: That was led by DFJ [Draper Fisher Jurvetson] Growth. They were really great to work with too.
JASON: Looking back on this journey as an entrepreneur, what do you think the things you focused on correctly? Obviously, the follow-up to that is, what are the things that looking back on you would say, “Gosh! I should have course corrected quicker and faster, and needed to axe.”
DAVID: Well. Continuing with the financial theme, the reason why we raise so much money is because I am not actually a believer in the lean startup idea once you get some traction. So I believe that when you are in the early stages, the very experimental, creative stage, it is good to be very lean, have a small team. You are throwing spaghetti against the wall seeing what sticks, but once something sticks I believe that you have to basically pour as much like gasoline on that fire spot, as fast as you can, because people are going to copy it. You saw that. Marc Benioff was on stage, he saw us at LAUNCH, he said, “That is a good idea, I want to… [copy it].” We need to learn from that. When something actually sticks, and it is rare that it happens, you have to move as quickly as possible. That is the reason why we kept raising money, and we have to raise as much money as possible. We have to grow as quickly as possible. We have to expand the sales operations as much as possible. We went from lean to fat really quickly. That I think you have to do that if you have something that is working.
JASON: I am assuming when you see Marc Benioff putting an ad in the Wall Street Journal every day for Chatter. When I saw that, that immediately said to me, “Wow!” Obviously, Yammer is a very sustainable idea, Benioff is putting an ad in the Journal every day. As an entrepreneur, when you wake up, somebody as talented as Benioff is, decides he wants to be in your space, and he is putting an ad in the Wall Street Journal every day, what does that do to your management team? Did they all of a sudden panic, and go, “Oh! My God?” How did you calm them down?
DAVID: Right. Well. First of all, it is a tremendous validation. I think at the end of the day the way, that Salesforce implemented their product, it was different enough from the way we did it, but it was still something to obviously be pretty concerned about. You have to use that to motivate your team and to get them to move faster. I mean for sure.
JASON: You wrote a piece on Facebook. It was a throwaway piece. I do not know, was it written on a Saturday night, or a Sunday night, or something? It was just kind of off-the-cuff. It was not like published anywhere, but it was something to the effect that, the age of startups is going to get much more difficult because these big companies are getting so effective at launching new products. What was your thesis there? Because you got a very strong reaction. I saw Marc Andreessen, he came in hard to counter you. What was the thinking there?
DAVID: Well. I guess one way to put it would be, “No entrepreneur wants to create a product that is a feature of something else.” Right? You want to create a product that can be a company. The difference that I see between now and then, when I first got in the business in 1999, I am like the old man now, it was like 1999 with PayPal, is that you do have these huge Internet companies. I mentioned five of them, so there are Google, Apple, Amazon, Facebook, and Microsoft. Right? They have so much surface area to their products that it is easier than ever before for them to kind of featurize you. Right? So that is the bad news, but I think there is a lot of good news as well, which is that, and this is the Andreesen’s point, “software is eating the world.” So there are more spaces than ever before for software to go. We are seeing entire industries that were never technology industries, all a sudden, be disrupted. So two years ago who would have thought that the taxicab industry would be an Internet business? Now it is, thanks to Uber. Another company I invested in, called Houzz, is disrupting the market for home remodeling and design. So I love these businesses that are transforming non-tech industries into tech industries. So I think, there is just tons of opportunity for entrepreneurs to do stuff like that. Therefore, I do not want to seem pessimistic, I am very optimistic about that, but I do think you have to watch out for this sort of the four-five horsemen’s product surface area type of problem.
JASON: And as an entrepreneur, how do you do it? How do you actually navigate that?
DAVID: The part of it is the initial idea selection. I think you choose a space that is kind of as far removed from what they are doing. To start with, try not to pick an idea that is going to be on their two-year product roadmap, or something, you can guess is pretty obviously on their near-term product roadmap. I mean the reality is that when you first launch, your product is easy to copy. When we first launched Yammer, it was easy to copy.
JASON: It was a three-month-old product.
DAVID: Well. We developed the initial version in three months. We dogfooded for six months. So basically, it had been in development for nine months. OK. But it had been in nine months with the team of a handful of people, less than 15 people. So the reality is in a big company, if they have moved fast enough, they could have crushed us. So like I told you before, we moved as quickly as possible to add depth to our product, service area to the product. So two years later, by the time that Salesforce, whoever was trying to do those Super Bowl commercials, it was not the same product anymore. They basically copied our product circa 2008, we are onto Yammer 2010. The difference was big enough that people in the market could see it. That is part of it. It is the initial idea selection combined with this you-gotta-move-maniacally to when it is working to make sure that people cannot just copy you easily.
JASON: Is it easier today or harder today? I mean you have been in the business for a long time. Entrepreneurship. We hear about the lower cost of starting a business, but what you are telling us is something completely different. It may be lower to start, but when you do hit something, it is going to be a hundred million dollars in funding, and ramming, and jamming it to scale. Is it harder or easier in your estimation?
DAVID: On the whole, especially, if you look on the multi decade timeframe, it has gotten much easier. I mean there is so much more infrastructure now, in Silicon Valley. Sand Hill Road is like this financing API that any entrepreneur could plug into. I was looking after to get an early screening of Ashton Kutcher’s movie on Steve Jobs. I loved it, by the way. I thought he did a great job. The thing that really came across in that movie, they spent a lot of time focusing on the early days of how Apple got founded with Jobs and Wozniak, and how they got Mike Markkula to write them their first check. The negotiation was, Mike Markkula was, “All right, I am going to give you $90k.” Steve Jobs is, “OK, but I want to $300k valuation.” It is like the values change so much. They showed Jobs making hundreds of phone calls to land Markkula. It was so hard. It is almost as if Steve Jobs was like this civil rights pioneer for entrepreneurs, who made it so much easier for all the rest of us, who came later. So I just think it has gotten so much easier on every level. There are so many resources. We have conferences like this. The VC community so much more developed. You have websites and blogs that make knowledge transfer so much easier. Look, we all have it much easier than the trailblazers who invented this industry, like the Jobses and the Gateses.
JASON: What do you think it means for America as a country, internally, how society does seem to be changing, where the network effect is hitting people in New York, San Francisco, Los Angeles, Seattle, other places, and just skyrocketed them in efficiency and also wealth creation, and other areas are flat lined? Then, taking it out of step and looking at America versus the world because I know you do think about the big picture.
DAVID: Well. What is happening in tech is clearly the most optimistic thing happening in America. I mean this is the economy of the future. I think that it is spreading into all these other industries that you now have this culture of entrepreneurship that is thriving. When I graduate from Stanford in 1994, political science was the most popular major. Today it is computer science. That is like a total sea change in a way. When I graduated, I did not even know that the entrepreneurship was an option. Now we have these kids graduate from school, and they have seen “The Social Network,” and they want to be the next Mark Zuckerberg. They already know how to negotiate the valuation for the series A.
JASON: Yeah. They had three term-sheets, before they got accepted to college.
DAVID: Yeah. I think this is like the most positive thing happening in America. It is the basis of American competitiveness in the world. It is the basis of our future economy, that transition to this information economy from an industrial economy.
JASON: What do you think our government has done over the last ten years in terms of fostering or not? Or can it have any impact? I mean, we see the Obama administration and Silicon Valley. They seem to be perpetually at lunch together, if my Path is any indication. I think Obama lives like on University Avenue, or something. You would think they would move the White House there. Is the government helping, hurting, or indifferent in this sort of regard? Can they even have an impact? And people talk about immigration, taxes, et cetera. What is your take on the government’s role?
DAVID: Well. I think there is a short list of stuff that Silicon Valley needs: the immigration, the H-1B visas. Making it much easier for us to keep and attract engineering talent globally is hugely important. We all know that. It has been on the short list for a long time. I think the whole crowd funding legislation was on the Silicon Valley short list for a while. I think that patent reform is another one. That is really important.
JASON: How would you reform that patent system? What would David Sacks’ agenda be? You have been sued by patent trolls or no?
DAVID: Yeah. I have. A patent troll is someone, who does not create anything, but they have bought up some patent, and who knows what it even means, because these things are written in this legal gobbledygook, but then they sue you on the grounds that supposedly you have infringed their patent. I would say that I think there is a lot of ways just to skin this cat. I think you could say that if you have not actually created the product, I am not sure you should have standing to sue someone who actually has created a product. I mean, we know that, and I think everyone here knows that the hard part about being an entrepreneur is not sitting in a room and brainstorming ideas, it is actually creating the thing. If you did not execute it, what grounds do you have to sue somebody who has? I mean that is the thing that is really annoying. So I think that is one idea. I think another idea is that you should not be able to sue someone for an idea, like a feature idea. We all know that some of these crazy patents have been issued for like advertising on a website.
JASON: Yeah. Downloading a video off the Internet.
DAVID: The idea for a feature should not be patentable in my opinion, but the code should be protected. I do not believe in piracy. I think that we have copyright protection for that. But I do think that it stands in a way of innovation, if an idea for something can be owned by a company. That is not what the patent system was set up to do.
JASON: Nathan Myhrvold, a very talented guy, now, considered the world’s largest patent troll, is bringing inventors together, brilliant people, and saying, “Brainstorm!” with lawyers in the room to then file it with no intention of doing it. His claim is, “Well. The inventors deserve credit for inventing. That is all we want is our credit.”
DAVID: Well. An inventor used to be somebody like Alexander Graham Bell or Thomas Edison, somebody who actually created the thing, not sat in a room and talked about it.
JASON: Right. So the definition of an inventor in that case is wildly optimistic.
DAVID: Yeah. To invent, you have actually to create something. It is not about filing a piece of paper.
JASON: Since you are an angel investor, I mean you invest in many companies too, I do watch you evaluate their ideas quickly. What do you think when you look at an idea? I do not know how many angel investments you have done, do you?
DAVID: I am not sure. Like, dozens, I guess.
JASON: Dozens? OK. What is typically the thing that entrepreneurs lack? What is the thing they need to work on? Is there a theme that you see over and over again, when you say, “Hey! If you do this, you are going to get there.”
DAVID: Well. There are four things that I look for in an idea, it is frequently the case that at least one of them is missing, and by the way, I think if you just get to three out of four, I would be happy enough to invest as you usually forget the last one. Let me quickly run through them. The first thing I look for is a product hook. Right? It is a simple way to engage with the product that I can see people realistically do. Like, it is a realistic user behavior. For Yammer it was, “What are you working on?” We took that status update adapted for a business context. With Geni, it was creating a family tree by clicking arrows. With PayPal, it was a typing someone’s email address and a credit card number. They were all simple behaviors that I thought people could get hooked on. So that product hook is number one.
JASON: You are calling it a ‘product-hooked’, but it is a behavior that people do. It is an atom of behavior that filled your product.
DAVID: It is a starting point because if you do not have a simple interaction to get people started, luring a whole bunch of other features, like power user features, that is not going to help you. So it is all about getting that. It is the wedge. It is the on-board. It is the bootstrap. It is just that little thing that gets the whole thing moving. It has to be a believable interaction. Now, if they had launched the product, you can see it in their numbers, but if they had not launched the product, it just has to be a simple product hook. Again, that is what I just call it that. I believe that a typical user will engage in. Therefore, that will be like a number one. OK. Number two is, they are solving some market problem that actually exists, or there is some need for this thing in the abstract. Right? The product hook and the market need are opposite ways to come out. Frequently, I see an entrepreneur start with the market need. In addition, they will be exactly right about that. They point to some market that is horribly broken and needs a solution, but they will not have productized in the way that I believe any user will actually interact with. Then, sometimes you will get a product that has a hook, but you are kind of groping towards what the real problem is that they are solving. I would almost rather invest in that, because I take that…
JASON: You take the hook, not the market.
DAVID: I will take the traction and believe you can grope towards the market need and forget the business model. Right?
JASON: Because that shows the person has the ability to make a good hook.
DAVID: I think the hook is harder than identifying a market need.
JASON: I mean anybody can identify a market need. You just look around you and say what sucks.
DAVID: Right. That is true, but you sometimes have to iterate towards what that is. It was not probably clear, like day one, when Twitter launched, or even Facebook, like, how it got to be a business, but …
JASON: They had a good hook.
DAVID: Yeah. They get a great hook, and then the traction.
JASON: We got the hook, we got the market.
DAVID: Right. The third is a distribution model.
JASON: Oh! How does it spread?
DAVID: How does it spread? The distribution model is probably the single hardest component of creating a startup, I think. What I look for is virality. I want the users to recruit other users on some level. All the products that I have been involved in building: PayPal, Geni, Yammer, have all being viral on some level. The basic problem is, “You can build something great, but it is a big Internet out there. How people are going to find it?” So you have to figure that out. Sales is prohibitively expensive to promote startups. Marketing, like advertising, is prohibitively expensive. How are you going to do it? It is actually a really difficult problem. That is one of the really big things I look for.
JASON: What was the fourth?
DAVID: The fourth is what I would describe as a non-copy ability. So we talked about. OK. You launched something. You throw spaghetti against the wall, and it sticks. Great! Now, why is not that somebody else going to copy it and commoditize you? The thing about software is that it is very easy to copy. Right? I do not mean piracy. I do not say someone has to steal your code, all they are going to do is look at what you do, and they are, “I can build this.” If other people are going to rebuild it, what makes your product fundamentally non-copyable? The best is the network effect. Right? It is like eBay, the marketplace type a factor, or Metcalfe’s law type thing, like Facebook, or it could just be, if your first-mover advantage is strong enough. I will go back to Salesforce. I am not sure that Salesforce has a network effect per se, but Marc Benioff saw the cloud so much earlier than everybody did, he had like a multiyear head start. The first mover can be very big as well.
JASON: Right. Then, once people are trained up on the product, and they know how to use Salesforce, when they go to the next company, and that person then is already trained in Salesforce, it was like the old days when somebody had used GoldMine, or whatever the CRM software was, they are going to be, “Where is GoldMine? Where is Salesforce?” or “I know Excel. Why don’t you have Excel?” They become your product evangelists.
DAVID: Yeah. So you can build up a community that spreads your product. There are complementary network effects, where if all the sales people learn how to use your products then it becomes… Or your product becomes standard, or something like that. You want to have some basis for believing that you could win the market and that it would not just erode to a bunch of copycats.
JASON: If you could own either of the following two companies, which one would it be, and why? Twitter or YouTube?
DAVID: Well. YouTube is owned by Google now.
JASON: No, I am just assuming if you could. Hypothetically.
DAVID: Gosh! Those are both super attractive businesses. I invested in Twitter last year. I am super bullish on that. If I could invest in YouTube, I guess, I would.
JASON: So that was too close to call.
DAVID: That was too close to call. Yeah.
JASON: Facebook or Twitter? Which one is going to be more important? Which one would you rather own today? A share of one or a share of another?
DAVID: Right. Well. I think they are both important, but what I would say is on a relative pricing basis… One of the reasons I bought Twitter last year is that the gap between Facebook’s valuation and Twitter’s one was 8 to 1. So if you look at Facebook on a fully diluted basis, it is about $80B valuation. Twitter’s secondary shares are about $10B. I am not sure exactly what the spread should be, but I think 8X is too great. Maybe Facebook should be two or three times as valuable as Twitter.
JASON: So the catch-up will happen.
DAVID: I think that gap will compress. I basically think that what happened over the last few years is that Twitter peeled away the value of public sharing that could have been or should have ever, maybe at one point, belonged to Facebook, but… When I was watching the Super Bowl, I toggled between my Twitter feed and my Facebook feed. The Twitter feed was much more engaging. It was like real-time. Everyone was talking about the Super Bowl, and a half-time disaster, or whatever. I love Facebook too. It is the way I stay in touch with my family and friends, but Twitter is really peeled away that public sharing. I just think it is incredibly valuable.
JASON: What are your thoughts on Google today? Larry Page, Sergey Brin. It seems to hit an all-time high stock price. Every week, it seems to be hitting an all-time high. Why is Google doing so well?
DAVID: Well. Obviously, it starts with their advertising system, their ad platform is a very sort of core robust business model, but they seem to just have moved on to this incredible ambitious phase, where they are getting their fingers into everything, and enough other stuff is working. I would say, that for Google’s first maybe ten years or so, the salutary myth that they promoted was this idea that they are really prospering when they kick people off of Google to your site as quickly as possible. So, Google would be this sort of “Don’t be evil.” They are going to be this very unbiased navigation system for the web. I think over the last few years, that has really changed. And now they are…
JASON: They own everything.
DAVID: They own everything.
JASON: Yeah. Google has taken it. I have been there. I mean, it is like sports scores, ticketing, movie times, and it was Zygote [?]. Obviously, YouTube purchase. They have moved the organic search halfway down the page. Being number one in a search ranking in organic results means nothing today if the top of the folder is Google’s services and products.
DAVID: Yeah. Therefore, they have gotten very aggressive about branching out into new areas and capturing a lot of the value for themselves. I think you have to give them credit for, like you said, the YouTube acquisition, the Android acquisition. Those are probably two of the most successful tech acquisitions in the last decade.
JASON: Well. Speaking of Microsoft, Skype was a pretty great one as well. Skype and Yammer seemed to be the corollaries, people are having with Microsoft.
DAVID: Yeah. So Microsoft has done a great job as well.
JASON: If you do say so yourself. I mean they did, but Skype… Yes. Yammer is obviously close second to that in terms of the scope. What do you think now that you are inside of Microsoft? I have recently got Windows 8. I got a Windows 8 phone, a tablet, and a laptop. I started playing with them. I was pretty impressed with how awesome the Windows 8 interface is. That it is the same app store, same interface, and same cloud across all three. Have people counted Microsoft out a little bit too soon?
DAVID: Well. First, to me, just stuff the appropriate disclaimers.
JASON: Yes, of course. You do not speak for Microsoft.
DAVID: I do not speak for Microsoft. These are my own views. The Microsoft Office division is the division that acquired Yammer. I can talk maybe with a little bit more of insiders prospective about Office. I have none of that at all with respect to Windows, not part of that division. I would say that the thing that is very innovative about Windows 8, is that it is a single operating system across all devices. I think that is clearly the right direction. It will be interesting to see what the other guys do about that.
JASON: Yeah. And moving onto Apple, the stock price has gotten crashed recently, iPhone orders… [declined], people are wondering, “Hey, maybe, the iPhone’s best days are behind it.” What is your take on that with the iPhone? I mean, do you feel like Android has caught up and has parity now? How many people here are iPhone users? Then, how many are Android users? Wow! It felt like 60/40.
DAVID: Yeah. It looks like.
JASON: OK. Let us do two years ago. Two years ago, how many people were iPhone users? Two years ago, how many people were Android users? Wow! Just for the people who are watching on the live stream, it was 60%/40% iPhone to Android today, but two years ago, that look like what, 80/20 to you? Maybe 70, about 80/20 two years ago. So that is a big switch.
DAVID: Yeah. Well. I think you wrote a great blog about this. It seems like Apple is just repeating the same mistakes they have made in the nineties, where they are overly concerned with maintaining margins on the hardware. Part of it is a business model problem. Right? I mean they make money off the hardware not the software. So they are being undercut essentially by a union, which is Google-Samsung, that has a cheaper product. I think they should probably care less of margins, and more about market share. I think you made some more point. There was a great article on TechCrunch the other day with a fantasy designer who created a phablet for Apple, I do not know if you, guys, saw that?
DAVID: It was some of the best fantasy design I have seen. It is one thing when Steve Jobs says, “Look. This is our product line.” It is like Moses coming down from the mountain. It is like the Ten Commandments, but now, they are sort of on the next stage. I think it probably would make sense to be a little more experimental, and clearly people want these super large devices.
JASON: Yeah. The Note II is becoming addicting. I have one. This sort of “phablet” is a terrible ridiculous name to say. You look so weird, when you put that to your head. Anybody with a Note II, can you just put it to your head for a second that we can see how ridiculous you look? Look. There, it is. That was an iPad Mini, Owen! Business Insider! I just like the fact that Business Insider is in the front row, and they are just getting dogged every two panels. He-he.
DAVID: Yeah. Look. If you want me to play fantasy, quarter armchair CEO, I think Apple should consider doing some radical stuff like licensing the operating system, or coming out with a phablet, or having a more complete product line.
JASON: Let us talk about the best CEOs in the business. I leave Steve Ballmer aside because I do not want to get you in trouble with Microsoft, but Elon Musk, Jeff Bezos, Zuckerberg, rank them! And why?
DAVID: That is very hard, but I will give Steve a plug. He was really Bill Gates’ de-facto co-founder of the company. I do not think he gets enough credit for that. I mean, he was there when they had less than 30 employees and was a Gates’ partner throughout the whole growth of Microsoft.
JASON: He survived a couple of decades, and every five years, it was the death of Microsoft, and it just has never happened, so he does get credit for something.
DAVID: Well. The financial results of the company over the last ten years have been phenomenal. They are basically growing revenue from about 30 billion to 75 billion. They do some spin out about 30 billion a year profit. It has certainly been a very successful tenure by the numbers. Onto the guys, you have mentioned…
JASON: Because I would say Ballmer… I should probably put Larry Page in there. Yeah. I do not know.
DAVID: Obviously, they are all great CEOs in different ways. They all are founder-CEOs. They have a special insight into their business.
JASON: So let us just go through each one. Tell me what you think, if we are not going to rank them. Bezos? What do you think? Amazon? What they have done? Just Amazon and Bezos in general, go!
DAVID: Right. I guess what is impressive about them is, again, just ten years ago they were trying to get the basic e-commerce business. They put business to work. Now they have been up to really expand the surface area of what they do. So now, they got the web services. They are basically going to every category of e-commerce. They have their own device. It is impressive that they are able to expand like that.
JASON: What do you think when you see them ship a hundred million dollars to make movies? They have Amazon Studios now. You did a film. You did “Thank You for Smoking,” which won Sundance [Film Festival]. Correct? Did it win Sundance? Or what did it win?
DAVID: Something like that.
JASON: It won a couple of awards.
DAVID: Yeah. We got honored for Golden Globe and Independent Spirit Award. Yeah.
JASON: When you see Amazon is just shipping hundreds of millions into original content creation, what do you think? Good move or pocket change? What is the thinking there?
DAVID: Well, I would say, it is a horrible thing for a startup to do, but when you get to Amazon size, and you are a hundred-billion-dollar company, you can take flyers like that. In general, I am skeptical about the content creation business, but they have the ability to place bets like that. Again, if you are running a company that big, you now have the luxury of not having to worry about dying every day. The way that you do when you are startup like, all of us are kind of running in. You can place a bunch of different bets, knowing that some of them are not going to work out.
JASON: Take some moon shots.
JASON: Larry Page. Speaking of moon shots, self-driving cars, Google Glass, Larry and Sergey. What do you think?
DAVID: Right. It is sort of the same analysis. That is the reason, why we are talking about these guys, they have been able to expand the surface area of what they do.
JASON: What does Marissa have to do at Yahoo to make it and turn around? And can it be done?
DAVID: In general, I do not believe that tech turnarounds are possible, and just in general, because once the ice has melted under your feet, it is strategically too hard to fix it. The tech markets move so quickly that by the time you realize that, you have lost your product market fit. It is just almost impossible to fix it. The only turnaround story that we all talk about, that I know of, in the tech industry, is Jobs with Apple. He was one of a kind. Those turnaround situations are incredibly tough. Now with respect to Yahoo specifically, I like what I have heard Marissa say so far. This idea of “daily habits” that she is trying to implement. It is a great way to recognize what Yahoo has historically been very good at and align it with where the market is today. So I like what I am hearing so far about that. We will just have to see how that goes.
JASON: When she cut the telecommuting thing, and 350 people, and supposedly not a lot of VPN activity, do you think she was getting overly criticized? Because she is a female founder maybe, or that any CEO would have gotten that criticism of letting people go, because it is such a small fraction of the work force, why did that become such a brouhaha?
DAVID: I do not know that she was initially treated differently than other CEOs would be, but I would say, I would defend that decision. I mean I like her decision a lot.
DAVID: Well. Because, like you said, they did the data, and they are seeing all the people working from home and never logging in, and no one could tell what they do.
JASON: It is a pretty easy decision.
DAVID: It is a pretty easy decision. What is everybody complaining about? I mean it is unbelievable to me. In the past, the companies I have been involved in, we absolutely had work-from-home situations, but they have been situations, not policies. It has always been negotiated with the person. We know them, we trust them, and we talk about how this is going to work. It is not just the idea that, “Hey, I do not ever have to come into work.” I mean it is a crazy policy.
JASON: It is kind of insane.
DAVID: It is insane. It is not just about your productivity, it is about, we are collaborating and working with others. What if somebody else at the office needs to talk to you about something? It is nice that people are able to swing by your desk…
JASON: Or have a cup of coffee.
DAVID: …sometime, or happen to see you in the cafeteria, and you, guys, have lunch. It is not just about your productivity at home. It is also about being able to collaborate with your co-workers at the office. Even though, Yammer is a part that helps people collaborate sort of virtually, I still believe in the benefits of being in person in the same office.
JASON: You worked with Elon Musk at PayPal. What do you think of what he has accomplished in the last three or four years?
DAVID: I mean, it is obviously unbelievable. He is probably the world’s best applied engineer. I do not know anybody else who could design a reusable rocket and a battery-powered car, and do it at the same time. That would be enough to kill most people. It is an unbelievable design feat. It is an unbelievable feat of leadership to convince the investors that he needed a massive amount of investment. He needed to create huge teams to do that. So being able to pull all of that together, and then finally risk his all net worth on this venture.
JASON: He went broke. He has publicly said that he went broke, and he was living off of loans from friends.
DAVID: Yeah. So I think of the list you mentioned, I mean I think he is the gutsiest. He has to be the gutsiest on for an arena [?].
JASON: Hands down!
DAVID: Hands down.
JASON: The best applied engineer that we know. Interesting. What is next for David Sacks? You are obviously working at Microsoft. Are you the next CEO of Microsoft? Am I sitting here with the next Ballmer?
JASON: At some point, in the next ten years, he would retire. Is that something you consider?
DAVID: You know what? I am just focused on Yammer right now. That is flattering that you would say that, but …
JASON: I mean I think that a lot of us thinking, when you see someone like you from the Valley, you feel the air to Gates and to Ballmer.
DAVID: There is a lot of people, who have much more important jobs that I do at Microsoft. I report to the guy, who reports to the guy, who reports to Ballmer. Look, I am honestly not even thinking about that. I am happy to do what I am doing, building Yammer. Yeah. I am just looking forward to keep doing that for a while.
JASON: Enclosing, you have had a good run here at the LAUNCH conference. We were talking backstage, and you have this incredible idea. Let us hear it.
DAVID: Well. I mean the reality is, there is so much interesting stuff going on out there, I mean, in the demo pit, on stage here. There is more than any human can keep track of, except for you, I think. You are the only one who can keep track of all this activity. So I said to you is, “Why did not you pick, say, the top five of these LAUNCH conference startups every year, and I am making an angel investment, say, $50k each. So we will do $250k, a little mini fund, and you just picked the winners, and I am behind them.”
JASON: Wow! Big round of applause. You have just seen the formation, on stage, of the LAUNCH Fund, I guess we will call it.
DAVID: Yeah. We will give the LAUNCH conference a 20% carry as if a VC would take, so if you pick the winner, if you pick well, the money will go to the conference.
JASON: Let us put this in perspective. If the LAUNCH Fund had existed with Yammer, at the time Yammer launched, what was the valuation approximately? A hundred million?
DAVID: When Yammer launched? No. On the heels of winning the conference, we raised five million dollars in a 20 million post-money valuation, so 15 million pre-money valuation.
JASON: So if we put $50k in, it would have grown 50X?
DAVID: I think the series A guys made about 60X.
JASON: 60 times 50.
DAVID: So basically, it went from $20M to $1.2B.
JASON: What would $50k…?
DAVID: Oh! 50 thousand times 60, would be… Do you have a little trouble with math? That will be three million. You have got from $50k to three million.
JASON: He-he. I just want you to know the significance of this. That is three times the budget. This event cost a million dollars to put on. Inevitably, we will have another Yammer, I mean, we hope, but if we even had a half of another Yammer every year, or every other year, it would pay for the entire budget of the conference two or three times over.
DAVID: Yeah. Good. Let us do it. Pick one.
JASON: All right. Let us give it to David Sacks and the creation onstage of the LAUNCH Fund. David Sacks, it has been an honor to be with you from the rehearsals, and to become your friend over the years, and I lost a shit ton of money to you playing poker, and being absolute…
DAVID: Maybe I can fund the LAUNCH Fund with…
JASON: Yes, with the losses that I incurred. Just for people to know, Chamath [Palihapitiya]… We talked yesterday about Chamath being probably the best, one of the best players in the group. It is pretty much neck-and-neck between the two of you. Who is the better poker player, you or Chamath?
DAVID: Probably. I hate to say it, I cannot even say it.
JASON: You have to say it. Be objective.
DAVID: Honestly. Oh! I think we both know Chamath, but I …
JASON: You cannot say it.
DAVID: Saying it is so hard.
JASON: Because you have to play him.
DAVID: I have to play him, and he is going to be really obnoxious about it.
JASON: Right. So we would not say it, but we all know it. The most successful entrepreneur in the history of the LAUNCH conference: David Sacks.
DAVID: Thank you.