Enterprise SaaS: Venture Capital Investing

Bruce Cleveland, one of the most experienced and respected enterprise SaaS investors in the world, talks about startups and investing.


Oct 31, 2014

Enterprise SaaS investing and venture capital is a hot topic. In this episode, Bruce Cleveland discusses the history of enterprise SaaS startups and explains the origins of CRM.

Bruce Cleveland has been part of InterWest's IT team since 2006, focusing on investments in the business software and services sector with an emphasis on mobile, cloud computing and analytic applications. He is a former board member of Marketo (Nasdaq: MKTO), and currently serves on the boards of AppmeshAria SystemsBibaC9DamballaGet Satisfaction, and Splice Machine, and is a board observer ofTotango.

Prior to joining InterWest, Bruce held senior executive roles in engineering, product management and product marketing with companies such as Apple, AT&T, Oracle and Siebel Systems. Bruce's last operational role was as a member of the founding executive team of Siebel Systems where he served as SVP, Marketing and SVP, Products. He is credited by Forbes and IDC with creating the most effective BB alliance program in the software industry. Bruce attended the United States Military Academy, West Point, and received a B.S. in business administration from CSU, Sacramento. Bruce writes about cloud computing, venture investing and life in Silicon Valley on his blog RollingThunder.



(00:002) Hello, welcome to episode number 85 of CXOTalk. I am Michael Krigsman and today, we are talking about the world of enterprise adventure capital investing. I’m here with my gloriously, friendly co-host, Vala Afshar. Vala how are you?


(00:24) Thank you for the incredible introduction.


(00:27) Vala, you are incredible and we have an amazing guest today Vala


(00:31) We do, please let’s here the introduction.


(00:32) We are joined today by Bruce Cleveland, who is a general partner with InterWest. And Bruce is really one of the top and most respected software to service investors in the world. Bruce, how are you.


(00:49) I’m great thanks Michael and Vala.


(00:53) Bruce, could you tell us briefly a little bit about your professional background and InterWest.


(00:59) Sure, I probably spent 25 – 26 years on the operating side, so actually the majority of my career was really in the creation of products with some really great companies. Started out with AT&T on the data side designing data networks. Went to work for the small little tiny start-up of a few people with a pretty interesting idea called Oracle, where I ran the Unix division and got involved with some pretty great people. Many of them we all know, Larry Ellison, Marc Benioff, TomSiebel.

(01:34) I ended up working for Tom later on when he started Siebel Systems after I did a five or six year stint at Apple computers, running an engineering group there.

(01:43) I was a number of different things besides what I started off as. I did DP marketing, I ended up becoming and we didn’t call it that – a Chief Marketing Officer, but I help that title. I was the (BP?) of business staff and alliances. I ended up being the Chief Product Officer for Siebel Systems for several years before we sold the company to Oracle. And that’s when I joined – I decided not to go back into Oracle to a company of a hundred somewhat thousand people and decided to try something different.

(02:18) So I joined here at InterWest in 2006 and focusing on helping them to build a new practice in the software industry using software to service as a business model.

(02:33) InterWest itself is a firm that’s been around for about 35 years. It’s always been diversified. That is IT is a constant, but another half that either initially did retail type investments, like Chuck E. Cheese and Il Fornaio. We no longer do those, although that would have been interesting to have frequent flyer points into those companies, but we do healthcare today.

(03:00) So half the focus is on healthcare, half the firm is focused on Information Technology and of course I’m on the IT side of that, and we do a small slice of healthcare IT and we could probably talk about those as well.

(03:14) So been around for 35 years and were investing our last few deals in our current fund, which is a $650 million fund and we are in the middle of raising InerWest11, which will be a smaller firm with a smaller group of people but still focused around healthcare and IT. So that’s who we are and that’s what we do and where I’mfocused.


(03:39) So your title is General Partner, so very briefly just tell the people who don’t know what does that mean. What does a General Partner of a major VC firm do?


(03:51) So there is different titles in different firms and sometimes they carried meaningful and differentiated roles. Generally, the less experienced and perhaps younger folk are associates and principles, they typically don’t have a checkbook. They tend to do networking, analysis etc. then you can kind of move up the ladder as a venture partner.

(04:18) An adventure partner is not – and this is key, jointly and severally liable for all the decisions of the firm. That’s an important thing to note. So, many times they do have a checkbook and in this firm we do. And that’s actually how are joined InterWest as an adventure partner to see if I was A, interested and B, if I was any good at this.

(04:45) Eventually people become general partners, and basically the distinction there is you help govern the firm, you are a partner in all, and that means that you’re responsible for hiring and firing, running the budgets, and basically been responsible for the financials in the firm, in addition to running checks and the companies. And that is basically the big differentiating factor between a general partner – GP, and a partner.


(05:20) So from a broader perspective our audience understands that you are driving investment thesis and opportunities for IT and software as a service. But can you talk to us specifically about areas that you like to invest in and why.


(05:37) Yeah, maybe it goes back to doing what you know. I didn’t enter this practice really understanding venture and most of the companies that I have been mostly involved with weren’t venture backed, Siebel systems wasn’t. Apple may have been way long before I was there. Oracle wasn’t etc. So I really wasn’t familiar with the venture model. And I came in basically saying, I really need to learn this business model before I try to venture off of things that I don’t really know well.

(06:13)So my goal and where I focused in is in the areas of technology that I was some very familiar with. So B2B application software, B2B infrastructure, and B2B2C.

(06:23) I don’t really do consumer investing, I spent six or seven years building products at Apple and my analysis of building and investing is somewhat going to Las Vegas, and instead of the roulette wheel being one of 100 spaces, it’s 10,000 spaces and you have to call the actual what space the ball is going to land on.

(06:47)For me, that’s fraught with lots of peril, so I chose to stick with the areas of which I think I could have a controlling factor over, which is identifying business processes that are sub optimal in a company, applying information technology against those problems and helping companies to build those applications, and finding people to help that and going after that.

(07:18) It would be into basic spaces, they would be either category disruptive or category creating. An example of category disruptive is what work they’ve done, where you have got a team that well understood the best advocacy RP elements, having built PeopleSoft, basically re-fabricating that into a new form factor and business model.

(07:45) An example of category creating is what a company like Marketo have done, which is to take advantage and a sort of tested market, marketing automation, but not in the way that Marketo really thought about it. So that was a company coming into create a brand-new category, that we had hoped that at the time of our investment would become something significant.

(08:11) So those are the two things I look for and we look for as a team, category creating, category disruptive – very very large markets and billion-dollar plus and process into technology where we are sure that once it becomes adopted, very hard to rip out of the fabric of a company’s business model.


(08:33) You have a reputation as being one of the early software as a service investors, what were there characteristics of SaaS and that market back at that early stage that you identified as being particularly compelling.


(08:52) Yeah, that’s a great question Michael, so perhaps I had an unfair competitive advantage back in 2005-06. I had actual retired from Siebel Systems, went sailing for a couple of years and had a chance to clean my thoughts and rejoined Siebel and to call for what they called CRM On demand, which is there SaaS business, targeting primarily in the market and sales force at the time.

(09:21) So might interest to software as a service really started with getting my teeth kicked in that business model, having to learn that it’s a different set of metrics, different issues that you need to be concerned with when you’re running that practice and running that model. And then especially how challenging it was to make that successful inside of Siebel systems.

(09:43) Perhaps may be that was the biggest insight for me was recognizing upfront that it was like having a virus inside of a body and there was a lot of antibodies going on inside that company. In fact, I projected into any other incumbent company that it would have a very challenging time to overcome. I mean, I was one of the insiders, close with Tom and even then it was extraordinary difficult to get that flight real kind of moving inside the company.

(10:16) That’s what led me to when I joined InterWest was to suggest that I thought it would be very interesting to attack the incumbents with that business model, because it would be very hard for them to be responsive successfully.

(10:31) So that was the special insight that I came in – and the other part was that you have to differentiate yourself. Venture capital is competitive like anything else, and what I wanted to do was hang my shingle out and say I’m one of the few people who have actually built and run a SaaS business. I understand the business model, the metrics, the issues that are associated with it. Maybe I could be more of assistance them one of my my brethren up and down Sandhill Road. That was the way that I entered that model.


(11:03) Saw some of the companies that you invested in, I brought into our company such as Marketo for marketing automation and get satisfaction for our community. Both well integrated into our salesforce CRM solution. So when you think about companies like Marketo and GetSat, tell us your thinking and process to partner with these companies. What did you see for a sample in Marketo, who was very early in this marketing automation space, and now of course they are a leader in that space.


(11:41) Great question. So this is where a a lot of luck comes into being successful.

(11:48) I did happen to come in with a thesis when I joined here, which is more than just SaaS and that is that were undergoing a complete overhaul of our entire product suite at Siebel, and it was pretty clear to me take any of those ideas forward. They had a lot of their own initiatives, not at least, which is a big giant project called fusion. And any other ideas that we had on drawing boards that we had actually rollout to the Siebel customer world in October 2005.

(12:20) It became pretty clear to me with my conversations with a variety of executives there, they were less than interested in those concepts and more interested in just taking the answer to Siebel and continuing to monetize it.

(12:34) So we certainly turned over all of those plans, which was professionally and ethical thing to do, but I brought those actually over here to InterWest with my thought partner over here, Doug Pepper, who co-leads the IT practice for us here.

(12:52) We sat down in front of a whiteboard and what I drew out for him and what he augmented was this notion of completely transforming enterprise application in the front starting with into data driven or analytical applications, that would enable companies to make better decisions at the moment of value. To convert subjective data into objective data, for example., and that is to take what used to be purely transactional systems, but to infuse them with analytics so that I can make a better business decision.

(13:30) We wanted to take a position across the entire revenue supply chain, that was our term for the conversion of revenue which you could define down into discrete clicks on a website and apply resources against those. Over time, as they became more valuable, move them through the revenue supply chain applying more and more value to it and converting that into ultimately, a complete whole product revenue.

(13:58) That was the concept and we called this Revenue Performance Management or RPM, and it was actually the keynote that I gave in October 2005. We enabled it rpm and we said the first thing we want to pick off, we want to pick off marketing. Why? Well, because it was well understood and at the time Google had already taught us that if you want to sell a product or service, as a company, you needed to get people to search for that. And if we could combine those two things together but you put a vendor in front of a buyer as fast as possible, people would just pay for that and buyers would value it.

(14:42) So the concept was that for the first time we could actually do digital marketing, we could actually understand when somebody, a prospect might be interested in a product of service that we were selling. And that notion, coupled with the fact and what that told me was, that if we could convert the chief marketing officer from an expense to a revenue centre – instead of a party planner, event manager etc. we we could do what Tom Siebel actually demanded what I do, and that is to take a bunch of (Quanshots? 15:21), run a bunch of models and accurately predict not in period revenue, but next period and the period after.

(15:30) If we could do that, if we could meet the chief marketing officer have an equal seat at the executive table, for what every chief executive would look at, at their chief salesman officer and and asked for the called the ball on in period revenue. Then, look to the chief marketing officer who says I want to know what we’re going to do next quarter, because I have to guide Wall Street.

(15:50) If we could do that, this would be a billion-dollar idea, and so I have to blame Tom for kicking my teeth in for so long to give us that insight.

(16:01) We met with all the existing companies, we met with Eloqua, we met with Silverpop, Vetrends, and Doug and I met with the former marketing automation companies, (Anucio?), MarketFirst, failed CEOs in that category.

(16:20) And at the end we concluded, and this is where the luck part comes in and they will have to confirm this, but I think that the executives at Marketo would say and confirmed this the founders, that they were about two weeks away from disbanding. They had met with everybody and everybody thought this was a terrible idea. You fire marketing people first, they are of no value.

(16:47) I think that they walked into InterWest thinking that they were the final buzz saw, and instead we had one of those magical mind numbs, that we didn’t know what products that they were going to build. But we knew that if they wanted to go on the journey of transforming the chief marketing officer into this new revenue generating function, we were up for that.

(17:09) So we had to carry them through – there was no product, no code. It wasn’t as dog, but everything else that you would hear about the iconic Silicon Valley is definitely that story of a start-up.

(17:20) So we invested the first round, second round, third round – couldn’t get anybody interested. As a result we probably owned an unfair share of the company, but eventually dragged some other firms kicking and screaming into the company, some very good firms and they are very helpful.

(17:40) The company dealt with the rest and they felt –

(17:44) That was our first stake in the ground as revenue performance management, and now we’ve built an entire portfolio optimized, spread fast satisfaction, REO systems, NewsCred. I mean if you look at Doug in my portfolio individually on the website, you will just see a bunch of logos. If you line them up against advertising, marketing, sales, services and support, and you put the logos under those categories and tie revenue performance management over the top you will see a the strategy emerge.


(18:17) So we want to come back, let’s come back to CRM and its descendants and where it’s going, but we have a question from Twitter and we like to defer to the audience. And so we have a question from Frank Scavo, who is one of the top enterprise software analysts out there, and he asks what I was thinking. When you spoke earlier about the difficulty of on premise software companies to adopt the metrics the mindset and the different technologies, so what does that mean for companies like incumbents like SAP and Oracle today, who are both trying to and have explicitly stated that they are basically the cloud company?


(19:09) Well I think that there are words and there are actions, and I think if you talk to people who have attempted to build those insights, those are incredibly challenging projects. So my hat’s off to the people who have attempted to do that internally.

(19:28) You’re fighting a systemic and endemic issue, which is the entire business model is built on an entirely different set of metrics. You know, you don’t just get to build the product. You have to be the IT group for the product. There’s different margins involved. There’s a different vernacular used in the exec meeting at salesforce, in the exec meeting at SAP.

(19:54) In addition, you have this other problem, which is the revenue contribution of those product lines initially are so – I mean there are rounding errors compared to the other business. You’re fighting for resources in these companies against revenue lines that are going to help make or break a quarter.

(20:15) It’s always been my observation, that as much as these incumbent teams –they are very smart people. Bill McDermott at SAP, he was a peer of mine when I was at Siebel and he is a ver sharp guy now running SAP. He’s got a huge issue. He’s got to satisfy shareholders, but he then also has to transform this company so it can operate on a different business model. That is really, really hard to do.

(20:49) I’m not sure you can survive as the executive team through that process. It’s almost as if you have to go private and then come back out to be public in order to be able to do it. Very few companies have done it – I think Concurred did this. But other companies have had a very challenging time, and I just looked into the people who have gone into to do it. You know, guys like Lars Dalgaard who went into SAP and is now over in Andreessen.

(21:16) I just think this is really really tough stuff to do. The company that might be able to do it though, the one that I have kind of put my money on is Oracle. The reason of that, I think if you ask Larry, they really are a subscription business.

(21:30) There are business today, maintenance and support, and if you want to know why Safra and Mark Hurd don’t discount on maintenance, it’s because that’s the life blood of that company. Take a look at the contribution that that revenue provides. They might be able to make it over the hurdle and transform the engine underneath to be able to be a much more of a subscription model.

(21:56) Others though I think, this is going to be really really hard and it might go through the valley of death to come back out the other side. Again, I don’t know whether the executive team of a company currently in place, offering under those business models and on prem’ model could really make it through that transformation.


(22:17) What’s the timeframe, the life cycle of going through that valley of death or at least the valley of huge pain and being able to emerge.


(22:30) I mean I would say it’s five to 10 years. I mean you’re going to overhaul the entire company. I mean I just haven’t seen it and maybe you guys have. We’ve listened to IBM, we’ve listened to SAP, we’ve listened to these companies talk about how the intend to be the cog company. Intending, wanting, and desiring is a lot different to than actually putting in place the mechanics to really make that work.


(23:04) Is this the Clayton Christiensen and innovators dilemma scenario or more than that.


(23:09) I think that’s it in space.


(23:13) So you had an early focus on CRM and I think the audience would want to know why and perhaps where your views of CRM evolving to. Somebody just asked me recently, who is going to be a big player in CRM that’s not the ‘usual suspect’. I thought about it and the first company that popped in my mind was LinkedIn, you I though, strong database, social integrated into the fabric of it, which I think social is absolutely in enterprise. So I don’t know that’s a company that popped in my head.

(23:48) But I’d love to know where is CRM evolving and why did you have such a strong interest in CRM early on.


(23:54) So obviously because being with Siebel, we didn’t coin the term CRM by the way. I think it was Mary Coleman, who is now doing venture investing. I believe she’s the one that she’s credited with that term, but we certainly try to conscript it at Siebel. I think Tom’s view is rather Machiavellian and you manage your customers like that – but anyway.          

(24:19)So CRM has become obviously a well-accepted term. I believe that is just essentially though is just that a contact database in space. Really what these are is the ability to capture a name, address, and opportunity.

(24:38) I think initially that’s requires of what’s been able to do what actually Comet thought about doing many years ago. But I think it’s an opportunity to be transformed. I don’t know whether Salesforce will do it or not, but I can give you my sort of two cents on where I think we might go with this.

(24:59) My feeling – and I actually have a bet here, so I have a dog in this hunt and I’ll tell you what I think about it.

(25:07) I actually think there’s a guy named Don Peppers and a gal, Martha Rogers, who wrote a book many years ago, one-to-one marketing. It was combined by a guy named Joe Pine, who wrote a book called mass customization, and the idea of being able to connect the right person at the right point at the right time, at the right product, at the right price. That was a very broad and very interesting vision.

(25:33) My view is that a lot of sedimentary layers in technology had to be laid in place before that could begin to materialize, but I think we’re beginning to reach that point.

(25:45) We have a lot of new technology that’s emerged that’s allowed us to be able to capture people’s interests at a real time. And we’re beginning through these devices to be able to reach real people in real time; they are with us all the time.   

(26:03) So my view is that the next phase, CRM 3.0 is a lot less about the capture of an name and address, but it’s about as you suggested, applying the demographics of a person who we know something about, and being able to reach them in real time to provide them with an offer of servicethat’s relevant to something that they want.

(26:30) So a bet that we recentlymade is on a team that actually builds all of Seibel’s loyalty products, and you may not know this but those products power a lot of the most powerful loyalty programs in the world today like Starbucks.

(26:43) We took that team and were building a new company and that can in real time provide offers that are relevant that pull from social media, pull from enterprise data, and can provide an offer in real time for companies of all sizes.

(27:00) We’re in the very early innings of this, it’s a great team. I like to bet on great teams, just like you might bet on Dave Duffield and AneelBhusrifor being successful with Workday and it wasn’t hard to imagine, we tried to replicate that.

(27:14)I think that’s an example of boiling off things like Marc Benioff did with Salesforce, like we did with Seibel and using some of this next generation technology, like Hadoop and others to be able to give us the ability to materialize the vision what folks like Don Peppers and Martha Rogers, folks like Tom Siebel originally had with the CRM industry.


(27:45) Is there enough predictive analytics in CRM to even beat real time, like in other words, do you understand the buying behavior and the pattern and the buyers journey based on persona’s. you’ve gone through the market segmentation, account segmentation, buyers segmentation and now you have the ability again to connect to the market segment of ‘one’ with that smart mobile user, and you can offer things to him and her using predictive analytics and really delight the customer in advance of ‘need’ or ‘perceived need’.

(28:26) But how much big data and predictive analytics drive the CRM version 3.0 that you defined.


(28:33) So as you might imagine, I have a dog on a hunt on this one to.

(28:42) The issue really is around data and the most important part is that you have to have a tremendous amount of data and it needs to be available on real time, and it need to be fine grained in order to be able to make the offer relevant. Otherwise it’s just damn annoying.

(29:01) The first problem to solve in this predictive science area is to make sure you are capturing fine grained, detailed data in real time and then being able to provide a set of analytic services that the predictive science runs against. So it has many more data points to run its algorithms against, which then generate a better or more affective prediction.

(29:33) So it started seven years ago, building a platform to do this. It took – my partner aren’t too happy with me in how much it cost to build this. But we actually built one to try to go after revenue predictions and started rolling out last year. it’s a company called C9, and what they do is they are used by google, Yahoo, Pandora, 4M, LinkedIn – a whole bunch of companies we’ve all heard about.

(30:01) They basically at the end of the quarter, run all the refs and opportunities, they process about $2 trillion revenue and about 60 billion transactions and they build models off of those to predict down to the deal level and down to the ref level, what’s’ going to close in that quarter.

(30:19) And after two or three sales cycles running through the integrate data science team are very smart people who I could never have gotten into their schools with.

(30:31) They run these models and they are vision lysed through the UI - through mobile and web and they give the sales organizations and the finance organization’s these predictions. And after two or three sales cycles they are getting anywhere from 83 to 92% accurate. That as you can imagine is pretty transformational, and I think we are just at the cutting edge of this.

(31:00)They use the transactional data out of Salesforce and now out of Marketo, and they append that with social and then to generate these predictions. So I think we are going to see a bunch of companies emerge and we already have, companies like Profery, Infer and others that are attempting to do similar things with these next-generation architectures.

(31:25) So they are not to building – they are not replicating CRM as we know it. They’re not replicating the transactional systems, those are all in place. They’re generating systems of engagement, the ones that sit on the systems of records, to use and process that data and actually deliver what 20 years ago we initially hoped to and predict if we could.


(31:48) So at that point the value of CRM actually accrues to the users, of that system rather than just to the manage us now who have a greater ability to oversee their salesforce.


(32:04) Absolutely, and I think that’s the problem. CRM was built for the company, right. It really is a transactional system that the company uses to beat the crap out of its sales organisation.

(32:16) Although, if you’re smart as a sales rat, you don’t enter that million-dollar deal until it’s down to signing the damn order, otherwise you’ve got the CEO of the company effectively on your butt the entire quarter.

(32:33) I think what’s happening now, these new systems and what they do they deliver something to the Rep, they say hey guess what, out of your portfolio of opportunities these five deals are your most likely candidates. And the reason is that they have a pattern that matches others in the company. You might want to focus there.

(32:13) They can also identifying reps that maybe they are really good at prospecting, but not great at closing. So what you can do with this type of product, like what C9 does, they show the manager and the rep what deals they might want to work on together, and the manager can help the rep in areas where he or she might not be as good. So that’s the power.

(33:18) This is no longer, you know it’s no longer the stick is the carrot. And then there is the interesting part which I like, which is there is a kind of the leaderboard analysis that shows where you are in your forecasting predictions, and that hold you personally accountable for them for perpetuity. So that’s why we choose CRM data, it’s more reliable which is one of the big issues DQ - Data Quality has always been a big problem with CRM systems. So it has a naturally self-cleaning and process and that’s why I like it and that’s why I think we’re going to see more of this emerge.


(33:56) We have about 10 or 15 minutes left. So let’s jump topics, we could actually continue on this topic.


For the next five hours.


(34:08) I was going to say two hours.


(34:10) Well before we jump, I always think about the market automation on the front end of the customer acquisition funnel and how we score leads and marketing qualifies it’s inter sales and all of that. You get to that opportunity sage, and there is a lot of opportunity for automating the opportunity base on the buyer signal and all the social activity and everything that’s taking place with the rep and the customer.


(34:35) And now the technology has finally caught up with that to enable that.


(34:38) But all automation is at the top of the funnel and I don’t see the same level of sophistication, reporting predictive  analytics, regression analysis and all of that once the opportunity is created in CRM and if you can take that and it tells us all the way to the end and even winning the customer and adding loyalty, that’s where the magic should be.

(34:55) Anyway, we’ll shift but this topic is so juicy.


(35:02) You know. I don’t want to be a sale for C9, that’s not the purpose for this, but I think that exactly. They have a product called OffScore and that’s exactly what they’re doing. They are using machine learning to do that. At Marketo, if you want to run a campaign etc. you had to decide what the scoring was. What’s more important is – and you might have a point of view of what’s causal over versus what’s colligative. I think it is far more important for machine learning to tell us what’s causal and it can do it much more rapidly and much more objectively and quantifiably. So anyway, enough on that one, but I absolutely agree with you.


(35:42) I’m going to check C9 for sure.


(35:45) And there’s going to be a bunch of companies who are taking stabs and pieces of this and it seems as this is going to be over the next year, this will be the next big battleground.


(35:55) We think so.


(35:57) So let’s shift gear right now and hopefully you’ll come back another time and we can continue the discussion of companies and trends. But corporate innovation, how do you see corporate VC’s who have now started to enter your turf and enter the start-up ecosystem.


(36:21) Corporate innovation is kind of an oxi-moron, and I know it’s really popular to be chief innovation officer and these things sound really great in the annual reports.

(36:34) But the truth is once we get to be a company of a certain size and magnitude, everything in that company exists preserves status quo. You actually it’s annef mode to have innovation. Innovation means you disrupt everything, it’s unstable, non-predictive.

(36:50) We’re not rewarded on Wall Street for unpredictable things. You know, so you learn to keep your job and it’s about preserving status quo, and that’s why you end up having a challenging time doing in-house innovation.

(37:05) Off balance sheet innovation, which is effectively corporate development is about. Is about making sure that you don’t put something really cool that could cannibalize a revenue stream inside the company because the antibodies will emerge and destroy that. I think we’ve all read numerous cases on this concept.

(37:27)So I think that the truth is for me, and I’ve tried this. I wrote a blog about spingym taking out a page like what Cisco’s done but may be making it a business spingym and not a technical spingym, and the reason I suggested this is that we waste a lot of money here on Sand Hill trying things out.

(37:52) Wouldn’t it be a lot better that if we took a look at the blank white spaces that are going on inside these large enterprises, and partnering with those groups to build technologies that can be brought into the company that architectural has done spec of that organisation.

(38:13) What do small start-ups lack, distribution and credibility. What do large companies lack, speed, you know iteration and the ability to operate without legal hammering the hell out of you to try and get something out the door.

(38:31) I think if we did that – much like what farmers learnt to do. You know, farmer does a lot of off balance sheet R & D. They have a really nice way of working with start-ups and then spinning those into refill their pipeline. We don’t do a good job of that here and I’ve tried teaching this to a number of executives and companies. And the basic issue inside large technology companies is a big NIH problem, gee, we are smarter, we can do better, we can do it faster.

(39:02) I would just argue that the truth is, that the data shows that’s not actually true, and we can see that most of the innovation is happening through acquisition for these companies. The problem is that is kind of like throwing your net into the river and hoping that a fish that meets your spec is going to land in it. I would rather basically breed the dang fish, so that way when it matures and I get first shot at bringing it into the company.

(39:33) So that’s kind of my monologue on innovation and I think it’s the right thing for corpdev’s to do, but I think they are getting involved too late. They want to see companies already working. They want all the risks to be borne by the venture groups etc. and then they want to pick off the ones that they think would work.

(39:57) You know, one thing we are not building things that fit their business model and in fact, I would argue everything that I’m doing is to build companies is to destroy business models of incumbents. So that makes it – and I’m not different than any other venture guys. So that puts us immediately at odds.

(40:14) The second part is I’m guessing – you know, when I was running products for Siebel, I knew exactly what we were going to build and why, but none of the venture guys did. So, they would parade their companies in front of us hoping that we would buy one of them and at most times – it doesn’t work your dot net architecture job, or whatever.

(40:35) Why not architect the product up front, that we know is going to be well suited for the product line, be able to build the product for half the cost or maybe a third of the cost that it would take inside a large company. Do it twice as fast, and then when it emerges run it through the distribution channel of the company, so the revenue rapidly increase. So when you fold it in its already going to be a significant contributor that to that company.

(41:03) It makes all of the sense in the world, but I think the organizational behaviour issues of large companies versus small companies is as large and that’s the problem in that concept.


(41:14) Wow! We have four minutes left.


(41:18) Bruce is dropping some mad science.


(41:20) I know exactly, we could just go on here for hours, but I think we can’t leave you without asking your advice for start-ups.


(41:29) Yeah, please give some sage advice, I’m a founder CEO Startup, give us some advice on one, be able to connect with amazing business entrepreneurs like yourself and isn’t the team, is the product, is the pitch is it all of that.


(41:45) How do we reach you and what’s your criteria for deciding to find us as opposed to somebody else.


(41:53) Okay, so I’ve learned a few things during this sort of venture run, and I think universal truths here. I think this is a business of outliers. It’s about finding those outliers and investing in them, those other ones that make returns, make limited partners interested in adventures, it is highly risky.  As we’ve seen in the last 10 years or so, until recently on the IT side, for sure it’s been challenging for many many firms, except for maybe the very best for brands. And the reason that the very best is because they see all the very best deals up front.

(42:31) So there is a have and have not element to that piece of it and they’ve been very good and you know, the sequoias, the benchmark, the excels - you know, we know who they all are and then more recently with Andriessen, which is entirely different business, a different model.

(42:47) But first and foremost, our job is basically I consider to be a recruiting job. Our job is to find the best talent. So it really does start with two elements, the best talent and the best markets.

(43:04) It could be the best team in the world, but if it’s a really small market there is nothing you are going to do to make that outlier a multi-billion-dollar result. So you have to be a large market. It needs to be addressable. So legal profession, physicians – those are large markets, really hard to go after.

(43:31) So it needs to be large, multi-multibillion and it needs to be addressable, so I need to be able to find the people who are going to make the decisions. That’s the first thing, without that it’s a nonstarter, for any at least of the larger venture firms. Maybe if they are really small, maybe Angel – it’s a different story. But for our type of firm, the larger ones that we all know that’s the first thing.

(43:52) The second part is team. Is it a 1% team, that means of all the teams that could possibly prosecute this is this an A+ engineering, A+ marketing, A+ sales – every seat needs to be an A caliber person.

(44:10) Without that team, pretty hard to prosecute that market. And it’s a team sport, so it’s not just one individual it’s a collective of people who have in every category, in every seat is an A- talent.

(44:25) It’s kind of funny, last is technology. Unless it’s a science experiment/you know, sort of Time Machine more often than not we can build these things. So it may take a little longer, it may take a little more money, but typically we can build it.

(44:45) My personal experience is that at first you look for these large outliers markets and then recognised as an entrepreneur (Lost film connection 44:56 -45:00) maybe two but typically one, so don’t just get disappointed that we don’t invest in yours because we might have just done one deal.

(45:11) So a lot of entrepreneurs walk in here and – I mean you’re asking for millions of dollars. You would be surprised, I’ve had people walked in here and say, so there is this industry called CRM, have you heard about that? And I look dumbfounded across the table and say you’re asking for $10 million and you are sitting across from somebody who is part of that, why wouldn’t you know that?

(45:34) I wouldn’t go to a sales call and say to Merrill Lynch or whoever without knowing precisely who is in that room, what they’ve done, and what their opinion is going to be on this. We have a lot of entrepreneurs just show up like this is just some ad hoc sales call and then wonder why it is we aren’t very respondent to what they have to say.

(45:56) So at least come in the room and know who you are talking to and find out if they have done a deal recently. If they have, they may not be a viable opportunity for you because they are probably just gathering G2 on the industry.

(46:11) So I would just suggest to entrepreneurs to just do a little bit more diligence you know, on who you are meeting with. And then cover of those three pieces for them and I think you’ll get a higher conversion rate.


(46:23) Can I just ask you one last very fast question on this, just without thinking - without reaction. This is only one just quick question, so just gut reaction, somebody walks in the door and what as an investor an entrepreneur or walks in the door and what grabs your attention more than anything else – just off-the-cuff.


(46:56) Their personal intellect combined with if it’s an existing company, the growth rate. So those two things initially, so the ability to articulate to what they do in a very interesting way, very quickly and if they have an existing product growth rate. Those two things combined together would certainly make the conversation a lot more interesting.


(47:19) Well I sure hope there are a lot of entrepreneurs who hear this. Is great advice. So you have been watching episode number 85 of CXOTalk.


(47:30) Is that the fastest 50 minutes…


(47:32) I know, I wish we had more.


Bruce you’re awesome, wow!


(47:35) I wish we had a lot more time. We’ve been talking to Bruce Cleveland, who is general partner at InterWest and is one of the most experienced and long-lasting software to service investors. Bruce, thank you so much for taking the time to join us today.


(47:53) You bet, and thank you for the opportunity.


(47:55) And I hope you’ll come back another time. Vala, as always.


(48:00) Michael, a great show.


(48:01) Great to see you and everybody, I hope you will come back next time. We will be here and hope you will be here with us, bye bye.

Published Date: Oct 31, 2014

Author: Michael Krigsman

Episode ID: 85