Yes, it is very appropriate to be on here on Zoom with you recording these before going into the interview with Eric.
If only we had our notes on Viva, although I think it's a little bit out of our strike zone in terms of perfect market. We would be the only podcasters in the world using Viva.
Peter is very focused on clear and correct target markets.
Who got the truth? Is it you? Is it you? Is it you? Who got the truth now? Is it you? Is it you? Is it you? Sit me down. Say it straight. Another story on the way.
Welcome to this special episode of Acquired, the podcast about great technology companies and the stories and playbooks behind them. I'm Ben Gilbert and I'm the co-founder and managing director of Seattle-based Pioneer Square Labs and our venture fund PSL Ventures. and I'm David Rosenthal and I am an angel investor based in San Francisco
Today we have something very unique to share with you all. It is common for top venture capital firms in Silicon Valley to get all their CEOs together once a year in one room for a CEO summit and speak frankly with them. It is uncommon however to allow anything discussed to be shared publicly. Well, today we are doing just that. The good people at Emergence Capital, in particular, friend of the show, Jake Saper, invited David and I to interview two very heavy hitters at their CEO summit last week. Eric Yuan, the founder and CEO of Zoom, and Peter Gastner, the founder and CEO of Viva Systems. I think this is the first time that any content from any venture firm CEO summit has been specifically created for podcast public consumption. It's so cool.
I think Peter has never done a podcast before.
And he's built a $20 billion company.
Yeah. The Viva System story is amazing. As you will hear, we talk about they raised $4 million. That's four like one after three. And on just that $4 million that they didn't even consume all of that capital, they've now built a $2 billion revenue business with incredible margins. It's such a cool story. And Peter is on the board of Zoom. And so, as you'll hear, he and Eric know each other very well. And it's a super different company that we normally talk about, too. It's vertical specific. So, it's just in the life sciences industry. They sell high dollar software to pharmaceutical companies. and I think biotech as well, right David?
So the topic that we discussed with both of them is capital efficient growth and that's something we felt would be super valuable for all the CEOs in the room and obviously that means that we think it's going to be really great for everyone to be thinking about right now. So rapid scaling on very little capital is something they obviously both know a lot about. David mentioned the 4 million total funding that Viva raised before going public. As you remember from our Zoom episode with board member Santi Subotovsky, also an Emergence Capital partner, Zoom raised $30 million from Emergence and another $100 million from Sequoia afterwards. And they never touched the vast majority, if not all of those funds. I think they didn't touch any of that $130 million Eric had raised, as you'll hear about, he'd raised some money from angels along the way, and that funded product development, but none of the venture money was consumed.
It's crazy. So, if you're excited to learn about how these companies managed to pull off enormous impact with very little capital to do so, you are in the right place. And if you want to discuss these topics with us after you listen, you should come join the rest of the acquired community. I think we're 12,000 strong now, David atacquired. Slack, you should join us. It is always a riot.
This will be a great one to discuss in there with the community and other founders and including Jake Saper himself from Emergence who's active in the Slack.
It's true. All right, listeners, now is a great time to talk about a new partner of ours here on Acquired, Lora, the agentic operating system that is redefining how the world's best legal teams work. Yep, it's sort of obvious that AI is going to completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. Lora took that insight and asked the question, 'What if you really built something with that power from the ground up for the legal industry?'
So, the founders did exactly what great founders do, operate with obsessive customer focus. They embedded inside a massive law firm for months. They sat with the lawyers just watching how the work really gets done. And that's how you get features that customers love, like tabular review, where you drop in a folder of hundreds of contracts, and it pulls every key term into a grid a lawyer can actually work with. Lora's bed here is interesting. Since it lets each lawyer handle more complexity, any given person can increase the quality of their work and do higher value work. And this means that the pie can grow even as each individual task takes less time. And they recently launched Lora agent, offering greater intelligence and performance. The agent lets lawyers set an objective. Then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required. And Lora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early Lora numbers essentially speak for themselves. When they have a head-to-head pilot with their top competitor, they win 70% of the time. Lora now has over a 100,000 lawyers on the platform from 200 legal teams in 50 countries and crazily they went from 1 million to a 100 million in ARR in about 18 months. Truly insane numbers. And that is the real test. Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time or whether a partner trusts it before going into a conversation with a major client. If your legal team wants to check it out, whether you're a law firm or you're in-house at a company, you can learn more at lora.com/acquired and just tell them that Ben and David sent you. Now, as always, this is not investment advice. Please do your own research. David and I may hold positions in things we discuss on this show, and this is certainly not investment advice from anybody that we had on the show today. So now on to our interview at the emergence CEO Summit with Eric Yuan and Peter Gastner.
So to set the stage, I thought maybe could each of you please give us a brief overview of your fundraising history up to and including Viva and Zoom's IPOs which ordinarily that would take like an hour.
This is going to be pretty short.
Private financing history.
Go ahead. Go ahead. The simple angel investors when we just started and then emergence about 15 months in. So angel investors I think that was 3 million and emergence was 4 million. We never actually used the emergence 4 million but I thought I thought we might at the time and we got to within about 100,000 of using it and then we went public.
[laughter] [cheering] [applause]
The time frame we started in 2007 in February and we raised in about 2008 maybe March or so. So that was the environment at the time.
Another very simple time to be fundraising and company building in.
Yeah. It was hard to even open a bank account because it was the whole know your customer thing and financial crisis. So everything's hard. Yeah. And I think probably most people here know this but for folks listening on the podcast today you're doing about two billion in revenue at Viva.
Yeah we're doing about two billion about 30% profit. So
Amazing. Eric could you share your fundraising journey with us?
Sure. I started the company in 2011. First thing I did I opened up a Wells Fargo bank account. I thought it's very easy for me to raise capital. That's why I opened a bank account. Unfortunately, it took me several months. No VC wanted to invest in me. Fortunately, my brother sent emergency capital otherwise life would be much easier. Finally I talked to some friends and reached the three million seed funding. That's how we started. When it came to Series A, I tried to talk to VCs again and again nobody wanted to invest us either. So we talked to friends and got another 6 million and that's how we started. Yeah it's very hard.
And nobody wanted to talk to you at that point because most people assumed video conferencing was either a settled frontier or a race to the bottom. Am I thinking about that right?
Absolutely right. That's a theme everyone mentioned. Eric you are crazy, the world does not need to have another video conference solution. Another VC friend even is a great friend, he told me that Eric I have a check for you as long as you do something else. Good news I did not listen. I was very stubborn. I'll share a story. Once I stopped by a big VC, I do not want to mention the name, you guys do not like them. He told me that Eric I do not think your strategy works. You know look at Skype, look at Google Hangout, look at WebEx dominating. I debated with him a little bit, I failed and I cannot convince him. On the way back I told myself I'm going to change my Windows screen saver. Back then I still used a Windows machine. I changed the Windows screen saver to 'You are wrong.' So for several years.
Yeah.
And if just to make sure I have my facts straight, I believe you raised a $30 million round led by Emergence and then another $100 million round after that. And similar to Peter, you did not dip into any of that $130 million. Is that correct? To build the business?
For me actually after a certain meeting from Emergence Capital, I think yeah we are on the right track. To be honest with you, we even did not need to read Series D actually because at that time I think with that certain meeting the company completely transformed. I feel like a different game. So yeah.
Wow, that's one thing we wanted to ask. A difference between your two companies. Peter, you obviously once you got to cash flow profitability which was immediately, you never raised another round. Eric, you did make the decision to raise some more capital even after you were generating cash. And Peter, you were on Eric's board when that process happened. Why did you make that decision?
Well, for Viva, I didn't raise more just because I thought I don't need it. It was just that simple. And then as far as for Eric, when you're on the board, that's really Eric's decision. So you know.
So yeah as I mentioned earlier, after raising a certain meeting from Emergence Capital, at that time seriously we had no plan whatsoever to raise another round of capital. The reason why we still went forward to have a Series D because I thought the economy would go down quite dramatically. So.
2016-2017 time frame. I was completely wrong. So anyway.
It had been the seven-year bull run, of course the end was near, right?
Yeah. So long story, anyway.
Yeah, I think that raising that money at the time, I thought maybe we don't need to do it, but also I thought it doesn't matter. What matters for Zoom is the great product and the customers. Whether you take some more money or not, it's all fine. It would all work out.
That's right. Yeah. So as we were preparing for this interview, our first thought was if we just had one of you up here and we were interviewing you about capital efficiency, it'd be easy to chalk it up to business model and cash flow cycle. Multi-million dollar contracts up front in the case of Viva, or in Zoom, customers flocking with their credit cards for a self-serve experience. These are two completely different models. And so I think one of the things that it illustrated to David and I is capital efficiency is a mindset and culture thing more than a business model thing. And I'm curious to hear both of your reactions to that. But also what are the things that enabled you uniquely more so than 99% of startups to be so capital efficient?
I can take that one. I guess I've seen a little bit of Zoom and a little bit of Viva. I would say probably it starts with a mindset. Just run a profitable lemonade stand. For my point of view, there's safety in a cash-generating business. A business is always going to be valuable to somebody at some point. A business that's not cash generating is going to be valuable to nobody. You might be able to sell it before it becomes not valuable, but there's security in long-term.
So it starts with a mindset. I think Eric shared that. And then you have to have product excellence too. That's something I think Eric and I share, we're both product people. I think also we both work really hard. Especially Eric probably in the first 5 years I worked really hard and I saw you didn't see me working really hard but I saw you working really hard. So worked really hard, worked really focused. Anything that wasn't related to the product or the customer was just BS, don't do it. First 5 years I was not at a conference like this for example. I was just maniacally focused. And then the market really helps too. That's something you just have to get lucky on. It was the right timing for Viva. It was the right timing for Zoom. Maybe if you started Zoom five years earlier or five years later, it would have been hard. So product excellence, real focus, mindset, and then you have to have some luck in your market. I'm sure there are some things that I could have tried to do or Eric could have tried to do and we might have picked a bad market and then it just wouldn't work. We're outlier, right? And so is Eric. You have to pick something that most people think is going to fail to be an outlier. Otherwise, by definition, you're picking something that most people think is going to work and therefore a lot of people are picking it. Therefore, you're not an outlier. Just like Eric, most VCs, all VCs except for Emergence, all VCs of any kind of note except for Emergence turned us down. Ours was really simple. Vertical specific software, that's a small market and it doesn't work. That's what they would say. And I was encouraged by that because I thought it has an opportunity to be really good because it's something non-obvious.
Well, one thing I want to double click on that we were talking about beforehand. Like you need to be non-obvious to have a chance of a great outlier outcome, but you also need to be correct. But I think what you did was not, hey, I'm going to pick some random idea that other people think is crazy. I know Viva has as one of your core values clear and correct target markets that you have written on the wall. What did each of you do ahead of time that led you to genuinely believe, yes, the world thinks this is crazy, but I really think this is going to work?
Of course, it's really easy. I talked to three or four potential customers for our first product and they all said, 'We don't need that. That's not interesting. It's not a good thing to do.' But I wasn't listening for that. I was listening, are they emotionally attached to where they're getting their product now? Are they emotionally attached to those people? Do I feel like they're getting value out of that thing? And I could tell in their responses that they weren't attached and they weren't getting value. So yeah, all four customers said it's a bad idea.
They're all customers now, though.
Let me understand the Peter formula to build a business. Ask a customer if they want your product. They say no. You dig deeper and say, 'What are you using now?' And they say, 'Oh, yeah, I have a solution for this, but they just don't love it.' So you build for them anyway on the bet that you can be better than their current thing.
Yeah. You have to listen to what they feel, not what they say. They would say, 'Yes, we're very happy with this solution.' But then you dig, 'Oh, tell me more. Why is that? What is it that you get out of it?' And it's like, 'Oh, um, uh,' and that's when you know.
That sounds like the video conferencing market circa about 2015, 2016.
Yeah. So for me it's very straightforward because I was original founding team member of WebEx. So the two years before I started the company, I know actually WebEx really sucks. So and uh
Did you try and tell Cisco that?
I told my team, I do not dare to tell others. But anyway, Skype also not reliable. Google Hangout doesn't work. Every day I spend a lot of time talking with every customer. I know if I can build a better solution, I think at least I can survive. I never thought everyone is going to standardize on the Zoom platform, but at least I know for sure if customers do not like something, if you can build something better, you have a chance.
Eric, did you think from the outset that you were trying to build Zoom as a big company or did you just think that you wanted to build a profitable company to survive and then see where it went?
I think two things. First of all, at that time my passion was very straightforward because WebEx is more like my baby. I feel like I worked so hard for so many years. I let the customer down. I really wanted to fix that problem. But Cisco did not want me to start over and I had no choice but to leave to build Zoom. That's the number one reason. And after I started the company, I realized, wow, it's so hard to raise capital. And by the way, the money that investors give to you, don't think about that money. That's a trust. Every dollar matters. That's why every day I was thinking about how to survive, how to survive, how to survive. Even today, seriously, I still think about it. I woke up at night, how to survive.
You mentioned people in your team when you started Zoom. You were a solo founder but you brought a large number of people with you. One of the first operational topics we wanted to dig into around capital efficient growth is hiring and people. That feels like such an important part of the culture and DNA of having people who are going to get on board with not having the spiritual equivalent of Kind Bars and exposed brick in the office. How did you select for the people that you brought?
So, all of them are very good engineers, right? Except for me. I did not write any code. So and on day one we had around 25, very soon we got another 15, total 40 people and myself included. All the certain people they all write all kinds of code.
And this was all funded with angel money?
Yes exactly. But probably we could with run rate less than two years. That's why later on we had a Series A. But we only have engineers to get a product done. I'm more like a product manager, UI designer, and also the facility guy, everything else. Seriously, on day one I bought used furniture, assembled everything by myself, and also wrote down the company culture and values. That's pretty much what I did. And even for the first several years after product ready, some investor mentioned, 'Hey, you already have money in the bank, why not build a marketing team? Look at your competitors, they spend a lot of money on billboards.' At that time, for the first four years we did not have any marketing team. Only until 2015 we started building up our marketing team.
I have to be very disciplined, yeah.
To highlight this: you started the company with 25 quickly growing to 40 people, but those were 39 engineers and you, no product managers, no marketing, no sales.
Yeah yeah, that's the reason why I know how to use QuickBooks. I never knew how to use that, so seriously I had to learn how to use it.
So it sounds very easy to say don't buy billboards. You got to get your customers somehow. How did you get the snowball going?
A little bit lucky. Seriously, luck does play a role. Several weeks before we launched the product, we had no idea how to get a first customer. Luckily, the very famous reporter Walt Mossberg evaluated our service. We were so nervous. He's very straightforward. The good news, he did write a very nice article published in Wall Street Journal and also he personally recorded a video. Overnight we got 50,000
Wow. But most of them left after several weeks.
But those who stayed, I imagine that was the kernel of the virality of telling their friends who told their friends.
I maintain a very good personal relationship with them, either VIP account or send them a small gift. Someone they canceled, back then only $9.99. I personally sent them an email. Why you cancel our service? What can we do different? And we still maintain a relationship today. So we had some one of the CEOs wrote in and asked about different metrics to track. Did you have a north star after you had those 50,000 people where you realized you're holding something in your hand and the sand could slip through your fingers? What were you paying attention to?
To those early very loyal adopters. Yeah, even 100 good enough. They are the early, I would say the most loyal users. Double down to make sure they are happy. If they are very happy, guess what, network effects, they are going to bring a lot of new users. So even if 49,000 users left, as long as 100 still stayed, we doubled down on that.
Yeah, that's a strategy back then.
For Peter, on the hiring and people and organizational front, you had a very different type of business. Your customers don't buy with credit cards, right?
They buy multi-million dollar deals cash upfront for a year deal.
You need a salesforce to sell that, which usually means you need a lot of cash comp to compensate that salesforce. How did you think about the right people to hire and how to compensate them?
Yeah, I think one thing Eric and I have in common in the early days is no wasted people. No optional people, no wasted people because it just adds and burns through your money and makes your decision making more complicated. It's like sand in the machine. So no wasted people. For us, we needed sales right away because of a long sales cycle. So I was the first salesperson. I started selling before I signed the articles of incorporation. I showed up at the customer. 'Hey, I think you should buy something from me, this thing that I'm going to make.' 'Well, have you hired anybody?' 'No.' 'Well, can you show us a demo?' 'No.' 'How about a PowerPoint?' 'No.' 'Okay.' Then come back a month later. 'I got a PowerPoint now.' 'Have you hired anybody?' 'No, not yet.' And then just keep selling because it's a relationship based business. Funny story, the first customer who bought, small customer, actually somehow through a relationship with my co-founder, we got to this guy. He was the CEO. He wanted to buy some software for this small department just because he was really peeved with his IT team. So this guy had no idea what we're selling. He's like, 'I know that my IT team doesn't want you, so I'm going to make a point and show them that I'm actually in charge here.' So that's how we got our first sale. And you could barely log into the system at that time.
Could you? That's I didn't know that.
But then you got to hustle. Just like Eric, you got to hustle. Oh my god, this customer wants to buy something and then you're working super hard to make them successful. And Eric, I'm not sure I never asked you about this, but we never had customer satisfaction surveys for Viva in the beginning. I always thought if I talk to those early adopter people, I will know. I will get the feeling. And if I have some survey, maybe I won't get the feeling.
Totally. You are right. I agree with you.
You can hide behind metrics when it's small, but if you actually talk to the human and figure it out, you'll know what's going on.
How can you tell us also the story of landing your first big customer, which I believe is probably the deal that really made the business?
Yeah. There was a set, right? There was the first guy who was just peeved at his IT team and then worked up to the next size deal and the next size deal. It was always a step function. So the first multi-million dollar annual deals were with a big customer, Pfizer. It was just hand-to-hand combat. There was a partner at the time, Salesforce.com actually said, 'I'll send a note that Viva will never win this deal.' And I replied back, 'We will win this deal.'
They sent it to you during the bake off?
Yeah. They didn't want to even come to the meeting with us. They were like, 'Oh, we're going to go with this other system integrator.' So I sent an email back and said, 'We will win this deal.' Why? Because we have better people that'll work harder and we're Pfizer's only shot at greatness. And I think they want to shoot for greatness. So I remember there was this big meeting with Pfizer. There was a guy in charge of it. We had a certain amount of people in the meeting and the guy stood up for Pfizer. He said, 'We have more people in this meeting room than you have in your company. Why should we buy anything from you?' And I just said the same thing. 'We're your only shot. We're going to make something great and we have the best people. Seems simple to me.' And then we got lucky and we won it. And then after winning it, I thought, 'Oh my god, now what?' How are we going to make them successful? So the whole company got a bonus when that customer was what we called 'live and happy' which didn't have a formulaic metric. It was based on interviews.
So did you use the invoice from that customer to then fund product development?
Yeah, I thought, 'Oh, we've just raised a $3 million round of capital here and it didn't cost us any dilution. The check came in.' So that's exactly what happened.
Do you think that's still doable today? I imagine there's lots of folks out there that would love to go invoice a customer and get cash in the bank. In what situations is it possible to fund your product with customer revenue versus not?
I think it's first of all, you can't be wasteful. Every person has to matter. I would almost think about hiring a person, let's say we have to pay them $100,000 a year. I came from my father who was in the business of metal working and machinery. He would say, 'Oh, I got to buy that lathe. How much is that lathe going to cost? Is it worth it?' So I would think of people like, 'I'm buying a million-dollar machine because I got to pay him $100,000 a year. Is that million dollar machine worth it or not?' So, frugal. And then make a really excellent product because that's the best way you can lower your cost of sales. Like Eric's product, you probably all notice it's easy to use, but he made it easy to consume the whole product. So he didn't have to convince a bunch of people. So that's how to do it. Excellent product, get a good price, easy to consume. You don't have to spend your money on salespeople because you have a differentiated product. Salespeople are where it's really expensive. When I read Peter's S1 document many years ago, I still remember, 'Wow, my god, this business model is so awesome.' But in our case, our first paid customer, the largest paid customer only $2,000 a year, so we cannot use that to fund new product development because most users pay us only $9.99 a month. So this is really hard. But I do think for all founders, the business model is very important. If you can figure out something similar to what Peter and Viva does, that's the best. Spend time on that, not only on product but also on the business model. As Peter mentioned, product excellence and how to sell the product and how to land enterprise customers is very important to build a long-term sustainable company. In our case actually, I can tell you today the biggest challenge is our online business.
Right, it's very profitable, however it's very hard to predict. They come today, next two months they might leave, they cancel the service. This is not a great business. But the enterprise portion is very good. That's why I learned a lot from Peter, how to manage a big enterprise customer.
We met at an Emergence event way back when. That's how we first met Eric and I. It was smaller at that time.
Hopefully there'll be some more connections like that today. One thing I want to highlight on this topic of contracts and funding development because it's really counterintuitive. The topic is capital efficient growth. You would think that what you would want to do with the Pfizer deal, for example, or when you started selling enterprise contracts, is multi-year deals. Let's make this contract number as big as possible, get as much cash upfront, lock people in for two, three, four years. That's not what you did at all, right?
Yeah. Yeah. We didn't do that. Because I was always optimizing for the long-term value, which is the annual value per customer. If I had to give the customer terms that would lock them in, I thought that's actually shrinking my market because they'll pay less if they're locked in. That's one thing. The other one, I didn't want us to get lazy. I wanted us to earn the business every year. So it was just like that. The driver was really optimizing to the long-term value. Yeah, which makes so much sense now thinking about it. You would have had to give a 30% annual discount or lock in the price, then raising prices is harder later.
And that's unique to us. I think we're selling in a very confined vertical. So it's not really fair if there are two companies and one is paying 30% less than the other and they end up knowing about it and feeling bad about it. So that's something specific to this confined market.
And to put some shape around it for folks that don't know Viva's business as well, you have a couple thousand customers, of which there are a hundred or so that are your really big customers, and there's basically no one else out there who could be a customer without you expanding the market.
Right. We sell into a defined set of customers in the life sciences industry. There's kind of top 20 and then another thousand or so that are doing smaller things, and we've just expanded our product footprint. So when we sell to a customer, we might have 20 things that we can sell to them. They start in this area, they start in that area. Gordon calls it layering the cake. We have a lot of different layers to the cake that are all into the same customer. We leverage relationships. It's fine for us to spend $100,000 a year maintaining free relationships. Just putting into developing relationships, that's not wasteful. Because we're showing up at the door with $100 million worth of product. So if you have a relationship, it's worth it. Like a bank, investment banking, it's worth it to invest. So it's a different type of business.
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Eric, for you, I'm curious. Maybe you can talk to us both in the beginning days and then also now at Zoom. How do you think about pricing and account strategy?
Yeah. So, you know, our case is a little bit different. You know ideally when you start a SaaS company either focus on vertical market or focus on departments, that's probably the best business model. Unfortunately, you start from building up a horizontal collaboration solution is really hard, right? Because you know a lot of other competitors already there, right? So our strategy
