Josh Stein of DFJ: What Makes a Great SaaS CEO

🎥 Jul 07, 2017 📺 SaaStr ⏱ 22m

As a partner at Draper Fisher Jurvetson, Josh Stein has invested in some of the most well-known SaaS companies in the world like Box and Yammer and spent plenty of time with truly remarkable SaaS CEOs. In this session he and Jason Lemkin sit down and dive into what really makes a great CEO, and how that differs one that’s just “good”. Josh shares insights into both the external challenges, like promoting a vision that goes beyond the company, to the internal challenges like a finding ways to stop doing everything yourself. When planning growth from $5m ARR to $10m ARR, great CEOs are simultan...

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About Josh Stein

In a 2017 session, Josh Stein, a partner at Draper Fisher Jurvetson (DFJ), discussed the qualities of a great SaaS CEO. He argued that a great CEO makes the company's vision "something that transcends the company and captures the imagination," citing Elon Musk as an example. Stein identified three distinct break points for CEOs, occurring at roughly 40–50, 200, and 1,000 employees, where communication, span of control, and external focus become critical challenges. He also stated that the role of a CEO is to be a "magnet" for talent and capital, and that the "people stuff" — including leadership, processes, and managing career aspirations — often trips founders up. Stein noted that while skills like public speaking or conducting reviews can be learned, the CEO must be committed to "go to school on the side" and learn continuously. In a 2013 interview, Stein described DFJ's approach to early-stage investing, stating that the firm looks for "great people who can sell us and get us hooked on an idea," who are motivated by solving a problem rather than by money. He noted that because it is now cheaper and faster to start a company, he would advise a SaaS founder without at least a minimum viable product or customer conversations to "go do that and come back." Stein commented that product-market fit is a "moving target" and that he is more interested in a founder's "demonstration of skill and competence." He also described AngelList as a complementary tool for deal flow, though he noted DFJ had not used its syndicate model.

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Transcript (23 segments)

Host0:11

Well, thanks for staying for day three. Hold on, let me find my clicker. Did anyone see it? Did it disappear? Oh, here it is. So, as you can see, we changed up the stage again, and the theme today is Zen learnings, right? It's the journey that we're on. So Tuesday in theory was about scaling, yesterday was clearly about unicorns and money to a large extent, and today's about the journey. It's a journey right, and we've talked a lot on SaaStr and other places that it's seven to ten years in SaaS often to get to something real, and even longer. So we're kind of exploring that in many cases with folks that have been on the journey for a while. So I want to start it up briefly. I won't read all of it, but I want to highlight Marketo and Cornerstone. After that, I want to talk with Keeper all about building amazing teams. We'll have a fun break, so when Keith and I are done, stay here for five minutes for the Academy of Villains; don't leave. We'll talk about that, and then we'll have two sessions in the afternoon about the next five years, how to really scale and how to take it to the next level. I think this is one of the most important topics. One of the things I learned when I transitioned from founder to observer, founder, and angel investor otherwise, is that year five is where it gets tough. You get tired, and the best CEOs and VPs and teams push through to that sixth year, and the other ones... it's tough. You see a lot of transition in five years. You see a lot of folks handing the reins. Do we even get PR? Why are people even here today on stage? How do you get it? What does it mean? And then we'll have a really fun wrap-up, which I want you to stay for after that briefly downstairs. It says it's all about sales. We've had a lot of sales this week, but it's really all about revenue. And we added some fun things in the morning. Well, we'll have another session like we did last year, but you get to see it live of a great CEO and VP of Sales together, someone from a B2D background that learned to love sales and then watch not loving sales and then learning to love it, and watch the impact of that of going from nothing to millions and millions of revenue in one year, which will be fun. We'll talk about something that's a current which is account based sales development, how to really target big guys. We all need to learn this. And then out these, more about corporate marketing and brand building, Jeff. So this mysterious thing of building a brand. Come here, Jeff. The dude is awesome. A lot of us know him that have been in the industry for a long time. And then Meagan Eisenberg, who's now at MongoDB and was at DocuSign before that. I watched I competed with them and watched what she did from a distance in terms of demand generation, lead generation. She's badass. So go see this session. I mean, it's gonna be crazy. And then we'll have a few more sessions: selling the enterprise, a real session, and two sessions on customer success, which as we know in some ways, once you have something, nothing matters but customer success, right? It's getting that net negative churn and building on the customer. So the downstairs stuff, the tactical theater, was an experiment. It's performed much better than we expected, so go see that stuff. It'll be awesome. The Academy of Villains, which I know nothing about, but should be super fun. And then the afternoon. I'm sure none of you are tired, but I might be a little bit tired. So in addition to the bars opening at 8:00, we'll actually serve beer in the stands here like at a ball game to make the afternoon more fun. And I want to bring Josh out in just a second, but I do want to acknowledge one thing because this whole event is about founders, two founders, founders to VPs and folks on the journey. That's what we're about. And we did lose one speaker from the agenda today, which I'm bummed about. And I don't want to go into too much detail, but I want to say I have the utmost respect for any founder that's killed it, that's done better than me, that's blown it out of the water in a couple of years, and also that treats people incredibly well, that has high ethics and morals. And anything to be here. So anyway, with that, let me bring out Josh Stein and let's talk a little bit about great CEOs. Hey man, thanks for coming.

Josh Stein5:24

Absolutely.

Host5:24

So Josh is fairly stylish. I DM'd him and said let's match the velour, and he said I'm totally into that. So that's pretty good. So let me bring this up. But so a couple things on Josh. Josh has done a ton of amazing SaaS and enterprise investments. He invested in Box at, I think, a TechCrunch early TechCrunch party, right? First institutional investor after Mark Cuban. Yeah, yeah. First institutional investor. We met him at Mike Carrington's house actually. Like I remember those days. Deloitte, Nymi, Deloitte got into the game. But guys know what they're about. So cheers to that, VC of the year, right? I love sake on the team here. So that's great. And there's been a tiny bit of turbulence in the market, but you closed your new fund recently, right?

Josh Stein6:29

Yeah, we announced it on Tuesday. 300 million bucks. So no matter what anyone else, Goldman Sachs, the markets say, life is good, right?

Host6:38

Yeah, yeah.

Josh Stein6:38

I think that's right. I'm a believer, man. I think the long-term trends in SaaS are super solid. I mean, the market's gonna move up and down, it's gonna affect things, but stick with it, and I don't see anything changing fundamentally.

Host6:51

Yeah. So let's talk about a couple things on this theme of great vs. good. Because when I was a founder, you and I met when I was a founder. This guy's pretty good. I met Aaron Levie probably before you did, and I said, like, I don't need this, I think I know this cloud content space, but this guy, there's something in this guy right? But I didn't know what it meant until I got a chance to do some angel and institutional investing and see it. So what's the difference between great and good? What do you see in Jeff at Twilio or Aaron? And what's just to help people calibrate, because it's so hard to see early from the outside. What's great? What makes something great?

Josh Stein7:35

Yeah, and you know, I think the greatness often becomes apparent later, like you're talking about those guys when they're running big companies. So how do you see, go all the way back in time and see it early when you invest? I mean, the role of the CEO/founder through the whole company history, I think, is going to be to be a magnet. So you're setting a vision, you're communicating a vision, you're attracting talent. We tend to invest mostly Series A, Series B, and what you'd now call seeds. Like when I invested in Box, it was three people in a garage, literally. So we're getting these guys super, super early. And I think that sometimes people who are great early can scale all the way through, and sometimes they can't. And I think it's because the role typically changes over time. So you know, when I was a student at Stanford, Tom Siebel, who people remember Siebel anymore? Fastest growing company in history at the time. And he came in and he told us, he said, 'You know, I was here. I thought accounting and finance were the only things that mattered and all the touchy-feely psychology stuff was just... yeah. And I'm here to tell you I had it completely backward.' He's like, 'I have people that do the accounting and finance for me now. I deal with right leaders and the right chairs and making sure that you've got strong processes.' And like, you know, every, all those thousand people have hopes and dreams and career aspirations, and how you manage that. The leadership part is relatively constant throughout, kind of communicating the vision, but the people stuff really tends to trip people out. I think that's one thing. The other thing I think, with a great CEO versus a good CEO, is on the vision part. Being able to make the vision something that kind of transcends the company and captures the imagination. So this is an ass-in example, but I think Elon Musk is, for example, the best at this. SpaceX isn't about launching satellites into space, it's about going to Mars. Tesla's trying to save the world by killing the car. I think if I look at Aaron, I think that's one of his great gifts. I think that that's something I don't think you can necessarily teach. I actually think the other stuff can be learned.

Host10:15

Fair enough. Yeah. So let's have a little fun with Aaron. So you invested in Aaron. What was he? 21 or something like that? Probably.

Josh Stein10:21

Yeah.

Host10:22

How many? No, that's sort of mid-pack today for a lot of SaaS founders, but back in the day that was considered young, right? So how did he... I know you don't know, but how did he... you've had a chance to observe him over ten years. How did he scale? What were the things that he did to be able to see? How many Box employees do we have today?

Josh Stein10:41

A little under 1,400.

Host10:42

1,400. Right. So he scaled. He's one of the most articulate, poised... he's almost like an elder statesman of SaaS for many of us today at 30, which is... he's like 31 or 30. Yeah. So how did he address some of those challenges?

Josh Stein10:56

Yeah, so you know, Box was actually more of a consumer idea when we originally backed it. And he was sort of your classic consumer founder, wearing t-shirts and shorts, and he'd have hair rumpled and the whole thing. And that kind of works when you're dealing with credit card signups and ten dollar stuff. And then we kind of stumbled on this idea of, 'Wow, maybe the bigger opportunity here might be for businesses.' And it was this realization that the best customers, the ones that were paying us the most, that churned the least, that were actually consuming the least resources from a cost of goods standpoint, were the businesses. And I've never seen anyone make such a complete 180. He completely... he spent about a week, went from 'we're a consumer company' to 'we're an enterprise company' and he burned the boats. The stuff that Jason has done on SaaStr, which we didn't have back then, I think that's an incredible corpus of information. There's people that you can learn from. I think a lot of it is just force of will. Aaron basically worked 24 hours a day, read every book he could get his hands on, tried to network and mentor with every enterprise leader he could find. And if you look at him today, he is a legitimate thought leader in the space. He walks with CIOs that are controlling five billion dollar budgets, and they look at him as somebody that they're looking to for guidance about their strategy. And that is just pure force of will. He didn't pop out of the womb knowing about enterprise transformation. Having both the discipline and the desire and the lack of ego to say, 'I'm gonna go learn this stuff,' is incredible. I think the biggest failing in a bigger company CEO past that initial founder stage is they don't want to change. They say, 'This is me. I'm not a good public speaker. I don't want to sit down and do one-on-one reviews.' Well, you know, that's a choice that you're making. You're saying that you're not good at that. You're saying that you don't want to do it. But you have to recognize that's a choice. I can sit down and teach anybody how to do a one-on-one review. It's not that hard. But you just got to want to do it. And you got to suck it up. If you're afraid of public speaking, get out there and do it. Practice makes perfect. But you need the commitment and the openness to change.

Host13:45

Yeah. So let's dig in a little bit on that. So I'm here, I'm a driven founder. I'm at a million in revenue or whatever, and I don't want to get burnout. At year five, I want to go the distance. I'm hardcore. I see all this. Those are some good actors, but what... what is just maintaining that incredible growth, incredible scaling, to maintain this constant thing?

Josh Stein14:16

I think one thing that helps a lot is to realize that it's not about being the hero leader or 'I'm gonna do it all myself.' If you look at a leader like Marc Benioff today, he's mostly external. His job is really dealing with seven, eight, ten senior leaders, all of whom could run large public companies themselves. So they're almost like peers to him. And making sure that they have clearly defined roles, responsibilities, and the resources they need. What Jeff has done at Twilio that I think is so remarkable is he's hired an incredible team around him, and he's built an incredible culture and set of values. Twilio has this really neat thing you can check out on the Twilio website, these nine values of Twilio. And they're these very clarifying kind of... they have this conflict, yeah, it's a tough one. If you have clarifying culture and vision, it sometimes helps to resolve that. So I'll give you one of the truly, one of the values I really love is 'No Shenanigans.' There's a lot of nonsense and shenanigans in enterprise pricing. It's like hitting up charges. And Jeff's favorite bugaboo is the 'call us for the enterprise version.' It's like $100 a month, $1,000 a month KLA, which is based on code for... 'We're gonna see how much we can get out of you.' Twilio is just transparent, simple pricing. We've had talks like, 'Hey, are we leaving money on the table?' And he's like, 'Nope, no shenanigans.' Boom. That makes it a very short conversation. It makes the alignment very simple. It saves him a lot of stress. And he's built a tremendous team around him. So as the company gets bigger, you should be moving up in the organization. The break points for CEOs: the first is around 40 or 50 people. That's usually where communications break down. You can't just rely on osmosis to get information out in the company anymore. You got to actually write things down and have them. 200 people is usually the next one. That's where you start having span of control issues. It's not, 'I have a report and then they have a report and that's the engineer or that's the salesperson.' There's maybe two or three layers. And almost none of us have dealt with managers of managers before. Managers, it matters exactly. And so understanding that, that's where you start bringing in people who are like executives. And executives start grabbing power and resources, and you understand how to deal with that. And then 1,000 is really interesting. If you're interacting from a reporting relationship with more than six to ten people, you're really probably doing something wrong. Most your time externally, and then most... as opposed to a person that's interacting with them directly.

Host17:11

Yeah. So let me ask one question. Sometimes people make mistakes on it. So you've got to stop owning everything yourself early, right? That's a mistake. Most of us that can multitask own too much. So bring in the right management team. And a lot of times we try to bring in someone early that can do it all, a CEO sometimes, right? Network great at Box, yeah. And we talked to... they were here last year. But when should I bring in whether it's a COO or a deep number two? And when is that a crutch and too early? Because I meet more and more founders that are at a million in revenue, and their next plan is, 'I'm gonna hire a CEO.' And I get nervous when I hear that.

Josh Stein17:53

Yeah, I think they think it's gonna be a magic bullet. It's like a magic technical founder says, 'I'm gonna hire a CEO.' The Ben Horowitz talks about why Workday works and other ones don't. But I think the most important thing if you're gonna bring in a CEO is having very clearly defined responsibilities and roles. What does not work is two in a box where people feel like they have to ask you and this other person to decide. And if they disagree, what happens? Everyone gets really confused. Roles have to be clearly defined. So for example, at Box, Dan basically had the vast majority of the entire go-to-market function rolling up into him, and Aaron has product, has the CFO, and has the external, the entire external vision part of the company. And they have a trust relationship that's very clear. And you have to, if you're going to have a COO, you have to... too early? I think 40, 50 people is probably where it might become relevant.

Host19:17

Yeah. So well, I'd love to do a half an hour on this, but let me do one last question on this whole thing. Another thing I hear a lot: CEO too early. The other one that I don't like to hear as a founder is when I meet a founder and they're not sure if they're the right guy at 20 million or 30 million. But as the VC of the year, you have to think about these issues when you make an institutional investment. So the question I have for you is if you're a founder here and you're doing well, but you're not sure you can go the distance, what's your advice to me? How should I be self-critical? I'm confident at 1.3 million a year, I'm growing 11% a month, I don't even have any venture backing. That's hard to do in the grand scheme of things. So what's the advice?

Josh Stein20:10

So you have to basically go to school on the side to learn how to do that. The Aaron and school stories are great. You got to be worrying. Everything that Jason's wrote on SaaStr, you want to read every business book you can find. You're gonna have to really commit to developing that. And just say, are you... some people might say, 'I just don't want to do that.' And then you know the answer. You don't want to do it. That's the answer.

Host20:34

Yeah.

Josh Stein20:34

I think that's really the key thing. Do you want to make it happen or not? And I think self-awareness is good. It's so hard as a founder and CEO, you bear all these burdens and the doubt. And it can either way, you can always share it. That's actually what I always hope you are. There can be a role of a venture or board member, which is to either fix this together or if not, let's move on. One thing companies always forget is, let's say you're going from five to ten million in revenue. It's not just going from five to ten. It's going from five to ten, and in that year you're laying the groundwork to go from ten to twenty. And if you're not, you're gonna go from ten to twelve or ten to fourteen. It's the same thing with being a CEO. So if you're going from 50 to 100 people, you want to be developing the skills to be going from 100 to 400. So you've always got to be thinking six to twelve months ahead in terms of the skills you're building.

Host21:38

I think that's right. I think the straight advice when we have any of us, everyone smile, have these doubts, those founders don't internalize it too much. Get external feedback on this. When I went through it, I asked a lot of my peers and mentors and everyone said, 'Go for it, man. You have something good, just keep going.' But I'd want a CEO. What's that? Nobody tough. I mean, everyone learned it. So the question you...