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Andreessen Horowitz

When I started at Hotmail in 1996, we were thirteen people, and frankly, we didn’t know what we were doing… The company had recently launched the first Software as a Service (SaaS) application to the world, and we were struggling to keep it up and running.

Everything about it was just so different than the traditional software we were used to:

  • We had one version of the software that was being used 24/7, as opposed to 5-10 versions.
  • We rolled out new versions every few weeks, versus months or years.
  • The end users were part of the quality assurance process and we were in a constant state of rolling new bug fixes, as opposed to a huge QA staff and a long process.
  • The software engineers had to learn to collaborate across functions with the data center techs, who rolled out the code, and the customer service group that was getting the customer QA data — compared to before, when those organizations were siloed.
  • We could see exactly how the end users used the software — real time — which dramatically increased the innovation cycle. This was very different from past approaches, where you had to do focus groups to figure out how an end user was using the software.

These were major shifts, and we weren’t sure how to organize for success … but somehow, we muddled through it.

As it turns out, though, we weren’t the only ones — just about everyone involved in the early internet era who had come from traditional, waterfall-centric programming environments started inventing new ways of doing things that were more in keeping with the always-on, fast-release iterative cycle that especially suited the world of the nascent SaaS and web-based software environments.

In 2001, a group of developers met to debate and discuss a new set of “lightweight” methods for software development, and the Agile Manifesto was born. While the manifesto wasn’t necessarily a direct outcome of the new web/SaaS/cloud organizational meanderings, it struck a nerve by stressing the need for cross-functional collaboration, communications, and short release cycles. Essentially, it helped to codify the hodgepodge of learnings we independently discovered about what worked at Hotmail, Yahoo, and other first-generation internet companies. These learnings ultimately became the underpinnings for what we now call “DevOps” [adapted from Wikipedia]:

DevOps (a portmanteau of “development” and “operations”) is a software development method that stresses communication, collaboration, and integration between software developers and information technology (IT) professionals. A response to the interdependence of software development and IT operations, DevOps aims to help organizations rapidly produce software products and services — and to improve operations performance.

But DevOps is more than just a methodology. It’s a must-have skill set for the modern programmer — and is increasingly becoming its own department as well (the subject of much debate). The rise of the hyperscale cloud datacenter has made this job much harder as developers have had to hack together tools and complex scripts for pushing code to thousands of pancake servers.

The growth of the DevOps movement coupled with this complex cloud infrastructure has opened up an opportunity for a company to own the entire process and help developers and managers manage it.

It is with this backdrop that I am pleased to announce Andreessen Horowitz is leading a $2.8M Series A in Distelli, an infrastructure automation company that I like to think of as the “DevOps dashboard.” Here’s why we’re so excited about the company:

  • It was founded by Rahul Singh, one of the early engineers on the Amazon Web Services team. Rahul is the epitome of one of our most important criteria — founder/market fit. He has essentially solved a set of problems he encountered during his nine years working on Amazon’s cloud.
  • Rahul has a grand vision for Distelli to become the DevOps platform. Application, database, and middleware deployment are just the first tasks that Distelli automates, and they’ve got a rich roadmap to automate the other things DevOps does.
  • Shortly after the first beta, the product was of such high quality that every proof of concept resulted in a paying customer. The customer references raved about how it was simple, scalable, and consistent across multiple cloud and on-premise installations.
  • When it seems like every smart entrepreneur we meet seems to adopt the same new technology at once — indirectly demonstrating it as part of their pitch — we pay attention. A few of the companies in our portfolio that hold this important distinction include Good Data, Mixpanel, Okta, Optimizely, and Zenefits; and now, Distelli.

Rahul is one of those “10x founders” (as we like to call it) that just get shit done at an astounding rate. (These are the founders to whom you’re about to share feedback you’ve heard or suggest a new feature and they’re like, yeah, we already did it.) Every month I check in with Rahul, it feels like he’s progressed ten times more…

I’m so pumped to be joining the board to help Rahul grow into a powerhouse, and am pleased that Distelli is joining the a16z family. Onward!

One of the rookie mistakes first-time entrepreneurs often make is to be too guarded about their idea – in fact, many will actually spend their first $25,000 on patent lawyers without ever fully vetting their product. In order to gain credibility and attract investor attention, it’s critical to aggressively seek out the most relevant people in the world and get their feedback. I believe most young entrepreneurs massively overestimate the chances of someone stealing their idea versus the benefits associated with sharing it.

When my co-founder and I first had the idea for IronPort, an email security company, we triangulated a list of the 20 most relevant people in email – former CEOs, open source technologists, investors and thought leaders. After we had the target list, we got resourceful in getting to them – friends of friends, cold emails and FedExed letters. One of the tactics we used was trying to get a diagram of our technology into their hands — subject matter experts just couldn’t resist correcting our analysis. Here are the huge benefits with taking the “sharing” risk:

Fix your compass. The experts can immediately get into the weeds and help steer you around the potholes they went through and make sure you’re not headed for a cul-de-sac. The input we received proved essential to refining our idea and setting our order of battle. We gave a number of these experts equity grants to become formal advisors to the company.

First employees. Two of the people on our list became employees after we went through the idea with them. One had built PayPal’s email infrastructure and the other had built Newman, the massively scalable eGroups email engine. The experts typically know where the other best-in-the-world talents are currently working and can help you recruit them in with a credible intro.

Investors. Our friends and family seed round became a who’s who of people who had done interesting things in email. The PayPal founders, the eGroups founders and the Hotmail founders all ended up investing. You can imagine the warm VC intros we received from a massively credible angel investor right in their subject area strike zone. In fact, on more than one occasion, a VC would say, “I’d like for you to meet with so-and-so to better understand the technology.” I would reply, “Oh, so-and-so? They are already an advisor/investor…”

It’s really hard to break through the clutter and get the attention of the top investors as they typically only look at deals that come in from a warm, credible referral. There’s absolutely nothing more credible than getting an endorsement from a well-known subject matter expert who has already put their own money into your company.

This post originally appeared in the Wall Street Journal.

At Andreessen Horowitz, we talk about the notion of being “too hungry to eat.” That’s to say, we often see startups that are so entrenched in the product that the founders forget they need muscle to grow. Without the right people in place, it’s not easy to get to where you want to be as a company. And since recruiting the very best talent is extremely competitive, it’s important to pay maniacal attention to the entire process, and that doesn’t stop with the offer letter. Here are some important elements to keep in mind:

Aim high—much higher than you think you should. Work with your entire network (mentors, investors, customers, partners and friends) to help you identify the top 10 people in the world for the role. Try to meet every single one of them, even if they may not be looking for a new role. It helps to know what to aim for. I was surprised at how many superstars were actually very humble, approachable and culturally compatible with my team.

Don’t be cheap. If you have the money and the business is scaling, don’t shy away from using the best (and sometimes most expensive) recruiters. These recruiters will know—or unearth—the crazy-great candidates who are often stuck vesting-out at large companies. And don’t be afraid to pay market salary and equity for top talent—they are always worth it. I see many founders waste too much time trying to work their networks and/or ultimately settle for mediocre, but available candidates. You will definitely have to interview hard for cultural fit, but the best talent isn’t cheap.

Have an amazing recruiting process. This is not something you can freestyle and still expect good results. My team honed in on a specific process for recruiting that we repeated again and again. Candidates would go through two to three rounds of interviews with two to four people per round. The interview team would meet beforehand to discuss the job description, learn about the hiring manager’s hot buttons and assign interview roles (so everyone didn’t ask the same meaningless resume questions).

After each round, the hiring manager would lead a discussion and decide if the candidate ought to go to the next phase. We were prompt, organized and responsive, while making sure we over-communicated with the candidate. When it came time to make an offer, the hiring manager took the wheel completely. People leave and join companies primarily on the connection they have with their boss and negotiating the offer is the crucial start of building this relationship. I’d always want to get a handshake and eye contact with the candidate when they accepted the offer.

In addition to making sure we hired the best people, the process was a reflection of a well-run company. It allowed the candidate to meet and connect with a critical mass of our people. In the end, it made the offer feel hard earned and special.

Enlist the interview team. Once I knew when the candidate had given notice to his or her current employer, I would schedule a team dinner or drinks within 24 hours to help diffuse the pressure and to reinforce their decision. It’s also important for you and the team to keep in constant contact with the candidate during the notice period. It’s a bit weird for the hiring manager to be calling every day, but I found that a coordinated effort among the eight to 12 interviewers was not only appreciated but a pleasant surprise.

The Welcome Basket. We would put together an awesome basket of swag: t-shirts, coffee mugs, hats, Nerf guns, fruit, wine, chocolate and a handwritten note to let them know how excited we were to have them join. We’d deliver it to their home a few days after acceptance, and we’d always get an enthusiastic email or phone response. I always thought it was much harder to consider a counteroffer when our swag was strewn all over the house and their daughter was walking around in our hat and logo T-shirt.

Don’t screw up the onboarding. The first day, week and month of an employee’s experience carries a lasting impression. Everything needs to scream: “We’ve been expecting you!” You need to have business cards printed, the desk stocked with supplies, a lunch buddy schedule, basic orientation meeting and a thoughtful plan for training and beginning real, useful work. As CEO, I had a standing 30-minute meeting every Monday to greet and connect with new hires. We also had a daylong new hire orientation scheduled every quarter where I would go over the founding history, values, goals and the most recent board presentation. The product managers would go through every product and a VP would go through the organizational structure.

This piece originally appeared in the Wall Street Journal.

“There was never any trust there. He was constantly conspiring behind my back with the other board members. At the board meetings, it was clear that he was leading a bunch of side conversations…”

I heard this quote from a CEO I had called for a backdoor reference on a potential board member for IronPort. It instantly made me realize the importance of transparency between a CEO and his board. If I were to totally suck at being a CEO, I wanted someone who would have the hard conversation with me. How else does someone learn and improve?

As a first time CEO, I wasn’t sure if I would scale to run IronPort long-term. But I wanted a legitimate shot at it. And I wanted a board member that considered the company’s interest first, but was also committed to helping me become a better CEO.

I will never forget that backdoor reference because it made me think twice about the fundamental skills and characteristics I wanted in a board member. Early on it became clear that transparency and the ability to provide honest feedback were paramount. I learned this through receiving instant and honest feedback following every board meeting (a healthy board practice). When this was coupled with annual 360 performance evaluations I always knew where I stood. The feedback was crucial for my growth.

In addition to transparency and feedback, through my own personal CEO journey, I came to realize that the following represents table stakes for the best board members:

Experience: I wanted someone that had been there, done that. In addition to the investors, I went out of my way to recruit three CEOs to the IronPort board because I wanted to surround myself with people that could help steer me around common potholes and would be unflappable as things were going haywire. Diversity of experience was also very helpful. Some of my board members had been on 50 boards while others had run large direct sales organizations; both contributed in completely different ways. If given a choice, I don’t see why any entrepreneur would take a term sheet from a VC with little or no board or operating experience.

Sharp opinion: Quiet is not helpful. A Melvin Milquetoast who sits there nodding his head all meeting is not helpful. I wanted someone who consistently contributed meaningfully and constructively to the conversation, however wide ranging it became. Every board member slot is an opportunity to find someone truly amazing who will speak up and help you build your business. The traditional “financial expert” as a board member essentially compromises a valuable seat with a former CFO or accountant that rarely contributes outside of their domain. It’s worth working hard to find a CFO that later became a CEO or interviewing hard for a financial expert who really contributes. The thorniest business problems will surface at the board meetings and the different, sharp, opinions help to to better explore the poles of the arguments to make better decisions.

Responsive: Board members need to respond to texts within hours and emails or phone calls within 24 hours – no excuses. Things move fast at startups and when I needed help with a lawsuit, contract, employee situation or financing, I wanted to have a damn batphone with my board members. Yes, I realize that I was not in the business of saving lives, but the difference between landing a rock star candidate or closing a round often depended on the timeliness of a board member’s response.

Does real shit: Being on a board is not just about showing up for the meetings. A board member needs to materially contribute to the success of the business. This includes making numerous introductions to potential customers, partners and employee candidates. This is in addition to being available to interview/sell employee candidates, coach management team members, speak at sales kickoffs or just about anything reasonable that a CEO asks you to do to help the business.

I once had a venture capitalist explain to me that a board doesn’t have many options when it comes to affecting the direction of the company. That if you don’t agree with where the CEO is leading the company, you basically have two levers: 1) threaten to fire the CEO, or 2) fire the CEO. He also added that the former gets pulled much more often than the latter. This describes well the authoritarian and adversarial nature of many CEO-to-board relationships. Given the makeup of most boards, where most of the members lack the practical experience to help coach the CEO, the lever approach is not all that surprising. But like any bad relationship, it’s something to avoid.

The best board members aren’t elected by default. CEO’s that set themselves up with their choice of board member – which means getting more than one term sheet and doing extensive reference checking – are better off. You want to find a coach, not a lever puller.

There is a perfect storm of three distinct disruptive forces that has the potential to topple nearly every major enterprise software incumbent. And the traditional approach of dealing with technology shifts – through acquisition – looks like it’s headed towards failure. As such, there is an unprecedented opportunity to create many, new multi-billion dollar enterprise franchises that are on the right side of these forces and are willing to go the distance in the face of ridiculously high acquisition offers.

Let’s examine these forces individually:

Software as a service (Saas): Seemingly a little long in the tooth as a disruptor, Saas has finally gone mainstream in the Global 2000. The primary disruptive force of this technology is the speed of innovation. The feedback loop is especially powerful: as opposed to using focus groups and surveys to figure out how users are interacting with the product, Saas companies can see what their customers are doing real-time by capturing and analyzing every click. They quickly extend their products through a “cell division” that continuously builds out and A/B tests the features that are getting the most engagement. On-premise and client (PC) software-based product cycles can’t possibly compete here as new releases are typically pushed 10 times faster at 45-60 days vs 18-24 months. There’s always one version/code base so it’s much easier to support, patch bugs, and roll out new features to all customers at once. The old joke of “How did God create the world in 7 days? He didn’t have an installed base!” certainly applies – but Saas also demands entirely new skills sets associated with running a 24×7 services business. Dev/Ops, customer care centers, network operations and delivering uptime via failover, mirroring and hot backups are all new and essential. It’s easy to see how the early Saas pioneers gained so much ground with this innovation but even they are unprepared and poorly architected to take advantage of the additional disruptors that have hit more recently…

Cloud infrastructure: As I detailed in a prior post, “The Building is the New Server,” the humongous internet powers, Facebook and Google, are literally breaking new ground in re-imagining the design, components and cost of running a hyper-scale data center. The cloud infrastructure they are pioneering has the primary disruptive force of massively driving down cost. Facebook, for instance, is experimenting on the bleeding edge of solving the new cost bottlenecks of power and cooling. I recently read that it actually rained inside one of their datacenters. The cloud service providers (CSPs) are following their lead using commodity components, open source software, data center design and testing software defined storage and networking products to enjoy the same, devastating cost curve. The corporate datacenters (aka “private clouds”) will slowly disappear as Global 2000 companies migrate to these irresistible new cost curves. Don’t be fooled that security and reliability concerns will keep large enterprises away – as the CEO of IronPort, I watched in horror as large enterprises started pointing their treasured Mail Exchange (MX) records to cloud services like Postini – a much superior and vastly cheaper cloud based architecture versus our perimeter appliances. And email is the most sensitive and mission critical of applications…

Mobile: About two years ago, all of our consumer companies went through an “Oh shit!” moment with mobile. One year mobile was 10% of traffic and the next year, when everyone was expecting ~20%, it was 30% on it’s way to 50%. Facebook, for instance, famously bought Instagram for $1B and then continued their pursuit of talent to redesign for mobile. The new mobile operating systems and devices are proliferating an entirely new interaction and design paradigm that has the primary disruptive force of a re-imagined user interface. The innovative use of touch/gestures (e.g. pull down, swipe, pinch etc.) pioneered by the consumer applications will become de rigor for enterprise as well. Although it’s still early, the mobile sensors (e.g. GPS, accelerometer, video etc.) will also become integral and spawn new innovations in the enterprise as they have enabled new consumer franchises like Lyft and Instagram. The number one problem facing so many of the startups I talk to is hiring the design talent (e.g. Mobile app, front-end engineering and user interface) to take advantage of this trend. In addition to being in ridiculously high demand, most of these people are “arteests” who eschew just cash and stock as incentives because they want to work for a purpose and in an environment where design is an overarching priority/core competency – not something that is grafted on afterwards. These environments are hard to find.

So exactly why won’t these big incumbents make it to the other side? There are just too many things changing at once. Beyond the technology changes, there are structural impediments as well. The incumbent sales forces have become farmers instead of hunters. They still sell on relationships (e.g. A round of golf, anyone?) and bundling/discounting instead of product attributes. They sell to the CIO instead of the line of business buyer who is making the decision. The quotas and incentives are too different. The accounting systems don’t speak recurring billing and revenue. Ugh – it’s just too much change…

A handful of exits have been priced based on a NTM revenue average of 11X vs around 4X for the rest of Saas companies. Examples include Workday, Splunk, ServiceNow, Marketo and Tableau. Not to mention the SuccessFactors deal (done at 11X) has officially kicked off the next wave of consolidation. On the private side, companies like New Relic, AppDynamics and ZenDesk have seen private transaction multiples of between 9X and 11X.

There is outright panic going on right now at the large incumbents as they pay ridiculous premiums for the early Saas companies. And so why won’t these acquisitions pan out? Most of the early Saas companies weren’t architected to take advantage of the cloud infrastructure cost advantages AND most completely missed the boat on mobile. It’s hard enough for new, cool enterprise startups to hire the necessary design talent but the large incumbents really have no hope.

Next Up

As I’ve said, there is a perfect storm of three distinct disruptive forces brewing which has the potential to erupt into a new multi-billion dollar wave of enterprise franchises. In particular, there will be at least 30 new enterprise franchises that will go the distance, resist high acquisition offers as they either supply or ride this trio of disruptors to dominance.

Amongst others, the new suppliers are companies like Cumulus Networks, Okta, New Relic and Nimble Storage. The “riders” are awesome trifecta companies like Box, Evernote, Base, Expensify and Tidemark.

Where will these 30 New Franchises come from? A double investment cycle in Saas, as the large incumbents buy the early Saas pioneers and fumble them, will pave the way. Like Lenny from “Of Mice and Men,” they will smother these companies with too much negative attention, mismatched salesforces, and misunderstood business models. Following a short vesting period, the product and management talent – who are used to working at a completely different pace – will ultimately leave the incumbent, resulting in a bevy of entrepreneurs that roll out to start even more of these franchises.

I can’t wait to meet them!

🙂

All great pitches have a few things in common: the founder/team is wicked smart, the idea is big and a breakthrough, and the market is potentially enormous.

But the best pitches are also usually non-obvious and unique to the particular entrepreneur’s story and background. “Founder/market fit” is important. Does the founder’s life story, educational background, personal struggles, Ph.D thesis, or prior work experience somehow qualify them to unfairly prosecute the opportunity they are pursuing? At our firm we always start off our meetings with a deep dive into the entrepreneur’s background, and the most convincing pitches literally pour out of them with some deep connection or “aha” that led them into the business they are explaining. By doing so, the idea is unique/original and is presented authentically versus a canned sales presentation.

A lack of originality and authenticity is probably the biggest turnoff. Stereotypically, this can be a couple of MBAs that have been churning through different business ideas in order to find something that might make them rich. Or it could be a hired gun/former sales VP as the CEO adopting or explaining someone else’s idea. In both cases, they typically have done a superficial, McKinsey-esque market analysis but have no passion or connection to the business.

Another important quality of a “perfect” pitch is when a founder exudes in many different ways, the confidence and courage to go the distance, against improbable odds, to make an enduring or lasting business. They come off as expertly informed, determined and unflappable during the hard questions. And they usually lay out a series of chess moves that reveal an even bigger ambition: “If we do this, then we can do that…”

A lack of confidence is also a huge turnoff – usually typified by a single slide in the deck entitled, “Exit Strategy or Exit Options.” This is the kiss of death for our firm.

This post originally appeared on the WSJ Accelerators Blog.

One of the most famous hackers in the world, Kevin Mitnick, published a book about his exploits — “The Art of Deception” — after he got out of prison. This guy broke into corporations, government agencies – even the FBI cell phone network to find out they they were closing in on him. Surprisingly, the most interesting “a-ha’s” of the book weren’t related to his prowess behind the keyboard but something much simpler — he was a master of “social-engineering.” Kevin would get unsuspecting staffers on the phone and trick them to reveal passwords, backdoor locations, and critical tidbits of information to enable his hacking. He used well-worn techniques like urgency, name-dropping, and a folksy familiarity that were popular in the Depression era and updated them for the modern times.

Kevin Mitnick was not alone.

Most of the largest online fraud hauls begin with a live telephone conversation. The existing caller ID infrastructure is useless as there are plenty of software options available for fraudsters to spin up millions of fake numbers and spoof the origin of the call. Quite honestly, there really isn’t a good way to authenticate who is on the other end of the line other than a series of painful security questions and even those are getting harder — my great aunt’s maiden name? There’s just got to be a better way…

While working on his PhD degree in 2009, Vijay Balasubramaniyan, had an unusual thought: could each phone call possibly have its own unique acoustic signature? Specifically, are there patterns in the sounds, packet loss and latency that could tell you the network, phone type and specific location the call was coming from? After some investigation, Vijay decided to focus his efforts on proving out the technology and the results became the core of his PhD thesis.

In 2011, Vijay completed his studies and hooked up with Paul Judge, a fellow Georgia Tech PhD alum and security industry veteran, to co-found Pindrop Security. The company’s technology is a commercialization of Vijay’s unique primary research and patents. Pindrop provides an enterprise solution that helps prevent phone-based fraud. Vijay’s pioneering acoustical fingerprinting technology detects fraudulent calls and authenticates legitimate callers, helping customers eliminate financial losses and reduce operational costs.

I’m very pleased to announce that Andreessen Horowitz will be leading Pindrop’s $11M Series A financing round. Our friends at Citi Ventures, will also be participating in the financing round. Here’s why we’re so excited to work with Vijay and Paul:

Founder/market fit. This is really our kind of opportunity — a very unique technology with virtually all the intellectual property invented by the founder. And it works! Vijay developed and patented the core technology while pursuing his doctorate at Georgia Tech, a school renowned for its cyber security and signal processing research.

Focus on voice fraud. As much as we talk about data overtaking voice — every customer we talk to has seen voice calls increase linearly with customers. And voice is becoming even more of an attractive alternative for fraudsters as the online channel is maturing and becoming more secure.

Very differentiated technology. It’s a very differentiated solution and the only one that isn’t purely fingerprint based so it detects zero-day attacks. Customers rave, “we are finding whole new fraud rings that had previously gone undetected…”

A track record of execution. Since we participated in Pindrop’s seed financing, Vijay and Paul have executed to plan in a remarkable way — they launched the product and had a stable of excited, apostle customers. The game film on their progress has been universally positive.

I’m super excited about joining Pindrop’s board of directors and look forward to helping Vijay and Paul bring this technology to everywhere people are answering phones and wondering who is on the other side of the line…