Tips For SaaS Startups Seeking Financing | With Cindy Padnos

Prior to your investing career, you led several successful venture-backed entrepreneurial efforts and was the founder and CEO of Vivant. Hopefully I'm saying that correctly, which is now part of Oracle. Can you share with our audience kind of your— what's your background with SaaS from launching and leading Vivant, from raising VC capital up until acquisition by Evolve Software, which I think later became part of Oracle?

Yeah, so Vivant, that's the way one would pronounce it because it's a French word, means alive or living in French. And the reason we chose that name, it's a long story, but the short version is that it was a procurement application for what we've then focused on as, we said, services procurement. But what that really meant was procurement of contract labor. So, it was people. It was alive and living things that you were procuring. And the reason I mention it and the company name is your question about SaaS. So, we started that company in 1998, late 1998. I think it was October, and I remember our move-in day. We had orange and black t-shirts for Halloween, and we adopted those as the colors of our firm as well. It just seemed propitious. And in any case, that company was a very, very early SaaS software company, meaning it existed before the public cloud. We decided to create a multi-tenant architecture and deliver the product as a subscription revenue model. Service, but we didn't have cloud computing. AWS hadn't launched yet, and so we had to buy all the servers, buy all the Oracle database licenses, and host the darn thing at Rackspace. So, it cost a lot of money. We still had to have all the skills you might have to run your own server farm and everything else. And, we were only getting the smaller revenue streams that you normally get from a subscription service, not the big upfront what had been the traditional, you know, license fees that were a one-time larger license. That was a hard transition to go through. And, but we felt very strongly, and I certainly did as a CEO, about the value of recurring revenue. And I had been in too many companies at that point where I saw that every quarter it was, you know, traumatic. I don't know how else to put it, whether you would either make or break the quarter based perhaps on one transaction.

Mm-hmm.

And that wasn't the kind of company I wanted to run. I also firmly believed in the idea that customers should have a voice, and they should have the opportunity to tell you they liked your product or they didn't every year. And that just wasn't true with traditional enterprise software licenses. People paid $1 million or more, frequently more, upfront. And then we had this concept back then, the word probably doesn't even exist anymore, at least isn't used, of shelfware.

Mm-hmm.

Have you heard of shelfware? That's software that's never used, that you paid for, you bought, you have a right to use, but you never use. So, it's sitting on the shelf somewhere, this kind of concept, and it really was because Back then, they sent out CDs, and you had to install it, and all the rest. So, my involvement with SaaS is all the way from that time to where we are today. And, the reason that we formed Illuminate was largely because I had joined another enterprise tech investing venture capital firm that was a traditional Series A fund, after having sold our company. I came to realize that AWS crept in, and this was around 2006 kind of timeframe, that 2007, 2008, founders didn't need $4 million to get started anymore. They didn't have to buy the database licenses. They didn't have to buy servers before they could write a line of code. And in fact, I came to believe that you had to be either foolish or lazy If you didn't just plunk down your credit card, start buying that cloud computing resource and build a prototype before you ever talk to any investor. And that's when I realized there was a real market opportunity for the kind of investing that we do today.

Curious what the cost difference was back then to start building your first prototype from what you needed to like today. And I would imagine a couple of grand maximum to get started.

I don't think we could have done much of anything. And again, these were enterprise-grade products. They were not something that was going to be put on somebody's iPhone. They had to go through security testing. You had to have single sign-on. You had to have all of those things. I don't think we could have really built anything without a couple of million dollars in the bank.

Wow!

I mean, the Oracle database license alone was hundreds of thousands of dollars.

Okay!

You know, just getting a license, and they didn't have programs like AWS, and Google, and Microsoft Azure have today, where, you know, any of our portfolio founders receive hundreds of thousands of dollars of free cloud computing when they're first getting started. Free! Right? No credit card, no nothing, right? Nothing like that existed then. Nothing was free.

Wow! So, we live in a good time to be in the SaaS industry. So, almost every founder or CEO, their dream or hope when first launching a startup is to get acquired at some point by a big corporation. I'm assuming that you had some vision at your point when you started. Can you describe that moment of how your life changed or how you felt, if there were any key things you remember after the acquisition by Evolve and then became Oracle?

After or before or during? I'll say this. I mean, I don't know that most founders go in assuming they're going to be acquired. Most of the founders I talk to want to go public. They want to build a big, enduring brand.

Sure.

And those are the kind of founders we're looking for. The reality, however, is very different, that I think it's around 95% or better of companies that actually get a successful exit are acquired, you know, don't go public. So realistically, you want a founder who understands that, but I don't think you want someone where that's their goal from day one. You know, what we're— and there are angel investors and others who would be perfectly happy with, you know, 2 years, 3x return on their funds, quick exit. You know, that can be fine, but it's not what we're looking for, for venture-style returns. So, I frankly was not delighted to have to sell our company, and we had more than one offer on the table. We had a term sheet from PeopleSoft, if you remember them, that was before they were acquired, right?

Mm-hmm.

And we were in conversations with SAP, and we had the term sheet as well from Evol. And yet, the only reason we were serious about being acquired is the timing. You have to remember that this was in January of 2001, and the world was falling apart around us.

Mm-hmm.

Our lead investor was an extremely well-known firm, but they were primarily well-known because they were relatively new. They were primarily well-known because they had actually gone public themselves. A very unusual thing. They were what's called a business development corp, a BDC. It's a firm called Internet Capital Group. And along with all of the rest of the market, their stock was tanking, which meant everyone knew that they were going to be hard-pressed to be able to raise any new capital and to be able to deploy, you know, follow-on capital into their existing portfolio. So, not such a good place to be for us. It was honestly It was kind of like having a boat anchor around your neck, because every other investor knew that your lead investor probably couldn't participate in the next round.

Mm-hmm. Okay?

That was a tough place to be. The really good news was we had built something of value. We had a product that was going to be useful to a broad set of constituents, and that integrated very nicely And importantly, into the whole stack of an ERP system. Because if you think about it, I mean, they had Ariba on one side that was for hard goods procurement, they had us on the other side for soft goods, and we were— we had a partnership with Ariba and with some of the other hard goods procurement platforms as well.

Okay, and then after the acquisition, did you feel like there was a life-changing moment at that point? What was kind of your thoughts there?

Well, it was life-changing in several ways. I had already pre-negotiated my way out the door. I knew that I had— I'm not a good employee. Let's just put it that way. The idea of going to work for someone else again just didn't appeal to me. And I knew I would either go start another company or do something else independently. And so I didn't feel trapped in any way. I did have to learn how to sell stock in a publicly traded company where we owned a very large portion of that company because as their share price dropped, we actually, at the end of the transaction, because we had negotiated a price, not a number of shares, we ended up getting a lot more shares than anyone had thought we would.

Okay.

it was complex. I was dealing with figuring out how and when to sell those shares for all of our shareholders, not for just ourselves, and had responsibilities there to all of our investors that I wanted to focus on as well.

Got it.

So how did I feel? You know, I felt at some level a little bit of relief because I knew there was a great opportunity for jobs at a time when the— I mean, this is the dot-com bust, right? And yet all of our team had jobs. And we had had an incredibly loyal team. We practiced what the industry calls open-book management, meaning we basically opened the kimono and told them all along the way what was happening in terms of the acquisition, and what our cash position was, and what the risk was. And we did not have a single employee leave during that entire time. The level of loyalty that we received in exchange, if you will, for our Honesty and integrity was unbelievable. It was phenomenal.