Skill Sharing with Bogomil Balkansky

I'm sure you have better things to do than come and listen to me, so I'll try to be quick. I have a few prepared remarks and a few slides, but please ask me questions anytime, whatever's on your mind. It's way more productive to answer if I can be a resource to you and try answer some questions. Way better than just me standing here and pontificating. Another thing I should say is that I honestly have very little credibility to be giving advice to startup people because this is my. My second time working at a startup. The first time was in the year 2000, 2001 during the first dot com boom. And the first startup where I worked was a miserable failure. And after that I made a career as an executive in a large company. And so I'm at a startup again and the new startup is still in stealth mode. We haven't produced a product on the market, so take it with a big grain of salt, whatever I'm telling you. Cool. So I wanted to start with, basically I have. The preparatory marks that I have are things that I have been thinking about for the last couple of years since I left my corporate job at VMware and I have been living the excitement and the struggles of a startup. And these are things and takeaways that I've been thinking a lot about myself. Hopefully they'll be useful to you. And again, interrupt me anytime. So in the environmental movement there was this notion of like, think globally but act locally. And I think it's a nice metaphor that applies to startup life that while all of us should be always dreaming very big and set our aspirations very high and always like aspire to change the world, but at the same time we have to be very, very careful how we sequence our execution. And we should be taking very small, digestible steps towards the eventual goal. You know, why should be dreaming big, hopefully should be self evident and you don't need convincing. But of course, as a startup we have limited resources. You don't have money, you don't have enough people, you have all sorts of risks and obstacles. You have technology risks, you're not sure if you have product market fit, you don't even know if the market is there yet. All of these things need to be verified. You may be taking on a very powerful and entrenched competitor, et cetera. And because of all of these reasons, like, you need to be very, very careful, how do you sequence your steps? Because you may actually run out of money if you kind of take too big of steps at a time. And I Have a couple of case studies of how interesting case studies of companies that did that sequencing of their execution in a very interesting way. The first case study is something that I'm obviously most familiar with, which is VMware, the company where I worked for quite a long time. So the big vision. So VMware was a very geeky infrastructure company, but what VMware did was invented virtualization for x86 systems and invented the notion of virtual machines. And the big vision was that every application should be running in a virtual machine. And from the very beginning they knew that the big goal was to conquer the data center. So every single workload in the data center should be running in a virtual machine. But from the very beginning they knew that the technology risk is too high and the technology sounded like too good to be true. And they knew that if they tried to go and fight the battle for the data center, it's going to take way too long, because the data center is something mission critical. These are the most important applications that run every business. And to wrap these applications and install a new and improvement technology, basically every potential customer would have been running proof of concept for six months, a year, and the sales cycles would have been too long and the company would have run of money if they had to go through these like long, long sales cycles. So the very interesting thing that the company did was. So basically what the company did was the company was founded like in 1998, and instead of going and fighting the battle for a data center immediately, they actually created a product for the desktop, a very different product that wasn't targeted at the data center, but was targeted at individual developers and helped individual developers create multiple development environments on a PC side by side. So you could have like a Windows and a Linux development environment, you could have like two different versions of Windows, et cetera. And that first product they created happened to be a huge success. They had half a million downloads of the beta, and from the very first version of the product, it just flew off the shelf. Happened to make the company cash flow positive, literally from like the second year after they launched the first product. And actually they gave them the financial muscle and the financial resources to keep going. But more importantly, it actually provided great proof point for the technology because half a million or a million developers had been using the technology already and they started believing in it. They saw the technology in action and actually the developers became huge advocates for VMware. When the company developed the data center products and decided to go after the data center and the data center and it are usually like different organizational units within a company. But once the developers were convinced that this is a great technology, they're actually advocating for them in front of it and telling them, hey, you should go and deploy this because it's great. I've been using it for two years, et cetera. And they were selling the desktop product for $149 apiece. Again, made enough money, the company hardly ever raised any venture capital simply because they didn't need it. And then it was only two years later that they created the first data center product, which kind of, without getting too geeky here, was based on the desktop architecture. And then three years later, they launched like the real sort of data center product. But this is a great example of how it took actually three years between founding the company and actually developing the very first product that started executing on the grandiose vision. They didn't immediately go after the grandiose vision because honestly, they knew that they don't have the Runway, they don't have the resources, they don't have the credibility to go and fight the big, real fight. So create a small product, become successful with a small product, gain credibility, prove the technology, and then go after the big dream. I see kind of relatively somewhat similar strategies being deployed by a whole bunch of current startups. These are five CRM companies. CRM is customer relationship management. All of these are startups. Relate IQ actually got acquired by Salesforce. The other ones are independent. Relate IQ is maybe 100 people now, but all the other ones are anywhere from like 10 people to 30 people. And basically all of them are trying to battle Salesforce, which is the huge incumbent. Salesforce owns the CRM space. They have, I don't know, 90% market share or something like that. And Salesforce has been in existence since 1998 or 99 or something like that for 15 years. They have been completely unchallenged. Right. If you're a large company, if you want any software for sales, you know, for Salesforce, automation, for customer support, like Salesforce is the default place you go. And as it happens with incumbents, basically Salesforce really hasn't innovated much in terms of their functionality. It's like the same old product for 15 years. And these companies are trying to provide a better CRM application and better means mobile first, a lot more automation, et cetera. But again, they face these hugely powerful companies. So the question is, what do you do if you have this hugely successful competitor? Basically, I've seen two approaches that these companies deploy in order to battle the Big competitor. The first one is to develop a small product that actually doesn't compete with Salesforce but actually snaps on top of Salesforce literally and provides like little add on functionality on top of Salesforce. And I copied these straight from the website of Salesforce. They position themselves not as competitive to Salesforce, but groundbreaking mobile experience being built on top of the Salesforce platform. So much so that even Salesforce advertises them on their website. And what mobile experience means. Basically what all of these companies have tried to do is really automate all the really manual data entry that salespeople need to do. So if you're a salesperson, you're forced to use Salesforce and you make a phone call to a customer, you have to manually go in and log that phone call to prove to your boss that actually you have been doing something you've been trying to sell. You send an email, you have to go and log the email, et cetera. And this is huge time waste and salespeople really hate it. And so what these companies do is you send an email, they automatically figure out that this person is part of this account and they'll automatically associate that email with that account. So you don't need to move a finger in order to log that email. And they do the same thing for phone calls, for meetings, et cetera. So salespeople go about their day as they would and automagically it all finds its way into Salesforce. And so this is like one of the approaches that these companies are deploying. So they're not threatening Salesforce directly, they're using, they're providing like very kind of interesting real value add on top of the Salesforce application. The other kind of value add that these companies are trying to do is provide analytics, right? So all the data still resides in Salesforce. Salesforce is notorious about not having any sort of like good reporting. And of course people want to learn over time, you know, where do we have success, you know, what could increase our probability of closing a deal, right? They're always looking for cues of like, what are the kinds of customers, what are the kinds of industries where we're having more success? And some of these startups basically provide this type of functionality. And then based on this learning, they start doing predictive analytics. You give them a deal, you give them a customer and they give you some probabilistic score that this is like 96% probability or only 23% probability of ever closing the deal. Now this is kind of how they provide add on functionality. But the slightly Dirty trick that all of them do while doing all of this is, and I copied this from the website of one of these companies is they take all of this data from Salesforce and they also take the data from email and LinkedIn and all of that. But at the end of the day, they actually also record all the data in their own database. So basically all the data that they analyze in munching Salesforce they also copy to their own database and they copy the data from all these other data sources. And if you think about it, all of a sudden they have all the data that Salesforce has. And over time as they gather more and more customers, they have all the data and becomes more and more feasible to start displacing Salesforce and to start going to their customers and saying, you know what, like you're already using us. We're the front end, we're the actual application that your salespeople interact with. Forget about this stupid back end that costs you millions and millions a year. Just cut it off. And we already have all your data. You know, all your salespeople already are using us, you know, and so they haven't started doing that yet. But I guarantee you that, you know, this is the strategy going forward and this is another potential strategy. If you're facing a big competitor, don't compete head on. Start with something small, non threatening, so non threatening that even the incumbent competitor would actually gladly work with you initially. While you gather steam, you improve your product and eventually work on displacing them. The other strategy that I see, these competitors basically start by nibbling away at the relatively low price point or low monetization use cases. So this is the price sheet of Salesforce and this is how you can buy Salesforce for $5 per person a month. You only get contact management and all the way. The real application is about 250. And obviously it shouldn't be surprising that Salesforce makes 98% of their money by selling this. And all the other things are kind of just there for props. And so another strategy that some of these companies take on is basically start from the bottom, try to win this use case and then grow and nibble away at the Salesforce monopoly from the low value use case. So there's a company called Close that provides like amazing contact management. So I just, you know, typed Luben, I personally started using this application and you know, it tells me all my complete picture of all my interactions with Lubin, like all the emails, you know, anything, you know, whenever he mentions me in his tweets like any files that we have exchanged, you know, et cetera. It tells me which company he's associated with. But check this out. I can immediately take him here. Is he a prospect, is he a customer? And so this actually, you're an eater, not trying to sell you anything yet. And if here I clicked on Launch Hub, basically it immediately goes and scours all my contacts and figures out, here's the list of people who I know associated with LaunchHub and all my interactions with anybody at LaunchHub. And so this is contact management. This is a potential replacement for the Salesforce contact management. But you start seeing the beginning of a fully fledged CRM system. But basically this gives me actually the most valuable information that I need in order to be selling to an organization. It tells me who at my company has had any interaction with anybody at the company where I'm trying to sell, et cetera. And so this is another kind of potential, very interesting strategy when you try to compete with a mighty competitor. And so again, I think all of these companies obviously are nowhere near a point where they're trying to directly challenge Salesforce, but all of them have found very interesting niches, very interesting approaches in order to be able to provide a product, start growing and not get completely steamrolled by Salesforce from the very beginning. Second thing that, by the way, if there are any questions, raise your hand or just shoot. Yes. What was the name of the app that you mentioned? Close. It was like this one on the left there. Yes.

I'm wondering, it's an interesting traction. Do you pay also for Salesforce and for this company at the same time or just this one?

Because you end up paying both for Salesforce and for Veto. Yeah, I start with the upsell. Yes. People are actually very glad to pay. I mean, relative to Salesforce, they price themselves as, let's say, like 10, $15 a month. So if people are already paying 250, it's not too big of a leap to pay another 5 or 10 or something like that. So. Yes, but cool. The second thing that I wanted to talk about is stay focused. And again, as a startup, you have very limited resources. You need to have your conviction and pursue it steadfastly. Distractions will be all around you. And I find that the most difficult distractions to stay away from are the distractions that are going to come from your customers. You know, once you build a product, you start going to market, you start finding your initial early adopters, beta customers, et cetera, and you come to market with a certain value proposition. And invariably some of your early customers will start asking for other things that are not core to your value proposition, that are sideways from your path, your belief of the future. And usually it becomes very, very difficult to resist these asks from customers. And sometimes customers will even dangle money in front of you, right? So if you do this special thing for us, we'll pay you, I don't know, a big sum of money. And I think it's very important, kind of to stay focused and to stay true to your belief of where the future is. Because in the short term, the distraction may actually win you some small amount of money, like may win you another customer. But over the long haul, you're basically losing momentum in terms of executing on your eventual destiny. Couple of examples from my personal experience at VMware when we went to market with virtualization for x86 systems in the mid 2000s. Over and over again, we're getting a lot of queries from customers to start doing virtualization for Unix systems. And Unix was actually still very prevalent in the 90s and beginning of 2000s. And there's like a lot of Unix machines in the data center. And customers are telling us, well, it's great that you do virtualization for x86, but my data center is not only x86, I have a whole bunch of Unix machines. So why don't you go virtualize the Unix machine so that I can virtualize my entire data center? And this was a very reasonable and very logical ask from customers. However, we firmly believe that Unix was actually losing market share. And over time, the number of Unix machines was going to go down and the number of x86 machines was going to go up. And so because of that, we always said no, and we could have done it, but it would have cost us probably years and years of engineering effort. And eventually, like 10 years later, we're proven right. I mean, nowadays, of course, there are still Unix machines in the data center, but like, who cares? Another customer asked was kind of to do the opposite of virtualization. Virtualization is partitioning a single server into multiple virtual machines. A lot of customers who are running big workloads were asking us, why don't you do the opposite, which is take multiple servers and aggregate them into a single humongous virtual machine. And again, our belief was that the x86 servers were becoming big enough where the need to be aggregating multiple physical machines was going to disappear over time. So the lesson learned here, I believe, is have a strong conviction about where the future is going in our case at VMware, we believed strongly that the future was x86 servers that are getting bigger and bigger. And we didn't let ourselves get distracted by anything else, like no Unix, no aggregation, et cetera. Stay true to your course. Another example that somebody told me very recently, I saw the guy, the venture capitalist from Sequoia who was on the board on WhatsApp before they got acquired by Facebook. And he had been on that board like for quite a few years. And you know, he was telling me that, so WhatsApp is the messaging company that got acquired for $19 billion by Facebook. And he was telling me that over and over again, large companies were coming to WhatsApp and saying, why don't you guys provide a more secure sort of private instance of WhatsApp for us to do internal messaging within the company. Basically take the consumer product and start providing kind of private instances of the consumer product for large companies to be using in a corporate context. And they could have done it. Yes, again, it would have cost them a whole bunch of engineering effort, et cetera. But basically they thought there is such a humongous opportunity in the consumer space that will not get distracted even by people dangling millions of dollars in front of us. And obviously the outcome proved them right. The third topic I wanted to talk about is at some point all of us will need to figure out a business model for the startup and how we'll make money. And this is arguably one of the trickiest things to get right in the lifetime of any startup. And if I have any lessons about how you do this right, is first, you need to establish a clear vision of what your success looks like and what is the metric that's going to grow as you grow and your business grows. And once you figure that out, then the next step is easy. You just need to hit your financial fortunes to that growing metric. And a couple of examples of good examples successful one. Let's say if you're a Dropbox, you know what is going to grow as you grow is like the number of files that are saved on Dropbox. And so as you grow, the terabytes of storage of files that get stored on Dropbox is going to grow. So it's kind of obvious that you should try to be pricing yourself as dollar per gigabyte. And this is what they've done. So as consumers or Dropbox for business, that's how they price themselves. If you're something like Salesforce, you win if more and more people use your app, and since you have multiple apps you have Salesforce Automation, you have marketing, you have customer support. It's basically number of users using multiple of your apps. And that's why you price yourself as dollars per user per app. And one bad example how you can really screw it up, which is VMware. And again, I worked at VMware for a long time. VMware did a lot of things right, but when it comes to figuring out the business model, they committed an original sin all the way back in 2001 and did, like, the most stupid thing. So if you're VMware I mentioned the big vision was every app should be running in a virtual machine. So it should have been obvious that what is going to grow if you're successful is the number of virtual machines is going to grow, because that's what you do. So you. It should have been obvious that we should have priced ourselves on dollars per virtual machine. Guess what? VMware did. They decided to price themselves. And this predates me going there. They priced themselves on physical server cpu and guess what happens? So the value proposition of virtualization is you need fewer physical servers because you squeeze workloads on. We squeeze multiple workloads on the same server. So if before you needed like five servers to run five workloads, now you put them in a virtual machine and you run the five workloads on a single server. And because you priced yourself on physical cpu, basically, the more successful you are, the more you undercut your ability to grow, right? Like, the more successful you are, the fewer servers people need, so the fewer licenses they need to buy. And for a while, that wasn't quite obvious, right? But in the middle of 2000, basically it became quite obvious that we're kind of running against a big problem, right? From business standpoint, we're very successful, but running against a cliff.

Is there a way to fix the problem?

Boy, I mean, it became so difficult to fix the problem because. So I'll tell you, like, all the number of things that we tried to fix the problem, and all of them worked only halfway. So as VMware was developing more and more products, so we couldn't change the pricing model of the underlying hypervisor. We had sold it to like 300,000 customers. We had sold perpetual licenses. People had their perpetual licensings. Nothing we could do, right? So we developed these management technologies, and then we changed when we introduced these management products. Then we price the management products on per VM basis. So you buy your underlying server platform on per cpu, but then the management is on per vm. That Was kind of okay, but became too complex because you're a salesperson, you go to a customer and you needed to walk in with a spreadsheet and a calculator and it was like a non trivial calculation of how much money the customer owes you. By the way, the most important thing in pricing and your business model, it better be simple. I mean you better don't need a spreadsheet model to be able to figure out how much the thing is going to cost. The more complex, the more people just don't know. You just introduce friction in the sales cycle. You want your salespeople to be talking about how your product, how great your product is. You don't want your salespeople to be explaining the pricing for half of the one hour meeting that they got with the customer. I say like this pervm thing only worked halfway because these management products basically weren't as successful as like the underlying platform. And it took quite a while for all these products like to start like gaining steam, you know, et cetera. And then because the pricing models were different, then it became so complex for people to sell that the management products weren't as successful being sold. So then what we ended up doing was we created bundles of the underlying platform and the management products that are also priced on per CPU because the per VM was too complex. And then so bottom line is like nowadays VMware is almost like squarely back to on per CPU basis and the only way for the company to grow is to keep piling more products on that cpu. Right? So initially just sold virtualization and now it's selling virtual storage, virtual networking, management, but it's all on CPU and it's a very, very difficult way to grow for a large company. Another interesting business model that for some reason I see being very attractive to startups. And I talk to any number of startups that think that oh, we're going to be freemium because, oh, we're just going to plaster it on the website, people are going to like it and eventually they're going to pay us some money for some portion of some add on feature or something like that. This notion of freemium takes all sorts of different permutation. Like in app purchases for gaming you have kind of the classic thing like Dropbox where the first 10 gigs are free and then you start paying after that or something like that. And Evernote and Skype and all sorts of like this model is like very dominant in consumer services. In B2B, especially in software you see like the open source model where like the core thing is free and then you pay only for support and subscription, you know, et cetera. So it's all good. The trouble though, in my mind is that you need huge, huge volume to make the numbers work. And honestly, I mean, you need like volumes like Dropbox that is being used by 500 million people or something. And quite honestly, even with 500 million users, their growth in the consumer part of the business is completely plateaued. And I don't know if you've seen Dropbox is now really aggressively pushing Dropbox for business. So they're going after businesses and trying to create a fully paid product. Because the freemium thing in consumers basically has its limitations. And especially, I mean, they've pretty much penetrated the rich markets like the us, et cetera, when they go to emerging markets, people will use their free quota and nobody gives them a cent of anything paid. And when you look at open Source in the B2B space, there have been very, very few companies that have been able to build a sustainable business based on open source. I mean, Red Hat is the only one in Linux. Basically Docker is trying to do the same in terms of containers, but they're kind of too early on anyways, not impossible. But my best advice is don't get too excited about it. Recently I started seeing some very interesting new business models being created. I think the best way to explain it is like with an example, there's a company called Zenefits. And what Zenefits provides is they provide employee benefits primarily for small companies. So if you're a small company and you need to provide health insurance and all sorts of things like that, you go to Zenefits and Zenefits gives you software to manage all of that for free. And so the question is like, how do they make their money? And again, I copied this from their website. Zenefits is free, really free. And again, people are like, this is too good to be true. Are you serious? How do you do this? And basically what Zenefit's figures figured out is that there is very high brokerage commissions if you're a benefits broker. So in other words, the value chain is complicated. You have a health insurance company that actually provides the health insurance, but then the health insurance company distributes its health insurance through this huge network of brokers. And the brokers who actually end up selling the health insurance to companies takes a huge cut. So something like 4 to 5% of the money that the companies pay in terms of insurance premiums. So it's not too dissimilar from like brokerage for stocks or any other sort of commission. Right? And the benefits figured out, you know what, we can actually stay in the middle and capture that commission that is going from the health insurance companies to the end customer. And by standing there, we can provide our software for free to end users. And actually we can make a ton of money just by capturing that 4% commission that the benefit providers, that is the health insurance companies, are happy paying. And so this company is on fire. It has been like the fastest growing startup, like in the last decade. It is like the fastest growing software as a service startup ever created. You know, last year we went from like 100 people to 700. And I don't know how many people, they just raised half a billion in terms of, in venture capital. I mean, really, really amazing story. I recently came across something relatively similar, which is a little company not nearly as successful as Zenefits, called Cozy, which provides rental management software for landlords. And again, it's completely free for both landlords and tenants. And how do they make money? So in the US if you're applying for, you know, to rent an apartment, you have to provide your credit report. And guess what? Credit reports cost $19. And so the business model of these guys is solely based on providing leads to the credit agencies for people to buy credit reports. And so they take a cut from like the $20 that every prospective tenant or renter has to pay in order to get the credit report sent. And this is enough money for them to make a living. And this may not be kind of applicable to every situation, et cetera, but I thought it was like a very interesting kind of new innovation in terms of business model. In other words, figure out where there is an exchange of money. Figure out where if in your industry there is any kind of existing commission or anything like that, stand in the middle, try to capture some of that commission, and provide your product for free to the end customer. And the reason I mention it is that I think it's actually a much smarter take on this notion of freemium, because again, it's free to the customer. But actually there is a very well established and well documented and easy to capture money flow. Speaking of business model innovation, I think that brings up another important point, that innovation is not just about the product that you provide to your end customers. I think truly successful companies end up innovating surely on the product, but also end up innovating on other aspects of their business. Truly successful companies innovate on their business model, innovate on how they Distribute, innovate on how they support, provide support and maintenance for their product. Anything. One of the most overlooked aspects of how a startup or a company can be successful is really to look for opportunities to change other things around the product in terms of how do you sell it, how do you support it, how do you service it? And I'm going to give you a fairly trite example. Of course, every example of Apple Anything is very trite, but I think it's very telling, which is why was the ipod so successful and by far the most successful music player? And before the ipod came along, you probably remember there was like God knows how many MP3 players and iPod came along and kind of obliterated all of them. Sure, it was an amazing product, but what Apple did very ingeniously, and nobody had done that before, was they managed to completely change how music is purchased. So they absolutely provided a great product. But that great product would have not been nearly as successful if Apple was not the first company to go and convince all the music labels to sell music by the song for the first time, rather than to force everybody to be buying the entire album. So it was not only buying by the song, but also they made it extremely convenient to buy and download your music so you didn't have to go and copy it from your CDs, which for many people actually was a fairly complicated thing. And yes, Apple makes a ton of money on their hardware. But it's very curious that in 2013, Apple made $16 billion on iTunes. And this is an article from Fortune. Basically, $16 billion is more than the entire revenues of General Mills, more than the entire revenue of Gap. So it's a pretty amazing story, and I think it's a pretty compelling illustration of the fact that, yes, the product is very important, but there are also a lot of other things that all of us need to be mindful of. How do we play within the ecosystem? What partnerships can we have? How can we change how other things around the core product that we provide can be distributed, accessed in a better, easier, more efficient way? Some of the things that all of us need to be thinking about is how do we distribute our product? Can we figure out a new channel? Can we figure out a better way for people to experience our product? New and interesting partnerships, new business models, like new ways to support and maintain. And the reason I emphasize that is that very often people who found companies are technology and product people, and we get very excited about our product and really overlook a lot of opportunities to make ourselves successful by leveraging other aspects of the ecosystem that we play in. And my final thought is listen to advice from anybody and at the end of the day absolutely feel free to ignore it. And when I say listen to advice, advice from people like me, and the reason I say is feel free to ignore it, is that at the end of the day to be truly successful you need to do things differently from most other people. To be truly successful you pretty much need to break if not all rules, majority of the rules. And if something worked for a company in a given segment at a given point in time, doesn't necessarily mean that the same trick or set of tricks is going to work for your company in your domain at your point in time. And so I think the best thing you can do for yourself is always consider everything for first principle and figure out within your situation is this going to work or not going to work and not kind of go with the flow and sort of, you know, go with the common wisdom. I think swimming against the current and swimming against the flow is probably a better and kind of winning strategy. In startup plan there's always like flavor of the month, right? You know, there's like always some fad of how you can be successful as a startup. I mean I'm sure like you've read the lean startup and of course there's like a lot of useful nuggets and useful stuff in a book like that. Now Adreessen Horowitz is talking about the full stack startup which is pretty much the total opposite of the lean startup. So if the lean startup is like create a minimum viable product very quickly, plaster it out there and see what happens and people give you feedback, et cetera. The latest thing that Adreessen is pontificating is no, own everything. You should own the entire stack. So it's just a far cry from minimum viable product. And of course the spin doctor wisdom vacillates. The pendulum sweep back and forth between own everything, no, should own only wherever you have core competence, et cetera. In terms of product development, I grew up in the business when waterfall was the way we did things. Now of course everything has to be agile and et cetera. I'm sure two years from now somebody's going to say no, no, forget about it. Agile gives you minimum viable product and people, I mean you can be successful with a minimum because if it's minimum, it's not viable if you ask me. Anyways. And so I want to leave you with like the last thought from I don't know how many of you have read the book By Ben Horowitz. The hard thing about hard things, and my favorite quote there is there are no silver bullets. There are only lead bullets. And so there are no shortcuts, There are no easy tricks. You just need to buckle up and kind of fight the fight and think everything from first principles and pursue your conviction. Of course, listen to advice, evaluate it, but absolutely have the confidence to go against it and to do just the opposite of what most people would have you do anyway. So I'm going to stop kind of pontificating and hopefully you'll have a lot more questions than while listening to me.

How do you challenge your conviction?

How do you challenge your conviction? I think it's very, very important to surround yourself with people who challenge your conviction. And I think it starts with, how do you look for co founders and how do you choose the people to found a company with? I mean, it's not a very original piece of advice to basically look for people who are very different from you, both in terms of skill set and also in terms of, like, emotional temperament. And then after you found the company, like, when you look for investors or advisors, reach out and look for people who are not like you in terms of experience, in terms of domain expertise, a diverse team and surrounding yourself with different people is like the best antidote to group thing. For example, I mean, I can tell you, like, from, you know, you probably know that I work at a startup, and me and my boss, who I know from way back when at VMware, couldn't be like, more different. You know, she is. An engineer, you know, thinks like an engineer. Like, I'm not an engineer. And, you know, we duke it out like, every day. I mean, we disagree on most things and we really argue, like all day, every day. We argue very hard. And that's what you need. Georgi, how do you persist with your conviction? How do you persist with your convictions? I mean, I wish that there was a silver bullet of how do you persist with your convictions? And God knows it's not easy, right? Because oftentimes very powerful people will give you otherwise. It will tell you otherwise, right? I mean, people on your own team, your investors, et cetera, and sometimes people who are hard or impossible to ignore. So I'm not kind of absolutist in my advice. You know, there are times and circumstances where you have to make compromises bigger or smaller. So it's never kind of like, you know, this linear path of, like, I'm pursuing my conviction. In every startup, there will be like some amount of Brownian Motion, there'll be like twists left and right. And, you know, you. In my experience, sometimes you have to make compromises, like to keep people who you respect on your side, to keep them at least somewhat happy, you know, etc. So I'm not suggesting that it's kind of a nice and linear path. It never is. But if you know kind of where you're going, even if you have to take a slight turn left, then you know that you need to course correct. And like kind of go back on track.

A little bit more operational question.

Yeah.

You said something on the business model, which I really liked, and find this a growing metric, basically this metric which will basically mean that the business is successful.

Yeah. And make the money out of it. Yeah.

Basically what I'm facing at the moment, we know more or less what that metric is. But at the beginning, when the product is in a very small stage for every specific. Let's say it's a transaction thing.

Yeah.

You don't add that much value to the customer because you'll be building a.

Product.

This specific thing, and you cannot get the money, the big amount of money right there at the very beginning because the product is just not doing the same. Would you advise still to be persistent and take money right there on the spot? So psychologically you kind of educate the customer or rather do something like six months, no cost or something like that. Because that's very intriguing.

Yeah. So two answers to your question. So if you feel that, I mean, you know what the growing metric is, but you don't yet feel that you provide enough value, you can start with like very low price per that metric. And the very low price could be zero for the first five customers, for the first 10 customers, by the way, I think you can always raise your price. I don't know why many people think that once you establish a price, you cannot raise it. You can always raise a price. And so if you don't feel that you provide enough value, start with as low of a price as you feel like the market bears. And as you develop your product over time, then you keep raising the price. We did that very, very successfully at VMware. I mean, we started with. In 2005, the VMware hypervisor was like 1850 per CPU. And by the time I left it, the most expensive price point was like 5,000, which was very. I mean, most people think that price just falls over time as the market matures and commodities and this and that. Which, by the way, could be true. It depends very much on the Competitive dynamics and competitive pressures that you're facing, et cetera. But like in the VMware case, over the years between 2002 and 2008, we had just provided so much more value in the product and we kept raising the price and people kept paying for it and VMware kept growing and like nobody. So you can start with very low price and you can raise your price. The other answer that I'll give is that again, I'm not sure exactly what your business is, but at least in B2B, your first five to 10 customers would always be like some random financial arrangements. And with your initial beta customers, early adopters don't worry too much about the financial arrangements. You need proof points that your product is good and the product is successful. You need customer case studies, and this is way more valuable than the money you'll extract from the very initial customers. I think the business model becomes paramount when you know that you're onto something, you have enough feedback on your product, you know you have product market fit, and then it's a matter of scaling. Then you need to be like, very, very disciplined about establishing a business model and not deviating from the business model. But for initial, I don't know, 5, 10, 20 customers, I wouldn't overthink it. I wouldn't worry too much about it. You'll provide to them a lot more value that they'll provide to you at the end of the day. That's why they're taking a chance on you. That's why. In Bulgarian, on your behalf. So, yeah, What's the competitive landscape through the course of the company VMware like when you started? Yeah. So VMware should have been killed by Microsoft at least three times when I was there. And I mean, honestly, there aren't many examples of companies who successfully competed with Microsoft and actually won. And VMware was one of them. I would say Intuit with QuickBooks is probably another one. And I can't think of too many other companies that were successful fending off kind of multiple successive onslaughts by Microsoft. So Microsoft was really like the competition for VMware. Now, at the very beginning when VMware started, Microsoft didn't have anything. But once VMware launched first data center product, Microsoft immediately saw it as a threat to Windows and they made an acquisition they bought. Kind of like the second company that had created virtualization for x86. The company was called Connectix. The technology wasn't nearly as good as VMware was. That happened in 2002. So that was like the first attempt that Microsoft started going after VMware. Honestly, I think luck played a big role because Microsoft managed to kind of kill that acquisition, somehow stifled it. Like, they bought the company and didn't do much with it. And they launched a product where the product wasn't really well received. Then Microsoft scrapped that product and started developing from scratch their own product called Hyper V, which was, again, they played the typical Microsoft playbook, which was, we'll just bundle it with Windows and we're going to give it away to every single Windows customer. And basically what they did to Netscape. Right. Interestingly enough, that playbook didn't work in the B2B space. So turns out that the hypervisor is a slightly more sophisticated piece of technology and slightly more important piece of technology than the web browser. And so when Microsoft launched Hyper V in 2008, basically people looked at it, everybody tested it, because by definition, every single VMware customer was a Microsoft customer. Everybody looked at it, got it for free, turned it on on a couple of servers, and basically shrugged it off. And it's like, yeah, it's not as good as VMware. We'll continue paying VMware a lot of money for the better products. And that was the story. And like, to this day, Microsoft really has, I mean, VMware has like, more than like 60 to 70% market share in the market, and the rest is split between Microsoft, Zen is like the open source and et cetera. But so it was a competitive market. And I think Microsoft basically made a mistake, quite honestly, by trying to play the same Playbook. I think there is something to be said that I think people oftentimes take the price tag as one of the signifiers of how good and how valuable the product is. And I think a lot of people basically thought, oh, you know, you get what you pay for. Well, it's free. They turned it on and turned out to be like, not such a great product. So as I was mentioning, you can always raise your price. The other thing is, people would always pay for a good product. I mean, if you have a good product, you shouldn't be afraid asking for the money and customers will complain about it. You know, that it's expensive, but that's okay. I mean, if customers aren't complaining that your product is expensive, then you're leaving money off the table for sure. Yes.

If you're running a startup, would you consider growing apart from organic growth, acquisitions?

Yeah. So I work in a startup, and we're still in stealth mode. We haven't launched and we made an acquisition a year ago. So it's basically like two midgets fighting it or whatever, parting each other. What? And so, yes, you can. And I think you should consider all options on the table. I mean, acquisitions are always very tough. Doesn't matter how big or small you are. And honestly, I had to personally deal a lot with the acquisition that we made and the overhead that it created for our little company. You know, I honestly, knowing what I know now, I'm not sure we would have done it like all over again. But I think everything should be on the table.

If you assume you can afford to buy whoever would you choose, then you have an option between the second player and the first player. Like you gave the example of Microsoft. Who would you choose? If you can make choices, if better to take the one that is, let's say upcoming, the upcoming brand that has stronger advantages, or you would choose the one that is dominating.

I wish that I had a good recipe, but it really depends on kind of what are you trying to do with that acquisition. You can be buying a company just for the talent. You don't care about the product. They're just a bunch of smart guys and you'll pay some amount of money just to get a bunch of smart people. You can actually be buying for the product. As such, if the product already has customers and customers like it, you could be buying it for the technology, which is different from the product. Right. And so maybe there is something inside the product that could be very valuable. So this is like at VMware, we made a bunch of acquisitions where we take a product. We didn't care about the product assist, but we cared about a piece of the architecture, a piece of the technology. We'll basically yank out that piece that we created, cared about and kind of implant it in the rest of the VMware product set and then like, you know, get rid of the rest of the product. You could be buying a distribution machine. You could make an acquisition just because, you know, that company somehow had special relationships with distributors or this and that. I mean, there's so many different reasons why you could be buying a company. So if, if your question is, you know, there's like a number one competitor and number two competitor. And again, like, I don't know more of the context of that particular situation. But of course it also depends on what price you need to pay. Right? And especially like, if you are, I mean, as a startup, like, you don't have the scrutiny of a public company and like, is it Accretive or dilutive to your earnings and all of that stuff. So maybe you can get away with like less financial discipline that way. But I think honestly it's always kind of the trade offs that you need to strike price versus what you're getting for it. I would personally have always a bias to go and buy the better product and the stronger competitor. I mean, if you're going to really go and for the disruption of an acquisition, at least buy the better product. But that's not always possible. Again, I'm not going to be absolutist. Yes. If customers like your product, they always Pay. Why then VMware couldn't fix their business model to be based on VMs. Oh, don't get me wrong, people were paying and they're paying a lot of money, right? But so the reason it becomes impossible to fix your business model is that imagine you have a customer and you've already sold them 100 units of the VMware hypervisor. And the customer comes for the 101st and the 102nd, right? You know, they want to buy more. And so it becomes very difficult to tell the customer, ooh, like, you know, the hundred units that you have are priced this way, but like the 101st and 102nd are going to be priced like that other way. You know, this was a perpetual license and now you're going to pay something different. This was counted this way, this was counted that way. It just creates like so much complexity, quite honestly. The other interesting thing is that technologically in the VMware use case, the way the VMware product works is these virtual machines are actually not fixed to any particular server. But with this technology called vmotion that we created, the virtual machines keep moving around on different servers. So if you started pricing on per virtual machine, you could never actually establish for which virtual machine you are paying because you didn't know. Because this VM could move from this server to that other server and just became very complicated to be keeping track of. How are different things licensed? This was the VMware specific situation. But I feel once you have a very, very large customer base, it becomes really, really difficult to evolve your pricing model. With a lot of customers, we had these enterprise license agreements where the customers had prepaid for the next three years. And so changing the pricing model all of a sudden was like, what do you mean? I have a contract for the next three years? And about 30% of the VMO revenue came from contracts like that that ran over three years. And so going through these contracts and trying to figure out, oh, you've prepaid on this pricing model for this much, but now we're going to do something different. It just became like a huge, huge operational nightmare. Krasi.

So you said about 15 years ago you joined VMware.

Oh, no, like I joined 10 years ago.

10 years ago. Okay, so just a number of questions. So what advice would you give yourself to kind of 10 years ago? And let's say you had the option of joining some corporate job and maybe you didn't have the foresight of VMware being, you know, that successful and growing, but then you had the option of kind of following your passion. Maybe you had a startup kind of as an option. So what advice would you give yourself if you had those options being either joining the startup that you have right now had it been available 10 years ago? I guess 10 years ago, maybe you're the dot com thing which didn't pan out because as a startup you don't know, versus kind of a corporate job which you know has its own benefits.

Well, obviously I'm talking to a very biased audience here. All of you guys have made a decision like to work in a startup. So the advice that I'd give myself is I think going to a startup is only worth if you have a true passion for it, if you have truly fallen in love and if you think that your life would be incomplete if you don't do it, if you feel.