Top Lessons Learned after 200+ SaaS Investments

He sold his second company to Salesforce. He then built the biggest and most prominent venture capital firm in Los Angeles. Chris Bosh and Robert Downey Jr. were at his own Upfront Summit last week. Please welcome to the stage a man who needs no introduction, Mark Souster, partner at Upfront Ventures. Hello, hope everyone doing well. You guys all still awake? Good. I want to quickly introduce a good friend of mine, someone that I've known and worked with for years. He's the Executive Vice President of Corporate Development and runs Salesforce Ventures for salesforce.com, John Samorjai. Why don't you come on out?

How are you?

Good. How are you?

Good.

I feel like I should be Jimmy Fallon. We should have a game that we're supposed to play and make fools of ourselves out here, but—

It's a great stage.

No such luck. I want to talk about Salesforce Ventures first. Corporate venture capital. Fred Wilson, a year ago, publicly said you shouldn't work with corporate venture capitalists. "Uh, you run a corporate venture capital group." First of all, what do you think of that as a broad statement, not about Fred, but as a broad statement, should we work with corporate venture capitalists? And how do you think Salesforce Ventures is positioned in the market?

Sure. Well, I think that that was kind of a broad brush that he applied to an entire industry, which isn't often, often an accurate way to portray it. I think there are different types of corporate venture firms. I'm sure you've, you've experienced this yourself. Um, what we, how we like to think of ourselves is we are strategic investors that are focused on helping our entrepreneurs build out great cloud enterprise companies. And the whole goal of our program was building an ecosystem of partners that, um, would really, uh, help provide more solutions for our customers. And really raise the whole level of the cloud industry around the world. And we approach it in a way that is very entrepreneurial friendly. We help our companies, we advise them, we introduce them to our executives, to customers, and the whole goal is really to help them grow rather than to try to make money and maximize all of their rights.

[Speaker] So, so, um, if I could put on one end of the spectrum, I think Google Ventures has very publicly said that we're just financial. That's what we're in it for. And over on this side of the spectrum are maybe the corporate venture capitalists that Fred Wilson is worried about, because I've been involved with many deals in which corporates are asking for oversight over engineering or product. They're asking for right of first refusal, which makes an acquisition difficult. They're asking for 2 board seats and a commercial agreement that has to be side-by-side. Like, you guys don't do any of that, right?

We don't do any of that. So we, you know, we ask for a notification, right? If you're about to be acquired, just come and tell us first and give us an opportunity to participate in the process. But there's no blocking right or anything like that. We just want a notice, and that's actually usually helpful to the companies because it helps them create a little bit of a process. And then we ask for quarterly financials, so because we're— we invest off of our balance sheet, we don't have a separate fund, and we've got to track the performance of every company every quarter and know whether we need to mark up evaluation or impair it.

Does that ever get disclosed? Does the— does— does my— like, I know when Fidelity and some of the later-stage mezzanine finance people were starting to take positions in late-stage companies, it became very public how their valuation metrics were. Do you guys disclose that?

Not on an individual company basis. We just have to disclose the aggregate value of the portfolio, and then how that's changed quarter by quarter.

Gotcha. Well, if I could, if you don't mind, let me just offer you some advice real quickly. First of all, I've worked with John on several deals together. We don't mind notification rights, but I won't sign a corporate deal with someone who asks for a ROFR. And a ROFR stands for right of first refusal. And the problem with the ROFR is, let's say that John Wood asks for a ROFR, which he doesn't, then anyone else who wants to engage in that process, whether it be SAP or Microsoft or Oracle or Adobe or anybody else, They're not going to want to get involved in an M&A process because they know that they're a stalking horse for the insider to buy. Notification right doesn't bother me as a venture capitalist for the reason John outlines, which is the fact that I have to notify Salesforce.com helps me create a marketplace if someone else shows interest. And actually, a marketplace is how you get a fair price. So I've had nothing but good experiences.

Yeah.

Talk about how many deals you've done. What is the average check size of deal that you do? What, you know, you say you're strategic. What strategy are you trying to drive with this program?

Okay, well, let me start with the last question is that, again, you know, we are trying to deliver more integrated solutions for our customers. So our goal is to invest in companies that are integrating with our technologies in some way so that they can be listed on the AppExchange, make it really easy for our customers to buy them, buy that technology, and we can go together with an integrated solution. We also invest in companies that are building on our platforms. On— we have a great platform consisting of force.com, Heroku, for building internal employee-facing apps, for building external customer-facing apps. And we have a Lightning Fund for building Lightning components. And all of that together is, is the Salesforce platform. So we want to grow that, that business quite a bit. And we've seen, you know, one great example of the value that our platform can bring with Viva, which is one of the most profitable SaaS companies that's gone public, and that they are profitable because they're built on our platform. We also invest in system integrator partners. So that's how we think of it on the strategic side. One of the other things that's very unique about Salesforce—

Do you mind if I just ask you a follow-up on that, though, John, is do you guys have internal resources, sort of the glue, once you've done an investment to then help me get access to the sales team and the sales engineers and marketing? And do I get to be on stage at Dreamforce? Like, do I get extra benefit or is it just money?

Uh, you definitely get extra benefits. So, uh, we provide, first of all, a lot of advice to our portfolio companies because we've done so many investments. I'll get you the numbers in a moment. Uh, but we have a very good sense of both on the investment side and if you're setting yourselves up for M&A down the road, what are the best practices around that? Um, we, uh, also provide access to our customers. We introduce our portfolio companies to relevant executives within Salesforce on the product side and on the sales side. And so there is a lot of benefit that you get from that. In terms of numbers, so we have right now a little over 175 active companies in the portfolio. We've had over 40 exits and 7 IPOs. Some of the most notable IPOs, Twilio, Box, HubSpot. The programs have a lot of success. When you look at some of the exits too, it is interesting to note that Oracle's bought some of our companies, Amazon has, Adobe has, Yahoo has.

[Speaker:JASON M. LEMKIN] Just because someone takes money from you, they don't have to worry about maybe getting an exit somewhere else. Do you guys ever try to block a sale, or does it ever become contentious?

We would never try to block a sale. I mean, I think, again, going back to what I said earlier, you know, this is, we're an entrepreneurial-friendly company, and this is about growing our partners. And so we're pretty helpful, actually, when an exit process happens. We do, you know, I would say in terms of the exits themselves, we always will work with the entrepreneur to try to maximize, you know, what the company is receiving in that.

Gotcha. And average check size, and do you lead or follow, or how does that work? We—

our model is to co-invest with VCs, and so we don't really have— my team is relatively small for considering all the transactions that we do, and so we don't really have the capacity to lead a lot of rounds. On occasion, we have led rounds, but it's you know, less than 10.

Right.

And, uh, and that's because it was more about getting the right allocation. Uh, but our, our preference is to always co-invest with a venture capital firm. Uh, and we'll do it at any stage. So we'll, we'll go from Series A up to the later stage, uh, rounds. And the check sizes will ri— will range from $250K to $500K in an early round, all the way up to maybe $10 million in a later round.

And so if I want Salesforce.com to be an investor in my company, is the best route to go Do I have to go find a VC that's friendly with Salesforce.com, or can I approach you and say, "We'd like you to invest," and you'll introduce me to VCs, or do I play it at the— How does the process work?

You can approach us directly, and we will introduce you to VCs, or, you know, go to one of their many friendly VCs here, and—

I heard there's some in LA, too.

Yeah. Yeah, I meant here at this conference.

Sorry.

Of course.

Yeah.

But, you know, we're— We make the process pretty easy. The other thing that's worth mentioning too is our 1-1-1 model, and which is another area where we're very different. So as many of you know, sales, one of the tenets of our company is corporate philanthropy and giving back to our communities. And so we, we follow the 1-1-1 model where we get, we gave 1% of our equity to a foundation when the company started, and that's now grown into a very substantial amount that enables that foundation to give out grants and to do employee matching for employee giving. Employees also give 1% of their time for volunteer hours. And so we offer, I think, up to an entire week, actually up to 7 days now that employees can take during the, their work year and give that to causes that are important to them. And then lastly, we allow nonprofits to use our products for free, and we have over 30,000 nonprofits Use Salesforce for free. So we are encouraging actively all of our portfolio companies to adopt it. We have 70 companies that have adopted all 3 of the ones, and then we have a smaller number that's adopted maybe 2 of the ones.

So if I could say, just if any of you are ever in the position to be super generous like Marc Benioff and Salesforce overall has been, because you have a windfall. If you give cash, if you want to give $1 million away, you have $1 million of cash, you get taxed on that cash. Let's say you get to keep $550,000 of it. You give that money away to a charity, you're giving them $550,000 of cash, and now they got to figure out what to do with it. What charities actually like is stock, and there's a couple reasons. If I never sell the stock, but I give them $1 million of stock as a gift, I'm now giving them $1 million. And number 2 is they get to keep all the appreciation on that. So if you give them stock in an early-stage company that will appreciate, they get all the gain as well. So anyone who's helping advise you on philanthropy, that's what they advise. And the 1-1-1 program, I guess, makes it easier to do that.

It does. And we, we actually have people within our foundation who will advise you on how to set it up. Um, it does, it's, it is really useful. The, the whole giving back piece is also super important to employees. We find that it's, it's one of the, the key reasons why they love working at our company. And so when you think about employee retention and what millennials in particular are looking for in their companies, you know, a, a program where you're giving back is important.

OK, so us Gen Xers, we're more of tight-fisted bastards. But the next generation of people— no, I want to spend some time on M&A, because I think that's something everyone in the room wants to know. And rather than focusing on what Salesforce itself buys or wants to buy, let's get into the advice business. When you want to sell a company, first of all, how early should you approach a potential buyer? The fear factor that everyone always has is, if I start talking about a sale, do they suddenly— is that seen as a sign of weakness? Should I not talk about a sale? Do I have to do a biz dev relationship in order to get a— what's the best way for people, not just with Salesforce, but anyone, to develop a relationship to one day be acquired?

So I would say that building out a partnership with with a potential acquirer or 2 or 3 of them is usually the best way to start, uh, where they get a chance to work with you, you work with them, they know your technology, their customers are using your technology. Those are the sorts of proof points that, you know, as a, as a corporate development executive, that's what I'm always looking for when we're thinking about buying a company is, okay, are our customers using this technology, and how do they like it? And are there champions within our company that are going to raise their hand and say, I think this deal makes sense, we have to buy that company. And so you want to start building those relationships. The best way to do that is through, through partnering. And, and I would start early. Once you have a product in market and you've got some early traction with customers, I think, you know, it's not something that you want to hold back on and be secretive and be stealth about it. I think, you know, you want to build those corporate relationships. It will only help you in the end.

Okay. So I have a relationship going. We're co-selling product. Maybe we have some product integration. Corporate buyer gets to see how I behave, how I act. How do I flip that into a dialogue for sale? It's a very tricky business, right? Like, let's say my valuation is, $80 million, and I'm thinking, okay, maybe now I could raise $20 million, raise a big round, like, or $40 million, whatever. But if I do that, now my chance of being acquired is that much higher, and maybe this would financially be good for me, but I don't want to go right out and say, will you acquire me? Like, what's the delicate act? What's the balancing act?

Well, so first of all, it is important that when you're at those moments you do the math, and you actually go through a spreadsheet exercise where you think about, okay, if I raise another round, how much dilution, more dilution am I taking? How much loss, more loss of control am I having on the eventual exit that I may want to pursue? And then what's, you know, if you set a valuation, how long is it reasonably going to take you to achieve the metrics that would justify an exit at a higher valuation. And so, you, you have to kind of go through that exercise. Unfortunately, I think few entrepreneurs actually do, and they get very enamored by, uh, all these term sheets flying at them, and they'll, you know, try to maximize their valuation. That is absolutely the wrong thing to do, in my view. I, I don't think ev— it's, it's never a good decision to maximize your valuation, and you want to really think carefully about the terms you're agreeing to. And, um, and, you know, who you're partnering with as a VC. There are some very entrepreneurial-friendly VCs, and there are others that, uh, you will come to regret working with, especially when you're approaching a sale situation, because that's when— when you're at that sale situation, you want people that are going to be helpful to you, not people that are going to fight you along the way. And so, uh, there are a lot of variables that you have to really think about when you're— when you're looking at that. In terms about the delicacy of approaching a corporate buyer, this is where the champion that you have internally is really your best advocate. And rather than hiring a banker or going directly to corporate development, it's usually better to have, you know, a conversation with the person within the company that you think would be the best person to really champion an acquisition for you. And just talk to them frankly and just say, look, I'm thinking of raising another round of funding. It's going to be at a high valuation. We're working really well together. There's a lot more we could be doing that could really catapult our company to the next level. But, you know, what do you think I should do? Should I raise now, or might this be an interesting acquisition for you? And just have that conversation.

[Speaker:JASON M. LEMKIN] What about the very delicate balancing act, and recognizing you have a bit of a bias in this answer, but let's try to stick to the advice column here, of let's say I have a relationship— I'll make it a different company. Let's say I have a relationship with Adobe, and that's going very well. Like anything in life, if I have a market, I feel like I'm more likely to get a fair exit price. If I discuss with Adobe and they say, "Yes, we're gonna go through a process, please don't talk to anyone else." I'll give you an example. IBM said this to one of my companies. IBM said, "We will give you a fair process and a fair price. If you talk to anyone else, we're out." And I didn't really believe them, but—

That's why we have our notice right. That's exactly why we have our notice right.

But people play like a strong-arm kind of like—

Yeah.

But how do you feel about that? Like, should I, as an entrepreneur, talk to 2 or 3 people? Should I talk to 7 people? Am I running the risk of offending you guys if I talk to your competition?

I, I think you want to talk to the place that's going to be the best home for you and your employees and focus on that. And, uh, and the process will, will go as it, as it may. You may have a board member that will force you to talk to someone else, but at the end of the day, uh, be the person that's controlling the process and where you want your company to end up. And find the best home for your company. That's always the right thing to do, rather than maximizing price and placing your employees in a location where they may not be happy.

[Speaker:JASON M. LEMKIN] So you would say, look, in a perfect world, if you're working with Salesforce, don't talk to Oracle, and SAP, and Microsoft. But if you're doing it graciously, it's not disqualifying for us. Is that a fair way of putting it? Like if someone's rubbing your nose in it, it's gonna put a bad taste in your mouth, and then you start thinking, shit, I gotta work with this person, maybe I'm not gonna enjoy that, right? Like some amount of acquisition is like liking and respecting the people, isn't it?

[Speaker:JASON M. LEMKIN] Absolutely, because you're gonna have to work with them. And so, you know, you have to handle the process very carefully. That's why, you know, again, there's some, if you feel like you need to hire a bank, to help you, hire one that will be helpful in the process and won't piss off the company that you really want to buy your company. So it's a, it's, it's a very delicate process that you go through. But in the end, if you just, you know, stay true to like, okay, this is the best outcome that, uh, I could achieve. This is the right place for me and my employees. And we can, we're going to a, a home that will really accelerate accelerate our business, then, you know, get the deal done.

If you were advising your brother, and you wanted him to maximize his own personal earnings, do you have a brother?

A sister.

Sister. If you were advising your sister, would you tell her hire a banker, and would you tell her to hire Frank Quattrone, and even though it's going to drive corporate development nuts, that's the best way to get the best price, or would you say, be careful, you might get a higher price, but you might piss off buyers, or like what would, What would your real advice be to your sister?

Well, I think having, having done this for so long, I've been in M&A for 20 years. I've just seen so many situations where someone is just focused on maximizing price and leaves, you know, a wake of carnage around the deal that doesn't help anyone because, you know, this is a very small industry, and you're going to run into people that you're dealing with in later careers, and you never want to try to do a deal where you're just doing everything to squeeze every last dollar out of the buyer to the point where there's just a lot of animosity that happens in the end. Uh, and, and so I, I just think you need to find the right partner. If you need a— if you need to hire a banker, hire one that is not going to squeeze out that last dollar and focus on price because that's, that actually at the end of the day is not a good deal for anyone. Because what happens is you end up in the company, you got rich in the process, you feel like you got this incredible price, but guess what? That company is going to expect a heck of a lot of, uh, of you and you're gonna have to deliver on the financial model that the corporate development team put together to justify that really high price. And if you can't deliver on that model, you know, you may not last at the company, but also the deal itself is going to be viewed as a failure internally. And you've just created a huge PR nightmare for yourself. So it just does no one any good.

In the, uh, life is very short category, uh, in case you didn't know, in 2007, my second company was acquired by Salesforce.com. And my buyer was John Samardzija. Uh, and it's been great having a working relationship with you for the last decade.

How did we treat you and your team in the process?

I think treated me very well. Like my, my biggest regret is Mark kept telling me, and we, company was fairly small in '07, and he's like, we're gonna be this big and it's gonna have this growth. I just didn't believe it. And so I thought, ah, maybe I'll try my hand as a VC. If I did the math, like I probably wasn't that smart. For not staying longer. You guys have performed incredibly.

Yeah. But you know what's cool about that?

But by the way, I just want to say real quickly, like, I think of my team, except for me, the minimum a person stayed at the company was 5 years. And by the way, my team didn't want to sell to Salesforce. Not anything against Salesforce, but they didn't actually want to work at what they perceived as a big company. They wanted to stay independent. And what I said to them is, you guys have never worked at a company that has scale. And I had. And I said, you're going to learn things that are going to be valuable in the rest of your career when you go back to being startups. Go learn about corporate politics. Go learn about how to develop things that take big processes. Go learn about how to deal with a database that has millions of customers and has to be fault tolerant. And those skills will be incredibly valuable to you. But they really enjoyed the process, and I think several of them are still there.

Yeah, we have half of the engineering team is still with us, just had their 10-year anniversary.

That's unbelievable. And they all made a lot of money, which pisses me off because I should have stayed. No, of course I'm delighted. I'm delighted for them, not for me. And I would say also, John, in the life is short category, eventually 2 of them left. Tim Barker, who's now CEO of a SaaS company based in Europe. And he got that opportunity from first having joined Salesforce, and then he ran marketing for Europe, if you remember, for you guys, and developed that skill set that allowed him to become a chief product officer and then a CEO. And then Ryan Lissac, who's had a tremendous run. He saw scale at Salesforce and did well at Salesforce, became the CTO of Maker Studios. Which we sold for $700 million, and he did very well, thank you very much. Good for him. Again, he did better than I did. You know, no one ever told me this VC thing, like when you're an entrepreneur, you get paid right away. I got to return the entire fund before I get any upside. Why didn't you tell me?

I think I tried, you know, but—

So tell me this, John, like every company works a little bit differently. In some companies, corporate development, I've noticed, is like legal or IT. It's where deals go to die. You get an overexcited product guy or salesperson or saleswoman, marketing person, and they take it to corp dev and they're like, no, that deal's never going to fly. You're paying too much, and we can buy something cheaper. and in some places, corporate development has a lot of power and actually is the place that drives deals. How do I know? How do I know when to talk to corp dev versus business and how the power structure works and how decisions get made?

So I think you always want to start off talking to the business. Like, that is, that's really the best place to go because I take my cues of what companies we're going to buy and also what we're going to invest in based on the reactions from our product teams, uh, or from our sales teams. And so we, we get their input before we really engage on a deal, uh, because every deal has to have an executive sponsor, whether we're investing or we're buying. Um, and so, uh, you want to start at the business level. You want to build those relationships, prove it out with customer, uh, customer case studies, then go to corp dev. And you, you can always, ask for introductions to corp dev from the person you're dealing with at the company, which is always better because we're all inundated with companies approaching us all the time, and we pay attention more to what our executive team is sending to us and our product team is sending to us. So it's always better.

[Speaker] I may try to wrap a bow around this, John, by saying, as someone who's been acquired by Salesforce.com, you guys were a great acquirer. My team was treated incredibly fairly. They got great roles and earned And as we've already said, stayed for a long time. As a venture capitalist now, I would work with Salesforce on any deal. I hugely appreciate both that you guys are not just helpful, but we don't get some of the corporate bullshit that I do on some other deals, which I try very hard not to do. And then finally, I just want to say thank you to Marc Benioff, to your leadership team, to you for living the social values that many people in our industry care about and taking a stand stand because that's incredibly important to hold our politicians' feet to the fire. So thank you for that too.

Yeah, thank you. It's great to be here.

That's it.

Thank you.

Thanks.