From Product Market Fit to Scale - Perspectives from Founder & Investor

CEO monica ennad. Hi guys.

Hello. Thanks for sticking with us this afternoon.

I know, I know that we are what is between you guys and parties and happy hour. So we'll try our best to make this interesting and educational. I'm Renee Stewart and I'm a partner at Vista and I co head the Endeavor Fund. And with me today is Monica enan, founder and CEO of ZApproved. And we're here to share with you guys some perspectives on the journey that a company goes through from a fundraising standpoint as well as some of the operational challenges as a company hits product market fit to all the way scaling the business. A little bit about myself. I've been a software investor for pretty much my entire career and I grew up in the heart of Silicon Valley and so I've seen kind of the ups and downs and ebbs and flows of what this great, what this great town has to offer over the last few decades on Vista. We are the largest, most prolific software enterprise software investor in the world with over $45 billion of cumulative capital raised. And most people know us for some of our largest deals like the marketos and the mind bodies of the world, but we actually invest all the way down to the growth stage. So I co head Vista's growth fund which is a $500 million fund that partners with founders and CEOs who are running 5 to 20 million ARR businesses. And we provide the capital, the support, the tools, the knowledge to really help them grow to 50 to $100 million in a sustainable and predictable way. So with that, I'll let Monica introduce herself and share a little bit about Z Approved.

Thank you so much Renee. I'm so happy to be here. My name is Monica Enan and I'm the founder and CEO of ZApproved. Z Approved works with corporate legal departments. We help them respond to litigation. In addition to being the CEO and founder of Z Approved, I have a few other activities. I'm really lucky to be part of a high growth startup on the board of auth0. It's an identity as a service company actually in Bellevue and I serve my local community in Portland, Oregon by being the chair of the board of the Technology association of Oregon.

So Monica, you know, you have obviously taken a company from figuring out product market fit to now a company of scale. Can you walk us through a little bit of the fundraising journey from literally the first dollar that you raised to your most recent round?

Yeah, we founded the company in 2008 which many of you who are around then know. It was A pretty difficult time to start a company. In some ways I think it made us a stronger company. But the fundraising in 2008, 2009 was pretty difficult. So we decided to pick one thing, have it be non discretionary spend. And litigation is typically a counter recessionary, a counter recessionary phenomenon. In that recession, it actually did go down, but we decided to be the best at one thing in that litigation space. And we were able to raise angel funds in 2009. We raised a million dollars in 2009 and used that to get some early traction with customers. Kind of based on the first, say 15, 20 customers. Were able to raise another angel round in 2010,000. That one was actually the first angel round was tough, hard. I must have gotten rejected maybe 50 times, 100 times for every one small check that I got. Took a long time based on the success we had with the early traction in 2010, raised a million and a half, kind of more of a super angel round. Got more expertise around the table, was able to get the founder of Battery Ventures, one of the first initial partners at Sequoia, also Steve Singh, who at the Time was the CEO of Concur great SaaS company, he's the CEO of Docker now, was also one of the sort of super angels, did larger chunks in that second round. And then frankly we, based on that, we started, we hit cash flow break even and we started growing organically and getting great traction with our customers and kind of cruised for a while, just growing organically in 2014 based on, you know, we were sitting at a trade show actually in New York that we go to every year and sitting with all of our customers back to back in meetings and realizing that something had changed in the environment we were serving the legal teams who were frankly, their late adopters, they were late to the cloud, late to software as a service, but they were starting to say, hey, we have cloud initiatives and we need to get more of our, we need to go with where the rest of the corporation is. And so based on that sitting with kind of couple hundred corporate customers, really high retention rates, good growth in our revenue, we decided to raise our first institutional round in 2014 and expand our product line from 2014 to 2017. We actually spent time just getting traction, building out that product line and getting traction on the expanded product line. And then in 2017, actually partnered with Vista Equity Partners based on the success to really kind of say, okay, we've really hit, we have a larger market, we have a larger product offering to give to our customers.

Let's scale this thing these days there are just a plethora of options, financing options. There's angel seed, there's venture, there's even venture debt, there's growth equity, there's private equity. There's so many options. How. And you've kind of raised capital from a lot of those different choices. What was that journey like and how did it differ from say the venture to the private equity realm?

Yeah, I've been lucky to be part of some great companies that have done, you know, venture, you know at Auth0 we have Bessemer, Trinity, Maritech, Sapphire. I was part of a company before Z approved, had Bessemer, Redpoint, so top tier venture capitalists that I really enjoyed working with and I had great respect for. But when it came to Zaprud, you know, I think it really depends on your business and your aspirations for the business. I started to realize, I think maybe because we started in a recession and every, I mean look, every founder knows that every first 20 customers are hard fought hard got lots of blood, sweat and tears to get those 20 customers. But when as the company grew and so many early customers had taken a risk on us, I kind of decided that I was not interested in a lower probability, higher return. I was interested in high probability of return and high probability of success. I personally am at a stage in my career where I'm not going to do 10 more startups and even then I don't have a portfolio of entities that I'm working on. I have just this one and I really needed it to be successful and that's why working with Vista, working with our other K1 was our institutional partner, really was a good fit for us because of our market and because of how it grows and because of the probability of success.

Yeah. And I think, you know, one of the things that, you know, we, we see and a lot of founders approach me and ask how do I figure out what type of investor to take on. Yeah, I think some of that has to do with just your peer size. So usually the rule of thumb and this is general category, you know, I'm obviously being generic here but usually kind of when you get to that first million of ARR, you're just raising angel and seed round. Once you cross that million dollar threshold, that's where VC is really an option. And then it's when you hit five I found, I don't know if you saw this to be the case, but when you hit five, that's when your options really open up. You can continue to raise more vc, you can raise growth equity and then private equity like ourselves would be interested. And when you get to that stage and you're trying to figure out, you know, what do I do, you know, what are those options should I pursue? I think it really comes down to two big things. The first is the fundamental characteristics of your business. So if you are at 5 million of ARR and you are doubling, tripling, quadrupling in growth, I would argue that VC is probably your best path in terms of being able to provide you the capital and support that's well aligned with your goals. However, if you're growing respectably, but you're growing less than 100%, you're growing 50, 60, 70%, chances are growth equity and private equity is probably a better option. A lot of VCs won't even consider a business that's sub 100 million or sorry, sub 100% in growth. You know, I think private equity is a better suited fit for that type of growth. The other thing to think about is really your risk tolerance profile as well as what your ultimate goals are. So if you want to become the next Facebook box slack and you have those aspirations and you have a high appetite for risk, then venture is really the best path to support you to get to those aspirations. However, if those aren't your aspirations and you just, you've built a great business, you want to build a great sustainable business where you don't want to have to worry about running out of cash, you don't want to worry about, you know, having to fundraise every 12 to 18 months. Then I think it's, you know, good to consider the private equity model because that business model seems to be a better, you know, better suited for the outcomes that you're trying to drive. Would you?

Yeah, and I think for me it was kind of a soul searching journey because there is this allure of the home run and you know, go big or go home. And I think after a little bit of experience with that and sort of all of the sacrifices that early employees, early customers make, you know, for me it was, I looked at the Midas list and you say, okay, when you look at kind of the top venture funds, it's really one or two companies that return the fund. And that's when it was like, okay, if you can be that one or two, that's great. But if you're really focused on absolutely succeeding and sustainable growth at a more reasonable pace to ensure absolute success for all those early stakeholders, then I think the model works really well.

Yeah, I Think one of the other key differences between venture and private equity is the stake. So in the venture world you are giving up 10 to 20% of your stake each time. In the private equity world you're giving up potentially, you know, 51, 60%, 70%. Now you're getting some liquidity, but you are, you know, giving up what is sometimes perceived as control. Monica, I know you went through that journey and that was not an easy journey for you. How did you ultimately get comfortable with kind of quote unquote giving up control?

Well, I think, you know, you've probably heard the story many times of when your colleague approached me the first time and I said, there is no way I will do a deal with Vista. I'm just not going to do that. And I kind of held to that for a little while. And then after getting to know the Vista team, getting to know the model, first of all, like, I didn't understand that Vista is the most active. Pitchbook says that Vista is the most active software investor. I didn't know 380 transactions and 0 losses. And I just don't think I understood what the model was. And I had a lot of misconceptions frankly about being spreadsheet oriented or thinking that you guys would know how to run my business better than I would, you know, kind of those things. And so after that journey of kind of learning more about Vista and learning what kind of track record Vista had and realizing for me personally, I decided, look, I want to be the best software CEO that I can possibly be. And the best run software businesses are in the Vista equity portfolio. I mean there's a track record of consistent best run software businesses and it's not just working with Vista. I love working with you guys obviously, but we also get together as CEOs all across the portfolio. Just this last weekend spent some time together as a retreat and what I learned from that network and the sharing that goes on in that network, I think because of the dynamics of the investor base, it's pretty remarkable. So it took me a while but I think I realized I'm going to look, control is kind of a fictional thing in some ways. As long as you're doing well, as long as your company's succeeding, you've got control. And control on paper is kind of, I don't know. So for me it was, I want to figure out the best way to make the company as successful as possible and decided that that was a really good option.

What are some of the things that you look for in a partner yeah.

You know, I kind of talked about my misconceptions about Vista, but I really wanted somebody who was going to be able to be in the trenches. It's hard business. And I used to think that, oh, that early stage stuff was really hard and that scaling stuff, I mean, come on, lots of people do it. It's got to be easy. The truth is it's hard at every stage. It never actually gets easier. I wish someone would have told me that, although I probably wouldn't have listened. And I think having people that when you're in early stage, you're kind of a unique snowflake because you have your own product and you're trying to find product market fit and there's pricing and there's all kinds of competitive landscape dynamics that are unique to you as you're trying to scale. A lot of the problems that software companies hit are not unique snowflake problems. They're really common. Like, as I talked to the other CEOs, even at the Vista retreat this past weekend, we're hitting all the same problems and what they're trying to solve is the same. So I think I look for a partner with track record and some expertise and some willingness to roll up. If you were wearing sleeves, I know you would roll them up with me. You have on many occasions and kind of be in the trenches and really kind of help me get through and the transparency and the, you know, I don't even think our, our board meetings don't feel like board meetings to me at all. They actually feel like working sessions, like where we actually just come in with the hardest issues and everybody sits around the table and kind of throws out, you know, and we kind of beat each other up and best idea wins and everybody's bringing their different experiences. You know, that's what I love about the partnership. Got it.

Just switching gears a little bit. Maybe talk a little bit about your business journey. What were some of the key milestones that you hit and some of the step function changes that you experienced as you were growing your business? Whether it's hitting kind of number of employees or ARR.

Yeah, I think there are a number of them. And it's funny when you stop to look back on it. Like I said, as a founder, the first 2030, you know, we're kind of an enterprise sale, larger price points. So we're 20 or so customers or, you know, me on a plane every day calling everyone in my network, trying to get whatever meeting I could. And I think realizing getting from there to repeatable, sustainable Sales process, where you have a sales team that's actually delivering and closing business without you for the most part, was definitely a big change. And then kind of in the last. The scaling is learning the levers of the business, learning the leads, learning all of the metrics around. Okay, this is how much we need to get put in to get this out. And this is the. The timeframe and kind of learning how to instrument the business was definitely a big change. You know, it changed for me from kind of looking at. Looking at the business from more of a dashboard view of those metrics than really being in the trenches. That's a big change. That was definitely. I think the other thing is the number of employees. For me, once we hit over 100 employees and I didn't interview every single one, and I didn't know everybody very intimately and couldn't sit in a room with all employees all the time. You know, fairly smaller room, you know, the communication changes, the structures that you need to have changes. Those were the big things.

Got it. What about on the people side? In software businesses, we all know people are your greatest asset.

Yeah.

And we also know that without a really strong management team and leadership team, it's hard to scale a business. What were some of the lessons that you learned? What did you get right, and what were some of the things that you underestimated along. Along the way?

Yeah, lots of things I underestimated along the way. In the early stages. You know, you need a team that really, Jack or Jill of all trades, people who can wear multiple hats, you know, really flexible, kind of master of none, sort of really, really flexible in what they can target. And I think we did that. Right. And I also think, because maybe when we started, we were really willing to listen to customers, willing to pivot, agile, willing to change, make whatever adjustments we needed to make to grow the business. And so I felt like our team was really good, low ego, collaborative, good perspectives and talents. As we scaled, I think I was slow to figure out when people were struggling and when people needed help and, you know, when we needed to make changes to create more, you know, a little more infrastructure. And the people that obviously, you know, we've all heard that the people that get you here are not the, you know, not necessarily the same skills. And for. Sometimes that can be the same person because they. They can change, but sometimes it's a different person that gets you to the next level level. And that was. That was definitely a tough part of the journey for me. Yeah.

Yeah. I think one of the other things that we've seen is just in hindsight, I think you always kind of, at least from our perspective, you always feel like you could have made a change sooner.

Oh, yeah. Well, because it's never the case that you make a change and you go, oh, you know, I could have waited six months to do that. You never do that. You wait until it's, you know, completely obvious.

Yeah. What about, you know, if we were to kind of, you know, if you. Your younger self was really sitting in the audience today, wanting to start and found a company, what advice would you give to your younger self?

Well, one thing I try to do is not look back and not really kind of live with any regrets, I guess. But, you know, I think there's this disease that entrepreneurs have or high achievers have where they're always kind of beating themselves up. And one of the things that's been happening to me recently, especially after this latest partnership and the kind of aggressive growth that we're targeting and realizing that every time I come upon something that I need to change, you know, I spend about all this time kind of kicking myself for why I didn't know that before, like, why I didn't realize that person was struggling or why I didn't know I needed to make. Make that change with our sales model or with our pricing or with our product. And now I've kind of realized, instead of kicking myself for all the things I wish I had known earlier, instead I'm going to view it as, hey, that's a really good month, quarter year. Because if I feel like that, then I've obviously learned a lot and grown a lot over that period of time. And, you know, that's all you can do to make your company better. So my advice to earlier stage founders would be just don't kick yourself so much. You know, we're all like, it's all a journey and you have to just kind of keep going, keep looking forward, and keep being kind of grateful for what you become and what you learn along the journey. Yep, Got it. I was kind of curious, in working with founders, what have you seen as the common mistakes?

I think the team one is a common one that we see is just recognizing that there are different leaders that can help you grow the business at different stages. But the other one that I've seen is really just around being vigilant, around having visibility on the metrics of your business. And the key, the KPIs, essentially. And I feel like it's never too early to figure out the right metrics to track for your business. Because ultimately the financial results are always lagging indicators. They are never the leading indicators. And instead, you know, every business is a little bit different. There's probably overlap, but really taking the time to figure out what are the leading indicators, whether that's leads, whether that's your pipeline build, whether that is adoption, whether that's overall engagement, those are gonna really be the trails in the sand to help you figure out is my business going and headed the right direction. And you can never do that early enough.

That's definitely something I've learned from you guys. I think maybe because we started in 2008 and we were kind of capital efficient and just trying to survive until the next day, we didn't lay a lot of that infrastructure, especially around the finance and HR functions. Operationally, we were really focused on sales and product and marketing and not that kind of underlying infrastructure. And I, you know, I think I've learned the hard way that I waited too long for that. Yeah.

When you were raising, say, your first institutional capital, what kind of metrics and what characteristics did you feel like investors dug into?

It was kind of a funny experience because in 2008, based on trying to raise angel capital and it being so difficult and thinking, gosh, no one will ever really invest, I kind of had this mindset. And then fast forward five years and we've got hundreds of logos. The logos are some of the biggest companies in the world. We've got, you know, legal. Like I said, they're late adopters, not quick technology changers. So we actually have a really low churn rate. We have a high retention rate and then growing pretty significantly and a bigger opportunity with a segment of the business that hadn't been disrupt segment of the corporation that really hadn't gone through the same disruption that others had. I felt like the belle of the ball when I went out for institutional funding. I was like, God, I'm like the prettiest girl here. Everybody wants to, you know. And it was really, you know, what I realized was, why was that like, it was all about kind of our. For us, it was all about churn. We have a really low churn, and then we have negative revenue churn. Net net churn or net negative revenue churn. So we're able to grow our customers in the revenue side more than we lose them. So that I think really changed the dynamics of the conversations that I was able to have with institutional. I know when you guys are looking at companies, what are the main kind of think characteristics of that you're Looking for?

Yeah, because we are fundamentally a private equity business, we don't have the luxury of relying on that one or two successful investment that returns multiples of the fund. Instead, every one of our investments needs to be successful. I mean, we bat a thousand, and if we want to keep batting a thousand, that means we have to inherently invest in highly predictable businesses. And so for us, what highly predictable means is, I'd say, some quantitative things. It's recurring revenue. And for us, best in class of recurring revenue is greater than 90%. And you guys were north of that. The second metric that I focus on is churn. So it's really gross retention rates. And I consider best in class enterprise SaaS gross retention rates to be greater than 95%. You guys were greater than 95%. And then the last metric really is around unit economics. I know a lot of people out there look at LTV cap ratios. That is an industry standard. Great metric to look at. I think it's easy to play funny math sometimes with some of those numbers. And so I like to keep it simple. I focus on gross margins, industry standard and best in class. Gross margins are over 80% fully fully loaded. And when you have greater than 80% gross margins, that it really allows you to create operating leverage as you scale larger and larger. And you guys were close to 90% gross margin. So those are kind of the three quantitative metrics that I focus on. Qualitatively, there's kind of two core ones. The first is really product superiority. At this stage, you guys are disruptors. You're not the incumbents. And the only way you can disrupt or create a new category is to have product superiority. And then the second just comes down to team and the leader. Ultimately, we like to partner and work with CEOs who are intellectually curious and who are life learners. So they kind of check their ego at the door and they're here to learn and grow alongside us. And then the other piece is really people who can lead through change. As a growth business, you are going to go through so much change. Good change, bad change, all of that change. And it's going to be very difficult to scale if you can't kind of lead a team and lead your entire company through the ups and downs of change.

And you know, I think there is a kind of a misconception. You actually work with quite a few founders, don't you? I know that many people ask me, when we did the Vista transaction, I got asked all the time, like, you're not still with the business, are you you're not still operational. And I was like, heck yeah. Like this journey is just beginning. What are you talking about? This is kind of the best is yet to come for its approved. And I have, you know, I want to be along for. I want to be on this journey as long as I can and as long as I'm serving the company. Is that what you find in most of your companies?

Yeah, I would say we're here to back founders. We want to back passionate founders and we want to provide them the support system, the tools. You know, a lot of the founders we're working with are first time CEOs, and for first time CEOs, this is the first time they've been in that journey. And so my advice for first time CEOs is really take advantage of your network. Don't be afraid to ask lots of questions, ask your peers, find advisors, and then ultimately find a partner, whether that's a VC partner, growth equity partner, or private equity partner that can really support you in that growth.

All right, it looks like DJ Lally is about to start the music.

I think it's time for you guys to party. Thank you so much for joining us.

Thank you.