What It Really Takes to Build a $1B+ SaaS Company with nCino CPO and Salesforce Industries CEO

Provide a bit of context. So I've had the fortune of working with both of you over the last few years and seeing really the change in the vertical SaaS industry change over a number of years. We've invested in over 300 companies at Salesforce Ventures and have partnered with both of you closely. And it's been amazing to see the story up close and personal over the years. And I remember a few years ago when companies were out fundraising, vertical SaaS was not as popular as it was today. And part of that is the adage would go that, well, these are smaller tams and these are going to be lower gross margin businesses. And if you look at the chart we're showing, the gross margin in the early days can be as low as 30% and maybe getting above 50%. There's a lot of services. Are these really product companies? There's heavy services, at least 30 to 45% versus best in class that want to be less than 10%. But then when you start to grow and you start to get these customers, you see some really nice benefits. These companies can scale really efficiently. They need fewer sales as a percentage of overall employees. When you look at sales efficiency as measured by magic number, it's quite good. Retention is much better than most businesses and then the upsell opportunities are quite good. So it's not surprising that while maybe not so popular a few years ago, you've seen quite a few successful exits in this space. A few of the leading companies in the Cloud100 list, as put together by Forbes of leading enterprise software companies, are industry verticals. And just on the Salesforce platform, the three most valuable companies built on the platform were industry vertical companies including Encino, Velocity and Veeva. And so if you just look at Velocity and Encino, amazing businesses grew to over $100 million in revenue in five years. As I mentioned, acquired by Salesforce for over a billion dollars in Encino. Amazing business. Had a fantastic IPO recently, valued, depending on stock price at around $6 billion. So we wanted to hear firsthand, how did you do this? And we have again, David Schmeier of Salesforce Industries. So, David, maybe would you give us a quick background about you and what gave you the idea to start this company?

Yeah, thank you, Matt, and it's great to be here. Thanks for inviting me and welcome to all the folks from Sastry. I've been working in the front office space for 34 years. I've been doing this a long time. And when I started the worldwide market for what we now call CRM software was $50 million globally. And so I worked back out of graduate school at a small company called oracle in the 80s and I met a guy named Tom Siebel there and I went off and founded a company called Siebel Systems with him. And I met another guy named Marc Benioff who went off to found Salesforce. So I was either smart or lucky, and either answer is okay by me, but maybe a little bit of both. But I had built CRM and then I had built industry specific verticals, actually over 20 in my in my prior life. And a few of my colleagues worked with Salesforce right when the App Exchange started to found a company called VIVA Systems. And VIVA became and I think it's still the biggest company ever built on the Salesforce platform and it's the worldwide leader in life sciences CRM. And so I saw how successful VIVA was and I realized I went to my First Dreamforce in 2013 to find the next Viva. And what I found was incredible. I was amazed by how big Salesforce was in the ecosystem. I was amazed by the App Exchange. I think back then there was 2,800 companies, now there's 5,000 and 2,799 of them were horizontal software companies. And one was Viva. Actually two, I think Encino had been already started, but I didn't see Encino there. I didn't know of them then. So maybe there's a couple of vertical SaaS companies, but Viva was a big one. And it became clear to me that this was a huge opportunity. I had built verticals before, so I called up my old friends from Oracle and Siebel who founded Veeva, and I got together the next morning with the three VIVA founders. And of course it wouldn't be a great software company without a cocktail napkin. So on a cocktail napkin we drew out the strategy for what became Velocity. So that's how we got started.

Fantastic. Tricia, I'd love to get a bit more of your background for everyone and then talk about the founding story of Encino, which is certainly a little bit different than Velocity.

Sure. Matt and David, the reason you didn't know about the other industry vertical is because that stage we probably had like two customers or something like that. So we were just too small to be on your radar back then, but appreciate the chance to talk to everybod today. Matt, Encino is a little bit different in its background. We were actually built out of a bank called Live Oak bank. And Live Oak bank was founded in 2009 and they had a Need for a completely digital bank. Well, to most of you, that may not seem crazy today, you may even engage with a bank that is completely digital today. But at that time it was pretty much unheard of to have branchless institutions. And so they started looking around for the right software to help digitize their processes. And cloud was important to them for scalability and they couldn't find anything. So they started working on this concept of digital banking in the cloud. And from there, very early on, we spun out and created Encino, which is Spanish for live oak. And we created Encino. So our roots from the very beginning was were built by bankers for bankers. And from the very beginning we made the choice to build the application on the Salesforce platform. And since then we've scaled quite a bit. We have over 1100 customers across the globe. We have offices in Tokyo, Sydney, Melbourne, Toronto, Salt Lake City, and then our headquarters here at the beach in Wilmington, North Carolina. And we have over 900 employees.

Superb. So we went to the idea. So let's talk about the different phases of building a $1 billion vertical SaaS company. David was kind enough to share this framework that he uses. David, you talked a bit about the team and the founders. Can you talk about maybe a little bit broader, the initial founding team and when you were first hiring people, how did you think about hiring people who had SaaS and software experience versus people that had industry specific experience experience?

Sure. I think the team is probably the most fundamental step, maybe even more important than the idea. So I'm a big believer in Jim Collins's book Good to Great, where you want to get the right people on the bus and then figure out where you want to drive the bus to. And luckily from my prior experience, I was able to call a few of my old colleagues who were like minded. And I think that's the key is, you know, if you're starting a company, you, you know, it sounds glamorous, but it's 24 by 7 and it's a lot of work. It's exciting, it's thrilling. There's amazing highs, but there's low lows too. And you have to do everything. You have to plug in the computers, you have to set up the network, you know, you have to figure out how to pay people, you have to find office space, all that stuff. But we found a team of people who are really passionate about building software and building a company. And so I went through my Rolodex of top people that I knew from my prior networks of companies and there was kind of a founding six and ultimately 10 of us that banded together in a little low cost office to figure out how to build a bunch of industry cloud verticals. And then the key part, which I think we'll get to later, is we figured out that we had to do it with a partner. And so there was no other choice. In our mind, we were all aligned at doing it with Salesforce. And that was maybe the other most fundamental decision besides the team is the partnership with Salesforce.

Thank you. So, Tricia, similar question. When you were starting to hire and scale out the team in Wilmington, were you focused on people who had experience in financial services or software experience or a little bit of both. And how did you balance that?

Yeah, I mean, I couldn't agree more with David in Cino. It all comes down to the people and execution, right? Ideas are a dime a dozen. Lots of people have lots of them. But to make a company successful, it takes grit, it takes determination, it takes a certain attitude, it takes relentless focus on customers. And that is just a level of execution that you need to get to the kind of success that David's company and we at Encino have had. And so we've always been one to hire for attitude and aptitude more than a specific skill set. Now in an industry vertical like financial services, you absolutely have to have a deep banking experience. And the built by bankers for bankers has been a part of our core DNA. So we absolutely have hired lots of folks with a banking background. But the problem you get if you only focus on, on folks with a banking background is the faster horses problem. And what I mean by faster horses is they know how to automate the processes that already exist at a, at a bank. But that's not really going to disrupt an industry. That's not really going to get people to get off of their current systems and processes. And so it's not about faster horses. It was about inventing a car. Right. And so how do you get people who are innovative who, who can think outside the box? It does require certainly people with technical background. For us, that didn't necessarily mean Salesforce. We've tended to hire just the best attitude and aptitude full stack developers we can find. And Salesforce has such a plethora of trailheads and training that that's not really an issue. And so it has been a combo, I would say of three types of people. The best technical talent we could find with the best attitude, certainly people with deep domain experience, which is needed, SaaS and then those out of the box thinkers, those Inventors, those creative folks who can really cause you to think about things in a different way.

I can attest to the commitment to hire for aptitude versus specific skills. I don't know if you recall, but we were at dinner one time and there was a waiter that she just blew us away. We were really impressed with her and she ended up becoming one of your. I kept saying you need to hire her and you ended up. She became one of your customer success managers, if I recall. So full testament to you never know where great talent is going to come from.

That's right.

Let's move on to the initial product. David, can you talk about the initial product that you took to market and maybe to provide some framework? I generally think of industry vertical solutions of having to be sort of full stack and a bit broader than a horizontal app. There's generally a higher build up front. Can you talk about the first product and how did you know it was done or at least ready to take to market in the first place?

Sure, yeah. I'm a product person by training. And so we had had a lot of experience building SaaS and vertical products. The key for us was we were building not one industry cloud, but four. And then at velocity we later added two more and expanded to six. So the secret of building one vertical SaaS product is going deep. The secret to building more than one is reusing components so that you don't have six engines that do the same thing, that you reuse that engine and you get to use what we call metadata to kind of reimagine it for each one of these industries. And luckily we had had experience doing that. So I couldn't agree more with what Tricia said. If you do industries, you got to have domain experts. So I had originally four domain experts, now six, leading each one of our industry teams. And then we also hired full stack developers. So like you said, Tricia, not Salesforce experts, but just great developers. And they all learned Salesforce. We immediately standardized on Salesforce and did the full training course. I think it was a pre trailhead, but did whatever the training was back then. I can't even remember what it's called now. And we were amazed how fast we were able to build on top of the platform. So my prior life, I had built the platform and the core apps and the industry apps. But to build the platform can actually be several years of work and cost hundreds of millions of dollars depending on how you do it. And so we got incredible leverage. Incredible. It's kind of hard to overstate this. From the Salesforce platform. And so we actually created our company In March of 2014, and at Dreamforce, we showed the four vertical apps, which is about six months later, and they were kind of beta releases, and then we shipped them soon after Dreamforce. So maybe in seven or eight months we were able to ship four industry clouds and then we were off to the races. But the key, again, in industry specific SaaS is understanding the business processes, understanding the critical problems and the issues, and really kind of going deep in each one of these industries.

Now, I want to pick up on that in a second with you, Tricia, but David, I guess when you were building this out and you had such a big vision, can you talk about the fundraising? Did you need to raise more money to build such a big product platform? And were there specific VCs that you sought out or that were going to be more attracted to this solution? How did you manage that?

Sure, yeah. I think on the fundraising, maybe my. Our experience was a little unique, which was we knew a lot of people in the industry. So because we wanted to partner with Salesforce, our first call was with Salesforce and John Samorgai and Mark Benioff wanted to immediately invest in our company, which was great. If you're going to build a company with Salesforce, who better to invest in Salesforce? And so I think if that's the question, the answer to that should be yes. Salesforce became our lead investor and then in our second round, there was room for a second investor. And so we went with Sutter Hill Ventures, was a VC partner of ours, and I had known a bunch of the partners there. It's a great tier one firm on Sand Hill Road, but I think what they're looking at when they're trying to fund you is this Wheel of. Is there a great idea? Is there a strong team that's done it before? What is the product? What will the product be? Or where is the product? Do you have customers? And then how repeatable is the model? And so because we had done this before, we were able to very quickly do the fundraising. So we literally had like two meetings with each one of the investors and we're able to close on the financing. So I don't think that's normal. I wouldn't expect that to be the typical process, but it was pretty straightforward for us.

Tricia, maybe back to the product and building the platform. How do you balance building? How do you compare this? Building a more vertical industry solution versus a horizontal application? And how challenging is that initial build?

Yeah, I mean, Certainly when you're in a vertical build, the depth you have to go to for customer success is deep, right? There has to be value that you're delivering beyond a surface level set of features. It's got to solve end to end problems at a financial institution or whatever your vertical may be. It may be that they're on spreadsheets or word documents or things of that nature. And so maybe your barrier to entry and those type of processes can be a little bit lighter. But if you're doing a rip and replace of a legacy solution that requires an end to end set of features that really solve that end to end business problem and that typically means deep integrations, right? Most of these vertical industries that we're talking about, you're not the only shop in town, right? It's an ecosystem of applications. And so having a very strong approach to integrations, whether it's one like Salesforce took with having your own app exchange type concept and ecosystem, or whether you're building direct productized integrations or a combination of both, that takes quite a bit of time, not just to solve your end to end set of workflows and feature sets, but to get those integrations right for customer success. So I do think that takes time. But I completely agree with David. Building on top of Salesforce dramatically decreased our time to market. From my background, I've been building banking software for my entire 20 plus year career. It's really the only thing I've ever done, pretty much. And so for me, this was the first time I've worked for a product company built on top of Salesforce. And it was a tremendous difference for me to come in. I'm certainly a learning curve of different ways of doing things that take some getting used to, but the benefit that we received from it from a company perspective was tremendous. And it wasn't just in the early days to get that product out quicker. Think about the scalability as you go global. I talked about our offices in all these different countries across the world. Data centers. Have you thought about data centers in Japan? Have you thought about data centers in Australia? These are not simple things to solve. And then you layer on top of that platform features like multi currency, multi language. You layer on top of that things like entitlements and security and investment in security. And so that certainly did impact our ability to get to market, even with the kind of complexity and depth that our product and our vertical requires.

And you hit on something pretty interesting there. Tricia, when you said you're talking about ripping out incumbent players Even if it's a bad solution, as long as people aren't miserable, they're not going to rip those out. If it's part of your banking platform, what was the core value proposition or the thing that you focused on most that was the most convincing thing or that really was compelling for banks, particularly the larger banks, to move off of their incumbent solution to you?

Yeah, I mean for us it has changed over the years and it has changed as we've launched new solutions. Right. When we first started we primarily focused in the commercial lending space and since then we've launched retail banking solutions as well. And retail banking solutions tend to be more fully banked than the commercial lending space was when we first started, which, which was a lot of spreadsheets and word documents in the early days. Changed a little bit now, but, but primarily that's still true. So. So I think, you know, but from the beginning we've had core value that we've been able to deliver to our customers. Right, faster. Like as a customer, what do you care about when you're applying for a loan? Am I approved? When do I get my money? Right, Whether you're a business or you're a consumer. And so how do you help banks do that quicker? How do you help them do that at scalability? And how do you as a software company do that for the smallest community and regional institution in the US to the largest, most sophisticated global institutions in the world on one code base? Right. So cloud definite differentiator. Right? Because if you look at these financial institutions, they have growth aspirations, right? They get acquired, they acquire other institutions. So having immediate scalability of the cloud definite differentiator and then having a set of features and solutions that drive value of regulatory compliance, supporting their growth strategies, doing it in a cost efficient way are really our core values in how we think about building software and why I think so many customers have jumped on the nc no product and maybe.

A follow on to that. When you're building an industry vertical solution, how do you avoid a lot of the customization work? Is that a challenge? From company to company you have presumably a somewhat smaller tam. And if a large bank is coming knocking and they want something, how do you balance that and making something that's reusable without too much customization and services?

Relentless focus. Relentless focus. It is very easy in vertical and these kind of depth of applications and I know David's been faced with this, I'm sure many times to get off course from the industry product that you're building and say yes to A customer. But if you have those creative people that I talked about earlier, you can figure out how to solve a customer problem, but do it in an industry way. And I think, yes, that requires the customer to be able to apply configurations on top of your product to meet their needs. And it requires some ingenuity in how you code and create a product. But it certainly can be done. And I think coming back to the Salesforce platform, Salesforce has done this phenomenally as a platform and so you can learn from what they've done and take advantage of a lot of their configurations to handle that in a similar way that they have.

Got it.

David, I asked the same question for you. I'm sure that's something you're going across multiple industries. I mean, generally, how do you, how do you balance, how do you make the decision whether to start building something for one customer that's not already on the on the product roadmap or that's not currently part of the product?

Sure. Relentless focus is a great phrase to use. So I agree with Tricia. And the other thing we do is we look at, you know, what's in our three year or five year roadmap for each one of these verticals and if we're going to build it, then it's a matter of sequencing it. We would never entertain building custom software. I mean, custom software companies, there's a lot of them, they're not worth very much. So you're not going to. If the theme is to try to build a billion plus SaaS company, you're not going to do it if you build one off custom pieces of capability. But if you're going to accelerate core capabilities to the product and you're going to move around the roadmap in a way that's not detrimental to your overall strategy, I think that can opportunistically help you because it locks in a strategic partnership with the big customer. It's just got to be big enough to warrant moving around the roadmap. So I think of it as we'll definitely accelerate things, but if it's something that's company specific, we won't do it.

Got it. And as you talk about making your initial customers, David, back to your initial customers successful, can you talk share maybe generally why services tend to be higher in industry vertical solutions and the journey you went on to push more of that out to partners. Sure.

I mean, when you're doing an industry specific solution or industry specific transformation, it's deep, it's sophisticated and you're optimizing the business processes of a company. And so as a new company like Encino was in the early days, we didn't have a big network of SI partners that were trained and certified. Because the software is so new, the only people who really know it are the people in your company. So in the first year or two, our view was as long as the customer is paying for this, whether it's licenses or services, we're just all in on making them successful. So, you know, the hardest customer to sell is your first one. The second hardest one to sell is your second one, and then it kind of goes from there. But I'm a big believer that you got to make the first four or five have to be 100% successful and they have to be references to scale your business. So you can't take a customer on and not make them successful. So failure is not an option. So it really takes everybody in the company to be all in and then that that focus, because the product might be a version one or version two.