This latest episode of my podcast with Ryan Denehy goes inside all the crucible moments building and selling his first two startups, plus inside how he’s building Electric today.
We talk through the lessons learned from founding to exit of his first two startups, the early days of getting Electric off the ground, and Ryan’s frameworks for fundraising, recruiting, and sales. This includes my biggest takeaway: "everything is a pipeline problem".
Timestamps to jump in
3:05 Building an ad network for extreme sports websites
11:07 Why a better pipeline solves all problems
13:24 Ryan’s trick for hiring executives
17:00 Selling the ad network to USA Today
18:11 Moving to SF to start a software company
21:33 Getting rid of his car to extend runway
24:23 Paying rent with credit cards
29:17 Struggling to raise a Series A
31:55 Using channel sales to grow the business
37:05 Almost running out of money before selling to Groupon
43:37 How cloud created the perfect timing to build Electric
48:33 Leveraging software and AI to automate manual human tasks
51:45 Why you should avoid buzzwords in marketing
53:57 Pros and cons of being a solo founder
56:14 Why Electric built a large initial board
1:02:41 Advice for picking lead investors
1:06:35 How VC fund dynamics have inflated Seed rounds
1:09:15 The downsides of high valuations
1:12:45 Almost wiring back the Seed round
1:16:37 Why every fundraise is a pipeline problem
1:21:04 The reasons VCs actually pass on founders
1:26:42 Inside the decision to cut Electric's burn rate in 2022
Referenced:
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Transcript
Find transcripts of all prior episodes here.
Turner Novak:
Ryan, how's it going? Welcome to the show.
Ryan Denehy:
Thanks for having me. It's great to be here
Turner Novak:
I'm excited to have you. I think you're the first guest that has started three companies, sold two companies, a lot of stuff that you've picked up on over the years.
We'll start off with a listener question from Jeff Richards on your board.
Ryan Denehy:
Nice.
Turner Novak:
Notable Capital.
Ryan Denehy:
Formerly GGV, now Notable.
Turner Novak:
What’s just been the biggest lesson that you've learned founding multiple companies?
Ryan Denehy:
Probably start on the personal side, managing your own psychology is one of the hardest things, but also one of the most important things to get right.
I think what I realized, probably midway through my second company, was that I am my own worst enemy. And that most of the pain and suffering that is involved in the startup is largely of my own creation. And that's not true just for me, but for most founders.
Turner Novak:
What does that mean?
Ryan Denehy:
So most problems are generally going to be related to running out of money, not growing fast enough, not hiring the right people. You're in control of all of those things.
And so I spent a huge amount of time and a lot of sleepless nights in my first two companies worrying about a whole bunch of things I had no control over, and frankly, not spending enough time on the things that I did have control over.
And at the end of the day, if you zoom out, when you're a seed-stage company, every customer win, every customer loss feels like this monumental thing. And you have to treat it that way.
At the same time, in the grand scheme of things, you do have to regularly zoom out and go like, okay, there's good days, there's bad days. But on the whole, if we're putting the right work in and putting the quarters into the machine, figuratively, on a consistent enough basis, good things are going to come out the other side.
Turner Novak:
What's an example of that? Just when you were at seed stage, huge win or huge loss that you were able to get through?
Ryan Denehy:
So my first company was an online ad network. But it was not originally an online ad network. It was a destination website for people to buy extreme sports videos.
Turner Novak:
Wait, extreme sports videos?
Ryan Denehy:
Yeah.
Turner Novak:
They were buying the videos?
Ryan Denehy:
Well, we wanted them to buy the videos. They did not ultimately buy the videos.
Turner Novak:
Wait, so what's the story with that website? What year was this? Is this like early 2000s?
Ryan Denehy:
Yeah, 2006-2007, I was making extreme sports DVDs in high school. I was making mountain biking videos, and then I linked up with a guy named Rudd Davis.
He and I ultimately started multiple companies together, we're still involved in each other's businesses today. But he had an idea, this was before YouTube, that you can sell videos on the internet.
Turner Novak:
Just like, cool mountain biking videos?
Ryan Denehy:
Yeah. And there were a lot of people producing these videos, but they were exclusively released on DVD.
Turner Novak:
So could you make them available on the internet, pay to download?
Ryan Denehy:
Great idea and concept, except for the fact that most people did not have a broadband internet connection back then.
Turner Novak:
So it would take you like a day to download them?
Ryan Denehy:
Yeah. And most people, you still had a computer room. You didn't have a phone, or a... Not only was it a solved problem, going to the local ski shop and buying this ski movie on DVD, but actually the solution that we were proposing was infinitely worse than the status quo.
Turner Novak:
That's bad combination.
Ryan Denehy:
Well, it seems obvious in hindsight. But just because you're technologically able to do something and on paper it's technically better, doesn't actually mean that it's going to be better for the consumer, or better as a business.
Also back then, pre-AWS, we needed our own data center. So there was a pretty big, pretty big build involved.
Turner Novak:
So why did you do this if it kind of… didn't make sense? Did it make sense at the time?
Ryan Denehy:
Hey, hindsight's 20/20, right? You know what I mean?
Again, at the time we're young people and we're going like, okay, the world is rapidly getting connected to high speed internet. People are spending more and more time on the internet, and how great would it be if anywhere you are in the world, you have access to the largest library of extreme sports DVDs, if you were guys like us who were really into that sort of thing at the time. Made sense, we had some investors who believed in it. Again, in practice, people universally were disinterested in the idea.
Turner Novak:
And then somehow it became an ad network?
Ryan Denehy:
Well, yeah. I mean, we had two kind of like "Oh, shit" moments.
The first was a guy that had worked for us had gone to Russia to hire an engineering team, and then we found out after we didn't ship the website on time. It didn't really work the way that we wanted to.
And we found out that when he'd gone to Russia, he'd pretty much just partied. And he stopped by and I think spent maybe a grand total of a half hour with the engineers. They thought he had abandoned the project.
Meanwhile, he was staying up all night in the office, allegedly, we had no idea what he was doing. So all that went away, kind of had to start over.
Then we actually launched the website. With months, and months, and months of trying to get people to care about it. It was just like, okay, obviously consumers have voiced their opinion, and this is not the way they want to consume this content.
So we had probably, I don't know, six months of cash left. And yeah, Rudd calls me to his office and he is like, "It's time to burn the ships. This is a road to nowhere." And he's like, "But there are hundreds if not thousands of extreme sports websites that have all this great content and have a big audience, but none of them are big enough to go have a credible conversation with a national advertiser."
He's like, "We've already built content distribution technology, we've built ad-serving technology. We're already talking to advertisers, and they're basically just telling us, 'Bring us an audience and we'll spend money with you.'"
And so he said, "Look, let's divide and conquer. I'm going to spend the next three months flying and meeting with every ad agency. You're going to go to every extreme sports trade show and get every extreme sports website that you can to join our ad network. I will pitch the network to the advertisers while you go build it. And in a few months we should have a bunch of revenue."
Turner Novak:
And how did it go?
Ryan Denehy:
In a few months we had a bunch of revenue.
Turner Novak:
So how do you convince people to sign up? It didn't exist yet…
Ryan Denehy:
And there lies to catch 22 of starting a business. I think people want to believe that you can take a bunch of pragmatic steps and "do all the right things."
The reality is, when you're forcing something into existence, you have to do a bunch of highly unnatural things. A business, in many cases, will never get off the ground if you don't figure out how to build the engine in flight.
So in our case, what we were pitching to the ad agencies was a network of sites that we were intending to build, but did not totally exist yet. And what we were pitching to the websites was a roster of advertisers that we were actively pitching and actively engaging, but did not yet have any signed deals.
And I see this all the time with startups. And I’m not saying that this is the only way to go get a company off the ground from scratch. Had we waited to get all the websites signed up before pitching the advertisers, we would've run out of money. Had we waited to get all the websites signed up before doing the other way around, we would've run out of money.
And so I think business startups at the inception stage, these decisions are life and death in a lot of ways for the company. You have to figure out, how do I compress what would normally take a year, two years, if at all, to do it "right"? How can I compress that down into six weeks, two months, three months, right?
Turner Novak:
Yeah. That's your only advantage over whatever other business is trying to do.
Ryan Denehy:
It's physically not possible. And this is why most companies die. Not because they don't have a product, but because they didn't get any traction. And it's often because you can't solve the catch 22 of, I'm trying to sell the thing, but I can't until it's built, but I can't get the money to build it until I have the traction, and so on and so forth.
And so I think that was probably one of the biggest lessons I learned working with Rudd in our first company. He really opened my eyes to this idea of, you can thread the needle, you just have to sort of be thoughtfully aggressive in how you go do that, right? You’ve got to make sure that the things that you're pitching on either side of that equation are things that you are actually going to do and intending to do.
Turner Novak:
Is it almost like a pipeline conversion rate? Let's say you're talking to 1,000 advertisers and you think you get 10% of them. So you tell the websites, we have this pool, we think we'll have 100 advertisers potentially. How do you-
Ryan Denehy:
Yeah, all day. Again, I mean weren't going out there claiming to have relationships with people that we didn't have. At the same time, it was pretty easy to sort of pull up the agenda and go, listen, in the next three weeks we're meeting with Gatorade, Mountain Dew, Toyota, blah, blah, blah, right?
Turner Novak:
These are extreme sports advertisers.
Ryan Denehy:
These are major national advertisers, and we go, "In the last two years have you met with any of them?" And the people that run these websites will be like, "No." They're like, so listen, we can't pay you an upfront guarantee on revenue we don't have yet, but what we can tell you is we're at meeting with all of them, and your highest likelihood of landing a national advertiser is with us. And that pitch worked for some, not for all, but it was an essential part of getting things going.
But to your point about a pipeline, that's probably one of my other biggest learnings, having started three companies, is that a large pipeline for anything solves a myriad of problems. I mean, the easiest way to be less stressed when running a company in any situation, whether you're fundraising, whether you're trying to ignite growth, whether you're trying to land a big hire, is build a bigger pipeline. Be relentlessly building a bigger pipeline.
Every single fundraise across three companies that I've had where we almost didn't get it done, where in the end you only got one term sheet and it came in at the 11th hour. When I look back on all those situations, I think to myself, oh my God, if I had half the number of investors in that pipeline, the company would've been done. Or when I think about, every time we've landed a really big hire, hey, if my pipeline of candidates was half the size, it was a really good shot. The first time we landed wasn't going to be in there.
Turner Novak:
So I've heard people say that, it's almost like a meme like, "It's a pipeline problem." I've heard everything is a pipeline problem. So how do you build a big pipeline, and is there a quality gauge? Like, shitty leads versus high quality leads?
Ryan Denehy:
Yeah, I mean, you’ve got to be barking up the right tree. I think that's a huge problem for early stage companies when they're talking to investors is, companies that I angel invest in, for example, oftentimes someone will send me their spreadsheet of, here's everybody we're talking to for our series A.
I'll eyeball the spreadsheet and go, "Hey, newsflash, two thirds of the investors in here are not series A investors. So they're all going to take a meeting, and they're all going to be really excited up until the point they tell you that they are for sure not investing." And I can tell you, I just went through this with a company a couple weeks ago. I'm like, "I can tell you for sure that two-thirds of the people on this list are never going to invest in your company. And they're going to act really excited because it's their job to, but these are not series A lead investors, for example.
But outside of that, one of the things that I've really learned to appreciate over the years too is that certain aspects of the job never change. There is no substitute for working your ass off, and just rolling your sleeves up.
And I think about some of the executive hires that we've made at Electric in the last couple of years, our COO, I brought him in, that was cold outbound on LinkedIn.
Turner Novak:
What did you say?
Ryan Denehy:
Oh, I made up some story about how we were building an IT industry, COO operating advisory board. We may have, we may not have, but I just wanted an excuse to be able to reach out to people who I thought were really talented operators in this space.
But again, at the end of the day, we were able to hire him simply because I was sitting in my backyard one day and kind of freaking out about how the search was going with our retained search firm, and I just said, you know what? I'm just going to go spend an hour, do the work myself, and just see what happens. And sure enough, that's what it resulted in.
Turner Novak:
It's almost like you treat it like a consulting or a part-time thing. You don't come on and say, "I want to hire you." You treat it as like a, "I'm looking to learn more about this," or, "I need help with this one thing."
Ryan Denehy:
I think, yeah, absolutely. I think if you talk to most growth stage founders, some of their best hires are people that they've developed a relationship with over many, many years. It's a little naive to think that you can go hire a retained search firm, and that the absolute best candidate is going to be somebody that you met 60 days ago who doesn't know you, and you don't know them.
It can work. I mean, for example, my CTO, who originally we hired as VP of engineering, God, almost five years ago now, that was a little bit of a shotgun marriage. My friend Nolan, who we'd hired as our retained recruiter on that one, he found him, and it was a pretty quick process, and hired him, it's worked out really well.
That being said, as your company gets bigger, and as the job gets more complex and as the cultural fit becomes really, really important, way better if you've known people for a long time, you've had your eye on someone, you've kind of both been sizing each other up. Then by the time they join, it's a much more natural fit. So yeah, it's a huge aspect.
Turner Novak:
So you’ve told me that, I think you did sell the skiing video advertising network? What happened there? Just to close out the story.
Ryan Denehy:
Well, so Rudd, my partner in the business, he was the CEO, and then had the presence of mind to fire himself and brought in... He still worked in the business, but brought in a guy named Ross Shuffleburger, who had been the GM of AOL Sports. He came in to take over as CEO, Rudd and I still working at the business. We had very little cash left. The business was clearly working.
Turner Novak:
How'd you get this guy to join if he seems, like AOL head of sports?
Ryan Denehy:
No idea. Yeah. I mean, put it this way, I was so young that when I was going to trade shows to sign up websites to join our network, I was still using a fake ID.
So yeah, Rudd and one of our investors, I think had a relationship there, and somehow convinced him to join. He joins, and then he knew some corporate develpoment people at Gannett, which was the parent company of USA Today. And so then we ended up selling the business to USA Today Sports on New Year's Day 2008, which was-
Turner Novak:
Interesting time, yeah.
Ryan Denehy:
I mean, had we raised a little bit more money and then ultimately tried to then go properly finance the business later in 2008, that obviously never would've happened. Also, the advertising market got beat up pretty good throughout the global financial crisis as well.
So the fact that we were able to find a home within a public company that was really looking at us as a cost-effective way to drive digital transformation, timing couldn't have been better. I wish we took some stock in the deal, because we would've gotten-
Turner Novak:
Has it been up quite a bit since then?
Ryan Denehy:
Well, no, I mean, if we had gotten stock in that company in the beginning of 2008 and then sold it when we left. But the deal worked out fine for everybody, so I can't complain. Yeah.
Turner Novak:
Well, so I think you mentioned before that basically every single company you've been involved in has had to pivot, almost died, had team issues, or run out of runway. What was the second one?
Ryan Denehy:
Yeah, so the second one we, Rudd and I left LA, moved to San Francisco with the goal of building our first software business. We were super naive. In the online media business, particularly back then, two guys in a garage could snap their fingers and be doing millions of dollars in revenue. You could just stand up... And there were hundreds of ad networks for that reason.
We did not realize that B2B SaaS, while in the end, can be a much better business than running an ad network, ultimately is a lot harder. And is a much different motion. There's a much bigger upfront build building software versus just signing contracts to arbitrage ads on other people's websites. Its just a different game.
Turner Novak:
Yep.
Ryan Denehy:
Yeah, we were idiots. I mean, we moved up there and we were like, "Yeah, we're going to raise a few million bucks, no problem. We're going to hire our old team members," which would've been a horrible idea, because they didn't know anything about software.
And so for about a year and a half, we were unable to raise anything other than the bare minimum amount of money. I mean, we didn't know anything about software.
So we're going around pitching these VCs, and I think it was clear to them we didn't know anything about software either. I think it was clear to most people, most investors we talked to that we didn't know anything.
Turner Novak:
What year was this? I'm trying to think of the timeline.
Ryan Denehy:
2012.
Turner Novak:
Oh, 2012. Okay. So the market was kind of recovering a little bit.
Ryan Denehy:
Yeah, it was a good time, but to give you sort of a window into what the world was like back then, the only reason we moved from LA to San Francisco is because everyone on Earth told us, "You will not be able to raise institutional capital if you're not in San Francisco, and you will not be able to hire engineers and build a product if you're not in San Francisco." Now, whether or not that advice was right or wrong, even back then, it was generally the prevailing wisdom that if you wanted your software company to be successful, the highest likelihood of making that a reality was being in the Bay Area.
So we moved up there. I don't think we adjusted our lifestyles with the thinking that we weren't going to be able to raise money or pay ourselves for a couple years.
Turner Novak:
How would you recommend approaching that as a founder?
Ryan Denehy:
I mean, just assume you're not going to be able to raise money. And assume that if you do, it's going to take a lot longer, and that you're going to pay yourself a lot less. If that ends up not being the case, great.
Turner Novak:
But you gave yourself some buffer, some leeway then?
Ryan Denehy:
We had no buffer. We were coming out of basically being the two youngest executives at a public company, flying around with corporate expense accounts, all this really good stuff. To then all of a sudden having no money for a long time, but always thinking it was about to come in.
And so I just sort of watched as I went from, "Okay, it's not that bad of a situation" to, "It's getting a little tight."
To finally, by the time we closed our series A and could start paying ourselves something, I was leasing a Volkswagen GTI, and I had to turn the lease in a year early I couldn't afford the payments anymore. I'd scraped the side of the door leaving a parking garage, and so I intentionally turned the lease in on a Sunday afternoon and just parked the car with the scraped side facing away from the dealer.
I was like, I think I probably had $1,000 in my bank account at the time and I'm like, they're going to ding me for more than $1,000 on the scrape on the door. And I literally just could not cover the payments anymore. It was like $600 a month, it was killing me.
I turned the keys in on my Volkswagen. The guy's like, "Yeah, it looks good." I sign off on it, and I just skipped down the sidewalk. I'm like, oh, okay, cool. I can kind of sot of pay rent now.
Turner Novak:
Yeah, extended your runway a couple more months without the car payment.
Ryan Denehy:
And then the worst part is, so we closed series A, it was $2 million at $9 post, and we were doing a million in ARR. And that was considered a really strong series A, not really strong, but a good series A back then. But still couldn't really afford to pay ourselves.
So we were paying ourselves enough kind of, but ultimately when I did the math, and I had two roommates, had gotten rid of my car, all that. I couldn't afford to have taxes withheld and still be able to cover my rent and food for the month for what I was taking as a founder salary on the $2 million that we had raised.
Turner Novak:
So what did you do?
Ryan Denehy:
I had the company pay me as a contractor, and then I just didn't pay taxes for two years.
Turner Novak:
And then did you obviously... true it up?
Ryan Denehy:
Yeah. I mean, that was the first thing I did when we sold. Yeah. But my view at the time was like-
Turner Novak:
You got to make the cashflow work, I guess.
Ryan Denehy:
My view at the time was like, okay, I can't pay myself more, and I can't afford to have taxes withheld and still be able to pay rent. I'm literally going to be sleeping in a car, which I don't have anymore, so that's off the table.
So I was like, I'm just not going to pay taxes for two years, which again, I do not recommend this to anybody, and either we're going to raise a much bigger round of financing or sell the company, in which case I can, on the minuscule amount of taxes I owe, can true it up and pay the penalties. Or the company goes sideways and I'm basically going to have to file for bankruptcy anyways.
Fast-forward to a year later, we tripled revenue. We had a killer new product. I'm skipping over some stuff that didn't go as well, but directionally, company was doing well. I was actually telling this story to a friend of mine over the weekend - paying rent and covering expenses was still so hard. I took out a credit card. I would take out credit cards, hook them up to my Venmo account, and then pay my roommate rent on Venmo.
Turner Novak:
You could basically pay rent with your credit card?
Ryan Denehy:
Yeah. Ultimately, in that company, it was an analytics platform for SMB retailers, so we could tell them foot traffic conversion and sales in their retail store. It was a cool little business.
But ultimately, when we sold it to Groupon, I was probably 30 or 40 grand in the hole on all the credit cards I was using to pay my rent.
Turner Novak:
Wow.
Ryan Denehy:
As a business, when we signed the term sheet to sell the company to Groupon, and it was a great deal, but when we signed that term sheet, we told them, "We're choosing not to go raise more money." The cash balance is getting pretty low.
It was a little nerve-wracking ultimately doing that deal because we were like, "By the time we get to the end of diligence, we will have no money personally or in the business." Everybody, at the time had told us that the Head of CorpDev at Groupon at the time was a guy named Jason Harinstein who went on to become the CFO of Flatiron Health. He's now helping run a company called Collector. He's just one of the best executives I've ever worked with. Everyone said, "Harinstein's a class act. If he gives you his word and you keep to your word, the deal should get done and they're not going to try to re-trade you."
Fortunately, we got the deal done. It worked out really well. Yeah, there's those moments where you're going like, "Okay, cool. Two months from now, I'm either going to have successfully sold my company to a public company and done really well, or the company's going to shut down and I'm truly going to be bankrupt."
Turner Novak:
I feel like a lot of founders have that story, though. This is a little bit less intense, but for me, when I first started Banana Capital and my fund, I didn't realize you get paid the management fees for the fund in the following quarter. I had completely used all my personal runway, and I was like, "Amazing. I'll get the amount you get every quarter. It'll hit my bank." And they're like, "No, you'll get it in three months." I was like, "I have no money."
I was the same thing with credit cards. I've done that in the past, but this was one of the big ones where it was like everything was funded with increasing credit card limits and it's nerve-wracking.
Ryan Denehy:
Even after we sold the company, what was interesting is, and I don't know, just because Groupon was public or just the way the deal was set up, the deal closed, but the first wire that I got for deal consideration was like 30 days-ish after close, and then getting set up on their payroll system you're paid two weeks in arrears.
Turner Novak:
Okay.
Ryan Denehy:
I remember going home for Thanksgiving, and my roommate at the time, this guy Casey Saran, who runs a great company called Spaceback, God bless him, I was like, "Hey, Casey, I know this is going to sound weird. I just had a great exit. Can you spot me $500 bucks?"
Turner Novak:
"I'll give you 100% interest," or something.
Ryan Denehy:
Oh, yeah, yeah.
Turner Novak:
I've also heard you say that that business, initially, the unit economics didn't work initially. What were you doing and how did you-
Ryan Denehy:
No, I mean that's the other thing, the coming of age I think that some founders have is when you have complete P&L responsibility down to the last dollar that leaves the bank account. You learn at a very accelerated rate around things like sales efficiency.
Obviously in most cases, a really efficient selling motion is not going to be hyper efficient at first. You have to get some money, you got to do the outlay and hire some people and all of that.
Turner Novak:
Yeah, the thing with SaaS is people don't realize it takes probably 18 months, maybe two years.
Ryan Denehy:
Yeah, I mean it can, depending on the sales cycle. Obviously for enterprise, it could take 18 to 24 months, SMB within about a year you should... You got to know that the thing you're investing in can turn into something really efficient.
You've got to know that based on my ACV, based on how I'm marketing and selling the product, if I put those two things together, it might not be tomorrow, but in some reasonable timeframe, using some generally accepted industry standard conversion rates, it's possible. It's entirely possible to have a profitable selling motion. We had no concept of that.
We were just like, "Oh, we're booking revenue. We're booking revenue. This is awesome." We had a $1,200 ACV product and we're hiring sales reps full time, is W2 employees in San Francisco working out of our office.
Initially when we were going out raising money, investors would look at it and be like... We had one investor tell us, he's like, "You realize the more revenue you generate, the bigger the hole is?" We're like, "What do you mean?" We literally hadn't associated at some VC firm rebuilt the financials for us. I think they just felt bad. They were like, "These guys are clueless."
Turner Novak:
Oh, no.
Ryan Denehy:
They're like, "See, so if you actually hit your revenue targets, the number of sales reps you're going to need and how long it's going to take you to get paid back, basically all of the money that you're looking to raise right now will be gone in eight months."
I remember Rudd and I got in the car, we're driving back to our office. And he was pretty quiet. And he's like, "So that sucked."
Turner Novak:
Oh, no. It was basically profitable, but the cash outlay, it's just you had to pay people salary?
Ryan Denehy:
No, it was never going to be profitable.
Turner Novak:
Oh, it wasn't profitable at all.
Ryan Denehy:
No. I mean, so which again sounds obvious, and I think founders now because of what you're able to read on Twitter, LinkedIn, Substack, whatever, there's just so many more materials available out there now, which is amazing. Podcasts and all of that. There were no podcasts in 2012, 2013.
For the most part, there was not some wealth of information you could just go read on the internet. The way you learn about unit economics is you went and built a business that had shitty economics, and you go, "Wait a second. I think I'm missing something."
Turner Novak:
How did you transition to suddenly, there was a good business and you raised that Series A?
Ryan Denehy:
I met a guy who is in sales at a company called Meraki, and this was before they had gotten acquired by Cisco. For anyone who doesn't know, Meraki makes Wi-Fi gear for businesses.
Turner Novak:
I've maybe heard of it.
Ryan Denehy:
Meraki was one of the first companies to really take Wi-Fi network infrastructure and move it all into the cloud. You didn't have to write a command line to manage a network. Really awesome company. Some of the most brilliant, brilliant founders that I ever met.
I'd met a guy who was in sales there, and their office was down the street from ours over on De Haro Street in San Francisco. I went over there and I looked at their sales floor and I looked at how they were selling, and they were like, "Yeah, we sell through the channel." I'm like-
Turner Novak:
What channel, on TV?
Ryan Denehy:
Yeah. I'm like, "What's the channel?"
Turner Novak:
The River? The English Channel?
Ryan Denehy:
Yeah. It's like a British punk band or something.
No… that's really where I got this very quick education on indirect selling, partnership selling, and it was unbelievable. It was like, "Okay, cool. You can sell your product to a partner who then sells it to many people."
In practice, indirect sales is quite a bit harder than direct sales, but depending on the product that you're selling, it can be significantly more effective and more efficient.
Faced with the fact that we had a working inside sales motion that was likely to never make us any money, that's when ultimately for that business we just said, "Hey, let's go all in on selling through partners." In the end, that was one of the things that gave us the revenue momentum and the traction to help us ultimately sell the business.
Turner Novak:
When you're thinking about direct, indirect, do I do a channel partner, is there a general process you'd go through to figure out if it's a good idea or not? If I'm listening to this and I'm like, "Holy shit, this could solve all my problems." What should I think?
Ryan Denehy:
I would say for most startups, they try to go after partnership sales too early. The vast majority of the time it never works. I think people got to keep in mind is the vast majority of the time, direct sales never works. Again, as I said earlier, most startups fail because they can't get traction regardless of channel. They are not able to successfully generate demand for the product even if they have a huge TAM.
As it relates to selling your product through partners, I would say two things are really important. One is, you generally need to learn how to sell it yourself first before you can enable somebody else to go sell it on your behalf.
Turner Novak:
You're completely outsourcing it to them.
Ryan Denehy:
Yeah. Two, the ROI for the partner, it has to be really easy and it has to be an obvious complimentary and adjacent solution to what they're doing.
For example, in my last company, we had this retail analytics solution, and we would integrate with your point of sale system. We ultimately figured out that all of the third party resellers that sold retail point of sale solutions, what they wanted was ways to have higher priced bundles with more advanced offerings.
Since we integrated with the products they were already selling, and it was very easy to understand what we did. It's like, "Do you want to know how many people came in and out of your store every day? Great. Add this package."
What we found is it was very easy to sell. It was very easy for our resellers to make money, and it was very easy for them to position it as an extension of the products they were already selling. That took off almost immediately.
Most of the time, again, what I'd say is for startups, it's easy to get enamored by this idea of someone else selling your product. More often than not, they won't. You're going to invest a lot of time and energy into something that's not going to yield anything.
What I would say is approach with caution and really make sure that you know what you're doing. Or, at least have someone that you can call on who's an expert in this stuff that can guide you in the right direction.
Turner Novak:
Is that you?
Ryan Denehy:
Yeah. Hey, listen, you want to talk partner sales? Give me a call. I'm happy to. For the right companies, it can be transformational.
You look at a company like Meraki, their entire selling motion was through partners. Shout-out to Hans Robertson, co-founder of Meraki. God, I must've sent him countless emails and phone calls and coffee meetings, just getting him to teach me everything that he knew about channel sales back then. Yeah. Thanks Hans.
Turner Novak:
Did you know him or did you just cold reach out at some point?
Ryan Denehy:
No, and actually I have a ton of respect for him because the reason I ended up... Well, one of the reasons is, we were working on a small partnership with them, which is partially how I got to know him. And collectively their team was pretty gracious when I'd hired a couple of their sales reps as well. They were doing so well and growing so fast that I think there was no love lost.
Turner Novak:
You just use it as a way to just get to know them a little bit better?
Ryan Denehy:
Yeah. I mean, look, that's the thing I still love about the venture-backed tech industry is that for the most part, founders are very generous with their time. If you're respectful of them and you're asking good questions, I think more often than not, people are going to be willing to give you some advice.
Turner Novak:
Yeah, makes sense. Groupon was interested in this probably because they were looking at some analytics offering for the retailers that they were selling to?
Ryan Denehy:
Think about it. Yeah. Groupon at the time had an app with a hundred million downloads of value-seeking consumers looking for deals, and then they had really figured out a hyper efficient way to go acquire large amounts of SMBs at scale to get on their platform. Where we got interesting for them is they had been looking for a way to, how do you provide more value to both the end user and the merchant? And how can we automate more of that process?
When we went to their offices in Chicago, this was I think toward summer of 2014, they were pointing out to their sales floor and saying, "Look, we have thousands of people making calls every day." If we had software that we could give to merchants that would in a programmatic fashion, identify when they were busy, when they were slow, what was selling, what wasn't selling, and we could auto-populate and auto-generate a lot of this activity, rather than having to engage in this hand-to-hand combat the way we are now, that'd be really interesting for us.
Turner Novak:
They could be able to tell, it looks like no one comes on Thursday, you should offer a Groupon on Thursday?
Ryan Denehy:
Yeah, and at the time, the way that they would go about doing that is they would rely on a very busy local restaurant owner to go figure that out and to punch something into their system or to call a salesperson, or they would rely on some recent college grad making enough phone calls and having enough insight to go figure that out.
The idea of the unlock that was potentially automating all of this was really compelling, and we saw that vision. We say, "This is really cool."
I think at one point when we were in one of the final diligence meetings with their whole exec team and CEO and CFO and everybody, we were starting to lose the plot a little bit. The conversation was just going nowhere. And I hadn't actually said much. Basically it was, it was Rudd, our CFO Nicole, and our VP of Engineering Steve, and myself we're sitting in there. And his meeting had gone on for four hours. We're getting toward the end. We're in such minutia. I'm like, "We got to bring it all back together."
I get up and I walk across the room. I hadn’t said much the whole meeting. Walk across the other side of the boardroom. I basically just draw this picture. I was like, "Okay, you have your consumers over here. You have all your merchants over here. You have this big database of deals here." I just sketched out this diagram of like, "Okay, if you put us in the middle of that with the software we have today, plus the stuff that we're building..."
I just wanted to literally draw a picture of, "Here's how this whole ecosystem is going to flourish." I felt like I made a pretty good point. What I didn't realize is, when the room went quiet, I thought I was putting the marker down on the little shelf. But there was no shelf.
I just turn around and I'm like, "See?" I just dropped the marker. Nicole, our CFO, I looked over at her, she's trying her best not to just burst out laughing.
Turner Novak:
Yeah?
Ryan Denehy:
It was just like unintentional mic drop. Yeah.
Turner Novak:
And then the deal closed the next minute?
Ryan Denehy:
No, well, no, the diligence took six weeks longer, and we almost ran out of money in diligence.
Turner Novak:
Because of the marker drop?
Ryan Denehy:
The deal eventually closed.
Turner Novak:
Well, that's great.
Did you stay at Groupon for a while? With some of these times you've sold the companies, do you typically, just curious for people who have not been through that before, retention stuff, how long do you usually stay? How does that work?
Ryan Denehy:
Yeah. It's weird. In USA Today's case, we fought really hard to be on our own P&L because we had a pretty sizable earn out.
Turner Novak:
That means be your own business segments successfully?
Ryan Denehy:
Exactly. Yeah. One of the issues that can happen after an acquisition is that if there's an earn-out and you have business targets that you have to hit, but you're not in full control over the finances of your business unit, you're being held accountable to goals that you don't actually have a lot of control over. That can be a huge problem.
Turner Novak:
Someone can also be like, "You know what? We're just going to give you less resources." Or they can shift things when something doesn’t go right.
Ryan Denehy:
Yeah. Earn-outs can be really tricky, because very often they're buying you to do something really innovative and explore a new direction of the business. But then very quickly, those plans evolve and the needs of the business evolve and change. You have this company that you acquired that's like, "Why have millions of dollars on the line to do this thing that we agreed to do a year and a half ago? I know that doesn't matter to you anymore, but I still need to go do it."
Turner Novak:
Yeah, the earn-out doesn't change, right?
Ryan Denehy:
It can get really acrimonious. Fortunately at USA Today, we were on our own P&L and we had basically two years to go to hit this earn-out. We hit it, but we were having so much fun just running amok inside a public company. It was great. I love a public company. I love startups and I love public companies almost equally, but for very different reasons. We stayed for four years and we had a blast just really helping that company get into digital publishing and programmatic advertising and all that. It was a ton of fun.
Groupon was the opposite. We got there, and then Eric Lefkofsky who is the CEO who was in charge when the deal got approved, he ended up stepping down as CEO about three months later. Rich Williams, who was the COO, who became the new CEO. Talented guy, but very different perspective on how to grow the business. I think there were merits to both. But ultimately his view was like, let's simplify and let's do fewer things better.
Part of doing that, we were in a position where there was some cleanup work that we were asked to do with various parts of the Groupon business, but ultimately, instead of staying for two and a half years, we had a very amicable split and I got to go home after about 14 months. I ended up moving back to New York about a year ahead of schedule and getting Electric off the ground in the summer of 2016.
Turner Novak:
That's what you're doing now?
Ryan Denehy:
Yeah.
Turner Novak:
What was the insight to start Electric? I guess maybe explain to us what it is and then why start it back in 2016?
Ryan Denehy:
If you're a business that has an IT budget, you're spending money on software. You're buying computers, you don't want to get hacked. But you are still small enough where you don't have an IT department. There are very few good solutions for you on the market.
Turner Novak:
What are you probably doing back in 2015, 2016?
Ryan Denehy:
You're doing it yourself.
Picture your typical 25-30 person company. There's an office manager making sure that the AV stuff in the conference room is set up correctly. Your HR people are probably the ones figuring out how to get Turner's laptop when he starts on Monday.
This is not a great way for businesses that run on technology. Spreading out a bunch of technical responsibilities to non-technical people generally doesn't work great over the long run, bad employee experience, waste of their time. Increasingly, it's going to lead to a higher likelihood of security breaches, stuff like that.
The market's dominated by thousands of local IT consultants, some of whom do a great job. They're just very, very expensive. It's an all-or-nothing proposition. You're going to pay me $40 to 50,000 a year, I'm going to be your outsourced IT department.
Turner Novak:
There's a guy will show up and fix your Wi-Fi if it goes down?
Ryan Denehy:
Yeah, they'll take over administration of all of your applications and everything. And they'll do all that for you. Again, for a certain type of business that wants the Rolls Royce of outsourced IT management, some of these local consultants, they can do a great job.
For the vast majority of SMBs who are younger using newer platforms, a little bit more tech-savvy, there was no lightweight modern solution. And I felt the pain of that when I was running my previous company and couldn't believe that nobody had started a company, a software-centric approach to IT management for SMBs, a modern approach to doing that.
Turner Novak:
It doesn't seem that complicated. It seems pretty straightforward. Someone should have built this by now. Do you know why it didn't exist yet?
Ryan Denehy:
Yeah. Up until I would say probably seven to 10 years ago, most SMBs were actually still on locally-hosted software and on a wide mix of cloud and legacy software. Most of those things needed to be managed and supported either in person or in a very high-touch service eccentric way.
I think about, for example, my dad's company. He's got, I don't know, a dozen employees. They have a little office in Connecticut. 10 years ago, it's like he had a server in a closet and that's what their email ran on.
That is not a business that you could run as a software business managing that email server. In a world where, again, around seven to 10 years ago when this shift happened where basically any new business who was getting started was going to be on Office 365 or Google Workspace, and then all the new software they were buying was in the cloud, well now all of a sudden, instead of sending someone to the office, you could remote in, you could admin these things in an automated way through API.
The timing was perfect. There was enough of a critical mass of SMBs who were in the cloud. Still a huge replacement cycle to happen, but for the first time ever, you could actually manage IT via software rather than a peer-play service.
Turner Novak:
It was essentially cloud penetration had hit whatever percentage? The majority of new businesses coming online were all going to be using cloud-based versus-
Ryan Denehy:
Exactly, Yeah. It was also the first business where the idea made a ton of sense. But also, I just kind of fell ass-backwards into it from a timing standpoint.
Turner Novak:
I was going to say it sounds perfect based on-
Ryan Denehy:
It only took me 12 years and two other companies where I was extremely late to the party! I mean, God, when we started our ad network, I was like, "Wow, this is a great idea," and then you go online, you're like, "Oh, there's 900 ad networks." It's a race to the bottom. So this was, yeah... Finally after a few swings, you hit the timing.
Turner Novak:
Well, and you also have a .ai domain. Have you always had that?
Ryan Denehy:
Oh, yeah.
Turner Novak:
Is there an AI component here? Are you like a-
Ryan Denehy:
Yeah, I mean the plan from the beginning was always, "Let's leverage software to automate things that humans were doing and as time goes on, and we get more data, there's going to be some really exciting use cases for AI." Either through software we build, or license, or what have you.
I think, interestingly... Obviously, electric.com, we could not buy. It's some lead-gen site for electric utilities.
Turner Novak:
Okay. You'd probably have to pay millions for that thing.
Ryan Denehy:
We offered, I think at one point... Because it was a non-binding, we were never going to pay $5 million for the domain, but we sent a non-binding offer for $5 million just to see what would happen, and they're like, "No, not even close."
Turner Novak:
Wow! Okay.
Ryan Denehy:
I think the company that owns it is doing, probably, $10 million in EBITA. So it's unobtainable.
Turner Novak:
You'd have to pay like 10 x that. 10 x EBITA.
Ryan Denehy:
No, the .ai... I mean, look. But in 2017, we had multiple companies asked us if we were based in Anguilla.
Turner Novak:
Yeah, because that's where the domain is registered to or whatever.
Ryan Denehy:
Yeah. I mean no one understood it.
Turner Novak:
No one knew about AI back then.
Ryan Denehy:
But yeah, I think... What was interesting is, when we got the company off the ground and started building the software, what we found is, you absolutely did not need AI to automate a huge chunk of these IT responsibilities.
A lot of it was much more rudimentary than that, which was great. We didn't have to invest in a big build to go do that. Now, it's kind of come full circle. You have all these AI companies and we're like, "We've been an AI company!"
Turner Novak:
Was there an AI component of some kind early on? Or was it just a domain availability thing?
Ryan Denehy:
Yeah, I mean, it was both, right?
Ultimately, the original basis of the company was to automate desktop support. So we'd integrate with Slack, integrate with Teams. The idea is, you could really automate the IT help desk over time. Because we stayed so focused on the SMB, automating the actual support agent interactions was less valuable than simply automating the whole stack and really automating the experience.
Our customers are not IT experts. So our ability to proactively recommend solutions, to recommend configurations... To then carry out the deployment of these things in ways where they can just show up and be like, "All right, the right employees have the right software and the right computers, and I can log into a dashboard and see that we're probably not going to get hacked today."
Turner Novak:
Good thing to know.
Ryan Denehy:
Look, it sounds really unsophisticated. But at the end of the day... I think you had Dane from Odeko on your podcast, and I thought that was an awesome one. And he's an SMB guy too. And that's, to his point, you have to really respect the level of simplicity with which the solution has to be delivered to an SMB.
So if I'm talking in almost comically simple terms right now, I'm not talking down to our customers. It's just that it's simply not useful or helpful to, essentially, burden our customer, and our user, with all of the really complicated and sophisticated things we have to do in the background simply to make sure that your device is secured. Or that your email secured. Or that things happen on time when you expect them to.
Turner Novak:
Because they don't really care about that. They just make sure my laptop works and my email works.
Ryan Denehy:
Yeah, they buy solutions to problems. They're not buying tools.
Turner Novak:
Not a cool technology.
Ryan Denehy:
Yeah, I mean, it took us years to refine our sales pitch to a place where we were actually talking about it... Credibly speaking the ways that we're, actually, going to save you time and money and reduce business risk, rather than throwing a bunch of acronyms at someone who's not an IT person.
Turner Novak:
So how did that change over time? Do you feel like you were too acronym heavy and then was there a realization?
Ryan Denehy:
Yeah, I was enamored by the technology. I was like, "Oh, we can do this. We can do this."
Turner Novak:
APIs and stuff was probably a huge thing at the time.
Ryan Denehy:
Mobile device management and all this stuff. And when we really started nailing the sales pitch and just, consistently, being able to walk into qualified prospects and close them... We can answer those questions if asked, but really, it was just more about... There's a few major food groups of problems that are likely going to be important to you. And explaining to you, as clearly as possible, how we can solve them without having to bore you with all the details.
That was a huge turning point and that's... Look, most startups get that wrong. Particularly, if you have a technical founding team. Unless you're selling developer tools, for the most part, people don't really want to hear about the technical somersaults you had to do to go deliver the solution. They're buying, again, they're buying a solution to the problem. They're not buying a word salad of technology.
Turner Novak:
Yeah. That's fair. So it was just you. You had no co-founders, right? It sounds like you-
Ryan Denehy:
For Electric, no. Yeah, and I would not recommend that to most people.
Turner Novak:
But you’ve also said, "It's not as bad as it sounds."
Ryan Denehy:
This is coming from a place of having done two companies before. I hope it wasn't as bad. Yeah, the whole thing was... There's absolutely no way the first two companies would've been successful if Rudd and I hadn't worked with each other.
Turner Novak:
Yeah, because it sounds like you tag teamed completely different areas.
Ryan Denehy:
Yeah, and neither of us were technical guys. But one of the things he was really excellent at was dividing and conquering. And being really explicit at any given moment. "I'm going to do this, you're going to do that. We're going to stay aligned on this stuff," but, "Hey, it's not going to work if we're both fundraising," or, "It's not going to be effective if we're both out trying to sell," or, "If we're both trying to equally call the shots on the product..." "Do this, do that." I didn't always agree with 100% of the things that he said, but in the end, directionally, it was all right. And so we had to go do that.
And when there's those days where stuff's really screwed up and there's just catastrophically bad days in the business. If you've never experienced that before, you need someone who is equally deep in the trenches with you. Otherwise, I think it's going to be really hard to get through. And I think most founders would agree with that.
By the time I got to my third company though, I realized that, absent having anybody that I felt could really occupy that position, it wasn't worth giving people co-founder titles, simply in name only. And that the ability for me to just, unilaterally, make decisions and move fast was infinitely more valuable than optically having co-founders.
And fortunately, because I'd started to develop a little bit of a track record, investors didn't really seem all that bothered by it either. But yeah, would not, at all, recommend that for a first-time founder.
Turner Novak:
It seems like, maybe, one way you worked with that... You set up a pretty big board, initially. Just compared to what most people do.
Ryan Denehy:
We had a five-person board out of the gate, which was unusual. So, Mike Brown from Bowery Capital, Brad Svrluga from Primary, occupied the two preferred seats. I had three other seats. Me, plus two independents.
Turner Novak:
What does that mean, an independent board member?
Ryan Denehy:
So these are people that are not major investors in the business and are generally there, truly, to be helpful, and to add a diversity of viewpoints and opinions.
Turner Novak:
Are they usually investors? Do you give them shares?
Ryan Denehy:
Yeah. I mean, they have ownership of the business, but they are not coming on behalf of a major preferred shareholder.
Turner Novak:
And do you control their vote if you had to vote on things? Does that help?
Ryan Denehy:
Yeah, I mean, look. Let's get to that in a second. Because, I think there's a lot of misconceptions about controlling the board and all that. But no.
So, set up as a five-person board. Again, I think my experience from my first two companies was that, if I have the right board members, it's much more valuable to have, essentially, a committee of people who I really trust and who are going to bring different viewpoints to the table who can help. That's going to be far more valuable than some kind of "pretend" board meeting where it's like, me, and maybe one or two other people. I wanted a very professional outfit, out of the gate, and I wanted a lot of really smart people around the table.
It's a double-edged sword. We were lucky, in the sense that I had two great lead investors by way of Bowery and Primary. I still have great relationships with both Mike and Brad. Brad's actually still on the board. And then for the two independent seats, I brought in Rudd.
So, even though we weren't working together as co-founders on my third company... He was starting his own company, but I said, "Hey, this is my first time as CEO. You have spent more time with me in the past decade than anyone on earth. I want you around the table because you're going to be able to see things, and call things out, and give me advice that, truly, no one else is going to be able to do." So he joined as an independent and then I kept the third independent seat open.
So technically, it was like I had three votes. Mike and Brad had two. But here's the thing, is... Nothing ever comes to a vote. I mean, obviously, you're going to have to option-grant approvals, and low-level governance stuff, but seed, series A, it's just not a thing.
Turner Novak:
It's just like, does the company survive or not?
Ryan Denehy:
Yeah. I remember at the series A, when it flipped from, basically, me having three seats and the investors having two, to then turning into... I think it was a seven-person, or maybe it was still five-person. Whatever it was, it flipped.
Bob Goodman from Bessemer joined the board and I didn't have a stink about it, but I remember, as we were getting closer to the deal closing, I was like, "Well, Bob, then I don't control the board."
And he was just like, "Dude, listen. You want to go where you're wanted, right? At the end of the day, if you're doing a great job as CEO, it's going to be fine. And if you're doing a bad job, we're going to have to address that, and whether or not you control the board. If this was a case where this was the next Facebook or something, and there was, truly, once-in-a-lifetime, meteoric growth? I don't know, maybe."
But his point to me was like, founders get overly religious about this idea of, "How many seats do I control?" and all that other stuff. And listen, some people are going to disagree with me on this, but at the end of the day, at the series A, debating the minutia of the exact number of board seats... What you really need to be focused on is, "Am I getting the right people around the table?" And, "Am I maintaining these relationships in a way where we all operate with a high level of trust?"
If that's the case, virtually nothing will ever come to a vote like that. It's not going to get contentious. You're not going to have to protect yourself. If you suck, you should not be the CEO of the company, and if you control all the seats on the board, you're still going to suck.
Turner Novak:
Well, it's also probably, it sounds like, if you have a good relationship with your board members, it's not like you're sweating about this big vote that's coming up in a week, a couple days, and everyone shows up and you don't know what people are going to do.
Ryan Denehy:
And listen, just down the road when you are a true pre-IPO, we're filing next year and... You're going to make a ton of changes to the board structure and the overall governance of the company. So, I've seen early-stage founders nuke deals because they didn't agree, or pass on a term sheet with a great investor and take one from a bozo, because they... Over dumb stuff like this. Again, at the end of the day, just focus on getting the right people around the table.
Turner Novak:
So when you think about that, "right people", how did you approach it? What were you looking for and just, how you added to the bench there?
Ryan Denehy:
Well, I'll tell you what. Without naming any names, there were two rounds in a row where we got either term sheets, or were very close to getting term sheets, from funds who are both out of business now.
Turner Novak:
Okay, interesting.
Ryan Denehy:
So I look back on it and I go like, "Man, I got Bessemer. I got Bob from Bessemer in the series A. Awesome. I got Jeff from GGV, now Notable Capital, in the series B." Love those guys. They're phenomenal investors, both as individuals, and their firms. I go, "Had I gone in a slightly different direction, I would've had a zombie series A investor, and an AWOL board member, and then the same thing in the series B."
Turner Novak:
Wow. What's the downside of that? Just if like, you can't conceptualize, what happens if they're dead and gone?
Ryan Denehy:
No, look, it's a great question. One is, my view has always been... My relationship and how I pick a lead investor. It's partner first, then firm, then terms. Generally speaking, if you really do your homework and you're really aligned with the partner who wants to lead your deal, and they're with a reputable firm or a firm that you, at least, believe in, and whose interests are aligned with yours, the terms tend to take care of themselves. Meaning, if you're working with someone who you're really aligned with, they're great and you really believe in the firm, it's very unlikely that they're going to write you a totally wonky or out-of-market term sheet.
And I'd never, ever, in any of the rounds that we've done, took the highest price term sheet. Never took the lowest price. But founders for a while would optimize for every last dollar at the expense of having someone around the table who's really going to be a great partner, through thick and thin, over many, many years.
The thing people forget about is, you can fire an executive. It is very hard to remove a board member. Minimally, it's very unpleasant, and it's even harder to get people off your cap table. Now, obviously, it would be a very extreme case where something like that would be necessary.
But to answer your original question, in the small percentage of cases where the board member you have leaves the firm that they're with, it definitely introduces a bunch of risk. If you made your decision based on feeling like that person... You know, "Hey, Turner's going to be my long-term partner in the business and we're really aligned on stuff," it can really open up some risk. Getting a new person in there, that can be tricky, but it's even worse if the firm goes away. So now, they've got all this money on your cap table.
But when I think about... When we raised money in later rounds, our early investors continued to take their pro rata, continue to help fill rounds and make each fundraise successful. When you take that away, everything becomes a lot more difficult. I mean, if you go out to go raise a series C and your series C lead is like, "Cool, we're going to put in $50 million on a $100 million round," and no one else is taking their pro rata, that's a lot of extra work that you got to do.
Turner Novak:
Yeah, I have a couple of portfolio companies that have gone through that. Where it's like, the lead, their seed, or their A, doesn't exist anymore and it's a little bit harder.
It's actually interesting. One of them, they'd been trying to get people to sell secondaries in the round, so there was a ton of demand. So I guess, if the company's doing really, really well, maybe that's not as bad.
Ryan Denehy:
Look, if the company's doing really well, a lot of your problems get solved.
Turner Novak:
We're talking about... Yeah, not exactly the biggest issue at that point.
Talking about fundraising again, you mentioned, you think the size of a seed round is sort of, I guess, inversely related to the long-term success of the business. I'm not sure if that's exactly how you think about it, but can you explain that a little bit more?
Ryan Denehy:
Yeah, so I have two thoughts on it. One is, the more time I spend with institutional VCs, who, I have to couch this by saying, play a mission-critical part in the ecosystem... And I love them.
However, it has never been cheaper or easier to start a technology company, ever. There have never been more ways to distribute a product, there have never been more ways to build a product, staff a team, all of that.
So it's hard for me, as both a founder but also an angel investor, to then reconcile that with the fact that, on balance, seed rounds, in terms of total dollars in, are the biggest they've ever been. In that, given how diverse of a path you can take to starting a company and how much lower the barriers to entry are, simply doesn't make sense that virtually every seed round falls within this size and this size, and this valuation and that valuation.
Sure, there's outliers, but when every seed deal is between three and five million of paid-in capital at some corresponding valuation-
Turner Novak:
$15 to $30 million, probably. Or more.
Ryan Denehy:
Yeah. I look at that and from the founder perspective, it's like, again, it's never been easier, and there's never been more flexibility, and there's never been lower barriers to entry to starting a company.
And so, I think that's the thing that founders really need to keep in mind, is, you're so much more in control of your destiny now, than you've ever been. The homogeneous nature of the seed landscape is a reflection of GPs having a fund dynamic and a portfolio strategy that they have to fit the deals into, right?
If you think about it, I'm never going to say that being a fund manager is harder than being a founder, but I definitely understand the challenges that a seed-stage investor has to deal with, because when you go raise money from LPs, be they individuals or institutions, you have to have a portfolio strategy.
"I'm going to do this many deals over this period of time to hopefully generate this type of return. And to do that, my check size is going to be between here and here, and that means I need to own this percentage of the company, which means the valuation can..."
And so, again, I feel for a lot of these seed investors because what you're looking for is a hyper, hyper-specific deal structure in a world full of businesses that look very, very different from one another.
And so, I think founders, increasingly, are all getting driven to a nearly identical cookie-cutter style of seed investing. Not because that's what their company needs, but it's because that's what the funds need to manage money professionally on behalf of institutions.
Turner Novak:
Yeah, that's fair. So, the episode that came out right before this, we talked about why it's bad for the VC to invest in too high of valuation or too big of a round. From your perspective as a founder, why do you think it's bad to-
Ryan Denehy:
Oh God, it's a nightmare. It's like, this is going to be true until the end of time. Everyone... For the most part, founders can be very responsible and pragmatic up until the point they get a frothy term sheet.
Turner Novak:
What's a frothy term sheet, for someone who doesn't know?
Ryan Denehy:
Too much capital, too high of a valuation relative to the business performance. Current or anticipated. Right? And so at the end of the day, if you raise too much money at too high of a price, you're setting the bar unrealistically high for the next round.
And as a founder, optionality is the greatest gift you can give yourself. And so, the more that the round, the terms, and the money that you're taking... The further that gets away from the reality of the business you're running today, the less optionality you have.
There are some cases where, maybe you're in a capital-intensive business, or there's a very specific use of those proceeds that would justify an out-sized round like that in the early days. But more often than not, you're hurting your chances at a successful follow-on financing and growing the business, not helping.
And I see this now, even in my own company, as we're launching new products and getting things to market. More money and more people does not increase your likelihood of success past a certain point.
Turner Novak:
Why not? Sounds like it would.
Ryan Denehy:
Yeah. When you have a nascent product, a nascent selling motion, you're getting an MVP out the door, the work will expand to fill the resources available to it. It's why big companies can never get anything done, right? I mean, both public companies I worked at, even with the best of intentions... If you get 12 product managers in a room, it's going to take you forever to get anything done.
Turner Novak:
You're going to have like, eight meetings.
Ryan Denehy:
Meanwhile, you have three people working on something, they're going to be able to bang something out in a weekend that's probably going to get 80% of the impact of what you're looking for.
And so, the same is true in early-stage startups. If you raised five, six million in a seed round and you go hire 25 people for a problem that probably only requires five or six, you're not doing yourself any favors.
Not only are you not likely to get to the answer faster (and of course there's exceptions to every rule), you're going to get there slower. The inertia of getting 20 people to do anything versus five people to do anything.
I mean, I think about in the early days of my last company at Swarm, it was me, Rudd, and Steve, our head of engineering, and we would just stand up new products in a weekend and then be out selling it two days later and generating revenue.
I think about in the early days of Electric, there was me, our founding head of engineering, founding head of sales, and our first support guy. Four of us would sit at a table and be like, "Hey, so we talked to 10 customers over the last week. They need this. Want to do it?" "Yeah, let's do it."
Turner Novak:
Versus let's aggregate it all on a spreadsheet, let's rank it all, let's get everyone's input. You just went and did it.
Ryan Denehy:
Yeah, exactly.
Turner Novak:
Okay. Seed round, I've heard you mentioned with Electric, the very first round you raised, you almost wired the money back right away? What was going on there?
Ryan Denehy:
Yeah. I don't know why I've told that story a bunch lately. But, even though it was my third company, solo founder, first time as CEO, Mike from Bowery, Mike and Lauren had written me the term sheet, signed it. We did the first close of the first million and then I was out just kind of rounding up the second million, which ultimately Primary and a few other folks did.
But in that in-between time right before we had launched the product and before I'd done the second close and actually formally hired anybody, I was sitting on my couch at home one night thinking about all of the potential competitors, all of the ways that it wouldn't work.
And this doesn't happen often, but I had this kind of fleeting moment of existential dread and I had momentarily convinced myself it wasn't going to work. And yes, for about 30 minutes, it was like, "Can I just send the money back? Then what would happen? And would that be a bad look for Mike and his LPs?" And all this other stuff.
But, I mean, thank God I didn't, but I don't know. Doubts will enter your head but at the same time, snapped out of it, so...
Turner Novak:
Yeah. Well, okay, so obviously you didn't do that. You kept the money, started building a company. You raised a couple more rounds. I guess we've kind of been talking a little bit about fundraising. What have been some of the biggest lessons you've learned just in terms of the A, B, C, D, I think, that’s all public that's out there, what have been your biggest lessons on what to do, what not to do? The framework for just getting that landed, getting the money in the bank?
Ryan Denehy:
Just a couple off the top of my head, is build relationships with great investors well in advance of actually needing the money.
I knew, for example, at every single round, if I look at it, I knew Mike Brown when he was still at AOL Ventures even before he started Bowery. And then by the time I actually came back to New York and started working with him and Lauren on the initial idea that became Electric, we already knew each other and we were really comfortable working with one another. Jeff Richards, he led our Series B and Series D. I met them right after our seed round and gotten to know him and his team and some of his other partners and-
Turner Novak:
So how do you know meeting Jeff? He's like a later stage Series B. Why would you talk to him after your seed?
Ryan Denehy:
Well, look, that's also... you got to be really careful about that too.
What you don't want to be doing is going out and just taking coffee meetings with a bunch of late stage investors when you need to be shipping product and signing customers. As with most things, nuance is really important.
For example, at the seed round, once you have solid product market fit, the business has traction, and you're really starting to rev up the growth engine, it's really important to go to some of your other investors around the table, other founders that you know, and say, "Hey, who's the best Series A investor that you know? Who are some of the best people that we might want to start to get to know before the next round?"
And you opportunistically start having those conversations and just getting to know people and get a feel for who you like sort of stylistically, who likes your space, that kind of thing. So yeah, pretty much every investor in every round was someone that we had gotten to know well in advance of when they actually led the round. So that's a huge one.
Second big one, we talked about this a little bit earlier. You've got to have a huge pipeline. You will just be stunned. Even in rounds where if they happen really quickly and you end up not having to do a whole big dog and pony show, the reality is you can't put the business at risk. You really need to understand that I've got a sizable list of highly qualified, great fit investors who know me so that I'm not left empty-handed by the end of the process.
Another thing is you just want to run a really tight process. Nowadays, investors definitely want to spend more time getting deals done. I hope we never go back to 2021 where, I mean, people would literally send unsolicited term sheets and all this other stuff. I don't think that was good for anyone in the ecosystem. And now more than ever, you need to give people time to know you and know the business.
But at the same time, you need to run a tight process. You need to have your act together and have a really clean data room, have everything ready to go, make sure all the trains are leaving the station at the same time.
A huge mistake we made that Rudd and I made at Swarm when we were raising our Series A initially was we took meetings on a rolling basis. And so what that meant was I would meet with you today and we'd pitch you for the Series A and maybe you'd start doing some work on it and maybe we'd be six weeks into the process. Maybe we're getting close to an investment committee.
And then we'd get introduced to another investor. And so we'd be starting that conversation brand new from the start. So I'm at the beginning of this conversation at the end of that one with you.
And so we spent nine months until we got to a place where we actually got a term sheet. In reality, if we had just sort of made a list and said, "Here are the 25 most likely people to invest" and had all of the first conversation and actually run a process, you're going to get to a yes faster.
But also if the fundraise is not successful, you're going to get to a no faster. The last thing on earth, the situation you want to be in, other than running out of money, is being out in market for a really long time just eating shit.
And then word gets around, "God, those guys have been out there forever. No one wants to..." they can smell it on you when you walk in and it still is a little bit of a momentum game and that's an unforced error. You can totally avoid it.
Turner Novak:
Yeah, I remember you mentioned, it was on another podcast, I think your Series C. You had a huge pipeline. You went in and it seems like people were really interested. Then what happened once you kicked it off?
Ryan Denehy:
Well, so the thing is in the end, we still had a bunch of interested people at the term sheet stage, which was great. But relative to the number of people at the top of the funnel at the start of the year, it was a fraction of that.
And in the end, it was a really successful round. And we had multiple folks who either were putting down a term sheet or about to, but I mean out of the gate, there were probably 20 firms that within a two or three-day period just all called to pass. So...
Turner Novak:
And it's you thought that they seemed like they were pretty interested?
Ryan Denehy:
This is something like Jeff Richards drills this into the heads of all of his founders. A great conversation is not a term sheet.
Turner Novak:
Yeah, so how do you know if an investor’s actually interested?
Ryan Denehy:
A lot of interest is not a term sheet? You know they're interested when you get a term sheet and/or they wire the money. And actually, Tom Peterson from Rally Ventures who led our Series A at Swarm, I think one of the things he told us, he's like, "One of the ways you know an investor is interested is if they change their schedule to meet with you."
Turner Novak:
Because you know that they're prioritizing it?
Ryan Denehy:
But for the most part, and I think a lot of investors are still pretty bad at this, is they'll come up with reasons why, "Oh, we're still looking at it. We're thinking about it." That's a no. That's a pass. For sure, so...
Turner Novak:
Yeah, I feel like you can usually tell... from my perspective as an investor, I usually try to follow up within 24 hours. It's like sometimes I might just have too much going on that day, but I try to pretty quickly just confirm something, say whatever the action items, the follow-ups were.
Ryan Denehy:
So there was a tweet going around recently and it was investor... it was a founder who shared a pass email from an investor.
Turner Novak:
I remember, I saw that. Yeah.
Ryan Denehy:
And while the email maybe could have been worded in a bit more of a diplomatic way. As a founder, and I know a lot of people agreed, because I basically said that this guy was entitled and that was a totally, totally fine email. And I think my repost of that tweet got almost probably half as many likes as the original one. So I felt somewhat vindicated that people aren't crazy.
But basically for anybody who didn't see it, a founder posts a screenshot of a pass email from a VC. And the pass email basically says, in so many words, "You don't break out any of your expenses, so I have no idea how much money you're spending on anything, sales marketing or otherwise. While you have $100k in MRR, your churn is astronomical and so I have to devalue the revenue as essentially zero. All that being said, I would still do the deal, but at this price, not that price."
Any founders here who have raised multiple rounds of financing I think would all probably look at that and go, "Man, I wish I got more emails like that."
Turner Novak:
That sounds like a top 10% VC pass email.
Ryan Denehy:
Yeah, it sounds like an amazingly helpful email.
Digging around a little bit, I think this founder just struck me as someone who's less experienced, but posted it and framed it up in a way of this VC begged to meet with me. I sent him the deck and this was his response. We did not take his money.
And it's like, "Dude, shut up." You should be so happy to get clear, crisp feedback from an investor like that. And by the way, the reason that a lot of investors don't send pass emails like that is because of stuff like this where immature founders put them on blast for things that are actually quite respectful and quite helpful. So...
Turner Novak:
What's the most common way that VCs pass? Just not doing anything, just not responding?
Ryan Denehy:
I would say 50% of the time, it's follow-up that is so slow that they essentially bow out of the process without even bowing out. That's a really common one.
The second one, at least that I've seen across the three companies, is they'll come up with some very tactical thing about the market or the unit economics or whatever.
The reality is in an early stage company, there are plenty of totally valid reasons. They don't believe in you. They don't believe that you are actually going to go get the job done. Anytime you point to unit economics are small TAM, it's like, "Well, for a business that doesn't exist yet and will likely have many different evolutions," at the end of the day, most early stage investors, while there does have to be broadly a thesis that they can write it around, they can write their memo around, they either believe that you're going to be a great steward of their capital and return money or they don't.
And I mean, look, even when I am doing angel investing and I pass on stuff, I find it hard. What am I going to tell a founder like, "Hey, I don't believe in you. Sounds interesting. I just don't think you're a killer. I don't think you're going to get it done."
Turner Novak:
How do you say that diplomatically or in a way that's...
Ryan Denehy:
I mean, for a while I didn't. I just did a lot of deals that are all probably going to go to zero. I've been really lucky that the angel investing I've done over the last eight or nine years has on the whole been very, very successful. But as with anything in the angel world, that also means that 80% of the deals I've done have yielded nothing, right?
And when I go back, I look at the 40 some odd investments that I've done. Time and time again, the ones that don't work out, it's the founders came out of a high profile company or they went to the right school or otherwise look like the right founders on paper. The space they're going after makes a ton of sense, huge market. And the way they're thinking about solving it looks really good. It all seems like a good VC investment, check, check, check.
So for a couple year period, me and a couple friends I did a bunch of angel investing with, we said, "Hey, let's increase the number. Let's set this criteria and we're going to learn," right? And-
Turner Novak:
You set a fixed amount, that we're going to do this kind of angel investing?
Ryan Denehy:
We just said, "Look, if the deals sort of meet a certain..." and for us, it was still a very high bar. These were deals coming in from other founders, well-respected investors. I mean, the vast majority of these from that vintage that most of them are probably going to go to zero.
It was, yeah, talented founding team, big space, compelling prototype, all of that. None of them moved fast enough, iterated fast enough, or really had enough of the killer instinct to get traction. 100% of them died because of lack of traction.
Turner Novak:
And that's just because they're unable to raise money, don't get momentum.
Ryan Denehy:
Not even about raising money. It's like you could not commercialize your product. You could not prove in a short enough period of time that people actually wanted and/or were willing to pay for the thing that you were selling. I mean, that's why all of them are going to go under.
Turner Novak:
So it basically comes down to can these founders commercialize a product? And then that leads to all the other things that go right or wrong.
Ryan Denehy:
Without traction, it's a research project.
Turner Novak:
In 2022, I know you made some big changes to Electric. That was another question from Jeff Richards. He's like, "You kind of rebooted the business. What'd you do?" And you made that decision fairly early in terms of when other people kind of made similar decisions. How'd that go?
Ryan Denehy:
So two big changes, and again, for anyone who's not super familiar with our business, providing its outsourced IT management to small businesses from 2017 to the end of 2022, it was a mix of software and services.
Turner Novak:
Oh, you actually had people that would go to the sites sometimes?
Ryan Denehy:
Like a remote help desk, but mix of software and services and sold it all with an inside sales team. Very, very predictable revenue, very high cost of sale, not the best from a retention standpoint
Scaling a service as business, like a SaaS business, there's just going to be a bunch of issues. And ultimately, the way that it was set up from a margin standpoint was never really going to get to pure software margins at the rate we were going.
Turner Novak:
You wanted to get there eventually though, right? That was the goal?
Ryan Denehy:
And so we looked at it and said, "Okay, so what do you do," right? And it's like basically with a business like that, you kind of have two options. Actually go all in on services and start generating huge EBITDA and just grow it differently and is that a smart way to do it?
We ultimately looked at what our customers wanted and what they were asking for and realized that going all in on the software, while we were going to actually essentially have to walk away from a huge amount of our revenue in order to get there, a more partner channel-led sales approach and a more software-centric approach to solving this problem.
We could have a very, very high growth business with products that were accessible to almost any SMB and be able to grow that as a company that may never need to raise more money again, which is ultimately kind of what everybody wanted in the beginning with the company.
But the only way to do that was to commit to a massive transformation. So at the beginning of 2023, we made a tough decision to do, take a substantial amount of cost out of the business by way predominantly of layoffs was one.
Two, rewrite all of our products from scratch as true native SaaS applications that could be packaged in a million different ways and bought and deployed in a lot of different ways and rewire the entire go-to-market function around something that was going to be significantly more efficient.
In the end, it was all about making products that could be consumed by as many SMBs as possible, make that as easy as possible. Software was the best way to do it. So fortunately, what the market wanted aligned well with a high margin, high growth-centric model.
But yeah, I mean that was 18 months ago, so 2023 was the huge rewrite reorganization. Now we're a little over midway through the year 2024. Products are in market. We're working on some massive, massive partnership deals and glad we did it when we did it.
In a lot of ways, what I told the team at the time is there's two ways this is going to go down is we're going to sit here and we're going to look at what we want the next two, three, four, five years to look like and acknowledge what we need to go do and take a swing and go make that happen, or we're going to do what a lot of companies do and either be in denial or be in denial and then very slowly make changes.
And then what's going to happen is someone else is going to come in and make all these changes and it's going to be a lot less fun for everybody. So if we know what the answer is, let's commit.
Turner Novak:
How did you manage the board? All your stakeholders, your investors, I'm sure they were probably... what was the feedback you were getting at the time?
Ryan Denehy:
Again, I think in the middle of 2022 when it was clear that the venture markets were reverting back to something that looked a bit more normal, there's season enough investors to realize that like, "Hey, a lot of this market is just going to go away. A lot of these companies are going to go to zero."
Turner Novak:
Like your competitors? Or just the landscape?
Ryan Denehy:
No, just the landscape. There simply shouldn't be 2,000 companies all valued at a billion dollars or more. It's not right. And most of them are, at least at the time, not being run well and from just a P&L standpoint.
And so I think for us to be really proactive and say, "Look, if we keep going at the rate that we're going, this is a model that is going to continue to consume a lot of capital and ultimately be, I think, potentially kind of tough to value from an exit standpoint.
So with all of the available options in front of us, we think that pursuing this sort of efficient, more partner-led software-centric approach and investing in that while concurrently reducing a lot of cost in what is now sort of our legacy business, that's our highest likelihood to having a phenomenal outcome and serving our customers.
But doing that from a position of strength, doing that coming off of successive fundraisers and playing offense rather than, I think, what a lot of companies have done over the past couple of years, which is kind of try to run the same business they ran in the ZIRP era, but with less money. You're going to get worse results.
Turner Novak:
Yeah, I've seen a combination of all ends of the spectrum of that strategy of quick changes, too long to change, eventually running out of money, having to do fire sale, the full gamut of all that.
Well, this is a fun conversation.
Ryan Denehy:
Dude, thanks for having me.
Turner Novak:
Yeah, thanks for coming on.
Ryan Denehy:
Yeah, enjoy the rest of your time in New York and we'll have to do this again sometime.
Turner Novak:
Yeah, definitely.
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