Lessons of Greatness: Start a Movement; not just a business
David Sacks: Legendary Startup Product Expert
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Now, it’s go time with David Sacks.
Introducing David Sacks
David Sacks is widely praised for his extraordinary operating skills and ability to hold things together, no matter how crazy they might get. And he's proven himself time and again, he played a major role in holding PayPal together during a very tumultuous time. Led Yammer to a very successful acquisition and consistently is invested in and supported startups that have achieved outsized greatness. If there's only one thing I hope you take away from this episode, it's David's perspective on how to execute at a high tempo startup and how the approach differs from operating a larger more stable company. I especially like his thoughts on startups his movements.
✨ Follow David @DavidSacks on Twitter.
🎙 The Full Episode
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🌟 Highlights from the Episode
Golden Line
“I thought it was a dumb idea. Why would you need to be money from one PalmPilot to another? We started talking about the idea of what if we could email money? And I told him, "Well, if that's what the company is going to do, then I'll quit my job Mackenzie, and tomorrow and go do that with you.” —David Sacks
From McKinsey to PayPal
I knew Peter Thiel from having gone to Stanford together and we'd actually written a book together back when I was a student at Stanford and this was back in 1999. I was a management consultant at McKinsey. I just graduated from law school the year before, knew I didn't want to be a lawyer. I wanted to do business. And so McKinsey seemed like this good transition path. And then Peter called to tell me what he was working on. And it was... At that point, the company was called Confinity and it was this PalmPilot beaming, money thing.
I thought it was a dumb idea. I was like, "Who would want to do this?" Like, "Why would you need to be money from one PalmPilot to another?" And we talked about it over the course of several months and then the question came up, "Well, could you email money?" That seems like a much better idea because what if the other person doesn't have a PalmPilot, we started talking about the idea of, well could you email money? And I told him, "Well if that's what the company is going to do, then I'll quit my job McKinsey, and tomorrow and go do that with you."
So Peter and Max got together at basically the beginning of 1999, and then they raised money from Nokia ventures in summer of 99. And there was this big event at box where Nokia beamed the $3 million or whatever it was. And so, the company was still very much focused on mobile at that point. It was just one of these things that was just way too early, but it was after that, that how do we create something people are actually going to want to use, or at least I was... what I was focused on.
Working with Peter Thiel
Peter said that he wanted somebody he could yell at. Peter was the smartest guy that I knew and I did think it was a great idea. I thought this idea of emailing money could just be a killer idea. Peter went to hire me and pretty much no one else did. To his credit Peter overruled everybody else and hired me anyway. He overruled them, and so he put me in this position called VP of Strategy, which your responsibilities are really undefined. It's just like a license to have a lot of opinions about things. It's usually the role that's the obsolete founder gets stuck in. But anyway, so I joined the company as VP of Strategy. What I quickly realized is that even though the leadership of the company had decided to focus on emailing money, that's not what the team was focused on.
And I see product management as the hands of the leadership in terms of implementing its will through the organization. We had this terrific engineering team, but they were still building encryption and things that were just fundamentally interesting engineering problems. And so in very short order, what happened is, I gravitated from being VP of strategy to product because there's no one else doing it. And one of the first things I did was just drawn a whiteboard with the new UI of the website should be. Showed it to Peter and Max and we just wanted you to be able to put in your email address and a dollar amount. And then basically we surface the product hook and got all the other stuff out of the way.
Product Hook
A product hook is the atomic unit of the product. It’s the thing that's going to grab the user's attention. It's the single transaction or interaction that the user is going to want to engage in, hopefully again and again. It's the search box on Google. It's the dropping the pin on a map in Uber. It's that very simple user interaction that they're going to want to engage in. And it's a little bit like a musical hook for a song. Is that thing that grabs you. And this is especially important for consumer products, because if a consumer product doesn't have a good product hook, there's no reason to use it and adding a bunch of other things on top of it aren't going to help, because consumers don't want to graduate up to more complexity unless they're already hooked to begin with. Until you've figured out, you've nailed that interaction, nothing else really matters for a consumer product.
Working with Elon Musk
Elon always thought bigger than everybody else. He always thought that PayPal could be a hundred billion dollar plus company. Think to his credit, he didn't really want to sell and you'd have to say probably on an expected value basis, he was right. Because, PayPal today is worth over 200 billion. It's basically the same product and we sold the company for one and a half billion.
So if there was even a 1% chance of being successful as a standalone company, then you would say on an expected value basis clearly. I think he was probably right on that basis that we shouldn't have sold the flip side of it is that selling the company set everybody up for the things you're able to do next. And so he was able to do Tesla and SpaceX and Peter was able to fund Facebook and I went off and did Yammer. And so on that level, I think the deal made sense, but Elon always, I think thought bigger than the rest of us and had very big ambitions and had ideas that were just much more ambitious than other people.
Startup as a Movement
I usually discuss this in the context of trying to explain to founders what earned marketing is. So there's paid marketing, which is buying distribution, Google ad words, Facebook ads, things like that. But then there's earned marketing, which is everything else. It's PR, it's communications, it's branding, it's content, it's word of mouth. It's all the things that make you who you are, which is very hard to quantify, but is undeniably important. And so a lot of founders are a whiz kid who, A, sees the math portion of the SAT and then flunks the verbal, like they're very comfortable with stacking up quantifiable wins on paid marketing. But then when it comes to earn marketing, they just don't know how to present what they're doing to the world in an interesting way. This is where this idea that your startup is a movement in order to make your startup interesting to the world, it has to be a movement for change.
And I think the best startups are movements for change. They want to change the world in some way, they diagnose something that's wrong with the world as it stands today, and they want to move the world to a better place. And so they're constantly evangelizing for the change they want to make. Almost like a political leader or the leader of a political movement and so that's why I encourage founders to do now. So if you look at the very best, I'd say founder CEOs, they do this. Marc Benioff with Salesforce or Elon Musk with Tesla or Steve Jobs with Apple. All think about a cause that's much larger than themselves, or even the company they're creating right? With Benioff, it was about moving software to the cloud, moving business to the cloud. With Elon, it's about moving the whole world to sustainable transport and then sustainable energy.
And with Steve jobs it was about, making the computer more personal, like a bicycle for your brain. There was always this much larger vision associated with the company. And when you listen to the movement founders talk, they're not talking about the specifics of their company as much as they're talking about this movement they're creating. And that just up levels it and makes it so much more interesting. So even if you're just going to view it as like a tactic that you might want to use, it's a smart thing to do because you'll get more earn marketing for your company. But I also just think that just beyond the level of tactics, there is something to this idea that I think they're really great founders. See their startup as a movement, not just like a company.
Launching Yammer
It pretty much immediately took off by enterprise standards, because enterprise adoption is maybe one 0.1th or 0.01th of what a successful consumer product would be. We never quite knew how good it was. This whole idea of consumerized enterprise software was so new. We didn't have any benchmarks. We didn't know how well it was doing, but it definitely pick up right away. We launched it on stage at the tech crunch 50 conference in 2008, I believe. And we got about 10,000 users on the heels of that. And then it started spreading into fortune of 500 companies.
So, I guess it ended up also being fortuitous that you applied the notion of a product hook in a distribution trick. Because it would have been easy to say at the time, well, doesn't jive do this or name your B2B enterprise vendor, but you came from a completely bottoms up approach. And this is before GitHub was a thing and this was before, Slack wasn't even a gleam and Stewart Butterfield, and there weren't... now people take for granted the idea that there's several bottoms up sales motion companies, where the product does the selling and then the salespeople come in later but it's hard for me to recall a company before Yammer that did that.
Product Hook and Distribution Trick
The product hook in the distribution trick give you the initial wedge into the market, but you're by no means finished once you have that, that's really just a starting point. And with respect to SaaS or enterprise software, I think a major difference between enterprise and consumer were like call the race to completeness where enterprise buyers want to buy a complete product. Something that solves the problem that they're paying for, that they're paying to solve. And so, whereas a consumer product can remain extremely simple, like Twitter basically hasn't changed much in a dozen years and that's fine, people don't honestly want to mess with. Enterprise products are constantly in this race to be more feature complete, than their competitors. And because part of the sales process is, you'll be in a bake-off against some competitor and there'll be feature checklists that the buyer has.
And you'll have your battle card of you versus a competitor and checking more boxes than the competition is a real thing. And so the product hook in the distribution trick are really just about getting that initial wedge into the market, but then you need to race to get to some idea of a complete offering before your competitors just assimilate, whatever little tricks you've figured out. And so just having the product in distribution tricks, isn't enough. You've got to solidify that in order to figure out what is a complete offering well, you've got to have some sense then of what is your market? I think one of the things that's really hard about consumer products is that the average user doesn't have that much value, because either because it's an ad supported model, these are not paying you directly, so they're indirectly monetized, or maybe they're paying for the product, but they have high churn because consumer services too, they have very high churn.
So either way this is not a huge long-term value associated with any particular user. And so if you're paying for users, if the only distribution you can get is through paid channels, those businesses just tend not to work. They tend not to get to very big scale. It's just prohibitively expensive to buy that distribution. Enterprise software, SaaS is different because the customers have a lot more long-term value, assuming churn is low, you might keep that customer forever. And then there's this beautiful dynamic with cohorts where, okay, there may be some logo churn, but seed expansion from the customers who stay with you might offset that logo churn. So your cohorts just keep compounding every year. And so the longterm value of these customers is huge and they're willing to pay, they paid for the software, it can pay out-
Advice for Founders
I call it the wilderness period. Because... and you never know how long the wilderness period is going to take, that's the thing that's scary about it. And I talked about in the context of SaaS, because that's... I'm probably most focused on SaaS right now as an investor. The wilderness period ends when you cross the penny gap and the penny gap is when you get the first revenue for the company, but it's got to be repeatable revenues. So certain kinds of revenue don't count.
The deal that you sell, because you get your friends to buy it or your classmates at YC, I would say maybe it doesn't count, because it's not clear you can repeat that outside of YC or if it's a deal that's coming to you really through any affiliated revenue, it doesn't count. If it's a deal that you got, because you basically promised a bunch of custom work that you're not going to be able to repeat for other customers that doesn't count. So, getting that first penny of repeatable revenue is really the critical first milestone for a SaaS company. And it's quite hard to figure out exactly what it is that's going to sell. What new market can you create with a new product that people are actually going to be willing to spend money on? And that's one of the toughest things.
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