Podcast Summary
Investing in non-consensus ideas in the software industry: Identifying and investing in non-consensus ideas, like MongoDB in 2012, can lead to significant returns in the software industry. Having a clear vision and the courage to bet on new technologies and business models can help investors succeed.
Key takeaway from this conversation between Patrick O'Shaughnessy and Chetan Putagunta is the importance of identifying and investing in non-consensus ideas in the software industry. Chetan's investment in MongoDB in 2012, when the company was still in its early stages, is a prime example of this. At the time, many developers were skeptical of MongoDB and preferred established databases like MySQL. However, Chetan saw the potential in MongoDB's ease of use and ability to help developers iterate faster, which resonated with him and his experience in building consumer apps during the early days of the App Store. This story highlights the value of having a clear vision and the courage to bet on new technologies and business models that may be overlooked by the mainstream. The history of software and software investing discussed in the episode also sheds light on the importance of agility and productivity in the software development process and the role of early investors in helping new software businesses grow and succeed.
MongoDB's Impact on Database Landscape: MongoDB's flexibility and ease of use made it a popular choice among developers, but handling large-scale production use was a challenge. However, it has since matured and is now a significant database challenger.
The emergence of MongoDB as a popular NoSQL database solution was a game-changer for developers who wanted to focus on application development without worrying about complex schema and database planning. The speaker shared a personal experience of investing significant time in schema planning for a relational database for a failed consumer app. MongoDB's flexibility and ease of use allowed developers to get started quickly and learn cheap lessons, making it a popular choice among developers during its early stages. However, as the popularity grew, there were challenges in handling large-scale production use, leading to a rough period for the company. But by the late 2010s, MongoDB had matured and could handle large-scale production use, making it a significant database challenger since the 1970s when Oracle was first established. The speaker also touched upon the history of databases, mentioning Oracle as a key player due to its successful business model of offering applications built on its database technology. In summary, the emergence of MongoDB and its impact on the database landscape can be attributed to its ability to cater to the needs of developers who wanted to focus on application development without the burden of complex database planning. The history of Oracle provides valuable context to understand the business model of database companies and the evolution of database technology.
MongoDB's success due to addressing market needs during a specific time: MongoDB's NoSQL approach met the needs of developers and businesses for handling unstructured data and faster development in the rise of web and mobile apps, leading to its success in the database market.
The success of MongoDB in the database market can be attributed to its ability to address the challenges of creating a general-purpose, scalable, and flexible database solution during a specific period of time when the market was ready for it. SQL and relational databases, which had dominated the market since the 1970s, were not designed to handle the vast amounts of unstructured data and the need for faster development that came with the rise of web and mobile applications. MongoDB's NoSQL approach, which allowed for more flexible and agile data management, was well-timed and met the needs of developers and businesses in this new landscape. Additionally, the cloud and the increasing importance of software in various industries have led to a proliferation of more specialized open-source databases for specific use cases. Overall, the success of MongoDB and other modern database technologies demonstrates the importance of market timing, addressing specific use cases, and building solutions that can adapt to changing technological landscapes.
The importance of software in businesses and opportunities for growth: Investing in software companies offering general-purpose applications for specific use cases can lead to increased efficiency and significant value creation. Focusing on present trends and understanding the ground truth can lead to attractive investment opportunities in enterprise software.
The penetration of software in businesses is still increasing at a significant rate, with every industry recognizing the importance of software in powering their future. The number of developers and the shift to cloud solutions represent untapped opportunities for growth in the enterprise software market. Despite the large IT spend, a significant portion of it is still allocated to custom, manual solutions. Investing in software companies that offer general-purpose applications for specific use cases can lead to increased efficiency and significant value creation. For instance, Salesforce's cloud-based CRM system paved the way for Veeva's multibillion-dollar success in the healthcare vertical. As an investor, focusing on the present and understanding the ground truth of what's happening in enterprise software can lead to attractive investment opportunities in the 2020s.
Focus on solving customer's jobs: Build software that solves a problem and makes the customer's job easier or faster, with a clear value proposition and empathy for user experience.
Building enterprise software can lead to the creation of large, meaningful companies, as demonstrated by the high growth rates of established players like Salesforce, Workday, and AWS. To build successful software, businesses should keep in mind that their customers have jobs to do and don't have the time or desire to become experts in the system. Instead, focus on creating a solution that solves a problem and makes the customer's job easier or faster. Empathy for the user experience is crucial, as is offering a clear value proposition. The success stories of companies like Instagram and the high growth rates of cloud infrastructure providers illustrate the vast opportunities that still exist in this space.
Focus on specific users and needs for empathy-led products: Start with a small user base, understand their unique needs, and deliver professional services to build trusted relationships and eventually transition to software revenue.
Building empathy-led products in enterprise software involves focusing on a small number of relevant users and their specific needs from the very beginning. This approach, known as "go slow to go fast," allows companies to create generally applicable solutions for their focus market while avoiding the pitfalls of custom services that aren't extensible. Additionally, delivering professional services early on to customers can help build trusted vendor relationships and eventually transition to software revenue. Companies like Workday and Veeva are prime examples of this strategy, as they relied heavily on services revenue in their early days due to the complex migrations and trainings required to transition customers from their existing systems to the cloud. By delivering services that benefit the platform, startups can provide valuable assistance to customers while also creating tools that can be used for future migrations and trainings, ultimately leading to software revenue.
Identifying unique insights and finding early adopters: To create a successful enterprise software business, entrepreneurs must identify unique insights into a market, find early adopters, and build a strong product. Patient capital and a focus on customer needs are essential for long-term success.
For entrepreneurs looking to innovate, it's crucial to identify unique insights into a market and find early adopters who share that vision. This can come from having fresh eyes on an industry or deep experience in it. By addressing a problem in a new way, entrepreneurs can create a new industry standard and find willing customers who want to make their businesses more profitable. However, this process may require patient capital, as revenue growth may not come as quickly as traditional venture investors might prefer. Instead, focusing on building a strong product and finding early adopters can lead to long-term success. Ultimately, understanding the needs of your customers and providing a solution that addresses them is the key to creating a successful enterprise software business.
Minimizing customer acquisition costs and achieving organic growth through user-led product development: Focus on creating a high-quality, user-led product with a compelling customer experience to minimize CAC and achieve organic growth. Build a compelling story and sell to customers not looking at incumbents. Achieve a CAC close to 0 by creating something truly outstanding.
Focusing on developing a high-quality, user-led product with an exceptional customer experience is the key to minimizing customer acquisition costs (CAC) and achieving organic growth. This approach requires patience and a long-term perspective, but it can lead to a product with infinite customer lifetime value (LTV) and a mature business that is highly efficient and able to scale effectively. The journey to building such a product can be challenging, as it involves developing product maturity, minimizing costs, and avoiding the trap of becoming spreadsheet-driven rather than technology-driven. Companies like MuleSoft and MongoDB provide examples of how this approach can lead to remarkable success, with significant revenue growth and eventual acquisition by larger companies. Competition should not be a major concern in the early stages, as it is unlikely that someone else is building exactly the same product. Instead, focus on selling to customers who are not looking at the incumbent and building a compelling story of why your product is better. Ultimately, the goal is to create a product that spreads organically and has a CAC close to 0, which can only be achieved by building something truly outstanding and user-led. This may require a significant investment of time and resources, but the long-term benefits can be substantial.
Focusing on solving a specific problem for customers in early stages: To grow a software business, focus on solving a specific problem for customers, be cash efficient, and maintain a 15% yearly revenue growth rate within each customer to create loyalty and expansion.
In the early stages of selling a software solution, customers are more likely to evaluate you against their existing custom solutions rather than competing products. Therefore, it's crucial to focus on solving a specific problem for the customer and taking the time to refine the solution. Cash efficiency is also essential as you scale, as it impacts return on invested capital in research and development and sales and marketing. By growing revenue within each customer by 15% year over year, you can create customer loyalty and natural expansion, leading to significant long-term growth. However, maintaining this growth rate for an extended period requires solving fundamental business problems for your customers and acting as their business partner. Common reasons for not investing include a lack of focus on solving a specific problem and premature scaling. It's essential to take calculated risks and learn from mistakes, as making a mistake in early-stage investing can result in significant losses.
Aligning with entrepreneurs for long-term commitment: Focus on hiring capable executives, sales and marketing, financing strategy, and capital efficiency for successful scaling in early-stage investing.
Early-stage investing requires a deep alignment between the investor and the entrepreneur, making it a double opt-in decision. This long-term commitment involves becoming a trusted business partner and requires open-mindedness to new opportunities. While product development is crucial, scaling a business comes down to people. Great enterprise software CEOs attribute their success to hiring capable executives who exceed expectations. When scaling, focus on sales and marketing, financing strategy, and capital efficiency. Remember, every investment opportunity is unique, and being open-minded and prepared are key to discovering the next big thing. Despite the occasional missed opportunity, which can be painful, continuous learning and refinement are essential for growth in the ever-evolving world of early-stage investing.
Hiring top talent for software businesses: Build a large talent pipeline, have a structured interview process, consider references, and embrace remote work for a competitive edge in recruiting
Recruiting great talent is crucial for the success and scaling of a software business. The process of hiring involves a double opt-in decision, where both the company and the candidate must be a good fit. Building a large talent pipeline and having a structured, predictable interview process are essential. References are also important to understand a candidate's past performance. Companies can differentiate themselves in the talent market by embracing remote work and creating a remote-friendly culture. This includes practices like having all meetings be virtual, encouraging written communication, and having deep wikis to promote asynchronous collaboration. Ultimately, every software business relies on its people to scale, and a well-run recruiting process is key to bringing in top talent.
Effective offline advertising for enterprise software companies: Offline advertising can reach potential customers or candidates at the top of the funnel. Successful campaigns require systematic thinking, efficient use of resources, and saying no to good but not great ideas. MuleSoft's campaign at local train stations is an example of effective offline advertising for enterprise software companies.
Offline advertising can be an effective and creative way to reach potential customers or candidates at the top of the funnel, especially in the context of enterprise software companies. The speaker shared an example of a successful campaign run by MuleSoft at local train stations in San Francisco, and expressed interest in replicating it at the Greenwich train station. Offline inventory, such as airport ads, can be particularly efficient due to the captive audience and free time available. This approach requires a systematic thinking around pipelines for product, customers, and recruiting, which takes time and discipline to implement but can lead to long-term benefits for company culture and innovation. The speaker also emphasized the importance of saying no to good but not great ideas in the early stages of company building, and working with talented investors who can provide valuable insights and guidance.
Exploring extensibility in early stage investing through consumer and enterprise software: Unit economics, LTV and CAC traps, product engagement, and deep customer focus are crucial concepts in early stage investing. Effective communication, asking the right questions, and synthesizing complex ideas are key skills for success.
The concepts of extensibility in early stage investing, such as unit economics, LTV and CAC traps, product engagement, and deep customer focus, are widely applicable to various segments of technology businesses including consumer and enterprise software. Bill's insights on LTV and CAC traps and Sarah's writings on consumer software engagement are particularly valuable in this regard. The group at Benchmark, with its diverse perspectives and open-ended discussions, has helped its partners continuously improve and learn from each other, enabling them to make informed decisions and discover new opportunities. Effective communication, the ability to ask the right questions to subject matter experts, and synthesizing complex information into digestible ideas are essential skills for success in this field.
Leveraging a diverse network for investment opportunities: Having a diverse network can lead to quick and accurate answers, efficient research, and strategic partnerships that enhance investment opportunities. Companies like Amazon, Microsoft, and Google have demonstrated this through their success in the cloud business by embracing open ecosystems and partnering with startups.
Having a diverse and knowledgeable network can significantly enhance investment opportunities by providing quick and accurate answers to questions, and allowing for efficient research. This was exemplified by the discussion about Amazon and its cloud business, AWS. AWS revolutionized application development a decade ago by providing a more convenient and reliable alternative to traditional hosting methods. As Amazon's dominance in the infrastructure layer grew, Microsoft and Google entered the market, but took a unique approach by embracing an open ecosystem and partnering with startups to offer best-in-class solutions. This strategic move has played a significant role in their market momentum. Overall, the power of collective knowledge and strategic partnerships can lead to remarkable business success.
Competition among major cloud infrastructure players drives innovation and interoperability: Microsoft, Google Cloud, and AWS lead the cloud infrastructure market, each with unique strengths. Competition fosters innovation and interoperability, enabling technologies like Kubernetes help businesses move workloads, and open source initiatives foster developer communities and drive innovation.
The cloud infrastructure market is becoming increasingly competitive, with major players like Microsoft, Google Cloud, and Amazon Web Services (AWS) leading the charge. Each of these companies brings unique strengths to the table, with Microsoft's rapid growth, Google Cloud's focus on machine learning and analytics, and AWS's long-standing dominance. This competition is driving innovation and interoperability, with enabling technologies like Kubernetes making it easier for businesses to move workloads between different cloud providers. Open source initiatives, such as Google's open sourcing of TensorFlow, are also playing a significant role in this evolution by fostering developer communities and driving innovation. For entrepreneurs, this is an exciting time as more businesses prioritize software and seek out partners to help them succeed. Open source businesses offer valuable lessons, including the importance of engaging with developer communities and the constant pursuit of the best solutions for specific problems. By plugging into these communities and learning from industry leaders, entrepreneurs can gain valuable insights and grow their businesses.
The Value of Openness and Transparency in Business: Being open and transparent in business can lead to stronger relationships with customers, recruit top talent, and foster a community of engaged developers.
Being open and transparent in business, particularly in the tech industry, can lead to unexpected benefits. This approach can foster a community of engaged developers, help recruit top talent, and build trusted relationships with customers. Contrary to the traditional notion of protecting proprietary processes as a company's ultimate defense, the value lies in the customer relationship and being a trusted vendor. Companies like Google have shown this through open sharing of technical knowledge and solving complex problems publicly. The speaker emphasized the importance of mentors and informal mentors in their career and learning in public as valuable sources of knowledge and growth. Overall, the discussion highlighted the importance of openness, transparency, and community in building successful software businesses.
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