20VC DFJ's Josh Stein on Why VCs Must Adapt To Their Founders, The Major Transition Points For Aaron Levie @ Box & Why SaaS Startups Are Growing At A Rate Never Seen Before

Summary Notes


In this episode of "20 minutes VC," host Harry Stebbings interviews Josh Stein, a partner at DFJ, discussing his transition from an operator to a venture capitalist and the insights gained from his experiences. Stein shares his investment philosophy, emphasizing the importance of backing driven founders and the potential for growth in companies like Box, where he's a board member. He highlights the significance of adaptability in leadership, the impact of a company's ability to integrate into customer workflows, and the vast untapped potential within existing markets. Stein also touches on the art of market sizing and the value of understanding a company's total addressable market (TAM). The conversation delves into the dynamics of VC-founder relationships, the evolution of SaaS companies, and the role of metrics in investment decisions. Harry Stebbings also promotes his new writing venture and endorses products that align with his personal goals of better sleep and productivity.

Summary Notes

Introduction to DFJ and Josh Stein's Background

  • Host Harry Stebbings introduces Josh Stein, a partner at DFJ.
  • Josh Stein's board responsibilities include companies like Box, Chartbeat, Launchdarkly, Lendkey, Sugar CRM, Periscope Data, and Talkdesk.
  • Stein is also involved with DFJ's investments in AngelList, Doximity, and Twilio.
  • Before joining DFJ, Josh was a VP at Telefia and a co-founder of Viaphone, a DFJ portfolio company.
  • Jason Lemkin is acknowledged for introducing Josh Stein to the show.

"Well, this week we will be featuring DFJ and joining me from DFJ today, I'm thrilled to welcome Josh Stein, partner at DFJ, where his current board responsibilities include Box, Chartbeat, Launchdarkly, Lendkey, sugar CRM and previous guests with me on SaSta in the form of periscope data and Talkdesk."

The quote explains Josh Stein's significant role at DFJ and his extensive involvement with various successful companies.

Journey into Venture Capital (VC)

  • Josh Stein joined VC from the operating side, starting as a product manager at a startup.
  • Post business school, he co-founded a company in the wireless web tools space, which received investment from DFJ.
  • Stein sold his company in 2002 and later joined DFJ in 2004 as part of the investment team, after gaining experience as a VP of sales.

"And so we founded the company in 99 and a number of venture firms invested in us, including DFJ, who actually led my series A round and so got to know the DFJ guys."

This quote highlights the start of Josh Stein's entrepreneurial journey and his initial connection with DFJ, which later led to his career in venture capital.

DFJ's Investment Philosophy

  • DFJ is known for taking 'moonshots' and not being afraid to challenge conventional wisdom.
  • In the 90s, DFJ was one of the first firms to invest in internet companies like Hotmail and Skype.
  • Josh was attracted to DFJ for their willingness to think differently and their alignment with founders.
  • DFJ's culture emphasizes backing people over ideas or markets and supporting entrepreneurs without micromanaging them.

"DFJ has always been known for kind of the moonshots before that was a popular term, so they haven't been afraid to buck convention."

The quote encapsulates DFJ's bold investment strategy, which has led to the firm's reputation for funding groundbreaking ventures.

Founder-VC Relationship Dynamics

  • A strong relationship between a founder and VC is crucial for a successful partnership.
  • The relationship is compared to a marriage, often lasting many years.
  • It's important for both parties to spend time understanding each other, beyond just a few meetings.
  • Josh Stein believes it's the VC's responsibility to adapt to the entrepreneur's style rather than the other way around.
  • Effective VCs adjust their approach based on the needs of each founder and company.

"I think the best interactions I've had is when I've had more time to get to know entrepreneurs."

This quote underscores the importance of building a deep, understanding relationship between VCs and entrepreneurs for successful collaboration.

Role Flexibility in Supporting Entrepreneurs

  • Venture capitalists must adapt to the needs of entrepreneurs to facilitate their success.
  • Josh Stein emphasizes the importance of being flexible to the entrepreneur's style rather than imposing one's own.

"I try to be flexible rather than forcing the entrepreneur to be flexible."

The quote underlines Josh Stein's approach to venture capital, where he prioritizes adapting to the entrepreneur's needs over enforcing his own methods.

Adapting to Entrepreneurial Styles: The Case of Box

  • Josh Stein, as an operator, is naturally more conservative, focusing on a smaller number of tasks to ensure quality.
  • He adapted to Aaron Levy's more aggressive and parallel processing approach at Box, recognizing its effectiveness in the context of time-bound opportunities.

"Aaron Levy at Box is much more of a parallel processor and is much more also know, I think he's more willing to make mistakes along the way because he sees, and I think very correctly, in the sense of know, a time bounded opportunity where taking a more conservative path could actually, interestingly, lead to failure rather than a higher chance of success."

This quote illustrates the difference in operational styles between Josh Stein and Aaron Levy, and Stein's recognition of Levy's successful approach despite being counter to his own conservative instincts.

The Role of Board Members and Managers

  • Board members and managers should allow individuals to pursue their own strategies and feel ownership over them.
  • Imposing an unnatural strategy on an entrepreneur could lead to resentment and less success.

"I think it's really important as a board member, but also when I've been a manager, I think it's very important to let people pursue their own strategies so that they feel ownership of them rather than feeling like they've been constrained by the outside."

Josh Stein highlights the significance of autonomy in strategy development, suggesting that board members and managers should facilitate, not dictate, strategic direction.

Handling Disagreement with Leadership Decisions

  • Disagreement should not be seen as disobedience; it's about listening, understanding, and addressing concerns before making decisions.
  • Making repeated mistakes is a sign of poor leadership; learning from mistakes is crucial.

"The number one reason where we do occasionally say, hey, this is not the right leader for the company is when you see someone who's not able to learn from their mistakes, right. And adapt to them."

Josh Stein points out that an inability to learn from mistakes is a key indicator of ineffective leadership, emphasizing the importance of adaptation and growth.

Identifying Potential in Entrepreneurs: The Early Days of Box

  • Entrepreneurs Aaron Levy and Dylan Smith exhibited high intelligence, passion for their product, and intense drive.
  • Their response to feedback and willingness to work tirelessly were key indicators of their potential.

"It was great. I sent them later that day a list of questions and like 04:00 a.m. That night I get back a ten page written response from Aaron and Dylan with really thoughtful answers to all my questions."

This quote demonstrates the commitment and responsiveness of Box's founders, qualities that impressed Josh Stein and contributed to his decision to invest.

The Evolution of Aaron Levy and Box

  • Aaron Levy's growth from an inexperienced founder to a respected leader shows the potential for self-improvement and skill acquisition.
  • Stein believes that with enough drive and willingness to learn, anyone can become a successful leader.

"So Aaron is a great example of, if you just read and study and go seek mentorship from experienced people, how far you can come in really just a few short years, all of those skills he learned on the job."

The quote is a testament to Aaron Levy's dedication to self-improvement and the ability to develop necessary skills to become an effective leader, as observed by Josh Stein.

Pivotal Moments in Leadership Development

  • Aaron Levy's growth as a CEO was marked by pivotal moments that included focusing on the company's best customers.
  • These moments were crucial in developing a deeper understanding of the business and refining the company's strategy.

"So the first was about a year after we invested in 2007. Company was actually doing great and it tripled or quadrupled from when we invested."

Josh Stein reflects on a significant period in Box's growth, indicating that strategic customer focus was a key factor in the company's development and Aaron Levy's evolution as a CEO.

Box's Pivot to Enterprise

  • Box began as a consumer-focused tool but shifted to enterprise due to customer usage patterns.
  • Businesses utilized Box for sharing professional documents, prompting a strategic pivot.
  • Aaron, the leader, decisively transitioned the company to focus on enterprise solutions.

"The best customers, in terms of the ones that stuck around the most that used the product, the most that were paying us most were people who were using it for business stuff, not personal stuff." "Aaron internalized that, thought about it, and basically came back a couple of days later and said, hey, we're going to become an enterprise company."

The quotes explain that the decision to pivot to enterprise was based on customer behavior and revenue patterns, and Aaron's leadership was pivotal in making this strategic shift.

Leadership During Financial Crisis

  • The financial crisis posed a significant challenge during Box's Series C funding round.
  • USVP continued funding internally when external funding was difficult to secure.
  • Aaron's leadership was crucial during this period, making tough decisions to ensure company survival.

"Lehman Brothers fails. Like, as we're out on the road for series C, nobody wanted to hear from a couple of guys in their early 20s about a young software company." "Aaron's leadership through that period, I think, made him a lot tougher. And he did what needed to be done there."

The quotes highlight the difficulties faced during the financial crisis and the importance of strong leadership in navigating through tough financial periods, which also set the stage for future growth.

Box's Potential for Growth

  • Box has a broad customer base across various industries and functional groups.
  • The Total Addressable Market (TAM) for Box is substantial, with opportunities for upselling within the existing customer base.
  • New features and functionalities could enable Box to increase its value and pricing.

"The TAM is effectively all knowledge workers." "Even if we're within our existing customer base, we have a ten x plus opportunity to upsell within that."

These quotes emphasize the vast market potential for Box and the existing opportunities for growth within their current customer base by expanding their offerings.

SaaS Landscape and Growth

  • Companies like Box, Talkdesk, and Twilio are growing rapidly in the SaaS landscape.
  • Twilio focuses on developers and has a frictionless onboarding process.
  • Modern SaaS companies can scale quickly with lower initial investments compared to the past.

"Twilio, developer focused, not a traditional sales process to a large degree." "Today, a company, from a technical perspective, can spin up... in hours."

The quotes discuss the growth strategies of different SaaS companies and how technological advancements have reduced the cost and time required for startups to scale.

The Artistic Approach to SaaS Investing

  • Metrics in SaaS are often trailing indicators of success.
  • Investing in SaaS involves assessing the team's ability to scale and the size of the TAM.
  • SaaS investing is not just about spreadsheets but understanding the holistic picture of a company's potential.

"The metrics are usually trailing metrics." "Is this a team that is going to reliably figure out how to scale a company over time?"

These quotes convey that while financial metrics are important, the true art of SaaS investing lies in evaluating the team's capabilities and the market opportunity beyond just the numbers.

Importance of a Competitive Moat

  • In the fast-paced tech landscape, having a competitive moat is crucial due to ease of entry for competitors.
  • Network effects and deep integrations into business workflows can create a strong moat.
  • Examples include Box and Salesforce, which are deeply embedded in their customers' processes.

"So looking for things that have some inherent network effect or deeper ties is really important."

The quote emphasizes the importance of building products that have network effects or are deeply integrated into customer workflows to create a durable competitive advantage.

Market Sizing Approach

  • Market sizing is both an art and a science, involving a mix of bottom-up and top-down approaches.
  • Founders must be adept at navigating and identifying where the money is, which often involves numerous micro pivots.

"I think some of it is bottoms up. I think some of it is top down. Some of it is looking at what the current generation of technology has been."

Josh Stein highlights the multifaceted approach to market sizing, indicating that it requires a combination of different perspectives and an understanding of current technological trends.

Quick Fire Round Responses

  • Josh Stein values simplicity and focus, as reflected in his favorite book choice.
  • President Obama is cited as an inspiration due to his intelligence, drive, character, and poise.
  • Time management remains a significant challenge, with the need to prioritize the important over the urgent.
  • For venture capital insights, Term Sheet by Dan Premack is recommended.
  • The relationship between venture capitalists and founders should be viewed as a partnership.
  • Josh Stein's most recent investment, Launchdarkly, is favored due to its solution to a common pain point between marketing and engineering teams.

"I just read insanely simple by Ken Siegel about Apple. And I think I'm a big believer in focus."

Josh Stein's preference for simplicity and focus in business is underscored by his favorite book, which aligns with Apple's philosophy.

"President Obama. I think if you want a great example of someone with intelligence, drive, character and poise, he to me, is the exemplar of all those."

The quote provides insight into the qualities that Josh Stein admires in leaders, with President Obama serving as an exemplar.

"It's the hardest thing in venture. It can be reading about a new sector, you can be diving in on one of your existing companies."

The challenge of time management in venture capital is highlighted, with the need to balance various demands on one's time.

"Term sheet by Dan Premack, although he has just left and he's starting a new one. But that has been the absolute go to."

Josh Stein recommends Term Sheet for those interested in venture capital insights, indicating its importance in the industry.

"Together as partners. Not thinking that one is working for the other, but thinking of it as a business partner who is totally aligned with you."

The quote emphasizes the importance of a partnership approach between venture capitalists and founders for successful collaboration.

"They have a platform for something called feature flags, which enables much more agile development for continuous development and delivery."

This quote explains why Josh Stein is excited about his investment in Launchdarkly, highlighting the product's ability to solve inefficiencies in software development.

Show Acknowledgments

  • Harry Stebbings expresses gratitude to Josh Stein for his insights and support.
  • A thank you is given to Jason Lemkin for introducing Josh Stein to the show.
  • The hosts promote their respective social media and blogs, providing platforms for audience engagement.
  • The podcast promotes Simba Hybrid and Cirrus Insight, emphasizing the benefits of the products for sleep and productivity, respectively.

"Harry, thank you so much and congratulations. I look forward to doing a deal with you."

Josh Stein reciprocates the appreciation and looks forward to future collaboration with Harry Stebbings.

"I really do appreciate it."

Harry Stebbings expresses his gratitude for the support received.

"Another target of mine for the new year is also productivity, and there's no better for that than cirrus insight."

The quote suggests the importance of productivity tools, specifically Cirrus Insight, for sales professionals who use Salesforce.

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