20VC Okta Founder Frederic Kerrest on Why You Want To Be A Monopolist In A Small Market, The Biggest Challenges in Scaling Okta To IPO and Being a16z's First Ever Fund Check



In this episode of the 20 minutes VC, host Harry Stebbings interviews Frederick Kerrest, co-founder and COO of Okta, a company that has impressively IPOed and raised over $415 million from top-tier investors. Kerrest shares insights from his journey, emphasizing the importance of perseverance, hiring the right team, and adapting to market needs. He reflects on Okta's early challenges, the strategic pivot from targeting small businesses to mid-market companies, and the significance of having investors with operational experience. Kerrest also underscores the need for substance over flash in Silicon Valley, the balance between growth and capital efficiency, and the criticality of founder-market fit in enterprise software. The episode also touches on the value of resources like Stripe for scaling businesses and tools like TravelPerk for efficient business travel management.

Summary Notes

Introduction to Frederick Kerrest and Okta

  • Frederick Kerrest is the founder and CEO of Okta, a platform that securely connects people to technology.
  • Okta has raised over $415 million from notable investors and IPOed in April 2017.
  • Prior to Okta, Frederick worked at Hummer Winblad Venture Partners, Salesforce, and Sun Microsystems.

"And today's guest has all of these in buckets. And so I'm super excited to welcome Frederick Kerist, founder and CEO at Okta, the independent and neutral platform that securely connects the right people to the right technologies at the right time."

The quote introduces Frederick Kerrest as a dynamic guest with a successful background, highlighting his role at Okta.

The Founding of Okta

  • Okta was founded ten years ago by Frederick Kerrest and his co-founder Todd McKinnon.
  • Both founders have a background at Salesforce.com, where they observed the shift from on-premises software to cloud services.
  • They identified identity management as an opportunity and created Okta to provide an enabling layer for SaaS adoption.

"We looked around, we talked about it a bunch and we saw that identity was going to be a huge opportunity."

This quote explains the rationale behind founding Okta, focusing on the potential of identity management services.

Lessons from Salesforce's Hypergrowth

  • Frederick's time at Salesforce was marked by rapid growth and opportunities for innovation.
  • He learned the value of SaaS through Salesforce's ability to provide immediate utility without the overhead of traditional software implementation.

"Seeing the value that companies were getting out of Salesforce.com, out of a service that you could subscribe to over the Internet and you could just start using right away, as opposed to spending all of your precious resources implementing software, getting it right, deploying it to servers, putting it in data centers, just that value, the return on investment, the time to market, the total cost of ownership was such a clear, powerful mission that that was actually what really got us started on Okta and has us where we are today."

The quote reflects on the transformative impact of SaaS models, which inspired the creation of Okta.

The Importance of Market, Team, and Product

  • David Morgenthaler's investment philosophy emphasized the importance of a growing market, a fantastic team, and the product, in that order.
  • Frederick Kerrest agrees with the significance of a large and growing market and a great team to find the right product-market fit.

"Basically it's been 70% market, 20% team, 10% product."

The quote summarizes David Morgenthaler's investment philosophy, which influenced Frederick's views on what makes an idea worth pursuing.

The Role of Founders in Identifying Markets

  • Founders are crucial in identifying and capitalizing on market opportunities.
  • There is a belief that exceptional founders will find their market, even if it is not initially apparent.

"I might have been even more successful if I'd thrown away all the business plans and just read the resumes."

This quote from an investor at Sequoia suggests the paramount importance of founders' capabilities over initial business plans.

Founder-Market Fit

  • Founder-market fit refers to the alignment between a founder's background and the market they are entering with their startup.
  • Some founders have a natural fit with their market due to personal or professional experience.
  • Others may not have a direct connection but can still succeed through analysis and identifying opportunities.

Can I ask, we often hear today about founder market fit. I think to say Pillpack with TJ being brought up in the world of pharmacy and then starting pillpack.

This quote exemplifies the concept of founder-market fit where a founder's personal background aligns with their business, as with TJ Parker and Pillpack.

But then I had, like, Marco at Thumbtack on the show who said that actually you can be a consultant coming out of Bain and do a swot analysis and come up with an idea that maybe doesn't have such founder market fit.

This quote acknowledges that founder-market fit isn't always necessary for success, as demonstrated by Marco from Thumbtack, who entered the market with a consultant's analytical approach rather than industry-specific experience.

Enterprise Software Market Knowledge

  • In-depth market knowledge is crucial for success in enterprise software.
  • Successful enterprise software founders often have significant experience and understanding of business processes and systems.
  • Vision for the future of the market is also important.

I think in enterprise software you do have to have a lot of knowledge about the market. You have to have a lot of experience, a lot of understanding, and a lot of vision, frankly, of where it's going to go.

Frederic Kerrest emphasizes the importance of deep market knowledge and vision in the enterprise software industry, drawing from his own experience.

Market Sizing and Expansion

  • Market sizing is not just about targeting big markets; it can also involve starting with a niche and expanding.
  • Becoming a monopolist in a small market with many adjacencies can be a strategic approach.
  • Successful companies often start with a focused offering and then expand by adding related products or services.

You want to become a monopolist in a small market with a lot of adjacencies.

This quote from Frederic Kerrest explains the strategy of dominating a small market with the potential for expansion, which aligns with Peter Thiel's advice from "Zero to One."

Scaling and Perseverance

  • Scaling a company is a challenging process that requires perseverance, especially before reaching product-market fit.
  • Transparency and communication within the company are essential during tough times.
  • Founders must balance conviction with openness to feedback and potential pivots.

When the going gets tough, the tough get going, you got to keep grinding at it, you got to keep pushing through, you got to keep finding those different ways to do things.

Frederic Kerrest highlights the importance of perseverance and continuous effort during the challenging early stages of a company's growth.

Determining When to Pivot

  • Founders must decide whether to stick to their original vision or pivot based on market feedback.
  • Conviction is necessary, but so is the ability to listen to feedback and adapt.
  • Having experienced advisors or board members can provide valuable guidance during decision-making.

You do have to have a certain amount of conviction as a founder... At the same time, you can't walk around with blinders on.

Frederic Kerrest discusses the balance between having conviction in one's vision and being open to making changes based on feedback and market realities.

Leadership Under Pressure

  • Leading a company through pressure and scrutiny is challenging.
  • Having co-founders can provide support and facilitate decision-making.
  • Staying positive and focusing on small wins can help navigate tough times.

Hopefully you have a co founder... You're able to at least look at someone else and ask the hard questions, are we doing the right things?

Frederic Kerrest speaks to the benefit of having a co-founder to share the burden and collaborate on critical decisions during high-pressure periods.

Scaling as Founders

  • Scaling requires a focus on continuous growth and the ability to adapt.
  • Venture-backed companies, in particular, are expected to grow aggressively.
  • The ability to raise capital and maintain a positive outlook is crucial.

So I think the biggest thing for us in building a venture backed software company, Harry, was that we knew that we were going to keep growing, and we're going to keep growing aggressively.

Frederic Kerrest identifies aggressive growth as a key component of scaling a venture-backed software company, emphasizing the need for a forward-thinking mindset.

Building Different Types of Businesses

  • There are various types of businesses one can build, including lifestyle, cash flow, and high growth businesses.
  • High growth businesses are characterized by aggressive hiring, expansion into new markets, geographies, and businesses.
  • Success in scaling a high growth business involves hiring experts who are more skilled in specific roles than the founders.

"You can build a lifestyle business. You can build a cash flow business. You can build businesses where it's a very good way of building a different kind of business."

This quote highlights the different types of businesses an entrepreneur can choose to build, each with its unique approach and goals.

"We were in the high growth business, and we have been right."

Frederic Kerrest emphasizes that their focus was on building a high growth business, which has proven to be the correct path for their company's success.

The Importance of Hiring Experts

  • The process of scaling involves the founder transitioning from multiple roles to hiring specialized experts.
  • Key hires, such as a professional head of go-to-market and head of engineering, can be pivotal for growth.
  • Being introspective and recognizing when to hire experts to replace oneself is crucial for the company's advancement.

"So it's kind of thinking about, how can I hire myself out of these jobs? By hiring experts."

Frederic Kerrest explains the importance of hiring experts to take over roles that the founder initially filled, which is essential for scaling the business.

Capital Efficiency in Aggressive Growth

  • Capital efficiency is crucial in a capitalist world where growth is highly valued.
  • Building a sustainable company requires a balance between aggressive growth and mature operational management.
  • Understanding and applying the right financial ratios and frameworks, such as cost of customer acquisition and lifetime value, is essential.
  • Companies need to have a payback plan for investments, particularly in go-to-market strategies.

"I mean, the capital efficiency is key, right?"

Frederic Kerrest stresses the importance of capital efficiency when growing a business aggressively, highlighting its significance in both private and public markets.

"We thought about it as how fast can we grow while still doing it in a mature way."

This quote encapsulates the company's strategy of pursuing rapid growth while maintaining a responsible and adult approach to running the business.

Venture Capital Funding and Investor Relationships

  • Meeting influential individuals like Mark Andreessen can lead to valuable connections and opportunities.
  • Building a company within the ecosystem of supportive friends and investors can be beneficial.
  • The story of receiving the first check from Andreessen Horowitz's first fund is a notable milestone for Opta.

"The first check that they wrote out of their first fund in the summer of 2009 was into our seed round."

Frederic Kerrest recounts the significant event of receiving venture capital from Andreessen Horowitz, which marked the beginning of a long-standing partnership.

Overcoming Intimidation with Venture Capitalists

  • First-time founders may find it intimidating to pitch to and manage relationships with prestigious venture capitalists.
  • Founders need to focus on their strengths and be able to communicate their vision effectively, sometimes beyond traditional pitch decks.
  • Receiving numerous rejections is common, and founders must persist to secure funding.

"But, yeah, totally intimidating. When you're trying to build your first big technology company and you're sitting there trying to get 510 $15 million to get going as a company. Very, very intimidating. Absolutely."

Frederic Kerrest acknowledges the intimidation that founders feel when seeking significant funding from venture capitalists for the first time.

Selecting Investors and Advice for Founders

  • When selecting investors, founders should look for those with experience in building large, independent companies.
  • It's important to have a diverse group of investors with complementary skills and networks.
  • Founders should consider cultural fit, shared values, and the potential for investors to provide support beyond capital.

"So we tried to put folks around the table who were operators, who had the experience doing exactly what we were trying to do."

Frederic Kerrest explains the importance of selecting investors who have operational experience and can provide valuable insights and support for building a large company.

"You just want to find people who are going to help you complement and who have the same vision and are going to be there with you to build."

This quote highlights the need for alignment between founders and investors, ensuring that both parties share the same vision for the company's future.

Intestinal Fortitude in Business Partnerships

  • The importance of having partners with the resilience to endure challenges.
  • Partners should share the vision and culture to successfully do business together.

You want to make sure that there are people. We're going to have the intestinal fortitude to say, hey, we know things aren't going to go perfectly smoothly, but we are here with you. We see that right vision. We've got the same culture and we want to go into business together.

The quote emphasizes the need for resilient and culturally aligned partners in business, recognizing that while challenges are inevitable, a shared vision and commitment are crucial for a successful partnership.

Importance of Historical Knowledge

  • Reading about history, specifically the US Civil War, provides insight into the formation of current societal structures.
  • Understanding history is beneficial for contextualizing current political and social environments.

It's a very long book, but it talks about the US civil War. So it just gives you an idea of what was going on before the Civil War, what actually happened in the war, what happened after the war.

This quote highlights the value of understanding historical events, like the US Civil War, to gain perspective on their influence on today's society and politics.

Substance Over Flash in Silicon Valley

  • Advocates for a focus on meaningful innovation over short-lived trends.
  • Calls for investors, entrepreneurs, and media to prioritize impactful technological advancements.

I think that there's a lot of sizzle and not enough stake in Silicon Valley. So I really would like us to see an increased attention on substance over flash.

Frederic Kerrest criticizes the tendency in Silicon Valley to prioritize style over substance and calls for a shift towards more significant and enduring innovations.

Hiring Philosophy

  • Supports a balanced approach: hire slowly, fire fast.
  • Warns against the pitfalls of hasty hiring and the long-term negative impact of unfit hires.

Hire slowly and fire fast. I think the problem with hiring too fast is you're going to end up getting someone in the role, which is great... But if you don't get the right people, that is actually going to push you back twelve or 18 months.

Frederic Kerrest explains his hiring philosophy, emphasizing the importance of taking the time to find the right candidates to avoid setbacks caused by premature hiring decisions.

Guiding Mottos for Startups

  • "Keep the main thing, the main thing" stresses focusing on core objectives.
  • Herb Kelleher's quote "We have a strategic plan. It's called doing things" encourages action over excessive planning.

First of all, keep the main thing, the main thing... The other one is actually a quote from Herb Keller, founder of Southwest Airlines. He had a great quote, which is, we have a strategic plan. It's called doing things.

These quotes serve as mottos for startup founders, suggesting that they should concentrate on their primary goals and prioritize taking action to achieve success.

Decision-Making in Startups

  • Emphasizes the importance of momentum and making timely decisions.
  • Acknowledges that waiting for perfect information can lead to missed opportunities.

Make good decisions as quickly as you can with the best amount of high fidelity data you have at the time. But it's never going to be perfect, and you got to just keep moving.

Frederic Kerrest advocates for making the best possible decisions with available data rather than waiting for perfect information, highlighting the importance of maintaining momentum in a startup environment.

Long-Term Perspective on Building Companies

  • Acknowledges the lengthy process of building a significant company.
  • Stresses the need for speed and endurance throughout the journey.

I wish I'd known that it was a marathon, not a sprint. But you still have to run six minute miles.

Frederic Kerrest reflects on his experience, wishing he had known the importance of balancing the long-term outlook with the necessity to move quickly in the competitive landscape of building a company.

Future Prospects for Okta

  • Excitement for the future due to the potential in workforce and customer identity management markets.
  • Aims to leverage trends in cloud adoption, digital transformation, and security.

The markets that we're in around workforce identity management, around customer identity and access management, these are markets that are tens and tens of billions of dollars being spent on legacy infrastructure software.

Frederic Kerrest outlines the growth opportunities for Okta, identifying key areas where the company can make an impact and expressing enthusiasm for the future contributions to technology and security.

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