20VC Why Founding Your First Company Is Like Learning Through A Thousand Paper Cuts, The 3 Core Phases to Product Adoption and Why Valuation Obsession Must Change In The Valley with Armon Dadgar, Founder & CTO @ Hashicorp

In this episode of "20 Minutes VC," host Harry Stebbings interviews Armin Dadgar, founder and CTO of HashiCorp, a company specializing in open-source tools for automating modern software operations. Armin shares his journey from software engineer to co-founding HashiCorp with Mitchell Hashimoto, focusing on the lack of consistent tooling for managing cloud infrastructure. With over $74 million in VC funding, HashiCorp has successfully navigated the open-source landscape, producing multiple hit products by addressing pain points they personally experienced. Armin discusses the balance between product innovation and commercial viability, emphasizing the importance of understanding customer needs across various market segments. He also reflects on HashiCorp's decision to bring in an external CEO to better position the company for enterprise success, highlighting the nuances of this transition and the careful consideration of founder strengths and company focus.

• Armin Dadgar is the founder and CTO of Hashicorp, a company specializing in open source software for infrastructure management.
• Hashicorp has raised over $74 million in venture capital funding.
• Armin leads Hashicorp Research, focusing on security and large-scale system management.
• Before founding Hashicorp, Armin worked as a software engineer at Keep and Amazon.

"And to date, Hashicorp have raised over 74 million in vc funding from many friends of the show, including Scott Rainey at Redpoint, Glenn Solomon at GGV, Semil Shah, True Ventures and Mayfield, just to name a few."

This quote highlights the significant venture capital funding that Hashicorp has secured, indicating its strong position and potential in the market.

• Armin and his co-founder Mitchell Hashimoto met at the University of Washington in the computer science program.
• They worked on research projects and startup-like ventures during university.
• Both worked at the same mobile advertising firm, where they recognized a gap in operational tooling for cloud infrastructure management.
• The realization of the need for common tooling for infrastructure provisioning, deployment, and security led to the founding of Hashicorp.

"And the thing that became painfully obvious to us, sort of after working closely together for many years, was there's this gap in the market of operational tooling, right?"

Armin explains the primary motivation behind founding Hashicorp: identifying a market need for better operational tooling in cloud infrastructure management.

• Hashicorp is unique in that it has produced multiple successful open-source projects.
• The secret to their success is creating products that solve problems they personally experienced.
• They deeply understand the end-user's pain points because they were once those users.
• Not all projects succeed; they are willing to shelve projects that miss the mark.

"I think what it really comes down to is, in some sense, for me and Mitchell, these aren't products we started off creating for the market. It was products we were creating for ourselves."

Armin emphasizes that the products were developed to address their own challenges, which translated into a strong empathy for the end-users and successful product development.

• Hashicorp's products often appear as overnight successes, but they typically undergo three phases of adoption: flatline, linear growth, and exponential growth.
• The flatline phase, which can last one to two years, is a period of uncertainty where it's unclear if the product will succeed.
• Determining whether a product is in a natural flatline phase or has missed the market is a significant challenge.

"And this is the kind of the essential baking period, if you will. Or is it a flat line because we missed the mark?"

Armin describes the critical period of product development where the team must discern whether a product is simply in its early stages or has failed to meet market needs, highlighting the difficulty in balancing perseverance with recognizing when to pivot or stop.## Conviction in Product Development

• HashiCorp's approach to product development is influenced by the strength of their conviction.
• They have held onto certain tools, like Terraform, for extended periods despite slow initial growth due to strong belief in their potential.
• Other tools, like Surf and Otto, were discontinued more quickly when it was clear they weren't meeting the mark.

"I think usually it depends, I think, on the strength of our conviction. Right. I think there's been some of our tools that probably the tool we held onto the longest was terraform."

The quote emphasizes the role of conviction in determining the persistence with which HashiCorp continues to develop a product before deciding to discontinue it.

• HashiCorp promised investors to focus on completing their open source vision before commercialization.
• The company created six open source tools before shifting focus to becoming a profitable business.
• Identifying the customer base was challenging when transitioning from offering free products to paid ones.

"We have to think, know, what does Hashicorp, the business, actually mean?"

This quote reflects the strategic pivot from being a purely open source project to defining HashiCorp as a business entity with a revenue model.

• HashiCorp's commercial business focuses on the global 2000 companies.
• The open source model allows them to service the wider market with free tools.
• There is a balancing act between servicing the original customer base and focusing on profitable segments.

"I think it's a delicate balancing act, and I think the way we've designed the company is the commercial side of the business really focuses on the global 2000."

This quote highlights the strategic decision to target the global 2000 companies commercially while still supporting the broader market with open source offerings.

• HashiCorp views professional services as potentially detrimental due to lower margins and non-renewable nature.
• There is a risk of creating a misincentive where product issues drive service revenue, discouraging product improvement.
• The company chose to focus on the product rather than professional services to avoid these pitfalls.

"I think professional services are dangerous for sort of two different reasons."

The quote explains HashiCorp's stance on professional services, highlighting the potential negative impact on margins and product development incentives.

• HashiCorp believes that quality work will always be valued despite commoditization from cloud computing.
• They focus on providing tools that offer common workflows across multiple cloud environments.
• The company sees opportunity in the gaps left by cloud providers focusing on their own platforms.

"I think the other big gap where we've sort of focused on is how do you fill in the space between the cloud."

This quote discusses HashiCorp's strategy to differentiate by addressing multicloud interoperability, which is a gap not fully addressed by cloud providers.

• HashiCorp encounters varying levels of cloud maturity among their clients.
• They engage in customer education, especially for those later in the adoption curve.
• The company promotes understanding of the cloud operating model as distinct from traditional data center operations.

"You have your early adopters who need no education and are telling us what you can use our tools for."

The quote reflects the spectrum of customer understanding regarding cloud adoption and the need for targeted education based on customer maturity.

• HashiCorp has been advised to focus on a niche but instead manages multiple products for diverse audiences.
• Their strategy contradicts the common startup advice of maintaining a sharp focus.
• The founders' experience as operators led them to create a suite of tools addressing a range of needs.

"The number one startup advice, I think, is focus, focus, focus."

This quote captures the conventional wisdom HashiCorp has challenged by pursuing a broad and diverse set of products and markets.## Integration and Interoperability

• HashiCorp aims to alleviate the pain of integration and interoperability for users by ensuring its products work together seamlessly.
• The traditional weakness of a lack of focus in a company is turned into a strength by taking on the integration challenges internally.
• The approach goes against the common advice to focus on a single product, which HashiCorp's founders decided to ignore.

"And so this moves from being what you traditionally would consider being a weakness as a lack of focus to, for us, becomes a strength."

This quote emphasizes the strategic decision by HashiCorp to redefine what is typically seen as a weakness (lack of focus) into a strength by taking on the challenge of integration, which most companies avoid.

• The complexity of HashiCorp's business model could imply the need for distinct sales, marketing, and engineering teams for each product.
• Although there is some sharing of resources, the company operates almost like four distinct business units, multiplying the complexity of marketing and sales efforts.
• The interconnected nature of the problems faced by users in cloud infrastructure means that solutions are not isolated but part of a lifecycle, which HashiCorp addresses with its product suite.

"But I think the flip side of it is, for these end users, none of these problems are distinct."

Armin Dadgar points out that while the business may have distinct units, the problems faced by users are interconnected, which justifies HashiCorp's integrated approach to product development and sales.

• HashiCorp's business strategy involves building trust with users through one product and then leveraging that relationship to introduce other products that solve related problems.
• The shared infrastructure and familiarity with HashiCorp's ecosystem facilitate cross-selling and ease the introduction of additional solutions to the users.

"Then when we say, hey, by the way, you probably also have this secret management problem, here's how vault can help you, right?"

Armin Dadgar illustrates the cross-selling approach, where solving one problem for a user opens the door to address additional challenges with other HashiCorp products.

• The founders of HashiCorp decided to bring on a CEO to lead the company as they pivoted from open source to a business-focused on the enterprise market.
• The decision was based on the recognition that the founders' backgrounds did not align with the skills needed to lead an enterprise company.
• The founders and the board opted to bring experienced leadership to avoid the "1000 paper cuts" of learning on the job, aiming to reduce mistakes and accelerate growth.

"And our view was, is that worth it? Is it worth it for us, both personally and for the business to kind of subject ourselves to that? Or is the right answer? Let's go bring in a team of folks."

Armin Dadgar reflects on the decision to bring in experienced leadership, weighing the personal and business costs of learning through trial and error versus the benefits of seasoned executives.

• The transition to a new CEO involved a "dating process" to ensure alignment in values, strategic approach, and market perspective.
• Comfort with the new CEO never fully materializes, but trust in the board and the understanding that the decision isn't irreversible helps mitigate discomfort.
• Founders must be honest about their strengths and willing to delegate authority to the new CEO to avoid conflicts and ensure a successful partnership.

"So I think maybe the assumption there in that question might have been that we ever managed to become comfortable."

Armin Dadgar acknowledges the ongoing discomfort in the process of transitioning leadership but emphasizes the importance of trust and the ability to manage uncertainty.

• Founders should assess their strengths and desired focus areas and be clear about what they want from a CEO or COO.
• A successful transition requires founders to be willing to delegate and find a CEO whose strengths complement their own.
• The partnership between founders and the new CEO should be based on clear domains of focus and mutual respect for each other's roles.

"I think it's a few things I think you have to be really honest with yourself about. What are your own strengths?"

Armin Dadgar advises founders to introspect on their strengths and weaknesses and to seek a CEO who can fill the gaps, particularly in areas such as go-to-market strategy and enterprise growth.## Communication Skills Improvement

• Armin Dadgar discusses the evolution of his communication skills as his company grew.
• He emphasizes the need for efficiency in conveying ideas, which becomes crucial as one moves from typing to talking frequently.
• Armin shares his strategies for improving communication, which include conscious practice, writing to refine thoughts, and reading extensively.

"So I think, for me, what became clear is, as you go from sort of a two person company, what you spend most of your time doing is typing silently as the business grows. Now, I find myself rarely typing, but talking frequently."

Explanation: Armin reflects on the shift from written to verbal communication as his company expanded, highlighting the increased importance of speaking efficiently.

"And so how do you do that precisely, succinctly. I think all of that becomes important as a skill."

Explanation: He stresses the importance of being concise and precise in communication, identifying it as a key skill to develop.

"One is you just do it a lot, but try and do it consciously."

Explanation: Armin suggests that frequent, conscious practice is essential to improve at communicating effectively.

"I think another thing that I find very helpful is writing."

Explanation: Writing is mentioned as a method for refining communication skills, through the process of condensing and clarifying ideas.

"I think the last part of it is reading a lot, tend to spend a lot of time reading, and I think that sort of adds to the repertoire of phrases and words and imagery that you can use that makes you more efficient."

Explanation: Armin notes that extensive reading contributes to a wider vocabulary and a collection of phrases that can make communication more efficient.

• Armin Dadgar shares insights on personal values and growth.
• He discusses the impact of literature on his personal development, specifically citing "To the Lighthouse" by Virginia Woolf.
• Armin reflects on the transformative experience of coming out as gay and how it influenced his approach to life and risk-taking.

"Would be to the lighthouse by Virginia Woolf. And I think it's one of these books that taught me a lot about myself and what I value in life in a way that's relatively profound."

Explanation: Armin credits "To the Lighthouse" as a book that profoundly influenced his understanding of himself and his values.

"I think the moment of coming out for me was actually very transformative."

Explanation: He describes the moment of coming out as a significant turning point in his life, impacting his personal and professional journey.

"You have really only one life and don't hold back from it."

Explanation: Armin conveys the lesson he learned from coming out, which is to live life fully and take risks, as we only have one life to live.

• Armin Dadgar expresses his views on Silicon Valley and venture capital.
• He criticizes the obsession with valuation and the lack of focus on capital efficiency.
• Armin also laments the trend of focusing on less meaningful problems instead of tackling hard or interesting challenges.

"I think valuation obsession. I think people have forgot what capital efficiency means."

Explanation: Armin criticizes the focus on company valuations over efficient use of capital in Silicon Valley.

"It's like the number of Fitbit for dogs and Uber for Ikea assembly is disheartening."

Explanation: He expresses disappointment in the trivial nature of some startups, suggesting that talent could be better utilized on more significant problems.

• Armin Dadgar shares his go-to motto for perspective.
• He finds the phrase "this too shall pass" universally applicable and grounding, whether in times of struggle or success.

"My favorite one, I think, is this too shall pass."

Explanation: Armin reveals his favorite quote, which serves as a reminder of the transient nature of both good and bad times.

• Armin Dadgar outlines the goals for Hashicorp over the next five years.
• He focuses on continued innovation, community engagement, and expanding commercial partnerships.
• Armin looks forward to transitioning from building tools to growing and mentoring his team.

"How do we continue to innovate?"

Explanation: Innovation remains a priority for Hashicorp, according to Armin, as they aim to stay at the forefront of DevOps and cloud technology.

"How do we continue to focus the open source community and our efforts around evangelism and sort of driving the ubiquity of the tooling."

Explanation: Armin emphasizes the importance of engaging with the open source community and promoting widespread use of their tools.

"How do we invest in that and become kind of a trusted partners to much more of the global 2000 than we are today?"

Explanation: He expresses the desire for Hashicorp to become a trusted partner to a larger number of top global companies.

"I think for me personally, I think what's been fun is getting to be in more of a position where I can help grow people internally."

Explanation: Armin looks forward to the personal shift from direct tool development to nurturing his team's growth and leadership within the company.