CapitalEfficient Growth (with Zoom CEO Eric Yuan & Veeva CEO Peter Gassner)



In this special episode of Acquired, hosts Ben Gilbert and David Rosenthal, along with guests Eric Yuan of Zoom and Peter Gassner of Viva Systems, delve into the intricacies of capital-efficient growth. They explore how both companies, despite operating in mature markets with established players, managed to scale rapidly with minimal capital. Yuan and Gassner emphasize the importance of product excellence, customer focus, and a disciplined approach to hiring and marketing as key drivers of their success. The conversation also touches on strategic decision-making for long-term sustainability, such as when to introduce new services and the balance between promoting internal talent and hiring experienced leaders. The CEOs share insights on maintaining a competitive edge through continuous innovation and cultivating a company culture that is both performance-driven and socially responsible.

Summary Notes

Pre-Interview Discussion

  • Ben Gilbert and David Rosenthal discuss their upcoming interview with Eric Yuan and Peter Gassner.
  • They note the uniqueness of sharing content from a venture firm CEO summit publicly.
  • The focus of the interview is on capital efficient growth.

"Today, we have something very unique to share with you all. It is common for top venture capital firms in Silicon Valley to get all their ceos together once a year in one room for a CEO summit and speak frankly with them. It is uncommon, however, to allow anything discussed to be shared publicly."

This quote explains the rarity of the content being shared and sets the stage for the interview's focus on capital efficiency in the context of a CEO summit.

Viva Systems and Zoom's Capital Efficiency

  • Peter Gassner's Viva Systems raised $4 million without consuming all the capital and built a $2 billion revenue business.
  • Viva Systems is industry-specific, targeting life sciences with high dollar software.
  • Eric Yuan's Zoom raised $30 million from Emergence Capital and $100 million from Sequoia without using most of the funds.
  • The discussion with Eric and Peter is centered around growing rapidly with minimal capital.

"And it's a super different company that we normally talk about, too. It's vertical specific, so it's just in the life sciences industry, they sell high dollar software to pharmaceutical companies, and I think biotech as well. Right, David?"

This quote highlights Viva Systems' niche market focus and its capital efficient growth within that sector.

Fundraising History of Viva and Zoom

  • Peter Gassner discusses Viva's simple fundraising history with angel investors and Emergence Capital.
  • Eric Yuan shares Zoom's challenging early fundraising, relying on seed funding from friends and later venture capital.
  • Both CEOs emphasize the difficulty of raising funds initially and the skepticism they faced.

"I started comedy 2011. 1st thing I did, I opened up a Wells Fargo bank account. It's very easy for me to raise capital, that's why I opened up bank account. Unfortunately, it took me for several months, no visits wanted to invest me."

Eric Yuan humorously refers to his initial optimism about raising capital and the subsequent difficulties he faced, which is indicative of the challenges in securing early-stage investment.

Capital Efficiency as a Mindset

  • The hosts suggest that capital efficiency is more about the mindset and culture than the business model.
  • Both Eric and Peter agree that a mindset focused on profitability is crucial.
  • They stress the importance of product excellence and hard work in achieving capital efficiency.

"I would say probably it starts with a mindset, just run a profitable lemonade stand from my point of view. For me, it was, there's safety in that. Cash generating business is always going to be valuable to somebody at some point. A business that's not cash generating is going to be valuable to nobody."

Peter Gassner's quote encapsulates the philosophy of building a business that is fundamentally profitable and sustainable, which is central to the theme of capital efficiency.

Product Excellence and Focus

  • Emphasis on the importance of product quality and dedication to customer needs.
  • Avoiding distractions not related to product or customer.
  • Acknowledging the role of market timing and luck in success.
  • The necessity of choosing a non-obvious market to become an outlier.

"Anything that wasn't related to the product or the customer was just know and just don't do it." "So product excellence, real focus mindset, and then you have to have some luck in your market."

These quotes highlight the speakers' strategy of maintaining a laser focus on product development and customer satisfaction, while recognizing the element of fortune in finding the right market at the right time.

Being Non-Obvious and Correct

  • The significance of targeting non-obvious markets to achieve outlier outcomes.
  • Importance of not just being non-obvious but also correct in market predictions.
  • Using core values to identify clear and correct target markets.

"You have to pick something that most people think is going to fail to be an outlier." "What did each of you do ahead of time that led to you to really genuinely believe, yes, the world thinks this is crazy, but I really think this is going to work."

These quotes convey the idea that successful entrepreneurs often pursue ideas that are not widely accepted but have a strong belief in their potential success based on their understanding of the market.

Understanding Customer Needs Beyond Surface Level

  • Importance of listening to customers' underlying needs and emotional attachments.
  • Distinguishing between what customers say and what they truly feel.
  • The value of detecting a lack of attachment and satisfaction with current solutions.

"I talked to three or four potential customers for our first product, and they all said, we don't need that." "You have to listen to what they feel, not what they say."

These quotes emphasize the importance of deep customer insights, looking beyond their initial reactions to understand their true feelings and unmet needs.

Founding Team and Early Focus

  • The significance of having a strong founding team with complementary skills.
  • Prioritizing product development over other business functions in the early stages.
  • Being financially disciplined and avoiding unnecessary spending.

"I was a regional founding team member of Webex... I know if I can build a better solution, I think at least I can survive." "For the first four years, we do not have any marketing team."

These quotes reflect the speakers' strategies of leveraging their expertise to create a superior product and focusing on essential functions, delaying the development of teams like marketing until the product was established.

Hiring and People

  • The critical role of hiring the right people for a capital-efficient growth.
  • The need for every team member to be essential, with no room for redundancy.
  • Balancing the need for a salesforce with the costs involved in compensating them.

"All of them are very good engineers, right? Except for me." "No wasted people, no optional people, no wasted people, because it just adds a, it'll burn through your money."

These quotes discuss the speakers' approach to building a team where every member is crucial and productive, avoiding unnecessary hires that could drain resources.

Customer Acquisition and Virality

  • Leveraging media coverage and product reviews to acquire initial customers.
  • Focusing on maintaining relationships with early adopters to encourage word-of-mouth referrals.
  • The importance of customer happiness and satisfaction in driving virality.

"Luckily, the very famous reporter Walter Mossberg... he did write down a very nice article published in Wall Street Journal." "I maintained a very good personal relationship with them, either vip account or sending them a small gift."

These quotes illustrate how positive media attention and personal customer engagement can be pivotal in gaining an initial user base and fostering organic growth through satisfied customers.

Tracking Metrics and Customer Satisfaction

  • The value of focusing on a small number of loyal early adopters.
  • The avoidance of hiding behind metrics in favor of direct customer interaction.
  • Understanding the significance of customer happiness and its impact on business growth.

"Even 49,000 users left, as long as 100 still stayed. We doubled on that." "We never had customer satisfaction surveys for Viva. In the beginning, I always thought if I talk to those early adopter people, I will know."

These quotes highlight the speakers' preference for direct feedback over formal surveys to gauge customer satisfaction and their strategy of concentrating on a core group of dedicated users to drive growth.

Landing Big Customers and Business Sustainability

  • The journey of securing the first significant customer through persistence and conviction.
  • Utilizing large customer payments to fund product development.
  • The challenge of predictable revenue streams and the importance of a sustainable business model.

"We will win this deal. Why? Because we have better people that will work harder." "I thought, oh, we've just raised a $3 million round of capital here, and it didn't cost us any dilution."

These quotes recount the experience of acquiring a major customer and using the revenue as a non-dilutive funding source for further development, emphasizing the need for a sound business model for long-term success.

Initial Meeting and Connection

  • Ben Gilbert recalls how he first met Eric, noting that the group was smaller at the time.
  • The importance of making connections is acknowledged by Speaker F, setting the stage for a discussion on contracts and funding development.

"That's how we first met, Eric and I. It was smaller at that time."

The quote reflects on the beginnings of a relationship and the context of a smaller group setting, emphasizing the significance of initial connections in business and personal networks.

Capital Efficient Growth Strategy

  • Eric discusses his approach to enterprise contracts, focusing on the annual value per customer rather than multi-year deals.
  • He avoided locking customers into long-term contracts to prevent market shrinkage and to keep the company on its toes to earn business annually.
  • Speaker F points out the counterintuitive nature of this strategy, which avoids the typical long-term contracts that are common in business.

"Yeah, we didn't do that because I was always optimizing for the long term value, which is the annual value per customer."

Eric explains his strategic choice to prioritize long-term customer value over short-term gains from multi-year contracts, suggesting a focus on sustainable growth.

Pricing and Discounting

  • Speaker E highlights the importance of maintaining price consistency within a confined vertical market to avoid customer dissatisfaction.
  • Speaker F adds that offering discounts or price locks could complicate future price increases.

"And that's unique to us. I think we're selling in a very confined vertical, so it's not really fair if there's two companies and one's paying 30% less than the other, and they end up knowing about it and feeling bad about it."

This quote emphasizes the need for fairness and transparency in pricing within a niche market, where customers are likely to compare notes and feel aggrieved by disparities.

Viva's Business Model

  • Speaker C outlines Viva's customer base, which consists of a few large customers and many smaller ones, with no potential customers left outside of market expansion.
  • Speaker E describes Viva's approach to selling a broad range of products to the same customers, akin to "layering the cake," and investing in relationship development.

"Right. We sell into a defined set of customers, life sciences, industry, there's kind of top 20, and then there's another thousand or so that are doing smaller things."

The quote summarizes Viva's targeted market within the life sciences industry and their strategy of selling multiple products to a defined customer base, illustrating a focused and layered approach to sales.

Zoom's Pricing and Account Strategy

  • Speaker D (Eric) discusses Zoom's horizontal collaboration solution and the challenges of entering a market with established competitors and free alternatives.
  • Zoom's strategy focused on better service, pricing, and product quality to differentiate itself in a competitive space.

"So our strategy more like, you open up a new restaurant business, right? And you have a better service and a better price and a better food."

Eric uses the restaurant analogy to explain Zoom's strategy of excelling in service, pricing, and product quality to stand out in the market, indicating a comprehensive approach to competition.

Organizational Efficiency and Capital Efficiency

  • Speaker D acknowledges the importance of internal efficiency in achieving capital efficiency, which impacts gross and operational margins, leading to better cash flow.
  • The conversation highlights the relationship between internal organizational practices and broader financial health.

"That efficiency translates to capital efficiency, which translates to gross margin, not gross to operational margins, which translates to cash flow."

This quote connects the concept of organizational efficiency with financial metrics, showing how internal practices can lead to improved financial outcomes.

Product Excellence

  • Speakers E and D discuss the critical role of product excellence in a company's success.
  • Eric emphasizes the importance of a focused approach in the early days and the impact of having a significantly better product than competitors.

"And that's a lot about people, right, Eric? About which people you put on the product."

The quote underlines the connection between product excellence and the people working on the product, suggesting that the right team is crucial for creating an exceptional product.

People and Team Dynamics

  • The discussion shifts to the importance of people and team dynamics in a company's success.
  • Speaker E prefers hiring people with range and potential for growth, while Speaker F notes that this strategy can also be linked to capital efficiency.
  • Speaker D shares lessons learned about team readiness and the need for a mix of potential and experienced leaders to handle rapid company growth.

"Yeah, I always wanted to have some people with some range they could get very hands on, but also grow into managing."

Speaker E expresses a desire to hire versatile individuals who can contribute at multiple levels and grow within the organization, emphasizing the value of potential and adaptability in team members.

Marketing and Capital Allocation

  • Speaker D elaborates on Zoom's cautious approach to marketing, initially forgoing a marketing team to prove product value through customer experience.
  • The importance of measuring marketing effectiveness and knowing when to invest more or pull back is emphasized.

"Even today, every Tuesday we have a 3 hours staff meeting, right? This morning, the first topic read about reviewing our marketing toppedin marketing programs."

Eric explains that Zoom continues to scrutinize its marketing programs regularly, highlighting the ongoing importance of strategic marketing decisions even as the company matures.

Defensibility and Long-term Strategy

  • Speaker D discusses the need for both offensive and defensive strategies to maintain Zoom's defensibility over the long term.
  • Continuous innovation and a focus on product excellence are cited as key to staying ahead of competitors.

"So, you know, I think it's more like a sports. Right. We need to focus on both offense and defense."

The quote draws a parallel between business strategy and sports, where a balance of offensive and defensive tactics is necessary for long-term success, implying the need for agility and foresight in business.

Strategy and Innovation

  • Innovation is critical for maintaining a leadership position in the market.
  • Companies must constantly reinvent themselves to stay relevant and competitive.
  • Expansion into new areas is necessary to avoid over-saturating an established market.
  • Diversification can prevent disruptions caused by unnecessary changes within a single service area.
  • It's important to plan for future services or features well in advance.
  • A successful offensive strategy can also serve as a good defense.

"That's the most important thing. Right. By doing that, at the same time, you also need to think about what's next."

This quote emphasizes the importance of not only focusing on current innovations but also considering future developments and directions to keep the company moving forward.

Product Excellence and Market Expansion

  • Achieving product excellence requires continuous effort to maintain that standard.
  • Companies should expand to new areas to provide creative outlets and prevent problems from over-concentration in one area.
  • High market share without expansion can lead to excessive focus on an established area, which may not be beneficial in the long term.
  • Expansion can help avoid arrogance and complacency, which can alienate customers and damage the company.

"Also, you do want to expand to different areas because critically, and I think something that people don't realize, if you get a high market share in an area and you don't expand to another area, what will happen?"

This quote highlights the risks associated with having a high market share without seeking expansion, which can lead to over-investment in one area and potential issues.

Leadership and Company Culture

  • Leadership integrity and energy are crucial for maintaining a successful company.
  • Companies should audit for leadership integrity and energy proactively to prevent future problems.
  • Setting a goal to be a leader and liked by customers can hold the company to a higher standard.
  • Being transparent with customers about company goals can reinforce accountability.

"We also have a goal that we set out about five years ago to be the leader in light."

This quote discusses the importance of setting aspirational goals that align with company values and the impact of sharing those goals with customers for accountability.

Planning for New Services

  • Decisions on new services should be made years in advance.
  • It's crucial to think about the next service or product early on to ensure a successful launch.
  • Delaying decisions on new services can lead to missed opportunities and hinder growth.

"If you wanted to have new service, you cannot have a new service today. Right. You need to think about trying to make a decision two or three years before that."

This quote underscores the necessity of foresight in planning for new services, highlighting that these decisions need to be made well before the intended launch date.

Multi-Product Strategy

  • Diversifying into multiple products can be a turning point for a company.
  • Choosing a second product that is distinctly different from the first can establish a company as a multi-product entity.
  • This strategy is risky and can affect the performance of the first product, but it may be necessary for long-term success.

"So I thought, this is the way to become a multiproduct company, and it'll either make us or it'll break us."

The quote reflects the calculated risk taken when diversifying into a new, distinctly different product, acknowledging the potential for both significant success and failure.

Company Growth and Challenges

  • Companies must work hard and there are no shortcuts to success.
  • Founders and CEOs often face pressure but must remain optimistic and forward-thinking.
  • Constantly worrying about failure can hinder progress.

"The good news, I do not think that's a work, because we all enjoy that this is a part of life."

This quote conveys the idea that hard work is an integral and enjoyable part of life and building a company, suggesting a positive attitude towards the challenges faced.

Building Companies with Limited Capital

  • Efficient capital use and a focus on profitability are key to building successful companies.
  • Leaders should concentrate on delivering customer satisfaction and growing a profitable enterprise.
  • The mindset of building a great company on limited capital is increasingly relevant in changing market conditions.

"I actually cannot imagine a more useful topic right now than dissecting how to build great companies on little capital based on the era that we're going into."

This quote acknowledges the importance of discussing strategies for building successful companies with limited capital, especially given the changing economic landscape.

Future Prospects and Company Vision

  • The vision for a company's future should focus on being essential and appreciated within an industry.
  • Companies can aim to automate entire industries and become indispensable partners.
  • Success can also be measured by a company's contribution to society and example as a good employer.

"Essential. Appreciated. Really automating this industry and contributing to being an example of a good employer so that other people could copy it."

The quote outlines a vision of success where a company becomes essential to an industry, appreciated by customers, and serves as a model for positive societal impact.

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