“A lot can be solved by helping a startup and explaining what mistakes we have already made” - Interview with Leonid Igolnik
The guest of the next issue of “Without Slides” was Leonid Igolnik , a business angel from Silicon Valley, an expert in the management of engineers and engineers who, in the fall, visited St. Petersburg on one of our conferences. What we talked about with Lenya:
- who is Leonid Igolnik, what did he do and does;
- about creating a competitive advantage;
- about startups and their survival;
- about B2B, business platforms and digital transformation of “traditional” businesses;
- about business angels;
- about money;
- about the culture of "growing" startups;
- about the attitude to failures in the Valley;
- about how the price of the company is formed.
Here's a video:
Under the cut - traditionally, a transcript. Enjoy reading!
- Dear friends, good afternoon! This show is “No Slides,” my name is Alexei Fedorov. And today I have a guest from sunny California - Leonid Igolnik. Hi, hello!
- Leonid is a specialist in startups, performance, engineering management, and also a business angel, so today, I think, we will have a very interesting conversation. Lenya, tell us about yourself, introduce yourself to our viewers: who you are, what you did and what you are doing now.
- Well, let's start from the very beginning. I grew up in St. Petersburg, at some point we left here. He began his professional career while still at university in Israel. He worked for one of the early Internet providers, and somehow he got into the so-called enterprise software, that is, everything related to B2B. And I’ve been living with this for the last 20 years. At some point I moved to North America, lived in Canada for a long time, worked in Toronto, in a company called Tucows (those who are older can still remember). She was at one time the second largest domain registrar. I did a little of this, a little of consultations, and inadvertently in October 2005 (and in Toronto the winter was beginning, or, as they say now, “The winter was coming”) I ended up in Silicon Valley for a year, and somehow it dragged on. I have been based there for 12 years. He worked in such SAAS companies as Taleo, where he was responsible for two large SaaS products, once the largest in their fields related to HR software. It took a very long time to do Software as a Service at a stage when no one else believed that SaaS is something that you can live and earn, and that the company will trust you with its most valuable data. At some point, as often happens with companies that break out to certain lines, a larger company ate us, and we ended up at Oracle, where I was serving a voluntary sentence for several years. But in general, it was also interesting there, because we helped the guys at Oracle understand what SaaS is and what is needed for this. related to HR software. It took a very long time to do Software as a Service at a stage when no one else believed that SaaS is something that you can live and earn, and that the company will trust you with its most valuable data. At some point, as often happens with companies that break out to certain lines, a larger company ate us, and we ended up at Oracle, where I was serving a voluntary sentence for several years. But in general, it was also interesting there, because we helped the guys at Oracle understand what SaaS is and what is needed for this. related to HR software. It took a very long time to do Software as a Service at a stage when no one else believed that SaaS is something that you can live and earn, and that the company will trust you with its most valuable data. At some point, as often happens with companies that break out to certain lines, a larger company ate us, and we ended up at Oracle, where I was serving a voluntary sentence for several years. But in general, it was also interesting there, because we helped the guys at Oracle understand what SaaS is and what is needed for this. as often happens with companies that break out to certain lines, we were eaten by a larger company, and we ended up in Oracle, where I served a voluntary sentence for several years. But in general, it was also interesting there, because we helped the guys at Oracle understand what SaaS is and what is needed for this. as often happens with companies that break out to certain lines, we were eaten by a larger company, and we ended up in Oracle, where I served a voluntary sentence for several years. But in general, it was also interesting there, because we helped the guys at Oracle understand what SaaS is and what is needed for this.
- What year was it?
- It was 2012.
- And they still did not really understand this?
- Yes, then it was still early. Then Fusion was written as singleinstance per tenant.
- Do you mean Oracle Fusion Middleware?
- No, it is the Oracle Fusion Suite application. Middleware - he is middleware, he does not care, he is singleton and multitenant. We talked with the JVM team, discussed what can be done to make it easier to write multitenant applications.
- Communicated with Shipilev, Kuksenko and all these people?
- We talked with the guys at Redwood Shores, but more with product management. We discussed how it is easier to do things for multitenant, how to manage resources in one VM, where you have a bunch of clients running. We worked with a database team, my product was probably the first in the world that Oracle took for itself in 12c Multitenant. Very interesting database.
At some point, I went to a company that used to be called Computer Associates, now called CA Technologies, where a lot of guys from Taleo gathered. I was responsible for two large products. Firstly, it helped extend the life of the original product that APM invented, a former Wily product, now called CA APM. These are the guys who at one time presented the Java Agent API, the original implementation in the community, because without this a normal APM product could not be written. He also helped our security business understand how to write security products for SaaS, which is now a new trend in the industry. Just the other day I saw that Duo Security, one of the rather popular vendors, closed the next round in this area.
- Does this mean that he received another pack of money?
“In my opinion, about fifty million.”
- That is, is it round C most likely?
- It may already D, I do not know. I think we’ll talk about this again. And since May I have been on a small professional vacation. Periodically I travel to talk with people at conferences. I decided to play a little with ML, I train the neural network to play a snake. It is very interesting to watch how this happens.
- Class! And how do you combine all this in yourself? All that you have been doing in recent years is consulting, business and so on, and now with your hands you write a neural grid.
- Still, I want to remember that you are still somewhere once an engineer. Such things, of course, are not forgotten, I have been programming since 12 years old.
“And how old are you now?”
- Already almost 40.
- And how did you do programming in the glorious city of Leningrad?
- BK-0111 and DVK, this all started. In the summer, a local computer center was opened at a local vocational school because vocational schools needed to make money and one could go play with toys.
“Do you remember exactly where it was?”
- In Kupchino. A computer room was opened in a local vocational school, all the children ran there, it cost about 20 cents per hour. According to the stories of my parents, I spent there all summer. If you needed to find me, you could definitely search there. And also, surprisingly, the old newspaper “Leninsky sparks” helped me, where once an article appeared that implemented some sort of elementary sorting. Something somewhere in my head connected that it was possible to drive this program into the BC, because BASIC was built into it, and there was something to be done. And this feeling, when I wrote the code, and this plastic thing did something, it ignited. And so, thanks to the newspaper Lenin Sparks, the October Revolutionaries and pioneers, I got into programming.
- This is surprising, because somehow it was traditionally believed in the late Soviet Union that children should learn computer science and they would be given all sorts of languages, but they basically handed over everything on a piece of paper, and teachers checked it on a piece of paper, because there were no computers in schools did not have. And what you are telling is very cool, because it means that somewhere they did appear, and people did it live, on real pieces of iron. Just when they talk about the peculiarities of the domestic education of programmers, about theories, algorithms, about all this, some juicy details come to light that almost no one had machines when they taught your generation.
- At our place, maybe these Commodore appeared. As I remember now, they wore games on cassettes to each other. But, again, there was BASIC, there was something to play with. Then I went to visit my sister, she is also a programmer, studied here in Bonche, and they had a computer there. And the father had a computer at work.
- That is, you grew up in such a computer environment.
“But there was no computer at home, before moving to Israel.” I remember how we wrapped the floppy disks in foil so as not to demagnetize them when you go on escalators.
- In Israel, you unlearned, and then moved to Canada, in Toronto. How did you end up there? For work or family reasons?
- Yes, somehow it happened. And for family and workers. At some point, my sister left Israel, I went to Canada, I liked it, and now I was late.
- Can you briefly tell us what you have been doing in recent years, after you left Oracle?
- I ended up at CA Technologies, a company unique in its approach to the market. These are one of the few software manufacturers that (and here I have to apologize in advance for the partial lack of a professional Russian language, English terms will appear, I still grew up professionally in North America) vendor-neutral. The company has an approach to developing just some tools that allow our customers to manage fairly complex systems.
The largest telecoms, insurance companies from all over the world, banks and so on fall into customers. And we observed a very interesting transformation of the industry there, because today “every company is a software company”. There was a trend, and if in the early 2000s we saw that some applications appeared on the web, and users had to use what they wrote. I still remember my first web bank application, which was just awful by today's standards. We began to notice that, at least in North America, there is such a trend: before, people chose a service and used applications, but now very many people choose an application and thereby choose a service.
- And this creates a competitive advantage?
- Great. For example, I changed the bank three years ago, because I travel a lot, the mobile application of my original bank was in a terrible state, it didn’t suit me. And at some point I chose the application that I liked, and thereby I took my entire portfolio of what I needed financially to another bank.
- It is very interesting. We have such a living example in Russia - Tinkoff. If earlier they told about themselves that they are a bank without offices, at some point they understood this chip and began to tell that they are not just a bank without offices, but a bank that is Online-first. Mobile and Web. Now they are investing more in the mobile application. And I have a question: in Russia there is such a market that mobile and online banks are quite advanced here. Even the largest bank in Russia, Sberbank, heavy in many respects, it has many social and other functions, even it manages to transform quite quickly. They have a very good mobile application, a decent online bank, and so on. When I talk to people from the United States about this, they say that so far many large American banks are still stuck very far. Is it true? Is it changing now? Did the big bank enterprise understand that you still have to deal with this?
- From my experience in communicating with clients, I can say that, of course, they understand all this, but there are certain laws of physics that are difficult to change. The United States has a very complex banking system, it is very fragmented due to the fact that each state has its own specific laws governing the banking system, which complicates the problem. In addition, all these banks are not young; they had no options to start from scratch. You can laugh, but, for example, CA still has a fairly large part of the business - it is software to support the mainframe applications that still live everywhere, through which we all go through. Just on top of them appeared a bunch of layers of more modern software. First in Java, now Node is gradually appearing in banks. I don’t know how much this was known here; in the States, Equifax credit bureaus were hacked.
- Does it collect everything?
- Yes. In the United States, there is an approach to granting a loan by identifying your risk as a potential customer. There are two or three large agencies, one of them is Equifax, they have recently been hacked, dragged about 145 million profiles, more than half of the country, over the past four weeks.
- Do I understand correctly that the population is wildly credited?
- One is not connected there with the other, whether it is loaned or not, but these agencies exist, they help businesses make some kind of decision on granting a loan.
“But just if in America there are about 300 million inhabitants, and 140 of them have been hacked, does this mean that at least so many people use it?”
- Everyone has a credit history, it does not depend on whether you use loans or not. The bank issued you a credit card, you want to pay for a telephone subscription, and you need to check whether it can be given to you on credit or if you need to demand an advance payment. A credit agency is engaged precisely in helping business make decisions on whether you can provide something on credit, it doesn’t matter whether it’s a credit card, an account, a loan, or whether it’s an opportunity to pay for the phone without prepayment.
- That is, the business of such an agency is in this case that it collects and issues this information?
- Yes, they have some kind of algorithms for calculating risks. Returning to digital transformations. All these transformations are underway, but the risk is quite high. There are more conservative banks that, in terms of their approach to security, move more slowly; there are banks that are more aggressive. This is all quite a serious mass, and her inertia is large.
- Why am I all this very interesting: there is Sberbank, and at our conferences Sberbank Technologies, their technological division, is a rather large client. And I sometimes see on the sidelines that the guys chuckle at how this all works. As I understand it, this problem exists with all major banking, and in the States, apparently, the same thing.
- I think the whole big business has such a problem, not just banking. When I was responsible for APM, among my clients, for example, without mentioning names, there were three of the largest state communications providers. The task, for example, was this: on the day the new iPhone was released, make sure that the system did not fall when everyone wants to buy it. Everyone has such a problem. Communication providers in the United States are equivalent to Russian mobile operators, only in our country the operators are engaged not only in communication technology, but also in the Internet, etc.
- We have the same situation. In Russia, the three largest companies are MegaFon, MTS and Beeline. I have internet from Beeline at home, and Internet from MegaFon in my office. They are conducting an interesting transformation. The same Beeline: if before they were positioned as a mobile operator, now they are positioning themselves as an operator of IT solutions, in particular, home Internet.
“I suspect they had to seriously transform their back office when they made such a business decision.”
- In general, it is very interesting. The classic story with Amazon, when people sold books, and then realized that they could work in a completely different way.
- The new Amazon motto is generally very interesting, well explains their approach, their new key task. It sounds like this: "We want to participate in every business transaction in the world." This very well explains, for example, why AWS (Amazon Web Services) is suitable for this strategy, because with AWS you can participate not only in businesses that are directly involved in Amazon, but also in all businesses that host Amazon AWS.
- Let's talk a bit about Internet startups, moving gradually to this part of your life. I am starting to notice that those businesses that are a platform that unites two certain audiences are scaled up: say, the audience that sells and the audience that buys. And in this sense, it turns out such a quadratic volume of transactions, when you have N sellers, M buyers, you have N on M, and if through you goes N on M, to some other constant, transactions, then you are great , you let it all through yourself. Startup platforms against start-ups that provide some kind of service or sell a product. What is the difference between working with some and with others? From the point of view of an investor, a vendor, technologically. As far as I understand, you have a lot of expertise in workloads.
- In loads, including, yes. A great example is Uber, thanks to which I ended up in this interview today.
- There are two audiences. There are drivers who are looking for orders, and there are customers who need to go somewhere.
- I don’t know how much this is known here, but with Uber we have a lot of scandals there.
- It’s known. We have special resources that live due to the fact that these gossip from the Valley broadcast here.
- Let's take the Uber company, which started from the fact that there was a disgusting taxi in San Francisco. And now the company, which at one time consists of thousands of people with a certain number of servers located somewhere in the States, operates around the world. I use quite a lot, both for work and myself, I travel, and Uber I used in almost every country.
This Digital transformation allows today to operate worldwide, crossing all borders, both national and cultural. For example, in Vietnam, I went to Uber Moto - this is when a scooter with a helmet comes for you and carries you. By the way, this is faster than by car, considering what kind of traffic they have.
The scale that you can achieve today from your home office is somehow unrealistic. The Internet has truly transformed how business is going. And there are quite a lot of examples of such companies today. Facebook is also a great example, for a billion users. WhatsApp is a great example of a 60-person company on the day of purchase.
- The company is already worth over 19 billion.
- The guys developed very well, at that time, in my opinion, they had over a hundred million monthly active users. And these scales - they are very interesting, but there are problems that are not talked about much. The Valley has a standard approach to investing and generally to developing startups, because more startups die more than we know. Basically, according to statistics, one out of ten goes somewhere and becomes profitable. Although Uber is still not profitable, we still go on subsidies from their investors, but we are very satisfied, and it is clear why they do this - they are trying to buy a market for themselves. As with Amazon, having Uber, at some point all the competition is likely to go away. At least key figures.
- Here is a well-known story that they are engaged in dumping in order to increase market share.
- Just like Amazon, as well as a bunch of similar businesses at the stage of their development.
- Isn't Amazon profitable?
“Amazon's Jeff Bezos has such a great pivot arm that you can adjust how much they earn.” If investors are satisfied, why pay income taxes if you can continue to invest in business development. With this approach, market products are very difficult to build. First, you need to convince the market that you have this problem, and there are not very many problems that are fairly well known. For example, the problem with a taxi is quite basic. Every person who travels at least somehow understands how hard it was to find a taxi system in an unfamiliar city before, how to explain where you are in the city without knowing the city. And now you can just click on the button on the phone and say: “Can I give the car here?” Very few such companies survive, because in a market system, where it is necessary to build both sides - both demand and supply are very difficult. And this is only suitable for certain investors, because a lot of money is needed to develop such a market. Uber has already poured more than a billion.
- Relatively speaking, this is indeed a very interesting investment in the final result, but not for every investor. In addition, it is necessary to invest heavily in the development of supply and demand.
- And for me, from the point of view of the investor, there is any product that requires an explanation to the client why it is needed, and there are some new markets. From the stories of the 90s: in the sixth-seventh year, I did not know that I needed ICQ. I did not have such a problem - the lack of instant messengers. But ICQ amazingly solved this problem in those days, because they did not have to spend money explaining to me as an end user why I need ICQ. A friend came to me, installed the application, taught me how to use it so that there was someone to talk to. And such problems are quite difficult to scale if you do not have the so-called network effect, where users become your marketers.
- Yes, word of mouth. How do you like Russian Uber?
- Great. I ran into a couple of small problems when leaving the airport: it so happened that I lived in a hotel not so far, and several drivers phoned me and refused to go so close.
- What, they said that they wanted to earn money on you, but you live nearby, and we will not take you?
- I’m not sure for what exact reasons they refused, but this is sometimes found even in the States, but less often. Apparently, the market solves this problem sooner or later.
- You put one asterisk for them, and the market will solve this problem very quickly. In general, I am amazed at how important feedback is in such platform systems. The same Amazon - you have some suppliers, you can rate them. We have some kind of market for services, YouDo, Airbnb, Booking, etc., where you create a rating system on this platform, where everyone evaluates you, and this is what creates added value.
- Regarding "everyone appreciates everyone." In North America, it started with Uber - a fairly new dual pricing system. For a very long time in the Uber application it was impossible to see your rating as a passenger, then it was very deeply hidden, and now it appears in the main menu.
Who are business angels
- This is very important, because when we talk about the digitalization of some traditional business, it is very important (and Dima Zavalishin, who has a wonderful series of interviews , all the time, says ) to understand where the added value is created, which, in fact, the business turns into value added. There is a certain business process that allows you to do something else, due to which you get the service either faster, or better, or cheaper. How does this analysis happen? Do you help when doing business consulting? Do you think about creating such a value with startups?
- By the way, a pretty good transition to talking about who these business angels are. Let's start with the context. A rather large culture has formed in the Valley. There is an interesting proverb, I’ll try to translate it into idiomatic Russian: “When you take the elevator to the top floor of a skyscraper, do not forget to send the elevator down.”
- How does that sound in English?
- "Having gotten to the top floor of a tall building, don't forget to send the elevator down" - help someone climb further behind them. A small digression is why the Valley itself is unique. I have lived in many parts of the world. In Israel, they are trying to develop this business, I was in Toronto, where they are trying to develop a startup ecosystem, like this one. The valley began absolutely by accident. One of the original inventors of the transistor, William Schottky, moved there. There Fair Child began, there Intel began, there suddenly money appeared.
- Therefore, she, in fact, and "silicon".
- Yes, because we don’t have silicon near there. At that time, there were mainly groves and farms.
“And garlic, as we now know.”
- Yes. And such a concentration in the Valley turned out for two reasons. There is magnificent Stanford University and there is magnificent Berkeley University, the famous BSD (Berkeley Software Distribution). There was a concentration of brains, a concentration of money. At some point, our venture capitalists got tired of going somewhere to directorate meetings outside the Valley, so all the companies gradually pulled in there. And now there is a concentration of specialists in all areas necessary for raising a startup. A culture of openness has also emerged. Literally, on the way here, during a transfer at the Chicago airport, I talked with some startup who saws something in the HR industry, where I understand a lot of things, because I worked for a very long time, but they raised one rather successful company.
- This is what you said, how did you do software for human resources?
- Right. The company was called Taleo, we started with the automation of recruiting, everything related to all this process - search, selection, tracking, providing an offer and so on.
- It is very fashionable now in Russia. There are several startups that are doing this.
- Pretty standard business. From the point of view of the market, it is interesting in that every business has this problem one way or another. Just like Salesforce. CRM is also one of these fairly broad markets.
“And thanks to this, there is some kind of help culture.” Business angels are mostly either entrepreneurs or occupy rather high positions in companies with some kind of outlets that have some kind of free money. And the point is not only in money, but also in the desire to help.
- Plus, probably, communications and expertise. Because if I want to help, but I don’t have the expertise, who needs me?
- Exactly. Now there are no particularly serious new problems under our sun, and much can be solved by helping a startup and explaining what mistakes we have already made.
- A short question: if you escape from the snake and all that, are you a business angel now?
- Including. What is the difference between a business angel and venture capitalists? Venture capitalists are responsible for managing other people's money, and I, as a business angel, manage my own money and, basically, put money out of my own pocket.
- That is, your interest is that you enter the company with your own money as a share, and you are interested in making this share grow.
- Naturally. To grow not only the share, but also the company itself. My share grows when I either invest money and get an even larger share, or increase the size of the total pie.
- If I understand correctly, publicly placed companies that are traded have two fundamental financial goals. This is an increase in the value of the company, an increase in the value of shares, if you have some shares. And the second, which is less interesting against the background of the first, but, in principle, also has the right to life, is just dividends on shares, profitability, and all that.
- In fact, this is the same share. Each shareholder has one task - “I want what I own to get bigger.”
- Yes, but in one case it just makes a profit for you, and in the second it is an increase in the market price. And what we hear recently is just stocks. I have not heard any talk about dividends and stuff for a long time.
- I will give you an interesting example: CA Technologies, my last employer, four with a penny of a billion of world turnover, the class of shareholders of this company is growing in that it still pays dividends. So it exists.
- This is more an exception. A business simply reinvests itself. For example, I have a million dollars. I’m thinking about where to put them. I can invest them in some financial instruments in which I do not understand anything, but serious people tell me that I can have 10-20% per annum. But at the same time, I understand that there is, for example, an Internet business that grows twice a year, ten times a year, this is a much more interesting investment. And it turns out that now, at least in your industry, I’ll very roughly call Internet startups, it’s much more fun not to make a profit, but simply reinvest it all in business growth and live off the growth of your own share.
- Yes, at some point this was a key criterion, but, apparently, we are approaching the end of the gold rush of Internet startups.
- And tell me about it, because it creates the feeling that these wild billions, which are now throwing everyone - and these ICOs, and IPOs, and just sales, there is such space money that it is completely unclear where such incredible estimates come from.
- Let's look at the same WhatsApp and compare it with the purchase of Instagram. It would seem that Instagram bought for a billion, WhatsApp - about 19-20 billion, there were plus Facebook shares in the deal, and the total cost depends on the price of these shares.
- It is also important that both this and that - a lot of money. The fact that the cost of these two purchases is very different is one question. But in both cases we are talking about billions.
- Let's understand why. If I remember correctly, Instagram bought for 30 with a penny of dollars for a monthly active user, WhatsApp bought for 43. This is about one price, just the scale was already different. Facebook snapped Instagram a bit earlier, at the stage of its growth.
“And this is a good investment for them.”
- This is a great investment if you look at how they are now struggling with the same Snapchat. There are businesses where the price is really determined by the scale of your access, as we said before. For example, Facebook is a phenomenon that operates around the world. Instagram, same WhatsApp. Accordingly, in the market of Internet technologies, especially when you look at B2C, that is, end users of applications, there are markets that are not yet fully disclosed. The same India with its billion people and China. And Russia, of course.
- But Russia is small compared to India and China.
- Yes, and it’s still very hard to earn money there. But speculative investment in grabbing users today to earn money tomorrow is not always dumping, sometimes it is done for free. There was a scandal when Facebook wanted to give free Internet in India, and the government politely asked them to step aside.
- This is generally a very interesting point, because there is a lot of talk that somewhere there is competition, but somewhere it is not. In Russia, for example, there is no competition, but in the States it is. Very interesting things are happening there. For example, at a time when the state understands that there is no competition in any market, it begins to regulate it wildly or somehow intervene. It sees that there is some kind of super-profitable business that does not compete with anyone, and from all this it can make a lot of money. And the state will necessarily intervene.
Very often the key to success is a certain uniqueness. And if you find some kind of non-competitive market, then you have built something that people need, and here you can earn money. But someone will definitely come there. People will think: "Wow, how much money, I will do the same or better." And then the person who originally came up with all this will face market pressure, and problems with the law will begin. All these stories that we are now witnessing with all kinds of blockchains, ICOs and so on. States around the world have begun to seriously engage in this, and prohibit, and regulate, and build something of their own, and somehow actively get into it.
- It seems to me that in the case of the blockchain, the situation is slightly different. There simply goes a gold rush, and a lot of money flows in there people who do not understand anything about it.
“In my opinion, a very overrated thing.”
- Still, there regulation is a pretty big plus. Because if, for example, in the States there is a great culture of regulating investments - who can invest where, how to do it right, how to prevent investors from being fooled, then ICO today is just some kind of Wild West. And just a month and a half ago (an interview was recorded in October 2017 - approx. Ed.), The American service that regulates investments, called the Securities and Exchange Commission, said: “Well, no, guys. If you still offer someone something on some factional basis, then this is still a stock. It doesn’t matter that this is done on the basis of some kind of digital currency, stocks are stocks. ”
“Suppose I’m an online startup in the Valley who invented something.” In which case do I need to turn to venture capitalists (investors), and in which case to business angels?
- The culture of startup development is very interesting. I'll give you a little context. I am often asked what is the easiest way to characterize the Valley. Over the years, I have come to the conclusion that I call the Valley Hollywood of our industry. Like in Hollywood, we have an acting school, they are also incubator accelerators, there are some large studios of their own - venture capitalists who invest their money. If you look at the film industry, it is the same investment in getting the product back. Films can be perfectly filmed outside of Hollywood. But, as we previously discussed, in Hollywood there is a certain concentration of money, talent, it’s nice to live, the weather is good, taxes are high.
- And the role of VC, respectively, is played by these various companies that produce movies. All sorts of Miramax, Paramount, 20th Century Fox and so on.
“Yes, of that type.” All VC funds manage someone's money, they have the so-called LPs (Limited Partners), limited partners who have been given money to manage.
- And they have connections - they know which director, which operator, which actor, which network of distributors.
- Yes. But usually startups don't start with venture capital. Startups traditionally start with the so-called “friends and family money”. Some small amount of money is being collected. There is also such an English concept as “sweat equity” - “earn your own sweat”. Many start-ups start with the fact that you still need to come up with a product and make sure that it is there, make some kind of MVP (minimum viable product - the minimum viable product), that is, test the hypothesis and prove that it has a market, and under it is possible to collect some initial investments.
- I talked with some of the familiar guys who are raising the business here. Basically, this is some kind of business related to development. The guys said an interesting thing: they (I don’t know how they measured it) should test each hypothesis with one Land Cruiser. That is, I can buy a car, but I can say: "Sit and test the hypothesis." Judging by such bloated amounts and the sums that these rounds cost, in the Valley to check such a hypothesis is much more expensive?
- Yes, but most people understand this very well and understand that there is an arbitration price for development, and very many do it outside the Valley, although, again, there is a special culture in the Valley, although I do not fully believe in it, because I worked with teams all over the world, I had teams in Prague, in Serbia, in Krakow. The Valley believes that “there is no better than our programmers,” and therefore everything needs to be done there, but it is very expensive for various reasons. Now a lot of outsourcing, which lives in Central and Eastern Europe, is well understood, and even there are some ready-made packages for startups that do not always include full cash compensation, and in part they take “equity” from the company.
- Is it possible to test a hypothesis in the existing economy for my money?
- Can. And I give advice to a lot of entrepreneurs, sometimes I get to know someone, because, as a business angel, I want to make sure that the money invested will be spent correctly, I now have a set of some companies that I recommend going to, they will do UX, help write MVP and so on.
- Relatively speaking, these are some kind of inexpensive companies (not in the States, it is hardly possible with the US economy; somewhere in Europe, in Russia or elsewhere) that can do something pretty quickly in a couple of months and you can already somehow check.
- A small amendment: the States are a big country, we naturally have different conditions, different prices for accommodation. There is a Valley, and there is everything outside the Valley. There is a coast, it is more expensive, a lot of things are happening in the center of the country, where it is still more expensive than in Eastern and Central Europe, but it is possible there.
- It’s cheaper there, and there, accordingly, there is a cluster of small outsourcing companies that provide services such as testing a hypothesis.
- Not every founder (especially if he does it for the first time) can effectively work with outsourcing in Europe, it’s hard. There is a time difference, there is a serious difference in culture - communication, understanding and so on. There are certain barriers.
- You can pay a little more, but do not take all these risks?
- It depends on the founder. This is exactly the moment when a business angel can help with advice by looking at the founder of the company, at his experience.
- That is, a business angel - he, in particular, comes before any venture capital?
- Usually this is the second money after “friends and family”. Naturally, the risk is very high. If the standard venture capitalist ruins the company ten to one, then the business angel, rather, twenty to one, the money went nowhere.
- An angel should build a briefcase?
- Yes. If anyone is interested, my investment portfolio is on my LinkedIn profile.
- How many positions do you have there now?
“Twenty-five, I think.” There are still some positions not directly. At one time in the Valley, I participated in the creation of an accelerator-incubator called Batchery. We will control every company that has passed through us, that is, this ownership is not direct. And this money is collected under a very interesting condition. You and I said that you get some piece of the company. A lot of initial investments by angels are made by a tool called in English Convertible Debt (convertible debt obligations). This is a type of loan that an angel gives to a company. But this is a loan that is never paid. So you came to me as the founder of the company, and in order not to even try to understand how much your company is at this stage of the idea or some MVP made by you, certain tax implications are made, to evaluate your company at a fairly early stage. We will not delve into them, they are very specific, related to the American tax system. Initial money is collected by a tool called Convertible Debt or Note - I wrote you a loan. Since our industry is large, at one time there was an incubator, called Y Combinator, he released a fairly standard set of tools called Safe Note, it lies with them somewhere on the site. These are all legal documents that describe all the conditions. The key things in Note is that I give you a loan, it has a percentage, that is, the money I gave you grow at a certain percentage, quite high, usually 18-20% per annum. Initial money is collected by a tool called Convertible Debt or Note - I wrote you a loan. Since our industry is large, at one time there was an incubator, called Y Combinator, he released a fairly standard set of tools called Safe Note, it lies with them somewhere on the site. These are all legal documents that describe all the conditions. The key things in Note is that I give you a loan, it has a percentage, that is, the money I gave you grow at a certain percentage, quite high, usually 18-20% per annum. Initial money is collected by a tool called Convertible Debt or Note - I wrote you a loan. Since our industry is large, at one time there was an incubator, called Y Combinator, he released a fairly standard set of tools called Safe Note, it lies with them somewhere on the site. These are all legal documents that describe all the conditions. The key things in Note is that I give you a loan, it has a percentage, that is, the money I gave you grow at a certain percentage, quite high, usually 18-20% per annum.
- Ha. Now Russian bankers laughed. We have a refinancing rate of more than 10%.
- And we have a loan of 5-6% - this is a fairly normal occurrence.
- And we have 40% per year for the bank - this is nothing at all.
- There are still certain instruments to protect the angel from devaluation from the investor, but the most interesting thing is that this tool says that as soon as you get your first so-called Priced Round — when you collect money, when the company is already valued.
- My company is valued for so much money, I give so many percent of the shares to the investor and get the corresponding percentage per day.
- Yes. For me, like an angel, money grows like a loan and is converted into the company's shares in the first Priced Round, that is, this is the second or already third money for the angel. And at this moment this conversion takes place, and there are a bunch of conditions that protect the angel.
- You enter a share on certain conditions even before the assessment, and it says that when they get an assessment, you get a certain part according to your amount.
- And the angels protect themselves by the fact that in such an instrument there is such a thing as Cap (the upper bar). Let's take a standard example for today. I invested in the initial business under the convertible note condition, under the Cap condition of three million. If the company is valued at ten for the first time, I will still receive a percentage of the shares, as if the company had been valued at three. If the company is rated less, I will receive a percentage of the share of a lower rating. Angels thereby protect themselves. Angels also very often get the opportunity to participate in subsequent investments in the company in order to continue to maintain their stake in the company.
- So you have the right of the first night in this sense?
- Yes. And there are additional rights that, due to the high risk, allow us to somehow protect the angel from losing money, or allow, if the company is quite successful, to continue to develop its position in it. Everything used to be clear. There was a Seed round when we planted some seed. Now a lot of them have appeared - Seed, Pre-Seed, Pre-Seed A and so on.
- Does all this infrastructure develop somehow? What about the legislation?
- The legislation is pretty standard, it has existed for a long time.
- Say, the patterns by which all this interaction takes place?
- Templates appear, and the market, even in the five years that I take part in it as a business angel, has changed in the Valley, because we have a lot of money spinning. There are two concepts in the Valley: dumb money - “stupid money” and smart money - “smart money”. Just like venture capitalists, angels can help you with money. Sometimes you need a light passenger who does not go anywhere for the development of the company. He gave you a check and went about his business. And there is the concept of smart money. If a company comes to me that wants to engage in HR-industry, I know a little about the industry, I have a list of contacts that I can call, for them I will be considered more “smart money”.
- Because for them you have added value. Turning to you, they get not just money, they get something else.
- They get contacts, industry knowledge and so on. Due to the fact that a lot of money is spinning, the initial investment in a company can be from 50 to 150 thousand dollars. This is not such a large amount of money for a person who lives in the Valley.
- Well, I'm sorry, if I understand the cost of programmers in the Valley right now, then 150 thousand dollars is such a normal engineer for a year.
- This is his salary. It costs 200-220 thousand to the company, because there are still taxes, medical insurance, offices and everything else.
- That is, this is not even enough to feed one normal engineer for a year. Enough for six months, but nothing more. How then can one develop at the expense of this money?
“Well, not in the Valley.” Very often, since we have a rather technical place, Sweat Equity of the founder himself. Very often, the founders themselves write the initial version of their product.
- Why, then, because of such small by the standards of the Valley of money money to get involved in it all and share it with someone? Or as soon as your money runs out, are you trying to find something somewhere?
- Yes, at some point, the founder needs to live on something, eat, and support his family. It all depends on individual situations. Naturally, the further the company is developed without attracting other people's money, the more profitable for the founder, the more he will have a share. We haven’t talked about this yet; I’ve been involved in Mergers and Acquisitions for a very long time, these are company purchases and sales.
- This is how Oracle bought Taleo.
- Yes, and at Taleo we bought companies, I have about $ 3.6 billion worth of deals in which I participated. And I saw how money is distributed when buying a startup. Apart from the investor, basically the money goes to the founders. There are exceptions to any rule, but most of the money goes to them, and for individual workers, well, enough for something.
- Can I have a stupid question? A business angel needs to get some kind of capital. That is, at some point you became a wealthy man. And how did this all happen next? Someone who bought one of the companies you worked for ...
- I was once the vice president of the technical department, who was responsible for two of the three products at Taleo.
- You had an option there, you were a public company, and when Oracle already bought you, they probably made you serve a voluntary sentence for some more number of years?
“Yes, usually two to three years.” I spent two years at Oracle after the purchase.
- So that there is no such thing as a company being bought, and all the key people scatter.
- Usually when buying a company, this is all taken into account in the examination process, due diligence. And when the purchase is being evaluated, the money that is needed so that key personnel do not run away is included in the purchase budget.
- And the money is quite serious, they need to somehow interest people so that they, having already made money in this place, do not run away. Because they immediately change the circle of interests, living standards and many such things.
- You know, in the Valley this happens in different ways. I saw people who really change money, but there are those who, after receiving quite serious amounts from well-known exits, continue to live and behave in the same way as usual. Money affects everyone very differently. But since there is concentration, there is a culture of “helping someone further”, returning to our proverb about the elevator down.
- We talked about both rounds and investments. How many companies really survive? There are different rounds, different amounts of money - round A, B, C, first less, then more and more, and immediately an order of magnitude. The first round may be a million, the second - ten million, and the third - generally one hundred. A typical story. And as I understand it, the further the company goes, the more rounds it goes through, the more likely it is that something will come of it. Our statistics may be completely wrong, now I’m saying random numbers, but, as we already understood, out of the companies that get round A, every tenth somehow rises, and nine burn out. What happens to these people, with their infrastructure? The valley, as I understand it, is very much tied to this story with startups, of which 90% do not end with anything. How do you live with this?
- You know, in the Valley “failure is always an option” - many people think that having failed in something, you get some valuable lessons that will help you in your next startup not to make the same mistakes. For example, two of my close friends started a company, gathered a round - it didn’t work. We talked with investors, closed the company, and started doing the next startup.
People do not go anywhere. Again, the industry is large, not everyone is ready to continue to work with such risks, someone goes back to work with the employer, with a fixed salary, a quiet life, insurance, and so on. Everything is very individual. And someone goes on the next call.
- You, as a business angel, come across people who either never did startups, or once did something, they did something, and this is their second startup, or people who once did something- then, one, two, three times, they never succeeded, but here is another new cool idea. Does this affect how you communicate with them, decision making?
- When a team is at the stage of communicating with a business angel, this is one of the key points for several reasons. Firstly, if I invest my personal money in your company, we will communicate quite a lot. One of the first decisions that I have to make for myself is whether it will be pleasant for me, as an angel, to periodically communicate with you. This is an elementary, banal solution, but it is. Sometimes people somehow connect, and sometimes it doesn’t work out. Secondly, there are just experienced founders, and there are founders like me who have worked in the industry, made some serious career and are leaving to do something of their own. They have some kind of experience, some kind of their connections and so on. But there is another culture in the Valley called the advisory board - a group of company advisers that is usually often offset by stocks of the company or, most likely, options of the company.
“Do they have real money?”
- Not a single startup has real money, and if there is, then they must be spent on product development, and not to attract experts. I am a consultant in several companies, but they cannot afford me for my normal hourly wages. And one of the tips that I always give: if you come for the first time, your idea is interesting, we believe in it, and we like you, surround yourself with such an advisory board that will compensate for the lack of any of your expertise and connections in a certain industry. And thus, without spending money, you can slightly compensate for this risk as well.
- It turns out that you and your counterparties, as it is customary for us in the Russian Federation to say, are engaged in somehow balancing risks and all such things correctly?
- As in any investment. But it depends on the team, ideas, technology. Recently I saw guys who wrote their doctorate at UC Davis University, which is located near the Valley. These guys were engaged in biology. And they have the so-called defensible IP - this is some kind of intellectual property that is protected by something. Most startups like Uber are protected. In principle, you can write another Uber today, there are a bunch of clones. But here is the secret in the business model, and not in technology.
There is a type of startups where the technology is protected by a patent. And these guys, doing their doctorate, decided that they really did not like how long the RNA sequence was going, and came up with a new way that accelerates this tenfold. Accordingly, this was done under the auspices of the university, the university has a patent, it is protected. And the fact that they never engage in bringing this from the university to the real market is a certain risk, but it is clear that this is all protected from the point of view of intellectual property. And there are a lot of people who can be attracted to the company who can help it all commercialize.
- In general, a culture of protecting intellectual property rights should also be an integral part of your ecosystem.
- In fact, the entire legal framework. Speaking of trends, if you look at the Valley, companies are becoming more and more expensive, because the cost of living is higher, more money is spinning, respectively, the initial cost of companies is becoming higher and higher. Again, we have incubators, for example, 500 Startups, Y Combinator, which come out with a company value of five million. It does not matter what the company has, it always has standard conditions on which it leaves this incubator. And many investors begin to seek and attract investments from other countries, perhaps with more attractive conditions. But what is often a barrier is the lack of a specific legal framework. In the States, everything is very clear: how I am protected as an investor, what happens if this money flew away, how I deduct it from taxes. And here is this general legal framework, legal platform. For example, large law firms sponsor a bunch of startup events, they try to find a clientele in startups. And all these documents, all this is put on a standard stream. All this base exists, it removes some specific friction from the process.
- You know, there is such an interesting character - Milner. I personally do not know him, but I read that he has his own models, he invests his money in a very interesting way. Through a specific accelerator, he gives money to everyone. What do you think about those people who are thus trying to fit into everything?
- If you look at the statistics of our VC industry, apart from certain exceptions, the standard profit of limited partners who gave money for management is from 12 to 18%. There are no crazy surprises, there is, of course, WhatsApp, which shot in 100X and so on, there are exceptions, but this all balances the balances of the funds. And so at some point we got a pretty famous incubator called 500 Startups. Already far more than 500 have passed through it, but the whole model for him was that they do not know what will win, what will shoot, so they simply take in quantity. Naturally, there is some kind of filtering there, they don’t take everyone there, but their approach is very simple. Due to the amount of investment, on average it will still fire. Next week I’ll be talking in our own accelerator about
“When you are asked why this should be fired, you have to answer something.”
- Rather, how to make sure that they do not drag you away, how you are protected, what is your trick. After going through these incubators and accelerators, you get some basic structure, how to conduct sales, how to conduct marketing, how to pitch money, how to make sure that your startup is made on the right legal basis, so that there is no discrimination in hiring and so on. There are such basic things. And this is a rather interesting approach, because you have a certain quality. For example, when the guys left the mathematical school in St. Petersburg, they have certain basic knowledge.
How is the price of the company
- Such a question: I am still afraid of the huge numbers that I hear when it is announced that the next big company bought the company a little less, or when the company makes some kind of crazy IPO. What's happening? I follow European football a little, and when a few years ago there was a transfer to Cristiano Ronaldo in Real for one hundred million euros, it seemed that it was just some kind of sky-high sum. And literally this summer there was a transfer of citizen Neymar from Barcelona to PSG, which seemed to cost 222 million euros. This doubled the previous record, and this is some absolutely crazy money that seems completely incomprehensible to me. When I see the same in the Valley, I also don’t understand where these wild tens of billions come from. When do you take stories about Tesla, Uber, Amazon, which, in general, are unclear, whether they earn and whether they earn. When there is a company, some people work for them, some money they spend, there is no profitability and is not visible for the coming years, and at the same time, the company still receives some estimates that are hundreds of times higher than its current turnover. Where does this money come from?
- Let's start with the most commonplace. It is believed that, unlike many impressions, all such financial decisions are made on some basis of financial analysis.
- How does this analysis happen? How is this price formed?
- Apparently, since I do not follow European football, I’m sure that someone calculated that the profits and ticket sales, the rights to television advertising and so on, will somehow work.
- There are some, for example, oil sheikhs who simply have billions.
“And that too.” Symbol of status - bought a new brand for yourself.
- Something like that. These are toys. But you do not have toys, you have a business.
- Such sales occur for several reasons. Firstly, these are strategic reasons. Bite off a piece of the market before your competitor eats it. This is from the story of how Taleo was bought. Oracle at one time very painfully bought PeopleSoft, which really did not want to sell, there was an aggressive takeover, when shareholders were directly offered to sell the company. And after that, two companies appeared on the market in our industry - SuccessFactors, one of our competitors, and Taleo. They have grown to a size sufficient for Oracle to eat customers away. And at some point, a decision is made that you have grown well, maybe it's time to eat you?
- It turns out that, knowing this business, Oracle understands that we’re under-earning so much money, these people have a certain market share, let's get this market share for ourselves? We will not buy a solution, but a client base.
- Or we won’t allow our competitor to pick it up. It so happened that within four months SuccessFactors was bought by SAP, Taleo was bought by Oracle. But there are other solutions to this purchase. Taleo was a public company.
- Was the purchase amount announced?
- 2.2 billion dollars per turnover of 360 million.
- This is not many times more than profit, but many times more than turnover.
- Today, all estimates for the company are a multiplier per turnover. There is a fairly standard factor in the industry, for example, a SaaS company, if you look at a public joint-stock company like Salesforce, if it normally grows 15-20%, this is most likely 5X.
- What is also important is the exponent in growth?
- Mandatory. For example, SuccessFactors grew 10 percent a year faster than us, they were bought for 3.6.
“But the growth takes place exponentially in the first years, then it starts to slow down due to many factors - due to the appearance of a competitor, due to the fact that the market starts to end and so on.
- Not always. There was also a second key factor to this purchase. Taleo had 1,400 employees. At that time, there were about 130 thousand in Oracle. The most expensive and complex component of business development is the global sales team, especially for B2B enterprise-business. We could not afford the level of sales-team in Europe, Africa, Asia that Oracle has. Due to the fact that Oracle had some existing customers, relationships with these customers, taking the Taleo product and simply putting it out to everyone who sells Oracle products, including resellers, integrators and so on, is an instant growth factor right away.
- This is talk about additional and cross-selling and so on. About the fact that we are on the existing customer base to sell some of our new product.
- Also, for example, when I worked at CA Technologies, we had types of purchases when we strategically understood that we could sell a product to our existing customers that simply could not be sold to a small startup. You can’t just open the door to American Express or Bank of America. This is in B2B.
In B2C, this most likely works because for the first time in world history, thanks to the Internet, the scale to which a company can grow has become several orders of magnitude greater than it was ever possible. If you look at the same Facebook with more than a billion monthly active users - well, there has never been such an option. This is part of the gold rush because this market is still dividing.
- That is, Dot-com is not the boom of all ...
- He has become more rational. Again, an example of Uber: who would have thought that a company would appear that would manage a taxi service in almost all countries of the world? There are certain scales that were previously not visible, and there is still some definite factor of that gold rush. And this is just the third factor. It also becomes more rational, because nevertheless, our industry comes to some stage of maturity, becomes more responsible. But we are not done yet. We are still in full swing blockchain.
- This just indicates that not everywhere there is rationality.
- The desire to make money quickly will never go anywhere, and where this happens will simply move from place to place. What else is interesting in our industry is that a lot of money is pouring into all these gold rushes, and even if the bubble bursts, we still have many interesting and useful technologies that allow us to form the next round of development. Even after the dot-com bubble died in 2000, Netscape emerged from it, Linux is some kind of formed technological base that allowed the next round, Web 2.0, to develop.
- I understood you. You lived in the Valley for many years, now you have come to Russia for a short while. Surely you are already talking with some people here, and you have a vision of how people here are different from people there. Or how a business that is built around IT here is different from a business there. Can you conclude our conversation today with you to compare these things?
- I will try. I do not have such a lot of experience communicating with start-ups and entrepreneurs from Russia, but let's take the space of the former CIS. The biggest difference for me is the fact that I see so many people who understand how to make good products, but do not fully understand how to make a business out of them. And for me, as a business angel, each development of a company has three key stages: idea, product, business. Mostly investors invest in business, because somehow you need to get it back. And my theory is just a slight absence of this business culture, because I see in Western Europe (maybe less in countries like France) and in America the business culture that so many people bring from their families. They have this experience, tips that you can get, concepts on how to do business, not just how to drive products. This is one of the big stages where a lot of startups do not collect investments. They understand how to make their product, but they don’t understand how to do business, how to make money out of it. Most likely, this is one of the biggest differences that I see between startups from North America and from outside of it. This is not only the CIS. I recently talked to a startup from Africa. This business culture is something to think about and understand very well, either where to learn, or where to attract either business angels or strategic consultants who can help with this. which I observe between startups from North America and from beyond. This is not only the CIS. I recently talked to a startup from Africa. This business culture is something to think about and understand very well, either where to learn, or where to attract either business angels or strategic consultants who can help with this. which I observe between startups from North America and from beyond. This is not only the CIS. I recently talked to a startup from Africa. This business culture is something to think about and understand very well, either where to learn, or where to attract either business angels or strategic consultants who can help with this.
- In Russia now there are certain projects in which the state or a very large business participates. The most famous one is probably Skolkovo, where people are really engaged in education and try to teach startups to teach this whole culture. It is clear that this is obtained somewhere, but not somewhere. But we really in recent years have seen very few Russian startups that shoot around the world. This is due to the fact that there are ideas, but they do not live to the stage when it becomes a business?
“I think partly yes.” It seems to me that the key to your question is “for the whole world”. One of the things that I notice in start-ups coming to the Valley from outside, including from this region, is the lack of understanding that in order to scale a product really to the whole world, you need to understand how users behave in different parts of the world. Russia is slightly different from the whole world. I saw many startups who came to the Valley who tried to take something that worked well in Russia, but somehow did not scale to the next market. Unfortunately, it is difficult to study this market without plunging into it, without having lived in it. It so happened that I have been living in North America for almost 20 years, I understand the culture of consumption, the culture of communication. Why do we have a gold rush? Because the Internet allows you to create a business that scales to the whole world, but for this you need to understand the culture of your audience in each country. A great example for me is again Uber, which did not bring all its standard services from San Francisco to Vietnam (where I rode a motorcycle on New Year's Eve in Hanoi), but found on the spot how to change the product so that it fits under local market.
- This is still very important not only from the point of view, for example, of the market or understanding of the client, but also from the point of view of regulation, that is, the regulatory framework. Now Uber is faced in European countries with the fact that there, from the point of view of taxi regulation, the cost of the trip must be determined in advance, before the trip. And they had a model that changes the cost depending on the time (you have a traffic jam, you have no traffic jams).
- Yes, there are such elementary problems.
- Banks often come across this. Deutsche Bank operates all over the world, and in different countries there are simply different business rules.
- Yes, banks, we also encountered this. Why the purchase of Oracle Taleo helped these two companies - we tried to work in Germany, and from the point of view of legislation related to hiring and with employers, everything is very difficult there. There are some unique laws, working tips. Understanding all of this costs money.
- You must have special people who understand German law and adapt your service to it.
- The concept of these unique market specifics is very important in order to really get these huge estimates of the company's value of billions of dollars, because it is possible only for products, and there is all the mathematics - how many users you have, then everything is multiplied by some specific factor, and it’s very difficult without the concept of this global. And for this it is necessary either to attract some local partners, or to try to immerse yourself in this culture of your market, where the product wants to develop.