Welcome back to Smart Bear Live, the call-in show with Jason Cohen, sponsored by Software Promotions. In this episode, special guest Mark Suster joins Jason to talk with Dan Bowen from SyncBloc.com.

Listen to this episode if you want to learn what a VC investor thinks about “Internet scale” and how you can usually simplify your idea by charging a fair price for your product.

You can subscribe to Smart Bear Live on iTunes (please review the podcast as well!) … and if you’d like to appear on a future episode of Smart Bear Live, send an email to Patrick.Foley@microsoft.com to schedule a recording with Jason.

Transcript

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Dan Bowen: My name is Dan Bowen, and I’m up in the wine country in Healdsburg, California north of San Francisco, and the company name is SyncBloc, S-Y-N-C-B-L-O-C.

Jason: SyncBloc. Well I know what Sync is, but Bloc. That feels like a set of entities working together for a common goal. I guess the goal, maybe Sync allows them to do that, to become a Bloc and synchronize their efforts. So I think it’s for people that are trying to do a political movement together, it allows them to get on the same page and be organized so that they’re more powerful than they were individually.

Mark: Oh come on, that’s way off base. SyncBloc is a place that takes incredibly large files that are all stuck on your offline non-cloud service and helps you sync it with the cloud. We all know the success of DropBox, but let’s be honest. It’s really used for small documents and images and stuff like that. When you really need to sync big stuff, you need SyncBloc.

Dan: Well, I obviously haven’t been memorialized in your memory yet, Mark. No, it’s best thought of as CRM for families, individuals, and the businesses and organizations they interact with most.

Mark: Oh crap, this is Dan. I should have put it together. I know exactly what you do. That’s unfair. And that’s what your name is. Look Dan, so I know exactly what your company does. I know exactly who you are. I should have put two and two together when I realized you were in the wine country. The brand hasn’t stuck in my brain so much as the whiskey has. I’m not sure that’s the right name for what you do, because what you do is more of a consumer proposition, and I think the word sync is very technical, and a very technocratic kind of IT sync up my crap kind of stuff. If I were you, I would look… not that you’re looking for this advice, but I’d look for a simplified brand.

Dan: Understood. I’ve certainly gotten that feedback. We’ve gone back and forth on it.

Jason: I’d add to that. When you describe it as CRM, you and I know what that is, we know what a CRM is. But I bet these people you’re selling to, almost none of them know what it is. Anyway, again it sounds corporate. Although that’s fine, because you had your little phrase that communicates it, but aren’t you anyway going to need a little phrase that communicates it to your actual end users to put on your website? I think you’ll need that phrase anyhow, so you might as well also have that phrase instead of saying CRM, even if that’s what it is. So, is it like a shared family contact list and calendar and stuff like that? What is it?

Dan: Our goal is really to get beyond search social and the inefficiencies that search social and mobile have introduced to us.

Jason: There’s no way families are sitting around saying, “If only somebody could reduce the inefficiencies that search social.” There’s no way this is the language that anyone uses. If I talk to a family and you show them one screen shot of this, what would they say it is for them? Finally the family is organized. Now I know what Billy’s calendar is when he changes it. What would they say it is?

Dan: I think you started to mention it. It’s rich contact management, event planning, notification services, and task management, but at the family level. And connecting individuals to those businesses and organizations they interact with most, with critical information. I think that we get lost in search and social.

Jason: Can you give me an example of something where it really sucks for a family, but if they had this it would be super easy? Like, the dentist keeps changing the appointment, and I never know if I’m taking Billy to school or you are. Poof, now they have this, and Dad just takes a look and says, “Oh, I’m taking him to school.” What’s the deal?

Dan: Take it even one step easier than that. Do you have the telephone number for your dentist in your phone? Does your wife have the same telephone number? Do you have the insurance that’s related to that. I think the problem that we have right now is we’ve got amazing tools in our pocket. We’ve got amazing calendar tools, we’ve got contact management tools. No one uses them, because they quite simply require too much effort for someone to engage them.

Jason: I use them.

Dan: Well, you and I also just mentioned that we’re on the bleeding edge of technology.

Jason: I bet there’s someone in the family who has all the information. I bet I know who that someone is most of the time. And then everyone else has these little pieces of information. That might be a better way to describe it. There’s usually someone who’s kind of the gatekeeper of all this, knows where the files are, knows where to find the stuff, but everyone needs it.

Dan: You bet. No, I agree.

Jason: Not that you asked, but you’re using a lot of very generic things that I think could apply to pretty much any kind of data organization company, whatsoever. I think you’ve got something pretty neat. Why not make it really human and just say, “I took my kid to the dentist, and then they prescribed this thing. So I went to the pharmacy and realized that I didn’t have this number that I needed, which is silly. How come I don’t have that number? Well, everyone in the family can’t have all the numbers all the time. Except yes they can. Now they can all have all the stuff.” That would be pretty neat.

Mark: So Dan, now that we’re done with five minutes of telling you everything you never asked, what the F do you want to know?

Dan: Actually, the reason I called really wasn’t to discuss what we’re doing. I’m in development right now. We’re building a product. This is actually my third company.

Jason: So what’s the question?

Dan: The question is really directed towards the definition of Internet scale. I was in a 10-year company.

Jason: I Just ask what the question is.

Dan: My question is related to all this talk that I hear in the Silicon Valley about Internet scale. With the exception of Facebook and Twitter, it seems like this magic 10 million user number is a rare benchmark that companies hit, and yet that’s only 10% of the mobile market. It’s a fraction of the overall Internet market. I continually hear this reference to Internet scale, and I’m trying to get an idea of what people like Mark and other Vcs, when it comes to mind, when you’re looking at products and you say Internet scale, what does that really mean to you?

Mark: I tend not to use that term, but I’m not opposed to that term. Let me direct you first of all to my blog. It’s called Both Sides of the Table. I think you know that. If you do a search in quotes on “deflationary economics,” it tells you my thesis on Internet investing. It’s quite simple, which is when you had systems where you had limitations on distribution or transportation of products, it enabled you to operate with a certain cost structure. That cost structure for traditional industry, for historic reason, remains high. When you can offer something that’s deflationary and significantly deflationary, meaning you massively drive down the cost structure, and you massively drive down the profitability, you really need to hit scale, really serious scale, to build a huge business. I think very large businesses are built on the back of the scale.

You’ve mentioned a couple companies, but I would throw out Craigslist and eBay. I would throw out people like YouTube, or even the scale that you see of Yahoo! or an MSN or an AOL in terms of portal distribution. You see scale increasing at places like Pinterest, and you see scale increasing at places like Instagram. Once you get to a certain scale and it reaches a tipping point, if you have network effects, meaning there’s such a tight network that goes to a single place to do a single kind of transaction that popping up and doing it somewhere else becomes harder to do. Then you have a business that’s defensible. And when you’re operating on “Internet scale”, let’s call it 10 million users plus or 100s of millions of page views, then introducing new product offerings at very low prices, even at low margins produces enormous returns. I think that’s what VCs maybe are getting at.

Dan: Thank you, first of all. That’s helpful. It’s also at the same time a little confusing when you see the daily barrage of the next Me Too app for the last eight months that’s been produced in the same space. Trying to figure out how the Silicon Valley… again, my last venture was not built here. I bootstrapped it on my own. Trying to learn this environment..

Mark: But Dan, I want to say, your language, you have to be careful about not coming across as a grumpy entrepreneur. Let me say this to you. 99%, maybe 99.8% of companies should never raise venture capital. Venture capital, it’s a very particular industry. Overwhelmingly, you can build very successful businesses that are not Internet scale, that become $20, $40, $80, $150 million dollars and don’t have the same kind of return structure that you see on the Internet. Venture capitalists are raising money from other investors, institutional investors who expect certain returns from us. And to get those returns, we need very big wins.

At GRP, the partnership that I work at, we have produced 15 companies that have exited north of a billion dollars. You don’t exit at north of a billion dollars unless you’re operating at scale. So just because our industry is structured to try and find huge outsized returns doesn’t make, first of all, doesn’t make that right for most entrepreneurs, and it doesn’t make it bad. Now the second part of that, which is “Me Too” businesses. That’s just a function of too many VCs chasing similar ideas, and that’s always going to happen, and that’s fine. I think the smarter VCs are never trying to fund idea two, three, or four in a category, but define what they believe the next categories will be.

Dan: I hope I didn’t come across as too miserably grumpy. This has been a big education for me up here.

Jason: Here’s another thing to keep in mind that you can actually do one and then switch to the other, if it makes sense. In fact, that’s exactly what happened to me with WordPress Engine. The initial concept was this thing doesn’t have to be big to make money. In fact, we were cash flow positive, including everyone’s salaries and everything in seven months. That’s pretty fast. That also showed we had a nice profitable business and something that enough people wanted. It doesn’t matter how many people that is. It could be 100 or 1,000, but that’s enough to make a profitable business. OK. As long as we built the business that way. Then we hired two people and got profitable again in another six months. But the market we’re in, which is WordPress hosting is huge, because 10% of the websites on the Internet are run by WordPress. So the potential market is enormous, even though we weren’t really attacking it as a big market sort of a company.

But as we showed, we had this solid company and product people wanted and so forth, it simply was an option to say, “Do we want to try to grow much faster and maybe raise a little bit of money and use that money to grow faster, work on some strategic things that would secure us some long-term competitive advantages, instead of just having a profitable, growing company that’s good, but doesn’t have overwhelming advantages over the competition?” We decided, yeah, we’re going to do that. And then we did raise some money, and now we’re doing that, and our growth rate has gone up literally exponentially as we did that, which is really neat.

But we didn’t have to do that. We could have decided not to do that, and then we’d have a company growing less fast, but profitable. And so what? That’s great. So, I guess it’s just a long way of saying, if you want to focus on who your perfect customer is and someone who will give you money because they have this pain so bad, that yeah, they’re going to part with dollars to see it fixed, you don’t need many customers to make money. Maybe just 50 or 100 customers and you’re making enough money that this is your deal. And then, you really can have your pick of what to do. You don’t necessarily have to know, at the outset, how you want to scale or grow the company if you don’t want to. You sound sort of skeptical of… I can see these big successes through the go big, go Internet scale. You’ve bootstrapped a company, so you can see all those things, and you’re skeptical of the VC side. I think that’s healthy, and you don’t have to choose right now, if you don’t want to.

Dan: Jason, we’re certainly leaning more towards what you said. I’ve been slowly establishing relationships in the VC world for that long-term potential. And Mark, that’s why I’ve reached out to you. I mentioned that once before. That’s really our longer term goal is to make sure that we have some relationships in line, if and when that opportunity presents itself to push. I’ve been trying to define some of these things for myself. That’s why I asked the question about how you guys defined Internet scale as it relates to the VCs.

Jason: But see, it may not matter. Mark just got through saying, it matters when either the margins are small or this and that where you need to multiply by a million for it to be interesting. But you don’t necessarily have to build a company in which that is the structure. So, in our case, we’re playing in a huge market. Even so, we didn’t play toward a thing in which we barely scrape by with money on each one, and so we had to play in a big market. In fact, it’s almost stronger not to. It’s almost stronger to say, “Look, If I can find 100 families to give me, I don’t know, $19 a month, $49 a month, whatever, for the stuff. If I can get 100 to do it, you know there’s a million families around the world that would want this. If I can just get 100, the market’s there. All of a sudden you’ve proved a lot of stuff.

I say proved maybe in quotes, but actually I’d like to ask Mark sort of across the table that way. Does that make sense? If you see someone going, hey, I’ve sort of built it for, maybe you could call it profitability, but showing traction revenue, and now I’m ready to scale it big, and I don’t know if I should still charge. Does that evidence, even if it’s just 50 or 100 people but in a big market? Is that super interesting to you? Or do you want to see that growth curve start to bend, and you want to see that direction of the company, and just getting 50 people to pay isn’t interesting?

Mark: Let me start with a disclosure, which is I am a very happy user of WP Engine. I think the great thing you guys did is step into a market that was unfulfilled and needed more players like you. The reason I started working with you is I started by using WordPress’s own hosted product. But that had great limitations, because they restrict you from using JavaScript, and therefore you couldn’t do plug-ins. I then took over the hosting of that and started hosting at RackSpace. The problem is my site kept falling down. I had denial of service attacks. I had people who came and hacked into the site through a known exploit in RackSpace and changed my header to a Polish auto company. I wanted someone to manage all that. I just want to produce content. So, you’re offering as a customer, as a consumer really spoke to me, and I think that’s some evidence for the market opportunity that you have. Let me talk more broadly, which is, listen, everyone always says, “The VC said I needed traction, and how can I get traction without VC? The VC said I needed traction. Let me tell you what you need traction means. You need traction is code word for no. That’s all it means. It means no. It’s a very soft, polite way of saying no. What it also means is, I don’t actually want to tell you no, because then you might be pissed off with me and not come back if you get that aforementioned traction.

What Vcs are investing? So VCs invest in different stages. You have seed stage, A round, B round, C round, D round. Those correspond with how much capital they want to invest at which price points. The later the round, the higher the letter in the alphabet, the more the expectation of real revenue, real customers, real usage, real traction. But what VCs are really looking for is a sense that the management team has extraordinary potential as individuals, that have some sort of domain knowledge or some sort of technical or market or product or customer knowledge that other people don’t have. And the VC has to imagine that the market that you’re service either has an existing market that’s being served inefficiently, or there’s going to be huge latent demand for what it is that you’re going to offer. Frankly, that’s all they’re really looking for. Even if they can’t articulate that in their own brain, that’s what they think.

The overwhelming majority of VCs are lemmings. And you’ve already said it yourself, Dan. Why do people fund so many “Me Too” things. Because it’s far easier if I’ve seen four of these that each raise 5 or $10 million from the brand name VCs to say this is obviously a good idea. I think people call that social proof, and I think that’s a terrible investment thesis. What I’m looking for is the quirky idea that I think no one else is thinking of, that no one finds sexy, but I’ve got an entrepreneur who’s so passionate and knowledgeable about that area that they can persuade me that they’re going to make that an opportunity.

I’ll just give you one example. I started looking at YouTube networks about two and a half years ago. Every VC I met in Silicon Valley was saying, “We don’t invest in content. We don’t invest in video. It’s a hits driven business.” But every entrepreneur I saw on the ground in LA here was massively trending up. I started to develop a thesis that the future of content distribution is going to be different. It maps to the ideas of deflationary economics, and content production I think is becoming more predictable. I think video distribution in the future is going to look more like the Gilt Groupe than it is going to look like NBC. Meaning I’ve got a direct relationship with my customers and I send them daily curated things that I know they’re going to enjoy and like or that they have self- selected. That is a lot more predictable of a business. The reason I mention all this is every VC I know is cynical, and I was seeing the numbers on the ground, and I’m licking my chops saying, “here’s an enormous opportunity that other people aren’t seeing and isn’t going to risk being “Me Too?”

Jason: So Mark, what should Dan do? He’s not sure which way to go. What should he pursue, and what should he do right now to progress the company and maybe intentionally delay the choice, or maybe he shouldn’t delay the choice. What should he do next?

Mark: I’ll say this for public consumption, because I’ve told this to Dan privately I think twice already. I think, first of all, you’ve got to get a product live and in the market. You’re going to learn a lot from that and get a lot of feedback. Number two, I think you really need in your brain a really tight definition of an economic problem that you’re solving and why that’s going to be valuable. Valuable either because people directly are going to pay you money or because third parties are going to pay you money to reach your user base. You’ve got to really have your head on straight about how you’re going to acquire customers more cost effectively than other people are going to do.

I would study the history of whose done what you’ve done in the past and why they’ve failed, because you and I both know a number of people have tried to enter this category unsuccessfully. So that’s really the answer for me. You’ve got to find a way to get some developers working with you to ship your product, test it, learn some lessons. From those lessons, you can begin to develop a relationship with VCs to say, “here’s what I’ve learned, here’s what’s working, here’s why we’re excited.”

Dan: Thank you for that. Just so I can follow up with you there Mark, we have. We have actually started coding. We have a former very senior Microsoft Exchange engineer that’s writing code now. I’ve certainly taken your advice to heart, and we’re in process on that. So as we get closer, I will certainly be in touch. Everything you’ve said is exactly the track that we’re heading towards right now.

Jason: The thing I took out of what Mark just said that really rang in my ears was, a lot of people have tried this before and failed. That’s really, really interesting. The fact that a lot of people have tried it means maybe there’s something there. The fact that they failed doesn’t mean you’ll fail necessarily, but it does if you can’t articulate why this time it’s going to work. One thing that everyone likes to hear as an investor is maybe now is the time that the idea can come to fruition. Something changed. Now everyone has a phone. Now people understand these kinds of systems, etc.

Now they’re ready for it. Or you’ve got some new insight that none of the other people had, and that’s the thing.
You’ve got a handful of all people who, by their actions, are demonstrating that you’re right, that is the one thing that just unlocks this. Otherwise, it’s just really easy to lump you into that, everyone’s tried, everyone’s failed, and you haven’t really told me even plausibly why you’ll not fail. Saying, “This time I’ve got a senior Microsoft developer” ain’t it. I realize you didn’t’ say it was. It’s just starting, but that’s not it. These are all means to that end. So to me, I took all of what Mark said, and that’s the thing that rang at me. Because if you don’t solve that part, I think it’s just too easy to lump you in with the folks that tried and failed before.

Dan: Couldn’t agree more. Absolutely.

Mark: Great, awesome.

Jason: Good luck, Dan.

Patrick: Thanks for calling in, Dan. Really appreciate it, and hope to catch up with you soon.

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