Sramana Mitra: Your point is well-taken but you have to be able to afford it. You’re starting with a $7 million Series A. Not all entrepreneurs have the luxury of starting with a $7 million Series A.
Sunny Gupta: I understand. I have myself been there when I started, which was literally two years prior to that. I was running on angel money, but my fundraising experience was different. I had angels who had written me $200,000 checks. In fact, I had five people in the company. None of the founders took any money and we had only three people we were paying the money to. We gave them equity deals – I had two sales people who I hired on equity. To be honest with you, I started one business in 2005 with less than $500,000 in capital and the next one with $7 million. My philosophy on the V.1 service and the capital constraints didn’t really change my perspective in terms of how we went to market.
Sramana Mitra: The market today is such that people have pretty much to raise angel money. People have to show some level of validation and traction. Yes, your point is well-taken but people are often working on not even half a million worth of capital. They’re really bootstrapping their way into a stage where they can raise a seed round.
Sunny Gupta: I think that’s a very fair assumption. I didn’t have to go through that with Apptio.
Sramana Mitra: That’s a very interesting position to be in. We have this distinction between fat and lean startups. We’ve talked to quite a few. I’m actually quite interested in the fat startup phenomenon which is more the classic Silicon Valley style. The lean startups came later. But I think people who have the luxury of being able to do market validation in a systematic way and writing code after doing that validation are in a much better position.
In our program, by the way, we ask people not to write any code without doing the same kind of customer immersion process that you have put yourself through. But that is not necessarily the methodology that a lot of entrepreneurs these days follow. The first instinct they have is go around and write a bunch of code. I’m like, “What code are you writing? Why are you writing this code?”
Sunny Gupta: I agree with you. You raise a very good point around a fat startup versus a lean startup. That’s a really good analogy. I never really thought about it from that perspective. The key principle I would say is, I know a lot of other companies who raised $7 million of capital but one of the principles we had was our entire operating plan from the first year through 2008 was built on no more than a million of capital burn. The cost of capital by the way, even to a fat startup, becomes pretty high. I could have done $100,000 in branding.
My promise to Greylock and Madrona was I’m going to run it very lean. Even lean is relative. I’m saying lean is a million bucks. In your definition, lean may be nothing. We were very capital-efficient. In fact, I didn’t pay myself. My co-founders didn’t get paid for the first six months of the business. We pretty much ran very lean because I wanted to make sure the fact that my bank balance had $7 million and that I didn’t get swayed by that. I was focused truly on the customer and getting the product to market with the least amount of capital spend as possible.
Sramana Mitra: What you did was a much disciplined approach to spending. Part of the problem when people raise a lot of money is they go and spend it. A lot of people end up in a situation where they raise whatever amount of money in Series A and they haven’t achieved enough milestones to raise Series B because they’ve burned through that cash. That’s really the real issue.
Sunny Gupta: You are absolutely right. By the way, the cost of capital in the follow-on round, as you know, becomes high. You can take a beating anytime if you’re not executing. If you can have an idea turned into a product, which customers are willing to pay money for with five to ten customers to start with, then that starts to eliminate risks. That’s what we were trying to optimize for.
Sramana Mitra: With $1 million, you achieved that kind of validation. What did you learn from the market about the deal sizes that you can extract the most out of?
Sunny Gupta: My validation was a very large global Fortune 50 company. I did a lot of large and small companies. Our first five customers were smaller IT shops with $10 million to $20 million in technology expense. Enterprises were intrigued by the idea but when it really came down to a V.1 service, which was not validated yet, we didn’t have them as customers. The first customer deal I did was a $1,000 monthly contract. They do not exist anymore. They filed for bankruptcy two years later. I had five small customers – couple of them in New York, Valley, and a couple in Seattle.