If you’ve been around long enough, you’ve heard this narrative before: The market is grinding to a halt, the IPO window shut, and only a few brave souls dare venture out into the turbulent seas. The mergers and acquisitions market is adrift as well; public companies are under stock price pressure; further down the value chain, the startups – especially the venture-funded ones – are stuck in an exit-starved no man’s land.
You can sit around, depressed, or as some technology startup veterans will tell you, you can pick up great technologies at rock-bottom prices and build businesses out of them. Big businesses.
Lars Dalgaard, former chief executive of San Mateo, California-based SuccessFactors, a maker of talent management software, could offer you a blueprint. In the dotcom carnage of 2001, Dalgaard, fresh out of business school, bought several companies – among them, eAlity. Believe it or not, he bought two of these Web-based software companies at an auction in Redwood City, California. “I don’t remember how old I was, maybe 31, and I was taking on $3.2 million in debt to own this company,” Dalgaard recounts. “I figured I would do whatever I could to build it up.”
And what did all this debt get him? A big, scalable on-demand platform built by three Chinese supercomputing geniuses stationed in the supercomputing labs of the University of California, Berkeley. “They had built this twice already. Talk about pioneering On Demand – they were way before anyone else,” Dalgaard says. “These guys had built an outstanding, one-code, scalable supercomputing platform, but they didn’t have a CEO.”
They also did not have much of a product vision, which Dalgaard brought with him. He wanted to build a company that developed Web-based software to manage human resources functions.
Foundation Capital had invested in eAlity early on, so the natural bridge was already in place for Dalgaard to seek funding. But Foundation turned him down – he wasn’t a Silicon Valley guy. Originally from Denmark, Dalgaard had spent most of his career at Unilever in Europe. Dalgaard, however, caught the ear of the legendary David Strohm of Greylock, who remained skeptical at first. “He just sat there and looked at me like, ‘Who the hell are you, and what do you know about anything?’” Dalgaard says. But Strohm was involved in one of the other companies Dalgaard had bought at auction, and Dalgaard’s passion turned infectious.
“I’ll give you a million,” Strohm told Dalgaard, “and you see what you can do with it. That’s it. You’re never going to get anything more if you don’t do something incredible with it.”
Dalgaard took eAlity and turned it into SuccessFactors. But the timing wasn’t good; the company launched its first product three days after the September 11th attacks.
But Dalgaard made SuccessFactors cash flow positive soon after, and from there on funding was easy to come by. Dalgaard also became an adept fundraiser, raising $45 million over multiple rounds from Greylock, TPG, Emergence Capital, Eric Dunn at Cardinal Venture Partners, and others between 2003 and 2007. A year after going public in 2007, the company boasted a market cap of over $650 million. And in December 2011, SAP acquired SuccessFactors for $3.4 billion.
Lesson to learn?
Our valley of geeks has always built wonderful, rocket-science technology, often without any idea what problems the technology would eventually solve. Other times, these visionaries have built technology with an idea of what problem to solve, but set out with a flawed market strategy. From sophisticated artificial intelligence algorithms to chip testing at 45 nanometers, these engineers’ achievements are always humbling. But they need business savvy to make and sell products.
Venture capitalists have plowed millions into such ventures, and many are now approaching a breaking point. Either the VCs want an exit, or the founders – after years of muscling their companies forward – are exhausted. These ventures are starved for new leadership to rejuvenate them, or in some cases, resuscitate them.
As Lars Dalgaard has proved, you can actually build a unicorn company on top of technology developed by entrepreneurs who have spent millions of dollars of venture capital, but have failed to achieve market success.
Note: Lars is now a General Partner at Andreessen Horowitz. You can read the full March 2008 interview about the startup to IPO phase of SuccessFactors here.