Responding to a popular request, we are now sharing transcripts of our investor podcast interviews in this new series. The following interview with Asheem Chandna, Greylock Ventures was recorded in September 2016.
Asheem Chandna, General Partner at Greylock Ventures, talks on the topic of funding fat startups, something Asheem has done routinely, one of the very few VCs still doing so. Very interesting discussion.
Sramana Mitra: We’re going to start with some level-setting. You’re one of the very few VCs who still practices real venture capital – as in financing concepts for developing significant products. These are not revenue-generating businesses, which is where venture capital is slowly moving to or has already moved to. Please share with us a couple of case studies of concept to scale financing that you’ve done and that have worked out particularly well. What is your thinking in how you choose to do those kinds of businesses? What can we learn from it?
Asheem Chandna: I’ve been at Greylock for 14 years. A significant part of my work there has been working with entrepreneurs from the founding stage. They’re really from a concept stage where one has a smart engineer or a smart entrepreneur that has a product concept that either targets an existing market or goes after a new market. In terms of quick case studies, my most successful case study in this area would be a company called Palo Alto Networks, which initiated in our office 11 years ago.
The business size of the company today is roughly about $2 billion. They’re generating many hundreds of millions of free cash flow every year. That company was started by a brilliant technologist and entrepreneur. He was a friend of mine. Nir Zuk came by our office without an idea. We cycled through a bunch of ideas and came up with an idea for an enterprise-grade integrated security product.
A key thing here is what we did next is we went and talked to a very significant number of customers. We defined the basic product concept. We took the rigor of writing the data sheet before anything was built. We created a few slides. We flew to New York together and talked to a bunch of customers there. We also talked to many customers in Silicon Valley. We probably talked to 40 or 50 customers before the first significant check was written.
Another quick example would be a company called Sumo Logic which is a privately-held company today. It’s annual recurring revenue is several tens of millions. They have a couple of hundred employees. It’s a similar story. They have two brilliant engineers – Christian Beedgen and Kumar Saurabh. The idea was doing cloud-based log management and analytics, which seems a lot more obvious today than it was five or six years ago when the company was started.
It’s a similar process. We talked to a number of customers and refined the concept. The last one I’m going to quickly mention is Awake Networks. They have about 35 engineers in the company today. That company also got initiated in our office a couple of years ago by another brilliant entrepreneur by the name of Michael Callahan. It’s the second time we’re backing him.
We came up with the concept for a next-generation security analytics offering. Michael and a couple of my colleagues at Greylock talked to about 50 customers and refined the concept. Greylock wrote a $8 million check. We also helped them find three co-founders to complete the founding team.
Sramana Mitra: Just to underscore some of the case studies, you’ll find the case study on Palo Alto Networks on the blog. Nir Zuk disused his founding process extensively. It’s amply documented. We’ve also done Sumo Logic. The process that you’re describing is precisely the process we follow here at One Million by One Million with all our enterprise or B2B projects. It’s this immensely immersive customer discussion very early on.
I try to tell people not to write a line of code without actually talking to a significant number of customers. The lean startup movement has created this myth that you need to iterate and prototype. I don’t think madly iterating without talking to customers and getting the facts right is a productive way of doing business. Do you agree with that?
Asheem Chandna: I couldn’t agree more. A lot of entrepreneurs think that they got to hit a significant number of milestones before they can approach a venture capital firm. I would say that nothing could be further from the truth. The most important thing is the quality of the individual and the significance of the opportunity.
To your point, the most important thing an entrepreneur can do is think through what they’re doing and try to get an understanding of the market opportunity and the reality of it – or the lack of reality of it. Size the opportunity and understand the pain of the customer and understand the buyer as much as possible. I would argue that that’s hundred times more important than quickly writing code.
There are companies that approach us all the time that may have north of a hundred employees. We either won’t take the meeting after we see the slide deck or we take one meeting and there’ll never be a second meeting. Our view is that a particular situation doesn’t have the runway that we want where one person comes in with a good idea and we can see that there could be a very large runway here.