Welcome back to the second installment of our OA Spotlight series. Elsewhere operating advisors (OAs) are accomplished software executives who partner closely with portfolio companies to accelerate their growth. Be sure to check out last month’s OA Spotlight with Dan Schoenbaum if you haven’t yet.
This month we sat down with Josh Stephens, a product and engineering leader who we also have the honor of calling CTO of Elsewhere. Josh works closely with Elsewhere throughout the investment process, particularly on product demos. He also works closely with our portfolio companies in the areas of product and growth. Read below for a bit more on that, as well as Josh’s perspective (edited for length and clarity) on promising sectors, good and bad investor-company dynamics, and advice for bootstrapped startups.
One of the key takeaways? Embrace discomfort and prioritize growth.
Generally, I act as an advisor, and in some cases, a mentor to the folks running our portfolio companies. I also spend a lot of time extending our network and assisting our portfolio companies with hiring for key roles.
Today, there is an intense amount of competition for key roles within startups. Product Marketing has always been a super hard role to hire for, but I think it's even harder right now. Product Management and DevOps are also two extremely hard to find roles to fill. And obviously, hiring C-level executives or functional leaders, is always something you have to focus a lot of time on. I'd also add user experience (UI and UX) to that list.
I'm helping one of our portfolio companies make the shift from an enterprise top-down sales model, to a product-centered, high-velocity, value-led growth model. It’s a significant shift, it changes the culture of the company, it changes the way that you go to market, the way you sell and the way you build products. It’s a large-scale transformation—and in many cases, involves changing out parts of the team that are more familiar and more aligned with the prior business model.
As these companies scale, their needs change. As they're hitting those next milestones, they need help and coaching and business planning, and aligning that with product roadmap and strategy.
I'm a big believer that technology's main goal is to improve the human experience, and most excited about companies with transformative products that need help getting into as many technologists’ hands as possible. Lately, this has been focused on AI, natural language understanding (NLU), and product engineering lifecycle. They are becoming well enough understood that we're finding practical applications within market segments and product types that haven't used them before.
And we’re beyond the hype cycle for those technologies. We're starting to see adoption in ways that actually drives revenue and change. Part of what we're seeing is those technologies being deployed in order to scale teams of knowledge workers that otherwise would be hard to scale. But we're also seeing implementation of those technologies to bridge the gap between the work environment that we're used to from 2019—you know, being in a corporate office space—and the new environment of remote workers and distributed staff.
In many ways, we're using these technologies to adapt and advance the rate at which we're able to make technology changes. And when you think about what happened this year, you would expect that sending all of our teams home to do the same work would slow down velocity. But what we're seeing is a faster rate of evolution. And I think a big part of that is that we're relying upon technologies like AI, and we're investing in product engineering lifecycle products that allow us to shorten the path from innovation to improved products—that are more in tune with our customers’ needs—and iterate on those very quickly.
We see a trend right now where big tech companies are getting bigger, and we're also seeing some great performing IPOs. And we're seeing a lot of growth. It's been hard for startups that compete with companies like Facebook and Google and Microsoft to gain market share. But I think we'll see a reversal of that trend beginning in 2021.
I think that as healthcare becomes more generally available, and it's less of a draw in terms of why you need a W-2 job, it spawns a lot of activity from startups and entrepreneurs. And so what I expect to see is a lot of chipping away at some of the very large companies’ market share by innovative new companies, started by technologists who are working with people that they trust and know how to work with but aren't constrained by where they live and how easy they are to get to. So I'm really excited about that trend and very excited to be living in a world where I can invest in those companies and help them.
I invested a few years ago in a company that seemed very good on the surface—the business was sound. But I didn't go visit the headquarters and spend a day with the team. And right after the investment, within a few weeks, I had an opportunity to do that. And had I done that before, I don't think I would have made the investment. It really taught me that it's fairly easy to have a good showing in a boardroom for a couple hours with investors when you get on an airplane and fly to their headquarters and meet with the investors in their setting, but as an investor you don't really know a company until you go spend a day in their office with their people and you see how they work and can observe the personalities and how they integrate with each other.
What I've learned is that investing in companies with leadership that is not open to coaching and mentoring or isn't willing to take help when they need it is a really bad recipe. You might get lucky and have a team or a founder that doesn't want advice and doesn't need it and just plows ahead and does really well. But one of my rules is I only invest in companies that I believe I could help if they needed it. And so if you're in the business of providing smart money, and you invest in a company who won't allow you to provide that intelligence and that assistance, it can be very frustrating and usually leads to a poor outcome.
It's a good question. First of all, if you're doing a minority investment, you have to remember that the founder is often the majority shareholder. And so you have to think about them as another investor, as well as a key operator.
It’s hard to invest in a world where we're all remote. But I think you can mitigate that by spending more time with the company and with the team. And in realizing that you almost need to sort of integrate with some of their processes and see how work is done first. Also, as we’ve continued to focus on expanding our network it becomes more and more common that we’re connected to people that have deep experience with the founding team.
You can also learn a lot about a company by reading the reviews on Reddit and Glassdoor and what users say about their products or talking to other people that have worked with the founders in the past.
About eight years ago, an investor I've worked with before asked me to step into one of their companies to create a new strategy, increase velocity, and create a more marketable asset from an exit standpoint. We set a target window of three years for an exit, and we set an exit price. And 15 months later, we sold the company for three times the goal. This wouldn't have happened if we hadn't had clear alignment between the whole exec team and the investors—it took us all working together to make that transformation a reality.
It was a great example to me of what can be done when you're all in alignment, and you all work together. Another example, which is more recent, is ActivTrak. What was great about that investment is, as part of the deal, we put in a new leadership team, and that leadership team and the investor group are very closely aligned. We've worked together many times before, and we understand each other. Alignment has been easy, because we have similar ways of thinking about things and a very similar set of goals.
What that should tell us is that personalities matter. What you tend to see when you think about these companies at scale, is you tend to see small groups of people that travel together, and are very good at scaling companies, from x to y: either from 3 million to 20 million, or from 20 million to 50 million, or from 50 million to an IPO. What you want to look for is a team of people that have done it before that worked well together to understand each other. Quite frankly, that can be a team of people that can have a shouting, cussing match one night at a whiteboard, and wake up the next morning and come to work together amicably and move past it. That can be very hard to do when you don't trust each other. That trust between and amongst the executive team and with investors is super hard to find, but when you find it, it makes everything easier.
When I joined the Air Force, my first job was as a programmer, and I was writing code for mainframes. There was a consolidation effort to get rid of some of the mainframes in the Air Force and move them to larger bases, and we lost ours. I moved over to doing secure messaging. And while it might sound glamorous—to be able to handle and process top secret message traffic—it was a very boring job.
I was trained in cybersecurity and crypto, and programming, but those things just weren't appealing to me. There was a group of guys in the back of our data center that did network engineering, and it looked like fun. I volunteered for the night shift and would work really hard from midnight to three, to finish all my work. And then I read every book that those guys owned, in their drawers, on their desks. I watched hundreds of hours of video training on that subject. And I self-taught myself network engineering.
A few months later, a team from headquarters showed up one morning to install some new Cisco routers, and DNS servers. Our network engineering team was all out of town on a temporary duty assignment. I was about to leave the office and the commander turned to me and asked me if I would take charge of the implementation process. I said that that would be great.
For the next few weeks, I worked midnight to eight on my job, eight to five with them, slept an hour or two, and then either went to college that night, or worked at Best Buy, which was my part time job, and then went back to work. And it was rough. But after a couple of weeks, I was the only person trained on those technologies. And so they were forced to transfer me to that department. Within a short amount of time, I took over the department as the team leader. And that really launched my career into network engineering, which led me out of the military into a high-paying job at INS, which is how we innovated the ideas for SolarWinds and began that transition into software. That was a very big defining moment for me.
Well, first, let me say that, I think it's important for scale-up operators to have a founding experience. It's important to have started a company and run it from scratch, all through the scale-up process. And when you do that, you'll probably find your sweet spot, and that you're most comfortable at a certain stage of growth.
You've got to be scrappy and creative when it comes to bringing in capital to help run the business. And you should avoid institutional capital as long as you can. They might sound funny coming from an investor. But a lot of software companies use services revenue to bootstrap. There are also many government programs you can use. I'm using one right now for a startup I'm working on.
Learning how to be scrappy, innovative, and budget-sensitive is important. When you think about the founder operators that are scaling businesses up from 3-5 million a year to 30. The ones that do it well are thrifty. They are very focused on the budget. And they're very focused on getting as much growth out of every dollar that they spend as they possibly can. When you think about founding teams and operators at that scale, you'd never want to take capital from an investor who isn't providing what we call smart money. If that investor is only giving you money and not expertise, not help, not coaching, mentoring, help with recruiting, etc. Stay away from them. You don't need that money, you need smart money. And after you take that smart money, some founders and operators almost look at it backwards. They ask themselves, how quickly can I spend this money to grow the company, so I can go out and get another round?
It’s much wiser to ask yourself, how much growth can I possibly get out of each of these dollars that I took from a capital investor? And how can I use that to most effectively accelerate growth? And then if you do that, getting the next round of funding will be easy. My advice would be thrifty and focus on growth—at all costs. Every dollar you spend needs to grow the top line revenue. And if you do that, then things are much, much easier. If you think about our operators that are the most successful, they are the ones that are watching every penny.
Sometimes it can be tricky, because if you bootstrap the company, and you haven't had any money to pay yourself or pay your team very fairly, you make promises of equity, you’ve bought the cheapest toilet paper you can find and you make your team buy their own soft drinks. Once you take capital from an investor, it can be easy to get a little more comfortable. My advice would be to stay uncomfortable for as long as you possibly can. If you use that money to drive growth, instead of driving comfort, the comfort comes later—when you have a giant exit.