FriendlyData is an unusually quick success story: taking less than three years from idea exit. In the summer of 2016, the founders had a prototype. After six months, they began selling their services to enterprise companies, allowing non-technical employees to work with databases. Later, they got a boost from 500 Startups (which has offices in Minsk and San Francisco), and soon thereafter, investments. Last October, the Belarusian startup was bought by ServiceNow, a publicly traded cloud computing company in Santa Clara, Calif., revenues of nearly $3 billion.
Michael Rumiantsau, a founder of FriendlyData, recently spoke with The Heroes about his experiences in finding investors, sales, choosing key metrics, and conditions that are ripe for an exit. He also discussed his “company builder, ” a different sort of accelerator.
— Michael, FriendlyData went from prototype to exit in less than three years. To an outsider, it seems to have been a quick and quiet journey.
— It only seems so. Like any other startup, we’ve spent a lot of time overcoming difficulties. Everyone goes through difficult moments in which you want to give up; this is normal. But as a rule, the winners are those startups and people who don’t give up and know how to overcome such situations. All startups go through a number of standard problems: lack of money, lack of the product or market fit (PMF, product’s compliance with the expectations of the target audience), and difficulty in attracting users. We, too, went through it all. And it was a success — we were optimistic and believed that we would succeed sooner or later.
— You didn’t create a new market — the problem of data processing and voice search in data arrays existed before. Why was FriendlyData the first to come up with a workable solution?
— Indeed, there have been many attempts to make a language interface for working with databases before we made one. But for startups, it is important to time its entry just right — not later and not earlier than the market is ready for it. When we first started making FriendlyData, we often heard people say that nobody needed it and there was still no market for our product.
But the acceptance of innovative products always goes through a series of stages. At first, there are a few early followers. As a rule, these are companies that are ready to try your product simply because they are curious. Many startups are faced with the fact that they are of little interest at first.
While we were developing the product, we began to look for seed investments. At that stage, we were constantly told that the market was already oversaturated, that there are too many players in it. I think this indicates that we entered the market on time and with the right sales strategy.
Many large companies in the business intelligence market are currently trying to implement NLP technologies for working with data; there is a demand for such solutions. This indicates that such a problem still remains on the market and hasn’t yet been globally solved.
— Does the CEO of a startup necessarily have to become a salesman? Suppose he doesn’t know how to sell his product, especially in New York, which is considered a “predatory” market?
— Of course, he has to sell, and if he doesn’t know how, he must learn. The first sales should always be done by the founders of a startup. In Belarus, many founders come out of engineering circles, not out of business, so they definitely need to learn sales. And it is best to do this in practice — sales cannot be mastered in theory. Making the first 10 calls you will feel discomfort and worry — this is normal. You’ll get used to it gradually, and it will become a natural part of the company’s development.
We also started making calls when we worked with medium-sized companies. But when we shifted our attention to large companies, we focused on personal meetings and presentations. That said, cold calls and meetings helped us understand customer problems and modify our product the way the market wanted. Therefore, the first sales should be done before the MVP is ready.
The best possible feedback you can get is from people who will be using your product. First, you need to think about the problem to be solved, then focus on sales, and only later consider the product. The correct product approach usually emerges from communication with the customer and thoughts about sales.
As for the “predatory market of New York, ” we had some trouble with sales there at first, in the absence of contacts. B2B sales are, first of all, relationships and reputation. They help explain the benefits you offer to people. Sales of any product must be supported by social proof — which is why it is so important to build good relationships with people.
Of course, it should be done on the spot, not remotely. At least in order to see from the inside how the local market works. If you want to sell in New York — fly to New York. This will help to understand non-obvious things like business etiquette and customer expectations.
— Sales are one of the main metrics. But it’s not the most important one at every stage. How can a startup determine the key metric for itself?
— Startups at an early stage need to have at least one key metric and concentrate on it. This may be the annual revenue, the size of the pipeline, or some growth metrics. But you must understand which specific metric primarily affects the growth and development of your company. And the whole team should work to ensure that this metric drives growth.
It is crucial to understand which metric it is, as well as whether you have reached the product/market fit, or PMF. These two parameters will largely ensure the future success of the company.
There are no universal means to reach the PMF and be sure of it. It’s like with love — you will feel and understand that this is it. A good sign that you have reached or got close to the PMF is when the product is already being paid for while it is still raw.
At pre-seed stages, you can sometimes afford unscalable solutions. For example, you can support a very important client and exceed your normal resources. Or you might close an unprofitable deal if it lets you receive social endorsement and provides many product insights, while validating the solution on the market.
At later stages (post-seed, series A), a startup cannot afford to lose money with clients; it needs to think about the metrics. For later-stage investors, it is important that your business looks healthy, and in many ways, this can be indicated by the unit economy.
If the founders don’t have a common idea of which metrics should be considered key metrics and how to promote them, you have to solve these issues peacefully. Avoid disputes that cannot be resolved. They can kill your time just when it’s so important for a startup to move quickly. Establish communication in such a way that there are no complicated hitches in making decisions. And don’t be afraid to make mistakes. Mistakes help to move on if you draw the right conclusions from them. But conflicts between founders strongly hamper development.
A startup has a few advantages over large organizations, so use them! One of the main advantages is the speed of decision-making, due to the absence of bureaucracy and low cost of mistakes. A failure can cost a large company hundreds of millions. People in corporations are afraid to take risks that may hurt their careers.
— How do you attract the first investors if the 20 “X’s”—the hoped-for return on investment--are something that may or may not come to pass? And what share of the company should you offer in exchange for outside funding?
— In venture capital, nothing is ever obvious. Experienced investors understand the risks they face. But it is more important for you to show investors what you’ll have in 1-2 years (prospect, growth potential) than what you have now. You sell the future to the investor, not the company in its current state. If all your metrics are predictable and there is a stable growth, then it’s better to take out a bank loan. In any case, it makes no sense to give out a share of your company.
Don’t give investors too large a share of your startup, even if it gives it a high company valuation. If you give up 40%-60% of the company in one round, it will simply kill the startup. Work with investors who understand that the size of the pie is more important than their share.
Be honest and always pre-negotiate mutual expectations. You will cooperate with investors throughout the life of the company, so, build trust with them at the initial stage.
I would divide all investors into three types.
The first type is those from whom it is worth taking money, even if you don’t need it. For example, if it’s a top established fund, it can offer more benefits than just money. Don’t need investments right now? Look at it strategically, in perspective. Such an investor will help you attract the next round when you really need it. And also — it will become a serious social confirmation and share its connections. Even if you don’t need money, you can ask for other resources in return to close the deal on mutually beneficial terms.
The second type is smart-money, investors with expertise. You should attract money from such investors when you need it. You can also take money from experienced investors who simply won’t prevent you from moving further. They understand that you are responsible for the result and know your own business better than others.
The third type is inexperienced investors who are trying to impose their vision on you. It is difficult to work with them, and often this doesn’t end very well — it’s better to avoid such people.
To understand for sure what type is in front of you, talk with the portfolio companies of this investor. Ask the founders about their experiences of working together.
— What should you do if a company approaches an exit but there is no agreement between the founders and investors on the terms of the deal?
— The exit is one of the situations when the interests of founders and investors may diverge. Choose relationships. I would never agree to an exit that would have a negative impact on my reputation or that would dissatisfy the investors. For me, relationships and reputation are much more valuable than money. To sell or keep waiting? Do whatever helps the company move forward. In our case, the exit strategically helped the product to reach a new level, thanks to the resources of the global organization.
I’m pleased with the deal, and the money is not the main factor here. The number of “X’s” in the returned money is not the only source of profit for investors. In our case, in addition to the money, the investors added to their portfolio a startup that was later acquired by the most innovative company in the world, according to Forbes. It’s always a good social confirmation for the investor. In addition, the payoff happened very quickly — shortly before the exit, we announced the closure of the seed round, including the participation of Belarusian investors. But this round definitely wasn’t timed to the exit — there was no question about it yet.
— Why ServiceNow, and not a search engine?
— Firstly, the mission of ServiceNow is to make work easier for people in large organizations. This largely coincided with our mission — to make data available to people in large companies.
Secondly, we realized that our technology fit very well into the ServiceNow ecosystem. Therefore, we could quickly scale the product inside it. Thirdly, we saw a cultural similarity with them. In fact, we neatly fit into ServiceNow.
The deal was a classic technology purchase, but our core engineering team joined ServiceNow and is now successfully completing technology integration. Inside ServiceNow, we got access to important resources — not only human resources, but also marketing opportunities, new customers, internal technologies, and company infrastructure. In many ways, access to real customer data helps to quickly train the system and scale it. The benefits are mutual — the demand for our technology inside ServiceNow is large enough, there are many potential use-cases for us.
— After selling FriendlyData, you announced a “company builder”, in which you will support startups with expertise and money. How will this differ from early-stage accelerators?
— It’ll differ by the fact that I have a fairly narrow focus — on companies that change corporations using deep technology and data. In addition, I will personally be actively involved in the development of these companies. My participation will not be limited to any particular stage. On average, a program in an accelerator takes 3-4 months and it is the same for all startups, even if they are at different stages. I will maintain the individual rhythm of every company throughout its development, or in the period when my expertise is particularly useful. The idea is that my active participation in the development of startups, which is not available with most accelerators, can bring them to the next stage. I’m already helping several projects — two from Belarus and one from Ukraine.
The degree of my participation will depend on the stage of development of the company and the need for my involvement. The amount of investment is in the range of $0 — $250,000. We have a flow of applications from quite high-quality startups and the external pipeline is quite large: I have good networking in Silicon Valley.
In the next two years, I plan to expand my portfolio to 10 companies. In the venture capital environment, it doesn’t make sense to invest in fewer startups — according to statistics, it greatly reduces the probability of a successful exit. If you invest in more than 10 companies, it will be difficult to actively participate in their development. But over time, some portfolio companies will become more independent, and I will be able to concentrate on new projects.
But for now, my number one priority is to bring FriendlyData’s integration with ServiceNow to successful completion. In parallel with this, I am helping startups and working on a new project, which I’m not announcing yet. It’s also associated with analytics and data processing.
— Your company builder targets startups at the pre-seed stage. At this stage, it’s very difficult to predict and evaluate since there are no sales, no metrics, and often no product. So what do you pay attention to?
— First of all, to the team. I look at the chemistry between the founders, whether they can work as a team. I also look at personal qualities — it’s a good sign if I see stubborn people who are not afraid of serious problems. A very important factor at this early stage is the learning ability of the founders. As the company develops, the founders should develop along with it, acquiring new knowledge and skills.
It’s easy to assess the learning ability — to work with people and evaluate them in action is enough. Teams that can be trained easily set up experiments and put forward hypotheses, test them, and move quickly.
We had a lot of hypotheses — in products, sales, and marketing. Literally, at every moment of time, we had dozens of hypotheses on various aspects of the development of the company and the product. Hypotheses must always be measurable so that you can get an answer in digits, not in emotions. Specific measurability helps to draw the right conclusions. It didn’t work? You immediately understand this and draw the following hypothesis. It worked? You accept and improve it.
— You live in the USA but spent the last few months at home, in Belarus. How do you evaluate the state of our startup ecosystem now?
— Over the past few months that I spent in Belarus, I saw a lot of startups. But if you compare Belarus even with neighboring countries… Many things need to happen here so that we can catch up with them. I’m not talking about such leaders as Silicon Valley or China. These changes will not be subject to any decrees or laws. No, some mental shift is needed. And this will require dozens of years, generations.
So far, unfortunately, we don’t have a strong entrepreneurial culture. The number of people willing to tackle responsibility and take risks is still far from the critical mass that is needed for the rapid development of the startup ecosystem.
At the same time, the lack of a domestic market helps Belarusian startups to immediately focus on the global market. A technology venture startup should always focus on either a fast-growing or a large and rich market. Therefore, if the company focuses directly on the global market, this is a good sign. In Russia, for instance, there’s a rather big domestic market, and this hinders many startups from going global. It is a common misconception that if you validate a product on the Russian market, then it will simply be scaled. In fact, it almost never works. If you are making a global product, then it should immediately be global. What worked in Russia doesn’t necessarily work in the United States. Companies that target domestic and international markets have completely different cultures.
Always focus on the largest market. If it’s a large or growing market, you can grow there even with an average product. But in a local or declining market, it will be difficult for you to build a successful company even with an amazing product.