Before Tableau was the $15.7 billion key to Salesforce’s problems, it was a couple of founders arguing with a couple of venture capitalists over lunch about why its Series A valuation should be higher than $12 million pre-money.
Salesforce has generally been one to signify corporate strategy shifts through their acquisitions, so you can understand why the entire tech industry took notice when the cloud CRM giant announced its priciest acquisition ever last month.
The deal to acquire the Seattle-based data visualization powerhouse Tableau was substantial enough that Salesforce CEO Marc Benioff publicly announced it was turning Seattle into its second HQ. Tableau’s acquisition doesn’t just mean big things for Salesforce. With the deal taking place just days after Google announced it was paying $2.6 billion for Looker, the acquisition showcases just how intense the cloud wars are getting for the enterprise tech companies out to win it all.
The Exit is a new series at TechCrunch. It’s an exit interview of sorts with a VC who was in the right place at the right time but made the right call on an investment that paid off. [Have feedback? Shoot me an email at lucas@techcrunch.com]
Scott Sandell, a general partner at NEA (New Enterprise Associates) who has now been at the firm for 25 years, was one of those investors arguing with two of Tableau’s co-founders, Chris Stolte and Christian Chabot. Desperate to close the 2004 deal over their lunch meeting, he went on to agree to the Tableau founders’ demands of a higher $20 million valuation, though Sandell tells me it still feels like he got a pretty good deal.
NEA went on to invest further in subsequent rounds and went on to hold over 38% of the company at the time of its IPO in 2013 according to public financial docs.
I had a long chat with Sandell, who also invested in Salesforce, about the importance of the Tableau deal, his rise from associate to general partner at NEA, who he sees as the biggest challenger to Salesforce, and why he thinks scooter companies are “the worst business in the known universe.”
The interview has been edited for length and clarity.
Lucas Matney: You’ve been at this investing thing for quite a while, but taking a trip down memory lane, how did you get into VC in the first place?
Scott Sandell: The way I got into venture capital is a little bit of a circuitous route. I had an opportunity to get into venture capital coming out of Stanford Business School in 1992, but it wasn’t quite the right fit. And so I had an interest, but I didn’t have the right opportunity.
NEA’s Scott Sandell
A couple of years went by — I spent a couple years at Microsoft, right out of Stanford. And then, for personal reasons, I moved back to the Bay Area. And I was doing consulting projects, and one of my consulting projects was a company in Houston, they needed to raise money.
And so I helped them put together a presentation and we went around to a bunch of venture capital firms, some of which I knew, some of which were known to the founders.
NEA was one of the ones that were known to the founders, not to me. So we first went to the Baltimore Office of NEA, which is one of our founding offices. And after the pitch, they said, “Hey, we like what you’re doing, why don’t you go out and meet with our partners in Menlo Park?”
So, the next week we went to the Menlo Park office, and after that they called me and they said, “You know, we’re not actually interested in that company, but would you like to work here?” And so that started the interview process, where I met all the people in the firm, and they ultimately gave me a job offer the day before Christmas in 1995.
Matney: Was there much of a transition process for you or a steep learning curve when you joined NEA?
Sandell: So, yeah I had a done a number of things before venture capital, I was at the Boston Consulting Group for a few years and then in a startup for a couple years and Microsoft after business school.
Those were all really intense jobs where there was a lot of direction as to what to do. And when it came to NEA, there wasn’t very much direction about what to do. So I had to figure out how to manage myself and integrate myself into the organization, which I didn’t actually. They gave me a bunch of positive feedback for the first couple years, but after two-and-a-half years, they told me I wasn’t going to make it.
Matney: Undoubtedly a very encouraging thing to hear from your bosses, but why was that?
Sandell: Well, they weren’t super specific about it, but they just said — you know — we don’t think there’s a path for you here to become a partner. And so — that was on a Friday — I thought about that over the weekend, and on the Monday, I decided to go in and ask for another chance, and I went to the partner I knew best at the time, Dick Kramlich, to make my case.
Long story, short, within a year I was promoted to associate partner and the year after that I was voted to general partner. So that was October of 2000.
Matney: There was an article in TechCrunch recently kind of talking about how much associates matter at VC firms, I know this in-house rise to the top isn’t that common, but do you think it’s become even less common today for associates to make the jump to partners?
Sandell: Well, I don’t know, I can’t speak for the industry because I think most firms are different. But at NEA, we intentionally hire and develop associates, and some of them become partners and general partners. So we have a long tradition in a systematic way of doing that.
Matney: Why do you favor that route?
Sandell: That’s a good question. I think, looking at it from the other side, we haven’t had a lot of success, hiring in very seasoned executives and turning them into investors, and I don’t think the industry has either. I think that that’s a fairly low-probability event that somebody that’s been the CEO of XYZ turns into a great investor.
Adding somebody as a general partner means that you’re going to commit a lot of capital to them before you know whether they’re any good, so they’re a much more expensive failure if they come in as a general partner and turn out not to be a good enough investor. You know, a lot of people come in that way and think they already know everything there is to know, they’re a little bit less likely to recognize that being an investor is an entirely different skillset. And while the experience they have can be informative to that and possibly very advantageous, it’s really a completely different game.
So, if you just look at all the challenges of hiring people who have been very successful executives and making them venture capitalists… I mean we still do that, by the way, and expect to get about one-third of our general partners that way, but we found that it’s super-valuable to be able to develop people internally who are much more malleable.
Generally speaking, you have a lot longer time to train and develop them before you entrust them with your limited partners’ capital, so the risk of failure or — I suppose — the cost of failure is much lower.
Matney: Now, talking about failures, looking at that timeline you gave, you said you became a general partner at the end of 2000, so you were kicking off this new role right in the midst of the dot-com bubble burst?
Sandell: So, yeah, I made some investments in the late 90s and some of those turned out well, but when the bubble burst in 2000/2001, I had about 10 portfolio companies which were all in free-fall.
So, I was spending a lot of time, you know, trying to help them figure out the right way forward: downsizing, doing layoffs, and figuring out whether there was a viable path forward.
Some of those companies survived, but most of them didn’t. It was all very painful.
And what’s especially painful is that I remember at some point, I stepped back and realized that in the prior 24 months, I had been a part of, I think, 25 layoffs in 10 companies. The rule of thumb about layoffs is if you’re going to do a layoff, cut deep and do it once.
But here we had 25 layoffs at 10 companies, I think one of the companies had four separate rounds, so obviously we didn’t follow that guidance very well and it stinks. It wasn’t so much the fact that we didn’t try to cut deep each time, but it was just such an incredible free fall and I feel like there was just no way to anticipate how far it would go and what couldn’t survive.
Frankly, it was very depressing, because I had only been a venture capitalist for a short number of years. It was very feasible to me that I would lose my job. Even though I’d been promoted to general partner, it was very clear that you only got to stay a general partner if you were successful at that and here I was watching my portfolio fall apart in front of my eyes.
Matney: What could you do at that point?
Sandell: Well, I had this insight that maybe I needed something a little more positive, in my day. And so I asked my executive assistant to dedicate 25% of my working hours to seeing new companies for the simple reason that new entrepreneurs are always excited about what they’re doing and I thought that would cheer me up. But I also knew that, you know, eventually I would fall prey to one of their stories and start making new investments.
And that that might be a really good thing to do also, so that turned out to be a great time. Because only the best entrepreneurs were courageous enough to start companies in 2001/2002/2003. It was a very tough time in the tech economy.
But you know, those were the years when I invested in both Tableau and Salesforce and then others like Data Domain and Neoteris, some other really great companies.
Matney: A lot of these companies obviously had some huge exits later on, but following the tech collapse did you feel like you had to consciously shift your focus to being bolder to make up for some of these companies that had cratered?
Sandell: So, we had gone from investing a $230 million fund in 1996 when I joined to four years later when I was a GP, we had just raised a $2.3 billion fund. And so I, I realized, as a new general partner that we had to set our sights on much bigger outcomes than we had historically realized. So, the lens was actually quite different for me, making investments in 2001 onwards than it had ever been before, and in particular, I was focused on things that could become very, very big.
Matney: So, finally, zeroing in a bit more in on Tableau, when did those founders first land on your radar?
Sandell: My longtime, very close partner, Forest Baskett, who I’ve worked with for 20 years on a lot of good projects, came into my office, and he said that he wanted me to meet with this company Tableau which had been brought to him by Pat Hanrahan, one of the founders and is a very famous professor at Stanford. And so we had a meeting and got very excited about Tableau,
It wasn’t without some trepidation, because there’s always trepidation. We loved the technology. But it was a Windows desktop software product in 2004.
And by that point, no one was investing in desktop software anymore, because there wasn’t really an effective way to sell it. You know, the retail distribution channel has kind of gone away in the late 90s. And nobody was making any money funding desktop software products, especially products, which sold for, you know, a couple thousand dollars per account.
So we knew we had a big challenge in our hands, which was to figure out how to sell this very, very good stuff. But it was with that understanding that we made our first investment in the company in 2004.
Matney: Looking at the pedigree of the founders, it kind of seems like that might have been a tough deal to score.
Sandell: It was a very competitive deal, we had to move really fast, It was over the summer as I recall. All the best deals tend to go that way though. So, you know, Forest comes in and says, “We’ve got to jump on this one, clear the decks.”
So we do and we went up to Seattle. And I remember having lunch with [Tableau’s other co-founders] Chris Stolte and Christian Chabot.
There were a bunch of other competing term sheets, of course. So we’re trying to take this deal off the table and all of the valuations were in the low-teens. For the Series A, we wanted to invest $5 million at $12 million [pre-money valuation] or something like that. And Christian just said, no, that’s just way, way too cheap for Tableau.
So in the course the lunch, we said, well what price would get it done? And he said $20 million pre, which was at least $5 million higher than any other investment proposal that he had at that point. I know for sure that the closest one was at 14 of 15. But we decided to go to $20 million and match that and that’s what got the deal done.
And I’ve teased Christian ever since then, that the one problem with all the investments we ever made in Tableau is that at every single juncture, Christian always insisted on some completely unreasonable valuation. In that case, it was $20 million pre. And the next round was like $60 million pre. The round after that it was like $300 pre.
Every time these were just absolutely ludicrous prices for where the market was and the progress of the company and all that stuff. I say that, tongue-in-cheek now, because of course each and every one of those rounds was a home-run.
Matney: I’d bet Salesforce is hoping they get the same kind of value.
Sandell: I think they’ll be thrilled, this is a great acquisition for them, but you know the reason I bring this all up is that other young venture capitalists might hear this and I want them to realize that paying up for great things is almost always the right thing to do. The converse is also true, being that things that seem like a bargain probably aren’t.
Matney: With the Tableau deal in particular, at the time, were you scouring this space and meeting with the other companies and founders, or did this opportunity feel like it was a little out-of-the-blue?
Sandell: You know, oftentimes, when we fund something I am very much looking actively at the space, but in this case, I really wasn’t. That said, I was convinced that the space was ripe for disruption.
Matney: In the pre-IPO life cycle of Tableau from 2004 when you made your first investment to the later rounds, there were some big things happening with the broader global economy. Was their some belt-tightening at Tableau during the financial crisis?
Sandell: So, Tableau’s core was built on less than $2 million in capital, even though we invested a lot more than that. The company was incredibly parsimonious with the capital that we had given them, which I think was one of the signature reasons for why they were so successful.
And I’ve found over and over again, that people that are incredibly careful with capital are often more successful.
And, in the case of Tableau, there was this adjustment that I remember happening in October of 2008, so right in the middle of the global financial crisis. It was right after the board meeting, and I went into Christian’s office as I usually did just to chat about things and we talked about whether we should make some adjustments to our plans.
We’ve been growing something like 100% per year for the prior couple of years, and we were talking about whether we should be trying to grow at that same pace or if we should pull back a little bit. We decided to be a little bit more conservative in our hiring plan and just see how things developed.
And if you look at the revenue trajectory of Tableau today, 2009 is the only year in which the company wasn’t growing like crazy. So, at the time that was a pretty tough decision but it turned out to be a good one.
Matney: What was your advice when the Tableau leadership was mulling an IPO in the early 2010s? Were there concerns around then about their readiness?
Sandell: You know, I think the concerns were the same as any company getting ready to go public, the question is, are you ready? Do you really want to do this? Because you can’t go back.
And so we were very careful in preparing for the IPO at Tableau. In particular, one of the important decisions that we made was that Tableau had this wonderful management team, but they were all first-timers in the positions they occupied.
The conventional wisdom from the bankers was that if you have a first-time CEO when you’re going public, you ought to compliment that person with an experienced CFO who had previously taken a company public. And we didn’t have that CFO in place, we had a wonderful fellow named Tom Walker, who had been with the company since very early on, and was a critical part of the management team and the success of the company but he had never taken a company public.
So two years before the IPO, we talked about this and we decided that we really wanted to give Tom a chance to be the CFO to take the company public. And so we brought one of our venture partners, Brooke Seawell, who had taken 4 companies public as a CFO, onto the board to chair the audit committee, and importantly, to coach Tom Walker.
So that was one of our biggest decisions, making sure that we had the right team in place for the IPO, and being willing to go public with a team that had never done it before.
Sandell’s other bets that IPO’d include:
- WebEx
- Workday
- Data Domain
- Fusion-io
- Bloom Energy
Matney: Let’s switch gears from the IPO to this latest deal. You have pretty deep insight into both Salesforce and Tableau. What do you think this coupling signifies in terms of how Salesforce protects itself from competitors?
Sandell: Well, I think Salesforce is doing all the right things from an acquisition standpoint, they’ve capitalized on the cloud as the new platform and they are building or buying everything that one needs to serve their customer.
Analytics is a natural extension of almost any application, so Tableau is a great fit for that. They also have a major footprint of customers so the cross-selling opportunities for Salesforce should be considerable. I would be surprised if there weren’t a lot of cross-selling activities between those two companies.
Matney: I was reading some stuff in the aftermath of the deal, detailing how Tableau has this huge presence on-premise and Salesforce is really prioritizing their cloud services. It would kind of seem like a bit of an odd coupling from that standpoint, what do you think?
Sandell: I think that’s an interesting question, you know, Salesforce has been maniacal about cloud-only from the beginning, I remember when Marc had the circle that said “software” with the red line through it, and that was the way he always thought about it. I thought it was great marketing.
Tableau has been transitioning to the cloud for at least five years, so they have a very robust cloud offering. So from that standpoint, I think it’s a really good fit with cloud platform that Salesforce already has.
What they do with the on-premise customers, I don’t know. I would be surprised if Salesforce uses this as a sudden push into the on-premise business. My guess is that when they can, they transition everything into the cloud.
Box CEO Andrew Levie took to Twitter after the Tableau deal was announced:
Matney: Which companies should be scared by this deal?
Sandell: Oracle ought a lot of be scared, Microsoft ought be scared, SAP ought to be scared. But, all of the big incumbents are still struggling to develop their cloud strategies. I think Microsoft’s making good progress, but I’m unsure about the other ones.
Matney: Yeah, Microsoft seems to really be positioning themselves well lately.
Sandell: I think Tableau is still a much more advanced product than anything Microsoft has or will be able to develop anytime soon. And I think, analytics is such a fundamental capability that every organization needs and especially needs to take advantage of all the other software they’ve already bought.
So, you know, having all these other systems of record without the ability to analyze what’s inside them should be pretty worrying to the competition.
Matney: On Google’s side, how much of a coincidence could it be that their big acquisition of Looker was announced just a few days before Salesforce announced they were buying Tableau?
Sandell: I have no special inside knowledge, but I would tell you that those things are rarely coincidental.
Matney: Wrapping things up, I know you’re still very active in making investments, I’m curious whether there are some spaces you feel like you analyzed pretty heavily recently but ultimately decided to stay away from?
Sandell: You know, the most recent one that was so quick to me was these companies that have electric scooters. We looked at a bunch of those and I was like, “Lord, that’s the worst business in the known universe.”
Matney: Why do you think that? Some of these companies have some massive valuations already.
Sandell: It’s so capital-intensive, they own the scooters as opposed to Uber that doesn’t own the cars. And the asset itself only seems to last about four months and then to service the asset, I’m pretty sure that the daily cost of servicing the asset exceeds the revenue. So basically, the faster you grow, the more money you lose and the idea is to get really big really fast and eventually you’re gonna make money somehow.
It’s worth noting that Bird’s leadership would likely push back on this as the current narrative, the company recently raised at a $2.5 billion valuation and CEO Travis VanderZanden said publicly that the company was making money on every ride of their newest scooters.
Matney: So, one last question, and now I’m guessing it won’t be a scooter company, but what’s your latest investment?
Sandell: I think we’ve just announced Divvy, but please don’t announce them for me if we haven’t yet. [They did, here’s our story] They simultaneously solve about three different problems for a company, they have an extensive management product that they give away for free, they have a corporate credit card that automatically feeds all the transactions into an expense system so employees never have to fill out expense reports, and then they also can make money as a provider of corporate credit to these companies. So they enable banks to lend money to companies to cover their expenses for a month or two, so it’s a form of credit that’s quite useful to small companies in particular.
Matney: I’ll check it out. Thanks for taking the time to dive into some of these topics, I appreciate it.
Sandell: Absolutely, thanks.
The Exit is a new, investor-focused series on TechCrunch. If you have feedback, input on a recent exit or would just like to chat, shoot me an email at lucas@techcrunch.com