In this Turing Distinguished Leader Series session, we conversed with Ashu Garg, General Partner at Foundation Capital. Ashu is an early investor in several unicorns, including Turing.
Welcome to Turing Distinguished Leader Series. Today, we have a special guest, Ashu Garg, General Partner at Foundation Capital and Turing’s founding investor, with us. So Ashu, could you please introduce yourself?
Absolutely! Thank you for having me here today. Here’s a very quick introduction—I’m a general partner at Foundation Capital.
I’ve been at Foundation for 14 years. And before Foundation, I started my career as an engineer graduating from IIT Delhi. After that, I spent 15 years in various operating roles, primarily in technology companies, [that culminated] in two stints at Microsoft—leading the machine learning and AI work, and before that, leading field marketing for the software businesses.
And coming to the topic of today’s discussion: What’s the secret behind building unicorns?
Great companies always start with some unique insight into a customer problem and solve it. In any recipe, the salt makes all the difference. The ingredient [in the case of companies] is founders.
I think they are what make a difference when everything else is equal. Founders who have persistence and are willing to do what it takes to cross the hurdles every day are game-changers.
Yeah, that’s right. You said to pick a big customer problem and have a unique insight. But there’s a lot of work to validate the problem and the feasibility of your solution. How do you know if this is a unicorn-sized problem?
You’ve said it well. I think in most B2B problem spaces, especially at the application layer, the hardest part is identifying a problem that deserves your attention and time and identifying a point of entry through which you can create your wedge.
It takes a lot of contact with customers and other people participating in that market to figure out that one thing people will buy. What is that thing that will reduce friction for them? What’s the compelling customer value proposition?
And in most cases, if you spend too much time coding, you miss the forest for the trees. Because now, you lock yourself into whatever features you’ve built without really understanding what the market wants. Now, that’s not necessarily always true. To be fair, I think there are situations, especially as you go lower down the stack, where the technical innovation matters. And very often, you have to follow the technology and see where it leads you.
Let’s return to your broader question of how do you decide that a market is large enough? At some level, you never know. But I think about this from the first-principles point of view.
Let’s take Turing as an example. If you ask yourself: How many engineers are there today? What do you think that market will be three or four or five years from now? In the case of Turing, the market is massive. It’s a multi-trillion dollar TAM. Now, not all of that market will be applicable on day one. And so, you have to slice and dice that and think: What engineering will people outsource? Who will be willing to outsource remotely?
Some of those are judgment calls. But in general, my instinct is if you’re solving a huge problem and thinking
about the market broadly enough, you have a much higher probability of building unicorns than if you start with a very narrow view of the market.
That sounds great. What things does a company need to do differently as it transitions from a scrappy startup phase to a unicorn phase?
That’s a great question. In some ways, it’s a paradox. What makes you successful at the scrappy startup stage can hinder you in some ways later, but you have to find the right balance.
One: I would say the first thing that exceptional startups in the scrappy stage do well is they have an incredible level of focus on a customer problem on a set of customers.
I would say that’s something you don’t want to lose. And so the balance for founders and companies is [focusing on] innovating on the product without getting distracted by new shiny objects that come along, especially as they get more cash. Cash, in some ways, is the biggest distraction. It allows you to start thinking about doing different things. And you want to leverage the cash to strengthen your value propositions, but you don’t want to get distracted by trying too many new things. So focus while innovating.
Two: In a small, scrappy startup, the founder / CEO does almost every job in the company. And as you start making the transition, you have to step away and build a leadership team. You need executives in each key role to build and scale those functions. But attracting, recruiting, and managing executives take a lot of time and energy. It is more than a full-time job for most CEOs.
And so, how do you balance the things you’re doing today? Because you need to keep growing the company every day while building your leadership. That’s hard. I encourage people to start doing this early.
Because if you suddenly get to the point where you need to hire six executives simultaneously, you’ll hire zero. And so you need [to hire] one every quarter, and you need to plan through that. So I think that’s a big transition.
Three: The third big transition is about putting systems and processes in place and keeping them lightweight. Now that you’re no longer managing every function yourself, you want to have some indication of how the pipeline looks. And so you need some tracking tool or some process [in place.] But, at the same time, you want to keep that lightweight because you don’t want to build too much bureaucracy and silos in the organization.
So those are the three things to think about as you go from a scrappy startup to a unicorn and beyond.
If I had to pick the one thing that is most likely the barrier to becoming a unicorn or a decacorn is how much time and energy people spend on building a leadership team. Because this process is never complete. As soon as you think you have the right leadership team, another hole will emerge. So you just have to make it part of what you do every day.
And I think unbilled recruiting is one part of it. Another aspect is making sure that your executive team is successful, building the right relationships with their peers, and integrating well with the company.
And that takes quite a bit of work because, at each stage in the company, the kind of people you hire are slightly different. It’s almost like driving a car. There’s first gear, second gear, third gear, and when people come into different gear ratios, there’s a little bit of constructive friction from time to time.
And there’s merit in both sides. There is no blanket area to match this culture. The company’s DNA changes with these new ingredients [new members] that you add into the gene pool.
Yeah. And most founders have to realize that great executives bring a ton to the company, but they are still executives. They’re not founders. Many of them have worked in a siloed environment. They’re used to working in silos and creating silos. Many of them have worked in more political settings, and even if they’re not usually political themselves, some of that rubs off.
So how do you create an environment where they work well together? If you focus on their gaps, there will always be friction. But if you focus on their strengths and help each of them realize what they are exceptional at, that’s when a team goes into gear four, and you start to see an acceleration in speed.
However, you have to decide when someone’s weaknesses have gotten to the point where they are a barrier to the next growth phase. And at that point, you have to have the difficult conversation and have them step aside.
In the first phase of a company’s growth, you want a sales leader that leads from the front. They’re still a manager of salespeople, but they’re often the best salesperson in the team. They’re the ones you go to when you want to close the big deal. Sometimes those people are also very good at the process, but they’re often not.
And in the early days of getting to the unicorn stage, you can supplement them with process people. But as you start to go from unicorn to decacorn, it’s almost entirely about the process. So sales must become a system at that scale. And you need someone who can design and run that system.
Going from a team of 10 to 100 plus salespersons often takes a different leader. Not always – some people can do both. But if you don’t have that person, you have to make a change.
Awesome. What are some common pitfalls that companies run into at the unicorn stage?
That’s a great question. But, just like there’s no one formula for success, there’s no one reason why companies struggle or fail. In many situations, luck is a big part of it.
But if you put that aside, the first reason companies fail is because the value proposition is just not compelling enough. So listening to the customers and thinking: “Is this [value proposition] really important enough?” is vital.
The second thing is a lot of founders underestimate the friction to buy and adopt new technology. Most founders have a very optimistic, risk-taking outlook. But if you look at the society at large, that’s a tiny subset of people. Customers don’t have that personality.
So most customers are thinking about: “What if this doesn’t work? What is it going to take for me to integrate this technology? How am I going to migrate data? How am I going to manage my downside risk?”
So you have to think through the adoption issues. And even if you have a compelling value proposition, it is crucial to think through how you get people to adopt. I’ve seen companies with incredible technology that never closed a sale because of adoption issues.
The third thing is challenges around founder dynamics. The initial phases are challenging. There are some fantastic days. There are tough days, too. If you have only one founder, they have challenges because there’s no one to talk to. If you have multiple founders, then you’ll run into fingerpointing situations.
So I would say those are some factors companies should look out for. I’ve never seen a company fail because of the lack of cash. If you have the right team and customer momentum, you’ll always raise money, in my opinion. If nothing else, I’m a firm believer that once we’re in for a penny, in for a pound.
That sounds good. Can you talk a little about how companies plan when they reach this unicorn stage? What’s the process? Do they look one year ahead or three? What do they get right or wrong as part of the planning process?
It’s a great question, Jonathan. The lack of planning is hugely problematic. And at the same time, too much planning early on is also problematic because you’re essentially throwing darts blindfolded. And so at the unicorn stage, I think about a company as having a solid product-market fit, having absolute clarity around the unit economics, their sales cycle, sales, productivity, etc.,
First of all, you have to start with a top-down view. If you let every executive build a bottom-up plan, then you get into a dozen strategies that you’re trying to reconcile with different assumptions.
So you need to create an envelope for the plan that is top-down. The envelope needs to have a lot of clarity. For most companies, it is four quarters out. In some cases, where you have very short sales cycles, you can put two quarters out.
In some cases where sales cycles are more than six months, you need a six to eight-quarter plan. This duration is necessary because the planning window depends on how far ahead you have to hire salespeople. And if you have a 12-month sales cycle, then a 12-month plan doesn’t tell you much. So, in that case, you need a 24-month plan.
You then put some basic structural constraints in place. You put some basic assumptions around productivity, resourcing, etc. Be very careful not to make too many aggressive assumptions. One of the most significant risks of planning is assuming an improvement in every metric. Individually, those improvements seem reasonable. But cumulatively, it is not very likely it’s going to happen.
Start with a basic plan. You want to get every executive team member to participate in the planning process. And there is a combination of buying and negotiation there.
And during that process, the most challenging part for a CEO is listening and distinguishing where an executive is merely negotiating and where they just don’t believe the plan is doable. Because if it’s the latter, you have to change the plan.
There’s no point in having a plan that your exec team doesn’t embrace. Your senior team doesn’t have to have 100 percent confidence, but your people have to believe it’s possible. So if I try to pick a number, I would say 80 85 percent confidence level [is vital.] So I think that process of going back and forth and fleshing out the assumptions is a critical step in the path.
This planning process and the process of articulating the assumptions help you understand what the drivers and warnings of the business are at that point.
Once you have that plan with that envelope, I recommend reviewing that plan. Let’s assume it’s a four-week plan for a typical sales cycle where a company has a three to six-month sales cycle. You should review that plan with a lot of detail every two quarters and revise it because every six months, you’ll have a lot more information every six months.
And you should do a very lightweight review quarterly and start tweaking the assumptions quarterly. But most of the update happens every two quarters, and every time you update the plan, you want to do a rolling four-quarter plan. So you then have planned out the next two quarters. This is because you need to start building capacity for the subsequent year at that point.
And typically, how long have you seen companies do this process?
Once you have 10 million in revenues, somewhere between 50 and 100 customers, and ten plus salespeople, planning becomes critical. Otherwise, a lot of uncertainty starts to creep into the system.
But generally, I would say if you do a rolling four-quarter plan every six months, that should take you through to a billion dollars in revenues.
Right. And at a unicorn stage, what do you see typically getting discussed at board meetings?
So I think board meetings have two dimensions to them. There is a dimension around operational and financial metrics reporting at the unicorn stage. At this point, you have a plan and an understanding of why you are deviating from the plan. And so, it’s essential to define the key metrics that you’re going to focus on. There should be one metric for revenue, one metric for cash, one metric for gross margin, and you need to have a shared understanding of how those are defined.
Getting that set of metrics agreed upon and digging in at the start of every board meeting is critical. Ideally, you want to circulate the metrics in advance. So the board meeting is focused on a discussion around ‘why’ not ‘what’ the metrics are. I would say that’s a third of a board meeting.
The second third of the board meeting is an opportunity to dig into one or two strategic topics. Again, you can pick a topic that you do a regular cadence around maybe twice a year. So if a metric isn’t going well, that’s an obvious topic to dive into. So pick a couple of topics that you can go deeper into and have a more substantive conversation.
The trick is to know where you’re looking for input and help from the board versus where you’re trying to drive to a decision because those are three different things. And you want to be explicit about which of the three sets of objectives you’re chasing. So that’s the second third of the board meeting.
The last third of the board meeting is a closed session, which provides a safe environment for the CEO to talk about the people dynamics in the business. But most of the closed sessions focus on the people dynamics because that’s a top area where founders have almost nobody to talk to very often, not even their co-founder.
So I would structure the board meeting as three thirds.
I’d love to dig into the second portion regarding the topics to discuss. Are there any patterns in what issues typically come while discussing metrics? Or is it particular to individuals or companies?
So I think there are some patterns. I don’t think they apply all the time. But most of the time, one of the pitfalls for companies transitioning from unicorn to decacorn is customer satisfaction or customer advocacy.
[In this stage] the product-market fit is not static. And when a company has five or 10 or 20 or 50 customers, the founders and key leaders know every customer and their issues. As you start scaling, some distance builds up between the day-to-day product usage by customers and the key leaders in the company.
And I think that that’s where the risks of product-market fit getting compromised are the most. So at that stage, having a handle on what is going on with your customer base and creating the proper instrumentation is essential.
That instrumentation can include everything from CSAT scores to other product usage and adoption metrics. So that’s the number one topic at that stage because it requires structure.
The second topic at this stage that becomes critical is starting to instrument productivity metrics for the organization because you now have many layers of leadership.
You need to figure out your engineering productivity. But, then, you need to find a way to have that discussion. Because very often, as you’re increasing the size of the engineering team, engineering productivity is falling. And that shows up over time, either in the form of technical debt or slowing innovation. And so, having the conversation around engineering productivity is an important deep dive topic to have.
Very often, in these cases, in the case of engineering directly, you may not get a lot of input from the board. So you are not looking to the board to make a decision. But it forces the team to rally around that topic and make a conscious decision.
Sales productivity is so much easier to measure that people focus only on that. But I’ve often seen that the lack of discussion around engineering productivity is what drives a decline in value creation.
Yeah. That’s right. And speaking of boards, what advice do you have for founders as they add board members for companies at this unicorn stage? Who’s a good board member for the company at this stage in the company’s journey?
There are three things to think about when you add a board member at this stage.
First, you want to have someone adding value where you are looking for good advice. You want a board member that adds to the conversation around the most important strategic topics for the next few years.
Second, you want to find a board member with whom you have chemistry. Ensure they have chemistry with the rest of the board, too. The most important thing about a board is the board dynamics. If the board works well together, is collaborative, can drive to a decision, is effective in communicating with each other, then that’s a superpower for a company because most boards aren’t like that.
Most boards have inherent friction. People are not talking to each other. Everyone’s multitasking all the time. Nothing gets done. So ensuring every board member improves the dynamics are the second critical thing.
The third thing is you want a board member who brings a different and diverse perspective. Sometimes, that perspective comes from gender diversity, racial diversity, functional diversity, etc. So it’s unique to the specific situation. But a board’s job is to help open your eyes to new things and guide you in situations you haven’t encountered before. And so that’s why diversity matters so much.
Okay, got it. And typically, at this unicorn stage, do you see companies do board meetings quarterly?
So I recommend companies have a formal board meeting every quarter at this stage and then have a board check-in between board meetings. So you’ll end up having eight meetings a year, and you’ll use the check-ins to focus on the tactical topics. But even in the check-ins, try to discuss whatever is on top of your mind. And I would suggest having the quarterly meetings in-person as far as possible.
That sounds great. And the final question as we wrap up is, what should companies look for in terms of their investing partners in the unicorn stage? I’m sure it’s different from the early stage.
The unicorn stage is very different from the early stage. First of all, you have to separate [the investors.]
Are you bringing on board an investor who has no board role? Are you bringing in an investor that has a board role? And I think there’s a lot of overlap, but there are some differences. The most important criteria at this stage are ‘do no harm.’ Typically, board members have some marginal upside in a company from unicorn to decacorn.
So I’m very focused on downside risks because the companies are still very fragile at the unicorn to decacorn stage. You’re playing soccer with a ball of glass. You want to hit hard, but you don’t want to hit too hard. So I think that’s the number one criteria to me.
Then comes some of the other stuff we’ve talked about, like how they would add value? What are the things you want help with? And can they help you with those topics? I think you’re still too early to worry about the public market experience at this stage. I think it’s the decacorn stage that you start thinking about how they can help you go public.
At the unicorn stage, focus on the basics. Focus on ‘do no harm,’ consider if they can help or be thoughtful about the strategic issues? Can they introduce you to great executives? Remember, great executives have the most impact on the company.
That sounds great, Ashu! And for everyone reading, Ashu and Foundation Capital have been phenomenal partners right from day zero. So if you’re building a company that’s looking for its first round of capital, you should definitely talk to Ashu.
I highly recommend working with Ashu and Foundation if you’re either at the unicorn stage or have ambitions to be a unicorn someday.
Thank you so much, Jonathan. I appreciate that. It’s been an extraordinary journey together, and we’re just getting started. All the founders out there, if you have more questions, feel free to reach out to me, but also check out my podcast, B2B CEO, on the Foundation website, where I’ve interviewed many decacorn CEOs, including Eric Yuan, George Kurtz, Dan Springer, and others. Thank you.