CFI Podcast: Scaling Companies… and Culture

In this episode of the CFI Podcast sharing more founder stories, Ben Horowitz interviews CFI partner Lars Dalgaard about SuccessFactors, one of the earlier software-as-a-service companies. (It was founded on 2001, IPO’d in 2008, and was acquired by SAP in 2012).

SuccessFactors focused on software for “human capital management” in the enterprise. But what are the success factors in talent, scaling companies, and most importantly, scaling culture? Lars and Ben cover everything from what motivates (the best) founders, the difficulties of entrepreneurship, and team building and building culture. Especially if you have values — not just an HR offsite exercise — that mean something, like “no assholes!” …. but then how do you balance a value like that with the desire to succeed (for example, if you have a 10Xer who is an asshole)?? All that and more in this episode.

 

TRANSCRIPT

Sonal: Hi, everyone. Welcome to the CFI Podcast. I’m Sonal, and today we’re sharing more founder stories; this one hosted by Ben Horowitz and starting with one of our very own partners, Lars Dalgaard. We cover Lars’s own story founding SuccessFactors, one of the earlier software as a service companies. It was founded in 2001 which IPOed in 2008 and was acquired by SAP in 2012.

The company focused on software for human capital management in the enterprise. And on that note, in this episode, we cover Lars’s views on what are the success factors in talent, scaling companies, and most importantly scaling culture. Over to Ben and Lars.

Ben: Hello, this is Ben Horowitz, and I’m here with Lars Dalgaard. And we are going to talk today about how he built SuccessFactors and achieved the first great outcome in software as a service and then what he took away from that. Welcome, Lars.

Lars: Thank you, Ben. I’m excited to have this discussion.

Ben: Well, let’s start with SuccessFactors. So you came here from Denmark. How did you and SuccessFactors first get started, and were people all fired up about it? Did they believe in you? How did you get it going?

Lars: Yeah, it seemed like pretty much no one believed in it. We had the opportunity, or I personally did, to pitch through 73 venture capitalists who all said no. That was painful because in some cases, I brought it in front of customers and also good stuff…

Ben: Freaking venture capitalists.

Lars: Yeah, I know.

Ben: I hate those guys.

Lars: Who the hell wants to be around them? It hurt my feelings. It was hard and oddly, it didn’t really influenced me much because I kind of felt that this had to be done. And to me, that is the number one piece of information for anybody starting a company; don’t try and catch a wave. Don’t try and do something you’ve read in a magazine that might be hot and you can just get in on it because there is no such thing. Once you try to catch that wave, that wave is gone, and it’s got a bunch of people on it that came up with it, and they are well-funded and it’s over.

Ben: So you’re saying, don’t do it if you want to do it or if you think it’s a good idea; only do it if you have no choice?

Lars: I think so, it must be done.

Ben: It must be done.

Lars: I remember asking Reed Hastings a long, long time ago over a decade ago… started Netflix… get done, Pure Software, a bunch of other companies I was impressed with. And at that time the story was because I got tired of walking the extra blocks to the blockbuster store with my VHS tape. Why couldn’t I just use DVDs? So I think it’s…

Ben: You had to do it for a walk.

Lars: …to assume that he didn’t imagine a $50 billion streaming empire. It had to be done. For him it was too damn stupid. And every amazing entrepreneur I meet, when they start talking, they get so steely-eyed when they talk about the reason that they’re doing this and why it must be done. It literally means that nobody will ever extinguish that fire. It will just keep burning.

Ben: Yeah, so did that…what did that mean? Did that mean that SuccessFactors was straightforward to build because it had to be done or was it challenging or how did you go from no from 73 VCs to $3.5 billion outcome?

Lars: Well, first of all, it was an exceptional effort of a lot of people that all of a sudden began finding a place that was as important to them as their family and their friends, and it was a big part of their lives and they gave it everything they had. They left nothing on the field. I have over 10,000 examples of what they did to get us there, and I’m grateful to all of them.

It was extremely hard. In fact, I just spoke to my co-founder this morning, and we joked about it never got any easier. We looked at each other like, “When did it got easy?” And people ask us this thing. When did you get into a glide path and on the stride? It was like, “I don’t remember when I was checking in with him. Do you remember?” No, it never got easier. So it was always hard. It was different degrees of hard. Sometimes it was just physically hard challenge. Sometimes your brain turned upside down and you were wondering what the hell you were doing. There are many different hards.

Ben: And so why did you continue? If it was hard the whole way, and every step of the way was a grind, what was the thing that kind of kept you going? Every quarter is hard, every sale is hard, every product cycle is hard, every employee quitting is hard.

Lars: Well, it starts back with it had to be done. I believed in the overvalue of creating a much, much more richer, better informed dialogue in the workplace across the globe, whether it’s a non-profit or it’s the NFL or it’s Walmart. I believe that better dialogue create greater, big lives for every individual who goes to work every day and in the process, the whole company could be lifted up because they could do better work and then create better products.

And so I had to see that come into fruition, and at 50 million people using it, I began to believe that it was going to be a consistent and systemic change that would not go away. So that was exciting for me. The second thing is something begins to happen when you’re together with people, and it’s like a sports team. You just have to do it together and you’re excited and you look forward to coming back and doing that thing, you’re all together.

It’s not like you show up at 8:00 in the morning; you’re always doing it. And so I had to find a part that I could accept that I was always working because I always was working and so were the people I was teaming up with. And so it became a thing that we were involved with. That was part of our systems, part of our body.

Ben: So really, interestingly, the company that you built, SuccessFactors, helped other companies with their success factors. Basically, the whole point of the company was to basically help people build better companies.

Lars: Yes.

Ben: And so as you looked at how you did that within your company for your customers and then now as you’re trying to help entrepreneurs do it, what are the things that get people to do what you said? What are the things that get someone to build a company where people are doing it for each other? They’re not doing it for like a billion dollars. They’re not doing it to sell their stock in series B. They’re not doing it to be in TechCrunch or on a headline but they’re actually doing it for each other and that’s something larger than themselves, how do you build a culture like that?

Lars: So I think it starts with values. Many times when I say that people will say, “Oh, I saw those at another company I worked at. Nobody knew them, nobody remembered them, and it didn’t mean anything.” Well, then don’t make those values. Make some values that people remember.

Ben: I thought that was an HR offsite like exercise, what are you talking about?

Lars: Exactly. Why not make some values that you can remember, that you’re proud to espouse that you want to tell everyone about? Your family, your friends, that when you look at those values, they mean something to you. And those are the type of values we had. My first one was respect for the individual that starts and it said, no assholes. I just believed that with every part of my fiber, and I believe that if you set that tone to everyone, then there is no discussion of whether that’s how we’re going to work together or not.

Ben: What’s an asshole?

Lars: First of all, everybody has one, and I think everybody is not confused.

Ben: I thought that was an opinion.

Lars: No. It’s okay to have one; it’s just not okay to be one is what we used to say. The reality is everybody knows what are those. It’s somebody who is abusive. It’s somebody who doesn’t think before they speak. It’s somebody who’s not accountable for the shit they throw out there. It’s somebody who’s politically trying to get somewhere without actually being part of a team that does somewhere. It’s someone who needs to put themselves forward at the cost of everyone else. It’s someone who’s rude. It’s someone who takes advantage of a situation that they full well know they shouldn’t be. I could keep going and going and going and going.

Ben: But those are all things that are really interesting but they’re generally things that people feel about other people but rarely feel about themselves. So how do you go about with a value like that building like real self-awareness and what are the object lessons that occurred in your company to change that behavior? Because you’re really not here talking about getting rid of a behavior rather than a person in a lot of ways when you say no assholes.

Lars: Yeah. The way it ended up working for us was it became very self-selecting because people thought that they could still join because we happen to be the fastest-growing company for many years in Silicon Valley. So in that part, people were like, “I’ll join this because they’re growing fast and they won’t discover who I am, and I can get away with my asshole ways.” But the second they came into an organization where you’re actually allowed to speak up if someone is, everybody becomes a police officer that governs this incredibly important value. And so many people self-select out after a couple of weeks and just say, “Shit. This is not for me, man. I’m not there yet in my life.” I like to believe everybody can’t become not an asshole, but it’s just you need to have that much introspectively.

Ben: You have to want to be not an asshole.

Lars: Yeah, you have to want to. Yeah, and some people have had so much hurt and pain, and they have so little commitment to changing themselves that they’re not going to go there. But I’ll give you a very specific example of how we put this into practice which has a lot of allure just because it’s kind of funny, but it actually wasn’t funny to me when I came up with it and became legend for our company which was, it was very normal for people to email the CEO and say, “Hey, I don’t like what Joan was doing and you need to know as a CEO because it’s really bad for the company, and it’s the opposite of what you want.” So if you kind of focus…

Ben: Kind of a little bit of manipulation going on there. It’s like, all right, I’m going to kiss the boss’s ass and take out my peer at the same time. This is going to be awesome.

Lars: It’s a double, these two samurai swords. Of course, the shock then is when you send that email back and you copy Joan on it, who this person was speaking about and you don’t make either Joan or this person feel bad but you say…

Ben: How does Joan not feel bad?

Lars: Well, she’s probably surprised when she sees it, but what happens to her when she sees that she’s being respected because she knew she wanted to know what the other person wrote. And when she knows and she knows she’s supported by the CEO and the management that that sort of shit won’t happen, her whole life changes.

She gets a commitment to that organization because she now knows that she feels a level of safety and trust that in this company, that won’t happen again. And it’s almost as if when they come into an organization they’re thinking, “There’s so much of that but I’m willing to do it. I get paid. It’s a good job. It’s better than the other one and this works for me. But I’m going to tolerate that 20% to 30% of bullshit that’s just inhuman that I don’t want to be around, but fuck it, it’s how companies are.”

But when you all of a sudden see that being completely x-rayed and it’s right out there and you say in a very supportive way, “Hey, you wrote me this about Joan. I’m sure Joan would like to know and I think you guys need to go figure this out.” So first of all, in our office, we all sat out in the open. Nobody had a big fancy office. We’re all sitting in the same desk, and what you can begin to realize around the office is people seeing the electricity that happens and then they meet and you see them talk about it, and something magical happens. Because I think deep down everyone wants to have that conversation and that person who wrote it actually want to tell Joan. They just aren’t equipped to do it, and they’ve gotten scared of doing it. What happens now is now it’s endorsed and it’s, “We need to have this conversation otherwise this company can’t move on any further.” And that’s what the power is of that type of exchange.

And when it begins to happen throughout the…and guarantee you never get an email from that person again, and you actually begin to see the two of those people work together. I’d say 9 out of 10 cases, they become people who trust each other and start working together. People can forgive.

Ben: Well, let’s get to the 1 out of the 10 cases. A lot of CEOs in Silicon Valley would say, “Look, we’re in a war for talent.” If that person, the so-called that person is, whatever, 10x or top-end engineer who are often the kind of people who will send you an email like that, and I stripped them naked like you’re talking about, emotionally naked, they might quit. And so like I can’t afford to lose my 10x…or how would you react to that kind of thinking?

Lars: Oh, I’m completely comfortable losing the 10x. What the total unanimous team that are together in fighting this big battle can gain together because they have that power of trust, completely dwarfs that one 10x. You multiply all those people up, what they were doing like that and let them perform together, there’s no 10x and no single 10x that can even think about competing with that type of power. And I’ve seen that scale. Nobody can stop you.

I believe strongly it’s what Southwest Airlines did. They came and turned to, everybody said, “It’s monopoly. You can’t do anything in this. What are you thinking?” And 20 years later, their market cap was that of all the others combined. You can.

Ben: Let’s talk about scale for a moment. So SuccessFactors was the biggest thing and most important thing that you ever ran, so how did you learn to run the biggest thing that you ever ran? How did you go about that?

Lars: So how do you learn things you don’t know, and how do you learn that the speed you’ll need to not lose market share and not get killed by a competitor? You think you have to adopt a perpetually learning mindset. In particular, my hardest part was I like to be right and I didn’t really like to admit that I was ever wrong, and I really didn’t want to personally ask anyone anything.

In fact, you can’t find any of my friends working for my company for the first decade, and you couldn’t find any of our customers being any of my friends, and many of my friends run big companies. So that’s a bit stupid you’d think. For me it wasn’t because I thought it was complete waste of time signing them up. It would be like a keiretsu or a pyramid scheme. Of course they would sign up, but that’s not what I’m here to build. I’m here to build a gigantic business that could really, with zero friction, grow to massive scale and be amazing to everyone involved and be very profitable.

And so if I’m just signing up all of my buddies, that doesn’t tell me anything, and it informs me nothing. So it’s a waste of time. I can always sign them up. So what I wanted to do was find out how do I get customers that really believe in what we’re dealing with.

And so therefore, my biggest principle came not lying to yourself, and what that meant was reams of data because it doesn’t mean I’m a complete math freak. It just means data doesn’t lie as much as your own brain does, and you can come up with all sorts of interpretations around why what you’re thinking is actually right but there is nothing to prove it. Also it had massive instincts and more ideas than a Quaker has oats, so I’d always throw new things out there.

But I have data underneath it, I would make sure that it was actually somewhat realistic that it was going to go there. So what I wouldn’t track was the 12th and the 13th month only. I would track every quarter and every month was always very easily accessible not, “Hey, can you guys go get it? It was right there in front of us.” And that did not tell as many lies as my brain did. I would think that market was actually doing well and the data just wasn’t there, and then we had an organization where people are allowed to say, but it’s not there.

You’d like it to be there but it’s not there. It’s just not there. And so that type of truth in what you’re actually doing and then also allowing other people to believe that they could tell the truth and not get blamed by, “Hey, you’re speaking against this person and therefore you shouldn’t be allowed to talk.” Like having a culture where that’s allowed; it’s permitted to speak your truth.

Ben: Well, getting back to the war for talent because I think this is where I see a lot of entrepreneurs who would not do what you’re talking about, they like to always paint the rosiest few of their company particularly to their employees, the last people they want to say, “Look, the data says we’re fucked,” or “The data says we failed,” or “The data said we missed,” because they want to go, “Oh no, it’s going great.” Like when I told you we were going to be the biggest company ever when I recruited you and you were going to make $100 million, that’s still true. And so how do you think about that and how do you reconcile having an honest culture that doesn’t lie to itself versus keeping people who are very focused on their fiduciary responsibility to their family staying in the company?

Lars: So nobody in my company sold before we went public. Secondly, my co-founder and I agreed that if somebody would ever say, “So when are you going public?” They could not get a job. And that’s pretty extreme but it tells you our culture. We weren’t there to go public and despite how many people have said this and it’s just a financing event. So going public cannot be a goal in itself. And if that’s what you’ve put in everyone’s head, then you’re constantly fighting that until you’re public, and that’s not where you want to be.

You want to take everyone’s energy and put it into building something of value that they can relate to. And that’s how you bring it back to, “Well, so this quarter wasn’t great. Let’s talk about why we don’t think it was great, and what went wrong, and what your role is in fixing it.” The amazing thing is I was so afraid of admitting this for 10-20 years is people actually want to be led. If you give them very clear leadership around what their role is in taking us to the promised land, that’s not some big number.

Another thing was I got a very big resume person in who would in the leadership she almost said, “We’re almost 1000 employees now. Let’s tell everyone.” How is that a goal to achieve 1000 employees? It doesn’t mean anything. It’s a lot of cost. It doesn’t mean a thing. And so why bring that out there? Or now we’re valued at a billion or 2 billion. Why tell anyone that? It’s just not important. What’s important is…

Ben: A hundred million registered users.

Lars: Yeah.

Ben: They’re not users. They’re just registered.

Lars: They’re just registered. Yeah, exactly. So what matters is, let me have this customer come up on stage and talk about how their life has actually been changed because of the work you’ve done, or let me pick an engineer that did something that everyone thought was outstanding. Another thing we would do is we would pick MVPs which was very, very, very unpopular but I do this way to the algorithm where even somebody who didn’t have as many people in their organization would get a fair value based on the votes that they were collecting.

And having this absolute score, we both did that as well as the way to the algorithm ended up the same way. And so we’d have people actually being cherished in the company for the contribution that they have had and the number thing was how they contribute to everyone else’s productivity. And that just became legend for that company. We had these batons like when you’re running the 4×100 that we would hand out to everyone showing that what we don’t care about is you throwing…another word I learned when I came to Silicon Valley was throwing something over the wall.

It’s like the most asinine toxic thing I’ve ever heard in my life and people would say it with a big smile on their face. I just threw it all over the wall to the product management, and walked off. Who the hell wants to receive anything that was thrown over the wall? You want to have something that is…like if you’ve seen Carl Lewis practice the handover of that baton, there was nothing they hadn’t thought about. They didn’t shatter those world records by accident. They were the first…

Ben: Carl Lewis was that famous track star in the ’80s, for those of you who are young.

Lars: He was legendary, yeah. But what they would do is they would show you how to nail that handover. It was timed perfectly and every little millimeter of handover was figured out. And that’s how I always thought at the back of my mind of building an organization. Drucker, sort of OG of management, would talk about the real power of an organization is not in the silos. It’s when you can leverage across the organization, product management to marketing, sales to engineering. When you can have a fluid communication flow there that is honest, you can do insane thing with the company. You can be unstoppable.

Ben: Moving onto board of directors, is the board of directors really important for a young company? Isn’t that just like a bureaucratic waste of time, I mean having a bunch of guys who sit on your board and you’ve got to go present to them every quarter? Aren’t you better off just running fast?

Lars: Breathing down your throat.

Ben: Yeah, breathing down your throat, asking you a bunch of questions that you don’t want to answer.

Lars: Yeah. Well, I think there’s at least three things. First of all, a board member will…the combined board will never know more than you can balance on a pin hat of the company and they shouldn’t. That’s for the CEO to know; CEO runs the company. But what I learned the hard way, I would say, as I expanded my board is that these people are people who care about your company, and they actually understand company building. And if you’ve hired good people to the same degree that you’ve built the great company, then they will give you advice that is immeasurable and is important to you.

Many times you can’t see it at first back to that learning mindset, you just can’t believe it even, and particularly because you’re probably not that challenged in your daily job because everybody adores you as the founding CEO that’s so amazing, that’s a rock star. But here are some people that couldn’t give less of a shit. They have your best interest in heart and they’re going to tell you some things that you need to hear.

So you can either find those things out because it’s the immutable laws of physics. You will find these things out by running your head straight into the wall without a helmet and that’s going to hurt a lot. You might not even recover from the brain trauma or you can try and listen to some of the stuff that you’ve actually learned. They’re not sitting there because there’s money in it, it’s because they want to help.

And then the final thing is I think you will be surprised, I certainly was, of how important some of the things that I had first just rejected almost in reactivity like the…

Ben: Like what kinds of things did you reject?

Lars: Well, my reptilian brain would shoot in because for me mostly because I was probably afraid of what they were telling me.

Ben: Tell you to do something you don’t know how to do.

Lars: Yeah, I had no experience in it. It’s scary, and don’t you know how good I am? Look at me. I’m growing faster than everyone else. Do you not understand how great I am? Look at my people what we all did; it was insane what we did. Have you ever grown a company this fast? Which most of them hadn’t, but that’s irrelevant. They had grown companies fast at their time.

And so the relevance is that you become all victim-y and ego based when they start telling you that you need to think different but the reality is they’re giving you really important insights for where you need to take your company. And in most of the cases where there was turnaround people, geographical trouble, pricing issues, where you need to…one big one that I thought I had figured out forever was when we have to do a big layoff in Q3 of 2008 when the whole world was melting. I thought I was all clever because I was out with customers and I went to a Boston office and one of my board members said, “No, you need to be in the head office.”

Ben: Yeah.

Lars: It hurts mostly because I thought I was the cultural leader that got that more than she did but she was right and I was wrong, and I needed to get my ass on a plane back to the head office and face the music. And I am so happy I did that. I ended up walking out to people’s cars with their boxes hugging them and I tell you, that made me put in the position where I could rehire them later when we were doing well again. But if I had been in that Boston office, it would’ve been the biggest mistake I made.

Ben: So you touched on something very interesting there which is your strength which was determination, confidence, will to power ended up being your issue which is all that led you to not want to take any advice even advice that would be very, very valuable to you. How did you learn how to listen and then how do you see that on entrepreneurs today where their great strength can end up undermining all of their efforts?

Lars: So I learned that I think by running my head into the wall and getting some big cuts in my forehead and a…

Ben: Head concussion.

Lars: Concussion.

Ben: CEO CTE.

Lars: Yeah, and so I think you can even manage to ignore that because there’s so many other great things because you’re living in the best time ever and you have to acknowledge supporting you to get such turbo propellers into an opportunity that you really can’t get in old industries. And so it’s very hard if you compare to what the alternatives are to believe that you are actually not doing as well as you can.

But once you begin to see that there are some decay and there are some issues when the company starts scaling, then it becomes very natural to realize you need help. Another important thing I did was I got a coach. And what’s really great about a coach is that they’re actually a safer place in a way than a board is. And it’s not like we all have an adviser, that’s not the same. An adviser will cancel a meeting with you if they have something else to do. They won’t be consistent even if they’re your friend.

This is not your friend, and you don’t need friends here. You need friends for other things. You need somebody who has got business experience and who can actually talk truth to you around how they can start out with the 360, where you’re getting real input anonymously from the whole organization including the board. But once you begin to realize the power of asking for help which was really a hard place for me to get, you realize that now you are building a muscle structure you never even knew was possible. You’re running faster. You’re hitting the ball faster, hit longer. You’re doing something you never even know you’re able to do.

And so, like inviting that crowd sourced power of knowledge around people that care about your company, it’s the only way to get there. I actually don’t think you can get there all the way, and certainly not the potential that you would be able to if you don’t tap into all of these people. And I think, most people that have real success now, you ask them, they always have a bunch of people that they ask a lot of great questions.

Ben: All right. Well, I’d like to thank Lars for joining me. And as you heard from him, and as Michael Jackson said, you are not alone.

Lars: You are not alone…

Ben: And this has been the CFI Podcast. Thank you.