The Capital Efficient Founder

founders what's going on you guys know i love in-person events and they are back the recording you're about to hear is from our most recent event where we had hundreds of founders come together share intimate details templates kpis okrs about their business and it was something special something special we'd love to meet you in person if you want to see the next live events we have coming up via our schedule the link will be down below in the description if you're listening on itunes check this out on youtube you'll see the links in the description or you can just google

founder path or latka next event we'd love to see you in person in the meantime though enjoy this recording it's a good one whose idea was it to ipo in the middle of a pandemic anyways [Music] [Applause] that's it [Music]

zoom info is still founder-led henry chuck is the ceo and started the company while he was in law school by putting 25 000 on his and his co-founders credit cards you know we're investing for the long term i'm focused on building this company into something much larger than it is today our team at zoom info is innovative we're hard working we're always looking to define new possibles and we're just getting started three two one

marketing platform zoom info open for trading earlier today the company's ceo henry shuck joins us now remotely from his home outside of portland zoom info helps sellers find their next best customer whether you're a pallet manufacturer in alabama or your fortune 1000 technology company zoom info helps sellers find those companies and find the buyers of those companies we've got zoom info set to go public this friday morning how is the current environment affecting you what advice would you give if another company was out there looking

to come to market right now congratulations it's always a big deal let's do this [Music] guys before you eat that guy welcome to founder cops

get so guys henry shuck uh we're thrilled to have him with us before you meet him though i just want to say it's incredibly back in person yeah i hope it feels good does it feel good yeah it feels good drink lots of coffee keep your energy high we've got outlets for every person so if you get bored you can just open your computer and look up occasionally and act like you're paying attention and go back to your gmail okay so perfect there's plenty of extra seats on this side of the room if you want to grab one of those um as well um so let's let's get this on the content here um

henry's story is really incredible right so many many years ago before uh he was now a publicly traded sas founder uh i i don't know why he responded a cold email to come on the podcast but he did and i was so impressed with how he was building the company how he was doing it but specifically because he was creating multiple opportunities for liquidation before ipo there's some very non-traditional stuff that he sort of did and i'm excited to have him teach us exactly how he did that you bet you bet you

san francisco he's a san francisco guy i'm actually in portland but i was in san francisco san francisco is open now huh yes okay all right very cool this is a little bit different attire than like dorm room days this is what i wear to work what i wear to work all right so take us back in the story over the next 25 minutes we're going to really chat about how you got going uh where you are today where you see markets going some of the key things that you were important for your first 10 million in revenue um how you did a big secondary 40 million bucks when

you're 27 years old and what a secondary means and now sort of pre-ipo metrics versus post-ipo metrics so we'll have fun that's all expected right yep no surprises yes surprises all right all right so here we go this is dorm room henry dorman 25k in debt was that on student loans i mean i was actually like a hundred and fifty thousand dollars in debt you can't tell by my smile in this picture but i was 150 000 in debt if you count law school undergrad and then when

we started the business i put 25 000 on my credit card and my co-founder put 25 000 on his credit card for some reason chase gave us this ridiculous limit it made no sense for a 23 year old uh but that's how we funded the business and and what was the original idea so you guys can follow along on the bottom of this chart and see sort of henry's product launches as they got going but you started in 2007 with with org charts why org charts i had worked for a similar company when i was in college and we grew the company from about 300

000 in revenue as a lifestyle business to 5 million in revenue at 5 million in revenue it was like 4.8 million dollars in ebitda and so there wasn't much of a business there and so i left i went to law school and then we founded like a company that we wanted to actually build a company around and invest inside of uh and so it was it was a lot of it was a replication of that company but done in a more professional scalable way and before we go to the next slide just

out of curiosity um stand up in the room if you're currently running you're founder of a software company stand up real quick stand up don't raise your hand stand up stand up stand up stand up okay let's let me stay standing also stand up if you if you own if you're own a little bit of a sas coming you're on the cap table of a sas company now there we go okay so i love how curio we really want to curate this event you guys are all operators you all have upside you're on the cab table you have equity so good that's that's a good view now sit down so

henry take us into this deal right explain first what a secondary is how the opportunity came out in 2012 and how you negotiated this loi yeah this was a bad loi for what it's worth uh but uh the business was profitable because we didn't know how to run a bus we didn't have an option otherwise and so you had to build a profitable business because after the 25 000 of chase financing ran out there was no more money to run the business so we ran the business in this really profitable way

and then we started getting calls we got on the inc 500 list and then we started getting calls from venture capital firms and private equity firms the private equity firms ended up being the ones most interested in us because we had profitability and that's what they would give a multiple off of and so they have a sense of that real quick how pro what was revenue in in 2012 in 2012 revenue was uh it was probably 20 million and it was like 10 million dollars of

profitability yeah and so when the venture capital guys came in they said okay here's what we want to do we want to buy fifty percent of the business what is the seventy percent of the business for thirty-five we got a close-up baby we got a close-up by the loi yeah some portion of the business we want to buy and when we buy that business we'll give you and your co-founder the dollars because the business is profitable so the money doesn't really get dollars what you want to say 40 million bucks was it 40 million dollars yeah so the

second highlight down on the left right you can see it specifically says part of this deal is buying kirk and henry co-founders uh 40 million bucks this is sort of right is this yep okay no that's right okay you keep going i know sorry sorry i'm sorry can you guys see it from the tables when you look up so that's that's risky right they can all see it and you can't you're going off memory from and this is ten years later yeah yeah uh so buy the company give us give us cash

for in exchange for ownership in the business and then the things you're thinking about here are like do i want to give up control do i not want to give up control do i like these people how is the board going to be set up what do they want to do my biggest mistake during this was they asked me what do you want to do after the investment and in my head it was like well you're going to give me 40 million dollars i could do whatever you want me to do i don't whatever what do you want me to do

and so they were like well you know why don't we bring in a ceo we'll bring in a professional ceo and they can run the company and i was like yeah okay you're 27 at the time 20 here i'm yeah 27. yep and if you're going to give me that money great bring in a new ceo i didn't really understand how business worked there wasn't like networks of people like this really back then like jason lemkin was writing some stuff on quora that's it that was the extent of that's a long time ago yeah

so uh so then he started introducing me to other ceos and saying like look when when we do the deal we're gonna bring in this professional ceo and i was like yeah okay great luckily this deal fell apart um and i took it we took a year and then kind of rebuilt some of the pieces of the business and had i taken that deal you know i would i don't think i would have ever been a public company ceo well just going back to that for a second you can

see the the yellow highlight on the right i believe is the proposed post post cap table deal so you would you'd be down to 10 effectively they they were buying up 90 is that accurate yeah that's right so what were some of the reasons you turned this down obviously that's a big one that's a big one they actually retraded this deal that retrading is like an industry term for hey i gave you an offer and then after diligence i changed the offer on you i gave you a worse offer

that's like also if you tell somebody that a firm re-traded you it's really bad for their reputation these guys retraded me right at the end they said oh come down to san francisco have lunch with us so i came down to san francisco and they were like yeah you know there's some things in diligence we didn't like and so we're gonna cut the deal in half and then in a year from now

we'll have the right to buy the other half at the same rate as what we're proposing today this is like really nasty and we'll help you figure out how to scale the business it's like what is this guy next course of course they will yeah and then i just said no and round of applause for saying no right to 90 90 delusion all right so let's let's keep going here with a story okay so you say no do you do anything in 2012 cap table wise nothing in 2012 right tickets to what

happened in 2014. 2014 uh we decided we would pick the process back up we hired a banker it was a small niche investment bank in in seattle investment banks by the way i didn't know what investment bank was basically it's someone who sells your business for you they build the decks they talk to the private equity and venture capital firms they come to all your meetings they're a broker like a real estate broker but for businesses um so we hired an investment bank in seattle

they built sort of the marketing material started talking to private equity firms and then we brought in our first institutional capital a firm called ta associates who bought 50 of the business at a 275 million dollar valuation free or post pre so how much they put in they put in a hundred and ten million and then 80 million of debt okay help us understand just quickly touch on this debt on the back of an

equity round was it the svb sort of deals back then or who did you go with on the debt side it was a firm called nxt capital okay so at this site at that point the company's 35 million dollars of revenue it's growing 60 percent and it has 50 ebitda margins so it's very profitable and so when private equity firms do a deal like that they can increase their return if they fund a part of the deal with debt so instead

of it all being equity that shares in the upside they do a portion of it in equity and then they do the rest of it in debt that the company has an obligation for and the company pays the debt down but it juices their return because the debt doesn't participate in the upside i'm just reading faces to see if people are following i think they got it they'll follow along all right so between 2014 and 2018 uh you grow the

business you grow the business what was revenue in 2018 revenue in 2018 would have been uh like pre we made an acquisition so 2018 was post acquisition so 170 million and so was this loi pre or post the one point five on uh post the ranking acquisition pre the zoom info acquisition okay uh you said post rain camera plus drain king pre zoom info did you know in this ly that you're going to use a bunch of debt to go do the zoom info deal no we didn't know we were going to do the

zoom info deal when we got this loi okay so this is the same firm as the other firm who i wasn't going to do business with but i really wanted to frame their offer next to one like a few years later that said 1.5 billion dollars for a much less of a portion of the business and so a few a few years later the private equity private equity firms or venture capital firms who come in they have a hold period they need to get in and out of investments usually within five years

and so within five years whatever the business is going to do double triple the value they have to exit either all of the business or a portion of the business within that period of time and so this was you know four years post the investment we had done an m a acquisition so ta made this invest investment at 275 million dollars and now we're four years into the future this offers for 1.5 billion we ended up taking an offer at 2 billion which uh ta

ended up selling a portion of what they owned and then holding on to the rest and then the myself my co-founder and then we had an employee pool i should talk about that we have an employee pool of shares all participated alongside that as well this is actually interesting so i had a co-founder my co-founder left in 2015 left the business when he left um

he agreed to put 25 of his ownership and i put 15 percent of my ownership into a pot that we set up for employees and so private equity firms are notoriously not great at giving equity down to the last employee so we were able to take this fund of our shares and then give it out to employees so that they would participate in the upside of the business and so every time ta or carlisle or anybody sold the

employees also had an opportunity to sell in those transactions as well and so when we were out in 2018 selling a portion of the business so ta could get their returns internally the employees the ta sold 33 at this time the we asked the employees what do you want to do they were like we'll sell 50 at 2 billion valuation the company's worth 20 billion dollars now so it wasn't the best decision um but they so they sold fifty percent of

what they owned and people put a lot of money in the in the bank at that you sell any of yours i sold 33 of what i owned at that time at that time so i had and along the way we missed a couple points but along the way touch on where you pulled capital out yeah exactly that's what i was gonna do um so ta makes the acquisition in 2014 and then they do this thing called a recap where they go out and they add additional debt to the business and then dividend that debt out as a return to

the shareholders this is a weird thing i didn't know what it was um but we're like a year in the business performed and they said hey we have an opportunity to add another 25 million dollars in debt or 40 i honestly i can't remember and when let's say it was 40. when we put 40 million dollars in debt on the business the business is super profitable so it can continue to support paying that debt down so we're going to put 40 million on we're going to take 20 million dollars as a return and then you

guys are also 50 owners so henry and kirk will also take 20 million dollars out of the business at that point too so that's an another capital return that was the only debt recap we did when you do those debt recaps you get like a you get in a room have you ever seen a conference room at an airport i remember like walking through airports and going like who does a conference in an airport like that sounds horrible so you do these conferences in airport debt

conferences that's where that's what they're there for uh so you go to an airport conference room and there's like a bunch of debt guys people who work at svb or nxt there's like this group of companies that does kind of like mezzanine debt debt that's kind of weird and takes specialization to understand uh and then you pitch the business to these debt people and then they decide what they would

give you and at what rates and so okay so do you take capital out any other time before ipo yes um post the rain king acquisition and before this when you put the two businesses together we made this acquisition of a company that was doing 40 million dollars in revenue and 10 million dollars of profitability we acquired the business and then three months later it was doing 45 million and

35 million dollars of profitability because we optimized and we cut where there was duplication mainly employees it was half of it was employees rain king this is rain king and when we made that acquisition because we had a whole bunch of additional profitability we did another recap of the business like a small 15 million dollars okay that was uh that was the last time we did that and then so then take us through you're now preparing yourself to

go after one of your largest competitors you know my big question on this is yeah if i was in your shoes i mean you read a lot of the regulator's reports on sort of going into ipo and and i'm going does henry worry about people blocking this deal because you've because if you listen to all your presentations publicly you always say linkedin's our biggest competitor we compete with linkedin it's linked and it's not zoom info but privately ignore linkedin zoom info was really like about 100 million revenue against your 165 something like that yeah exactly so why did you do this deal and

how did you deal with regulation was there any issues of maybe not closing yes so when we did um how disseminated is this this is like going on a public thing this was your interview with me you can see you smiling yes i remember that interview this was your voice in 20 i think something no i mean this the the recording now this will keep we'll keep i don't believe you [Laughter] probably a smart idea don't say anything

it's a very big market um when we made the acquisition of rain king we actually you you have to get anti-trust approval and so uh we went and and the regular late the regulators didn't love the ranking acquisition uh because they felt very similar to very similar companies and so we actually went to washington dc we met with a panel of department of justice regulators in the antitrust division and included like lawyers and economists

trying to figure out how anti-competitive these two companies coming together would be they stretched it out until the last day of when they would basically deny or approve it they approved it um we put those two companies together and then a year later we acquired zoom info which was another player in the market that process was not as difficult as rainking as ranking yeah wow did that surprise you it did surprise me

how did you get that deal done you're buying discover i'm sorry you're buying some info i believe from a private equity firm this is a complicated deal from a debt perspective so what happens here and the company wants to you want to use debt as well as you can if you're a profitable business because and i'll do this point again every time you use debt debt doesn't participate in the upside of the company and so if i take a hundred dollars of debt and it has a five percent interest rate and then for

three years my company grows a hundred percent the the debt doesn't get a hundred percent return it gets a 15 return over those three years and the company participates in the upside so uh when we went out to buy zoom info zoom info is an 800 million dollar acquisition just under 800 million and uh and we it took me forever for you to get the freaking number you didn't give that number out yeah i don't think we talked

about that we got close though yeah yeah i got pretty cl yeah it's actually like 785 so it's pretty close and so we had to go out and raise raise as much debt as we could as much as the company could handle and at the at these levels of debt you actually have to go to moody's and s p and get them to rate your debt you know like junk rated debt like i didn't know what this was um and you like go to s p and you go to

moody's and you do the same pitch and then they decide the rating of your debt and based on the rating of your debt a whole bunch of other people buy the debt at certain rates what happened here was we ran out of debt room like we took as much debt as we possibly could which was how much which was 1.2 billion we needed against how much of profit um at that with the combined business you would

have had about a hundred million dollars of profitability so it was like 13 times levered but less than that in the future it's a lot um and um and so but there was no more room so you you could raise debt up to like uh 900 million and then you had a hole you had a 300 million dollar hole in getting the deal done and so carlisle who was who came in in 2018 the carlyle

group stepped in and took a thing called preferred equity which is equity that looks like equity but acts like debt jeez it's like i'm a finance guy now disgusting i wasn't gonna talk i wasn't gonna talk about your tie i was listening you described the bankers in the airport conference room going he's trying very hard not to say negative things about these bankers the so it's it's kind of debt but it's it's debt that gets a higher return and that's

really hard debt to get especially when you when you put it behind like a billion dollars of other debt but carlisle stepped in and so then we bought zoom info with 1.2 billion dollars of debt um and started operating the business and so 1.2 billion against how much of their revenue what multiple you pay for zoom info uh zoom info is doing 100 million of revenue 105. so that feels expensive at the time 12x yeah i mean what vista's deals are usually like 7.5 7.8 like 9x

this was the high price yeah it was a high price and the funny thing funny a year later i had a year earlier i had an opportunity to buy zoom info for 240 million and i passed and that might feel like a bad decision like oh that was dumb he had to pay 800 million dollars one year later it wasn't a bad decision like the business wasn't ready to take on that acquisition and we would have fumbled it a year later we were in a much better place but a private equity firm came in at 240

million dollars that year before and they're happy to hold the investment for four to five years because that's the hold period they had i had to come in a year into that hold and pay them for what they thought they would get four years into the future and so they weren't going to transact with me unless i could tell them like i will pay you now for what you bel what would be a great return three or four years from now

heck of a story there uh so sort of moving forward were you do you already know what this one obviously you're gonna ipo when you're doing this minfo deal no you didn't okay no uh i thought we were putting two great private companies together and three months in it went really well the integration went really well the m a was really positive everywhere we thought we had upside we did and more and so is this really exciting time in the business three months into the acquisition the board went hey

maybe you should ipo and i went like well i'm kind of putting two companies together right now and so i don't know how i'm gonna find time to set up for ipo but they didn't care so we started the pathway to ipo the business and so talk us through there's sort of pre-ipo henry there's a lot of handwritten there's pre-ipo then there's post ipo talk to us about some of the key metrics you were looking at going into the ipo um so going into the ipo

you know we track everything um so we obviously on the on the retention side we're looking at net renewal rate net retention rate upsell dollars we're looking at different products that we sell and how those are being sold we're looking at how products are being adopted across the customer base how they're getting implemented on the new business side we're looking at the top of the lead funny funnel how many leads are we generating how many of those are converting to appointments how many of those are converting to good fit

demos and opportunities and how many of those are closing and then we get a daily pacing report which tells us like based on this month we expect to close these dollars and where are we day over day over day over day um and how are we pacing against that target and then any numbers that are off every single day the only unique thing pre to post ipo is that in the in the ipo world in the

public company world analysts and investors like the billings number and we never tracked billings internally what is that billing what does that mean billings is basically how much have you sent an invoice out for and so if i sold a deal how however many deals i've been able to send an invoice out for however many dollars i could send an invoice out for that's your billings number wait henry real quick raise your hand if you've ever sent an invoice and it hasn't been paid

so can't you just send out a bunch of invoices i mean you can i mean you don't they're actually sold deals you think they're sold how do you control actually like it's not money you have like a bad debt expense that investors understand so some portion of your dollars never get paid and so they can discount against that the problem with billing well the reason why billings became important for our company post ipo is that we weren't we don't release an arr number we don't tell investors what the uh the ar the

the arr number is and instead we just tell them the revenue number the revenue number is a lagging indicator right or it's a it's a lagging indicator so if i sell a whole bunch of deals in march only a third of that actually shows up in revenue in that quarter or less if it's at the end of march so revenue is always lagging well billings what i actually sent invoices out for is something that they could get a feel for what you actually sold in the quarter and the problem we went

we ipo'd in the middle of the pandemic and one of the things that happened to us was customers wanted more flexible payment terms and so instead of sending annual selling annual upfront subscriptions we started selling like monthly or quarterly well that has a big billings issue right because i'm not sending you a invoice for your whole term i'm sending you a one month invoice or a one quarter input explain why you did that again because everyone here is going wait i thought you'd do annual up

front collect cash no cac issues why were you doing this again only because in the middle of the pandemic people wanted more flexible payment terms we had never done that before and so all of a sudden we started doing this thing that complicated the billings number so my first earnings report which i was like really proud of was like hit all our numbers totally crushed it like carrying me out of the room uh the analysts were like don't go on cnbc look like this yeah billings billings billings billings billings billings billings what's up with billings and i

was like we don't even we know we don't we don't look at billings now we look at billings [Laughter] you sent me a really funny email because i put out in my newsletter i said like i think this guy it might be an ipo watch list i think if they do it'll be like 5 billion i would go the next morning i get an email from you and it was something i'm paraphrasing here uh it was something like why not 10 or something is that what you said it was something like that yeah it was literally like a one sentence subject line only and he was like why not 10

would be question mark and i wrote back and said well here's my math here's my analysis and of course i'm wrong right so did you expect this on day one well people were telling us at this point that like this was an amazing company and the ipo markets were gonna be really excited about seeing it come out so we expected that the company was gonna go out around eight billion um and but i did we didn't expect i didn't expect it was gonna it was gonna rock it

the way that it did the first day and any i mean there are some people in here with 50 to 100 million bucks in revenue that are hiring the cfo that might be thinking about the ipo i mean would you do anything different like is it okay that you under or that you've basically doubled yeah there's gonna you're gonna read articles that say like oh the pop on day one like that just means you like did a bad job of pricing your ipo it's not really true like we had the best advisors the best people around the table on this you

don't really want an ipo that doesn't go up on the first day creates like bad issues and moral issues for your team you want a successful ipo and ultimately the the the trick is we didn't sell a hundred percent of the company in the ipo we sold like 10 of the shares in the ipo and that's how all companies are they don't sell the whole company in the ipo like we're publicly traded but most of the shares are privately held so

you can do a small amount in the ipo get a kick get a bunch of press and excitement about it and then downstream you sell the rest of the shares at a higher value and so so you go to the ipo you do well by the way we're going to talk about founder dilution uh later on i think tomorrow uh we talked about some sas founders when they went public and how much they still owned of the company and some of these are very small numbers two 2.5 percent you were able to optimize a bit here are you comfortable sharing how much you owned at ipo yeah do you have it uh i can tell you it's not yeah it's

like 12 actually yeah what do you do i have the best ones there's like it's the the employee bonus it's complicated but i had two percent somewhere else yeah cool so um talk to us quickly as we wrap up here about zoom info today and what's next yeah so a couple things one if you get to like 10 million dollars of arr you don't have a great cfo you should probably get yourself a great cfo and you're probably thinking because i

was you like i got a guy who does the books and sends the invoices and does the bank stuff like what do i need a big expensive cfo for what's expensive uh probably three hundred thousand you paid your that for that higher first one probably 250 300 okay it's worth every penny if you get the right cfo the great cfos are business strategists and they help you understand the rhythm of the business they help you see where to invest behind the company and how the

business operates and you have a feel for it because you're a founder cfo makes your life a million times easier don't you know don't wait too long for that hire um look we're public the company's growing 60 a year it's doing it profitably at 40 operating margins we've done 12 acquisitions in our history we'll continue to do m a who are you buying next i try you used to tell me everything a

little youtube recording now nothing yeah you know for what it's worth nathan has the best content on this stuff it's why i'm here it's why i respond to his emails it's the most it's the most dead-on content um and the way you ask questions in interviews like nobody really understands the sas space well enough to articulate questions the way he does which i think by the way is why people come on and why they like share information because usually you're

talking to like an analyst who doesn't understand your business or a journalist who really doesn't understand like business period but we're gonna continue to grow the business we help sales marketers and recruiters uh hit their numbers find the best candidates um it's a sas platform it's an annual subscription there are multi multiple dimensions of it how many are there customers here raise your hand if you use zoom info thank you guys very much and you guys should they've got a booth right outside of the nourish area you

should definitely chat more you've got some interesting new products coming out as well but again henry incredible growth story here anything you want to sneak in that i didn't ask no but maybe just a piece of advice please like someone asked me the other day if i'm having fun i'm not like by the way the job is just too hard it is just too hard there are too many moving pieces it is not fun i am fulfilled i am challenged i would never

do there's nothing else i would want to do professionally but it's not fun and so i respect everything that you guys are doing it is a hard job you should embrace it it does not get any easier it's hard all the way through um but it is the best thing i could ever imagine doing guys henry shuck zoom info give it up