From Startup to Exit with Serial Entrepreneur & Author Shirish Nadkarni

Shirish Nadkarni, Serial Entrepreneur & Author chats with Amit Somani, Managing Partner Prime Venture Partners.

Shirish is a serial entrepreneur with proven success in creating multiple consumer businesses that have scaled to tens of millions of users worldwide. Shirish was the cofounder of Livemocha, the world’s largest language learning site with more than 15 million registered members from more than 200 countries. Livemocha was acquired by RosettaStone in 2013. Prior to Livemocha, Shirish was the founder of TeamOn Systems, a mobile wireless email pioneer that was acquired by Research in Motion.

Listen to the podcast to learn about

02:00 - Acquisition of Hotmail by Microsoft - Build vs Buy Question

06:15 - How to Think About Exits as a Founder

10:15 - Startup’s Fundraising Journey: Storytelling Vs Metrics

20:10 - The Actual Purpose of Board Meetings

23:30 - Relocating from India to US as a Founder

To learn more from Shirish, check out his book From Startup to Exit: An Insider’s Guide to Launching and Scaling Your Tech Business 

Read the complete transcript below

Amit Somani 01:00

Welcome to the Prime Venture Partners podcast. I’m your host Amit Somani. And I’m delighted to have Shirish Nadkarni with me. He is a serial entrepreneur, an ex Microsoft veteran, and now has recently published a book. So he’s an author as well. Welcome to the show Shirish.

Shirish Nadkarni 01:15

Thank you very much for having me.

Amit Somani 01:18

Shirish you had a long and illustrious career, both as a corporate executive, and then a multiple time founder. And now I know you also do angel investing, can we maybe step back a little bit, say 20 years and talk about one of the most famous acquisitions perhaps in the history of the internet and one of the earliest ones perhaps as well which was Hotmail, I believe you were a part of the acquiring side. So can you talk to us about what the environment was back in the late 90s, at Microsoft, and in the overall internet ecosystem?

Shirish Nadkarni 01:50

Yeah, you bet. So at that time, this was in 1997. At that time, I was responsible for the product strategy for MSN.com. And Microsoft was migrating from what was a proprietary online service called MSN to a web based portal called MSN.com. And we were missing two key elements of our strategy. One was search and the second was email. So on the email front, we felt email was very important, because it’s an application that you use on a daily basis. And it’s a very sticky application. So once you come into our web portal to access email, then hopefully you can access other services that we would provide. So that is a kind of strategic reasoning behind the interest in email, specifically, and at that time, hotmail had pioneered the notion of web based email. In fact, they were the first saas service of its kind, ever.

At that time, they were growing very rapidly. So I made the pitch internally to my management that we should go acquire hotmail because they were adding about a million users a month. And I convinced my management and then we went up all the way to Bill Gates to convince him. But it was a real challenge, because this was at the time of the dot com boom. And our CFO had warned us that this would cost us a lot of money, probably in the range of $300-$400 million, because hotmail at that time had the option of going public, and probably would have gone public at a billion dollar valuation. And so fortunately for us, I was able to convince both Sabir Bhatia, the founder of Hotmail, as well as convince Bill Gates and the email team at Microsoft, that it makes sense for us to go acquire hotmail and ultimately we paid 400 million for the acquisition.

Amit Somani 03:40

Absolutely, I remember that both as a hotmail user back in the day, and then even later on having heard Sabeer Bhatia talk about it, and so forth. How about the rest of the internet ecosystem? Of course, Microsoft has recently become very acquisitive, again, Microsoft, has had multiple journeys by itself. So what was this whole build versus buy thing? How did you guys think about the rest of the ecosystem? I know you were involved with MSN, but there were so many other things that were happening at that time.

Shirish Nadkarni 04:10

Yeah, I mean, there’s always the build versus buy kind of scenario. Recently, for example, Microsoft acquired a company that I invested in called Ally. They were looking at OKRs, objectives and key results as a key element of their strategy. And I’m sure they had internally a build versus by kind of dialogue, but they ultimately decided to go by Ally, even though I’m sure it was a fairly expensive acquisition. But if the strategy is being driven by the business folks, as I did at Microsoft, time to market many times is essential. And even though you might be able to build that, buying somebody who has built the technology, who has momentum in terms of customer base, etc, can go a long way towards justifying an expensive acquisition.

In the case of Hotmail, for example, they ended up with 300 million users ultimately, and was one of the top email solutions out there. So it was well justified in terms of the acquisition price. So that’s why, often the discussion goes on is build versus buy and Microsoft now has the currency for example, to go easily and acquire a lot of companies.

Amit Somani 05:15

Fantastic It’s a great segue into your recent book that you just authored, “From startup to exit” and would love to talk about it in a reverse chronological order. I’m a big fan of Stephen Covey who used to say begin with the end in mind. Eventually, the goal of any company could be an IPO, could be an M&A, to really create large value for all its stakeholders, employees, investors, the founders of course most importantly, and so forth. So this book “From startup to exit”, has multiple sections. But maybe we’ll start with the exit first, since you mentioned ally.io, and hotmail and so forth.

So how should one as an early stage founder, right from the early days, think about it? And idea is not of course, I mean you want to be a missionary founder and build a company for a very long amount of time. But do you also believe that exits just don’t happen randomly and serendipitously and have to be cultivated? How should one think about it?

Shirish Nadkarni 06:15

One of the things that I talked about in the book and I mentioned to entrepreneurs is that, yes, certainly, you should have a missionary mindset, you should build for the long term and really focus on building the business because that’s the best way to get a good exit. But you should also draw up a list of major players in your industry. What you should be doing is reaching out at the right time, of course, reaching out to them to explore potential business partnerships, or relationships, where they might be distributing your solution or making part of the marketplace or training their salesforce etc.

And even though for the first, two or three years, your relationship may be a kind of relationship where you’re a partner, etc. Ultimately, what may happen is that acquiring company may reach the conclusion, because they have been successful in selling your product, etc, that it is strategic for them, and they need to go acquire your company. And it’s a lot easier at that point, to get an acquisition to happen, because they’re familiar with the business. they’re familiar with the kind of revenues they’re able to generate. And that gives them a lot more confidence to go acquire a company versus somebody else. So that’s one of the things that we did as a board is keep track of potential acquirers and then explore opportunities to build relationships with them.

Amit Somani 07:40

Shirish, I want to double click on several things here. One is that you might be afraid of “ sleeping with the enemy” because let’s say you’re competing as well, if it’s a clear, segregated thing, then there’s no problem. Like Microsoft’s not doing OKRs, ally.io is doing OKRs, obviously, so it’s fine. We can talk, we can partner. In other cases, you feel like no, we are, partly competing, partly collaborating. And they will learn more about us. So you’ll always have that paranoia kind of thing as a founder. So any thoughts on number one, that. Number two, like you said, in most companies, and I used to be at Google and do OKRs, and so forth, as well, is that the business leaders or the product leaders typically are the big drivers of the acquisition, not the corp dev folks, corp dev folks come towards the end, and help close the deal and the terms and take it through the process.

So maybe if you can talk about both, like how do you overcome the fear of paranoia, that they will, “ steal our stuff”, or they will know how much traction we really have? And that kind of stuff, especially when you’re on this thing? And how do you make the relationships with the product business leaders and not just corp dev?

Shirish Nadkarni 08:45

Yeah. So on the first point, my philosophy is that you don’t really have to be that afraid of your competition, especially larger competitors, because they are slow to move. And they are probably already familiar with what you’re doing, how many users you have, and so forth. It’s better to establish a relationship, and you may not enter into a relationship with them at that point. But it’s better to establish a dialogue with them, and even potentially explore a partnership. For example, when I was doing Livemocha, which will hopefully talk about more, in more detail, which is a language learning startup, we established a relationship with Pearson, which is a very large education company, and they had their own language learning products.

But we were really not very concerned about them, having something that could compete with Livemocha, which is a social language learning platform. And in fact, we ended up with a partnership with them where we decided to, licence their content, and build relationships around that. Now, they ultimately did not acquire us, but they could have certainly been the acquirer of Livemocha, we ended up selling through Rosetta Stone instead. But even there, we had a conversation with Rosetta Stone, fairly early on, when we were not even talking about an acquisition. But the CEO reached out to me, he was in town, he wanted to have a chat and I said, Sure, I’d be happy to have a discussion. You may want to keep certain things close to your chest. But there’s no reason why you can have a conversation with your competitors.

Now to your second point about corp dev versus the product side, I’m a big believer in establishing relationships with the business leaders as opposed to Corp dev because they’re the ones who make the ultimate decision on whether to acquire or not. So in the case of Hotmail, for example, I was the product leader, the business leader within MSN and I was the one who made the evaluation of hotmail and decided that we needed to buy Hotmail. And then once I had convinced management that I got the finance team involved in the acquisition process.

Now that process works differently if you’re hiring an investment bank, as with an investment bank, their relationships are typically that of the corp dev people, and then they go through that gateway to the business leaders and get feedback on whether an acquisition is possible. So it really depends on the situation. But I’m a big believer in reaching out to the business folks first.

Amit Somani 11:15

And hotmail might have been different because they were rapidly going back at the time, but let’s say I’m a founder of a company, and I want to make a relationship with somebody in Salesforce or something else. Any kind of practical tips or thoughts on how to do that. Because you’re obviously not going to randomly send a LinkedIn email saying, Hey, I’m such and such, and I’d love to talk to you, because you’re a SVP product at Salesforce.

Shirish Nadkarni 11:40

Well, there are a number of ways you can do that. Certainly, you want to establish yourself in their marketplace and drive a good amount of revenue through their marketplace, they are certainly tracking your sales, because they can track how much you’re selling through their marketplace. So they’ll have a good sense for what companies are doing really well on their marketplace. The second way that you can do this is through your common customers. Because common customers will demand a certain level of integration, beyond what may be immediately obvious, they may want deeper integration with somebody like Salesforce.

And that will also create an opportunity for you to have a conversation with the product teams to say, Hey, can you give us better access? Can we work closely to provide better integration for our customers? And then, of course, through your board, your advisors, those are some of the ways that you can get in touch with a large company.

Amit Somani 12:40

Yeah, I love the last point. And we often encourage that, for startups we work with or we help, which is that you can actually leverage the investors of the other companies, of course, Salesforce is too large now and, a big public company, because they are often in the know about what is happening, and what is in some of the internal board conversations and so on.

It’s a great segue to jumping, since we are going reverse chronological, your startup journey. From exit to startup as opposed to your book, which is from startup to exit, talk to us a little bit about livemocha. And in particular, now I know you do a lot of angel investing yourself and also advise startups. Let’s start at the beginning, which is fundraising, how do you advise people to run an effective fundraising strategy at the early stage? And in particular, any tips on what you are looking at as an investor or what other investors they’re looking for? How should one structure the investing pitch? Some of these are in your book as well. So I’d love to hear your thoughts on that.

Shirish Nadkarni 13:37

Yeah, there are a couple of things that I emphasise in my book. One is it’s really important to tell a great story. What prompted you to start your company? But more importantly, what is the global trend or transformation or technology innovation that is driving your vision? What is it that is allowing your company to emerge, and really disrupt existing players in the industry. So in the case of livemocha, for example, this was in 2007, when we started the company, we were in the middle of the globalisation phenomenon. And companies were outsourcing their manufacturing jobs, their knowledge worker jobs, IT jobs, etc. And you had a significant amount of demand for learning English.

So I painted this picture of this globalisation that was happening, and that there are a billion plus people who are interested in learning English. And suddenly, when you talk about a billion people, which is not, a number out of the sky, but a real number, then people take notice. And they can see along with you how big really the opportunity is as much bigger than any of the existing players in the market. So that’s one thing I talked about the importance of telling an overall story. The second thing that you need to do is to really coordinate your VC engagement, you want to essentially start all the VC interactions at around the same time and you want to keep them going in terms of the due diligence and all the other stuff that they need to do along at the same pace.

So if somebody is ahead of somebody else, then slow them down and make the other ones go faster. Because what you want to do is you want to make sure that when you get term sheets, you’re getting multiple term sheets at the same time. Otherwise, you have a situation where somebody might give you a term sheet and say, Hey, you have 24 hours or one week or whatever to respond. And you don’t have other term sheets on the table. So managing that workflow. The whole process is very important.

And the third thing I would say is time your fundraising activities when you have significant traction, because that’s one of the proof points that investors look at is do you really have product market fit? And is there real customer demand that justifies the vision that you have. So I mean, there are many other things I can talk about in more detail. But those are some of the things I would emphasise in terms of the fundraising journey.

Amit Somani 16:10

I want to go to the storytelling one, because it’s one that often comes up, because we also invest in startups and so forth. So there are two elements I feel about storytelling. And I think you alluded to both. One is the journey of your startup, like, why did you start, what was the inspiration etc. And sometimes, that may or may not connect with the investor, because if they have not appreciated that problem, even though they may appreciate your journey, the second is painting a story of how the world will be five years from now, or 10 years from now, and why this is going to be a big thing. And often, when you’re fundraising, there’s this struggle between how much are you selling the dream versus how much are you selling the metrics or the data, depending on the stage that you’re at.

I mean, obviously, when you’re just starting up, a guy and a gal and dog in the garage is largely a dream, and not much data to go around. But let’s say for a series A type of thing. So any thoughts on how to balance the storytelling for the future, as well as this role of metrics versus data. Because I might be at a million ARR. But I’m like saying, Look, I’ve got to be doing $500 million in revenue in five years. And it seems a little far-fetched.

Shirish Nadkarni 17:15

No, I don’t think it’s really that contradictory. Because the VCs want to invest in companies that will reach at least a billion dollars in valuation, they don’t want to invest in small companies. And they also understand that you’re going to start small, but ultimately, you can grow to be a very large company. So going back to my example of livemocha, if I was painting a picture of a billion English language learners, and each one of them was paying $100, you’re talking about a $100 billion business. So you need to be able to do simple math, to explain to investors how large the opportunity is. I often tell people don’t worry about five year projections, because nobody believes them, what you really want to do is simple math.

Explain to them, hey, there’s a billion users that say they pay us $100, that’s a $100 billion opportunity, maybe I’m off by a factor of two or whatever. But still, it’s a 50 to $200 billion opportunity. And if you can get 10% market share, that’s a very large company. And they have seen how companies like Facebook and Google have grown tremendously from very small companies at very rapid growth rates. So it is possible to get billions of dollars of revenue in a five to seven year time frame that has been done before and has been proven, as long as the opportunity is very large.

Amit Somani 18:40

So I love the point about simple math, but I will also push back a little or maybe there’s a balance. There is also the kind of a little bit of the bottom up sizing right as is the top down. But I completely agree with you that for TAM, you can give any kind of macro fancy pictures, but until the simple math works, it is very difficult to sort of connect with it. But then when you have to think about where you will get to in the next two or three years, I would encourage people to think about the bottom up kind of approach in terms of your addressable market, and GTM, and so forth.

Let’s switch gears, a little bit, from fundraising into managing your board and running your company effectively. Any thoughts you have in terms of there was one interesting note in the book about running your first board meeting, as opposed to every other board meeting, and so forth. So maybe if you want to talk a little bit about some best practices for running your company?

Shirish Nadkarni 19:30

Well, the first thing I would actually say is that, find investors and find the board members who have either deep startup experience or deep operational experience. That’s not to say that we haven’t seen very successful VCs who come from a finance background, and there are many of them, of course, but like yourself Amit, you have had deep operational and startup experience. And that goes a long way towards providing really great advice to founders who are doing it for the first time. So that’s goal number one is to build a really great board that can give you strategic advice, then the first thing I emphasise in my book is that for the first board meeting, you have to kind of level set, you have to make sure that one, you explain to them what your strategy is, and how you’re going to go acquire customers.

And then you need to establish a budget, you have to get agreement on those two main things before you can proceed to the next set of board meetings. And then after that, what I recommend is you create a standard template. Sequoia Capital has a good template that you can go to the website and access the template. And then I would prepare that and actually send that a week in advance to the board. I know that’s challenging because most people are trying desperately to get the board deck done in a day before the board meeting. But really, what you want to do is to get through the operational information as quickly as possible. And you might even want to give them a call to your board members before the board meeting, to talk about how things are going operationally. And especially make sure that there are no surprises.

So if something bad is going on, or whatever you want to tell them before the board meeting, the board meeting should not be a place where they find that information from you. And then make sure that you set aside enough time in a board meeting to really discuss one or two key strategic issues, where you really want feedback from the board. And because you prepared them in advance, you will have a much more productive discussion, and you’ll get valuable feedback from your board members.

Amit Somani 21:40

Absolutely agree with the last two points. One is that bad news should take the escalator. And good news can climb up the stairs, because you don’t want to surprise people and if anything over communicate, for sure. And then the other thing is I don’t think people leverage the board meetings enough for strategic discussions, it ends up being a lot more of a business update kind of a meeting. Because you’re not running an operating review here. You’re really saying what are the trade offs and the challenges and the opportunities you want to work through. And in fact, equally importantly, how can the board help? And are you leveraging your board enough not just for discussion, but to, like you said earlier, make connections with potential acquirers or partnerships, or key hire or whatever it is that you’re dependent on.

Shirish Nadkarni 22:27

Absolutely, yeah, you should generally have one or two tasks on the board for every board meeting so that you can leverage their time and connections and so forth.

Amit Somani 22:35

Absolutely. So shirish as we come to the end, sort of switching gears a little bit on some of your recent work that you’re doing in Seattle. I know you’re very active with the TiE, perhaps even headed, there’s a lot of startup ecosystem that’s booming. It’s interesting to see the evolution of Seattle as well, in some sense, from the giants like Microsoft and Boeing to even Amazon and so forth, to a quite thriving ecosystem of new startups. So can you talk a little bit about what is on the ground buzz in Seattle? What are you seeing in TiE and other organisations that you volunteer with, any new trends, any new thoughts there?

Shrish Nadkarni 22:31

Well, certainly a lot has changed in the last 25-30 years, you now have not just Microsoft, but also Amazon has a huge presence, of course. And then you have Facebook and Google and others who have large campuses. So the amount of tech talent has increased dramatically. And in any of these companies, you will have some number of people who are tired of that work environment and the bureaucracy, and so forth, and they want to join startups. So there is a lot of interest in startups, you’ve had lots of success stories as well, which is very important to inspiring young entrepreneurs. So you’ve had many companies go IPO, you’ve had companies that have become unicorns, you’ve had acquisitions, like Ally and so forth, that have done really well.

So those are all inspiring things for startup founders and for the ecosystem. And we at TiE we’ve been very active and helping the community, I run a number of programmes here, from everything from an incubation workshop called go vertical, to tie Institute to train aspiring founders, we also have small funds to invest in b2b startups, I would say that TiE Seattle has become the organisation here in Seattle, that is the most active in helping founders and entrepreneurs.

Amit Somani 24:35

One quick follow up question. Oftentimes, a lot of Indian SaaS entrepreneurs who start in India, grow, get to a certain scale, and then one of the co founders will relocate to the US, and whether you like it or not, and I spent many years in the Bay Area, often the choice of place is Utah, how would you think about somebody who wants to relocate to us from India running a SaaS company to Seattle? Perhaps what would be some of the things that they should look for? Cuz I’m sure cost of living is perhaps higher in Utah or some other places like Austin, maybe.

Shirish Nadkarni 25:05

Yeah, certainly, Seattle has many advantages, but it has become a lot more expensive in the last 10 years especially. It is a lot less expensive compared to the Bay Area. But the people love the Pacific Northwest, they love the environment, the schools and so forth. So that’s very attractive. And there’s a lot of tech talent here. It is getting expensive, but at the same time there are a lot of startups who are raising a lot of money so they can afford to pay the higher salaries needed to compete with the likes of Microsoft and Facebook and Google. So there are still many advantages. But things are changing with remote work, you now have the ability to, maybe located in Seattle, where a lot of talent lies, but you now have the ability to recruit people from Utah or Austin, and other places and work as effectively as before.

Amit Somani 26:00

Wonderful Shirish. One last question as we wrap up, what did you learn about yourself in the process of writing your book? Because writing a book is quite arduous. I don’t know if it’s as hard as starting a company or exiting a company. But any thoughts on that?

Shirish Nadkarni 26:15

Yeah, actually, it was a really good project. I did this during COVID times when I was isolated. So I got a chance to talk to a number of entrepreneurs. As you may have noticed in the book there, there are a number of inspiring startup stories. And so I had the opportunity to talk to a lot of entrepreneurs, a lot of VCs and get some really good insights. So overall, it was a much more enjoyable experience than I thought. It wasn’t as arduous as I thought it would be, and was a lot more enjoyable at the end.

Amit Somani 26:50

Well, thank you so much Shirish for being on the Prime Venture Partners podcast. It was great to have you.

Shirish Nadkarni 26:15

Thank you very much. Great to be in the conversation with you. I look forward to the podcast.

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