Month: June 2020

This is a recap of our partner Ian Taylor’s April 27th fireside chat with Matthew Prince, founder and CEO of Cloudflare. Watch the full talk at pear.vc/speakers, and RSVP for the next.

Cloudflare was born in 2009 during the Great Recession, and recently went public last year. As we continue to make our way through the economic downturn caused by COVID-19, we’re looking to Matthew Prince, Co-founder and CEO, for insights and advice on starting a company during hard times.

What a recession teaches you
Don’t start a company with your friends
Figure out your unfair advantage in hiring

What A Recession Teaches You

As many have said before, some of the greatest companies have come out of recessions. Matthew’s business school classmates included the founders of Rent the Runway, ThredUP, and Tough Mudder. Matthew thinks there are two reasons for that.

“If the economy had been roaring, and if everything had been going really well, I’m not sure that Michelle and I would have ever taken the risk to start a business. At some level, adversity makes you start to think about other paths that you can take,” says Matthew.

Michelle, Matthew’s co-founder, had completed her MBA summer internship at Google. Traditionally, if interns did well over the summer, they could expect an offer to return after their MBA. That year, the recession meant that Google was not making offers to anyone.

The second reason great companies come out of recessions is that recessions force a frugal attitude.

“At some level, your job as the founder of a company is to not run out of money. There are lots of ways to not run out of money. You can generate tons of revenue. You can raise a whole bunch of money. But one of the best is just not to spend a lot, and to be really frugal with the resources you have,” says Matthew.

Building a company during a time of crisis made Matthew and Michelle incredibly cognizant of every dollar they were spending. It also forced them to focus on pushing forward instead of getting caught up in unnecessary details or wasting time running up and down Sandhill Road.

“We basically pitched one venture capitalist who we thought was the right initial investor. We had a relationship with another VC firm that didn’t typically do early stage deals as well,” said Matthew. “But we didn’t optimize.”

Matthew continues: “We said, ‘Yeah, okay, you’ll give us a couple million bucks,’ which seemed like a huge amount of money at the time. We basically did the deal on handshake. In retrospect, we could own a lot more of the company. The biggest slug of equity we gave up was in that first round, but it just so doesn’t matter if these things are successful.”

Don’t Start A Company With Your Friends

Matthew Prince’s first company was an anti-spam product, and he co-founded the company with his friends from junior high school — they’d all had lockers next to each other.

“That is about the worst possible way you can choose who your co-founders are,” Matthew says emphatically.

While his co-founders were great people that he respected, the big problem was that there was no diversity in their skill sets.

“If there aren’t natural divisions that make it clear whose job is what, then when you get to hard decisions, you end up spending all your time just fighting over what the right answer is and you don’t actually get anything done. If you then resort to hierarchy where I say, “Well, I’m the CEO, therefore this goes, that doesn’t make the other people feel really good, because they could have just drawn different straws and been reordered in different ways. So we fought like dogs,” Matthew recalls.

Though Matthew and one of his co-founders are close friends again nowadays, there was a point where they didn’t speak for several years after the experience.

It is a far better strategy to look for complementary co-founders.

“If you’re starting a company, there’s this huge surface area that you’ve got to build a team to cover. With your founding team, you want it to be like a Venn diagram where there’s just enough overlap that you guys can communicate. But mostly you’re just trying to cover as much surface area as possible.”

In those early days of Cloudflare, Michelle focused on process and operations; Matthew focused on vision, marketing and sales; and Lee focused on tech.

“I remember early on, one of the things that really mattered to Michelle — she was like, ‘I want to be on the board.’ I went to Lee and I was like, ‘Do you want to be on the board?’ He was like, ‘Why on earth would I want to be on the board? I just want to write code.’”

It made for a strong, foundational group, and Matthew believes it’s a crucial set up from the beginning.

“One of the questions that we get all the time is, ‘Gosh, how did you guys split up responsibility?’ I try not to say this when someone asks it, but immediately my thought is, you have the wrong co-founder. Because if it’s not 100% clear from day one, it’s only going to get harder every day that passes.”

Figure Out Your Unfair Advantage In Hiring

Recruiting is always the hardest thing you have to do as an entrepreneur, and it’s likely the biggest challenge you’ll face when starting a company during a recession. Workers are less palatable to taking on risk during hard times.

Still, it’s the one thing you as the CEO cannot “fire yourself” from.

“Companies are just collections of the people who join them, so there’s almost nothing that you can do that’s more important than just making sure you’re getting really, really, really high quality people,” says Matthew.

The two characteristics that Cloudflare tries to hire for are curiosity and empathy. Matthew defines empathy as the ability to be a good listener and the ability to change one’s mind when they hear facts that are different from what they might have assumed.

In the tough early days when nobody’s heard of you, the mindset you need to take when recruiting is to think about what you can do that gives you an unfair advantage.

For one of Cloudflare’s early hires, that meant figuring out visas.

Matthew found one of his first programmers simply scrolling through LinkedIn. They were looking for a candidate who was a low-level C and assembly programmer, and they found a profile of a person who had an incredible resume for exactly that. However, the candidate was currently working as a front-end HTML web designer.

Matthew saw an opportunity. He reached out to the candidate, pointing out that he seemed underemployed. It turned out that the candidate was a French citizen who wanted to be in the United States, and his current firm was the only one that could sponsor his visa.

Matthew offered to transfer the visa to Cloudflare, where the programmer would be able to write C and assembly. The candidate immediately accepted.

After that hire, the team went and found a great immigration attorney, and continued the strategy of looking for people who were underemployed on some kind of visa. They would then transfer those candidates’ visas over.

“You can say ‘We’re going to all make a ton of money,’ but that’s what every startup says. You have to figure out ways to get people to have a span of control of things that they really love to do, or have a mission and a purpose which really resonates,” says Matthew.

“It took us a while to figure out that Cloudflare’s mission was to help build a better Internet, but once we did, people were like ‘Yes! That’s why I work here, I like coming in and solving the hardest problems on Internet-level scale.’”

Matthew and his co-founding team made sure to be relentlessly fair to those first employees. Though half of Cloudflare’s original 8 employees eventually went on mostly to start other companies, they all came to join the team on the floor of the New York Stock Exchange when Cloudflare went public.

“It’s pretty amazing, we wouldn’t have gotten to where we were without them, so it was great to be able to celebrate there with them,” says Matthew.

“Pear was the first one to take a bet on us. Pear has been our home for the first two years of this business. To say that they have played a fundamental and foundational role in building this company… it may even be an understatement.” 

— Charlie Olson, Cofounder & CEO, Pando

This week, Pear Accelerator Summer’17 company, Pando, announced their $8 million Series A fundraise, led by Core Innovation Capital with participation from Pear, Avalon Ventures, Ulu Ventures, Nimble Ventures, Stanford StartX Fund, WTI and Slow VC.

Pando allows individuals to contractually pledge a small portion of their future earnings above a set threshold to a shared pool, which is then distributed evenly. The pool offers each participant more career security and certainty in an increasingly volatile and uncertain world.

As Charlie and Eric continue to build on their success, we can’t help but look back on their early days at Pear — when they were just embarking on the volatile and uncertain journey of being startup founders.

The Idea

When we met Charlie and Eric as Stanford MBA students, Pando was just an idea. Eric had been doing research with a labor economist at Stanford, and the research suggested two macro trends: first, that more people are graduating into high uncertainty, winner-take-all careers than before; and second, that our generation is less reliant on the community-based institutions that provided previous generations with a safety net.

Pando emerged as a modern, community-based financial tool.

“Mar quickly got beyond the idea. She clearly bought into what we were trying to solve, but it quickly became — okay, how are you going to do this? How are you going to target this customer base? How are you going to price this? This was before we had answers to any of those questions,” said Charlie.

The two founders realized that Pear could help push them further than they might be able to go on their own.

“There’s no substitute for experience. On the other hand, there’s a billion potholes and I don’t need to step in every single one of them,” said Charlie. “Early on, I saw that Pear would be able to steer me around the pothole minefield.”

The First Customers

To get started answering those questions, Charlie and Eric first thought about which groups of people would be the right customers for their idea. Many types of careers seemed to make sense, but they narrowed it down to baseball players, entrepreneurs, and MBA students. The next step was to test their hypotheses. To do that, the founders wrote up some Letters of Intent and pitched the idea to all three of these groups.

“Funny enough, we ended up having success with all three and realized we should start somewhere,” said Charlie.

Ultimately, the founders decided to focus on baseball players first, especially after considering the strong network effects at play. Sports are widely popular and athletes are widely admired. If they could successfully serve athletes, they hypothesized, the product would be much more interesting to many other customer segments — not to mention investors and future talent.

While that was the business reason, the team was also compelled by the human reason: baseball players seemed to face the most volatile career path of the three.

“I don’t think the rest of the world thinks about professional athletes as being vulnerable, but I would argue they’re some of the most vulnerable. We only see the superstars,” Charlie points out.

What many don’t see is the path it takes to get there. In 2018, Congress passed America’s Pastime Act, granting Major League Baseball the ability to pay minor league players below minimum wage.

“The vast majority of professional athletes play in the minor leagues for a few years before getting cut. They’ll never make significant money and will leave the game having sacrificed career and educational opportunities,” Charlie explains.

Further, even players on the right path face many daunting variables beyond their control, such as injury, the team they are drafted into, and organizational politics.

“These players live on a knife’s edge where a bad outcome is zero. It’s flat zero. That’s different from, say, MBA’s.”

Once Charlie and Eric decided on baseball, the next step was figuring out how to get those first customers. Neither had any real connections to professional baseball. Charlie knew only one minor league baseball player from his undergraduate years.

So, he spent spring break at baseball spring training in Scottsdale, Arizona.

“I just started calling agents and financial advisors and players. I was taking them out for coffees. I would go grab a beer. I would do anything — I was just begging for meetings,” Charlie laughed. “It was hilarious. It’s 100 degrees, I’m now inundated in the baseball ecosystem, and I know nothing about what I’m talking about. Yet, we found out pretty quickly that we were onto something, that there was a refined need here.”

Charlie took those learnings back to Stanford, where he and Eric refined the product and pitch. During the Pear Accelerator program, they revised those LOI’s and began approaching baseball players again. With the LOI commitments, they were able to attract investor interest. With investors on board, they convinced a lawyer to work with them in a unique product design capacity. Together, they drafted the first income pooling contract in the United States, which became a case study for a Stanford Law class.

The team also moved into the Pear offices.

“We put a dent on their food bill for sure — so I don’t know if it was a good idea for them, but they let us stay!” Charlie jokes. “It kind of became the Pando office, honestly. We’d have like 15 people in there on a daily basis and Pear would have three, so we ate them dry.”

The Challenges

Aside from eating our food (we forgive them!), Charlie and Eric also spent many nights sleeping on our couches as they worked through those early ground zero challenges.

“Starting a company is about no’s. You’re getting no’s early and often. You either have a good idea and the product is not there, or a person doesn’t like the idea, or the idea is just repulsive because it’s new. You’re pitching things to investors and you’re getting hit for any number of 6 trillion things. Meanwhile, your company has been in ‘existence’ for three days and you’re like, ‘I don’t have any of these answers, I have no clue what we’re doing,’” said Charlie.

Because Pando was such a novel product, one of the early challenges for Charlie and Eric came in learning how to best educate their customers.

“My baseball calls — it was like I was an economics lecturer trying to teach about the value of diversification and risk mitigation,” Charlie said. “The early client wins — there’s nothing sexy about it. It’s hand to hand and trying to figure out how to be really curious and match product value with customer need.”

Nowadays, as a maturing company, Charlie has been able to take himself out of the baseball sales process and has passed on the torch to a very strong sales team (“they’re better than I am!”). Charlie, meanwhile, is back at school — working on their second customer segment: MBA students.

“I think about my job as CEO as having three parts: the first is making sure we don’t run out of money, the second is aligning my team with company vision and company strategy, and the third is hiring and retaining great talent,” said Charlie. “For me, knowing the customer and the different segments is absolutely critical to my ability to do every other part of my job, and I wouldn’t know it unless I go do it.”

Whether Charlie will continue the strategy of learning about each new segment personally is, however, an open question.

“I think your company looks very different every time it grows 100%. Running a five person company is radically different from a 10 person company, which is different again from 20,” he says.

Indeed, Pando has had to face inevitable growing pains — such as the first firing. It’s an inevitable responsibility for a CEO, but it’s never easy.

“Frankly the first person I fired, I had no idea how to do it. I didn’t know how to think about having the conversation. There’s a lot that goes into it that I wouldn’t have known how to do, and I wouldn’t have had the order of operations,” said Charlie. “I went into it with a 10 point checklist that we executed well. Because we executed it well, I think all parties involved left feeling better — including the person that we split ways with, because it was handled professionally and respectfully.”

Again, there are business concerns, and there are human concerns.

“We were emotionally invested. It was definitely the right call for the company, but it had us really stressed out. We came to Pear for a quick conversation, like ‘Here, this is what we’re thinking,’ and they said, ‘Hey! Here are some best practices, but also sounds like you’re making the right decision.’ That support in that moment made the next conversation very much easier,” said Eric.

“You have a lot to go through and having somebody who you know is 100% in your corner is really important. The way Pear has set things up, from day one, they’re 100% in your corner regardless of whether or not they end up being your major backer. Starting a company should be hard, but it doesn’t have to be impossible and Pear makes things possible,” Eric added.

Now, the Pando team is paying it forward. Their ultimate vision is to make income pooling available to anyone in any career, allowing more people to pursue their ambitions, just as they have been able to pursue their vision as founders.

“I think Pando can help unleash a lot of people into careers that they’re passionate about and liberate them from near term financial constraints,” says Charlie. “I hope that Pando can help better encourage people to better align their personal risk preferences with career choice.”

Charlie and Eric see a world where communities come together to celebrate and empower each other in the pursuit of their passions, and also to support each other in the hard times. Pando creates a trusted environment for individuals to share directly in each others’ success.

“We live in a volatile world. Am I willing to give up a small portion to a group of people that helped me get there, in the case where I make so much money that I don’t need it? Yeah! Of course I’d make that trade,” says Charlie.

“That trade also helps ensure I don’t have a bad outcome and allows me to be more comfortable with the risk I’ve taken. As an added benefit, I’m with this great group of people and we’re going to work together. It’s so intuitive to me. We see this as the future.”