The Exchanges

Q target there. You mentioned your business school experience, and it's something I'm thinking about a lot at the moment. Not, not in terms of me doing it. I think you need a degree first to go to business school, but, but, but just intrigued as to kind of how formative it was to you in your self-development growing as an entrepreneur. What was your take on its importance to you?

A For me, it was, it was incredibly important. Helped me build a broader set of business skills, expand my network in a really meaningful way, and it was a transition for me from one industry into a new industry, and I, I really used graduate school as a springboard to move into tech and entrepreneurship, and in many ways, I felt like I spent three years just analyzing and breaking down internet business models, you know, so we studied the early makings of Amazon, eBay, Dell, had an opportunity to meet so many phenomenal Chicago tech entrepreneurs. And then these trips out to Silicon Valley, we met with Eric Schmidt when he was running Novell prior to moving over to Google. We met with small startups, VCs, law firms. It just immersed me in tech entrepreneurship in a way that I hadn't been able to in the past and really inspired me and gave me the confidence to go out and do it on my own.

AI assessment note: “For me, it was, it was incredibly important. Helped me build a broader set”

Q And you mentioned kind of the inherently exciting, uh, margins available in SaaS businesses. I'm intrigued as to kind of what milestone and what percentage does it really excite you? Is there like a 70% plus and it, you know, Scott is just jumping or at what stage does it really hit that excitement phase?

A You know, I think that's a, that's a good question. I think from a gross margin perspective, you know, the first couple of years, you know, you're just, you're really focused on hiring developers, hiring salespeople, getting go to market moving and, and revenue is so small that gross margin, you know, is less significant, you know, but let's say once you hit second, third, fourth year, then your gross margin dynamics really start to become apparent. And we look for gross margins, you know, north of 80%. If you have a strong services component, then probably north of 70%. But that's what makes the model, you know, so rich is that your cost of goods sold is low. And actually with AWS and all the cloud platforms today, you have an opportunity to drive gross margins, you know, to, to really new levels. Some of our companies are running north of 90%, which is really outstanding because it just gives you more money to be able to invest in R&D, invest in go to market, and really scale the business in a meaningful way.

AI assessment note: “We look for gross margins, you know, north of 80%.”

Q target there. You mentioned your business school experience, and it's something I'm thinking about a lot at the moment. Not, not in terms of me doing it. I think you need a degree first to go to business school, but, but, but just intrigued as to kind of how formative it was to you in your self-development growing as an entrepreneur. What was your take on its importance to you?

A For me, it was, it was incredibly important. Helped me build a broader set of business skills, expand my network in a really meaningful way, and it was a transition for me from one industry into a new industry, and I, I really used graduate school as a springboard to move into tech and entrepreneurship, and in many ways, I felt like I spent three years just analyzing and breaking down internet business models, you know, so we studied the early makings of Amazon, eBay, Dell, had an opportunity to meet so many phenomenal Chicago tech entrepreneurs. And then these trips out to Silicon Valley, we met with Eric Schmidt when he was running Novell prior to moving over to Google. We met with small startups, VCs, law firms. It just immersed me in tech entrepreneurship in a way that I hadn't been able to in the past and really inspired me and gave me the confidence to go out and do it on my own.

AI assessment note: “For me, it was, it was incredibly important. Helped me build a broader set”

Q So talk to me then, in terms of that two very differentiated elements of the business there, one thing that strikes me very much is with the segregated fund, how do you avoid the negative signaling function with those that come out of the studio that you potentially don't invest in? What does that look like for you?

A That's an important issue. That's an important topic, and one we think, we think quite a bit about. Our Our philosophy on the studio side is we're going to use our own seed capital to get these companies started, and that's really from High Alpha Studio. Once we feel like we have product market fit, we've built a strong leadership team, we have early customers, we feel like, okay, there's really a business here. Then we put the round forward for a larger seed round, and those rounds have tended to range between two and three million dollars of capital. That's the moment when High Alpha Capital participates in the round. So we're only going to put forward a company Out of studio and funded by capital. If we're really confident there's product market fit. And then at that time we bring other investors in as well. So the signaling we think is going to be a relative non-issue because we're only going to be putting our own money and, and bringing other capital together when a company is actually graduating from studio and ready to go. So another way to put it is we're, we're likely to invest in every one of our companies that come out of the high alpha studio.

AI assessment note: “we're likely to invest in every one of our companies that come out”

Q And as you said, you did that. And I do want to discuss then the acquisition by Salesforce. Uh, incredible experience, but what was it like then to work directly for Mark Benioff, the hailed Mark Benioff?

A Yes, yes, that was, uh, it was a wild experience. It was an incredible experience. So I reported directly to Mark and was a part of his executive leadership team, and that was incredible. I felt like that was my PhD in cloud computing, software as a service, and I learned a lot. So Mark, as we all know, is an extraordinary visionary, speaks often about having a beginner's mind, being very curious, and being a Very thoughtful about what's happening in the future and making sure that Salesforce gets there first and that their customers get there first. What most people may not know is he's actually an excellent manager. He's very focused, kind of widely reported. Salesforce uses the B two mom framework, which is a great business planning framework for prioritization and focus in the organization. But he's also, he's also just a terrific kind of blocking and tackling manager. So we'd have, we'd have weekly one-on-ones, And we'd focus on what was most important. And he'd always encourage me actually just to focus on my top three priorities. And that's really where we channeled all of our discussion around the three top priorities for all the marketing cloud. And that, that focus and prioritization was, was really terrific. So it was a great experience. I learned so much within Salesforce. I also learned that Salesforce, their success is not an accident. You know, there is a level o…

AI assessment note: “So I reported directly to Mark and was a part of his executive leadership team”

Q And you mentioned kind of the inherently exciting, uh, margins available in SaaS businesses. I'm intrigued as to kind of what milestone and what percentage does it really excite you? Is there like a 70% plus and it, you know, Scott is just jumping or at what stage does it really hit that excitement phase?

A You know, I think that's a, that's a good question. I think from a gross margin perspective, you know, the first couple of years, you know, you're just, you're really focused on hiring developers, hiring salespeople, getting go to market moving and, and revenue is so small that gross margin, you know, is less significant, you know, but let's say once you hit second, third, fourth year, then your gross margin dynamics really start to become apparent. And we look for gross margins, you know, north of 80%. If you have a strong services component, then probably north of 70%. But that's what makes the model, you know, so rich is that your cost of goods sold is low. And actually with AWS and all the cloud platforms today, you have an opportunity to drive gross margins, you know, to, to really new levels. Some of our companies are running north of 90%, which is really outstanding because it just gives you more money to be able to invest in R&D, invest in go to market, and really scale the business in a meaningful way.

AI assessment note: “we look for gross margins, you know, north of 80%.”

Q Can I ask, is your dream then kind of the complete interdependence from the core tech ecosystems and have kind of 10 fantastic VC firms around you who could support your entrepreneurs with the capital requirements that they need. Would that be the ultimate vision?

A That's a great question. I might, I might position it slightly different for sure. I would like to see more scale of capital in the Midwest. We have drive capital in Columbus, which is excellent and a great team. They're putting meaningful capital to work in the Midwest, but really outside of drive, we have very little scale of capital and that makes it more challenging for our company. So, Yes, I would love to see more capital in the Midwest. However, that connectivity, you know, into the tech ecosystem and down in Austin and in Boston and out in San Francisco, that's extraordinarily important as well. So as surprising as this might sound, we've also been putting a lot of energy into making sure we have nonstop flights and just strong connectivity, you know, out to San Francisco and other, other parts of the country and other parts of the world, because we're in such a connected world, we need to be a part of that tech ecosystem on a global basis. And break down every barrier we have to serving on boards, developing partnerships, finding new customers. So we think about, I'd say, I think about those two components. One is capital, and second is just connectivity.

AI assessment note: “I might position it slightly different... One is capital, and second is just connectivity.”

Q So talk to me then, in terms of that two very differentiated elements of the business there, one thing that strikes me very much is with the segregated fund, how do you avoid the negative signaling function with those that come out of the studio that you potentially don't invest in? What does that look like for you?

A That's an important issue. That's an important topic, and one we think, we think quite a bit about. Our Our philosophy on the studio side is we're going to use our own seed capital to get these companies started, and that's really from High Alpha Studio. Once we feel like we have product market fit, we've built a strong leadership team, we have early customers, we feel like, okay, there's really a business here. Then we put the round forward for a larger seed round, and those rounds have tended to range between two and three million dollars of capital. That's the moment when High Alpha Capital participates in the round. So we're only going to put forward a company Out of studio and funded by capital. If we're really confident there's product market fit. And then at that time we bring other investors in as well. So the signaling we think is going to be a relative non-issue because we're only going to be putting our own money and, and bringing other capital together when a company is actually graduating from studio and ready to go. So another way to put it is we're, we're likely to invest in every one of our companies that come out of the high alpha studio.

AI assessment note: “we're likely to invest in every one of our companies that come out”

Q Scott, that gets me excited. Sorry. I love the topic of pricing and unique economics. So let's talk about that. The pricing elements Super interesting for me, because we often hear that SaaS founders always underprice, and B to B founders always underprice their products. Is that something you agree with, and do you always tend to err on the upper end of pushing your, pushing your limits on ACV?

A Completely, completely. Most early stage SaaS companies under, underprice their offering, and I think it's maybe lack of confidence, or lack of enterprise experience, or, or understandably so, being timid about a small feature set That you're putting into the market. We try to work with our companies to not be afraid to sell product and services together or in the early days and put a bigger price tag in front of the enterprise. And that's often, that's how the enterprise will take you seriously. If you know, there's, let's say six figure or more proposal, it shows you have the confidence you're going to make a difference in their business. But for early stage entrepreneurs, I think that that is a common mistake. I also think that's perhaps a lack of experience in selling solutions to the enterprise. These large organizations have Very, very large IT budgets. And if you can meet, move the needle for them from a productivity perspective, you know, the rewards are great. Harry, it's one of the elements I absolutely love about the software as a service business model is that gross margins tend to be very high. The incremental cost of bringing a new customer on board is very, very low. So pricing literally comes down to your ability, your ability to prove and deliver value and, and really show that ROI. That's, that's the only thing that pricing comes down to. You know, back in our…

AI assessment note: “Completely, completely. Most early stage SaaS companies under, underprice their offering”

Q And as you said, you did that. And I do want to discuss then the acquisition by Salesforce. Uh, incredible experience, but what was it like then to work directly for Mark Benioff, the hailed Mark Benioff?

A Yes, yes, that was, uh, it was a wild experience. It was an incredible experience. So I reported directly to Mark and was a part of his executive leadership team, and that was incredible. I felt like that was my PhD in cloud computing, software as a service, and I learned a lot. So Mark, as we all know, is an extraordinary visionary, speaks often about having a beginner's mind, being very curious, and being a Very thoughtful about what's happening in the future and making sure that Salesforce gets there first and that their customers get there first. What most people may not know is he's actually an excellent manager. He's very focused, kind of widely reported. Salesforce uses the B two mom framework, which is a great business planning framework for prioritization and focus in the organization. But he's also, he's also just a terrific kind of blocking and tackling manager. So we'd have, we'd have weekly one-on-ones, And we'd focus on what was most important. And he'd always encourage me actually just to focus on my top three priorities. And that's really where we channeled all of our discussion around the three top priorities for all the marketing cloud. And that, that focus and prioritization was, was really terrific. So it was a great experience. I learned so much within Salesforce. I also learned that Salesforce, their success is not an accident. You know, there is a level o…

AI assessment note: “we'd have weekly one-on-ones, And we'd focus on what was most important.”

Q Scott, that gets me excited. Sorry. I love the topic of pricing and unique economics. So let's talk about that. The pricing elements Super interesting for me, because we often hear that SaaS founders always underprice, and B to B founders always underprice their products. Is that something you agree with, and do you always tend to err on the upper end of pushing your, pushing your limits on ACV?

A Completely, completely. Most early stage SaaS companies under, underprice their offering, and I think it's maybe lack of confidence, or lack of enterprise experience, or, or understandably so, being timid about a small feature set That you're putting into the market. We try to work with our companies to not be afraid to sell product and services together or in the early days and put a bigger price tag in front of the enterprise. And that's often, that's how the enterprise will take you seriously. If you know, there's, let's say six figure or more proposal, it shows you have the confidence you're going to make a difference in their business. But for early stage entrepreneurs, I think that that is a common mistake. I also think that's perhaps a lack of experience in selling solutions to the enterprise. These large organizations have Very, very large IT budgets. And if you can meet, move the needle for them from a productivity perspective, you know, the rewards are great. Harry, it's one of the elements I absolutely love about the software as a service business model is that gross margins tend to be very high. The incremental cost of bringing a new customer on board is very, very low. So pricing literally comes down to your ability, your ability to prove and deliver value and, and really show that ROI. That's, that's the only thing that pricing comes down to. You know, back in our…

AI assessment note: “Completely, completely. Most early stage SaaS companies under, underprice their offering”

Q And you mentioned there that you will Uh, when they have product market fit, I'm intrigued for you having seen the success of so many incredible businesses. What does product market fit look like for you in those early days? Is it, is there a certain milestone or, or kind of quantifying factor that you can use to determine it?

A You know, we, we look at customer conversations being very important. So even before we decided to green light a new company, we were looking for 25, 30, 40, 50 customer conversations to really validate that we're solving a true problem. And that we're solving a problem that can move the needle for that business. And that could be driving incremental revenue. It could be saving money and lowering costs or hopefully both. I mean, that was really one of the beautiful elements of exact target is that we were a digital marketing platform that was not only driving more revenue for our customers, but it was also lowering marketing expense. So on the ROI element, if you can, if you can do both drive more revenue and lower costs, you know, that's, that's pretty magical. But with our new companies, we're looking for Many, many customer conversations validating. There's a true market need. The problem we're solving is meaningful and actually difficult. You know, we'd like to run to complexity. We like to run to difficulty. We want to solve difficult problems that help enterprises run better. And then the proof of the pudding comes in. Can you build the product that customers are willing to pay for and willing to pay a significant amount for? And we look for, you know, early revenue traction. We look for early customer traction. You know, those are some of the elements that go in to say, …

AI assessment note: “looking for 25, 30, 40, 50 customer conversations to really validate that we're solving”

Q Can I ask, is your dream then kind of the complete interdependence from the core tech ecosystems and have kind of 10 fantastic VC firms around you who could support your entrepreneurs with the capital requirements that they need. Would that be the ultimate vision?

A That's a great question. I might, I might position it slightly different for sure. I would like to see more scale of capital in the Midwest. We have drive capital in Columbus, which is excellent and a great team. They're putting meaningful capital to work in the Midwest, but really outside of drive, we have very little scale of capital and that makes it more challenging for our company. So, Yes, I would love to see more capital in the Midwest. However, that connectivity, you know, into the tech ecosystem and down in Austin and in Boston and out in San Francisco, that's extraordinarily important as well. So as surprising as this might sound, we've also been putting a lot of energy into making sure we have nonstop flights and just strong connectivity, you know, out to San Francisco and other, other parts of the country and other parts of the world, because we're in such a connected world, we need to be a part of that tech ecosystem on a global basis. And break down every barrier we have to serving on boards, developing partnerships, finding new customers. So we think about, I'd say, I think about those two components. One is capital, and second is just connectivity.

AI assessment note: “I might position it slightly different for sure. I would like to see more scale”

Q terms of the studio itself that we talked about kind of product market fit, it's often a topic that many founders come to me citing they either have a problem with or they, they don't know whether they've got it. I'm intrigued having seen a couple of cycles with the studio now, What are the really common challenges that your companies face when they're looking to graduate out of it?

A Oh, absolutely. You know, and just kind of expanding a product market fit. Often we start or our, our co-founders and entrepreneurs start by selling to, you know, friends and colleagues. And that's a good place to start with friendly customers that are going to be patient. They understand, you know, what early stage product and MVPs are all about. You know, they want to have a big voice in shaping your roadmap and being a part of your company's success. But when you know you have product market fit is when you start selling organizations where you have no prior relationship, you know, they're, they're not friendly. So, so I think that's another important dimension. Some of the biggest challenges for our, our early companies and many others, you know, that I see throughout, throughout the country, certainly funding is a challenge. And that's one element of the high alpha model. That's really quite beautiful is that we're able to really minimize the distraction in the amount of time these early stage companies need to go through and fundraising and But perhaps more important than that, it's just momentum. It's momentum in hiring a world-class team, momentum in getting early customers on board, getting ARR ramp, getting buzz, getting that go-to-market model, uh, really clicking. So I think, you know, momentum getting that flywheel spinning is super important. I would say another b…

AI assessment note: “Some of the biggest challenges for our, our early companies... funding is a challenge”

Q And you mentioned there that you will Uh, when they have product market fit, I'm intrigued for you having seen the success of so many incredible businesses. What does product market fit look like for you in those early days? Is it, is there a certain milestone or, or kind of quantifying factor that you can use to determine it?

A You know, we, we look at customer conversations being very important. So even before we decided to green light a new company, we were looking for 25, 30, 40, 50 customer conversations to really validate that we're solving a true problem. And that we're solving a problem that can move the needle for that business. And that could be driving incremental revenue. It could be saving money and lowering costs or hopefully both. I mean, that was really one of the beautiful elements of exact target is that we were a digital marketing platform that was not only driving more revenue for our customers, but it was also lowering marketing expense. So on the ROI element, if you can, if you can do both drive more revenue and lower costs, you know, that's, that's pretty magical. But with our new companies, we're looking for Many, many customer conversations validating. There's a true market need. The problem we're solving is meaningful and actually difficult. You know, we'd like to run to complexity. We like to run to difficulty. We want to solve difficult problems that help enterprises run better. And then the proof of the pudding comes in. Can you build the product that customers are willing to pay for and willing to pay a significant amount for? And we look for, you know, early revenue traction. We look for early customer traction. You know, those are some of the elements that go in to say, …

AI assessment note: “those are some of the elements that go in to say, okay, we're onto something here.”

Q terms of the studio itself that we talked about kind of product market fit, it's often a topic that many founders come to me citing they either have a problem with or they, they don't know whether they've got it. I'm intrigued having seen a couple of cycles with the studio now, What are the really common challenges that your companies face when they're looking to graduate out of it?

A Oh, absolutely. You know, and just kind of expanding a product market fit. Often we start or our, our co-founders and entrepreneurs start by selling to, you know, friends and colleagues. And that's a good place to start with friendly customers that are going to be patient. They understand, you know, what early stage product and MVPs are all about. You know, they want to have a big voice in shaping your roadmap and being a part of your company's success. But when you know you have product market fit is when you start selling organizations where you have no prior relationship, you know, they're, they're not friendly. So, so I think that's another important dimension. Some of the biggest challenges for our, our early companies and many others, you know, that I see throughout, throughout the country, certainly funding is a challenge. And that's one element of the high alpha model. That's really quite beautiful is that we're able to really minimize the distraction in the amount of time these early stage companies need to go through and fundraising and But perhaps more important than that, it's just momentum. It's momentum in hiring a world-class team, momentum in getting early customers on board, getting ARR ramp, getting buzz, getting that go-to-market model, uh, really clicking. So I think, you know, momentum getting that flywheel spinning is super important. I would say another b…

AI assessment note: “another big challenge is pricing and packaging.”