David Sacks is one of the earliest members of the so-called PayPal “mafia,” a group of PayPal employees who went on to unusual positions of influence and power in Silicon Valley.But his first startup after leaving PayPal, a genealogical site called Geni, didn’t exactly conquer the world.
Then in late 2008, Sacks launched his second company, Yammer.
The social networking service for businesses has since exploded, gaining more than 4 million users and 240 employees, and it’s tripling in size every year. It’s also fended off a challenge from the much bigger and more powerful Salesforce.com, and now has its sights on the corporate intranet market dominated by Microsoft’s SharePoint.
We caught up with Sacks recently at Yammer’s San Francisco offices. Here’s what we learned:
- Why PayPal spawned so many success stories. The company never hired professional recruiters or headhunters, so the founders hired people who resembled them in terms of scrappiness and smarts. Also, the company never believed conventional wisdom about what it could not do, and it failed a lot, fast. Some of the lessons learned, like to stick with visionary founders over “professional” managers, and to use platforms from bigger companies to spread virally, are now commonly accepted wisdom.
- If you want to disrupt, don’t hire people from the big boys. They tend to be too set in their ways and will come up with lots of reasons why trying new things can’t work. Of Yammer’s first 15 employees, none came from enterprise startups.
- Salesforce doesn’t scare him. After 11 years, Salesforce has about 2.5 million seats. After three years, Yammer has 4 million. Salesforce CEO Marc Benioff is noisy — and he was one of the first proponents of moving core software functions to the cloud — but it’s still basically a niche product for sales people. There’s plenty of room for Yammer and other enterprise startups to focus on other areas.
- Yammer plans to go public. Someday.
Here’s a full transcript, lightly edited for clarity.
Business Insider: How did such a small and relatively young company like PayPal spawn so many people in positions of influence and power?
David Sacks: Several things. I think first the people themselves were very good. The team. They were not recruited by headhunters or recruiters, there was this viral recruiting method. Most of the people in the company were recruited by Peter or Max, or by people who Peter or Max recruited. So Peter recruited me from Stanford, and then I recruited people I knew, and then they recruited people they knew. So it ensured that there was a much greater degree of uniformity, at least along certain dimensions like scrappiness, entrepreneurial spirit and talent.
Another part of it was, PayPal was a success but it very easily could have been a failure. Because we narrowly avoided failure multiple times, we learned a lot of the right lessons from success. If you fail too hard or succeed too easily, I’m not sure how much you really learn. One question is “Why hasn’t Google spawned more companies?” I think there’s a tremendous amount of success bias with a lot of these companies they hit a geyser early on, so then they’re just running around trying to capture the oil and cap the well. So I’m not sure how much they really learn.
And then because PayPal sold at the end of 2002, a lot of those lessons were really valuable. Blogging didn’t really start until 2005, so the stuff we learned wasn’t widely disseminated. Now there’s much less of a gap. For instance, when YouTube started, the way they got distribution initially was to embed videos inside MySpace, which is exactly the tactic that PayPal had used inside eBay, we embedded our auction logos inside of eBay auctions. Basically turning larger sites into involuntary platforms for our applications, we figured out that distribution model.
Now people get it. People understand the embed strategy. Companies want to be platforms now. EBay and MySpace saw PayPal and YouTube as parasites.
BI: Facebook is the exact opposite. They’re trying hard to become a platform.
DS: Yes, what Facebook did in late 2006 or 2007, that was really a transformative moment where sites stopped seeing third parties as parasites and now they try to encourage them.
There were lots of other lessons as well. We understood virality before anybody did.
So all these things have been written about extensively, you’ve got startup schools and Y Combinator and Quora. Now there are lots of places to learn this stuff. Back in the early 2000s there wasn’t.
One of the lessons we learned is that professional managers hired from the industries you’re trying to disrupt tend not to be very beneficial. This whole idea that Mark Zuckerberg should stay CEO of Facebook, as opposed to being replaced by a professional manager, that was one of the things we learned at PayPal early on. If you look at the PayPal companies, they did not try to replace the initial leadership with supposedly more qualified people.
Don’t hire people from the industries you’re trying to disrupt. They have too much ideological baggage about the way things have to work.
One of the ways PayPal was so successful is we did not know all the Visa and MasterCard rules we were supposedly violating. There were other companies who didn’t pursue what we were pursuing because they thought it’d be a violation of the rules. In fact, was it a violation of the rules? At most it was a grey area because Visa and MasterCard rules weren’t written for the Internet….
eBay certainly felt constrained — this may have been a rationalization after the fact for losing to a company they so clearly should have beaten — but they always said they felt too constrained with the risks and liability they could take on. PayPal was able to take on these massive liabilities because if the company didn’t work it was going to go out of business anyway so there was nothing to lose.
BI: How do you apply those lessons here at Yammer? Particularly in hiring — do you look for people who have never worked at big software companies?
DS: Yes. There’s a strong strand of consumer DNA in our company. Out of the first 15 people who started, none of them worked at an enterprise software company. I don’t think we hired anyone who had worked at an enterprise software company until last year. We came at it from a blank slate. What we’ve learned is there are certain enterprise functions we’ve had to backfill. There’s been this steady process of starting with a consumer mindset and then saying, “OK, we need an enterprise sales team. We need some enterprise marketing to back them up.”
BI: Do you find you need a big enterprise sales force to compete with the big guys?
DS: In the large accounts, yes.
BI: What’s your mix like, SMB vs enterprise?
DS: It’s quite a lot of both because of the viral spread. People ask if we target small businesses or big businesses, but we just let the virality fill the pipeline.
BI: Of the traditional software companies, who do you look at as a competitor? Is Microsoft a competitor with SharePoint?
DS: Not yet, not today. Microsoft just released SharePoint 2010, they’re generally on 3 to 4 year product cycles, so we’re not going to have to worry about a new version until 2013 or 2014. So we know what we’re going to be competing with for about he next two years. And SharePoint as it stands today is not competitive. We’re an enterprise social network. They’re kind of like … [long pause] … this programming language to build a portal. They’re not a portal, you have to program it to be a portal. We actually have a SharePoint Web Part you can lay on top of SharePoint to make it more social. SharePoint doesn’t really do social mobile very well and it’s certainly not very engaging. Most company intranets are a disaster in terms of usability, nobody goes there. Eventually, I believe the enterprise social network will replace company intranets, but we’re in a period where they can coexist.
BI: What about Jive Software?
DS: We’re on much more of a collision course with them. We’ve come at it from very different directions. Basically they were forum software, they’d sell companies the ability to build a forum, an external forum where they could talk to their customers and things like that. And then they kind of repurposed that tool for internal collaboration. The problem with that is, forum software is 10 year old software. It was written well before social networking existed….Where Yammer’s come at it is, our mission has been to bring social networking inside the workplace. It’s a secure, safe solution. Both of us are converging on solving the same need, which is the need for better collaboration inside companies.
BI: Obviously Salesforce is making a big play for your space now with Chatter. Marc Benioff is going out and talking about the social enterprise all the time. Has their entry affected you?
DS: No. Not by the numbers. Their rhetoric is way ahead of where their product is. The way we see it is it’s another free feed to bring into Yammer. So we brought it into our ticker. Have you seen our ticker that we recently launched?
DS: So Facebook, you saw it a few months ago, they launched this ticker on the right hand side, it shows you what your friends are listening to on Spotify, what they’re reading on the Washington Post, what they’re watching on Netflix, what have you. It’s a great discovery tool for real time what your friends are doing.
We’ve done something analogous in Yammer, but we’re showing you what your coworkers are doing in their enterprise apps. So we’ve launched with 10 ticker partners, including Salesforce. We acted alone doing this, but using Salesforce’s APIs we were able to bring their activity feed into Yammer. So we’re now a superset of what’s happening. You can now get the Salesforce activity stream, you can get activity from from Box, from SharePoint, from Zendesk, NetSuite, Badgeville, Spigit. So what we’re trying to do is we’re creating the superset of all your business activity feeds.
The direction we see it going is that every departmental app is going to add an activity stream. They’re going to surface what’s happening in the app. That doesn’t make them an enterprise social network, despite the rhetoric. It simply means their siloed departmental app is a little more social. We’re going to pull all this data into Yammer where it’s actually social and collaborative across the enterprise.
Where you can see this in terms of numbers. After 12 years as a company, they [Salesforce] have under 3 million seats using their product. They were at about 2 and a half million last quarter and then they stopped reporting it because Yammer blew past them. We’re just under 4 million verified seats after just 3 years as a company. What that reflects is they’re deeply siloed inside companies, it really is primarily a workflow tool for sellers.
BI: What’s your growth like lately?
BI: It seems like the whole enterprise startup space is exploding — you guys are growing, Box.net, Workday, tons of other companies. What’s driving this?
DS: Several disruptive forces are underlying all this. One is the cloud. That’s been around for a while, but now there’s greater acceptance on the part of enterprises of the cloud. Very few companies are now outright saying they’re not going to use cloud software. It’s gone from cloud is presumptively insecure to cloud could be secure but we have to dig into the details. So there’s much more openness to the cloud. In our case, the cloud has enabled an entirely new distribution model which is the viral spread of the product, you can sign up and invite your coworkers.
The second is social, the larger picture of social networking. Facebook has more over 800 million users. Social networking is the way many people want to communicate, it’s the most efficient means of many-to-many communication that’s ever been invented. That’s created demand on the part of employees to use this type of communication tool in the enterprise.
Third is mobile, there’s demand for people to access this kind of data on mobile devices. The traditional enterprise tools don’t do that. I think that’s a really big factor in Box’s case, one of the reasons you want to put documents in the cloud is to get to them from any device. You really can’t do that with a behind-the-firewall traditional document management system. The same thing is true with all Yammer’s content, you want to be able to access it in feeds wherever you are.
Fourth is consumerization, which is the ability for the average employee to bring devices into the enterprise without waiting for IT to install that. You see that with not just Box and Yammer, but iPads and phones, that whole revolution. People started bringing their smartphones to work and said “I don’t care if you approve this or not, I’m going to use it.”
All four of those things are interrelated. The cloud makes mobile easier, the cloud makes consumerization possible. Social and mobile go together. Social makes all these solutions much more participatory and dynamic because you want to get that information in real time wherever you are.
BI: As these new enterprise startups get larger, you start to run into each other in the margins. We’re seeing it with you and Salesforce, with Workday adding financials, and so on. Is a shakeout inevitable? Are we headed back to a world with one dominant vendor, or do you think there’s a way for all these companies to coexist and even thrive together?
DS: I’d tend toward the latter view.
I don’t think there will be one cloud. There will be lots of clouds. If you’re in a world of on-premise software and you’re installing big iron behind your firewall, it all has to work together, it’s really cumbersome, hard to maintain, hard to install. All those reasons drive enterprises toward using one vendor. In that case it’s usually Oracle or someone like that.
Once you’re in the cloud, you pretty much have to create APIs to be successful. So you take the case of Salesforce, we can now extract their activity stream from Salesforce and bring it to Yammer, so why would you try to make everyone in your company use the sales workflow tool as their enterprise social network? The sales department might like that because they’re in the sales tool but the rest of the company does not want to go through Salesforce. It starts to rebalance things in terms of focus and usability, those types of issues become much more heavily weighted in a world where it’s not just about getting the damn thing to work.
A lot of companies now say that Yammer’s just going to become their company intranet. With their previous company intranet, they had to spend all their time just getting the thing to work. With Yammer it just works, and now they worry about things like driving engagement and innovation within the company.
That’s what all these cloud solutions will ultimately do. IT’s not going to have to worry about getting these things to work anymore, they’re going to be focused on driving innovation through their company. Somebody was saying CIO used to mean chief information officer, now it means chief innovation officer….That’s certainly what CEOs are expecting from their IT department.
So getting back to your original question, it’s going to be a world of multiple clouds. I’m sure Benioff would love to be like Oracle in the cloud, but if you look at their users, it’s not happening. And really, it’s a testament to Marc Benioff’s marketing genius that we even talk about Salesforce as this much broader type of solution. If you put aside how they describe themselves and look at it objectively, it’s a product that after 12 years has gotten two and a half million people to use it. Just describing it that way you think it would be a niche product. Now they’re a $15 billion company because the app is very close to revenue, they can charge over $1,000 a seat per year. So the company has a very high market cap, but if you were to look at it any other way, it wouldn’t even be an interesting product or company. It would be one of these companies like Autonomy or something where you don’t even know what it does.
BI: Well, Autonomy just got bought for $11 billion.
DS: It’s valuable because they’re close to revenue. [Salesforce] is a workflow tool for sellers.
BI: What about Google in the enterprise? They kind of started off hot with Gmail and Apps, but now their focus seems to be elsewhere. Are they a potential competitor?
DS: Every large internet company or enterprise company is a potential competitor, they certainly have the resources to get into our space if that’s what they decide to do.
Within PayPal’s first year we had tons of competitors. Every small startup that was doing something with payments looked at what we were doing and said “oh, that’s what we should be doing” and they tried to copy us. Then we had large companies, everyone from Citibank, they launched something called c2it, to Western Union, to Yahoo, and eBay itself, and then eventually Google. They all got into our space and tried to copy us, and they all found out that it was a lot harder than it looks. There’s a lot that goes into doing what we do that’s not completely on the surface. There’s a lot of advantages to a company focusing on one thing and doing it really well….Google has not had a tremendously successful track record getting into other people’s spaces once those spaces have been defined by somebody else.
BI: Are you planning to IPO?
DS: Yes. We aren’t thinking about it now, don’t know the timing yet, but that’s the plan eventually. People think this is an interesting question, but there are really only three ways you can go — do an IPO, get acquired, or go bankrupt.
BI: Or stay private forever, like Coupons.com.
DS: Or stay private, but not when you’re venture backed. Like Mark Zuckerberg recently said, eventually you have to pay back your investors with some kind of liquidity.