In response to “TechCrunch-gate,” worried I would never again be in the good graces of Silicon Valley kingpin Michael Arrington, and completely cognizant that I had no clue what I was doing with the press, we hired a marketing pro in San Francisco to help us with introductions and advice. He was a very helpful guy, and the next time I saw him in San Francisco he scored me a ticket to the TechCrunch August Capital Summer Party.
The event, which had become legendary, had been held for several years in Michael Arrington's backyard in Atherton, California. I had read the over-the-top stories on the blogs—how this was the event where deals were made, where companies were founded, invested in, and acquired. I'd also read about how people passed out and how the police were called. It sounded like fun.
The party had grown so big that it was now held on VC firm August Capital's giant outdoor deck on Sand Hill Road in Menlo Park. I had never been to Sand Hill Road. I knew it was renowned, but didn't know what to expect. By this point I did know that I didn't know anything about how the Valley worked.
I had been in the city a few days for meetings and drove down to Sand Hill Road. This was the first time I really experienced the climate difference between San Francisco and Silicon Valley. San Francisco had been cold and foggy, but thirty minutes south on 280 it was 20 degrees warmer, and in the gardens, hummingbirds flew around. When I arrived, the event organizers gave out name tags, and on mine I just wrote ZENDESK in giant letters. As I waited in line, I ran into a VC I had met earlier that day, and we went into the reception together. The minute I walked in, before I made it to the bar or ate an hors d'oeuvre, people started coming up to me.
“You are at Zendesk?”
“I use your product!”
“We love your product.”
“Great product, man.”
Completely unbelievable. (The VC I was with asked me if I had rigged it.) This was such a new experience for me. All of these very cool companies knew about us, and a bunch of them were using our product—and liked it. We were having a different kind of conversation about product from the one I was accustomed to having. I felt like they could relate to me and I could relate to them. I was amazed that here was a group of people taking us seriously and giving us real recognition that we were doing something right. It was the first time I felt we were making an actual impact.
For me, the TechCrunch August Capital party was like the classic ending of a storybook. I felt like the beautiful sister who never knew she was beautiful! Or the ugly duckling that grew up and realized it was a beautiful swan. I never had high hopes, but then suddenly, I received all of this validation from the right people, and it changed everything.
In Copenhagen we were always the odd men out; now I had found so many like-minded people. I felt like this was family. I felt like I was coming home. I was so in love with San Francisco. And I started to think about it as the place where we needed to build our business—and the place we needed to call our home.
We used some of the seed money proceeds to recruit an initial team—although it was very much on the cheap. We invested primarily in the product. We scouted some engineering help from freelancers, including a few guys in Argentina and Ukraine. Two of these guys are still with us today: Mick, who now works out of the San Francisco office, and Anibal out of Córdoba in Argentina. In many ways our hiring was very random. We have people working for us in Argentina because Morten had spent a few weeks there on vacation. He liked the local talent and persuaded us to hire there.
I was in touch with my friends and former colleagues and let them know what was happening at Zendesk, what we were working on, and how things were going. Michael Hansen, the good friend who had worked at Caput until it imploded—and then still invested in Zendesk and helped us with the Buddha Machine—was now living in Hong Kong. Post-Caput he served in the Danish army, ran a diving business, and did some work building sales for me at Materna. He never really liked that work, though; he was not a big company guy at all. For Michael, work has to be fun and “a good environment” or he quits. Literally. Early on I had tried to get him to pursue the startup idea with me. But instead of joining me, ever the traveler, he moved to Australia.
Now he was in Hong Kong for his wife's job. She works in education quality control and as he says, keeps them “in the green.” Although he really enjoyed Hong Kong, the local job opportunities didn't include what he wanted to do. Michael was bored. And that was lucky for us. Michael asked what he could do to help. He's always been good at building teams and building a customer-centric culture. As you grow your business, it can become very easy to forget to be customer-centric. Michael always said that the more time you spend internally with a company, sitting around a meeting table facing each other—discussing, arguing, or agreeing with each other—the more time you spend showing your rear ends to your customers. It's simple, but there's a big degree of truth to it.
We needed somebody like Michael to stay true to our customers. And we needed somebody to get shit done. At this point we needed to reach our customers; we needed to be able to respond to them quickly. But even more important, we needed to be proactive and reach out to them during the product trial process and give them a great experience. We needed to help onboard them and then make them feel cared for and loved. Michael could do that. He hired a team of local guys, primarily students in Hong Kong, who helped onboard customers. We didn't have enough cash to give him a salary, but we covered his expenses.
The crew in Hong Kong were the first of what later became Zendesk's advocate group, helping customers pre- and post- the trial period. We called them customer advocates because they were supposed to be the advocate for the customers. They were on the customers' side. Today this is a very common practice amongst startups. If you engage early and personally with your trial customers, you will experience much better conversion rates. And this isn't just our best practice—it's our business; in many ways this is what we help our customers do themselves.
Another old friend from Copenhagen, Thomas Pedersen, had just quit his job in Atlanta, Georgia, and was now working as a consultant. We had a bunch of inbound requests from U.S. companies, where about two-thirds of the traffic came from, and we needed somebody on the ground in the right time zone to handle a lot of these requests. Thomas had a well-rounded background in everything from engineering to product marketing and sales, so he was ideal for managing a broad range of conversations that included everything from partner opportunities to sales calls and good old product support. We had worked in the same building when I was at Materna, and Thomas was one of the few people I had talked to about the Zendesk idea very early on and had kept in the loop on how it was developing. He provided solid advice along the way, which included telling us that Thank You Machine was a terrible name. Thomas had moved to the United States during this time, and we kept in touch on the company's progress until things got very busy and I went pretty dark. But when we needed help, Thomas was there for us.
Even after the seed round with Christoph Janz, we were still looking for investors. If you've never been in a startup this may seem odd, but when you're a startup founder you're basically always fund-raising. Building a company costs money, and the faster you grow, the more cash it requires. Of course, that's not the case for all startups—there are definitely examples of companies that have come a long way on their own positive cash flow—but the general rule is that if you optimize for profitability, you sacrifice growth. And for a startup, it's all about growth.
Being a SaaS company, and therefore technically a subscription business, makes the need for cash even more urgent. A good small-business customer would pay us something like $500 a month. Considering the expansion and upgrade profile of our customer base and our churn rate, we can calculate the lifetime value of this customer as something around $50,000. That's a significant amount and a good value customer, but the problem is that it will take us years—maybe many years—to see that total amount. The first month we'll see only $500, and that won't pay many salaries. So for a SaaS company it's all about reaching scale, and until you get there, you need cash.
We knew we needed money. But initially, we were pretty leery of American venture capitalists. Alex believed VCs would “eat us up and spit us out.” We didn't have any experience with them, so I too was concerned we might not be sophisticated enough for this system. But at the same time, in order to really take it to the next level, we needed to raise more capital. Of course there was still no investment industry in Denmark, so I started to meet with people in the United States.
I frequently flew out to California and the rest of the United States to meet our budding customer base, have business development conversations with potential partners, and meet with potential investors. It wasn't long before things really began to progress with one VC firm in San Francisco. We were close to constructing a deal.
I had just arrived back in Copenhagen when about a week later, in September, they asked if I could fly back to California to meet with them again. I was not excited. Another trip back was expensive, and it wasn't as if we were swimming in money. And there was another factor: I struggled with a fear of flying. I didn't feel the charm of traveling thousands of miles within hours and being above it all. Instead, I was always much more grounded in my own dread and anxiety. Of course, back then I always flew coach and chose the cheapest flights, bad connections and all, to save money. I'm not a small guy, and I hated being squeezed into that tiny tin can in the sky. I needed to sit by the window, and every bit of commotion disturbed me. I always turned to Channel 9, where you could hear the communication with the flight controllers, and I listened to this dialogue with rapt attention, feeding my own paranoia. I fought small panic attacks the whole way. Twelve hours proved a long time to be tense, and I arrived at the other end exhausted.
But of course, I got over myself and got on the plane to finish this deal. I was sure it was just a formality, and I was eager to get the papers signed and return home.
Now, in the very nice conference room of the quintessential brick-and-timber San Francisco office, the vibe was different from what I had expected. And the attitude was different from what I had experienced with the partnership before. There was more noise. Partners were squabbling around the table.
In the short time between visits, the world had changed. Mortgage lenders were closing, Lehman Brothers had collapsed, Merrill Lynch had failed. The air was charged with fear and uncertainty.
I gave my presentation, outlined the updated metrics they requested, and waited. There were no papers presented, no agreement determined. The partners said they would call me, and someone escorted me out.
I went back to the Phoenix, my favorite Tenderloin hotel with the affordable hipster rock 'n' roll attitude and free WiFi. And I waited in my room. Several hours passed. I knew they were not going to call. I went to bed.
I never called Alex or Morten to tell them. I didn't know what to tell them. And I couldn't let my own confusion and uncertainty get to them. I wanted to protect them and not disappoint them. My way of thinking had always been not to involve them before they needed to be involved. I didn't want to give them higher hopes. And I probably didn't want to make it more complicated than necessary.
Perhaps I should have shared more with them. But determination is always easier to share than doubt. When you're in the middle of it, it's not always clear what happens and therefore not always so easy to share.
I didn't talk to Mie either. I didn't talk to anyone. When these things happen you can't talk to anyone. People have all these questions, and you don't have any of the answers.
The next day I flew home, wracked with even more anxiety than usual. It was one of the worst flights of my life. I missed my connection in Seattle and was reluctantly rebooked on a middle seat in a packed Lufthansa 747 on a turbulent flight via Frankfurt.
As a startup founder, I blamed myself for things imploding. Something was wrong with the presentation. I should have done it differently.
Many years later I got the full story from the principal I interacted with at the VC firm, and who later became a good friend of mine. The partnership had had an epic fight following our meeting over whether or not they could make an investment in Zendesk. At some point my friend had stormed out of the conference room and printed out his resignation. They persuaded him to stay and later promoted him to partner. Unfortunately, he never got around to investing in Zendesk, but I know that he did buy stock in the IPO.
At the time, I didn't know it was all about the market and the craziness in the firm's portfolios. I didn't know that the VCs couldn't make new investments. I hadn't read the “R.I.P. Good Times” manifesto from Sequoia Capital. I didn't realize the impact.
Looking back, it's better that I didn't know. The economic crisis would continue throughout the following year, and if I had known, I would have been further terrified that it could destroy us just as the dot-com disaster had destroyed our previous companies.
At the time, all I knew was that we were starting all over again. And that was something I was still getting used to.