How to build a startup: 7 tips from Keith Krach

So, before you even wrote a line of code, you’re connecting with these customers and listening to all their problems. You’re building trust with them, and they become sort of like your beta testers.

Krach: Yes, although we never did betas. We created a corporate account program. Many of those original customers came from that 12-person group.

We said, ‘We’re only going to pick five companies to work with for this corporate account program. As part of this program you’re going to get a discount on the application. You’re going to have direct product inputs. We’ve got to make you successful. What you’re going to give us is that you continue to serve on the advisory council. We want you to issue a press release, write an article, gives us quotes.’

A lot of them wanted to do it, so we decided to make room for more.

How did you price it?

Krach: To be honest with you, we weren’t sure how to price it at the start. When we finally did do our own internal business plan, the only data on pricing was based on Cisco, because they were writing their own procurement system.

We found a couple other companies who had done this [for themselves], like SGI Sun and Tektronix. I asked them, ‘Why are you writing your own?’ They said, ‘The amount of money you can save is unbelievable. You can channel all this purchasing power, you eliminate maverick buying, and you can negotiate better deals.’ So, we asked, ‘Why don’t you buy it from some other company?’ ‘Well, none exists,’ they said.

So, we had three magnificent factors going for us. First, all the requirements were the same regardless of industry. That told us that it’s a horizontal app. Second, companies were doing it themselves because there was such a huge ROI. The third thing was that there was nobody else out there doing it — yet.

At that point, we knew we really had something. We had been thinking of starting our price at $100,000, but the strong ROI and the fact that companies wanted the solution so much they were building it themselves told us to go higher. We knew a lot of procurement people had authority to purchase up to $250,000, so we set the price at $245,000, and we knew we were still offering a great value.

So, we said to our advisory council, ‘Let’s meet next quarter, and we’ll show you the progress on the product we’re developing.’ That next quarter, we added 12 more people, so [the customer base] was at 24. And we did it quarter after quarter. It went to 50, 100, 200, 400, 800, 1,600 and 3,200 people. The next thing you know, it was 10,000 people. By then, we called a user conference, and we held it in Miami.

What year was this?

Krach: We started the company in September of 1996. Two or three quarters later, and we raised 6 million in a first round [of public funding]. Then, about a year after we started the company, I thought, ‘We need to raise more money.’ We had only spent $3 million of the money we had raised earlier, but my experience at Rasna taught me the best time to raise money is when you don’t need it.

When it came to valuation, we were in a great position. We had built the product in six months, and we got revenue. We charged our first customers, so we were cash flow positive from our second quarter of existence.

They asked, ‘How much do you think you can value [the company]?’ I said, half-joking, ‘$100 million.’ This is before big valuations started happening. So, we raised about $18 million in Round B. We had $21 million in cash in the bank, so that meant we only burnt through $3 million in equity. That’s equity efficiency. We went public, and our stock tripled or quadrupled the first day. We were $6 billion after two-and-three-quarter years.

Eventually, our valuation got up to $40 billion, because we were doubling revenue quarter over quarter for 12 quarters.