There are few people who understand the fundamental shift that’s taking place in the world of business software better than Lars Dalgaard. And if you think you’ve seen disruption, well, as he tells it, you ain’t seen nothing yet, because there’s more of the same on the way.
As the founder and CEO of SuccessFactors, a company he started in 2001, took public in 2007, and sold to the German software giant SAP for $3.4 billion in 2011, he has seen firsthand how software sold as a service can mess up the best-laid plans of old-school software that companies run on their own hardware.
SuccessFactors turned out to be the first of a string of cloud software acquisitions by SAP, but it laid the groundwork for an attempt at a massive pivot by SAP away from its traditional software business and toward software that runs entirely in the cloud. Dalgaard’s role was to inject some life and color into the corridors of otherwise-sleepy SAP. At the time of the deal, Bill McDermott, now SAP’s sole CEO, told an interviewer he hoped that Dalgaard would inject SAP with the “adrenaline shot” it needed to propel its efforts to grow into the cloud.
And that Dalgaard did, until suddenly he didn’t. He ran SAP’s cloud business, but suddenly walked away from SAP last year, marking the first in a series of management shakeups atop its cloud business unit. He then joined the venture capital firm Andreessen Horowitz as a general partner.
In the past year, he has led investments in four companies, including two rounds at Zenefits, a cloud-based human resources outfit. He’s also invested in Teespring, a custom t-shirt company, and a $40 million round for Imgur, a Web-based image-sharing company.
Re/code caught up with Dalgaard at AH’s offices on Sand Hill Road. My first question was about the recent shifts in the valuations of publicly held cloud companies.
Re/code: Lars, let’s start with the state of the markets: The valuations of the cloud companies have been swinging up and then down in recent months. What do you think is going on?
Dalgaard: It’s exciting, because when the market swings like this you always find out who is Lambeau Field and who is not, who is built for bad weather and who is not. … I’ve been through it twice myself, once in 2001 and once in 2008 and both times it was fantastic. It’s a great chance to grab market share and a great chance to find out which companies you can buy, and which of your competitors is truly weak and who is living on borrowed time. As a venture capitalist, scoping the whole market in terms of what companies are worth, I think that very selectively you get better chances to pick markets and opportunities. I have a little more kick in my step these days. It’s extremely easy when things are all the same and there are no issues in the market, and at times like that bad companies look just as good as truly good companies.
What about the public cloud software companies in particular? Their valuations spiked early in the year and then fell pretty dramatically, and that included the bigger, established ones like Salesforce.com and Workday. What’s happening?
If you look at it over time, they’re still significantly up. That’s overall the main trend. That is what matters most. You’re right, it’s a serious correction. I don’t want to say things have come full circle, but it’s clear that investors probably had a moment of flight to safety as opposed of being willing to trust all the impressive upsides. It’s been impressive to see how Salesforce has held up. It has corrected too, but it hasn’t come down as far as it was in July of 2013. So it does seems like certain companies are getting a bigger correction than others. I think it’s all part of the maturing of the cloud applications market. People are beginning to pick their favorites. … If you look at Salesforce’s five-year stock history, the positive story is stunning. It’s coming up on having been public for ten years, it has been an unbelievable stock to have been a part of. But it’s good to see investors be a little more critical in who they believe in.
So what does that mean for cloud software startups, of which there are now so many?
I think it sharpens and strengthens the companies that are thinking about being public. Even the newest and freshest companies that have just raised money, they will definitely feel the pressure of Wall Street wobbling. To me that’s a good thing, because you sort out the serious contenders from the pretenders, and that is seriously important to me. I don’t want to spend time with the pretenders, and some of the pretenders are very good at pretending.
If the cloud software market is reaching a more mature point than before as you say, does that imply that it is also ripe for some disruption from some of these new players?
Every time I see Salesforce doing an acquisition, I wonder what’s going on. You’re only serious about acquisitions when you’re having trouble growing your own stuff. There is a new generation of companies coming up that are extremely strong. And most of them are growing even faster than the companies we know today did at the same time in their life cycle.
Are you investing in any of them?
The biggest cloud disruptor that I’ve invested in is Zenefits. I’m almost scared to say this out loud but it has been growing at a rate of about 1,500 percent. I almost don’t want to say it. We never grew like that at SuccessFactors. And the funny thing is, customers can’t get enough of it. So there’s definitely a new wave of disruptors coming. There’s no doubt about it.
When you make an investment, what do you look for in a team?
If they haven’t failed at something, I find it hard to invest because I think they have too much yet to learn. I’ve invested in some that haven’t failed. In those cases, it’s important I think to inject some realism, some sense of how much of a slog it’s going to be. This startup game is not just for anyone. It has much higher highs than other professions, but the hardest lows, because you can lose everything. … Second, I think that founder CEOs are massively undervalued, and it has to do with this fake humility that we introduce because of this idea that CEOs need to be humble. Yes, they need to be humble, but if they’re not confident in their own convictions, that’s a big problem. They have an unnatural understanding of the company and they sit in a position that no one else sits in. They see things that a board member will never see, that the CFO will never see, and they see it every day from the birth of the company. So CEOs should trust themselves much more than they do. But they don’t because it’s perceived as being cocky or arrogant. It’s not that they shouldn’t listen to their teams. They should listen to themselves, but then enrich that decision-making with what they hear around them.
Your last role was at SAP, and that company is going through a management shift where Bill McDermott is taking over as sole CEO. What do you expect from him?
I think it’s the most exciting thing to happen at SAP in the last decade. They have had this messed up reporting structure where nobody reports to anybody. It’s this German thing where I didn’t even report up to Bill myself, I was reporting to the Supervisory Board. That doesn’t work. It just doesn’t. I mean, the COO doesn’t report up to the CEO? It’s not a matter of power. It’s just that someone has to be the decider, and with Bill, now they’ve got a decider on the job, I can tell you that. I get texts from people every day telling me what that guy is doing, and it’s super-positive stuff. I know him really well and just had dinner with him, and he was very fired up in a way I haven’t seen him before. I think it’s the best move that company has made in 10 years, better even than buying SuccessFactors. … He’s been visiting some of the SAP buildings in the Valley that have never once been visited by a CEO of SAP, and he’s been walking the floors and drilling down. People have been saying, ‘what the hell?’ That’s something he never would have done if he was not really in charge. He has a sense of complete responsibility for the whole company.