Cracking Categories: Interview with Tom Gonser, DocuSign Founder

by | May 10, 2018 | Business, SaaS Founders, Technology

DocuSign began trading on the Nasdaq at $38 per share on April 27, 2018 after being priced at $29 per share the evening before its public debut. By the end of the trading day, DocuSign shares had hit an intraday high of $40.69 and secured a market cap of $4.4 billion—over one-third higher than the $3 billion valuation received following the company’s last private round in 2015. Today, DOCU is trading 28% up YTD around $52 per share, and has pushed its market cap to more than double its last private valuation, at $8.43 billion.

Founded in 2003, DocuSign is one of several major tech companies to go public in 2018. The first half of the year alone saw Dropbox, Spotify, and Carbon Black IPO, followed quickly in H2’18 by the likes of SurveyMonkey, Eventbrite (which grew 60% in its first trading day) and Tencent Music (one of 2018’s largest IPOs) begging the question: what does it take to build a SaaS company to IPO?

Tom Gonser, the man responsible for the idea behind DocuSign, needs little introduction. After founding the company, Gonser served on the board until July of this year, when he steppend down to focus on early stage technology company investments. Despite his success, Gonser maintains the profile of the resourceful founder—hands-on, engaging and ready to take on anything himself. DocuSign began as a document signing platform, and under Gonser’s supervision evolved into a cloud based storage and communication solution, housing documents and facilitating communication around various legal processes. At the time, Gonser envisioned the creation of a full-service platform as the USP that would drive the product’s success in the market. His fascination for the internet and the notion that it could be more than just a marketing platform drove him to the success he enjoys today.

Gonser’s career has been marked by a drive to fix broken systems, inefficiencies in markets and lapses in communication. Indeed, each of the businesses he founded created a new category in tech most notably: NetUpdate in their point-of-sale mortgage-origination technology and DocuSign in its creation of a B2B e-signature cloud storage and communication solution. Gonser leverages this experience in his role today at Seven Peaks, where he advises early-stage startups with what he calls “the unfair advantage.” In an exclusive interview, Gonser details his experience founding and growing one of the world’s most successful document signing platform, and what it takes to be truly successful in the field of SaaS.

What initially attracted you to the enterprise SaaS space? 

So, a long time ago, let’s say late 1990s, I saw the web as something ahead of what most people were thinking at the time. People were looking at the internet as a marketing vehicle, advertising and communicating that way. I saw something different. I realized, “actually, we’re all going to be on the same wire.” I thought the internet would be an amazing platform to create a communication system between a business and their customers; a business and another.

At that time CRM was really not in the cloud yet, and I felt CRM was inside out. I take this tool and I write down everything about my customer, but my customer is not connected to it at all. They can’t see it. They can’t update it. And so, starting with founding NetUpdate in 1998 I’ve been working on creating these platforms for more efficient business communication by allowing the communication to happen through the web. You were on the board of Net- Update when you left and decided to focus on DocuSign.

How did you know that DocuSign was the idea you wanted to run with?

When the market collapsed in 2000, NetUpdate had to make a tough choice. Like, “we need to shrink. We need to refocus.” The company effectively became an online mortgage origination platform, which wasn’t that interesting to me given I was trying to build something a lot bigger. That was a perfect time for me to exit that business and start focusing on making the electronic signature process actually work online. There were a bunch of companies that were trying to do that at the time, but they were all doing it wrong.

I literally sat up in bed one morning and I had an idea that turned the existing processes that people were pushing inside out. Back then the solution for an electronic signature was, “I get a certificate. You get a certificate. I have software. You have software. I encrypt a file and email it to you signed. And then if you can work off this or in the certificate, you can encrypt the file and sign it and email it back.” That’s a mess. It doesn’t work. It wasn’t scaling.

The big “aha” was, rather than moving the files around the internet, let’s just keep them in a server, and have people come to the files as opposed to the other way around. I can deliver that entire experience just through a web browser.

At that point it became something that I knew was inevitable—and I love inevitability. There are a lot of things you can think of in the world and say, “that’s not efficient. Given the pace of technology, I guarantee you that will change.” And people running around, shoving paper into envelopes, sticking them on planes and flying them across the country for $80 to get another person to scribble and then send it back across on a plane, and then scanning the whole thing into a database, was so obviously broken.

You’ve talked about the zero-to-one period being your favorite phase of a company’s lifecycle. How did you develop personally as DocuSign scaled significantly past ‘one’?

First of all, starting a company is the most terrifying thing you can possibly do, but also the most fun thing you can possibly do, especially when you’re doing something totally new that hasn’t really been done yet. Zero to one obviously refers to starting a company that does something that hasn’t been done before. So, it’s all new, off the ground. And that brings with it a whole set of unique challenges, because you can’t pattern your pricing like someone else did—because there isn’t an existing pricing structure like that.

Your go-to-market doesn’t have a pattern. If you’re the first one, you’re inventing as you go and taking all the arrows. So, there are many lessons learned through the journey of starting several companies. One of them I think is important is that you’re in this pressure cooker trying to get something going, and well, what’s really true is it’s never as good or as bad as you think it is. I mean, some new company will make an announcement, say, that they’re doing what you’re doing in your space and they’re backed by IBM. You might get a feeling like, “I’m going to melt down now because we’re going to lose, and this is a bigger company.”

Not true. It’s something to watch, but it’s not that bad. It’s actually good to have competitors. Likewise, landing a big distribution deal with some company and thinking it’s immediately going to make you $1 billion… Maybe temper how great you feel about it, because things can go wrong. You don’t ride the rollercoaster all the way to the top or the bottom.

The other thing I learned, I think—actually, in the last, I’d say five years because it’s really become the science around these platforms—is how vitally important data is. For the first few years at DocuSign, we weren’t very well instrumented in terms of user data and system data. But the insights you can get by well-instrumenting your applications are amazing, and we started seeing it. I thought, “how do we get here without knowing this information?”

And so, from now on for any company that I advise on, I just dashboard the hell out of everything. Because it provides you insights that you really need to know, and it makes you rely a lot less on gut estimates to create your strategy, and a lot more on data. This is super important, and possible with a SaaS platform.

Right. And that has proven true for you, I’m assuming?

Absolutely. It totally changed the way we’ve made decisions, and it increases accuracy. You end up not being wrong because of a gut decision. It doesn’t mean you never make a mistake. It just means the chances of success go up. The last thing I think is important is really knowing as a person where your business passions are—and taking stock of where they’re not. Not everybody likes to do everything. When you start a company, you have to do everything, because there are not a lot of people around. As the company grows, however, it’s important that you put yourself into a role in the company wherein you have the best chance of making an impact, as opposed to, “I’m going to do this role because I want the title,” or, “because I think I should.” I don’t like details. I’m the last person you want trying to do the books at the end of the month Not me. You need to be honest with yourself about what you’re focused on. In my case, DocuSign is the fifth company I’ve started. I decided I’m very passionate about the product-market fit, digging into that and getting it right. I am not as passionate about doing the day to day operational company stuff. So, it’s probably not a great fit for me to be COO or CEO.

In the DocuSign project I have always brought in those roles to complement my focus on the product.

Going back to data points, what metrics would you say are the most important, if you had to pick a few?

First of all, every business is different. There are going to be some things that are specific to a business—their own internal magic number on how their product is performing. And it might be usage. It might be churn.

Typically, there are going to be four key metrics in a SaaS business. This relates all the way back to the time I spent at McCaw Cellular when we were building the wireless data industry, really. It’s actually amazing how alike the cellular industry early days were to the SaaS industry, because with a cellphone as long as the service is good, you’re going to stay on as a customer. Likewise, if it’s not, you’re going to churn. It’s the same thing with a SaaS product. So, the four underlying metrics that seem to be common across all these are: revenue, users, usage and churn. Those are sort of the big four that every company should have a handle on.

And then there are some very specific ones that will be tailored for your business. A lot of them should have to do with engagement. For example, at DocuSign there are a few metrics that observe a new company coming on the system. If they don’t do three particular things in a certain period of time, they are highly likely to disengage and churn.

Keep your eye on those things that a successful customer will do, and then optimize the product and the sales process to support getting each customer to that point.

What would you say was the tipping point for DocuSign?

It’s funny. When people see, “wow, it’s amazing. DocuSign just took off and it’s incredible.” It’s like, “not really, no. We’ve been at this for a long time.” There were several tipping points as we built the business.

One of the first ones was in 2005 when we answered the question around how we get distribution to happen, because you can have a great product, but if you have no efficient way of getting it into a market, it’s pretty tough going.

We actually had a partnership with the largest forms provider in the real estate industry that embedded us into what amounts to about 60% of the US residential real estate users. All of a sudden we were pushed out so that right next to the print button was a DocuSign button. That really shifted our strategy. For one thing, we thought, “Jeeze, there’s lots of platforms out there with large user bases that need to make an agreement happen.” That partnership strategy became a very core part of DocuSign.

Another one came in 2007, which involved figuring out direct sales. We really needed to flesh out the SaaS sales process, and we bumped our head a lot getting there, but we finally figured out the recipe for the right personnel, the right approach, and the righ sales engagement strategy.

Once we had a model that we could replicate, we could say, “We know if we bring on a sales person, they can achieve their quota in this period of time, which will be worth this much.” Then you can start forecasting your business a lot better.

Finally, in probably 2008/09 we spent a lot of time listening to our customers and became aware that signing isn’t actually the problem.

That was a big deal for us. First off, signing is the reason a business process didn’t get automated, but it’s not the solution. If all you allow users to do is sign, then you didn’t really help someone completely digitize the process. It became apparent to us that we needed to make this entire digital conversation and the transaction happen—on our platform. It’s really a system of agreement, as opposed to a signature tool. So, rather than replacing overnight express envelopes, we’re now creating an entirely new platform that accelerates business transactions, which is a much larger market with a much larger impact. There are a lot of ways we might look at it. The company could tell you, “we can at least see our way to $25 billion right now, and the market might be 5% penetrated.”

But I’m a big thinker, so I look at it and say, “I think if we could improve the global GDP by only 1%, that’s $800 billion.” So, if you really just think about transforming us from a paper manual process to a fully digital one, it’s an enormous impact. I would argue a lot more than 1%.

In light of DocuSign’s recent IPO, how do you expect the company to change now that it has gone public? Was this always the vision for the company?

Of course—you always start with the huge vision that you could create an independent company. I can’t comment specifically on the IPO, but I will say that DocuSign has been operating like a public company for about the last four or five years. We tend to believe that IPO is a funding strategy, but it requires a company to be a little bit more buttoned up than when you’re completely private.

It was important for us to actually start operating like a public company, closing the books on time, doing quarterly reports on performance, providing guidance to our own internal teams.

It won’t be a huge shift for the company as it sits today to be in the public eye. There’ll definitely be some things that will be different. If you have a strategy that’s difficult to explain, you’re now going to have to explain it to the public market. So there won’t be a huge cultural shift in that case.

Along the same vein, what inspired you to join Seven Peaks rather than build a new company?

Well, I’ve started so many companies. I’ve done a lot of stuff. I really enjoy it. But at this stage I want to focus on helping early stage technology companies get off the ground, as opposed to doing it again myself. It’s the best of both worlds.

I’ve been really fortunate in my career to be involved in lots of category-creating companies. I was at Apple in the early days. Not super early, but the company was the only graphic user interface and really the leader in that space. I was early with McCaw Cellular when we created the first mobile data devices in a completely new category. And then DocuSign, being the first cloud-based electronic signature platform. So, I’ve seen category creations from a lot of different angles and learned a lot about what it is and what it isn’t. Seven Peaks allows me to find that next mind-bending unicorn that’s got this crazy idea, a crazy category.

I get behind them to help them not make the mistakes I made. You of course make lots of mistakes when you build companies. In deep risks there are strategies. The investment philosophy we have at Seven Peaks is really very different than that of a typical venture fund. We’re all operators and really focusing on what’s operationally required to help a company get out and hit their stride. Our game is not, “We’re going to make 30 investments, and five of them will fail and five of them will be successful, and there’s the middle, and we only care about those folks.” We are much more roll-up-the sleeves, actively involved, but not running things by any stretch. The team has to be strong. If you’re starting a company and feel like it’s a category creator, we want to talk to you.

Part of our investment thesis is, if you can’t slide there with one hop from Redmond, Oregon—which is the middle of the West—then it’s too far away because we’re going to want to be able to jump on a plane quickly and go sit down and talk about whatever strategy we’re working with.

Is there one thing that you look for in these category creators that you’re seeking out?

Well, first of all you can’t say it too much: it’s obviously people. You need the right people, the ones who are fundamentally engaged in making it happen and who won’t quit.

But there’s another one that I really like, and that’s what I call the unfair advantage. I love it when I run across somebody who’s starting something because they were working in or around that thing before and they noticed there was a hole, an inefficiency, something wrong that wasn’t being taken care of. That gives them an unfair advantage because they’re seeing something ahead of the market, and they’re able then to come into the business with a different perspective. We’re not really investing in technology. We’re investing in new business models.

Those new business models come from someone who’s able to understand a new technology, whether it’s blockchain or AR or machine learning or whatever, look at that technology in the context of some big market segment and say, “If I apply this technology in this way, I can solve this problem and create something that might be 10 times more efficient, 10 times cheaper, 10 times faster than what’s currently happening out there.” That’s where you create amazing value. The big incumbents can’t react to that because it is so far off. They can’t just lower their cost by 10 times or just go 10 times faster, so they have to do one of two things: do nothing and hope for survival, in which case you create a giant company (see what Uber did, for example). Or they buy it. From an investment philosophy perspective, those are two great outcomes.

Where do you think there is a most exciting SaaS hub right now?

There are a couple of answers to that. One is, I think the most exciting SaaS hub is your home town. I think you don’t need to move to Silicon Valley anymore to start a great SaaS business. You just don’t need to do that.

As a matter of fact, the founders of Google will tell you not to do that because it’s really hard to compete for folks in the Bay area, and they’re going to steal the best engineers and pay them a lot of money. We think over the lifetime of the business it might cost up to $10 million more to get something off the ground in a more expensive town as opposed to a more cost-effective town.

We really like the idea that you could start a fantastic SaaS company in these secondary markets. For us that’s Phoenix, Portland, Salt Lake, Seattle and Austin. Various range of size there, but as long as the market has some tech businesses in town, has some good university infrastructure and some venture support, there’s the right recipe to create an amazing business, and in a much more cost-effective manner.

This “Rise of the Rest Strategy: West Coast Version” is what we’re really executing. If I had to pick one of those cities as a SaaS center where I see a lot of amazing stuff happening, it’s actually Seattle. That’s where DocuSign came from, and there’s just a lot of amazing stuff happening in Seattle Southside.

Lastly, if you had to become the CEO or a board member of any other public SaaS company, which would you choose?

If I had to become CEO of another company, I think Atlassian‘s got an amazing model. I love the efficiency of their go-to market motion and the breadth of their offerings, and I think they’re having a huge impact.

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