Welcome to Episode 171! Chetan Puttagunta is a General Partner @ NEA, one of the world’s largest venture capital firms in the world, with over $3Bn in their latest fund and a portfolio including the likes of Mulesoft, Jet.com, Uber, Houzz, and many more incredible companies. As for Chetan, he focuses on enterprise software and has made investments in MuleSoft, MongoDB, Elastic, Heap, just to name a few. Due to his phenomenal track record, Chetan has been named to GrowthCap’s Top 40 under 40 Growth Investors, Forbes 30 under 30 All-Star Alumni List, and Forbes’ 30 under 30 in Venture Capital. 
In Today’s Episode You Will Learn:
* How Chetan made his way from the world of leveraged buyouts to the world of enterprise VC investing with NEA.
* Why does Chetan have such conviction with regards to open source companies today? Why does he feel the big question of “Can open source produce multi-billion dollar companies” has been proven?
* How does Chetan think about the underlying business models of open source when comparing the likes of Red Hat with 85% gross margin to Hortonworks at negative gross margins? What does Chetan believe is a healthy ratio between professional services vs closed premium features? Does Chetan believe this is the end for per seat pricing in SaaS?
* How does Chetan approach market sizing today when evaluating potential enterprise opportunities? Why does Chetan believe there is a mental trap in the VC requirement for large markets? How can founders present the niche market they are attacking, in an exciting enough way to satiate the investor appetite for large market?
* Chatan has said before, “If you have conviction and vision, you should not be afraid to raise capital and go big.” Does every founder not have conviction and vision in the early days? How does Chetan determine when truly is the right time to pour fuel on the fire and raise that mega war chest?
60 Second SaaStr?
* A moment in Chetan’s life that has changed the way he thinks about the world?
* Fave SaaS reading material?
* What does Chetan know now that he wishes he had known at the beginning?
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Jason Lemkin
Harry Stebbings
SaaStr
Chetan Puttagunta
Transcript
Harry Stebbings: We are back for another week in the world of “SaaStr” with me, Harry Stebbings. I would love to see you behind the scenes on Instagram @hstebbings1996 with two Bs. There, you can even submit questions for future guests coming on the show. But to the show today, I’m very excited. We spent many weeks on the operational side of the table.
Today, we return to the enterprise investor side as we welcome Chetan Puttagunta, general partner at NEA, one of the world’s largest venture capital firms with over $3 billion in their latest fund and a portfolio including the likes of MuleSoft. Jet.com, Uber, Houzz, and many more incredible companies.
As for Chetan, Chetan focuses on enterprise software and has made investments in MuleSoft, MongoDB, Elastic, and Heap, just to name a few. Due to his phenomenal track record, Chetan has to GrowthCap’s Top 40 Under 40 Growth Ambassadors, “Forbes'” 30 Under 30 All‑star Alumni list, and Forbes’ 30 Under 30 in Venture Capital.
I do also have to say a huge thank you to Heap’s Matin Movassate and MuleSoft’s Ross Mason for the intro to Chetan today without which this episode would not have been possible.
But that’s quite enough from me. Without further ado, I’m thrilled to welcome Chetan Puttagunta, general partner at NEA.
[drums]
Chetan Puttagunta: That’s perfect. I think we’re warmed up.
Harry: Chetan, it’s absolutely fantastic to have you on the show today. A big hand to prior guest Matin Movassate at Heap for the intro, but thank you so much for joining me today, Chetan.
Chetan: Harry, thank you so much for having me. The show that you’ve built here and the following you’ve built is truly remarkable. I’m personally a big fan.
Harry: That is very, very kind. What better way to butter me up for the interview? But let’s kick off today with a little bit about you and how you made your way into the world of SaaS investing with NEA. Let’s start with that.
Chetan: Look, I think it’s a similar story to a number of your other guests, which is that I’ve always had an interest in technology. I was an engineer in undergrad, Stanford here in the Valley, and met the NEA folks really starting around 2009 and got to know them over a couple of years and joined in 2011 primarily to see how I can bring value to the firm. It was a very organic process.
Harry: Absolutely. From MongoDB to MuleSoft, you’ve more than delivered value to the fund on that front. But I want to start today by breaking the interview up into a couple of different segments. I want to start on the rise of open source, then move to all things market sizing, and then finish on fundraising. How does that sound?
Chetan: Sounds perfect.
Harry: The rise of open source, unprecedented rise of VC funding towards open source projects, you said to me before that it’s the best way to build next gen infrastructure software. I want to start on that. Why do you have such conviction with regards to open source companies today?
Chetan: That’s a great question. I think that when I started in venture capital in 2011, the big question that venture capitalists had around open source was could you really build multi‑billion dollars or multi‑hundred million dollar revenue companies with open source technology?
There was a company there called Red Hat of course. But there hadn’t been examples beyond Red Hat. MySQL got taken out. SpringSource got taken out. There were all these great acquisitions, but never these great, big standalone companies. Fast forward to 2018, like you said, there are a number of public companies now that have built on open source.
If you just look at how the modern developer approaches problems, they’re focused on agility and the ability to try solutions out very, very quickly. The only way I believe to get in front of them and to get at the point when a developer is trying to solve a problem is having open source technology out there.
I think proprietary products, even if you have it in a free way or in a distribution where somebody can download it and try, I think it’s still not as attractive as a developer going on GitHub and seeing an open source project, pulling that repository down, and just playing with it.
I think that ease of use that we often associate with consumer products has become extraordinarily important in the world of development. I think the only way you can reach the vast majority of developers today is to be open source.
Harry: Can I ask is this a fundamental shift in the buying decision and pathway to buying decision in the way that developers interact with product?
Chetan: I think it’s changed over time. I think that if you just go back 20 years or even 30 years, a lot of architecture decisions were made top‑down. You were building monolithic apps. There was some head of engineering or CIO making these architectural decisions. It made a lot of sense to build enterprise companies where you’re selling directly to that CIO.
Today, I think we live in a world where everything is coming bottoms up. You have individual developers even amongst the largest enterprises working hard to build better product. They want to do it fast.
Harry, I think it’s something that we would all agree with. If you can do something faster, cheaper, and better, you definitely do that. Then with the advent of agile development and lean teams and scrum and all of these management techniques where you’re decentralizing management and enabling people to really shine, this bottoms up approach is the way to do it.
It’s something that’s really become mainstream more recently. But I think this is a trend that’s here to stay.
Harry: You mentioned earlier the ability to really build those mega‑businesses in the space. Going one layer deeper into the business model itself, we’ve got, in light of Red Hat with 85 percent gross margin and then Hortonworks with a negative gross margin, I’m intrigued. How do you think about the underlying business models and monetization strategies inherent within open source?
Chetan: As with any software category, you’re going to have quite a big difference in business models. You’re absolutely right. I think that Red Hat who’s been an established player for a long time has a very high gross margin and a very steady gross margin profile. I think if you look at companies like MuleSoft or Mongo, they also have really strong gross margins.
Like you mentioned, Hortonworks is I think probably very early in its development lifecycle in terms of where they eventually end up with their monetization strategy. I think that over time, you’ll see that evolve. Obviously, I don’t know the intimate details of Hortonworks because that was not an investment we were involved in.
But broadly in open source, you invest a lot upfront into the open source project. You get a lot of developer adoption. That’s what you hope for. Once that starts happening, then you can really start investigating your monetization models.
Like am I going to provide this open source product as a service and sell it like a SaaS? Am I going to provide this on‑premise where large enterprises are going to be able to manage and use this open source product in production? That’s more of an on‑perm term license business model.
There are also those that want to start in professional services and then transition to some kind of SaaS or term license business model. There’s a lot of different ways to approach it.
But I think over time, the journey comes down to are you able to build a sustaining business over time that eventually becomes profitable? First of course, you have to become cash flow positive. Then you become profitable. I think that’s the long term test for all these businesses.
Harry: In terms of cash flow positive and profitability, we’re seeing more and more focus from VCs and the VC class on capital efficiency today. How do you think about that and the right time to really start engaging with that as a core priority?
Chetan: I think, obviously, at a company level, there’s no need to do that at the early stages of company development. But certainly on a unit and a customer level, that’s something that we as a firm really encourage entrepreneurs to pay attention from the very, very early days. You can look at customer and unit economics as soon as you start engaging whatever your customer base is.
You can start looking at things like how much did this customer cost to acquire? How have they been ramping revenues? What’s my churn rate? What’s my expansion rate? What’s my upsell rate? What’s my days to close? How are they engaging with the product? How are they using the product?
How is the product itself spreading? Is the open source deployment model ahead of our pricing model or am I having to do both in parallel?
These unit economics and unit level understanding of these businesses is very critically important. It’s something that you have to pay attention to from the very start because to punt on a problem and say, “We’ll fix it when we get to 100 million,” much, much harder.
Harry: I’m intrigued. From your experience and portfolio of past successes, where do you see most people are having challenges in really engaging with this metric‑centered, capital efficiency so to speak?
Chetan: I think that entrepreneurs are naturally optimistic people. The hope is that given enough time that a customer will eventually become profitable, will eventually become a good business for you to serve.
I think that ahead of time setting those goals and time limits to say, “We’re going to see results in 12 months, 18 months, 24 months,” being able to set milestones for yourself and your team is critically important because that’s how you can stay intellectually honest.
When things are going better than expectation, obviously, that’s something that you can learn from and then take that and start developing a real playbook. When things are going worse than expected, you’re able to dig in and really understand what’s going wrong.
I think what really is a mistake is having these ever‑moving goalposts. Every three months, you move the goalpost further out. You’re never able to have that hard, intellectually honest discussion to really dig in and say, “Are things going well or are things off‑track?”
Harry: Can I ask, we mentioned or slightly touched on the element of payback period, when analyzing open source projects, what’s a healthy and exciting payback period for you investing?
Chetan: I think it depends. I’ve invested in open source projects very, very early on where it was just only open source and there was no monetization. In those cases, we figured out as we develop a thesis or hypothesis on how monetization works, obviously, if you’re going to go for a high‑end enterprise monetization model, the payback period’s going to be much longer.
But what makes it all worth it is that the initial ticket sizes are much larger. You can have a long payback period if the initial ticket size is very large, and you know that customer’s not churning, and you know that the customer lifetime is going for quite some time. You know that in year two, they’re going to expand by 20, 25, 50 percent for example.
On the other hand, we’ve also had experiences of monetization models where you go after the SMB segment where the ticket sizes are in the $2,000 to $5,000 per year ticket size.
You want those to pay back much faster, because otherwise, the company business model just won’t ever…Even at scale, it’s very hard to get it to be cash flow positive. It really depends on the ticket size that you’re going after.
Harry: Speaking of the ticket sizes and the models themselves, I spoke to Andy, founder of Logikcull, one of your recent investments. He wanted to know how do you view SaaS pricing models? More specifically, your thoughts on the perceived move away from maybe the traditional per‑seat model.
Chetan: I think that if you just look at within my own portfolio or with NEA’s latest portfolio, the per‑seat model is probably the minority than in the majority.
Customers are wanting to buy software in a way that aligns with their business. As vendors and as companies and as startups, I think it really behooves us to move in a pricing model that aligns with how the customer perceives value.
You’ve got software companies that are pricing based on the amount of data. They price per gig. You’ve got other SaaS companies that, if you’re in analytics especially, price based on events. The more events you track, that’s how pricing works here.
You’ve got other infrastructure companies that price on the number of servers you run the software on. Or, I’ve seen folks at even more granular level like price on the amount of memory that you use for example.
These are all great ways to price primarily because, one, there are a couple things that are important. Number one, you want to align with how your customers perceive value. Two, you want to encourage broader usage of your product. You don’t ever want to introduce pricing and have the customer not be incentivized to use more of it because ultimately for your business…
You take a step back. You’re like, “Obviously, we would never do that.” But when you’re in the weeds and you said, “I’m going to just price per seat. That’s just the way I’m going to do it,” you can miss that larger picture of does this really align with how my customer perceives value?
These are discussions that are happening in board meetings today. I think there is a lot of companies realizing that there is a better customer alignment if they move away from this per‑seat model.
Harry: I do agree with you. We spoke about the incredible growth of the open source market which leads me to maybe a much more macro discussion on market sizing itself. The common prevailing investor wisdom is it has to be that massive, multi‑billion dollar market. I’m intrigued. How would you respond to this statement on the VC demands of market size?
Chetan: I think that we all want big markets. That’s something that you learn…If there was ever a VC 101 handbook, I feel like it would say, “Only invest in big markets.” But I think there’s also a mental trap here that you have to be very careful about which is that very, very large markets could also mean very, very competitive markets, very, very hard markets to break into.
What I really like to think about or encourage entrepreneurs to think about when we meet and talk about market is, great, you’ve identified some market. But what is the actual market size you’re going after with your initial use case? Let’s focus on that.
For me, it’s not so much about there being some multi‑billion dollar big addressable market. It’s about what is the differentiation of your product versus what’s there today. Is this product going to allow you to build momentum such that you can attract spend from multiple markets into your product?
If you’ve got a great platform, and I think you can see in really large SaaS companies…Salesforce is a big example where they built this incredible platform that they’ve actually started to take on way more markets than the core CRM market.
I think that’s what I like to have that conversation with entrepreneurs is what’s the specific market that you’re going after with your initial use case? Forget the broader market. What kind of solution are you building? Does it attract more spend over time?
Harry: Can I jump in and ask what can founders do then when speaking to you and when trying to articulate that granularity towards their market size and the niche market that they’re really attacking? But then how can they do that focus while also satiating that appetite for the big market? Is it through vision and projection? What’s it to you?
Chetan: It’s a little bit of vision and projection for sure. But I think that more importantly even at the prototyping stage of a startup, you can engage your end customers and do customer interviews.
Those customer interviews I’ve seen entrepreneurs present are so powerful because when the customers are talking about the promise of your product, you can start to see this market pull already in the very, very early stages of a startup. To me, that’s a great sign.
I think that if you talk to a customer who says, “Yes, initial use case, no brainer. What you guys are thinking of building is way better than what I have access to. You guys do that really well. There are all these other things that would be great to bring onto this platform.”
I think that’s the real power of engaging customers early and sensing that market pull early. I think that’s really important in these enterprise markets which at the beginning may seem to be small but over time, end up becoming very, very large.
Harry: How would you respond to the statement that it doesn’t mean anything until they’ve paid for it?
Chetan: That would just go against our entire open source thesis. I think a big part of the open source world and how you go to market in the open source market is that nobody pays for it for quite a while.
I would just say the final signature where you’re finally getting the customer to sign, that’s quite a ways down the road of a development for an enterprise startup. There are a lot of signals that you can pick up well ahead of that.
Of course, over time, you’ve got to get customers to pay you. Yes, it doesn’t mean anything over time if they don’t pay you. But it’s a moment in time question. As you’re beginning to start your company, I would completely disagree with that statement. But if you’re five years into that company, I would absolutely agree with that statement.
Harry: Before we dive into the quick fire there, how can we not touch on my favorite topic of all which is fundraising? You’ve said before that if you have conviction and vision, you shouldn’t be afraid to raise capital and bet big. If we unpack this a little further for me, does every founder not have conviction and vision in the early days? How do you separate between the two?
Chetan: I think that’s a great question, Harry. If you unpack it further, you can tell in the very initial pitch of how aggressive a founder wants to be.
I think there are founders that show up that have a very specific viewpoint on a market and say, “Hey, I’m going to build this set of products over the next three to five years. If this works well, in parallel, I’m going build a next set of features that are going to take this company for the next five years beyond that.”
That huge vision where you have this proprietary insight into a market and you’re willing to say, “This is going to cost a lot of money, and it’s going to require a team to go after it. But I have this very proprietary view of this market and understand it better than anybody else in the world. I want to go for it…”
I think that’s just a great pitch to hear from my perspective because that shows a founder that is mentally very, very well‑prepared and has a view on the market that’s completely differentiated from everybody else.
They see an opening. They see an opportunity that’s not apparent to the rest of us. When you have a founder with that strong conviction, such an informed viewpoint, it’s just a really fun ride to back somebody with that because from the initial days, you just dream really, really big. You go for it.
I think that I contrast that with the incremental approach which is building a set of features to satisfy a small set of requirements and then after we solve that initial problem, we’ll figure out what’s next. I think that if entrepreneur has that proprietary viewpoint and that big vision of how to take an entire market space down, just go for it.
Harry: You know I’m always brutally honest. If we go past that conviction and vision, if there’s a time where the metrics make sense and the numbers make sense, when’s that right time to really pour fuel on the fire? When’s the time to really set the rockets on fire?
Chetan: I think that really breaks down into two segments. You have the ability to fund the product development part of your business and then the go to market side of the business. Of course, I’m talking exclusively about enterprise technology.
The go to market side, of course, you’re going to be wanting to pay a close attention to all the metrics that we previously spoke about, customer acquisition cost, paybacks, sales efficiency, how long is it taking for my marketing and sales costs to become really effective, are my customers expanding, etc. When those metrics start to align, absolutely go all in.
On the product side, this is where I think entrepreneurial conviction and spirit is so important is oftentimes you’re not going to have all that clear signal and metrics from a product perspective to bet big. That’s where the conviction comes into play.
That’s where this market insight comes into play to say, “I just know this market better anybody else in the world. I see this opportunity. It’s time to build this great product that’s going to take some time, but when it comes out, it’s just going to change the world.” That’s really amazing.
Harry: Can I ask what entrepreneur most symbolizes that to you? Do you remember a meeting with one entrepreneur where they said, “I know this better than anyone else. I know we can do this. We’re ready”? Was that that recent?
Chetan: I think that if you think about Eliot Horowitz at MongoDB, his vision is just infectious. It’s pretty brave to say that I’m going to build a better database company knowing that building a database company is a long journey. His vision and his ambition is I think truly unique and actually very inspirational.
I see someone like Eliot who has had a backing of great venture capitalists including us, but his vision and his ability to articulate that roadmap is amazing.
The team that is at MongoDB, Dave who’s the CEO, Michael who’s the CFO, they’ve just got a great team that understands how to build not only a great business, but also they understand this roadmap and where it makes sense to bet big and when. It’s just awesome to be part of journeys like that.
Harry: It must be very special. But speaking about betting big, we’re going to bet big with the quick fire round now. I say a short statement, and then you give me your immediate thoughts. Are you ready?
Chetan: Ready.
Harry: You recently invested in a legal space with Logikcull. What other untapped areas excite you? That one was from Andy.
Chetan: I think that the whole industrial space is super exciting at the moment. I think there are tons of opportunities in manufacturing, in processing, in insurance. There are all these huge industries that haven’t yet been addressed by software innovation that are available that I think are very, very exciting.
Harry: Tell me a moment in your life that serves as an inflection point and changed the way you think.
Chetan: I think just being around great investors. Count my mentors here at NEA, folks like Scott Sandell, folks like Harry Weller who’s no longer with us, Robby, John, Tony, all the great general partners that I serve with here at NEA.
Just at the early days of being here, watching them in board rooms, seeing how they connect themselves and how they give advice to founders, that was a huge inflection point for me personally. I think that’s just been an amazing experience.
Harry: What’s your favorite SaaS reading material? Rainy day, what do you sit down to?
Chetan: This isn’t specific to SaaS, but I’m a huge sucker for “Good to Great” by Jim Coliins. I think that this is just a great read.
I know that some of the use cases are no longer relevant, but the underlying principles of do you have the right team, are you thinking about your flywheel, have a flywheel success properly, I think these are all principles that you can build on. It’s a great book to continue to come back to for me.
Harry: I couldn’t agree with you more. It’s one of my favorites. But let’s do the final one which is what do you know now that you wish you’d known at the beginning of your time in VCs starting out with NEA?
Chetan: This is pretty obvious, but I don’t think I appreciate it as much, which is that patience is really, really critical for this business. You have your highs and you have your lows.
But I think that ability to just stay calm and patient and continue to execute is so important because I’ve had companies that have had three, four straight disaster quarters and then the following eight have been amazing. The inverse has been true, too.
Patience and just playing the long term vision out is so critically important in this business that I don’t that I quite appreciated it when I first got started.
Harry: Chetan, it’s been such a pleasure having you on the show. As I said, I heard such great things from Andy at Logikcull, Ross at MoleSoft. Thank you so much for joining me today.
Chetan: Absolutely. It’s been a pleasure.
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Harry: So fantastic to have Chetan on the show there and, fun fact, our first ever guest from NEA. If you’d like to see more from Chetan, you can follow him on Twitter @chetanp. Likewise, we’d love to see you behind the scenes at SaaStr. You can follow us on Instagram @hstebbings1996. That’s hstebbings with two Bs 1996. It’s be great to see you there.
As always, we so appreciate all your support and cannot wait to bring you next week’s episode with Jon Lee, cofounder and CEO at ProsperWorks.
