What's up everybody? This is Courtland Allen from IndieHackers.com, where I talk to the founders of profitable internet businesses and I ask them how they got to where they are today so that the rest of us can learn from their mistakes and their successes.
Today I'm doing a first for the podcast and actually talking to two guests in the same episode. They are Peter Reinhardt and Calvin French-Owen, the CEO and CTO of Segment, respectively. Segment is one of the most popular platforms for collecting all of your company's analytical data in one place and then sort of rerouting it to wherever it needs to go.
At first, I thought I was flirting with disaster by having two different guests on the podcast at the same time, but it turns out that hearing the perspectives of two different founders of the same company is somewhere close to twice as insightful as just hearing from one.
During our conversation, Peter and Calvin began by sharing the story behind Segment, which really starts with numerous failed attempts to get their start up off the ground. They really had zero success early on and very little to lean on besides themselves, their third co-founder Ilya [and fourth co-founder Ian], and a rapidly declining bank account.
After that, we get into how exactly they found product-market fit and created something that people actually wanted to pay for. We also spend some time trying to put a finger on just why it's so difficult to understand, and internalize, and consistently apply broad advice like "make something people want" until you've both failed and succeeded at doing so.
I think the contrast between the way their business grows and the types of challenges they have to overcome before and after finding product-market fit really illuminates why it's so important to make that the first milestone you need to go after. All of these growth hacking techniques and sales and marketing skills really don't matter until people actually want what you've made.
Anyway, I find what these guys have to say very illuminating, and I hope you guys will too. So without further ado, Peter Reinhardt and Calvin French-Owen.
Okay, we're trying something different today, joining me on the podcast is not just one but two founders, Peter Reinhardt and Calvin French-Owen. They are the CEO and the CTO, respectively, of a very successful and popular analytics company called Segment. How's it going guys?
Good, it's really good to be here.
Yeah, thanks Courtland.
Can you guys identify yourselves and kind of do like a personal intro so everybody can know who's voice belongs to who?
Yeah, sure. This is Peter, one of the co-founders and the CEO. I studied Aerospace Engineering at MIT and then dropped out with Calvin to get started on Segment.
I'm Calvin, another one of the co-founders and CTO here at Segment. I work primarily on kind of the back-end infrastructure and a lot of the data pipelines here. It's an odd story— I actually knew Peter way back in seventh grade from a summer math camp.
Oh cool, so you guys go pretty far back.
Peter, I had no idea you went to MIT, by the way. You were Course 16?
I was, yeah. Calvin was there too.
Oh, cool. Calvin, what course were you?
Okay, me too. That's stereotypical. For people listening, MIT scores goes by numbers, so Course 6 is Computer Science and 16 is Aerospace Engineering.
Yeah, we have what, 21 departments… and all of the humanities are in one?
Exactly. It's all condensed. But anyway, can you guys give me a description of what Segment is just to provide listeners with some context, and I guess also a description of how you guys would measure your progress and your success.
Yeah, so Segment is basically a, you can think of it as a living record of your customers and every interaction that you're having with your customers. We help companies collect data from their websites and their mobile apps and their payment systems and their help desks and pull all that data about interactions with their customers into a single spot, and then we fan that data out to the analytics tools, the email marketing tools, the data houses, etc. where they actually use that data.
So we're sort of like a data sewer system if you will. We basically sort of invisibly help the data go wherever it needs to go. On the flip side, if Segment ever breaks, it's kind of a mess.
Yeah, I think one of the interesting things about that, being in that domain is that's not an idea that you could imagine someone just coming up with out of the blue. I'm sure you guys have a zonky story for how you got there, but maybe let's start at the beginning since most of the people listening in are in a situation where they haven't really started a company yet or they're just now contemplating getting started so they'd like to hear about how you got to where you are today.
You guys met in seventh grade, did you know back then that you wanted to start a company together or was it something you talked about?
Calvin, you want to take that?
Yeah, at that point not at all. I think all we were focused on was learning trigonometry. Yeah, I think the first time we kind of seriously considered starting a company together was kind of after freshman year at college. We met one of our other co-founders, Ilya. And throughout that year, we would spend time on these hair-brain schemes, whether it was to build a digital surround sound set up so that everyone's laptops would be playing the same music, or Peter and I were trying to game this one online auction site for a little while. Basically just building lots of little hacks around different parts of our life.
Even though none of them really panned out or became kind of big projects, we got a sense for what it was like to work together. Then fast forward to junior year and Peter can probably take this over from there, but Peter and Ilya took this one class called Founder's Journey at MIT.
Yeah, and what happened was, it was actually basically the structure of the class was every week they would bring in a founder who would just tell their story, not dissimilar to Indie Hackers. And the first week, this guys Adam Smith came in and just talked about how he had started this company called Xobni and how they had raised like $45 million and so forth and I was just like floored. I was like, "Wow, this is just incredible." I was like idolizing sort of everything about him and there was this funny moment at the end of class where he was sort of milling around talking about a few people and Ilya, our co-founder was like, "You know what? I'm going to ask if he wants to come back to the dorm for beers."
I was like, "Dude, don't do that. It's just going to be embarrassing. Like I don't want to be around when you're going to ask that." He's like, "Ah, screw it. I'm just going to do it," which if you know Ilya, is a very Ilya thing to do. He goes over and he's like, "Hey, you want to come back to the dorm for beers," and Adam's like, "Yeah, sure." In that like two-second interaction, the accessibility of like starting a company, I was like, "This is just a normal dude." I can go to a dorm and drink a beer. You know, it was like so humanizing, that it sort of made the entire enterprise feel accessible if that makes sense.
Then there was one of the professors of the class, this guy who is a partner at General Catalyst, and at the end of the course he was like, "If anyone wants to come pitch me at General Catalyst headquarters in Cambridge after the class, you're welcome to come do so." I was like, "Well, I definitely want to do that." I went and I pitched some of the sort of like hair brained idea for a tool that would let professors monitor whether students were actually reading their course notes. It's a weird idea but anyway, it was a bad idea.
And at the end of the conversation, he's like, "Well, this is cool, if it's going well in the spring, we'd be happy to put in 100k."
I was like, "What?" I have never seen that many digits, and we're off by like two digits from the amount of money I've ever seen before. I was just like, "This is crazy. Maybe this is a lot easier than it seems." We just had like a sequence of these sorts of experiences that led up to us applying to Y Combinator in the spring of 2011, that just made everything feel like, "Okay, this is doable," and frankly, we were in sort of a good, unusual time and location to actually get exposed to these things. It was pretty lucky.
They didn't have the course that you took when I was at MIT. If they did, at least I didn't know about it, but interestingly enough, I also was really inspired by having Adam Smith come give a talk. I don't know what he event was exactly. I think it was something put on by Y Combinator, they're going from campus to campus but Adam Smith came and talked about his experience. I did not think to ask him back to my dorm for drinks but I talked to him a lot at the event it was just incredible to me as well.
I think one of the things that you said that stuck out to me was how you were inspired by the fact that he was just a normal dude and it made it seem like it was possible for you to do something that was similarly incredible. But at the same time, all three of you guys are far from normal dudes and the common way that people might think of it. I mean all of you went to MIT. What do you think sets you apart, or do you think anything sets you apart? Do you think anybody could have done what you guys have done?
I think a lot more people could do this than think they can. I think there's like a pretty significant like idolization of founding things, of CEOs of later stage companies, etc. I think it certainly, it makes a better story to dramatize it, which is fun but I think in many ways it ends up creating a barrier to doing it. I think it's a lot more accessible than people realize.
I'd say if there's anything that helped us kind of succeed or kind of break out of this pattern where for a long time we were just trying to find product-market fit and we were building all these different things that didn't work out, it's actually the closeness and kind of the relationship of the four of us at the time and how we kind of built things out as a team.
Basically, when we started, we started with this classroom idea and it was myself, Peter, Ilya, and Ian. I think it took about a year and a half of just various failed ideas where we're all living in the same apartment. We were all constantly thinking and brainstorming and figuring out what next idea we take. We had white boards like lining the walls. We'd basically be hanging out 24/7. Peter and I shared a room where there was a foot and a half between the two beds and there was really nothing else in the room.
I think that kind of closeness and the strength of the relationship that you get from just working with other people for that period of time, is really what allowed us to then when we came to the current idea, just execute relentlessly against it and actually build out Segment, kind of the primordial pieces of what exists today.
Yeah, I think having co-founders to rely on is such a humongous advantage. If only because it helps you not quit. I mean when you talk about spending a year, year and a half working on an idea that ultimately didn't pan out, that's so much harder to endure that and keep going as a solo founder where nobody else understands what you've been going through, no one has seen the journey, nobody can really talk to you about it as an equal versus having people who are doing it with you and you just say, "Okay, this might not work out but at least we're all together, we can figure something else out." Was there ever a time where you guys were on the verge of quitting before you ended up getting into Y Combinator and dropping out?
I would say 100% that the most important part of the relationship was the like quitting prevention mechanism. I don't think in that year and a half of sort of struggling for product-market fit between when we got into Y Combinator and when we launched analytics.js on Hacker News, I don't think there was a moment that anybody seriously considered actually leaving or quitting or going and getting a job. We were all deeply committed to each other as co-founders and I think the strength of that personal relationship and a few other smaller things that we did to sort of make it a fun environment that we wanted to be in made a pretty huge difference in actually allowing us to ride out that year and a half of bad times.
An example of another thing was we slightly overspent on having a nice office/apartment so that it would be a place that we wanted to be rather than a place that over time, grew to be a place that we wouldn't want to be, so it was like an apartment with a view for example, which I think makes it some place that you want to be.
Yeah, it's like little things like that and just paying attention to your psychology and your mindset to extend your ability to actually give your all to what you're working on and I think another thing that you guys did that is challenging for a lot of people is that you were able to juggle at least to a certain degree, multiple responsibilities. Because MIT is not an easy school to be at. In fact, having any amount of course work or a job or a family to take care of really takes away from the time that you can devote to your start up. How much time are you guys spending on your first ideas when you were still in school?
I guess when we first applied to YC, we were honestly just building prototypes. We applied just after or at the tail end of junior year. At that point, we were going around to all the professors that we knew. We even talked to Robert Morris, who was a Y Combinator partner and we said, "Hey, what would you like to exist for your students and your lectures?"
It was kind of out of those conversations that we spent maybe the last 90% of the last four weeks of school just focused on that piece as we were applying and then subsequently got in and subsequently said, "Okay, at this point, we're going to decide to take some time off from school and actually focus on this chance full time, because we feel like it's one of those kind of unique opportunities that might not come around again."
Tell me about the idea that you guys got into YC with and what those first months in YC were like.
Yeah, so the idea was that we would build a classroom lecture tool that we'd give students this button to push to say, "I'm confused," and the professor would see this graph over time of how confused the students were. We were pretty excited about it because we were students, and we felt like these classes could be like livened up by a little bit of feedback between our interaction, between the students and the professor and the professors were excited about it. Robert Morris basically said that this was what he wanted, he wanted a button the students could push.
We applied to YC with that idea, and I remember very distinctly in the YC interview — Robert Morris is one of the YC partners and he was in there with Paul Graham and Jessica Livingston and so forth and PG was asking us a bunch of questions about this he's like, "Oh, I always wanted this as a student because the professors would say something dumb."
Then all of a sudden, he turns to Robert Morris and he says, "Would you use this?"
Robert Morris, I shit you not, says, "No." Just flat no.
What a betrayal.
Yeah, we were like, "Are you-"
Yeah, right after we asked him two weeks earlier.
Were you guys mortified?
Briefly mortified and then tried to recover like, "Well, we talked to these other 20 professors and blah, blah, blah." They let us in anyway. Yeah, that was the idea for all of Y Combinator. We raised about 500K at demo day on that idea and then that fall semester, we put this into the classroom for the first time and it was like an unmitigated disaster basically. All the students opened their laptops and they all just went straight to Facebook, which is probably what we should have expected to begin with. Turns out, putting laptops in the classroom is incredibly distracting.
We saw a study appear, someone did scientific study and determined that when students have their laptops out in class, they spend about 60 to 70% of their time not paying attention, which was pretty much what we found in our less rigorous product-market fit experiments as well.
It seems like you guys really didn't spend very much time before launching actually testing this out. You were doing a lot of customer interviews with professors and perhaps students. Is that like a lesson you guys took away from that that changed how you worked on your future products?
Yeah, it definitely is. It's not to say that we didn't do any testing, the product, I remember we'd be frequently biking over to Stanford in kind of like a mad dash and testing in summer classes there or take the train up to Berkeley from our apartment in South Bay and be meeting professors after class or almost ambushing them and saying like, "Hey, I just saw your lecture. Would you like to try out this new product?" I think in terms of how we kind of took their feedback and how we looked at student use across the classrooms, we didn't really understand the lecture dynamics where for the best professors, it's almost more of a performance art and they already understand where students confuse.
Instead, we were trying to kind of push our view of the world onto these professors rather than really understanding and listening to what their concerns were. I think if we've been further along, we would have probably taken a step back and said, "Okay, what's really working about this product?" There were some things that were certainly working, like students would take pages and pages of notes in the product, which in retrospect seems crazy for a start up that's three months old and has no visibile signs that it's going to persist any longer than that.
Would you actually trust all of your course notes inside that product, but interestingly enough, people did. As we were transitioning kind of through the next idea in the next year, we started paying much closer attention to the problems that we were actually trying to solve and not going in with any pre-baked assumptions about how things should be and instead figuring out what the customer actually needed.
What did your next product end up being, because a note-taking tool or a tool for students to signal to professors when they don't understand what's going on is so far removed from what you've ultimately ended up with, which is Segment. I'm curious what the sort of trail of bread crumbs was to get you where you are now.
Yeah, I think the big failure in that first product was that we felt like it was how we wanted the world to work as opposed to what problems the world had. As we shifted out of that product, we were trying to think of like, "Well, what problems did we encounter when we were trying to build this?" We felt like one of the problems that we had encountered was trying to use an analytics tool to actually properly segment the data so the existing analytics tools of the time wouldn't allow us to analyze how one classroom used the tool differently than another classroom.
We decided, "Okay, it's important that we build a better analytics tool." This is a bad idea for a bunch of reasons. It's very difficult to sell the value of insights, because the value is fairly unclear and very spiky, so it's difficult to sell an analytics tool. It's a really crowded market. There's a lot of companies that build analytics tools, which now of course is to the advantage of Segment since we integrate with all these different companies and there are hundreds of them if not thousands.
At any rate, we decided to build an analytics tool that would do advanced segmentation, and this is actually where the name Segment came from. We spent about a year building out the infrastructure and so forth to make this advanced segmentation possible. Frankly, we really struggled to get product-market fit for the reasons I mentioned before. It was crowded and difficult to sell the value insights, etc. We spent basically the next year sort of rumbling along with that and never really got any customers to really adopt it and depend on it.
We got to December 2012, so we're now a year and a half in and we were starting to run low on cash from having raised it at demo day, and we realized we should probably go back and talk to Paul Graham and get his thoughts on how we should proceed. We met with him and we were walking around a little cul-de-sac by YC and bringing him up to speed, and he sort of stops and looks us straight in the eye and says, "So, just to be clear, you've spent half a million dollars and you have nothing to show for it."
How'd you guys feel about that?
That was pretty much our low point I think. It was not a great feeling. I told him this story later and he looked and me and he was like, "Well, yeah. That was the situation."
He was totally right.
He'd be like, "Yeah, I was right. That was exactly what was going on." Did he give you guys any constructive feedback after that or was it sort of just a pep talk?
Sort of just a pep talk and then we were like, "Okay, well, we need to figure out a new idea here."
Pause there, rewind all the way back to that first week of YC. In that first week of YC we would have been like, "Whoa, we should have analytics on our classroom lecture tool," and so we had Googled them all and we found Google Analytics and Mixpanel. We were trying to look at these tools and figure out which one we should use and we're like, "Okay, well Google Analytics seems like it's more marketing, is sort of more revenue-y, and Mixpanel is more product-y in how they think about their analysis, but we won't know which one."
Then we looked at the APIs for collecting data and we're like, "Okay, the APIs are kind of similar for collecting data," but actually, if you sort of squint your eyes it's like it's the same data exploding into all three systems. So rather than decide which one we want to integrate or which one we want to use, which is a business problem, we're just going to solve an engineering problem, which are the sorts of problems we know how to solve, and we're just going to send the same data into all three tools by building this abstraction that can send data anywhere.
Okay cool, so we built that little library, it was like 100 lines of code out of hundreds of thousands that we wrote for that classroom [software]. We set it aside and forgot about it. Then like four months later, we needed to use that sort of thing again so we like cleaned it up a little bit, improved it and then set it aside. Four months later, cleaned it up a little bit more, maybe pulled it out as a separate library and then for it about it again.
Then we were trying to sell our own analytics tool at this point and we kept encountering this objection, which was, "Well, I already have Mixpanel installed and so I don't really want to use your analytics tool." Like it's too much of a burden to install it. We're trying to figure out how to like growth hack our way around this and our co-founder Ilya was like, "Well, what if we took this library, added ourselves as the fourth service that it can send data to and then every time someone has that objection, we give them this little library so that they can install us alongside and give us like a fair shot." We're like, "Oh, that's a cool idea."
We did that. We took this little piece of code, open sourced it and started sending it out to people and they started replying like, "Oh, this library is awesome. I'll definitely use it." Then we'd follow up a couple weeks later and we'd be like, "Hey, we saw you're using the library sending data to our analytics service, here's the API key. All you have to do is drop it in." They're like, "Well, the library's fantastic but like I don't really want to use your analytics service." Okay.
A few more months go by and we start noticing that this little library is getting a few stars on GitHub. We don't really take that much notice of it, but it's definitely the first time that something has had this sort of organic pull. We definitely took a little bit of notice of it. Then we had this conversation with PG, we sort of sat down and Calvin and Ian had put together this manifesto, which was, "We think there's a big business behind analytics.js," which is this open source library that routes data to different analytics tools."
I was like, "Guys, this is the worst idea I've ever seen. This is 400 or 500 lines of code. It's already open sourced. I in no way can see how this can turn into a significant business opportunity." We argued about it all day and I went home and I was like racking my brain it's like, "How do I kill this idea? This is the worst." Finally, I figured it out. I came in the next day and I was like, "Okay guys, here's what we're going to do. We're going to build like a really amazing landing page. It's going to be really beautiful." I was like really trying to sell them on this, "And then we're going to put up this landing page on Hacker News and then we're going to see what happens."
I was thinking like, "This will kill it off and we can like go find something else." And so we built it, I think it maybe took us a day or something and we put it up on Hacker News. This was on December 12th, 2012, 12, 12, 12.
You still remember the date—
Yeah, it went straight to the top. It was a very humbling experience for me.
Peter had come up with a perfect way to validate it.
Yeah, and it was like thousands of email sign ups, thousands of stars on Get Hub, people are reaching out to us on Linked In demanding access to this thing, so the whole thing blew up in like 36 hours basically. We sat down and we were like, "Well, I guess we found product-market fit so let's build a hosted version of this library because it's kind of a pain in the ass to use as an open sourced library," and so we built that over the next five days and launched that on December 17th and then we had this giant waiting list so by December 30th, we had about 70 companies sending maybe 20 events per second through the system.
That's amazing. I really like how you mentioned earlier that you're going to people to get them to use the product and they were complaining. They were saying, "We're already using Mixpanel, we don't want to use it," and your instant reaction was, "Okay, well how do we growth hack our way around the problem?"
I think that's a reaction that a lot of founders have, which is I think somewhat contrary to like the YC mantra of make something that people want. Right? Where ultimately if you make something that people want, you don't have to growth hack your way around any sort of objections, right? You put it up on Hacker News or your target audience wherever they are, and they love it because it clearly solves some problem or it does whatever it is that they really want to do.
What was your next step after that? Did you end up raising money?
Then we spent about a month just sort of tidying up the product. We built some like dead end things, like we tried building a dashboard for PG for YC companies to share their growth metrics with PG. That was a bad idea. He never looked at it. So we had some dead-end product experiments.
Then we launched on TechCrunch and then we started focusing on marketing so Google Analytics Academy, which was like a pretty heavy in terms of writing good content about analytics and how to get started with analytics. That did well and was like pretty important I think in terms of building the brand and starting to drive early adoption. There was a lot of organic adoption, just like word of mouth started happening as well.
By June or so of 2013, we had maybe 1,000 companies sending data or 1,000 customers sending data through Segment. We still weren't charging for it, and at that point we had maybe like 60k left in the bank or 50k left in the bank. We were pretty much running on empty.
How big was your team at this point?
It was still just the four of us.
Okay. Who's writing all this code rule? Are all of you guys coding? Because you guys are releasing product after product.
Yeah, at that point pretty much all of us were coding. Peter was doing a bit more of the Analytics Academy content. We're all kind of writing blogs as well to figure out what things can we deliver that we've learned that are actually really useful for our audience to understand. Like what sort of internal code can we put out there as open source to help make more and more people aware of Segment.
Okay, so you guys are basically— four of you guys are all contributing. You've got 60k in the bank. Your product seems to be catching on and you've got 1,000 companies using you for free.
At this point, I think you know you've probably got a few things running through your mind, which is, "Thank God, something is starting to work, but also, we're running out of money. Should we try to charge people or should we try to raise more money?" Which decision did you guys make and what led you to that decision?
We were pretty sure of, like, let's try charging people, but we were also terrified of asking for money. So we just started asking people for like ridiculously small amounts of money in retrospect. We were like, "Okay, we should charge like $10 a month for the service," which is just like ludicrous in retrospect.
It's so small.
We were just like terrified of asking for money. It took us about-
Yeah, remember we, I was going to say that we put up this like public pricing page with the $10 a month for analytics routing, and we were really nervous at the time that it was going to set expectations there. I remember Peter and I actually had a manual Stripe script where we'd go through each one of our customers and we'd like, we hadn't set up any form of subscription building. At that point, we just had to run this script once a month and charge them and just hope that no one got upset at this $10 a month charge.
We had one customer that messaged us, I'll never forget this guy, Eduardo. He was a customer from Brazil. He actually messaged me a few months ago. He's still a customer. He messaged me and he's like, "Peter, I'm very concerned about your pricing," and we're like, "Oh shit, we're charging too much," and he's like, "It's far too low for this to be a sustainable business and I really want to use Segment for a long time, you really need to find a way to charge me more." It took us maybe like a year to really like ask people for reasonable amounts of money for the value that was being offered.
Was this the first point in your entire process where you guys had charged for any of the stuff that you'd made? Had you charged for the classroom tool as well at some point?
Yeah, no. No, we had never charged for that.
Okay, so you guys put up this pricing page. How did people respond? Was it enough to kind of pull you guys back from the brink of death, or did you also have to raise money in addition to that?
It definitely was not enough because we weren't asking for enough so I think we maybe got to like $1,000 a month in revenue or something like that. Which I guess was a big deal at the time. But they were like, "The only way this works is if we raise around ," we raised $2 million and sort of seed funding and we're like, "Okay, we're going to built out a team. We're going to hire someone to do sales, and we're going to figure out how to actually sell to real companies here," because up to that point, we had been mostly working with small start ups but we were starting to see larger companies sign up.
We were like, "Okay, well actually maybe this is a problem that gets worse as you get into larger companies and larger companies are willing to pay, so we should probably start thinking about building out a sales offer." We did. We started building a team for a sales person, Raf, joined and I was sort of his sales engineer and over the course of that first six months after he started. The first part of 2014, we basically went from zero to a million in annual revenue in the first half of that year and the second half from one to 2.5 so 2014 from a revenue perspective was sort of the break out year.
That's humongous. Were there any lessons that you guys learned going to making like your first $100,000 in revenue that stopped applying when you were trying to grow from one million to 2.5 million because I talked to a lot of founders at various stages and the things that are important in one phase are very often not important in another phase and vice versa. Was there sort of a stair step approach that you guys had to take or was it kind of smooth sailing all the way up to that amount?
Yeah, I think Jason Lemkin does a good breakdown of the stages of revenue, at least from what we saw.
Zero to a million in revenue was just a mad scramble where what we really had to figure out was how to ask for a reasonable contract size given the value that we were providing. Frankly, it's like it's a little bit of a ridiculous process to train someone with an engineering background like myself to ask for that.
We had this sales advisor, Mitch. Basically we went to one of these sales meetings, and he's like, "You have to ask for 120k a year." Keep in mind, the most we had been thinking before this was $120 a year, this is 1,000x more, and I was like, "Dude, I don't know, that's crazy. I don't know if I can do that."
He's like, "Peter, if you don't ask for $120,000 a year, then I quit as your advisor."
I was like, "Well, I guess I'm asking for $120,000 a year."
From one customer?
From one customer, yeah. I asked and he negotiated me down to $18,000 a year, which was pretty embarrassing, but was also two orders of magnitude higher than what I expected. There was that and, basically, it was like a six month period of us asking for increasingly larger amounts of money until we stopped turning beet red when we'd ask for it. And then people were like, "Yeah, it is that valuable to me, I'm happy to pay it."
That's insane. Do you remember their reaction when you first said 120k? Were they taken aback?
Well, I turned beet red, so then they just sort of gave me a comical look.
I think one of the biggest challenges for a lot of people listening is that a lot of us are developers and our primary skillset is writing code. So we know how to build a product, we know how to keep it running, we know how to write tests, but once we start getting into these areas of sales and marketing and these other things that seem like intangible dark arts, they're scary. We don't really know how to take the first step and to getting good at those things.
What did you do besides having advisors that taught you these skills?
Yeah, I think it's not actually just that they're sort of mysteries. I think there are some strange idealisms in the developer community around whether things should be free or how much they should cost and the costs are often like, I think there's a lot of just like sacred cows that often come along that really end up being a pretty significant hindrance in actually building a business like when you are setting pricing in motion, it doesn't matter how much it cost to provide the service. All that matters is that you bill significantly less than the value that you're providing, because then it's a totally reasonable transaction for the customer. It's super helpful to them. It's a massive net positive.
Your costs are kind of irrelevant, but I think because on the engineering side, you're mostly thinking about cost and you're mostly thinking about how the thing itself functions. It's a shift in perspective to take the perspective of the customer and what value you're providing them and sort of their whole view on the transaction. I think there are just some strange sacred cows that end up being a hindrance to building the rest of the business that are sort of super powers on the engineering side but a hindrance on the other parts of building business.
Yeah, I couldn't agree more. I like what you said about taking the perspective of the customer, just because that's so crucial in pretty much every phase of running a startup. Like when you were doing your classroom tool — if you guys had known somehow magically what every person wanted and you were able to get into their mindset, then you would have built a much better product. And the same thing applies to not only building product, but sales, how much to charge, etc.
Yeah, I think the major perspective here that we had or the perspective shift at least in my mind was: We started out thinking of ourselves as primarily a developer tool where you start using Segment and it's much easier to hook these things up, or you don't have to worry about integrating new tools for your data any longer.
But when we talk to companies out on the market who are using Segment, they saw it as saving their developers time. Internally they have a team of maybe 10 or 15 people who are maintaining this giant data pipeline and they're spending a bunch of cycles on that, and those 10 to 15 people end up being really expensive particularly if they're highly trained software engineers.
Most of our customers, they don't think of us as a developer tool, but just a service that we provide such that they can now take those 10 to 15 people and start them on something that's much more ROI positive for the business.
It's such an amazing insight to start thinking that way. I mean I talked to Patrick McKenzie (better known as Patio11), and another guy, Brennan Dunn, on the podcast months and months ago. They were both working as contractors or consultants at some point in their career, which I have also done.
And I charged like a pretty decent rate, or so I thought at the time. I was charging companies like $125 an hour to work with me. These guys were charging multiples of that, just because they understood that. They would look at things from the customer's perspective and they could calculate exactly how much value they were providing, how much money they were making these companies that they worked with, how much money they were saving them.
Whereas I was looking at myself as just a good developer, so I priced myself relative towards other developers, and so I wasn't able to charge nearly as much.
How did you guys come to understand the value of Segment and how did you end up having that switch in your mind from, "Okay, this is just a developer tool to, okay, here's how much money we're going to save customers?"
I think the first part is you sort of have to test the limits of what the customer is willing to pay. Customers aren't stupid.
They're doing the analysis on their side to decide whether it's worth it or not. Like you can sort of test with your pricing, especially if you're doing more like mid-market or enterprise sales where you really are sitting down with a customer and talking it through with them and coming to a reasonable price, every conversation we would try double the price that we had tried previously until we hit a ceiling. It was very obvious that like, "Okay, we hit a ceiling. We have exceeded the actual value or a reasonable return on the value that we're providing," so that gives you some numerical cap.
Then you can also just talk with customers and understand like, "When you use Segment, what value does that provide you?" It's so bizarre to like flip the conversation and as a customer or a prospect like, "What do you value in the product," because usually you're pitching, pitching, pitching. But to flip the gears and have them tell you why they find it valuable, you then hear in their words like, "Well, the thing I find valuable about this is that like these three engineers are going to do this other thing for these four months and I won't need to hire someone to maintain this ongoing."
Then okay, like that just gave you your ROI calculation, right? Those three engineers are going to do something else for four months, what's the value of that, and this ongoing maintenance person. By sort of understanding how they think about the value and then testing the limits, I think you can pretty accurately narrow in on what the price should reasonably be.
That's really cool to see like the difference in what you guys were doing. Kind of these like pre and post product-market fit phases of your company.
Beforehand, you're so focused on iterating and changing a product and trying to find something that people like, but once you hit on that, then it turned into kind of a process of doubling your prices and talking to customers and estimating how much your product was worth and… you're kind of sitting on this rocket ship that just needed to be fine-tuned in a way.
Also, you guys obviously haven't stopped developing Segment as a product. How did you guys balance product changes and actually improving what it was you guys were building with efforts like sales and marketing, which don't really affect your product and just affect your positioning in customers' minds?
Yeah, I think we never really thought about those two as a trade off so we never really, I don't think we really thought about it as like, "Well, we could either develop a new product or we could invest in sales and marketing." I think once you have product-market fit, you can sort of look at sales and marketing as a unit and say like, "Well, if we invest more heavily here, then how much revenue will that generate?" Then separately on the product development side, you can say like, "Well, do we have the resources today to just sort of solidify our existing product or do we have the resources to sort of like pursue building a new product?"
I sort of see them as independent tracks and I think as a result of that, we actually started building out a sales and marketing team much earlier than, at least the sales team much earlier than most companies do, Raf was basically our first hire and he led sales from the fifth person in the company was the sales person, which I think is a little bit unusual, at least for companies founded by young engineers. I think that sales team just sort of grew with customer demand and then meanwhile, we sort of separately built up the product development and engineering org at sort of the pace that it could grow. We never really saw this as a trade off.
We hae built a number of sort of significant expansions to the product every time. The most significant one was probably warehouses initially where we sort of realized that one of the most important destinations for people's data was at their data warehouse. People wanted that data in Red Shift and Big Query and so forth so we launched that like maybe a year and a half or two years later. That was big and it pulled us up market and really sort of expanded the value that we were providing to customers in a significant way.
Then also sources, so massively expanding the number of places where we could pull data outside of people's products and starting to pull data from the Cloud services that they were using like payment systems like Stripe or Zen Desk or Sales Force or so forth. The product has expanded in a number of different ways as we felt that we have the sort of bandwidth to expand it but it's always been sort of separate investment engines if you will.
It sounds like you guys were really spending a lot of time learning from your customers. Like your success was feeding into the ideas that you were able to come up with for what products to provide your customers would actually like. A lot of people aren't at that phase yet where they're so successful that they have paying customers who said, "Yeah, I'll pay you more for this feature."
It is dramatically easier to find your second product-market fit than your first one because your second product-market fit, you have a defined customer base and you go to them and you solve the problem for them. As soon as you solve a problem for someone, they will like tell you all their problems because they're like, "Oh, maybe you can solve this or this or this," apparently you solved something so they're excited to tell you about everything else. It's much easier to find product-market fit repeatedly after you find it once.
Were there any mistakes that you guys made or things that after this point where things were starting to take off that if you could go back, you would do it completely differently?
Really it's hard to say if we do anything completely differently. The one thing I wish we had done a lot more of a lot earlier was kind of written everything down. I think we have a decent culture of writing at Segment now, whether that's on the blog or on our internal Wiki or just kind of recording things as learn them but earlier on, we were just sort of slab dash like moving really quickly, kind of throwing stuff together and we didn't have enough time to write down all of our assumptions, why we were building the things that we built and in what way it made sense to build them.
I think that hurt us over the long term because we didn't keep in mind which assumptions would change, you know? Like in the case suddenly there's this new product Red Shift that's out on the market. For instance, we built initially the ability for customers to just instantly spin up a Red Shift instance, which is this data warehouse and we would manage it all for them.
Over time as more and more customers started adopting the Red Shift instances, we realized that simultaneously it wasn't that great for us because we would continually have to tweak the sizing of these Red Shift instances, we had to view into all of their monitoring but we'd have to kind of babysit them. On the customer's end, it wasn't good either because they had no window into what that Red Shift instance was doing. They couldn't see any of the metrics. They couldn't see the sizing. They couldn't see the data loads.
Eventually we said, "Oh, our assumption that what customers really want is just sort of some like kind of turn key Red Shift instance here isn't actually the reality, they'd rather be able to have the customization of managing it themselves." In that case, we kind of flipped our assumptions but it would have been much easier to do had we written that all down and made them kind of explicit from the start.
Is there any sort of start up philosophies or schools of thought like the lean start up or things that Peter Teal's written in "Zero to One", or "Crossing the Chasm"? I mean, there's all sorts of start up movements and books and things that people preach where how you should run a start up. Is there any one in particular that guided how you guys grew your company?
I think the synthesis business books where they have like a point of view where they've sort of synthesized across a bunch of research that they've done or whatever, I think those are helpful. I think there's like a bottom list stack of those books to read. I found a lot of the biographies of some of the like great founders to be possibly more helpful because the story helps it sort of stick and see how these principles really play out. "Made in America", the story of Walmart's founding I think is pretty fascinating. Elon Musk's biography, "Who Says Elephants Can't Dance?" about IBM sort of getting reinvented. Software about the . These sorts of books really like those stories help solidify what things really look like in practice maybe a little bit more than just focusing on like the ideals from sort of pure business books that are a little bit more synthesized, a little bit more abstract.
I feel like start ups are this interesting class of problem where you can get the same advice from 10 different places and like with YC, they plaster it all over the shirts that you get the first day, there are stickers. They all say just, "Make something people want." You can get that advice and it sounds so simple but until you've screwed it up enough and done enough failures yourself, it's really hard to internalize what that means until you both failed and then subsequently succeeded at it.
I think it's sometimes tough to get kind of traditional advice from these books without kind of going through those motions yourself and actually failing at them once and then succeeding at them after the fact, but I do think they kind of help sprinkle in ideas, particularly now as we've grown into a little bit later stage just following what other companies are doing and how they're operating and how they're running.
At least in our case, I find we try certain ideas from those and implement them. Peter recently was talking to a few other founders and had this idea for product pitches. The general idea that people kind of pitch what products they want to work on every six weeks or every two months, and so we've adopted some of those sorts of ideas internally based upon what we hear but I think it's really hard to take those sorts of lessons in the early stage when really the whole world is kind of your unknown universe as it were.
Someone told me recently, or they sent a tweet actually, and I think they said, "If startup advice is short enough to fit inside of a tweet, then you can guarantee it will be misunderstood and misinterpreted."
I think "make something people want" is a perfect example, because I went through YC too and I don't know how many times I heard that and then went off and made stuff that people did not want and didn't really catch it until months and months, maybe even years later.
We did exactly the same thing.
I think it's funny how you realize what all the YC partners were saying only, or at least in our case, it was only after the fact. It was like a year and a half after we'd been through YC, we're like, "Oh, that's what they meant."
What is it that you think is so hard to internalize about this advice? I'm kind of putting you on the spot here, but how would you try to explain it to a new founder or somebody who's just starting out and might not fully understand it?
I tried to explain this whole concept at the YC Stanford class with a lecture on product-market fit but I think the problem for me personally was I didn't actually know what product-market fit felt like. I didn't know when we had it or didn't have it and basically I only had, if you imagine sort of like you're trying to train a machine-learning algorithm in your head and I only had data on the like negative side. Like, "This is not and this is not," and you're like, "Well, it doesn't really give you like a boundary," like if you're trying to train a classifier, this is like a really bad data set.
Once we had one success and once we sort of like knew what that felt like with launching and sort of feeling the product-market fit there, it was like, "Oh," and all of a sudden the classifier got like much stronger. In that presentation at Stanford, I was trying to help people just understand what it feels like to prime for product-market fit so they could maybe have at least by proxy one data point on the other side of that classifier. I think that's the hard part. It's a very sparse data set and it's almost entirely one-sided.
Yeah, so I just want to talk about the future of Segment too because I think it's kind of a clue into your psychology and where you guys are going with this.
What are your goals as founders and how have they changed over time because I'm sure there are things you guys are thinking about now that you probably didn't even consider four or five years ago?
Yeah, I think we have like a reasonably well-developed sort of like vision and product strategy for where we want the product to go in the next, or where we think the product should go in the next, let's call it five, maybe 10 years. Based on all of the conversations and learnings that we've had with customers about what problems they have and how we think we can solve them with Segment. We're doing a major product launch in October so I can't sort of totally talk about what's coming but what matters the most to me is executing against that product strategy and solving a lot of the problems that customers have with data, with customer data, with actually being able to market and support their customers effectively and sort of solving those problems for them with the products that we're building and basically building out the vision that we set out over the last few years. That's what matter the most to me.
I think there's like a certain size of company and funding structure and so forth that people probably talk about more in the press that like supports that sort of impact that we're trying to have with that vision but I think what ultimately matters to us is less like, "Oh, we're going to IPO," or whatever and is more like what really matters is building out that vision and bringing it to all the companies that really need it.
What about your personal goals as founders?
I think for me at least, what I've appreciated most about our journey at Segment is just having kind of having a front row seat into the life of a start up, at least, I know Peter has mentioned this on a couple different occasions but he likes to say that every start up has their own totally unique journey and no two are really alike. I think that's part of the reason that these business books are so fascinating is because when you're figuring things out and defining a new company structure and defining like what the org looks like or what the priorities look like, there's no real right answer and so that discovery has been at least incredibly rewarding for me and I'd like to continue seeing it forward kind of over the coming years.
What about you, Peter? What are your personal goals?
I'm not sure that my personal goals differ very much from the company goals.
You've become Segment.
Yeah, I think founders get pretty deeply tied up in terms of their identity with the company I think, for better or worse. I've seen companies get acquired where this basically, well, it has a very destructive impact on a founder I think when I've seen founders have companies get acquired.
Yeah, I totally understand that and I think in a way, having your goals so aligned with the company is a tremendous advantage and it's why you should probably do something that's at least somewhat interesting to you, otherwise, five, 10 years down the road when you're still working on this business, you might hate your life.
It's kind of funny because you initially wanted to kill the idea and now you're the CEO, you know, and your identity is all wrapped up in that. What changed besides just like the success of Segment?
I think I didn't understand what it actually was, so the initial idea was like, "Well, there's this open source library and like it's a really good abstraction for sending data to different analytics tools," and I was like, "That's just not that exciting, like how many analytics tools are there? How many analytics tools is a company actually going to use? Like who cares?" Then it turns out that like the data we're collecting is like not just useful for analytics tools, it's also useful for email marketing tools and post notifications and help desks and CRMs and security and fraud tools and data warehouses and advertising conversion pixel. I could go on and on.
This was like this data about what interactions a customer is having with a company are like deeply important to every aspect of the business and that's a totally different proposition. I think we launched this thing not really knowing what it was, to be honest. Then as we saw people start using it and learned from them from the customers, like what it actually represented to them and what it could become, that became far more exciting.
I think it took us, I'd say actually we had so much downward momentum in our moral. I think our moral as a founding team bottomed out like a month after we hit product-market fit and then it started coming back up as we realized sort of what was actually happening. Yeah, I think the year or two after that of sort of the journey of actually understanding what problem we were really solving for people, gave us a ton of motivation to actually go like really invest a lot of time in solving it.
Yeah, and that moral is extremely important, anyway, I think that's a really good point to end the interview on. I know you guys got places to go and things to do but I really appreciate you guys coming on the podcast. You had some really awesome insights and why don't you tell people where they can go to learn more about you guys personally and about Segment as a company?
Yeah, you can learn more about Segment at Segment.com and my personal blog is REIN.PK.
Yep, and my personal blog is CALV.INFO, but I write mostly for the Segment blog these days so go check that one out.
All right, thanks guys.
Thanks for having us.
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