Finding product-market fit with Ryan Denehy of Electric.ai

Maren Kate
Hi, welcome to From 5 to 50, the podcast dedicated to helping startups and founders survive and thrive in the early stages. I'm your host, Maren Kate. And we're here with Ryan Denehy of electric.ai. Ryan, welcome to the show.

Ryan Denehy
Hey, thanks for having me.

Maren Kate
Absolutely. So just first off, because I just finished watching an interview from you, you described entrepreneurship as a succession of punches in the face, punctuated by moments of success. I thought that was brilliant.

Ryan Denehy
Very true for anyone who's ever tried to start their own company.

Maren Kate
It is and it's also something that's really I don't feel like talked about nearly as much as it should be.

Ryan Denehy
Yeah, I don't know. I think a lot of founders have this predisposition to gloss over the stuff that doesn't work but I think that the reality is most of the reason why your company will end up being successful is how you dealt with all the things that didn't work.

Maren Kate
All the body blows?

Ryan Denehy
Yeah, absolutely.

Maren Kate
You’re a three-time founder and tell me about your current company Electric. When did you guys find…or found, find…(ha ha) when did you found the company?

Ryan Denehy
Fall 2016. We launched with our first customers in January 2017.

Maren Kate
Okay, so just quickly in 90 seconds or less tell the audience the founding story or the why behind starting Electric?

Ryan Denehy
Yeah, the why behind it's pretty simple. So for anyone that doesn't know what Electric does, we're effectively automating the IT department for small and midsize offices. So why we ended up on this idea was when I was running my previous company in San Francisco we had all these internet outages, and people never had the right software on their computers, security was a joke, and I thought there's got to be a tool that makes it easy for a nontech person to manage and support all the tech in their office. My assumption at that time was there had to be 10 other companies doing this and, as it turns out, there wasn't anything on the market that did that. So I just decided that this had to happen. This had to be a company that gets built.

Maren Kate
Okay, and so after your second company, you started Electric. What's the business model? How do you guys make money? How did you think about it then? How do you think about it now?

Ryan Denehy
Yeah, that's a great question. You know, we sort of looked at what businesses were currently doing to solve this problem and most smaller companies were typically hiring a local IT consultant. They would have to buy blocks of hours you either used or if you didn't use them you still ended up having to pay for them. So we looked at it and we said alright, well, every company right now is increasingly comfortable with paying a flat rate per month, per employee for all their software licenses so why don't we just offer a flat rate per month, per employee for what we considered ‘all you can eat’ IT support. So that was the model then and it's the same model now. Now, as the business is growing, we're starting to get a lot more dialed in around the pricing and various packages of our products. But, you know, fundamentally, it's just a flat rate per month, per user.

Maren Kate
Do you consider it SaaS? Or is it like a SaaS services hybrid?

Ryan Denehy
Yeah, I mean, look, the vision of the company long-term is that this is a SaaS product. I think there will always be some small percentage of humans in the loop, even at much larger scale, for the purposes of enabling us to automate more of these tasks and train our models and really deliver the sophisticated software that we want. That's sort of an arc that happens over time. When we first launched the company, there was no tech at all which is sort of what we had to do in order to figure out exactly what we needed to build. So I would say that, at this juncture, it's both. Obviously, one of the unique challenges or nuances of our model is being predominantly services-led in the beginning and transitioning to being predominantly software-led over time. I think at this juncture too, though, it's also a little bit of a competitive advantage in so far as it would take a lot for someone to try to copy this model at this point.

Maren Kate
Yeah, absolutely. That makes sense. And then I know you guys raised outside capital. How does that work in the beginning? Did you self-fund or bootstrap it and then get to a point where you raised? Did you raise right out of the door? And how did you discuss the services aspect of it with investors? I know sometimes they can be a little bit spooked around that.

Ryan Denehy
Yeah, so I think if the end state of the business was just gonna be a bunch of people banging on a keyboard I think this would not have made sense as a venture-backed investment. But I think what was really clear early on was that the way we actually get to the promised land of building a really big powerful piece of software is actually starting with a lot of humans in the loop and automating more and more of those tasks over time. So that story made a lot of sense to folks and so, initially, when I explained the idea to Mike Brown at Bowery Capital he got it immediately and was like, yeah, this makes total sense and, actually, this is a really novel way of going about it. So he actually gave us the term sheet for a seed round before I even had a deck put together.

Maren Kate
The dream.

Ryan Denehy
Yeah. I mean, compared to my last two companies where I don't know how much time we spent building presentations that people never even looked at.

Maren Kate
It always happens like that. It's like you just spend 100 hours building a presentation, then you get to a point where they're like, “cool, here's a check”. You’re like, “what the hell”. That's awesome. Is this an investor who had backed you before or just someone you knew from the…

Ryan Denehy
No. I'd spent most of my career on the West Coast and so when I moved back to New York to start Electric I really didn't know anybody out here. Mike and I just happen to have gotten to know each other. When he was running AOL Ventures and I was still at USA Today our paths had crossed and so it was pretty serendipitous in the sense of like the only VC I knew in New York City just happen to be a seed-stage investor who knew the enterprise really well. Yeah, so it all worked out.

Maren Kate
So do you have co-founders? How did that work? Because I know you did have co-founders in your last two companies or the same co-founder.

Ryan Denehy
Yeah, exactly. So my co-founder for my first two companies, Rudd Davis, he's still out on the West Coast. He's on the board of Electric but not involved in an operating capacity. So yeah, it's been great having him along for the ride. He actually runs a company called Blackbird. If you need to get somewhere that’s a really far car ride, you can use Blackbird to get there.

Maren Kate
A scooter, right?

Ryan Denehy
No, you can use a plane. So he basically built a marketplace for aircraft. I'm totally butchering it. He probably wouldn't describe it that way but if you need to get somewhere quickly on a plane Blackbirds is a pretty good solution for that. But, no, he and I decided we had a great run, 10 years working together, two successful exits, he was the best man at my wedding. But he really wanted to do Blackbird and I really wanted to do Electric and so privately still great friends but, for this one, I technically don't have any co-founders. Bill Tyndall joined me as the first employee. He famously quit his job on his honeymoon after I signed the term sheet for our seed round. He's been here since the beginning. We have another guy, Julian, who is our original support guy. He left his job at Geek Squad a month before we launched and he was the person answering all the questions customers sent us on Slack for the first few months and he still works for us today.

Maren Kate
Awesome. And then what's the current size? I know you guys have grown pretty fast.

Ryan Denehy
We have, yeah, one day we were five people and now I walk in and we're 150 full-time employees. It's a big payroll support. Most of the team is here in New York City at the moment. We have an engineering office in Buenos Aires, Argentina, which has worked out really well for us and we'll be expanding our customer support centers to Rochester, New York and Bangalore, India later this year.

Maren Kate
Yep. What made the decision for engineering in you said Argentina, right? And how do you make that call?

Ryan Denehy
Well, look, in any business, particularly when you're trying to grow fast, headcount is both your largest individual expense and, even if you had all the money in the world, actually finding the right people on the timelines that you need them is really challenging. So we just took a more holistic view of building out our teams and said, okay, what if we opened up our talent pool to the world rather than just one really competitive market. So Argentina was a really good mix of significantly lower cost for a lot of these roles than hiring in New York but on the same timezone, a lot of the folks down there speak English, so it just made a lot of sense for how we were trying to grow that team.

Maren Kate
And did you have a CTO that kind of led that vision? Did you lead it?

Ryan Denehy
Overall, it was a decision made between our technical leadership and our Head of People, Jamie. She had spent a lot of time thinking about it because when it comes to opening up remote offices there's a lot of internal cultural implications to the company that you have to consider. Jamie actually knew of a group that had been pretty successful building remote teams for people in Argentina and so one thing led to another and we said, alright. We went to these guys and said, “give us three software developers and let's see how it goes”, and very quickly they brought people in, and those people were good, and the numbers made sense, and it just kind of grew from there.

Maren Kate
Okay, that's cool. That actually led to one of my questions, which I was going to say, why did you guys choose to go fully in-house in Manhattan of all places? Like you said, headcount can be beasty. But that makes a lot of sense if you're putting together distributed offices, too. Do you think, at any point, you will launch remote options? Or do you guys really like the culture of the in-house offices?

Ryan Denehy
It was really important for us in the early days to have people here just because of the rate at which the business was evolving. From a management perspective, you want as few things getting in the way as possible so that you can just evolve your strategies quickly. Now we're at a scale where it's kind of the opposite. Trying to have everybody here in New York City would be an inhibitor to growth and so we started experimenting with this model with our engineering team, obviously, in Argentina. As we saw that working really well, we then looked at our support team. We knew from the beginning that beyond a core group of support folks here in New York who would be our initial team to help us prove out a lot of the processes we knew long term it was going to have to be somewhere else. So now that we're at that point we applied a similar methodology in terms of balancing cost, quality, scalability and that's how we were able to settle on Rochester and Bangalore for expanding the support team. I think every other headcount-heavy department eventually is going to have an augmented staffing model somewhere else because, again, it just comes down to resources are finite and talent pools are finite. So the smarter you can get about looking outside of the market that you start the company, generally, the easier it's gonna be to continue to grow the company in a responsible way and keep quality high.

Maren Kate
Yeah, absolutely. I mean, every business I've started has been fully remote and I just fell into that because I was in college and I was poor and I didn't know how to hire people so it made sense to go offshore and I liked working online in between classes. But one thing I'm noticing now is I feel like there's kind of a sea change in terms of companies, whether they start co-located or start remote or have a combination, there's a lot more openness to the idea of everything doesn't have to be in one place and maybe as we're becoming more of a global economy. But I think it's really interesting to see as you have an engineering team in Argentina or customer support in Bangalore, or remote. I have clients that have remote product teams all over just one timezone so that's really interesting. In terms of how much you guys have raised, what does that look like? And what's your timeline then? Because I'm doing the math in my head, it's like two years you've been around, right?

Ryan Denehy
We’ll be officially celebrating our third birthday as a company in like a month or two. Yeah, not even three years old. Every round has happened a little faster than I thought. So we've raised 37 million since we started and so that's between Seed, Series A, Series B. Bob Goodman at Bessemer led our large Series A and 2018. Jeff Richards at GGV Capital led our Series B which closed this past January. In every case, we've been really fortunate where I think there's just a lot more venture funds and a lot more institutional capital in chasing venture deals now than there ever has been. In our case the benefit from having raised money many other times for previous businesses is you really have to appreciate the gravity of the decision when you're deciding to bring somebody into the company because these are people that are going to own a significant portion of your company, have decision making power, and that you're generally going to be working with for many, many years. In our case, both Jeff and Bob were both entrepreneurs before they got into investing, and then one of our other seed investors, Brad from Primary, whose still on our board, he operates his fund as if it's a startup. So all of these guys are sitting around the table and really understand and appreciate what it means to go through the struggles of building a company and, as a result, they know when to raise their hand and point out things that need to change but also know when to just be supportive and push us in the right direction.

Maren Kate
That's amazing. It's so important. I think after you've raised money before you really get an understanding of how important those relationships are and how important someone supporting you for the ups and the downs are. What would you say the most successful growth hack is that you've ever tried for Electric in terms of acquiring users? Or B2B companies? And it even could be really early on.

Ryan Denehy
Yeah, well, I mean, it's kind of twofold, right? I would say there's growth hacks from a customer acquisition standpoint, there's a couple that we're still employing that I'd probably rather not talk about because we use them and don’t necessarily need other people copying that strategy. I would say, taking a step back, more so than just overtly a customer acquisition tactic but just a growth hack in general, I think launching our MVP two months after we closed our funding was really critical in the sense that it barely qualified as an MVP. Our first product and I'm using product with air quotes, was just a user in our customer Slack account that we call Electric, and then Julian, our first support guy, sitting on the other side of the account manually responding to all the messages and then turning to his other computer and pushing the info into Zendesk.

Maren Kate
I love that. I love those nitty-gritty things like that.

Ryan Denehy
That's about as bare-bones as it gets. What we knew, or what I knew, from my first two companies was, for both companies, we wasted about a year trying to find product-market fit, and every time there'd be this product development cycle, we'd get the product in front of the customer that we thought was our customer. And your decisions can be clouded based on the amount of work that you put into building these things. Very quickly, you can lose 18 to 24 months building stuff that no one cares about. So not wanting to repeat that I basically said, look, we're gonna focus all of our energy on who our customer is, what problems we're solving for them, and, generally, how we're going to deliver that. Because until you have real product-market fit, you don't have a real business, right? So you want to get there as efficiently as possible and, in our case, because we raised money pre-product, what I really wanted to avoid doing was burning through a year looking for product-market fit while we were on the clock with our investors. What I wanted to make sure we were focused on was this capital that we raised on our seed round is so that we can prove out a real business that then we can go scale. So, when I looked at it, I thought, okay, well the most efficient way to do that is to build as little software in the beginning, really understand the customer and the model behind it, then start building the software. So that's enabled us to get pretty far in our first year with minimal hiccups.

Maren Kate
So you said build as little software as possible upfront, get to know the customer, and then scale it out once you have that initial product-market fit.

Ryan Denehy
Totally, yeah, and the tolerances to which you can do that are gonna vary wildly based on the business you have. I mean, I've got another example of that on the consumer side is, a very good friend of mine, Justin Mares, he owns a couple of different brands, CPG brands, so like he's got a bone broth company and his bone broth is sold at every Whole Food and the way he started that company was he literally didn't even make a product. He just set up landing pages first and bought search terms around different consumer packaged goods and very quickly was able to see there's a very real business around bone broth and then he went and made the bone broth. I think they'll do 40 or 50 million in revenue this year and that was four years ago when he did this.

Maren Kate
That's phenomenal. I mean, that's one of the biggest takeaways that people get from listening to this because in our day and age where it's so easy to launch and start a business, you know, you just need a Squarespace page or WordPress or whatever, you just need an idea and you can get it up there. I think the big barrier is finding markets. So now it's about testing, and going through that struggle really early on, and then iterating versus trying to build something in a vacuum. That's awesome. I love it. I made a note for myself because I do that too.

Ryan Denehy
Also getting people to pay for stuff is, shocker, a business involves people paying you for things right? A lot of companies have seen what some of these bottom-up SaaS businesses like Slack and Dropbox have done with scaling quickly on a freemium model but that doesn't necessarily work for different types of businesses. We got asked when we were raising our Series A, “how come you don't just like give it away and scale like crazy and then charge for it?” With something like IT services, we realized very quickly that the types of customers that would respond well to free IT support, free IT managed services…

Maren Kate
Isn’t the type you want.

Ryan Denehy
No, not at all. Yeah, I was like, that would just be a disaster. Yeah, we tested that for like all of two days and I was like this is going to kill the company so we moved on. The difference between getting people to tell you that they would theoretically pay for something and actually getting them to transact even $5 or $10 is way different.

Maren Kate
It's a game-changer. Awesome. Okay, so my final three questions. What is your favorite book or podcast from the last year?

Ryan Denehy
Well, there's a book called The High Growth Handbook that's really solid.

Maren Kate
I have that in my basket.

Ryan Denehy
Yeah, it's great. It's not super dense. Each chapter is basically almost like this series of anecdotes that is…each chapter is broken up by different departments of the business. So like, one chapter is raising money, another chapter is hiring executives, another chapter is business development. So it's like any good business book, a lot of the stuff that you'll read, you'll read it and think that it's kind of obvious but the power is in internalizing that and thinking about it. So yeah, I would recommend everybody read that for sure. There's obviously some classic ones. I think that I've read Principles by Ray Dalio like nine times.

Maren Kate
Oh, my gosh, that’s so amazing. I used to print that out like 10 years ago when you could just print it out from his website and I would go through it once a year and highlight it. I think I learned operations just by reading that.

Ryan Denehy
I did that when it was just a PDF on the Bridgewater website

Maren Kate
Yeah, yeah, like 157 pages and you'd print it out at like Kinkos and then you just have your highlighter. I used to take the train from San Francisco to Menlo Park and just sit there and I still think he's a genius. What business tool could you not live without? Besides your own, obviously.

Ryan Denehy
I would say, when we first started the company, this has since changed, but when we first started the company I would say Yesware was critical because when Bill and I were handling our first sales to customers it was very important to understand if people are actually reading your emails or not but even through our last fundraising round emailing investors and just managing that cadence of communication and really understanding how often are my emails getting read, are they being read at all, when are they being read, how many people are reading them, right? Yesware was super helpful in the fundraising process because you could time your responses. I'm kind of jaded by it now. If I open an email and they get a follow up right after I'm like, “okay, well, the person probably knows I opened it” but I was stunned even six months ago I'd see a potential investor opening an email and I'd ping him right away like, “oh my gosh, that's crazy, I was just thinking about you”. No way, me too..(ha ha)

Maren Kate
That's amazing. Okay, and the last question for founders listening who are somewhere between that 5 to 50 person stage, what is either the best piece of advice you've received in that stage or the best piece of advice that you give to someone who's scaling for that?

Ryan Denehy
Yeah. So let's see, when we were in that 5 to 50 stage that was like post-seed so, basically, right around Series A so we had a business model and now we just had to professionalize it, operationalize it, and start scaling. Hands down, my single biggest failure, my single biggest mistake at that stage, which is probably once we were north of about 10 employees, I needed to have just taken a step back, looked at the plan that we wanted to execute on for the coming 12 months, and then just had a really honest conversation with myself and our investors and said, “Okay, if this is the plan we want to hit, the plan being product roadmap, sales, account management, whatever”. I should have then basically said, okay, what are the requirements of the manager that needs to be over each of those key functional areas, write the job description, and then walk back into my office and say, okay, do those people work here? Because ultimately, when your business is just you and a handful of people you don't want really rigid management and overly defined roles because you need to divide and conquer but you need a little bit of everybody doing everything. But the second year you're doing half a million, a million in revenue, real departments start forming, and you really need to start managing against metrics and goals. The quality of the business you're building is 100% tied to the quality of the leadership that you hire. What I'm not saying is you don't necessarily need to go out and hire a bunch of C suite executives when you're 15 people. In most cases, that's probably not the right call. You just need to be really clear about what defines success in each of these departments of the company and what is the caliber of leader required to make that happen. I think most people at the seed stage would probably be shocked to go through that exercise and sort of have this realization that I don't have a lot of the right people here right now. Right? So for us, many of the earliest employees of the company are still here. So, what I'm not advocating is just go swap out your whole team but what it means is you try to be honest about who you need in what roles because the worst thing you can do is have a talented person in the wrong job. For me, I think it was after our Series A, I remember thinking to myself, the expectations of the business are so high, we've raised all this money, we just gotta press on and sort of figure it out as we go along. In hindsight, it was still not a very big business. I think if I had gone to the board and said we need to push the whole schedule of the company back a quarter so we can really get our arms around the hiring I don't think anybody would have pushed back on that. So that'd be my biggest piece of advice. Get the team right early.

Maren Kate
That's exceptional. I couldn't agree more. Awesome. Ryan, thank you so much. Just last how can people find you online and find Electric online?

Ryan Denehy
Our website is just electric.ai and anyone, founders or prospective founders, if you want to reach out to me directly, my email is ryan@electric.ai.

Maren Kate
Great