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Concept Financing from Andreessen Horowitz: Andrew Rubin, CEO of Illumio (Part 6)

Posted on Wednesday, Aug 19th 2015

Sramana Mitra: Venture capitalists and even seed investors do not fund concepts. We say this to our entrepreneurs in the program all the time. You have to get to a business. You have to get to some level of validation with your product before people are willing to write big checks.

Andrew Rubin: I think there’s a lot of truth in that. But I think we are among the few of the data points that does show that there are some exceptions to the rule. They are far and few between. What ended up happening with us was we had a lot of soak time. We spent a year. Although we hadn’t built the product and we didn’t have customers and revenues, we were in a position to be able to explain in an unbelievable level of detail, the depth of the problem, the specifics of why it existed, exactly what we wanted to build, the architecture of how we were going to build it, and exactly what it would do and how it would behave. I think three things came together for us in December 2012 when we pitched Andreessen Horowitz, which gave us a yes before we had a product.

The three things were very simple. Number one is we really did have a lot of domain expertise, not only in the industry and the space, but because of that year of working so deeply on this. We were in a position, even without a product, to describe it at a level of detail as if it existed. The second thing is in December 2012, the world had started changing. Security became a paramount focus for most enterprises. It has obviously become a very big focus for a lot of governments. The world was starting to understand that security is no longer an incremental piece of the technology space. It’s going to be as core as how you build a network or application. That had nothing to do with Illumio but we benefitted from it. The third one was luck and timing.

The partner at Andreessen Horowitz that I had an opportunity to pitch our idea to is a gentleman named Scott Weiss. Scott had started a company called Iron Port, which he built to about $100 million in revenue, and just before taking it public, sold to Cisco for about a billion dollars. Scott had an immediate appreciation because he had been in that same space that PJ and I had been in. He understood at a visceral level what we wanted to do and why. In a lot of ways, those three things came together. That allowed us to raise an $8 million Series A round in a very unusual way.

Sramana Mitra: How did you get introduced to Scott?

Andrew Rubin: I got introduced to Scott by one of the venture capitalists that I pitched who actually said no to me but liked the idea. He wasn’t an early stage investor. To your point, he wasn’t able to deal with a company so young and said, “I happen to know Scott. I was one of the investors in his company. I think Scott would like to see this deal. I don’t know if he’ll fund it but I think he would like it.” He was kind enough to pick up the phone and call Scott. Two weeks later, we had our meeting. Within a couple of weeks after that, we had come to terms with Andreessen to fund the company.

Sramana Mitra: Great. It sounds like you took some time to build the product after that, and it’s basically a traditional venture-funded company route.

Andrew Rubin: Once we received the $8 million in funding, we started the company in January 2013. We hired a handful of engineers, went to work very quietly, and started working on building the product. The next meaningful data point for the company was eight months later, but there’s an interesting side story about what happened in those eight months besides building the product. It actually ties to exactly what you said about validation.

Sramana Mitra: What happened?

Andrew Rubin: I made a decision in the first two weeks of the company’s life. It was made at first casually that it would be impossible to build a disruptive technology for enterprise and not have the customer’s voice in the room from the very beginning even if you don’t have a product ready to sell to them. I believed that when you get funded early on like we did, there’s a tendency to put on a set of blinders to execute on the business plan that you have, which in the early days means to simply build the product. The one things that’s missing from that motion is any sort of feedback loop from the people you eventually want to sell the product to.

I went out and started talking very privately and under non-disclosure agreements with some customers that I’d worked with in the past. I went to some industries where I had a lot of exposure in my past like financial services. I started talking about what we were building.

Over those eight months, we were building the product. We would start showing them very early and very simple rudimentary pieces of it. What we found were two things. The first one was we were very fortunate that security became incredibly important. The receptivity of the customers to spend time with us was probably much higher than it would have been in the past. They wanted to think about security differently and they were willing to spend time with an early-stage company that was trying to do that. The second thing that happened was they became our validation, and in some cases, our course correction that allowed us to continue to build something that we knew made sense to customers. Eventually, it became an institutionalized motion. The company evolved around the fact that even though we were in stealth mode, customers were part of the company’s conversation every single day.

Sramana Mitra: What you’re saying is part of our methodology in 1M/1M. If you’re doing any kind of product, we want our entrepreneurs to immerse themselves in customers long before they write a single line of code. If you want to do any business, you should immerse yourself in talking to customers.

Andrew Rubin: I think it’s a great strategy for you to advocate. Maybe of equal or even more importance, never let it stop. Some of those customers spend a lot of time talking to venture capitalists in Silicon Valley. As you can imagine, it’s a very productive conversation because the venture capitalists get to learn what the customers are thinking. In our case, it ended up becoming an unbelievably fortuitous feedback loop. In August of 2013, we ended up raising Series B that was much larger and earlier than expected. We raised $34.5 million. We were only eight months old. The company was actually not even 20 people when we did the round.

Sramana Mitra: Did you launch the product?

Andrew Rubin: No, we did not launch the product for another 14 months after taking the Series B round. We remained in stealth for 22 months. In the next 14 months after closing the B round, because the company was so well-funded and we had started this motion of involving customers in every stage of the conversation, we would spend time with over a hundred global enterprises. We delivered our software, not for revenue, but for validation. We delivered software to about half of the hundred enterprises that we engaged with. Even though we hadn’t launched the company, we were building a set of operating muscles and a set of communication muscles that prepared us for launching the company.

This segment is part 6 in the series : Concept Financing from Andreessen Horowitz: Andrew Rubin, CEO of Illumio
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