Building a Venture Scale AI Developer Tool Company: Moderne CEO Jonathan Schneider (Part 4)

Sramana Mitra: So now what about the go-to-market strategy? What were you settling into? You were talking to customers all this while. What was emerging as the go-to-market strategy?

Jonathan Schneider: It’s hard to say I regret a particular approach because we are where we are. It’s always hard to know what the alternate universe would be. The first product we delivered was a single tenant SaaS and completely isolated infrastructure, cloud provider and region of the customer’s choice, bring your own key encryption, egress only connectivity, etc. Our co-founder Olga had been at EMC Enterprise Data Protection for twenty years. She knows a lot of these specifics of what an enterprise is going to need to adopt a product like this.

We used to tell early customer prospects that it has the same security profile as highest tier enterprise virtual Snowflake. It’s insane to build that as the first product, but that’s what we did.

Perhaps in retrospect, we would have done more of an on-prem air gap, CLI type thing first and then build our way up to single tenant SaaS, but we just went straight to single tenant SaaS.

So, the first few customers were Shelter Insurance out of Missouri, Desjardins Bank, one of the top Canadian banks out of Quebec, Allstate. They’re not the typical first customers that you go after. These are usually later stage adopters.

Sramana Mitra: The pain point was the same. They were trying to migrate from old applications.

Jonathan Schneider: Absolutely. They just had massive amounts of technical debt remediation platform health type things to work through. We had to work through very long sales cycles with them as they evaluated a new technology concept from a very early-stage company where they’re not used to working with early-stage companies.

Sramana Mitra: What kind of deal size did you end up with those two early customers?

Jonathan Schneider: We ended up with $100K- $200K annual deals.

Sramana Mitra: Very good.

Jonathan Schneider: Those were one-year deals initially. As those rolled over after the first term, we increasingly started signing multi-year deals -three to five-year deals. We’d have guaranteed net dollar retention increases locked in year over year in exchange for some price control. There was this dynamic in the market, especially well into 2022, where companies had raised at very high valuations.

In 2022, there was a sharp correction in valuations that compressed all the way down into early growth stage companies. Now, you’ve got companies that are kind of facing very high valuations. If my valuation multiple on top of my revenue’s too high, I’ve got two choices. One I raise at a flatter down round and try to correct, and then just reset things and build for the future. Or I go shake down my customer base for a substantial increase.

So, we started seeing products that were going back to their customers with 15 x, 6 x, or 10 x prices. This put a big chill on the whole enterprise sales market. You started to see enterprises very reticent to work with an early-stage company for fear that this was the sort of behavior that we would show in the second year or third year.

So, recognizing that and that we’re not in this for the short term, how can we alleviate that concern? That was by signing a much longer deal, which has some degree of price control, but then we also have guaranteed net dollar retention increases locked in and really try to align incentives.

Sramana Mitra: But they would depend on an annual basis. They were not paying everything up front, right?

Jonathan Schneider: Yes.

Sramana Mitra: OK. So it was predictable revenue, but the cash was coming in due course, not all at once.

Jonathan Schneider: Exactly. We felt that that was best aligned to our customers. It’s a bit of a humble approach.

Sramana Mitra: I really like humble projects. And were you working from home, you and Olga, and your co-founders?

Jonathan Schneider: Yes and no. It’s a bit more complicated. I had actually moved to Toronto before we had started the company, but then Covid started. Technically, software engineering isn’t considered work in Canada by treaty.

You can be there on visitor visas, but then the border shut down

and I got stuck on the US side of the border and didn’t really have anywhere to go.

The first founding engineer we hired was in Seattle. So I was kind of stuck on the other side of the border, not really clear where I should go exactly. I just moved to Seattle because that’s where our founding engineer was. At that point then Covid is in full, full force. Everybody’s kind of afraid to meet with one another. We used to work together side by side on a picnic bench in a park in Seattle in the early stages of the summer of 2020.

Ultimately, Olga had to move to the US because of the, the tax implications of investing equity in Canada. There’s no 83 B be equivalent to Canada. So that was a surprise we didn’t know about when we founded it. So, she came to the US on a TN visa and joined us in Seattle. We kind of had a little bit of a nexus there in Seattle and a small office there.

Sramana Mitra: And you’re still in Seattle?

Jonathan Schneider: We left by early 2022. Most of the early stage founder community we knew were leaving both the SF area and Seattle area. It just became increasingly sparse and people were moving to New York or Miami and a scattering of other places.

In early 2022, we visited New York and considered that as a sort of a nexus of the company. We then visited Miami. I had never even been to Miami prior to that. I think 10 days later, we packed the ship up and moved everything to Miami.

Sramana Mitra: To Miami? Goodness!

Jonathan Schneider: It was literally the opposite corner of the country. It took 11 days to drive from one corner of the country to the other.

Sramana Mitra: Yes. At this point you still have just those two rounds of financing- the Robin financing and the Puneet financing?

Jonathan Schneider: We had raised Series A from Intel Capital in December 2021.

Sramana Mitra: What were the denominations of all this fundraising? $750K from Robin and then?

Jonathan Schneider: It was just under $5 million seed then a $15 million series A.

Sramana Mitra: So, seed was $5 million and series A was $15 million. You were raising big money. Was the go-to-market an enterprise sales go-to-market?

Jonathan Schneider: Yes, was and is. It continued to be unpopular in 2021. It’s interesting how quickly that shifted. In 2022, as the valuation compression started moving down market, the very same investors that we would that would one day say bottoms up PLG, very quickly moved to the capital efficient enterprise growth story.

Sramana Mitra: There’s one thing in your early customer traction that I liked tremendously – the structure of the deals. You had these $100K-$200K deals, and then they were three-to-five-year deals with a fair bit of predictability and sizable deals.

That’s a very attractive deal structure and a very attractive price point for enterprise VCs. It’s a tried and true category of investment. VCs understand that very well. Everybody in Silicon Valley has a lot of knowledge around that kind of investment. So, I’m sure you benefited from that.

Jonathan Schneider: No doubt. For our series A, I categorize that as a pre-emptive series A. The reason that was possible at the time was really the feedback from Allstate back to Intel. We’d actually met Intel Capital in the first couple of months when we just had the safe and hadn’t raised a seed yet. Intel Cap doesn’t do seed rounds, but Nick does like to meet companies very young and just be helpful in some way. So, he introduced Morgan Stanley and Allstate.

All that time, Allstate was feeding back to him. This is what we think is the total economic value and the long-term value. Morgan Stanley said similar things. And that gave Nick somewhat inside knowledge of where he could see things going that others may not have seen at the time. So, that’s how he does it.

This segment is part 4 in the series : Building a Venture Scale AI Developer Tool Company: Moderne CEO Jonathan Schneider
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