Building a Fat Startup: Apptio CEO Sunny Gupta (Part 3)

Sramana Mitra: You got this input from the CIO of Goldman Sachs. Did you go talk to other CIOs in the financial sector or other CIOs in general?

Sunny Gupta: Yes. I came home back to Seattle. On a long flight back, I thought, “This is the most ridiculous idea I’ve heard because it’s too easy. Why hasn’t it been done?”  Having sold to a lot of large customers, I felt that building a company just based upon one customer’s data point is a disaster. That’s where a lot of entrepreneurs go wrong. I believe in deep customer validations and whatever I did next had to be a big category idea. To do that, I wanted to go talk to at least 40 IT leaders.

For the next three months, I and my co-founders talked to at least 40 companies. I had good relationships with financial services, so I spoke to three or four financial services. I also wanted to make sure that I spoke to a lot of small companies in different verticals – healthcare, technology, airlines, financial services, and government. I also wanted to talk to customers in different geographies – Seattle, San Francisco, and New York – because you get a very different perspective from customers in New York and San Francisco. I wanted to talk to customers in Chicago, St. Louis, and Texas just to get a broad spectrum. I didn’t want to build a company based on one customer.

Sramana Mitra: In everything you said, everything made sense to me. It’s all great strategy to get this triangulation across different types of customers. The only thing that caught my attention is you said you wanted to talk to small companies. Small companies would not have the same scale of problems for this particular issue.

Sunny Gupta: The reason is at some stage, if you only focus on the big companies, over time the market limits your growth. I knew that big companies would help me get to a $100 million to $200 million run rate. I wanted to make sure that this was a problem which was felt by companies whose IT budgets were $10 million to $50 million – not only companies whose IT budgets were a billion dollars.

By small companies, I didn’t necessarily mean a two-person shop or a five-person shop. I wanted to talk to companies which were half a billion in revenue who felt like they have the same challenges. I felt like I could have a product which could be sold to thousands of companies as opposed to a 100 or 200 companies.

Sramana Mitra: Given what you just presented, I assume you have a pricing structure. You came up with a pricing structure that could then play not only in the very large enterprise customers but also in the mid-market?

Sunny Gupta: Yes. To be honest with you, pricing is something which I had some initial theories on. I’ve reverted to our pricing model. Our pricing model is based on spend under management. It’s really a vector of complexities. We have multiple modules and applications and each application is priced by spend under management. It’s really a factor or a vector of complexity more than anything else. The more dollars you have under management, it scales down in terms of what our customer pays. A $10 million IT shop can get started for smaller than what a larger IT shop would get started for.

In the first 18 months of the company, I experimented with two to three different pricing models of the business based on the complexity of the infrastructure, how many assets they have, how many IT employees they have, and how many data volumes we were taking from the customer. We realized that it was too complex for a customer to understand the value and correlate the value. I remember sitting in front of 10 customers at one of our customer advisory board meetings. I asked them about the pricing strategy. They basically said, “Come up with something that is easy to understand and correlates to the value. It’s not different than how a personal financial manager charges you.” Even companies that sell into HR charge based on the number of employees. Just come up with a vector of what you’re really managing in the system and that’s a very easy vector to scale up and down. In that way, the smaller company is not paying the same and the bigger company can pay you more.

Sramana Mitra: My next question is, you had this input form Goldman’s CIO and then you went and triangulated that from various CIOs with different perspectives. By the time that you got a sense that this is a real problem, what did you do next? Did you raise money? How did you get the company off the ground? What was the thought process behind those decisions?

Sunny Gupta: Having done my previous startup, I knew these startups are all consuming and once you get into it, it’s a very long term commitment. I wanted it to be big. The most important thing I did was validate the product and market idea. The second was creating product mock-ups. We created a level of mock-ups where they could touch and feel the analytics, product, and the cost modeling.

The third thing I did was I asked 8 to 10 out of the 40 people I’ve talked to if they would be willing to pay money for the product. I’ve found in my past experience that advice is free. A lot of people are willing to give you free advice but I wanted to test the conviction whether they’re willing to write a check from their companies. We even made three customers sign an LOI. That gave me very strong conviction that this was a need and that they were not doing it as a favor to me.

Then came the assembling of the team and fund-raising. Those were the two most important things. Assembling the team was very easy because I had a lot of the people I’ve worked with in the past. I think a lot of startups get formed that way. Our Chief Technology founder was a guy I worked with at Mercury Interactive. My CFO Kurt was my CFO at iConclude. Then I had two other co-founders who I had worked with.

The key to me around assembling the team was that we have spent a lot of time together. We all had the same vision. I wanted to make sure these guys were committed for a long time. We also had very complementary skills but the first focus was on building the product. I wanted to make sure there was a lot of horsepower on building the product and getting the right product. The three people were technical people. One was a business guy. That was the most important thing.

This segment is part 3 in the series : Building a Fat Startup: Apptio CEO Sunny Gupta
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