Efficient and sustainable scaling

While just starting a business can seem like an exhausting task, the real hard part comes with building and growing it. On this EXTRA episode, we speak with Pat Sheridan, co-founder of Modus Create; Bobby Christian, COO of deepwatch; and Glen Pendley, CTO of SecurityScorecard about how to ensure your business can actually scale.

ABERMAN: When you all started out your businesses, what was the hardest part about starting?

CHRISTIAN: I think just making the decision. Usually something happens. In my case, I was with a company that had been acquired. We’d built a successful services division, incredible margin, we were growing rapidly, but it was part of a public product company. So, that product company decided to basically shut down the services business. So, that became an opportunity for me to go back to the CEO of the company and say, there’s still a market need and demand here. It may not be good for your margin, but that led to an opportunity to actually start a company to fill that void. So, it was almost like a forced situation, more than just an opportunity to start my own company.

ABERMAN: Certainly not the stereotype of a guy, a dog, and a business plan.

CHRISTIAN: Exactly. In fact, each of us has been a part of very successful companies. I’ve had some incredible mentors who built companies I was a part of, and I was a sponge. One of my biggest lessons learned was, when you see someone doing something well inside a company, come alongside them and ask them to mentor you. Just beyond what your normal job function might be, seek out other people that can help you build a capacity you may not have.

ABERMAN: How about you, Pat, Glen? Does your experience match the stereotype?

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SHERIDAN: No, not at all. When I talk to other folks who have founded companies, or to Jay, my business partner, we always use the term “accidental CEO.” So, for me, I hit this point around fifteen years ago into my career being very much on the emerging tech side, where you start to realize you know a lot of stuff. And, you know a lot of people who have gone on from early startups you’ve been a part of, and you have this network you didn’t realize you had. What I realized is, I knew a lot of people who wanted to do work with me. And so, the hardest part was just becoming self-aware and realizing okay, am I an LLC? a C-corp? How do I pay myself? We often have our areas of domain expertise that are core to the business being successful, but being able to do the things that enable you to have a business can be the most challenging when you’re getting off the ground.

PENDLEY: I think my opinion’s in line with both Bobby and Pat on this. And to touch on something Bobby said in regards to mentorship and being around experts, I’ve been very fortunate in my career to be involved with founders of companies who have been successful in starting, in some cases, garage-like startups versus serial entrepreneurship. In my experience it comes from the network, the people you know, and taking advantage of that sort of mentorship.

ABERMAN: I think network’s a big thing, and I want to come back to that. Before we go there, I am curious what your life experience has been. Is it harder to start a business, or scale it, and when did you realize one was harder than the other?

CHRISTIAN: Making the decision to start something is probably one of the hardest things to do. People delay it, even people that really want their own business, so I think making the decision and actually starting it is harder. I think if you find the right people to surround yourself with, find the right mentorship and advisory board, I think they can help you with each of the steps along the way. But I think making that decision psychologically, to do it, is actually harder, quite frankly, for me, at the beginning.

ABERMAN: That’s surprising, I feel the exact opposite. What about you guys?

PENDLEY: I was going to say, I actually feel the exact opposite on this from a tech and product perspective. Assuming that the business is in place, the very quick hack-things-together, do whatever you need to do to get the next deal, you don’t need as much discipline in place to continue to get that next deal closed. Once you start getting critical mass, and have to build things for scale, and put in a discipline process, and really start growing out? To me, that is astronomically harder than just beginning.

SHERIDAN: I think about how I actually met you, Bobby, and I was five years in with a company I’d started as an independent consultant, we had about ten people, I’d just finished business school and thought I knew all the things as it related to business. And after meeting you, and the companies you were involved in scaling, I realized: in order for me to grow, I’m going to have to fire myself, or get a company to see value as a complementary piece to what they’re doing with the business that I couldn’t get above ten people. And being able to surrender that, and help accelerate someone else’s run, you can’t imagine what you’ll learn and the experience you’ll get. And I think as it relates to the scaling side of a business, on the service side, like I said before, I think it’s easy because you’re good at something. If people want it, a computer and a network can keep you in business, but may not get you above ten people. But at a certain point, all the MBA stuff, when you get to five million in revenue, all of those things about discipline, as Glen mentioned, of running a business matter. And I think for where we are in the scaling, at Modus, essentially we had to fire ourselves to move to a more corporate structure, whereas before everything was going through the founders. You have to make the switches from hero to systems power. When I’d heard and witnessed from my network here in D.C., that a lot of people exit after ten million, or they exit between ten and twenty, many times it’s because that’s where you’re shifting from hero to systems power. And that can be a very painful thing, and you have to invest a lot in it.

ABERMAN: I think that’s the biggest challenge that many entrepreneurs face: we start a business that interests us because we see an opportunity, people come and join because they want to work with us. But you reach a point in an organization where you literally don’t have enough hours in the day to communicate with everyone all the things that need to happen. So, you have to have organizational structure. HR, strategy, product managers, and all these things. A lot of us don’t like that kind of structure, which I think is why a lot of people sell. How did you all get over that, not knowing everyone that works for you?

CHRISTIAN: Patrick said something interesting, I’ll tell a little story about Patrick that relates to that. What I find fascinating is, he started his company because he was really good at what he did. People were drawn to him. He got to ten people, but Mike Tyson says that a great strategy is phenomenal until you get punched in the face. And so, I think Patrick was getting frustrated, because he got punched in the face. He couldn’t quite get through the threshold of ten people. So when we did meet, he knew he didn’t have the sales side of the equation nailed, so to his credit, when he said he fired himself, he asked: what structure do I need to put in place in order to scale this business? He was interested in and passionate about growing a business, versus the thing he was doing. Which is very different. You can be really good at something, have a lifestyle business, make a ton of money and be very successful. But if you truly want to scale a business, you need all the components, from finance to marketing to sales to operations. And so, to Patrick’s credit, he fired himself, we actually acquired his company, and for about 12 to 18 months, we literally went up and down the corridor selling together. And he knew, at a certain point in time, when he got to the point where he knew he could do this as good or better than I could, he was out! And 18 months to the day, he came in, we got a cup of coffee, and he said, I’m out. And now, he’s been incredibly successful in his next venture, Modus, and I’ve been a part of that and watched him scale that.

ABERMAN: So effectively, he fired himself, then he fired you.

CHRISTIAN: Exactly. And it was one of the best moments of my life.

SHERIDAN: I remember talking to Glen, when I met him, and I asked, look, how do you be part of a company that gets acquired by one of the biggest companies in the world, and come up with ideas? And in this area, what I love about D.C., is that it’s a medium-sized pond with a lot of big fish. It’s a small city with a lot of big impacts. So, I remember talking to Bobby as I planned my next move, and he was like, have you heard of Mindshare? Or things like Foundercore, networking opportunities where I met you, Jonathan, for example. And then, part of that implicit contract is that the interview is the first year. The interview isn’t the interview, it’s seeing what happens. And so, being able to tap into his network as I was trying to build an advisory board, or I needed someone to lead sales, or asking, who have you worked with that I’d know? And I think that’s one of the hardest things for any entrepreneur, understanding the human side.

PENDLEY: For me, maybe it’s just the engineering side of me, I try to look at things as logically as possible. And scaling a company, millions of companies have done it. It’s a solved problem. And while every company has nuance and a unique experience, there’s no real reason to reinvent the wheel on this. So, I’m very data-driven, and I apply different things. If it’s not working, be open to change and try to be as efficient as possible, communicate as much as possible. So, with the success I’ve had, I just try to take a more logical approach and do what’s necessary to work.

ABERMAN: So, how do you know if you’re doing a good job scaling an organization?

CHRISTIAN: I’m addicted to the graphs that go up and to the right. If you’re scaling, the curves should be going up and to the right. They’re very easy metrics. What’s our revenue growth, gross margin, net profit, headcount, revenue per headcount? You look at that every morning when you wake up, then you go to the sales side and ask: what’s my total pipeline? Look at that funnel. It’s so easy to measure that, and that’s one of the things I love about growth: the problems have been solved, all you have to do is emulate the best, and ask what the dashboard’s telling you. You’ll know if you’re doing a good job, because at the end of each month, it’s X or Y, and it’s black or white.

SHERIDAN: I’ve been saying a lot to my team: there’s strategy by default and strategy by design. If the macroeconomics are in your favor, as Bobby said, your graphs will go high and right, but not because you’re doing anything. There are just a lot of folks who need what you have, and you’re not being challenged by someone who might be out-thinking you. I think there are certain rules of thumb, and one of the most important is that you need a co-founder. If I didn’t have a co-founder, there wouldn’t be a Modus right now, because I would have taken us over a cliff. So for me, I think about good problems, like if we don’t have enough people, or things that indicate that what your business was optimized to do is no longer working. And so, you have to start rethinking, and I think the faster your growth rate is, the faster you need to do it. And for us, since we’re a people-based business, we’ve seen this explosive headcount growth, and all of a sudden you’re replicating entire structures and getting close to one of those numbers that will drive when we need to do a big rethink. But what I try to do at the end of the day is say, how do we incorporate that into a management cadence? If there’s good or bad happening in the company, will they be identified in time to address them formally?

PENDLEY: At the end of the day, no matter what you’re building, you have customers. As long as everything you do internally is focused on driving customer success, the best possible customer experience, the growth will continue. You can organize your company around ensuring that the efficiency and execution that continues to drive those customer outcomes are in place, but the growth will continue as you continue delivering, and setting yourself up for success by focusing on customer outcomes.

ABERMAN: It’s fascinating. As I’ve taught entrepreneurship and scaling, when I ask, where does growth come from? I get a million different answers. I say back, guys, it’s really simple: growth comes from more people wanting your stuff than you can currently deliver. So, scaling opportunity comes from having a product or service people want to buy. I often think a CEO or founder is best evaluated by whether or not the lowest-level employee can explain the reasoning for the business, how the business executes, and have the words coming from them be consistent with the founders’ vision. What do you think?

SHERIDAN: I don’t know if that’s the case, because I think about the role of the CEO as being future-oriented. I need to excite the customers about what I’m investing in and building to match their needs, even the ones they don’t know they have yet. And when I often talk to folks, I get an answer relevant to the part of the company they see. If you’re in sales, you see it this way, another way in the client work. From my perspective, if you’re in client work, that may be the world where you need to understand the value for what you’re doing there. The bigger-vision things can become super esoteric, especially for an engineering-oriented business. Your outward-facing message speaks to the customer, and your internal message is to your team.

PENDLEY: But I do think that even from an engineering perspective, truly understanding a customer problem, having empathy for the customer, that’s where innovation comes from. Every vertical within a company has different goals and outcomes, and their vision is a little different, but I believe that if everyone is aligned to understand what problem the company is trying to solve, and what that problem is for the customer, good things are going to happen, growth is going to happen.

CHRISTIAN: Glen, you’re also in cyber, an incredible space right now, and I am as well. So, deepwatch is a security service provider, and Charlie Thomas is probably one of the best CEOs I’ve ever met in my life, and we’ve worked together on multiple companies. He’s the CEO, and I’m the COO. And going back to Patrick, I knew that he was doing a phenomenal job building Modus because of the questions he would ask me, and the problems he was solving each step of the way.

ABERMAN: Give me some examples.

CHRISTIAN: Absolutely. In the early stages of growth, they were more people-oriented, internally-focused. But as time went on, even in our last conversation, he started talking about making an impact globally, and how his model could be built out globally. He was talking about being outwardly-focused, and wondering how he could impact the community. How can this be connected to universities, so we can actually start building people inside universities? So, I think the problem he’s solving now is not, how do I scale my business? It’s about how he can make an impact.

PENDLEY: I know we keep praising Patrick here, but when I first met him, I was at McAfee, and I reached out to him, and the offerings and things Modus has at the time, just seeing him evolve over the last ten years, you could tell success when you know you have to evolve with the problem space. You can’t just have your heart and mind set on one specific problem, and it’s been really interesting seeing Patrick and Modus evolve with the needs of the market.

ABERMAN: It’s important to say, we can tell many similar stories in the tech community. And I think that’s probably the most important lesson: we all build networks not by “networking,” but by executing. People are always watching. A friend of mine, a lawyer, told me 18 months ago that I should meet Bobby for a particular reason. And I spaced until he walked into the studio and I remembered. That’s the kind of thing that happens. So, as an entrepreneur in this area, the most important thing is to establish very early on that you deliver, you execute, you don’t make stuff up, you don’t lie, and you’re honorable. And ten years later, you can tell a story about somebody, and that’s the ability to network.

CHRISTIAN: Yeah. That’s so true. As big as the world is, this is a pretty small community. You only get one shot, and integrity is extremely important. So, think about deepwatch. It’s growing 100 percent per year right now. That’s the growth side of it, but there’s also the delivery side. You can get customers in, but part of scaling is actually delivering successfully and retaining them. If you don’t do a good job for your customers, you won’t be scaling effectively. So, it’s two-pronged, especially above 25 or 50 million in revenue. You could do two shows on this: how you grow, but also how you keep it successful.

ABERMAN: What’s your best advice for an entrepreneur getting ready to scale?

PENDLEY: So, one of the cofounders at Tenable, Renaud Deraison, invented one of the most widely-used security tools at 16. As Tenable was growing at the rate it was, there was a lot going on, and he told me: just don’t give an F. Which sounds odd, but the context around it is: there’s always so much going on. You can’t boil the ocean, you can’t solve ever problem. So, being able to really prioritize what will make the most impact on the business, is the best advice I’ve ever gotten.

SHERIDAN: Like I said about being an accidental founder or CEO, people who aren’t one of these think you have some magic knowledge. But my definition of a good founder or CEO is, your job is to not let your success outgrow your ability to run it. I think that, in many ways, with peer mentoring and earning new degrees, you have to always be learning about the next needs of your business.

CHRISTIAN: Yeah. There are a million things going through my mind, but one is this quote: brilliant tactics executed marginally will never outpace not-so-great ideas executed with passion. That always gave me the opportunity to say, no matter how brilliant someone else is strategically, I can always outwork the hell out of anyone. So, that’s probably my best advice: get ready to work your butt off.

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