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Avi Freedman is the co-founder and CEO at Kentik which is a network intelligence platform that provides visibility, performance, and security services to digital enterprises. The company has raised over $50 million from top tier investors such as First Round Capital, Data Collective DCVC, August Capital, Webb Investment Network, Glynn Capital Management, Third Point Ventures, Engineering Capital, and Tahoma Ventures to name a few.
In this episode you will learn:
- Being rejected by Y Combinator
- Why the traditional demo as call to action style marketing approach is dead
- How Kentik is adding value to others in this new era
- Avi’s top piece of advice for new founders
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FULL TRANSCRIPTION OF THE INTERVIEW:
Alejandro: Alrighty. Hello everyone, and welcome to the DealMakers show. Today we have a very exciting founder, a founder that has been able to build, scale, finance, you name it, and he’s done it multiple times. Also, he has experienced the corporate world and making the leap of faith. So, without further ado, let’s welcome our guest today, Avi Freedman, welcome to the show.
Avi Freedman: Thank you very much. Thank you for having me. I’ve been a fan of the show, and it’s an honor to be asked.
Alejandro: Likewise, it’s definitely an honor to have you here. Let’s start with the early beginnings, like a walk through memory lane. So, born and raised in Philly and raised in the suburbs. How was life growing up there?
Avi Freedman: Life was very 1980s Radio Shack. I haven’t seen the show The Goldbergs, but we grew up one town over. My parents were a doctor and a lawyer, so we were middle-middle-class, and I was very privileged and fortunate to have a good education. I grew up around people that were wealthier and some that were less. I also had some business and tech in the family that I got involved with that really helped me out later in life.
Alejandro: In 1978, you received a book that changed everything.
Avi Freedman: [Laughter] Yeah. It was a book called Instant Basic. We had a Seder. It’s a family gathering around the Passover holiday. My uncle, who had gone to MIT and was a cardiologist doing research, gave me a book in BASIC, and my father said, “Oh, I have computers at the hospital.” He was a pulmonologist doing research on lung obstruction. So, I went upstairs and wrote a program, and my uncle read the book. My uncle said, “No. Here’s changes.” Then I wound up going down to the hospital, hacking all night. I was eight or nine. My father had a wizard who had been in the UNIX world, so I was very fortunate to get into that pretty early.
Alejandro: That’s amazing. Obviously, that gave you access or exposure, and even then, you were envisioning how to create and build things in a scalable way. Your grandparents, at the time, were running a manufacturing company. Then, you got involved and applied some of that knowledge. Tell us about this.
Avi Freedman: Yeah. My uncle had started off – this was in the CPM days, which is an old operating system – with an interest in trying to help them automate their business from index cards to attract the customers. Then, once that was bootstrapped, I took that over and developed that out until it was a full-fledged business control system for them. Then, I worked in the business. I got to see their attitude toward customers. My grandfather was in the Rotary, and we did some hustle, and I went to the other businesses and basically adapted that system to them. So, I did database consulting back in the 80s. Built computers for people back when you could go to computer shows and buy the parts and put them together. I had a mix of things that gave me my money for toys. I always wanted to build a multi-line bulletin board system at the time, but I didn’t quite have permission from my parents to put a wiring closet in the basement with 20 lines, and modems, and all that. But I had fun as a teenager and into college doing various things.
Alejandro: So, you went to Temple for college, and you were already having your own gig that transformed into becoming a lab that you had with all those resources. That actually led you to start your first project.
Avi Freedman: Yeah. When I went to Temple University, I had already started using UNIX machines and buying and selling some workstations. They had these VNS machines, which I really didn’t like. The operating system was like the administrative empire operating system. But I got permission to bring in my own machines, and I was interested in parallel processing and distributive systems, so I set up bigboy.cis.temple.edu. It was a public-accessed UNIX machine, ran multi-user Dungeon games, learned a lot. Ultimately, by the time I was ready to leave college, there was no way to buy dial-up internet access. So, I had become addicted to the T1 that I had access to directly from all my machines and said, “How do I do this?” I had wanted to run a multi-line bulletin board, so I actually wrote some software that looked like a bulletin board system, but was actually UNIX underneath; connected to the internet and thought, “How hard could this be? I’ll just set something up – one of these public-access UNIX machines in my apartment, add some phone lines. So, it was 215-664-UNIX and discovered that I had found something that was impossible to fail at. So, it was very fortunate timing. It was the first ISP in Philadelphia, and it was just a ton of demand at the time.
Alejandro: Nice outcome, too, for being your first little project. Correct?
Avi Freedman: Yes. I mean, it was humbling because I tried very hard to fail. I really wanted to pay attention to the technology side, but ultimately, people need to [6:52], and we needed to buy modems and all that. It was very fortunate. It was the right time with a good idea, and I had been fortunate enough to have had a lot of the ability to learn before the internet really hit, what it was about, and the foundational technologies.
Alejandro: Then, you go to AboveNet, and this is the time when you really have exposure to understanding the effectiveness of micromanagement. Tell us about this.
Avi Freedman: [Laughter] Yes. So, I was recruited to go to AboveNet and run engineering there. I joined before they became public. That actually drove me to merge my ISP, and then get that on a different track before it was sold. It was great. We were the third largest web hosting company. We ran an international backbone. Yeah, it was very interesting to see because I was working for one of the founders who was a technologist. It can be very frustrating, as a founder, because you can often feel that no one can do anything as well as you can. I’ve seen that from both sides. At one point, I said to my mother, who worked for multiple large law firms, tried her own thing, and then went back to working for large law firms. I said, “Am I a bad person because I feel this way?” She said, “Well, all you think about is this thing, and you have the equity, and most people have lives, and no, it’s not surprising that in a lot of different areas, you have opinions about what’s best and can actually do a little bit of everything. But to scale, you actually need to let go. While I had great fun at AboveNet, there were also times when for various technical religious reasons, decisions that really didn’t matter would get overridden, and it hurt my ability to run the group and decreased my job satisfaction. That’s a struggle that I’ve had since then, which is what’s the right level of delegation? How soon do you interfere? The answer is, it’s got to be something pretty major. That’s what I’ve learned is you can’t hire the great people that are going to surprise you with great ideas and run things. You’re constantly micromanaging, but especially in a venture-backed company, you can’t wait for quarters if your gut is telling you something is wrong. Finding that balance is one of the great challenges of running a company.
Alejandro: You know, there’s a saying that goes, whatever you resist persists. You definitely resisted because after AboveNet, you go to Akamai, and at Akamai, you still have issues with thousands of employees, things not going as fast, perhaps not scaling the way that you want them, and you were even there for ten years all the way until you finally got to your business today. So, what did you learn there because, also, you were fortunate enough that they let you do a side project, which turned out as a nice outcome?
Avi Freedman: Yeah. Akamai was, next to Kentik, the most amazing business experience that I had. I was much more aware of what I was doing when I joined Akamai right before their IPO. Then when I started Netaxs, which was really just a hobby, and I wasn’t sure what was going to happen with it – the first couple of years, especially working with Daniel Lewin, who was the CTO and founder. He was such an amazing man, a technologist, but also strategy, managing, leading, motivating. Akamai was also – I mean, raising. It was the bubble. We were raising hundreds of millions at a time. We still got very fortunate. We almost went out of business when basically half of our customers ceased to exist. They didn’t just stop paying the bills. They ceased to exist, and Danny led pivoting the company fundamentally. But after that, a really intense earlier period, you become the company that needs to scale. I was not a founder at Akamai. I had a strong conviction around going into what’s now called Cloud. Ironically, enough, we were calling it Native Edge Computing because we had Java-based computing, and edge computing is the thing. But it wasn’t clear that the market was ready and that looked a little bit infrastructure-like for where Akamai was going. At the same time, I was a big fan of technology and the company and friends; I had many friends there, but I did wind up staying ten years. I did try to leave a couple of times, and one of the times that I tried to leave, I said, “Look. I’m going crazy not being able to put my hands on technology other than my one machine that I host.” So, I got permission to start a side project called Readnews. Readnews started out trying to be more consumer-making Usenet usable, which was one of the first distributed and decentralized applications of the internet. Then it wound up turning into a wholesale business that I ran part-time. Eventually, I added a couple of employees. I got permission to do that while I was at Akamai. It wasn’t competitive, and it kept me sane because I couldn’t work on the product that I really wanted to create there, but I gave enough value that they didn’t want me to leave.
Alejandro: And that sold in the single-digit millions, so quite a nice bonus, too, while you’re getting your nine-to-five paychecks. So, way to go, Avi!
Avi Freedman: Thank you.
Alejandro: What I want to ask you now is, after this journey, then you become the CTO of ServerCentral, where you were doing stuff around Cloud infrastructure. This is your segue into starting Kentik. It’s like your real baby and meaningful business that you’ve done to date. So, tell us how this happened. How did you bring it to life? And also, that rejection from Y Combinator.
Avi Freedman: Sure. I had done a lot of federal work at Akamai. That wound up introducing me to a lot of people in the broader security space. After I left Akamai, there are various dynamics going on, and I had a partner that I had done some cloud work with. We got approached by various people that were looking for highspeed network sensors, like hardware, not SaaS. I built a next-gen version of that, and we sold it. Everyone that bought it said, “What do we do with all this data?” I’ve always been interested in the internet and scaling and operations and the cloud ways. I thought that was a much more interesting approach because other than selling sensors, everything I’ve ever done has been recurring revenue. I had a Usenet company that could be a mock customer, and I had resources running from that. I mocked it up and showed it to people. Not only did they say, “If you build it, I’ll buy it,” but they said, “How much do you want to charge for it?” which I think is a really good signal for early product/market fit. People were saying, “We have this problem. We want to pay for it.” Then, it was just a question of how do we want to go about making that business? I thought about bootstrapping it because I had the Usenet company that had infrastructure that we could do that in. I thought about going the more venture-backed route. I was starting to read about incubators, and I had a friend that became a co-founder who was a big fan of Y Combinator and Hacker News. I had worked for two companies that were venture-backed, but I joined right before their IPOs, which is – every year in a startup, you’d have an infinite number of things that you could look back on, but you did. So, when you joined right pre-IPO, it’s very different from the idea stage. We applied to Y Combinator. I thought it was a good ROI because if we get 7% more valuation, then the dilution is, in essence, paid for. What do I know about starting a venture-backed startup? It was different than the other things I had done. We didn’t even get an interview. It wasn’t that we were rejected, but we had four co-founders. Three of them hadn’t left their day jobs to only focus on it. The idea we applied for was more around data storage and not the actual transforming how the internet runs, which is what Kentik does. You know? What they tell you to do if you don’t get into Y Combinator is just do what you’re going to do, so that’s what we did.
Alejandro: Amazing. What ended up being the business model, so that the people listening get it?
Avi Freedman: Kentik is a SaaS company that ingests real-time telemetry from all the networks in the world and helps people who run the infrastructure, both the service providers and the Cloud companies, and the people that build the apps that drive the revenue for their companies to run all that infrastructure. Your networks, your internet networks, your cloud, your [16:21] all the way up into your servers, and things that are going on. We sell to infrastructure people, and our customers are Drop and Dropbox and Yelp and Zoom, and then infrastructure companies like IBM, DigitalOcean, service providers, and folks like that.
Alejandro: I know that, as well, you raised capital early on. How much capital have you guys raised to date?
Avi Freedman: We’ve raised $52 million of equity, and we, as part of a last round, raised about 10 million dollars of long-term debt.
Alejandro: In your case, why did you decide to go via the venture capital route. You took the $3 million seed early on, but why did you think that venture capital was the way to go, especially on your last two projects, you just bootstrapped them yourself?
Avi Freedman: Yeah. In hindsight – I know you like to ask this question last, but in hindsight, I think there are some hidden advantages to bootstrapping that I didn’t even realize at the time. But one of the key things that I didn’t want to do was just go get started and not have a reporting cadence. So, 1) I didn’t realize that I could have filled out – we did $3 million seed round. It turns out we could have filled that out with people from the industry that were fans of what we were going to do. At the time, I didn’t know that. I wasn’t comfortable asking my friends that I see multiple times a year for money because I felt it was riskier than they might realize. I knew that if I raised a price venture capital round, we’d have a recording cadence. I’d have people that I respected, that I wouldn’t want to look foolish in front of, and I wouldn’t get distracted with the technology because I’d be committed trying to grow. Venture capitalists have defined fund lifetimes, and you need to build to a result. So, that was part of it – just looking at myself, I wanted to have that, and I thought the market was large enough to support it. That was why we went with venture backing from the beginning. There are some downsides to that that may not be obvious, also, in that if you have early success, it can be too easy, maybe, to raise more money and pile on. But it wound up being a good choice for us.
Alejandro: Talking about funding, obviously, you guys just raised the last round in literally May, which the last round is really fantastic. Talking about timing – right? You’re in San Francisco, and you’re very close, as well, too – especially now that you’ve been in it – the fundraising arena and market. How have you seen that COVID-19 has impacted the fundraising landscape for everyone?
Avi Freedman: It’s interesting because the public market is not behaving as we might have expected. In the venture funding market, it feels like things have gotten sharper. The raises that were going to be easier are actually maybe even a little easier than they were because people are trying to focus their capital, and they have plenty of capital, and raises where you can’t really from companies that are having difficulties telling the story, or people weren’t convinced about capital efficiency and growth. Those have gotten harder or maybe impossible right now. I think a lot of people have talked about what I see is true, which is definitely easier if you have people that you have already had some relationship with. Our round, we met them 25 minutes – for 25 minutes before we raised the round in February at one of the last investor conferences that ran. But we had met in person. Some of my current investors, I go on walks with around San Francisco, properly socially distanced. The founders that I talk with are generally a little bit later stage, and as they’re talking about raising capital, it’s people they had in their network, but they’re having no problems raising capital. It was not an issue for us. I talked with two founders in the last week about what the maximum evaluation they’d be willing to take was. In other words, the valuation in your round is really the hurdle you need to jump over to have an exit or raise more money. It’s not actually what your company is worth at the time. If you make it too high, that can be a huge issue. So, I would say it’s a frothy market for companies that are doubling or have great SaaS efficiency and in great markets. So, people are still raising money, but just a little bit differently.
Alejandro: And talking about the impact, how would you say COVID has impacted your operation, as well as your people?
Avi Freedman: We’re still growing, but I would say I couldn’t have predicted exactly what customers would be growing and what customers would have issues maybe in March. But net positive, we’re growing. Some of them were traditional enterprises that were expansion for us, actually accelerate because now, in a remote world, they need to see their corporate connectivity, not just the applications in internet and cloud. And we’ve even had our two biggest travel-related companies either renewed or are talking about upgrading. But we’ve seen even some big tech companies say, “I just can’t think about anything in Q2,” which we expected. We’re still booking businesses and upgrading. On the people side, that has been a huge amount of management overhead. In terms of not that it’s a chore, but just we take a lot of time as the management team trying to think and be proactive in a world of uncertainty. So, it’s like everything that a startup is has actually gotten even more accelerated where you have to plan with incomplete data. For the first six weeks, we spent a lot of time thinking and trying to make sure there wouldn’t be issues with work from family. It’s not even work from home. It’s really people are working from family. Then, over the last six weeks, we’ve also added in how do we keep people connected who were field sales, or in the field remote because we were a few field remote before COVID and keep them connected when some of their network might have disappeared. But, in one way, it would be hard to see that there’s anything going on with the company. We’ve done the transition pretty well. On the other hand, we know there’s a lot of stress and spend a lot of time thinking about how to make that easier. We see that in our customers, too, which are spending a lot of time with that.
Alejandro: What kind of insights have you gotten because, at the end of the day, experience is everything. With such an unpredictable event like COVID, and how it has shaken up every business and every market. As an operator, what have you learned?
Avi Freedman: The thing which was most impactful for us and not to go too much out of order with the questions that you so brilliantly ask is, looking at the companies that have had great success in the SaaS world, there’s a whole trend called Product Led Growth, which is trying to invest in education and onboarding, and it’s something we were focusing on adding. We spent all last year reworking the product to be much more accessible to the non-super nerds of the infrastructure world. We were starting a bunch of educational efforts. But COVID has brought that into contrast that no one wants to be marketed to. Traditional Enterprise goes 1) I think you have a problem. 2) We solve it. 3) Would you like a demo, and then you repeat that programmatically. With COVID, it became clear early on that was not going to be successful in a world that had just transformed. But First Round Capital, which has been an awesome investor for us, led a CEO panel, and one of the CEOs said, “You need to make a deposit before you ask for a withdrawal.” Again, I think that’s really like give people value; educate them, bring them into the product, and I think you’re seeing success of companies that were set up for that because they weren’t as dependent on field sales. They weren’t as dependent on the trade shows. So, I think that was a motion that people were realizing was really successful in SaaS in terms of capital efficiency and growth. We were already investing in that, and COVID has made it easier to understand and talk about. At the same time, it’s a very stressful time for people, their families, customers, and just trying to be supportive and realize that the world has changed is, again, a lot of stress going with it. As you said, all the markets are getting shaken up and many in ways we can’t predict. Our focus is, how do we become the most value-creating for our customers, which ultimately is what creates the most success in business over time.
Alejandro: You were talking about having customers like Dropbox and other great brands. The people that are listening are probably wondering how big is Kentik? Is there anything that you can tell us, like the number of employees or anything to give us an idea?
Avi Freedman: Sure. We’re 80 people. We are in the tens of millions of dollars or recurring revenue with great positive net retention and gross margin in the 80s because we did a lot of work on the technical infrastructure to be able to do that. We’re growing and adding. This year is the first one when we’re going to be adding some new products, and we’ll be making some announcements about that over the next couple of months. There are things that I wish I had done differently and things that we did pretty well. Starting a venture-backed startup where it’s going for high-growth has been more humbling than I could have predicted. As you said, I’ve done a lot of different things, but signing up for constantly critiquing and trying to find the cumulative sum of 5% better that you could do that will be better results for your employees and your investors and customers is hard work. It keeps you from being bored.
Alejandro: Where do you think your market, your space is going as a whole?
Avi Freedman: I think that there are two or three trends that even pre-COVID were really on the move around digital transformation and how infrastructure is changing. That’s a really exciting opportunity for Kentik because we really are the platform that the infrastructure people use to observe, predict, understand, plan, and scale the infrastructure. So, looking forward, we focus on bringing up more product in an integrated way to those customers and getting into additional verticals. Our first customers were Zoom, Yelp, Dropbox, and folks like that – big international infrastructure companies. But the traditional enterprises are realizing they need to operate like them, but it’s a different language; it’s a different mindset and even some different technologies they use. Those traditional companies are now accelerating. You can’t go to the data center. You can’t drop appliances in, so our competitors like Riverbed and NetScout, that doesn’t work. People don’t want to bring appliances to the Cloud, so there’s been a huge amount of acceleration that I think will be beneficial to Kentik. And companies like ours, companies like Dropbox that are on the application side, companies like Looker that Google bought that are on the VI side – service delivered, modern approaches, I think are going to have even better growth in the next few years.
Alejandro: Very nice. What a remarkable journey, Avi, and I’m sure that you’ve been able to learn quite a bit during those lessons, during the successes, during the failures, and really embrace them all. As you’re looking back, Avi, and let’s say if I was to propose that you had this opportunity of going back in time and having a chat with your younger self, with that younger Avi that was thinking about launching something back in the early days, perhaps some years ago, what would be that conversation that you would have, Avi? And more than that, what would be that one piece of advice that you would give to yourself before launching a business?
Avi Freedman: It sounds pretty common, but in one word, it would be focus. In the last 90s, inside my ISP, we started three projects, each of which later became multi-hundred million to multi-billion-dollar businesses. But they were really side projects that got up enough to see that people liked it, and there was no real focus on targets or growth. Before I started Kentik, I was CTO of a company. I had Readnews. I had another startup that we started and shutdown, and I was doing the prework for Kentik. I had a couple of friends at that time when I was already 40, so you know, it’s nice that you can do all these different things, but maybe you should just pick one. And that’s been a challenge for me because I look around, and I say, “Oh, that’s a problem that needs to be solved, and that’s a problem that needs to be solved.” I think you either need to decide you’re focusing, or you need to do an idea lab. One of our first investors that led our seed round, Howard Morgan, had been involved in an idea lab. If you’re the kind of person that sees opportunity everywhere, either just pick one, as painful as that might be, and just make that the thing, which is the only thing you’re going to do. Or find some other kind of structure so you can advise it at best because it’s really hard to build more than one meaningful thing at a time.
Alejandro: Wonderful. For the folks that are listening, Avi, what is the best way for them to reach out and say hi?
Avi Freedman: I’m always happy to hear from people. I’m [email protected]. I’m @avifreedman on Twitter and LinkedIn. Even if you’re just looking for advice, looking to compare notes, I’m always happy to get to know people. Building a network is one of the best things that CEOs can do because it can be a lonely place, and even people asking questions can teach you a ton.
Alejandro: Amazing. Well, Avi, thank you so much for being on the DealMakers Podcast today.
Avi Freedman: Alejandro, thank you for inviting me. I’ve been a fan, and I’m taking notes myself on how to create value with helpful content for the ecosystem.
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