Peter Reinhardt is the cofounder and CEO of Segment which provides a customer data infrastructure that helps businesses put their customers first. The company has raised $300 million from top tier investors such as Accel, Google Ventures, Meritech Capital Partners, Thrive Capital, NEA, Kleiner Perkins, and General Catalyst to name a few.
In this episode you will learn:
- The importance of listening to your customers
- Why traditional CRMs don’t make sense anymore
- How one article made their business a hit in just 24 hours
- The trials and secrets in finding product-market fit
For a winning deck, take a look at the pitch deck template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.
Moreover, I also provided a commentary on a pitch deck from an Uber competitor that has raised over $400 million (see it here). Remember to unlock for free the pitch deck template that is being used by founders around the world to raise millions below.
About Peter Reinhardt:
Peter Reinhardt is co-founder and CEO of Segment, the customer data infrastructure company. He studied Aerospace Engineering at MIT and fell into the world of customer data and analysis when he and three of his college friends started Segment in 2011 as part of YC.
Prior to starting Segment, Peter was a Research Assistant at the Naval Postgraduate School, where he wrote and designed flight software for the NPS-SCAT Cubesat, a platform which tests solar cells while they’re in orbit.
Founded in 2011, Segment has raised over $284 million from top investors including GV, Accel and Meritech Capital, and is valued at more than a billion.
Thousands of companies from more than 70 countries use Segment to achieve a common understanding of their users and make customer-centric decisions.
Whether it’s thorium reactors, online education, or space travel, Peter enjoys nothing more than diving deep into a new field of study. He and his wife Erika live in San Francisco.
Connect with Peter Reinhardt:
* * *
FULL TRANSCRIPTION OF THE INTERVIEW:
Alejandro: Alrighty. Hello everyone, and welcome to the DealMakers show. Today we’re going to be having an entrepreneur that is going to be teaching us a lot about product/market fit, what worked, what didn’t work, scaling companies. They’ve raised quite a bit of money too. They have a large number of employees. I think talking about culture is also going to be very interesting with our guest. Without further ado, I’d like to welcome our guest today. Peter Reinhardt, welcome to the show.
Peter Reinhardt: Thanks for having me.
Alejandro: So originally born and raised in Seattle. How was life there?
Peter Reinhardt: It was great. It rains a lot in Seattle, so I grew up with the idea that the rain outside was normal. It’s actually a little too sunny here in San Francisco for me now.
Alejandro: Very cool. Your father was a carpenter, and also, your mom was an art teacher.
Peter Reinhardt: That’s right. Yeah. My dad had his own business in terms of a small-scale contractor. I learned a bit from seeing that in action. In high school, the first entrepreneurial thing that I got myself into was starting a high school underground newspaper called The Watchdog. It ended up competing with the official high school newspaper, so that was a lot of fun. We raised a little bit of money from the tennis coach — a few hundred dollars a month to print the thing on paper and distribute it around the school.
Alejandro: Very cool. What was the lesson that you got from that?
Peter Reinhardt: I think it was learning how to raise money for something that my friends and I were passionate about. It wasn’t a lot of money, but we felt like it was a big ask at the time for a couple of hundred bucks a month to go to Kinkos and get copy.
Alejandro: I love it! Then, how did you develop this love for aerospace?
Peter Reinhardt: I guess I was always excited about aircraft, and I was always studying different rocket designs and reading about the missions to the moon and what was going on on Mars and just always super excited about that. I loved the book Enders Game. Then I went off to MIT and started studying aerospace engineering there. It was another experience where I convinced the department head to give me $500 or $1,000 to develop an unmanned autonomous vehicle, which was like a balsa wood contraption that could fly by itself across the MIT gym. That was fun.
Alejandro: Wow. It sounds like fun. Then, what happened with your roommates?
Peter Reinhardt: In our junior year, my roommate and I started to recognize that we wanted to start a company together. We had started reading a lot of Paul Graham’s essays on, in and around, Y Combinator and Hacker News, which started getting me excited about that. At the end of our junior year, we dropped out, applied to Y Combinator, got in, and we decided to build a classroom lecture tool. The idea was to give students this button to push to say, “I’m confused.” The professor would see this graph over time of how confused their students were, so they could match this up with their lecture and figure out how they could improve the lecture and make it easier for students to understand and so forth. We were really excited about this. We had a bunch of professors at MIT who were excited about it, and we built all this over the summer at Y Combinator. I wrote all this code. It’s crazy — hundreds of thousands of lines of code trying to make this overcomplicated classroom lecture tool. We raised a bit of money coming out of demo day for Y Combinator, about 600k. Then, we deployed it into the classroom, and it was a total disaster. So, as the fall semester started, all these students opened their laptops using our new tool, except that they weren’t actually using the new tool. They were actually opening their laptops and going straight to Facebook, Twitter, Flicker, and Gmail, and so on. It was an incredibly distracting thing that we had mistakenly deployed into all these classrooms.
Alejandro: So, what happened next?
Peter Reinhardt: We had just raised this money about two weeks before we deployed it, so we had to call back all the investors and say, “This thing you just invested in, we’re really sorry, but it’s a terrible idea. What do you want us to do with the money?” Almost all of them — a couple took their money back, but the rest said, “We really invested for the team. We believe in you guys. Go figure out something else and work on that.”
Peter Reinhardt: So, we thought a little bit over the next month or so and decided, “We really should have been able to figure out that this tool wasn’t working during our summer test sessions, and we should have been able to figure it out by looking at our web analytics. We shouldn’t have had to — we actually stood in the back of classrooms and counted screens to figure out what people were doing. We should have been able to figure out analytically from the data that this wasn’t working during our summer test. We thought, “Okay. We’re building an analytics tool, like a web analytics tool, to compete with Google, Webex, Mixpanel, Kissmetrics, or Adobe Analytics. We started doing research on that. We started building a ton of infrastructure. We basically spent the next year building out various variations of that product, and frankly, not spending much time talking with customers. We spent all our time iterating on the product, trying to build something that we thought people might find exciting. After a year of working on that, we had burned down to maybe 100k left in the bank, and we didn’t have that much cash left. We still had no paying customers. We were clearly failing to find product/market fit. We were clearly failing on this sort of customer sales side of things, and we were just spending all of our time building, building, building. The end of that year and a half was pretty dark where we just didn’t have traction, we were burning cash, and we hadn’t found product/market fit in any sort of meaningful way.
Alejandro: Then eventually, you had to put this out there. What happened when you finally put this out there? Once again, another product. What happened there?
Alejandro: Wow. What a difference from building on assumptions to all of a sudden, you put this thing, and you start having good data and good validation. Finally, I’m sure this was a big breakthrough for you guys from understanding the value of being able to listen to your target audience. Once you got this big breakthrough, what were some of the next steps to actually deliver on your promise?
Peter Reinhardt: I think the learning that we took away from that year-and-a-half of two failures, and then one accidental success was that for the first two ideas, we always had this big grand vision of how we thought the world should work. Like, “Classrooms should be digitized. People should have all these great feedback loops. Or, the future of analytics looks like this.” There was always this inside-out kind of view of how the world should work. I think the tough learning or humbling learning there was like the world doesn’t care what you think. The world has some set of problems, and if you’re not solving those problems, and it really doesn’t care how you think it should work. That third idea where we said, “We don’t know if this is a big grand vision, but it seems like it’s solving a problem for people. Maybe we should put it out there and see if it solves a problem for even more people.” Yeah, it turns out it solves a big problem for people. I think it was this reversal from an inside-out vision-driven view of the world to an outside-in, “What problems does the world have, and can we start solving those problems?” Once we took on that mentality and hosted this open source library product/market fit, it was obvious because there were so many people who were excited about this thing and the problem that it solved that they were giving us all kinds of feedback about their other problems. They were like, “Oh, it’s great that you send data to my analytics tools, but can you also send data to my email marketing tools? Can you also send data to my advertising tools? Can you also send data to my data warehouse? Can you load data not just from my website, but from my mobile apps, and so on? Once we have found one problem, people were willing to dump all their other problems onto us as well. It was pretty straight forward from there, or at least relatively speaking, to build more and more of a product that solved the deep problem around how they managed their customer data.
Alejandro: You had a very good problem and, obviously, explosive product/market fit, but also, it’s tricky because now you’re getting all these different people, different feedback, and requests. How are you able to filter through that to be able to focus and prioritize what matters on the roadmap in front of you?
Peter Reinhardt: I don’t think we did a good job of this at first. We actually built a lot of stuff that ended up not being useful. Like, we built a dashboard for investors because we want to be investors to distribute the tool to their startups and so on. It ended up not being useful at all. I guess that worked initially was, it was okay to build a lot of stuff and kill a lot of stuff as long as you actually kill a lot of stuff. Then, over time, as the stakes have gotten higher, we’ve gotten better at figuring out how to determine whether something is really going to move the needle, which surprisingly, that didn’t come from learning more about product management. It ended up coming more from learning how the sales process works. Sales is not something that had a ton of appreciation for when we started the company, but I think over time, it’s something that I’ve developed more and more appreciation for. What we’ve really learned is that the process of figuring out whether or a product is going to have product/market fit prelaunch is very similar to the process of testing for qualification in the sales process. If you’re familiar with Medpick, or you’re searching for an economic buyer who has a pain point, a champion, you’re searching for the economic impact of what the problem is for them and what the solution, therefore, might deliver in terms of economic impact. So, getting really clear what the customer about what the exact explicit problem that they have and the economic pain that it’s creating for them, and then how your product is explosively going to solve that economic pain. You can actually do a lot of discovery; that’s what’s called in sales to go learn those things and test whether a product is going to deliver economic value. If it is then, at least, in the B2B world selling software to other businesses, I think you can do a lot of good product/market fit testing with relatively few conversations.
Alejandro: Once you started on the execution of this, and you got this great feedback, it took a little bit of time until finally, you got the Series A in place. What a Series A and from top tier guys. Tell us about how you guys went about the fundraising process as well.
Peter Reinhardt: About six months after we launched the open source library, we had a good bit of free traction — some customers using the product for free. We still had no revenue, so we went out and raised a 2-million-dollar seed-extension round from Kleiner Perkins and E.ventures based on the traction that we were having in customer reviews, but not based on revenue. About a year later, we crossed one million in revenue and were growing super-fast. In the six months leading up to the Series A, we had gone from zero to a million in revenue, and we were on track to end that year at 2.5. So it was a really fast growth year. That’s when we raised the 15 million from Excel for our series A. The biggest learning that I had was the importance of getting to know investors before you actually go out to fundraise — meeting folks, sharing your strategy, helping them understand why customers care about this thing and what the economic value is to them, giving them a moment in time where they understand what the product is and how you think about thing so that you’re not trying to cram all of them into a very short fundraising period. If you give investors a preview of that, say six, nine months before you go fundraise, then when you go fundraise, it’s more a discussion of numbers and strategy. They’re already sold on you. They’ve seen the progress over six to nine months. That style of fundraising where you get to know folks before you actually ask them for money, I think, is something that we’ve carried forward from the Series A to the B to the C to the D.
Alejandro: Got it. Peter, the people that are listening are probably wondering “How do I get the attention from an investor” because obviously investors are in the game of investing. They meet with entrepreneurs to invest. How can they position scheduling that meeting and keeping the fundraising conversation in the background so that they can target the discussion more towards seeking advice and then later on getting the money price, but making sure that it’s not going into that direction yet?
Peter Reinhardt: Yes, investors are in the business of making good investments, not just investing. I think what that means is, they want to figure out which investments are going to be good. Especially in venture, they get very few chips to place, and they want to make those chips well-placed. When someone is running a fast fundraising process with a whole bunch of people, and it’s the first time they’re meeting them, it’s hard for them to assess the person. It’s hard for them to assess the strategy with a clear head. It’s hard for them to understand the broader space. They don’t have time to talk to customers. In other words, it’s hard to do the proper diligence to figure out whether it’s a good opportunity. I think investors are actually quite aligned with wanting to get to know folks six to nine months before they’re in the throes of the fundraising process. I’ve never found misalignment with an investor where they’re like, “Oh, I don’t want to talk to you if you’re not fundraising.” They’re like, “Oh, great. I would love to get to know you and understand this business prior to being under pressure to make a decision.”
Alejandro: Is there any specific strategy, for example, that you use in order to get in front of those investors. Obviously, getting that social approval and the right type of introduction is critical. How did you go about that?
Peter Reinhardt: Yeah, getting the right introduction is critical. The hardest thing is breaking into the network for the first time. Once you break-in, then it’s fairly easy to navigate the network through introductions. For us, Y Combinator was that key foot in the door, into the network of Silicon Valley and the investor scene as you meet some of the investors all at once, YC obviously has connections. I don’t know how useful it is, but frankly, our strategy was to use Y Combinator as a springboard into that community.
Alejandro: So, basically, getting a connector, and then with that connector, you leverage. It’s like a snowball effect kind of thing?
Peter Reinhardt: Yep. Exactly.
Alejandro: Very cool. In your case, how much capital have you guys raised for Segment?
Peter Reinhardt: We’ve raised a bit shy of 300 million in capital in the West, seven years.
Alejandro: Very nice. What’s that transition from early stage to growth stage where you guys are. What does that look like?
Peter Reinhardt: One interesting thing that people always said that I have not found to be true. People have said that around Series B is when it stops being about the vision, and it starts being about just the numbers. I didn’t find that to be the case in our Series B fundraise. And “Around the Series C, it’s all about numbers at that point.” The numbers are important, but I still found that it was heavily still all about the vision. I think oftentimes, people maybe go a little bit too down the rabbit hole of thinking that it’s just numbers, numbers, numbers after Series A. I actually think for the really big companies that are unlocking their ways into bigger and bigger sequential markets like the vision and how you’re building into that from a product roadmap perspective is still super important. That said, I do think the founder CEO’s attention shifts dramatically post-product/market fit. I think I was a little bit slow to make this transition from the search from product/market fit to go-to-market strategy. Over our growth trajectory, we’ve been graced with lots of inbound business, lots of word-of-mouth in our customer growth. We were never challenged to go and figure out deeply, who is the customer? How do we get in touch with them? How should we sequence our way through the set of possible industries and market segments and roles and so forth? For us, that is the big transition we’re going through now, which is how do we figure out the go-to-market strategy and details of who we go after? When? Where? Why? Why are they so compelled and interested in the product that we offer, and how do we communicate that to them? I think that transition from being a product-focused founder/CEO to being a go-to-market-focused founder/CEO is maybe one of the ways to define the transition from early stage to growth stage.
Alejandro: Makes sense. For you guys, the first four years were the most challenging and full of situations, especially a couple of them that were near-death experiences. One of them, in particular, was when you experienced the growth rate that slowed a little bit, and that happened in 2015. Tell us about what happened, and how did you guys overcome that challenge?
Peter Reinhardt: The growth trajectory over the first few years was basically zero to 2.5 million, and then 2.5 to 10, and then 10 to 20. In that year, we went from 10 to 20; we had a really big scare. The first half of the year, we went from 10 to 12.5, which scared us. It was not at all the growth trajectory that we wanted to be on. What happened was that we had a pricing and packaging problem. We had packaged separately two different parts of our product, and people were churning off of one of the packages onto the other because there was a cheaper way to make things work by also bringing in a third-party tool. That was a disaster for us. Our churn rate spiked in the first half of that year. We made a pricing and packaging change where we rolled the two separate packages into a single package, and then changed our self-service pricing relative to our sales list price for larger contracts. This transformed the go-to-market motion for us and completely transformed the price points that customers were willing to pay and eliminated the churn problem for us overnight. That was a transformational pricing change. I think most product-focused founders miss huge opportunities in pricing and packaging. I think we had a big success there, but I think we have also massively under-invested in pricing packaging, aligning pricing, and packaging to help customers want to buy is critically important. Yeah. 2016, for us, was rescued by pricing and packaging.
Alejandro: In this case and perhaps in other situations of the business, how do you go about first, identifying the problem? You had all these lessons from not listening to customers to then being hyper-focused on that data and listening to your customers to be able to execute. How do you go about first, identifying the problem, then finding a solution, and then executing on it as a whole when it comes to strategy and execution for Segment?
Peter Reinhardt: I read somewhere recently this concept of two ways of responding to problems. There are people who, when they see a problem, tend to shy away from it and be like, “Oh, I don’t want to deal with the problem.” It may be totally subconscious. Then there’s a separate mentality you can take, which is, as soon as you see a problem, you go 10x-deep directly as hard as you possibly can at the problem until the problem doesn’t exist anymore. Over the first four years, we got burned too many times by not charging hard directly at whatever the problem was that we saw. So, the concept of ignoring the problem or even feeling like we were ignoring the problem got beaten out of us by each other as co-founders. I think if that’s a piece of advice that I could go back and give myself, it would be to run straight at the problem. You probably see the problem. You’re probably just avoidant of it. I think if you just run straight at the problem and dig as deep as you possibly can into the problem, gather all the data that you possibly can, talk to as many people as you possibly can, the solution is probably not actually that hard. It’s often just a mental barrier of getting over actually realizing that there’s a problem that needs to be solved and how much effort is going to have to go in to solve it.
Alejandro: Going back to the discussion on growth, you guys have experienced quite a significant amount of growth, as well, on the employee side of things. I think that in the last couple of years, over 100% growth in terms of the number of employees. I think that you have something over 500 employees. How do you go about scaling the team? How do you go about embracing culture, and what are some of the key lessons there that you could share with the people listening?
Peter Reinhardt: I think from the founder’s perspective, the only way to scale the team is to hire strong senior executives who then have their own capability and their own network to go hire and recruit aggressively. The best trick that I’ve found for executive recruiting, which has made a huge difference for me, is batching my own recruiting process. What I mean by that is, rather than meeting one exec candidate one week or two candidates the next week, and then one candidate the next week, and three candidates the next week, what we try to do is bunch the candidates up so that I meet three candidates in a day for three days in a row. It’s hard, so you have to delay the early ones and pull forward the late ones. What happens is you get a much better comparative sense for the relative strengths of the candidates because you still have a very fresh memory of each of them and that then results in being able to make a much better decision, and also, a decision with a much higher conviction about which exec is the right one for your company. Then, I think when you get those right execs, then they can build out whole teams. In terms of growth, recruiting, and bringing people into the company, that, for me, has been a big on-mark. The other, obviously, is just scaling culture. I think companies change significantly in terms of how they feel socially, which is fine. That needs to happen, but what shouldn’t change is there should be some set of values that are literally the things that you value that shouldn’t change if it’s the things that you value. We always find ourselves having to put way more effort into that than we think is necessary, and it always pays back in spades to reinforce our core company values again and again in as many different places as we can in the interview process, in the welcome package for onboarding, in the performance review at all hands every two weeks, etc. That pays back in spades as people then operate on the same operating system of what everyone values inside the company.
Alejandro: Very nice. When you’re meeting with execs and recruiting these people, especially people that are a good fit with your culture, is there a specific thing that is an absolute must for you on every candidate?
Peter Reinhardt: I have four things, and they’re mapped exactly to our values. Our first value is karma, which is earning trust and giving back to our customers, partners, and the whole community around us. Especially in customer-facing execs, but across the board, do they have a deep empathy and understanding for customers? In their prior roles, have they shown that they want to understand the customer and that they will go over and beyond for the customer and the broader communities around their companies previously? The second value for us is tribe, which is that we want to push everyone around us to get better and be accepting of that when we feel that push from others. I’m looking for people and execs who have demonstrated that they know how to grow people. That people they previously managed may be in even bigger roles, and those people say, “The time under that exec was formative for me.” The third is drive, which is delivering results, probably the most straightforward one. Do they have a history of delivering results, whatever those were in their function? The fourth is maybe a little more unusual, which is, create clarity. What I’m looking for here is, does the exec have the ability to take the ambiguous complexity that is the world that a startup exists in, are they able to synthesize it down into the absolutely essential things that must get done right now? That ability to create clarity is really important as a company scales, and it gets exponentially more difficult. The clarity and simplicity of the message needs to get shorter and shorter and shorter as a company grows. That’s hard work. It’s hard work to pick the few things that really matter. I look for evidence of those four things.
Alejandro: You were talking about company growth. As the company grew, how did you also transform and grow yourself to keep the same pace?
Peter Reinhardt: I find that the most motivating times for me are when it becomes clear that over the previous quarter of two, that I have failed at something because that, to me, means that over the next quarter, I now understand the thing that I need to get better at. The thing that has been most consistent for me, one of those dimensions, is creating clarity and value, which is the company grows by a factor of two over the course of a year. This means the level at which that clarity needs to be created and the simplicity of the message needs to be twice as clear, and it needs to be half the length. Otherwise, the company simply can’t ingest it fast enough. That has been a challenging pace to keep up with, so I lean on investors. I lean on the board. I lean on my co-founders. I lean on those direct reports, who are best a creating clarity to help me figure out how to synthesize at that next level. I know that next year, the challenge is going to be twice as hard again. That, to me, is a skill that I’m constantly working on.
Alejandro: In that regard, you mentioned the word failing. Some initiatives work; some initiatives don’t work. For you, personally, what does that reflection process look like?
Peter Reinhardt: We reflect on our company goals every quarter. We reflect on the annual plan once a year. I also set personal goals once a year and reflect on them quarterly. That’s probably most of the reflection process. I do find that vacation is critically important for actually going and reflecting on things. Last is, about once every two weeks, my co-founders and I get dinner. We work in different parts of the company now, but that dinner is a helpful time to reflect on what’s working, what’s not working, and what each of us can improve and do better. Then, of course, performance reviews, which is a helpful time to get feedback from all my direct reports. Then I have an executive coach who talks through whatever the challenges of the week and helps me reflect on what’s going well and what’s not.
Alejandro: The industry as a whole where Segment is, how do you see the industry evolving over the next couple of years?
Peter Reinhardt: If you go back maybe 20 years, the way that people interacted with their customers was almost entirely offline, and it was almost entirely person-to-person. Let’s say, you’d walk into a Nordstrom’s, and you’d talk to someone. You’d talk to a sales rep, and they would help you, and they would have memory in their own head or in their CRM of what your preferences were for clothing or what you last bought, etc. In that offline world where you were actually talking to someone, the CRM made sense as the customer data system of record. Right?
Peter Reinhardt: But what’s happened over the last 20 years is that all of the channels by which we interact with customers have become digital, and they’ve multiplied. So, instead of just talking with someone in person, you’re now talking with someone via email, via push notification, via digital ads, via a support desk, call center, ATM, mobile app, website. You have this multiplication of all these channels that you’re talking with customers on, and it’s all digital and many times automated as opposed to a person. So, the concept of a CRM being the customer data system of record doesn’t make sense anymore. Like, sure, sales is one channel of the 20 I just mentioned, but it’s just one of 20.
Peter Reinhardt: I think the world that we see ourselves and all our customers moving towards is one where all of the data across all of their customer touchpoints is collected and synthesized into a modern customer data system of record, and that’s what we’re trying to build.
Alejandro: Very nice. Now, you’ve been at it for quite a while with the business, and everything started back in 2011. So many lessons learned, so many things that you guys have done, so many experiences — now, if you had the chance to go back in time, Peter, and have a conversation with your younger self and give that younger self one piece of advice before launching a business, what would that be, and why, knowing what you know now?
Peter Reinhardt: The most important thing to realize is that the world doesn’t care how you think it should work. The world has some problems, and you have to listen and learn to listen very carefully to hear other people explain what their problems are — hear other businesses explain what their problems are. If you solve those, they will reward you for it. But the world has its problems, and it doesn’t care what you think in terms of how it should operate. That’s what I’d tell myself.
Alejandro: That’s very powerful, Peter. For the folks that are listening, what is the best way for them to reach out and say hi?
Peter Reinhardt: You can reach me on Twitter at @reinpk.
Alejandro: Amazing. Peter, thank you so much for being on the DealMakers show today.
Peter Reinhardt: Thanks so much for having me.
* * *
If you like the show, make sure that you hit that subscribe button. If you can leave a review as well, that would be fantastic. And if you got any value either from this episode or from the show itself, share it with a friend. Perhaps they will also appreciate it. Also, remember, if you need any help, whether it is with your fundraising efforts or with selling your business, you can reach me at [email protected].