The DealMakers podcast features entrepreneurs that have been successful with M&A transactions or capital raising efforts.

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Steve Newman is the Founder of Scalyr which offers a cloud platform for high-speed log management and server monitoring. The company has raised over $30 million from investors such as Google Ventures, Shasta Ventures, or Bloomberg Beta. His most recent company prior to Scalyr, Writely, was acquired by Google to become Google Docs. Steve Newman has co-founded 6 companies so far.

In this episode you will learn:

  • How to pick an idea that serves you where you are a representative of the customer
  • How to survey customers to get to product-market fit, quickly
  • Why he finally raised money for his latest startup, after bootstrapping all the others
  • What traits to look for when seeking investors
  • The importance of competition – and of sharing your ideas
  • The advantage of being the underdog, even against a giant like Google

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About Steve Newman:

Steve Newman is the Founder and Chairman of Scalyr.

Steve learned to program at the age of eight and is a lifelong engineer and entrepreneur.

Scalyr is the sixth company he has founded. His most recent company prior to Scalyr, Writely, was acquired by Google to become Google Docs.

Prior to Writely, Steve started San Andreas Systems (the second graphical web page builder, acquired by Claris), Bitcraft (acquired by Macromedia), and Peninsula Game Works (makers of Spectre).

He also spent a few years at Intuit, where he built the Quickbooks Customer Manager.

Steve studied mathematics at the University of Michigan and received his Master of Computer Science at Stanford University.

Connect with Steve Newman:

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FULL TRANSCRIPTION OF THE INTERVIEW:

Alejandro: Alrighty. Hello everyone and welcome to the DealMakers show. Today, we’re going to speak with someone that has the engineering chops, and I think that we’re going to learn quite a bit from all of his experience. So without further ado, Steve Newman, welcome to the show today.

Steve Newman: Thank you.

Alejandro: Steve, originally from Ann Arbor, Michigan. How was life growing up there?

Steve Newman: It was nice. It’s a college town. It’s the University of Michigan. I grew up outside of town. Just a nice, classic, mid-western upbringing with the addition of a computer. I was one of those kids who was on my computer from a young age. A nice place to grow up.

Alejandro: Cool. At what point did you start engaging with mathematics and with computers?

Steve Newman: It was pretty early on. My father was in the computer business, and he brought a Commodore PET home when I was eight years old. I started learning to code in Basic all the way back then.

Alejandro: Really cool. Then you got your mathematics degree from the University of Michigan, and then you did Stanford. What was Stanford about? What happened there. Were you studying the Masters of Computer Science?

Steve Newman: Yes. Side note: I never actually finished my undergraduate degree. The Masters in Computer Science is the only degree I ever finished. I dropped out of Michigan to go work at a software startup. A decision I don’t necessarily recommend, but it turned out okay. That was mathematics. My passion has always been computers. I found myself working at a software startup. That led to a move out to California. But I never had any formal education in computer science or software. After I’d been in the field for a few years, I decided that might help me. That’s when I went into the Masters at Stanford.

Alejandro: Tell us how you started getting engaged with startups.

Steve Newman: The truth is I’ve almost never known any other way to do it. It was back when I was in college, freshman year I met a fellow who had recently graduated, and he had started a little software company there in Ann Arbor. He said, “Why don’t you come work for us over the summer?” which I did. That set my whole career. It’s been startups ever since. Just had a ton of fun. That summer was 1985. The Macintosh originally came out in 1984. This was very early days still, and we built some of the first graphic editing, and then word processing software on the Macintosh. Just working in that small group, going a mile a minute, building new things. I loved that pace, so that’s been my career ever since.

Alejandro: Then what was that time when finally, you got your first project. I believe that was a product that you did that you sold to Claris. Is that right?

Steve Newman: That was the first thing I built on my own as a co-founder. That’s right. Yeah, that was in the very early days of the web. My co-founder and I had a lot of experience building desktop software and word processing software in particular. There was the certain need to build web pages which really is very similar to what a word processor does. You’re creating formatted documents. We saw an opportunity to take what we already knew from the word processing role and apply it to this new web thing that seemed like maybe it was going to be big.

Alejandro: Got it. Then did you guys raise money, or what was the journey like with that company?

Steve Newman: We did not. Basically, the two of us went off for—I don’t remember exactly now, but maybe it was six-months, just the two of us, each working from home through together this early application. A friend of ours started taking it around the Valley seeing if someone might be interested in getting into that market. So, the whole thing happened so quickly. It was just the two of us building it and this third fellow handling the relationship side. Never had any need to raise capital.

Alejandro: So, why did you guys go for an acquisition before releasing the product?

Steve Newman: Because we had no idea what we were doing releasing the product. We were just engineers and knew nothing about taking a product to market.

Alejandro: I guess looking back now if you would have done things differently with this one, what would you have done? Would you have waited a little bit before selling it, or what would you have done?

Steve Newman: That’s a great question, and I honestly don’t know the answer. Obviously, there was a real market there, and successful businesses came out of that. The web did not turn out to be a flash in the pan. It would have been a very different journey. In truth, I don’t know that we were ready for it then, but it was great experience, actually, to then give us confidence the next time around. It took the mystic out of starting a business. We had done this thing. We had created a product that was successful. To have done that, have that under our belt, have it a success, and then have that experience and confidence for the next company we started, I think worked well for who we were.

Alejandro: Then talking about that success, why do you think that success changed. What did that success alter for you as an entrepreneur?

Steve Newman: Mostly, it was just a sense of confidence. The story behind that product was—we were quite young at the time. We were in our 20s. We looked at this new technology that was coming up, and it looked like there was starting to be a market for tools there. We felt like we could create a good solution, but we had never started a business before on our own. Partly, I think we had imposter syndrome. If we can see this opportunity, if this is something we can build, obviously, lots of other people must be able to do it too, and it’s probably silly to go do something because I’m sure other people who know what they’re doing and have raised money before, they’re obviously going to make something better. We had those doubts. But we decided to try something partly because it was low risk for us. It was something we were able to do ourselves. Building that product, having it be successful, it didn’t turn out that we were drowned out by 50 other people doing the same thing and doing it better. Seeing that product actually becoming both a business success, we were successfully acquired, and then a success in the market, that took the mystic away from the idea of starting a business. I think it showed us that if something makes sense to you, it may actually make sense to the world.

Alejandro: So, it’s just having this ability. Perhaps understanding the process, really seeing how it works, the full cycle. It just gives you a better understanding of what’s the road from start to finish.

Steve Newman: Exactly.

Alejandro: Got it. The terms of this deal, were they public?

Steve Newman: No.

Alejandro: Okay, got it. So, then you go into Bitcraft. How did Bitcraft happen?

Steve Newman: Bitcraft was this same friend and I, and then another engineer we knew. Basically, what the idea of “Hey, let’s go.” We knew we wanted to do something before we had an idea of what we wanted to do. It was basically let’s the three of us go figure out another interesting product to build. We wound up building a web application server which then was acquired by Macromedia which they were then incorporating into a product that they were in the midst of building internally.

Alejandro: Then was it like your purpose always to build and sell this thing? Once you had the frames of reference from the company that you had sold before, or what was the intention when you guys got started with this?

Steve Newman: I’m digging deep into my memory here. I don’t remember whether we specifically had the plan at the start, “Let’s build a thing to be acquired.” But that was a path that had worked well for us. So, it certainly was one of the possibilities that we had in mind. Then things just lined up. What we had built fit with something Macromedia was trying to do. So, when that opportunity came along, we were pretty open to it.

Alejandro: This is actually when the dot-com bust was happening. How did that push you guys to a transaction, or motivated this, or perhaps influenced this? Was it the circumstances that you guys were dealing with? You were like, “Okay, let’s maybe not build this thing farther and dump more money into it. Maybe let’s find an outcome,” or what was the reasoning behind doing a transaction with Macromedia?

Steve Newman: Actually, I think we closed that transaction in early 2000. It was just before the bust or before it had fully become apparent that what we were seeing was, in fact, the bust. So, it wasn’t something we were pushed into. It was a good path forward. We knew some of the folks at Macromedia. There was a good relationship there. We were happy with the plans and the directions things were going to go. It was an opportunity that we were happy to take.

Alejandro: How long did it take from start to finish to get this deal done?

Steve Newman: I couldn’t tell you. I think it was relatively quick, but this is 20 years back now.

Alejandro: I hear you. We’re testing your memory here, Steve.

Steve Newman: Yeah. It was not some kind of prolonged year-long kind of a process, or I would remember.

Alejandro: The terms here, were they made available?

Steve Newman: No, I’m afraid not. Just to save you trouble, I’ve been through a couple of other acquisitions over the years, but none of the terms have ever been public.

Alejandro: Got it. Maybe one day I’ll take you to have a few Tequila shots, and maybe we can spill the beans, Steve. No worries.

Steve Newman: Yeah.

Alejandro: So, after this transaction with Bitcraft, you stayed a little bit with Macromedia as an engineer. Then you did a little bit of consulting gigs here and there with companies like Intuit. Then finally, you land with doing Upstartle, which builds really meaningful. Walk us through that transition into really landing on the idea of Upstartle, and how did that happen?

Steve Newman: Upstartle was the same fellow, Sam Schillace and I who had been part of these other startups as well as a woman named Claudia Carpenter who we had met at Intuit, and who is know here with us at Scalyr by the way. The three of us, like with Bitcraft, we knew we wanted to go build something together for the fun of building something together. We didn’t have any specific project in mind. We went through the legal process of incorporating Upstartle before we had any idea what the company would actually be. We spent probably about a year experimenting with different ideas and prototyping things. Then basically, one day Sam walked into the office with an idea, and he described Writely. A couple of different things had come together in his head. Sam and I for years had been wanting to solve what we called the emailing word file attachments problem. You’re working on a document with someone. You’re writing it in Word on your computer. Then you have to email the draft to your partner to look at. Maybe they make some changes and email it back. You’re sending it back and forth. Pretty soon you’ve lost all track of who has which revision and what’s the latest. Certainly, back then, everyone would live through this all the time. That was a problem we had always wanted to solve. This was 2005 now and the year before Gmail had launched. I think 2005 was when Sam signed up for it. The big thing about Gmail was a gigabyte for free, gigabyte storage. But another thing that was fairly unique about Gmail was the ability to edit email documents with styling fonts, and boldface, and so forth in the browser. Hotmail and other email solutions before then were just plain text, but Gmail had this browser-based application where you could do more complex formatting. Basically, the idea was, “Wait. If you can do complex formatting on the web, we could use that to solve this co-editing of a document problem. That was the idea for Writely. It was immediately apparent to us that this was an idea worth pursuing. Actually, from that point to that day when Sam came in with the idea till we launched was 100 days which I remember specifically because I had just read some blog post where someone had said, “Any new product you start working on you should launch in 90 days. If you take longer than that, you’re overthinking it. So, 90 days was our goal. We missed by a week or so.

Alejandro: What happened during those 90 days?

Steve Newman: A lot of typing. It was pretty clear to us what we wanted to make. It was basically just a simple document editor and some very simple facility to share the document with other people. So, it was just go and code it.

Alejandro: What do you think made your partnership with someone like Sam so solid and magical because you guys had been building all these projects for so many years, so what do you think made it so special?

Steve Newman: It’s a good question. I think we just get along well, and we complement one another.

Alejandro: What did you have that he didn’t have and vice versa?

Steve Newman: I’m always the optimist. Like, “Yeah, let’s do this. This is going to be great.” Sam is more of a realist. On his own, maybe he wouldn’t be inspired to do something. On my own, I’m going to go off in a crazy direction, or at least back then I would have. In other ways, just kind of complementary skill sets. I think sometimes it happens that way. You bring two or three people together, and it just happens to be a good mix.

Alejandro: Really interesting. So, after the 90 days when you put this thing to the world, what was that initial reaction that you were getting from the market?

Steve Newman: We did a very soft launch. We were really just thinking of that as a prototype. So, the purpose of launching, it was to start to get feedback. We didn’t announce it. We set up an AdWords campaign. I think we were spending $5 a day, literally because we just wanted a few people to come and try it and give us feedback. Actually, we had a form. There was a box right on the page where you could just start typing feedback and hit a button, and it would send it to us because that was all we were looking for at that point. So, a few people a day would come and try it. We had no analytics are any kind of sophisticated reporting, but I had a little script I could run against the database that would just tell me and would give me the count how many people have signed up. I would check it once or twice a day. I remember I went to bed one night, and the number was about 100, many of whom I knew personally. It was friends and family. I woke up the next morning, and it was 1,000 and climbing fast. What had happened overnight was Michael Arrington had blogged about us on TechCrunch. He had just gotten started. I think we were maybe the 22nd article ever posted on TechCrunch or something like that. But it turned out some college student had blogged about us, and someone had seen that, and then Arrington had seen that. That was when we caught people’s attention.

Alejandro: Wow. Really, really interesting. What were some of the days after that because, obviously, you guys were acquired by Google, and for the folks that are listening, Writely eventually led to really Google Docs and Google Drive, which is really unbelievable. Eight hundred million people daily using this. What were some of the next challenges that you guys were experiencing? We’ll get into the acquisition in a little bit, but what were some of the challenges that you were experiencing then?

Steve Newman: At that point, it became all about scale. We went from 100 to 1,000 to 10,000 to 100,000 to millions of people using this software. Every factor of ten or so adds a new set of engineering challenges. We went from this little prototyped application running on a single leased Windows server somewhere in Dallas. Now, we’re at Google and scaling up to hundreds of servers and a completely different architecture, and having to make this thing work at scale. Suddenly, it went from building the basic product to making this thing work when eventually millions and hundreds of millions of people are going to be using it, and also integrating it into the rest of the Google ecosystem. We had built this word processor that became Google Docs, folding that in with Google Sheets and Google Slides, and as you say, Google Drive. Suddenly, we’ve gone from this one little piece of software running literally on one server to dozens of internal services that are linked together and linked into the rest of the Google internal cloud supporting hundreds of millions of users. That was really the challenge. That actually is what eventually led to what we’re doing now here at Scalyr where we’re building tools to help people understand—when you’re running a big system like that, how is it functioning and tracking down problems? Because that was the situation that we were dumped into at Google. It was “Think fast. You’re about to be 100 million users. Make it work.” We had real challenges in tracking down problems and understanding the limitations as we were scaling up the system.

Alejandro: We’ll get into Scalyr in just a little bit, but I wanted to ask you here in the process, for example like building the company. You guys have, obviously, at this point product/market fit. There’s no way for you to really keep up with the growth, which is typically what happens when you really hit the nerve in the market. What actually happened? Did you guys start to receive inbound requests from VCs and perhaps companies to try to acquire you, or what happened?

Steve Newman: Yes. It all happened so fast. From that day that my partner Sam walked in with the idea until the day the acquisition closed with Google was about ten months. That first hundred days building the product, launching it, getting noticed by TechCrunch. Then the next steps after that. Now, suddenly, all we’re doing is dealing with these inbound people reaching out to talk to us, and just scaling the system. In fact, I’ll never forget when I called my partner Claudia, and she hates it when I tell this story, but to tell her about TechCrunch and that suddenly everyone was coming to try out the product. The first words out of her mouth were, “We have to make them stop.” Because in her mind, it wasn’t ready. This was the prototype. It didn’t look like something she felt she could be proud of yet. But the world had other ideas. At first, it wasn’t—I don’t want to make it sound like we were too much of a runaway success. I think at first, we were a runaway novelty. Everyone was just interested in this new thing. In our minds, we had been building a collaboration tool. I talked about this problem of always emailing the word file back and forth. This was a tool to collaborate, work together with someone to create a document. But everyone quickly decided that what we were really doing was replacing Microsoft Word, that this was the web kicking out the desktop, which we knew we kind of silly because Word is this extremely sophisticated product, and does a million things that back then and even today Google Docs doesn’t do. It wasn’t that we were trying to be a better Word; we were just trying to be a simple way to collaborate on a document. Everyone loved the message of the upstart web-based company threatening the big incumbent desktop software. I think that story was really what drove a lot of the excitement. Everyone’s trying outrightly. Some people are actually using it. We’re getting all kinds of inbound press requests. Sam winds up speaking at Web 2.0. I think either immediately before or immediately after Barry Diller. About six weeks into all that, we get an email with the subject line, “Greetings from Google,” which we almost threw away as spam. But it was Google’s corporate development team reaching out—

Alejandro: The head of corporative, or was it just like someone on the team that was tasked with getting you guys on the phone? Or who was this person?

Steve Newman: Yeah. Someone from the team.

Alejandro: Then they were requesting a call? Is that the email?

Steve Newman: Yep.

Alejandro: So, then you guys have a call. What happened?

Steve Newman: We met with them, but we felt like they were at that point—I don’t know whether this is true, but we felt like they were really just looking for an acquihire that we thought we’d done some neat little thing, and they were interested in acquiring it. They thought maybe we would be interested in a small acquisition, and we weren’t. So, the conversation didn’t go too far. That was the end of that for the moment. But then a little while later, I don’t remember the exact timeline, but probably a couple of months later, they reached out again. Again, we engaged briefly, but it didn’t go too far. Then a couple of months later, they reached out a third time, and things got more serious. It was that third conversation that led to the acquisition.

Alejandro: Because on the second conversation, it was just more of the same on the first one, and you guys were like, “Not interested.”

Steve Newman: Yep. I’ll tell you, something else that entered our thoughts along the way, and I don’t remember how this fits into the timeline exactly, but the truth is it was clear we had built something interesting, and we were getting a lot of attention, and we were getting outreach from VCs, and we took a couple of meetings. We never took funding because we never had a need for it, but we certainly could if we were getting outreach from VCs as well. But it wasn’t obvious to us what the business model was going to be for this. Publicly, I think we were getting a lot of attention and making some noise. We could see that actually when people would come and use the product, very few people in truth were using it deeply. We would see a lot of, “I want to create an account.” They would create a document. They would start typing text into the document, and they would just type like, “Huh. This is interesting.” Then they’d close the document and never come back. So, for most people, it was still a novelty. There was some real usage, and we did truly believe that there was a real product and real potential here, but it looked like it was going to be a very long climb to turn it from novelty into real business.

Alejandro: How were you financing it, Steve?

Steve Newman: We were just self-financing. The costs were a few hundred dollars a month for hosting. Then keeping ourselves in Ramen. There really wasn’t any cost. In fact, if you do the accounting, once everything was wrapped up, we spent more money on legal fees for the acquisition than everything else combined. The legal fees weren’t that high. It wasn’t the complicated acquisition, but that was the only expense.

Alejandro: Right, because especially Google is just so clean and so effective when they have this assembly line of doing their M&A. It’s normally very easy. Once you want to do it, you just do it, and it’s not like the typical back and forth that you see with other less sophisticated structures.

Steve Newman: Yeah. That was certainly our experience. They were in trust great to work with.

Alejandro: That’s amazing. Then you were at Google for about four years after the acquisition. What were you doing during this time?

Steve Newman: There was an initial hand-off period, getting an internal team at Google, engineering team up to speed on what we’d built. I wound up transitioning to work on some data infrastructure projects to support Google Docs. Google, of course, started out with search—first, there was search. Then there were ads. Then there was Gmail, and Calendar, and Google Docs, and all these other things. All those applications of Gmail and Docs and so forth, it’s a very different kind of system. It takes a very different kind of engineering than things like search and ads because Google Search, for example, it’s obviously an immensely sophisticated piece of software, but it’s not, and especially back then, not sort of live. You don’t interact with it. You don’t put data into it. You’re just getting data out of it. So, Google didn’t really at the time have any good database solution for storing data that was being created on the fly by customers for interactively entering data into the system. So, applications like Gmail and Docs really struggled to have a reliable place to store user documents in email and so forth. So, I wound up working on a project to address that.

Alejandro: We’re going to talk about your next rodeo with Scalyr, but during this time with Google, here you are, this founder that has been doing projects here and there. The all of the sudden, this is your first real experience with a tech giant. What was your biggest takeaway from working for these years and maybe there was a ton of new stuff that you experienced and maybe really, really big lessons? So, what were some of these big lessons?

Steve Newman: There were a lot of big lessons. That four years, I think I learned more there than I ever learned in school. That was my real undergraduate education in engineering server systems at scale. The first month almost literally at Google was just spent reading things on the Wiki. There was all this great internal material about how all the systems work. Basic principles for building systems that are going to be reliable at large scale. Large scale really is different for the obvious reason that you have to be able to control a big system instead of a little system. But there are a lot of other things you wouldn’t anticipate. People used to say if an event is a one-in-a-billion chance, then it’s going to happen everyday because if you have a billion users, and they do more than one thing per day, even the weirdest little edge cases will come up every time, so you can’t write your software only to support normal situations because if you have to go and chase things down and clean them up when something really unusual happens, unusual things are always happening at that scale. Working at Google was a great education in how to do that and where the challenges are.

Alejandro: Really cool. Then if you had to guestimate today, how many people do you think are using Google Docs?

Steve Newman: In honest truth, I’m sure you probably know better than I do. What I know is that every school my children have been at since elementary school, they’ve been using it, and through no connection to me. So, that’s always made me really happy.

Alejandro: Wow. Wow. I mean it’s amazing the legacy. So, really, really well done on that one. Steve, at what point do you start to think, “I think that I’ve done enough time here. It’s time for me to go at it again.”

Steve Newman: It was a couple of things, and I think they connect. One was—I talked about what an incredible learning experience it was working at Google. That started to slow down. I got to the point where I felt like I had learned what I was going to learn. Then the other side is I was ready to start. I started to see things that I thought could be improved or done differently. It’s hard to do that. It’s hard to make changes as an individual in a large company like that. That led more or less directly to Scalyr. I talked about it at Google. I wound up working on this database infrastructure project to support Google Docs and Google Drive and some of those other applications. We wound up having major challenges within Google to get that system to work well and to keep it working well. The system was so complicated. We were building several different pieces of software within that team. We were interfacing with lots of other systems run by other teams within Google. So, there are all these moving parts from different teams, all being updated on different schedules and different things happening. One application will have a big press event, and suddenly they’re getting more traffic, and that might overload part of the system, or some other thing happens and some other part of the system. There were constantly technical problems, performance problems, bugs that were popping up. Tracking that down in this enormous, complicated system, figuring out where the problem is actually originating so that we can fix it, that turned into a big frustration. I had ideas for better tools to support that, but that wasn’t something I was going to be able to make happen within Google. So, that’s what we wound up doing at Scalyr.

Alejandro: Tell me about the day that you give your notice and you decide to really go at this like full speed ahead.

Steve Newman: There should be a good story there, but I don’t think there is. I barely even remember that day in truth.

Alejandro: So, you were just, “Hey, let’s just do this thing” and you got together with your other co-founder, Sam, as well. Right?

Steve Newman: That’s right. Sam and I and Claudia, the three of us who had done Writely, we left Google more or less together with the idea of “Let’s get the band back together and do another startup.” I think the seed for what became Scalyr had already been planted in my head, but we didn’t leave with the specific agreement that we were going to do that. We just knew that we wanted to—we had so much fun working together; we wanted to go do it again. We went through this same process we had been through a few times before of spending a little time prototyping different ideas and deciding what we were going to build. By this time, from places we reached from coming from in our personal journeys, we decided there wasn’t one idea that all three of us were really enthusiastic about. So, we actually went our separate ways at that point. Sam wound up back at Google, and I went and started Scalyr. Then Claudia joined me. So, two of the three of us are back together, but the path to get there was a little complicated.

Alejandro: So, really quick question, Steve because you’ve done the brainstorming and really given birth to an idea several times. I know that there are a bunch of people that probably right now are listening in, and either they have a corporate job or they’re thinking about what kind of idea they can come across. So, what is a good methodology or process to really brainstorm or to come up with something that can turn into something meaningful?

Steve Newman: In hindsight, the thing for me that I think has worked the best for us is to pick an idea that serves you where you are a representative of the customer. Now, you have to be careful there because it might be that you’re the only customer, but if there’s something that you really want to use, it bugs you that this doesn’t exist and you can’t have it today. That, for me, is a good litmus test, “Is this an idea that at least some people will care about?” We’ve also had periods where we would just sort of think something would make sense. College students would love this, or these people would love to have this thing. I wouldn’t use it, but there’s this big market that would use it. You don’t have the right sense of taste when you’re trying to project onto someone else like that. So, even if you have the correct basic idea that there’s a market over there somewhere, you’re not necessarily going to serve it well. So, the ideas have always worked well for us, the ideas that we wanted to use ourselves.

Alejandro: So then, for example, on the testing, once you come up with something and you’re like, “Okay. This is really cool.” What kind of pointers would you give listeners about testing that potential?

Steve Newman: You know, I don’t think there’s any magic there. You have to go out and talk to people, talk to the kind of people who you hope are going to be your market, and see what they think. Of course, everyone’s polite, and everyone will want to tell you that it’s a nice idea. My partner, Claudia tells this story that—I think it was Procter & Gamble, which is one of the great consumer products companies. They would go out and test products. Sometimes, there would be something like single-use little soap packets; they’d have some little idea for something like that. They would describe it to people, and people would say, “Oh, yeah. That’s a neat idea. That would be great for camping.” Because you’re camping, you don’t have a place to keep your soap when you’re using it or whatever. They quickly learned that great for camping meant “I would never bother to buy this in a million years, but that’s my polite way of not saying that it’s a completely stupid idea because how much of your life do you actually spend camping?” So, you have to learn to hear the difference between “I’m being polite, so I’m going to describe an artificial situation where that idea makes sense.” Or “Yes, I actually want to use this and I need it every day.”

Alejandro: That makes sense. I mean, it’s about how disappointed would people be if they could no longer use whatever you’re doing.

Steve Newman: Exactly.

Alejandro: That’s a good way to really understand it. You can get to product/market fit or not with qualitative research and quantitative data as well that you can get from potential customers. In Scalyr, what ended up being the business model?

Steve Newman: The business model is actually very straight forward. It’s basically just fee-for-use, specifically. Our product just very briefly, again, we’re addressing the problem that we were experiencing ourselves within Google managing a complicated system. This is a problem that comes up everywhere now because you’ve got the move to the cloud, and service-based architecture, and software as a service. All these big shifts in the way people are deploying applications, they’re enabling companies to build more and more sophisticated applications with lots of moving parts because someone like Amazon or Google or Microsoft will run most of those parts for you. But now you have the challenge of making that whole complicated system work together. Even if a service provider is managing each individual piece for you, your team still has to keep the whole thing working together. That was the problem we had internally at Google, and that’s the problem we’re solving now for our customers. The way we do that is by collecting data from all these systems that you’re running and giving you the tools to make sense of that massive data. So, we just charged by the amount of data. It’s a straightforward model. It fits our internal cost structure. It fits the way customers think about things. So, almost unusually perhaps in the internet age, the business model was the easy part here.

Alejandro: So then why, for example, I know that before you guys were self-funding stuff, why did you decide to take money for this venture?

Steve Newman: Really, it’s just the scale of the opportunity. Some of the other companies I’ve built, it was two or three of us in a garage or an attic banging out code and mission accomplished. We had built what we wanted to build. There’s a lot more to the ambition of what we’re trying to build here. Frankly, I think this is the most interesting business I’ve built both in terms of the enjoyment of building it, but also in terms of the actual opportunity here. So, what we’re trying to do is just at a bigger scale than Writely, for example.

Alejandro: So, would you say, for example, being coined or perhaps viewed as the Father of Google Docs helped you to really raise money easier?

Steve Newman: It didn’t hurt. You know, you have to build something worthwhile, but that calling card will get you in the door, and that certainly helps.

Alejandro: So, for example, like the investors that you got, you got Google Ventures. Right?

Steve Newman: We did. Yeah.

Alejandro: Really cool. Then you got Shasta Ventures, Bloomberg Beta, Susa Ventures, Shea Ventures. How did you decide that these guys were the right investors for this? Because it’s interesting. When you’re fundraising, and when you’re a first-time entrepreneur, you just take checks from anyone. I guess when you’re at your level, and you have that level of credibility in the market, you’re at a point where you can actually decide who you want to invest in your company. So, what drove that decision?

Steve Newman: Yeah, we were fortunate to have some ability to pick and choose. I think the number one thing was looking for investors who they saw what we saw. Sometimes, you’ll meet investors who have kind of a one-size-fits-all mentality, and they want everything that they invest in, to kind of fit the same model, whether it’s hire a big sales team or whatever it is, they see everything as a cookie cutter. But we managed to find investors who were excited about what we were building for the reasons we were excited about it, and who were brought into the vision of how we wanted to build the company. Being personally an engineer by background, I’m very interested in building a company that’s going to succeed on the basis of the technology and the product. The investors that we’ve been able to work with, they were excited about that. So, they’re supporting us to build the company we want to build instead of just trying to fit us into some enterprise SaaS cookie-cutter model.

Alejandro: How much capital have you guys raised to date?

Steve Newman: About 34 million give or take.

Alejandro: Really cool. Your experience is really incredible, and we know that in entrepreneurship there’s no such thing as a straight line, so let’s talk about one of those dark moments that you had and what was the big break to get out of it?

Steve Newman: Let’s see. I’m struggling to name a specific one. I’ll tell you one moment. This was back during Writely. During that first 100 days when we were building the product and hadn’t launched it yet, suddenly it seemed as if competitors were just popping up out of the woodwork. Almost literally every week, there would be some new announcement of somebody who was building a web-based word processor or something like that. Some of these looked like they might be pretty sketchy, and not to be worried about. There was a company called 37signals. It was very well respected. They had done a lot of really nice web applications. They were some of our heroes as we were building Writely. They ran a teaser ad for something called Write to Board. It was a teaser ad and didn’t really say what it was going to be, but it sure looked like it was going to be a collaborative word processor. We just didn’t feel there was any way we could compete with those guys, but we were in it. We figured, “Let’s at least proceed with the launch.” So, we launched, and then a few weeks later they launched. Long story short, what they’d done was nicely done, but it was only intended to serve a niche audience. It wasn’t really directly related to what we were doing. All those other companies as well, all those other products that we’re launching around about the same time as ours. None of them wound up getting really in our way. Most of them never went very far. We thought we were going to be just this little fish in this huge pond, and what we’re doing is not in the least bit unique. It seemed like a unique idea when we started, but just a couple of months in already, everyone is doing it. But at the end of the day, if you build the right thing, it’s easy to envision that everyone else is doing what you’re doing, but it doesn’t always turn out to be the case.

Alejandro: Interesting. That’s why I always tell entrepreneurs that they shouldn’t be afraid of sharing what they’re up to, and their ideas, and perhaps brainstorming without disclosing the secrets because at the end of the day, if someone knows what you’re up to, and they try to replicate what you’re doing, it’s going to take them anywhere between 6 to 12 months to really get it right.

Steve Newman: I’ve always felt that way. If you’ve been out there trying to pitch your idea and trying to get people interested, and find customers, and find investors, it’s incredibly hard to sell people your idea. So, the idea that someone is just going to steal the idea and run with it without you when you can barely push and shove people into trying out the idea. Certainly, it can happen, and you don’t want to open all your cards always up front, but there’s so much more to be gained by getting out in the open than trying to hide in stealth mode. I completely agree.

Alejandro: Then shifting gears here and going back to Scalyr, in a world where the vision is fully realized, what does that world look like?

Steve Newman: Again, we’re about giving visibility to engineers. It’s an extremely difficult problem because these applications, and database service, and all these pieces that we run, they’re so complicated and they’re so opaque. Think about back in the day if you had a problem with your car, you’re there in the car, and you can hear it, and you can smell it, and you see smoke coming out of the engine. You have a decent idea that it’s probably the radiator or something. There’s kind of a direct connection between you and this complicated machine. Nowadays, cars are so complicated, and it’s all software. Something goes wrong with your car. Even though you’re there in the car, you’re going to have no hope of figuring out what’s going on. It’s that much worse in the server world where you’re not even physically located with the thing, and even if you were, it’s not going to give you any physical clues. It’s this huge complicated thing that is just completely opaque. What we’re trying to do is take all the information, the logs, and all the detailed information that these systems generate, and summarize it for people, and let them explore it to give them back the ability to actually understand what’s going on in a server. You know, you talk to a lot of operations teams or engineering teams today, and often the attitude is almost one of fear like, “I don’t really know what’s going on in my systems. I know it’s not on fire at the moment until it is, but I don’t know what might happen next, and I don’t know whether I’ll be able to figure it out when it does happen. What we’re working toward is ultimately giving people such a clear idea of how their systems are functioning that it takes that fear away. That, in turn, is to allow people to move faster. You’re always trying to evolve your software create. Create new software functionality. Move things forward, and it’s hard to do when you’re not sure how the system is functioning and what your next change is going to do. So, to really give people that quick and deep understanding of how things work is what we’re working toward.

Alejandro: Got it. So, one question that I always ask the guests here Steve is basically knowing what you know now if you could have the opportunity to speak with your younger self and give yourself one piece of business advice before launching a company, what would that be and why?

Steve Newman: Focus on your customers, not your competitors. This goes directly to that story I was telling about all the apparent competitors for Writely because you can spend your whole life doing market research and convincing yourself that these eight other things are all doing what you’re doing. But if your customers think your idea is new and interesting, then it’s new and interesting.

Alejandro: I love it. So, for the folks that are listening, what is the best way for them to reach out and say hi, Steve?

Steve Newman: Just go to scalyr.com. You can get to us from there.

Alejandro: Amazing. Steve, thank you so much for being on the DealMakers show today.Steve Newman: Thank you. This has been fun.

 

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