Startup Field Guide Episode 5

In this episode of the Startup Field Guide podcast, Sandhya Hegde chats with Arctic Wolf Founder and CEO Brian NeSmith. Founded in 2012, Arctic Wolf is a leader in the cybersecurity category known as MDR—Managed Detection and Response, provided as a service.

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Be sure to check out more Startup Field Guide Podcast episodes on Spotify, Apple, and Youtube. Hosted by Unusual Ventures General Partner Sandhya Hegde (former EVP at Amplitude), the SFG podcast uncovers how the top unicorn founders of today really found product-market fit.

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If you are interested in learning more about some of the themes and ideas in this episode, please check out the Unusual Ventures Field Guides on customer validation, innovator outreach, and fundraising seed and series A capital.

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TL;DR

• Instead of asking “how do you know you have product-market fit?”, get curious about the process — how are you going to learn about getting to product-market fit? Create a controllable, iterative process to get to PMF. 
• You don’t need to have a sellable product to start pitching. Start with a scripted pitch and think about it in 3 segments: the 5-second pitch, the 15-second pitch, and the 1-minute pitch. If you lose people after any of those, then you need to fix your script. If you make it through the 1-minute pitch, then ask for a 15-minute meeting.
• Brian created an alter ego for himself named “Brian Robinson” to do early sales pitches since selling as a CEO can create a different dynamic. 
• Brian had to wait for the market to shift. Once ransomware events impacted hospitals, the market woke up and customers wanted to talk.
• Be completely transparent with your investors so that they can help early on. When you share your struggles, come into the meeting with potential solutions.
• Learning: Brian's early positioning highlighted “delivered as a service” which isn’t common nor generally successful in the venture industry.
• Develop your inner strength and conviction. While you want to be open-minded as a CEO, you need to stand by your convictions and be willing to get fired. Because even if your board tells you to do X and it doesn’t pan out, as a CEO you’re still responsible for that decision.

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Episode Transcript 

Sandhya Hegde:

Going back to that moment in 2012, Brian, what was happening when you decided to start Arctic Wolf Networks? What was going on in your mind? You have done this a couple of times before. You know how hard it is. What was the opportunity? What got you excited?

Brian NeSmith:

We have to kind of rewind prior to the official start date, like you often do in these things. They don't come into existence out of nowhere, they come from a set of ideas. I had ostensibly retired. I actually knew John. We joined a small company that had its own struggles and got to know John through that experience really well. It served me well, I think, when we talk about the fundraising, because that was a big part of the motivation for me–having worked with a venture company, especially in a challenging dynamic. How do they behave? What do they do? It was a real, strong proof point for me that the partner you get in with matters a lot, and especially when times can get difficult.
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I got bored. There’s no other way of putting it. I retired. I got bored and called up my co-founder Kim Tremblay, who's based in Waterloo, Ontario, and said, "Hey, how are things going post my previous company?" (We worked together at the previous company.) She says, "Well, I'm bored too." That's a bad formula, two bored, kind of entrepreneurial folks. What are they going to do? They're going to jump in and do something.

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We got together over her kitchen counter in Waterloo and brainstormed a half dozen different ideas. Five of the six would've made it, and one would've been a complete abysmal failure. We decided to focus on this one mostly because I wasn't as excited about starting a company that was going to get acquired. Not to say that we couldn't have got acquired, but it wasn't going to be a feature that had to be a part of a bigger company. I wanted to do something that was a little more category-defining. It didn't have to be category-defining, but I thought that it could be sustained and grow into a truly large entity. Maybe that created some later challenges for us in what we were doing, but that was really the start of everything there.

Sandhya Hegde:

What was the market insight? You decided to start a company. What were you looking for in terms of an actual problem to chase and why?

Brian NeSmith:

The actual space we focused on, people today call it MDR, “Managed Detection Response.” I look at it as like neighborhood watch for your IT infrastructure. It's collecting data from the environment and understanding when things are not doing what they should be doing. We called it continuous monitoring at the time. The essence of the idea came from my prior company, Blue Coat. Blue Coat, the security solution, produced really voluminous logs, like massive log data — a huge wealth of information. We found it to be very rare that a customer was able to understand what that data was telling them, and so that was the kernel of the idea.

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If you look across everything that's in your environment, your endpoints, your servers, your security devices, your firewalls… every one of them is producing data. There's a huge amount of wealth in that data mixed with a massive amount of noise. The thought process was we could build a solution that would get through all that and draw out the specific items that are relevant to the end customer and we called it “continuous monitoring.” It evolved over several iterations through different names into what we're doing, but that was the original insight and the thought process of what we wanted to build.

Sandhya Hegde:

John, as an investor, what was exciting about the problem area Brian wanted to focus on? What piqued your attention?

John Vrionis:

Well, it actually all started with Brian. Brian and I, as he had said, we worked on a board together. I had recruited him to an early-stage company and had worked with him through multiple rounds of funding, and unfortunately not a great exit. I don't know if Brian knows this, but when I was in business school at Stanford, we actually studied cash flow, or Blue Coat, so I remember him as the protagonist in that case. My mentor Andy Rachleff and Brian worked together — Andy as an investor and Brian as a CEO, so we had that history.

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Then Brian is the proud father of daughters, like myself, and also a lover of soccer, so we had hit it off both on a professional and a personal level. When he came to me, I was already positively inclined about anything that he was going to do. Although I did think he was retired. So I was a bit surprised when he came, but he made this very compelling argument, as the good founders do, about why the industry was changing, why there was a need for what Arctic Wolf would inevitably become.

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It felt like he had what we call that proprietary insight. He understood the market and how the world was evolving and he saw the opportunity uniquely because of his experience. With the combination of those two things, I was really excited to work with Brian again.

Sandhya Hegde:

Going back to 2012, you've raised your seed round from John and then I think very soon after you actually also did a preemptive series A, which almost feels like you are back in 2021, but you did this way back before it was the norm. You had a preemptive A round led by Redpoint. What was happening on the product side? As a repeat founder, how did you approach developing the product, testing the hypothesis? What was the product-market fit journey for Arctic Wolf?

Brian NeSmith:

Yeah, so just a slight correction there. Lightspeed was the series A round with John and then the series B round was with Redpoint. It was a fairly simple process. Redpoint had missed out on the series A round, they did not get selected and the person that was leading that just wanted to get into the deal, so he came to me. We weren't actually trying to raise money at that time, and we just added the money at that point in time.

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That being said, a lot of this is when you have an idea of a company or have an idea you think somebody's going to want. You don't actually know if it's true. You don't really know if it's true until you go out and try to get somebody to pay money to buy it from you. 

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I started with a group of engineers. I was the only non-engineer, even though I have an engineering degree. I haven't really practiced engineering, so I no longer qualify as an engineer in the truest sense to the word. I spent most of that first year to year and a half selling early and starting to think about who's the target customer and what does that profile look like?

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A realization — especially for a B2B business–is that there's a lot of direct interaction with the customer. And so you’ve got to do a bunch of things to help you figure out how you're going to get that product market fit. One of the things that I think is a common misnomer is—and I think it's a question that comes all the time—”how do you know you have product market fit?” I don't think that's actually the best question. 

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I think what's really important is, “what is the process? How are you going to go about learning how you're going to get product market fit?” Because product market fit is hard work. It's intelligence. It's luck. You can't control everything there. The process you go through in figuring out how to get a product market fit for a B2B company I think is something that can be done and you can't dictate the outcome, but you can dictate the process.

Sandhya Hegde:

Could you walk us through what that process felt like at Arctic Wolf?

Brian NeSmith:

Sure. In its simplest form, and you see this illustrated if you talk about people doing fundraising and say, “what's your elevator pitch?” I don't think that's good enough. 

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The way you think about it is you get five seconds to get somebody to listen for 15 seconds, and in 15 seconds to get a minute, and a minute to actually ask for a meeting to talk about what you do. Those three sessions—and ultimately the pitch that you're going to give them to get them to buy the product—those have to be scripted. And you don't have to wait to have the product that you want to sell to do those scripts. You can go test them and start learning and iterating.

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I actually wrote those scripts out. Early on, I was the only one doing that. I was the sales development rep, the SDR. I was the SDR that would give them the 15-second pitch. I was the one that would do the one-minute pitch. Then I did an interesting thing: I created an alter ego early on that was not me as the CEO but me as a salesperson. I called that person Brian Robinson. I was Brian Robinson doing the sales pitch because for some customers you get a different dynamic once the CEO is selling versus when it's this sales guy. I would do that pitch and do it as Brian Robinson. It also afforded me, if people would ask for discounts or they'd want help, I could say, "Well, I got to go talk to the CEO and we'll see what he can do." I did get caught once. I fessed up immediately. 

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Also, it kind of put in me that idea that I'm not the CEO of selling right now. What does that pitch need to look like? It's the story itself—not my personality nor is my title going to get me the meeting. And I wrote those scripts, did them myself before I hired anybody in sales, many, many times. I iterated on them. Even after I started hiring people into those specific positions, I still participated fairly actively in selling right along with those people and listening to them.

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I also reserved, even as we're still learning that product-market fit as I hired people, I reserved about 20% of the capacity for an alternate script. Then once a quarter I'd hold a free day where everybody can try their own script and tell me what worked. It can't be what we do now. Just trying to find ways to iterate and create that rapid learning dynamic. I think I articulate to people, you can't dictate the outcome that you're going to get product-market fit. You're not guaranteed to get it. What you can do is control the process and be as efficient as possible about what doesn't work. It can be frustrating and painful because I guarantee you anybody who does this, you will get a lot more about what doesn't work than what does work. You may go through hundreds of iterations of what doesn't work until you find what does work.

John Vrionis:

One of the things about Brian that was so compelling was his perspective on the market. But at the same time, it was his willingness to continue to try different scripts as he called them. He and Kim had this fundamental insight about the security market being broken, in the sense that most companies were cobbling together a bunch of point products and then building a security operations center to try to really get to the root cause of a lot of the most recent attacks. He just saw that because he had been one of those point product vendors and he saw the opportunity to build a platform that brought a lot of that data together. How to articulate that, how to compel a customer about the value proposition when they were accustomed to buying something else, was more of a point product.

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It took time. It took a lot of time. It was a creative process that's very difficult to put a schedule to. But he would always come to us as investors with these different scripts, these different positioning statements, these different narratives as he was working his way through the process. And as he said, there's no guarantee that the outcome is a success. But he knew that by following a process and continuing to iterate and iterate and iterate, he was maximizing his probability of finding it.

Sandhya Hegde:

Makes sense. Brian, I'm curious, what were the reactions you looked for in a pitch to say, "Oh, this meeting went very well. I think my buyer's leaning in hard" versus, "They said nice things, but actually that meeting was a complete dud"? Could you share examples of how you built your own gauge?

Brian NeSmith:

Well, so the five-second pitch: did you get a 15-second pitch? I actually literally tracked that. Then for the 15-second pitch, do I get a minute? I would understand no, they hung up after 15 seconds. Okay, well something in the five or 15 didn't work. Then sometimes I'd get to the minute pitch and I'd say, "Hey, could you take a 15-minute meeting and I'll give you a more thorough overview?" They'd say "No." They'd kind of go, "Nah." They're being polite. I'd say, "Hey, could for a minute here share to me why not? Tell me what you didn't like or what didn't resonate with you." I would encourage them, because what I would do is I'd criticize myself. I think you didn't like this, because then that opens the door, because people are naturally generally polite. They won't tell you why they don't want to do it.

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Ultimately it's very obvious, your five-second pitch gets you the majority of the time, a 15-second pitch. And your 15-second pitch gets you the minute and your minute gets you the full meeting. Even for the full meeting, that was scripted and pitched. 

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We did something a little different and atypical with customers. Generally in an enterprise-level product, people want to do a POC. I didn't want to do POCs, so what we would do is we would get customers to buy the first month's service. We did not do POCs. It's like, I'm not going to do a POC. This is worth it to you and I'll put you on a month-to-month subscription. Pay for the first month. If you're not willing to pay for the first month, then my guess is the POC would've been a waste of our time.

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It's every step of the way asking for the order. Five seconds, can you give me 15? Can you give me a minute? A minute, can you give me that 15-minute meeting? In that 15-minute meeting, are you ready to buy it? Because I'll only charge you a month and if you don't like it, you can cancel after a month and you can move on. It's hard. I think as an entrepreneur you don't like rejection. It's your little baby that you're building and they run it for a month and they say, "Yeah, it wasn't worth it to me." There's a lot of lessons. You may have the basic idea right, but I guarantee every entrepreneur has to iterate on even the basic idea to really turn it into something that's truly going to be successful.

Sandhya Hegde:

What were some of those iterations like? Do you remember the very first original form of the idea and then how you guys evolved it based on the feedback?

Brian NeSmith:

It was mostly, I'd say, marketing pitches; how we talked about it. We did continuous monitoring. We had SOC-as-a-service, we had SIM-as-a-service. We even had this term “fire break,” which I think was reaching the pinnacle of my team getting frustrated with me. It was mostly, I'd say, iterations on that piece.

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Ultimately, all that aside, by focusing on the process and measuring it, you get to reward yourself knowing that I've learned things, things that I've improving on the product, things that I'm improving how I talk about things here. We didn't really achieve product-market fit. I think this is a lesson for people, that it's not always about your iterations. Sometimes the market just has to come your way.

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For us, five and a half years into it, if our audience might remember, but the big ransomware events that occurred with the UK hospitals changed the dynamic in our space. Because prior to that, hackers got into your network, they steal your stuff, and so what? It wasn't that big of a deal. They say it was a big deal, but they didn't really care about it. When those ransomware events returned those hospitals to the dark ages, all of a sudden everybody woke up and said, "Hey, a hacker could bring down my entire infrastructure." Everything shifted.

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You could just feel the wind when you talk to people, and they're like, "Oh, somebody that would watch and tell me when that's about to happen and warn me and correct me!" Then they just start taking stuff away from you. They can't stop you. They're like, "Yeah, let's do the meeting. Yes, let's take the next call. Let me get my other team on the phone." All those sorts of signals that tell you on that. Those are the indicators of it. But ultimately the real indicator is people buy it and they keep it installed. That tells you more than anything.

Sandhya Hegde:

This was like 2017, 2018, right? About five, six years after Arctic Wolf was born. What was that kind of wandering through the wilderness process like? What did the board conversation sound like when you went back and said, "No, we are still figuring it out"?

Brian NeSmith:

This is what made it especially frustrating. It was not that there was no success. It's like we're getting some traction. I joke even today, we've been doubling for almost 10 years. Every year we're getting growth, it's just not in the traditional model. It wasn't like three times, three times, two times, two times. It's been 2x, 2x, 2x, 2x, and now at the size we're getting the 2x's start to matter. Not every company grows the same way.

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I think a couple of things. One, I have the experience where I've lived it and I was comfortable being fully transparent with where we screwed up, where we made mistakes, where that was a waste of money. Okay, well that wasn't a waste of money, but I did learn something and moved on from that. That's the benefit of experience. I think even as a young entrepreneur, there's no reason not to be transparent. You'll just benefit measurably like that. Just even for your own psyche, that you're not trying to maintain two sets of books in your heads about what you told your investors versus what's actually happening for whatever reason.

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I think that, coupled with seeing enough proof points in the individual, not in the overall market, but in the individual where people did rip it out of my hands. I believed that eventually the market would come about. I'd be misleading to tell you that I knew it was going to be the ransomware event that was going to cause that. But I knew something would happen in our space that would trigger that kind of event to take place. That transparency and then also just sharing anecdotal information about when it was successful and what made it successful were proof points that this is going to happen.

John Vrionis:

Yeah. I mean, Brian, you can't understate that I think for our audience. The fact that Brian was brutally honest and brutally transparent, it actually gave us confidence in him to continue, to persevere. I think way too often VCs believe in this mythical, “well, it's supposed to triple, it's supposed to triple and then double.” But it's an artificial growth rate that you're putting on a startup. While we'd all love to see those happen, it's unrealistic—especially when you're creating a new category—that that company's going to grow according to some spreadsheet exercise.

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I think what happens is that fundraising rounds happen, valuations go up, and all of a sudden people with hindsight say, "Oh, we're supposed to triple, triple, double, double." When they don't, they kind of panic. In this case, because Brian was so transparent and so truthful about the struggles and the moderate successes, we continue to have belief, I certainly did, in him and believing that eventually the market would come around if we could really figure out how to position and get the narrative right. I think that was true. He's underselling his ability to continue to do that, but it also was there was a macroeconomic shift in people's thinking. Sometimes it's just about being around and surviving until that happens and having the antidote in this case that people really recognize now that they needed.

Sandhya Hegde:

Makes sense. Brian, a very important question, especially in this environment, how did you think about your burn and your team while you were going through this more of the wilderness path? The big tipping point hasn't happened yet. You can see that. How did you think about planning your team expansion accordingly, and what did your team look like two or three years in?

Brian NeSmith:

For the first two, two and a half years, it was me and a bunch of engineers. I was selling and marketing and doing all the pieces. My marketing skills aren't great, my design skills aren't great, but what I was comfortable doing is selling and doing the pitch. I didn't think I needed something too fancy to articulate the value proposition to the customer. Now, as you start to iterate and you start getting a little bit of traction, we started adding resources and paying attention to the metrics. Having five of something, are you learning any better or any faster than having two of something? If two of something is you're learning fast enough, then don't add more until you really prove a formula.

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Although we've raised a lot of money over the history, through the early days, through all the way up, even the series D round, we had not raised that much money. We made it last a good six, six and a half years. It's really on the last couple rounds when the fundraising increased and the volumes increased. It's just being measured and being honest with yourself. Is running a big marketing campaign going to change it? In our particular world, no. I didn't have trouble getting to people to give them my initial five-second pitch. If that's not my problem, then okay, it's the steps to the other funding. Just be cautious when you're doing it.

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Now it's very different for a B2C or some other type of company. For a B2B company, there's no reason—you don't need a big massive marketing spend and launch and all those things to prove that people really want to buy what you're selling.

Sandhya Hegde:

Makes sense. Looking at that time period again, you probably needed to go out, raise that next round before the tipping point had really played out. You have the pressure of being compared to the gold standard of, “oh you didn't triple for three years?” type of benchmarks. What was your fundraising process like? John has given me a spoiler alert here that it was really tough. I would love to dig into that and really help all the founders who are going to pretty much go through the same experience in the next 18 months or so of fundraising in a very challenging environment where the standards have been raised extremely high for A, B, C rounds. Would love to hear from you what your approach to fundraising in that environment was.

Brian NeSmith:

Yeah, the A and the B round, just from my reputation and historical experience were fairly straightforward. We're talking about the B2, I'll talk about why we call it a B2, the C and the D. “Hard” would be an understatement. They were full-on agony. The B2 round should have indicated this to me. Now with the benefit of hindsight, I go back and look at it, and I'd like to tell you that in the venture world, everyone's really looks through to the root of everything and understands it and is willing to swim against the tide. But it's a momentum-style business like a lot of public markets are.

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We had two negative things going with us. 

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First, is that what we were doing as a service was delivered as a service. It wasn't a product company. I think the experience in the venture industry generally with service companies has not been great. It's been pretty bad. 

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The second part is our initial focus. What I found through my iteration, small customers were the best fit. Not super small, but kind of the 100 to 500 employees, and that type of investment has generally not played out well for a lot of venture investors. Even going into the pitch for the B2, the C, and the D, which is, well, you're selling to small companies and you're selling a service. Then on top of that–the metrics—we hadn't grown into them yet. So we weren't experiencing that kind of growth that John alluded to that investors liked to see, even though I think we were getting good traction. 

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The B2 frankly happened because I think in the end, I talked to probably 80 plus companies in the B2 round and they all said no. I had three or four that got close but ultimately ended up at “no.” One in particular, one potential venture group, it was a split. One partner wanted to do it, the other one did not. I actually got blackballed by the other partner as I come to find out through history there. Then John and I, we both put some of our personal money in and that kind of set the round.

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The B2 was done at the same value as the B a year and a half later, so there's no increase. You arguably could call it a “down round.” I don't think of it like that, I know other people do. We needed the money and I would've taken the money at that price. I would've taken the money even at a lower price, but we did the down round. I think with me stepping up and John stepping up on the personal side—and then we created the metrics—we then got some of the existing investors to participate, not all of them. Then we were, actually with that, able to add a few others. We added a company out of Europe, an atypical investor, and a few others to round out the round, so we did the B2.

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The C was probably my lowest point in the company. At that point, I went and talked to 150-plus companies. Partly I think, now you got to remember: still got the small business, still got the delivered as a service. Now you got the failed success of the B2 or the failure of the B2 kind of hanging over you as this rain cloud. I had talked to everybody and got “no’s” across the board.

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I actually went to a session with John, and John, to his credit, this company would not be here without John going to the wall, who became the lead ultimately in the C round. I think they did it as much off of John's reputation in what they're doing. They've obviously done very well in that investment as a result.

Sandhya Hegde:

Yeah, they look like geniuses now!

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Brian NeSmith:

I think it's fair to say that John looks like the genius, as the piece there. Just to give you an idea of just how disheartening it was, I had scheduled a two-week vacation with my family to Italy and I canceled it. And the rest of my family went off to Italy in that vacation. I'm not sure my wife has forgiven me to this day for doing that. I was as stressed as I think I've been in a long time related to work-related items.

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Then with John stepping in, we made the pitch, they did invest, we had a few other smaller people follow along with that lead investor—a very small uptick. The valuation was right around 80-100 million post the B and the B2, and we only went up to 140 million where people are used to jumping hundreds of millions even into the billions in that category.

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Then the D round, same thing. Now this is kind of 2017, 2018. I did get one particular investor—a PE firm–that wanted to invest, but it was a bit of “you give your soul over to them, they control everything about it.” We said no. I said no. I remember sitting in the board meeting and they're like, "Yeah, you can take this money but you don't have anybody else ready to do it at this point in time, but it comes at a price." We chose not to, and we were able to stitch together a round with Blue Cloud and Stereo Cap. Again, not your typical investors. Then we got other people to follow on. And then after that it became pretty easy.

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Fundraising is either ridiculously easy or ridiculously hard. There's usually not a middle ground in these things, and it was ridiculously hard for everyone. Honestly, I was a bit surprised. People that I knew and had worked with before said no. Other folks... I had multiple firms say no more than a few times, even as part of the D round. I had one particular firm, a very well-known firm in the valley, call me in, say no, call me back in again, and talk to them again, and they said no again, and then call me back in again. I didn't just get one rejection in that D round, I got three from that firm as they, I think, were struggling with how to think about it and what to do. If you believe in it and you kind of bet and you have got to be willing to fail also at some point. It was a non-zero chance it could have all failed.

Sandhya Hegde:

I have so many follow-up questions. Let's see. First, a question for John. What gave you the conviction? Because you have to decide as an investor when you have multiple companies that, some of which are struggling, all of which need your help, you have to decide, okay, where are you going to really do something monumentally different? I'm curious what gave you the conviction to step in with Brian and go to the wall, like he said?

John Vrionis:

Well, it's definitely not that I was a genius, so I think we need to just make that really clear. Anybody who knows me knows that's already true. Honestly it was mostly about Brian in the end. Back to that transparency, that belief. I'm a bit of a product nerd myself, and so I had done a lot of work around the space and the customer problems, and increasingly just had conviction both in Brian and the need in the marketplace, and that our solution at Arctic Wolf was actually the right one. 

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It was just going to be a matter of time and not being afraid of the grind. As an investor, you make investments and then it's almost like a poker game. You turn over some cards, you have more data and you have to decide, do you want to stay in the game and keep betting or do you want to fold based on what you know?

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In this case, I was really convinced that the right answer was to stay in. Maybe more than any other investment I've been a part of. Over time, there were those nuggets of success that continued to give everyone belief. To Brian's point, a lot of times investors don't like to acknowledge they made a mistake, so we did have this overhang where we had tried to pitch the story before, and people said no. Some of the other early investors, the funds, despite being multi-stage funds, weren't stepping up in a meaningful way. There just were a lot of issues that created headwind for Arctic Wolf. Then when it was obvious, Brian was beating people away with a stick. I mean, just people throwing money at him like you wouldn't believe. But those three financings, they were lean and scrappy years. It's just really a credit to him and the team that they persevered.

Sandhya Hegde:

Now a follow-up question for you Brian. What do you think in hindsight? Two separate questions. One, in hindsight, what decisions do you feel like you made that helped you survive through that phase where you might potentially be seeing other people trip up? How do you survive when it's lean and you need to wait for the market to meet you in terms of readiness? Then two, what would you do differently if you had to do it again in terms of the whole fundraising process itself?

John Vrionis:

Well, he had an amazing spouse, so I just want to plug right there. That was the real reason that he survived. Go ahead, Brian. I know you were going to say that, so go ahead.

Brian NeSmith:

Yeah, and that is a big part of it too, is that these come at a significant personal sacrifice. Not just time, but energy and psyche and stuff like that. You can live through some pretty dark times where you ask “why doesn't everybody get what I get? I don't understand this. It's like, what's happening there?”

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My advice for someone here is that the transparency that's required—that we talked about at the board level—I think also applies to your team. Even at present day, we're very transparent as a company about how we're doing and where we're going. I had explained to folks and I had a history with a lot of these early folks, so they knew me from prior lives and know that I'm not sugarcoating what I'm delivering to you. “This is pretty dicey, it may not work. What's going to happen?”

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But I also think you can't lose sight as the senior executives. You have to be able to tell a story: this is why it's happening, give some explanation for it, and explain what you're doing to try to fix it or make it better, what you're doing, and getting the team bought in. That, I mean, in a lot of cases, that's what sustained me. I saw the team members. I saw with some of the early customers that we were getting success with using the product and keeping with it. Our very first customer is still a customer. It kind of highlights some of the value that we got there early on.

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If you're getting no response, that's a different thing than you're getting somewhat of a response and you just think that the market's not really there. That's probably what sustained me. I believed that we were getting a response, the market just hadn't quite come into its own. That if we could just be persistent and patient that this is going to pay off in a big way. Obviously with hindsight now we look like geniuses, but it would've been a hard time to tell you that I knew for sure that was going to happen, but that was my best assumption.

Sandhya Hegde:

Going back to the 200-plus rejections and those two fundraising rounds, do you feel like there's something you would have done differently in hindsight?

Brian NeSmith:

I think with the positioning of the company, I overemphasized the delivered as a service. What I think that the venture community in general wants to see is a product. And I think we could have probably emphasized that much better, especially in the B2 round, where we could have made it much more about the technology and the portfolio. I think we ended up making mistakes there that created the overhang that John was highlighting. Then we did fix that as we went into the C and the D, but it's too late. They have a view of it that now kind of taints what you're doing.

Sandhya Hegde:

Got it. I think this goes back to your comment that people are not trying to get to the root of your story, they're kind of reacting to the first five, or 15 seconds. You have to be very careful what you lead with.

Brian NeSmith:

That's right.

Sandhya Hegde:

Moving on a little bit to this board situation, how you're communicating to the team, how you are handling your board... I'm curious, John, do you have advice for other founders based on what was your best experience with Brian? What would you like other founders who are going through hard times in terms of scaling their company to know? What is it that you need to see to give you that conviction that you had with Brian?

John Vrionis:

Well, I think when things aren't going well, which in every startup there's a time when that's the case, as an investor, you want to be helpful. One of the few benefits you can bring is your perspective—the reality that you've seen a lot of companies go through their ups and downs. And the truth is, you know things are probably not all going right. If the CEO isn't telling you that things aren't going right, they either don't know or they're not telling you on purpose. Neither is good. In this case, Brian was always very open about the things he was trying and what wasn't working and what was, and that allowed us to work together on how to solve these things.

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I never lost belief in Brian. Sometimes I think investors fool themselves. They think they add value in all of these ways, but I actually think the single most important thing an investor can do is continue to give that founder a sense of belief in them, right? A sense that we're going to get through it. For me, that was a lot easier with Brian because of just how he handled the openness in terms of, "Hey, this isn't working, this is working." He always kept us informed. He treated us like partners in this, and I think that made a huge difference. If I had to give any advice, it would just be, it's really along those lines. Treat your investors truly like partners. The good ones, they understand that there's going to be ups and downs, but if you want them to help, they need to know what's going sideways or wrong so that they can.

Brian NeSmith:

The thing I'd add too, is that openness is not simply just spewing raw data at your board members. Part of the job is you need to frame the problem and understand it and put it in a way that the board members can add value in what you're doing. I like to bring challenges to the board when I think I have the different potential answers to it, but I haven't made up my mind yet. It's a little bit of an art form. If you get too far down the line and you've already made up your mind, then when you bring it to the board and they disagree with you, now what do you do? If you bring it to the board, then you can frame the problem.

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It's a mistake for an entrepreneur, I think, to go to the board and have no idea what to do. If you're doing that, basically you're saying you give up, what should I do now? That doesn't mean you can't go to some of your investors and you just need a bit of a pep talk. You can do that! Just ask. Say, "Hey, I'm really struggling right now. Give me a little bit of a pep talk." I've done that before with board members. I'm like, "I don't even want to tell you about anything. I just need a little bit of a pep talk. Tell me how good I am. Give me some confidence in what we're doing."

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I spent a lot of energy just making clear that by focusing on the process and showing the measurements and showing the data associated with that process… you can't guarantee the outcome, but I can show you all the work we're doing in the process and what we've learned along the way. And you can have ideas and we're open to whatever you want to do. All those things I think are part of it. Openness is not… it doesn't forgive you for not being prepared, not doing the work, not getting ready. It's those things, that are critical for someone to understand. Because I think sometimes someone confuses that. It's like, "Well, I'm just going to dump to you my last meeting and how that felt." Okay, no, that's not value. Frame it, help put it in a form that people can understand.

John Vrionis:

Have a plan, right Brian? I mean, I would say that despite the problems, you always had a suggestion or a plan that you wanted feedback on, as opposed to just venting. One other thing—I'm conscious of time Sandhya—but I also wanted to say that I would often bring Brian my problems. Sometimes it's nice to think about other people's problems as just a little bit of a respite. I always valued an opportunity to kind of say, "Hey Brian, these other companies are struggling with these things. What do you think?" Anyway, it made it more of a two-way dynamic.

Brian NeSmith:

I have a story, not from Arctic Wolf, but from two companies ago. A venture investor, I should probably give him credit because I quote him all the time to other entrepreneurs that come to me, John Feiber, who worked at Mohr Davidow, he's now retired. Not Blue Coat, but the company before that wasn't really playing out, same sort of thing. We had a board meeting, option A, B, and C. Nobody wanted C. It was clear the board wanted B, and the management team wanted A in this conversation. After a while, you realize you're talking in circles, so I called a break. I go walking down the hall with John and he looks at me and says, "I just want to be clear that if you choose option A and it doesn't work out, you're going to get fired."

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As a first-time CEO, I was a little bit taken aback. What am I going to do? Then he little dramatic pause and he goes, "But if you choose option B and it doesn't work out, you're going to get fired anyway." His basic point, and I think this is something I tell entrepreneurs all the time, is because it's your industry, it's your business and what you're doing, you’ve got to be willing to get fired. I'm not saying you got to behave in a bad way, but you’ve got to be willing to stand by your convictions and present the case and do it.

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I had another situation with a very well-known persona in the industry that was on my board. They had presented a plan for me that I categorically disagreed with and I said, "No, I'm not going to do that." They ultimately resigned from the board. It was a bit of a hit for us. Those are all kind of… that developing of that inner strength and the conviction in your thoughts. Being open-minded, but you're still the CEO. Even if the board tells you to do X and it doesn't work out, that's still going to be your fault as the CEO. I'd leave you with that advice, which is listen, but it's still your call and you need to live by it.

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