Some leading companies arrived at the top without taking early venture capital funding. I sat down with Mark Leslie, founder, chairman and CEO of Veritas, to learn how he created a $1.5 billion revenue business on a $4 million investment in a breathtaking 11 years.
Founded in 1990 and headquartered in Mountain View, Calif, Veritas Software Corp. designed, developed and marketed enterprise storage management and high availability software products that manage both online and offline data for business-critical computing systems. Its products were designed to improve system performance, availability and manageability while reducing the cost of administration. Veritas products were delivered through a worldwide direct sales force and a network of resellers and OEM partners in North America, Europe and the Asia-Pacific. The company merged with Symantec in 2005.
Exit Value: $16 billion at the time Mark Leslie stepped down as Chairman
Exit Value to Capital Used: Very High/Not Meaningful Figure
I have known Mark for over 10 years and have been impressed with what he has accomplished. But even more impressive is how he did it. As Chairman and CEO of Veritas, Mark broke many conventional rules for building a market-leading technology company:
- Company restart – Mark restarted an existing company – a business plan that most VCs despise
- Capital efficient/patient investments – Clearly not the typical VC model
- Focus on a small market – Venture investors like companies that quickly pursue big markets
- Radically transformed a successful company – He changed the company’s focus in spite of its success, a brave move for all stakeholders.
Despite breaking these rules, Mark created a business with staggering growth and market leadership. From 1993 to 1997, he grew Veritas from $10 million to $120 million – 10x revenue expansion in just four years. Then he did it again. Between 1997 and 2001, Veritas grew from $120 million to $1.5 billion – unprecedented 10x growth for a very large software business, with over $1 billion in new revenue. Perhaps the most impressive part of the story is that he did this on just $4 million of invested capital.
Javier Rojas: How did Veritas get started?
Mark Leslie: I had already run two companies and was looking for a new CEO opportunity. I was patient, turning down most of the opportunities I found. After turning down the CEO position at Tolerant, I joined their board. When they failed, I saw an opportunity to start a new company with some of their assets. Though Veritas was technically a restart of Tolerant, it was, in essence, a new business.
JR: What did Tolerant do and what assets did you start Veritas with?
ML: Tolerant Systems developed a fault-tolerant computer system for the transaction processing market. It raised over $50 million, but was not successful. As a side project they had developed a few software products – a file and volume manager for UNIX – to take advantage of their UNIX expertise and had signed an OEM deal with AT&T. When the primary business failed, I saw an opportunity to take these products, the AT&T deal and the 15 employees working on it and try to build a company around that under a new name – Veritas.
JR: With your experience you could have joined a bigger, better funded start-up company. Why was Veritas appealing?
ML: I had a lot of friends and VCs advise against my decision for that very reason. They felt that doing a restart is risky. They also felt that I was taking on a lot of risk for a small market – maybe $50 million of revenue potential – that may never materialize. The UNIX source code was owned by AT&T and conventional wisdom was that a phone company would not be able to develop, market and sell the OS successfully to the commercial market.
I think the concerns were valid, but I saw the opportunity differently. I felt the UNIX market would be successful – customers really wanted open systems to avoid vendor lock-in. If I was right, these products would be category leaders since AT&T was not going to build them and we would have a small, but relatively captive market to ourselves. I
n addition, the venture would not require a lot of capital since we were selling to OEMs, hopefully with AT&Ts help. I had run a capital-intensive systems business before and knew the challenges of that model. If Veritas was successful, we could have a nice, modest cash flow business with the option of other opportunities if UNIX became broadly accepted. That was my big bet. I also thought it would be fun to build a business from scratch, while benefiting from some key assets like the software, technical skills and the AT&T partnership.
JR: What was the situation like at the company when you became CEO?
ML: The company had almost no cash at the time and we did a bridge round for approximately $2 million in 1990 with three of the existing investors. We went to about 50 venture capitalists and were turned down by all of them. Even though we were essentially functioning as a new company, no one liked funding “restarts.” In that first year, we did only about $95,000 in revenue. Ultimately we raised $1.5 million from Bessemer (plus converted the bridge and added a little more insider money), who was willing to bet on our business. This $4 million was the last capital we raised as a private company.
JR: What strategic decisions did you make in that first year that helped improve cash flow, and set the stage for the company’s growth?
ML: First, we were very, very capital efficient. The OEM business involves long lead times where you have to do some paid work upfront and then wait for a few years for the real revenues – if the OEMs are successful – so you need to really conserve cash. My job was saying no to most ideas for expanding the company’s burn rate. This discipline really helped us stay focused on activities with the highest near-term customer payoffs. It also created the profitability that opened other doors to us – such as the early IPO and the currency for product/channel acquisitions.
Second, we renegotiated our contract with AT&T, which had originally called for an equal revenue split of sales from Veritas’ software. We told them we needed to make the change in order to stay in business, asking them for 85 percent of revenue in exchange for a 10 percent equity stake in Veritas. They agreed. The AT&T relationship was critical to being capital efficient because we could piggyback on their efforts to have credibility with, and get access to, the OEMs.
Third, we knew that we needed to have our product development complete by the end of 1990, so we hired five more engineers to ensure we’d meet our deadline. This decision was difficult but necessary.
Fourth, we sized up our potential customer base and determined our targets. We were meticulous about not spending more than we needed, so we focused on OEMs rather than end customers. We figured a sales force dedicated to a finite number of customers around the world (100 OEMS, of which 10 really mattered) would be more fiscally responsible than one that had to find hundreds or thousands of end users. To start, we hired just three sales people.
Fifth, as part of our product development process, we had developed a code-testing product that we thought might be commercially viable, so we made the decision to pursue this line of business as well. Investors could see this as a distraction but it generated cash and at this stage we needed to be open to different growth directions.
Also in this process, we looked for some creative ways to generate cash. We found one. As Tolerant, we had licensed hardware to a consortium of four South Korean computer companies. But as Veritas, we were no longer in the hardware business, so we convinced them to pay us $3.2 million in cash immediately for ownership rights to the technology.
With products completed, and our OEM strategy and fee structure in place, we could focus on sales. Between 1990 and 1993, we closed 60 contracts with OEMs, which enabled our software to become the standard in the industry.
JR: How were the company’s financials during this period?
ML: We hit cash flow break even by the end of 1992 and then had four quarters of profitability and $10 million in revenue by the time we did an IPO on December 9, 1993. We decided to do the IPO while the opportunity was there. We felt that having money in the bank would immunize us from bad things happening. We raised $16 million, but never used the cash. The public stock also gave us a currency to make acquisitions.
JR: What were your next steps after the IPO, to maintain revenue growth and profitability?
ML: In 1994, we analyzed our business and determined that it probably wouldn’t get larger than $50 million because our limited OEM customer base would ultimately consolidate, reducing our ability to garner additional revenue. So, we asked ourselves, “What kind of company do we want to be?” This was probably our most decisive moment. It would have been easy to sell the business or maintain the status quo. Instead we took the riskier option of transforming the business by dramatically expanding our market opportunity by getting into entirely new areas. This was a “bet the business” decision.
JR: That sounds like a major change in strategy. What did you decide to do?
ML: Yes, in hindsight it was a strategic transformation with new products, markets and channels. We decided to find more products to sell to the same customer set, segment our product with a richer version to sell to end customers independently, and to build versions for Oracle and Exchange. Also, we decided to get into the back-up business because we felt we could have an enduring, competitive proprietary advantage.
Why? Since most UNIX OSs by then had our file system and volume manager embedded, our future back-up products could have insight and access that would make them much more efficient. It’s like having our own socket in each OS to supercharge our end user product. Now this was a big market opportunity. But to get into the back-up business, we needed a product that could work cross-platform and we needed an end user sales force and channel – something we couldn’t do on our own.
So, in 1997 we acquired OpenVision, which was mostly focused on the back-up market. It gave us a huge distribution channel and enabled us to become the first end-to-end storage management company.
JR: Was this the game changer?
ML: Absolutely. This merger was what really ignited our business. Consider that in 1996, both OpenVision and Veritas had revenues of about $36 million. By the end of 1997 – our first full year as a merged entity – our revenue was $120 million, after shedding a couple of smaller lines of business. And by 1998 it climbed to $200 million.
In 1999, we acquired Seagate, which also had revenues of about $200 million in 1998. This move enabled us to gain market dominance in back-up and have the industry’s largest independent NT enterprise channel. We finished 1999 with $700 million in revenue. By 2000, we reached revenue of $1.2 billion, and we continued to grow revenue to $1.5 billion in 2001 – a year when our competitors experienced dramatic losses (the “nuclear winter” of the dot.com bubble bursting).
JR: You stepped down as Veritas’ CEO in 2000, and as chairman in 2001. From your experience at Veritas, what advice would you give to other bootstrapping entrepreneurs?
ML: I believe that “strategic transformation” is the signature of great companies. All companies have to realize that they have only a limited number of years for success and that there is a limit to growth in their business. We had to face that early because of the market we were in, and we transformed the business with a very detailed plan created in 1994. We accomplished all of the goals we set out in that plan, and were able to exceed the billion dollar revenue mark by 2000, becoming a Fortune 1000 company.
The big lesson I learned is that whatever the business – no matter how great it is – it’s not always going to be a great business. And you need to start thinking about that, and planning for the changes, when things are going well.
Javier Rojas is a Managing Director of Kennet Partners in Silicon Valley. Kennet provides growth equity capital to bootstrapped companies in the US and in Europe. Kennet focuses on capital efficient businesses with annual revenues of $5M to $50M. Kennet works with founders to build high value outcomes and preserve equity value through capital efficient growth strategies. For more articles on entrepreneurship, go to Javier Rojas’s blog at seekinggrowth.typepad.com.