In this episode of SaaS Origin Stories, Alfonso de la Nuez, Co-founder and CVO of UserZoom, joins Phil Alves to share what makes a great user experience and how UserZoom helps you deliver a best-in-class digital experience.
The demand for a killer digital experience is higher than ever. But when launching a new product, you don't have the luxury of time to see if you’ve made the right choices regarding its design. You must know what your customers want for from the very beginning.
Fortunately, one piece of software allows you to get accurate user insights and create digital experiences people will adore: UserZoom. Today, one of its Co-founders and CVO, Alfonso de la Nuez, joins us to discuss:
Getting User Insights for a Better Digital Experience
UserZoom is a SaaS platform that helps businesses understand their end users by testing and measuring their behavior and the quality of experience with digital products. Thus, it gives you a better chance to create a great digital experience that will impact your business results positively.
Fall in love with the problem before you launch your business - Alfonso de la Nuez
What Makes a Great User Experience?
Retention is everything for a SaaS business. When you look at it in today's world, the end users purchase the software. So you have to build a phenomenal onboarding experience. A great UX design understands clearly what the end user looks for and even exceeds expectations by providing them guidance, convenience, and ease of use. When you deliver a great user experience, your customer will become your best salesperson and marketer.
You only have one chance to provide a great first experience - Alfonso de la Nuez
The Difference Between a VC and Private Equity
Private equity typically likes to own a majority, put together their operating experience and capital, and grow with profitable companies. VCs tend to like minority investments and high, faster growth and a little more risk.
VCs are not that active now, while private equity tends to be very active - Alfonso de la Nuez
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Alfonso: One of the things that happens when an investor comes in, I would say this is even without an investor, but even much more important when an investor comes in, and I think even more important when a private equity comes in, it's all about the team. It's not about you. Sometimes, especially if you're a first-time CEO like I was, you may just not know.
Announcer: Welcome to SaaS Origin stories. Tune in to hear authentic conversations with founders as they share stories from the earlier days of their SaaS startups. We'll cover painful challenges, early wins, and actionable takeaways. You'll hear firsthand the dos and don'ts of building and growing a SaaS, as well as inspirational stories to fuel you on your own SaaS journey. Here is your host, Phil Alves.
Phil Alves: Today, I'm excited to chat with a Alfonso de la Nuez, the founder of UserZoom. Welcome to the show, Alfonso.
Alfonso de la Nuez: Thank you so much for having me, Phil. It's a pleasure.
Phil: The way that I like to start this interview is asking about what problem does your company solve?
Alfonso: That's a great first question, because I always say, hey, let's fall in love with the problem before you launch your business. The problem we're trying to solve is to help businesses really understand their end users, and understand specifically not only who they are, but also how they behave and test and measure the quality of the experience they have with digital products.
We call this user experience research. Our company provides a user experience insights system that helps businesses test and measure user experience of digital products. Ultimately, if they run research, if they get to understand the customers and the users before their customers, they probably have a better chance of designing a great killer digital experience that ultimately will become or will impact business results. That's really what we're doing.
Phil: That's great. Let's dive deeper into that a little bit. Let's say I'm a SaaS product and I'm having a little bit of issue with retention of churn. Churn kills SaaS business every single day. How can UserZoom help me with that?
Alfonso: That's a great question again too. Great questions, Phil, to start with. Great to start like this. I'm actually well-known internally in the company as the retention freak. I think retention is everything for a SaaS business, like you said. There's multiple ways to look at it, gross or net, revenue, customer, all sorts of stuff. I think that's what you have to do as a SaaS business. When you look at retention, in today's world where software is purchased by users sometimes, it's not like the old way or the old times when, let's say, the chief information officer, the CTO, or the VPs would buy software for everybody.
Today, software is bought or is purchased by the end users. You usually buy with a monthly subscription or with an annual subscription. In the past, once again, it was purchased and it was installed everywhere. Whether it was a startup or more specifically in an enterprise, you have thousands of users and you just had them use the product. In the SaaS world we live in now, the users buy it and the users use it. Let's just say the term, for the sake of this conversation, let's think about a year or an annual subscription. If after a year or even a few months if you don't use the product, if you don't have adoption and usage that can prove the validity or the value of the product, the company's not going to renew.
Really it's a much more, I would say, much more fair and the right way to acquire or to purchase software, to continue purchasing software. It's either providing value or not. Now, having said that, you can break that down into multiple stages. For instance, when you buy, you want to buy something and start using it right away, have a great onboarding experience, get going easily. In today's world, we don't like to call customer support or read manuals, or go to YouTube to figure out how to use a product, which sometimes it happens with many products out there.
To build a product that has a phenomenal onboarding experience, you only have one chance to provide a great first experience. There's only one chance. Great UX and great UX design that understands clearly what the end user is going to need, is going to look for, and even exceed expectations in that chance in that sense, by providing them with guidance, and again, convenience and ease of use, that is absolutely critical for that onboarding experience. When retention actually starts, or when the retention strategy should start whether it's from customer success or product people, or account managers, or whatever, it starts on day one.
As soon as they log in, the first three months are going to actually tell, maybe even less than three months are going to tell whether they're going to renew or not because if you don't get going, you're probably dropping that product and you're just leaving it out there, and you're not going to use it. If you do have a great experience, a great product experience, a great user experience, then what's going to happen is that the end user is going to become your best salesperson, your best marketer. They're going to tell everybody inside an organization, "Use this. It's super convenient. I got it going super easily, and it worked."
Then all of a sudden now others jump in through either a credit card or somehow through an expansion they're going to expand. That's what net retention rate is. It's how much of the book of business is renewed plus the expansion dollars on top of it. There's a phenomenal opportunity to grow as a SaaS business if you have a great UX design. I always say, a product led growth. Meaning invest in product and usability in UX before you invest in sales and marketing, because that's how you're going to get going. If you can make user experience a competitive advantage, it's going to be fundamental for your growth strategy.
Just a minute to finish this point, if you actually have that UX, it's actually the opposite. It's going to be a showstopper for you. Basically, it's going to cut or to reduce your chances of growth. As C level or as executives of startups, as founders and CEOs, I think you have to pay really close attention to this and think that you want to increase the productivity of your engineering and design teams, and you certainly want to have an effective and efficient marketing and growth strategy. UX design becomes central part of all this.
Phil: For sure. I have a lot of customers, as we build SaaS products in my consultant's firm, that they start in the sales-led approach. I agree with you, the product-led approach, It is the way to go, is the way to scale your business. What do you think would be the first steps for that business that maybe they are bootstrap, they start sales-led, they're a little bit big to a point.
Maybe they got to $5 million, $10 million MMR, and they're afraid of making that jump. They don't know where to start. They don't know how to become product-led. Maybe they even try and they fell, and then they're like, that doesn't work. Of course, they fell because their user experience wasn't perfect. How would you advise that person that already have established sales-led business to maybe put product-led in place to allow them to scale?
Alfonso: I think that's another brilliant point, Phil. I just identify so much with what you're saying here. I want to clarify that I'm not suggesting you only go product-led. Some companies may want to do that because they have millions and millions of users out there, and you want to go to a pure product-led growth strategy. There are certainly a lot of vendors or companies out there doing that. The point I was trying to make earlier is that you want to have product be part of your mix. Especially early on when you're bootstrapping, you don't have a lot of capital for marketing or sales.
Make that product design a big part, let's just call it a big or important part of your growth strategy. Having said that, product-led is a really broad term in my mind. I've heard about product-led growth for many, many years now. What I would like to actually say about product-led, I'd like to break it down into pieces and components of product-led. One of it, for instance, could be pricing. You should be able to just buy something online with your credit card and onboard. That doesn't necessarily need to happen in all companies, to your point.
Some companies may be doing the change or the shift to product, but they may have more of a sales-led approach. They might not want to offer a premium or a free trial and even purchase online. You do want to offer more self-service options. Self-service to me is one of the biggest components of product-led. Let's not mistake or let's not confuse product-led growth and sales-led growth as certainly total or polar opposites. What I would say is the best mix you can have is have some components of product-led, especially if you're already grown, to your point. By the way, at UserZoom, we have a very similar situation with bigger numbers, but very similar situation.
We've been sales-led and we haven't really used the product-led growth approach, but we are adding a lot more self-service options where users can grow and you can still allow for expansion. Also, users are happy with how your product. They may need to check back with you once in a while. You may want to have more of a consultative approach. You may want to have, like in our case for instance, some consulting services as well. The fact is that you still want to focus on, and you still want to enable users with self-service options so they can figure things on their own.
Otherwise, some users today, what I find in the market is that they don't want to talk to anybody. They may have other tools out there that are so simple and they are okay with that. I guess for clarification, Phil, I don't mean to make it 100% pure product-led, but I do believe that if you can build great UX into your product, that enables some of these self-served options, it enables your users to be very, very happy. With that, you can balance it with the consultative or consulting approach that you mentioned earlier. Just balance it out a little bit.
Phil: I like that strategy. I think you're probably serving different people. As you are adding the self-service, you are now touching a part of the market that you maybe couldn't touch before, and you keep going at the same time with both options. You don't have to go out any one another.
Alfonso: I do believe to that point, we do have segments and we do have both mid-market and enterprise. I do believe, I do strongly believe, I've been thinking about this quite a bit in the last few years, Phil, I do strongly believe that in both cases, in both segments, it applies the same. You still want to have a phenomenal UX as a clear competitive advantage. Even if you do have a much more of a, let's say, high touch consulting engagement with the customer, you're still going to have those customers.
In our case for instance, a lot of the enterprises we work with, we're very close to them and they appreciate it, but a lot of times also they want to go on their own right and do their own thing. The product needs to enable that. Again, to me, it's much more of that self-serve component for those advanced users that maybe just want to go on their own, or maybe even some beginners that want to go on their own. That is actually important regardless of the segment.
Phil: For sure. Thank you. I like how this conversation expands on us talking a lot about UI, UX, just trying to understand what UserZoom does. A big thing of this show, I really like to understand how you start your business and where you come from when you are about to start. I feel like we see business today, but we don't understand what they went through in the beginning of their business. You are 15 years overnight success. Let's talk about those first years and go deep on how it was 15 years ago when you were starting UserZoom. First, could you tell me what you were doing before you start this business, and what were you personally and before you had the idea to get going?
Alfonso: I love to talk about the story of how we got going at UserZoom because I believe that it's-- I think it's a model for other entrepreneurs. Sometimes entrepreneurs, we have these ideas, we have this drive and this passion. I always say fall in love with the problem, because otherwise all this passion is great, but there may not be a market for it. I'll say that as an intro to how we got started. Back in the day, we have to go back to the late '90s where my professional career started in web design and development. There was some UX design, some very little user research and usability testing.
That's when I started. That got me thinking, and I was a 26, 27-year-old back then, but that got me thinking that there must be a better way to build websites that are a little more focused on the end user, and not so much on the CEO or the manager that's putting this website together. We started a consulting business called Xperience Consulting. Nobody was talking about user experience back then, but we were pretty innovative in that sense. We called it Xperience Consulting. What we wanted to do is to invite end users over to a physical lab.
It was a room where you had a one-way mirror, like what you see in the police stations, and a full set of equipment with a camera and a microphone, and all that stuff, to record the end users using our customer's websites. What we would do is we just basically say, "Listen, we don't want to redesign it. We don't want to rebuild it." There's so many others out there that do that. We just want to be like the advocate of the user and just provide you with a report of how things work. By the way, you're invited to observe in the observation room through the one-way mirror. The end user doesn't know that you're out there, but I'm sure you're going to have some fun."
When customers came, and we had this funny anecdotes, the user was asked to perform certain tasks. That's how usability testing works. Here is the website, it's new to this user. Sometimes they're not new, but they're just a redesign or something. We would record and say, "We're going to ask you to complete a series of tasks here and just do your best. Also think out loud and tell us what you experience and what you think.
If it's confusing, if you like it. If you don't like it. We're not testing you, we're testing the website." Like that. It was so funny, Phil, because a lot of times it was funny, other times it was more dramatic. The customer would observe from the other side of the room and say, "What are you doing? Just click there. Don't you see? It's right there. Click there." Then the user would just move on and fail miserably.
We recorded those video clips, and then we use that as our marketing, going and doing training courses and showing things, and people would be like, "Oh my God, I never thought--" The point of this is we are not the user, we are not the end user, Phil. Whether you're a designer or whether you're the entrepreneur and you are Mr. Know-it-all, and Mr. Smart, you go through the process of building a website, and it's very difficult to design great experiences. With experience consulting, we learned that this was important and this was valuable, and we grew the business to about 3 million or so and 40 people.
Phil: Let me stop you here, because I have a couple questions. This is back in the '90s?
Alfonso: No, this is in the early 2000. Sorry, from the--
Phil: Early 2000s.
Alfonso: -'90s, we moved on to 2001.
Phil: Early 2000. Still user experience, user testing. It's not a thing. How are you getting customers? How you get people to pay for this service? Now it's easy, but how did you do that early?
Alfonso: We just threw ourselves on a cliff. Oh, how we're going to sell this. Honestly, there was a lot of-- First of all, back then, I don't know if you recall because you seem young, but the 2001 crisis where all these dot-coms were failing, and there was this big economy crisis. We spoke about the fact that end users are not using your site and they're leaving. They're not enjoying the experience and they're having issues. How do you know? Through analytics or through surveys, or something? They would not know. What we did is we picked some of the enterprises that we knew.
Insurance companies and travel businesses, larger companies, technology companies, banks. We picked some of those guys, and e-commerce, retailers, that we knew that this message would resonate with them. We could actually increase your conversion rate here, and it wasn't SaaS, by the way back then, but we can change your conversion rates. We spoke the business language with all three founders, we were business people, and they resonated. Actually we got going. The first customer was the toughest, but then we got going.
Honestly, it was a services business, so we kept our expenses low. It took us a while, but after two years or so we started growing. That was the case with Xperience Consulting in the early 2000s. UserZoom, as we move on, is a completely different animal. Basically what I wanted to highlight about how we got started with UserZoom is that we started with a consulting business. UserZoom started in 2007. What we did is we tried to respond to, again, a gap. We fell in love with the problem. The gap was not just that there was a user experience or a usability problem, which there was, but the gap was that a lot of people wanted to do this.
They of course wanted to test websites, but it cost a lot of money. It was manual, labor-intensive, and slow, Phil. What we did is we said, what if we could automate and cloudify this lab and do thing, and do this testing and this research remotely? Like what happened with online surveys. Back in the day, they were doing them over the phone or over pieces of paper, and then we had Survey Monkey and Qualtrics, and all these other companies that launched online surveys. We did the same thing, but for user experience research, or for user research and user testing. We launched in 2007 with a different valuable composition.
In this case we would have everything remote. Trust me, we've gotten all sorts of issues with the market. "Whoa, wait a minute, you can't see the customer, you can't touch the-- You can't feel them. You're not in the lab." We said, "Yes, but you can scale." We started as a services organization. I know you're interested in this. We started providing a service, even though it was remote. The fact is we could provide this 10 users that you usually got in the lab, we would be able to do this in a week versus a month. Also, it was very deep and rich.
The software would pick up a lot of the data and the behavior data, and things like that. We started providing a service for about two to three years. Then it was in 2009, 2010 when we started seeing the first licenses. What happened was that we had a conversation with one of our best customers, actually I can provide you with the brand. It was Google who as we know is clearly the leader right now, and they have more user experience researchers than any other company in the world as far as I understand. Google back then told us, listen, you guys are great guys and you're providing great service, Phil, but they said, we want the keys to the car and we'd like to run our own sites.
As entrepreneurs, you're like, Okay. First of all, we fell in love with the problem. We understood the gap in the market. We need to scale this. We need to be able to provide a more scalable, cost effective way to run research, one. Two, the market is telling us that they're hiring people in-house, some of these enterprises, and they want to run it on their own. Then we did the next change in the business, which was to go SaaS or to provide a username and password for them to run their own studies. You see. Really that's how we got started in this business.
Phil: That's great. I wanted to talk a little bit about, I love how you did, starting as a service. Then because, like you're saying, love with the problem, it's about solving the problem, doesn't matter how. Also, services business are known for be profitable business. A software business, they don't make any money for years and years. How do you think that play a role? Then was it easier for you guys coming from a service business transition? Where are some of the ventures that you saw for doing it that way?
Alfonso: It was really, really hard, Phil, I have to say. Looking back, we were a little bit crazy or maybe ignorant. Sometimes that's good because you don't see the danger or how hard it is. We just felt that being an entrepreneur is going to be really, really hard. We went through it. The fact is that it was extremely difficult. What we did is basically-- To build a company, I always say the same thing. To put together a company or to start up a company is hard to do it. In Spain, we're not well-known for tech entrepreneurship. Now things are much better, but not back then in 2007.
Then three, to do it here in Silicon Valley, to move over the company. In this case, it was myself that moved over and grew the company here in the US, and to do it bootstrapped. It's like three things we did that were very, very hard. What we did is we basically overlapped the consulting business with the software business for, I want to say two to three years. We got seed capital. We didn't raise a lot of money, but it was enough. A lot of this capital came from the consulting services. Between the three of us, we were just working super hard at getting both businesses to go and to grow. Then we ended up hiring a bunch of engineers to get that MVP going. Really, we didn't have a lot of capital in the bank.
I think we had, I don't know, maybe a couple years run rate or something. It was mostly funded by, again, a lot of the services we were providing, and it gave us stability. Of course there was not much money in the bank. Therefore we were super frugal and we were also very capital-efficient and resourceful, just resourceful. We were scrappy for many years. Then once that software as a service got going, honestly by 2014 we were profitable. We were past the $10 million mark. It wasn't a lot of profit, but we were owners of our own destiny. Again, really hard, but we were able to manage that.
Phil: The revolution of service business allow you to take your software business all the way to profitability.
Phil: How did you balance things? How did you balance the customers? Imagine that the bigger customers are still in the service business, and you're trying to-- The future in the scale, it's in the SaaS and you're trying to balance that, because I think that's the hard part. Now you have the money from the service business, and you don't need outside investors, but you also have two things. How did you manage that?
Alfonso: During those years, if I remember correctly, we were just basically customer-focused. If they wanted services, we would provide it. Then when Google came to us and asked us this, and then we noticed that others followed up. For about a two, three-year period, we just offered both options. We talked about a hybrid model. Then I have to say that we made a small mistake, which was that we said let's stop doing many services. We stopped the services for a few years, I think it was around 2011, 2012. We missed some opportunities there because we were just tired of providing services.
It was really hard to scale. To your point, having two businesses with two models was very difficult. I think that the answer to your question would be that we spent two or three years just doing what we could, being customer-focused and providing both. It wasn't easy and it wasn't something we continue doing, especially without capital. Once we did raise capital, I guess we can talk about this in a minute, but once we did raise capital in '15, I actually went back, and the first person I hired was a professional services leader to create that services arm.
We went from having 80%, 90% services business and 20% to 10% being licenses or subscriptions to the opposite, to having, 89% licenses. I think that if we had maybe invested a little bit earlier, because with capital we would've invested in growing a services business, perhaps we would've had a little faster growth at some point, because a lot of customers asked for that service, and we just said no. We gave it to their partners or whatever, but yes, ultimately it wasn't easy to do.
Phil: We all learn from mistakes. I love that you brought, and you found it was a mistake to stop the service. Can you talk a little bit deeper about that? Maybe an experience. When did you realize it was a mistake? Because so many times when we heard stories of entrepreneurs, it's about everything that went well. I love that you were so open about, look, it was hard. We made mistakes. I definitely want to touch on your funding and bringing the private equity, but before we go there, let's go deeper on that mistake and the lessons that you learned from the mistake.
Alfonso: We made three mistakes, I think. I'm happy to talk to them about it. I'm transparent, and yes, to the point earlier, we want to help others maybe avoid those mistakes. Now the first one I think was, we dropped services. What happened was that there was a lot of prospects in the market that if we had had the service, I think they would've joined us, or they would've maybe chosen us because what we did is we went to the advanced users. That part of the group, we never thought, Phil, the thing is that we never raised capital, and we never thought that honestly this was going to be a big market for us.
I just got to be honest. That's also a good thing. If you can say, your total addressable market is small and I'm just going to be a $5 million to $10 million business, that's totally fine. That's already super success in my mind. Again, we were profitable, so we were owners of our own destiny. Lots of times in Silicon Valley, it's like, no, but you got to be growing, growing, growing, and super fast. That's not necessarily true. In our case, we moved here to the Valley, but we were okay with growing steadily. A lot of the customers we picked were just advanced and they didn't want services.
We could have grown, and we could have actually picked up a bunch of customers that were maybe more amateurish, or not amateur, but starting in this space. Had we not dropped services altogether, I think we would've had more customers. Our competition did that and made it easy for them, and they grew. They ultimately actually became even bigger than us. Today, I think we share the market, but they did take off. I think there was a lot of the services that were happening underneath, with licenses, or in combination with the licenses. That was our first mistake.
I think the second mistake was that because we were so focused on those advanced users, we didn't do what I just explained to do earlier, the advice I was giving SaaS businesses. We didn't really invest that much in UX design ourselves. We built a product that was extremely advanced and innovative, and feature-rich, but it wasn't as easy to use. We've made a lot of changes and improvements of that since then, but that was something we should have done. I think, again, if we have done that, we would've also increased our growth rate. Last but not least, again, to the point about the market opportunity.
Because we weren't sure how big this opportunity was, we didn't raise any capital for seven years, a filth. We typically, you'd say bootstrap for three years, for four years, but seven years, we waited all the way to '15. Looking back, I think it would've been great to raise maybe $2 million or $3 million to take a little bit more risk, a controlled risk with a minority investment. We didn't do that again, and we just kept going and going, and going. I wouldn't call it a mistake, just simply a missed opportunity that we could have taken advantage of.
Phil: Thanks for sharing. Let's talk about the market. It looks like you stay in the sophisticated market, the high-end user. Do you think it was because from the beginning you had big customers like Google and you're like, "That's who I want to keep serving"? You think that's what happened? How did you get those huge clients, by the way?
Alfonso: Great question too. I always talk about focus and focus and focus, especially at the beginning. We learned from this MIT professor that gave us a phenomenal lecture. Actually, it was in Barcelona. His name is Ken Morris. He came in with a phenomenal lecture on focus, how important it is. We were not thinking about this. We would just take anybody that would call us in those early years. He said, "Look, focus on one or two, maybe even just one target persona." What we got out of that, I guess as a lesson learned, was we got to focus on those big, sophisticated, advanced users who really, first of all, they pay more and they value more, and they renew more back to retention. We did.
Those were the ones that helped us and fueled the growth of UserZoom. I think focus is important. However, as you grow, I think that one of the things that we did is we started looking at broadening that and also working with customers that were not fans. They just simply want some basic solutions. I think that that's when you come with the land and expand strategy. You start with something and you land. It doesn't have to be the biggest contract. It can just be a great starting point, and then grow with them. Then use education and use evangelization, and use sometimes your services to help them grow with you, which is what we're doing today.
Phil: The lesson learned here, it's the strategy of how you start was great. You really focused, but you took a little bit to expand into that little market, and you think that should go early. The same goes to your point for investing. You think you should have done that a little bit earlier, but you eventually did. 2015, you decide to bring a private equity as a partner. Walk me through the process, that decision, and how did that go?
Alfonso: That was a phenomenal deal, I think. Because what happened was this, we bootstrap the business. I'm from Madrid, my partners were in Barcelona, and we had the board in Barcelona. This is a Spanish company that has very strong presence, about 80%, if not 90% of the revenue in the US. There's competition and there is opportunity in the market that we observed in 2014 like we hadn't observed, like we hadn't seen in the previous years. At that point, we were like, "We should go for capital. We need to go for building a big business here. Let's open it up to VCs, and/or for capital raising."
I think we all agreed on the board that if we've got the right offer, this was going to be the best thing for the business. Initially, we were going to just raise some minority investment to continue growing and to be able to compete, but what happened was for us, we have to, what we call, re-domesticate, which is basically to flip the business from the Barcelona business to a US business, a Delaware business. Also, the board was going to be moved here, and there was going to be a big change. At that point, it felt like the business was going to change dramatically.
The control was going to be changed, and all that stuff. We decided ultimately that a majority investment with the private equity was going to be a win-win. The three co-founders were, we still owned the majority of the business. We had some business angels and we had a lot of equity. At that point, we're looking at, if I remember correctly, about $12 million revenue, profitable and healthy growth, and in an interesting space. We actually, without pitching to investors, Phil, I say this openly, and I brag about it, but without pitching, we had offers.
We had plenty of offers and a nice valuation. We're talking 2015, valuations were very different than today. We ultimately said, we can take some money off the table. There's some good liquidity for the founders who have been for many years, just month to month. Also, we can pay back to our early investors. Everyone won with this. Then the next thing was, let's build a big business here. There's an opportunity. Let's go on. We kept enough skin in the game to keep going, and it was just a great deal. Professionalize the business and keep going.
Phil: Did you ever have an M&A advisor or just the private equities were reaching out to you, you pick the one that you like the best, and you went with.
Alfonso: To be honest with you, we did work with an advisor earlier. They were great but the timing was not good. This was a couple years before that. I had a good experience with them. We had great conversations but it just wasn't working from a timing perspective. [coughs] Excuse me. What I would say that I did, I'd like to get myself a little pat on the back here, which I don't usually do, but the fact is I built a network and I had a ton of presentations and conversations with investors. By the way, investors reached out. I want to actually give kudos to the Plug and Play Tech Center, which is a mini Silicon Valley within Silicon Valley.
They're based out of Sunnyvale. We were there for many years as a startup, and we have the ability to network, because they have a phenomenal network with investors and the investment community. We built this rapport and the relationship for years. These investors just keep knocking on the door and say, "How are you guys doing? It seems like it's an interesting market. You guys had some traction." I guess to answer your question, we did not use M&A advisor for this deal. We had this network that we had built. Frankly, they all came and they had heard about us.
We had cultivated those relationships. By the time we made a deal with Gus Alberelli and Sunstone Team which came from Trident back in the day, it was a new fund called Sunstone Partners. They knew about us. They knew about our space. They'd done the research. Also from a chemistry and culture perspective, it was a good fit. That's how it all went down. We had a few conversations, not a lot of negotiation to be honest with you. There was offers that were maybe a higher valuation but we felt like this was the right team, and certainly, seven years later we feel like we made the right decision.
Phil: That's great because you were able to just out of your own connections do that. You say you start with VC and there's a difference between VC and private equity. You end up-closing private equity versus a VC. Could you talk a little bit about the difference between the two and why you think a private equity-- I think you say they had a majority of your business are after the deal. I'm not sure if I hear correctly.
Alfonso: Correct, yes.
Phil: Why do you think private equity was best for you guys, and how do you see the difference between private equity and VC?
Alfonso: I think the difference mostly is a private equity typically likes to own a majority. They like to put together their operating experience and their capital. They like to grow with companies that are profitable, maybe not growing super fast. They're not burning a ton of money. In fact, they like profitable businesses. Then they like to use their operating experience and their playbook to perhaps even make it more profitable and help with growth and essentially get a five times, maybe more hopefully, like what happened with Sunstone plenty more, return on investment, or multiple on their investment.
VCs tend to minority investments and faster growth and a little more risk. It's just a different model. They might just come in and be part of your board and help you out, but, actually, not really be that active. Now, private equity tends to be very active and they tend to, I wouldn't say, tell you what to do, but they are, certainly, they have a voice because they own the company, ultimately, they become your boss.
To be honest with you, with Sunstone, I felt that there was a good mix between them telling me what to do, even providing me with the Chairman of the Board and became a co-CEO, but the influence that I still had in the business as a co-founder and co-CEO was still great. They don't want to destroy what you've done. It's silly. Some private equities are well known to be very strict and not good about that, luckily in our case, with both Sunstone and Thoma Bravo hasn't been the case, they really want the founders to be part of the next step of the journey.
Back to your point, they to own the majority and just be very active and they provide you with a ton of operating experience and partners that can join the board and the team. VCs, again, are going to be much more about fast, fast growth, land grab, growth at all costs. It's just a completely different philosophy, a different way to manage a business.
Phil: I think founders should really be aware of that when they're looking for investors, because like you say, VCs, they're okay if you fail because they're like, "Make it or die." I think when you look at private equities, they're like, "Okay, I want a profitable business." They're buying a business because they wanted to succeed. They're lot more invested. I think, there's not right or wrong, but there's the personality of the founder.
I imagine that you, that run a profitable business, for years and years would be so hard to raise VC money and now we start to run an unprofitable business, like going out in. I think founders should take that into consideration. I would love to hear from you, what did you learn? How did you grow as CEO? Now having a boss, you're still the CEO, but now you respond to someone.
You're like a public company at this point. You have investors money. How was your personal growth? How you had to change to keep--? Because there's a lot of people that after their first exit that don't make to the second like you did, they end up fired. They can't operate in that environment and you did a good job at that. Walk me through. [chuckles]
Alfonso: I could write another book about this one, seriously. I thought about this and talked about this so much, both internally and externally. One word, ego. Just one word. Let's think about that word, ego and what does that mean? Listen, I think that the way I respond to this question is, I go back to my basketball experience. I play basketball all my life and I'm a team player.
One of the things that happens when an investor comes in, I would say this is even without an investor, but even much more important when an investor comes in. I think even more important when a private equity comes in, it's all about the team. It's not about you. It's all about the success of the baby, not about you. Sometimes, especially if you're a first time CEO like I was, you may just not know.
One of the things I've learned and I was fortunate to partner with a couple of really experienced operators, is that, "Oh, my God, there's so much to know and to do when you're scaling a business past 20, 30, 50, and now we're reaching 100, there's so much to know, Phil, that I just didn't know.
Now, how many people are actually able to raise their hand and say, "I don't know," or, "I didn't know," or, "I'm not the right person to make that decision," or, "I need help." Very hard to do when you've been the founder and you've created a business and you think that you're Michael Jordan or Spiderman or some superhero, which you are, by the way, because it's very difficult to do that.
What I went through the years, it was really hard for me to do this, by the way. Psychologically, I lost a lot of sleep, but looking back, honestly, what I did is I put my ego aside, I still kept some ego, but it was all of a success. I think the reason I'm welcome to be part of UserZoom, both by Sunstone and by Thoma Bravo, is because I think that I put the team first. I put the company's interest first and my personal second. As long as I am okay and I'm aligned with the strategy, the vision, and they haven't changed dramatically, what we put together, which hasn't happened in our case, you can still be a huge influence without being the CEO.
By the way, I'm not the CEO now. Back with Sunstone, I was CEO and then co-CEO, for six years. Then, now that Thoma Bravo has come along, we've made the decision to, actually, convert me or move me over to more of a Chief Visionary Officer, and have a CEO that is a very experienced operator who has been there, done that after 100 million to 200, 300, 400, or even more. I don't know how to do that. I'm happy to team up with, in this case David Murphy, who's become the CEO. I'm just there helping and advising the company in many, many ways.
Phil: I like what you say because you have to become a different person. I have a friend and he built three business to $10 million. He built the first one, $10 million. The business got sold, made a bunch of money, and then he got fired, and then he felt very bad. He built the second one, $10 million and then he got fired again.
Phil: Third time he was like, "Look, I know who I am. I am the 0 to 10. I am not the next guy." In the third business, he didn't get fired. He learned, it's like, "Look, this is how I am," and he got humbled. It looks you didn't have to get fired twice to learn the lesson, which is pretty impressive. You really change and it's even cool to see now the company went to the second acquisition and you're like, "I'm not a CEO, the 100 million plus CEO. I wanted someone to be there and I want to be there to a device and to learn." You had to change every single time. There are different people that do 0 to 10, 10 to 100, and 100 plus. There are different personalities, different everything.
Alfonso: Absolutely. Not even as a CEO, but there's a lot of employees that are great in the first stages that may not make it in the second or third stages because maybe they have a different personality or they provide the business with different value. Some people want to do everything and they want to be very involved. Those guys are phenomenal, a one person army.
They're very versatile and they're very dedicated. They feel like they're super huge part of the business and make a big impact. Those guys are phenomenal employees to hire when you're in the early stages. When you start growing, it's all about scale. It's all about empowering others. It's all about making things repeatable. It's all about focusing on talent and you getting out of the way.
It's all about building a middle management team, oh, and there's processes, and there is tools, and there's systems. All that stuff, it's all about operating excellence, has got nothing, nothing to do with the first 10 million, trust me, or even 20. It's a completely different job, Phil. I, personally, I'm honest with everybody, that's not the type of job I want to do. I feel I'm a good, maybe up to 50, up to a 100 million, from there, somebody else should run it. [chuckles]
Phil: I think it's so important to realize who you are and what's great. I love what you say about the team, because it must be, for you as a founder that brought this team and now seeing that they're not cut off to the next stage, it must be very hard on yourself. How do you walk through that and maybe even have to let someone go because now they're not the right person? Tell me about that.
Alfonso: My toughest moments, obviously, there's a ton of tough moments in the 15 year journey. One of them was, actually, letting go of people that I knew had made a great impact. We were close and they were great people, great employees. You could just tell after having multiple conversations, you could just tell they were not going to scale, and they were not the right people for the next stage.
Conversations around the fact that things were not automated or were not, actually, registered in a cloud tool, let's just call it, whether it's a CRM, or ERP, or whatever, because the next stage was going to be completely different and this person was not going to be the right leader for it. Mostly it was a leadership issue.
One of my most favorite books is Good To Great by Jim Collins. He talks at length about it's a who problem or it's a right people at the right place in the bus thing that you have to worry about when you scale versus a what problem, it's about talent. That was tough. By the way, I used myself as an example. I said, "Look," I stepped down, became a co-CEO versus leading it all myself or just threatening the company to leave, and then, ultimately, now the CVO, Chief Visionary Officer, just handing it over to somebody who has more experience. If you can do that yourself, you're setting an example for others to do it. I think at some point you're going to run into that. If you do, by the way, you are very successful. I'm very proud of what we've built so far.
Phil: I can only imagine how hard those conversation have to be. Because these people, like you said, they had such a big impact on your business and now they're not developing. They're not the right people and they don't supposed to even to be in the bus anymore. Because I feel like you did a very good job at changing seats in the bus. Maybe going back to the ego, they're some people that don't want to do that. Could you maybe go deeper? I feel like there has so much growth for you as a leader.
Alfonso: I just literally had a conversation with the company that I am involved with, I once say. I had a conversation about some family members in the team and some professionals that he wants to bring in and there's a need for reorg, at some point. Company's also scaling past 20 million, close to 30 million. It's a very difficult conversation sometimes, again, even family members
Listen, ultimately, this is one of the reasons why being an entrepreneur is so hard and being a great leader is so hard is because you have to make tough decisions. It's really bad. A really bad leader doesn't make decisions or doesn't make changes when company needs it at the right time. A poor leader doesn't think about talent, but thinks that, "Oh, we can continue and maybe product and focus on product," and stuff like that.
Which you still have to focus on product, but if you don't focus on the talent, the org structure and the right people in the right place in the bus, as we said earlier, you are really being a poor leader. It's not just today stuff, is that you have to do it and it's part of the journey and it's part of how much sleep you're going to lose because you're going to feel bad about it.
Phil: Thank you for sharing. I love what you say. It's part of you growing as a leader yourself because you have to do it and that's how you become a good leader. Recently, this year you guys had to deal with Thomas Bravo and you, again, change your sit in the bus. Could you tell us a little bit, first about that deal? What can you share about that deal? How you went? How it changed your life? How it is now having this new sit in the bus?
Alfonso: The Sunstone of deal we did in 2015 was like a warmup. [chuckles] Back to the basketball analogy, we were warming up with Sunstone and understanding that there is a boss, there is a company that owns the business and they're giving you a lot of support. It feels a certain way when you're getting up in the morning, you know that you have a boss out there and some objectives and also a playbook.
You're looking at profitability, not growth, and all that stuff, that you should have discussed all of this upfront, is one of the first advices. Back to your point about entrepreneurs knowing whether they go to PEs or VCs, discuss upfront the goal, and the strategy, and the growth. Be okay with putting all the cards on the table and saying, "Hey, this is an opportunity where we have to invest $100 million and go everywhere, geographically expansion, all that stuff. I don't care if we lose money, buy a bunch of companies."
Or is this more of a, "We're going to grow 20 to 30%, maybe 40%, but we're going to do it profitably in two, three years they're starving, otherwise heads roll." You should be discussing this upfront with companies. Back to Thoma Bravo, we had the warmup with Sunstone. It was going to be literally this month, seven years since we did a deal with the Sunstone, sorry.
We started having conversations at the end of last year. I had had multiple conversations with Thoma Bravo three to four years ago in some conferences that we met and then we continued the conversations. Once again, like the Sunstone deal, we had had conversations many years prior. We got to know each other, and they understood our market and they understood what we were after. Then, year after year, we were telling them we were meeting those targets. We were just exaggerating or hoping or wishful thinking, we, actually, did it.
I think it's Q4 last year, the pandemic has, actually, been good to us. We're growing faster and we're doing really well and we don't really need to do this deal, to be honest with you. Sunstone wasn't in a hurry, we have plenty of cash in the bank, but the fact is the Thoma Bravo comes in with a really strong value prop and message.
Look at us as the, first of all, as a stop on the journey. This is not an exit. We don't like to talk about exits or acquisition. I like to look at it as a strategic growth investment. Okay. Look at us as a stop on the journey. Look at us as a partner that can enable you to speed up and to accelerate your vision. We want to keep everybody that is in the bus, maybe add a few here and there because it's a new stage of the business.
Also a pretty nice valuation of $800 million, not bad for a company that started in Spain with Z a few years ago. Also there was going to be a great return on investment for everybody, once again for the founders, but also for Sunstone and many employees. Just a great story. I'll be honest with you, and I'm very open with everybody about it. I was skeptical at the beginning, it's like, "Why we were doing so well? Why would we do this? We can just wait."
We didn't know that there would be a crisis this year, to be honest with you. From a timing perspective, it's phenomenal to have closed in March, April timeframe. The fact is that, these guys are, if not the number one, one of the top three software private equity investors and boy does that matter because you have a ton of support, they know what you can do out there.
They give you a lot of help. They are supported. We, actually, acquired a company that I wasn't thinking that we were going to be able to acquire because they came in and they said, "Yes, let's do it." Definitely showing that they have the muscle to help us out. I think they have the right culture as well.
These guys don't have this typical image of people with ties and jackets. They're pretty innovative and I feel like they've made some great investments as well in our space. They believe in our space, they believe in our people, they believe in our mission and vision. We said, "Yes, let's do it." So far, honestly, it's been great.
Phil: That's super cool to hear. Again, going back to those two journeys, you can go PE or you can go VC. You go PE and you make your company work for most $1 billion. It's super exciting to see there. There's more than one way to get there and that's the way that work for you guys, and it's so amazing to see your success. I have just two more final questions for you. We are coming to it hour here. I don't want to hold you for so long. [laughs]
Alfonso: That's fine. I have some space.
Phil: Okay. First, I always ask you, if you could go back in time and you meet yourself 2007, 2010, and you could tell something to yourself, what would you tell?
Alfonso: I'd go back to those three mistakes that I highlighted earlier if I could just go back. I'm very proud and I have no regrets. I'm very proud of what we've done. I think we could have, again, knowing what you know now after the journey, it's just crazy. If I were to do it over again, for instance, not just going back, but maybe do it again, in both cases, I think I would, actually, work on those three mistakes or I would try to avoid the three mistakes that I mentioned earlier.
One is, I think it's really important to work on having great UX in your product. I'd love to hire a designer and a product leader before I hire a marketer and a salesperson. I just feel like that's something that is really important now, and if we have done that before, would've paid off.
I think the second thing I would do is bootstrapping is great, and don't get me wrong, if you can do it, but you can find the balance between maybe raising even a little bit more seat capital and not have to go to the hardship that I went through, especially moving here to the Valley. Today I think you can work a lot more. You can work remotely and have talent all over the place, it's much easier. For me, those initial years were really tough. Were really tough in the family. Financially, we were just very stressed out.
I probably would've raised a little bit more. Even though I liked the concept of bootstrapping and I recommended, I do say, "Hey, try to balance it out and don't go through too much hardship." Then the third one was this picking full services or full subscription model, or PLG versus more a consultative approach. I would try to merge, I would try to have a hybrid model a little earlier versus extremes. Those three things potentially.
Phil: Yes, I think that's great advice. I love finding the balance in everything. Like finding the balance, when is the time to bring the money. Where is the business headed now? Now you're divisionary, you're not going to be there as the CEO, but you're the visionary, so where is the business headed or maybe where it is today? What could you share about where it is now after the acquisition and where is headed?
Alfonso: I like to say that, every company either dot com or a brick and mortar, big or small, in every single industry vertical is a digital experience company. That's how I look at the world. Every company is a digital experience company. Let me break this down for you. What does that mean? It's part of my vision, it's part of our vision as a company, and this was prior to the pandemic or pre-pandemic, but even with the pandemic, it became even more important.
With every brand we interact with, we're going to have either an app or website and we're going to interact with that brand through some digital UI. In some cases you don't even want to anymore talk to somebody or have a physical relationship. I don't know, banks, insurance. How much do you go to those branches, or retailers, travel? There's so many.
Then, of course, in the enterprise software space, how much is, now you're remote, so you're working remotely and you're using all these tools to collaborate. Everything is happening through a digital, again, whether you're a digital company or not.
Now, what's the difference between digital and a digital experience? I've been spending quite a bit of time explaining this because the book that I just wrote, it's called The Digital Experience Company. I don't know if you've seen it, but here's a copy. I'm very proud of, The Digital Experience Company.
Phil: Yes. I owned that book. I didn't realize you were the person that wrote. [laughs]
Phil: I haven't read it yet.
Alfonso: Now you have another excuse to read it. Winning In The Digital Economy by gaining a lot of experience insights. A digital experience company is different from a digital company because it is not good enough to say, "I am a digital company. I'm the CEO of GM or a large enterprise out there. We invest a ton in IT and digital and our digital channels," it's not enough.
You're digital experience company. You're providing experiences. Your customer uses you and interacts with you through the front end. Not the digital, not the back. When you think about it, they say, "I'm in a software space." To me, that's not enough. To me, it's all about providing a great front end, which obviously design is what matters in this case, not just the look and feel of design, but how it works.
How easy and convenient is it to use these products and engage. Maybe you're an employee, maybe you're using a tool every day to do something in your internet or something, and that product needs to-- You have to create your own expenses or something. Those things need to make you productive and need to make you feel like that's a great employee experience.
This is not just for dot coms or for B2C companies, but also b2b and the enterprise. My vision, back to your question, is that every company is a digital experience company and therefore they're just going to invest and they're going to have to invest a lot more into understanding the end user, the end user before their customers, sometimes they're not even customers.
Again, there might be just employees in order to succeed because the competitors think about what Airbnb, or Uber, or Door Dash, or CarGurus. Those companies have taken over the relationship with the customer by providing portals, websites, apps that work so well, that even though they don't own the actual assets, hotel, a car, whatever, that's where the value is, you know?
The new way of building software is through insights that you collect constantly in every stage of the design and development life cycle to fuel the way you build software. That's where we are at as UserZoom. We are, basically, the one source of truth, the insights provider for product people, digital product leaders and digital product professionals, user experience researchers, designers engineers and product managers to build their products focused on the end user and with insights, rather than gut feel or whatever the designer wants to do. That's our vision. Every company's going to do this. One source of truth, one system of record for companies to manage their digital products.
Phil: If I could summarize, maybe is about time we start to build the right feature, the right strategy, not just like throw stuff in the wall and help their work.
Alfonso: Exactly. There's plenty of ways to do it in a cost effective way. It used to be very expensive and time consuming, but now there's no excuse. You can get insights and responses from these users within hours on your prototypes. There's no excuse of why you should be, again, insights driven, hence customer or user-centric.
Phil: For people that want to learn more about that, is your book a good resource?
Alfonso: Of course, the book is not so much about how to do research or it doesn't go into depth. This is not a book for the researchers. This is mostly a book for product leaders and maybe even C-level and certainly startups that are thinking about, "Okay, this sounds really sexy and stuff, but why? Why would I do this?" The focus is really on return on investment and on helping people, very much a lot of the things we've talked about today, retention, growth, strategy, efficiency, productivity, capital efficiency, a lot of these things are highlighted in the book.
Phil: Awesome. Alfonso, was great to have you today, so much insight in the show. Thank you very much for taking the time.
Alfonso: My pleasure. Thank you very much for inviting me.
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