Stanford case study: Workboard

The strategic partnership with a corporate venture capital unit can be even more valuable than just the capital injection, that is, a go to market partnership, sell to, sell with, sell through, all can be critical to the early success of a startup company. With the increased relevance of corporate venture capital and the acceleration of its key models of engagement, this class will leverage both the case study on Corporate Venture Primer as well as a very current reference article of a strategic investor’s engagement with a successful entrepreneur founder / CEO to allow the students to better understand from both their perspectives in selecting and engaging with one another that resulted in a strong partnership that enabled the young company for growth. This session will provide entrepreneurs with references on best ways to leverage this strategic source of capital as well as its strategic in-kind resources. It will also provide key learnings to students that want to pursue a career in strategic corporate investing.

One recent study of corporate venture capitalists (CVC) by Stanford found: “More than 60% of respondents also believe that their executives do not understand the norms of the venture space, and that educating them (including those on the investment committee) is a constant struggle, compounded by frequent turnover of parent executives.”1

Deidre Paknad, serial entrepreneur and founder and CEO of Workboard, would agree. She has just seen Microsoft as the corporate parent of one of her largest partners and investors acquire a rival in the enterprise OKR solutions software space.

Talking in October 2021 a few weeks after Microsoft’s purchase of peer Ally.io, Paknad said: “Microsoft had invested in our series A through D rounds – the last one in April 2021 just a few months before it decided to purchase Ally. WorkBoard drove more $10m in Azure and Teams consumption for Microsoft as a premier partner, and its sales team and Microsoft actively partnered in winning deals together. Microsoft was a large WorkBoard customer using over 40,000 seats of our software – all outside of the business unit that bought Ally.”

Paknad continued, “Buying Ally gives CVC a bad name. It is the worst-case scenario CVC: Invest early stage, get educated on the value of the space, then buy your way in cheap, and use distribution power to compete with a less offering. It is so back alley but perhaps classic Microsoft.”

As far as Paknad knows and according to Microsoft’s M12 corporate venture team, M12 was not aware of the pending Ally acquisition by the Viva employee experience group. Microsoft’s cloud platform, Azure, which is the largest user of WorkBoard inside Microsoft, was also not consulted     by the Viva team before the Ally purchase. Unlike WorkBoard, Microsoft had not used Ally software nor was Ally on the Microsoft cloud or stack.

WorkBoard revenues at the time of the Ally acquisition were 4-5x that of Ally which was single-digit revenues at the time according to its own early investors. Moreover, Paknad says WorkBoard’s last round valuation of $825M April 2021 was at least double what Ally shareholders received in value; the decision to buy Ally appears price-driven so rather than purchase the category leader, Microsoft chose to buy a low-end competitor to compete with WorkBoard (and its own investment).

No public valuation has been disclosed for Ally’s purchase but PitchBook data indicated that Ally was worth a $345m post-money valuation when the company raised $50m in early 2021 for a total of $76m raised, according to news provider TechCrunch.3

Paknad said this created a false-promise experience for entrepreneurs. The CVC unit, M12, touted a “new Microsoft” and Microsoft itself had done much to re-engage the startup community after years of tarnished brand in Silicon Valley. One of its primary themes was a “partner first” mantra. Paknad sees this as “pure marketing” and views Microsoft as using its learnings gained from WorkBoard to compete itself and says “actions are louder than marketing.”

Looking back on the experience, Paknad said: “It is okay to dance with the devil as long as it is not disguising itself as an angel.”

Early on, Paknad took a calculated approach to corporate investors bringing Microsoft into her Series A and adding Workday in her Series B rounds to keep potential competitors close, balance power, and create close alliances. Alongside M12 in the latest round led by SoftBank were corporate venture investments from Intel, Capital One, Silicon Valley Bank and Workday.

Microsoft as a highly referenceable customer was “super valuable in getting to $30m in annual recurring revenue (ARR), shaping the category, and establishing ourselves as the leader.” Microsoft was one of WorkBoard’s earliest high-scale customers which helped it gain more at-scale customers. Now with many large enterprise customers like Walmart, Ford, vmware, Cisco and others, the purchase of Ally is less significant and WorkBoard continues to use its Microsoft users as references.

Paknad said her focus has always been on the individual rather than VC fund as a whole when considering investors. “The person matters more than the fund. There is an enormous difference between investors in how they show up, hear you or help.”

Workboard had been one of the first investments for M12 when it was formed by Nagraj Kashyap after his move from running peer Qualcomm Ventures in 2016. After his move in 2021 to become managing partner at SoftBank’s Vision Funds, Kashyap led WorkBoard’s latest round – a no brainer for Paknad.

Paknad said she had been introduced to Kashyap by another entrepreneur at a launch reception for M12 and valued his “humble expert” approach. She added: “As an early stage investor, you need imagination and vision to see what founders see –because there are few proofs but big ideas. For checks in the A round founders might talk with 40 people but 38 will not get it. Founder-VC fit is a real thing – if they do not see your vision, they cannot help you achieve it.”

As the company grows, its proof points, the round sizes, and valuations get bigger, and VC behaviour changes. It is no longer based purely on vision and there are plenty of proofs like revenue and references. If your proofs are good, the money and VCs will come to you with bear hugs, wine and roses.

“It is no secret that very few dollars go to women founders and in enterprise software, just 2% of CEOs are women which quotes this survey. There is just more friction every stage of the race, and I have heard my share of shocking or appalling statements. VC has an arrogance problem and a bias problem. Nagraj, however, operated differently and was first to have a balanced investor team, he invested in unconscious bias training for his portfolio companies, and he extended funds in several global women entrepreneur programs to create access far from Silicon Valley. One of my favourite memories of Nagraj is right after the bias training when he offered us all dollars to bring it in-house: He also told us if we do not run these programmes it will be the last dollar we got from him.

“Nagraj is extraordinarily helpful – he will take a text anytime if I need help or have a question. And perhaps what stands out most, is that his help is not less helpful because he is a CVC but is actually best in class VC.”

“When we decided to raise money earlier this year, I went straight to Nagraj in his new role at SoftBank. My confidence in his good faith and my experience with him were such that I did not ‘valuation’ shop. A speculative $20m in valuation (on $825m) was immaterial when I weighed the process cost, who would join the board, and how he could help me build the business. More typically and without that kind of relationship, it is a time consuming auction or beauty pageant.”

Postscript: In November 2021, Deloitte named WorkBoard 162 on its list of the 500 fastest growing tech companies in North America (based on three years of financial data) – one of 22 led by a woman and the fastest women-led tech company in Silicon Valley.

Kashyap, speaking earlier in the month before news of the Ally acquisition by Microsoft had been released, said for his part Paknad was a classic founder to back at an early stage.

“This was her third CEO job. Her prior company she sold to IBM where she presented a new category, OKRs, but was rejected so instead took it out and raised money.

“For M12 this was a new category where Microsoft had no competing interests but a chance to see signals about the next generation of innovation. Then we had to work hard to make it mutually beneficial [for Microsoft and Workboard].

“An investor sources deals based on a thesis – they have a prepared mind on a topic, opportunistically if the network brings one forward or if a prior angel investor where you have a developed relationship introduces the idea. For Workboard, a seed investor made the introduction.

Deidre and I had three meetings. At the first I liked the vision and gave her homework to come back if she delivered x, y and z – customers and ARR. For the second meeting with an update and at the third I was 85% sure and liked her persistence so told what she needed to do to get over the line.

“For an entrepreneur it is hard to do reference calls on a new investor [such as M12 at the time] so required a leap of faith, which they would only do if critical.

“Meanwhile I had gone back to Microsoft to see if there were any internal efforts or roadmap so Workboard could help Microsoft as a customer and partner. If you promise for the mothership it has to be true and deliver as a customer.

“Once the A round had closed I joined the board and did not tell her what to do but made introductions to customers for top line growth, such as Best Buy, and to be there where things were not going well. It is hard to get to the first $1m. I was not a life coach but to hear struggles and help get to the next financing round. It is a lonely job trying to evangelise a category

“A good CVC gives a longer time line if an entrepreneur misses a quarter versus VCs that can panic and cut assistance.”

This potential issue has not been seen from the outside. As TechCrunch reported before Workboard’s D round, it grew its top line by 350% in 2018, 300% in 2019, around 100% in 2020, and the expectation was of another double in 2021. Alex Wilhelm at TechCrunch said: “That is smackingly close to the (in)famous triple-triple-double-double-double model of startup growth that gets companies to $100m in recurring revenue at a venture-ready pace.”4

 

References

  1. Strebulaev, Ilya A. and Wang, Amanda, Organizational Structure and Decision-Making in Corporate Venture Capital (November 15, 2021). Available at SSRN: https://ssrn.com/abstract=3963514
  2. Microsoft buys Ally.io, October 7, 2021 https://blogs.microsoft.com/blog/2021/10/07/microsoft-acquires-ally-io-to-improve-employee-experience-by-aligning-peoples-work-with-team-goals-and-company-mission
  3. Ally.io rasies $50M Series C, TechCrunch, February 17, 2021
https://techcrunch.com/2021/02/17/ally-io-rasies-50m-series-c-as-the-okr-software-market-stays-explosive
  4. WorkBoard raises $75m, TechCruch, May 4, 2021
  5. https://techcrunch.com/2021/05/04/workboard-raises-75m-as-the-okr-focused-startup-bets-on-a-growing-economy-changes-to-business-culture

 

Reading matter

Mandatory reading

  1. Strategic investors in Workboard by James Mawson

Optional reading

  1. Meeting entrepreneurs on their terms: Why we don’t require any ‘special rights’
  2. Corporate Venture Capital Strategic metrics (GCV)
  3. 2020 Global CVC Report
  4. Corporate VCs are Moving the Goalposts

Study questions for students can begin to think about after reading the article

  • How can entrepreneurs gain an advantage if she/he better understood the models and metrics of a CVC?
  • What type of startups and at what stage of their financing should they consider corporate investors?
  • Imagine that you are in Deidre Paknad’s position, sitting across the boardroom table from Nagraj. What is the most important question you have for him regarding his investment strategy?
  • If you are Deidre Paknad, what would you have done differently?
  • The information flow between the CVC and the portfolio company can be bi-directional. How should both parties be sensitive to this confidential information flow?
  • How effective is the corporate venture approach to helping large companies strategically adapt to an ever-changing business environment? Especially given the covid-19 experience.
  • How could trends in CVC partner compensation and organisational structure (increased salaries, carried interest and reporting to CEOs), potentially influence the types of deal that they pursue? How may this influence the mandate of a CVC group?
  • Is pursuing a career with a CVC be a good stepping stone for those that seek a career in venture investing? If so, why?