The Stack Overflow Podcast

Founder vs Investor: What VCs are really looking for

Episode Summary

Ben talks with startup founder and advisor Elizabeth Zalman about what makes the founder-investor relationship unique in the world of capital, what changes with technical founders, and what VCs are really looking for.

Episode Notes

After founding two companies, including StrongDM, a dynamic management access platform (explore their docs here), Elizabeth took a “break” by co-authoring a book. 

Founder vs Investor: The Honest Truth About Venture Capital from Startup to IPO is about what she learned as a founder and executive about the founder-investor relationship. Order it on Bookshop or Amazon.

Elizabeth’s co-author is investor and advisor Jerry Neumann, managing director of Neu Venture Capital.

One option for your next weekend outing: a ride and tie.

Connect with Elizabeth on LinkedIn.

Connect with Jerry Neumann on LinkedIn.

Nice work: User Reap’s answer to Get String Name from Enum in C# earned them a Lifeboat badge.

Episode Transcription

[intro music plays]

Ben Popper Hello, everybody. Welcome back to the Stack Overflow Podcast: a place to talk all things software and technology. I am your host, Ben Popper, Director of Content here at Stack Overflow, flying solo today. I'm going to be dipping back a little bit into my history as a journalist covering the world of software and technology. That's first how I got to know a lot of the folks at Stack Overflow where I eventually came to work, and spent a lot of time with people who wrote code, but also created businesses, and learned a little bit also about the venture capital side of the house, covered IPOs like Facebook and Twitter, all that fun stuff. Anyway, today we're going to be chatting with Elizabeth Zalman, who is the author of a new book called Founder Vs Investor, exploring some of the ways those two parties can butt heads and I'm sure also work well together. She began her career more on the technical side as an analyst and SQL developer working in the ad tech world, then switched to IC and founder, and now has written this great book exploring a little bit of what it means to be a founder and is also here to talk a little bit about some of her company's emphasis on things like pair programming and why they chose a language like Go in the early days. So Liz, welcome to the show.

Liz Zalman Thank you, Ben. I appreciate it. 

BP So situate the folks who are listening, a lot of whom are on the technical side. What brought you into the world of technology initially doing SQL and ad tech work? And then after you tell me that, we'll talk about why you wanted to branch out and do your own thing as an IC founder.

LZ So when I was 26 I actually got my first job. That was when you could still find reputable jobs on Craigslist, believe it or not. And this company took pity on me and they hired me and they were an ad tech, and it was actually the company that invented remarketing or retargeting– the banner ads that follow you around online. 

BP The ants that follow you around the internet, yeah.

LZ One of the founders of ICQ, which I'm sure most of your listeners remember, actually invented those ads. And so he gave me my first job and I was an analyst and I started having lots of questions about data and I was sick of waiting for the answers and so I was like, “Well, I hear there's a language that I can figure out how to write,” so I started writing SQL. And then the startup bug bit me because they were a startup and I had a chip on my shoulder and I thought I could do better, and so I started my first company in 2010, four years after that, also in ad tech. I just borrowed their idea and moved it from web into mobile. HTML5 had just come out and we thought we could do some fun stuff. 

BP Nice. So they didn't have the patents there yet. You could take the good stuff and do it over. 

LZ Yeah, so that's how I started in technology. 

BP Very cool. And is that still the company you work on or with, or what happened to that company? Did it run its course? 

LZ That company raised at the time, I think we ended up raising $2 million, maybe the last million and a half was a series A, so you know how much has changed. I think series A's now are 20-30 million dollars. 

BP Yeah, that's a pre-seed round now. 

LZ Yes it is. We spent four years building and selling and then ultimately got acqui-hired. So we got it over the finish line and then I worked for the acquirer and then decided to start my second company, which is where I left about 18 months ago, and that company was called StrongVM. It was an infrastructure access proxy, so instead of using keys and credentials to get access to servers and databases and Kubernetes clusters, you would simply log into our system and we would mediate the connections back and forth. 

BP Neat. And so you started that, you said about 18 months ago?

LZ Oh no, I left it 18 months ago. So that company started in 2014 and I stepped down as CEO in 2021 and then it was time for a much needed break and then I ended up writing this book as a way to take a break. 

BP Okay, very cool. So you've had, it sounds like, two startup experiences: one where there was an acqui-hire, one where the company is still going but you stepped down. Tell us about some of what you found to be most useful as a technical founder and leader when it comes to managing that relationship with investors and getting it right. And I assume the book maybe has a few stories about how things can go wrong. 

LZ So I think just zooming out for a second, I think what I've seen over the two startups that I've been a founder and CEO of, and then the other two that I've been a part of, is that I would argue that the investor/founder relationship, especially one of the technical founders, may be the most unique in all of capital finance. It just doesn't exist anywhere else; it doesn't exist in a Fortune 100 company. And so both sides have these reasons for calling each other up and saying, “Yo, we'd like to do business together.” But at the end of the day, both sides, I think, have vastly different motivations for why they're doing what they're doing, and I don't think either side does a particularly good job of understanding those motivations and so then these fights ensue and things blow up and you see things in the news, but most often you don't see anything at all. And one of my investors at StrongVM had written this blog post about one of his founders getting fired by their board of directors, and it shot to the top of Hacker News. In November of 2021 it crashed his web server and I called him up and I said, “Why don't more people talk about this?” and he said, “Because VCs don't want a bad rap and founders don't want to talk about things like getting fired,” and so we decided to write a book about it. We thought both sides could do a better job of communicating with each other. And so we go through the lifecycle of the company and talk about why people do the things that they do. And so I think one of the chapters, to answer your question, is a fundraising chapter. How do I raise money, what does the VC want to see, what does the founder feel about it? And I would say as a technical founder, it is much, much, much easier to raise capital when you can sit there and talk about your idea with gravitas, so long as you can communicate it in a way that makes sense and is accessible to the investor. I think so many technical founders, and I was guilty of this early in my career, we get caught in this notion of features and “Let me show you this widget or that widget” or “Isn't this cool?” or “Look at how much throughput I have,” and at the end of the day, the investor is like, “Am I going to be able to 1000X my return, yes or no? Please can you just answer that question. I understand your tech is sexy and beautiful. Just stop for a second.” 

BP Right, exactly. It's interesting. I do think, like you mentioned, it's a unique relationship. A lot of times nowadays a successful technical founder will go on to get hired by a VC shop. You might meet somebody there who's on a similar wavelength. But in the end, whether or not the technology works isn't the ultimate question. It's product market fit. 

LZ Correct, it has to be product market fit. And the way that I thought about it when I was first selling– and also selling as a technical founder is incredibly difficult because you're like, “Look at my amazing tech!” And the person's like, “Does it help me solve a problem, yes or no?” Me and my two co-founders of my last company, we used to say, and this sounds like a joke but it isn't, is, “Will somebody pay at least $1 for this thing?” I can always raise the price, but can I get you to part with a dollar, because the dollar is the difference between free and actually deploying the thing within an environment, and that turned out to be the key to success. 

BP So when I think about startups that I've seen go wrong over the years as a journalist, a lot of times it was about kind of an Icarus story, reaching a little too high. I think of my Theranos or my Uber or my WeWork, but those are kind of the big ones that grab the headlines and have these very charismatic, perhaps slightly psychopathic, leaders. What are some of the more mundane things? If you were to start out today again, let's say you caught your breath and you have a bestselling book and your arts and culture section of your life is well balanced but you got the startup bug again, what are some of the fundamental things you'd put in place to protect yourself and to put yourself on the right foundation to have a great, in the end, relationship with the investor and a great outcome? 

LZ So with the investor in particular, the first thing that I would do is that I would do diligence. So the vast majority of founders do not pick up the phone and call around and ask a CEO or a co-founder or a coworker, whomever it is, what is it like to work with this person? It is an old startup trope that you're in business for the next 10 years. You actually are in business with this person for the next decade. You've signed a prenup except there is no out clause, there is no divorce. The divorce is typically the founder getting fired. The investor is not going anywhere. So the first thing is, who am I getting into bed with? You’ve got to call around, it's true. There was this startup founder that called me, I think it was last week, and he said, “I have this term sheet and it's amazing and I just met him last week, but this investor wants me to pick up my company and move to the middle of the Midwest.” And he was like, “So I'm just going to negotiate an evaluation. I think if I can raise it by a million or two bucks, we're just going to go in.” And I was like, “I'm out. Who is this human who wants you to pick up your company on the strength of a conversation you started a week ago and move you to the Midwest? What's in the Midwest for you? What's available? Have you spoken to anybody who is invested?” And there was none of it. It was just this fear that, “Oh my god, this term sheet is going to disappear.” And that made me sad because this man is in control and yet he doesn't feel as if he's in control. And one way to get that control back is to pick up the phone and do your diligence.

BP Right. Yeah, maybe the office space in the Midwest gives them a little bit more runway than they'd have in New York or San Francisco. So you also mentioned that there were some things that you sort of lean into from just a technical perspective. Pair programming and Go were two you had mentioned, so tell me why those were things that you wanted to highlight. And then I'd be curious to talk about areas where, if ever, you feel like investors try to step in. I know you said all they really care about at the end of the day is the exit, but do they ever try to step in and second guess a technical decision, or somebody on the board thinks they know better?

LZ Happy to touch on both. So I think in the early days StrongVM was a low-level network proxy, so we're essentially deconstructing the protocol and looking at the bits across the wire because we need to essentially pass ourselves off as the request. We also need to inject credentials into it and write down what people are doing. So what are you doing in that SSH session, what's the query that you're issuing? And so that required some pretty low-level stuff and so my co-founder and CTO chose Go for that coding decision. That was in the earlier days of GoLang. We had a little bit of difficulty finding folks and actually found that the best developers for our product were coming from the game development section, highly fluent. And he also made the decision early on, which turned out to actually be sometimes a struggle when it came to recruiting or after folks were in house, we pair program constantly. There was such sensitive code that we were working on with the most inner workings of a company's network and infrastructure that we wanted to make sure we had a second pair of eyes on everything, which can be exhausting when you're doing this 6-7 hours a day. The team would take pity on me and would let me do some database development with them and I would pair with one of our principal architects, and it was quite frankly the highlight of my week doing that, especially as we scaled. But at the same time, I would only spend an hour with him. I would get done with that hour and I would just be exhausted, and I don't get exhausted. I can do 14 hours of interviews nonstop on zoom, but I was just like, “Bleh!”

BP There's different muscle groups. You're used to working one muscle group, you can do it over and over, and you do a different sport and it can be tiring after five minutes. 

LZ That's true. But I would say the decision was fantastic because I think that the code that we pushed out was of much, much higher quality and bugs got resolved much more quickly. I guess to go back to your other question– do investors jump in and question technology decisions? My general experience is no. So when are they going to raise their hand and say, “Hey, what's going on?” If you've crashed five times in a month and you're starting to churn customers because you don't have sufficient uptime or you're losing contracts because you're not hitting your SLAs. Investors tend to not want to operate. Even if they want to give operational advice which they're very good at giving, they tend to not want to get into the nitty-gritty. I think with respect to the product, it's, does it work, are people buying it, and now are they buying it fast enough, yes or no? So they're going to trust that, plus or minus. 

BP You start to get busy with operations. It's harder to clock out at 3 PM on a Friday to have a long weekend, use your sailboat, all the things VCs like to do. 

LZ I could tell you stories, my friend. 

BP Well, that's what we're here for. You don't have to name names. Be my guest. 

LZ Do you want to hear a story of something they do in the valley?

BP Yeah! 

LZ Have you heard of this game called Ride and Tie? 

BP No. 

LZ Ride and Tie is two men and a horse. One starts out on the horse, one starts out running, the horse and the guy run ahead, rides two or three miles, ties up the horse, he or she gets off, starts running, the guy originally running catches up to the horse, unties it, jumps on it, passes the runner, so on and so forth until the end of the race.

BP Whoa. So it sounds like everybody loses. 

LZ Everyone loses, and it just shows you how many people own a horse. 

BP Wow, amazing. I don't have a horse to spare, but some people around these parts do. So the investor that you worked with on this book, tell me a little bit about them, why you like them and what kind of insights they brought about things that, from the flip side, could be a nightmare for an investor.

LZ My coauthor is a gentleman by the name of Jerry Neumann. He's a fairly well-known seed investor here in New York. He wrote the first check into Datadog actually, and Trade Desk, both are outsized successes. He was a founder himself once upon a time, I think 20-25 years ago, and then he decided that his calling was in investment. And he is typically the first check into a company. He was the first check in my last company and the first check in the company before that and I trust him because we've created a tremendous amount of trust over the past I think 12 years now. And actually, we've had some of the biggest– no, we haven't had some of the biggest– we've had the biggest fights of our relationship while writing this book together. I think as we were writing it, I have much greater empathy for the investor side of things, especially as it comes to monetization. And I've been consulting for a VC fund for the past year and I'm talking to all these founders who don't seem to quite understand that the moment you take a penny of venture capital, you're going down a road. And that road, I don't care if you're an open source product, you're going to have to monetize in some way, shape, or form in the future. That road is, “You need to get to 1000X return,” because VC funds work in that way. They're going to place 50 or 100 bets in a fund and one of those just needs to pay off to return the fund, just one, and it needs to be a crazy 1000X return. And so when they invest in your company, they believe at that moment in time that you have the potential to 1000X. Every investment has the potential to 1000X. And so as I've been sitting here working with these founders, I've realized that they don't quite get it most of the time and they don't quite get that their North Star, either now or eventually, needs to be money, and it needs to be people who are willing to pay at least $1 for this thing. And reading Jerry's point of view about power laws and returns of funds and stuff like that gave me, I think, even much greater empathy than I had and I am a much more capitalist founder I think than many technical founders in our space. I like money and I want to make it. 

BP Okay. So one other question I would ask is, we talked about what some things are that you should look out for if you decide you want to go down the VC route. For folks who are listening, maybe a little bit of what are VCs looking out for? What would you say are traits which would indicate that– anybody can be successful, but let's say you're a software engineer, you've worked for a long time in that world, you have a certain amount of experience, you see a problem or a pain point that could be productized. What are some traits you think are important to go from being an operator inside of a company to being that IC founder? What are the things that could make or break a person as they try to make that transition from, “Hey, I'm behind the scenes taking PRs or leading a team or getting my story points done,” to “I have to make a pitch deck, then I'm going to have to go out and meet clients, then I'm going to have to figure out what needs to be sacrificed maybe from a technical perspective in the interest of product market fit.” What kind of person do you think is going to be successful making that transition as you were? 

LZ So I think first and foremost you need to not be in love with your idea, especially if you're raising venture capital, because we have to be the 1000X. 

BP Right, can't love the baby too much. Tough love.

LZ Can't love the baby too much. You actually need to be able to throw it out. Because the question you need to ask yourself is, “Is this thing working? Am I able to sell it, or am I getting the required number of installs a day such that I get the proof point such that I can decide if I want to double down on this idea?” And so I used to joke when I would interview people. They would say, “Well, do you love your idea?” And I'd be like, “Look, at the end of the day I actually don't give a shit what I'm selling. If you told me that I could build a billion dollar company by waving a flag in Times Square selling cutting boards, I'm going to wave that flag until my arm falls off because I am in service to the business and the business needs to ship a product and sell a product.”

BP Right, you're here to spend the money on the other side. We'll talk at the end about your self care routine. 

LZ Okay, we can talk about how many hours of therapy I've done. 

BP Important for any founder. 

LZ So there's definitely a question of love. I also think, to say it differently, it's a lack of ego. It's a willingness to question and to be wrong and be like, “I'm so glad I'm wrong and that we've discovered that this thing is not going to sell. I can't wait to throw it out and try something else.” And then I think to your point about fundraising or telling a story and creating slides, technical founders have generally the hardest time in a narrative. You need to be able to tell a story about either why you're saving the world from near certain doom or why an investor needs to give you money because you are delivering on the future, and of course they want to be a part of the future. It's going to be one of those two narratives and it can't be about features and it can't be about benefits. It needs to be about emotion. You need to be able to connect with them and that can be really difficult for people that are sitting behind a screen all day. Sales is hard and fundraising is a sale. It's nothing else. 

BP Yeah. I also think a lot of people who I've met throughout my career as engineers at DJI and at Stack Overflow, they're pragmatic and they dislike hype and hyperbole, a lot of them. And so the idea of going out and selling a dream and convincing somebody that your vision is going to change the world, even if what you actually think is, “I think I can make a much better mousetrap and maybe we can make some more money,” but you don't necessarily want to go out and sell that. So in some ways that can be, I think, a personality clash for certain kinds of engineers and it's very different from some of the personality you often see highlighted in media stories about founders. 

LZ It's funny because I couldn't agree with you more. And what's interesting is that selling a vision doesn't necessarily mean you're selling something. Sales, for some reason, especially technical people think about it as gross, it's distasteful. It's a conversation, and I feel like we often turn it into this negative thing because you feel like you're selling something, but at the end of the day, I wish that more people felt as if they're simply sharing their ideas and sharing their stories. I've been super effective in software sales simply by saying, “Look at what the thing does. Do you like it, yes or no?” and letting the person come to their own conclusion, and I don't know why it has to be any different when you're fundraising. Hey, dude, do you believe that– I don't even know, let's talk about log storage– do you believe that S3 is too expensive? I do. And look, right now people are sampling files in Datadog or AppDynamics or Splunk. Why do they do that? Why sample when you can make decisions on the entirety of the dataset? Meet new S3, whatever that is. 

BP Right, right. I think the distinction is like, I bet a lot of you gained this skill in working inside of companies and they have is like, you have to go to a meeting and make your case for your vision of where the product should go or what the technical solution should be or what the re-architecture should be, and so you could be skilled in that in explaining, like you said, do you want this to be 10X better? Do you want this to be 3X cheaper? And “that will change the world” bit that I think some people get hung up on, that then they have to wrap it in this package that's sexy for a venture capitalist or that somehow makes it more than it is. And like you said, a widget is a widget is a widget. Why do I need to sell you on this sort of this messianic vision of what my tech product is going to do? But anyway, so as you mentioned, your second company was pretty deep tech. What was it like to try to go out and sell that? What was it like to talk to a CIO, CTO, or engineering lead somewhere and have to convince them to switch from the tool that they already signed up for, or to be your evangelist within the company to say, “You're going to go make the case to the person who holds the purse strings and it's going to take a lot of time and energy, but believe me, at the end the solution will be worth it because X.” How did you learn to get good at doing that sort of deep technical salesmanship? 

LZ The very first thing that we learned was that– we sold the heads of infrastructure and heads of DevOps, and you cannot sell to those people. They know exactly what they want and they're going to make the decision themselves and they want to try it out and they don't want to be bothered by purchase orders or any of that stuff. And this is really early on in the sales process because essentially we were creating a new market. How do I get to a database? Well, I'm going to use a jump box and I've got a public key. Blah, blah, blah. I'm SSHing in. Or in the case of Kubernetes, I'm issued a certificate or whatever it is. Or I've got a VPN and I've only got a VPN and there are a million ways of getting into a firewalled infrastructure. Or not– maybe the database is publicly available. And so you have these people who are living with the problem and they don't quite know what the solution is yet. And so if you can get in front of them– the way that we used to get in front of them in the early days was warm introductions, because the only people that DevOps listen to are other DevOps people that they're drinking with or playing video games with or have worked with for 20 years. And so if you get it in front of them, you would say, “How are you doing things today?” And they would talk to you for 30 seconds or a minute, and then they would say, “Let me show you this thing.” And they either saw themselves in it or they didn't. And so early on, I was just in service to them and my job was to create an image in their head and then say, “Would you like to try it, yes or no?” In my opinion, there was no sales early on. It only became sales after people like Gartner and Forrester dubbed it a category. You needed a “zero trust solution” or whatever you wanted to call it and then a software defined perimeter or whatever. And then you could say, “Hey, I know you have an initiative to do this thing. StrongVM does X. You've just said that you have A, B, and C problem. Let me show you how it might solve those problems.” But again, we're going back to the “show, don't tell” side of things, which even goes back to the fundraising, which is to paint a picture. So it's never sales. I always have a conversation. 

BP I love that very much. Sort of the approach we've taken here on the content side is, “Let's not have any marketing in here. Let's tell an interesting story about how somebody made a product or where they messed up or why this new technical framework is different than the last one.” And if the engineer who reads it feels like they come away with some value of having learned something or being entertained, then they'll be interested in the product and they'll explore it for themselves, and if it's what they need they'll go after it. Seems like a lot of engineers are pretty allergic to being sold to. 

LZ Which is actually perfect because if they know how they want to be “sold to” then they can simply, if they're building a technical product, which I would assume many would reach for, they can flip it on themselves and say, “What would I like to hear?”

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BP All right, everybody. Thank you so much for listening. I hope if you were considering the entrepreneurial path, you're inspired, or if you're just starting out, I'm sure there's some interesting things you can learn from Liz's book which is coming out. As we always do this time of the show, let's shout out somebody who came on Stack Overflow and helped out the community by sharing a little knowledge. Awarded yesterday to Reap, a Lifeboat Badge for coming on and saving a question that had a negative score. Now that question has a score of 3 or more and the answer has a score of 20 or more, so a great answer from Reap. “How do I get a string name from Enum in C#?” Reap has the answer for you and has helped 30,000 people. Appreciate it, Reap. As always, I am Ben Popper. I'm the Director of Content here at Stack Overflow. Find me on X @BenPopper or call it Twitter like I do. Email us with podcasts or suggestions: And if you like the show, leave us a rating and a review. It really helps. 

LZ My name is Liz Zalman. You can find me on LinkedIn, and the book is called Founder Vs Investor. It is available for pre-order and on sale on Tuesday. You can walk into a Barnes and Noble and buy it the old fashioned way, just like how Ben calls Twitter. 

BP All right. Go get a Starbucks and walk into a bookstore, sounds great. All right, everybody. Thanks for listening and we will talk to you soon.

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