Triangulating a Sustainable Revolution

Fun Night at the Luxor

By the end of 2015 it was clear to me that the craft of cybersecurity was broken. My mind continuously compared SECOPS with other mature crafts that I had observed and executed, and it bothered me to the point of stealing peace and sleep. I decided I was going to start a revolution to “Build the tools and data needed to enable the craft of cybersecurity operations to mature.” This focus formed the mission of WitFoo and the battle cry for the revolution. Most revolutions fail because there is a myriad of devious factors stacked against them. Most Davids are murdered by Goliath. It is very rare for bold, underdog revolutions to succeed. We knew that even before we filed Articles of Incorporation. We knew to deliver sustainable, healthy change into a toxic market, we were going to have to have a set of plans resilient to the dangers and evils that existed. We needed a vision that went beyond good desire, we needed to triangulate a path to the mission by thinking through the 3 critical facets of product, business and capital plans.

Product Plan

Building something that has never existed is not easy. There is no promise that it can even be done. The work to get it done is going to require vision, flexibility and perseverance. It’s also going to require a wide array of skills, knowledge and perspective.

Divide and Conquer

Before the work began, we decided to divide success criteria into phases. We identified the “7 Unstable Conversations” (see: Building a DEVSPECOPS Team for details.) Having 7 identified problems allowed us to run experiments focused on a specific problem. It gave us opportunity to take a massive scope and divide it into smaller, more digestible phases for us to work through. As we solved for each conversation, we had to evaluate if our approach would hinder or enable the solving for the next set of problems. Often, we found a solution to a set of problems, but we realized that using that specific approach would lead to problems when it was time to solve a future problem. The 7 phases allowed us to focus on solving 1 phase at a time, but it also helped us not forget bigger picture and that our decisions in the current phase would impact our options in later phases. Shortcuts and short-sightedness are poison to sustainable, long-term revolutions.

Failure Worship

Ryan and I often give a talk on Metric Driven Development. A core tenet of success in “Lean Startups” is failing quickly. It means making decisions based on real data collected using scientific method. We have benefited from building our software inside of dozens of live networks and receiving billions of metrics that inform our more than 3,000 experiments. Learning what works as quickly as possible is the cornerstone of solving problems. Failure is our friend because there isn’t much to learn from success.

Burn it Down

Much of our product success is a product of being willing to do a lot of work that will be thrown away. It took us more than 52,000 labor hours and 6 full architecture overhauls to get Precinct ready for the market. It was heartbreaking on each version of the platform to realize we were going to have to start over. We would salvage the pieces that did work and spend another 6 to 12 months building another version that was likely to just be burned down to make room for its successor.

Time on Your Side

We spent a solid 4 years just building, learning and burning. Most revolutions never have this opportunity because of the capital plan. Revolutions need time and data to solve complex technology problems. It is often believed that doing great things require great resources. In my recent entry, The Rock & Roll of Startup Development, I explore why that isn’t true. Focused work with methodical learning over a long period of time produces an environment where history changing technology can be born. Patience is a key component of getting the product ready to improve the world.

Capital Plan

Funding a sustainable revolution has several challenges to overcome and several landmines to avoid.

Patient Investors

As we just discussed, it will take many years to build the product needed to empower the revolution. That means the primary attribute of an investor in the revolution is a long-term, patient vision. You need investors to understand that in addition to all the risk normally associated with funding a start-up, that it will be years before they see a return. That by itself shrinks the pool of investors that will take the risk.

No Plans of Exit

The other challenge with a sustainable revolution is that you are endeavoring to continue operating for years or decades before contemplating an “exit” via acquisition or IPO. This will prompt many of the remaining investors to pass. If they must wait 5 or more years to see the business generating real revenue and there isn’t going to be a clear path to liquidity (cashing out) the investment will seem hazardous.

Valuation Game

There are several unsustainable, unhealthy investment practices currently plaguing Cybersecurity start-ups. The most prevalent and insidious is what I call “The Valuation Game (TVG).” An example of TVG is a group of investors investing in a start-up at a $1M valuation. The investors have a singular focus of justifying a $10M valuation to the next round of investors. They build valuation models around the rate/slope of quarter-over-quarter gross revenue growth. They extend the rate of growth out several years to justify the valuation. The start-ups in TVG are prompted to achieve growth at all costs. This includes spending $2 to make $1. This works in TVG because the focus is not on net revenue (profits) it is on gross (top-line.) The start-ups and investors gloss over this unsustainable shortcoming by stating it is just a product of growth and they promise that after they finish growing, they will create a business plan that leads to sustainable profitability. TVG continues to round after round of capital raises until there are to investors ready to back another round. The investors stuck with the hot potato when the music stops either has to sell the company to a Blue Chip that values the products and intellectual property of the start up (and will discard the unsustainable business practices) or they file for IPO promising Joe Public that they will become profitable.

Field of Landmines

The Valuation Game has all the landmines that a sustainable revolution must avoid. Sustainable revolutions must stay dedicated to “mission first.” Revolutions that lose sight of why they were formed atrophy quickly. Big valuations, great press releases and sacks of money seem attractive to worn out revolutionaries. By pivoting focus to revenue growth as the mission, the product will transform into a Frankenstein monster of ill-advised features that create bloat and technical debt that hinders any hope of sustainable innovation. The valuation race also means the most precious commodity to technology innovation, Time, is now scarce. The most insidious result of TVG is that control of the company moves from the hands of the founding revolutionaries and into the hands of the game players. Its why many founders exit their companies with just enough money to pay off the debts the revolution created for them.

Old School Dividends

With all of that in mind, building a sustainable revolution means building a sustainable capital plan. Raising capital is going to be much harder is going to require detailed plans and custom pitches. Seeing that sustainable revolutions cannot offer quick exits/liquidity nor can they offer quick return on investment to succeed, there is only one avenue left: dividends.

To deliver dividends, a business must become profitable and sustain those profits. Investors that wish they would have invested in Microsoft and Apple when Bill and Steve were still kids will find sustainable revolutions attractive. When the vision of the mission is coupled with a sustainable and profitable business plan that will pay generational dividends, those investors will put some serious thought into providing the capital needed to get the revolution off the ground.

WitFoo Capital Plan

The WitFoo plan is a product of these cautions. We only have 1 equity vehicle: common shares. 1 share equals 1 vote with no covenants or concessions extended to any shareholder. Investors expect dividends to begin payment after the first 5-7 years. Investors believe in the long-term vision of the venture. To find the investors we found the most success pitching to family-offices, hedge funds and using crowd-funding. Venture Capitalist in general are not looking for this type of investment. With the golden age of TVG in cybersecurity playing out, there isn’t much appetite for sustainable business. We wasted a lot of time barking up the wrong trees until we were able to articulate the value of investing in WitFoo and understand what the right audience was.

Business Plan

To build a revolutionary product you need time that only a good capital plan can buy you. There is no way to execute that capital plan without a business plan that explains how the revolution will become and stay profitable. There are many ways to build a sustainable business so below I’ll just focus on how we did it at WitFoo.

Low Unit Cost

While it took it us 52,000 labor hours to build our product, it doesn’t cost us anything to make a unit. We spent a lot of time building components from scratch that would allow us to avoid needing to license components or services. This means our cost of goods sold (COGS) is $0. We can create infinite units to sell without needing capital for cashflow. It also doesn’t cost us anything to package or ship our product.

While these mechanics are almost exclusive to software sales, there are several pitfalls we had to avoid. First, we will not sell a hardware version of the product. We lean on reselling partners to package and ship these. Secondly, we will not host the software as a service (SaaS). It is MUCH easier to develop a product as SaaS because you can control most of the environmental variables (hardware, network, etc.) SaaS also makes getting metrics simpler and it is easier to deploy updates. The major downside is variable hosting cost. Many a SaaS company has been crushed by these cloud hosting costs. At WitFoo we allow our Partners to deliver these services to our customers. It delivers more value to our partners and customers and keeps COGS at $0. In addition to unit cost being as low as possible, it is also not variable (always $0) which prevents capital crunches that can lead to catastrophe.

Minimizing Operating Costs

Operating expenses (OPEX) in a software start-up include payroll, insurance, HR, legal, IT Services, equipment leases, software and travel. Keeping OPEX as low as possible for as long as possible buys the development team the time the need to build the game changing product. It also stretches every nickle of investor capital as far as possible. At WitFoo we out-source virtually all non-core services to obtain the highest value for the least cost. We also keep the team as small as possible, work from our home offices as much as possible and in the early days, purchased labor with equity. Running a company with as little waste as possible is a cornerstone to sustainability.

Low Cost of Sale

After the unit cost is minimized, the next thing a sustainable venture needs is a low cost of sale. To accomplish this, WitFoo only sells through our distribution channels. Distribution sells to our reselling partners and our partners sell to our customers. This approach means that we leverage the resources of each partner to pitch and transact business on our behalf without costing us anything aside from the sales margin. WitFoo personnel deliver enablement to these partners so that the customers receive the best possible service without WitFoo taking on costs. This model also has the merit of being extremely scalable. The costs of maintaining this channel grows at a much slower slope than the revenue it produces.

Additionally, WitFoo provides all the information a prospective customer needs to make a purchasing decision. Pricing, product demonstration, training and free trials are all available without needing to communicate with WitFoo personnel. This “self-selling” model provides very short sales cycles at a minimum cost to WitFoo and its partners.

Investing in technologies and strategies that minimize costs while maximizing potential scale are the keys to the success of the WitFoo model. Coupled with a recurring revenue model, these factors lead to sustained profits to fuel the dividends needed to attract and satiate our investors.

Risk Mitigation

The last thing to consider in a business plan is how to address risk. We spend a lot of time looking for the things that may kill us. We mitigate those things with hygiene in human resources, legal, patent filings, insurance, cybersecurity and personnel redundancy. We surround ourselves with experts in those fields to help us plan for things we would not see ourselves.

Three Corners of a Revolution

All revolutions start with a grand mission. Revolutions do not normally fail because of its strengths but die because of the weaknesses. Building a start-up that changes the world requires a devotion to mission but it also requires three separate but connected plans that lead to its accomplishment. Planting a victory flag on a mission requires a innovative and comprehensive plans for product, capital and business. If any are missing, all will be lost.

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