Lessons from a rare $2 billion LA tech win: “I was competing with both hands tied behind my back”

Lessons from a rare $2 billion LA tech win: “I was competing with both hands tied behind my back”

ON MAY 15, 2013

You hear it over and over again: What the LA ecosystem needs is a big, publicly-traded, home-grown, multi-billion dollar company. Well, there actually is one in LA that almost no one talks about: Cornerstone On Demand, an enterprise software company that focuses on HR software. And it’s a real enterprise software company, not a consumer company with a  freemium model that’s calling itself enterprise to get money and headlines these days. Why doesn’t Cornerstone — with its $2 billion market cap – get more love and attention? It’s partially that the company hasn’t focused on press and also the fact that enterprise software companies just aren’t as widely covered as consumer or ecommerce companies. But it’s also because the company was bootstrapped for much of its existence, growing up in a time in the LA ecosystem when there was little press or attention paid to tech. In an effort to raise the profile of LA entrepreneurs generally, Cornerstone is sponsoring our month-long look at the LA ecosystem. But as the multi-billion tech company that no one in LA talks about, it is also just the type of company we should be surfacing in this report. I hopped on the phone with Cornerstone’s founder and CEO Adam Miller to talk about the pros an cons of building one of the only billion-dollar-plus companies out of LA — and one that doesn’t rely on celebrity endorsements to boot.

PandoDaily: How and why did you wind up doing an enterprise company in LA?

Adam Miller: I started the company in my one bedroom apartment in New York City and one day, when it was especially miserable outside, I thought, “Why am I doing this?” It was too hard and too expensive, and New York wasn’t as tech-focused then. So it was difficult to hire people.

I figured if I could start this anywhere, why not start it somewhere beautiful? I went to grad school out here and always loved LA and loved the beach. At the time, all my advisers said I was crazy and I needed to be in the Valley or just stay in New York where most of them were. My excuse to move to LA was that we were an online education company at the time, and LA had a preponderance of educational software companies. But that was really just an excuse to live here.

Was there any advantage to being in LA?

You can be a larger fish in a smaller pond, which helped with recruiting and some partnerships.

Where there disadvantages in terms of recruiting talent as you got bigger, getting press and funding? 

Yes, yes, and yes. We had a big advantage in recruiting certain people at a much lower cost. There is high caliber talent in LA for less money. But there were certain huge disadvantages to being here. It was very difficult to get capital. There is still not a mature VC community in LA, and people in the Valley didn’t want to get on a plane. The hurdle was much higher to get funding.

The other thing was I just didn’t know people in the Valley. Most of the funding work gets done via contacts and relationships, and I was going in cold to all of those meetings. When I finally raised money, it was mostly due to the fact that I had been around trying to raise money for so long, and they’d already rejected us. But when we came back, and I had done what I said I was going to do, it got easier. But all that rejection was what ultimately allowed us to raise money.

On press, it’s a huge disadvantage even today. You’re just not in the flow of having dinner with people or going to a party. People aren’t running into you.

When it comes to hiring, it goes in waves. At first it was easier, then as we got bigger it was harder. We were not ourselves yet a big company, but we were competing with other big companies. Now it’s become easy again, now that we’re one of the dominant tech companies in LA. There aren’t many choices like us.

How we hire is important since we are a talent management company. We base hires on potential and not specific expertise. It is very very difficult to find an enterprise software expert or someone who has build a platform or scaled a cloud company already in LA. We’d pretty much have to hire from ourselves to get that. We have to train them more and put in extra effort and be a little more cautious. We can’t just rely on prior experience or that pool would be impossibly small.

That sounds like a lot to overcome. It seems like you could have removed a lot of risk by just moving north to the Valley. Why didn’t you? 

We thought about it, but there were also advantages. Our retention is phenomenal; it’s under 2 percent. People aren’t poaching our people the way they do in the Valley. We had the opportunity to define our culture without a lot of noise from the outside.

We are realistic about how we were doing and how the world perceives us, because we are not in the Silicon Valley bubble. In Silicon Valley the world revolves around you, and in New York the universe revolves around you. The market for what we do in LA is very small, so we had to go outside LA quickly.

People give LA a bad rap in terms of the quality of talent, and you can’t find many people who have built a huge developer platform already. But there are plenty of creative people and talented engineers. The LA university system is producing more engineers that almost anywhere else. The problem is 75 percent of them leave LA, and that leaves us with relatively few to squabble over. We need the ecosystem to grow so they don’t have to leave.

What else does LA need? 

We need more people who are generally tech savvy. We still need all the professional services. We need more people familiar with how tech companies work. We need more incubators, more service providers, and more support. Most importantly — and we’ve seen this at your PandoMonthly events here — we need more of an appetite for people to just want to be around tech. It is growing dramatically, but we need more of it. Entertainment used to be the default the way finance was in New York, and that is starting to shift.

But, why should it shift? You don’t see the Valley trying to be the next Hollywood or be the center of the financial world like New York. Why does everyone think they can become the new Silicon Valley?

I don’t think anyone has the illusion that LA will take over Silicon Valley, but LA could be a very solid No. 2 ecosystem.

What worries you most about the recent wave of excitement around LA startups?

The seed glut in LA is very, very real. It is real in San Francisco, but it is very real in LA. You have had a lot of entertainment money angel investing, and there’s the extra hurdle to get venture funding.

We have a couple of high quality VCs there and some new and existing ones will open up down here eventually. We take our little piece of credit for that. Before Cornerstone there wasn’t a huge exit in LA for 10 years. The guys willing to get on a plane made a lot of money on Cornerstone. Our angels made more than 100 times their investment. There’s a real opportunity to invest outside Silicon Valley and be successful.

Does the current “Silicon Beach” hype and struggles of more well known LA companies like BetterWorks concern you?

Absolutely. That’s one reason we’re trying to take more of an active role in this ecosystem now. There’s been a lot of sizzle and no steak, and we’re the opposite. We have a business that’s been well received by Wall Street, but not well known in the LA community. No one was better at getting PR than Paige Craig.

Little things will add up over time, but the big area of concern is that seed glut. It’s going to be tricky to fill that and make sure there’s not an issue with too many companies dying on the vine. Some should go away, some should consolidate. They need to do whatever they need to to stay in business.

Some quality has to rise out of the noise. I think we have a cultural advantage over the East Coast in that LA is more like Silicon Valley. It’s more about the individual than the institution. It’s a place people come to to go off on their own and take more risk. It’s more socially acceptable than on the East Coast.

That’s an interesting point I hadn’t thought about. You’ve certainly had that culture with people flocking to LA to become famous in the entertainment world. When it comes to the entertainment world, what’s the best way to exploit that part of the LA ecosystem? Not everyone is bullish on the celebrity endorsements we’ve been seeing.

The most obvious is the potential as a source of financing. One reason there’s been so much angel financing down here is that tech has become a more viable business in LA and less of a hobby. Celebrities meet entrepreneurs at cocktail parties and have friends in tech. Angel investing becomes a more legitimate thing to do.

A lot of celebrities are looking at ways to diversify risk, since a lot of Hollywood is about what you last did and income can be very sporadic. There were early adopters like Ashton Kutcher, but celebrities have to be careful about selectivity or the impact of their brand endorsement loses its punch. It was a huge story when Ashton started to do it, but who cares about the next company he’s investing in now?

You are one of the few LA companies we talk to who is on the other side of an exit. What are the biggest challenges for Cornerstone now? 

In LA, we are trying to prove that we still have the entrepreneurial culture even as we are much bigger. There is a relatively limited resource pool and we don’t want everyone going to the five person startup. We’ve done a lot of work to create a culture that has the excitement and fun of a startup but the advantages of a big company with a ton of capital on the balance sheet and a big market cap too. We benefit by helping grow the LA tech scene.

There is a huge opportunity for the next wave of companies to learn from companies like us. When we were coming up, there was no one to go to for advice here. There were no other companies we knew who were doing what we did. It wasn’t until we raised venture capital from Silicon Valley that we got the benefit of all that mentoring.

I didn’t realize what I was missing until I saw that. I didn’t realize I was competing with both hands tied behind my back. The next wave in LA won’t have that problem.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: