Jesse Rothstein is the co-founder and Chief Technology Officer of ExtraHop Networks, a cyber defense platform that uses cloud-scale AI to help enterprises respond to advanced threats. ExtraHop was acquired by Bain Capital and Crosspoint Capital Partners for $900 million in 2021. On today’s episode, Jon Sakoda speaks with Jesse about selection bias for entrepreneurs and how some of his lowest moments as a founder were actually blessings in disguise.
Jesse Rothstein is the co-founder and Chief Technology Officer of ExtraHop Networks, a cyber defense platform that uses cloud-scale AI to help enterprises respond to advanced threats. ExtraHop was acquired by Bain Capital and Crosspoint Capital Partners for $900 million in 2021. On today’s episode, Jon Sakoda speaks with Jesse about selection bias for entrepreneurs and how some of his lowest moments as a founder were actually blessings in disguise.
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JESSE ROTHSTEIN: I remember one initial meeting where I was pitching our offering, and the prospective customer said to me, “If even half of what you say is true, we’re interested in taking a closer look.” And I laughed, and I said to him, “Wow, is that the bar, that most vendors are lying by about 50%?” And he said, “Absolutely. Usually more.”
JON SAKODA: Welcome to the Decibel podcast. I am excited to welcome my friend, Jesse Rothstein, founder of ExtraHop, to our show. Jesse founded ExtraHop back in 2007 and has grown his company organically into one of the great cybersecurity companies in the networking space. His company was recently valued at nearly a billion dollars in an exciting private equity transaction. He has a lot of personal advice for founders and has a lot of fascinating stories to tell.
Jesse, thank you for coming here today, and welcome to the show.
JESSE ROTHSTEIN: Thank you so much for having me, Jon. I’m really happy to be here. I’ve listened to some of the other podcasts in the series, and I know they’re always great discussions.
JON SAKODA: Jesse, if you don’t mind, could we start at the very beginning? Where did you grow up? What was it like growing up in your house? And when did you discover computers?
JESSE ROTHSTEIN: I grew up actually in rural southeastern Ohio, kind of right by the West Virginian border. And it was and continues to be a very impoverished area of the country. This is Appalachia. I don’t know that there was anything particularly notable about my childhood. I think I had a good childhood. We had a close-knit family. Perhaps one thing that maybe shaped me a bit is that the public school system there was pretty underfunded. And they did their best, but I think that really forced me to go elsewhere in my learning and my exposure to technology and things that interested me. And, as luck would have it, I originally actually grew up on a farm, but we eventually moved to the small town, and it was a college town. So, I actually had access to a university and a university computer lab, and even a university with a computer science department.
So, from junior high onwards, I was kind of the kid who was hanging out in the lab. And through some great state programs that were immensely helpful to me, I was actually able to enroll in coursework there as a junior high school and high school student. And just exposure to that technology and old stuff like VAX-11/780s and mainframes to modern Unix systems, and being exposed to really the internet in the very, very early days was just a phenomenal experience. And I have no doubt that shaped who I am and certainly my career.
JON SAKODA: Now, as I recall, you started your career as an engineer and eventually as a product leader. Remind me, what were the first few jobs you had out of school, and was there something about those experiences which prepared you later on for starting and running a company?
JESSE ROTHSTEIN: Well, what’s interesting there is I actually took a little bit of a wrong turn, and I was able to correct it. I studied computer science and computer engineering at university. And my focus was very much on systems and networking. This was over at Rice University. But when I took my first job out of college, and this was kind of in the height of the dot com boom, which was a pretty fun time to graduate with a computer science degree. I don’t want to necessarily use the expression bait and switch, but let’s just say that what I was working on was not what I expected to be working on. I was doing a lot of uninteresting programming that I thought was a little bit more consulting-ware than products, and it was not really the systems and networking that I loved.
But really, when I kind of got my career on track for at least where I wanted it to be was when I moved to Seattle to join F5 Networks. And F5 Networks was, of course, an early pioneer in load balancers and really what became known as application delivery controllers. So, that was a fun thing to be a part of. And then the other fun thing to be a part of at F5 was really just winning. I learned a lot there, and I was there during a period of real hyper-growth. But as much as I would love to say that the best product always wins, we all know that’s not true.
And I think one of the most important lessons I left with F5 is that you have to be good at all three— sales, marketing, and product. Two out of three doesn’t get you there. If you have sales and marketing but no product, you’re selling vaporware. If you have marketing and product but no sales, well, certainly enterprise products don’t sell themselves. And if you have sales and product but no marketing, you have no awareness. Nobody’s ever heard of you. And F5 was absolutely good at all three, and I’d like to say maybe we were even great at a couple of them. And just that period of hyper-growth for the next couple years, sky’s the limit. It felt like we couldn’t loss. We just hockey sticked. And it was a great feeling and a great thing to be a part of.
JON SAKODA: So, it’s not always the case that people that work in fast-growing successful companies choose to start something new, but clearly there were some reasons why you thought you might want to make a change. Do you remember your thought process? Why did you choose to go from a high- growth business to starting something from scratch and doing something that was completely new?
JESSE ROTHSTEIN: That’s a great question. So, I had spent about six years at F5. And I don’t think starting a company was really forefront in my plans. I mean, it wasn’t something I discounted, but I wasn’t one of these people who felt like I always wanted to start a company, and that I was just biding my time and racking up experiences in order to set myself up for success. I actually think that when it comes to managing people, I was always technical track. And I never really desired to be a manager. I’ve spent years actually learning how to be an effective manager and certainly hiring other effective managers.
So, for me, I think the entrepreneurial spirit came from a couple things that might be some sort of personality defect or foible. First, I think it comes from maybe a desire to prove oneself. When I was at F5, I was in a great position, and they listened to a lot of my ideas, and I was able to put a lot of them into practice, but not all of them. And I think part of me wanted to break away and prove myself, prove that some of these ideas were good, and show “them,” being I guess the world, that I could do it or that this was the right way of doing things.
And then second, and this really comes from a conversation I had with my wife years ago, where she looked at me, and she said, “You’re never happy,” or “I don’t think you’re ever happy.” And I paused, and I said, “You know, I think you’re right, and maybe this is a personality flaw.” But I also told her that I think it’s a selection bias for entrepreneurs, because people who are happy with the way things are, or the way that the world is, or the current solution to a problem aren’t the people who quit their jobs and go start a company to build something else. So, I really think it’s those two things, Jon—that I probably had something to prove in terms of some ideas I had, and that I’m never happy with the way things are, that caused me to start the company. That just seemed like the right way to do it.
JON SAKODA: I always say that founders are always a little unsettled.
JESSE ROTHSTEIN: I think that’s true. Definitely not people who are likely to just be content or gather moss.
JON SAKODA: So, you had this great conversation with your wife. And now you are starting to warm up to the idea of doing something new. Looking back, was there a moment that was the catalyst for starting the company? Do you remember there being a magic moment?
JESSE ROTHSTEIN: So, I don’t remember the exact moment. And it must have been in early 2006 or so, I spent about a year making sure that F5 was set up for success before I departed. And it’s something that, years later, John McAdam, who is F5’s CEO, actually complimented me and Raja on how we left the business, in kind of a classy way, in his words, that we tied up loose ends and made sure that we didn’t leave them in the lurch. And I think there’s a lesson there. You can leave a company in a couple ways. You can leave it in a really good way where you’re setting them up for success, or you can leave them in a lurch. And people really do remember how you exit a business.
But so, sometime in 2006, I must have gotten that itch. And by early 2007, Raja and I departed F5 to start ExtraHop. And we did two years of R&D and building a product before we actually came out of stealth and entered the market. And by today’s standards, that’s a pretty long time. But for our part, I think we’re engineers, so we definitely wanted something worth putting in customers’ hands before we were ready to do so. And also, I think the nature of the problem that we bit off was a pretty big problem and required some real engineering. It wasn’t the type of thing where we could stand up a new web app or a new service relatively quickly. We were building something fairly new.
JON SAKODA: So, for our listeners that don’t know the ExtraHop story, take us back to 2007. You guys start ExtraHop. You had an idea of building a product that helped people see and understand their network using analytics and data in a very unique way. And you took two years of development before you were ready to go to market. What did it take to build minimum viable product back then? As I recall, your product idea was incredibly ambitious at the time.
JESSE ROTHSTEIN: Well, in hindsight, perhaps too ambitious. But the idea, and I think what’s remained ExtraHop’s North Star, is that we could extract intelligence from all of the traffic, all of the communication on the network. And we knew early on that we wanted to be out of band and out of line. So basically what that means is we wanted to just take a copy of the traffic through some sort of traffic mirroring. And modern enterprise networks have the ability to do that. And we wanted to do that because at F5, we’d experienced what it’s like being an inline device. And those are hard to get. That’s a very sought after part of network real estate, and it’s also potentially a point of failure. In a large enterprise environment, they’re very reluctant to install a new product in an area that could cause some sort of outage. But being out of band and out of line, we knew that we could much more easily get in. In fact, something I used to say is, short of setting fire in their data center, we weren’t going to cause any problems.
Now, that original idea, so it required that we be able to ingest crazy amounts of network traffic. And then you have to do a lot of real time analysis, or at least with these very soft, real time constraints, you can do a little bit of buffering in order that traffic and to extract intelligence from that. And then maybe the final piece is you need to actually present this in some way that users can do something with it, in some way that they can understand. You need to distill it and digest it. And of course, our first UI was very much what you would expect. It looked like a UI that was built by engineers. And it took many
years of investment and work with UX designers in order to build a product UI that users could navigate much more effortlessly just with the massive amounts of data that we’re dealing with.
JON SAKODA: So, the initial ExtraHop product has to do these three things: ingest tons of data, analyze it all in real time, and create a novel visualization layer. I’m sure each of these was a tremendous amount of product and engineering work. Looking back, do you remember how you, in the very beginning, found product market fit as you were building all of these pieces?
JESSE ROTHSTEIN: So, product market fit in some ways can be transitory, because markets are dynamic. You can get product market fit, and then you can lost it due to some sort of market shift or an event, or even competitive pressure. I think this is actually how I choose to interpret Andy Grove’s Only the Paranoid Survive, though this product market fit lens, because sometimes one of these forces changes, and it can change drastically in a short amount of time. And that’s when you can find yourself losing product market fit.
But I do remember in the early days when we started to have those initial meetings, and there was interest. And I remember one initial meeting where I was kind of pitching our offering, and the prospective customer said to me, “Wow, if even half of what you say is true, we’re interested in taking a closer look.” And I laughed, and I said to him, “Wow, is that the bar, that most vendors are lying by about 50%?” And he said, “Absolutely. Usually more.” So, not only was our initial pitch clearly compelling, but I think we tended to under-promise and even over-deliver, because certainly back in those days, we didn’t have a lot of marketing either.
JON SAKODA: I think this is a really great point. You mentioned that product market fit is a dynamic problem, that the market can and does shift for a startup, and it has to constantly evolve. Did you guys ever lose product market fit, or how did you have to adapt to the shifting market during your early years?
JESSE ROTHSTEIN: In those days, I don’t think that we lost product market fit. For us, I think what really changed is that the market pulled us into cybersecurity. And I can tell the story for how that happened. But one of the real differences between cybersecurity and maybe network performance management is that it’s a much more scalable, repeatable business. I guess it was probably in late 2014 or so when Heartbleed happened, that the cybersecurity use cases really got my attention. For those of you who don’t know, Heartbleed was kind of an information leakage vulnerability in OpenSSL, and it was a really big deal, because attackers could extract really sensitive things like passwords and private keys. And we had customers come to us and actually use ExtraHop to determine if some of these servers had received a bunch of these SSL Heartbleed probes, and then they’d know to reissue the certificates. And that was really just one of several security use cases where people would come to me and they would say, “Oh, you know, we used ExtraHop for this.”
There was another one I think shortly thereafter called Shellshock. And I had users at large financial institutions come to me and say, “Oh, you know, we used ExtraHop to help triage our environment and see if we were seeing these Shellshock attacks.” And I initially would thank them and say I’m glad that they’re getting value out of their purchase. But I started to ask questions. I initially considered this an off-label use case. But I said, “Well, why did you use ExtraHop instead of an IDS system or some sort of security product that you already had in place?” And the answer was usually some combination of, “It was just so much easier,” or “ExtraHop was already deployed and had visibility that we just didn’t have any place else.” And usually, it distilled down to, it was the best way to get this information and
the fastest way. And I’d love to tell you that the light bulb just went off, but Jon, I really had to hear this over and over and over again before it became clear that the market was very clearly pulling us in that direction. This is getting to be a bit of an old joke, but if you remember, in Game of Thrones, Sansa said, “She may be a slow learner, but she does learn.” And I mean, that’s how I felt. I may be a slow learner, but I do learn.
JON SAKODA: Is there a lesson in there, though? I mean, I do think sometimes we as founders fall in love with our products, and we become very dogmatic about what it is intended to do and what the best use cases are. In some ways, you have to in the beginning, right? You have to evangelize and promote a product for a certain use case, and you have to have such incredible tunnel vision in order to make sure that that becomes a reality. But along the way, I think everyone recognizes that sometimes the market forces may be pulling you into a slightly different direction. And is there some words of wisdom or coaching that you could give to founders about how to balance this kind of dogmatic approach towards delivering the product and the way in which you have a vision for it, versus letting the market speak for how it should be used?
JESSE ROTHSTEIN: Well, it’s certainly possible that I had some blinders on about how the product was intended to be used. And at the time, I considered security to be these off-label use cases. But I think I was actually really reluctant to enter into the cybersecurity market for a couple of reasons. Cybersecurity had always been a hobby of mine. But I never liked the market because I considered it to be a really noisy market with a lot of marketing spend and a lot of noise, and very low signal. And I felt that it would be a very difficult market to compete in and compete effectively. And also, by this point in time, we were pretty far down in ExtraHop’s journey as a company. So, to actually enter a new market, and perhaps less as an adjacency but more as a pivot—and pivot’s a bit of a dirty word, especially after a certain episode of Silicon Valley.
JON SAKODA: If it’s a successful pivot, I think many people would still say that pivots are heroic.
JESSE ROTHSTEIN: It is, but more often than not, those are risky. So, we were pretty far in the lifetime of our company and certainly some of our venture investment funds. And to actually pivot the company into a new market was a decision that we didn’t take lightly.
JON SAKODA: How many years into your journey were you when you pivoted? JESSE ROTHSTEIN: So, we started building cybersecurity in 2017.
JON SAKODA: So, it had been 10 years of successfully selling your product for network performance management. And if I get the story right, then your customers come and say, “Hey, let’s make this left turn into cybersecurity.” You hesitate; rightfully so, because it seems risky, the industry looks very noisy, and it’s the great unknown. But in retrospect, it was obviously the right decision to go do this. Do you have any advice for founders on how to navigate this type of choice? How do you decide what to do when you have to consider selling into two separate markets with potentially two different buyers, and you’re still a relatively small company?
JESSE ROTHSTEIN: Wow, Jon. I think you and I could probably use up an entire separate podcast just talking about this one topic. Here are a few thoughts. First, I think it depends on whether you’re actually talking about pivoting the business or expanding into an adjacency. Expanding into an adjacency is a great way to grow, but there are a lot of pitfalls where businesses maybe don’t protect
their core business, and they’re too focused on the adjacency and the new shiny that they end up winning nothing instead of kind of winner takes all in both areas.
So, maybe an important distinction in the ExtraHop journey is when it comes to the NPM market, the network performance management market, our part was quite mature. And that’s not a market that we wholesale abandoned or anything. But when we decided to double down on cybersecurity, really what happened is that the market uptake was so rapid and we grew so fast that it quickly became not just a meaningful part of our business, but the bulk of our business.
Now, I do think there’s some really important go-to-market lessons in terms of how to do that, because in general, sales team—so, this is an enterprise sales model, or a B2B sales model—sales teams will generally sell what they know and where they’ve seen success in the past. And they’re often pretty reluctant to go try selling new product offerings. So, how to get them to do that is part of really good sales management. Sometimes that’s carrots; sometimes that’s sticks in the sales comp plan in terms of the incentive structures. But sometimes it’s a sales overlay team. And that’s something that we did very effectively, where you have a new sales team whose job it is to sell this new thing and sort of get the flywheel going. And then once that flywheel’s going and the rest of your sales organization sees the success, you can kind of roll that into your larger sales organization. The only downside is that that’s expensive, because you generally are paying double commission when you do that. But that can be a very, very effective to kind of get that flywheel going for a new market opportunity.
JON SAKODA: This is probably a good transition to a conversation about people. Did you have a framework for hiring your initial sales leadership? And what words of wisdom would you share with founders who ask you today for hiring advice in sales, particularly at a very early stage?
JESSE ROTHSTEIN: I think that, and this really applies to just about any position in a company, is that there is this stage fit. Are you stage appropriate? So, in our journey, we definitely had sales leaders at different stages. It’s not uncommon to have your first sales leader who can really get the business off the ground and grow it from zero to, let’s say, 10 million. And then it’s not uncommon to need another sales leader that goes from, say, 10 to 50 million in ARR because those require a different skill set. Now you’re building out an organization. You’re building repeatability. You’re doing sales enablement. Maybe you even need second level sales managers. And then it’s not uncommon to have another sales leader who takes you from 50 million to 250 million.
But I think this applies to pretty much every position in the company. One of the hardest things for me about the journey as a founder and an entrepreneur is that you might have someone who’s in a certain position in a certain part of the journey, and then the company grows and you shift into a higher gear. And usually you only realize that this happens when you kind of look into the rearview mirror and you say, “You know, I think we just shifted into a higher gear, and this is now the new normal.” And somebody’s who’s been with you along the way is all of a sudden out of their depth. They’re just no longer a stage fit. And we usually all make the same mistakes. We try to give them the chance to grow, and maybe we even invest in some coaching or something. Sometimes we can get them there. But more often than not, what’s required is you usually need to bring someone else into the role on top of them. And I’ve had to do that a number of times along the way. I’ve tried to do it in a very transparent and respectful manner. And more often than not, I was able to retain the person who was in that role and make them successful, even if that required a new leader above them. But sometimes it would result in someone exiting the business. And often, that was due to title inflation. So, I learned some lessons about title inflation as well. But I tell you, the stage fit really applies to every position in the company,
especially the leadership positions. And there’s nothing harder as a founder and as a leader than when you watch somebody who’s been with you along the way kind of lose that stage fit. Then you need to make a change.
JON SAKODA: Jesse, I call this the paradox of loyalty for a founder. Every founder I know has to go through this moral dilemma. I think in the very beginning, people obviously make a big bet on you to join your startup, and it’s incredibly risky. This engenders a lot of loyalty between a founder and their first execs. If you’re fortunate, your company grows incredibly fast and frequently outgrows your people. And when a founder gets in this position, they can’t help but feel torn. Should they give their team time to grow or should they recruit in outsiders who have seen size and scale before? I think this is a very challenging question, and I’m not sure anyone really knows how to confront it directly.
JESSE ROTHSTEIN: I really like that term, paradox of loyalty. I haven’t heard that before. I think that describes the situation well. I think when the organization grows, it’s not a sometimes thing. It always outgrows people. There are some people who are able to grow with it fast enough. So, this really has to do with how fast the organization’s growing. There’s nothing clear-cut there. There’s a balance that has to be struck. If you were the type of leader that terminated people too soon, then you’re going to make mistakes. And that would be terrible. You’d be seen as this loose cannon that goes around kind of firing people for relatively small infractions. So, I think there’s a balance to strike here where, when you make a personnel change, you have to make it at a point where you’re pretty sure that it’s the right thing to do. And it’s always the case that with the benefit of hindsight, you say, “Well, I guess I could’ve done this sooner.” But I think if you’re fair to yourself, unless you waited a really long time, where you’re trying to strike that balance too, when you’re pretty sure that you need to make a change before actually effecting that change.
JON SAKODA: Jesse, I think you shared some really great advice on recruiting stage appropriate execs to your company depending on where you are in your growth. And I’m wondering if you wouldn’t mind talking about the role that a founder plays in potentially recruiting a professional CEO. I think a lot of founders grow their company to a certain size and scale and have the privilege to attract some really great people. You have gone through this process successfully at ExraHop, and I’m sure a lot of founders would love to hear, how do you go about making such an important decision and eventually recruit a new CEO to the company?
JESSE ROTHSTEIN: Well first, I think any decision to bring in a CEO is usually a board decision. That’s what boards do. Boards, their primary responsibility is to hire and fire the CEO and to ratify or approve the operating plan. There are lots of ways that I could tell this story. First, I’m going to say that in hindsight, I was wearing a couple different hats, and I was probably doing it for too long. ExtraHop didn’t have another CTO. I was very much the CTO and head of product. But I was also the CEO. And as the company grew, trying to do both, trying to be CTO on the product and technology side, and providing vision and leadership there, and also trying to be CEO for the entire company became less and less tenable.
And at some level, the reality is that the board wanted that change, and that’s an important thing as well. I think with any founder CEO, especially a first-time entrepreneur, one thing that you have working against you is that at some level, you’ve never done this before. And the board members know that. So, every step of the way, they’re judging you a bit and saying, “Well, you know, this person’s never done this before. Are they growing fast enough as the organization grows?” And I think, whether founder CEOs make the best CEOs goes in and out of vogue. So, there’s always a pendulum swinging
there. I personally believe that there’s nobody more committed and nobody more knowledgeable about the business than the founder. But sometimes the founder’s not necessarily wired to run a big organization or to grow it. So, it really depends on the situation.
JON SAKODA: I think it’s great that you are willing to talk so openly about this process. A lot of founders don’t realize that as a company becomes wildly successful, it raises the bar for everyone, including the founding CEO. And many boards do start asking more questions about what is right for the company. I think you were fortunate to land two great CEOs at ExtraHop. What advice would you give to founders on how to bring someone in, and how do you make them successful?
JESSE ROTHSTEIN: That’s a really tough one. I feel like a lot of situations are different. For me, I put a lot of effort in both cases into establishing a good working relationship. And I think that cut both ways. For my part, and I think maybe this is one bit of generalizable advice for founder CEOs who are bringing in an outside CEO is, I was very cognizant of the fact that the new CEO would be looking to me to see if I’m still trying to act like the CEO, or if I’m trying to encroach on his or her responsibilities. So, for my part, I put a lot of energy into being sure that I didn’t—that we brought in the new CEO, and I’m here to help facilitate their transition, and I’m here to be supportive in any way that I can, but I’m not here to step on their toes or be CEO.
Now, at the same time, my role is CTO, and I led and continue to lead R&D and product. So, I think respecting those boundaries was extremely important because the new CEO is always going to come in and kind of look at the prior founder CEO and wonder if there’s going to be friction there or if that founder’s going to step on their toes unwittingly, or maybe even intentionally.
JON SAKODA: I think this is very helpful advice and a really great framework, the concept of having boundaries. This is what I do as a founder and I’m going to continue to do, and this is what the new CEO is going to do that I used to do. In theory, if you get the right person, this kind of framework makes it a lot easier for you and the entire organization to understand what to expect from a new leader and why you went looking for someone in the first place.
JESSE ROTHSTEIN: And if you’re lucky, the new CEO that you bring in has a very complementary skill set and can maybe accomplish some things that you couldn’t. And at the end of the day, what I told myself is, “Well, at least I’ve got this other guy who, he can now spend 25% of his time managing the board and things like that.”
JON SAKODA: Yeah. No, I mean, if we’re all being honest, there is a big part of the CEO’s job which is not all that much fun. And now it is somebody else’s job to take care of all those things.
I know you’ve had many opportunities to exit through the years, but more recently, you went through a strategic transaction that is becoming increasingly popular for founders and VC investors, and that was to undergo a private equity investment with Bain that was both a growth capital investment and also an exit for earlier shareholders. This was a great milestone for the company, and I think a lot of founders are not as familiar with these types of transactions. Would you mind telling us the whole story? What led you here, and why did it make sense for ExtraHop to bring in a partner like Bain at a moment like this?
JESSE ROTHSTEIN: Sure. Well, first, ExtraHop has been traditionally a very capital efficient company. We built the business with, by today’s standards, relatively little venture capital. I think we
raised a total of around $62 million across a few rounds, which, like I said, by today’s standards, or at least the previous standards of a few months ago, that was pretty small. And we hadn’t raised any capital in quite some time. I think the last funding round we’d done was, I want to say, 2014 or so. And what was happening was some of our competitors had actually raised capital, one of them in the public capital markets and another competitor had raised capital, a big round in the private capital markets. And the capital can be a really good competitive advantage if properly deployed. So, we came to the conclusion that if we wanted to remain competitive, we probably needed access to more capital.
Now, at the same time, ExtraHop, you know, we’d been at this for a while. And most venture funds have a time horizon. They’re usually 10-year funds. So, the funds that we were a part of either had matured or were about to. And I think that our original venture investors were amenable to a takeout, to basically cashing out on their investment. So, at the board level, we decided that we were going to do a market check for M&A, which I think was a responsible thing to do at that point in time. So, we actually retained the services of a premier investment bank, and we conducted that sort of market check. And we had some great conversations along the way, and there was some interest. And I guess what I’ll say is one thing led to another, and it all happened really pretty quickly. And we were able to do that deal with Bain Capital, and it’s actually a syndicate. Bain Capital led it with Crosspoint, which is a more cybersecurity-focused fund, also joining that. And our venture investors were kind of cashed out and exited the business.
JON SAKODA: And Jesse, I have had some friends go through this transaction and say that it is really an amazing process, right? Because on the one hand, you are exiting the business in the sense that the shareholder base is turning over, and actually, there can be some liquidity for employees and for founders. And you also get this great new investor, and you’re able to carry on the business in a standalone fashion, so you’re not actually selling the business outright to, say, a strategic who might be taking the baby away from you. Has that been your experience today? Has it been the best of both worlds?
JESSE ROTHSTEIN: So, the story hasn’t been fully written yet. At this point, I think we finished book one, and we’re into book two in the trilogy. But what I will say is so far, so good. This is absolutely going to be maybe a little bit of a plug for Bain Capital, and I’m in no ways obligated to do so, but they’ve been great. So at least to date, Bain Capital and Crosspoint have done everything they said they’d do in terms of investing and growing the business. And I think we’re also very clear about our goals. And our goals are very much to grow the business along some very reasonable but maybe aggressively attainable targets.
JON SAKODA: Can I ask, just looking back on the entire journey, maybe if you could reflect on what were some of the highest highs and what were some of the lowest lows?
JESSE ROTHSTEIN: I don’t think I’ve ever shared this before. But the lowest low, I can talk about this now because it was many years ago. But the lowest low happened during one of our fundraising rounds. So, I think most of the listeners to this podcast are familiar with this process. But usually, you talk to a number of prospective investors. If you’re lucky, you collect multiple term sheets. And then you select one that you want to work with. But those term sheets are nonbinding. So, for us, we were probably 12 hours away from signing the closing document. This was the night before. And they blew up the deal. And this was an inexperienced junior partner at a major VC firm. And I mention this because it put me in an unbelievably terrible position. I felt like I was going to throw up.
These aren’t talked about very often, so I think it’s assumed in the industry that it doesn’t occur very much. I don’t know how much it happens and how much it doesn’t happen. But what I do know is that if a round doesn’t complete, then in many ways, you can be kind of tainted. Other investors maybe assume that they looked under the covers and found something that they didn’t like. Now, that absolutely wasn’t the case here. In this case, this junior partner just got cold feet. And I was very upset, and I said to him, “Listen, the first thing you need to do is you need to get on a call with my board and explain to them that you just got cold feet, and that you didn’t find anything objectionable in the diligence,” which he agreed to and did that. And then second, I actually had them pay the breakup fee. So, they covered all our legal fees. I think that’s another bit of evidence that this was a cold feet situation and not an indication that anything was wrong. But it put us in a very, very tough position because we no longer had leverage. So, then to go back to some of those other prospective investors would have been very difficult because, again, they would have assumed that something bad happened. So, that was, without a doubt, my lowest low. And it’s something, like I said, Jon, I don’t think I’ve ever really talked about before.
JON SAKODA: And I’m sad to say it does happen. And it happens regularly in turbulent environments like the one that we’re in right now. So, I’m glad that you’re sharing this because there are a lot of people out there that might be experiencing something like this or have friends that are experiencing something like this. In retrospect, any advice, or was it a blessing in disguise? If there’s somebody listening out there that is going through something like this right now and also is sick to their stomach, any coaching you would give them as to how to go get that round done?
JESSE ROTHSTEIN: Well, first, I’m sure it was a blessing in disguise because I don’t know how you’ll receive this, but a lot of venture investors kind of oscillate between fear and greed. And I think the best partners for an entrepreneur, and certainly the best board members, are the ones that have maybe a bit of a steady hand, you know? Not ones to get overly excited, but also not ones who are prone to panic. So, if this investor got cold feet before we even closed, I’m sure that they would have been a very, very difficult investor to have on our board. So, I’m sure it was a blessing in disguise.
In terms of advice for getting the round done, I think it’s tough. I think this is one of the reasons why the best time to raise money is when you don’t actually need it. Because if you can, the best thing to do might be to wait a little bit. In our particular case, I actually had a stroke of good luck following this stroke of bad luck. And there’s no doubt, the harder you work, the luckier you get. Shortly after that round blew up, we ended up closing a really large multi-million-dollar deal with a major financial institution. And that success buoyed the company with confidence. The deal itself was big enough that it gave us additional dry powder, that we maybe didn’t need the funding. So, I think that actually, we got a bit lucky there with the timing.
JON SAKODA: Jesse, that is such an incredible story, and it really warms my heart. I am glad you’re sharing it. I know it can be a little taboo to talk about these things. Sometimes we all just have to remember that the key is to survive the moments of crisis that might kill others, and eventually in a startup, something is going to break your way. I’m wondering, looking back, do you have any words of wisdom for your younger self?
JESSE ROTHSTEIN: You know, Jon, I was lucky enough to be in a small venue where I heard somebody ask Jeff Bezos this question about advice for his younger self 20 years ago. And he laughed his famous laugh. He basically said that he had no idea, that he’s a different person now than he was back then. If he went back in time 20 years ago, he doesn’t think he could necessarily even do that job
today. And that answer really spoke to me. I’m a different person than I was back then, and I’m really not sure I could still do that job, and I don’t know what advice I would necessarily give myself as a result.
JON SAKODA: Well, Jesse, I must say, it is hard to argue with Jeff Bezos. That is a great answer to the question. Perhaps we should all take his advice and look forwards and not backwards when thinking about our career. You have been a really great guest on the show. You have definitely shared some amazing stories and some great words of wisdom. And I really can’t thank you enough for being here with us today.
JESSE ROTHSTEIN: Thank you so much for having me, Jon. I can only hope that some of your listeners maybe find some of these stories at least a little bit useful or perhaps inspiring. I’m just thrilled to be a part of, and I really enjoyed our conversations.