Salesforce Ventures: "Firing people is very emotionally difficult, but a good CEO needs to do what's right for the next 10 years"
Salesforce Ventures: "Firing people is very emotionally difficult, but a good CEO needs to do what's right for the next 10 years"
"We are in the midst of a once-in-a-generation change and I cannot be more optimistic about Israel in this context," added SVP and Managing Partner Alex Kayyal, with Salesforce Ventures investing $500 million in 32 Israeli companies to date
"I don't have statistics on which of our portfolio companies is firing and who is hiring. But there is nothing to be done, there are companies that need to hire employees and there are companies that need to fire them in order to slow down their burn rate," explained Alex Kayyal, SVP and Managing Partner at Salesforce Ventures fund, in an exclusive interview with Calcalist.
According to Kayyal: "It's hard for entrepreneurs to look long term, and that's our job. The good CEOs are the ones who react quickly and take action. I know it's very emotionally difficult, but you have to do what's right for the next ten years. If you want to be an entrepreneur and CEO, you have to be able to do the hard things."
Many Israeli entrepreneurs would like to see Salesforce on their list of shareholders. In contrast to the heavy and outdated image of most corporate investment funds, Salesforce enjoys a modern and dynamic image. Proof of this can be seen in the fact that in 2021 it became the second most active corporate fund - after Google's GV. The explanation for this lies in the fact that Salesforce itself was a startup not long ago, when founder Marc Benioff and his partners developed software for managing sales and service systems. Since 1999, the company has become an international giant with annual sales of over $25 billion and a market value of $150 billion, even after a 50% drop from the beginning of 2022.
If you look at the dozens of companies in Salesforce's portfolio, all of them without exception, are software companies, and it is hard to ignore the extensive wave of layoffs they are undergoing. This is also evident in Salesforce's Israeli portfolio, in which it has invested over the years $500 million in 32 companies (not including the purchase of ClickSoftware for $1.4 billion in 2019). Salesforce itself has also laid off 1,000 employees this month and according to estimates, the total amount may reach 2,500 of its 73,000 employees.
The crisis, affecting the high-tech industry all over the world, including Israel, where 6,500 employees have been laid off since the beginning of the year, brought Kayyal here for a series of meetings with the entrepreneurs behind Salesforce's portfolio companies and also to assess new investment candidates. Kayyal conveyed everything but stress or concern about what's going on in the industry. On the contrary, for him layoffs are the right thing to do now.
"Entrepreneurs and CEOs need to be agile and adaptable. Empathy towards employees is important, but you also need to think about building the business for the long term," says Kayyal, who was born in Switzerland, studied business administration at Harvard, joined Salesforce in 2012, and last year became a Managing Partner, moving from London to San Francisco. He has no technological background and refuses to reveal his age, in what appears to be an attempt to obscure the fact that he is very young, probably in his early 30s.
Kayyal is a representative sample of the executives in investment funds who dictate the tone in global and Israeli high-tech: in good times, fund managers pushed entrepreneurs to expand quickly in order to take over market share and now, most of them, who themselves have never managed a company even a single day in their lives, pull out books from reputed business administration schools and use them as a guide to life. A look at Kayyal's Twitter account provides an excellent illustration of this:
"This letter is one of the best I've ever seen. This is what leadership looks like in difficult times." The "letter" attached to the tweet is a mass layoff letter sent by Patrick Collison, the founder and CEO of Stripe, a fintech company that until recently was one of the highest valued private companies, peaking at $40 billion. It recently cut its value to $29 billion and fired 14% of its 8,000 employees. In the letter, Collison admits that he made a mistake and exaggerated with the hiring of employees, and also lists a line of benefits for those being laid off, but the bottom line is clear and very "Elon Musky": "If you get an email within fifteen minutes, it means you're fired."
The business environment has changed, explains Kayyal. "The public market says it wants efficiency. This is a big change, and the entrepreneurs who want to build large and public companies - must listen. This means reevaluating how fast they want to grow. We tell the founders of our portfolio companies: Think about the long term."
So they are thinking long term, and that's why Salesforce Ventures unicorns, led by Snyk, OwnBackup and Melio, have recently experienced layoffs even though they have plenty of cash on hand.
How involved are you in your portfolio companies? In most cases you are not on the board of directors, but in the industry they say that you are very involved.
"Our role is not to tell the founders what to do, but to support them in what they are doing. We want to be the jet engine, to challenge them: before we sign an investment, I tell the entrepreneur that it means that he has invited me to his home for a long time and I will be sleeping on his couch."
Are you pressuring entrepreneurs to lay off employees?
"I have and continue to see many companies and what they all have in common is that even the best have issues along the way. The difficulties force us to think about strategy every time. When times are challenging we tell them: 'We are with you in the trenches, we are not running away, but we have to make decisions and they are not always easy.' The market is difficult for everyone, but there is also an opportunity here."
These days you are meeting with quite a few entrepreneurs at different stages, how much does the subject of budget cuts come up during your dinners?
"We didn't talk about the layoffs during the meal, and even now, founders are interested in increasing market share, not layoffs."
How do you know which companies should lay off and who can actually recruit and expand?
"We have companies that have enough money for several years, including in Israel, and there are companies that will have to raise in the coming year, and for them the long term is also very important because the big break in the software market is still ahead of us. A large survey conducted among CIOs showed that cloud computing expenditure will rise to 45% of all corporate spending in the next five years compared to 22% today. The transition to the cloud is such a big event that we laugh and say that, in fact, CFOs have become CIOs because they control these critical budgets."
How bad is next year going to be?
"It will be very different between a company that has money for six years, and we also have some of those in Israel, and a company that has money for five months. In general, there is currently a lot of pessimism around high-tech, but right now it is a great time to recruit employees, build market share and invest in existing customers."
What will happen to high-tech companies that only have money for a few months?
"We really want to invest now and we haven't stopped investing. The best investments made by the fund were actually those made during the financial crisis of 2008 and 2009. Marc Benioff is still very involved in the activity, because his DNA is very entrepreneurial, so we have a lot of understanding and empathy for entrepreneurs. But many growth companies don't want to raise now, so 2022 will end with less investments than 2021, during which we invested $500 million. When we meet with the CEOs, we ask them: 'If you had another $100 million in your pocket right now, what would you do with the money?' If the CEO has three big things he wants to do with that money, he needs to raise capital. If he says it is for the feeling of security and that the money will sit in the bank, it is better not to raise it now, because of market conditions. Obviously, valuations have changed, but for the healthy companies, there will always be money."
Kayyal is trying to avoid the term that scares funds and entrepreneurs alike: "down rounds" - or fundraising at a lower valuation than the previous round.
In the meantime, the companies together with the funds are trying with all their might to avoid such transactions and prefer to turn to more creative means such as transactions that include debt that will be converted into shares when the valuations grow again or even taking regular credit to finance operations until the market turns around.
Do you recognize changes in the behavior of senior managers in recent months? Did they grow up? Are they behaving responsibly?
"Many entrepreneurs have not experienced the previous crises and the current reality is new to them. But, to be a good entrepreneur you have to be able to go through walls. And it doesn't have to be accidental either, you have to be the kind of person who sees a wall and wants to go through it. However, at the same time you have to be able to listen to the advice of others and that's a difficult combination to find, because most people who walk through walls don't want to listen to anyone. On the other hand, if you're willing to listen, but you don't have a vision, it won't help."
In 2021, Salesforce Ventures reported a phenomenal profit of $2.1 billion and in 2022 it presented a smaller profit of $1.2 billion, but no less impressive is the fact that since it started operating 13 years ago, it has invested about $5 billion. It owes the extraordinary profits mainly to the IPO of software company Snowflake and to the meteoric jump in Zoom stock during Covid. In Zoom, for example, Salesforce invested $100 million at the same time as the IPO in 2019 and in about a year more than tripled the investment. By the way, the fund made a similar move in Israel's monday.com and purchased shares for $75 million at the same time as the company's IPO, which was done at a valuation of $6.8 billion in 2021. By the end of July (the last financial report published by Salesforce), it estimated the value of its investments at $5.2 billion, still a slight increase compared to $4.8 billion at the beginning of the year.
Did you warn your companies in advance that a slowdown was coming? That there is a bubble?
"Our valuation was also at an all-time high and we asked ourselves how long it could last, and what we would do when things started to change. We encouraged our companies to raise more money, which is why there are now companies like Bringg, Wiz or Gong, which have money for two additional years."
Still, as an economy that is dependent on high-tech, should we be worried?
"For the next 20 years the opportunity in software is phenomenal. We are in the midst of a once-in-a-generation change and I cannot be more optimistic about Israel in this context."
