playbook-Going for It-May 2012

playbook-Going for It-May 2012

How Code 42 learned to get over its aversion to venture capitalists.

Why would a Minneapolis software company run by folks with a low regard for venture capitalists and who didn’t need the money agree to one of the top 10 largest venture capital deals in local memory?

The short answer is that they saw an opportunity to be a billion-dollar company and they decided to go for it. 

The company is Code 42, producer of a suite of data backup and security products called CrashPlan. I happen to be a happy CrashPlan customer, but the first I’d actually heard of the company was through a news release announcing a $52.5 million series A financing round led by Accel Partners, a Palo Alto, California, VC firm best known for its early funding of Facebook. 

The money was the first outside investment of any kind in Code 42’s 10-plus-year history. The company declines to say how much stock was sold for $52.5 million, but my best detective work puts it at about 20 percent. That leaves the founders very much in control, which was important to them. 

Mike Evangelist, Code 42’s chief marketing officer, doesn’t suggest that anybody at his firm disliked venture capitalists, and he volunteers that they greatly enjoy the working relationship with their new partners, including Mike Gorman of Split Rock Partners, the other firm in the deal. It’s just that there was enough experience with Silicon Valley and the venture community that they were wary of the whole idea. Evangelist’s own background includes three years of commuting from Minnesota to Apple in Cupertino. 

Code 42 executives weren’t willing to take VC money if it required them to change their company’s culture. Their single biggest concern was that the venture investors would seek to get their money out, most likely via a sale, and the leadership did not want their company dismantled and shipped to California. Says Evangelist: “We like it here and intend to stay.” 

In addition to concerns about culture and control, Evangelist says that until recently, he and his colleagues didn’t have good plans on how to spend venture money. Seeking to come up with the right word to describe the spending culture at Code 42, Evangelist settles on “conservative.” Since its founding in 2001, the company has been entirely bootstrapped, funding itself as a digital job shop until CrashPlan took off in late 2007. 

Once that happened, it certainly did not have to seek out venture capitalists. Evangelist says that Code 42 cofounder and CEO Matthew Dornquast “had pretty much been barraged by VCs and equity firms and loan sharks who saw what we were doing and wanted a piece.” 

Gorman got to Code 42 by being a CrashPlan customer. He says any professional investor seeking opportunity in the data protection software segment would quickly conclude that Code 42 was a likely big winner. For the past several years, Gorman has met several times a year with Dornquast to share information and build trust. 

By 2010, Code 42’s leaders discovered that their little cost-effective and consumer-oriented backup software was much admired by large companies as well as consumers and skinflint small-business owners like themselves. That list of customers grew to include the likes of Google and Adobe. 

They could see from looking at financial statements what others in their market were spending on customer acquisition and product development. “We had come into that arena and competed effectively,” Evangelist says. “So we asked ourselves, ‘What if we spent twice as much?’” 

Reviewers of CrashPlan routinely praise its flexibility and ease of use. One of the key features of CrashPlan is that it can deliver data to its own cloud, a private cloud run the enterprise, other computers or devices under the user’s control, or any combination of the above. (Big companies tend to set up CrashPlan to deliver data to their own clouds.) CrashPlan also fits nicely in yet another hot tech trend, the “consumerization of IT”—the flood of consumer devices such as iPads and smartphones that employees in big organizations are using daily in their work. 

Last year, the Code 42 team realized that its flagship product offered more than an automatic data backup. For CIOs and other senior executives at big companies, CrashPlan presented the potential to know in real time what data a company has, how that data was moving among employees, and the various devices they used. That would make CrashPlan a true backbone application. You don’t need to be Bill Gates to know that is a very big deal. 

So here was this opportunity, says Gorman, “big enough, lucrative enough, and near-term enough” for the Code 42 team to conclude, “Let’s go for it.” The downside? According to Evangelist, spending money for additional data centers abroad, more development staff, more marketing depth, and more sales staff to call on large enterprises. At the same time, all of this spending struck the management team as relatively low-risk, given the momentum of its products. 

It is significant that Accel Partners, the venture firm behind Facebook and Groupon, made its Code 42 investment the first deal out of its $100 million Big Data Fund. This fund is an allocation of capital for start-ups that Accel thinks can be big winners providing solutions for managing the explosion of data generated by video, blogs, social networking, and numerous other applications. Can Code 42 be a billion-dollar company? “It has that kind of potential,” Gorman asserts. 

So for Code 42, now with real money in its checkbook, the pace is picking up. Evangelist says he just got to the point where he did not know everyone’s name, as the company has broken the 100-employee mark. He says that Dornquast and the leadership team remain intent on preserving their bootstrapping mentality. When the deal was announced, he says, Dornquast told staff that despite more than $50 million in cash, “we still can’t afford to buy pens.”

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