In Santa Clara (CA), we meet CEO and Founder of Centrify, Tom Kemp. Tom talks about his story how he came up with the idea and founded Centrify, how the current business model works, as well as he provides some advice for young entrepreneurs.

INTRODUCTION

Martin: Hi, today we are in Santa Clara in the Centrify office. Hi, Tom, who are you and what do you do?

Tom: Who am I? I ask that myself all the time so I am the CEO of Centrify corporation and we are a enterprise security company and we are specifically focused on the top attack factor that bad guys use to hack companies which is compromised credentials. So we are all about identity, users and their identity and making sure people are safe in a business setting in terms of accessing applications.

Martin: How do frauds compromise credentials?

Tom: Ok, that is a good question. The bad guys, what they do is they either phish you with a ‘ph’ not an ‘f’ right there by fooling you to go to a website to type in your username and password or they try to guess your password also known as cracking your password and there are other ways they go about stealing your password. Once they get your username and password they can access the applications you have access to or in a corporate setting then can VPN into the corporate network and then they try to get additional usernames and passwords including privileged accounts that have the keys to the kingdom. That is how the bad guys, they start with regular end users and then they eventually get into privileged users like IT accounts and then they like completely strip mine databases, servers with all the corporate information. It is a really big problem and that is what we are solving.

Martin: Great, so is it possible if I would be a hacker to hack a computer, you know basically Facebook account or so, try whether on the computer there is a corporate account, hack this and then hack into the corporate network become a privileged user and then hack the whole company?

Tom: That happens all the time. In fact, if you look at all the data breaches that have made the headlines, Ashley Maddison, not that we’re anticipating that but the office personnel management, Anthem, a lot of these big corporations both here in the US as well as Europe. What happens is often times users have the same passwords for their Facebook account that they have for the work account. So If I can steal your Facebook account, there is a good chance you are using the same password and then I can get into your work account and then that is kind of like the initial opening or crack. Then they just kind of pour in water, they freeze it and the crack expands and expands but by going out and stealing additional passwords within the organization as well, so it just starts with a single password and then people get into the corporate network and then steal additional ones.

Martin: Tom, what did you do before you started the company? Basically how did you come up with the business idea?

Tom: I was very fortunate to work with a great team prior to Centrify. The company was called NetIQ and I was one of the founders of that company and that company also sold to enterprises. We did more infrastructure management like monitoring servers and applications etc. And that was a great success. We went public in July 1999 and I was there for eight years and had a lot of executive positions there as well. But after eight years I wanted to take some time off. This was a couple of years after 9/11 so it was kind of tough going just being a public company in the early 2000.

So I took a little time off which I highly recommend, it is always good to recharge the batteries right there. Then I hooked up with a venture capital firm to be an entrepreneur in residence. The VC firm is called Mayfield, one of the top venture firms here in SiliconValley. And I just had some ideas and one of the ideas I had was as the world from an IT perspective becomes more heterogeneous in terms of different types of systems and applications from different vendors. The world was moving away from kind of the monolithic Microsoft centered environment. Ten, eleven years ago it was about Linux and now we have SaaS, we have mobile so it is a very diverse set of vendors. In that environment that introduced complexity and so each system, each application forces the user to have a new username and password in IT is very difficult for them to control who can access what.

So the idea was can we make a heterogeneous environment look and feel and smell like it is homogeneous from authentication, log in perspective, from authorization. So that was the genesis of the idea and I got that idea just from what I had done previously and just kind of my observations of what was happening on the market at the time.

Martin: Tom, give us some insights on how is such a EIR program running.

Tom: You know it is interesting that entrepreneurs in residence are very popular here in Silicon Valley and so typically this is an opportunity for the VCs to bring some executives or people with good ideas and just have them hang out at the firm and be able to think through their ideas, interview people, just take time. So there isn’t a pressure for the individual like you have to immediately start a company. It is more an opportunity for a would-be entrepreneur just to germinate some ideas It goes back to the value of taking some time off, getting a fresh set of perspectives as well. Probably good chunk of the EIRs – entrepreneurs in residence actually don’t go form companies. They may join in an existing company or they may have an idea they may pursue for a couple of months. In the end after they talk to some investors etc. they throw it away and they go onto a new one.

So the good news is that the VC, the venture capitalist does provide an opportunity for entrepreneur in residence to have an office, have access to smart people etc. There is one drawback that if you do have an idea and you form a company and that venture capitalist that want you as an entrepreneur in residence does not fund you then the other VCs will say “There must be something wrong” as well. So an entrepreneur in residence can be a great time but it does have some risks that if you are not able to get funding from the VC firm that sponsored you then it may look very negative on you and your idea as well. So there are both pros and cons, but the key thing to be an EIR is is you have to have a prior relationship or be well respected by the firm to bring you on board.

Martin: Tom, what was the process? Once you identified this kind of idea, what did you do? Did you build a product or did you raise the money first?

Tom: Typically, what you do is you just put the idea in a power point. Often times people say “Oh, you have to write a big business plan. You have to write 50-page document” and all that stuff. Typically, it is more if you can kind of consolidate it or condense it into 10 to 15 slides. In a lot of cases, especially if you are a known commodity which I was having had a successful previous start up that was able to go public, that can be enough to get funding there. But in other cases if you are an entrepreneur that may not have a prior track record of starting companies and making investors’ money then it is probably more important for you to go out there and build a product and build the technology, get some initial customer adoption. At least have a proof of concept as well. At the time I didn’t have to do that and that was good enough for me to go out at the time, this is ten years ago, to raise money. And then the biggest challenge then was to build the team because it was myself with the idea. I was very fortunate to hook up with two additional, my co-founders Paul and Adam and once we got the money then it is all about the team. First it is the idea and it is the market and be able to get funding, then from there it is building the team and see if you can execute.

Martin: Did you find your co-founders via the venture capital firm or did you know them before.?

Tom: No, it was interesting that I had actually Adam met a few times from my prior venture NetIQ and actually at one point he was trying to sell the company he was with to us so I got to know him but not really that well and then it was as an entrepreneur in residence you go to a lot of conferences, you meet a lot of people. It is a lot about networking, it is just about get ideas and I bumped into him and I hadn’t seen Adam in a year or two and we went out to lunch and he said “What are you doing?”, I said “What are you doing?” and I told him “Hey, I have this idea” and he was like “That is a great idea. I would like to be a part of that idea.” Which was great.

And it turned out that Paul who is our CTO, Adam is our VP of engineering, Paul had worked with Adam in Adam’s prior startup and then once I go Adam I was able to get Paul. Even though it was my idea, initial idea kind of it at a 20 000-foot view level that we really needed Adam and Paul to come in and really flush it out.

Again, I think it really emphasizes the point that it is so important to have a team around you because not one individual can do everything. You need to have other people that can contribute and then once is you get the initial team you are able to go out there and raise initial funding, then you have got to build the next set of people and that is also just as critical as well so you have to get the initial set but then the first ten or 15 people are really key to actually get it to a prototype stage and deliver version one of your product.

Martin: Tom, what made you think that you three are a great founding team?

Tom: I think we all had confidence in each other. I think the thing is that it is not until you actually deliver and then you get customer adoption and that is the validation that you have a good team. Clearly here in Silicon Valley you can hook up with people that may have done and had success in the past. Although there is a lot of entrepreneurs especially ones in college or just out of college that don’t have a track record but are just super smart and have a great idea etc. At the end of the day, it doesn’t matter if you are super experienced and there are three or four guys that have done this things, done incomparable things for ten or 15 years or you are three or four guys, right out of college or even in college right now. At the end of the day the way you get judged is the initial results in terms of whether or not you have built a team and that there is customer adoption. All the stuff up until getting customer adoption is kind of noise and there are a lot of people that have high “Woohoo we have raised money” and all that stuff. But are the dogs eating the dog food? Are you getting customer adoption? That is the most important thing in the end that allows you to then judge and say “Hey, we do have a good team”.

Martin: How long did it take you to acquire the first customer? How did you convince him to buy or try your product?

Tom: It was interesting. So we formed the company in March and then we had an initial early beta in like February, March. It took us about a year with a small team to build the technology and then we decided to go public with this in terms of announcing what we had. Through my prior contacts and networking with people we had a set of beta customers.

But ironically there was a company in Canada that just read the article and just said “Hey, I like what It does let me just go ahead and buy it.” And we were like “Is this a joke?” Someone picked up the phone and said yeah I just want to buy your product and you are like “Who is this?”

Martin: Do you know the price?

Tom: Exactly. It was like kind of out of the blue but often times if you have a good idea, a good product etc. people will just say “Yes, actually that scratch is an itch.” So I think one thing that an entrepreneur should know is that do they really solve… First of all, you have to have a great idea and you have to hopefully have a large market, then it is about the team. But fundamental thing is, especially if you sell to enterprises, do you solve a real point of pain. You have probably heard that form a lot of people. Do you solve a serious disease or are you a band aid etc.

And it turned out with that initial customer it was like “I really have this pain and so I am willing to kind of try it out, so I am just going to buy it.” And subsequently that spring about a year, a year and a half we started getting more and more customers including the beta sites and then started building a pipeline, started hiring our sales organization as well.

Martin: Tom, how did you collaborate with those beta customers in order to really find this product market fit?

Tom: That is a great question. You have got to find the right people, especially the ones that are willing to be patient, to experiment. You don’t want to lean on them too much because then it is like “Hey, you are the guys developing the product. I am not the one”. You just have to get them excited about selling the vision maybe they are experiencing the real pain point in their business and so they are willing to collaborate with you and also maybe it is an opportunity for them to get exposed to a startup or to help other companies well so they may feel kind of a philanthropic bent to themselves as while willing to help you out. But it is critical. You really need to listen to these customers out of the gate and try to convert some of them into paying customers as well.

Having a set of beta customers is really important. I think a lot of times a lot of entrepreneurs they go ahead and ship it and they don’t realize that you need to have a period of time in which you are more listening and having the product be tested.

Another thing I find really interesting is, you know I have been on board some other companies, the people will say “Our beta will be out on August 1st and we will ship it three weeks later.” But that is not a real beta process because there is no way that the customer will get in, install the product on August 1st, give you the feedback, allow you to fix it and then you can do the quality assurance as well. So especially with the version 1 you need kind of at least a couple of months’ beta process so you can get the feedback, you can fix and iterate then, etc.

Martin: What was the most valuable feedback that you got from the beta customers which you did not expect?

Tom: The most valuable feedback that we go was not necessarily on the product side of things. It was how they saw the product. What pain points that it solves for them. So I did have an expectation that I thought that our product would be used to address certain points of pain and then in talking with them in our particular case I didn’t realize the extent that they were looking for our product to address regulatory compliance issues. I just didn’t think as much about that. What I thought was like “They would want it for improvements of productivity. They would want to use it to reduce cost, etc.” It was really an education to say that especially with larger organizations that are more well regulated that it turns out that the regulators or the auditors can really drive things and so it turned out that in talking with them they were saying “Yes, I appreciate all those, the way that you are positioning our product but in reality the reason I want to buy it is to check off these boxes right here.” And I was like “Gees, I didn’t really think about it. When I was initially formulating I kind of thought that was more of a tier 2, tier 3 thing.”

A week later, I switched the bullet points and put those on top for the next set of potential customers. So again it is not only important to have early customers to help test the product and iterate and give you product feedback but it is also very important for the early customers to validate your messaging and your positioning, etc. You can have a great product but if it doesn’t resonate and it is not clearly grasped then it can just languish on the shelf.

BUSINESS MODEL OF CENRIFY

Martin: Tom, let’s talk about the business model of Centrify. What are the target customers in terms of company size, industry and what type of roles you are really targeting for pitching?

Tom: So we are an enterprise security company and it turns out the enterprises with the largest budgets, bigger companies, are well regulated and that are the targets of hackers out there. So the core of our market is the Global 2000. So our go to market is a mix of direct sales, some system integrators, etc. But we are fortunate that we are in a space called identity management where the pain point is also with small size and medium organizations that they have their users drowning in a sea of passwords as they adopt SaaS applications as well. So it turns out that we can also appeal to smaller medium sized organizations.

The problem is that you can’t use the same model, sales model to sell to large enterprises that you sell to small or medium. So we are very fortunate that our product is elastic enough that we can sell to almost all size organizations but you need to have the right mix and balance of how you go about selling it because otherwise why have an expensive outside sales guy calling on a 1500 to 2000-person small business, etc.

So for the large organizations as I mentioned earlier we do have more of an enterprise centric. We work with some system integrators, etc. But for more of the small and medium we rely more on inside sales people that are not out on the field, that are not as well paid, that tend to be based in your headquarters on the phone and we work with a lot of channel partners as well.

Another thing that a lot of startups need to figure out is “Hey, you have got the idea, you have got the team, you have got the product, you have got the messaging, then what is the go to market?” Obviously with version 1 you just want to get customers but when you did the version 2 by that time you really need to figure out what is the proper way of going to market with your product that eventually will be cost effective. Do you sell online, do you sell to the channel, do you sell through inside sales, is it more of a big customer enterprise and you need a lot of very expensive guys or gals that are making 250,000 dollars a year, etc. So you need to find the right balance to make it eventually economical for you as a company. In our case because our product can be sold to anyone and everyone and from a business perspective we have a hybrid model of both direct and indirect; both outside reps and inside reps.

Martin: Normally when you start a company you want to get very often feedbacks to use the feedback cycle to improve the proper market fit and the sales proposition and so forth. You said that basically you have two customer segments like the large caps and SMEs for example, and the large caps are mainly served by integrators so which are basically third parties to you. Then the question will be: did you start up outright with these smaller companies to get the higher feedback cycle? And second question is: how do you get customer feedback via third parties who are then serving customers?

Tom: Yes, a little bit of clarification so we do work a lot with large system integrators but we still even though we may fulfill through the channel of system integrators we do have a sales person involved and. For the larger ones they are on the outside for the smaller ones they are on the inside. So even though the purchase may happen through a third party we still have some direct touch to help motivate people as well.

But that is a good thing is that again you have to figure out what is the most efficient way of going to market and if you leverage the channel then you are right. You need to make sure that you don’t lose the feedback loop. That you are not disaggregated from the actual customer as well. And so the cool thing is that with technology today, because most of the technology is increasingly becoming cloud based that you can ask, even though the product may be sold by someone else you can actually get feedback directly inside the product itself with feedback buttons or things of that nature as well. You can make sure that you have your ears to the ground so to speak and listening the customers by putting things into the product to make sure that you actually have that info.

We always focused on trying to always make sure that we are on top of what customers were saying and so that is a big focus of what we always had as a company as well and we have added things to the product to give us the feedback loop even in the cases when the product is being sold or distributed by a third party.

Martin: Tom, what have been the major obstacles over the last years that you needed to overcome and how did you overcome them?

Tom: Yes, the technology space is dramatically changing. And so when we first formed the company we were more of an on premises software based approach selling into the enterprise. But the adoption of cloud and mobile is dramatic. Like four or five years ago we made a big decision to go whole hog into the cloud. I think that was a big obstacle for us which was how do we build our company, our technology to be optimized for the cloud. But then at the same time that we had a good product and customer relationships with us on premise so what we did is that we, actually four or five years ago, we were profitable etc. and we knew that we had to go out and raise some additional money to address the cloud so we raised another round of financing to fund that and we basically created a parallel development organization to work on the cloud as well.

So that a very big challenge for us which was that we could have either just incrementally done some cloud stuff, ignore the cloud and still carve out a nice business or decide to go whole hog in and embrace the cloud and basically offer to the customers the ability to not only use our software but our cloud based service. And so when you move to the cloud then the product through the cloud are mainly bought through a subscription, for example. And so you have to like reset the sales organization in terms of what their expectation should be for deals sizes. Also a lot of the adoption of cloud products first start with small and medium sized enterprises as well. So that may emphasize having more of an inside sales team as well.

So the second that you jump out of paradigm shift then it is just not about the technology it’s about you go to market, how to compensate people, etc. I think we have done a good job of migrating and moving to the cloud and you know recent competitive reviews in like Network World said, “Hey, Centrify is the number one for SaaS single sign on” for example. So I think we can clearly point to the fact that we have industry leading product and some technologies and we have successfully gone through that transition but it wasn’t easy and we had to really evolve as technology.

The thing is I have been doing this in a technology I have first moved out to California right out of college to start at Oracle and just the pace of evolution is just amazing. There was just a way for the first 15 to 20 years a way of building companies, building products, marketing them etc. It was kind of the same. And just over the last 5, 6 years it is just completely different in terms of how people go about building products and obviously having technology like Amazon can really facilitate things. The amount of money that some companies are raising is just like “Oh my god, they are raising hundreds of millions of dollars”. This is just insane. When ten, fifteen years ago like people would raise 5 – 10 million dollars. The way that you market to people is completely changed as well so I think everyone is going through a challenge in the technology industry in terms of just trying to keep up with the rapid adoption.

Martin: Tom, what made you go to the cloud anyway? Was it more of a vision that you though “Well long terms will want to have this” or that you got some customer feedback where said “Guys I want you on premise, don’t you offer something on the cloud” or was it more of another thought?

Tom: You know like 5-6 years ago when we made that decision actually most of our customers were not saying that but we wanted to go where the puck would be. There is a saying “skate to where the puck is going to be” as opposed to where it is right now. So we made that decision to do that and we are glad we did it. It is definitely a different model from our premise.

So today we sell mobile software and we sell both cloud services. The one thing that works to our advantage which is that the software and the cloud capabilities they don’t overlap. Oftentimes a lot of companies when they start off as a software company and they move to the cloud they are basically re-implementing the same technology in the cloud. And so now they are in a situation where the sales people say,“I used to make more money selling this stuff but I am going to make less money” or “This product is not yet fully functional” whatever.

The cool thing is that when we went out and built identity services in the cloud it was completely complimentary to what we currently we did provide from an on premises perspective. So the cloud products were net additive to what we were doing as well. But it was clearly at the time it was like we felt that more and more of peoples’ infrastructure will move to the cloud but the key philosophy we have which differentiates ourselves from a lot of startups that a lot of startups are saying “Well the world is going to be 100 percent cloud” and that is not going to be the case. If you sell to enterprises that even I 5 – 10 years it still is going to be a hybrid, they are still going to have some on premises systems, they are going to have some cloud systems. So from our perspective if you want to provide a comprehensive security solution you need to address both data centered cloud and mobile as well with integrated solution. That is what we are trying to do.

Martin: Great.

ADVICE TO ENTREPRENEURS FROM TOM KEMP

Martin: Tom, you have started several companies what kind of big learnings that you have generated over the years which can help people starting a company?

Tom: Well I think the key thing is that definitely pick large markets to go after because if you don’t 100 percent execute then you still have enough room to be successful as well. I think often times people are like get obsessed with an idea and it turns out that the market is not that big. If you want to start a business from a lifestyle perspective, like if you want to open up a restaurant that serves a certain type of food and then yes, maybe you can make a nice living just with that one restaurant. But if your goal is to create a technology business that you can sell product and technology throughout the world it’s preferable to build something that you think that could have a large total address full market.

The second thing is that the importance of the team. Getting really good people. That is one thing I have learned that sometimes throughout my career that when you have made bad hiring decisions it may take you six months to a year to realize that this person is not the right person. Then it may take another 3 to six months to get this person out and you have lost a year as well. One thing I always say is don’t cut corners when it comes to hiring. That is so critical. And get people that have also from a hiring perspective, get people that are in sync with you form a cultural perspective as well. That you can communicate very clearly as opposed to potentially having like a third party kind of active mediators as well. At the end of the day you don’t necessarily have to have beers with your co-workers because other people may have lives and have other things. But you want to be in this situation when you are in a room with those people you need to feel comfortable, you need to respect them in terms of, not only as individuals but also respect their intellect as well. And you don’t want to be sitting and thinking to yourself “Well, that person is a Bozo”. You want to know Bozo zone. Bozo is a clown. But you want people that you respect.

It is about the market, it is about the team and then just the passion, desire just to be out there and execute and knock down some walls. So these are the important things. But again the key lessons I have learned throughout the years is be in a good market and sometimes you don’t know it is a good market but you have to have that fundamental gut feeling that you do and especially in the early days you have got to get a good team.

Martin: Thank you so much for your time, Tom.

Tom: Thank you very much!

Martin: It was a pleasure, thank you for sharing your knowledge. So if you have a business and you think you might have a threat of being attacked by fraudsters, check out Centrify. Thank you!

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