Executive Cases: Interviews with Senior Executives of Early-Stage Companies:
OpenDNS – USA
Prepared by George Foster
OpenDNS is the world’s leading provider of cloud-delivered Web security services, enabling the world to connect to the Internet with confidence on any device, anywhere, anytime. OpenDNS protects thousands of organizations and their users from malicious Web threats and provides them control over how users navigate the Internet, while dramatically increasing the network’s overall performance and reliability. The company’s cloud-delivered Umbrella Security service protects enterprise users from malware, botnets and phishing, regardless of location or device. At the heart of all OpenDNS services is the OpenDNS Global Network, the world’s largest Internet-wide security network, securing 50 million active users daily through 19 data centres worldwide. OpenDNS was founded by David Ulevitch in 2005, launched consumer services in mid-2006 and launched business services in late 2009.
*DNS Queries per day is a proxy for free users.
*Number of paying business customers is a proxy for growth in the security business.
Q1: What was the source of the initial idea, and how did that idea evolve into a viable, growing company? How did it change over time?
Ulevitch: “OpenDNS was founded as a response to my first business, EveryDNS.Net, which became a worldwide leader in providing domain name services. We recognized that as we became more and more sophisticated at detecting and blocking malicious customers from using our services, they would simply hop to another, less-well-maintained service. In effect, policing our virtual neighbourhood simply moved the bad actors somewhere else. OpenDNS was created to address that by moving the security and protection to the perimeter and edges of the Internet, where companies connect to the Internet. Our architecture turned out to be fortuitous, because the rise of nomadic workers, smartphones, and cloud computing have all made the edge of the network the most vital and important to protect.
“I met our original investor, Halsey Minor, in 2005, and he had wanted to create a company focused on the domain name system due to its broad reach across the Internet, but a consumer DNS service had never been contemplated. We decided to go for it, and with US$ 2.5 million from Minor, I started OpenDNS with Minor’s help. It scaled quickly as we offered better Internet content filtering so parents could protect their kids, the best phishing protection available and numerous other free consumer services that made the Internet safer, faster and smarter. But businesses took notice, too, and were using it in droves. By 2009, thousands of businesses, and tens of thousands of schools were using our free service as a business-critical security solution. We launched OpenDNS Enterprise in November 2009 and that has been the core focus of our business ever since. Our business has changed many times over the years, but we have always been rooted in the foundation of wanting to deliver a better Internet experience, and to delight our customers with exceptional service.”
Q2: What were the major growth accelerators for your company in the early years of high growth?
Denton: “The initial consumer business took off because we were unique – no one had considered the need to use anything other than their ISP provider for connection to the Internet. By offering a free, faster and more reliable connection and then adding content filtering, consumers quickly saw the value and switched. Due to the cloud-based service, the switching cost was almost zero as it only required the typing in of a different DNS address into the router/modem.”
Ulevitch: “The rise of malicious attacks on businesses, the rise of mobile devices, and the shift to cloud computing all have created massive transformations in how IT organizations protect their users, resources and data. We have grabbed on to that trend and it has been a rocket ship ever since.”
Q3: What role did key aspects of the entrepreneurial ecosystem surrounding your company play in the growth of your company?
Ulevitch: “Starting our company in Silicon Valley was pivotal to our early success. Not only are we surrounded by an entire support structure to create companies through venture capital, but also by an ecosystem that encourages risk and tolerates failure. Moreover, there is an entire industry of service providers (lawyers, accountants, etc.) who are familiar with start-up challenges, legal requirements and more, to help facilitate the structure that start-ups need to be successful, helping us focus on our core business.”
Denton: “The proximity of the venture capitalists makes it easy to get visibility, network and set up face-to-face meetings when in a capital-raising mode. Our location has made it much more efficient when raising money and has allowed us to close on rounds of funding without spending a large amount of time. We were also able to tap into the local technology-savvy consumers who were not scared to change their DNS settings and try a new technology service.”
Q4: What key aspects of the entrepreneurial ecosystem surrounding your company that were absent (or existed only in a weak form) created the greatest challenges for growing your company? Please describe and discuss how you met/were impacted by these gaps in the ecosystem and their resultant challenges.
Ulevitch: “Frankly, starting a company in Silicon Valley, despite its many benefits, is one of the most expensive places to try and start a business. And it is not just expensive due to cost, but due to the distraction cost and the challenges in hiring great people and finding office space. It is in high demand for a reason; starting elsewhere would have provided many of these other benefits at a much lower friction point.”
Denton: “The cost of hiring is high resulting from the large full-time recruiting staff we have to employ, even for a relatively small company. We have to compete not only with the big tech companies like Google and Microsoft, but also with hot start-ups like Square and Box, so the effort required to build a world-class organization is large and occupies a huge amount of everyone’s time.”
Q5: Large companies can play an important role in the scaling up early-stage companies with high growth aspirations. These roles can include being customers, suppliers, marketing partners, joint venture partners, and so on. Describe the key areas where interaction with larger companies helped promote your growth path. Describe the challenges and potential problems that larger companies may have played in limiting the growth path of your company.
Ulevitch: “We have rarely found large companies to be helpful to our growth, but they often get in the way. Large companies can distract you with competitive offerings that are fast followers backed by more financial resources, and they can distract you with legal challenges in the form of patent assertions and lawsuits.”
Denton: “Getting one or two large customers with brand names early did provide credibility when selling other companies, but these agreements came with a good deal of pain during the sales and contract negotiation process. Large companies expect small companies like us to roll over and accept whatever they ask for. When you don’t, they are surprised and have to realize that their brand name only has so much value. Recognizing up front the trade-off between agreeing to unreasonable warranties, indemnification and other risk allocation terms to get a deal versus explaining to a due diligence lawyer from an acquiring company years after the deal why they should assume the risk is very important.”
Q6: Your revenue growth to date has been focused predominantly on the domestic market. What are the main reasons for this focus?
Ulevitch: “The shifts to mobility, nomadic workers and cloud computing have created a new set of security challenges that the main incumbent security vendors have failed to address. Our growth is due to our products better meeting the needs created by these shifts.”
Denton: “These changing market dynamics have created plenty of domestic opportunity. Focusing too early on international business will distract us from executing in North America. We need to create a well-oiled machine in North America first and then turn our attention to the rest of the world. However, we do have a lot of international customers given our global network presence and the reach of the Internet; we just do not focus on marketing and selling to that audience at this point in time.”
Q7: What would you view as the greatest challenges in growing a sizable revenue presence in markets beyond your own domestic country or region? In deciding when and where to seek growth in international markets, what characteristics of a country’s ecosystem would be most important in attracting you to invest significant resources in that non-domestic country or region?
Ulevitch: “Right now, as a SaaS-based business, our customer acquisition cost and cost of sales are key metrics that determine our ability to scale and grow quickly. Frankly, the more we spend, the faster we grow. And thus, access to cost-efficient capital is critical to maintaining our ability to rapidly expand, including internationally.”
Denton: “We are likely to look at Northern Europe as our first step, due to the lack of a language barrier with our product and communication between people. The legal system will not be completely foreign, although the tax structure and social welfare systems will take some understanding to ensure we operate within the confines of acceptable practices. There is a high cost associated with setting up an international location and this cost, time and effort cannot be underestimated. We have already established a Canadian subsidiary. We have an office in Vancouver which we are expanding, and currently have around 20 employees located there and increasing all the time. While this is probably the easiest first international step, the cost and time were significant and all the visa issues to allow people to travel freely between offices cannot be overlooked.”
Q8: Building a company that aims to have sustainable high growth inevitably will have both high moments and dark (low) moments. Briefly describe one high moment and one dark (low) moment in your entrepreneurial journey.
Ulevitch: “The high moments are fortunately quite frequent, and they come in the daily wins of a big customer, a new product launch, receiving an e-mail from a happy customer and working with great people. The lows come when we hit unexpected speed bumps in the form of a distracting lawsuit, an unexpected resignation, a lost customer or an inability to execute (and, related, an inability to understand why we are not executing).”
Denton: “Unlike the old enterprise software model where one big perpetual license deal at the end of the quarter can make or break a company, the SaaS model makes it much harder to have a huge quarter and overachieve; but, in contrast, the underachievement is also moderated, as the renewals business delivers a large and relatively stable revenue stream.”