David Sacks on angel investing: Distribution is key

The clever ideas have a new twist on distribution

At this week's first-ever Startup Sessions, co-produced by Vator and Google Ventures, Vator founder and CEO Bambi Francisco sat down with David Sacks, founder and CEO of Yammer, which was bought by Microsoft for $1.2 billion in cash this past June. The event, held at Google Ventures Startup Lab, was sold out two days prior to the event.

Francisco asked how his pitch for Yammer evolved from when he first pitched VCs four years ago to when he raised $85 million for the company in February. Sacks said that surprisingly the pitch has stayed pretty consistent. 

And, part of any pitch has to include how distribution will be solved. Sacks said a core conviction he and his PayPal colleagues had since their PayPal days was and is: Distribution is everything. 

"That needs to be kind of baked into your product from the beginning, it's not something you tack on later."

So when he was pitching Yammer, Sacks said he was concerned about creating a big sales force, something that he considered too hard for a startup to do. Plus, he said, he didn’t know anything about it.

The product still needed to be distributed, so Sacks had to figure out how to build a self-distributing product. He did this by modeling Yammer after Facebook's initial e-mail confirmation requirement. 

Since Facebook wasn't going after enterprises, Yammer basically "copied" Facebook and went after them, he said.

This was important, he says, because it blacklisted consumer e-mail services, such as Hotmail or Yahoomail, since workers needed a company e-mail address to join. They would then invite co-workers. The most forward thinking person in company would make it go viral, Sacks said, and they then would pull in other employees.

But he wrongly, assumed, that by self distributing, it would also lead the companies to self sell. 

"We learned that virality gets into door, but doesn’t close the deal," said Sacks, so Yammer had to take a hybrid approach, using an inside salesforce to close deals with companies.

Sacks investment thesis

The really valuable companies are those that are able to achieve a dominant defensible position. To be dominant, you have to get to high market share, and that goes back to distribution technique.

Sacks' distribution philosophy is also part of his investment thesis.

Startups need a scable way to get distribution, but the problem is that new techniques get copied. For example, advertising was highly 3ffective at one point, but people have now been so bombared over the years that it doesn't work as well. Same thing with the Facebook platform. Zynga managed to take advantage of the Facebook feed and get traction. But now that's tough to do. SEO (search engine optimization) was also a way to distribute, but now everyone is trying to optimize it. Even Yammer stole its distribution technique from Facebook, something that would be harder today because other companies have used the same technique.

"The smart plays have all been kind of arbed to death and so you have to innovate."

So what are some of the newer distribution models that work?

Highly transactional viratlity works well now, Sacks says. 

"It's not about blasting your address book, it's about getting users to engage in specific social behavior."

For example, Sacks recently invested in a company called GrabCAD, which moves CAD files to cloud. He sees an opporunity there, since there is not an easy way for engineers to share CAD files between companies, so the transaction is unique to that product.

Note: Yammer is hosting its first-ever "Hacktoberfest" -- a 27-hour competition challenging developers to build innovative applications on the Yammer Platform.  The event will be held at Yammer headquarters in San Francisco on Sunday, Oct. 28. Judges include execs from Yammer and Microsoft as well as Mamoon Hamid, general partner, Social + Capital Partnership, and Ravi Belani, managing director of Alchemist Accelerator. Prizes include up to $5,000 in cash and a spot in Alchemist Accelerator (an accelerator exclusively for enterprise startups) – which is pretty sweet given there are only 12 spots.