Interview, Fireside Chat
Zachary Bookman: Why Valuations and Fundraising are BS | E1235
- OpenGov's exit to Cox Enterprises closed in February 2024 for $1.8 billion, valuing the company at approximately $1.8 billion with revenues near $150 million.
- The transaction structure involved a "new partner" model where existing investors were cashed out, but founder Zach Perut retained a majority stake and a significant portion of his equity, aligning his fortunes with the company's long-term growth for at least five years.
- Perut defined product-market fit not by user growth but as the ability to make a customer successful "repeatably and profitably," a lesson learned only after a difficult pivot from a low-price, high-volume model to a multi-product enterprise suite.
- Early growth was stunted by a "wilderness period" where the company sold low-ASP ($5,000 software, $10,000 hardware) items to governments; it took five years to transition to a high-ASP model targeting seven-figure deals.
- OpenGov targets high gross retention (mid-to-high 90s, nearing 99%), describing the business as an annuity rather than a high-churn enterprise SaaS model, which prioritizes durability over the explosive growth rates typical of consumer tech.
- The company's mission to serve state and local governments was initially a fundraising disadvantage, as investors historically avoided GovTech due to long sales cycles and perceived market constraints, despite the sector's high stickiness.
- Perut admits to overspending significantly in 2019, nearly losing the company, and notes that the "easy" early rounds were a curse that led to poor capital discipline before the company achieved cash flow and EBITDA positivity.
- Mark Andreessen served on the board as a strict disciplinarian who enforced governance over mentorship, famously ending a two-hour board meeting early to teach Perut that "real companies measure revenue, not logos."
- The company utilizes M&A as a primary engine for innovation rather than just growth, acquiring niche vertical players to capture subject matter expertise and accelerate product development by years.
- OpenGov's strategy involves aggressively shrinking the Total Addressable Market (TAM) focus to a specific Ideal Customer Profile (ICP) in US state and local government to maximize ROI on sales and marketing time.
- Perut sold 49% of his vested equity in the deal, generating liquidity for his family but retaining enough personal wealth to remain "maniacally focused" on the business without the distraction of financial insecurity.
- Cox Enterprises, the buyer, is a family-owned telecom and automotive conglomerate that values long-term durability and understands regulated industries, unlike typical private equity or venture funds seeking quick exits.
- Perut expresses deep skepticism regarding the current venture capital asset class, citing 15-20 year fund timelines, poor IRRs due to "marking up" private assets, and a lack of actual distributions to Limited Partners (LPs).
- He identifies fraud in the startup ecosystem as significantly higher than public perception, noting that entrepreneurs sometimes falsify metrics in the intense pursuit of success.
- OpenGov is transitioning back to an in-office model after being "dead wrong" about remote work, citing disconnection and loss of collaboration as primary drivers for the shift, despite the cultural friction it caused.
- The company plans to continue acquiring other businesses to build a massive, multi-product "verticalized Workday," rather than pursuing an IPO in the near term to avoid quarterly market pressures.
- Perut believes that "unmade decisions" and a difficult childhood involving an alcoholic parent and divorce drove his entrepreneurial drive, seeking to create a sense of safety and worth that was missing in his youth.
- He advises that while brand-name investors (like Sequoia) offer networking benefits, their incentives are often misaligned with founders' needs, as their business model relies on a power law where only 0.01% of companies generate outsized returns.
- Perut advocates for bootstrapping or raising less capital to avoid conflicts of interest and maintain control, noting that the "holy grail" of venture capital is finding a company that doesn't need to be saved or sold to a giant immediately.
- OpenGov's growth trajectory has been steady rather than exponential, with revenue growing from $200,000 to $150 million over a decade, proving that "boring" B2B software can compound effectively over long horizons.
- The company has successfully broadened its suite from transparency reporting to permitting, licensing, budgeting, and procurement, creating a "multi-product stack" that increases Average Selling Price (ASP) and reduces churn.
- Perut suggests that the hardest work for a CEO is maintaining morale and energy during "flat" growth periods and personal tragedies, such as the death of his mother, while simultaneously steering the company through survival mode.
- The deal with Cox included a management incentive plan and a put-right structure allowing employees to sell equity in tranches over years three, four, and five, providing liquidity without a full exit.
- Perut notes that the "VC game" is becoming increasingly difficult, with high valuations in seed rounds (e.g., XAI at $18B, OpenAI at $150B) creating a disconnect where few companies can realistically achieve the 50x-100x returns required to justify fund math.
- He emphasizes that "snap judgments" and gut instincts are valuable decision-making tools, often overriding over-analytical approaches, particularly when assessing people or market shifts.
- The podcast concludes with Perut rejecting the notion of early retirement, stating that the stimulation and relevance of continuous work provide a higher quality of life than disengaging from the business.