A Hot Knife Through Butter

This is the most recent email in a series sharing my “founder’s view” of building Santa Barbara Management. You can catch up on my prior emails about our firm here. This month’s piece is not about building SBM, but about lessons learned over the seven years I spent helping to build Tegus - lessons that have strongly influenced my approach to building Santa Barbara Management.

I spent seven years involved with Tegus: two years as a highly involved investor and board member, and five years where I took on a full time executive role as President and later as CFO.

It was an incredible journey. When I met Tom and Mike Elnick in 2017, they had insatiable hunger, a lot of energy, a willingness to outwork anyone, a high level of intensity, and an obsession with a problem space. Over the next seven years I had a front row seat as their partner in turning that obsession and hunger into a product that defined its category and transformed investment research - and that taught us a ton of lessons along the way.

Today I want to share some of those lessons. But first, some context.

The Opportunity

Expert research has always been a critical part of fundamental, bottoms-up, company-focused investing. Whether you’re a public market analyst trying to understand a software company’s competitive position or a private equity investor diligencing an acquisition target, talking to people who actually know the business is irreplaceable.

But it has always been really hard to do.

How do you find the actual decision makers for a specific purchase decision within a huge company? How do you find customers of a product that only has a few hundred customers in the world? How do you find former executives who left a company and might have perspective on its culture, its leadership, and its trajectory? Then how do you convince those folks to talk to investors, all while ensuring that everything is highly compliant?

In the 1990s, the first major expert networks launched to solve these problems. Gerson Lehrman Group (GLG) came to dominate the category in the early days. GLG built a true proprietary “network” of experts. They had to. This was an era before LinkedIn, when you couldn’t just go online and find anyone in any industry who advertised to the world their title, their role, their company, and often their job responsibilities.

GLG grew into a large, profitable business, ultimately doing north of half a billion dollars in revenue. It also spawned dozens of competitors: AlphaSights, Guidepoint, Ridgetop Research, and many others.

The model worked, but it had real limitations. Expert calls were expensive: $1,200 to $1,500 per hour. They also required substantial lead time. You would kick off a project and only get to speak to an expert two to three weeks later, if at all. Many times, the experts weren’t perfect for the project at hand.

For investors on tight timelines trying to consume as much information as possible, this was far from ideal.

By 2015, the world was changing. LinkedIn had built a social network predicated on people’s careers, making it easier than ever to find experts. At the same time, new technologies like Twilio made telephone conferencing and call recording easier than ever. These changes created the opportunity for Tom and Mike Elnick.

The Tegus Story

Tom and Mike Elnick’s backgrounds perfectly positioned them to build a competitor to the traditional expert networks.

After college, Tom had joined Overbrook Management, a New York City based hedge fund. In this role, Tom was a huge consumer of expert calls (so much so that he was gently chided by his boss for spending so much on calls) but he saw their impact in his research process. Mike went to work as an early employee at AlphaSights, one of the high-growth expert networks chasing GLG. He was one of the first couple dozen employees and rose to a managerial role as the company scaled rapidly. He saw what an incredible business expert networks were - but also the flaws of the model.

Tom and Mike left their respective roles in 2015 to build a better primary research provider. They didn’t have everything figured out, but they had a few key insights.

They realized that many investors were looking at the same companies at the same time, each paying $1,200 to $1,500 for a call. The expert networks were happy to oblige, and experts were happy to do multiple calls and collect their fee. But there were huge inefficiencies baked into this model.

They knew that tools like LinkedIn Sales Navigator, ZoomInfo, and SalesLoft had eroded the power of GLG’s proprietary network.

They also had the seed of an idea: What if investors were willing to share their calls? Could you build a data product where previously there had been purely a services business?

In time, this became Tegus. Expert calls at a substantially lower price than the incumbents, but in exchange, the client had to share a transcript of their call with other subscribers to the Tegus database.

Once we began building a database of transcripts, the content value proposition was extremely compelling: answers to questions in seconds... and not having to wait hours to get a call scheduled.

The idea caught on. First with calls focused on enterprise software and tech in the public markets. Then expanding to other categories and industries. Then into the private markets. Eventually Tegus grew to serve clients beyond investment professionals. Over time, Tegus also expanded its data sets beyond one-on-one expert calls to include SEC filings, earnings transcripts, financial models, and much more.

By 2024, the business was well north of $100 million in ARR and meaningfully cash flow positive. In June of that year, Tegus was acquired by AlphaSense in a $930 million deal, bringing together Tegus’ industry-leading expert research with AlphaSense’s best-in-class equity research product to create a leading AI-powered research terminal.

The Founders

Tegus was a business that required scrappiness, grit, and a tenacity to grind through unglamorous work. Unlike many software and data companies, Tegus had a massive professional services component. For most of the company’s history, we had far more people working in client service and operations than in the rest of the company combined, including sales, customer success, engineering, and product. This wasn’t a business we could build by crafting a beautiful application and letting the dollars roll in. It required rolling up our sleeves and building a complex, human-powered machine to collect tons of qualitative data.

Tom and Mike were well suited to this type of business. They had been high school and college runners, consistently logging dozens of miles per week, building resilience and mental toughness along the way. Their summer jobs required embracing monotony and hard work. One particularly memorable (and difficult!) summer, they cleaned school buses and scraped gum off seats for eight-plus hours a day. In a business where the majority of team members were doing 100+ cold calls per day to recruit experts, Tom and Mike’s attitude was perfect.

The first couple of years after founding the company were brutal. Tegus struggled to find product-market fit. They had paying customers but didn’t have enough revenues to pay themselves. At the same time, Tom and Mike saw their friends succeed in their careers - getting promoted, buying homes - yet felt that they had essentially nothing to show for their own efforts. When they went home for the holidays in 2016, their mom asked how the business was going. After listening to their long response, she replied, “you know, there is a fine line between entrepreneurship and unemployment.”

That remark lit a fire under Tom and Mike. They returned to work after the holidays and redoubled their efforts. They narrowed their focus to public market investors and spoke to 400+ investors in three months. From those conversations, they built a beta that turned into real paying customers.

In the spring of 2017, as part of that intensive investor outreach, Tom and Mike were cold calling any investment firm they could find - and they happened to cold call the Investment Group of Santa Barbara (IGSB) and reached my partner, Alex Wolf. Fundamental, bottoms-up research is at the core of everything that Reece and Tim have taught their acolytes at IGSB for the last six decades - the mandate was always to “know our companies intimately” - and doing expert calls was a big part of the research progress.

Tom and Mike happened to call at an opportune time. Alex was deeply frustrated with GLG, which was struggling to find him any former executives from a Canadian software company that he was researching. He asked Tom and Mike to take a crack at it, and within a few days they had sourced the former COO, a former board member, and a former sales leader - something GLG had struggled to do for months. Alex was immediately sold on Tom and Mike, and said he would sign up for anything that they built.

A few weeks later, Alex called Tom and Mike and asked if they were interested in raising any money. Initially, they declined - but a few weeks later, they circled back, and IGSB led an initial, small round into Tegus, investing $1.5 million at a $4.5 million post-money valuation. Alex joined the company’s board, and a few months later as part of a follow-on financing, I joined him. Eighteen months later, Tom and Mike asked me to join the company full time as President, which I did.

When I joined the company full time we had about 20 employees and ~$2m in ARR. Over the course of the next few years, we grew remarkably fast. In 2019, we grew from $1m in ARR to $5m in ARR. In 2020, we grew to ~$13m in ARR. By the end of 2021, we had surpassed $45m in ARR, and by the end of 2022 we were at ~$100m in ARR.

Throughout this period of dramatic growth, we stayed focused on what we called “controlling our own destiny”: ensuring that we were at or above cash flow breakeven, so that we didn’t need to rely on the benevolence of financial markets to fund our operations.

This enabled us to act with confidence. We executed a stock buyback from early angel investors when we were at around $20m in ARR. We acquired BamSEC (a platform for SEC filings and earnings call transcripts) and Canalyst (a provider of financial models) on relatively attractive terms.

With the benefit of hindsight, I sometimes wonder if we should have been more aggressive, more willing to invest heavily and burn capital along the way. But ultimately, that didn’t suit the personalities of Tom, Mike, me, or the rest of our stakeholders around the table. It’s one of many lessons I took away from Tegus: the strategy needs to match management’s ability to authentically execute it.

Many of the lessons I learned came from Tom and Mike. Others from the exceptional members of our team. Still others from the mistakes we made along the way. I’ve tried to capture some of them below. I hope a few are useful to you too.

Sell, Design, Build

Too many companies do extensive customer discovery and tons of interviews, but when push comes to shove, the revenues don’t show up. Prospective customers are friendly and nobody wants to be confrontational or negative - so they’ll happily talk about their problems and their theoretical willingness to pay. Then founders go heads down, design a product, iterate, and take it to market - only to realize those same prospects aren’t actually willing to sign on the dotted line and sheepishly make up excuses for why they don’t want to pay for whatever you’ve built.

After 18 months of struggling to get traction, Tom and Mike flipped the script. They decided to start selling before they built anything. They’d ask funds to sign purchase orders and commit real money as part of their discovery conversations. That’s how they could discern “nice to have” from “need to have.” This approach scaled to every new offering. When Tegus started covering private companies, they followed the money and only built where clients were willing to pay.

The “Hot Knife Through Butter” Test

After you narrow your focus and “sell, design, and build,” how do you know when you’ve nailed product-market fit? It’s when selling feels like a hot knife through butter. When the knife is cold, you can still cut, but you have to saw, press, and fight the resistance. It feels forced. When you’ve perfected the solution, customers have the “ah ha” moment immediately, and they clamor to buy.

At Tegus, this happened in the fall of 2019. We hit a tipping point with the breadth and depth of transcripts on tech companies, and sales to tech-focused investors just clicked. What had felt like a slog (dozens of discovery calls and demos leading to a few trials and a small subset of conversions) transformed into something very different. Most discovery calls were leading to free two-week trials. More than half of those trials led to signed order forms. That’s when we decided to move beyond “founder sales” and to begin hiring AEs.

As we expanded to new products and end markets, our measure of product-market fit in each category became this “hot knife through butter” test. The corollary: do not add sales resources until you hit this bar. Focus on product-market fit first. Otherwise, adding salespeople just leads to false positives from early revenue but ultimately results in inefficient CAC, high churn, and all around disappointment.

The Power of High Expectations: Metrics are Magnetic

Mark Leonard, the founder of Constellation Software shared a story with me and Mike Elnick. In the early days of building Constellation, he pushed his team: why can’t you improve margins by 300 basis points this year? The team complained like crazy. No way, too hard. So Mark gave in and set the target at 150 basis points of improvement.

Come end of year, the team hit the goal by just a smidge.

The same thing happened the next year. Mark wanted another 300 basis points of margin improvement. The team again said impossible, especially after how hard the prior year was. Mark relented and set the target at 200 basis points.

The end of year comes around, and again the team just barely beats the goal.

The next year, Mark said screw it. We’re growing margins by 500 basis points this year. Bonuses are tied to that figure. The team complained like crazy, but you can guess what happened.

It turns out that margins, and most metrics that teams set, are magnetic.

The boardroom at Tegus was fun because everyone pushed everyone else to do better. Tom, Mike, and I would push the team to raise quotas and be more ambitious. Our board (Alex Wolf, Henry Schuck, and Patrick O’Shaughnessy) would push us to increase our own targets and expand what we thought was possible. At the beginning of each year, our plans seemed impossible. Yet we would get them done. Why can’t we do this faster? Why can’t we ship this today rather than tomorrow? This week instead of next month? There was zero tolerance for resting on laurels. Everything was about what we were going to do next.

These high expectations were self-reinforcing. When we accomplished goals that had seemed impossible in January, it changed our sense of what was achievable. Each year, the targets got more ambitious, and each year, the team found ways to hit them.

High expectations attracted a certain type of person and repelled others, and in our hiring process we were explicit about being a high expectations, performance oriented culture - and clear about what that meant. People who wanted to be pushed, who thrived under pressure and who got energy from being surrounded by others operating at a high level felt right at home. Over time, high performance became the baseline. No one had to explain why we were working hard or moving fast. For hard-charging people who wanted to win, this made coming to work incredibly fun.

Culture Must be Taught

“Culture” is a squishy term. It often feels overused, misinterpreted, and watered down. Most people think of ping-pong tables and free food when it comes to culture. But the reality is culture is not what you say. It’s what you do.

Our favorite definition of culture came from Ben Horowitz (the venture capitalist co-founder of Andreessen Horowitz), who in his book What You Do is Who You Are notes that “culture is how a company makes decisions.” To take it a step further - culture is how decisions are made when founders and leaders are not involved. A strong culture makes decisions faster and easier, removes ambiguity, and unites a team in their approach.

Culture is the culmination of lots of little actions: Do you get back to the customer quickly before you head out to lunch or do you get to it later? Do you fly first class or coach? Do you ship fast or need to polish code up first?

We quickly realized that culture needed to be taught and it needed to be reinforced. Tom and Mike began teaching every single new employee about our values. We reinforced them every Monday morning in a company wide email, where the values were woven into commentary about the business and anecdotes about our customers and our product. We talked about what mattered at every all hands. Our values (“Learn by Doing,” “Dazzle the Customer,” “Leave a Legacy”) became part of our everyday nomenclature.

The impact was that anyone on our team could tell you about what mattered to Tom and Mike: an intense customer focus, a long term orientation, a performance oriented team, and yes, intense frugality.

Hire for Potential

Conventional wisdom says to hire the person who has been where you want to be in 18 - 24 months. They will see around corners, know the trip wires, and generally will be able to figure things out a whole lot faster than those who haven’t been there and done that.

Yet we found that if we took a shot on people who hadn’t been where we wanted to be, we were more successful - what we called High Potential, Low Experience (HPLE) hires. People who wanted to “get on the right elevator” rather than maximize near-term pay. This wasn’t about finding cheap labor, but rather about building a culture of people who had something to prove and wanted to grow alongside the company.

We found immense success with this strategy. We selected for HPLEs that were hard working, smart, insanely curious, low ego, and action-oriented. We were able to attract an incredible pool of talent by offering opportunities (in terms of scope and responsibility) that they could not get anywhere else. Those team members then felt like they had to work harder and do better to do the job.

Adrianna Silver joined Tegus when we had about 25 people. She had minimal prior managerial experience and initially led a team of five. Six years later, she runs a 300+ person global operations team. Ryan Fennerty joined to lead our calls business, and within a few months, after multiple promotions, became our CRO. There are many similar examples.

To be clear, this approach had its drawbacks. Our leaders were almost always learning on the job, and we suffered some avoidable challenges as a result. At times, the company’s growth outpaced what even high-potential team members could keep up with, regardless of how good they might become given more time. We just didn’t have enough runway given how fast we were scaling. But the many HPLEs that were able to find their footing and scale with us became our most important and impactful leaders.

Follow the Genius

Tegus’ mission was to unlock the power of expert knowledge - and Tom and Mike lived this in their daily lives, and embedded it deeply in the company’s culture. Tom recently shared: “To this day, I am 100% shocked at the number of people who try to figure things out on their own without asking for help or seeking advice.”

Want to know how to craft a good performance management system? How to hire A+ employees? What does A+ even mean? How to run a great executive offsite? How to negotiate an enterprise contract? The best way to find out is to ask those who have done it before. Whenever we faced a new challenge, the approach was always the same: “who has faced this challenge before and executed best in overcoming it? Let’s go talk to them!”

This was never just a single conversation with one advisor. In every instance, it was at least half a dozen people who were ahead of us on the business building journey and who could share their lessons learned. We’d then take what we liked the most out of those conversations and adapt them to make them our own. It was never just copy and paste - it was learn and adapt.

One additional lesson here: it’s not that we had an amazing network that we tapped into for each of these questions (which is the number one pushback I get when asking others why they don’t reach out to those who have successfully built before them). We’d do the “dirty” work of cold emailing and LinkedIn messaging people we respected in order to learn. We got in front of a huge number of entrepreneurs and senior leaders this way - and it paid massive dividends.

Just Try It

In the early days of Facebook, Mark Zuckerberg famously pushed his team to “move fast and break things.” At Tegus, our approach was “just try it.” It’s so easy to get stuck at various points in a process - perfecting the idea, running the analysis, sifting through the feedback.

When Tom and Mike first conceived of the Tegus model, it was incredibly easy to come up with all of the reasons why it would never work and to argue “there’s no way users will share their calls.” Only after saying, “okay, let’s just test it out” was there any real learning.

Most of what we learned at Tegus came through these little tests. We’d come up with an idea, debate it for a couple of hours and very quickly move on to “let’s test this out and come back in two weeks.” Within a couple of weeks we’d gather a huge amount of real world understanding. The data from these tests settle the debate, and the entire organization moves a whole lot faster without bureaucracy (we’d approve tests for just about anything in a heartbeat) or hurt feelings (because decisions were based on data). We even tried things that would seem crazy to outsiders (example: let’s turn off all paid advertising for 2 weeks to measure the impact on inbound lead flow) because we thought what we could learn from the controlled experiments was more valuable than any damage we could do.

Ignore Sunk Costs

As Tom and Mike started selling the concept of Tegus, they had hundreds of conversations leading to 40 paying customers across a huge range of client archetypes: public market investors, private equity investors, venture capital firms, consultancies, corporates, and wealth managers. Clients were based in countries spanning Asia, Europe, and the US. Sector focus varied across technology, healthcare, industrials, financials.

At that point in time the company was based in San Francisco, and had hired ten employees. But things just weren’t clicking. The early culture didn’t match their values. Tom and Mike were struggling to hire the type of young, hungry sales talent that they knew that they needed lots of to build the operations side of the business. Serving such a wide range of clients was proving difficult. And they were serving lots of clients based in NYC and working market hours, but they were three time zones away.

Recognizing these challenges, Tom and Mike took a series of bold, almost crazy actions: first, they “fired” 30 of the first 40 customers, wrote checks to refund payments, and shrunk the client base - focusing exclusively on US focused public market tech investors. Then they let all employees go, moved the company to Chicago, and started over with a hard cultural and team reset. They essentially refounded the business to try to get it right on a second try.

It’s hard to overstate how hard this set of decisions was to make, especially when you’ve already invested time, money, and emotional energy into something. But the willingness to learn, ignore sunk costs, and adapt set the foundation for building a great organization.

Scrappiness Preserves Optionality

Tegus was essentially cash flow positive from the start. Part of that was having a product clients wanted to pay for. The other part was being relentless about costs.

We stayed with friends or shared hotel rooms when we traveled. We negotiated everything: AWS bills, Stripe fees, real estate leases, data vendor agreements, even office snacks. Nearly everything can be negotiated, but it takes legwork. Even if you know what vendor you want, get quotes from two competitors and push them against one another. Buy software on the last day of the quarter when salespeople are desperate to hit quota. When you lease office space through a broker, tell them you want 33% of their commission rebated to you. They’ll do it. Get your attorneys to give you an emerging company rate, and make them continue to earn your business as you scale. Trade non-monetary things for savings: offer to be a reference, let vendors use your logo, invite them to events where they can meet your clients.

You do want good long-term partners, so there is such a thing as going too far, and there is a difference between being frugal and being cheap. The Tegus culture was frugal. We were happy to pay top dollar for impactful investments and we did not cut corners on team or compliance or product. But if given an option to save money - taking an UberX instead of a Black Car, staying at a three star hotel rather than a five star hotel, or flying economy versus first class - those were the easy trade-offs that did not impact customers. With a team of more than 600 people, these small decisions really added up. We ran zero-based budgeting as a startup - and because we were radically honest about frugality as one of our core values, the team bought in.

We also found that we operated at our best when we had a lean and hungry team rather than a bloated team. We weren’t immune to the over-hiring in the technology industry in 2020-2022, and we had to make the difficult decision to reduce the size of our team. While we didn’t enjoy having to make that decision, we found on the other side that we operated with greater speed, purpose, and clarity as a leaner team. Not only did our team’s efficiency increase, but our team’s overall output increased with less bloat.

Many peers growing fast hired quickly, got fancy offices, threw big events at conferences, and flew salespeople everywhere. That’s fine, but it uses cash. Burning cash means raising cash. Raising cash means selling equity and building a preference stack. Scrappiness maintained optionality and let us control our destiny.

This became particularly important in 2022 when technology valuations fell off a cliff, and markets froze up. Many companies had to make dramatic, draconian changes to their operations. While our growth rate declined, which wasn’t fun, we never faced anything near existential risk.

The Power of Packaging

The hardest lesson from Tegus was about competition, pricing, and bundling.

For the first few years, we had virtually no competition. We were the only game in town for expert transcripts. Sales were brisk, public markets were ripping, and PE and venture firms were raising record funds. Life was good.

In time, Tegus’ success attracted competition. Legacy expert networks launched transcript libraries, Bloomberg and other terminals began licensing transcript content, and AlphaSense, a fast-growing company that had built its name aggregating broker research and financial filings, acquired our early competitor Mosaic. Suddenly we had a real fight on our hands.

We had a challenging problem: we were a pure play at a premium price. Yes, we had SEC filings through BamSec and financial models through Canalyst, but we were far from a complete package. Our competitors used that against us. They began bundling expert calls at minimal additional cost into their existing product. Shishir Mehrotra has written about the power of bundling, and we felt it firsthand. It is an almost impossible dynamic to compete against when you are the standalone, higher-priced option.

Ego is the enemy

In time, it became clear that AlphaSense and Tegus were a better-together story. Complementary data sets, complementary teams, and a client base with shockingly little overlap, particularly given AlphaSense’s strength in corporate and IR and Tegus’ strength in private markets.

For many founders, selling to a direct competitor never happens. There are so many better-together stories that die because ego gets in the way.

That was never true of Tom, Mike, and Jack, the founder of AlphaSense. From day one, they all saw the logic and worked hard to make a transformational deal happen. They continue to work together building AlphaSense today.

One of Tegus’ core values was Tegus > Team > Self. Tom and Mike embody that every day. It’s exactly what you want in a leader.

Enjoy the journey!

A lesson that perhaps can only be learned in hindsight: enjoy the journey.

Speed was at the core of how we operated at Tegus. You are always racing against the clock: racing to find product-market fit, racing to hit sales goals, racing to build the team. The question is always “what’s next.”

A venture-backed startup can feel very outcome-oriented. As the outcomes come and go, the feeling of accomplishment is fleeting. The true reward for great work is more work.

But that work is the fun part. The impact you can have on customers. The impact you can have on the careers of your team. The ability to pull various levers and see what happens: trying different performance management systems, experimenting with pricing, architecting GTM in different ways, testing new marketing channels.

In real time, it’s easy to dread these things or get caught up in the exhaustion of meeting customers, interviewing, conducting performance reviews, and running the business. One can let that exhaustion overshadow what should be the most fun and rewarding part of the job.

Mike Elnick recently shared an analogy to raising little kids: chasing them around the house can be exhausting, but we all know it’s fleeting. You have to live in the moment and cherish every day, even when they’re making a mess in the kitchen or throwing a tantrum. The same is true for building a company. The chaos is part and parcel of the experience. And it won’t last forever.

Parting Thoughts

Looking back on those seven years, a few things stand out.

Building something that matters requires patience and intensity in equal measure. Tom and Mike brought both. They were willing to go slow to go fast, to narrow focus when every instinct says to expand, to ignore sunk costs and refound the business when it wasn’t working.

They built something that felt like a hot knife through butter. Not on the first try, but eventually. And I’ll forever be grateful that they welcomed me on that journey as their partner.

Special thanks to Tom & Mike Elnick for reviewing this post and for sharing some of their lessons learned.

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