Back in 2007, Jon saw desktop software everywhere… at restaurants, doctors’ offices, the gym…and he realized it was all gonna move to the web. “So what’s the opportunity here?” On this episode of Crafted, we’ll hear how Jon and his co-founder homed in on property management as their target market and validated their solution with just four slides. We’ll also learn why rapid iteration is absolutely essential, why the secret to great talent management lies in lessons from basketball and fishing, and why Jon thinks artificial intelligence is the wave that AppFolio should ride for the next two decades.

Here’s Jon Walker on Crafted, Artium’s new podcast.

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Jon Walker: We'd walk into a restaurant, we'd walk into a doctor's office, we'd walk into a real estate office, and they were all using desktop software or client-server based software. And so we said, "This is all going to move. This is a huge trend that's going to happen over the next whatever, 20, 30 years." So what's the opportunity there?

Dan Blumberg: That's Jon Walker, CTO and co-founder of AppFolio, a software as a service provider to property managers. It's a publicly traded multi-billion dollar company, and it was born nearly 20 years ago when Jon and his co-founder, Klaus Schauser identified a trend, the move from desktop to web-based software that was worth betting on. On this episode of Crafted, we'll hear how Jon and Klaus homed in on property management as their target market.

Jon Walker: We looked at automotive repair, we looked at health and wellness and yoga studios.

Dan Blumberg: How they validated their solution before they'd even built it.

Jon Walker: With four slides, it changed our kind of everything we did.

Dan Blumberg: Why rapid iteration is so essential.

Jon Walker: You actually are getting more at bats. You're getting more chances to learn and more chances to score.

Dan Blumberg: And while building a company during a down market, as he did during the great recession, can really work to your advantage. Welcome to Crafted, a show about great products and the people who make them. I'm your host, Dan Blumberg. I'm a product and engagement leader at Artium where my colleagues and I help companies build fantastic software and recruit dynamic teams.

Can you take us back to when you were looking around for a company to found?

Jon Walker: My co-founder and I, we had been friends for a long time and we had started two different companies in the same town, and mine was moderately successful. His was really successful. It was a company that did ended up doing GoTo Meeting, GoToMyPC, which some people have heard of, kind of the precursors for Zoom. And I think we both had seen a trend, which I don't think was particularly brilliant back then, but it was just that. All this software is desktop and client-server based, and it's hard to even comprehend that now, but you still see it if you walk... If you're observant and you walk into businesses, you'll see people that are still using laptop-based software or desktop-based software and it's not really cloud-based at all.

Dan Blumberg: I mean, Adobe just got their hat handed to them with Figma. So this is still very much a relevant thing, right?

Jon Walker: Yes. And so we had seen that and we said, "Gosh, this is 2006." We said, "All this software's got to move to the web and mobile. It's just going to happen." And we also had the experience of walking into all these businesses. We'd walk into a restaurant, we'd walk into a doctor's office, we'd walk into a real estate office, and they were all using software. They all had very specific workflows they were trying to accomplish, and they were all using desktop software or client-server based software. And so we said, "Gosh, we've got to move. This is all going to move. This is a huge trend that's going to happen over the next whatever, 20, 30 years." So what's the opportunity there?

And we both kind of had this independent idea independently and we met up for lunch and said, "Wow, we have this similar idea." And we said, "Let's found a company and let's find some industries where they're really ready to go to the web and cloud and mobile software." And we spent about six months before we started the company really doing what we call market validations, sometimes it's called customer development. But really trying to understand where is there a need, where do people have pain, where are they willing to pay for it? And we looked at probably five or six different vertical markets, different types of businesses. We looked at automotive repair, we looked at health and wellness and yoga studios. We ended up picking property management as an area where people were ready to move. And we've kind of expanded into more than just property management. It's more real estate in general now, but that's where we started and that's still kind of our core product and why the company's been really successful.

Dan Blumberg: Can you share more about what you were doing during those six months of validation and why you ruled out yoga studios in favor of property management?

Jon Walker: We knew that to really find a problem, you have to go out and talk to people. And so one of the areas we're really interested in was automotive repair. And the reason why is I had a friend who worked for a really large automotive software company called Mitchell, and it was all desktop-based and he was telling me all the problems they had and he said, "You know what? Every auto repair place has to use software. The cars are really complex. If you're fixing one little thing, you need 13 parts and they need to look up online." They all use software, but they're using desktop software. And I was like, "Wow, this is a problem you solve easily on the internet." And so we said, "Let's start there. This is one that's interesting."

And so my co-founder and I, we literally walked around and we probably walked into 40 different automotive repair shops. When we talked to them, we'd say, "What do you do for software?" And they'd say, "Oh, I've got a computer. It's back in the office there." And they'd say, "But let me tell you about this hydraulic lift over here. It's really cool. I spent $3,000 on it." We found that they just weren't that interested in technology solving their problems. So literally that was kind of a perfect example of someone has a problem, they don't really know they have a problem or maybe they do, but they're not actively trying to solve it, and they don't even want to spend money to solve it. They'd rather spend money on a new set of wrenches or a hydraulic lift. And so is it a bad market? Not necessarily. It wasn't a good market at the time we were looking at it.

Dan Blumberg: One of the other things Jon and Klaus looked for was a system with multiple players who all needed to interact with each other.

Jon Walker: Like an automotive repair, you have customers and you have part suppliers. Everywhere where there's an interaction with the system, there's the ability to extract some value from that. And that was something that we found in property management just in spades, and it's something that we've really leveraged as part of our success there. And so we have kind of a core product and then we have what we call value-added services, which are all these services that where we basically address some third party interacting with the system, provide value enough to where we can charge for it in extraction value.

Dan Blumberg: Once they had an idea of what they would build, they tried to sell it. Note they didn't build it first. They just went straight to selling.

Jon Walker: I'm a big huge believer in this. Really the idea is you want to go to customers and you want to pitch a product and you want to see if they'll buy it. And then what you're trying to find is these early evangelist customers who are going to help you determine what you should build in the product. So we did that early on with AppFolio. We were literally pitching a slide deck. It wasn't any software. We didn't really have anything. We had four slides. We said, "Here's the problems you have." Then we'd say, "Here's our solution." And we were realistic about it. We're not going to do everything they do right off the bat, but we're going to do this set. And then to really be realistic, we'd say, "Here's what we're not going to do." And then the fourth slide was, would you buy it? And we really were, it was really like, would you sign a contract today and pay money for it? And here's what we're going to charge.

Interestingly enough, when we first started that pitching that slide deck, this is what we're not going to do. One of the things that was on there was accounting. And it was kind of like my co-founder and I were like, "Well, accounting's hard and there's QuickBooks and maybe they can integrate it with it. And why would people need accounting as part of this real estate software and property management software? I don't think they'll need it." And we would literally go, "Slide number one, here's your problems." "Oh my gosh, you really get us." "Slide number two, here's what we're going to build." "Wow, that would be amazing. You mean I could access it anywhere and it would solve all these problems? Wow, that's unbelievable. I can't wait for you to do this." "Slide number three, here's what we're not going to do. Accounting." Fall off the cliff. No interest.

We could have built all the software and found the same thing out after a year and a half of building software out or a year, whatever it was. But with four slides, we found out immediately accounting has to be part of it. With four slides, it changed our not only our success trajectory, but everything we did.

Dan Blumberg: Tell me, what did the first version of AppFolio look like?

Jon Walker: The very first version, all we were doing was importing from old systems and doing reporting. I mean, that was not really the first, first version, but we'd import people's data and they'd run reporting, accounting reports, a general ledger report. And there was a lot of data in there. For a desktop, it was a tremendous amount of data. And so we'd talked to one customer very early on and we'd say, "Well, how do you run this particular report?" And they said, "Oh, you know what I do is I click the button to run the report in my desktop software. I go to lunch and then I come back and it's usually still running. So I go grab a cup of coffee and maybe chat with someone for a while, and then I come back and then hopefully the report's done by then."

And so literally all we did was import the data on the powerful web servers, use the leverage that you get from web servers. We hadn't even really done a lot of optimization stuff, but they'd click it and a minute later, the report would come back. It was a life-changing experience for them. They felt like they had just seen the sun for the first time, and it wasn't anything super brilliant we were doing. It was basically we were taking advantage of this big trend that was happening.

Dan Blumberg: Describe AppFolio today. What does it do? Describe who uses it and why they're using it.

Jon Walker: We have a couple different products, but the primary product is property management software. A property manager, there's third party property managers and owner-operators, and it's basically people who own properties or manage properties for other people. Maybe you have a vacation home and you don't want to deal with a tenant calling you in the middle of the night because the plumbing's broken or whatever. You sign up a property manager and for a fee, they collect the rent, they deal with the tenants, they do move-ins and move-outs. They do all that stuff. And our software basically does all of that. It does everything from online advertising to all the backend accounting. It does move-ins and move-outs. It can help people sign leases. For example, we have a leasing solution called Lisa that uses AI to answer a lot of the common questions that people would ask about a property they're interested in. It does everything you'd actually need to do as a property manager. And so we have some pretty sophisticated parts of the system at this point.

Dan Blumberg: Jon has been building software since the earliest days of the internet. He started with data migration and building networking protocols to get audio and video onto the web. I wouldn't have expected that your experience creating compression for audio and video would also be relevant to property records, but we're going back to the 15, 16 years ago. So there really were true constraints of what you could send through the pipes, right?

Jon Walker: Yes, for sure. The idea behind AppFolio was there was all these people using old desktop and client-server based software to run their real estate and property management businesses and all that stuff should be on the web. But the problem was there was massive amounts of data that they had that was important to their business. And so how do you get it there? And so the area, we literally started with the product as how do we migrate data from these old systems onto the new one? And the first version of our product that was very useful to people, all it did was generate reports based on the data they already had that we had migrated in.

Dan Blumberg: Another key to AppFolio success is rapid iteration, which Jon says gives you an unfair advantage. To illustrate, he uses the baseball analogy that Lean Startup author Eric Ries first described.

Jon Walker: What he says is this idea of iteration and really getting feedback quickly, if it was in any other venue, we would recognize it as ridiculously unfair. What if at the end of a baseball game they played nine innings and the score is three to three or three to two or whatever, and you said, "Oh, you know what? We're going to give this team another five innings of at bats and they get a score, but the other team doesn't." And people would go, "Wait, I don't understand. That's not fair. We can't do that." That's essentially what rapid iterations are. If you can iterate and get feedback faster than other competitors or other people, you actually are getting more at bats. You're getting more chances to learn and more chances to score.

And so we really have throughout our life at AppFolio tried to drive down the iteration cycle time. We basically were looking for how can we match this feedback loop to how we do this market validation and customer development. And over time we've driven that down and driven that down and driven that down, and we've invested a lot in it. And so we have a huge automated testing framework that's on its fifth or sixth generation. The smallest part of that is an engineer builds something, it gets put in production, a customer sees it, and they can get feedback on whether they're using it or works or whatever. And we invest a lot in doing that.

Dan Blumberg: I'd love to go one level deeper of how do you motivate teams to move more quickly, and what are the specific things that you measure? You mentioned I think just now time to production is one thing that you're looking at.

Jon Walker: Yeah. So a lot of times there's a real name for that, which is cycle time. So we measure cycle time or we have measured cycle time at various times. We've measured just new hire engineer to code in production. I used to always say if you've been at AppFolio a week and a customer hasn't seen anything you've done, there's something wrong. That's how our engineers were used to working. It's like in the first week, you're probably putting something out there that someone's using.

I'll tell you the motivation behind it and how we motivate teams. I've had this experience and I think lots of software engineers have had this experience of really working your butt off to build something, spending a long time doing it maybe months, maybe even a year or two, and putting it out there and no one uses it. And it's literally the most demotivating experience you can have. And so if you can combine this idea of market validation where you're asking the customers, "Will you pay for this?" And this idea of rapid iteration and feedback, it's really motivating to teams. And it's not that hard to get across. You just say, "Hey, if we ever spend any time doing something that's not useful to people, it's going to be a very short amount of time and we're going to move on to something else." And we're going to measure that all the time.

Dan Blumberg: Can you share more about how you're leveraging AI? You mentioned when you founded AppFolio, you were looking at trends that there's going to be a big tailwind, and AI is certainly one of those trends.

Jon Walker: There's these trends that come along and they feel like big trends, but not all of them necessarily apply to your business and not all of them are really going to move the needle. And I think one way that companies can become unsuccessful is jumping on every trend. I interact with our board sometimes, and a few years ago, the board kept asking me over and over, "When are we going to do crypto? When are we going to do blockchain? This really important trend, why are we not jumping on it?" And I think we made a pretty rational assessment there that blockchain's relevant to our industry obviously. There's contracts and that's a part of what we do, but it wasn't really a needle moving this is really going to change this industry today or in the near term.

But I actually think AI for us is one of those trends. And AppFolio was founded in 2006, and so for the first 16, 17 years now, web and mobile made us super relevant, that huge trend. And I think AI is going to be the trend that makes us relevant for the next 17, 18 years. And so four or five years ago, we weren't doing much of it, and my co-founder and I both spent a bunch of time building up that capability within AppFolio. The real challenge is figuring out how can you apply AI because it can only do so many things. There's limitations to what it can do to problems that people are willing to accept AI as a solution to and where you can provide really a lot of value with that solution.

And so that was what we started with. We had kind of a whole hypothesis that we used to validate the AI efforts we were doing, and our goal was to build a few successful services. One of them is the leasing operator. We have a leasing solution called Lisa, and we had three or four of those with the idea that once we had built some successful services and extracted a platform from that, we could spread it throughout the teams. And we're kind of at that phase now where we're applying AI almost on every team.

Dan Blumberg: What are other areas where AI is in use in AppFolio? And why do you say, you said it's going to be the trend that you're going to be for the next two decades.

Jon Walker: Well, I mean, we're doing business software and I just think there's a ton of rote tasks in business software that don't add a lot of value. And so if you look at areas that we're using it, one area is really around, you could generalize it as chat, but any conversation where there's a lot of conversation that's just rote and there's not a lot of value add. We're using a lot of AI in accounting. There's a lot of rote tasks in accounting. Does that mean you won't need accountants? No. It means that accountants will be able to think at a higher level and really be more finance people. And how can we apply our finances in a way that effectively grow the company? We have a lot of those areas across the business.

Dan Blumberg: Tell me more about how you find and keep great talent.

Jon Walker: I'm not really a fisherman, but there's different ways that people fish. And one of the ways is what they call bottom trawling. They throw out a big net and they're trying to catch tuna or whatever. They throw out a big net and they catch all kinds of fish, everything. And then they sort out the tuna and they pull it out of the net. And then there's another way to fish that's kind of more of a differentiated way where you, you're a spear fisherman and you go, "I want to get that one fish." And you go after that fish and you use a spear to get it. And so you're getting one by one.

I'm a big believer that if you want to get really great talent, you have to be doing spearfishing. And what that means is you have to be somehow differentiating how you're catching fish. And we do that in a lot of different ways, but we look for places where we can do something that's different than everyone else is doing. Anyone who wants to hire great talent has to figure out how can they spearfish, how can they go out and catch the right people that they want the best people instead of throwing out a huge net, putting stuff on Indeed and whatever else, and trying to pick out some good ones. I just don't think that's very effective to get great talent. You might get good talent, but the real successful companies get great versus good talent. Every company has a different value proposition that attracts certain people. So how do you express that value proposition that's really attractive to the type of really great people in the area that you're trying to hire? The really tricky thing is as you grow a company to do the spearfishing at scale. That's the hard thing.

Dan Blumberg: So there's a recurring theme on Crafted that I'm calling the blog post prompt. It's a bit of an odd setup for a question, but it seems to work. So are you game?

Jon Walker: Sure.

Dan Blumberg: So the way it works is I give you the title of a blog post that you have written, and then I'd like you to write it in real time. So this is the blog post that you have written. Everything I know about running a software engineering organization, I learned on the basketball court.

Jon Walker: Oh, that's funny because that is very apropos. I was very fortunate to play college basketball under a really, really successful coach. He's one of the winningest coaches at my level of all time.

Dan Blumberg: That's former Westmont coach Chet Kammerer. He's now an advisor to the Miami Heat.

Jon Walker: And all of the management skills such as they are that I have come from basketball. There's a few lessons that I saw from him. One of them was really pretty interesting to me is there's kind of this notion that everyone should be treated fairly or equally. It's almost a societal notion. And I noticed that a really good coach doesn't do that at all. He treated everyone in different ways that were kind of the most effective for getting the best out of them. And so if there was someone that didn't respond to criticism very well, he was all about encouragement. If there was someone that really needed criticism, he would criticize them. And I think that's super counterintuitive. We have this notion of everyone should be treated the same and people just don't react the same.

The last one that I kind of bring up all the time is in basketball, they have this term of being in the doghouse. And it's kind of where someone has decided you're not going to contribute, and so they don't give you a lot of attention. And my coach was so good at never putting anyone in the doghouse. I remember my freshman year, I literally probably played 10 minutes the entire year. But the way that he made me feel, I felt like maybe if I have a couple good practices, I might be starting next week. And I felt like that the whole season, and it was very, very motivating. There was zero chance I was going to play, but I never thought that. I thought that, "Wow, I might get a shot if I just do well for a few practices here." And I think that's one more lesson that comes up is it's really good to look at the outcome versus how people get there.

Dan Blumberg: You built AppFolio. You mentioned before the iPhone was a thing. You've been through a bunch of cycles of boom and bust, and a lot of tech firms are dealing with layoffs and high interest rates in a difficult capital environment right now. And I'm just wondering if you have any advice for the builders out there who may be new to a cycle like the one that we're having right now.

Jon Walker: People say that one of the best times to start a company is in a recession. And I think the reason for that is you have to be really focused. You have to be doing something that people are going to value and want. There's not a whole bunch of just money that people are throwing at people out there where it doesn't matter really if the idea is very good or if the execution's very good. And so my advice is don't view this as a time to batten down the hatches. View it as a time of opportunity and be very focused and diligent. And I think you could be really successful in a time like this. And we actually went through 2008, which was a big downturn.

Dan Blumberg: Real estate bust.

Jon Walker: Yeah, yeah. We were fortunate in that we raised money right before that downturn. I think part of the reason we're successful is that we kind of were able to ride through that storm, and that was right after we started the company. We literally started, I think we incorporated as a C corporation in 2007. I guess that's encouragement too.

Dan Blumberg: That's a good case study right there. Yeah.

Jon Walker: Yeah.

Dan Blumberg: For sure.

Jon Walker: You can build a multi-billion dollar public company in one of these downturns with a little bit of luck.

Dan Blumberg: And rapid iteration-

Jon Walker: Yes.

Dan Blumberg: ... and a basketball-infused culture. Thank you so much, Jon. This has been really fascinating stuff.

Jon Walker: Yeah, I appreciate it.

Dan Blumberg: That's Jon Walker, co-founder and CTO of AppFolio. And this is Crafted from Artium. If you're looking to build something new to run lean experiments that validate demand for your product, to improve your software team's iteration and cycle time, or if there's any other way that we at Artium can help, let's talk. At Artium, we build incredible products, recruit high performing teams, and help you achieve the culture of craft you need to build great software long after we're gone. We artisans love partnering with creative people to build their visions of the future. If you've got an opportunity you'd like to discuss or just want to learn more about us, check us out at thisisartium.com or drop us a line at hello@thisisartium.com. If you'd like today's episode and hey, you've made it this far, please subscribe and spread the word because Crafted listeners are amazed listeners.