Todd McKinnon - Creating and Defining a New Market Category - [Founder’s Field Guide, EP.7]

This Issue's Overview

Guest: Todd McKinnon, Founder and CEO of Okta.

Main Theme: A review of how, from its founding in 2009 to 2020, the company identified and defined the new market of enterprise identity management, the painful early trial and error after leaving Salesforce, and the role shifts and innovation framework following company growth and IPO.

Core Judgment: Todd McKinnon believes that to define a market and become the "default mode" solution, one must endure the pain of an unprepared early market and ultimately establish a position through product and timing (the market shifting from "unknown" to "essential need").

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Theme 1: Identifying New Market Gaps — Early Insights from "Monitoring" to "Identity Management"

Todd McKinnon judged that, amid the trend of comprehensive cloud migration in 2008–2009, enterprise identity management would become an independent and necessary new market, rather than just an ancillary function of existing platforms.

• Historical Context and Mechanism: At the time, Todd was working at Salesforce and observed that cloud adoption had already expanded from business applications (Salesforce) to collaboration (Google Apps) and infrastructure (AWS launched in 2006). He anticipated that the next opportunity lay in "inevitably new tools." His initial idea was "SaaSure"—a system that monitors the operational status of other cloud applications. However, through interviews with potential customers (IT professionals), he discovered that the market pain point was not "monitoring" but "inability to log in": when applications migrated from on-premises data centers to the cloud, the existing Windows Active Directory integration became invalid, and users needed a unified login portal.
• Data Chain and Timing: Todd noted that in the PPT he initially showed his wife, he predicted that "in the most optimistic scenario, Okta's market cap after IPO would be 1–1.5 billion USD." The actual market cap later far exceeded that figure, reflecting a massive underestimation of the market size in the early days. He vividly described that "the market had to catch up": "We were selling cloud security, the second half of cloud adoption. In 2011, our quarterly target was $250,000 in new bookings, but we only achieved $100,000 (about 40%); the market wasn't ready yet."
• Reader's Note: Todd uses "the market had to catch up" to explain the early sales difficulties—this is both a factual statement and a narrative from the holder's perspective, emphasizing the product's forward-looking nature rather than a market mismatch.

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Theme 2: Becoming a "Default Mode" Solution – By Defining the Market

Todd McKinnon believes that Okta's key to becoming the "default mode" solution in identity management lies not in having an absolute product lead, but in being the first to define the new category of "independent identity platform" and emerging at the moment the market needed it most.

• Competitive landscape and mechanism: The biggest pushback at the time was "no independent company has ever succeeded in this space." Todd points out that it was exactly by starting from scratch and proving that "a truly easy-to-use platform can integrate identities across all applications" that Okta broke that perception. He describes the formation of the "default mode": it required an early "market-defining" process—surviving and growing to make the market realize that "having an independent identity management company" is viable.
• Historical analogy: Todd uses the name "Okta" itself (meaning "cloud cover measurement," with 8 Okta being fully cloudy) as an example: "No one remembers what it originally meant now. It's just a company that does identity management. We defined that category."
• Deduction and validation: He argues that after becoming the default mode, growth showed signs of "network effects": as more customers used the platform, more applications needed to be integrated, and the platform's value grew exponentially over time. Validation signal: Customers began proactively expanding Okta from "employee login" use cases to "customer login" scenarios (e.g., Allergan providing login for doctors), which directly gave birth to Okta's second-largest product line—Customer Identity, which currently accounts for "approximately 24%" of revenue.

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Theme 3: Key Challenges After IPO — Continuous Innovation and Role Switching

Todd McKinnon emphasized that after the IPO (2017), the company's biggest challenge was not external competition, but how to maintain a "hunger" and establish an internal innovation framework to avoid becoming a "one-trick pony" (a single-product company).

• Historical Context and Structure: He divided the company into three "chapters":

1. From Founding to 2011: The market was not yet mature; the core task was to "convince people to believe." His biggest fear at the time was "wasting his life."

2. 2014 to IPO: In 2014, Microsoft announced a competing product ("Okta killer"). Todd viewed it as a "milestone"—"the world's largest software company wants to enter this market, which means it must be a good market." The core of this stage was to "broaden the product portfolio" and prove the company was not a "one-trick pony."

3. From IPO to Present: Focus on "long-term platform building." Todd's energy shifted from "solving specific problems" to "keeping the team hungry, not complacent due to stock price and praise."

• Innovation Framework: To address the common problem of "innovation difficulty in large companies," Okta established a dedicated process: "Off-budget allocation" — allocating budget independently of the traditional annual budget cycle, specifically to fund projects that have "low initial success rates but huge impact once successful." The framework includes: proposing ideas, allocating ongoing budgets, regular reviews, doubling down on effective projects, and quickly shutting down ineffective ones. The author acknowledges: Todd stated bluntly, "The traditional budget process does not reward projects that start small and grow big, because they don't 'move the needle' early on, so they need institutional protection."
• Role Switching: Early on (Chapter 1), Todd had to be hands-on in everything; later, his core work was to "set a clear vision" and "be honest about uncertainty." He shared an important lesson: "Early on, I mistakenly thought the CEO had to know everything. Later, I learned to say, 'I don't know the answer, here is my view, let's figure it out together' — and that turned out to be more effective."

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Mentioned Positions

Position	Guest Sentiment (Bullish / Risk Warning / Neutral)	Key Data
Okta	Bullish (founder's perspective, qualitative analysis)	7,000+ enterprise customers; customer identity revenue share ~24%; gross margin 75%+; Q3 2011 target $250k ARR, actual $100k, then Q4 target $320k, actual nearly $400k
Salesforce	Neutral (background reference)	Todd previously managed engineering; early customer base ~10,000, each customer ~10 users
Microsoft	Risk Warning (competition)	Announced competitive product in 2014 ("Okta killer"); at the same time, by promoting Office 365 and Azure, indirectly drove cloud adoption
Amazon Web Services (AWS)	Neutral (infrastructure)	Launched in 2006; serves as Okta's primary infrastructure provider (cost source)
Allergan	Case study (customer)	Expanded Okta use case from employee login to "doctor customer login"
Box, Workday, Google	Neutral (application ecosystem)	Examples of cloud applications that triggered early identity needs

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Judgments Worth Remembering

1. Todd McKinnon on "defining the market": "To become the default mode, you must first define that category—and the cost of defining the category is that for a very long time, you are the only one who believes in it." Backing: Okta spent 5 years (2009-2014) proving that an independent identity platform that had never existed before was viable, during which the market remained indifferent.

2. Todd McKinnon on "early sales strategy mistakes": "One of the biggest mistakes we made was trying to sell small amounts to 10-person small companies—but the pain point of identity management is linear, while the number of users is exponential. We should have sold to the largest customers from the start." Backing: Sales were dismal in 2011, and it was later discovered that the pain points of large companies (e.g., Allergan) were far greater than those of small companies, because the more users, the bigger the problem.

3. Todd McKinnon on "maintaining innovation in large companies": "Traditional budgeting processes naturally reward projects with high success rates, but innovation projects have low success rates. You must set up a dedicated pool of funds 'outside the budget line' to invest in things where 'it's okay if they fail, but if they succeed, they change the game.'" Backing: Okta established a process independent of the annual budget cycle for this purpose.

4. Todd McKinnon on "CEO candor": "Early on I thought a CEO had to pretend to know everything. Later I learned to say 'I don't have the answer, here's what we think, let's figure it out together'—this builds more trust than pretending to be smart." Backing: He shared that this was a key personal growth moment, especially in 2011 when sales fell short of targets.

5. Todd McKinnon on "pricing for large customers": "The most common mistake small companies make is being too happy to be 'invited' by a large customer and not daring to charge enough. Be confident: the value you provide is real, make sure you are reasonably compensated for it." Backing: He advises not to "fake it" (pretend to be perfect), but to be "honest" (acknowledge limitations but emphasize flexibility).

6. Todd McKinnon on "selective abandonment": "Sometimes customers can't execute (they don't cooperate), it's not their fault, but we must acknowledge it—and then stop investing resources. Early on it's hard to do this because every customer is valuable." Backing: He reminds not to "blame the customer," but to identify signs of "bad customers" when allocating resources.