To Really Scale, You Need $1M on Your Balance Sheet for Every $2M in ARR


This post is curated by Keith Teare. It was written by Jason Lemkin. The original is [linked here]

“My CEO Told Me To Stop Selling So Much”

Recently, I met with a sales leader I’ve known for years, and he told me The Most Curious Story.  His SaaS CEO asked him to stop selling so much.

Slow down.  You are doing too good of a job, the CEO said.  We can’t afford it.

motorpowerNow … how could this be?  Well, it does make sense, when you understand the scenario, a combination of two things:

First, this SaaS company has a mix of freemium customers and sales-driven customers (with higher ACV, lower churn).  The freemium ones really have no acquisition costs at this point (the main lead source is mini-brand).  The sales-driven customers are very profitable on a CAC basis, since their lead cost is $0, and so the ‘Magic Number’ or CAC/CLTV ratio is very favorable.  But … still … the sales team’s commissions consume cash in the very, very short term.

and

Second, this SaaS company had a very tight balance sheet.  About $1m in cash for a $5m ARR business.

And here, they just couldn’t safely invest.  Because every $10k, $20k, $50k customer they closed … Hooray!! … but … that sales commission, just put them into Danger mode on the balance sheet.  Even though in 4 months, they’d be in the Black here … for years to come …

A crying shame, really.

We get that, but what’s the “right” answer?  Many of us can’t raise a $50m Series Seed, and many others of us don’t want to get diluted to 0.0001% ownership.

I think in SaaS, and I learned this from an insight from Josh Stein at DFJ (first VC in Box, SugarCRM, etc.) at a board we’re on together, what I’m going to inelegantly call “The 0.5x Balance Sheet Rule.”

Which is, once you are post-Initial Scale, past $3m-$4m in ARR or so, even if you have 80%+ gross margins and a very efficient sales and marketing engine … once your cash dips below 50% of your ARR … you’ll have stress, and importantly — underinvest.  And this is the worst time to underinvest.  Because when you get here, every great hire starts to be accretive (more on that here) — as measured in 12 months or less.  But you need enough capital to make these hires and let them pay for themselves in 12 months or less.

I made this mistake myself, with hindsight.  I was proud we got cash-flow positive at $4m ARR or so, and shortly thereafter, I figured out the “everyone great is accretive thing” and told all the managers to hire whomever they want.  But … I should have gone further.  At ~$7m in ARR I think we had about $1.5m in cash on the balance sheet, plus some venture debt.  If I’d had $5m+ on the balance sheet, I would have made far, far more investments.  At $7m in ARR and cash-flow positive, I didn’t have to worry about failing.  But I still had to worry about the costs of making data-driven, well-thought-through, but unproven mistakes.

Now I’ve watched this in action again and again, and Josh Stein is 100% spot-on.  Having 100% of your ARR on the balance sheet is a luxury.  Do that if you can.  But at least, once you’re at Initial Scale, make sure you maintain 50% of your ARR on the balance sheet.  It will destress all your investments.  Let you really go for it.  And let you be OK if the amazing team you’ve hired makes a few more mistakes on the way to $100m in ARR.

As CEO/founder, once you’re at even just $3m or so in ARR, and have a few good VPs on the team … really your #1 job is to empower them.  They need enough of a safety net, and enough runway, to do amazing things.

“Slow down, you’re selling too much.”  It can happen, at least, as a construct, to anyone.  Don’t let it be you.

It’s also a good rule for folks able to bootstrap to scale that are past the point they really need capital per se.  If you’ve gotten to say $4m ARR, and are growing quickly … why raise any VC money at all?  You don’t need to.  Atlassian waited.  Qualtrics waited.  It’s just, you probably don’t have $2m of cash on the balance sheet at $4m in ARR if you’ve bootstrapped.  So I’d raise at least enough to fund the growth and hires your team deserves.  Or at least, give it a lot of serious thought.

(note: an updated SaaStr Classic post)

 

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Why Now Is the Biggest Change in SaaS Sales in 15+ Years


This post is by Jason Lemkin from SaaStr

2021 will be the year SaaS sales evolves the most since the Appexchange ecosystem started to take off ~15 years ago, which spawned the entire notion of a true sales app stack.

What’s the change?

The permanent move to distributed sales teams.

Almost every SaaS VP of Sales and CRO I’ve talked to in the past few months isn’t going back.  At first, they missed the “pit”, the floors of sales reps in San Francisco, in Atlanta, in Phoenix, in Portland, etc.

Yes, every SaaS treat had multiple offices at scale — but still, offices.  Training was done, in part, by osmosis.  New AEs would learn from others next to them.  SDRs would be paired to an AE that sat in the next desk.  VPs would discuss deals with Directors and AES in the hallways.

That all went away when Covid hit.

What’s changed is VPs of Sales and salesteam adapted.  They finally got better at training and on boarding.  They do daily stands ups, not just weekly reviews.  They do daily check-ins.  Tools like Gong, Chorus and others have become mandatory.

And now that finally, sales teams have been forced to be more organized in their training and management because of Covid … no one wants to go back.

VPs of Sales cherish the flexibility of being able to recruit anywhere — and most don’t want to go back to floors of reps in San Francisco.  Of having better track of their team.  Of having more up-to-date analytics, because everyone has to report much more often.  Of folks on the team that are struggling not being able to hide, or be lost.

I wouldn’t have fully predicted it.  It was clear most engineering teams would prefer to stay distributed.  It was a change, but not as big of a one as for sales.

But sales isn’t going back to office-only, or even office-first.  That means:

  • First, you can work for a great SaaS company from anywhere now, especially if you have at least 1-2 years of experience already.
  • Second, the mediocre now fail faster.  With better data, communication, and pipeline visibility, it becomes clearly faster who isn’t going to make it.
  • Third, you have to be even more “tech savvy” now to be a successful AE.  You have to self-manage more in this distributed world, so AEs that struggle to do their own demos, or to manage Salesforce, or log data … will struggle.  They’ll get left behind.
  • Fourth, compensation will become less flat, and there will be some comp deflation for mediocre reps.  Top reps are working faster and better and making more now, but mediocre reps aren’t being kept on “just because we need more folks in SF.”  This doesn’t lead to lower OTEs, but it will lead to less realized comp for the mediocre.  Because now, you’re competing with everyone.  Not just the same small pool in SF, or whatever geography.

It’s a new world in sales.  VPs don’t want to go back to the office rows and rows of desks.  They’ve gotten good at managing distributed teams.

This will benefit the more agile and self-sufficient reps, and the ones that understand the product and technology better.  And probably be tougher on all the rest.

 

The post Why Now Is the Biggest Change in SaaS Sales in 15+ Years appeared first on SaaStr.

The Top 10 SaaStr Videos of the Week: Twilio, Wrike, Checkout.com, G2, Hubspot, Intercom and More


This post is by Jason Lemkin from SaaStr

Want to catch up on the top SaaStr sessions?

Here are the most popular videos of the week:

#1. “How To Collaborate, Manage & Work With Developers With Jeff Lawson, CEO Twilio”.  Our deep-dive with Jeff Lawson on how to really manage a great dev team has been very popular, both on YouTube but also on our podcast:

#2. “5 Dos and Dont’s Lessons From My Bootstrapping Days” Wrike Founder and CEO Andrew Filev.  Wrike was just acquired by Citrix for $2B+.  Take a look back at how Andrew really got it all going:

#3. “Secrets to Turbo Charging Sales in 2021 with Keyfactor, Checkout.com Contentstack & Insight Partners”.  A great kick-off to the year on how to sell faster and better.

#4. “From Burn-Out to $100M in ARR with Jason Cohen of WP Engine”.  A SaaStr Classic on how to really cope with the long road to scale.

#5. “The “Dos & Don’ts” of Building Winning SaaS Companies with G2 Crowd”.  A deep dive from CEO Goddard Abel on what the numbers show about building a top SaaS company.

#6. “Dharmesh Shah of HubSpot – From Day 0 to IPO: What Went to Plan, What Most Certainly Didn’t”.  A SaaStr Classic on the early days at $1B+ ARR Hubspot.

#7. “Lessons from Gorgias: How to Close your First 1000 Customers Based Solely on Data”.  Gorgias is now the fastest-growing contact center solution, with 5,000+ SMB customers.  Take a look back at how they got their first 1,000 SMB customers here.

#8. “Mastering the Art and Science of Product-Led Growth with Gainsight”.  A brand new session from SaaStr Scale, on what “Product-Led Growth” really means.

#9. “A Founder’s Guide to Getting More Leads — ASAP with Emergence Capital, Zoom and Gusto”.  A SaaStr classic from top marketing leaders at Zoom and Gusto on the #1 question all founders have — How Do I Get More Leads??! 🙂

#10. “Growing & Scaling SaaS Businesses from $1M to $500M in ARR with Intercom CEO Karen Peacock”.  An all-time SaaS favorite with Intercom’s CEO Karen Peacock and Bessemer’s Byron Deeter.

The post The Top 10 SaaStr Videos of the Week: Twilio, Wrike, Checkout.com, G2, Hubspot, Intercom and More appeared first on SaaStr.

To Really Scale, You Need $1M on Your Balance Sheet for Every $2M in ARR


This post is by Jason Lemkin from SaaStr

“My CEO Told Me To Stop Selling So Much”

Recently, I met with a sales leader I’ve known for years, and he told me The Most Curious Story.  His SaaS CEO asked him to stop selling so much.

Slow down.  You are doing too good of a job, the CEO said.  We can’t afford it.

motorpowerNow … how could this be?  Well, it does make sense, when you understand the scenario, a combination of two things:

First, this SaaS company has a mix of freemium customers and sales-driven customers (with higher ACV, lower churn).  The freemium ones really have no acquisition costs at this point (the main lead source is mini-brand).  The sales-driven customers are very profitable on a CAC basis, since their lead cost is $0, and so the ‘Magic Number’ or CAC/CLTV ratio is very favorable.  But … still … the sales team’s commissions consume cash in the very, very short term.

and

Second, this SaaS company had a very tight balance sheet.  About $1m in cash for a $5m ARR business.

And here, they just couldn’t safely invest.  Because every $10k, $20k, $50k customer they closed … Hooray!! … but … that sales commission, just put them into Danger mode on the balance sheet.  Even though in 4 months, they’d be in the Black here … for years to come …

A crying shame, really.

We get that, but what’s the “right” answer?  Many of us can’t raise a $50m Series Seed, and many others of us don’t want to get diluted to 0.0001% ownership.

I think in SaaS, and I learned this from an insight from Josh Stein at DFJ (first VC in Box, SugarCRM, etc.) at a board we’re on together, what I’m going to inelegantly call “The 0.5x Balance Sheet Rule.”

Which is, once you are post-Initial Scale, past $3m-$4m in ARR or so, even if you have 80%+ gross margins and a very efficient sales and marketing engine … once your cash dips below 50% of your ARR … you’ll have stress, and importantly — underinvest.  And this is the worst time to underinvest.  Because when you get here, every great hire starts to be accretive (more on that here) — as measured in 12 months or less.  But you need enough capital to make these hires and let them pay for themselves in 12 months or less.

I made this mistake myself, with hindsight.  I was proud we got cash-flow positive at $4m ARR or so, and shortly thereafter, I figured out the “everyone great is accretive thing” and told all the managers to hire whomever they want.  But … I should have gone further.  At ~$7m in ARR I think we had about $1.5m in cash on the balance sheet, plus some venture debt.  If I’d had $5m+ on the balance sheet, I would have made far, far more investments.  At $7m in ARR and cash-flow positive, I didn’t have to worry about failing.  But I still had to worry about the costs of making data-driven, well-thought-through, but unproven mistakes.

Now I’ve watched this in action again and again, and Josh Stein is 100% spot-on.  Having 100% of your ARR on the balance sheet is a luxury.  Do that if you can.  But at least, once you’re at Initial Scale, make sure you maintain 50% of your ARR on the balance sheet.  It will destress all your investments.  Let you really go for it.  And let you be OK if the amazing team you’ve hired makes a few more mistakes on the way to $100m in ARR.

As CEO/founder, once you’re at even just $3m or so in ARR, and have a few good VPs on the team … really your #1 job is to empower them.  They need enough of a safety net, and enough runway, to do amazing things.

“Slow down, you’re selling too much.”  It can happen, at least, as a construct, to anyone.  Don’t let it be you.

It’s also a good rule for folks able to bootstrap to scale that are past the point they really need capital per se.  If you’ve gotten to say $4m ARR, and are growing quickly … why raise any VC money at all?  You don’t need to.  Atlassian waited.  Qualtrics waited.  It’s just, you probably don’t have $2m of cash on the balance sheet at $4m in ARR if you’ve bootstrapped.  So I’d raise at least enough to fund the growth and hires your team deserves.  Or at least, give it a lot of serious thought.

(note: an updated SaaStr Classic post)

 

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5 Interesting Learnings from Cloudflare at $500,000,000 in ARR


This post is curated by Keith Teare. It was written by Jason Lemkin. The original is [linked here]

Cloudflare is one of those iconic Cloud companies most of us use, and know about as a product and vendor … but perhaps we don’t think as much about as a public company.  And quite an epic one it is, at ~$500m in ARR and a $25B+ market cap!!

What can founders learn from them as a public SaaS / Cloud company?  Here are 5 Interesting Learnings:

#1. 3,200,000 Total Free+Paid, ~100,000 Paid Customers, with 736 at $100k+ in ACV and 16% of the Fortune 1000.  We’ve seen a lot of leaders with tons of SMB customers and a smaller number of $100k+ deals, but Cloudflare is perhaps the most extreme here.  Over 3m+ sites and services use Cloudflare, and then 736 of them end up paying $100k+.  Cloudflare really does serve every size customer, with a classic funnel of 3m free, 100k paid, and ~1000 Big Customers.

Like many similar developer-centric products, the vast majority of customers come in via self-serve, but as the deals grow, sales is brought in.

#2.  48% of revenue outside the U.S.  We’ve seen this metric vary wildly at public SaaS and Cloud companies.  48% outside the U.S. may be the highest outside of Xero, which is HQ’d in New Zealand.  A reminder to go where your customers are.  Otherwise, you just leave revenue on the table.

#3.  Largest customers growing the fastest.  We see this often in Cloud and SaaS — but not all the time.  With Twilio and Zendesk, the average customer size has stayed constant, as SMB growth has kept up with enterprise.  Others like PagerDuty and Surveymonkey have traditionally started with SMBs, but gone more enterprise post-IPO.

Overall revenue has grown at 50% CAGR, while large customers have grown 68%, and customer count “just” 22%.  That means the $100k+ deals are really driving growth at Cloudflare now, even as it continues to serve a massive number of websites.

#4. Even with a freemium model, sales & marketing expenses are still “normal” at 45% of revenues.  An interesting contrast to Atlassian and a few others, Cloudflare still spends a “normal” amount on Sales + Marketing (45% of revenue), even with the efficiencies of a freemium base to draw on.  Given the rapid growth in large, $100k+ accounts, this makes sense.  Freemium can help a lot with efficiency, but the impact isn’t always as dramatic as we might expect.  Freemium often still needs sales to scale to bigger deal sizes, see, e.g., Fastly, New Relic, Twilio, Box, SurveyMonkey, etc. 🙂

#5. New Products are the next key driven of growth to $500m – $1B ARR.  Needing to have at least one core second product at $1B ARR is a key learning from this series, and Cloudflare has outlined that as part of its key strategy.  First, acquire a massive base of users and customers.  Check, at 3m accounts and 100k paying customers.  Second, drive up deal sizes.  Check, at almost 1,000 $100k+ deals.  And third, sell them more products.  That’s the next phase of growth for market-leader Cloudflare.

What a journey so far for one of our very favorite Cloud companies at SaaStr!!

And a few other great ones in this series:

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5 Interesting Learnings from Cloudflare at $300,000,000+ in ARR


This post is by Jason Lemkin from SaaStr

Cloudflare is one of those iconic Cloud companies most of us use, and know about as a product and vendor … but perhaps we don’t think as much about as a public company.  And quite an epic one it is, at $300m+ in ARR and a $25B+ market cap!!

What can founders learn from them as a public SaaS / Cloud company?  Here are 5 Interesting Learnings:

#1. 3,200,000 Total Free+Paid, ~100,000 Paid Customers, with 736 at $100k+ in ACV and 16% of the Fortune 1000.  We’ve seen a lot of leaders with tons of SMB customers and a smaller number of $100k+ deals, but Cloudflare is perhaps the most extreme here.  Over 3m+ sites and services use Cloudflare, and then 736 of them end up paying $100k+.  Cloudflare really does serve every size customer, with a classic funnel of 3m free, 100k paid, and ~1000 Big Customers.

Like many similar developer-centric products, the vast majority of customers come in via self-serve, but as the deals grow, sales is brought in.

#2.  48% of revenue outside the U.S.  We’ve seen this metric vary wildly at public SaaS and Cloud companies.  48% outside the U.S. may be the highest outside of Xero, which is HQ’d in New Zealand.  A reminder to go where your customers are.  Otherwise, you just leave revenue on the table.

#3.  Largest customers growing the fastest.  We see this often in Cloud and SaaS — but not all the time.  With Twilio and Zendesk, the average customer size has stayed constant, as SMB growth has kept up with enterprise.  Others like PagerDuty and Surveymonkey have traditionally started with SMBs, but gone more enterprise post-IPO.

Overall revenue has grown at 50% CAGR, while large customers have grown 68%, and customer count “just” 22%.  That means the $100k+ deals are really driving growth at Cloudflare now, even as it continues to serve a massive number of websites.

#4. Even with a freemium model, sales & marketing expenses are still “normal” at 45% of revenues.  An interesting contrast to Atlassian and a few others, Cloudflare still spends a “normal” amount on Sales + Marketing (45% of revenue), even with the efficiencies of a freemium base to draw on.  Given the rapid growth in large, $100k+ accounts, this probably makes sense.  It’s an interesting comp.  Freemium can help a lot with efficiency, but the impact isn’t always as dramatic as we might expect.

#5. New Products are the next key driven of growth to $500m – $1B ARR.  Needing to have at least one core second product at $1B ARR is a key learning from this series, and Cloudflare has outlined that as part of its key strategy.  First, acquire a massive base of users and customers.  Check, at 3m accounts and 100k paying customers.  Second, drive up deal sizes.  Check, at almost 1,000 $100k+ deals.  And third, sell them more products.  That the next phase of growth for market-leader Cloudflare.

What a journey so far for one of our very favorite Cloud companies at SaaStr!!

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Don’t Make Anyone “Head of Sales/Marketing/Engineering/Whatever” in SaaS. At Least, Not For Too Long.


This post is by Jason Lemkin from SaaStr

A little while back, I gave a great SaaS Founder CEO a Gift.

A real gift.

This founder CEO was at about $1m in ARR, doing well, but with only a smidge of angel funding and limited resources.

And I gave him an insanely great VP of Sales candidate.  An amazing fit for his company, his target ACV, his lead velocity and structure.

And let’s be clear:  the CEO was incredibly lucky to get this candidate.  Not because the company wasn’t a great, cool company.  But because the company wasn’t really big enough, funded enough, with enough going on to really attract a candidate of his caliber (at that time).

Screen Shot 2014-02-22 at 9.31.42 PM

But like any candidate, this VP of Sales wasn’t perfect.  He was an up-and-coming candidate and had the full package, but it was his first time to really own it all.

The CEO saw it … almost.  He hemmed and hawed.  And ultimately, he let the gift go.  He said he’d hire him … with a great package … but only as “Head of Sales”.  Not VP.

Fast forward 60 days.  And this VP Sales candidate met with another CEO I know well.  A really kick-arse CEO.  One whose start-up was growing even faster than the first, with much more funding, a bigger base, and much more velocity.  Objectively speaking, a better opportunity.  And the Second CEO hired this VP of Sales on the spot.  That Day.  As the VP.  And they’re just killed it together.

____________________

Fast forward another few days, and I saw the first CEO at drinks.  I asked him what happened.  He said it was just too much, to make the VP hire at that time.  He agreed it was a Gift, getting connected to this candidate.  But at the time, he just wasn’t 100% sure the candidate would be the right VP of Sales at $10m ARR or $20m ARR, let alone $100m ARR.  He didn’t want to have to make a change later.  He wanted to leave titular room instead, to top him later if necessary.  Make him “Head of Sales”.

I nodded.  I get it.

And it was a big mistake.

_____________________

In B2C, it may make sense to have a lot of “Heads of This” and “Heads of That”.  If you have matrix-type teams, and a lot of individual contributors who are hyper-productive.  And really early on, say < 10-15 employees, none of it may matter much.

But in SaaS, I say it’s generally a mistake.  Or at least rethink it, for the following reasons:

  • People get topped anyway in SaaS.  Sorry.  But it’s true.  Not everyone scales from $0-$100m.  It’s just a fact.  As we know, Great Teams Win.  But the players on the team do change as the years go by.  So using “Head of” to avoid issues later if you have to top someone isn’t really necessary in the end.
  • “Head of” is confusing to outsiders.  This probably doesn’t matter at Clubhouse.   But in SaaS, you are dealing with a lot of corporate types.  Fortune 1000 customers, partners, etc.  They want to know: Who am I meeting with?  What level of responsibility does he or she really have?  Is this company for real, or just some little start-up that might go out of business in a year or a month?

  • “Head of” is confusing to insiders.  Are they the VP-equivalent?  Or not?
  • It’s demotivating, after a point.  Bringing in someone as “Head of Biz Dev” and then promoting them in 120 days when they prove themselves may be motivating for some stretch candidates.   If everyone’s OK with it, and there is a clear path to VP, that can work.  But leaving someone who is putting their heart and soul into owning a functional area, without the clear indicator that that’s really what their job is … for too long … is a recipe for underperformance, ultimately.

I know all this squishy stuff may feel like the right way to go in the early days.  Especially if you care, and want to make sure all your great team members have career advancement opportunities.

Screen Shot 2014-02-22 at 10.00.22 PM

But let me step back one level, and tell you one more personal story here.  That I learned.  At Adobe Sign / EchoSign, we basically had the same management team at $2m ARR as $20m-$30m in ARR.  I wasn’t sure they could all scale.   I wasn’t even sure I could scale.  The skills we needed at $2m in ARR were just so different from $20m in ARR.

What I did learn is the great ones, more times than not, find a way to scale to the next level.   So be thoughtful.  But if you’ve got a Gift on your hands, a really game-changing great hire … I say just give ’em the title.  Even if it’s a slight stretch.  Just Get it Done.

They may exceed your expectations.  My team did.  And if they don’t … the great ones will know.  And will be OK being topped.

After all, that’s what they invented Senior Vice Presidents for.

(note: an updated SaaStr Classic post)

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6 Types of Bad Behavior Sales Reps Bring Out When They Are Struggling to Hit the Plan


This post is by Jason Lemkin from SaaStr

Q: Your sales manager is under great pressure to increase sales. At a recent meeting of the entire sales staff, this person said, “We have to hit our numbers no matter what it takes!” Does this emotional appeal change your way of dealing with customers?

The struggle to hit the base plan can indeed produce some less than ideal behavior in sales teams:

  • “Churn and burn” deals, where customers are promised functionality that doesn’t really exist just to close them. The customers depart as soon as they realize it. A bit more on this here: 5 Tips To Minimize “Churn and Burn” Behavior in Your Sales Team | SaaStr
  • Discounts that explode — with a threat. Discounts do need to have an expiration period, usually, to create urgency. But a sales rep recently told us if we didn’t take the discount this month, we could never buy the product. Mediocre sales reps especially sometimes add threats to exploding discounts. It can sort of work, sometimes. It will leave a very bad taste in the customer’s mouth, however.
  • Hiding cheaper editions. Sales can be incented to hide or downplay cheaper editions that might work just as well.
  • Going after customers “cheating a bit”. Do some of your customers share licenses / seats? Do some have more seats than they are allotted? If so, does it matter? In tougher times, sales will go after them to get them to pay up more. Done carefully, this is fine. Done aggressively, it creates customer resentment.
  • Forcing multi-year and annual deals. Sales will often force longer deals and multi-year deals if that helps them hit a tough number, even if a monthly contract is really what the customer wants for now.
  • Forcing / threatening early customers to pay today’s prices. This is never worth it, but when it’s hard to hit the base plan, sales teams will often go back to early customers with large discounts and try to get them to pay up to today’s prices.

All this type of behavior can happen at anytime. It just is heightened under the pressure to hit the base plan.

The real problem with all this behavior is it creates less happy customers. And we’ve learned that the top SaaS and Cloud companies all succeed with higher-than-average revenue retention, often in the 120%-140% a year range.

So be on the alert for … well .. perhaps a decline in “sales ethics” if the team is struggling to hit the base plan.  And a few other thoughts to help:

  • A great VP of Sales will lessen the amount this happens.  They may still be too aggressive here if the base plan seems just out of reach, but they also intuitively know if you go too far, it will backfire over time.
  • Listening to AEs’ calls on Gong or Chorus or similar apps will also help.
  • Audit and read SDR and AE emails.  You have to audit and listen to a certain amount of every rep’s customer communications.

Really, the best thing to avoid a lot of this questionable sales behavior is to beat the base plan and be going for the stretch plan. That makes everyone feel more win-win about things.

A bit more here:

5 Tips To Minimize “Churn and Burn” Behavior in Your Sales Team

The post 6 Types of Bad Behavior Sales Reps Bring Out When They Are Struggling to Hit the Plan appeared first on SaaStr.

Everything is Sort of the Same at a Given ACV (Annual Contract Value)


This post is by Jason Lemkin from SaaStr

As you try to hire up for your SaaS company, you’re going to be faced with a lot of choices and trade-offs.  No hire is the perfect package.  Do you take a risk on someone a little more junior than you’d like?  Someone from a company a little larger than you’d like?  Someone from a very different industry?

Screen Shot 2013-12-11 at 12.22.58 PM

I don’t have all the answers here.

But there’s one thing I can tell you in SaaS, at least:  Almost Everything Except the Product Itself is Sort of the Same at a Given ACV (Annual Contract Value) Level.

By that I mean:

  • If your deal size is say $5k per year, there’s a certain way you sell.  A certain way you market.  A certain way you retain customers and prove support.  A certain way, even, that you build software.  A certain way you deal with a high velocity of leads, and a need to close a ton of deals each month.
  • With $20-$50k deals, it’s different again.  You can spend more time with prospects.  You close fewer deals.  Customers will expect more services, more account management, more configuration.
  • At $100k+ deals, it’s different again.  You’ll need to get on a plane, most likely.  You may need solutions architects, more sales engineers, more support.  Marketing can do things that seem very expensive, but don’t need much yield to be High ROI.  Your engineers can build complex features that only a handful of customers use.  Your VP Product will really get to know individual customers.

I’ve learned I can pretty much predict what you’re doing, and what you will be doing in your SaaS company, and help you staff up, if I just know three things: 1.  your stage, 2.  your current Average Deal Size / ACV, and 3. your target Average Deal Size / ACV for next year.

You’ll want different salespeople for different segments, obviously.  But more importantly, you have to start with just one VP of Sales.  One VP of Product.  One VP of Marketing.  None of even the best candidates will have done it all, all segments.  So I’d pick candidates for all your top positions, even VP of Engineering, that have worked extensively and ideally primarily with customers/products at your target deal size.

My learning, suggestion and insight is just this.  Hire the smartest, bestest people you can.  Of course.

But then, hire people who can sell, who can market, who can ship software, who can retain customers, and who can build features, that match your target average Deal Size for next year, for the next level of your company.

Then they’ll have already learned 80-90% of the skills you’ll need to have to succeed in your organization.  You can drop them in and they’ll just succeed.  Even if they have no idea how your product really works, what your customers are really like, or what makes you special.

And this in the end is a lot more important than domain expertise and industry experience.  If you’re smart, you can pick that up in a month or two.  But the skills it takes to sell to a $10k customer?  That can take years to really acquire.

(note: an updated SaaStr Classic post)

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Mastering the Art and Science of Product-Led Growth With Gainsight


This post is by Amelia Ibarra from SaaStr

What does it mean to make your product the star in your SaaS growth strategy? It’s imperative to incorporate critical elements in your product-led strategy to ensure its success. Ciara Peter (Gainsight VP of Product & Design) and Mickey Alon (CTO & Founder of Gainsight PX) share their practical tips for product leaders looking to achieve business growth.

Product-Led Growth: The Disruptive GTM Strategy

A product-led growth strategy relies on the product itself as the primary vehicle for customer acquisition, conversion, retention, and expansion. But why is product-led growth such a disruptor in the software industry? 

Every year, millions of new products are created and launched. Growth is becoming more costly than ever, with companies pressured to outspend each other on sales and marketing budgets. Here are the ways that product-led growth cuts through the noise and proves effective in connecting with customers.

  • Product-Led Growth Meets Evolving Customer Expectations:
    • B2B buyers prefer to try before buying.
    • The end-user is becoming the decision-maker and catalyst for growth.
    • Ease-of-use and time to value impact the buying decision.
    • Pricing strategy based on pay-as-you-go has grown popular.
    • Product experience is associated with the brand experience.
  • Product-Led Growth Offers Unbeatable Economics:
    • Lowers cost of acquiring, onboarding and retaining customers.
    • The return on marketing investment is much faster.
    • Organic expansion grows through self-serve sign-ups and user invites.
    • The self-serve models feed growth and increase awareness.
    • The churn rate becomes more predictable based on usage sentiment.

Today, much of the customer experience happens within the product. Delivering immersive product experiences is the key to retention and growth. When you provide hands-on experience and demonstrate the value of the product, it goes a long way to ensuring a conversion.

 

The Trial Experience: The Art & Science 

A free trial should be integrated into your overall GTM strategy. The trial’s goals should include qualifying prospective customers, demonstrating the value of the product and generating sales opportunities.

  • The Growth Team: First thing’s first: To deliver a proper product-led growth strategy, you need a dedicated growth team. The growth team needs to focus on optimizing user acquisition and PQLs (Product Qualified Leads). This team and manager will own the post-sign-up experience.
  • Tips For a Successful Trial:
    • Mind the (Value) Gap: Show the immediate value during the trial. Be sure the user experiences positive results during their time using the product.
    • Provide Specific Instructions: Set user expectations and give clear, helpful in-product guidance.
    • Offer Accessible Knowledge: Be sure to offer ample and easy access to the knowledge base and simple ways for customers to provide feedback and ask questions.
    • Test Wisely: Be mindful of testing certain items during the trial. Avoid testing things like core workflows, dramatic replacement of features, etc.

When your team prioritizes the customer experience, you will continue to grow your SaaS business. Let the product do the heavy lifting and you will earn loyal customers.  

Key Takeaways
  • Product-Led Growth is a disruptive GTM strategy.
  • A dedicated Growth Team is essential.
  • User experience = product experience.

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5 Interesting Learnings from Twilio at $2 Billion in ARR


This post is by Jason Lemkin from SaaStr

We checked in on Twilio at $1B in ARR, but it’s interesting to check in again at $2B+ in ARR as the engine just hasn’t stopped worth.  Twilio is still growing an epic 53% at $2B in ARR; has diversified its product portfolio further acquiring Segment; and now has a stunning $60B market cap!  Up from $3B at IPO!

5 Interesting, Updated Learnings:

#1. Dollar-based net retention is still the key to almost all the winners in SaaS and remains at ~140%. Twilio’s NRR hasn’t come down as it’s scaled, and remains at 137% at $2B in ARR — essentially the same as at IPO and at $1B inARR.

#2. Big customers aren’t increasing as a % of revenue.  We’ve seen in this series in the case of many SaaS leaders from Atlassian to Salesforce to Pagerduty to SurveyMonkey that eventually, the bigger customers grow faster than the rest by revenue.  But not all.  Both Twilio and Zendesk have kept their ratio of large:small customers consistent to $1B in ARR and beyond.  A reminder that even as you go upmarket, you don’t have to necessarily leave the smaller customers behind, or treat them as second-class citizens.

#3. Gross margins remain “in the 50s”.  Yes, Twilio is a service with real telecommunications costs.  But it’s managed to keep its margins high enough to “still” be a software company at 52% now and 59% at $1B in ARR.

#4. 3,664 employees, or about $550,000 in revenue per employee.  That’s pretty efficient, especially with a sales-driven model, and efficiency also has gone up since $1B in ARR.

#5. The “average” customer account is “only” worth about $10,000 or so a year, across ~200,000 customers.  Twilio has 208,000 customers now comprising that $2b in ARR, so the average customer only pays about $10,000 or so.  That average was brought down by Sendgrid to about $7k at $1B ARR, and now has grown back to $10k.  But still, it shows acorns can grow into large accounts.  Twilio wins both with huge accounts — and 200,000+ happy $10,000 accounts.

And a reminder — growth isn’t slowing at Twilio.  In fact, it picked up steam last year.  Much of that is driven by an expansion of the product portfolio — but so what?  It shows TAM is what you make of it. You’ll find a way to grow your market deeper and broader.  Like Twilio has.  And when you do — the sky really is the limit.

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Three Things SaaS Founders Learn the Hard Way


This post is by Mark Faggiano from SaaStr

*This guest blog post was contributed by Mark Faggiano, CEO of Taxjar

I’m a lifelong learner — and I like to surround myself with lifelong learners. It’s a mindset. People who see themselves as always learning are naturally curious. They find unexpected connections. They try new things. They test and experiment, and when they fail, they try again. Lifelong learners are always trying to get better. Learning is energizing. And it can be humbling. It helps us not take ourselves too seriously.

I’ve learned plenty from books and classes, but as a startup founder, there are a few lessons I’ve had to work out on the job. We’re all bound to make mistakes, but in the hope that you might make different ones than I have, here are three of the things I’ve picked up:

1. Our people are everything.

The old saying is that customers come first — and that’s true in the sense that without our customers we’d have no business. But it’s vital that in the service of our customers (especially the way we strive to serve our customers), we don’t ever overlook the experience of employees.

In our first few years, when we were just taking off, we were scaling at supersonic speeds. It was a great problem to have, but still a problem. To keep up with the ever-increasing demand, our AutoFile team (which is in charge of state sales tax filing and remittance on behalf of customers) was working long into the nights and through the weekends, and despite their belief in what we were doing, morale was taking a hit. It became clear that if we didn’t do something meaningful,  we were going to start losing people.

That’s when we did what would be out of the question to most young, high-growth companies. We hit the pause button.

We made the decision to stop accepting new AutoFile requests from customers for over a month. You can bet that some of our customers were less than enthused by this decision, but we were completely transparent with them, and let them know we needed time to bring in additional employees to meet demand. And it was a clear sign to us that we needed to double down on our investment in automation that would protect our team — as well as help our customers.

Was it a tough call? Honestly, it wasn’t.  Growth had created an unsustainable environment, and it was hurting the quality of life of our team. And from a business perspective, losing my members of that team, with all of their specialized expertise, would have been a hole I’m not sure we would have been able to dig out of. We just had to do it and live with the consequences.

The result? We got the opportunity to take a step back and think about how to build the team (and our tech) for scale. And, more importantly, the team received the message that their happiness and sustained ability to do their best work at TaxJar was more important than growth.

2. Be honest. Even when it hurts in the short term.

Although we have customers of all sizes today, including many enterprise businesses, that wasn’t always the case. When we launched TaxJar, we did it with the goal of helping small e-commerce businesses solve their sales tax compliance. We served that market well, and we grew like crazy. As we did, we set our sights on larger customers.

And then, out of the blue, one came knocking.

We were approached by an e-commerce business that was orders of magnitude larger than any of our other customers. We knew that we theoretically had the capability to handle the volume, but there were major risks, risks that could not only prove problematic for this prospect, but for all of our other customers as well. As much as we wanted to do business with this customer, there were simply too many unknowns. We said no.

The prospect appreciated our transparency and rigor — and the fact that we were putting our customers over the possibility of a big deal — and told us to come back when we were ready. We didn’t figure they would wait around for us, but it was a sign that we needed to get our product ready for the big fish. And we did. We tweaked and tested until we knew without a doubt that our product could handle the order volume of big customers.

And wouldn’t you know, when we went back to the prospect six months later, they had waited for us. And they’re still customers today.

3. Everything is urgent. Slow down.

In business, especially in early-stage companies, everything is urgent. There are emergencies everywhere, all the time. It’s easy to get seduced by the frenzy. Although it’s stressful, it can be pretty exciting, too. And don’t get me wrong, it’s often important to act quickly and decisively. But it’s equally important to know when to take a breath. When to be patient.

Hiring is one of these times. When you have more business than you can handle, it seems like getting folks on your team as quickly as possible is the answer. But, as I mentioned above, your people are everything, and hiring quickly can often lead to hiring wrong. It might feel great to get people in the door, but in the long term, you won’t have the right group to take the company where it needs to go.

At TaxJar, we take hiring extremely seriously. We’ve learned that the short-term pain of not having enough people on staff is easily outweighed by getting the right people on the team for the long haul. It makes for happier employees and a stronger company.

Remembering what’s important

I’m a competitive guy. I grew up playing sports, and I like to win. But I don’t believe in winning at all costs. If there’s a theme here, I think that might be it. Sometimes, I think it’s important to take a step back and do what you believe is the right thing. Even when doing so smarts a bit. We need to have faith that making those hard choices will help shape the kind of business, and life, we want. I want us to create a place where we all love to work — surrounded by diverse folks with similar values that get up in the morning excited to build something together, and for the challenges to come.  As I’m fond of telling my employees, we are in control of our own destiny.

Sponsored blog post brought to you by TaxJar.

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Why It May Take You 12-18 Months to Hire a Great VP, Sales — Period. And What to Do About It.


This post is by Jason Lemkin from SaaStr

We’ve talked a lot about hiring a VP, Sales.  It’s just such a critical accelerate-or-decelerate decision for a post-Initial Traction SaaS company.   We’ve talked about the 48 Different Types of VP SalesWhat a VP Sales Really Does, and a Script to Use When Interviewing a VP Sales.

But even armed with all that, I’ve gotta admit, I’ve helped several friends hire a VP Sales recently and even with that we have barely batted .500

In those cases, no “big mistake” hire was made.  But still, some hires didn’t work out.  It took me a while to figure out why.  In one case, one of the investors thought it was just too early, too hard to get a great VP Sales — in this case, at a $6m in ARR, growing 100% YoY, kick-arse SaaS company.  To that, I say — Rubbish.  Joining a medium-hot SaaS start-up with incredible logo accounts, $6m in ARR, and 100%+ organic growth is a dream job for an up-and-coming VP Sales.

So what’s the remaining issue?  Why do reasonably hot SaaS companies still struggle to get a Great VP Sales, even with the right filters, scripts, and processes?  I thought back and realized — the issue is Time.

Why?  Imagine you are a Great VP Sales yourself.  You’re in a good gig, making a ton of money.  You’re there for the equity and the Big Win, yes — but also the cash.  Make no mistake about that.  The VP Engineering you hired is all about the equity.  Others, it will all be about the journey.  But for your VP, Sales, equity is table stakes, but Cash Matters.

So if you’re doing well, in a good spot — it doesn’t make a ton of sense to just Jump.  If you’re a VP or Director Engineering candidate, the old job is getting stale, and you’re offered a great package at something new — jumping can make sense.  You’re jumping from one equity package and POS code base to a new equity package and hopefully a slightly less POS code base.

But the VP Sales that’s killing it is different.  He or she will likely be reasonably comfortable.  Tons of cash.  Fair equity.   A good team under him or her.  A decent boss (a bad boss is always a big risk for a VP Sales).   And knows the job cold.  How to compete.  How to counter-FUD.  How to close.

Now if that VP Sales walks into a new gig, the job’s not just adding new features, refactoring, etc.  It’s taking a Big Frackin’ Risk.  From relatively easy cash, in a dialed-in machine, to a high degree of  uncertainty in a new environment.   Yes, the excitement of new equity is there.  But cash is big too.

So my only point here is, if you’re a Great VP Sales — it makes sense to Take Your Time.  Wait.  See more proof points.  Build a relationship with the CEO of a potential new company.  Watch progress.  And only then — jump.

Screen Shot 2013-09-07 at 3.41.24 PM

And if I look back at my Real VP of Sales, Brendon Cassidy — it actually took me about 20 months to recruit him.   I first “met” him on the phone, when he was heading corporate sales at LinkedIn, and he was a reference for a hire I wanted to make.  He gave me some insanely great advice in that reference call, we kept loosely in touch, and when the time was right, we had more customers, more proof points, more under our belt — the timing was right for him.  Twenty.  Months.  Later.

Now maybe I could have and certainly should have tried to hire him earlier 😉  No doubt.

But my learning from that, and from recent VP Sales hiring processes is this:  You Need to Always Be Hiring a VP, Sales.  Always.  And if you can, start 12+ Months before you need one.  Because many of the good ones will look, hard and long, before they leap.  You won’t be able to close them in 30 or 60 days, no matter how great a CEO you are or how well you convince others to join you.

>> Start at $1m in ARR is my advice.  Don’t wait until you are $2m, or $4m, or whatever to at least meet and soft-pitch as many great VP Sales candidates as you can.  Because they may need 12-18 months on their side.  Period.

(note: an updated SaaStr Classic post)

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5 Interesting Learnings from Datadog at $700,000,000+ ARR


This post is by Jason Lemkin from SaaStr

$30B+ Datadog became the great darling of developers and devops years ago, and never stopped pushing on the accelerator.  It’s expanded its product portfolio with Logs, APM and more to build an incredible observabillity engine approaching $1B ARR.  At ~$700m ARR, Datadog was still growing an incredible 61% year-over-year.

Let’s take a look at 5 Interesting Learnings:

1.  $100k+ customers generate 75% of revenue, even though just 7% of customers.  Even with Free and Cheap editions to start, 75% of customers are or grow into $100k+ deals. Datadog has 1,107 $100k+ customers out of 13,100 total customers.  That means the top 7% of customers generate 75% of revenue.

2.  20%+ of customers now use 4 or more customers, and 70% use 2 or more products.  This is a theme we’ve seen on this series.  At Box, at Salesforce, and more, customers that use more products, buy more, pay more, and have higher NRR.  71% of customers are using two or more products, which is up from 50% last year. 20% of customers are using four or more products, which is up from only 7% a year ago. 75% of new logos landed with two or more products.

In addition, multiple products have enabled $100k customers to grow into $1m+ customers.

3. 60% of revenue growth comes from existing customers, and NRR > 130% for 13th consecutive quarter.  This is similar to so many other Cloud leaders. At Salesforce, it’s 70%.

4. “Chunk up” payments from some annual deals.  Some larger customers wanted semi-annual and monthly billing, and Datadog let them move there where it worked for them.  Don’t over-push annual deals.

5. At IPO, Datadog already had 40+ $1M customers.  From an acorn, a mighty oak can grow.  Datadog shows customers can pay $1M+ at the same time as 10,000+ pay little and far more just use the Free version to get going.  In fact, Datadog has several customers that have grown to $1M ARR in their first year using the products.

At IPO:

A few other notes:

6. Like most other SaaS and Cloud leaders, the Covid impact is over for Datadog. Retention, churn, usage growth, etc. are all, as a group, back to where they were before Covid hit.

7. Infrastructure is the entry point on product side, then 70% buy at least 1 more product. But Infrastructure is still where they come in.

8. Growing team as fast they can.  They are hiring everyone great they can find in sales, engineering and more.  Hiring didn’t slow down at all even just as Covid hit.

9.  Haven’t specialized salesforce yet.  That’s interesting, given 4+ products and so many sizes of customers. Right now, it’s one salesforce selling all the products.

10.  Limited pricing pressure, even with competitors offering more Free editions.  Once you have a trusted brand, fair pricing can take you pretty far.  Even when folks come in even cheaper.

11.  Landing customers fast is more important than selling them more than 1 product.  Even with 70% of customers now buying 2 or more products, Datadog focuses on getting a customer using 1 product quickly, and being happy.

12.  Right now, partners generate very little revenue for Datadog.  New partnerships with Microsoft, Google Cloud and more are exciting.  But right now, partners don’t directly generate material revenue for Datadog. Even now.

SaaStr Podcast #117: Amit Agarwal, Chief Product Officer @ Datadog Discusses How, Why & When To Launch A Second SaaS Product

And a few other great ones in this series:

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Why Lead Velocity Rate (LVR) Is The Most Important Metric in SaaS


This post is by Jason Lemkin from SaaStr

One thing that is great in SaaS, from a 20,000 foot perspective at least, is You Can See The Future.

It’s the benefit of a recurring revenue stream in a B2B model.  If you did $100k last month, and have grown 6% a month each month for the last 12 mos, I can pretty much say you’ll be a $2m+ ARR business in the next twelve months or so.

The thing is, sales is variant, and sales pipelines have big data quality issues — and worse, sales as a metric is a lagging indicator.   In fact, your monthly sales tell you about the past.  Pipelines are cr*p for predicting the future.  Pipeline for This Month is useful, but still dependent on how various reps get probability right.  Pipeline for Next Quarter is almost useless for most SaaS start-ups, even once you get pretty big.   And actual sales are a lagging indicator … they reflect leads from the past, qualified, managed, and then closed over a 12+ month period.  Even if your sales cycle is short, how long ago was the lead first created?  Probably over a year.  The sales you get this month are really the sales you began to create over a year ago.

>> But there’s a better metric, your Key Metric, you should track and score yourself to, and hold your VP Marketing and marketing team to – Qualified Lead Velocity Rate (LVR), your growth in qualified leads, measure month-over-month, every month.  It’s real time, not lagging, and it clearly predicts your future revenues and growth.  And it’s more important strategically than your revenue growth this month or this quarter.

  • If you set as a top corporate metric growing your LVR about 10