The Sales Processes That Grew Echosign To $100M In Revenues with Jason Lemkin

Hello everyone, welcome to this week's edition of Growth Everywhere, where we interview successful entrepreneurs and bring you business and personal growth tips. I'm your host, Eric Siu, and today we have Jason Lemkin, who's the co-founder of EchoSign. Jason, how are you doing today?

Doing great, yeah, thanks for the time, Eric.

Yeah, thanks for joining us. So yeah, Jason, why don't you give the audience a little bit, you know, a little bit about your background, and then we'll go from there.

Sure, so I'm a repeat founder CEO. My last company is a company called EchoSign. Which was bought by Adobe on July 15th, 2011 at 3:01 PM. I do remember it well. And then I was the Vice President of Web Business Services at Adobe. And from inception of EchoSign on January 1st, 2006, through that, grew that business from zero to what is now $144 million in recurring revenue at the end of last year. So I've sort of— what's interesting about me, at least in this SaaS world, in this B2B world, I've done the $0 to $100 million journey. I've made a ton of mistakes, and I kind of decided back when I was a corporate vice president at Adobe that to the extent I was allowed to, I would just start sharing some of these learnings. And so, as you know, we've kind of built a bit of community around this now called SaaStr, that we've got about half a million folks that read this stuff every month. And it's all about going from 10 customers, right? And whatever that revenue may be, $1,000 a month to sort of $10 million, that kind of journey from, you know, the first having something where 10 people will actually buy your product to what I call initial scale or $10 million when you can no longer be killed, right? And so the goal is to share all the hard learnings, what worked, what didn't, how not to hire the terrible VP of sales, what marketing really does, how to think about customer success so that ultimately You can do even better than me. That's my goal. Got it.

Perfect. And I think everyone that's watching this needs to read Jason's blog and also his answers on Quora. There's nothing out there like it right now. It's pretty much— it's world-class stuff. So literally everything. So Jason, how did you guys get the first 100 users for EchoSide?

Yeah, and you know, times were different, right? So the way we got our first 100, and in fact it worked well for us up to a point, was really just press. Today we call it content marketing. Things are a little bit more sophisticated.

Yeah.

And so there's some things that are different and some things that have changed. Literally, we launched on TechCrunch back when there were like 2 TechCrunch posts a day in '06. No one read TechCrunch back then. It was this little tiny blog. But it was enough to get us going. And so my uber learnings from all that, and I'm a huge fan of PR, content marketing, whatever you call it today, is for most, for a B2B service, it's not enough. Okay? You can't have this magical, you know, WhatsApp explosion just off some press. Okay? But it can help. Right? It can really help. It can get you some of those first 10 customers, those first 20. That's not enough to build a $100 million business. But if you do it right, it may be enough so that you can really learn and get those few in the pipeline. Right? Got it.

How did you get to the next level? So, I mean, the initial PR bump hit, right? But what was— what got you to kind of the first 1,000 or the first Yeah, I think—

so in some ways I did everything wrong because I hadn't done it before. We launched without clear pricing, which I learned was a disaster for a paid service. We launched with the wrong messaging and the wrong marketing position and the wrong everything. But we sort of just did one thing right in the beginning. We really just did 2 things, and it wasn't enough, but it was enough, but we could have done better. We did 2 things. Whatever customer we had, we lavished them with just incredible attention. I know this seems obvious maybe to most people today, but you get 10 customers, and for us they paid $10 a month. We called that beer money. All we did with our first 100 or 200 customers is drink beer because it couldn't even pay one engineer's salary. I didn't think it was very funny, but everyone else thought that was funny. Here's the one thing I knew from the first 12 months, and they were really rough the first year. Here's the thing. I knew for every one customer we had, we could get another. For every Qualcomm, we could get a GE. For every BT, we could get a Dell. For every wedding photographer that used EchoSign, even though we had one to start, I knew we could get 2. Ultimately, my goal was to just double down on whatever was working. I only knew how to do 2 things. One, keep the customers we had happy.

Right.

And 2, kind of try and keep up the content marketing PR stuff. So that the viral engine, or at least the word-of-mouth engine, could run, right? And the uber learning was that all worked, okay, but the problem is if you want to get word-of-mouth and virality working in B2B versus B2C, it just takes longer. So it literally took 18 months for that engine to work, because you think about it, I sign up for the product, for something like EchoSign, I try it for 30 days, right? Then maybe I convert to paid, but maybe it takes me 3 or 4 or 6 months to fall in love. And then to interact with enough people through a contract or whatever it is, that they'll create a second-generation customer. And it took us 8 months from paid to generate a second-generation viral customer, right? And if you go back in time, since in the first quarter we had 10 customers, it was really hard for that viral engine to get momentum for about 2 years. But once we were at about 24 months, viral and word of mouth together, and what I call a mini-brand, was consistently the majority of our revenue. But that just can't happen in the beginning, right? The engine isn't running yet. Got it.

Yeah, so—

So a different way I've looked at it, we could talk about technical things, but I really think the key to all this stuff in SaaS is to do whatever it humanly takes to get $1 million in recurring revenue. Get up to $80,000, $50,000, $100,000 a month. And there's a, you know, there's only so many things you can do, but you don't know which one will work. Once you get up to $1 million in revenue, Then everything works. Then at $2 million, it all becomes programmatic and logical. But we're all going to hack it in different ways to $1 million. If you know how to sell, maybe not by training but by background, maybe you'll just literally grab a bag and magically create 1 million customers out of thin air. If you're terrible at sales but you're brilliant at content marketing, maybe you'll build an incredible community like the guys say at Buffer did, built just a brilliant community. I don't know. But in the beginning, you've got to hack it with whatever of the panoply of things you can do to get customers that you're best at. And for us, for me, it was shower what we had with love. I was good at that because I was just so thankful that we had any customers. And to be enthusiastic, to try and get PR and attention just through sheer passion for what we were doing. Those are the 2 things I was good at, and I pretty much was terrible at everything else in the beginning.

Yeah, the recurring theme, and I've repeated it so many times, is it's It's just doing the things that don't scale. Every single entrepreneur has done that in the beginning. It's literally, that's what it's been. And we talked about this.

But it has to be the ones that work for you.

Yep.

The thing is, if it's unnatural, right? I tell you, I was good at cold calling to big companies. I could call up, you know, I cold called into Google and we closed Google that way. But then when I had to close like some debt consolidation firm in Indiana and make 50 calls a day, I just couldn't do it. I wasn't the 50-call-a-day guy. I mean, I desperately wanted this company, Which was about to go under to survive, but I couldn't do the 50, right? Other people can do the 50. So I can do the large deals. So yeah, this sort of stuff that doesn't scale, but you have to pick the ones that are a good match for you. Because if you go off and do the stuff that doesn't work for you, it's hopeless, right?

I think everything's really— I mean, you read a ton of articles out there, even your articles as well. Everything at the end of the day, it's done— I mean, you do it for yourself based on a case-by-case basis. You don't have to necessarily emulate What people are saying. What works for someone else might not necessarily work for you. And I think a lot of people need to understand that. Because just because you see data here that proves something doesn't mean it's gonna work for you, right?

Yes, that's the parallel of the quantitative blog post. It makes it sound like if you could only increase your funnel conversion from 2.34% to 2.684%, you'd have a billion-dollar company. And anytime I read an article like that, I wanna jump off the roof. Same here.

Same here. So yeah, I mean, I think in some of your blog posts you alluded to getting— there's certain revenue checkpoints, so to speak, that you get to that you might hit like a snag. So you get to $1 million or $2 million and maybe at $10 million as well. Can you kind of talk about those certain snags people might expect on their way up?

Yeah, I think there's maybe 4. The first one generally could happen around $500,000 to $1 million in revenue. Okay, because typically— let's step back for a minute, okay? Getting even just 10 people to buy another web service is impossible. Do you seriously need to bring it— are you seriously desperate to bring another web service into your business? I mean, you know, maybe you'll play on your iPad at night and go to the App Store, Google Play, and find some cool new game. We have an endless appetite for that, right?

Mm-hmm.

Or hopefully, maybe there's actually something new on Netflix I want to watch, so I'll spend time on Netflix. But how many people go home late at night and search for business applications? Okay, there's a couple in CIO offices of innovation officers, there are a handful, okay, and we can talk about that, but it's an extremely small number, right. So my point is getting 10 users of your cool photo sharing app is not— doesn't impress me. Getting 10 customers is epic, right, you've done the impossible, okay. And so kudos, it's just not enough revenue, right. And so then the next— so you've done the impossible, right? And then can you build something that's real, right? That is actually real. You'll get a first check-in when it's almost real, when you're almost at what I call initial traction, but you're only halfway there. That could be $500,000, $800,000, $1 million in revenue. You're halfway there. And what will happen is you'll be good at it. The founders— see, the founders will be good at it. And maybe— but you're so small, you don't have enough money, you don't have enough this, and there'll be maybe one kid that's helping you. Okay, that sort of works, but the engine isn't quite working, right? The numbers are there, but you can't feel the engine, right? And that's a tough time, right? At least because you don't know how it comes together, but you know it's working for you, but it's not repeatable. It's not truly repeatable, right? The numbers are growing, but it's not repeatable. The next kind of phase— you have to blow through that. You have to just suck it up as pain at the gym, because what will happen is when you get twice as big, Usually like $2 million ARR, assuming your deal size is small. Maybe it's a little bigger, maybe a little smaller. Once you're there, the engine— I guarantee you the engine will work. Okay, if that's 500 customers, 1,000, 100, depending on your deal size, that's enough that you'll have a real engine that you could— even if you're not ready for a VP of sales, which we could chat about, at least you can bring people into your organization. You could bring a great head of marketing in, a great head of customer success. $2 million is not enough to pay the salaries of your full team. and hire all the people you want, but it's real, right?

Yeah.

So you hit the $1 million and you're seeing it in the numbers and you're seeing it in the logos, but it's not an engine. $2 million, you finally get the engine, okay? And then you're like, okay, it's working. I can actually spend a dollar and make more than a dollar, okay? I can actually bring Linda or Bob in off the street and they can actually close something, okay? Then the key is— and here's the thing that I learned that I didn't know. You've got to get from 2 to 10 as fast as possible. Let's just do simple math. If you get to $2 million and you have some growth rate, more than 50%, given enough time, you will get to $10 million. You will get to scale. If it takes you 10 years, you're dead though. Not only will competition kill you and market change will kill you, but you'll literally die of exhaustion. If you can do it in 1 year, which is Incredible, borderline impossible. But if you can do it in a year or even 18 months, no matter how much pain you suffer through, it's all epic. Okay? Because once you're at $10 million, you have fat. You have extra people. You can have 60 people, 80 people. You can bring in 10 or 20 sales guys. You can have an extra 5 or 10 extra engineers. I mean, who's ever had an extra engineer? Once you get to $10 million, you can actually have a whole extra team working on cool new stuff that you can't have. So you've got to get— once you're at 2, you've got to get to 10, right? And the real key is not to burn out, okay? Because if it takes you 5 years to get to $10 million, you will be too tired and you will die. I don't care how young you are, right? The other night, LeBron had his greatest game ever, right, at age 30, 60-something points.

Yeah.

And the night after that, he said, I've never been so tired, okay? He missed the 3-pointer to tie the game and it was one of his worst performances. You can't do that. You can't burn out. Burnout happens at year 4.

Got it.

It happens again and again and again and again and again. My real learning is at the end of the day, it doesn't really matter how long it takes you to get to $1 to $2 million in revenue. It would be great if it happened in a week or 6 months or a year, but the truth is it doesn't matter. What matters is pushing as fast as you can from $2 to $10 million so that you don't die. Got it.

Do you think this rule— I mean, this obviously applies to SaaS, it sounds like. But do you think it applies to like regular, like service-type businesses or traditional businesses?

It applies to any business that has reasonable gross margins.

Okay.

Okay? Because if you have SaaS-like gross margins that are 80% or higher, what it means is of that $10 million, you can spend $8 million of it on people, on help, right? If you have a low gross margin business, if it's a services business, it's 40% margin, this math doesn't work out, right? If it's ecommerce where the real margins are like 20%, then you have to multiply by 5. Instead of $10 million, it's got to be $50 million. It doesn't really matter whether it's true B2B SaaS, but for these sort of 1 to 2 to 10 numbers, they're kind of dependent on the margin contribution that you get out of, you know, really only needing 6 servers to run a $10 million business. Right.

Got it. One of the big things that I've always been wondering is you guys have been, or you have been really on top of tracking all the numbers. You have all these cool graphs and things like that. You know, when I was at a startup as well, we weren't super good at tracking everything. So I guess, how did you guys track things when you first started, maybe the first 2 years or so?

Well, at the end of the day, there's only 2 metrics that matter, right? Or 2 and a half. Revenue, growth in revenue, revenue and growth in revenue, and how much cash I'm bleeding. Okay? And all these wonderful metrics that I talk about, or even worse, are ad nauseam. Customer lifetime value, customer acquisition cost, Revenue per lead, I mean, they're all great, right? But if your revenue is growing quickly and you're not losing more money than you can, none of that matters.

Mm-hmm.

Right? So those are the revenues we track, but then you want to understand the science, right? Because the real key is you go through— there's the one most important phase you go through, and maybe it happens when you hit initial traction, that $2 million number, maybe it's earlier or later, is once you actually understand how your business works. Okay, and then what ends up happening is you have a core set of unit economics that are positive. Okay, my core customer, I spend $1 and I get $2 out. Okay, and that yields X percent of growth. Now maybe you don't like that percent of growth. Maybe $1 to get $2 out yields 50% annual growth. Okay.

Yeah.

Then your job as a founder is to add that extra incremental customer, right, that maybe is $1 to get $1, or maybe even $1 to get $0.20. As long as your core unit economics work, that's okay. Anyhow, I think that we can talk about all these different numbers and pipeline numbers and things. I think the real numbers that matter are your growth rate, your burn rate, and then there's that core unit economics, the core customer that probably costs almost nothing to get. You get it through word of mouth, or virality, or your brand. Is that positive? And you're growing 100%, you have magic.

Got it. Okay.

You look at like, why is Box spending hundreds of millions of dollars a year on sales and marketing? Does that look stupid? Like, it may look stupid, but you know what they're doing? Box is, you know, we'll see their exact numbers when they go public, but here's what they're doing. They have kind of an organic— they're at $100 million, more than $100 million in revenue, and they have what I'll call an organic growth rate. I don't mean literally it's no work, but it's just the engine's working, right? And let's say that's 50% for them now, 60%. They want to do 80%. So they will spend $100 million extra to go from 60% to 80% because the multiples justify it. But it doesn't mean that even if the unit economics are awful going from 60% to 80%, that core 60% growth has good unit economics there. I guarantee it.

Got it. That totally makes sense. Yeah, and it's kind of scary how they're going head-to-head with Dropbox too. You actually had a post on the $10 million ARR mark, and ARR means annual recurring revenue for people that don't get it.

Or ARR.

ARR.

But yes, absolutely.

So why— you have a train that's going up in that blog post. Can you explain why $10 million is so special?

Yes. What I learned, I didn't— I wish I'd known this when I was an entrepreneur, okay? What I learned is everything gets easier at $10 million. Everything, okay?

Uh huh.

By the time you get to $10 million, at least in your industry, your little segment that you sell in, right? Everyone's going to kind of have heard of you, okay? Because just think about the math for a minute. Let's say you get to $10 million, right? And your average customer is $1,000, $10,000 a year. How many customers do you have, right? 1,000, 10,000 customers. And it's taken you a couple of years to get there, right? And they've heard of you and they've taken you to their new job and they've told their friends and all of this and you've been heard of, right?

Mm-hmm.

And so the leads just come in, right? Maybe not enough, right? But it's all there. So you have a brand, right? And let's not discount the value of a brand. A brand is epic, right? A brand is why we buy a BMW. A brand is why we buy an Apple product that we've never even tested. Brands matter. Brands are a proxy for trust, right? So you can get a mini-brand much earlier than that, where, you know, some people in the industry Yeah. But by $10 million in run rate, in your best niche, everyone's heard of you. So at least you're going to get into every deal. You may not win every deal. You may lose that deal to your scrappier, smaller competitor, or your stronger, but you'll be— at least you'll have a seat at every— at most deals. So that's one. So getting into every deal is key. 2, here's the thing. $10 million is fat. It's enough fat that you can hire— let's say you're doing $10 million, you're growing 80%. That means you're going to add $8 million in incremental revenue next year. Let's assume you have a high margin. That means I can spend $6 million on people. How many engineers can you hire for $6 million?

A ton.

$6 million. That's why everyone that has something in one way or another accelerates once they hit $10 million. Just think, you can do anything with $6 extra million, right?

Mm-hmm.

So you have the brand, you have the extra money, right? At $10 million, you have so many customers that the question is, how quickly do you grow? But you're out of that period where you can't be killed, right? Google can't kill you, right? Adobe can't kill you. Salesforce can't kill you, right? Salesforce maybe can kill you when you're doing a million, if they want to like just throttle the space. But at $10 million, you are unkillable.

Okay.

You control your fate.

I like it. Cool. So you— there's a lot of talk, I mean, a lot of your blog posts touch upon customer success. Can you kind of explain why all the money is in customer success?

Yes. And this takes a while to figure out, right? So you get going, right? In your first year, how many customers have you had for more than a year? Well, zero, right? And then even as you get into like the first half of your second year, right, you know, months 12 through 18, think about going back a year in time, your very first 6 months, how many customers did you get? Like barely none, right?

Mm-hmm.

So, it takes people about 2 years to even understand what the heck is the point of investing in customer success, right? Because obviously on the surface it seems like a pointless waste of money in your first year, which it isn't, we'll talk about, right? And even by the end of the second— it takes you to the end of the second year to have enough customers that you could really see a quantitative impact from customer success, right? But what I learned, and then we can take it back a level, what I learned about 2 years in, okay, is just what I said before, is that we got 80% of our growth, okay, from our existing customers, okay?

Wow.

And that constitutes both viral and word of mouth and the brand. But also importantly, upsells, upgrades, buying more from you. And here's the secret sauce there. If your customer loves you, they will buy more from you electively. If your customer hates you but is forced to use your product anyway, like United Airlines, then I will still fly United if it's the only reasonable way for me to get to New York, but I will never electively fly United. I will always electively fly JetBlue, Or Virgin, right? So if you build this attitudinal loyalty, okay, where your customers love you, you will grow another 20% right there because they will buy more from you, okay, and they will churn out at a much lower rate, okay. And we did this math and I really feel like once I got my real VP of sales and got an engine going, I feel like we had like the best sales team in SaaS in terms of efficiency, right. Having said all of that with the best team, Once we hit $4 or $5 million in run rate, we could have still grown literally 80% a year without any traditional sales, just by making our customers happy. Right? We still needed— don't get me wrong, we still needed the sales team. But what I mean is, the sales team could have focused just on internally generated new revenue and still grown 80%. Right? That's the magic aha.

Right?

Yeah. And so what you're seeing today is folks like me learned it. What you're seeing today, especially for companies that have enough funding, but even if you don't, You're seeing them bring on a customer success or customer happiness, if you want to be very au courant, officers, like literally with the first 10 customers.

Mm-hmm.

I was the customer success, had a VP of customer success in the beginning, and then we had an intern who turned out to be great. But you got to just shower them with love for the first day. And then in year 3, here's the tough part, it pays off in year 3 because of the math we talked about. So you got to make that investment now. In this recurring revenue so that all that love and all that word of mouth and virality and upgrades and upsells and all the stuff that I call second order revenue, right? Because it comes out of it. Second order revenue are seeds you plant that you harvest in year 3, right? This is why you look at all these SaaS companies and like they've been around for a long time, like 7 or 8 years, then you'll turn around, but then it just gets epic, right? Once these seeds— once they can really harvest.

So when you say harvest, are you saying they're actually Upselling, is that what you're saying?

Upsell, you know, and they'll just want to buy more from you if they love you. Because the thing is, if you make it 3 or 4 years, your product will get better.

Yeah.

Right? And so one way or another, whether it's them buying more licenses across the company, right, or them buying more modules or editions or whatever, basically what happens is outside of the very small bottom of the market, the Every great running SaaS company has negative churn.

Yep.

Negative churn. And the typical— the number that I set for our team and that we hit was 120%.

Wow.

Organic growth. So every year, if I ended the year with a $4 million base, okay, my customer success team was not just to keep that $4 million, but to grow that 20% in the next year. They had to turn that $4 million into $4.8 the next year. Inclusive of churn, including churn.

Wow.

Right? And all the good teams, they can all achieve that.

Yeah. Right?

So that's just a very narrow definition. That's not new leads, that's not virality, that's just literally just taking the customers that love me and them wanting to buy, you know, 30% more on a gross basis, 20% on a net basis. It will happen to anyone.

Yeah.

If you do it right. But it takes—

Got it.

Right? Because they gotta try the product, they gotta like the product, they gotta deploy the product, they gotta get comfortable with the product, then they gotta get more users on the product, and then they gotta get ready to buy more.

Yeah.

The fastest that really can happen is like 10 to 12 months.

If there's— I mean, if there's any testament to what Jason's saying here, like, we— I have a service-based business, and we started implementing, you know, client success managers or customer success, whatever you call it. It's starting to work. We're starting to get really good feedback from it. But again, like Jason said, It takes time. So I think it does apply to almost every single business. It's just a no-brainer, right?

I think what most sort of B2B entrepreneurs are better at today than we were when we started, the best ones, is they're more patient. We were not patient. Okay? We wanted to achieve— we gave ourselves sort of— and this was in 2006 when the markets were a hundredth the size. We gave ourselves about 10 months to get to $2 million.

Wow.

We weren't patient, right? And we didn't even know, honestly, I had to learn how to be patient, right?

I think most entrepreneurs aren't.

They're not patient, right? But to some extent, we were impatient in the wrong ways. And so today, there are more examples to learn from, right? And so customer success is all about patience, because if you're only giving yourself 10 months to make it, or 12 months to get to To $3 million in revenue, there's no point investing in customer success because it can't impact you, right? But the smart, the great entrepreneurs today are thinking in 7 to 10 years in the first 12 months.

Which is good. The long game is good. Do you, so question for the audience, I think this would help them. Do client success or customer success people get commissions for the upsells?

Yeah, you know, it's, yes, they should, right? But it's a comp— it's a, Everything about how you structure the organization in terms of reporting, how you compensate customer success, it's not as clear-cut as it is with sales, right? In fact, you know, I spoke at Dreamforce with the CEO of Gainsight, which is a customer success software company. He was VP of customer success at Marketo, long-time experience in the industry, and he did like 12 different org charts of how you structure A customer success team. Does your head of customer success report to the CEO or the head of sales or the head of this or marketing? It's just, there's no perfect answer unfortunately, right? Because here, let's step back for a minute. Let's talk about the challenge and let's talk about the solution, right? The challenge is you have to decide what behavior do you want to incent, okay? There's one thing that I knew I did not want in my company. I did not want used car salesmen in customer success. And there are a lot of these guys, especially old school guys. Sometimes they're called account managers or whatever. Yeah.

These are guys the customer never heard of.

And on day 362, before the contract's up for renewal, all of a sudden, Marvin's there. Marvin! Hi, Lisa. It's Marvin. I know we've never met, but your usage violates our terms of service, and you're not using our crappy other product you've ever heard of, and I'd like you to buy another $10,000 of my product this year. I just felt like even though there are examples of that working, I could not work in that company, and that it would not create this sort of attitudinal loyalty.

Uh huh.

So I knew I didn't want that. And a lot of companies do that. They do the hard sell on day 360. Okay, more power to them. But I don't think it's the number one approach. Okay, so, but if you have those dudes, what do you do? They're just salespeople on your existing base and you just give them a regular commission.

Uh huh.

Right? Very high, the majority of their revenue is going to come from commission.

Right.

Or half, right? But that doesn't build the kind of relationships we're That's what I'm talking about, right? So, you know, the kind of ratio that I came up with was as follows, is an 80/20 formula. So 80% base salary, 20% bonus target, and that was tied to that 120% number. Okay, we segmented it by group. Okay. So generally speaking, if you took— let's say you're a customer success manager and you manage $2 million in revenue. Your job is to get it to 2.4. I don't care how you get it done. But if you don't build good relationships with your customers, they will churn and you'll totally screw it up.

Yeah. Right? Yeah.

And if you sell too hard, it won't work either, right? And it's not so much commission, right, that you're incented to do nothing about that, right? So net-net, what I chose was a total target for your whole base, which is what most people end up doing.

Right.

And had the commission be material, you know, 20%, right, but not salesy.

Yep.

That's what— it seems to work. It seems to be what most people do. And then, you know, to get into the nitty-gritty, then the question is, okay, well, what if they do something that's material, right? What if they don't just grow their base 10% or 20%, right, but they add $1 million in revenue, right? Turns out, I think what the right answer is this. This is what a lot of companies do, is they basically say if a deal is up to— if an upgrade is up to a certain size, say 20% of the initial deal. Let's say it's a $10,000 a year customer. If they buy up to 20% more, up to $2,000, then customer success just handles it. No salesperson is involved.

Wow.

And there's no direct commission. Okay? And as soon as it's above a number, it could be 100% of the deal, right? It could be 20%, it could be whatever. Then customer success brings in sales whether they want to or not, and they may not want to because they have the relationship, right? But they have to, right?

Yeah.

And so later on when you get more sophisticated, I really like this idea of drawing this bright line between below a de minimis threshold, you know, it stays with customer success, no discounts, no games, it's just list prices because it's not that much money, right? And I'll just help you, George, right? And none of that sales guy has to come back.

Yeah.

But when it's above a number and you actually need sales expertise, sales has to be involved.

Yeah, got it. Makes sense. And I think you had in one post, you talked about a certain percentage of revenues going into customer success. I guess, what percentage would that be? And I think you said, when does this happen, like 3 years in? When does this happen?

You mean how much should you spend on it?

Is that the question? Yes, that is the question.

You know, It's going to depend, right? But roughly speaking, you're going to want to spend 10 to 15% of your revenue protecting that revenue.

Okay.

Right? And you can kind of back into that number in a sense that there is a slightly misleading but useful industry metric of like one customer success manager, one human being Okay. Okay, and just think about it. Let's say you have a million-dollar customer, which is a big deal.

Yeah.

Like, I just want one or two people. I want that guy or gal only just doing that customer and one other.

Yeah.

Right? Let's say your customers are at a $20,000 price point, right? Maybe this person could handle 100 customers total, right? That means they can be proactive with all of them. They can visit Most of them, if they're local. Anyhow, if you think about it, $2 million is kind of right, right? Except that's— you want to do it in advance, not in arrears. You don't want to get past $2 million because then the guy's— the person's too busy, right? So really it's probably more like $1 million to $1.5 million for customer success manager, okay?

Got it.

So that you know it's in advance, not arrears, right? So let's imagine it's $1.5 million or $1.2 million, right? Take the fully burdened cost of that person. Right, let's say the fully burdened cost is $100,000 with benefits and cool MacBook Air and all that. Let's say it's $100,000 in rent and maybe it's more, it's more, right? That alone is going to be close to 10% of the business that they're protecting, right? And then you got to give them money and you got to give them collateral and time and all this, so it's going to be 15%.

15%, got it.

So if you kind of budget that in, you know, since this is my most— this is my highest margin This is all the source of my second-order revenue. Let's spend at least 15% making sure we don't lose it, right? And you'll see that many older-school companies, and many people that aren't thoughtful about this, spend far less, like 5%. Yeah, that's the worst investment you're ever gonna make.

Got it. 15%, guys. Cool. So, um, changing gears—

And maybe a lot more in the early days if you're well-funded. Maybe if you're well-funded in the beginning, It's the single best investment you can make.

Can you define well-funded for the audience?

Well, I'll give you companies that are raising lots of money, like $8 or $10 million early. Okay. If you're able to do that somehow, I would hire 4 customer success managers the next day. Shower your customers with love, even at $1 million in revenue. Let's say we just talked about this metric of $2 million per customer service, but really more, probably more like $1.5 million so that you have them in advance on arrears. But if I were at just $1 million in revenue, that math says you need 1 person, right?

Yeah.

If I had $8 million in the bank, I would hire 4.

Okay.

So that they just get those first customers, just all their needs are met no matter what, right? And if you look at these well-funded companies, like they may not have— they may have a crazy number of salespeople, and maybe too little too few. They may not know what they're doing, but today they've got 4 customer success managers.

Wow, okay. Yep, and I think a lot of people don't realize that, but here you go. Cool, so let's switch gears a little bit. Let's talk about something that a lot of people ask. I think you get asked this question a lot. So when should you get a VP of Sales and how do you get a good one?

Yes, so the first one's easier to answer than the second, although they're both more nuanced than almost any other position you're gonna hire, okay? You should hire a great VP of engineering before you start coding, if you can.

Yeah.

You should hire a great VP of marketing as soon as you can afford to get one. Even, why not hire one at $10,000 a month in revenue, right? I hired my VP of marketing who's insanely great. Now she's VP of marketing at Insightly when we were doing $20,000 a month. And I didn't lose a dollar, right? You can't go wrong, right? The VP of sales, you can go wrong. Forget about the fact that this is the most expensive hire on paper you're ever going to make. You bring this person in before you have a repeatable process, it never works.

Mm-hmm.

Right? It never works. And so we can talk about why, but the bottom line is until you have, generally speaking, until you have at least 2 reps that are hitting a quota, that you have an engine going, if you bring in a VP of Sales, it will be a train wreck 9 times out of 10.

Right.

So if you back into that, when we talked about our stages before, if you bring in a VP of Sales before even $1 to $2 million in recurring revenue, if it's a real VP of Sales, you have a 90% failure rate. Okay, so what do you do? You kind of have 2 options. If you have the skills, you get 2 to 3 reps or whatever it is up to That level, get them great, get them going, and then bring in the right person, right? That's the right way to do it, right? And that's what you should do. That's the right answer. Having said that, what if you lack the skills? What if you literally are— do not, no matter how much you'd like, none of the founders, and this is sad, but it does happen, none of the founding team has the skill to manage 2 to 3 folks selling, right? And to do that, to step back, you have to sell first. Because if you can't close them, I closed all of our first 100 customers. If you can't do it yourself, how are you going to teach a 24-year-old kid how to do it? You can't.

You can't.

So you got to close them, and then you got to teach 2 people how to close, and you're not classically trained in sales, so there's a huge learning curve for you. So you've got to get that team of 3, which is you plus 2, right? You have to do that. But what if you can't, right? Then you're in this hyper-risky phase of hiring a VP of sales way too early. And this is the person I call the evangelist, okay? And they're not really a VP of Sales.

Mm-hmm.

They're someone with experience, okay? Usually charismatic and very smart. They can talk the game. They can do what you should be doing as a founder but lack the skills to do, okay? So hire that person as your second best thing, but just bear in mind that evangelist, that super charismatic person that you're somehow able to attract at $10,000, That person will never scale to be the guy that manages 20 reps. 0 out of 100, right? You may have to transition that person to a VP of Biz Dev role, right? Or it doesn't mean you gotta get rid of them. It just means that magical guy that can come in with no reps under them and nothing and do this magical stuff is not the same person that can hire your first 10 reps successfully. 0% correlation. So just bear that in mind, right?

That's more of the— I think you alluded to this. This is the individual contributor that's really good, but Not so much evangelists.

Yeah, and their last title at their job may have been VP of Sales. Usually this evangelist, when you really pick through it, so how many of those 8 guys that you managed did you hire? Well, I didn't really hire them. I inherited it. What do you mean by VP of Sales? Well, it's really more sales operation and sales strategy. I really more worked with the 8 reps. Aha! Right? And that great VP of Sales that hired 8 or 10 or 20 reps and built a really efficient engine, that person's not going to come into your $10,000 a month company from scratch. That's not what they're good at, and they don't want to do that. Sometimes, but they'll come into the $10,000 a month run rate company when they have 10 million users.

Yeah, that makes sense.

They'll come in like my VP of Sales did as the first sales manager at LinkedIn when it was all self-service business. Like, there was no real sales, but there were a lot of users.

And they come in and figure it out.

They figure it out, but at least there's the base. No great VP of sales is going to come in with no base.

Yep.

Right, nothing to work with, because what the great VP of sales do is, is they hire and they increase the revenue per lead. They don't figure out whether you have market product fit, right? That's not what they do. That's what you do.

Yeah, same thing with hiring a marketer too. You got to have product market fit.

You do, you do. But the point is, You hire this VP of Sales too early, they're gonna flame out. You hire the VP of Marketing, even at— as long as you have 100 customers, as long as you have time and money, it's gonna be okay.

Yeah.

Right? As long as there's something there to work with, raw materials, right?

Yeah, I agree with that. Cool, so in terms of— do you have any process for setting quota for people? Like, how does it work? How do you set quotas for sales teams? I'll just put it that way.

Yeah, so let's step back. There are certain industry norms that are very useful to reference, right? The industry, and there's wide bands, right? But the rough industry norms later when you're at scale, when you're past $10 million in revenue, okay? They all, everything kind of past $10 million, everything's kind of the same at a given ACV, at a given deal size, okay? Maybe even past $3 or $4 million, everything's the same. Adding companies that sell $20,000 a year products past $3 to $4 million, they all have the same type of sales structures, same type of organizations. Companies that are $100,000 are the same, and companies that are sort of low-end or self-service, they all— once it's $3 to $4 or $5 million, they all end up looking the same.

Okay.

So later you get bracketed kind of into the following quotas. The big enterprise guys get million-dollar quotas, right? Maybe later it's $2 million, but you know, $1 to $2 million is a huge variance, but, you know, $1 million, right? What I call, and some folks call, like run rate reps that sell $4,000, $5,000, $6,000, $8,000 a year deals end up with quotas sort of in the $400,000 to $500,000 range, right? And typically guys that sell to small, very small businesses, right, end up with quotas that are sort of in the $200,000 to $300,000 range.

Okay.

So that's where you're going to end up, right? And you're going to end up then paying those guys a percentage of those numbers back as On-target earnings, commission plus base. So that's where you're going to end up. The question is how do you get there?

Yup.

Right? So what you're going to kind of end up with in the very beginning, you have to pay people a living wage. Right? If you bring your first 2 reps in and they can't eat and they do a good job, like what's the point? Right?

Yup.

So what I did in the beginning with our first 2 reps in the beginning when we were getting going is all I wanted in the first 90 days was for them just to cover their costs. That was their quota, right? So your initial quota is $100 grand, basically, right?

Yeah.

And then it scales up to those numbers, right? $300,000 or whatever it is, right? But it has to— you want your reps, if they're doing a good job, you want— they have to be successful. They have to feel successful. So you have to engineer quotas and targets That if they're good, they can hit it and exceed, right? And if they don't, I mean, I know people that have had success with impossible goals in the beginning, but I find that just totally demoralizing.

Got it.

Or let me put it differently. I wrote a post like, your best rep, you want him driving an M6 convertible.

Yep.

Right? Like, in his first year, right? You know, we had a rep that was 24, and once he was unleashed from an SDR into an individual rep, You know, in 6 months he had the Mercedes convertible and then around month 14 it was the new M6 convertible. That's what you want.

Nice.

That means your comp plan is working. If everyone has an M6 convertible, you have a problem.

Yeah, totally.

But after 18 months, no one has an M6 convertible, right? And they're all saying it's not about the money, it's about the journey, you're dead.

I like it.

Sales is about money, right? Sales in a startup is about making money and enjoying making money.

Mm-hmm.

Right? Sales in a big company is just about money, right?

Yeah.

In a startup, it's making a lot of— having a chance to make a lot of money and not having a jerk boss and having fun doing it, right? Being part of a great team.

Yeah.

Right? If you go into SaaS startups, any startup that are like $10 million and above and growing well, and you meet with the team, you'll see just this incredible energy. It's just wonderful and it builds on itself.

Yep. I actually had a friend who did sales in the past. He's like, you know, if you're gonna hire salespeople, they need to have really expensive tastes. So when you interview them, you should ask them what their tastes are, or, you know, what kind of car they want to drive, right?

Yes.

I think you also said that too.

Yes. I like the ones with expensive tastes. The one I really don't like is the guy that drives a 6-year-old Mercedes E63. Okay, that meant 6 years ago he thought he could drive an AMG Mercedes.

Yeah.

But now it's got a lot of dance, and there's a lot of those big gulp cups in the back and all that. That guy, just run from that guy.

Got it. Cool. Makes sense. So, actually backtracking a little bit, you said in the first 90 days they should be able to cover their costs. So you said $100 grand.

Yeah.

Yeah, so would that be net or gross?

Well, I mean, later it should be inclusive of all costs. Right. In the beginning when you're small, when you're a startup, just try to make the math work.

Okay.

Define it in the most— just make her successful, right? So don't play any games. Like literally, I mean, if you don't have an engine, say all I want you to do in the first 90 days, right, is close whatever, $10,000 of new bookings, right? Make it easy and then make it hard, right? Later when you have 2 successful people, you know, you'll have an intuition there.

Mm-hmm.

But set the, you know, make the bar achievable for that first person in the first, you know, 90 days.

Got it. A few more questions here, I think like 3 more. So, and this is funny, you actually alluded to paying them, making sure you pay them a base and then giving mostly a base and then a commission. And this is something Aaron Ross said, which we'll talk about in a second. So yeah, I mean, actually we'll just talk about it right now actually. So, you know, Aaron Ross, former director of sales at Salesforce, I know you are working on a book with him.

Aaron and I know each other well.

Can you talk about what you guys are working on?

Well, it's Aaron's Mr. Predictable Revenue, but it's sort of the sequel to what he's done in Predictable Revenue.

Got it.

So it should be good, right? It's kind of tying to the themes that I have, which in some ways are broader themes about recurring revenue, right? To tying sort of his next-generation thesis and views and taking everything that he's learned very successfully, right? And taking it to the next level on the sales side.

Got it. So to the audience, Predictable Revenue, that's a must-read sales book if you're building an organization. And I think this sequel is definitely a must-read also. Also Jason's blog as well. So what is, what's one must-read book you recommend to entrepreneurs?

Oh goodness. Now you gave me the tough question of the hour. Right? I don't know. I'll tell you why. I'll tell you why in all honesty. Aaron is great. He's a perfect example. I should know that answer. I struggled as an entrepreneur when I was building my SaaS company, getting to something. In those years from '06 to '09, I couldn't find the book.

Right.

So I tried to produce the content on Quora and SaaStr to To provide my guide, right?

Yeah.

And I wish I knew the perfect source, but I definitely would include Aaron in that top 5 elite group, right? I wish I had the other 4, and ask me in a year. I just tried to contribute some of that content back because I couldn't find it. I wish I had it because I would have read it. There's a lot of good company building stuff, right? But I don't— there's only so many bibles on how to scale recurring revenue.

I think, you know, I think the really interesting thing—

Tell me.

No, I agree with that because it's really hard. I mean, before I read Aaron's book and before I read your stuff, there's really little information on how to build a sales organization. And a lot of people are just like, oh, we don't need sales. And then there's the startups that are just like, oh, we don't need marketing. We're just gonna let it grow organically. It totally doesn't work like that for the most part. So I think, yeah, I mean—

There's a lot of sales management stuff which is focused on once you're after post-scale.

Yeah.

Management theory, right? But when you're scaling something, I really don't need to hear a lot of sales management theory when I'm at $100 million a year or $1 billion from the SVP of sales operations at SAP. It just doesn't help me.

Yeah, totally makes sense. So in terms of what's a productivity hack that you use?

So my top productivity hack, and I wrote about it, was for me on the revenue side at least, was one that people thought was nutty, but now more people have adopted it, which was creating a sales commission plan that totally aligned interests with me and the company's economy.

Okay.

And what I did was, what I learned was, and you can find the exact plan at saastr.com. What I learned is that when I did this analysis, and I wish there was the perfect book back then, but what I learned is at the end of the day, most sales comp plans basically target 20 to 25% of a deal, up to 30 sometimes if it's at the very bottom of the market, SMB. 20 to 30%, really 20 to 25, goes back out as bonuses and commissions. Okay, so I knew that was kind of the way the world had worked out over time, and those are natural organic patterns. And then I knew this other thing that happened when I had my first VP of sales who almost ran the company to the ground, which was that we hemorrhaged cash.

Okay.

So he came in, Took the 2 reps I had and me, which were great, and then hired 10 people, and within 120 days our productivity had fallen 50%, and we were about— we were running into the ground.

Wow.

Okay, and it wasn't just that. That was the— like, I didn't know what to make of it and figure out, right? But what I saw, something which I really hated happening, which was that when he had brought in a traditional sales comp plan from Salesforce, what I saw is when you combine that with B-minus reps, I had a bunch of people coming into the office selling almost nothing and living off their base. Okay? So they weren't— so the one thing I knew is I didn't want anybody to live off their base. I just wanted to— on the other hand, I wanted the folks that killed it to be able to make an insane amount of money. The other thing I hated from the big company sales comp plan was what were decelerators. The idea that if you do too well, every year I'm going to raise your quota, dude, because you did so well.

Yeah.

I get it, but I didn't like that. I said, listen, if you make me— if you make the company half a million this year and a million next year, I want to pay you twice as much next year if I can.

I like it.

I hated the idea of raising the bar on people that were killing it, right? Although I get why you have to do it in a large organization. So I said, okay, how can I make— have no caps, no decelerators, no game, no stupidity, and also not have the losers that I'm stuck with Like living off their base salary, right? Because great folks will leave for their base, but the losers will— if they can make $80K a year, it's not like they can get another great job.

Yeah.

So they'll quietly sit in their queue or at their desk and just try and close anything. So anyhow, that's what I tried to accomplish. So the plan that I came up with was basically this. You pay back your base before you make a dollar in commission. You're fully burdened cost. Right. So if your base is $60K annual, you've got to basically— and let's say that's $5K a month, right? You've got to bring in 6 or 7 before you don't make any money on that, on that, you know, those bookings, right? But then you take a big chunk of what's beyond that. So instead of taking 10% or 5% of what's beyond that, I wanted to figure out what's the mathematical maximum that I could give them, right? And for us, it was like 22% or something like that, right?

Mm-hmm.

And so that meant, you know, if you made— that meant you bring in $1 million in bookings, I know I make $220,000, or for some folks it was 25%, they'd make $250,000, right? I do $2 million, that's $500,000, right? And so the folks that killed it made a lot of money, right?

Uh-huh.

But here's what I knew as a founder CEO. If he brings in $2 million, is there any way I can lose money in my company? It's impossible. I know I didn't even have to worry anymore about— so sales, here's the profound thing. Sales went from a cost center to a profit center. And I didn't even need to look at anything. I didn't need to see the dumb reports or log into sales. It didn't matter because I knew that those salespeople were driving revenue per lead up. And so that's all I cared about was revenue per lead. And I knew that it was accretive.

Uh-huh.

I knew that for every dollar that they brought in, I was giving them less than a dollar no matter what. And all my worries went out the door.

I like it. I'm going to have to reread that. Yeah, totally.

I didn't care, right? Yeah, because I knew every incremental dollar they made more, and as, as a founder and an equity holder, I made more because it added more value to the company, right? Go get your M6 convertible. Yeah, dude, it's totally cool.

Enjoy your S5, right?

Yeah, well, it's— we're gonna have— I think, I think Aaron's gonna have it in there, right? Go have your S5, right? You know, when you're a billion— when you're in a billion in revenue, this doesn't work, right? It doesn't work for Adobe. But, but you're a fool if you bring in this Salesforce-type comp plan. And Salesforce may have improved it since then. No, no, you know, I love Salesforce, but bringing that into your $2 million run rate company is a recipe for disaster.

Got it. So Jason, thanks so much for doing this. A lot of insights here. I recommend people watch this, rewatch this, and then go to Jason's blog, read everything, read Predictable Revenue twice, and you will be a Sales Master. So Jason, thanks so much for doing this. We hope to have you on the show again sometime soon.

Yeah, this was great. Perfect stuff. Thank you, Eric.

Thanks, Jason.