Balancing Growth and Efficiency in Tougher Times | Point Nine Managing Partner Christoph Janz

Ja, good morning. I'm really happy to be here in Barcelona today at SaaStr. Thank you so much, Jason M. Lemkin, for putting this together. It's awesome that we can finally meet in person again. I'm Christoph Jans, one of the partners at Point Nine Capital. In case you haven't heard about Point Nine Capital, 9 yet. We're an early-stage venture capital fund focused on SaaS. If you haven't heard about us, I'm sure you've heard about some of the amazing SaaS companies that we've been fortunate to invest in over the years, like Factorial or Typeform, both based in Barcelona, or Algolia, Contentful, and Loom, and several others. So I was planning to talk about this topic which you can see here, Mind the Gap: Balancing Growth and Efficiency in Tougher Times, because I think it's a topic that is really top of mind for many of us here, maybe most of us. But I do know that a lot of people have already talked about it and you've already seen a lot of tweets and blog posts. So in case you're all tired of this topic already, then please let me know and we can talk about something else. So raise your hand if you'd rather talk about something else. I don't see any hands, so I take this as a unanimous decision to proceed with this topic. And I guess it makes sense because whether you like it or not, and I don't really know if there will be an extended funding winter, but it's pretty clear that something has changed in the funding environment in the last couple of days, weeks, and months. Growth is no longer rewarded at any cost. And based on that alone, it probably makes sense for everybody to revisit some of their assumptions. I wrote a blog post a couple of weeks ago titled Hypergrowth is Great, But Don't Die While Trying. And I'd like to start by walking you through the key concepts of that post. And after that, I'll share some more thoughts on what you can do to navigate a SaaS company in this new environment. And then we'll have some time for Q&A. So I have a question for you. Who of you has been in a situation where you were growing fast, you were crushing it, You got calls from Tiger. Your VCs probably told you that you need to burn more money. And then almost suddenly, just like weeks or months later, things look drastically different. Your growth rate tanked, your burn rate increased, your runway started to look dangerously low, and you were getting nervous about your, your future and the next round of financing. So put your hands up if that sounds familiar to you. It's really, really awesome to have a couple of honest people in the audience. Everybody who hasn't raised their hand either is a liar— sorry— or you haven't been around long enough. I think things like this happen to almost everybody at some point. But let's try to understand a bit better why this happens. And maybe what you can do to deal with it, or even better, to prevent it in the first place. Why is it that companies sometimes go from boom to bust in a matter of months? There can be many reasons for this, but I think the two, like, most important or two most frequent reasons are a couple of things. If you suddenly find yourself in a situation that's much worse, and it's probably because two things happened— growth slows down, and at the same time you keep spending cash according to your original plan and expectations. And what you— what then typically happens is basically what you can see here. Let's try to look into this formula, which is really a formula for disaster, in some more detail. And if you— if your growth slows down and you keep spending according to your original plan, it's quite obviously that you have a higher burn, shorter runway, less ARR, less investor interest. And in a red-hot VC market like the one that we had in 2020, 2021 in particular, you might still be okay, or you might still get away with this. But in a tougher financing market like the one that we've entered a couple of months ago, this is a huge problem. In the best case, if you have to raise in a situation like this, you might have to raise at a much lower valuation than you, than you were hoping for. It might even be a down round. In the worst case, you can literally go bust. Let's try to dig in a bit deeper here, like how does it work and what are the mechanics and how can you diagnose a problem and what you can do about it? We're going to look at an imaginary SaaS company, obviously called ACME, and I'll show you the projections of this company. The company is at $4 million ARR, and they've recently raised $12 million in venture capital financing. The plan of the company is to triple ARR to 12 months— to $12 million ARR in the next 12 months, and then to continue to grow very fast and reach $19 million of ARR in 6 months later. You can see the ARR projection here, and on the next chart you can see the cash flow projections. Green is cash coming in, red is cash going out, and the red line is the, the net, the net burn. And here on the top right you see the, the bank balance as a result of this. It looks pretty good, at least based on this plan. The company has about 18 months of runway, which maybe sounds reasonably good. But now let's fast forward 6 months and see what happened. So 6 months later, the company has been doing pretty good, like didn't quite hit their plan. But pretty close. So they've grown from $4 million to $6.2 million in ARR, which is, as you can see, it's not quite— it's not 100% plan achievement, but it's pretty close. If you look at the cash flow charts here, you can see the actuals really not a hugely visible difference that you can see here, at least on this scale. And here what happened to the bank balance. But now the founders or the management of this company, they decided to take a much closer look, and they, they saw that their growth rate in the, in those first 2-6 months has only been about 7.6% instead of the 9% which they, which they were originally planning with. Which is not a huge, which might not sound like a huge difference, but because it's exponential growth and it compounds, the founders realized that things aren't quite going according to plan. So what they did is that they changed their forecast to make it more realistic. So here's the reforecast. You can see on this slide light green line, the what that looks like based on a more conservative, more realistic forecast. And now if you look at what the cash flow projection looks like based on that revenue forecast, but keeping costs as they were, and this is where things start to get pretty ugly because And as you can see here, if you look at what it does to your— to the, to the balance, to the bank balance of this company, is that they will run out of money after month 14 in comparison to month 18, which they planned originally. But because they're already at month 6, month 6, they only have 7 months of runway left, which means they have to do something immediately. We can talk about some of the things which they can do to increase runway a bit later on. But the key message here is it's about time. No, definitely not a day too early for the company to see that something hasn't been going to plan, according to plan, and they have to do something. If they had waited another 2 or 3 months to do something, the company would probably be dead. Here you can see the— again, like, what it meant to the bank balance. So what happened? The company started out with 18 months of runway, but 6 months later they only had 7 months left. I'm— what happened? How could it have been avoided? The simple answer is that the burden of the company was too high, that they didn't plan to have enough runway in the first place, and they should have had much more buffer. That's all true, but let's still dig a little bit deeper in here. One of the issues is that if you look at the total ARR, the delta is not very visible. Like, if you look at the chart here on the left, the dark green is the, is the actuals, the light green is the original plan. It doesn't look dramatic, right? It looks like the company is more or less on track. If you look at the net new ARR, however, the difference becomes much more visible. It's a really, really simple math, but nevertheless, I think some people, or maybe many people, or too many people don't really focus on looking at the net new ARR only in spite of this really being the metric that gives you a better insight, and which is where you basically see any issues earlier. And if you look at it in a different way here, maybe it becomes even more visible. So what you can see here is the ARR at the top and net new ARR at the bottom. And it compares the plan numbers versus the actual. And then in this green, yellow, orange, red cells, you see the percentage of plan achievement. And if you look only at ARR, it's always above 90%. So you might think it's all reasonably close to the original plan. Everything is okay, let's just continue. But if you look at net new ARR, you can see that the differences, that the amount that you've missed relative to your plan is actually much more serious. And really, as a startup, the ability to adapt super quickly is absolutely critical, right? It's being fast in general is probably the only advantage that you have as a startup going after bigger companies. But it's also really, really critical to react quickly to a new situation, whether it's a new situation by, based on lower growth or something having changed in your business or a change in the market environment, or maybe even a combination of both. And if you're not focused on the right KPIs, you will probably not be able to react quickly enough. And as I showed in this example, This can be a matter of life or death. Now, what should you do if basically shit has hit the fan already, or if you are already dangerously close to that iceberg? Well, I think there is no one-size-fits-all answer. There is a lot of advice these days. Along the lines of, um, every company needs 5 years of runway, or every company needs to be profitable. Um, I, I think that's, um, it's not— it's, it's, it's well intended, but it doesn't really always, um, doesn't really always work. Um, it's just not possible for every company to, to have so much to create so much runway, it might lead you to underinvest in growth. And then maybe you won't die quick, you won't die quickly, but you'll basically die slowly and miss your chance to build a really big company. So not every company is able to become default alive. The second best option that you have is to become what David Sachs recently called default investible, which I think is a, is a good concept. What he meant by this is think about how much runway you have and how you think you're going to look like by the end of that runway, or maybe 2 or 3 months before that, and try to find out if at this point in time you have a really high chance to be a company that has a reasonably easy time raising money from investors. So we can talk about that question a little bit, like what makes a company investable. We've tried to address this question like for many years with our SaaS funding napkin, which maybe some of you know. There is not— there is never just one factor or one metric that makes a company investable or not investable. It's always a combination of of many different things like non-quantitative things like your team and product and market and competition and all these things. But there are also many important metrics, and the later stage the company is, the more it is about quantitative metrics like growth and churn, revenue churn, net expansion, efficiency, and many, many, many other metrics. Growth is still incredibly important, and I'm going to show you some of the benchmarks here from Bessemer's very large cloud portfolio. As you can see here, the bar is still pretty high. If you're not growing at least 2x year over year, it's pretty hard to get investors really excited. At least until, let's say, 20-25 million in ARR. If you're significantly beyond that, then obviously the growth expectations in terms of the relative growth are a little bit lower. But if you look at these numbers here, which are really from the entire cloud portfolio of Bessemer, it's not only the unicorns or the public companies, it's their entire portfolio, you can see that the, the bar is, is pretty high. So growth continues to be very, very important, but what's maybe new in this new environment is that it's no longer growth at any costs. And efficiency is, is important, has become more important, because growth at, at any cost is no longer rewarded. And so you have to try to find the right balance between growth and efficiency. And in order to measure or get a sense for your efficiency, I like two metrics in particular that I'd like to show here. One is the, the burn multiple, which basically tells you How much capital do I have to raise for $1 of net new ARR? So I think it's a really simple to understand and quite practical metric to keep in mind. It's, it's, it's not possible to tell you like what is good or what is not good without knowing a bit more about your company. It depends on the stage, right? If you're just starting out, it's normal that your— that that value or that metric is higher because in the first couple of years you have to invest so much in product and engineering to get things off the ground and to even have a sellable product. So it's normal that this value is higher in the beginning, and then over time you, you can, you can lower it because you have some benefits of scale. As a general rule of thumb for SaaS companies around $1 million to $25 million in ARR, which I'm assuming is probably the, like, the range most people in the audience here are in, 1 to 5, 1.5 to 2 is good, 1 to 1.5 is or even lower is, is great. If, if you're spending or burning like $3 or $4 to add $1 in net new ARR, it's probably hard to convince investors because they will think about like, I'm going to invest $20 million here, they are going to add only, let's say, $5 million in net new ARR, um, and then they think about what does it mean for the next round, and it just doesn't look that, that convincing then. So the, the burn multiple is a, is a pretty important thing to keep in mind. Um, the, the other really important, like, efficiency measure is the sales efficiency. And what the sales efficiency does is it tells you how much net new ARR do I add for $1 spent on sales and marketing. There are a couple of related similar metrics like the magic number, which you may have read about, or like the, the net sales efficiency, which looks only at net new or gross sales efficiency, sorry, which looks at not net new ARR added, but all of the, which looks— I'll follow up with this. I want to make sure I don't say something that's wrong. So I'll, when I share the slides, I'll add the definitions of some of the other alternatives. But the bottom line is that there are some nuances in the way you look for only like net new ARR or new ARR, or if you factor in gross profit, if you want to know your CAC payback time. But in the end, it's always about measuring the efficiency of your sales and marketing machine. And a value of 0.5 to 1 is very good. 1 to 1.5 is even better, is great. So note that in the burn multiple, the net new ARR was in the denominator, while in the sales efficiency formula it's in the numerator. So for this one, you want it to be as high as possible. For the burn multiple, you wanted it to be as low as possible. It's not so important, I think, if you look at the sales efficiency or the magic number or the CAC payback time, which, which of these metrics is the right one depends a bit on your stage and in your sales cycle and a couple of other factors. But you have to have one metric that measures the efficiency, the efficiency with which you use— we can acquire customers and basically how long it takes for you to recover your investments in sales and marketing. Now, if we put these two metrics on a 2x2x2 matrix, we, I think, can make some pretty interesting observations. If you're in the top right corner here, congrats, then. It's— you're probably on a really, really good track. Everything is pretty awesome. If you're in the bottom right, then it means that your sales efficiency is very good, like very, very good, but your overall burn multiple is too high. So in that situation, you probably should not cut costs across the board in order to increase your runway. You actually have an opportunity to increase your sales and marketing spend until you reach the point where it stops to be efficient. So if If you're in this quadrant, you should consider trying to cut costs in everything that's not sales and marketing, R&D, G&A, and all like all these other buckets and try to shift more budget to sales and marketing. And this might be a little bit unintuitive because you might think that you just have to cut costs in order to maximize the chance of, I don't know, surviving or increasing your runway. But this is known— this isn't always the case. If you have an efficient sales and marketing engine, try to spend more on it, not less, and try to save money in other places. On the opposite part of that, if your sales and marketing efficiency is pretty low and your burn multiple is also quite low, it means that overall you're probably doing okay, but you're wasting money on sales and marketing. So in this case, you should almost certainly reduce your sales and marketing spend because it's just waste. And you should most likely, you probably have to let go some salespeople, reduce your marketing spend, spend, rebuild things, learn. And once you have a— once you're better in terms of your sales and marketing efficiency, then you can increase it again. You might wonder, like, if you think you're— it's not looking great right now, but you expect it to look good. Like, you'll probably wonder, like, should I let go my salespeople? I think they will do well in next week or next month? I can't give you the answer to that. It always depends, depends on your confidence that things are really starting to look better. Depends on how much runway you have. But there is no one-size-fits-all solution to most of these questions. Last, and I don't know, hopefully least, if you are in the, in this quadrant here in the bottom left, It means you're burning too much overall and you're spending too much on sales and marketing. So this is obviously a very tough spot, and in this— if you're in this situation, you most likely have to cut costs across the board, spend less on sales and marketing, and decrease your overall, overall burn just to ensure the survival of the company. You most likely have to accept that you're not going to grow very fast in the next 6 to 12 months, but you probably have no other choice. So in the— if you're in this situation, you most likely have to make pretty deep cuts and buy yourself time to improve your product market fit and basically to figure things out. All right, let me try to summarize some of the, some of the takeaways from this. You can and you should have an ambitious plan, but when it comes to determining your runway, it has to be based on a more modest plan. Like this gap that increases month over month, if you don't hit your 9% or 10% or 11% month over month goal, will just get bigger and bigger every, every month. So if you— and it's, it's usually at least at a Series A or probably even Series B stage startup, you usually don't have that level of predictability. So if you're basically planning to spend money that you will only have if you hit those growth targets, it's just very, very risky. So I think you need to have a more conservative plan which you use to, to manage your runway. As I talked about at the beginning of the talk, you need to have a look at net new ARR, because if you look at ARR only, you might not notice that things are off track fast enough. You need to be really fast to adapt, and you should consider having a burn budget. That's something that Jason wrote about in a blog post that really resonated with me. So you're basically defining a maximum amount that you and your team know they can burn, and you just don't increase that. So if you're— if you have less revenue than planned, it just means you have— you just can't spend more. So I think you need some guardrails to ensure that you're not running into the situation that I described at the beginning of this presentation. If you can't become default alive, then try to become default investible. And to become default investible, look at your burn multiple, look at your sales efficiency. You may want to move budget from G&A and R&D to S&M, or the other way around, depending on where on this 2x, 2 times 2 matrix you are, or you might also have to reduce costs across the board. I have a few bonus points that we can go through quickly, and after that I'm very happy to take some questions. So, I'm sure you've all read a couple of posts or many, maybe many posts by various people, VCs or CEOs, operators about ways to increase runway. I think not everything here is something for everyone. Consider it a menu of options that you can consider and kind of try to find the right ones. Based on your specific company. I'm sure there are a couple of other ones, or maybe many, many other ones that I didn't mention here, but those are some of my favorites. I just mentioned them really briefly. You can try to switch more of your customers to upfront payments. Like if you have a lot of customers paying you monthly, I think you should try to get more of them to pay you a year in advance. You probably have to offer them something like a discount. You shouldn't do too much, but there obviously there is a trade-off. You sacrifice some revenue in order to get some more cash. But if you need that cash, now is probably the time for you to do that. So that's something that you consider, and then you can need— obviously need to make sure that your sales team knows about it and is is incentivized to collect more cash in advance. Another possibility, if you have a significant number of customers on old pricing plans and you have increased your pricing in the meantime, is that you de-grandfather them. And this might feel odd to you, like talk to customers and tell them, well, you're going to have to pay us more. But companies have done it. You have to manage it carefully, and if you need some more cash, this might be one of the, one of the less disruptive ways of actually doing it. Next point, in general, try to increase your pricing. Pricing is a huge leverage. Lots of SaaS companies don't charge enough, so increasing pricing or expanding experimenting with pricing is generally always a very good idea, but if you haven't done it before or if you're not sure, now is a good time. It's another reason for you to consider it. The next one, it might sound quite harsh, but every company has 5 to 10% or maybe even more of people on their team who are just not performing as well as the rest. There is just no company where everybody is at the same level. So just consider letting go like the, the bottom 5 to 10% in the, in the sales team. It might even be the bottom 20%. And you will probably not lose much in terms of output and productivity by doing that. The next one, again, it's a topic which Jason M. Lemkin is the expert on and can tell you more about. Move on from any VP that isn't amazing. I think this advice has been given and repeated many times over, but it doesn't make it wrong. If you've hired a VP, sales, marketing, or any other function, and if he or she isn't absolutely awesome after a couple of months, then you know that you have to let that person go. Just, I wouldn't even try to understand the excuses why he or she isn't performing. I would just judge them based on the results because that's what you— well, that's basically what you're paying a leader to deliver. Next point, very tactical, but most SaaS companies or many could get much better at collections. It might be that if you hire somebody, probably just part-time, to chase revenue from customers where they didn't pay you or credit cards failed or things like that, they might— that person might pay for herself or himself. Next point, renegotiate with your vendors. As a SaaS company, you might have seen this from the other side already. In a downturn, everybody is trying to renegotiate, like, with their landlord or their SaaS vendor. So you should try to do that too. Again, it's maybe an awkward conversation to have, something that maybe you won't enjoy, but I, I think you can, you can do that, and it's another way of saving some money. Number 8: if you look at your marketing spend, you will almost certainly find that the last 20% or last 10% or last X percent of your spend is much, much less efficient than the average. That's just really basically quite natural and logical. You catch the lowest-hanging fruits first, and then the marginal spend, like the marginal customer, is just much, much more expensive to acquire. So just by cutting like the last 10 or 20%, you can probably save, save some money. And the last point that I'm going to mention here is that you can consider venture debt or revenue-based financing, but it should probably be the last resort because it'll add a lot of risk to it, to your company. So if, if you do that and things don't work out, then basically the bank owns your company by the time you, you have to pay back. So not the, not the best way of extending your, your runway in a situation where the company isn't very healthy. That's all I have in terms of slides. Thank you so much for your attention. Very happy to take any questions. And as I mentioned on Twitter, because there is usually Usually nobody who wants to be the first. Whoever is first will get a 0.9 SWOG package. And I think we have somebody from the Saastr team, I think Caitlin or somebody else with a microphone.

So thank you for the great presentation. My name is Manu Matés from here, from Barcelona. Yesterday we had a dinner with some SaaS founders here in Barcelona, and some of them say, listen, it seems that it's coming a disaster, no?

So I'm sorry, I have some trouble hearing you. I don't— speak into the mic for everybody else and I try to understand you too.

Question is, how much—

could you speak into the mic?

Yesterday we were talking with some SaaS founders about what is macro and what is uncertainty. So There are some VCs at late stage that seems that they don't know which can be the upside and so on, and they are starting to stop valuations and investments now. They say, "I don't have a view, a clear view which will be my upside in the next round, so for the moment I stop." This effect from top bottom will go Do you think that you will go from Series B, Series A, and C? What's your thought about this? And what's your thoughts about, hey, I'm investible, as you say, and I can continue the market and going for money?

Yeah, great. Thank you. So the question was— I hope everybody heard it— like, basically, what is— how do investors react to in this current environment? And basically, is it trickling through? Through from the public markets to the later-stage growth financing and ultimately to Series As and seats. I think it's, it is really cascading through, right? The, so the impact on from the public markets are, have been very, it's been very fast to trickle down to pre-IPO financing and later-stage like growth equity financing. Because these types of investors, especially the ones that can invest both in private and in public markets, they, they will look at this delta. And for them, they will just think, why would I invest in a private company at 30 times ARR if I can invest in a public company at 5 times or only 10 times ARR? So this will be arbitraged away really, really quickly. And on top of that, some of these crossover investors who invested a lot in both private and public SaaS companies. Now they see like the public portion of their portfolio like devalued by, I know, 2x or even more. So it means they have basically overallocated on the private side now. So there's a lot of drama happening in the pre-IPO and growth rounds. I think it will trickle down to some extent to earlier stages, but I think it's a bit too early to tell like how much, right? I think everybody is— most investors that I talk to tell me, yeah, they are still excited about SaaS, and obviously we are. But I think it will have an impact if some of the players that were so active in the last few years just go away. So it'll increase some— it will decrease some of the competitive pressure. Um, my, my guess is that we will not go back, maybe never, or maybe not for 10 years, to what we've seen in 2020 and 2021, where there was a lot of craziness, like every round being done in just a couple of days at insane valuations. Um, so I think now is more normal than the last 2 years, and I think if things kind of stabilize the way they were between, let's say, 2016 and 2019, I think that would probably be okay for everybody.

Hello, I'm Jean-Louis from Socialbund. I think so, the presentation is really great. I would say that there are many companies that are not in, in this type of quadrant, but they're just profitable and bootstrapping. And, and I think that this new period is a good moment for the bootstrappers, honestly, because most of us face companies who burn a lot. And, and who— we, we face these companies now, probably the burning rate will be lower and the competition will be probably more fair for the bootstrappers. Bootstrappers. So I, I can understand that for some, some of us it's a bad moment, but for others I think it's a good moment.

Yeah, absolutely agree. I think there are two types of companies that are in a good spot now. One is bootstrap companies, right, because they never made themselves dependent on, from financial markets or investors anyway. And then on the other hand, companies that raised a lot of money 6 to 12 months ago, but have— but importantly, have not increased their burn rates, like, accordingly. So those companies that have raised maybe 5 times as much as they wanted or should have raised, and if they haven't increased their burn rate as much and they can kind of stretch this over to have a burn rate of many— a runway of many years, that's great. I think the companies that are in trouble trouble are the ones that have raised a lot and then immediately started to create a huge burn rate, and/or companies that maybe were— had a— have a high burn rate and were about to raise but haven't raised last year. But bootstrapped companies definitely can be super strong in this, in this situation, and you can still consider raising if you want to accelerate because you're in a great position to to be, you're in a great position, make very attractive for investors. And the value of cash is actually bigger now, right? So if you can raise capital now, you can probably buy other companies and do all kinds of things.

Thank you very much for the presentation.

Louder.

So how hard do you think it's going to be for companies that are used to have a big cash burn? I'm just taking back this question here, and I want to know how hard do you think it's going to be for companies that are used to burn a lot of cash in order to grow, to pivot into a more profitable model?

I— it, it obviously depends, right? Depends on like what they— why— depends on why are they— why do they need so much capital? Like how do they spend it? Do they spend it on, let's say, moonshot product developments, which might be good investments that just don't pay off? Quickly, or do they spend money on inefficient ways to sales, to buy customers using sales and marketing? And in that case, they should probably cut costs very quickly. I, I think it's not going to be easy, but it's possible for these companies, right? And the sooner you react, the better it is, because every month you wait reduces loses your runway, and it means that once you do pull the plug on some of these things, it'll just become harder and harder. But I mean, there have been, I know, probably thousands or tens of thousands of cases of startups going through a phase like this and maybe laying off 20% or 30% of their people and downsizing and that came out as healthier companies after that. So I think this is definitely possible. This is not a death sentence, but it requires really fast, decisive action and doing things that are probably amongst the least pleasant things that you can do as a CEO.

Designer in Brighton. And I'm wondering, you were mentioning in order to increase the runway, you can switch the payment model from— love feedback— going from monthly to annually payment, right? I'm just wondering, what's your experience doing that? Isn't it something that can backfire, that people wouldn't sign up It depends on your customer segment, right?

Like enterprise customers are totally used to paying annually, and, and they even want that, right? They don't want to deal with having to pay something on a monthly basis. If you're targeting SMBs, they, they might prefer to pay you, you monthly, but they might be be okay to pay annually too. And if you give them an incentive like 1 month for free or 10 or 15% discount, they might actually like it. So I think there is really no risk in trying that. It's not— I'm not necessarily saying you should force everybody. I think you should try. You should give your sales team the right incentive. You should give your customers the right incentives, and then I'm pretty sure that a certain percentage of your customers will make that switch. I think it can be 5% or 30% or 40% or even more, right? It really depends on a lot of factors, but I think there is really no risk trying that.

Hi. Hello, I'm Leopold from Evina. Thank you, Christine, for the presentation and the blog post as well. Always super useful. My question is with regards to the burn multiple and this kind of indicators, and what in your opinion is the right time frame to to use when you look at those. Because for instance, if you hire, you know, sales in an enterprise environment, it takes a while for them to ramp up, and so your burn is gonna mechanically increase before it stabilizes and then decreases, you know. And so if you look at just one month or a quarter, it's a bit biased and it can feel a bit scary, and it's actually normal. So why in your opinion is the right way to look at that, both in the past and then in the future also?

Yeah, right. I think it's a very good point. Like, one, like, not all revenue is created equal, right? So if you're selling to enterprises and you have a low churn rate, you might even have a strongly positive net dollar retention rate. So $1 of new ARR from an enterprise customer customer might be worth $1.20 next year and $1.40 the year thereafter. And that definitely means that you should want to spend more on acquiring that customer, right? And you should be, you should be willing to accept a significantly lower sales and marketing efficiency. So maybe you're, you're saying that 18 months of payback on that customer is, is fine because you know that you have this, this amazing net dollar retention. I guess the only caveat here is, can you do it if you're running out of money in 6 months? Then you probably just don't have the choice and you have to do things that are really focused on more short-term results. Um, so I, I think if you're like early enough in your planning cycle, you can kind of, uh, think about these like longer-term investments. But there might be a situation where you just, where you just have no choice but, but optimizing for the short term.

My name is Rahul, uh, forecasting.ai. Hi, one question that I have is basically during this slowdown in the VC market, how is it going to affect companies with high R&D expense? Now what I mean by R&D expense is we are a deep tech company. This means that we have to have an R&D budget which we can't cut in a short period of time. So what's your perspective on, let's say, AI-based SaaS companies during this time?

Yeah. Hey, thanks for the question, Rahul. I think, yeah, that's a good, um, good question. I, I think it's a bit too early to tell, right? Things are really, uh, moving very, very fast. And today the market is maybe already different from what it was 2 months ago, and it might still be different in, in another 2 months. I, I think pre-seed or seed companies will still be able to raise significant amounts of money, like let's say $5 or $10 million if it's the right team and if it's the right opportunity to do that R&D work to get a product into the hands of customers. And so basically, you— maybe one way of looking at it is you have this initial shot, right? You get this pile of money, but you have to do something with it. You have to prove something. And in comparison to last year and the year before, where money was just cheaper and more readily available, it's probably fair to assume that it's going to be somewhat harder. So I, I, my, my default assumption is just that it's comparably harder to raise for any company at any given stage, because in the last 2 years there was just so much money in the system trickling through to basically every bucket. So I think you— you— the unfortunate, or maybe tough, message for almost everybody might be that you have to do more with less. Yeah.

I'm Patrick from Motion Tools. Thanks for the presentation. You mentioned sales efficiency on the one hand and gave a really nice framework for that. On the other hand, some best metrics for growth, like what is considered good. What is a good kind of rule of thumb on how to bring those together and say at what kind of sales efficiency is it still good enough, like the growth rate, or when is it okay to even grow faster?

Yeah, so for somewhat later-stage companies, there is this famous rule of 40, which you might have heard about, which is basically you take your growth rate and you add your EBITDA or cash flow margin, which is usually negative, and then you get the sum of those two values. And if it's above 30, 40, 50, that's generally considered to be good. And if it's lower than that, it's not so good. The problem is that this only really works if you're at, I know, $10-15 million or so in ARR. At a much earlier stage, you will almost always have a not so good rule of 40 because the investments in product and engineering are just like so high that they matter, relatively speaking, so much more. I think at the earlier stage, you probably have to wonder what's the minimum growth rate that I need to attract investors, and then you try to get there as efficient as possible. And if the conclusion is that you won't get there in an efficient way, then you need to do something else. Then you probably need to like kind of like be back, go back to bootstrapping mode, or somehow extend your runway and assume that you're not being investable for now, and you need to kind of get back to the, to the drawing board. So that leaves the question, like, what is a good enough growth rate? At the early stages, like, let's say below a million in ARR or a couple of million in ARR, I think 2.5x is probably pretty much the minimum. Definitely more than 2x. I think anything below 2x is a, is a bad thing. Signal for, for investors. And even if you're at $5 or $10 million ARR, as you saw from these Bessemer metrics, it's like the 2x still holds until, I know, $10, $15, $20 million ARR, where, where it gets really, really difficult. So the, the bar is pretty high there. Yeah. Hello.

So subscription is the business model that we're talking about today, but what are maybe one or two verticals that you and Pointnine find interesting at the moment?

Yeah, so at Pointnine we do primarily two things: B2B SaaS, the subscription model that you mentioned that we all love here, and then we also do B2B marketplaces, and then some of these companies do both, like what we like to call SaaS-enabled marketplaces, which can be really, really strong businesses. In terms of the verticals, which, which you asked about, and we really like, especially for the marketplace side, we really love verticals that I probably didn't even know they existed before a founder tells me about it. Like, we're an investor in a company called Laserhub, for example, which is a marketplace for custom-made metal parts using laser cutting. Probably none of us in the room is really like— has thought about this industry. I'm happy to be proven wrong, but it's probably trillions in size. Or similarly, logistics, or like like metal trading. So there are so many companies from the so-called old economy that are working in a really inefficient way. Um, like, we, we tend to think that every company that transacts using phones and fax machines deserves a better solution, a better SaaS solution, probably a marketplace to match supply and demand. And, and so we're really, really excited about these types of industries that are not really on everybody's mind and where you need founders with super deep domain expertise to build a company there.

Hi, Espen from Kindly AI. Thanks for a great presentation, and I also love to read your posts.

Thank you.

And this question is because you maybe have an answer to it apart from a lot of others. So what we have seen through the GFC and the COVID situation is that quite some customers have chosen to stick to their current vendors and rather increase their commitment with current vendors rather than having new vendors. Would you have any thoughts on— I mean, because if we are going into troublesome times, it could be harder to acquire new logos rather than to stick with the current customers. So my question is more on, from experience with other situations, GFC and the COVID What, what was the decline in new logo retention in terms— and, and what was the stickiness of current customers? Could be, it could be a topic for a post of yours. Yours.

Thank you. Yeah, so I, I don't think I have a quantitative answer on that. And maybe if the question is like, how can you deal with that situation? I, I think it's maybe related to like, in general, like your product market fit and the urgency that you can create for customers to, to buy your product because it's much better than the competition. So, which means that it's a complex topic in which where the answer doesn't fit into like just a in just a few minutes, but maybe just two things to think about. Like, one is to just, in a situation like this, spend more time with your existing customers so that they expand more with your product. If the behavior that you observe is that in your industry people stick more to whatever they're using already, so maybe you can try to benefit from that as well. And then when it comes to selling to new customers, I think it's generally hard to sell to customers when they don't have a pressing need. So obviously you can do a lot of things, you can have a better sales team, better tactics, but I think the thing that probably works better is to find better leads. I think if you chase leads that don't seem to have the right urgency and they might be reasonably happy with whatever they are using and might not see your USP, it might just not be the, the best use of your time or your salespeople's time. And so what you should maybe try to do is open up the funnel, try to get more leads, and but then let your sales team be picky to focus on the leads that have the highest probability of closing. And if you don't have any of these leads, then I think it just points to a deeper problem with your product and positioning. Yeah. One or two more questions?

Hello. Hey.

Okay.

Hey. So thanks a lot for the talk, it was amazing. One question, you talked about the sales efficiency. So we're seeing an impact of the overall situation and environment also, for example, on the conversion rates, sales cycles are getting longer, acquisition costs are going up. So what's your point of view there, like how do you think companies companies should adapt also to the market, uh, you know, behavior.

Yeah, that's a, that's a very good point. And I, I didn't even, even mention this in my talk, like, like what could be some of the impacts on really the fundamentals of the company, right? It could be that companies' customers go out of business, right? I think we're not really seeing this yet, at least not in big numbers, but especially for companies that sell to other startups, and some of them might go out of business, that could really have a pretty bad spiraling effect. Sounds like you might already see it, and maybe not in churn, but in lower conversions and/or lower or longer sales cycles. That's definitely not, not that unusual. I don't know if there is a simple way to, to address that, right? And I think you can try try all kinds of tactics to increase your conversion again or reduce your sales cycles, but at the same time you probably also have to take into account the possibility that it'll just be like this for some more time and then adjust to it. If it means you have somewhat lower growth than you planned, then you're maybe a bit like this company that I, this imaginary company that I talked about that should find some ways to extend runway. So, but I think it really depends if you can make investments in sales and marketing, customer success, which kind of deal with the core issue. Then if you can do that, that's great. But if that doesn't work out, then you'll probably have to do something else to at least have enough runway. I think we're out of time. Thank you so much, everybody, for joining, also for the great questions.