How to Double Your Magic Number and Increase Your Go-to-Market Efficiency with Sapphire Ventures

Thank you all for coming. Excited to be here. We're here to talk to you all about go-to-market design, which we firmly believe is a far too often overlooked yet critical driver of the health of any SaaS business. And this particular talk is portrayed through the lens of the magic number, which as we all know is a top 1 or 2 metric, SaaS metric for any business. So excited to get into it. I'm Rajeev. I'm a partner at Sapphire Ventures on the investment team. I've been investing for over a dozen years now across a few dozen companies, been fortunate to partner with companies like monday.com, Braze, Outreach, uh, Flowcast, Sixth Sense, and a whole host of others over the years. And I have a particular passion, I would say, for working with management teams and founders from that $5-10 million ARR scale to hundreds of, of ARR. and particularly around go-to-market and the iterations around go-to-market, different motions, different metrics, different organizations, and the ups and downs across it all. That's what inspired a lot of this particular topic.

I'll introduce myself as well. Karan Singh, partner at Sapphire Ventures. I run our revenue excellence practice and manage, curate our broader go-to-market community. Before Sapphire, I was an in-seat go-to-market strategy operations leader for large B2B technology companies. Most recently at Procore and before that at Cloudera and ArcSight. In all three instances, I was responsible for and helped participate in building what I would call sustainable, durable, and efficient go-to-market organizations. So this topic that we'll cover with you folks today, near and dear to my heart as well.

Thanks, Curran. I'm Jane. I am a vice president here on the investment team at Sapphire Ventures. I've been investing for a little over 5 years now. And have also had the fortune to work with and also learn from a ton of amazing B2B SaaS companies. So over the last couple of years, we have seen a significant drop in go-to-market efficiency. By efficiency, we are specifically referring to the net magic number, which is calculated as total net new ARR divided by total sales and marketing spend. In a given time period. And we've seen this metric drop precipitously across both public SaaS companies as well as private companies that we have observed in our own portfolio. And just to give you a sense of magnitude on this change, we can see here that the median Net Magic Number for public SaaS companies has dropped from 0.7x earlier last year to 0.3x in the most recent quarter. Just to put this 0.3x in perspective for all of you, this means that you are spending $3 in sales and marketing to generate every $1 in net new ARR. And we're here today to not only talk to you about why we think this decline happened, but also more importantly, one less talked about way that you can use to double your magic number without having to reinvent the wheel or just cross your fingers for better quota attainment. But before we get there, let's just take a step back and talk about why the magic number is an important metric. So the magic number is a key measure of financial health for any SaaS company, and it has really significant implications for a company's ability to not only drive profits, but also its ability to drive growth. So let's just bring this to light with an illustrative example we have here. Say you have a mature B2B SaaS company doing $650 million in GAAP revenue, and it's growing 30% year over year, but operating with a 0.4x magic number. And say you back into the sales and marketing expense from Magic Number and assume that the R&D and G&A expenses are around similar levels as public SaaS comps at similar scale. What you end up with is actually quite an unprofitable business operating with negative 25% operating margin despite having significant revenue scale. At above $600 million in revenue. And what does this mean? It means if you want to reach breakeven, you will have to cut that growth down by half, down to 15%. Or if you had a magic number of 0.7x in this, you would already be at breakeven. So this just goes to show that efficiency is what gives you the ability to double your growth and grow faster. And all of this also goes to paint the picture that having a low magic number really diminishes your ability to not only drive profits, but also your ability to drive growth. And it makes that path to profitability just that much more challenging. And I think we all know that profits is what drives shareholder value in the long run.

Thank you, Jane. Now that Jane helped to reground us and refresh us in the importance of magic number, let's talk about why, what's driving that deterioration. Number one, I think most of us know it and most of us feel it. I feel it in board meetings. It's just hard out there to sell most software. Maybe there's some verticals or some motions that are still working, but by and large it's hard. And that's really reflected in a decline in the core AE sales attainment. It's interesting. I was just reviewing in preparation for this, a lot of the board decks coming out of Q2, just the quarter that just passed, comparing the sales, AE sales attainment to Q2 of '21. And Q2 of this year was roughly at 60% for some of the best performing private SaaS companies. That same number was 90% in Q2 of '21. That's about a one-third decline in AE sales attainment. Again, Macro clearly has an impact on this. We all hope the demand environment will soften up, and I think it will one year from now, and that'll boost back up. But the point here is, I think that's just one reason, and there is something still missing to the equation of what's driving this decline in Magic Number, because as I just mentioned, there's two factors. One, the decline in sales efficiency has been 60%, but the decline in quota attainment, we think, is roughly 30%. There's still a big gap. Two, I've had 3 conversations with CEOs that I work with talking about second half of the year planning and next year budgeting. And we were modeling some uptick in attainment, hoping we would get back to 85% attainment. Assuming healthy ramp times and quotas across your sort of sales organization is pretty darn good. I would be pretty excited if you could perform at 85%, anyone consistently. I saw that input and then I saw the output of these models and I'm like, wait, why are we still at a 0.4x magic number? There's something disconnected. I would've expected a 0.8 or 0.9, something close to the 1x that everyone dreams of. That's top decile of companies. But there was something, a massive disconnect that still leaves a reason number 2, which got us to really thinking and led us to the next slide, which is what we really are missing is this go-to-market design point, this ability to holistically look at your go-to-market organization beyond just the AEs. Realize that of course there's so many other folks in a go-to-market organization and pockets of spend. And that most importantly, we've spent a lot of time looking at the data, the board decks, surveying the operators at best-in-class companies over time. And what we've noticed is 5 to 7 years ago, this composition of the go-to-market team, the ratios of this individual to that individual has changed dramatically over the last 5, 7 years. I saw saw it start to happen in 2018. And then now I think there is some re-engineering to go back because the sales attainment hasn't kept up with that shift. So I'll let him get into the data and tell you exactly what that means and how that translates to numbers.

Right on. I'm going to go a little bit deeper on the same topic. So we do, we have a belief that go-to-market org design and more specifically tuning the composition of your go-to-market org is probably one of the most meaningful levers you can pull on right now. It has massive implications to the success of your business. And we were able to go in and look at around 5 to 7 years worth of data, trended data, to see if we could glean any observations or learnings about how go-to-market efficiency has been changing. So what's happening practically out there? We went out to a slew of operators in our network from companies like MuleSoft, New Relic, ProForce, Snowflake, and others, and got their perspective, effectively pressure tested some of the things we were hearing, feeling, sensing. To come together and have a perspective on how go-to-market efficiency has been evolving. So let's start with the numbers. This is what jumped out to us when we looked at our Boarddex and some of the trends that we've been seeing, that go-to-market composition has changed pretty significantly over the last 5+ years. Most specifically, we're seeing that the percentage of investment that we've made against quota-carrying sellers has dropped. So back in 2018, on average, what we were seeing was around 30% of go-to-market investment was going to quota-carrying sellers. Now that number is actually closer to 10%. That's a pretty meaningful and significant change in composition and something that I know has ramifications to what we were talking about earlier, which is magic number and overall efficiency. See, we know there's a challenge here, and when we saw this number and we saw this data, our immediate reaction was, why did this happen in the first place? Rajiv alluded to some of it, but I think there's more beyond. Here's our belief. Our belief is that there's external, think macro, advanced macro changes that have ultimately informed and influenced how company leaders are thinking about investing in their go-to-market. Let me get a little more specific as to what I mean there. So for starters, I think we all know, felt, and have seen the zero interest rate, free money environment in the years past. What that meant tangibly, and we see this now from the VC perspective, I certainly do. Is that led to an abundance of capital that needed to be deployed out, right? VCs did exactly that, which has led to a proliferation of SaaS companies. In other words, a highly competitive environment. I suspect a lot of the operators in the room have felt that in the companies that they've been a part of. I see some hands raising. I was one of those and I felt the same too. So on one hand, we have— we've seen this increase in a competitive environment. I think we've also felt and seen that growth rates haven't slowed down or hadn't slowed down back then. There was some aggressive targets we were all achieving. So knowing those two things together and having that additional capital, we saw some of the behavior trends change across our portfolio. And some of these things should make sense. For starters, investing ahead of growth. It's something I did at Pro4 because we had such aggressive targets. So how do we set ourselves up, not just for now, but for one year from now? What are we investing in? and certainly that's a healthy behavior. But what we've also seen, both in the data as well as in our conversations, is that there was an additional incremental investment against what I call supporting resources, resources around the entire go-to-market engine that ultimately should drive upseller productivity. Think sales engineers, SDRs, CSMs, et cetera. And the thesis is pretty straightforward, right? It's something that I also was involved in past lives, which is that if you allow for more specialization across the go-to-market engine and really help sellers focus on the main thing, which is closing deals. In theory, what should that do? That should drive up productivity. That should lead to more pipeline generation, better conversion, and ultimately help hit the targets that we have in place. In practice, that's not what's happening. We're seeing a drop in seller attainment. In fact, we went in and spoke with a lot of the operators, a lot of the CROs within our portfolio, and they all alluded to the same thing. That this and these investments, while it was the right decision in some way, shape, or form, or the premise was correct, have actually led to a diffusion of responsibility, which has led to a lack of ownership. In other words, nobody's quarterbacking the full go-to-market engine the same way as they were before. This has some pretty sizable implications, and we're going to go into some scenarios that explain that. But the moment that we recognize the challenge at hand, which is the composition of go-to-market is changing. We understood why it was happening in the first place. We packaged all that up and went back to our go-to-market community and said to the operators in our network, we know there's a challenge here. The challenge is that we need to rethink go-to-market org design, especially in this day. How should we think about it? So consider a complete blank slate. Forget what you're doing today. Forget what you've seen. Tell me what good and great would look like if you had the chance to start from anew. And we captured all that information through a survey, through conversation. And put it together. Here's what we saw. This is very much more sort of SLG-centric than PLG. So if you're more sales-led versus product-led, it is a little bit of a different animal when it comes to these ratios. But directionally, this is what they all came back with as what good and great looks like. Here's the observation we had when we looked at the data. Actually, the way that operators think about what good, best practice go-to-market orgs look like actually are not reflective of what we see in board decks and in an org design today. In fact, this is far more similar to what we've seen in 2018. So by no means am I suggesting we need to turn back and look at what 2018 is and was and use that to reflect of what it needs to be today. It's more the observation that great operators in our community understand the importance of a balanced go-to-market organization and the importance of the efficiency gains that you get from that. So with that, I do want to take a step back because this is to me a really important concept. And the best way I think we can illustrate it is actually through scenarios and examples. And so I'm gonna actually pass it over to Jane now, and she's gonna go through a few of these to give you a sense of the impact of org design on your overall company success.

Thanks, Curran. So let me just walk all of you through an illustrative example of how go-to-market teams were typically designed back in the day, say 5 to 10 years ago. Let's say you have a business with 36 quota-carrying reps, each with $1 million quotas. So altogether you're supporting a bookings goal of $30 million for the year. For these 36 sellers, what we used to see in terms of the composition of the various supporting roles for the sellers looks something like a 3:1 AE to SDR ratio, a 3:1 AE to SE ratio, a $3 million book of business size per CSM, and a 10:1 RevOps to revenue FTEs ratio. And under this specific go-to-market composition, let's say we assume 85% quota attainment with some reasonable assumptions around churn. What we're looking at is an aggregate sales and marketing spend of $24 million against $20 million in net new ARR. And this gives us a magic number of 0.86x, which is actually pretty healthy based on a lot of the survey data we have seen published out there. And in fact, it's actually pretty close to the historical top quartile magic number trend of around 1x. Now let's fast forward and look at how these teams are designed today. And what this composition of different roles and how that's really drastically changed over the years. For the same 36 sellers, what we're seeing is an AE to SDR ratio closer to 1:1, and this all came from a fair attempt to boost pipeline generation and take prospecting responsibility off the sellers. For SEs, you know, we're seeing a similar lower AE to SE ratio now closer to 2:1. As companies now claim they have a much more technical sale and may need much more technical resources. On top of that, with the increased focus on driving up retention and expansion, we're now also looking at much bigger CSM teams with much smaller book of business sizes. And this similar trend also holds true for marketing and RevOps. And all in all, all of this happened as part of a very sincere effort to drive up seller productivity. However, what you end up with is a significantly different go-to-market org. One that has so many more supporting roles with so much higher expenses for the exact same number of sellers, for the exact same bookings target. And not surprisingly, This change in go-to-market org composition has some pretty significant impact on your go-to-market efficiency. In fact, if we want to go back to the same level of efficiency that we had from scenario 1, what we have to do now under today's go-to-market composition is to increase sales quota attainment to 120% across the board. So just let that one sink in.

By the way, I would have loved to have 120% attainment. Never happened for me. I think those scenarios are really interesting. I think illustrative of the point that we're making. In fact, when you put the two things right, two scenarios right next to each other, it's even more evident the challenge that we're facing. Same quota capacity in both scenarios, almost double the spend. And that is certainly untenable. And that is effectively what we want to speak to today, is that there needs to be a rethinking around go-to-market org design, because that has massive implications across your organization. And in particular, we have a belief that sellers need to come and become right at the center of the go-to-market engine once again. Overspecialization or specialization in some ways can be a very healthy exercise, but we still need somebody quarterbacking the entire initiative to make sure that they can understand how these different roles work together, how they hand up. We can make that shift and we'll speak a little bit more on the how in a moment. And we have the mindset of having a more balanced go-to-market org. I think you can set yourself up for what I think is the most important thing right now, which is a durable growth company, a company that can stand and withstand the headwinds that we're all facing and feeling today. So with that, we want to give you a little something to chew on as you go ahead, as look forward in your go-to-market organizations, how to think about resetting or restructuring or recomposing your organization. There's some guiding principles we'd suggest. I do want to start by saying that, and we've seen a little bit of this, when you see that efficiency metric and it hits you right in the face, the immediate reaction for some companies is, hey, we gotta cut spend. We're here to tell you that's not the goal. It's not to indiscriminately cut spend, but rather to rethink and recompose the spend that you have. We spoke to this with the magic number slide at the beginning as well, which is that if you can spend effectively and in a balanced fashion, you actually can drive up growth in your business as well while maintaining that cost efficiency. So that is what we're advocating for. Now, how do you do that? For me, there's 3 primary guiding principles. And by the way, there's probably more than this. These are the ones we're most passionate about. So number 1, be customer-centric. It's a lot harder to have role redundancies and poor handoffs if you start first with the customer in mind. And we do this, I do this a little bit with our portfolio companies as well. Map your customer's journey by phase and stage. And then look at that to understand what the objective is for the customer by the phase and stage of their journey with you, very quickly and very easily, you can find out exactly what it is you need to invest in from a go-to-market standpoint and where you may in fact have role redundancy. So start with customer first. Secondly, look at the full go-to-market picture. If there's one thing you should glean from today is that looking at go-to-market comprehensively is the approach to take. So I'll give you an example. We have a lot of folks talk about quota to OTE ratios being 4 to 7x, things to that effect. It's fair. We should consider things like that. But what about quota to full pod cost? All the resources that are being supporting, are supporting the revenue generation we're talking about. Consider that as a benchmark, as a guardrail for you, as you could build out a go-to-market org, the full go-to-market picture. And then finally, benchmark and iterate. So benchmarks to me are the starting point, not the ending point of a conversation. They give you the directional of when you're out of the swim lanes, when you're maybe off the reservation. Use those to start conversations internally. Leverage those other two guiding principles to see if there's a good reason why you may be out of the benchmarks, or if there isn't, how do you want to tune and iterate? Which brings me to that point, which is that Go-to-market org design is not a conceptual exercise. It's a people-centric exercise. So we have to be mindful about how we make this progression and transformation. Take the time, tune, iterate, and continue to do so until you get to a healthier place. Ultimately, we think that if you can look at your go-to-market org, rethink it, assess it, pressure test the composition. And make sure you're following some of the guiding principles that we've set here, you have the opportunity to build that durable growth organization, to build a little bit more consistency in your org and help it drive success.