ICONIQ Ventures: Building Resilience through Efficient Scaling in 2023 (Workshop Wednesday)

For any of those who are at our SAS for APAC event last week, good to see you back here virtually, and welcome back. So we do this every Wednesday, like I said, at 10:00 AM Pacific time. We share these detailed, interactive, hands-on workshops along with a few SAS experts. And this is live, and there is an interactive Q&A at the end. So you'll have the opportunity to interact with both of our speakers directly at the end of their formal presentation. To have any questions answered and connect with fellow community members. So as we go along in today's Workshop Wednesday, if you got any questions, drop them into the chat. We'll also be doing the Q&A live. So I'll ask if you want to come on and ask your questions of our presenters. We're also streaming worldwide, so we'll have some questions from our global audience streaming. But without further ado, this week we're going to hear from two great SaaSter faves, Jason M. Lemkin, um, Doug Pepper and Christine Edmonds, who are both from Iconic Growth. They are some top-rated SAAS speakers. Um, they just spoke at SAAS Annual. Doug and Jason did a VC panel not too long ago together. Um, so some really great heavy hitters for today's Workshop Wednesday. Um, and their topic of discussion today is gonna be on building resilience through efficient scaling in 2023. Highly topical for today. Um, so glad to see you all here. And again, we wanna keep this as interactive as possible. So at the end, feel free to come off mute to ask your questions and feel free as you see others to keep your camera on as you're tuning in. So Doug and Christine, welcome formally.

Thank you. Great to be here.

We're so excited to have you and you guys are our first duo. So the honors go to you as our first dynamic duo. We're gonna start with a few icebreakers before we dive into your formal content. First one is for you, Doug. What is one of your favorite investments that either you or ICONIQ has made in 2022 or recently?

Yeah, first of all, so great to be here. Always fun to be part of SESTER. I think I saw Jason on there. Hey, Jason. Thanks as always for including us and just awesome to be here. I guess I've learned to never answer the question, maybe like a politician, so I won't answer it directly. But I'll give just a tiny bit of perspective. We made fewer investments last year than ever before in the history of the firm in a decade. Almost none. And that's obvious. It was a tougher environment, in particular in growth. And that's not what we want to see. What I'll say I'm excited about is it's feeling like that's really changing already in 2023. Much more active. Deal pipeline. We've already committed to a number of new investments and it feels still slower than 2021, but dramatically more activity already this year, which is what's got me the most excited right now.

Yeah, that's, that's great to hear actually, because I know, yeah, on that last panel you guys all did together, it was a little dire. So good to see it's been turning around a little quickly. What is, I mean, a related icebreaker question, what's one thing that surprised you the most? I guess Maybe it sounds like the timing of the return.

No, that's not surprising. We're seeing that coming and it's sort of predictable as companies' balance sheets start to come down, they're gonna come to market and we're gonna find great opportunities, I think. You know, I think maybe what surprised me the most, including ourselves, is just to the extent to which great investors experienced investors lost sight of what we're going to talk about today during 2020 and 2021, which was the balance of growth and efficiency. And I think we all got sucked into the vortex of the low interest rate environment, high multiples, and focused solely on growth when we should have been focused on growth and efficiency. In many ways, I'm happy that we're back to that.

Yeah, well, I know you guys are going to cover a lot of that in today's topic. So without further ado, I will let you and Christine take it away.

Um, yeah, so I'll kick it off here. Again, super exciting to be here. And, uh, just quick introduction, uh, my name is Doug Pepper. I'm one of the investing partners at Iconiq Growth. I've been here for about 4 years, but I've spent 23 years investing in software companies. Typically, you know, seed all the way through pre-IPO in terms of stage, and have been lucky to be involved with companies like Braze, Marketo, Highspot, Calendly, Airtable, and many others. So it's been a really fun journey.

And I'm Christine. Great to be here today. I am also on our growth team. I head up our analytics function. I've been at Iconiq for about 5 years now and excited to share a little bit more about the type of work that we're doing on the analytics side.

We'll keep this short, but we gotta do just a quick commercial. So, and for those of you who don't know, I think it's helpful to know our perspective. So Christine and I are both with Iconiq Growth. We are a venture capital firm, $10 billion under management. What's unique is that we're part of something called Iconiq Capital, which was founded as a multifamily wealth management platform. Essentially, we help some of the world's most successful technology founders— you know many of them— manage their assets. And we decided about 10 years ago to create Iconiq Growth, again, a venture firm that helps those founders, those clients of ours, systematically back and support the next generation of founders, the next generation of iconic companies. And that's what we're privileged to do. Every day. And we've been lucky over the last decade to partner with companies like Snowflake, Datadog, GitLab, Procore, Braze, and, and many, many others. And it's just been a super fun platform to partner with those great, visionary founders.

One of the core ways in which we partner with our companies and support them is through our analytics function. And It was founded really on the same foundation of gratitude and feeling really like we're really lucky to have been part of these amazing growth journeys, to Doug's point. And so wanted to honor the opportunity to take the learnings that we've seen and the anecdotes and aggregate them, anonymize them, and share them back in the form of data-driven insights to the broader community. So today we're going to be sharing a number of different pieces of data across variety of studies that we've done recently. Much of this data comes from our portfolio ourselves, which you can see some of those logos here on the page. We also have some public companies pulled in that we've identified as best in class. And then some of the work is based on external survey work just to get a broader sample set across the whole industry. The main takeaway is these are real numbers based on real companies that we're going to share today and really excited to dive in. So some of you may be familiar with this framework. We will hopefully share more about this later on this year when we refresh our annual Growth and Efficiency Study, but it's really the 5 key biomarkers that we believe to be really representative of long-term health across businesses. Today, though, instead of sharing what longitudinal health has looked like over the past decade, we thought it would probably be more relevant and perhaps more top of mind to really dive into what does growth and efficiency look like in today's environment. So starting with 2022 and really trying to get a sense of from a data perspective, what did performance look like? When we look at attainment of plan, so what did companies project that they would add in terms of revenue relative to what they did, we sort of see the total impact that accumulated across the year. I don't think it's a surprise or secret to anyone that last year was challenging, and I think especially starting the year with more 2021-like growth expectations, by the end of the year, less than 20% of companies were actually able to hit or exceed that plan. I think maybe a more helpful benchmark to put some of these numbers into context, the 67% of companies that were below 75% of their original plan, that was closer to just below 10% in 2021. So definitely impact that was felt across industries, across companies of all scale buckets, but in particular those that were in more volatile stages of their growth journey. At the same time, we know that many companies started the year with really healthy balance sheets and were able to take many of the learnings from 2020 when they sort of went through the process of scenario planning for the first time and apply them relatively quickly. So while they weren't able to hit that top line plan, they were also on average able to burn significantly less than they had originally anticipated. And so if you look at this for— that's 2 by 2. Over 50% of the companies that we looked at ended up in this top left quadrant, again, missing the top line plan, but able to really extend their runways by burning less than anticipated. So we'll talk a little bit more tactically now about what those different tactics look like in terms of managing efficiency and really thinking through the cost structure over the course of the year.

Great, thanks, Christine. So, so Christine said it, and it's true, companies have figured out to some extent and still working on it how to grow, but grow more efficiently. And there's a number you've all heard from Jason and Saster. There's a lot of different metrics for measuring efficiency, something called Rule of 40. You've probably heard about lots of companies look at ARR per full-time employee. What we're looking at here is another one you've probably heard about by now, which is burn multiple. Which is essentially how much money are you burning for every new dollar of ARR that you're adding in a given period of time. By the way, we have a lot of data. We're gonna give you these charts afterwards, and we'll try to make these as simple as we can as we describe them. And I'll, I'll try to describe this slide and then provide two key takeaways from this slide. What we're looking at here is burn multiple at different stages of companies from left to right. The black bar is burn multiples for companies during the pandemic when it was all about growth, 2020 to 2022. The bar is burn multiples for companies before the pandemic, 2018 to 2019, where it was more about growth and efficiency. We think environment that's more like what you should expect going forward. So the first takeaway is, of course, the black bars are bigger than the blue bars. We got away from efficient growth during 2020 to 2022. The burn multiples were too high. You can see here in the back bucket on the left with companies less than $25 million ARR, the median was 2.1x burn to net new ARR. That meant half the companies were higher than that, many of them dramatically higher than that. And you can see the blue bar dramatically lower. So the first takeaway is look at the blue bar. Those are more normal and what you should be focused on going forward. That's number one. Number two, as you move to the right in scale, those burn multiples should come down. And what you see is that in the black bars, they didn't come down enough. Companies were not gaining efficiency as they scaled like they did in the blue bars. In 2018 and 2019. Look all the way over on the right, companies that are $200 million ARR and beyond. They were growing faster during the pandemic, adding on average $96 million ARR, but they were burning $77 million to do that. Look at the 2018-19 companies. They were adding a little bit less, $83 million, but they were only burning $33 million to do it. That's what we need to get back to. In terms of efficient growth. And those are the types of metrics that we're looking at now. And so how are companies— obviously this is anecdotal, but these are some of the actions that companies have taken and are taking. Obviously on the far left, reductions in force, very tough. You know, everybody's slowing down hiring, many freezes, everybody's looking at various aspects of spend. People are making changes to their go-to-market strategy to get more efficient as well. And so we can look at each of these, uh, with a bit of data on the next slide. So again, we looked at a survey of all of the most successful companies that we, that we've been a part of, and we asked them, what are you doing? And these were the results. And so you can see at the top, obviously most common, 80% of companies are slowing hiring. And on average, companies are only growing their workforce in 2023 by 10%. You can see that on the right. Compare that to last year where they grew 50%. People were hiring too many people, and that's changed this year. Uh, the other is software cuts. By the way, we all love software, and I hate that companies are cutting their software spend, but, but it does need to happen. And we got to a point where companies were spending too much on tools that were nice to have, not must-have. That's changing. Uh, 59% of companies are cutting their software spend on average by 14%. Then we get to RIFs. This is the toughest, right? Letting go of great people. And we are now at 56% of companies that have done some RIF. If you look on the right, on average, people have let go on average 16% of their work of course, obviously a big range. And then another tactic is outsourcing. And on average, companies bring about 10% outside of the company, either to an outsourced firm or a different geography. We wanted to just dig into the pattern of RIFs and how that's looked cumulatively over time. What you can see here in the purple is that RIFs have really increased quarter over quarter throughout the last, uh, 5 or 6 quarters, but with a big jump in Q4. Why is that? Well, the reality set in that the results of 2022 were not what people really wanted to see, and that's when everybody does their 2023 planning, and it was clear that people were burning too much, wanted to extend runway. And so you saw a big jump in RIFs, you know, by 2020 or Q1 of this year. We're now at 56%. So the takeaway should be for everybody on the call here that if you haven't done a RIF, you're actually a minority now, and you better be feeling really good about your efficiency, about your runway, if you're one of those companies that hasn't taken that action yet. So let's dive a little bit more into what are people doing to get more efficient in terms of go-to-market, which is obviously one of the biggest areas of inefficiency over the last 2 years and an area for people to really get efficient. Um, not surprisingly, if you look on the far left, almost every company, 83%, is slowing their go-to-market hiring. The nuance that I would add there is, of course, people are also letting go of people in go-to-market, and where they're doing that is, is interesting and honestly a bit sad. You know, people are letting go of the least experienced, the newest members of their go-to-market teams, in particular salespeople. The salespeople that aren't ramped, that haven't gotten productive yet, and haven't reached attainment yet. And so what's left is your most tenured, highest attainment reps, which could lead to much better efficiency in 2023. That's the goal anyway. You know, another category, actually categories 2 and 4, I would, I would suggest are around adjusting pricing and contract terms with customers. You know, really the name of the game right now is reducing churn and increasing retention. And companies are doing that by giving price breaks to customers and saying, "We'll give you a price break this year, but know when things get better next year, pricing might go back up." That's one tactic. You know, another one is, you know, and we've done this for a while, you know, incentives for longer-term contracts. So multi-year renewals, giving a real price break around things like that. And then categories 3 and 5 are really changing the comp structure of your salespeople and your business development reps to really align go-to-market with what you want. Some of that might be higher, higher— this is commissions for long-term contracts, higher commissions if you are generating pipeline and closing deals in the highest quality verticals, for example, really focusing on what are the ideal customer profiles and incenting salespeople through compensation to go after those. Those are just a few examples of some of the things we're seeing out there to drive go-to-market efficiency. And so the result, you know, ultimately is What is a company's cash runway as well as burn rate, which we have burn multiple, which we talked about before. And the results here are amazing. If you think about it, just look at the two bars on the left. The light green bar is the runway in months at the beginning of 2022 for the median company, 27 months. All the way through 2022, at the end of 2022, The median runway was 28 months. In other words, they burned throughout the entire year and still had the same runway at the end of the year. They got more efficient. They are burning less. They extended their runway. Uh, really impressive, actually, I would say, how well founders have adjusted to this environment, cut costs, extended runway, and I think in many cases haven't really given up the growth opportunity that much. The other takeaway, of course, is that, you know, there's only so much you can cut. And here we are now at the beginning of 2023 with on average 28 months of runway. That means at the end of this year, there will be a lot of companies that are going to start to need to tap into the capital markets and they're due their next raise. And so you're going to see much more venture activity in the second half of this year and even more next year.

So what does all this mean when it comes to planning for this upcoming year? I'm sure most of you have either just wrapped this up or in the process of doing it. And as Doug and many others across our team can attest, this was probably one of the hardest years for folks to put together their annual budgets just because there are so many moving pieces and again, a real need to focus on that balance of not suffocating your growth with efficiency, but really moving back towards an efficiency-minded approach. So starting on the left here, when we were at the beginning of 2022, most of those plans were really still based on the assumption that, that growth that was seen in 2021 could be sustained. So 56% year-over-year growth in revenue in 2021, that was basically the same heading into 2022 in terms of expectations. What companies were actually able to achieve obviously fell quite a bit shorter of that at 38%. And some of those learnings we're seeing being baked into plans now with the median growth rate forecasted to be a little more tepid, right around 35%. What's probably more notable on this page though, it really brings to life that additional focus on efficiency. So moving to the centerpiece here, while still expecting roughly in-line growth to last year, the increase in OpEx has significantly come down. So again, really thinking through how to fuel that engine in a most efficient manner and only increasing OpEx on average by 13% relative to last year. And so that's resulting in healthier margins. And for many companies, this year being the year that they project to either break even or, or really cross the threshold into profitability. As Doug mentioned, obviously headcount is a huge lever when it comes to reducing costs. And as we think about headcount planning for this year, we have seen a significant change in how companies are thinking through growing their teams relative to prior years. Doug mentioned this in 2022, year over year headcount growth was right around 50%, and this year that's been brought all the way down to 10%. So again, a much more conservative approach to building out teams. But what was interesting is when we looked at this by scale of company, it's really these companies in sort of that $25 to $100 million range that likely overhired in the past year or so and are really feeling the effects of that now. So again, those that are in the very early stage buckets under $25 million of ARR probably hadn't quite hit that threshold of really investing in their team and building it out. And those that were beyond $100 million have a bit more of that robustness going and, and have achieved steady state. But this cohort in the middle that really has to rethink their plans and right-size their organizations. And it's not just how teams are being built, but also how we're incentivizing them that's changed. So again, this really brings that shift towards efficiency to life. When we surveyed a host of of companies in the industry around how they were tying bonuses for various folks, you can see universally a shift in the metrics that were used. So on average, there are probably around 2 to 4 metrics that are formally included in how bonuses are defined. And relative to last year, this year there's again universal decrease on the inclusion of metrics that are purely top line or top line growth oriented. And a universal increase in those that are really more focused around efficiency and profitability.

Thanks, Christine. So this is a very busy chart, obviously, but just want to talk through some takeaways from this. Obviously, we're in board meetings almost every day. We're talking to founders literally every day. And I think one of the key things that I want to communicate is that we would never give advice, and sometimes we're quite leery of others that might give advice that's one-size-fits-all. Every company is navigating this environment in a different way because their situation is different. You know, which, which category they're in, how have the demand patterns changed, and how has growth changed in their particular category. To what extent did they overhire during the pandemic? And so, you know, the situation that every company is in is different, and therefore, so should the advice. And this chart just is one way for us to try to put different companies in buckets, and maybe the advice or their actions in this environment might be different. So an example might be the bottom left. You can see these are companies that are lower growth, missing their plans, they're not attaining very well, and they're also not efficient. They, you know, are below Rule of 40, they have high burn multiples, and they have less runway. Those are unfortunately companies that are likely doing RIFs to extend runway to find a better place. You know, look at the bottom right. These are companies that are still high growth, they are meeting their plans, but they're still not efficient. And maybe they don't have the runway they need. Those are companies that we're seeing that are really cost cutting. They're cutting discretionary spend. Maybe they're doing a hiring freeze. Maybe some are doing RIFs. But they're obviously in a better place because they're still growing and they probably have strong product market fit. I contrast that with the top right bucket. These are companies that are high growth, hitting their plans, and efficient. They're Rule of 40 or better. They have long runways. These companies are getting totally different advice. These are companies that are using this environment to separate from the competition, to win market share, uh, and really emerge stronger from this environment. What are they doing? Well, they're actually picking through all the RIFs that other companies are doing and hiring talent. In particular, many companies are hiring in product, doubling down on innovation so that as the pen— as, as you know, the recession, if there is one, ends, they're positioned to just capture the market. And so again, we're giving very different advice depending on where companies are falling within this matrix. The final point I would make is that this, um, distribution of how companies are faring is totally normal. This is what I remember from my first venture, is that there's some companies that are killing it, there's some companies that are struggling, and then most of the companies are somewhere in the middle trying to figure out which one of those they are. And the unusual time was 2021 when everybody was killing it, or so we thought they were. And therefore they were all getting the same advice— grow at all costs. And that was the big mistake. And now we're back to normal where there's a distribution of companies and a distribution of, um, advice and strategies for growth. And in many ways, I think we're back to where we should be. In terms of the ecosystem and venture capital in general.

So the danger of having two of us speak is we totally ate into the Q&A time. Apologies for that. There is a lot more of our work on our website, and again, we're happy to share these slides after the fact. Doug and I can also stay on for a few minutes in case there are any questions, but grateful for the time and hope this was insightful.

Yeah, thanks so much. That was so good and already one of our most popular Workshop Wednesdays. So let's try and hit a few questions before you guys have to bounce. Ben, I know you're in the room. If you want to come off mute and ask your question on the magic number.

Hey, guys.

Yeah, Ben Murray here. So I know we have the traditional SAS magic number, but looking at your definition, I wasn't quite sure if it's the same as kind of the traditional one you see out there. Or you have a little different nuance to your magic number calculation?

I'm happy to take this one. And we, again, we have the actual benchmarks back here in the appendix as well as the definition. So the short answer is it is a standard one. Again, we actually look at 4 flavors of magic number: net magic number, gross magic number, and then both on a gross margin adjusted basis. But in general, the one that we like to really orient around would be the net magic number where we look at the current quarter of net new ARR over the prior quarter spend in sales and marketing.

Okay, appreciate it. Thanks.

Okay, next question comes from Ajay. Wanna come off mute?

Can you hear me?

Yeah.

Okay. No, actually, you answered a much better version of the question that I was asking with that beautiful eye chart that gave me a good understanding of how different size companies and different growth challenge companies are tackling. So thank you.

Very cool. Jason M. Lemkin, ask your question.

I apologize, I do have to run in just a minute on DoubleBook. Yeah, the question— I just, I thought it was interesting that the comment was super helpful on the relative bullishness of this year versus last year and how last year was a new low in growth investing, which all makes sense, right? And we have seen a little bit of a rebound in the markets, right? If you had to spitball it, I think for founders, what's your gut? How will we end up this year in your investment pacing versus say 2019 versus say a normal year? What, where do you think we are? Will we be back to 2019? Will we be half of it? Let's put the whole COVID craziness behind us. Where do you think the pacing will end up?

[Speaker:JASON M. LEMKIN] Yeah, it's a good question. I would say building throughout the year. I think January is always busier because people come out of the gates hot and they, you know, people plan to fundraise then. So I think the activity right now might be a bit of a head fake, but I do think it'll build throughout the year. Again, as balance sheets deplete, companies are gonna come to market. It's very simple. And so I think it's slower in the first half, building in the second half, I would think, Jason, still less than 2019, maybe significantly less, is my guess. I think there's still a pretty massive disconnect between public valuations and what people want in the private markets that'll continue to slow things down. And balance sheets are still pretty good. So the flood is going to come in 2024. And that's when I think we get to a pace that is at 2019 or potentially bigger than that. And who knows? But the deal flow will be bigger than 2019. The question is, how many of those will we really want to invest in? And that'll be the thing that we don't know.

Yeah. One quick follow-up question I think will be helpful to folks now that the floodgates aren't opening, but the faucet is reopening. If you're not sitting on a crazy valuation, if you didn't raise at $5 billion at $5 billion in revenue, right? But you may be sitting at a valuation from your last round that is slightly above today's market, right? Within a range, let's say up to 50% of what you might get today. How do you tackle that as a founder? Are there any issues at all? Do you even care as a growth investor? Like, let's say you want to do a round at $500 million, right? Let's make something up, right? The company's at $50 million in revenue, it's growing 100%, the NR is great, and you want to put in— you're comfortable paying $500 million, 10x, just something, right? And the last round was at $700 million. right? Or $800 million. Just give us a flavor of that dynamic today. Do you even care? Is there any issue? Do you kind of address it but ignore it? Where are we? How do we deal with slightly overpriced companies?

Yeah, I think they're in a better place than those, of course, that are dramatically overvalued. As you were talking, I thought of one thing where I thought you were going. First of all, if I was that founder that hadn't raised the crazy round, I would feel really good about that. And I would try to get ahead of the flood. I would not want to be in the morass of 2024. I try to get out in front of it because I'm one of those companies that didn't go crazy, so I can raise in a normal environment, which is what's going on today. The challenge is those companies that got way ahead of themselves and need to take the big down round, and it's hard to lead the way on those, both as a founder And to get to your question, as an investor, we don't love being the investor that comes and gives the down round. They're still pretty uncommon. If it was close the way you're talking about, I think we could probably find common ground. Maybe it doesn't need to be a down round, maybe it's a flat round. And I think that's fine because in the end, we don't make our money by small differences in valuation. It takes bigger changes to matter to us. So I think we'd we'd find a way there. The challenge is where there's a massive disconnect. And I don't think anybody's quite figured out yet how to bridge those gaps, although Stripe has. And if Stripe can do a 50% down round, and they're the best private company in the world, why can't everybody else do that? And the answer is, they can, and they will. And it's not the end of the world, because just celebrate that you raised a lot of money at a low cost of capital before, and now you're raising at a normal valuation. It's okay.

Yeah.

And to put some numbers behind this, we looked at a set of companies and I think we saw— again, I think the, the truth will come out as more of these rounds happen, but as of now, somewhere between 25% and 30% decrease in average valuation. I think what was interesting is it is still highly correlated on that growth rate. And again, if we're— the companies that were growing at more than 100% had sort of flattish valuations relative to prior versus those that had significantly slowed their growth. That's where we're really seeing the impact. So to Doug's point, yes, growth and efficiency, but growth does still matter. And it is really what a lot of folks are focused on.

Thanks, Jason.

Okay, do you guys have time for a couple more questions that have come in? Sure. All right. Awesome. Okay, there's a little— there's a few. Okay. Vikram, if you're still with us on the Zoom, do you want to— Yes, I am.

Yes. Hi, Doug. Hi, Christine. Thank you for the session. It was great. What I want to understand is for a lot of companies that are at a seed stage or just starting or have raised, you know, very little funding or trying to bootstrap their projects, do you think the solution that helps them make the right decision and, you know, helps them manage their burn and extend their runway would make sense at this time?

A solution particularly focusing on, let's say, e-commerce or startups that are just building So you're asking for a seed stage company, should they also be finding ways to cut burn and extend runway?

Yeah, I mean, a solution that takes care of a lot of these things automatically for them so that they don't have to. I mean, I've seen a lot of first-time founders making a lot of mistakes when picking softwares or solutions that they should be using, or the way they should be managing the money that they've received either in funding or investing themselves. So do you think a solution that automates most of this would make sense for the market at the moment, given that we are in all cases sitting on recession already? I mean, nobody has confirmed that yet, but do you think a solution like that would make sense?

Yeah, I mean, if I understand, you know, speaking in generalities, but yes, I mean, a seed stage company should be spending every ounce of their energy on finding product market fit, right? And to the extent— now, I don't know what that is— that there's a solution out there that allows them to automate everything else so all they have to focus on is product market fit, that would be wonderful. And if that helps them extend their runway and, and just focus on what matters, then, then of course that would be, uh, that would be fantastic.

Great, that answers my question. Thank you so much, guys.

Okay, um, next, uh, quick shout out in the chat to Miss Jill Rowley. She put that a lot of companies are still hiring today. There's a link in the chat there, um, that's super useful if you guys want to use that. Um, Jill, always good to see you as a SAS for Speaker and super fan.

Yes, I'm a big fan and this was awesome. Hey, Doug, good to see you.

So good to see you.

Good to see you.

The Ella Queen is on the phone. I love it.

Woo-hoo!

Okay, the next question comes from Amir. Let's see if he's still on the Zoom. Amer.

Yep.

Hello.

Hello, everyone. Um, Doug and Christine and Amelia, thank you for taking the time. Um, so we're in the Series A range, and one thing that's top of mind for us is R&D efficiency. I know you didn't really— it didn't seem you touched on it, and I don't want to distract from the conversation, but I would love to know how we could think about this. This is how we're spending, this is the percentage of revenue, but how do we know we're being efficient? In this spend in R&D?

I can start. Amir, that is just an awesome question, seriously. And the reason it's a great question is because I think it's a really hard one. And you asked it because you're thinking about it, and it's not in here because it's not as easy to track and it's not as easy to measure as go-to-market, obviously, but we talk about it every board meeting and we spend virtually an entire board meeting talking about go-to-market efficiency. But then a massive amount of the spend is in product and engineering, and it's very hard for us founders and investors and board members to know, are we getting the same return on those dollars as go-to-market? And I'll admit, sitting here right now, Amer, I don't feel like I have the answer. It feels more anecdotal today. In other words, relative to other companies in the portfolio that I'm working with, other fellow partners are working with, you can kind of get a sense for velocity, which companies are delivering products quickly, new features on time in a quality way. And it's not a perfect answer, Amir, but it's kind of what it feels like right now is that's how we're doing it. But we do have a technical advisory board. Christine, maybe you have some comments on this.

Yeah, I was going to— we probably can't get into all the details, but we do a study actually on engineering efficiency every year. And so you can find that on our website, Amir, and download it there. But to echo Doug, we hosted an event with Aditya Agarwal, who's on our technical advisory board, and a number of our other CTOs. And the resounding feedback was, yeah, for the first time, we are actually needing to measure the productivity of these engineers who historically can't really be touched with these quantifiable metrics. And so there's a few frameworks in there that you might find helpful in terms of how they think about it. But to Doug's point, for the most part, really thinking through the framework of the different types of functions that they should be serving, whether it's keeping the lights on, new feature development, figuring out bugs, that sort of thing, and bucketing it in that way is also a helpful way to think through it.

This was awesome. My engineering team is gonna be thankful because I've been breathing down their necks and you validated a lot of what they've been saying, but like, they're not Doug and Iconiq, so thank you guys.

Thank you so much.

A lot of good questions, and you guys are getting a lot of love in the chat. I don't know if you guys have seen.

I can't see anything.

Okay, I'll send it to you after. I'll send it to you.

I've got a question if I'm, you know, if I can have an opportunity. So Doug and Christine, you know, wow, this is just so on point. You know, we've, as a business, we've been really focused on capital efficiency. We haven't scaled crazily, but really, I'm not sure if I heard you correctly about, you know, some organizations are placing bets on product, and that's exactly where we're thinking is, is improving our win rate through product investments rather than scaling out the sales team right now. You know, that's obviously not fashionable when everyone else is right-sizing. But yeah, really focusing on product investment as our core tactic to improve win rate and to do that as fast as possible, right? So that's how we're thinking about it.

Did I hear you correctly?

Yeah. By the way, Anne, it's great to see you. We met a long time ago.

Yes, I know.

I can't wait to reconnect.

Thank you. Everything's going well. I think what you're doing is very common and exactly right. If you're in a world where buyers are just not there as much and the market is quieter, let's devote our resources towards building amazing products and innovating so when the market picks up, you've got the best product and most competitive product in the market. I think it's a brilliant plan.

Thank you. It just feels like it's absolutely what we've got to do right now. We've got all the opportunity, but it's all about optimizing, right? Optimizing exactly what we do. And yeah, we obviously support organizations to optimize their talent, but it's a very I think we've got to operate in a really careful and prudent and make the best possible bets, right? Best outcome. And it's all about '23 performance as well as, you know, as well as the longer-term view.

That's great. Looking forward to reconnecting.

Thank you. Same.

Okay. Yeah, no, thanks for all the love. Good to see everyone kind of knows each other on this one. Um, quick question from LinkedIn. I think it's a good one. Um, Alexandru from LinkedIn asked, for pre-Series A, what is more important, profit or revenue, or the breakeven point?

You want to take that?

I'm happy to, I'm happy to start and you can, you can look at it. I think It is, I think it's interesting. A big question that's coming up right now is exactly this, but I would say not for Series A companies, but really for companies that are thinking through IPO in the next year or two. And path to profitability has always been something that we've seen correlate really highly when it comes to multiples at time of IPO. I would say in the early stages of growth, really nailing the growth piece is important. And especially when it comes to getting those new logos and setting yourself up for the ability to grow into them, have that upsell down the road is definitely a big priority. So that's not to say profitability should just totally fall by the wayside, but it is probably a little bit early for that to be the number one focus. I don't know if you'd add anything, Doug.

Yeah, I would add, you know, Series A or before, quite frankly, even beyond that. I hate to disagree with everything we've just said in this session. But, but it, you know, it is a lot about growth. Let's not kid ourselves. These are big markets that are competitive, and if you're not growing, somebody else is. And so, you know, you got to grow, especially at that stage. And but you have to learn to build a great business sooner than we were expecting companies back during the pandemic. And so unfortunately, the bar has just gone up.

Okay, that's a good one.

Okay, we'll try and sneak in one or two more. I know everyone's trying to ask you guys questions, but Ray, I know you've been waiting to ask your question if you want to come off mute.

Thank you, Ilya, Doug, Kristen. Great information. Everyone's saying we should invest more in expansion with our existing customers and maybe ratchet back on new customer acquisitions since sales cycles are elongating. Do you have any recommendations or best practices on how to measure the efficiency of existing customer growth ARR versus new customer growth?

First of all, I think it's the right advice, um, and, and it is without even looking at the data, you just know that the cost to acquire new ARR from an existing customer is massively lower than the CAC to go after a new logo. So I don't really even need to see the data to do that. There are some companies that do look at not just cost to acquire a customer, support and grow a customer, and you can look at, you know, what does it cost in account management? What does it cost in customer success to support company XYZ and how has that revenue grown? And I think there is a way to measure that versus the CAC for pure pipeline gen and new logo. But I think what you'll find is that the efficiency of that new ARR is so dramatic that it's sort of obvious right now.

We're actually, we had a dinner last night with a number of CROs across the network. And I think for them, even saying, how do we really incentivize reps to go after high-quality deals for the exact reason, if it's maybe a small initial deal, but the ability to really upsell into them far exceeds the ability to land a really big first deal with limited expansion, because I think to exactly Doug's point, it is always more efficient to, to sell into an existing customer versus acquire a new logo.

Yeah, I think that's true around the board. Oh, okay. One last question from Ajay. I know there's a bunch of questions we didn't get to, so I'll ask you guys next how folks can get in touch with you. Ajay, I know they kind of answered your previous question, but I know you had a follow-up if you want to come off and ask it for the last question.

Yeah, can you hear me?

Yes.

Yeah, I just wanted to ask about, you know, the craze around ChatGPT, AI, and LLMs that's going on. Do you anticipate another wave of crazy valuations towards the end of this year or early 2024, especially with companies either including them in their pitches or starting companies in this area?

Yes and yes. You know, this is just exhibiting all the characteristics of the classic hype cycle. Um, and what you see is typically a double hump situation where you get this initial, uh, hump of excessive hype and valuations, and then you go into this trough that they call the trough of disillusionment, where reality sets in. It's harder than people thought to really build great solutions. And then over time the, the line starts going up again, and the second hump is even bigger than the first in terms of the reality of what that technology can ultimately deliver. That happened with the internet— big hype cycle, then the bubble burst, and now of course it's bigger than we ever dreamed. Same thing happened with mobile. With crypto, we will never get to that second hump because it was never real. With AI, we will have a massive second hump, but we're going to have this initial craze. We're going to probably stumble, and then it's going to be huge. And, and we're spending a lot of time on it. We think there's a massive opportunity here. What's interesting is that the opportunity, yes, is for startups, and we're looking at those every day, but the extent to which our existing companies in real time are building features and use cases around AI to augment what they do already is incredible. It's like mobile, uh, all over again. And the downside is, yes, will it lead to this wave of startups at high valuations? It will. But the good news is that there's also going to be some incredible companies that come out of it. And an acceleration for many of our existing investments.

Thanks, that was very insightful.

Thank you.

Yeah, I think that's a fun one to end on. Now the screen share stopped, you can see how many of us there are still in the room after 50 minutes of content. I know, Doug and Christine, you've gotten so much love in the chat and on social. I know we didn't answer everyone's questions, so if folks want to reach out to you guys, what's the best way for them to get in touch?

You can find, I think, some of our information on the slides that are shared there, both our socials. You're also welcome to connect with us directly, and I think both of us would be happy to answer any other questions over email or whatever makes sense.

Yeah, I'm Doug Pepper on Twitter, and then you can, you can go to our website and probably find our emails pretty easily, but always happy to Love it.

Thanks again so much for doing this. As a reminder to everyone who was watching either live or recorded later, because this was such great content, we will share the, you know, full recording, the slides, all the Q&A, so that you guys have the ways to get in touch with Doug and Christine. Doug and Christine, thank you so much. I'm sure we'll have you back. This is great. Maybe we'll do it IRL next time. It's as this was, virtually it would be even more fun in person. So thanks so much for doing that. I know you guys are big SaaSer super fans, so always fun to do that. And then for everyone who's been watching, thanks for tuning in. I know you all tuned in from different time zones around the world. It's like early morning for some of you or the middle of the night. So thanks so much for doing that. We love to see you guys and we will be back next Wednesday. We'll be going over founder-led sales. The Lessons Learned on the Path to $100 Million with TigerEye. So without further ado, we'll wrap it there. Thanks everyone for joining and we'll see you next Wednesday.

Thanks everybody.

Take care.

Thanks, Amelia.

See you later.

Thanks all.