Increasing Runway Without Sacrificing Growth with Norwest Venture Partners and Andreessen Horowitz

Hi everyone, so excited to have you all here today to hear us talk a little bit about increasing runway without sacrificing growth. You know, we're gonna do it really casual up here, and so we're gonna hand it over pretty quickly, but excited to have this conversation. So hey, my name is Christina Shen. I am a GP at Andreessen Horowitz, and today, you know, I want to talk a lot about burn management and what's been talked about a lot in the market. And what I want to talk about today is actually burn management is really not one size fits all. I think there's been some phenomenal content put out there. David Sachs has done some great content around burn multiples and how that can be a measurement of capital efficiency. Our own growth fund and David George has talked about how to manage in a downturn market. And so, you know, I'm going to dissect a lot of the thoughts that great people before me have put together today to talk about how I think about burn management. And so rule number one, I think it's been all over Twitter, be default alive. This is a chart put actually together by Bessemer Venture Partners of the publicly traded SaaS companies, how they've traded over time. And what's really interesting, you can see obviously there's been a whole huge bull market over the last 12 years, but in particular in the last 3 years we've seen multiples really skyrocket. This is SaaS multiples for 1-year forward revenue. And if you look at the top quartile at the peak, so the top 25% of SaaS and cloud companies in the public markets, they're trading at 24 times revenue. Over the last 9 or 10 months, that has now dropped to 8 times. That is 1/3 of what they used to be. And so you might be saying, hey, Christina, what does that mean for me? I might be an early-stage SaaS startup. I might have $5 million revenue. I might have no revenue. Well, look, the private markets investors really do look at the public markets for guidance in terms of valuation. And there's obviously been a huge correction. And so one recommendation I tell people is like, you always have to think about your next financing event. And so whether that be an exit, whether it be your next fundraise, if the public markets are trading at 8 times for a company that is growing 30 to 50%, if not higher, in the private markets, that typically means that your valuation multiples dropped as well. And so a good proxy is like many investors will look at a multiple to the private markets. If it's trading at 8 times in the public markets, it might be trading at 15 times in the private markets. So as you think about that, plan your revenue ahead, apply a reasonable multiple that could be 8 times, that could be 15 times or higher depending where the markets are, and think about you can get to your next level. Now after that, it's all about building an efficient business. We talked about David Sacks and his great burn multiple chart. He talks about, you know, and burn multiple, for those who don't know, net burn divided by net new revenue. 1 is amazing and over 3 is less than ideal. Now you look at this chart, you say like, well, does that really fit every single business? For me, the two biggest challenges is this really doesn't factor in R&D costs in the company. So today, the amazing announcement of Figma selling to Adobe for $22 billion, I think is the largest private SaaS company to ever be sold in history. Most people don't realize they actually raised $50 million before actually generating their first dollar of revenue. And you would say, wow, that would be a horrendous burn multiple. And that, that is true. There are exceptions, particularly if you are building a more platform-based company that requires obviously a lot of R&D costs to build up. A lot of infrastructure companies tend to have higher R&D costs. And so that is one big challenge, right? And the second is obviously stage. Earlier-stage companies you don't have revenue, or you're just starting revenue, the ratio of the burn multiple sometimes is not the best representation of your business. So I actually really like to think about burn management by stage, right? And apologies for my bad PowerPoint scribbling, but like, you know, pre-everything category, you don't have revenue, it's an asymptote infinity, right? But if you think about it, if you are a $5 million AR business, and you grew from, you know, let's call it $2 to $5 million in the last year. Burn management for you probably means that you should be burning somewhere between $3 and maybe upwards of $9 million. And so I actually really think, like, we put a lot of emphasis on these benchmarks and burn multiples, but it really, really depends by stage because you are investing so much in R&D, the special part of your business is your engineering and product teams that are enabling you to continue to grow and have innovation. And so one thing to always remember is like these benchmarks, they're great guidelines, but really look at it by stage. Now I'm probably old school. I've now been, actually I saw my great little star for SaaStr. I've now been speaking at SaaStr, this is my third year running, and I actually am a big fan of CAC payback. Most of you know this metric, it's sales and marketing divided by net new MRR times gross margin. And this is why I really, really like this metric, this metric actually more than burn multiples. So it factors in all the things you really care about, right? It factors in how efficient your sales and marketing is. It factors in how quickly your revenue is growing. It factors in if anyone is churning because you're looking at net new MRR. And it factors in if you have an efficient gross margin. But it does not factor in R&D. And I think that, quite frankly, is like That is the secret sauce of our businesses, is that R&D is how we invest in the future. And so I generally have this recommendation that, look, burn multiples, a great hacky way for you to quickly see how, how you're managing burn within your business. But my big recommendation is for later-stage companies, particularly if you're $5, if not $10 million ARR and higher, to definitely start measuring your business by a CAC payback, because that's a true measure of new revenue that you're generating from your sales and marketing engine and how efficient your business is. So with that, you know, that's a quick overview of how, you know, we think about burn management, what's possible. But I think it's gonna be really fun is we're gonna dive a little bit deeper into what are some nonlinear ways that you can grow outside of thinking about burn management. So I'm gonna hand it over to my partner Sean here.

Thanks, Christina. Partnerships are a great way to get nonlinear growth without having to spend as much money in sales and marketing. In my operating career, I ran business development for 3 SaaS companies, Cornerstone On Demand, Wageworks, and Upwork. And I learned that there are 5 key rules to doing partnerships. The first rule is around partner fit. Setting up partnerships is like dating. You have to go on a lot of first dates to find the right fit. The best partnerships are those where you extend the product offering of another partner. So I, I'll give you 3 examples. So the first example is Salesforce. A natural extension to their CRM product is CPQ. So in the enterprise, they partnered with Aptus. In the mid-market, they partnered with SteelBrick. Another example is Gusto, who sells payroll. A natural extension to their product is 401(k), so they partnered with Guideline for 401(k). And then a third example is NetSuite, who sells ERP. A natural extension to their product is close management software, so they partnered with Flowcast, one of my portfolio companies. A common mistake is people think that giving the partner commissions to sell your product is going to be the primary motivating factor. There's no amount of money you can give a partner to motivate them to represent you. The— what's going to really motivate them is helping them sell more of their own product more quickly. The second rule about partnerships is about entering new markets. It is impossible to get into every market in every industry without partnerships. When I was at Cornerstone, we were really strong at selling to the enterprise and mid-market. So we found partners to help us sell in the SMB market. We also sold really well in North America and Europe. So we found partners to help us sell in Latin America and Asia Pacific. We also sold pretty well to most industries, but in higher education, Most companies bought from a few vendors that, that where they bought the full suite. So we had to partner with one of those players called Ellucian. A common mistake that people make is they try to partner with too many players in any one industry or geography. And what happens is you have very limited resources to enable those partners to be successful. And you might create channel conflict. And then those partners don't want to work with you anymore. The third rule about partnerships is enablement. Most people celebrate signing partnerships, but signing partnerships doesn't matter at all. What really matters is about enabling them to be successful. When I was at Cornerstone, we partnered with Ceridian in Canada, and we enabled their sales, marketing, support, and implementation teams to sell on our behalf. And because that worked out so well, we didn't need to have any other partners in Canada. A common mistake is people will just enable the partner on day one and walk away. But you need to enable them and train them just like your own employees. Your, your product changes, the competition changes, the market changes, the people changes at the product— at the partner. You need to treat them just like your own employees. The fourth rule of partnerships is around reciprocation. When I was at Cornerstone, we wanted to get the attention of ADP, and we thought, how do we best do that? And we said, well, why don't we start sending them business? So Cornerstone, we sold performance and learning products. ADP was selling recruiting. So what we did was we started sending them recruiting business, and then eventually they started selling us, sending us performance and learning business because they didn't want those leads to dry up. The referral relationship went so well that they said, hey, let's do a reseller arrangement. So we started small in the Northwest region. We enabled their sales, marketing, implementation, and support teams in the Northwest region to be successful. Once we had a repeatable motion, we transitioned that to other, other regions across the US and across the world. And before you knew that, we had over 1,000 salespeople selling our product on our behalf. A common mistake people have is that they will go to the big potential partner and expect them to start sending them business day one. You know, a common company that people want to partner with is Salesforce. Well, their sales reps have so many products to sell. They keep building products, they keep buying products. It's really hard to get their attention unless you start sending the business first. That can really separate you from all the other startups. The fifth rule around partnerships is M&A. How many people here hope to sell their company one day? It's got to be more than that. Come on.

Can be after you go public too.

Yeah, exactly. So partners are the best source of M&A activity. Companies are not sold, they're bought. And those that have the most intimate relationship with you are likely the ones that will acquire you down the, down the line. A really good example of that is Case. One of Norwest's portfolio companies, they wanted to get Dell's attention like we want to get ADP's attention. So they started sending them leads, and Dell didn't want those leads to go away, so Dell started sending Case business back. That referral relationship started going really well. That eventually led to a reseller arrangement. 2 years after they started that partnership, Dell bought Case. It was a great outcome for Case, great outcome for Norwest. But a common mistake is people get so excited about one partner that they put all their resource around that partner to be successful. And there's too much revenue coming from one partner. And if that partnership goes away or goes south, it puts your business at risk. So I typically recommend no more than 10% of your revenue from one partner. So we talked about 5 key rules of partnerships: partner fit, entering new markets, enablement, reciprocation, and M&A. It's now my pleasure to introduce you to my partner, Scott.

Thanks, Sean. Okay, next up, some do-it-yourself growth hacks to juice your sales on a dime. There's never been more value in your install base because we may be entering a period of very, very low to no new logo growth. So protect them at all costs. The classic Glengarry Glen Ross, always be selling, always be closing, is actually everybody be closing in a market like this. You should think about mental exercise. Retool your brain to think of every employee in your company as a lightweight customer success or account executive. What does that mean? It means that engineers, product people, back office folks can be on the phone with customers. You gotta love your customers right now because that's where you're going to get the growth, the expansion, the upsell, the cross-sell. Because if you don't embrace your customers right now and build deeper relationships, your competitors will. Back in 2015, I was at Desk.com and we hit some headwinds. And our GM at the time, she said, okay, we gotta touch— get in touch with every single customer. We've got 1,000 of them. How are we going to do this? Well, she assigned a list of customers to everyone. We're talking about, you know, the RevOps manager. We're talking about, you know, product marketing managers, everybody. We all called every customer. And guess what we found out? We found out that there were a tremendous number of customer support issues that were unsolved, that weren't even logged in tickets. So we proactively dealt with those and probably lowered our churn. We also found out, this was a little bit more shocking, that most customers were only using about 5% of what we built. So we, we helped them. Even engineers were great at this. They said, oh my gosh, I've been working on this product for years and you don't even know it exists. Well, let me help you. And what do you know, that led to expansions and upsells. So in a downturn, everybody should be closing. This next one's one of my favorites. Never been a better time to get creative. Get as creative as you possibly can tool your brain to in your cold outreach, because every buyer is inundated by SaaS reps blasting them on every channel. You gotta get through. About 10 years ago, I was at Salesforce, and there was a sales rep from Pluralsight who spent a year sending me messages over LinkedIn. Found out— he figured out my email address. He reversed it, or he, he socially engineered his way into my voicemail. I ignored all of it, not on purpose, it's just the other things were going on. It wasn't until I got a call from the mailroom And they said, "Scott, you gotta come down here, you got a perishable item." I said, "That's weird, I never get perishable items." So I went down, and sure enough, there's a warm apple pie sitting there with a cellophane front to it, so I knew exactly what was going on. I took it upstairs, and the smell of the apples and the cinnamon permeated the entire floor. And so everybody comes running, they're like, "What's going on over here? Hey, can I get a slice of that? Hey, who's that for?" Oh, Pluralsight, Pluralsight. Who is that? Who sent that to you? Oh, well, you're going to call him back? I guess I am now. So a series of meetings, one thing led to another, and he closed a multimillion-dollar deal. Not bad for a $50 apple pie. Everybody's talking about PLG these days, product-led growth. And why not, right? It's a cheap way to new ACV. Two of the companies that have taught us everything we know about PLG are right here, Slack and Calendly. These companies are brilliant. They're, they're what I would call pure-play PLG in the sense that they give away nearly 100% of their product for free. And then they have this, they build this flywheel to incent and gamify the system to so that these free users will invite other free users into the system, and it starts to grow virally. And then they back up the truck with the enterprise upsell. Slack had the benefit of building a PLG product from day one. Most companies don't have that privilege. In fact, if you try to jackhammer your own product to become a PLG product, it could take you quarters or years. You may never get there. In fact, maybe you shouldn't ever get there. Not all companies were designed to be PLG companies. It's, it's okay. The good news is there's an in-between. I call it Welterweight PLG, where you can make a small investment and get a lot of the benefits out of PLG. Now, if you have a trial, a free trial on your backlog, your product backlog somewhere, now's the time to spin it up. If you have feature flags, that's a great way to turn on Just enough functionality in that trial to get those free users engaged and make sure that trial never expires. Wire up your favorite user analytics tool, Mixpanel, Pendo, whatever you like, and give that data to your sales team. Let them see how they're using the product so that when they engage, they have more context, they can have a more intelligent conversation. Build a drip campaign through email and let your customer— look, let these prospects know why it's so important to upgrade to the enterprise version, all the value they're going to get. I sit on the board of a company called Connect the Dots, and what Connect the Dots does is they built a product that allows you to see within your network who actually knows who for the purposes of getting a warm introduction to a buyer. When they started the company, they built— they wanted to build two products. Product 1 was a PLG product, Product 2 was an enterprise product. Well, like every SaaS company I've ever had experience with, they didn't have infinite resources, so they had to pick and choose. They put the wood, most of the wood behind the arrow of the enterprise product, and that was great because that's where the, that's where the dollars were. But that didn't mean that they couldn't, that they just completely forgot about the PLG product. In fact, what they did is they built a free product you can go sign up right now. And get almost all of the functionality for free, forever. But what they didn't do is they didn't build that flywheel. That's a very engineering-heavy exercise. Can take a very long time, a tremendous amount of effort to build that gamified system, that flywheel, that viral growth engine. They'll get there. But all their sales reps have mixed panel data, and so they know exactly when customers, when prospects are using the product in just the right way, engaging with the product in the right way, where they can say, okay, now's this moment we can unlock a tremendous amount of value for you, and maybe close an enterprise deal. Welterweight PLG. All right, so let's talk about throwing out the trash and focusing on the fresh food. There is, there is a tremendous opportunity right now to focus on that which is working the best. And quite frankly, never been a better time to focus on your sales pipeline. How many people in this room have SaaS sales pipeline? Okay, nearly everyone. That's good, because so this might land. During a downturn, the way we look at our pipeline is very different from every other period in history. Now is the time to focus on those top 25% of accounts that are most likely to close and throw out the other, the bottom 75%. Why? Because they're probably not gonna close anyway. I mean, customer, we've all seen it, their budgets are frozen, they're bumping their buying decisions out to 2023, and it's okay. You can focus in on that which is most likely to close, and you can spend more high-quality time with those customers that have a higher chance of success. You know, way back in 2001, I was running my own company, and we sold a product to the healthcare industry. It was 2001, and, you know, we had an account list of 30 prospect accounts that we wanted to go after, but the Twin Towers had just come down, and the markets were tanking. We knew buyers weren't going to buy anything for about a year. Maybe more, who knew? So what we did is we said, we're going to focus on 5 accounts. We're just going to put those other 25 aside for a minute. We focused all of our product energy, all of our sales and demo energy into building the best, most highly customized demos for these 5 customers. We spent a tremendous amount of high-quality time with those customers. And we ended up closing 100% of those 5. Now, could we have closed some of those other 25?

Maybe.

But you would have spread ourselves real thin. And right now, during a downturn, we— there is no room to spread yourself thin. You've got to build the deepest possible relationships you can with your prospects. Full stop. So throw out the trash, focus on the fresh food. This last one is a Dave Kellogg special. For those of you who have been to SaaStr in the past, Dave is one of my favorite keynote speakers. He's incredible. And what Dave would say during a downturn is, "Why waste your time building trust with a new customer when you could hunt down your old customers and do jobs?" Your old customers hopefully love you. And you can help them build their new careers in their new job with your help. There's a great opportunity right now to do exactly that. I work with a company actually called Blue Core out in New York. They sell exclusively to the retail industry. And the retail industry, for those of you who have worked in it or sell to it, it's notorious for employees moving around a lot. So one day, their champion, who was the director of merchandising at a big retailer, vanished.

He was gone.

So what did a lot of companies do at that moment? They, what I would say, panic. And they say to themselves, We gotta go into account management mode. We gotta find our new champion.

Where's our new—

how are we going to solve— are we going to deal with it? That's not exactly— that's not at all what they did. Instead, what they did was they said, why don't we figure out where he went? And so they did, and turned out that he had gotten an upgrade. He was now the head of merchandising for an even larger retail brand. So guess where that led? First of all, when they connected with him, he was thrilled. 'Cause it's somebody that he knew and loved and trusted from his past, like bringing it all together. He was still getting his bearings, but after a series of meetings that were, that the sales cycle for this opportunity that they had was very short. He already knew the value that he was gonna get. And guess what? The land, the dollar land was much bigger than their average. Because again, he knew he could take a bigger bite 'Cause the product worked, and it's worked for him before. So in a downturn, do more of hunting down your old customers and new jobs. You can really reduce your sales cycle. Okay, so let's wrap this up. Some closing takeaways, Christina?

I mean, I think, you know, for burn management, it's really important to understand the root ROI of your spend. And if that's sales and marketing, I'd focus on CAC payback.

Start early on your partnership strategy. Most partnerships fail and the best partnerships take a long time to bear fruit.

And in a downturn, you can never focus too much. Be as creative as you've ever been and do less. Doing Doing less with more creativity will go a long way. Deeper, not wider.