Pivoting from Growth-at-All-Costs: Four Focus Areas to Thrive in Any Market with BCG

Thanks, Jesse. And thanks everyone for taking the time to join. My name is Courtney Dong. I'm a partner at BCG based on the West Coast, where I work with high-growth technology companies typically on the topics of modernization, org-not model, and growth strategy. Here with my colleague JB, who will introduce himself in just a minute. We're from BCG, a strategy consulting firm. And for those of you who aren't familiar, we've been around for 60 years. Are in more than 100 cities in 50 countries globally and about— and have about 25,000 employees. So as a firm, we certainly have a wide range of expertise in a variety of topics and industries. We work not just with the big companies of the world, but also with companies that many of you here in the audience represent. So disruptors, innovators through our growth tech initiative. We consult with growth techs on a variety of different topics from helping them figure out how to maintain and boost top-line revenue growth through pricing and packaging, expanding to new markets and adjacencies. And particularly right now in this environment, we're working with a lot of our clients on helping them optimize their organization and operating model to manage costs. So today we're really excited to share our perspectives on some of the recent macro shifts and changes in investor priorities, dive into what this means for you and actions that we think you should be taking now. Before we wrap up with some Q&A. So with that, I'll hand things off to my colleague JB to get us started.

Thanks, Courtney. Hi, everybody. JB Reed. I'm a managing director and partner with BCG, and I work in the same spaces as Courtney, but on the East Coast. So it's nice to be with you all. I think maybe before we dive into the slides, just one quick high-level message for you all today, right? And you can see it in the title. And the main message today is that we're in this fundamentally new era now, right? We've been in an extended period of relatively free capital. That area of— that era of growth at all costs that that kind of capital affords is now over, right? And so management teams face a new challenge, right? How do you thrive in a downturn? How do you thrive in an era where capital is not free? You know, how do you find durable, profitable growth and sooner, right? And so the, the, the main message we wanna leave you with today is that we think that you wanna take a strategic and ultimately holistic approach to, to, to rethinking your management approach, right? It's not just about cutting cost to extend your runway. You have to really rethink your strategy. Holistically. So that's what we want to talk to you all about today. It's great to be with you all. Okay, so maybe just a little bit of context setting, right? So how has the macroeconomic context shifted? And we think it's important to take a long enough perspective here, a historical perspective to understand the environment that we're in because, you know, without understanding that, We don't have the right frame of reference to make decisions from. So, you know, we took a look back all the way to 2000, multiple, multiple periods here and how investor preference has shifted. Right. And so I think the high-level takeaway is we've been in an extended period of stimulus since really 2008. Right. If you look at sort of the Fed's assets over this window, they go from $1 trillion to $9 trillion, right? And so there is an extended period of stimulus here. And the reality is that ends up affecting investor preference, our degrees of freedom as management teams and how we run our business, right? There has been this artificially low cost of capital and it's created a set of incentives for investors and companies that's been very growth-oriented. But now, you know, we're obviously in this period where inflation is rising. The Fed has raised rates and it's shifting investor focus towards margin. So inflation from 2008 to the current day goes from something like 2% to, I think it was like 9% at one point this year. The 10-year Treasury yield, so one of the alternatives to investing in these kinds of spaces, has been as low as 1.2% in this window. It's now above 3%. We're just in a fundamentally different context than we've been in. So I think one of the questions is, you know, let's double-click on investor preference, right? We, we obviously as a, as an industry, we think a lot about the rule of 40. And we think that's a great tool to illustrate the degree of shift here, how the context has shifted, and then therefore what it means for us fundraising and operating our companies. Right. So on the left, we have a cohort of software companies plotted against obviously free cash flow and revenue growth. Right. And so we're used to this diagonal line that tells us how we get to the Rule of 40. We either get to the Rule of 40 through growth, right, which is the lower right, you're getting there, you know, with incredible growth, and potentially neat negative free cash flow, or as you follow that diagonal up, you get there through margin, but not growth, right? You're shrinking in the total upper left, but you're throwing off a ton of cash. And so as we look along that diagonal, obviously historically the lower right has been a very attractive zone to be in potentially if you could, right? And we've called those like the blue groups here, right? So you're getting to your Rule of 40 primarily through growth, less through profit. An interesting new zone is the yellow zone. Companies that are getting to the Rule of 40 more through profit relative to growth. And if you then move to the right-hand side of this chart and you look at how valuations and multiples have shifted, even just from '21 to '22, you see really two things. The first thing is everyone goes down, right? All multiples go down, but blue goes down less than— blue goes down more than yellow. Yellow goes down less than blue. And also, Yellow gets higher than blue. So companies that get to the Rule of 40 through margin lost less value and are now generally worth more, right? So management teams that have been pursuing growth at all costs were punished the most in this period. And the imperative to find efficient growth, I think, is pretty clear here. Okay. So One of the key things which obviously we're trying to manage away from is, is a down round, right? We want to find sustainable growth so that we can avoid down rounds. And so I think as we try and extend that cash runway, we want to not only survive, but we want to thrive as the macro context evolves, right? And so two findings that I think are pretty intuitive here, but just to put the data out there, right? In periods of macro stress, right? And on the left-hand side here, um, we have the financial crisis illustrated, right? Down rounds increase, right? We haven't necessarily seen that yet in the data. Um, this is, this is data I believe from Crunchbase, um, from PitchBook. But, um, you can see that, uh, but those down rounds are increasing. We haven't seen that yet, but we would expect to see it again in this period, right? And then on the right, you know, what does it mean, um, for your exit options? Obviously companies that are taking down rounds, you can see in the data face less attractive exit options. They're more frequently facing a PE buyout. And you might say, well, it's only 12%, it's only 20%, but you know, the likelihood, right, is going up by two-thirds from not having taken a down round to taking one. And so this is obviously something we wanna try and avoid. I think the last, the last piece we put on the table here in terms of context is it's not just about avoiding a down round and targeting the most attractive exit options. It's also just how you pull ahead of your competition, right? We see empirically on the left-hand side, we're looking at 50 companies of a relatively small size for the last 4 US downturns. This is a great historical data set. Right. And, and we see that it's pretty rare for companies to both improve sales and margin in downturns. That's the, that's the green brick, right? 14% of companies manage to do both. The much more common experience is actually to decline on both, right? That's the red block. Despite the fact that most founders believe they're the exception, right? And so you have this risk of you're in this period where the likeliest outcome is that you're going to shrink both your sales and your margin, but you don't believe it's gonna happen to you, right? And so taking this moment seriously and being very thoughtful about how you adjust your management approach is really important. When the market's growing, you know, your management approach certainly matters, but there's a lot more grace and a bigger wave that you can ride. And that becomes less true in eras like the one we're in now. On the right-hand side, to give some dimension to that, you're looking at winners that successfully manage through downturns, right? So this is looking at This is looking at post-COVID shock, right? And how have peers who have managed to win, right? They get into the green block and manage not to become the rest. How well do they do? And you can just see the degree, the degree of separation that occurs. And so getting these moments right is really key to your company's future growth and future health. I think one of the big questions though that we wanna focus on is how. You know, right? What's the how? Where should we focus? What should we push on? What kind of levers should we pull? And that's what we want to focus on next. And Courtney's going to talk you through.

Great. Thanks, JB. So to help translate all of this into what it, what it means for you, we've identified 4 different tangible actions that you can take to prolong your cash runway and achieve profitable growth in the long run. In, and what we've done is we've broken this down in a structure where the focus that you might have in low interest rate regimes needs to significantly shift in order to thrive in a downturn. The first priority is ensuring that you really have the right strategy to win. So what does that mean? That means reassessing really fundamental questions. Such as, do you, do you have the right product market fit? Are you actually focused on the right ideal customer profile or ICP? If you're a B2B SaaS company, that means think about customer segments, not just in terms of firmographic dimensions, like geography, vertical, size of company, but also personas. Who are you selling to? What function? What level, etc.? And ensuring that your ICP is not just focused on accounts that have the lowest CAC, which most sales organizations tend to optimize for, but also accounts that have high LTV to sustain the business and manage revenue over the long run. So while it may seem simple to focus on ICP and sharpen that focus, it can actually have pretty tangible benefits, including ensuring that you have healthy gross margins, which we tend to see software companies have north of 80%. As an example, we— recently worked with a $400 million media company that was looking to realign product strategy in light of some market shifts. And we were able to work with them to identify $30 million in top-line revenue opportunity from just aligning ICP. The second priority is around product efficiency. So this is ensuring that shifting away from moving a lot of investment resources in adjacencies, and instead ensuring you have the right mix of product portfolio, which means focusing on the core where there's proven revenue, a proven cost structure that enables that to be efficient. But that's also to say that it doesn't necessarily mean, you know, taking a slash and burn approach or not focusing on longer-term bets at all. In fact, something that we've seen time and time again is that that slash and burn approach where you cut too much and too deep can have a really lasting negative impact on the company. So you need to be evaluating the right mix of both long-term investments as well as the focus on the core and doing so strategically. We also recommend adjusting the way that you learn. So in market environments like these, just being very, very focused in how you learn, testing where you have very strong hypotheses, learning and iterating really quickly will help ensure that those growth bets are efficient. Lastly, ensuring changes to your org model generate the efficiencies to how product operates is really important. So one metric we've actually come up with, which is proprietary metric, is around Research and Development Index, or RDI. And RDI reflects the efficiency of your R&D organization. It divides the year-on-year revenue growth by the R&D spend as a percentage of revenue during that year. What we've seen is that for companies that have less than $100 million in ARR, a good RDI score for best in class is somewhere around 2.3, whereas the median's around 1. The third priority is around go-to-market. So instead of throwing bodies at the sales funnel, we really recommend sharpening the sales operating model, retaining and empowering the best talent. An example tactic you could take is aligning sales comp to LTV to immediately reward good behavior and immediately disincentivize bad behavior. If you don't already have one, building a revenue operations capability to improve the sales process. And what that means is essentially aligning operating teams across marketing, sales, and success to drive go-to-market across the full customer lifecycle. These sorts of return— these sorts of investments can have outsized returns. We've seen in the work we've done recently, actually, with the B2B tech division of a company, where we worked on building revenue operations capability, that we were able to produce about double the revenues within a 3-year timeframe. The other go-to-market piece here that we'd be remiss if we didn't talk about is pricing. So ensuring that pricing is a margin enhancer. A lot of companies right now are raising prices with inflation that JB talked about. And highly recommend ensuring that your pricing model has the right strategy, the right structure, and the architecture is tightly aligned to value to maximize long-term value. Near term, we're spending a lot of time with customers, right, or clients right now on ensuring that their discount structure is, is operating effectively to mitigate against current revenue leakage. So typically, we see in our discount excellence work, an impact of about 6 to 9%. That's bottom line impact, not top line impact. Within the first 6 to 12 months for work that we do with tech companies on this topic. So another metric you can use to assess sales and marketing effectiveness is by looking at the magic number, which is a ratio of year-on-year revenue growth as, as a ratio of prior year sales and marketing spend to see what that sales and marketing spend generated in terms of revenue growth. The last part here I'll walk through.

Courtney, maybe, maybe just adding one comment to the go-to-market section. I, you mentioned price leakage. I think in general, you know, I think there's an open strategy question here and, and, and companies need to think about the demand signals that they're seeing in their own market, right? But I think a, a general hypothesis is that not only are funds getting more expensive to raise, but demand is also getting harder to come by, right? And so acquisition is likely not going to be as strong next year as it has been this year. So one of the things I'm hearing my clients ask about, specifically on the pricing front, you know, I had a pricing project that I was in discussions with a client with, and in the middle of the discussion, they actually pulled acquisition pricing out of scope and sort of doubled the focus on pricing for the existing base, right? Because they're just thinking, acquisition is going to be less, less next year. Let's make sure that we are monetizing the existing base in the right way. Right. So that's one thing we've got on the page here. It's one of the things that we're also seeing real time, you know, like how is management strategy shifting even like within these levers?

Yeah. Yeah, the expansion piece is definitely something that companies sometimes miss too frequently. The last part of the walkthrough is around G&A and support functions. So Org costs understandably are higher in good times and periods when companies are pursuing growth at all costs. But currently, as you focus your strategy, your ICP, past bets that you made will become less relevant to the company's future. And those bets have product sales, support, other resources tied to them. Redesigning and implementing a winning op model and organization for the future is really difficult, but a necessary exercise to thrive in a downturn. And find efficient growth. So this is a topic that we're spending a lot of time with clients on right now. One example metric you might look at is forward-looking revenue as a ratio of employees. And best in class we've seen is around $300K here. JB, you want to share some closing thoughts, and then we'll open to Q&A?

Yeah, and I think it's worth— I think it's worth saying, Courtney, in case you didn't, like, some of the— and Alex, you could, you could maybe flip to the next one while we're saying this. Like, we tried to bring like a, you know, obviously a very small subset of metrics you might look at. But we did try and tailor them to this audience, right? So we've— what, what these are is this is looking at 50 public B2B software companies with revenue between $30 and $100 million in 2021. Right. And I— so these may not be the most 4 important metrics for your particular business. Many of you may fit into that window or potentially not even be there quite yet, but I did just want to call out that we tried to tailor this, you know, somewhat to this group. Yeah, I think, look, it's a very challenging period and it's a period where most of us on this call have never been professionals in a market like this before, right? And so it really does require rethinking. We're trying to make the argument that that the context has shifted. This is not a momentary change, which you can get through with a, a modest and, and broad headcount reduction, right? What you really need to do is, is understand that the whole context has shifted. This context is likely to persist for some time. And given that, you want to take a strategic lens here, right? You want to be thinking about customers and markets and therefore implications for how you build product and how you invest your go-to-market resources as the lens through which to find whatever cost reductions it is that your specific business requires to navigate this period and avoid the kinds of events that many of you are looking to avoid. So, so that's the broad message here. We think this stuff is really interesting. We're excited to hear from you all about some of the questions that are on your mind. This is— these are the kinds of challenges that, you know, that we're living and breathing with our clients every day. Courtney, I think Jesse, let us know if you want us to just jump right in to Q&A. I think there was one question that came across about, can you give specific examples of companies that are managing costs well? So I thought, Jesse, maybe we could just start there.

Yeah, of course.

Yeah, I, I'm maybe two, two, two perspectives. One is, um, I think companies are managing this change now, and I think there's, uh, it to, to appreciate the, the degree of change in the context is not easy, right? And so I think management teams are really wrestling with this, right? I think Courtney and I are seeing that real time. I described a, a price, a BCG pricing project, which just changed in the last week. In its scope, right? So we're seeing it real time with our clients. So, so I think it's very much a work in progress. And I would highly doubt that there's a broad understanding and already level of holistic, really strategic approach to this kind of change. I will say, you see signs in the market, probably especially among large public companies that are under quarterly pressure to make some of these moves potentially faster. So, you know, just a few, and I can't speak for the quality of these decisions specifically, but I can speak to like the sort of shapes and colors of what they're doing, right? And what you're looking for is companies that are not only taking cost seriously, but are describing it in a strategic lens, right? So Snap, for instance, announced a workforce reduction, right? But they tied it to specific investments that they were scaling back as they try and reaccelerate revenue growth, right? So I think they, they cited Snap Originals, Minis, games, Pixie, and others, right? Twilio is scaling back specifically headcount and go-to-market R&D as they are making an investment by investment evaluation of which no longer makes sense. Those are larger companies, but smaller companies have made similar announcements too, right? Like two of the ones that, that we found, FullStory, which is here on the East Coast, making a cut in staff in sales and marketing, right? So it would, you would hope that those are tied very strategically to certain parts of their portfolio, or certain geographies that are becoming less relevant as they try and get more focused. So, so just a few out there, but I think you're sort of looking for that, that dual dual perspective, right? We know we need to get costs down. And we have a— we're taking a strategic approach in where we— how we do that.

Yeah, I think that's right. I mean, it's generally about, you know, scaling low-cost, high-revenue divisions. It's about looking at the org-not model. We talked a little bit about how we've seen how too deep of cuts can actually be detrimental to a company's performance longer term. And so just being really strategic, looking at spans and layers, doing benchmarking, which we do a lot of, to really understand where are you underperforming in terms of efficiencies. And those are typically areas for it, which will vary across companies. There's not just sort of one answer. I know there was a question in the Q&A about which functions specifically are best to cut. And I think it really, unfortunately, just depends on each individual company situation. Great. I also saw a number here about magic, uh, magic number, and, and someone was interested in understanding what best in class is. Um, JB had it on, on the final slide we showed, but I thought it'd be helpful to address verbally. So best in class is typically around 0.7, um, and the median is 0.4. That answers that question.

And obviously that changes, Courtney, right, as you go up the maturity curve. Like, you, you hope that number improves as you become more mature. And so what we try to do is, for this audience, take a smaller, less mature company profile and bring you those figures. But, you know, you always have to be obviously very thoughtful about where you are on your journey, and so therefore what's possible.

Yeah, yeah. There's a great question also just asked here about What's the best way to help customers react positively to investments made in the product that are associated with raises in prices? I'll jump in here with my thoughts and then JB, you should add as well. So this is a longer sort of answer, but to try to be brief, I mean, there's certain moments in time when I think that price increases are more well received. And that's usually around renewals. It's also usually around product launches, where it's very visible to the customer as to what the value is that they're receiving for the additional price that they're being asked to pay, versus just adding kind of incremental features and then asking for price along that. But JB, is there anything else that you might add there to the—

it's, it's a, it's, it's not a simple question to answer, right? Like when When Courtney and I do this kind of work with our clients, the first thing we do is we try and understand a few things, right? We bring a few lenses, right? There's a, there's a customer lens where you go and talk to your customers and you ask them about how satisfied they are and what's working for them and what's not. You know, when, when we really get involved in a client, we also will do big surveys, right? And we'll go survey thousands of customers of, of our clients' products, of our clients' competitors' products. And we're looking to understand the willingness to pay. We're looking to understand the perception of you, of your product relative to competitors' product. And the reason I say all that, Chris, is you may not actually have to convince them proactively that they should be happy about a price increase because your product is worth it, right? It may just be the fact that there's like latent, untapped monetization and you've been underpriced relative to your competition at your particular point in the market? And research, you know, thoughtful research is really the best way to determine that. And if it's there, it's your opportunity right now. Do you want to have a thoughtful communication strategy? Yes. Do you want to plan for these changes almost at an account level, understanding account by account how different specific accounts are priced relative to the opportunity given the unique deal that your sales team sold them. Yes, like those things are all important, but I guess my broader point is they may already be ready to pay more, right? And research is really the way to figure that out.