Mastering GTM and Growth in Current Markets with Rajeev Dham of Sapphire Ventures

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Be scrappy when you're in a wartime versus peace time, even as a founder and CEO and management team, you have to be scrappy. You have to do the unscalable things. I was talking to a hedge fund friend of mine who said hey, you know I call Alto Networks, everyone loves them and their stock has done so well. It's because the Kesha Aurora and don't quote me in the exact numbers, but this was over a cocktail party. The kesha Aurora spent 50% of his time flying around the world meeting with the top 100200 customers that really make up the big chunk of Palo Alto network business. And he just meets with them. He personally, he doesn't spend anyone on his management team or a customer success manager or cut sheet customer. He cuts. And so I tell my companies all the time, quarter after quarter, you want to protect that? Grr. You do the same. Who are your top 100 customers? Go meet all of them. I need some traction. You need some traction. Let's get some traction.

Hey, what's up innovators, entrepreneurs, visionaries and disruptors. This is your Traction podcast host Lloyd Lobo. We're a community of over a hundred thousand people just like yourself on a mission to help you get the methods, the money and the madness to explode your business growth. Featuring stories and tactical advice straight from those who've done it before like Shopify, Twilio, Asana and many more. Hey Traction fam. Super excited to be here today bringing you Rajiv Dham, partner at Sapphire Ventures. We're going to dive into actionable tips and current advice he's giving his portfolio founders in areas like GTM strategy, performance metrics, fundraising valuations and more. Rajiv has backed a number of hypergrowth startups and unicorns and has experienced a number of notable exits and IPOs, Monday.com, braze, segment, transfervise, just a few to name. Sapphire has backed 16 companies on the Forbes Cloud 100 list, making Sapphire a top 10 investor in the B2B SaaS category and Rajiv's been on the 40 under 40 list. You know what's funny though, as I was looking up Rajeev, the first thing that comes up is not the unicorns he backed or the 40 under 40 list, but his big Bollywood.

Oh, no. Thanks for embarrassing me.

Didn't mean to embarrass you.

But there's a fun story now. It will come up every time.

Yeah, it's the first link. It's Google autocompleted. So it must have been quite a wedding. So while you're looking up Rajeev, also look up that wedding video and let's give it some views. Having closely worked with a range of fast growing software companies in up and down markets, Rajiv's here to break down the formula for us. Rajeev, welcome to Traction. Thank you so much for joining us.

Thanks Floyd. Thank you for having me. Pleasure to be here.

I'd like to start on a funny note, something humorous and glad to see you smile. So how did you get into investing? Give us your backstory.

Yeah, no, happy to. And maybe just quickly on myself reiterating some of the elements you spoke about. Again, a partner here at Sapphire Ventures. Actually, Lloyd, I've been investing for about a dozen years now across a few dozen companies that I've been a part of. Many of the names that you spoke about really at Sapphire, our mantra is, and my mantra is to sort of back and partner with category defining what we call companies to consequent in the private software arena. And so hopefully some of those names you mentioned sort of fall under that umbrella. I certainly think they do. And I really began my career actually in investment banking about 15, 16 years ago. I was at Goldman Sachs. Quickly after my analyst program, I moved over to start my investing career. I was at Silver Lake, really focused on software growth, equity and buyout investing to begin my career and then transition to business school. And been at Sapphire Ventures for over a decade now actually.

And what drew you to investing as a career versus maybe starting a company or doing any number of things there?

Yeah, you know, investing is an interesting business. You get to sort of learn about a lot of different companies and a lot of different spaces at once. You certainly don't go as deep as if you're an operator in one particular company for a number of years. But given that my interests are constantly moving and I get to learn about new technology waves and trends and different sectors, that's been a huge plus for me. And then moreover than that, it's really actually being able to meet and work with these brilliant founders and operators and management teams from different companies and see them over the years build just tons of relationships and help them in my own way. I think that's kind of the most exciting part about the business.

And you know, there's a testimonial here from Manny Medina, CEO of Outreach, which is a four plus billion dollar giant in the sales space, in the sales tech space. And he said working with Rajeev has been invaluable to growing Outreach. He's provided both insights as well as introductions to valuable customers and partners. And most importantly, Rajiv is passionate about helping Outreach become an enduring company and deliver on that passion as a constructive and positive partner. What a great testimonial, man. It speaks volumes to how you helped them.

Yeah, nice of him to say. I think that's what the business is about. You know, it's interesting. Early in my career it was all about chasing the next hot new investment. I think at this stage of my career, I look back and I really cherish the relationships built with folks like man through ups and downs, by the way. I think those are the relationships that really stand the test of time and endure and actually allow me frankly to win that next pot deal. In fact, at Sapphire, one of our North Star our metrics we have really three is our founder, CEO MPF score. So we actually take a survey, an MPF survey of all the founders and CEOs we work with on an annual basis. The Last score was 85, I believe. And that score is really important to us. We are there to serve our companies in whatever way they think is best.

You know, I wish more investors had that founder, CEO, NPS score.

Right.

Because it keeps you in check. But it is a noble journey, helping others achieve everything they're looking to achieve and as a result, finding abundance in your life. And it's not something that happens overnight. Right. It's a long journey. It's like a 10, 20 year life cycle with some of these companies until you see anything.

That's right. If you think about it, and I've been there, you know, on that and the new record stock exchange with Monday.com or with Livongo Health or with Transferwise and these coast of companies and you sort of reflect and you realize that this is a life changing moment for not just the founders, but oftentimes for the whole employee base. These are individuals that likely spent several years, if not more than a decade of their best and brightest years working for a particular company. If I can contribute to, you know, 3% in my little way, introducing them to a great executive, finding them some customers or more. We're just providing a steady hand and some advice through ups and downs on how to manage their business and budget their business and seeing around some operational corners. Just given all the companies that I and we at Sapphire have been involved with, that just provides me with an enormous amount of satisfaction.

Now, diving into your thesis, what excites you? What companies are you looking at that you're saying, hey, if I could, I would go and work for these guys. That's how much I love them.

So generally my focus area taking a step back is B2B and enterprise software companies that have the potential to disrupt or really lead large categories of software again. At Sapphire, we call that company the consequence consequential companies that can endure for many years and become again life changing to all the shareholders and stakeholders involved with that company. That's what I look for. Whether it's horizontal software solutions, vertical software solutions, solutions that are B2B and financial technology in nature or B2B and healthcare in nature, like Livongo that I mentioned, those are the companies that are interesting to us in general, of course, with everyone talking about AI, an area that Sapphire has been investing for over a decade now, with some of the advances in AI, all things software have sort of an AI story, whether it's at their core or it's enhancing their product. So I look for founders that have that sort of story. But more specifically, everyone will tell you, hey, it's about the growth rate and the metrics and the market opportunity. And for us at Sapphire, despite being later stage investors, we still really appreciate the product and the differentiation. But I think beyond that, I was reflecting on this the other day. For me, it's really founders that have some sort of infectious energy about them, right? Whether it's their quiet confident or they have an energy that's through the roof. I actually try to be really introspective about how I feel after each and every. Both the initial but every subsequent conversation I have with the founder, CEO and sort of measure myself, how do I feel? Do I feel energized? Am I thinking about that company at night? You realize again, as we talked about after doing this for a dozen plus years, it's really about that people and listening to your gut, the metrics and everything else will tell you a little bit of a story, but you've got to listen to your gut. In terms of how do you feel listening to that founder, Are they that passionate that they can keep you up at night? That means they'll probably go on to do some pretty incredible things.

Now, is there a specific stage when the company becomes interesting for Sapphire?

Sapphire Ventures is a global B2B software focused venture capital firm. Again, we back with what we like to say is companies of consequence. We're managing $10 billion of capital. What we really look for are companies that have demonstrated a very strong product market fit. Sometimes those companies can do so at $3 million of ARR. Sometimes it might pick, if you take in particular sectors or given customer concentration, $10 million of revenue. But usually that's the earliest we'll go and then we can invest all the way to pre IPO stages as well.

So you guys are a long player. You're playing the long game from the earliest stages, maybe coming in at series A all the way to ipo.

Yeah, a little bit more Series B. Lloyd. Again, post product market fit, oftentimes being Series B to some of the later stages as well. Awesome.

When I heard 3 million, that's why I said series. I think that definitions has skewed a little bit and I want to get into that. Given the market conditions and the big massive Covid boom, right, everyone needed to digitally transform. Maybe we roll for the market a little bit and then the interest rates went up and of course the market didn't sustain as people thought it would, which brought down some of the expectations that founders have. So what is that correction you're seeing in the market right now in terms one revenues you're seeing at Series A, Series B, Series C and associate valuations in terms of how founders should think.

Yeah, I think there's revenue, there's valuation, but there's also performance and growth, which I'd like to touch on as well. So from a revenue scale perspective, you are correct that 7, 8 years ago you really needed at least $1 million of ARR. If not, as you just mentioned, maybe 2 ish million of ARR in order to raise a Series A? A Series B would be usually 4 to 5 million of ARR@ some point between really coinciding with interest rates declining in 2018-2000, 21, 22, early 22, you could rate the Series B with almost 0 million of revenue. I think that's slowly shifting back. We're not quite there to where we were in 2012-2016 just yet, but it is shifting back and I'm seeing more mature companies raising Series Bs or even A's, which makes our business a little bit easier because we can see a little bit more signal versus noise in those businesses and doing diligence. I think the more interesting area is really growth rate. There was an adage or a sort of a rubric a lot of venture capitalists use at this stage, meaning at the 3, 5, 10, 15 million of ARR stage, which is called T2D3, triple, triple, double, double, double. If the company wasn't doing that, it wasn't growing fast enough. I think that's all really changed now. I think we at Sapphire are open to looking at companies that are growing a little bit slower, which might be the more natural rate of growth in this market and in general and historically, but maybe have stronger unit economics and efficiency, which we can talk about. The last thing I will talk about is in terms of painting the picture of how this market has changed is from a performance perspective, and we could dig into that more later as well, is sort of growth persistence. Growth persistence basically means that the company grows at x 100% in the first year. How fast do they grow next year? At some point, SaaS reached an 80 to 90% growth persistence range. Meaning if a company's growing 100% in year one, they're growing, call it 85% in year two and they're growing whatever, 66% in year three. Right. That growth persistence I've seen in the last couple of years has dropped to 40 to 50%. So the deceleration curve of companies coming off of an extremely high growth 2021 that might have been a little artificial is now dropping a little bit more. And that's something we analyzed. I fully expect, by the way, 2024 to have a growth persistence that stabilizes. It comes back up to closer to historical norms.

Are you seeing founder expectations shift as well? Because I found like in the last couple years, founders were demanding that 20x30x40x on a small sample size of growth. I'm not sure if anyone thought about it, that, hey, we're seeing this insane growth because everybody needs to transact online. We went from, it's a black swan event. Everyone needs to transact online. Will this sustain? Like if everyone who needed to buy Zoom, they did and they bought Shopify and Snowflake, and if they're not buying it, if they haven't done it in 2020 and 21, are they going to continue to do that? Are you going to see the same volume? I'm not sure if people thought about it, but I thought like founder, there was like an imbalance. Usually when that's there is an imbalance, something's got to give Somewhere.

I think you're exactly right. And that's what led to growth persistent scores and growth rates in general coming down in a massive manner late last year and early this year. And the valuation expectations are what you're hinting on. I think they have been adjusted for a large swath of entrepreneurs. But I think you're seeing two things. One, you know, companies rate at 2x the frequency and raise 2x the amount is what I like to say right from the 2019-2021 era, so they have four or five times plus the capital on their balance sheet than they really need. That coupled with now board members and investors saying, hey, let's slow down the cash consumption of this business because the demand environment is very different than what it used to be. Our bookings just aren't going to be the same. So why push a lock up the hill? That led to a lot more Runway. We all thought there would be a deluge of companies raising money today right now in middle of 2023. While there are certainly more today than there were at this time last year when there was effectively zero, it still hasn't happened. A lot of companies are sitting at a last minute valuation that's quite high, still growing into it. They don't need to come out and raise the money and really test the market. The ones that do are seeing valuations that are compressed from where they certainly raised in 2021. Sometimes that compression can be by half, sometimes by 2/3. Now, if you're in the generative AI phase, you're not seeing any compression and you're still raising a 2021 valuation. Definitely.

And what are those valuations you are seeing? Or rather range? Because I'm not expecting you to give me one specific number. But what is a reasonable range? Founders should expect that Series A, Series B, Series C, and maybe series A. And Series B is harder, whereas series C is more easier to predict given you got your metrics and everything more baked in.

I think that's right. Series A, sometimes it can fluctuate by 2030% depending on whether it's a repeat founder or idea or not versus metric. It's still all over the place. Like I said, Lloyd, there's not enough of a sample set of certain types of companies in different categories to point to. Okay, this horizontal software company gets valued at x kind next 12 months revenue or next 12 months ARR. I will tell you in the 2016-18 timeframe. So I'm not taking all the way back. I'm taking it to where companies were already starting to get valued quite nicely. The premier companies were getting valued 10 to 15 times the next 12 month ARR. So if you're at 10 million of ARR today, you think you can be at 20 a year from now. You put it 10 times or 15 times on that. And that's the valuation that companies pretty top decile software companies were getting valued at with great metrics and big markets and good teams back in 2016-18. We're seeing that selectively, but again, the sample set is not large enough where we're seeing that repeatedly. And frankly, I think we're living in an ecosystem right now where the venture dig is. The secret's out there that if you can get involved with great software companies, this is an enduring asset class that can build amazing returns for everyone involved. So there's more capital in our system too. So the question is, and it's still PVD, do we return to the 2016 and 18 valuations despite the public markets returning to those valuations, or will the valuations continue to be elevated from those levels, which forces venture capitalists to be able to choose and pick better, frankly.

But you know, it creates this situation when valuations are elevated is you end up taking more money than you need because investors want to have a certain ownership in the company. You end up taking more money than you end up spending more money. And then reality happens. And you know, the growth that triple, triple, double, double, double, double doesn't always pan out, right. For what percent of the company does it continue to pan out? It's very hard at like 10 million to grow to 20 and 20 to grow to 40. It's incredibly hard. It's much easier to go from 0 to 10 than it is right at those scales. And so then these companies are growing. You know, I'm seeing a lot of companies, especially in the few million ARR range that during the pandemic raised at few hundred million valuations that now don't have the growth to support that valuation. And they burn a lot of cash and they can't even raise. They're more or less zombie companies.

That's right. And a lot of them won't have to raise a down round. Right. And that you're going to start seeing that more and more. And that's not the end of the world, by the way, if that. If it's between choosing between the down round and running out of cash, where you can maybe raise cash in a down round and kind of pivot your product or positioning right, reduce your burn and Create something that's more enduring and interesting even if it takes you longer. I would advise entrepreneurs to really entertain that down route. But you're right that there will be a lot of these zombie companies that maybe sort of drive their cash flow to break even, but the growth rates are just naturally slower. We call them zombie as if it's a negative thing just because the company doesn't burst and go public. I still feel like you can create some very interesting shareholder value for everyone that involved in those particular companies.

You know, when a company is let's say 10 million in revenue or even 5 million in revenue and let's even call it they're growing reasonably at. When I say reasonably, but it's not good by venture means 40% year over year. If their NRR is over a hundred percent, they can run this playbook. SaaS is the same like you know, in many ways Warren Buffett.

Right.

It's compound interest, right?

Yeah. It's fascinating you say this. I completely agree. And actually at that part that's what I was hinting on earlier, which is we're not just looking for triple. We are growth investors. We do think growth can cure many things including high valuation and other. But we are looking for more durable growing companies. So for example, if we see a company that's 20 million of ARR and maybe it's growing 60 or 70%, we are not going to ignore it. Especially if the cash consumption or cash generation associated with that business is interesting, meaning minimal burn or even cash flow break even. That can be a very interesting and enduring business. It may not grow at 150% in the beginning, but I think more important than year one growth rate is growth persistent. So it may grow 60%. But if you see it doing so without burning any cash, you might gain confidence. That business may be able to compound through their NRR by the way and gross retention, which I think is equally critical. And through their cash flow efficiency and sales efficiency, they may be able to stay at 50, 60% growth to five years. That is huge. And if you get in at a reasonable valuation, that's a really interesting compounding business that all of a sudden you wake up five years later and is a couple hundred million in revenue. Right. And so we try to view the whole picture together, not just the year one growth rate and assign a value to that alone.

And growth persistence in your view, what are the leading indicators of growth persistence?

Yes. Yeah, and I think we hit on it. It's the rest of the SaaS metrics we talked about right one actually even more so than NRR is it's gross retention.

Define that for our audience effectively.

Mean if you were to measure all the you could do it on a customer count basis or a dollar basis. So on a dollar basis, if you were to count up all the dollars that you acquired in month one and you measure all those dollars in month 13, 12 months later, how much of those dollars are left? You exclude any of the customers that are spending more with you though. That's where the net revenue retention comes in. Only based on the lot, both dollars and customers. You can view that the year one in one year. What is the retention both on dollars and customers. You have companies that are performing at 93, 94% cloth, the maximum is 100%. Of course we really view as interesting and valuable company. Then you have an install base that's telling you this is a must have solution. And for starters that's a great foundation to build upon and sell them more. Over time you have a trusted relationship and you can then boost the NRR. Right now in today's environment, best in class NRR for public companies has come down from 135% plus to now 120, 125% or even lower for some companies.

That's enterprise like I guess the distinction being if a company's selling SMB, the NRR is typically the NRR will be.

Lower, maybe around 100, 103%. Ideally you don't want to break below 100 and the GRR. The gross retention for more of an FNB company could definitely be in the high 70s. Ideally it would be in the 80s. But we definitely look at the GRR as something that can say okay, can this persist? Is this a stable sort of grower? And then we look, like I said, at capital efficiency, both cash flow but sales and marketing. Is this company growing without consuming too much cash? If so, and if they let say they're break even, that means that they might actually be able to be profitable or reinvest cash that they raise into continuing that growth and keeping it up for a long time.

So in terms of cash consumption then what is best in class for what you're seeing today? Given like the markets have gone up and down like is it under 12 months in terms of CAC? Is there any other cash consumption metrics that we should look at?

Interesting. I'm actually stay tuned for it. I'm writing a blog on this right now about how the net burn ratio is bf. There's this net burn ratio that everyone says well hey, if you're growing ARR by a dollar, you can burn a dollar and try to keep it one to one. And I actually think that's B.S. remember what you said earlier that at earlier stages a little more trickier business isn't stable yet. So if you're a 3 million ARR company and you're going from 3 to 7, I don't think you should be keeping your earn early. Especially if your aspirations are to be a venture back business. If it's a lifestyle business or something else different, you should probably be burning more. If you see a big market opportunity, you're investing in R and D, you don't quite have the operating leverage on your P and L, it's okay to burn 8 million, 9 million, 10 million, 12 million. If you're growing from 3 to 7 in that particular year, that burn ratio might look terrible, but I don't think it applies for those companies. Similarly, if you're 150 million ARR company and you're growing by 25% right? Or let's make the math easy for me, 33%. So you're going 150 to 200 burning 50 million just because you're adding ARR 50 million to try to get that magical 1x burn ratio is actually not that healthy of a business at that scale with that growth rate you should be angling for more of a rule of 40. If you're growing 33% you actually want to be generating probably 7% plus of cash flow, not burning $50 million. So I think with a one burn ratio really focusing on those mid stage companies between sort of 20 to 100 that are hyper growth. Right. If you're going from 30 million of ARR to 50 million ARR and you're burning $30 million, I would be impressed. Even then I would say you could probably burn a little bit more as long as your underlying unit economics are healthy. Because you're sort of investing ahead and you're seeing pull in the market, that's a new one. So that's on cash flow and on sales efficiency. All of those metrics have been completely distorted Lloyd, in terms of they were supremely good in 2020, 2021 and they looked probably pretty terrible over the last couple of years we try to take a balance view. That's why we haven't. I've been doing this for 12 years and Sapphire has been around for a few decades and we look at all the historical metrics. I think it still shows that again it depends on the space you're in SMB or enterprise but you want to be within roughly a two year CAC payback. If you're going really fast, maybe it's 30 months. If you're going much slower, maybe it's 12 months.

The best and best of class is like six months CAC payback period. Maybe it's 90% GRR. So there's all these things, but you gave us a good range. And one thing I'm very curious on, right, There's a massive focus on NRR in the last couple years and something happened with this fall in the market and valuations and you know, the chaos is there's a heavy focus on grr. Why is that? Like what am I missing? Like I, I understand the concept of GRR and the value of it and it truly values the business. But if you have a set of customers that are spending more than you, why the obsession with GRR over nr? What is wrong with the NRR metric?

Grr Lloyd is more, you can count on it more, right? As you've seen with NRR in the last couple of years, companies that were at 145% of NRR are now at 115%. Yeah, it depends on how the NRR is also driven. Is it usage based and consumption based where people as you mentioned were consuming a lot more? I'm in some sales and marketing technology companies and everyone they sell on a per seat basis. The NRR looks incredible because people were hiring more people in all these other startups and pay for more licenses of the software. And so that's interesting. That provides an organic growth plan and that's fun during the good times, but that actually can hurt you really bad during the bad times. What you want to make sure is that now during a softer demand environment, is your software still a must have. They may not spend more with you or they may have laid off some salespeople or their consumption may not be as much. That's okay, you'll survive that. But if they just turn you off completely and churn from you and say we don't want you, that is scarier. That means that you have a software business that might just be a nice to have in any normal sort of economy. And that to me is more of an existential worry versus the NRR fluctuating from year to year.

That makes a lot of sense. And also then you can't sell them all kinds of other wraparound services.

Right? When the market comes back, you produce a new product and change your pricing or positioning. You want to still hold on to that install there. Definitely. Yeah.

Because I've seen what happens also is a lot of folks are able to pad that, you know, the extra NRR with other services they sell to the same customer and it could be, you know, you can wrap your consulting services in there. A lot of software companies, especially the enterprise IT services.

Right. They don't look like software. They're maybe a little bit lower margin. But if you're a big enterprise, you might be able to generate 30, 40% margin on some recurring services to you as well. And that's okay. As you should. Right. And make the customer even sticky. But yeah, I completely agree with you.

Now let's get into the traits of an long term enduring company. You talked about category defining businesses, right? And these are the folks that sustain. What are the traits of these category creators or category killers? Like what are some elements from a GTM sort of brand building GTM perspective beyond the metrics.

Yeah. You know it's interesting I think when you're talking about go to market, everyone has. It's almost like the market seems to have chosen guide to some degree over the last five years with the wave of PLG product led growth versus enterprise outbound selling. I just think that's almost a false dichotomy that's been driven in the marketplace for whatever reason. You sort of need both. I think Back to the Monday.com experience when we invested they were bread and butter, were selling $1,000 APV deals. Each customer was paying $1,000 of ARR per customer to very small teams or small companies. And that worked really well for them in terms of their paid marketing as well as product led growth engine and took them to 100, 150. But the reason why they're 600 million of ARR, I think they're public. 600 million of ARR still growing at 40, 50% plus is because they did something that a lot of these PLG sort of paid marketing SMB software companies didn't. They layered on an outbound salesforce that could also even target the enterprise. So they had both sort of combined and I think that's a pretty special element. I think you'll see a lot of companies need to have both of these engines working in concert if they want to scale beyond 100, 150 really efficiently and become these enduring again, 3, 5, 7, 10 billion dollar market cap companies.

And some of these category definers or category creating companies. It's a lot of evangelism, right. Like you're starting with no category or you're starting in a space that's overly crowded and then you change the name to create a new category. If you look at what Nick Mehta did with Gainsight, to me it makes sense today, but when I was looking at it back in the day, customer service was broken. People weren't responsive and they said we'll create a new category around proactive customer service and call it Customer success. It wasn't a completely new category. It was an existing category just done 10x better.

Yeah. I think what you notice in a lot of those businesses, by the way, the debate will rage on in terms of is it better to define to invest in a new category business or an existing category and budget line item with a company that's just doing it better or approaching a different segment of the market. We at Sapphire have done both. I have plenty in both categories. I think it sort of depends on the market cycle. I think most investors you ask will say it's a little easier to go after an existing budget line item today given again the demand market's softer in 2018-2021 where people are excited about all types of new software. And by the way, there was title proliferation and inflation within these organizations as you just mentioned. By the way, some companies have account manager, customer success, customer service, they have four handoff just at the post sale. That's another actually piece I'm writing right now in terms of how to shrink that in organizational design. But as a result you saw a lot of new software being adopted in today's market. There's consolidation, right? Go after known budget line items, consolidated vendors, and that's what these companies are going to have to reinvent themselves to develop more product and sell sort of consolidated suite because that's what's being true in today's market.

I've just released a book from grassroots to greatness 13 rules to help you build iconic brands with community led growth. We cover stories from big brands and small all the way from Harley Davidson to HubSpot to Nike Disaster to Gainsight to give you the frameworks to build a community led business that will take you from an obscure idea to a movement to a cult like phenomenon. Check it out at from grassroots to greatness.com the digital copy is on for 99 cents. Now shifting to GTM motions. What is getting you excited? What are the key elements of great startup growth under normal good circumstances and what are you looking for in startups today given these market conditions?

I am looking for companies that aren't reliant just on One particular motion you need to have two or three, particularly if you're a later stage. I'm looking for companies that have really thoughtfully thought about their go to market design. Again, not having too many touch points and too many people doing too many things. Not only does that lead to inefficiency from a financial metrics standpoint, it actually leads to a bad customer experience when you have three or four handoffs pre sale and another three or four handoffs post sale. So who had thoughtfully designed a go to market organization that looks like what it frankly used to look like in 2014, 15, 16 before the five, six years of absolute craze in our industry? I think that has huge ramifications as well.

And in terms of ideal motion that you see at every stage, like what do you love to see at series A, Series B, Series C?

I think in series B at B to D I would love to see most companies have a strong outbound motion where they can get directly to customers in addition to some level of for certain categories, especially SMB, if you're selling a 1,000 to $5,000 deal you need to have some level of a product led distribution that where your CAC is very low and you get the product enhanced customer. You cannot staff a enterprise sales rep and an SDR and a sales engineer to sell a $3,000 solution. But as you get up to more mature stages and higher apv so 5k to kind of 100k you need to be able to prove that you can do this in an enterprise and mid market outbound manner in a pretty efficient way. It doesn't mean all your pipeline needs to come from outbound, but you need to have probably 50% of your pipeline and deals closed from outbound, another 50% coming from marketing inbound.

And the other thing I'm seeing where some of the best long lasting companies have also these massive communities around them like HubSpot, like Gainsight, Shopify, like Canva. Are you seeing that take more and more form? I'm seeing large companies acquire now companies just for their communities.

Yeah, I think it depends on the sector. So if you're talking about software application or even some open source that almost begin bottoms up right Very user driven and or almost pro humor in some ways like a Canva was. I think that community really works. I also think that really works in category creation. You know Gong I think was really good at this in the early days game site as you just mentioned. That really helps there. I will say though that the community led growth is interesting but again in today's market, I do think that lost art of outbound and top 10, top down spelling, selling to procurement, convincing the CFO getting through six different steps, shift to close, maybe a 75 page deal where you didn't need to do that because someone in the community would refer some salesperson and they probably had their own virtual card from Brexit ramp and they can spend on something that outbound, more top down, sort of older school selling is actually becoming more in vogue and dare I say, might be a little bit of a lost art. And so I do think you need to have some of that art and science in your company as well.

Fantastic. I love that art and science because it's all about connecting with the customer and you can't just science your way into it because people buy with emotion. There's a lot of emotion behind every buying journey and you gotta tap into that both. So I like that art and science. Now, as you look into the rest of 2023, going into 2024, what are the top three things you're advising your startups?

Yeah, I think it's helpful to frame up how I view this market, if you will. You know, it's interesting, the first half of 2023 has been rough for the tech ecosystem. I think I saw Q1 of this year from my vantage point and Sapphire's and I think more broadly, given my discussion in the ecosystem, be the hardest quarter in my 12 plus years of investing for software. Quarter one at the beginning of the year, quarter two look not necessarily that much rosier, but also not that much worse. And so I do think we're sort of feeling the bottom from an operating perspective. Remember, I think this downturn has taken multiple phases. Phase one was 2022 valuation reset. Maybe not all the way, but it's certainly a crunch. Phase two is what we're in today, 2023, that's an operating performance sort of reset. And I do think we're sort of feeling the bottom now, which is good. There's not huge negative surprises I'm seeing in Q2 like I saw in Q1 and even Q4 last year. And then of course phase three, we'll see what that looks like in 2024. I do think we'll reach some sort of equilibrium both in terms of the price and earnings side of the equation, the valuation and the performance out of the equation. And companies will need to raise capital. So I think there'll be more activity. This is all to say, by the way, Lloyd, this is all separate from the AI Discussion where companies are getting funded maybe as they should like in 2021. But I'm more talking about the general sort of private software and venture capital sort of ecosystem market. So I'm advising my companies, you know, all the same in terms of cash one way and burn. I think you've heard that many times before. I'm also advising them to, you know, be scrappy. When you're in a wartime versus peace time, even as a founder and CEO and management team, you have to be scrappy. You have to do the unscalable things. I was talking to a hedge fund friend of mine who said, hey, you know, I call Alto Networks, everyone loves them and their stock has done so well. It's because Nikesh Arora and don't quote me in the exact numbers, but this was over a cocktail party. Nikesha Rora spends 50% of his time flying around the world meeting with the top 100, 200 customers that really make up the big chunk of Palo Alto network business. And he just meets with them personally. He doesn't spend anyone on his management team or a customer success manager or touch sheet customer. And so I tell my companies all the time, quarter after quarter, you want to protect that? Grr. You do the same. Who are your top 100 customers? Go meet all of them. I think the second area, as I talked about org design is more important than just saying let's just lay off 10% of people. How do you recompose the ratios? We've gone away from people that build product and sell product. That's the most important thing in the software business. Everything should be built around that. Too many other things have been going on. And so how do you reorient that? Design is another thing. And the third thing is I think we're moving to an area where, you know, not every company can go public. It's okay to talk to some of the large enterprises that may buy you one day. It's okay to maybe even talk to your competitors that you thought were competitors. Maybe you can sell with them in a critical way. We kind of have to stand together in this new world and try to kind of build more interesting businesses that way. I like that.

Visiting customers in person, nobody does it. Especially in the age of plg. Everyone thinks software should sell itself. And now generative AI has pushed those egos over the top. But ultimately people buy from people until robots are buying, people buy from people. And there is some great science behind senses anytime. Look, we're sound in sight. If we're doing this in Person, we'll probably be talking for two, three hours, hanging out, having a meal, sharing more personal stuff. Anytime you incorporate more than two senses, taste, touch, smell, in addition to sound and sight, you start building stronger genuine bonds. And we all know this. Like when we go to events or meet somebody who we did a 20 minute Zoom call with. I mean how many times you've met them in person and it's a couple hour conversation. And companies value that the CEO of this multibillion dollar company is flying, getting on planes, trains and automobiles to see me in person.

Right.

So I like that. That is great advice. And it's hard to lose a customer who you personally meet in person with a number of times.

I completely agree. Meet in person, do the unscalable things if you need to protect your business and install base. And yeah, in general, in person. Lloyd, I completely agree. I wish we were even doing this in person if we could. Maybe next time I'll fly over to Dubai and see you there because that sounds like a fun time.

You know, we're going to do the Traction conference in Vancouver next August.

Awesome.

And the IRL conference had a number of folks from Sapphire come. I think the first one we did was in Banff. Jdas was at the conference and I think Jay was. It was still SAP Ventures at the time. This is 2014.

We changed our brand name in 2013. 14. We were spun off independent from SAP, by the way in 2010. But yeah, that timing sounds generally right.

Yeah. Yeah. So we've had a number of Sapphire folks over the years. So in terms of investing and pulling back in terms of spend because we talked about cash efficiency and return on cash here. Product GTM Finance team growth Key hires. How should founders prioritize in this market?

You take what the market gives you. I think there's a fallacy that if we spend more, we'll grow more. As we can see, sometimes that doesn't happen. So like I said, look at design. Look at ratios of SVRs to reps and SVs and pod structures and really reorient that design and take what the market gives you. I do think, you know, investing in R and D is critical. I will say R and D is harder to measure in terms of efficiency than sales is because you can always look at bookings and quota attainment. And so I think over the last 5 years even R and D has sort of grown in an inefficient way. It's okay to invest more and more in R and D. But there was something I read, I Don't know if it was Aaron Levy or someone from Box saying, hey, with Box, they used to have, again, don't quote me the exact numbers, but 10 person sprint team and they shrunk that to four on the engineering side. And what they realized is the smaller sprint team were actually more productive, not more productive on a per capita, on a per person basis. On an aggregate basis, four engineers were better than 10. And that's the point I'm trying to drive. That is sometimes smaller is better in these things and you can actually produce more if you're really thoughtful around how you design all of these teams and the ratios of individuals to one another.

Definitely. And I like what you say is like take what the market gives you. I also like this bringing clarity to R and D. Historically, R and D has been a black box. Yeah, you sit on these board meetings.

And you know, is the number of code commits that might not be a good thing, maybe inefficient code that you're writing, is it that you've just met a deadline. In terms of product, this is still a very vague area. We have people at Sapphire Internally trying to work on it. By the way, there's an ecosystem of software companies that are trying to measure sort of productivity of developers. But it's a very nuanced thing. And so. Yeah, I hear you. It's tricky. I'm in general in favor of building great product and pouring investment into that engine, especially if the sales engine is unclear in terms of the demand environment. But even that can be done in a smart way. It should be customer driven in terms of just, rather than just proliferation of product and resources.

You know, marketing, you know, you put a dollar in, you know what channels they invest in, you know what those channels bring. It's traffic, it's leads, sales, you know, exactly. You know, finance. R and D though, historically, because like at, at our company boast, we fund R and D companies, right. We're a product that gives, that automates government funding and innovation incentives for companies based on the R and D and the product development they're doing. And then further, the next product we added was lending to those companies, securitizing those R and D credits. But then what we found is very interesting after looking at the guts of these companies to give them money for R and D by securitizing their R and D. We had to look at the R and D, the banking, their financials and the payroll. And so the next product we're launching is basically R and D analytics because we have a 360 view based on the R and D they're doing, who they hire, how stable their business is and how it ties to business outcomes. And that came out of literally looking at all these companies that are working on R and D and saying, hey, this is a black box. You guys do something. But code commits is not an outcome. Code commits. Saying code commits is a measure of productivity is like saying my sales guys sales team just slammed a bunch of calls.

Like their number of emails. Yeah. The number of emails they send throughout re. Yeah. That doesn't matter. Yeah.

All I want to know is how many proposals you sent because nobody's going to ask you for a proposal if they're not interested. How many proposals? How many closes? That's it.

Right.

This has been a fantastic conversation. As we close out. What's one piece of unconventional advice that founders ignore but shouldn't?

Ooh, that's a good question. You know, it's something you said earlier actually that got my mind thinking around that 10 million ARR. 40% growth business. I think what I would say is even in the venture market, there is a natural rate of growth in every market for your company. Right. And so some markets are high velocity markets. Maybe it's a new category. It's right place, right time. Or there's an incumbent that was stopped by private equity and you can kind of continue to grow. Some markets have slower replacement cycles. The buyers are just a little bit more sedentary or they want to stick to status quo or some vertical market slightly more constrained. There is a natural rate of growth. Not every business needs to live by the same metrics. You can still build a really valuable and interesting business. Zafar would be interested in your business even if it is slower growth, but it's growing at the natural rate of growth related to that. Lloyd, I would say people underestimate positioning. Right. So sometimes positioning your product or company to a different segment of the market or slightly to a different Persona can make all the difference in the world. It doesn't mean you need to completely pivot and build a whole brand new product or address a whole new market. But sort of product and company positioning is sometimes something that I look for pretty often. How smartly is this position versus incumbents or do it yourself or the segment of the market and the rate of growth in that segment of the market. I think you could do. There's a lot of interesting, a lot of power in product and company positioning.

Fantastic. Where can we follow your wisdom? You write a lot. I know.

Yes. That. Well, I'm on LinkedIn. I'm probably most active on LinkedIn and so I'm posting, you know, almost every couple of weeks new thought pieces. A lot of things I talked about here. I dig into more detail and obviously speaking at some conferences and such and I thank you for having me Lloyd. I really appreciate it.

Awesome. You have a blog as well.

My blog is all on the Sapphire Ventures website. So if you go to my team page you'll see all the sort of pieces I've written there.

Awesome. So we will add that to the show notes sapphireventures.com blog and then Rajeev, your name is spelled R A J E E R A J R A J E E V and D H A M. Is it Dham? Is it Dom? How do you pronounce it?

Dam Dam.

Dam Dam.

Yeah, I had it right.

Awesome. This is fantastic. Wishing you great success and I'm gonna follow you. I just added you on LinkedIn. I'm gonna follow your content and engage with it.

Thank you so much. I really appreciate it.

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