The Science of Scaling From Zero to Billions with Mark Roberge, Stage 2 Capital

VCs are trying to entice their investors with an attractive IRR. And to get that attractive IRR, their companies have to triple, triple, double, double. But really only two out of the ten have to. And everyone else fails. And everyone else fails because they weren't ready. And that's where the investor and the entrepreneur are misaligned. This is the story I hear all the time. So how fast are you going to grow? We're going to go for 12 million this year. Okay, how much did you do last year? Closed last year at 2 million ARR. So how are you going to do that? And they're like, oh, we're hiring 30 salespeople in January. How many leads per rep did your reps get last quarter to hit their number? And now you're going to 8x demand gen in a month? That's insane. And they all do it. It's because the founder negotiated this huge valuation and the VC was like, yes. And now the founder is like, oh, crap, now I have to do it. And the Excel model says, If I hire 30 reps in January, I'll hit my number. And that's the extent of the analysis. So don't do that. I need some traction.

You need some traction. Let's get some traction.

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Stage 2 Capital, Harvard professor, former CRO at HubSpot, super, super successful career in tech. You came to our first conference in Banff in 2014. So long ago you made the trip there. And you know what's really funny is from that 2014 conference, almost most of the speakers went on to build multibillion dollar companies like Jeff Lawson was there.

It was a great, great crew. Yeah, for sure.

And we got everyone to come all the way to Bev. Awesome. So give us your backstory. How did you get into technology? How did you meet the founders of HubSpot? How did you create this whole category and movement around marketing, automation and inbound?

Yeah, I mean I started my. I was an engineer. I was a mechanical engineer at school and my first two years of my career I was writing code and then it was staff. This is like some of you I'm dating myself. Like it was like 1999, right before the 2000 craziness. And entrepreneurship was not as accessible as it was the last two decades. And then when it started to blow up in a good way and then blow up in a bad way, I found myself into a startup and never looked back. And so I just dedicated my life to entrepreneurship. At that moment I was like, I got to get an mba. So I went to MIT where they're very focused on entrepreneurship and that added to my quant background. And then sat next to Dharmesh at school, the co founder of HubSpot, and he kind of said, hey, will you help me with my startup? So I was a consultant and he brought in Halligan, his co founder. And Halligan was like, I like that we have you for one day a week, but I don't really need strategy advice. I just want you to sell. And that's how I got into sales. It was just like I was getting paid an hourly rate by Halligan and Dharmesh. And Halligan was like, why don't you go sell? And bam. Like 10 years later, we were ringing the bell on the New York Stock Exchange. It sounded exciting, it was really stressful, but it was a crazy ride.

And then the valuation since that point has more than 10x yeah, when we.

Went public it was at a billion and it hit 40 billion actually last quarter. That was before the correction. I think it's gone down to 20 and up to 30. It's crazy, right? But yeah, it's done. Well.

How did your role evolve from selling to then pretty much running sales there.

You kind of have to have career ADHD because if you're not reinventing yourself in a company like that where you're, you know, one year you're one of four employees, the next year you're one of 50 and then 500, you know. So I went from seller for like the first six months, sold the first a hundred customers or whatever to sales manager, like hiring and training and coaching those reps, to teaching, building out the sales management layer and then teaching people to be directors and VPs and running and going international. Right. So when I left I think I was CRO and had like 500 people in the org. So you just have to kind of both be like in the day to day execution, but also thinking what is coming up six months from now? And what I found out through that journey was the bigger we got, the more important it was for me to know what was going to happen in six months. And probably the biggest asset I had there was a couple years into the journey I was introduced to John McMahon who made his career at PTC and then went off and did five other public companies as head of sales and he's on the board at Snowflake and MongoDB and he's just a world renowned sales coach, mentor, leader and he really helped me to see what was out six to nine months when we were bigger. Because when you get bigger it's like when you're like people going to 50 and you miss something like oh, I forgot to develop a sales manager, great, you can kind of fix that in a couple of weeks. But when you're much bigger and if you don't see something that's going to kill you in six months and deal with it, you're kind of cooked. It's very difficult to recover from that. So it took some career ADHD to manage through that growth.

The hardest thing a company faces en route to scaling is the leaders there or the early employees is going from individual contributor to manager to then executive. How did you make that transition or what were the key learnings or advice you have for the audience who are making that? Like, you know, how do you go from doing everything yourself to sort of hiring people to manage to then managing the managers? What were two or three things you learned along that way.

Yeah, I can speak to potholes that I see extremely common when people make that leap. I don't have that slide today in my deck, but there is a pretty a bunch of studies that show that the top salespeople on a sales team are the most likely to be promoted to sales manager. But there's actually a inverse correlation between the top salesperson and their success as a sales manager. They say don't promote your best rep to manager. And why does that happen? It's because if you think about what a great rep does, great discovery, relationship building, very selfish with their time, can be a little aggressive or pushy, like not in a turnoff way, but they're like, they can move people along. And a lot of those skills don't translate to management. And what happens is a lot of times the manager, a new manager who used to control their destiny and when they got behind in a quarter, they would just work harder. What a new manager sometimes does now that they're managing six people and their quota is those six people, when one of their people gets behind, they're like, hey, you know what we're going to do? Just get me on your demos. Let me do your demos for you. That's a huge mistake. Super rep. But it's what most new managers do. It kills it for a bunch of reasons. Your rep gets lazy, your rep is no longer accountable because you're doing their job for them. Your rep loses confidence because you can do it better than them and you don't scale as a manager. There's two big things you do as a manager, hire and coach. You gotta be a great hire and you gotta be a great coach and to be a good seller. You don't do either of those.

They're just very different jobs, recruiting and coaching. And you yourself got some great coaching by one of the biggest names in tech here.

When are you ready to scale the failure rate of a Series A company? If you measure failure as it doesn't return the invested capital, 74% series B, 74% serious C 73%. Is that crazy? I mean, you think this would be de risk, right? And so statistically speaking, as an ecosystem, I would say we suck at scaling. Right? The fact that this is laid out like this, and for me, as I've studied this across a lot of companies. So since leaving HubSpot, I joined the faculty of Harvard Business School. I spent a day, a week, each quarter with a different company coaching them on building their sales team. I did it like Asana, I did it at Drift. I did it. Salsify. I did it. Catalan did it. Vts. All these companies are like unicorn pluses. And so I got to see these patterns of what goes right and wrong. And I personally think this chart, the reason why it's so bad is because of not answering these two questions, right? When are you ready to scale and how fast? And so you all are kind of chiming in here like, when should you scale? So it's like, fine, you're building your product, you got your four engineer buddies, you build an mvp, you got a couple beta customers, it's going well. Some post seed investor comes in and gives you 2 million bucks. When are you ready to scale? So some folks like Terry jump in right away, always. David, Product market fit. Andy, Product market fit. Frank says scale comes post growth stage with a repeatable model. Okay, that's interesting. A product market repeatable model. Happy customer with case study for Dell. All right, so I like the product market fit. That's pretty common. A bunch of you chimed in with that. Then I'd ask you, what's product market fit? And you'd probably all start talking about this. If you want to say, what is product market fit? Feel free to chime in there because I think it's a brilliant answer. I think it's origination of product market Fit goes back to the Lean Startup by Eric Ries, published I think in 2005. And Steve Blank was talking a lot about this stuff too. And before that, and some of you probably weren't in entrepreneurship then we literally sold the product before it was done. We sold vaporware. It was terrible. Eric Reese and Steve Blank came out with this idea of agile development and involving customers and doing MVPs and doing all this before we scale, which is awesome. We don't scale while we have the idea. And it's like, wait till you have product market fit. But what is product market fit? And when I ask entrepreneurs that, I get a hundred different answers, half of which are associated with revenue. And I couldn't disagree more. I think revenue and customers acquisition has nothing to do with product market fit. It's confused around it. Oh, when we hit a million in revenue, we have product market fit. That just means you have market message. Fit just means you can sell it. If you sell ICE to Eskimos and they don't need it, you don't have product market fit. You just can sell. There's some pretty good answers out there. Sean Ellis talks about when you survey your customers and you say, what if your product didn't exist, how unhappy would you be? How disappointed? And if 40% or more stay very disappointed than your product market fit. I like that probably the most of anything anything I've seen because it's quantitative and because it's based on customer success, happiness, retention. My only issue with it is it's a survey. I just think people are. They may say one thing in a survey and act a different way. They might try to be nice. It's a founder. I don't want to hurt their feelings. So personally, if I were to quantify product market fit, I would base it on retention. Especially a lot of us I think here are in SaaS software, et cetera. And we could talk about how this applies to if you're not. But it's like someone bought your product and they used it and they renewed it, they keep buying it. I think that's the strongest signal. The problem is it takes a long time for us to understand retention. Some of us are signing annual contract. I actually wouldn't sign do annual contracts in the early stages. We could talk about that if you want. But sometimes we don't know for a year what our real customer attention is and we don't have that time. We don't have that much time to be like, oh, let's wait a year to see if we can product market fit. And so one thing that I do with a lot of these companies and now at stage two, we invest in these companies and look hard from this lens and help people operationalize this, is to create a leading indicator to retention. What can you see in the first month of a customer's experience with your product that if they do this, they'll be with you forever. And if they don't, they're probably going to turn. That's your lead indicator to retention. And that I think is a really important metric to know regardless of how big you are, to be able to operationalize things around that. Okay, so let's talk about what that might be, your lead indicator of retention. Like think about what your leading indicator of retention might be. And I use this framework to try to create a little structure around defining it. And it isolates it down to three variables. P percent of customers do E, event and tee time. So P, E and T. So let's make this real. So Slack, 70% of customers send 2000t messages in 30 days. I like that, I like that as a definition of product market fit, much more than a million in revenue. Imagine if the founder of Slack was like, we're Sitting around. It's the first year of Slack and it's like our first goal as a company is a million in revenue or our first goal as a company is to get 70% of our customers to send 2000 team messages in the first month. It's a very different company, I think, that comes out. And would you rather be building a business and scaling a business that has a million in revenue, unsure of what the customer happiness is, or a company that has even zero revenue? But 70% of the people that try your product send 2,000 team messages every month. And by the way, you're a collaboration software, so that's pretty correlated. Okay, Dropbox, back up your device in an hour if 85% HubSpot, if 80% of our customers used five or more features within 60 days. So that gives you some ideas there and think about what yours might be. Okay, so Scott, good question. Lloyd was going to ask this one. What about large enterprises selling big dollar products? Let me kind of hold that for one second, Scott, because I want to show you. Let's walk through the rest of this year, which is like, here's how I kind of think about defining the E and the P and the T. The E is the most important. It needs to be instrumentable, it needs to be objective. It's not like a customer success manager said, they're good. Ideally, it's lined with your unique value prop. Like in HubSpot, we were an all in one software. So ours was the breadth of the usage, really nice alignment within the organization. And then here's how I like to measure it. So I measure it in cohorts as defined by the month in which the customer was acquired. So you see here at the top, let's go back to Slack. This isn't Slack's data, but let's just pretend. 24 customers acquired in January and this tells us how many of them sent 2,000 team messages every month. In the first month, 3% bad. Second month, 27% better. Not good. After six months, only 39%, that's not good. You're a collaboration software product and only 39% of your customers you acquired six months ago are sending 2,000 team messages a month. But they made a bunch of changes to the product, the onboarding process, who they sell to, the messaging and bam. Let's look down column number two, month two. In October, they acquired 55 customers. By month two, 70%. Got it. We're sending 2,000 team messages. So I think they hit product market fit right around here. October, November, December Something like that. And this helps us see it as early as possible. All right, so Scott, let's take your question now. So I got a couple companies that are selling like ACVs are like 500,000 to a million. First off, I don't love starting upstream in a company in an early stage just because it's so much red tape and such long sales cycles and so capital intensive and there's such a slow learning curve. I'd rather you think about your total addressable market. And sure, it's enticing to close those million dollar deals, but I'd rather you start as low as possible in your addressable market to get faster data points and to learn. Now, you can't always do that. Sometimes it's just what you're going after is an enterprise play. The one company of ours is they only sell to the top insurance carriers. There's 27 of them. So their deals are they start at half a million and grow to 10 million. And so when you have a company like that, I think we had like six or seven customers and we were a multimillion dollar company, so you can't do this analysis. But what we did was we create a multidimensional leading indicator of retention. It was five dimensions. I don't remember all of them, but it was like how many users did they have in the organization? How high up were we in the C suite? How many sev1 support tickets did they do? How quickly did they set up and how many transactions were processed every month? There was like five dimensions of health and it was like red, yellow or green. And then that rolled up to a red, yellow or green for the account. And that's the first slide we looked at at the board level. And the board was trained on how to like see things through that lens. So hopefully that that's something Scott, that you can envision. All right. And then you can like actually test this. So if you're sitting around, you're like, I don't know what mine is like Slack, right? 20 messages in a month maybe. But like a year later you can actually analyze it. So in this case, like the company acquired 68 customers a year ago and 82% are still around. Now, 55 of them had hit that lead indicator retention the first month and 13 didn't. Of the 55 that did, 93% are still around. And the ones that didn't, only 39% around. Okay, great. This is actually correlated. There's a big enough variance in that retention that I'm pretty sure statistically speaking, that if someone hits this event in the first month, they're going to be around and if they don't, they won't. We learn something really important about our business. Same data set here, just not correlation. 68 customers, 82% around.55 hit it, 13 didn't. But in this case, 84% of the ones that hit it are around and 77% of the ones that didn't hit it are around. That's not a big difference. So that 20 messages isn't right. Did we waste a year? No, it was much better than focusing on revenue. You're focused on customer happiness, retention, success. Much better. North Star at this point and now we're in a point where we can actually, we have enough data, we can actually figure this out in a week. We can just analyze it and maybe it's the number of users, not the number of messages. Maybe it's if they have 10 or more users, we can do the same analysis right now and figure out what's correlated. That's interesting, Frank. On Medic Level 1 qualification, I'll have to look at that for correlations there. So that's that, that's product market value.

How far do you break it down? Do you look at what percentage of the people signing up are effectively going through the onboarding has a strong correlation between sign up and retention. And if people don't onboard for the first few weeks, chances are they're dormant. I saw that in my last company. 10,000 users wouldn't go to onboarding. We shut the company.

Yes. Speed to value could be it that we've seen that like we want to see that value. It's a good one, it's a good one to measure. It's just that I also like to come up with something. You could have a different one that's on the onboarding and one that's more longevity. Because I want to be able to measure this every week or every month too. But you're absolutely right, Speed. I'm starting to start to see some patterns that there's. There's some that are engagement based, like the Slack example, 2000T messages. There's some that are ROI based like Hubspots might be like a lift in leads. There's some that are like more just pure setup based your speed to set up and that's all that matters. Like oftentimes like with analytics stuff or processing stuff that's going to happen behind the scenes, that one's correlated. But yeah, it's interesting. Like I, it's. You Almost have to work on a mini case by case example to kind of think them through. Any other. Yeah, the only thing I want to say that you said Lloyd, is percentages because like segmentation is key here and I forgot to mention that is like you don't especially if you're doing a PLG product like growth type thing and like a hundred people are coming in the funnel every month. And let's say you say it's like 70% like set it up. That's when you have product market fit. You don't need 70% of the hundred because anyone's coming in like 13 year olds are coming in and like people in Japan and people there may not be in your ideal customer profile, it's only the people in a particular segment. So if your north star is like 70% set this thing up within a week of the hundred, only 40% set it up. But anyone that works for a B2B tech company in the US that number is 78%. Then you have product market fit. It's just in that segment and we'll talk about what to do with that. So are we ready to scale? I would still say no. I forget who had said it earlier and they said repeatable process. Notice as I was walking through that example, I didn't really say anything about profitability or scalability. In fact I would suggest that you take Paul Graham, the founder of Y Combinator's advice which is do unscalable things early. I think it's beautiful at the product market phase. Let's just appreciate how hard it is to come up with a business idea and to get 70% of your customers to realize that value. That's almost the whole business. You know what I mean? That is so hard to do and so throw everything in the kitchen sink at it to do that. I tell the example of David Cancel who was. He was our chief product officer at HubSpot and then went off as the founder and CEO of Drift and Drift sold for a billion dollars last quarter and they're still running. But what was he doing in the first year of Drift? He was flying pre Covid flying to personally onboard as founder CEO customers that were paying him $50 a month. Not scalable but beautiful behavior at the product market fit phase. Throw everything in the kitchen sink to make that happen. But now once you do and you've proven that if we put 100 customers into this this quarter, 70% are going to succeed and retain lead to even better numbers. Well now we need to prove that you can do it scalably. Oftentimes we talk about that in terms of unit economics in our world. Why do we do unit economics, not GAAP accounting? Profitability? Because unit economics isolates the costs that drive growth versus the costs that are more static. Okay, so that's why we focus in there. Now same thing with with tension, right? I'd argue customer retention is the best proxy of product. Market fit takes a long time, so we have to come up with lead indicators of attention. Unit economics is the best proxy of go to market fit, but it takes a while, it takes one or two quarters for it to surface. So we need to understand the lead indicators of good unit economics. And that's just pure algebra. Okay, so let me give you an example. So one way we can measure economics is LTV to CAC. The LTV to CAC greater than 3. Now imagine having a 27 year old account executive join your company and they're like what's my job? What's my goal? Technically their goal is to create an LTV to CAC greater than 3. But 27 year old accounting executive doesn't know what to do. They know how to make calls, they know how to do demos. So we have to extract that goal back to those activities. Right? So ltv, we often talk about the average sales price ACV times the gross margin divided by churn. CAC is how much does it cost to get the lead plus how much does it cost to sell the lead. The demand gen cost is like the cost per lead divided by the close rate. That's the marketing cost. So if I, if it cost me 100 bucks per lead and I close 100% of them, my cost, my marketing cost per customer is $100. But if it costs $100 per lead and I close 10% of them, my marketing cost per customer is $1,000. If I extract the sales cost of that customer, it's how much do I pay my rep divided by the number of customers they close each month or each quarter and the number of customers they close is how many leads do they get times the close rate or how many leads do they generate themselves times the close rate. So now I've taken that end goal of LTC and extracted it back to measurable things and I can create a business model around it. So okay, I think our average selling price is going to be $20,000. I think we can get leads for $1,000 a pop. I think our close rate is going to be 5%. So that's going to spit out a good business and I can just dashboard it. So we all have our dashboards, but this is the dashboard that tells us today if we're going to have good unit economics in six months. So as long as we keep the blue above the red, then we're good. That's my answer to when are you ready to scale? Because I think a lot of people are just. They're not that precise about it. And a lot of the VCs, like, I don't mean to be offensive, but don't help with that. They like, you know, they give a bunch of money and they're just like, go. I hope you can appreciate that this analysis is not letting some other company's success dictate when you scale, because some VC invested in that unicorn and it did well, and I didn't want to replicate it. This is showing you how you use your current company's performance to decide when to scale. Well, that just tells us when to scale. Now, how fast? I don't know if you all want to chime on this. This is always very interesting. Okay. A lot of you are probably in this situation. You had your 12 engineers, you built your product. You got to, like, a couple hundred thousand in ARR because of, like, introductions from people. And now it's like, okay, here's your series A. Congratulations. $8 million. We're valuing it, like, 30 million bucks. Congratulations. And then they're like, all right, well, how much revenue are you going to do next year and the year after? Can you put together a plan? So, like, how fast do you go? Sameem says, as fast as you can maintain the same great customer relationship and experience. I like that a lot. That doesn't happen, though, Sameem. That doesn't happen. Like, I just. I've never heard someone say that in a board meeting. That's a good answer. Like, I'll tell you, here's what. Here's how it happens. Abort me. And this happens to me every quarter. You know, it's triple, triple, double, double, double. And that's just because the reason all that comes about is because a lot of us raise venture capital, and VCs are trying to entice their investors with an attractive IRR. And to get that attractive IRR, their companies have to triple, triple, double, double. But really only two out of the ten have to. And everyone else fails. And everyone else fails because they weren't ready to triple, triple, double, double, double. And that's where the investor and the entrepreneur are misaligned. Because you, as the entrepreneur, for your investor, you're one of 20 bets. They kind of just want you to either be a rocket ship or fail fast so they can get off the board. Which kind of frustrates me about the ecosystem. And this is how it goes. It's like, all right, well, this is the story I hear all the time. So how fast are you going to grow? We're going to go for 12 million this year. Okay, how much did you do last year? Closed last year at 2 million. ARR. 12. 2 to 12. That's. That'd be great. It'd be one of the best companies in the country. So how are you going to do that? And they're like, oh, we're hiring 30 salespeople in January. Seriously, this conversation happens every quarter. Oh, you're hiring 30 salespeople in January? How many salespeople do you have right now? 5. How many did you hire last quarter? 1. All right, do you know how many interviews you have to do to get the 30 hires? Who's doing that? Do you know how many candidates you have to source? Who's training them? Do you know what the average rep to manager ratio is in the industry? Seven to one. Now you need three managers, four managers right now. And by the way, how many leads per rep did your reps get last quarter to hit their number? And now you're going to 8x demand gen in a month to feed your reps. If you do that, I want to know your marketing team, because they're the best marketing team I've ever seen in my life. That's insane. And they all do it. And I know why. It's because the founder negotiated this huge valuation and the VC was like, yes. And now the founder is like, oh, crap, now I have to do it. And the Excel model says, If I hire 30 reps in January, I'll hit my number. And that's the extent of the analysis. Okay, so don't do that. Don't fall into that. And I know a lot of you are sales leaders and probably like, oh, my God, I tried to tell my board that. And it's a much bigger story about how you talk people off of it. But think about pace, think about scale. Not as one time hiring upfront, like almost everybody does, but as a pace. Right? So it almost goes all the way back to Sameem's answer, which is brilliant. Which is like, you can go as fast as. Until you break customer success. It's a little bit broader than that. It's the speedometer, the leading indicator of retention and the leading indicator of unit economics. Becomes our growth speedometer. It dictates, just like Sameem said, how fast we can go. So establish a pace. Great. We're ready to scale. Let's hire two reps every other month. Okay, let's do that for six months. And then let's watch the speedometer. If the speedometer stays green, let's do 2 reps a month. Let's do it for 6 months. If it stays green, let's do 4 reps a month. Do that for 6 months. If it stays Green, we'll hire 8 reps a month. And congrats, you're a unicorn and you did it in a very predictable way. And you're watching the speedometer, which is, you know, most of your peers are deciding if they're going too fast or too slow based on the P and L results at the quarterly board meeting. That's bs. The P and L results at the quarterly board meeting, that's what happened nine months ago. That's a result of the sales calls, the onboarding of customers that we did nine months ago. This, the speedometer is what's happening today. This tells us if we're going too fast or too slow. Okay. All right. So now hopefully we've got a nice picture of product market fit, then go to market fit, then we're ready to grow. It's all based on our data. We know what phase we're in. And based on our phase, we know what our North Star metrics should be. The other thing this instructs us is it's. It helps us with our go to market system design. If we look at different aspects of the go to market system, who are we targeting? What's our sales playbook, who's on the team, how do we generate demand, what's our pricing model, how do we comp our reps? These all change as we progress through the model. Like the 10th rep you would hire in the growth fits is way different than the first rep. This came from the sales learning curve, also from the early part of the century, published in hbr, I think, for the first time. And they call it the Renaissance rep versus the coin operator rep. They use more of a manufacturing analogy. I like to modernize a little bit today where your first rep, your coin operator rep when you grow is just like, give me the comp plan, give me the playbook, give me my territory, let me go make a lot of money and make you a lot of money. Great. I like that rep. Terrible first rep. There is no comp plan, there is no sales playbook. And we don't even know who we're targeting. And that rep's just going to go out and throw up, show up and throw up to the market and say this isn't working and quit. Right. We need someone as our first rep, that's the first person in our company that's going to talk to 20 to 30 potential customers every week. That's valuable. That's our whole job is to talk to customers. And so they need to be like part account executive to be able to progress that sales conversation and talk about money and negotiate do discovery, et cetera. But they also need to be kind of like part product manager to step back and say what happened in those 30 calls? Here's the pattern and let me talk to the engineers about it. They also have to be like part product marketer. What's the messaging that's sticking? They have to be like kind of part csm because it would be nice if they can onboard the customers too. They're kind of like a jack of all trades. They're hard to find. Usually where you find them is in your region. If you're New York, San Francisco or Germany or wherever you are. If there's a company that's scaling up now, they're at series A, series B, they've gone to 10, 100, 200 people. They're usually in that company and they're lost and not happy. They were there when the team was 10. Now the team's scaling and they don't have really an important job. They don't want to be part of the factory and they like the new stuff and that's where you find those people. So anyway, at this product market fit phase, we're doing the whole scale, you know, try to make this the customer successful at all cost. So I don't want to talk about scalable demand gen. We should be able to get enough customers through our network. That doesn't scale. But I don't need to talk about setting up a cold call, a sophisticated cold calling or inbound marketing mechanism at this point. Pricing I don't care about. I want to price for commitment. I don't care. That's optimized for profit. Free is not good, that's not committed. But 50% off, absolutely. I don't care. Let me have a legit at bat to make this person successful. But that all changes at the go to market fit phase. We need a playbook. We need probably two or three reps with someone who actually knows how to build a process. We need one scalable demand Gen mechanism because before we start adding reps, we need to be confident we can feed them. And that could be they find their own leads or it could be we feed them. I don't know. We need one. And we need the pricing model to be right in the computer plan to be right. That drives our cat. We need to figure that out before we add 5, 10, 15 reps and then we can move into scale mode and a whole nother set of issues come up. I'll talk about a little in a couple of them in a second. But you add it, you know, the go to market playbook is reinforced. That's the introduction of your sales management layer. You often have multiple demand gen channels that need to be managed. You have to think about how people grow in the company. So that's kind of like not only does the framework help us know where we are and what we should be focused on, it also instructs us what the optimal go to market system design is. So the last place we could tackle is well, where do you scale? And so I mentioned that averages become dangerous. I mentioned that you could have 100 customers come in and try your product, especially in like plg. And some of them are like who you intended to build it for, like a director of engineering at a tech company. But some of them could be like, like I said, like 19 year old computer science students in New Zealand. Right. It's like that really who you build it for. So it's not that you have to get everyone to succeed. You have to take a segment and make that work and then you scale that and that's the green box here. Now what gets interesting is like you scale up to 3 million, 5 million, 10 million, 15 million. Here's the next big issue that happens. It's like okay, cool, we're at 10 million and our investors told us we have to get to 20 million because of their IRR need. Right now today we sell to the S and P market. We sell our product, our core product and we sell it through marketing generated leads. So we get like 500 leads a month and we sell those and we've got that down. That's our market product channel combination. We know how to do that. And I actually ran that through the analysis and I grew my lead flow by 5% a month and I added some reps at a good pace and we grow from 10 million to 16 million with that. And I think we're going to do that and I personally would buy that. But then like, well we have to grow to 20 so what should we do? I have an idea. Let's build a new product or let's go to the enterprise. Let's take that example instead. So then what they say is let's hire three enterprise reps and tell the board we're going to do 4 million in the enterprise. I don't get that. When we were four engineers in a room we didn't say I have an idea for a product and I'm going to hire salespeople and commit to 4 million. We just had no idea how long it was can take to get to product market fit and go to market fit. So how come when we're at 10 million in revenue we think we can just build some new product that's just going to work or change the market and it's just going to work? It doesn't. The messaging is going to be the same, the demand gen tactics going to be the same, the playbook is going to be, the playbook's going to be different, it's a different rep. We don't know how to do it. So we have to start over at the product market, go to market fit journey and we shouldn't pre commit to revenue before we've tested it and figure it out. So you can do a segmentation of this market channel, product segmentation in each box. And I know it's hard with cost attribution or revenue attribution. It's not always clean. But take a stab at it and you can uncover how much revenue are you doing in each box. What's the churn, what's the unit economics and what are the lead indicators with each. So you can understand which of these boxes are in the growth and moat phase where you can scale and which are not and for the ones that are not, as CEO founder you can decide which ones as a company you're going to experiment with to try to move them into the green box and which ones you're going to ignore. So this company has figured out how to sell direct to both the mid market and the enterprise segment through a direct channel, their core product and they're going to test out partners and they're going to test out a new product for the mid market. If you don't do this analysis, you're going to be like all right, everything's working because their altitude CAC is good, which is what normally they do. Let's add 20 reps this year and you could accidentally add them in the red boxes. That's what you basically do when you say you're going upstream, but you haven't figured it out. Or even worse, you build a new product, you train all 20 of your salespeople before you figure it out and it doesn't work. No one builds a product and it just crushes. It takes a while, a quarter or two for it to work itself out. So now you've decreased the productivity of 20 of your reps foolishly, as opposed to isolating one or two reps to sell that product so that they're the only ones that are affected and they see the patterns quicker because they're doing all the demos with that product. Okay, so there's actually good research on the ambidextrous organization if you want to check that out by Michael Tushman. So once you know where you are, if you're going to add 20 reps, you only add them to the scaling buckets and you keep the other buckets just like your company looked like at the seed stage. Small cross functional team to try to figure it out. Okay, so that's how it is on where we go. So John Crim says, how do you reconcile this approach with Blitzkind? Okay, yeah, Chris, Hugh's a good buddy and Reid Hoffman's obviously a legend. And I think I perceive their work as those that go out and raise the most money and make the biggest PR and get out ahead of the category and hire the best engineers, regardless of optimal profitability and stuff will win. I think there's definitely merit to that. I personally think if you think about their backgrounds, like Reid and Chris, they came from LinkedIn. Reid was the founder of LinkedIn, so they tend to be in more of a social network type of business where it is heavy network effects with winner take all dynamics. So I just sometimes I'm a little like totally agree in that context, but not as much in some of the traditional software plays. The other thing that I'm concerned about is just where's the line on unhealthy growth. Blitzscaling is kind of like raise a ton of money, hire a ton of people, don't worry about profits, just burn money and go. But what does that mean? Are you willing to burn $10 million a month? Are you willing to burn $100 million a month? Probably not. Oftentimes we'll have between half a million and a million. So don't confuse this framework as an argument to go slower. It's just to go really fast up the right tree at the right time. That's all it means.

We had Chris Yeh, he ran a similar masterclass There's a bunch of similarities. I think they're saying sort of prioritize speed over efficiency. If you're in a market, that's winner take all. But some of the things like product market fit and what you prioritize doing things that don't scale, figuring out one repeatable scalable channel and then go all in and trying to prioritize what sort of fire you put out or what you de risk. You got to prioritize at each stage. So there's a lot of similarities in there as well. I think we shouldn't look at blitzkading the audience here and just assume that, hey, you know what, we're going to raise lots of money and then just go boom or bust kind of thing. Right. Ultimately, not everyone can raise that kind of money. Not everyone's in a winner take all market. And so having a lean approach to product market fit, go to market fit and then scale is the way to go. But there's a lot of similarities.

Yeah, I think maybe the title is a bit surface, you know, I mean, blitzscaling, you feel like just go. And there's. There is some to that. And it's also like, hey, listen, I'm taking a pretty rigid stance on getting health and everything. You're not going to get these speedometers perfect before you go. You're not going to just, you know, I mean, it's like direction. They're moving in the right direction. You need to instrument it and you need to see when it goes into red alert. If you set up the speedometer, you'll catch that red alert instance two quarters ahead of your peers. But it's not like, there's certainly a compromise. And I also think Chris and Reid, if they misinterpreted their work and someone was like, just spend money, don't worry. No, no, no, that's not what we mean. You know what I mean? It's like, yeah, I try to get ahead of it, but there's certain lines there.

Who do you higher in each of those stages?

Right.

What does your company look like? Because you, you made that journey at HubSpot. Product market fit, go to market fit and growth and moat. What are the key people to bring on at each of those stages?

Yeah, so the first one, that's that athlete. You know, you probably have one. Honestly, like, I think at the product market fit phase, this could, you know, depend on how much money you raise and, like, what you're going after. But I think in general, you have a handful of engineers, a product manager, a Designer, depending on your product, et cetera. It's very much an R and D team. And then you have one go to market person who again is like, they're just out there, they're talking to 10, 20, 30 customers a week. They're doing deep discovery calls because what you think is out there is probably not. And so they're learning where the market opportunity truly is. And I like to run a daily film review in that context where this person might have two or three customer calls a day and they'll use something like gone IO and have those calls recorded. And then I like to get the whole team, the whole team might be like 10 or 12 people. I like to get them all in a room between five and six at night and listen to the call. And you do that every night. God, one month you've done 20 customer calls and you kind of sit back and talk about where's the opportunity, Are we building the right spot, are we messaging this thing right, et cetera. So that's kind of like my team there. Then it's like, okay, great, we have product market fit. We know that when we add 10 customers in, most of them like our product, succeed in our product and retain. Now we're at go to market fit. So now I need someone to build a sales process. I need someone to codify it. I also need a marketing, a demand gen approach. So it's either I hire a content marketer. If I'm going to lean in that way, I kind of like to start there. It tends to be pretty scalable. Or I hire like an SDR and try to get like, or two SDRs, try to get the cold calling mechanism going. I probably have like two or three reps at this point because I'm hoping that I don't have a single point of failure on that, you know, because like if, if I only have one rep and they, you know, they need to put up like 700,000 ARR a year for the math to work. And so that's basically what, like 60,000 ARR a month and they only do like 30. Well, is that the rep or is that the playbook or what is that versus if I have two or three reps and one does 65 and one does 50 and one does 25. Well, at least I know it's achievable and I can like tune my rep a little bit. So yeah, that's pretty much what it looks like. There probably two or three reps. Someone could build a process. You may have a sales manager at that Point if they're going to build the process and you might have either a content marketer or a couple SDRs, you definitely have like a CSM at this point as well. That's like partitioned out. And then, you know, once you get up to the growth and mo. I mean, that just goes right, you're in. There's always a question about, like, do we have STRs, the feed AES that feed CSMs. That's in vogue these days, but it's not always applicable. But you might have that. You have a management layer, et cetera.

At what point do you bring on a sales leader and what does that sales leader do in the first 1, 2, 3, 5 months? And what are the key traits of a sales leader?

Yeah, so on the homepage of Stage 2 Capital, Mandy Kohl, one of our partners, and I wrote a little ebook on hiring your first sales leader. So we wrote like, there's a whole bunch of information in there on like, what you should be looking for, how you assess for that interview, questions you might ask to understand that. So for me, the first one, like, it depends, Lloyd, like whether a good playbook is in place or not. You know, like, if you've got a great sales enablement person and the playbook's humming or an early rep who has a great playbook, then playbook development's off the table. So it just depends, like, do we need playbook development or not? And that might be almost always the case in the first sales leaders. They need to be able to build in the methodology in a playbook. But other than that, what I really look hard at in any sales leader hire is their ability. Just like we said before, hire and coach. Their ability to hire and coach. I don't actually care that much about, like, can they design a good comp plan, can they do a good territory analysis? Can they put together an annual plan? Because, like, we can find an advisor to help them with that. But I can't have an outside advisor help them like every day hire and coach their team. It's just like, that's just too. It doesn't scale. Like, that's what they have to do all day. That's really what I look at is like, tell me what you look for in a rep and how do you assess for it? A good answer is I don't really care what they say. Honestly, it's just like, it's thorough. It's like I look for coachability and curiosity and I do a role play and this is what I look for. And this is a good answer. And this is what a bad answer. A bad answer is like I know success when I see one or I just go back to my Rolodex of people I've worked with or I look for someone with 10 years experience in my industry. Those are really bad answers. When I coaching, right? Like can you tell me common skill deficiencies you see in your salespeople and how you coach people through that? If they stumble, it means they don't coach. If they're like oh, it's always sense of urgency, development. I do role plays around how to dive into the implications of need and I'm like beautiful. This is a good coach.

How do you figure out the one scalable measurable medium?

You have to start with your buyer. Like what is your, how does your buyer live? What works for them, right? So you're selling to engineers. Cocon doesn't work. Engineers don't have phones and they don't even like to go in their email engineers. PLG is beautiful. They love to try stuff. You're selling to CEOs. PLG is not going to work. They don't have time, they don't have a computer. They have three assistants. But like selling to CEOs of big companies, your demand gen channel is going to be like steak dinners and thought leadership. Small peer group workshops to get people together. So it really depends on your target buyer. The most common ones are content marketing. It still works today. There's a lot of examples. You just have to really carve out your unique messaging. Cold calling, cold emailing. Those are the ones that people lean into. If you have a product led growth model, you could add virality to that as well, which works beautifully. But those are typically the common ones to start.

When do you go global versus new product versus going up market?

My argument is anytime you change the market, product or channel. Channel being like you got to 5 million through inbound marketing, now you want to add cold calling. You got to test that out. It's going to be new. You got to get the unit economics work. It's hard. Like when do you go global? Lloyd that's so hard versus building new product. It's so contextual, right? It means like what's the competition doing? Where's the biggest opportunity? I don't know how to answer that other than when you hit like 10 million in revenue and we're doing this with a bunch of our companies now. You want to build a new cadence internally where you are experimenting and scaling at the same time so you actually have an Experimentation funnel that leads to growth opportunities. For example, if you're sitting here and saying, I don't know, should we build a new product or should we go international? I wouldn't suggest choosing one and going all in per se. Unless it's a must do or die situation because some competitors eating your lunch. I would argue how can we test if that new product has legs with as few investment in as little time as possible, can we build an MVP and see what the demand is? And international. Our first toe dip into international HubSpot was we had two reps, they happened to be new dads that called into Europe from Boston. That was our dip into international. It wasn't flying out there, open up a whole office, hiring a whole team. It was two reps that we knew could sell in the U.S. we said, now sell to the European leads. They worked from 4am to noon and they loved it because they had newborn at home. So they left at noon and the newborn was up at 4 in the morning anyway. We did that for a year and so by the time we were going into Europe, we knew how the message was different. We had a lot of confidence on it. So usually there's a way to test these things as opposed to having to go all in.

How does the process of assessing disruption risk for pricing work? HubSpot's price changed over time. You guys defined a whole new category, but once you define the category, lots of entrants came in. How do you assess disruption risk?

The pothole there is. Raising the opening price can be dangerous unless you have a sustainable moat. That's a mouthful right there. Sustainable mode is its own lecture. It's like, okay, I guess we have to start. There is read Michael Porter, his work from the 70s on Porter's five forces and read about barriers to entry. He nailed it in terms of a true sustainable moat. Normally when I talk to an entrepreneur like what's your moat? But go, we have this feature, okay, like how long would it take the competition to build a feature? Three months. Fine, that's not sustainable moat. The lens I want to have is. Imagine if like five rockstar engineers from Google quit Google and raised like 10 million bucks from Sequoia and basically downloaded your product, reverse engineered it and built it and sold it for half the price. Why do you still win? Well, there's reasons why Salesforce still wins because they've trained a lot of reps on how to use their product. They have an ecosystem of apps which creates a network effect and initially they own the end of Kill software. Relative to other folks. That was hard for the incumbents to move to HubSpot won. Plenty of people reverse engineered our product and built it and sold it for half the price and we still won. Why? Because people were not necessarily buying clicks and widgets. They were buying inbound marketing. And if they were going to do inbound marketing, they wanted to do it the best and they were willing to pay twice as much for that. So there's, it's almost like category creation, the modern version of brand Gone. Why do we, why do, why would we pay more for Gone than maybe Chorus or a new startup? Well, like Gone has a machine learning algorithm that has processed 10 billion sales calls. So what do you want? Do you want to pay? Do you want the cheap one that's only process a hundred thousand, isn't that accurate? Or do you want the one that's the roles Royce for your sales team so it can guide you on the best practices based on 10 billion sales calls. That's a machine learning almost like an economies of scale type sustainability. So you need like if you're going to increase your price, you need a defensible moat. Now the problem that I often see is people launch do well, they're the first to market first in the category, they don't have a sustainable moat. And the board's like, hey, why don't you double your price? And it works. The reps love it. It's like shit. Now I used to close five customers a month for $500,000 now or a hundred thousand dollars now I close five customers a month for $200,000 just because we doubled the price. And all that does is make you a more attractive attack from competition. Like how do you go after. Like that's why I love plg. Like how do you disrupt like slack when you can just download slack for free?

Yeah. And that's what a few themes I heard there is ecosystem, community, which HubSpot. You guys build a community. And I said at the start, if you build a community, you won't become a commodity. You're creating a category there. You talked about network effects.

What is the true sustainable moat? That's one piece of it. And another piece is be very careful of increasing your opening price because it just makes you a more attractive, disruptive target by the competition. I'd rather see you increase your expansion price, let people decrease the friction of someone to use your product for the first time and once you achieve success, drive ACV by selling them more stuff. So just be careful on that.

How much do you Spend on marketing, content driven lead gen, like the inbound stuff versus inside sales. SDR lead gen.

Yes. No guidance. It's all over the place again. It's kind of like what do you want to be? You know, like Salesforce is in a very like event driven, event marketing driven organization with driving a lot of their revenue through account management cross selling products into their customer base. Okay, so they're like how much they spend on event marketing versus cold calling versus account management is all based on that strategy. In the early days of HubSpot, I think we were probably like one third of our CAC was on marketing and that was pretty much all content marketing and 2/3 of our CAC was on the sales piece on selling. Over time we tested a cold call on SDR and as that worked and we had growth mechanisms that crept up to be a bigger piece. Compare that to maybe a workday that was selling into big HR companies that maybe didn't take as much of a content marketing play but was purely cold calling SDRs, they're going to have a much bigger spend. So I can't give you spend a third on marketing and two thirds on sales versus 10% on marketing versus 90% on sales. It depends on your market opportunity, your buyer. It really does.

As a founder who's recently been in some of these people's shoes, I would say you can get to 10 million ARR by focusing on one kind of customer coming through one kind of channel, getting one kind of value. And you shouldn't distract.

Yes.

Everything we did was through traction community. Our investors came through this. We hired 100 people through this. We got all our customers through it. We just copied the HubSpot playbook, but we were bootstrapped. So we hosted a lot, a lot of events and then we had SDRs calling post event and that worked really well to a point.

You're spot on, Lloyd. It's like because we get confused because we go out and raise money and then the investor's like, well, how do you get to a billion dollars? Right? Because they look for a big market and they have to, they have to invest in big markets. But don't confuse that with your zero to $50 million journey. If you have product market fit in this smaller market segment, that's going to get you to 30 million. Great. Exploit it, do it. And run experiments over those years to find the new growth opportunities that get you to the billion dollars. But disassociate your visionary story for the investors from the tactical execution you have to do this year.

What I found worked really well is at scale. Now we're spending 75% of our time scaling what works right? More SDRs, more AES. Does that work? More events, podcasts, all of the stuff that got us here and experimenting with a small team 25% of the time. And if we get to product market fit there, then we go through that same journey. So that's the playbook. We've followed you since the first conference when you came to bam. Thank you so much. What a delight.

I need some traction.

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