5 Myths That Stop SaaS Companies From Moving Upmarket Dropbox's CCO Yamini Rangan (now CEO HubSpot)

Good afternoon. How's everybody doing? Great. Welcome back from lunch. And I know people are just still walking in and it's fantastic to be here. The energy at Saster is always great. The passion in the conversation and a lot of the best practice sharing is fantastic. Congratulations. If you are here, it means that you've gone through the early stages of being a startup, you have actually found great product market fit and you are looking to go upstream. So that's great news and congratulations on that. I'm going to try and make sure that this is moving. There you go. Now I will also say that I'm going to put a little bit of a damper on that because for all the success that you have seen, the road ahead is a lot more difficult. 1 in 1500, that is the probability of SaaS companies to go from where you are today to more than a billion dollars in revenue. That is also the same probability that an average American has in becoming a CEO. One in 12, that is the probability of a startup that is growing at 20% right now to survive over the next decade. We are as an organization and we are as an industry really hooked to hyper growth. It's all about 50% growth, 100% growth. In almost any other industry, whether it is health care or consumer or manufacturing, 20% growth is phenomenal. But in the case of SaaS, 20% growth is just not enough. So most of the SaaS organizations really find it pretty difficult to scale up. Why is that the case? Why is it very difficult to actually scale up? That's the question that I want to talk about today. When organizations actually go from starting up to selling to SMBs and going up market, the pull up market is undeniable. When you get a call from a customer that is a lighthouse customer that could be a great brand for you, you're immediately all in. You're trying to figure out how to sell to them. And great companies actually help you accelerate your revenue. Also selling up market actually means that you can very easily have predictable revenue streams. You can accelerate your revenue, they are much more sticky as a business and therefore good for you. But it's also undeniable that going up market means your company will get like pulled. You now actually have to develop features that you didn't have in your roadmap. You may actually have to pricing differentiate. You may actually need to build a sales team that can serve upmarket and you may need to compete with more competitors that you don't have resources to really fulfill. So the path up market is treacherous. There are lots of companies that have done it well. Salesforce started at SMB and they moved up market and they have really done a fantastic job. So has Slack, HubSpot, Marketo. So many of these companies have done well and when they do well, they tell the tale. But for every one of those companies that have done well, there are hundreds of companies that do not actually go through that chasm. In the case of Dropbox, we were nearly one of them. We started as a consumer company, we had a ton of viral adoption and we grew to nearly 500 million of freemium users. And a few years into our journey we really wanted to expand to businesses and our customers were pulling us there. As we went through the process, we made a lot of errors and we tried. Some of them work, some didn't work. So today what I actually want to talk about is how, how do you cross the chasm? How do you actually go from selling to consumers to then to SMB customers and then going upmarket? And there are at least a handful of myths that nearly killed us. And I'm going to try and share five of those myths today. The first one, as you go up market, the first myth that you will encounter is sell to the C Suite. It's worked for a lot of companies. You know, if you're Salesforce, if you're workday, you sell to the C suite and you figure out who you have to go after within the C suite. And that works. And certainly that is where I've spent the last 20 years of my life, selling to the CIO or someone in the C suite. So I said, okay, when I came to Dropbox, this is pretty easy. Let's actually use that enterprise play and bring it to Dropbox and try and talk to the CIOs. Unfortunately, I was dead wrong. I was dead wrong because it just did not work. The enterprise sales playbook that I had used in other companies just did not work. At Dropbox, the sales cycle times were too long. Sometimes nine months, sometimes 18 months. The sales cycles were very lumpy and unfortunately by the time we got to the CIOs we were heavily price negotiated. But most importantly, we were actually not leveraging the strength of our self serve business. The freemium users that actually come to us, we did not leverage that at all. And so we learned two critical lessons at that stage. The first one is identify your buyer. Who is your buyer upmarket? And just don't assume that they are always in the C suite. For Dropbox, it started with the buyer that was taking Dropbox and using them in the personal workspace and then bringing Dropbox into work. Nearly 80% of Dropbox free users bring us into the business for a collaboration use case for something that they are sharing in their business. And so for us, it was so important to identify who those users were, what the use case was, and why they were actually bringing us into business. Once we identified that, then it was much easy to go and pitch to them. It was the departmental buyer, it was the departmental IT decision maker. And once we identified the use case drove value for them, it was much easier to go upstream and talk to, you know, the right folks within the organization. So we switched it. We didn't start with the cio. We actually leaned in to the bring your app into work movement. And the second part of it, the second lesson that we learned was that you gotta leverage the strength in one sales motion as you are going into the second sales motion. What I mean by that is we started with self serve. We had nearly 500 million users that were using, and we needed to figure out where they were going within the business and identify the kinds of users that were then upgrading into the business. And in order to do that, we gotta, like leverage our signals that we were getting. As we started with our business movement, we then had like salespeople and they independently went and were talking to the businesses, and that didn't work. So once we identified the strength of our primary sales motion, which is self serve, then we took that into the business and we said, okay, here is how to target the right kinds of business users that we're then going to convert into our products. So identifying the user and identifying the sales motion is really, really important. Now, if you're thinking that, well, for Dropbox, you had the viral adoption and we don't. But I would submit to you, think about what is working. Think about what is actually strong in your current sales motion. WebEx did this beautifully when they started, and they grew in the 2000s, and VMware did the same thing. So what is your sales motion? How should you be thinking about it? The second myth. The second myth for us is grow the sales team. Now, every one of you will get asked this question. How big is your sales team and how many people are you actually hiring? You're going to get this question from investors, you're going to get this question from board, from your employees, from almost every single person. Now at Dropbox, we get a variation of the same question during every single earnings release and every single quarterly call that we have. How big is Your sales force. And how quickly are you going to drive the growth of the sales force? There's no doubt in anybody's mind that you should be growing the sales team. Nobody's going to challenge you on that. But is that really the right thing to do? The reason people say, hey, grow your salesforce in order to grow your overall revenue is a very simple math equation. And the Math equation is ARR, which is annual recurring revenue, is the number of AES, account executives times the productivity of that AE. So this is a super simple math equation that conventional wisdom everybody takes for granted. You increase the number of AES, then what they produce in terms of their quarter attainment, that's going to increase your revenue. So simple that everybody assumes that this to be true. Now, how many of you here have actually worked for companies that have hired salespeople and then a year later, fired salespeople? Yep, all of us. Unfortunately, all of us. We go through the same vicious cycle of hiring people and then a year or two later, firing the salespeople. So why is this happening? That's because there is an even more fundamental equation that you really need to understand before you go out and hire your salespeople, and that is ARR, which is annual recurring revenue, is the number of opportunities that you have in your market times the win rate, times the asp, which is the average selling price. So let me explain what this is. So you know, ARR, this is kind of leading to your growth. The number of opportunities is if you have a total addressable market and in a given year you pursue a set of opportunities that is the average number there. So maybe you have thousand open opportunities at any given time, and your win rate is how you're competing and you're winning against your competition. So let's say that's 10%. And let's say your average sales price for the opportunity that you're closing is $10,000. Then thousand opportunity times the 10% win rate times the overall ASP, which is $10,000, will give you a million dollars. Now, why is this equation even more important than the first equation? This is important because if you don't increase the total addressable market and the opportunities, and if you don't increase the win rate and you don't increase the asp, but you add more AES, what happens is that you're taking the same number of opportunities and giving it to more and more AES, you're dividing their pool. And when you divide the pool of opportunities with more and more AES, they don't make their quota. And if they don't make quota, AES just leave. That's the fundamental truth. Right? So this is even more important than anything else that you can do before you begin hiring the salespeople. Now, I'll say. In the case of workday, we looked at this equation every year, every single year we cared about this equation. We knew how we were growing the win rate and how we were increasing the asp. In the case of workday, win rate improvements came from product differentiation. We really drove product differentiation to increase that and we tracked it quarter over quarter. In the case of asp, we added more products. Payroll, recruiting, learning, financials. All of those attached products increased the size of the opportunity and that was great. So because we were able to improve both of those key metrics and levers, we were able to add account executives without going through that vicious loop of losing them. In the case of Dropbox, it's slightly different. We started with a whole base of 500 million users. So the traditional way of taking the sales organization and asking them to go and talk to a whole bunch of users doesn't work. What are we going to do? Send them out to talk to 500 million people? That just doesn't work. So what did we have to do in order to increase the win rate was really use machine learning and data science to really drive the targeting of of the right opportunities. So a few years ago, we started building a set of models. We identified all of the accounts. We looked for about 20 to 40 different signals of accounts that had higher propensity to buy and accounts that had higher propensity to upsell. And we started scoring. And once we did that, we then took the account executives and had them target specifically on those opportunities. 90% of Dropbox revenue actually comes from high scoring accounts and high scoring opportunities. So we were able to leverage data science and machine learning to really identify the propensity of our accounts to buy and then leverage our account executives. When we did that, the win rate increased and therefore we were able to add the right number of A's. This is one of the reasons why we have a very, very scalable model. Our model is very scalable, it's super efficient. And because of that, our overall sales and marketing spend, when we compare it to our next Competitor is about 50%. This is super efficient. Something that makes our investors as well as our board really happy. Myth number three. So myth number three is worry about sales support later. I spent a lot of time talking to CEOs and CROs, exchanging best practices and having conversations about go to market strategies. And about a couple of months ago, I got a call from one of my friends who also happens to be CEO. He has a $10 million business, they're growing really well. And his question to me was, hey, when should I hire my first sales support person? He had 10 AES and some of them were making their number and some of them were not making their number. And so my answer to him was, you're too late. Let me give you an example. If you're building a house, you would first go and talk to an architect and the architect would help you figure out where to put the first room, the second room, the first floor, the second floor, and really get the structure of the building. Right now, sales strategy and sales support is about the same thing. They help you figure out where to put the first AE, the first 10 AES, and get them to be really, really predictable and get the organization to have a very, very scalable model. That's why you need a sales strategy expert. You would never build a house without actually having an architect. So just don't start building a sales organization without the right sales support. Now coming back to the same equation. ARR, which is annual recurring revenue, is the number of opportunities times the win rate, times the overall asp, which is the average selling price. Sales Ops, sales support BDRs, which are professionals that'll help you prospect business development reps, they're called solution engineers. Every one of them are going to help you increase the win rate. So think about them as strategic resources that can help drive the win rate and therefore help you have a very predictable and scalable sales model. So think much more about driving the win rate in the early stages and don't worry about the efficiency. That's something that we learned. A lot of times people ask me the question of so what does this ratio look like? And here's my cheat sheet based on a couple of decades of trying to get the model right. And if you're an early stage company, you're a million dollars to about $20 million. You're early stage. And then if you're a more mature company, it's $100 million and above. So if you're an early stage company, then invest a lot more in sales support as soon as you start building your sales organization, get the first sales ops person. Now, in all truth, I was a sales strategy expert before my current role and so I'm a little bit biased towards that. But they are the best investment you can actually make because they can Help you scale the organization in terms of prospecting help, which is the business development rep. They provide the right leads, the right kinds of quality leads into the pipeline. And so the ratio early on is one is to two and then you can actually make it one is to four. And then in terms of solution engineers and solution architects, these are the technical resources that really are driving the sales cycle early on. Invest more in them. One is to two ratio. And then as you continue to grow and expand, then make it one is to four, five or, or one is to six. So the lesson really learned here is that invest in your sales support and really help them drive the win rate before you think about efficiency within the sales model. Myth number four, so you've crossed the early stages, you're beginning to scale and you're really getting to the point of going global. And so the myth here is that go global to grow fast, try to go in as many countries as possible, because that's going to help you expand your revenue and you grow. A few years after Dropbox started, our user adoption looked like this. We got pulled in nearly 100 plus countries in the first three or four years of our existence. We had users almost everywhere and they were actually pulling us into the local markets, demanding more presence and demanding more investments in each of those areas. And we went along, we kind of went headfirst into a lot of these countries thinking, okay, this is going to help us expand really quickly. And in 2014, for example, we went into Australia and we went into Japan at the same time. Both these markets looked seemingly attractive, pretty big in terms of the population, very good in terms of the Internet usage. But once we went in, we realized the kinds of investments we needed were very different. Australia was cloud first, mobile first, SMB, heartland. And Japan was really still in the overall philosophy of I need viability of the solution provider, I need to make sure that they are going to stay within the country and I need a salesperson, someone that I can actually talk to. So this whole bring your own app and bring your own device was just not happening in Japan. But both countries, they actually wanted local infrastructure, which we didn't have, local contract support, which we didn't have, local marketing resources, local support resources, localized everything. We just didn't have any of that stuff. So it's really difficult to actually make these kinds of judgment calls of where you're going to invest and how much are you going to invest, especially when they're coming all at you. So we went back to one of the best known frameworks to mankind, which is the two by two. So step one in terms of the two by two is really to kind of figure out how would you prioritize entering into all of these countries. So our cheat sheet is this. On one axis we have the opportunity size and for us the opportunity size is the population of the country, it is the purchase power parity, it is the Internet users. And so with that you can actually identify what the total addressable market is within a country. And then on the X axis you have the ease of entry into the market. In the case of Dropbox, it was the regulatory environment, it was the competitive landscape, it was mobile users within that particular country. So with these two things we were able to quickly get to what are the countries that we need to prioritize that have very large opportunity size and pretty good ease of entry into the market. So step one was doing that. Step two was actually figuring out what is the return on investment. How are you going to phase this? You might get about 20 countries that you need to enter into. Then how do you do it in a phased approach? So the second step was a super simple cost and benefit analysis. So for every country that you're entering, you got to think about the top of the funnel investments that you're making, the mid funnel investments you're making and the end of funnel investments you're making. Top of funnel investments can be things like brand marketing. If your brand is not known in a country, then you really don't have awareness. So you got to start thinking about what the top of the funnel investments are for brand. You got to start thinking about what are the top of the funnel investments for marketing resources in that particular language in that local region. The mid funnel investments are the sales support people that we talked about. So you got to think about what you will do there. And then the end of funnel investments are local infrastructure that you will need, local contracts, local legal support, local support in that language for the hours that that country needs. So those are the kinds of investments. So what we did was we actually looked at these three categories of investments and we looked at all of the costs and then we said, okay, what do we think is the benefit? How much can we generate in terms of revenue from each of these countries? And got a very quick payback time once we did that. We now had a phased approach. So what we do almost every year is go back and revisit this and have a very planned methodology for actually entering different countries as you go global. Now, Japan and Australia happens to be in our top five Markets. So we're doing well. The kinds of investments we needed to make to get there was very, very different. So when in doubt, really bring data. Think about this problem as a data problem. Bring all the data and then go into different countries and markets. Myth number five, well, you are climbing up the SaaS mountain and you're almost there. The air is getting rarefied and the wind rates are getting tough and all you have to think about is the competition. That's conventional wisdom. Most sales kickoffs that you go to start with some kind of a whole audience pull on who's our competitor, how do we crush our competition then? That's the whole mantra that happens. But I'm here to tell you that think about competition very differently. It's not always a zero sum game. If you think about SaaS, there are two very broad categories of SAS. The first one is a system of record and the second is a system of engagement. Now, system of record are sources of truth. There are sources of truth for the company that you're providing that service to. It could be payroll, it could be inventory, it could actually be CRM, it could be hr. And if you are in system of truth, then absolutely you have to crush your competition. You gotta like rip and replace and you have to do that. But only a handful of companies actually do system of truth solutions, just so you can count them. Most of us in SaaS are systems of engagement. We are really focused on engaging our users and a lot of times we coexist with competition. In the case of Dropbox, every single account I talk to, where we are present, our competition is there. So every day our users actually have a choice. They have a choice of using us versus one of the competition. And so for us, it's much more important that we drive the level of engagement. We don't think about this as a zero sum game. We actually focus a lot more on thinking about the engagement. If you look at most organizations today, there are hundreds if not thousands of SaaS applications in every one of the organizations. The average number of SaaS applications that every knowledge worker uses is 36. And on a given day, an average knowledge worker uses at least 10 applications. It's really the world where the pendulum has shifted towards the business user and they are bringing more and more SaaS applications every single day. So there's never going to be a time where there's one chat solution in an entire company. There's never going to be a time there's one collaboration solution in an entire company. It really is about how you Engage and how you drive that user engagement within the sandbox. So for us, we partner with a lot of our competition. What we care about is driving a seamless experience for our users every single day so that they leverage Dropbox and they know that that they get access to almost anything from there. We have customers like WeWork and NatGeo National Geographic where they use us specifically because we work so well with G Suite. Their usage of Dropbox has actually expanded because we play really well with G Suite and it provides them a very seamless experience. 75% of Dropbox users link us to another application, a third party application, and when they do that improves our retention rate by nearly three times. So for us the focus is much more about really driving the user engagement and playing really nice in the sandbox. We think about competition very differently. So let me bring this all back together. As you think about going up market and as you think about scaling your organization, think about your user. Don't always assume that they are in the C suite. Think about growing your sales organization, but don't always do that before you understand how to drive the win rate and how to drive the asp. Throw a lot of bodies at sales support. Don't worry about efficiency early on when you go global, bring data. Use a very easy two faced approach to figure out how to enter different countries. Bring data and when you think about competition, just play nice in the sandbox. It is not a zero sum game in most cases. So this journey has been super interesting for Dropbox and we've really grown and tripled over the last four years from a business perspective, but it's been an adventure. I wish you the same kind of adventure and hope you the very best. Thank you.