Lessons from Hired CEO: How to Move from Transactional to Recurring Revenue

Good morning. How are you all? I've been in your seats. Third day of a conference. Many of you went out last night. Probably went out a little bit harder than you expected. So I feel your pain. There's going to be a bunch of primary colors, primary shapes on the screen. So hopefully it's comforting. So I'm Mehal Patel. I'm CEO of Hired. We're solving a problem many of you are familiar with. You cannot build great companies without great talent, full stop. Our approach is a little different. We built a marketplace. We use AI to more intelligently match top tech talent with the best companies. In terms of my background, I've spent 15 years in marketplaces. I was early at Lyft, back when it was called Zimride. I was at Kaggle. I was at Axiom. I've been eir in marketplaces. I spent a lot of time in marketplaces. So I want to chat a little bit about the evolution of marketplaces that we've seen. Okay. And we're going to fit Hyatt into this story. So marketplaces really started. Actually, they started even before the 90s. They had classifieds in the back of papers right in the 90s. That gets taken online. And now you get listings online. The great thing about the new marketplaces is this distribution. And so if you're looking for a dresser now, you can find someone who has that dresser. The challenge with these sort of open marketplaces was there was no curation, right? So you didn't know if actually the dresser you saw in the picture was the one you were going to go get. You didn't know that. It was actually Mother Teresa saying that dresser. Not like Ted Bundy, right? The next level of this was the marketplace, as you all know now and have exploded, right? This is the transactional marketplace. The transactional marketplace fixed a lot of these problems. They had a level of curation, right? They verified the seller. Airbnb goes and takes the photos. They have reputation and trust built into the platforms. That's where Hyde fits. We launched in 2012. For our first four years of our history, we're a transactional marketplace. Like that we curated, meaning we selected the best candidates. We grew triple digit percentages year over year, hit tens of millions of dollars of revenue. I'd posit there's a next wave coming in marketplaces, and that is really going to be the combination of a marketplace company and a SaaS model. The reason for that is actually the challenge of the transactional market base. The challenge of the transactional marketplace is to get loyalty and engagement over time. And the reason is there's a high marginal cost for every new transaction. Right? So in the Hired marketplace, you might spend 10, $20,000 to make that next hire. In a SaaS model, you take that marginal cost way down. Okay? So when you're on Netflix and you move from the video and demand world, you want to watch that Patrick Swayze roadhouse movie, you're not going to worry. That's another $12.99. And is it worth it because it's free? The power for the marketplace in that is as marginal cost goes down, usage goes up, they get more data, they understand preferences better. Once you understand preferences better, you can match and make recommendations better. Right. Netflix now knows you like mid-80s terrible movies that are kind of awesome. That means you're going to engage more, there's going to be more data. Okay? And we're seeing that. So. So if you look at some of the names up There, Lyft, Uber, TaskRabbit and Hired have all launched subscription businesses. I'm going to talk a lot about that, but we think there's an opportunity for B2B marketplaces to go further, further than just a pricing model. And that is really to start offering feature functionality that is SaaS feature functionality beyond the marketplace. So for Hired, we send great candidates to companies for them to interview. But there's a recruiting funnel that's happening after that. Right. The next step is going to be they're going to assess those candidates, they're going to see how good they are technically. And there's a bunch of steps after that. The next wave of category creating marketplace Companies will offer SaaS functionality that unites that entire funnel. Hired today actually has announced that we've taken the next step and launched through an acquisition Hired assessments, which is going to automate assessments, technical assessments for companies to again, make their hiring more predictable and to make it more efficient. So this is what I call my happy graph internally. This is our ARR curve. You know, some of you, when you're CEOs and have dark moments, and there are many, as a CEO, you know, probably think about bone white sand beaches in Bora Bora. I think about this curve because it's the metric on our business. I think it's interesting. Obviously, nice growth here. There's a tale of the tape here, though. Two different stories happening. If you look from Q1 15 to the end of 16, that's when we're a transactional business, right? So we were a marketplace and we focus on liquidity. How do we get a candidate at the right time? A customer is looking for that candidate, right. And matching them together. We charge on a transactional basis. So you made a payment to us when you made a hire, so very little recurring revenue. We had some clients who already coming to us and saying, hey, we want a long term partner. But it was really small. We were focused on the supply side of the marketplace. How do we get candidates? We had no sales team. It was all inbound. Around late 16, we start hearing more and more customers wanting to get longer term partnerships with us because they've seen success. We've also raised our Series c round of $70 million. We have investors saying, hey, it's all well and good. You say you grew this much without customers. You now need to be a grown up company and to find a way to acquire and grow customers. And so around 17 we, the beginning of 17, we start launching our subscription model and it's really had some nice growth. We're seeing the same 100% year over year growth that we saw in the transactional business. We've actually, in the two years we've been running the subscription business, we've got to a scale that is now greater than we got to after four years of running the transaction, after running the transactional business. So how do you make that change? That's a massive, massive change. To go from a transactional business in the tens of millions growing 100% year over year, to a subscription business that's delivering value now over the long term, that's also growing 100% year over year. It's hard and we've got some good learning, some bruising that I want to actually share with you and hopefully it's helpful. We think about it as this pyramid. I told you there'd be primary shapes here. And the pyramid really reflects kind of how this foundation, from the foundation all the way to the customer is built. So at the bottom of the pyramid, we had to really think about who we are as a company. We thought in the next round about how we work together in this new recurring world. Then we thought about our customers, how we serve them best. And then finally it was really around the voice of the customer and how we talk to the industry. I'm going to walk through each of these. So it starts at the bottom of the pyramid. This is the mistake I think a lot of companies make when they move to a SaaS model. And it starts with values. Values are critical because that's the one thing that's not going to change as you go through this transformation, this journey we've been on, everything changes. You're going to see that for the rest of the pyramid. The one thing that stays the same and should stay the same is the values. And our values we had to revisit and make sure everyone understood the five values we had still applied. And here's values isn't just kind of corporate speak. Values matter. And it's taken me sort of 15 years in industry to kind of get a sense of why they matter. They matter because if your team doesn't understand the values, if they aren't connected to the values, you're going to have to look for alignment in different ways. When you have good values and everyone understands them, everyone operates in the same way, they make decisions in the same way. When you don't have alignment around values, you have to find that alignment in different ways. And the way you do that often is policies and procedures. Policies and procedures kill an organization at this stage, right? You're going to lose the most innovative people, you're going to lose an innovative culture. You're not going to hire the best people, you're not going to be set up to win. So values is critical. We started there, we revisited our five values. They should all always apply. Whatever your company's doing, we started at that place. The second is team who bring the values to life and live the values and make that operating system work. So you've now got a company that had focused on liquidity. At the same time, we have a candidate. Let's find a customer with a job and let's match them through AI. We're now starting to think about recurring lifetime value for both of those completely different mindsets. So we had to change the team. Our approach here was to start at the top. And so we went out and got leaders that were pointing us and bringing us into the future. There was two learnings there that I wanted to share with you. One, we made a mistake of going too senior in certain instances. We needed people who knew how to be scrappy and how to build, not people who had done this at a very, very large company, at least in the early stages. The second is we needed to be far enough down the track of what we wanted to become that we could change, but not so far down the track that there would be organ rejection for that person. We also made that mistake. And so the way we thought about it is we wanted someone two steps forward for what the future looked like, but not seven, so they could pull the org with them. Underlying both of These we did something that was unusual. You've all been in boardrooms where your boards are like, let's put money in. The people who generate, generate the dollars. Right. And they think about sort of certain functions as cost centers. The first executive I hired when we went through this transformation was a head of people and a kick ass head of people. And that was because I knew if we didn't get this foundation right, if we couldn't get someone who could reinforce the values, make sure we lived and breathed them, make sure we're hiring team members that could take us into the future, but went so far ahead that they couldn't bring their team along, we weren't going to succeed. All right, so the next rung of the pyramid here is how we work. That had to change too. You know, one of the things that we faced was the investment decisions, right. So we have a business in the tens of millions growing at, you know, triple digits that we've had investors invest in us around. But we don't think that's the future. Right. The future for us is this much smaller business. You saw that ARR curve back in 17. It was very small or relatively small, but we think that's the future. How do you make investment decisions between the two? Right. The approach we took was to commit to what that change would look like. And that commitment for us was thinking out in 2016 what life would look like today two years later. Right. At the end of 18, essentially. And what we decided was we were 10% recurring at the end of 2016. We wanted to end 2018 at 50% of our business being recurring. Once we had that lens, we used that to make our investment decisions. Right. So at the end of year one, we wanted to be 30% recurring. So we went to the engineering team. It didn't make sense to break an engineering team out between those doing the transactional business and those doing the new subscription SaaS business. But what we did was we made sure that if you want to be 30% that year recurring, at least at a minimum 30% of those engineers time should be on the new subscription business. Even if that meant we were under investing in the legacy business. On the sales side, we ended up actually with a different construct. So with sales, we had our more junior, less experienced reps work on the transactional business tended to be lower lifetime value, quicker sale, higher velocity, higher churn. So a good way to kind of maintain and grow that business and learn our business for the reps. But we took our more senior reps, particularly on the AM side and had them take the most successful transactional clients and upsell them into recurring. By the way, I said that our goal was in two years to get to 50% recurring. From 10, we got to 80% recurring in the business. The second is metrics. So this is critical, right? Our syntax was a marketplace syntax. We talked about clearance rates and we talked about hires and we talked about conversion and yield ratios, which is all really about the efficiency of our marketplace funnel. The metrics in a SaaS world are completely different. And to our team, they didn't know what bookings was, they did not know what ARR was, net dollar retention, all gobbledygook for them. So we really had to start from scratch, kind of like you do at a seed company to educate the team. It started with the top at, you know, I would every week in our all company meetings talk about these metrics, why they mattered. Would show, you know, articles and curves on companies like Adobe that you could see kind of the multiples they got in the marketplace as a transactional business and then the multiple expansion they got when they built a recurring business. Talking about why we were moving to a recurring business. And that was to better partner with our clients long term so that we could deliver needs over a longer period of time versus just at the point when they need to hire. We had to cascade that down through our organization. So it started with our all hands meetings, we call them huddles weekly. But we had every team meeting talk about these core metrics. We created reports around these core metrics. We created a metrics meeting that was open, that was weekly, just talking about how these metrics were changing. And it was cascaded all the way down from me at the all hands to department meetings, to this metrics meetings, to orientation. And we hit repetition over the head. We kept hitting why that ARR curve I showed you matters, why that is really the temperature of our business today. And without it, we wouldn't have been able to operationalize around these metrics. Trade offs. So connected to investments, we had a business that was a marketplace which is totally local. The best marketplaces are hyperlocal. And we thought about liquidity at the moment, right at the point where someone is looking for a job and someone is looking to hire. Can we put those two together? We are now shifting into a business that is long term and recurring and about delivery of value over lifetimes. Those are two very different operating models. And to give you sort of an example of the trade offs we had to think through, typically a SaaS business has heavy centralization, right? You want consistency. While as I said, a marketplace is heavily localized. How do we break the tie between those two models? We started from basics and decided we needed a decision framework that we could rely on, put every decision on these trade offs through that. And so one, we could evaluate what was working and what wasn't. And two, we could have a baseline. And so for us, to give you an example, we use an OKR framework. It actually doesn't matter what you use. But for us, we looked at cost per hire. Cost per hire is a metric that really for us was a leading indicator of clients going to renew again with us, if the cost per hire was low, they'd renew and if it was high, they were risk of churning. We would then look at centralization and decentralization across that metric. When that metric moved in the right direction, that's a decision we made. And where we ended was a hybrid. So our go to market is centralized right now. Our field marketing, our delivery, our customer success is hyperlocal. And that's the model that's really optimized for the cost per hire. All right, so how we serve customers this all new to us. Go to market was a term that no one in the team even understood. We did not know how to price. We did not know what packaging was. I'm embarrassed to say I sold the first subscription the company sold. And the conversation was the client called us and said, hey, we hate paying this high cost for every hire. Can we do a yearly deal? And I said sure, what are you thinking? And they gave me a price N dollars. And my negotiating strategy was to say N plus 50% and we ended up at N plus 20%. You can't price like that. You have to have some thinking behind it. We knew that. We hired a consulting firm to help us. They came up with a strategy to really lower the ASP and really take it down. Took it down almost 50% from some the deals we were selling. And the strategy there was really let more companies into the market into the subscription product. The challenge we found with that was we left money on the table. Our reps productivity went down because they were selling the same amount of deals at a lower asp. Our learning from this actually was to hire an expert and hire them in house. So we hired a killer product marketing executive out of Oracle. She really drove a seat expansion model that has actually had a double win for us. We've got, we've got our reps able to sell more deals and we've got the ASP has gone up now significantly 30 or 40% from where it was after the consultants had talked to us. So there's a learning there for all of you to think about actually hiring that competence in house. So folks who understand the nuances of your business and how to set pricing when you're creating a category, there wasn't easy comparables for what we were doing. Customer success. So in the early days 17 we moved to this subscription model. We don't have many recurring customers so we don't really think about this install base of land and expand. And we spend all of our time, which at the time the right thing to do, focusing on the net new side of the story. So we hire a bunch of great sales executives, organize regionally under these sales leaders and customer success was just kind of a thing that was off to the side over time as we see the net new really scaling. You saw that ARR curve, we stopped building this big install base and we've realized that actually we need to break out customer success from our net new. And the reason is twofold. One, our net new folks are good at net new. Customer success is an entirely different skill set. And if we solve customer success and retention, those of you in SaaS businesses know this is the only thing you need to nail early. Our growth is really assured because you know that you know X dollars this year, a lot of it showing up next year. And their net new needs to be smaller each year. So we broke. The second reason was just bandwidth. The leaders just didn't have the time to be focusing with reps enabling reps closing deals as well as thinking about the installed base and the renewal and land and expand strategy. So we are now looking for a VP of customer success that is broken out from the net new business. And it'll have the other advantage of really building a tight structured feedback loop between that leader and our roadmap. So we're building products where we can grow with our customers. That brings us to roadmap. So our roadmap in the transactional day is very different. We just had to roll out functionality that made the marketplace more efficient, more efficient. To discover the right candidate at the right time. We could ab test it very quick if it worked, roll it out to everyone if it didn' roll it back. Once you're into the SaaS world, you're into a recurring lifetime value long view world. And so we had to revisit how we built our roadmaps, how we work with our customers, how we think about a product vision which for us is an end to end talent platform and how we articulate to customers how it fits their needs. One of the things we discovered, it reminds me of that sort of Henry Ford quote where Henry Ford said, if we had only done what our customers had asked us, we would have built faster horse. Our job is to deliver a car, right? That's very true. But what we found the nuance on that was because we hadn't done SaaS before, our customers didn't really believe we could develop the car and deliver it to them. The car for us is the end to end talent platform. So we needed to deliver some faster horse features, if you will. And so when they asked us for better Boolean search or some DE and I functionality, we focused on delivering that in the roadmap for two reasons. One, it was valuable to clients. Two, it built the trust so that then we could lead them to our vision of the future, which is end to end recruiting platform. So how we tell our story, right, you're defined by the brand you have. The brand you have in the external world is usually lagging. So we were seen as a transactional marketplace because that's what we were. We had to really engage. We hired a great PR agency, We had a terrific in house leader that led this and we really revamped our corporate messaging. Our opportunity to do that last year was our series D fundraise. And you know, we felt strongly that we didn't want to do the typical fundraise announcement where, you know, everyone gets high fives because they raised X dollars at a Y val, you know, which always seems like an odd thing to celebrate. It's a very Silicon Valley thing to do. It's sort of akin to celebrating getting a mortgage when you buy a house. It's an obligation, not a victory. And so we took that advantage. And this is difficult because the press wants to just tell that valuation story. It's just easy, it's just clickbait. But we took the time and really through this internal executive, we took the time to really get the messaging around our move to subscription. We had customer stories talking about the value and trust that they had seen, the long term partnering they were beginning to engage with us on. And we had stories from Zora and Dropbox and Nordstrom and wework and we really created a story about us being a subscription company. That's why frankly we're here today. Similarly, we had done a lot of thought, leadership and analytical stuff around the marketplace. So in the old days we would have periodic reports, we would talk about salary reports, what were trends in the industry on salary? Because we had a marketplace kind of like nasdaq, it was just clearing transactions. So you knew that in Denver, for a certain type of developer, salaries were shooting up. That was obviously very valuable. As we move though towards a subscription model and a subscription story, we started changing the analytics and thought leadership we put out in the press. So after that we started doing stories around our customers. We put out a brand health report that talked about the kinds of companies that the best talent now wanted to work for in each market. Real success for us was one of our clients, who I can't mention would say one of the world's biggest e commerce companies, who got some press recently about the choice of a second hq. And in the midst of sort of talking about why they picked the place that they did, we found that a lot of our messaging about why hiring the best tech talent in a way that's predictable and measurable and efficient was being pulled through that client and coming out in the press. And that's ultimately the sign of a really strong story. Finally, the customer. So look axiomatic to listen to your customers. And it was our customers that told us to move to subscription. They came to us and said it doesn't make sense for us to pay a high cost each time. That chills my users from using you more. Let's set up a longer term relationship, pay you a fixed price. Our incentives are to use you more, not less. And that was great for us because it gave us the long term partnership. It gave us data so we could match better for them. The thing I will say about listening to customers is what you really want to do is build trust. So they trusted us because they'd seen success in our transactional marketplace. They had come to us for a subscription offering which we delivered to them. We delivered those faster horse features, if you will, that they really needed today, that we didn't see a strategic long term but were necessary table stakes today. Once we did that, we built trust. Once we had the trust, the conversation changed. It changed from them telling us the features we should launch to the long term problems they were facing. And there were three problems. Hiring needed to be more predictable. They needed to know that if I look at six candidates, I will make one hire. It needed to be measurable. The CEOs were now talking about the recruiting funnel in the same way they're talking about their revenue funnel. And they wanted the same visibility. They wanted the head of people to be as conversant on that as the Head of sales or the head of marketing is in their world and they needed to be efficient. They need to be able to understand and articulate a cost per hire business case. Those were problems. Once we understood those problems, our solution, this end to end talent platform that we're building, the first step of which is the automated assessments we announced today, made sense. And that's been really the platform for us to grow our relationship with our customers. Customers. So this is a quick summary of what I walked through. What I'd say here is that there's a lot of change here that happens and you have to kind of navigate that change pretty carefully. And the pyramid construct is very helpful. The bottom of that pyramid starts with values. So you've got to revisit your values. That's your stability. You've got to change your team, but you've got to do it in a way that it's not too far in the future people can bring your team. As you think about how you operate, you're going to have to think about a commitment to the new business that lets you make the right investments while maintaining the legacy business. You're going to have to change the syntax and metrics that the company talks about, thinks about and values. Success is now judged differently. And similarly, you're going to have to have a decision framework that lets you make trade offs in a way that's understandable and that can actually clarify what works and what doesn't work. As you get out to the customer. You've got to focus on pricing and packaging. You have to have a customer success team that is separate from your net new business so that they could really drive retention up. And you've got to build a roadmap that's long term value. And part of that roadmap exercise is delivering on stuff your clients are asking for, but also building the trust to deliver on stuff they don't know that they need, but actually solves the problem. The car and not just the faster horse. You've got to focus on the messaging. The story's got to be told in a way that people understand. You are a subscription business. You're creating a category. You are the next wave of marketplace, which is a SaaS marketplace. And that's got to flow through. Success is when your customers start telling that story in the way you told the story to your customers. Customers. And finally you got to listen to your customers. And if you do it right, they're going to tell you their problems and you're going to be able to give them the right solutions versus them trying to give you a solution. I realize there's a lot of stuff here. I gave you a lot of examples. I think the trick for all of you here is how to distill this down, how to distill down that pyramid, figure out how to take it back to your organizations and drive change in the way that we did. Thank you for your time.