LIVE from SaaStr Europa 2023: Stage A - Wednesday

And a half billion dollars. Nobody's been able to have an exit bigger than Divvy's in a shorter amount of time. I think every good partnership starts with mutual appreciation. We don't have a customer success team. We don't have a sales team. We have a revenue team. How do you start to envelop this one? Team mentality? Everybody gets pumped up with a common goal. This is how we did it at Divi. There's this idea called swing. When eight people are rowing in such perfect that no action is out of sync with any of the others, when you have those moments as a go to market leader, they're magical. Getting in better swing. That's the key. Please welcome Divi's former CRO, Sterling Snow. I get to start out with a disclaimer right off the bat. Officially as of yesterday, no longer at@bill.com and we just, we just talked about that yesterday, so didn't quite make it into the hype video. But excited to be with everybody today. Kind of share some of the lessons that, that we learned as a go to market engine along, along our journey at Divi. It was very, very quick in a lot of ways. We went from our first institutional round of funding to getting acquired in about four years.

Right.

In a two and a half billion dollar exit. And we're gonna, we're gonna spend some time talking about the things that, that helped us do that. This is how it looked.

Right.

First institutional money in 18, getting bought by Bill in 21. I joined Divi just a little bit before we raised that series A, so got to see essentially the entirety of this story play out. I say a lot that I have a multi billion dollar education and I mean that from the bottom of my heart. Because if I could go back to that moment in 2018 with everything that we've learned along the way, we could have added more. We could have added a couple billion more dollars, I believe, to that eventual exit. So the things that I'm gonna talk to you about are lessons and learnings that I hold very dear because they were expensive to me and the people that we built this business with. Okay. One thing that always cracks me up when I kind of talk about the story and you know, it was quick. It was four years and we did all these things is people kind of assumed that you might have gotten to skip a step. I promise we didn't get to skip any steps. We just got to cram all of the learnings and all of the experiences into a very condensed time frame and that meant that if we were gonna stay, if we were gonna stay on top of it, we had to accelerate our rate of learning. We started with a base and a belief that we wanted to do something very special, very unique. So what kind of a team were we trying to cultivate? We wrote this out as a revenue team and we lived by it. We believed that everybody deserved to know what it felt like to be part of a high performing team. And we compared it to sports and running out of the tunnel on a Friday night with the bright lights on. Everybody deserved, in our opinion, to feel what that felt like and to work with people to the left and to the right of you who were absolute experts at what they did. That we believed that we were responsible for helping each other become the best versions of ourselves. That meant we were very high on accountability and we wouldn't tolerate less than a full effort from ourselves and from our teammates. That all led to us outlining a couple of very important things, and this is important to talk about before we talk about operating models, because you can have the best models in the world. If you don't have the underlying team and the underlying structure, it will do you no good. That is literal lipstick on a pig. So these were the key traits of our high performing teams. Not going to read them all to you, but I want to highlight a couple of the big ones. We believe that chasing ambitious goals was a fun thing. Sure, it's daunting, sure it's stressful, but it's also ambitious, energizing, invigorating, and we had a blast doing it together. We believed very strongly in extreme ownership. If you haven't read the book by Jocko Willink, highly recommend it. We had everybody who joined the revenue team read the book and write a book report because we believed that extreme ownership at the end of the day was what was going to separate us in many regards. And then we also believed that speed was of the essence every single time. The answer of when to act was now. The time to take an action was now. And we believed in that. Just important as what you as the traits that you want to have are the ones that you need to avoid. Again, we spelled this out. These were well published throughout our team in our years at Divi. So we do not on our team have excuses. So again, when you write these traits down, you give everybody license to hold themselves and each other accountable. So in many, many meetings, you know, somebody would say something and be like, well, that kind of sounds like an excuse. And we don't make we don't make excuses. On this team, we believed strongly in a principle that we would not be disloyal to those not present, meaning if you aren't in the room, you don't get to have a negative conversation about somebody. We will engage in conflict, and we will have discussions and debates and disagreements, but we won't do it behind each other's backs. Okay. That was an important one for us. And then the last one that I'll highlight here is that there is no room for passengers. When you're trying to build something really big, when you're trying to do it really quickly, you cannot have passengers. Everybody has to be engaged. Everybody has to be driving. Everybody has to be pushing and moving forward. And so, for us, we needed to make sure that there were no passengers on our team. So, again, I started with this because operating models can be wildly helpful. They can improve so many parts of your business. We're going to talk about six that we used at Divi, but they're only great when your team is. And also, as we go through the rest of the presentation here, I want to make sure everybody knows that what I'm talking about and the successes and the learnings that we've had, they're the result of blood, sweat, and tears poured over years by very talented men and women.

And.

And they're almost like, in spite of me, not because of me. And I'm just telling you what I got to learn along the way. Great team is the foundation of it all. Okay, so these are the six, and we're gonna spend a little bit of time on each. Aligning the funnel. Budget quota goal. Shorten the cycle. T3B3. Name number, and North Star sell design. Build number one, align the funnel. In that intro video, you saw a principle that we talked about at Divi all of the time. It's called swing. So for those of you who aren't familiar with crew or rowing, swing is when the oar, the paddle of each person in the boat is hitting the water at the exact same time, is pulling back with the exact same amount of force. Because if anything happens in this little boat, if anyone's out of sight, sink, that boat's gonna veer off course, that boat's gonna flip. Not good things are gonna happen. So the first principle, the first operating model we had is aligning the funnel. The way that we started this was actually with me, because as the CRO, I was responsible for marketing, sales, implementation, customer success, customer support, and revenue operations. So it behooved me to make sure that everything was aligned. Because if it wasn't working, there was nowhere to hide. There was no excuse that I could make. I couldn't blame the VP of marketing. I couldn't blame our churn problems on customer success. It was ultimately all on me. And this was a very powerful tool for us to align our funnel. Let me give you a specific example of how this model played out. We would take each stage from marketing all the way through customer support, and we would actually measure and compensate the Group 1 stage below where they were actually, like, responsible. So what does that look like? Marketing? We didn't talk about MQLs or SQLs. We actually talked about closed won new dollars. That's how marketing was measured. That's how they were promoted and compensated. Bonus, all of those kinds of things. Sales, it wasn't just on new logos. It was based on what they did during their first 90 days of implementation. Okay, so we would force, we would push everybody's accountability one step deeper in the funnel. Because what does that do? Well, automatically now that sales rep who has responsibility for what goes on when they're at the next stage of the funnel and implementation, well, they start to sell a little differently. They start to prep you for onboarding a little differently. They start to care about things that they didn't care about before, and bam, you have more alignment in your funnel, which allows you to go much, much faster. Every second that you spend with friction in that funnel is costing you business, and it's costing you time, and it costs you a lot of emotional energy as well. You're supposed to be out there taking on the market. You don't want to have internal friction within your own funnel, which is wildly common. The second model here is one that we call budget quota goal. A lot of people have a challenge. You want to go to a board meeting, you want to present to the CEO, and you want to have a plan that you can beat. Okay, you want to exceed expectations.

Right.

But on the other hand, you don't want to sandbag. You don't want to leave growth on the table. And so how do you balance this? You're also in the middle of all this trying to manage a culture. And I'm a firm believer that this is a momentum game. And if you can get wins and they turn into more wins, and if you start taking losses, they can quickly spiral into more losses. So what Budget quota goal is a financial framework that we would use. The budget number is what we would essentially present on to the board. This is the board number this is the number that, come hell or high water, we are not going to miss. And there is some conservatism baked into this number. This is the number that, given all the data that you have, you have, I would say, an 80% degree of certainty that you're gonna go out and get this done. I always called this the sterling keeps his job number. Okay, quota. This is what you build external facing. This is where every single rep, every manager, every leader, they're built around this quota number, which is a step up from budget, right? And then you want to make sure that you have what we call a go get them the goal, which is the stretch, which is something that you're probably only going to do a couple of times a year, but you're going to celebrate the hell out of it when you do. This framework was incredibly powerful for us because we got to beat and raise at a very high frequency. Most of the time we would push ourselves and come in between that quota and that goal number, and then we got to raise our expectations. Another thing that this model helps with is it doesn't matter if you beat your plan. If the plan sucked, you can be like, hey, our number was 50 and we hit 51. But if 50 was the wrong number or if you could have done 60, then you didn't do it right. And so this framework is remarkably helpful for making sure that you protect your downside and make sure you always do what you say you're going to do, but that you also have upward mobility. And as soon as you go see what's possible, you can reset the expectation very quickly. This allowed us to have remarkable. It allowed us to have a lot of credibility with our investors, too, because, you know, we'd pitch them one quarter and we'd show them kind of the sensitivity, and we would show them budget, quota, goal, and then we would come back and talk to them three, six months later, they would check in on how that went. And this allowed us to be very consistent and very credible with, with our board, with within our own teams, and with the external people that we were talking to as well. Third one here, shorten the cycle. I am a huge believer in this, and I've debated this with many people internally and externally. One thing that we found out very early on is that if we took our numbers and our targets from quarterly to monthly, we saved ourselves a lot of heartache. The reason I say that is because if I am maniacally paying attention to the month, right, I'm hinging my. My number and my expectations to the month. I will almost never have a quarterly problem, which is, you know, when we're, when we're talking to the board and when we have some, some accountability kind of outside of the building. So I wanted to shorten the cycle and as much as we possibly could. The other thing that shortening the cycle allows you to do is it allows you to have 12 chances to beat and raise during a year instead of just four. And so when you look at your annual operating plan and you think about how is this going to look in 12 months? Well, a lot can change in 12 months. And when we would focus on a four week interval, we had years where we got to raise our annual target 12 times. And that allowed us to grow much faster than if we had operated in any other way. I've got a stack of cards here because there's a fun story with this model. We were again, we moved to monthly and we were reporting on everything weekly. So we were really cruising and something happened with one of our largest customers at the time. They had their cards get accidentally shipped to hq. And also in an error at the card manufacturer, we got four cards for each one person. But we had two days left until, until the end of that month. And we needed to get those cards in folks hands because we had shortened the cycle. So myself, our head of product and our head of implementation worked on a Friday night until about 4 in the morning, sorting all these cards, putting them in envelopes, getting the addresses on them, driving them the next morning to FedEx and getting them in customers hands. And the reason why that story goes with this model is because when you shorten the cycle and you demand more of yourself in less time, you and your entire organization, you get scrappier, you get more creative. Necessity is the mother of creativity. And when you place artificial constraints on yourself and on your team, you have an ability to do a lot more than you thought you could. And it will take you to much, much greater heights. T3B3. This was a very helpful formula for us. So T3B3 stands for top three and bottom three. Every quarter we would sit down with every person in the organization. We had a little template, top three, bottom three. And we would list out the top three superpowers that somebody had and we would coach on how to lean into those more and how to continue to get the most out of, out of their abilities. And then we would have the bottom three which were the areas of opportunity. What do we need to be working on? What do you, if you're trying to Go from a senior manager to a director. What are those three key things that you need to develop to be ready for that kind of a promotion? Right. As an example, now there's a trick to T3B3. You not only do it for your direct reports, you have your direct reports do it for you. So it's bilateral. So I remember the first time that we implemented this and I asked everybody, okay, like you're Gonna rank me T3B3. And man, I had some great T3s. I was a rock star and my B3s were pretty wishy washy. And I went back and I said, there is no way that I don't have worse qualities or worse attributes that need to be worked on. Got to go back and do it again. Maybe I shouldn't have done that because when they came back, those were real. Those were a lot of like warts. And you gotta look in the mirror and figure out what you need to do better. But this created such a healthy thing for us because in a very non confrontational way, we got to have incredibly direct conversations and people got to tell their manager what they felt like they needed to work on. It was a very powerful thing because we all knew where we stood at each moment in time. There was no question as to what your leader thought you were doing well and what you thought you were doing poorly. And we were helping each other work on those B3s. We actually would present on them and say, like, hey, this is who I am. These are the things that I'm going to be working on maniacally over the next three months. Can you help me? So we helped each other and we got better. And we had a rule. If, if your B3s, if they stayed the same quarter over quarter, you know, they'd start getting highlighted, you know, in yellow and in red because you really wanted to see those change. We're always going to have things that we can work on. Hopefully they're not the same things over and over and over again. So T3B3 was very, was a very helpful model for us. Name, number and North Star. A phrase that we circulated all the time was, if it doesn't have a name next to it and it doesn't have a number, it's not going to happen. Just book it like it will not happen. It is a pipe dream. Every single thing that we cared about, we had to be able to say, well, who's the name that's responsible for that and what is the number? And it is complicated to have a number for Every function. For example, how do you have a number for a creative function in marketing? Right. It gets hard. It's easy when it's a pipe number for marketing. It's easy when it's a revenue number for sales. It's easy when it's a usage metric or an NRR metric for customer success. But nonetheless, even with the ones that are tricky, if you want it to happen, for us, we believed it had to have a name and it had to have a number. And then there's the third component to this, which is, what's the North Star? What is it that everybody orients themself around in order to make sure that they're prioritizing correctly? So we've got a picture of a whiteboard over here. We quite often would sit down and say that we wanted to raise our targets. We wanted to go and chase. Remember I talked about budget quota goal. We would say, hey, we want to go get goal. And right now, we don't see a great path to it. We would pull in 20 of the most capable people that we had, and we would have a brainstorm, and we would say, okay, where is there incremental revenue, incremental growth that we can go and chase? And between those 20 people, we would brainstorm tons of ideas. Some of the ideas were awful, some of the ideas were brilliant, but we would brainstorm them, we would select them, and people would put their name next to their number and their initiative. And it was all oriented around, well, what was our North Star? Well, okay, as this group of revenue leaders, we're chasing goal. We're saying, screw budget, screw quota. We're going for our stretch goal. And folks, in this particular sprint, we ended up. We set. You see this number that we set? You know, it's 821 million. And then you can see the actuals written vertically there. Eight, two one eight. Got there just by the skin of our teeth. But the principle of this is you are constantly juggling a series of glass balls. Some of the balls that you're juggling are glass. Some of the balls that you're juggling are rubber. And if everybody knows what their North Star is, you won't drop a glass ball. You will understand what the priorities are, and you won't allow a glass ball to hit the floor. So everybody. There's also an incredible power and everybody being able to understand what success looks like for them in their role. So, like, your name, your number, and your North Star end up being remarkably powerful agents. The sixth one here, this is Sell Design Build. We learned this lesson the hard way. We would set out to launch a new product or a new feature, and we would be met with kind of a lackluster result. Right? How did we get this wrong? We were so sure that people were gonna be excited about this. We did all the customer interviews and we looked at everything we feel like we could have. Cell design Build was born out of that frustration and realizing that our resources were precious. So how could we, as a revenue team, make sure that the things that we were advocating for our product and engineering partners to build were the right things? We came up with this framework. So very simply, this framework is when you think you've got the idea for the product or the service, you first go out and you sell it. Put together some duct tape and baling wire version of it. Most of the time it looks like a manual process or service. And you go out and you sell it. And you will find out very quickly, are people actually willing to use this? Are people actually willing to pay for this? If so, how much? And once you. Once you figure that out, then you can start designing. By the way, it gives you a head start when you think about designing, because now you've gone and talked to 10 people. You've got 10 people sold on this thing and they're using it, and it's a. It's manual. It's basically a service thing going on in the background with people, you know, pushing, pushing different things around and you know what to design, because you now you're actually like doing the flow and you know what the actual needs of the customer are and you know how it kind of looks on the back end. And so you get to design faster and you go back to those customers who you've sold and, and you show them these things like, hey, how does this look? Is this going to make it better or worse than the way that we're handling this for you today? And then you get a high degree of confidence in the design and then you go and build. And this saved us so much time and so much energy. And it's precious because when you are again, when you're trying to get big fast, you don't have time for missteps. They're very costly. Cell design build minimizes those. The picture here is with myself and our head of product, because this is what we would spend a lot of our time doing. This particular trip, we went out to Detroit and we were doing this. We were saying, hey, we have a new idea. We had sort of a target in mind for if we could get enough people sold if we could get enough folks bought in and actually using, using the thing, we were going to go and build it. And we talked to three customers in this particular day and we were getting on the plane, coming back home and we had just barely gotten the last person to commit and go over the goal that we had to set out and actually start designing and building something and had a product decided that was as good a reason as any to take a nap on, on the airport, airport floor there. These are all by design, very simple. There's no, there's no Pythagorean theorem up there. There's no rocket science. These things are simple and that's what, that's what makes them powerful and that's what makes them easy for everyone, everybody to understand and operate against. But they are not easy and they are not easy to do consistently over a long period of time. These things took years for us to get really, really good at and for us to be able to go to any person at any part of the organization and they would be able to operate this exact way. So as you think about, as you think about getting started or implementing any of these models, that might be helpful for you, consistency is the key. So let's say that you thought three out of those six were total crap, but three had some merit. And you want to go work on three. Make sure that you focus on consistency over anything else because it gets very easy to, to get convoluted and too much just kind of breaks our brains and we don't end up doing any of it. So again, a quick recap here before we get into Q and A. Align the funnel. Figure out how to have a singular owner. Figure out how to reduce friction. Figure out how to create virtuous cycles within your own funnel. Like, here's an interesting thought exercise as you think about aligning the funnel. What could you do today to make marketing care more about what sales cares about? What could you do today to make sales care more about what implementation cares about? And if you start going down that path, you will come up with ideas about how to align your funnel and reduce friction. Budget quota goal. Make sure that you are protecting your business. Another very virtuous part of budget quota goal is you build a finance plan around that budget number. It prevents you from over hiring, prevents you from overspending, and again creates sort of a safe environment for you to go and chase the upside. Go do something very, very aggressive, very, very hard. But do it in a way that's, that protects your culture, because you're going to be winning. Do it in a way that protects your reputation, because the board and your investors, they're going to see you beat and raise. But do it within this framework because otherwise you're simply choosing between sort of the lesser of two evils. Shorten the cycle to make sure you never drop a glass ball. As you're juggling all these important things, make sure you never drop a glass ball. Shorten that cycle. If your business today runs on quarters, figure out how to run it in months. You give yourself 12 chances to beat and raise. You give yourself 12 chances to correct mistakes. You give yourself 12 chances to have a higher growth rate at the end of the year. Shorten the cycle. By the way, that'd be totally remiss if I didn't mention if something is getting really hard. If you're behind, you need to shorten the cycle even more. So if you're forecasting and you're saying, hey, I don't think we're going to get there in whatever time period you've chosen, we're not going to get there this month, then you better be meeting on a weekly basis. The scorecards that your team is sending you better be coming in every night at the end of the night, because you need to shorten the cycle to give you more chances to figure out what's working and what's not and to get those feedback loops faster so that you can actually correct the problem before it's a real problem again. Put those constraints on yourself and nobody else will have to. T3B3. Give everybody in the organization a chance to give very valid feedback to their leaders and to their team, but also give them a chance to know where they stand. It's an easy way to have this conversation every quarter and then set out to maximize strengths and work on weaknesses. Nobody has to wonder, well, how does my boss feel about me? There's a lot of your high performers that, believe it or not, they walk around every day wondering if you hate them, if you're going to fire them, and you're like, whoa, I think the world of you. They don't know that unless you're having these kinds of conversations. This is a model that forces that into your normal rhythms. Name, number and North Star. Again, if it doesn't have someone's name and a number, it's not going to happen. So don't go promise it to a customer. Don't go promise it to your board, don't promise it to your CEO, but if it does Then you can have ultimate accountability and you can prioritize against the things that the organization deems most important. Sell, design, build. When you have an idea, when you have a product, when you have a new channel, when you have anything that's worth testing, go out and sell it first. And if you can do it in sort of its most nascent form, then you can design something, then you can build something, then you can have a level of confidence in what you're doing and you will have a lot more success and you can snuff out bad ideas well before they cost you tons of time and tons of money. So those are six of the go to market operating models that we used. And we've got some time for questions if anyone wants to dive into any of them. Thank you.

Thank you very much for fantastic presentation. I had one question about the shorten this cycle and my learning is that the customers move in the car purchase.

Process in their own schedule.

So how did you use this to kind of look at the different leads.

And cases that you have?

Yeah, it's a great question. Basically the idea is, well, the customers have, they're the ones who set, you know, what their timing is on all of these things. But what I've learned is that we can influence that a lot more than we think we can. And there's only one way to find out. Right. And so you try it. And I remember, especially with our mid market team, the whole argument was, well, you know, Sterling, these are much larger customers, they need a lot more time, they have a lot more processes we have to get through from, you know, procurement to all these different things. And the truth is, is once we moved, it was hard. I'm not, not saying it's easy, it was very hard, but we could influence that and we could take more control of that than we thought previously.

So thank you.

Yep.

Hey, when we think about goal achievement, you talk about hitting budget, hitting quota.

Target, which is ote, how do you.

Remunerate or do you remunerate against it in goal? Or is it just the celebration you mentioned?

No, no, we definitely built in mechanisms for that to be more advantageous for what we were chasing. Here's an interesting point. We sort of had classic accelerators and decelerators once, you know, based off of the, the quota line. Right. But when we would, when we would go after those, those stretch goals, a lot of times we used it as an opportunity to take the money that, that we would have spent and put that into like some kind of a really cool, almost extravagant Activity that we did as an entire team and they became these, these pushes that we really looked for, forward to and we wanted to hit because that was when everyone would bring their plus ones and we'd go to a really nice, you know, ski lodge or we would do something special. But the simple answer to your question is yes, we would change. You know, the compensation obviously changed. You'd get into your accelerators once you got over, once you got over goal and you'd be in decelerators at certain percents below quota.

So. Thank you. So, so when someone is so the whole team basically. So the goal requires the whole team to hit. If the whole team hits, then everyone goes.

Well the goal is sort of a raw number. So it's not like everybody, everybody would hit their goal. Some people are coming in at quota or budget, but when it rolls up it would actually like when you looked at our plan for the month or the quarter, we had to be above that.

Thank you.

Yep.

Hey, nice to you meet, meet you. I like the part where you say that marketing has to be accountable for, you know, for extreme ownership as well as like sales. Right?

Yeah.

And for me the interesting part is that how to make marketing more accountable. And you were mentioning the creative roles in marketing. What sort of goals maybe you can uncover did you use for marketing to you know, like hey guys, you have to stay put.

Yeah. So marketing always marketing had a quota for us from the beginning of time and the quota was essentially based in two parts. So we had the pipe right. The like. By the way, this is converted opportunities. So it's actually like a sales rep would convert the opportunity then that counts towards, you know, the marketing goal. So again you're driving the alignment. But then marketing was again based on closed one, right? Closed one, new revenue. And so they have that number and they have that responsibility and you need to set that up. And in my experience great marketers love that and bad marketers run away from that very, very fast. Like I talk about it a ton in the interview. Like hey, this is how we structure it and you know, you're going to, you're going to be a demand gen person here and like this is how, this is how we run it. And it was a very good sorting function because the bad ones are like no, no, no, no, no, I'm working on other stuff. So when you talk about the creative roles, well, they're doing a lot of other things. Right. They're working on brand, they're working on different things. You still have to figure out how to tie that back into. Into those. Those things as best as you can. It's not perfect, but you have to work on it. And sitting down, having smart people talk about it and debate it, you figure out what works for you.

How did you measure brand?

What's that?

How did you measure brand?

Like, well, so like, we would. We would have. Brand would, like, have a number. I know that's like heresy to a lot of people, but brand would have a number and their number was the organic number. Okay. So like I'm saying, okay, you want credit for basically everything, that's fine. The organic number. Right. So everything we didn't use performance marketing dollars for. That starts to. That starts to. To get wrapped into. Into that. Yep.

Quick question.

So completely agree on apps towards pipeline. Agree on marketing revenue towards your what?

However you measure your yearly goals, our.

Struggle is how do you ensure that when that lead closes and it closed.

One, how do you determine marketing or sales?

Right.

Because I feel like, well, marketing brought it in for you as an inbound lead.

Yeah. But we were already chasing it ahead of time. And then that causes friction between the two teams.

Yeah.

And so managing through that, because what we don't want is everyone has to participate in the final goal. How do you make sure that you.

Don'T drive that friction between the two teams?

So it's a really good question. The first thing you have to do is to make that matter just a little bit less. Make it more about the overall goal that you're chasing together and than about what portion of this is marketing source, what portion of this is coming from outbound, what portion of this is coming from channel. That stuff matters, but you have to make it matter less than the overall goal. Then you're getting into things like, well, do you want to do last touch attribution? Like what. What model best suits you? And you kind of just have to set those rules as best you can and live with there being some gaps and some inconsistencies. But the underlying principle is make it way more about the overall goal that you're chasing. Put people on the same team instead of splitting them out and saying, well, you know, like, marketing's over here and like, we did our job, but sales, you know, outbound missed this month and they didn't do it. So marketing, good job, sales, bad job. There's no such thing. Like, we either got the job done together or we didn't. And sometimes that's going to mean that marketing sourced is going to beat by a lot and sales is going to struggle Sometimes it's going to mean the exact opposite. So just work on making sure everybody's aligned to the right North Star. And then when you're splitting things out by line item, that should be secondary.

Hi. I really like the model of name number and North Star.

What would be kind of bringing that to life? A couple of examples of. Would that be, Sam, Your job is.

812 million this month and the North Star is what? And then also, how do you avoid having.

We've got like 20 different things all under Sam. Yeah, it's a great question. So here's what it looks like in practice. Okay. In practice, people can have their name next to several different numbers. For example, a VP of Customer Success Success. Like, let's say they have an expansion number that has their name next to it. Let's say that they have an nrr, an NDR number that their name is next to it. And you're going to have multiple. But you do have to like, clearly define the North Star for the entire organization. So most of the time that's like, that's like an ARR number. That's a usage number. That's, you know, you know, new logos. Like, what is the model driver for your business? And that is, that is the North Star. And that's why it's so important to have a North Star is because you will have your name next to several. Several different numbers. You will be responsible for. For multiple things at once. We can't simplify it down to just one and one. So you have to know what the North Star is, is so that you can prioritize appropriately and know which is a glass ball that you won't drop under any circumstances.

Hi.

I love the concept of swing that he introduced. I'm not sure I. In my experience, the water surface is the same because I work with sales teams and it often feels like white water rafting rather than being on a smooth surface. How do you look for swing when it often feels like all you want to do is for everyone to stay in the boat and to negotiate the river? Yeah, great analogy. Is a lot like whitewater rafting. The way that I think about swing is not necessarily that, like, there's, there's no variations and, and, you know, we're in smooth waters, just going as fast as we can. I think about it as. Is everybody who has an oar? Is everybody who has a paddle, Are they in sync with each other? Because I don't, you know, if you're going like this or if you're going like that. I need to make sure that you're all in sync, that you're not turned around, yelling at somebody over there that I'm not like that. Because a lot of times you'll have to play policeman if this, if this goes poorly. You have someone's data set over here telling one story, you have a different person's telling another, and you're trying to mediate a dispute and see whose fault it is and who's in trouble. That is what we're trying to completely get rid of. We're all focused. We all know where we're going. We're all rowing in the same direction and. And we're all doing it with the same amount of force, whether you're going over some waves or whether it's smooth sailing. And to be. I don't know what smooth sailing is either. I don't think that exists. But you want those teams to be rowing in the same direction together. That's what it means.

On the B3, C3, what were the.

Actual questions that you were asking?

Yes. So top three, bottom three. So if you and me were having this, I would have a template and it would say, what are your top three strengths? The things that I'm noticing in you this particular quarter that are just amazing. You're a great hire, you're a great recruiter, whatever. And then bottom three is what are the things that I, as your manager, am identifying that you need to work on? Okay, well, you're not organized enough or you're not like, whatever it is. But the questions are, what are your top three superpowers and what are your bottom three weaknesses? And we're going to write those out, we're going to talk about them, and we're going to make those. The subject of our one on ones for this quarter.

I wanted to pick up. There was this one image and you.

Mentioned the head of product was taking.

A nap at the airport and you.

Were on like the sales tour and.

Freaking head of products, man. So how do you basically get the.

Product on doing like a crazy, you know, tool like this review.

That is a great question. And the answer is you have to make sure that his or her North Star is the same as yours. Because our North Stars are the exact same.

Same.

Right. And that is we need to get here by the end of the year. Right? We have to. We have to expand, we have to launch new things. We have to get there. And our North Star is the same. So you're on the same flights, you're talking to the same customers again. You have different jobs. I'm not trying to make it seem like you don't, but you have to be aligned with that person. By the way, it goes for finance in particular too. And if you can align those functions with the same. Same Northstar, they'll be on the plane. They'll be on the plane right next to you.

Good stuff.

Thanks.

Yep.

Okay.

I think that's it. Thanks.

Everybody.

Will be kicking off in 10 minutes with Edith Harbaugh.

Top 10 mistakes getting to 100 million.

ARR with launch darkly.

Sa. Sa. Sam sa. Sa. Sa. Please welcome Launch Darkly's executive chair and co founder, Edith Harbaugh. Hi, I'm Edith. It's great to be here. You know, there's nothing like a band, a live band when you're walking up on the stage in London. So I'm here today at Saster Europa to talk about top 10 mistakes getting 100 million. And my qualifications for this is I started off in engineering. I was product, I was marketing, I was sales and support, and then I was founding CEO at LaunchDarkly. So the company started in 2014 and is now over 100 million in ARR. My joke is that I've always kind of started off in engineering, then worked my way out to the outer realm of the company. So my. My new role now is executive chair, which is super fun, but I'm going to tell you some lessons learned from when I was CEO. So launchDarkly, if you haven't heard of it, is a feature management platform. We have over 4,000 customers worldwide and nothing makes me happier than when I go to a conference or event and somebody says that you. They use launchdarkly, you know, I started it because of was something I was really passionate about as a software engineer and product. It helps our customers release new features, migrate safely, target features, use, experiment, and also do quicker mobile releases. So if you're a customer, thank you. And if you're not, give it a whirl. And that's all that Jason will allow me to say on that. So thank you. So 100 million does not happen overnight. So my job as a founding CEO was number one, to always make sure there was enough money for the company, to set the vision for the company and then to drive forward. And these sound really simple, but it wasn't. So 2014-2016 was this very slow grind from zero to a million in ARR. The literal quote when I went to pitch Josh Stein, who ended up doing our a waste. Wow, you guys really grounded out, huh? You know Cause he's looking at, you know, our first month of selling, we had one customer. Our second month we had one more customer. So if you're accruing customers at that rate, it's a long grind. But then things started going faster. So the period I'm gonna cover today is from one to a hundred. I think there's a whole nother talk I would love to give on the 0 to 1, but that's a different phase. So my hope with the talk today is that you learned something. I hope you laugh at a couple of my jokes. I hope you laugh at me and the mistakes I've made. And I hope that if you're a founder or working at a startup, that it gives you some recognition of. Here's some pitfalls along the way. Either ones that you might be about to make or ones that you've already made and realized that you were not alone. All right, so with that, I'm going to start through the 10 things that were maybe mistakes. The first sounds really obvious, but if you're not making mistakes, you're not in a startup. If you're just doing the status quo and doing the things that always work, you would still be at a big company, you'd be at Microsoft. And I learned this phrase, everything is up to the right. If you zoom out. Went after our Series A, things didn't go so well. So we were an eight person seed company with really tight rhythm and we got our Series A. We hired our first VP of sales and he was this great guy, a wonderful pedigree, had worked at some, you know, really hot startups. And he said he really wanted to join LaunchDarkly. And you know, I was like, wow, this guy has amazing pedigree, really passionate about customers. Great references is he joined as our first VP of sales. And the issue was about after three months, he came to me and he said, edith, are customers developers? And I said, yeah, developers. Yeah, developers. Love launch. I love developers. And he said, you know, developers are a real pain to sell to. I'm like, what? He's like, well, they're very technical. They don't really like PowerPoint. They're very exacting and they want the thing. They want a lot of proof points. I'm like, these are my people. I'm an engineer. He's like, I don't like selling to developers. And he quit. Great guy, by the way. He went on to start his own company, which I actually angel invested in. So nothing to do with him, but more just there's this Persona Mismatch of. He didn't like selling to developers, and developers were corporate, poor audience, and there was nothing you could do to fix that. So I had to very sheepishly kind of go to my new board member and say, hey, you know, all our forecasts for the year, when we said we were going to go from 1 to 5 million, we're going to be lucky if we eke out like 1.5 million, you know, because I got to rebuild the sales team. And I was extremely nervous when I went to tell you this. And what Josh said was the perfect thing to me, which was everything is up and to the right if you zoom out, because I said, you know, we're not going to be up to the right for a couple quarters because I have to rebuild. And he was totally right. We rebuilt the sales team. It turned out that the, the salespeople we hired were great and they started closing big deals and, you know, one of them, and then both of them actually entered the million dollar a year club, which was pretty fun. So the mistake I made was a little bit, I think, just being blinded by this guy with a great pedigree without really digging into whether he really cared about our customers. On the other hand, though, one of the salespeople that we hired at the time had never sold to developers before. He'd been a Twitter ad salesperson and he turned out to be an amazing salesperson because he just had so much empathy for our customers and he never talked down to them. They loved him. I went on a sales trip with him once and I never seen this before. The customer gave him a present. What? Yeah, he's been such a great salesperson. Cool. All right. I alluded to this before, but if you're a fast growing company, there are big changes every year. So if you're growing from 1 to 100 million, that means you're basically doubling and tripling in size every single year. And a lot of people are really uncomfortable with that. What I always tried to do was to persuade people that, like, hey, this is a fun adventure and you're going to have fun, but it's going to be different. A screw up. I did in the early days, again from the transition from seed to A was after we closed our A round, we started hiring a lot more people. And also some of the people who had been there from the seed days didn't really like the new company because they said a 25 person company is actually a lot different than 8, which is true. So we had a fair amount of turnover. I Saw this as just kind of normal turnover and wasn't really concerned until we were trying to get our be together. And I got this frantic phone call of why is your turnover so high? And I'm like, what turnover? What? And they were like, what about this person, this person, this person and every single person. I, I had a really good justification of why it looked like that. So what VCs do is they'll have some poor associate look at your LinkedIn and look at people who have titles for companies who are going in and out. And what had happened was we'd had some contractors who we replaced with full time. We'd had a summer intern who was never meant to be permanent. And then we had a couple people who were a little bit of a mishre. But when a VC looked at this, they're like, what the hell is happening with your turnover? So a change that I made immediately was to pay a lot more attention to culture. We started doing culture amp surveys just to get a pulse. And I also started doing a lot more skip levels with the team. Skip level is when you meet regularly with somebody to kind of say, hey, what's up? And I think this really helped our culture become a lot stronger and in fact so that people started commenting about how strong the culture was. But it was definitely a wake up call for me about if you don't pay attention to culture, culture will run away from you. Revenue is funding. So everybody here I think is in some sort of startup. If you didn't see Jason's talk yesterday, it was very eye opening. He basically talked about the compression and valuations, that it's harder and harder to raise money and that you have to have more revenue. I think this is always good to have revenue because VCs can be a little fickle in terms of what they fund. But if you have revenue, you have a lot more leeway about when you take an investment. And also, by the way, the VCs like that because that way they know that you're going concern. So I always try to pursue this path if we had revenue. This really helped me a couple times when I completely screwed up the VC pitch. So a mistake I made was VCs like to talk to you, that's not the mistake. And they'll try to lure you in and they'll try to extract more and more information from you. Again, in the A to B test timeframe, we were getting a lot of hits from VCs who want to learn more about the company and they said, come in, you don't have to have a deck. Just come in and talk to the partners. And I was like, okay, sure. And this was a huge mistake. I went into this, what turned out to be a partner meeting, and I was completely unprepared. I had looked at it as kind of like a workshop of, I have some rough slides. I'll give you some feedback. They were looking at it as a pitch meeting where they expected me to be on. Polished, convincing, compelling. I was not. I had some rough drafts with slides. I was like, what do you think about this? So the other funny thing I'll just briefly tell you a story is at the time I was back in D.C. to visit one of our Washington D.C. to visit one of our big customers. And for whatever reason, my iPhone at the time had wiped out all my contact contacts. It was this bad iOS release. So I had no idea when somebody called me who they were, which was kind of terrifying. It was like, is it a customer? Is it a friend? Is it a vc? Is it a random number? So this number calls me and I pick it up and they're like, hey. And I'm like, hey, how's it going? I'm like, it's going good. Me, I'm trying to figure out, is this somebody trying to sell me car insurance or what? And I'm like, I'm in D.C. visiting customer. They're like, oh, yeah, customers are great. And then it turned out to be the VC that I had gone into the bad pitch meeting with, and he was calling to tell me that they weren't going to fund. This was not great for me because I was not prepared for this call. And I got off the phone, I was like, I'm going to do 10 times better than the next pitch. So every time I went into a pitch meeting after that, I was as prepared as I could be. Even if I didn't need to have a deck, I would have a deck ready. I would have my pitch ready. I would have numbers ready. They never took it for granted again that these were automatic yeses. Always be prepared, and also always have the backup plan of revenue. Every time I got a little bit nervous about VC funding, I would try to close more deals worked out. I alluded to this before when I talked about changes. Every single one of these phases of 1, 5, 10, 20, and 50 million, you're probably going to be hiring completely different people. The people you're hiring at 1 million are the people that want to build the machine. The people you're going to hire at 50 million are the People who want some sort of machine that's already running. So really be careful about when you interview people about what they actually want. Startup gets thrown around a lot, and startup changes every single phase. So you might get somebody who thinks that they want to work at a startup. What they really want to work at is Google. They're like, oh, a startup Google. They have free massages and free bikes. Awesome. You're like, no, actually, we're 15 people and the refrigerator makes a ton of noise. So be careful about who you're hiring, be careful about their expectations, and be careful about the infrastructure that they expect. Again, we had people who came in and they just expected a lot. And we're like, no, we want you to build that. We don't have that yet. Which gets me kind of to executive recruiting. How many people here use an executive recruiter? All right, so let me briefly explain what a good executive recruiter does. A good executive recruiter, I call it kind of like a real estate agent or a matchmaker. Say you're in the market for a new cmo. If you just put up a listing that says you're looking for a cmo, it's probably not going to get a ton of traction. You're either going to get a lot of random resumes or people who are just not really a good fit. So a good exec recruiter knows who's in the market, knows who's available, knows who maybe doesn't really want to advertise that they're available, but is looking for a job. So the most recent search we did actually this way was a GC at General counsel. And that was a really good fit because they got what LaunchDarkly did and could find a great candidate. However, a bad executive recruiter can really torpedo you. We had one executive recruiter who got this great candidate, and I found out later that the candidate almost didn't join the company because of the high pressure tactics that the recruiter used. The executive recruiter gets paid when a candidate signs, so their motivations are a little bit different than yours. So the executive recruiter was telling the candidate they had to sign within 24 hours or I would pull the offer. I was like, no, it's not open for three weeks, but if you need to go talk to your partner, spend some time thinking about it, of course it's open. So make sure that your executive recruiters line with you on how they close candidates. Candidates. Another issue you could have with exec recruiters is just them trying to, again, jam somebody in a Real issue is if they like, say you have budgeted £150,000 for a role and you're like, this is about what we think the market is. And then they keep bringing you candidates that are 250 and it's just not going to work. You got to have alignment. So a good executive recruiter is totally worth it. A bad one is not. The main reason an executive recruiter is totally worth it is because you need to fill that role. Which brings the next one. Get leverage. I was guilty of holding onto stuff way too long so many times. So we did not have a full time finance person until our B route. So up until our B round, I was still running all the models of the spreadsheets. In my mind, this was not a huge overhead. I like Excel, I like numbers, I'm a nerd. It was taking me a couple hours a week to keep running the models and I didn't see this as a huge overhead. In hindsight, it was a big drag on the org. Those two hours that I was doing these spreadsheets was two hours that I could have been doing something else. And there's a lot of other things that a full time finance program person could be doing that I just had no room to squeeze in at all. So as soon as you start growing, look at what you're spending time on and see if you're really the best person to keep doing it. Again. Something I was guilty of was I didn't have an EA until pretty late. An executive assistant. In my mind, it's like, well, it's not that much time for me to schedule these meetings. You know, I'll just fit it in. Finally, what happened was our then VP of sales said, edith, I want you on the phone with customers, not trying to schedule your own entire meetings. That was a wake up call to me. Like, I saw it as, hey, I can just get everything done because I'm Superwoman, not, hey, even Superwoman needs to narrow her scope a little bit so that she could be more successful at that. So my advice to everybody is as soon as you start progressing, try to get leverage wherever you can in your own tasks and don't hang on to stuff for too late. All right, Pricing, it's funny. So pricing is one of those things that can be a total time suck because there is no right answer of it. One of the issues we had at launchdarkly was we sell both to B2B and B2C. So these are totally different markets, sometimes with different mental models. And we also had this kind of existential talk about, are we B2B or B2C? What happened was our first attempt at pricing was we tried to go cheap and cheerful. We had a click through where you could go and sign up with a credit card. Easy peasy, don't need salespeople. What happened for us is that absolutely nobody wanted to use our click through agreement. Everybody wanted to talk to a salesperson, everybody wanted some sort of custom contract. And I was a little annoyed by this, to be honest. I was like, you know, kind of like, please just use our nice credit card thing. And what I did to try to dissuade people from wanting custom contracts was I said, well, if you want a custom contract, we're going to charge you a lot more. Thinking that this would scare people off, people were like, great, custom contract us. I was like, shoot. And that was when I started using my infamous phrase that the engineers teased me about, which was, I should have asked for more money. If you're in an enterprise sales cycle, people expect you to ask for money. People are paying for a premium service, they're paying for a premium ela. They expect it to be higher. And the insidious thing is that they also expect it to go to procurement and get knocked down by 10%. So if you don't ask for more money out of the gate, you're actually kind of miss selling yourself. So underpricing can be as bad as overpricing in my mind, because it also then pigeonholes you. So in the early days, I did all the sales and I didn't really know what the product was worth at the time. I also was really shy. I was a very shy engineer. So I would ask for $29 or $9 or $2 if you can afford it. So we literally had subcontracts on the books that were for $9 a month. And the idea was that over time, these customers would hopefully start upgrading and pay us more money. What happens if you have a customer that is paying you $29, $79 a month is that you have anchored them for life, that this is a product that is worth $79 a month. So no matter how much you have other customers who are now paying a lot more and getting true perceived value out of it, if you have $79 a month customers, they don't want to move up at all and they have a budget for that and that's what they want to pay. So there's no right answer. I just encourage you all at your own startups to think about what value are you providing to customers? What is our perceived value for that? And if you have any hopes that people will automatically start paying you more money, it's very rare. People will pay what they anchor at. Always keep creating category. So when LaunchDarkly started in 2014, there was no such thing as feature management. How do I know that? Because I made up the word feature management. I made it up because I'd had this background in portal management and content management and I'm not very creative of a person. So I was like, what do we do? We manage features. Feature management. The reason why I wanted to be called Feature management is at the time people were doing feature flagging feature toggles. And these made it sound like a toy. Like, if you say, I'm going to pay money for feature toggles, people are like, well, that's just a Boolean. That was literally the quote that we got in Hacker News. Why would anybody pay anything for Boolean? So we were trying to up level and move it to feature management. The other reason why we wanted to be feature management is back then, this is a very different world. People were trying to compare us with Optimizely, which was a pretty entrenched company at that point. Optimizely, for those who didn't know, had come out of Y Combinator and their sell was that you could do on the fly, experimentation, a B testing. So whenever we started trying to compete head to head with Optimizely, it just totally flopped. They had a nice WYSIWYG interface and they sold to marketers, we sold to developers, but if we got in a sales cycle against them, it just completely disintegrated. The other thing we found was that people were experimenting a lot less than everybody thought. So my own background had been I'd been at tripit, where I had experimented heavily. My co founder had been Atlassian and he'd also experimented. What we found when we got out into the real world and were trying to sell in 2014 and 2015 was that people really weren't experimenting as much as we'd hoped and they were just struggling with basic releases. So we did this big pivot into feature management. What we found now in 2023 is that finally there is enough momentum in the market that experimentation is viable. People who have reliable releases are able to do experimentation. So we were able to keep creating a category, but we had to get some beachheads in first. Refreshing values. How many people here have written down values? Awesome. So one of the things we did when we moved From a seed company to a company is we actually wrote down our values. When you're eight people, you just kind of know your values. You all eat lunch together every day. You know what's happening. When we got our A round, we knew that we were going to hire more people and we decided to write down our values. So my co founder and I did a survey of the eight of us and asked what our values were. And from that we kind of distilled it down and we thought we did a pretty good job. So there were things like learn and grow, which was a big one for me. If you're not making mistakes, you're not learning. Respect for each other, our customers, our community. But then you can kind of see when we ran out, oof. When we were doing our values, because we had this last one which was workers life. And our literal thought at the time was, this is a little clunky, but we have other things to do right now. We'll just leave this be. And over time, over the next three to five years, this value of work is not life became a little problematic in that what our intent had been was we want to have a company where you're not working 80 hours a week. We want to have a company where you have a sustainable pace, where you can have kids. My co founder had another kid, or engineer had two more kids. We wanted to be a place where you could have a life but still get stuff done. What happened with this work is not life value was that people started weaponizing it of we don't have deadlines, I don't owe my other teams anything or I don't really have to work very hard at all. It was like, no, this is not Tim Ferriss four hour work week. We owe our customers, we owe other teams. We got to do more work, but in a sustainable way. So I actually, after five years, I decided that one of our actual annual objectives was, was gonna be to refresh your values. And this time we hired a consultant. And that was great. Again, this is the way to get leverage. When you're eight people, you could do a survey of your company very quickly. When you're 500 plus worldwide, you actually want a consultant who could come in and interview people, run focus groups and get real input. One of the most interesting things was when we did this survey, about 90% of the company loved our old values. They didn't want to change. I was the one that wanted them to change. I wanted them to reflect the company that we were. So we did this big project and we changed the value of work is not life. To work impactfully, work sustainably. And I think it was a big success. But don't be afraid to change values. And also, like I said, the mistake I made was, I don't know if it was a mistake. It was just having a value that wasn't quite right. And the longer that time went by, it just kind of didn't sit right. More and more and more.

All right.

So I talked a lot about culture, about making money, about building a company and scaling. I really want to reinforce that there's no right playbook, just play pages. A lot of the tactics that worked in 2015, 2016, 2017 might not work now, but other hand tactics that didn't work in the past can work now. So a real example from LaunchDarkly is in the early days we were experimenting with cold outbound emails, traditional BDR activities. We had these nicely written emails and they went out and the issue was absolutely nobody understood what feature management was at all. So just nothing resonated. We finally just terminated the campaign because I at the time was being the AE and I would just take a lot of calls from people that wanted to have an agile consultant. I'm like, no, that's not actually what we do. The one success we did have out of it was we sent a cold email to somebody at Microsoft and he said, this is the greatest thing I've ever heard of. Can you build a connector to Visual Studio and can you come talk at Microsoft Build? And said yes. The other thing he said is we really want to show that we're startup friendly. Can you get a booth at Microsoft Build? And at the time, our marketing budget per year was $36,000. A booth was about $40,000. So I said, well, that's kind of outside of our budget. He said, we'll give you the booth for free. So from that one cold email we got a wonderful relationship with Microsoft and a free booth. Their signage was very nice. So this was a play that we ran that had a very limited result but worked out. And then three years later we could ramp up and have an actual BDR team and reach out to customers because people knew more what we are and we had more space in the market. So I really encourage everybody. If you're interviewing or thinking about your company, it's tempting to say I want to run the box playbook or I want to run the LaunchDarkly playbook or I know that deal spoke earlier today, I want to run the deal playbook. The right Playbook is a bunch of pages that you're tearing out of other startups about like what should my pricing be, what should my culture be like, what market should I go after? And you gotta reassemble them for something that works for you. With that, here's a wrap up slide. I'm just gonna quickly run through it. Path to 100. There was a lot of, if you look at it, a lot of dip, then it went up. Be ready for big changes. I cannot emphasize this one enough. Revenue is its own funding. It's easy to get wrapped around the axle of what do VCs care about? VCs care about companies that make money. If you make money, VCs will care about you. Hiring changes over time. Value your time and get leverage. Executive creator is worth it. No right answer for pricing. Always be creating a category. If you're noticing carefully. I tried to weave launchdarkly into at least four different slides. Always, always, always talk about your company. Refresh your values if you need to. And again, startups are fun. You're going to make mistakes, but please take some pages and have fun with it. With that I'm going to turn it over to Q and A. So if you're interested, there's a mic there and there I can start assigning people to ask questions.

Hello, my question is about hiring. So first of all, you want to hire people who already done something that you want to achieve, but at the.

Same time, if they already done this.

Why they should be joining you. So for example, let's say you want to hire like head of marketing. But if they are already a great head of marketing, most likely they will be interested in moving to the VP marketing CMO role in the bigger companies. No?

Yeah, that's a great question. So let me paraphrase it. How do you get people to join your company who have done it? And it's funny, this was a constant thing with me and one member of our board. It's like, well, the person who's gone from 0 to 100 probably doesn't want to join at 1. They probably have a lot of opportunities. So what you could do is you can look for somebody who's maybe the number two at a role or an adjacent industry. The adjacent industry doesn't always work out, but you could get kind of somebody who's just that one step below. But it is hard because people have this vision of this perfect person and you're like, you want that perfect person before they're the perfect person and they become perfect while they're at your company. Good question.

Hello, Edith. Thank you for what you've created. It's helped us really accelerate our product development process. And I like sneaking in myself and enabling some features for me to test. But my question for you is the.

Values that you talked about, and with.

Changing them so regularly, are your values still, you know, and your co founders still kind of aligned with the wider company values? Are they still in there? And how do you roll those values out with 500 people when you're refreshing them and making them real, rather than just, you know, kind of an update on a wall somewhere?

Yeah, that's a great question. So we actually put a lot of effort into the values. So the original values, I actually did a session with all the new hires. So every two weeks to a month, I would do a session with everybody who joined. It was off the record. I said, don't tweet me, don't quote me, but you could ask me anything you want. And I would walk through the values and why they existed. And I love doing this. I thought that it really instilled with the team what the values were, and it actually, it was one of the reasons why I decided that some of our values were clunky. One of our other values at the time was teams, not fiefdoms. We're nerds. And I got tired of answering the question of what's a fiefdom? So when you repeat your values over and over and over again, you. You learn what's clunky, what's not working. So when we rolled out the new one, we actually had consultants who helped us. Like, we did a town hall. We did focus groups. We did a lot there. I don't want to spend too much time on, but it was a deliberate effort of making sure they weren't just words on a wall. Even things like, hey, are they easy to remember? And do we have examples of them? I think you're next.

Thanks.

Enjoy that talk. So my company, SearchPilot, has the exact problem of the category creation that you're talking about. We're trying to do SEO AB testing. I'd love any tactical examples you have or things that worked or didn't work.

On the path to successfully creating the.

Category that you've done.

Yeah, I mean, just everything.

Data representative.

So the advantage we had was that we targeted the developers. And what I learned was there wasn't a lot of technical content out there about what we did. So simple articles that I thought were kind of throwaway would get a ton of hits. I wrote Something like the top 10 ways you could feature flag. And that got some traction. I looked at what the number one hit for feature flags at the time was. It was feature flags, the worst kind of technical debt. So I wrote a rejoinder called feature flags are the best kind of technical debt and submitted it to QCon. I did a podcast. I think podcasts are a little oversaturated now, but at the time there just wasn't much out there. Just constant, constant, constant, everything you can to get the word out. And then our engineers, at one point we assigned them an article in every sprint. It was literally like part of your sprint is not just checking in code, but also writing about it. And one of those articles about database migration is still a really good article that seven years later gets a lot of hits. I could talk about this for hours.

Appreciate it.

Thank you.

Thank you for your great talk.

My question is also surrounding hiring. So you mentioned you hire different type.

Of people at different stages of growth.

And I was wondering what from your.

Experience are the typical threats, what you're.

Looking for in a 20 million plus ARR business?

Sorry, can you repeat that?

So a 20 million plus ARR business, what are the specific types of people you're looking for at that stage from your experience?

Yeah. So one of the screening questions that I would ask is what's the smallest place you've worked at and what do you like and not like? And that was pretty good at sussing out what people actually liked at different stages. At 20 million you have at least basic processes. You have departments, you don't just have one team, you probably have functional leaders. So people who are comfortable with that, if they say, hey, I still want to be in a 10 person team, that's not going to work when you're at 20 million unless you're probably not in a SaaS business.

Thanks for that.

I'd like to understand if your, I.

Guess, technical requirements for your salespeople changed.

Over time as you grew.

Yeah, it's funny. So I referenced that one of our most successful salespeople, and he's still with the company by the way, does not have a technical background. But what he did was he just was extremely willing to learn on the fly and ask questions. And then he never talked down to customers. So he was always just very empathetic. I could say this as an engineer, engineers could be kind of dismissive technically sometimes. And that's not a good look for a salesperson. If a customer doesn't understand something, it's your job as a salesperson to educate them, not to lecture them.

Hey, thanks for the talk.

I think you recently stepped down as CEO and hired a new CEO and I was wondering why now and how.

Did the process go?

So it's funny, our PR firm is like you stepped into another role and I'm like, no, I already stepped down, you know, 100 million. It was a good time to do so. I'm really excited about my new role.

Can you tell us a little bit more?

I got time for more SEO questions. All right. Jason, uh.

Oh, I just want to your values with your co founder on. Sorry, help me. I'll misquote it, but work is not life. This is not one I struggle with or I think about all the time the world. You have to be more and more agile today. I think in SaaS and software we all know there's so many competitors, things are faster and what have you learned and balanced that on the way to 100? And I think the views have gotten even more polarizing. I meet more really young first time founders now that literally are working 7 days a week and want the most intense cultures. And on the other hand, I think during lockdown a lot of folks worked even less. Maybe a lot of. A lot of folks started working 15, 20 hours a week. So what have you learned on that journey to 100 and how to. How to make that work and but be competitive because you had to win in a competitive category.

Yeah. Well, thank you, Jason. So I think my intent was. So I'd been in startups since the dot com era and I'd been that person that worked 80, 90 hours a week. I remember sleeping under my desk because the BART had shut and it's not sustainable. It leads to a lot of burnout. It leads to people just not doing their best work. Is the other thing I learned that I was working more hours and I would come back and look at my work the next day. And I had made so many mistakes. I was in engineering at the time and I did some work that ended up getting patented, which is great. So clean technical writing was really key. And if I was in this brain fog, I wasn't doing great work. And the other thing that would happen is if you get a bunch of snippy people who are working on little sleep, they start getting very snippy with each other. So it's not a productive environment. You think that you're working more, you're really getting less done. So what we were trying to build was this thing where you could do your best work and definitely There were some weeks where we were working 80, 90 hours, but those were kind of these peaks and valleys of like, you know, I talked about how we did the Microsoft Build conference. You know, at the time we're an eight person company, so all the engineers like came and ran booth with me, you know, and I could ask them to do that because I'm like, hey, this is a one time thing. You know, we're getting stuff off the ground. But if we'd done that every single week, like I know how much work goes into a conference. And so you have to balance asking your team to go up there and then saying like, hey, there's going to be this other week where it's going to be a little less hectic.

Hi.

Firstly, as a woman in tech, I have to say your story is really inspirational. Inspiring being a technical founder and growing the company like you did. So thank you. Secondly, Obviously following the 2021 series defunding, when you think about the future growth and next stage of growth for your company, what are your thoughts when it comes to thinking about a possible IPO in the future? I think it's just like everybody else, it's one path for the company. What I always told the company is it's just one step in a journey. You can go up on stage and ring the bell and then you still have to run a company and do a lot of work. So it's just a step in the journey. Where I've seen it backfire in companies is when they get too wrapped up in this one event and then life continues after it. You still have customers. Well, Jason, you going to ask me another hard question? Are we?

But I think you, you, you hit on some interesting things of really going from a self service PLG motion in the early days. And plg, everyone wants to do plg. They think it's a cheat code. Like there's so many folks that think, God, sales got so expensive, I spent all the money in 2021, I'll magically turn on PLG, these three initials. It sounds like you really went the other way very early from customers. And what did you learn about some of the fallacies of plg? Fallacies of self, beyond just pricing. But that was very interesting as well.

I think at least in our early days, what I discovered was that people weren't buying a product so much as they were buying a belief that the company would help them. So I remember I went to an early sales call@circle CI who was actually friends with us, and they asked me a couple Questions answered. The CTO also answered. I was like, well, why did you need to do this? They're like, oh, we just wanted to know that we could trust you. So a lot of sales is trust. So the reason why PLG didn't work for us very much in the early days is we realized that we were a new category. SaaS was still a little risky and people really needed to feel like they could trust us, I think. And I cribbed this from another talk, so I forget which one. Also, the belief that SaaS is cheap and cheerful and something that's $29 a credit card is being challenged that now SAS can go for hundreds of thousands of dollars. And at that point a CFO does want to get involved. And that's not something that could be very plg. You can run a. Let me say there's this false economy. People still love to do trials. People like to see the software, people like to know that it works for them. So like the old enterprise scare tactics of you have to sign a contract, even install it, don't work. But if people are going to go live in production, they do want to have some sort of sales motion to know that there's a company behind it, to know that there's something that they can call when they need help. Cool.

And maybe one other interesting thing you said in the talk, if I get another one, you talked about the AE that had come from Twitter, that was curious and thoughtful and the customers liked it, was able to succeed without a technical background. But to take that, let's put how many folks in the early days of launchdarkly, maybe phase how technical, and I'll put technical in air quotes did the sales team need to be. A lot of folks struggle with this for B2D, how technical they'd be. And a lot of folks in vertical SaaS struggle on a variant of this, which is domain expertise.

Right.

I'm selling a deep environmental compliance product. Do my reps need to know how this works? And it's, it's a very interesting question because I don't think the answers are, are obvious. So what did you learn about domain expertise being technical?

So I, it's funny because I, I do have an engineering degree. My co founder has a PhD in CS. So I would say we were both considered technical. But when we started hiring our first salespeople, I remember telling them that they were an Expert in what LaunchDarkly did, they were trusted advisors, and that nobody knew as much as they did about LaunchDarkly and that really helped them with the boost of confidence of hey, I'm here to help the customer. I don't have to understand everything about what they do, but I need to be able to understand how LaunchDarkly works with them and that helps slot it in of. I'm not here to lecture, I'm here to help.

Got it. So you did all the first 20 sales executives on the team, did they, did they need to be able to speak with enough confidence to a VP of ENG or cto? How did they overcome that hurdle?

I.

From my perspective, I think about it more simply, which is most VPs of Eng and CTOs, they won't suffer for fools like they smell a fool in the sales process and they just, they have an allergic reaction to someone that doesn't under. But, but most sales reps cannot. They have to find a way to speak and work at that level without having that skill set. So how, how, how smart did those first 20 have to be or special?

So I am over time but it's Jason's conference so I'm going to answer this one. It's a mix. I mean the, the thing this is about no right. Playbook is launchdarkly was creating this field so there weren't people out there that were experts in feature management. It was like we were creating feature management so we had to train the salespeople in. How do you talk about feature management? The first 20 came from a mix of different backgrounds. Some were from traditional, I'd say BD companies like New Relic, some we got from more apps like you know, from App Analytics. So they had to at least know the basics of, you know, what is an SDK and what does an engineer do. But the most important was really just again figuring out how to slot that into a customer's workflow. And as you said, VP engineering, they don't like fools. So being in a non dismissive way where they can work together, I'm out of time. This was really fun. If you have more questions, I'm happy to talk more. Especially if it's about tactics for category creation because I have like 10 more things I want to say now. Thanks. Sa. Sa, Sa, Sa, Sa. Thank you very much.

Please welcome OpenView's operating partner, Kyle Poyer.

Hi folks, I'm Kyle Poyer. I'm an operating partner at OpenView. We're a SaaS focus is VC and I have something to admit to you all. I am a SaaS metrics junkie, complete nerd, probably off the deep end. And it started when I launched OpenView's annual SaaS benchmarks report. I did that back in 2017. We're now in our seventh year running. It's been really great hearing from folks in this room who use the benchmarks for planning their business, whether it's figuring out how they're comparing to their peers or updating their board around their performance. But the more time I spend in this space and the more time I watch where SaaS is going, the more I'm convinced that our traditional SaaS metrics playbook is broken and that we need to rethink SaaS metrics for the way software companies are being built, how they're distributing their products and how they're monetizing their products. I have a very V1 of this, what I'm calling next era of SAS Metrics playbook and would love to get feedback after this during the Q and A, because we're in an evolution right now and it's going to be continuing. So first off, like, how do we even get here? And I think it's important to know SAS metrics. They've been with us for a little while, but not all that long. It's not some preorder ordained truth or law of physics. The idea was software originally was on premise, sold on a perpetual license maintenance model and had a really fantastic economic model. We would sell software for six or seven figures, right? We'd immediately pay off the cost of acquiring that customer and then we could use some of the proceeds to go acquire more customers. It's a really amazing economic model. Then we saw the rise of cloud based products sold on a subscription basis. And this was better for customers, right? Instead of buying on a capital expense basis, they could buy on an OPEX basis. It lowered the cost of adopting new software, it made it a lot more flexible to swap out software. But there were fears that you would all of a sudden be spending all of this money on sales and marketing to acquire customers that could leave at any time. And so we were unsure, hey, is SaaS actually as valuable as on premise software? How do we get comfortable with these business models? And that's where SaaS metrics really took off. We started to say, hey, look, based on these inputs, these are leading indicators that we can get comfortable with what a SaaS business looks like today because we know it'll be extremely predictive of what the future will hold. So this company X might be burning a lot of money today, but they actually have an efficient model. And we know that for metrics A, B and C, and so we believe even though there are a million today, there's a path to 50 million, 100 million plus ARR. That was really powerful for valuations. In fact, it might have even been too powerful. We almost got too confident of guessing about how the future would turn out for software businesses. And some of this overconfidence in SaaS metrics helped contribute to SaaS valuation bubbles. Now, this initial SaaS metrics playbook was built on an understanding, a simplified understanding of how software companies grow. And I'm gonna simplify that even further to say we believe software companies looked more or less like Salesforce. Right. The growth model happened with started with prospects, and then you'd convert those prospects to to be leads, turn leads into opportunity and pipeline. You might do a proof of concept to close that business, but that was more of a bug rather than something you were aiming for and then hoping to close the business. Right. And we had a number of operational metrics that we looked at to measure the health of these businesses. We looked at things like marketing qualified leads, number of calls and meetings set by our SDR teams, sales qualified leads, factored pipeline, number of ramp reps, and so on. And these might be metrics that you're still using to run the business. And these are very helpful for a sales sales motion. But there's a number of things that I think this model gets wrong. One is that it's extremely focused on the software vendor's perspective and it ignores how people buy products. Right. More and more research is done outside of conversation with a sales rep. That's a very small part of the buying process. So more part of the buying decision happens up front before someone even learns about your solution and through channels that are not just via your sales team. The other thing is this model focuses on the executive. That executive is that marketing qualified lead, that sales qualified lead. It ignores the users. They're almost an afterthought in this process. But today, end users are typically empowered to go find solutions to everyday problems. They start adopting software, seeing value and advocate from the bottom up. And we can actually identify those users, turn them into champions, and use that as an important part of our sales and marketing motion. Final thing is product interactions are pretty much ignored in this model. And so we think about it as sales and marketing is what contributes to growth. But now, oftentimes, the product interaction is the first thing that a customer does. Right. They sign up for a free trial, a freemium product sales comes later. And so how do we think about product as actually an influencer? In the growth model of a business. And this SaaS Growth Playbook 1.0 still works for many businesses, still works for salesforce, right? And it had some pretty powerful unit economics attached to it. So we look at metrics like CAC payback, period, net dollar retention and gross margin. And looking at OpenView's benchmarks, the good CAC payback would depend on the customer type that you were selling to. But we generally thought of around 18 months was fairly healthy. If you can get below 12 months, that was great. And CAC payback was about how fast you're paying off the sales and market costs of acquiring a customer. Net dollar retention, you're generally looking for above 100%. So this refers to how much existing customers spend over time with you. So if you get $100 from new customers, what does that $100 look like next year, the year after and so on? And if it's above 100%, the great thing is that you could in theory stop any sales and marketing and continue to grow with your customers. So it indicates sticky products that are expensive, expanding over time. The final thing is gross margin, right? Are we selling software, Are we selling services? And typically we look to see that software products are high margin, at least 70%, but ideally 80% plus. So the magic of all this together is SaaS revenue often means efficient customer acquisition paired with sticky customers who spend more and more over time. Means as a company reaches scale, they can be highly profitable. But we're starting to find that software companies are changing and our metrics aren't keeping up with these changes. So one example is around CAC payback. Now this assumes that we grow through sales and marketing, right through that salesforce style growth playbook. In a PLG model, your product is front and center in how you drive acquisition, conversion and expansion, right? So how do we think about growth teams or building a freemium edition, building a free trial, supporting free users? How do we think about that as part of our CAC payback? Is that part of the mix? And how do we know that what we're doing is actually paying off? I think there was hype around plg. I'm a PLG fan, but certainly hype around it. Many companies didn't see the results they were expecting. And I think part of that is we weren't measuring what whether PLG was actually effective for our business and holding it to the same types of standards, to the same kinds of metrics that we hold sales and marketing to. On the net dollar retention side, we're seeing More and more companies, particularly ones with a consumption based model where the initial land is really not that big of a deal. Right. We try to land customers with low friction, low dollar size. And Spencer at Cockroach talked about this a bit yesterday. And then there's a lot of expansion opportunity within those accounts. And so what happens with many consumption based businesses is that logo retention is lower than benchmark. It looks like there's a lot of churn, but the customers that stay grow significantly over time. And it's almost like you have a portfolio of customers like a VC has a portfolio and you have some winners and those winners offset at the folks that don't grow. And the blended basis net dollar retention can be through the roof, right? Potentially 150%, 200% and above. And a final thing is around gross margin. So software companies today aren't just monetizing software. The three revenue streams that are exploding the most are around payments and fintech marketplaces and usage based revenue. These often have different margin profiles and valuation expectations than traditional software. So how do we value things like payments and fintech revenue or marketplace revenue? Is that less valuable than software? Is that maybe more valuable for other reasons? How do we think about that in that mix? I want to unpack a few more examples of some of the most iconic companies built that have scaled over the last years. 10, 10 years. One is Snowflake. Now Snowflake has a consumption based business model where they recognize revenue as customers consume the product. And this has worked very well over time. For Snowflake, their net revenue retention peaked at 177%. Right? Truly off the charts. But at the same time, because they recognize revenue as their product is consumed, customers could in theory stop consuming the product. And were seeing seeing some of that as there's macroeconomic headwinds. Customers are optimizing their cloud spend, being more thoughtful around how much they use the product and therefore how much they spend. And so we have to think in the case of if you're a snowflake, how much should we spend on customer acquisition if LTV is essentially limitless in this business? Right. An 18 month CAC payback period probably doesn't make sense in this business model. But also how do we get customers comfortable with valuing this business when revenue is on a basis of consumption rather than commitment? Another example is Atlassian, one of the poster children of plg. Now when we look at publicly traded companies, they tend to spend two to three times as much money on sales and marketing as they spend on R and D. Atlassian actually flips that. 50% of their revenue goes into R and D and only 20% into R sales and marketing. And with their self service motion, the product is essentially selling itself. The product is part of customer acquisition. But how do we contemplate whether the investments they're making in R and D are driving incremental growth for the business? Right. The product managers probably don't have a quota like a sales rep would have. Right. Is it lasting in spending money to make money or is this inefficient? That's an important question if you're running a business like Atlassian. And finally, Shopify. Right. Shopify, like many vertical SaaS businesses does have a software subscription angle, but that's less than a quarter of their revenue. 76% of Shopify's revenue comes from merchant solutions. So things like payments, fintech, marketplace revenue. And this isn't just Shopify, you know, toast ramp. Many of today's top companies have this kind of revenue mix. So how do we benchmark ARR if less than a quarter of their revenue is actually typical software subscription revenue? And I think the first thing we need to start with is ditch that traditional Salesforce era growth playbook and think about a new playbook around how companies grow. And at OpenView we think about it in terms of the user journey. Now imagine you as a founder or operator are going out looking for products to buy for your business, right? Think about the journey that you go through. You first discover a product usually in the context of solving some pain in your workflow or because you just discover it through someone in your community, someone recommends it, you see it mentioned on LinkedIn like that 10 ChatGPT based products, they're going to change your life, right? You probably weren't even serious about a software evaluation at that point. You might not even known software solutions exist to solve the problem you were facing. So you discover it, land on the website, seems interesting, you decide to get started, like sign up for the free account, what's there to lose? You might sign up through Google login, GitHub login, some sort of social login. So you don't even need to create a new account. You do something where you might either see value or don't see value. Get to a stage that we call activation and then maybe buy initially on a credit card. An initial small purchase and then there's a lot of scaling over time that happens later on, right? So after that initial purchase you might work with a customer success person to onboard more folks on your team. You might start to engage with the salesforce about expanding across your company or growing your usage or growing into new products.

Right.

And so with this user journey, there are few key differences versus the typical salesforce model. Right? It's focused on the user as opposed to just the executive buyer. Now the executive buyer still comes into play. You gotta get to them in the sales process, but that's usually later in the customer lifecycle, right? It's not the first interaction that you have because your user is probably not signing. Your user who signs off on a million dollar purchase is probably not the same person as the one who wants to jump into your freemium edition. The other thing is it treats product usage and not just sales and marketing touch points as a signal of buying intent. Right? So product usage tells us that customers are seeing value, they're consuming more value over time, and that they're ready to buy. The other thing is that while in a traditional salesforce style model, growth is limited by how fast you can hire more people and then how productive can you make them. In this model, growth is limited by how quickly and cheaply can you acquire new users and how can you remove friction points across the user journey. Right? And so we're looking for ways to drive efficiency. Take things that would be manual, resource intensive and probably break and look for automating purposes, productized solutions, and more and more of that is through plg. But there's other things that you can do in this user journey beyond classic PLG techniques. So if you buy into this user journey that then influences the operational metrics that you want to look at to understand the health of your business and where you can get better. And I'll walk through some of the ones that I focus on from an operating perspective. And first is around discussion discovery. So this is, are people discovering your product? Top KPI here is just new website visitors. How many website visitors are you attracting? Specifically how many high intent website visitors are you attracting who land on pages like your homepage or your product sign up page, your pricing page, rather than just folks that land on a generic blog post you wrote that was optimized for SEO? The other thing is that you want to look at your lead generation. So how many of these website visitors and and signups you get by sources in different channels? PLG businesses disproportionately grow through channels like organic search, word of mouth, community, product virality, and you can't afford the same kinds of spend on things like trade shows, outbound sales, and so on. Right? You're looking for really scalable ways to drive this discovery. Then you want folks to go from learning about you and landing on your website to getting started, signing up for your product. And here you're looking at the conversion from those website visitors into either new signups or people that request to talk to someone on your team. And I treat these as equal. You shouldn't be necessarily. You might have data on what converts better and what has better ltv, but you should treat these as a similar kind of outcome.

Right?

You're not over overly prioritizing those demos. You want to let the customer opt in to the buying process that's right for them and where they are. The other thing I look at is new activations. So folks who sign up, oftentimes if you have a free sign up or a Demo sign up, 90% or so of the share goes to signing up for the free product. So among that group, how many activations are you getting? And these are people that sign up and do something, something in the product that indicates that they're seeing value. You're delivering on the promise of what brought them to the product in the first place. And what I think about new activations is they're normally time bound. And this is a much better metric to look at to identify your marketing spend than signups alone. Right? Because you might have some signups that are really low intent, really low quality users and you might pay a certain amount of money to acquire them. And then other signups that are very high intent know exactly what to do. See value immediately in the product are in your ideal customer profile and you want to double down on those. Now if you wait to find out if these folks become customers or turn into revenue, it's going to be hard to drive continuous experimentation and optimization of your demand gen channels. So activations gives you a leading indicator of what the future performance is going to look like. That's beyond what happens at signup. And then as folks are continuing their journey, you want to look at first that initial conversion are folks seeing enough value in the product that they're not just using it, but they're willing to take out their credit card or talk to someone on your team to purchase. And I like to look at cohorted free to paid conversion rates normally on a time basis and the time depends on different businesses. But if you don't look at it on a fixed time period, it's hard to tell if you're getting sequentially better over time. The other thing I look at is product influence revenue. And so a misnomer with PLG is that PLG means self service. In fact, at most of the top PLG businesses, not a whole lot of their revenue comes from self service purchasing channel. A lot of their revenue maybe starts off with a self service adoption. Someone sells, signs up for the product and sees value before talking to a rep and then they opt into a further engagement from there, but probably don't buy self serve. And so that's where I like this metric of product influencer product driven revenue, which to me refers to the health of your PLG motion and whether it's actually working as intended or not. Right. So is your product interactions meaningfully influencing your funnel and how many folks are signing up as well as how those folks convert down the line? Other thing is sticky users, right? So you'll have an initial product based metric around activation, but you want deeper metrics that show that you're continuing to bring folks back into the application and that they're inviting their team, they're deepening their usage over time. And then finally on the scale basis, I always want to have a North Star usage metric in a company and in a PLG company or a usage based company, product usage is very highly correlated with ultimate revenue. Right. If we look at portfolio companies that the correlation rates between usage and revenue are extremely high, but you can drive product interactions that increase usage in a much sort of much more natural way than driving, you know, product changes that influence revenue. There's more of a, more of a lag time there's there and so have a North Star usage metric that is correlated with future revenue. Make sure that if you have for instance a growth team that they're thinking about that usage metric across all of your users rather than just for instance self serve revenue on its own, which sets you up for channel conflict between sales and plg. Other things that I'll mention, just one final one on this slide is product qualified accounts. And so like I said, the revenue for a PLG motion often starts with the product interaction, but it doesn't end there. You want to be turning these product users into pipeline for the sales team. And there was some hype around what was called product qualified leads or PQLs for a while, which are users that are showing that they're seeing value in the product. But we need to get much more sophisticated. So we need to look at users who are signing up. What kind of account are they at? Does that account have potential to spend a lot of money? Is that an account in our ideal customer profile? You might even assign a sales rep or have a sales assist touch point before that person even does something of value in the product. But you want to be pairing that customer fit data with the product usage signals to get really smart about who you're selling to and how you're going to sell into them. And that's where you can really drive efficiency in the go to market motion by paying, comparing sales and plg. So with these metrics, there's then a new set of benchmarks for what success looks like under this kind of new framework. And I've broken out some of the benchmarks from OpenView's product benchmarks report. I've broken them out for PLG companies and more traditional sales led companies. And then within PLG, where it's relevant, I've added freemium versus free trial. Now a few things I'll call out here. In a PLG business, the rate limiter or one of the rate limiters is how efficiently can you acquire new high intent users at the top of the funnel. And so you need to be showing that you cannot just rely on, for instance, outbound SDRs and BDRs, paid marketing, trade shows and so on. You need to be finding organic ways of acquiring users through communities, through word of mouth, through product viral loop, through programmatic SEO. Happy to talk more about that. The benefit though is that because there are hundreds or even thousands of users for every one executive buyer, it sets you up to be able to take advantage of marketing channels that would normally be things that a B2C company would use, right? And so you can attract a lot more users, get a lot more people to experience value in your product. Your marketing is also often not as targeted. And so your marketing is going to attract a lot of people. And then you can be proactive about where you want to focus with your sales time, your marketing time to make sure that you are converting those highest value, highest intent users. So when you look at going from Discover to signing up and getting started, freemium businesses see a higher conversion to just signing up and creating creating an account. So that's where freemium is kind of an acquisition strategy to get more people experiencing your product, but you're getting them earlier in their journey. And the flip side is they tend to convert at much lower rates across the board. So there's lower free to paid conversion and time to conversion is longer than a free trial. So just something to be aware of between the nuances, between the two motions. Final thing I'll call out is around activation rates here, 20 to 40% of your new users Signing up, say seeing real value in a product is normal in a PLG motion. And you should expect because you're reaching people earlier in their buying decision before they put a lot of thought and work into it, before they're ready to talk to sales. Many of them are going to be tire kickers that really treat your product signup as a way of educating themselves about who you are and what you do. So make sure you have a path for these low intent users to nurture them over time. But expect that there's going to be a lot of drop off, right? It's going to be by definition a more leaky bucket than a traditional motion. And if you are a product with a lot of barriers to usage, right, where you maybe need a team or complicated data to set up, aim to be on that lower end of the range, probably 20%. If you're below that, your product might not be ready for a self service PLG motion. And then accelerating growth in this motion means reducing friction throughout the user journey. And so a few things to call out here around the activation piece. It ends up being really important to deliver value before the paywall, right? So be able to get someone to really have a real aha moment as part of the free experience and giving them a quality enough free version that they can see real value. What I see a lot of times that happens is as PLG companies add sales, they start to believe that the free edition or their cheap self service editions are competing against the enterprise editions. And so what happens is sales slowly cuts away at the free version. Oh, let's move this feature out of free. Let's cut this usage by half. And what happens is you're left with a free product that only really works for prosumers, consumers, hobbyists, SMBs, not the kind of customer you're trying to sell to. So make sure if this is part of your strategy that you're delivering real value to your target customer profile. The other thing is because you're attracting a wide set of users, right? You're attracting a wider top of funnel. You have opportunities to personalize product onboarding and there's going to be multiple ways that you can do this. I think the starting point is just ask questions as people sign up for the for the product that help you collect data on them, right? And so some of this you can enrich through services like Clearbit or Zoominfo, like company size, industry and so on to see if it's account in your icp. And some of these are questions that you can just Ask your users. And then in the future you can personalize that product experience based on what you've learned. But at the very least, you can personalize the emails and the sales touch points based on what you know. Final thing I'll just point to here is that on the previous slide I showed some of the nuances between freemium versus free trial and freemium businesses are great from an acquisition angle. So if your product has a virality component, if it gets more valuable as more people are using it, that's when we often think about freemium. But if you're looking for more efficient near term revenue generation, we often think about free trial. More and more companies are combining the two into what's called a reverse trial motion. And this is where you put your best foot forward when a new user signs up. So they get a premium version of your product, but for a limited time, often 14 days, maybe a little longer, and then that downgrades to free if that user doesn't convert. It's a really powerful way of getting the best of both worlds between those two. So those are operating KPIs, ones that you'll be looking at on a daily and a weekly basis with your team. KPIs you can give to people on your team, but then you need to bring your investors along with the right board level KPIs. And you might not have board members that are bought in. So make sure to talk to them about this first. Right? You want to be looking at the same set of data to evaluate the health of your business because this is going to be your way of talking about the future direction. Right? We want to invest more money here for XYZ reasons or we think it's time for the next fundraise. Because here's what we're seeing. You need to be speaking a common language. So I've split these out into growth oriented KPIs and then efficiency oriented KPIs. On the growth side, one is just reframing away from annual recurring revenue, which really focuses on software subscription revenue to annual revenue run rate. If the software is. If the revenue is high quality revenue, it acts reoccurring, right? It grows over time or stays steady over time. It's predictable in the aggregate. Right? High margin. You should be valuing it similar to how we've historically valued software subscription revenue. That's my view. Not everyone's on board. But think of it as like ARR in quotes. And then you can break out the sources of revenue below because people will be interested in in the drivers of that revenue. Then with this broader view of run rate, you want to be looking at the quarter on quarter change in net new ARR. So net new ARR incorporates new upsell and expansion minus churn. And so what that looks at over time is are you growing linearly, right? We're like adding the same net new consistently or are you growing exponentially? And if you're growing linearly, that would be a case to be relatively lean, be more efficient and continue on the current motion, or run experiments to see if you can inflect that growth. But you're probably not looking to pour a bunch of additional venture dollars onto that business. VCs are often looking for signs of non linear growth, right? Things are accelerating. It's an exponential growth curve. And this is your way of being able to show that that's happening or not happening in your business. Final growth point here is just cohort based everything. So I specifically look at cohort based retention. And so this is cohort based is just looking at the same set of people who signed up for the product and what happens to their spend over time. This is not new in SaaS, but it's particularly important as you have cohorts that have some subscription revenue, some payments, some usage revenue, right? You have folks on self serve plans, on sales assisted plans. We have a much more complicated business and so we need to break these down so we can compare apples to apples. And when you're looking at cohort retention, my only point here that I'll just leave you with is don't look at self serve versus sales as the conversion point. That's just a channel look at a customer type, right? Your enterprise customers, most of them are probably buying via a sales touchpoint, but you want to focus on the customer type and not how that customer is choosing to buy. On the efficiency side, Jason and I were actually just debating this. He's not as much of a fan of this metric as I am. Quarterly net new ARR versus Cash burn.

Right?

Your, your ratio of new versus burn. And to me this is an evolution of CAC payback. So CAC payback is really focused on sales and marketing. This allows you to see how efficient is your overall business at attracting net new revenue and so incorporating not just sales and marketing, but R and D expenses, other expenses of growing your business. Now, just because your burn ratio is solid, best in class, it doesn't necessarily mean you have the Runway to support high burn. And so make sure that it's in context with other metrics. Another One is natural rate of growth. And so this is basically pulling out your baseline rate of growth before you add incremental paid efforts. And so you can think of this as how much of your revenue comes in through organic sources and starts with a meaningful product interaction. And then how much of your growth comes from customers that you're paying to acquire and using expensive sort of sales and marketing touch points. And this gets a little bit complicated to calculate. I'm happy to share more if people are interested, but to me, what happens in PLG companies is that there's a very, there's a baseline of very efficient growth and then there's things that they do on top of that, especially if they have the funding for it to drive more growth. And then those get blended together and it on an aggregate basis looks okay. But it's basically a very efficient business hiding a very inefficient business. And what happened is PLG actually companies, while they should be more profitable, they got less profitable over the last couple of years than their traditional peers. And so you want to understand the drivers of profitability. Final 1 is ARR per FTE. How much revenue do you generate per employee? And we in SaaS love complicated metrics. I personally love complicated metrics, but this is one that's super simple. Anyone on your team can understand and assess here. Here's some benchmarks to get a sense of whether you're on the right track. And this shows that you're able to have an efficient overall revenue generation and then you're getting more efficient over time. So expect this number to increase as you scale. You should also expect that there's gonna be times when you're investing a lot in scaling up your headcount where you're gonna take a short term hit to ARR fte. So just know that this is a guide and not something that dictates every decision that you make. And PLG companies should be better in theory. This should be the magic of PLG that you're able to take things that would normally be manual people intensive processes and turn them into product based solutions. So companies like AHA have close to a million ARR per fte. That's not benchmarked yet, but it is possible with efficient PLG motions to have this be very, very high. So wrapping up and then I've got some time for Q and A. SaaS metrics were great. They served an amazing purpose to help us understand the power of SaaS business models, maybe even too well. But as we've adjusted how we've built distributed and monetized software products, they're no longer keeping up. We need to focus around the user journey and not just the B2B sales process and make sure that we're growing not just by adding people as fast as we can, but delivering value and reducing friction throughout the user journey. And then we've got to bring investors along to make sure that they're measuring the health of our business the way that we look at it. So if you are interested in this topic, follow me on LinkedIn. I also have a newsletter called Growth Unhinged that comes out every week and check out OpenView's SaaS benchmark reports. Otherwise line up on both sides for Q and A. All right, what questions people have.

Yes, thank you so much. Really engaging presentation. Really appreciate you joining today. Question is kind of indirectly for you. Why is Jason not a fan of net new AR versus cash burn?

Well, we were literally just talking about this. It's because people will use it to inform too much of their business, right? So if you're burn ratio looks good then in theory that should be a case for spending more, increasing your burn rate. But capital is an infinite, right? If you're burning money, that means you're not profitable and you have to look at your Runway and the ability for you to sustain a high burn rate given other characteristics in your business. And so the TLDR is basically don't make decisions in a silo based on one metric. Make sure you understand the overall health and picture of your business.

Thank you. Great presentation. Quick question for you. You shared some metrics around the user journey and then board level KPIs. What would you identify as good leading indicators that are more six month versus the user journey which was probably at the month board level KPI seemed quarterly. What would you identify as good leading indicators for a six month period for.

Both sales LED and plg?

Yeah, great question. So it's the leading indicators are going to be the things that are earlier in that journey, right? That flywheel. And so for a PLG business, my take for example is that you can get more comfortable that a company has product market fit earlier in their revenue generation, right? So a sales led business could close 1010 enterprise deals and get their first million in ARR. But each of those companies has their own set of requirements, they have their own feature requests. It's not fully product market fit. PLG business might get to that same point with hundreds or thousands of customers paying small dollar sizes. And so I look at a leading indicator of how efficient you are at bringing in new folks to the product and how efficient are you at converting them to see some sort of sort of value where they become sticky users and maybe they convert at some small dollar amount, but you're looking at product usage as a proxy for this motion is healthy and over time these cohorts are gonna turn into valuable customers. In the sales motion, you wanna look earlier, right? As well as how efficient are you at being able to attract new marketing qualified leads and then opportunities within your target market? What is your, you know, conversion rate through the pipeline? How predictable is your revenue generation machine? And I specifically will look at things like the contribution per quota carrying rep. So if it's just founder selling, it's hard to get confident that that motion is going to be ready for scale. But if you've hired a handful of reps, those reps sell their first deal pretty quickly and they're hitting quota in a consistent way. That gives you the confidence to say we can actually spend money to make money and we can further invest in this in this motion. Thanks Kyle Bertram from Mink and a huge fan of everything you're writing around usage based pricing and product led sales in particular. I have a question around product led sales, which would you say is the one metric we should be looking at in order to determine if we have figured out a good product led sales motion? Yeah, that's a great question. And so it actually goes back to some of the classic sales metrics of as you're adding sales to a PLG motion or pairing sales in plg, are you able to get that sales team productive? Right. So as you hire reps, can they close deals? Can they hit quota, can they consistently do that? The thing that I would pair that with is sales incremental beyond what PLG does. Right. So I've seen companies that add sales and what sales is basically doing is taking opportunities that would have bought via self serve, but just turning them to enterprise buyers on an invoice payment, maybe not a discounted price point. That's not a signal that adding sales is doing a whole lot lot for your business. Right. Sales is more order taking in that case. And so what I like to do oftentimes is run experiments with hey, if we carve out, hey, any signups that are less than companies with less than 50 employees go to self serve only or we're going to do an A B test, half go to self serve, half go to sales, can you prove that adding sales is incremental and it should be incremental in either converting new folks so net new revenue or convert or expanding people at a faster rate than they would organically.

Hi Kyle.

Stephen.

Forth, Stephen.

So OpenView has a lot of data. Have you done any analysis on how combining some of these new metrics you're proposing create better predictability into the future? So I think a lot of the reasons we're interested in these metrics is because they, they help us predict and then steer the future. And often combinations of metrics are more powerful to do that. So are you doing work in looking at the combinations that give better predictability?

It's a great question. More work to be done. There is the summary. I wish we had time series data. Right. For every company, what did their metrics look like three years ago, five years ago, and what was the outcomes? We're not at that point, especially with private market data. And so we can get signals of public companies as an indicator, but those companies often don't look like early stage companies do. And so these are things that we will look at from an investment like a diligence standpoint. But I wish we had more concrete evidence beyond that. So more work to do.

Yeah.

Okay. Hey Kyle, I'm Bhattacharya here. Love your LinkedIn content monetization and PLG stuff. Brilliant.

My question is, that's quite a broad question actually around like LTV to CAC.

Ratio and how much focus you would actually put on that and strategies that.

You can recommend to actually improve LTV to CAC ratio.

Obviously LTV is a difficult one to measure sometimes. Yeah, I. So I'm very conflicted about SaaS metrics and I'm especially conflicted about LTV to CAC in a B2B business because LTV, if you have net dollar retention above 100% should be more or less limitless. So I tend to like to look at the drivers of that separately. So looking at CAC payback period versus ndr, if you're gonna still use those two metrics that like look at them independently versus is combining them and then make sure that you're pairing where you are on the right map. So if your CAC payback is below 12 months, you want to have like, you can have kind of permission to have a lower ndr. If your NDR is higher, you have permission to have a higher CAC payback and still have an efficient business. In our assessment, where we have a little like grid with nine different quadrants that shows growth rates based on where folks fall within, within those quadrants. But in terms of strategies to improve, first you have to prioritize which do you want to drive efficiencies or drive more motion? And I tend to think that NDR tends to be a better place to mine because we tend to be very focused in SaaS on acquiring new customers. It's very expensive to acquire new customers. We don't put enough effort and resources into retaining and expanding our customer base. And then when you look at that side, I would look at how much of the NDR is driven based on churn. So how much, what's your like level of leaky bucket? What amount of revenue do you lose from churn? And are you comfortable with that? What are the reasons behind it? Is, is it for things that you can influence or things that you can influence? So you might be in an industry where this, where you're selling to small businesses, they shut down. Right? That's not actionable churn. And so how much of that is actionable churn that you can address? And then on the expansion side, often I'm looking at levers like whether it's products, packages or pricing to try to drive that, those are often the best ways that you can inflect net dollar retention relatively quickly that don't require adding a new account manager function on your team team building a totally new product. And so specifically, it's one of the reasons I like usage based pricing is from an expansion perspective. And so a lot of companies that maybe have a traditional seat based subscription model have been adding usage based expansion on top of their core subscription offerings to drive more efficient expansion motions. But happy to talk more after this session.

Yes. Hi Kyle, Laura with Pavilion. A lot of companies have laid off the sales team to transition from a sales led to a product led motion. So when you're in that transition period, what metrics are most important before you get to the point where you where you're a b testing the product led motion, what are some of those key metrics that will lead you to believe like we are ready to kind of rehire reinvest in a product led sales motion?

Yeah, great question. So companies that have been disinvesting essentially in sales, when do you know if they should reinvest in sales? Yeah, that's a good question. So I think one is, is the overall business model efficient? Right. So one of the reasons folks do cut folks from the sales team, but also from folks from other teams is that they're looking to have some sort of more profitable economic model where they need to reduce burn rate and extend Runway, find ways to do more with less to have a model that's more sustainable for their business. Right. Businesses fail because they run out of cash. So you always want to make sure that you have line of sight. And so a lot of times the thought process is let's extend our Runway, let's build a sort of default alive company and then we'll look for some signals from there about where are their pockets to invest going forward now that we've taken back some of the investments. And I would look at it as. So there's the decision about whether to invest more in more sales reps. But companies should not really be thinking specifically about sales in a silo because that decision sits alongside every other investment decision. Do you invest in a growth team? Do you invest in SDRs versus quota carrying sales? Do you invest in adding new products? You invest in maybe an aqua hire or a small tuck in acquisition for a company that might be a distressed asset that you can buy revenue. And so I think the first thing would be understanding where you're going to grow and where are the best places to invest and then within sales. For me the idea would be you are scaling up the number of users and product qualified accounts from the PLG motion that you've continued to invest in and there's too many opportunities for the sales team to prosecute all of them. And so they're either dropping the ball or having to kind of work around the clock, but they're hitting quota consistently and they're essentially too busy. That would be a strong signal that hey look, the PLG motion is humming but what's blocking us from growing faster is adding sales to work. All of these, this great pipeline.

Thank you.

Just last one and then we are out of time.

Okay, thanks for the very interesting speech.

And for your metrics.

We use them a lot. And thanks for promptly answering random emails.

On them like how they're calculated, the benchmarks. My question is around actually we introduced.

The PG motion but we struggle a bit with changing our funnel and there is a lot of internal resistance of moving to the 2.0 version version.

So what do you suggest?

How to more efficiently and make this happen, how to build internally a business case or whatever to shift to the.

New ways of the funnel. It's easier said than done.

Like just change the metrics of all the teams and align around it.

Yeah, it's easier if the CEO of founders are bought in or the boards bought in. Much harder to do it from the bottom up. And so the first thing I would say would be do some work to quantify the metrics and how they're performing over time and make the case for how you're going to drive decisions based on the data. Right. So before you start to kill other metrics that people have been using to run the business, you have to make the case for how this is going to allow the business to be a smarter, smarter in terms of overall operating. And so that would be my starting point. And oftentimes things get organically added all the time. If you find that they either help tell the story of how your business works or you really need to see that data to make smarter decisions. And then you'll start to notice kind of organically, you're not looking at some of the other data to make decisions. And so why even even report on it anymore? And so that's how I would kind of plant the seeds for evolution over time. All right, well, that's it, everyone. Thank you for listening to me geek out about SaaS metrics. Hopefully this helped you run the business. And I'll be around if folks want to talk more.

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Please welcome Iconics general partner Seth Pierpont and Iconic Growth's general partner, head of analytics, Christine Edmonds.

All right, it's amazing to be here. Thank you all for joining us for this session. Thank you to Jason and the SAASTR team for hosting this incredible event. It's awesome to see Saster in London. Our session today is about efficient scaling and efficient scaling in what is probably one of the most turbulent environments that we've seen in recent times. Certainly in my venture career, some of the most challenging market conditions I've seen operators endure. Undoubtedly many of you are founders and operators yourselves, so are living this firsthand on the front lines and painfully aware of that. But what does it look like in the data? How hard has it been across the board? What is a blueprint for how to navigate in these uncertain times and as you think ahead, how to build a more solid foundation to help you navigate going forward. That's what we're going to talk about in this for the next 30 minutes or so. Just before we jump in, briefly, as an introduction to myself, I'm Seth. I'm one of the investment partners at Iconic. I've been investing in early and growth stage SaaS companies for more than a decade and I joined Iconic a year ago to launch our office here in London.

And I'm Christine Edmonds, I'm a general partner at Iconic Growth and I have been leading our analytics practice over the last five years.

For those of you who are less familiar with Iconic Growth, we are a growth stage platform. We focus on investing in series B stage technology companies and beyond. We just turned 10 years old and with that launched our seventh fund. So have over $5 billion of capital to invest invest now. But what makes Iconic unique, what we feel sets us apart, is that we are very fortunate that the investors in our funds are is a very special network of founders, of leaders of the families behind some of the biggest companies in the world. And they view Iconic Growth as a vehicle to invest in the next generation of entrepreneurs. And so a core pillar of our platform is really to bridge the connection between the founders that we're investing in and this unique community of individuals to really help them accelerate and ultimately amplify the impact that they're having on the world.

In addition to the connectivity that we facilitate across our network and portfolio analytics is another core function and manner in which we support the various leaders across our portfolio. What that looks like in practice is a few different primary motions. The first of the which is broad thought leadership and studies, some of which we're really excited to share today. It's always a lot of fun to share our latest insights at saastr. In addition to the broad thought leadership, we also work with leaders on custom one on one advisory and very specific tactical questions that they're grappling with on a day to day basis. And then finally we really believe that putting together a picture of what best in class looks like across a whole number of different dimensions also makes us better investors. And so we put those learnings into practice across our own investment platform in terms of how and where we invest. So a quick note on the data that we're going to share today. We now have really had the fortune of partnering with all of these companies on this slide for many of which we've been partners with for over 10 years now. And so the data that is included to comprises tens of thousands of data points and a number of companies that you probably recognize that we've really seen grow from $10 million in ARR all the way up through and past IPO. So names including Snowflake, Braze, Datadog, GitLab as well as a number of companies that have roots in Europe. We know we're at Saster Europa and in addition to companies like Adyen, which was our first European based investment back in 2015, as well as Collibra, Data IQ, Miro and others, almost every company here operates globally. And so we really feel like the data points that we're going to share today are representative of the dynamics that we're seeing in Europe as well as the broader network.

So we wanted to start today by level setting on how we see the current state of the market. And we think that the public market are often foreshadowing of what's to come in the private market. So we wanted to start there. This is a chart that you've undoubtedly seen some form of. These are public SaaS multiples over time. You can see how dramatically they've compressed from the peak to the trough. If you look at that green line on top, that is the high growth SaaS company. So companies that are growing more than 30%, it's down 70%. And what's interesting is that we've now over the past four or five quarters or so seen some semblance of stabilization around this kind of 7.5 to 8.5x multiple. Another aspect of the public markets that we focus on is the number of public software companies that are beating analyst consensus and then raising guidance. Subsequently. If you look at the left hand side of the screen, I guess it's right hand and here it's Q1 2022, the gray bars, by comparison to Q1 2023, it's markedly down. So the number of companies that are beating consensus is a lot lower. The number of companies that are raising guidance is also a lot lower. And this is kind of, as I said, a barometer for kind of how public companies are seeing the market conditions in which they're operating. So unfortunately they see it as, you know, continues to be challenging. Again, this is a topic that I'm sure you've heard ad nauseam in the last 12 months or so. This chart indicates the public market sentiment for the trade off between growth and efficiency. A very quick way of reading this chart is the green line represents public market sentiment for growth, and the blue line is for efficiency. When blue is on top, the public markets are favoring efficiency. When green is on top, it's growth. And if you look over time, pre pandemic, it was really favoring efficiency. As we all know, during the pandemic it was all about growth and growth at all costs. You can see the gap widening between those two lines through 2021 and then the lines crossed again. And that was this kind of whiplash moment that we all lived through where over a very quick period of, of time it was revaluing efficiency over growth. What's interesting is that in Q1 of this year the lines crossed again. But what I would add is that it's not just about growth at all costs. It's still efficient growth. And what we tried to lay out on this slide, this is a slide that on the X axis, it highlights Rule of 40 and what Rule of 40 is, it's your year on year revenue growth plus your profit margin. So it really is a good method measure of efficient growth. And the companies on the left hand side of that screen, the green dots are companies that are rule of 40 or better. And the companies to the right hand side in the blue dots are below rule of 40. And so what you can see is that the green the rule of 40 companies are trading at almost a 2x premium to the companies that are below rule of 40. So efficiency is still very important, important.

So that's the macro context. But how did this actually play out when it comes to the financial and operating profile of companies that we analyzed? One of the metrics that we look at on a quarterly basis and have done so over the past several years now is attainment of top line plan. So how did performance actually line up to the plans that companies had when they entered the year? And what you can see here in the chart for 2022 too is the year started out quite optimistic. Many companies were actually using 2021 levels of growth to forecast the year ahead, which of course we all know now is quite an ambitious feat to have in any given year, let alone one where the macro backdrop is challenging. And that really played out in the numbers. So you can see accumulation of impact every single quarter through the end of the year landing at just 66% attainment of their original plan. One way to put this into context is thinking about 2020, which is the best benchmark of another challenging year that we have in the recent history. What you can see there is again challenging early start to the year Q1, Q2, but many companies being able to rebound as they closed out the year ending just above 80% again putting last year, which we know many of you lived and breathed and felt into context from a numerical standpoint. And I think if you think about both of these numbers in the context of a quote unquote healthy year, we normally see attainment really around that 95% plus standpoint. So from a top line, attainment certainly saw a lot of impact in addition to absolute growth. And ARR though there are a number of other metrics that we Always look at when we really think about the fundamental health of businesses and we have coined the term the Enterprise 5. Some of you may have heard about this group of metrics and are really excited to be refreshing this a bit later this summer and sharing our latest views in terms of what these look like across best in class companies. But starting at the top, we really like to think about the full spectrum of true growth, the predictability of growth in terms of retention, and then also how does that growth generated from an efficiency standpoint. So rule of 40 that Seth mentioned, net magic number thinking about the efficiency of your sales and marketing teams and then finally ARR per fte, which we'll get into a bit later, really thinking about both efficiency but also the productivity of your teams. So today instead of talking about these on an absolute basis, we really wanted to dive into the evolution of these five metrics, especially over the past three years. This is a fairly powerful and stark reminder of again the pain that I think many companies felt last year. One of the discussions we've been having internally is what do we do with benchmarks from the 2020, 2021 period where companies really were incentivized to grow in a manner that they hadn't been before. And you can see the whiplash in terms of a shift back to efficiency play out in the numbers. So growth coming down by over 40% in the past year. And at the same time, although companies implemented many cost management practices, we didn't see the impact of those play out quite in time given just the lagging effect that those take. And so again saw many of these efficiency metrics also deteriorate. One that we want to spend just a second on talking about is the last one here, ARR fte, which I think is a great example of why these high have and will continue to evolve. Many of the companies included in this analysis unfortunately did have to undergo rifts in the past year and let go of a number of folks on their team. And so some of these may seem artificially stable for a period, but again we think they'll continue to come down and hopefully over time some of that efficiency will pick back up and rebound.

We thought it'd be worthwhile digging into AR grad growth and why that has declined so dramatically in recent quarters. What we're showing here is a typical ARR funnel. The green bars on top is gross new ARR. We're representing it as a percentage of beginning of period, but that's what the green lines represent, the red lines are churn and what you can see here is that while Churn has remained relatively stable over the last four or five quarters quarters, gross new ARR has declined pretty dramatically and we're seeing in Q1 only contributed 10% to overall ARR growth on an absolute basis when you actually double click into that and break out the gross ARR into its constituent parts. So the lighter green lines on top are expansion ARR versus the darker green lines, our new logo ARR. You can see that both are are obviously down, but expansion has taken a pretty significant hit, especially when you compare it to the quarters in 2020 and 2021 where it was a meaningful contributor. Unsurprisingly, how this then translates into net dollar retention is also quite dramatic. And on the orange line on top, this is top quartile net dollar retention that we're showing at the peak you can see with 137%. And in Q1 of 2023 it was all the way down to 105%. So it's been a very dramatic change in terms of that overall picture. To add insult to injury, Christine alluded to this already. Efficiency metrics have not yet caught up to changes that were implemented in the last few quarters. So magic number, which effectively indicates how much ARR you just generate for every dollar of investment you're making in sales and marketing in previous years in 2020, 2021 we saw that all the way up at 2x very healthy levels, and we've seen it down at 1x now for the past four or five quarters and have not yet seen it tick back up as these changes have been implemented but have not yet translated through.

The culmination of all these dynamics is the software start to the year that we have observed since we've started looking at this analysis. Q1 in particular tends to be a relatively strong quarter for companies, given proximity to the planning phase as well as general visibility into the pipeline. And so the fact that the median attainment landed at right around 84% the first quarter of this year speaks to the ongoing impact that companies are feeling. But we promise we're going to flip this and become a little more optimistic. And there are certainly stories of resiliency that we are excited to touch on today. While over half companies did miss their plan, over half of the companies analyzed were also able to meaningfully reduce their spend. And so again implementing very tactical changes even in the first quarter of the year to reduce the average opex this two by two. So we have top line attainment across the x axis, bottom line attainment across the the Y axis. And obviously in ideal scenarios you want to be in that top right quadrant. The reality is most ended up being in that top left quadrant, which again is still a more positive outcome than the bottom two quadrants here. One of the things you might expect is to see the companies with more scale, more robust operations to end up closer to that top right. And that is the case for a few here. But I think what you'll notice there's not a single super clear trend when it comes to the scale of companies and where they landed. Just again speaking to how pervasive the impact that we've seen, where we did see a more market trend was when it came to the different sectors. And so again many of you here are probably feeling this real time where decision making is now very much more centralized, most purchasing decisions going through the CFO and with a lot more scratch scrutiny than in the past couple years when folks are really trying to fuel their engines and operations. And so as a result, tools and parts of the tech stack that might now be deemed more nice to have versus those that are truly mission critical like security and infrastructure are feeling a bit more volatility. Especially companies that are selling within the go to market space as well as a number of vertical SaaS, companies including those like Healthcare IT that might have some lumpy sales cycles to them.

So we appreciate that was not the rosiest picture in terms of the state of the market. But what we wanted to try and provide you with is a blueprint for how to navigate some of these conditions. So in addition to the Enterprise 5 that we always encourage our portfolio companies to remain hyper focused on, we added a few more things here to add to that. So we'll step through some of these and in more detail to kick off and go to market health. What we saw in 2022 was a lot of softening around top of funnel go to market metrics, things like longer sales cycles, slower inbound, more pipeline degradation. What we're starting to see now in 2023 is a lot of those impacts start to trickle down to the bottom of the funnel. So we're now seeing lower win rates, lower quota attainment and lower net retention. One of the things that we are hyper focused on with the companies that we're working with is around sales attainment, both individual rep attainment but also attainment across the broader team. What we've highlighted here is how attainment has declined by comparison today, by comparison to 2021. And also calling out top quartile attainment typically what we typically want to see in top quartile attainment is in the 70, 80%. And what we're actually seeing is high 50s, low to mid-60s depending on the stage of company. And what we're encouraging everyone to do is not only diagnose, you know, track these metrics closely, but diagnose what's really behind that a level level or two down. And also we're exploring with some of our portfolio gunpowder companies different compensation levers that we can pull to keep reps incentivized and also keep them hyper focused on some of those more underlying metrics that matter. If you're at all interested in this topic, we actually just published a report on sales team compensation, so please check it out. We're also publishing in the next week or two a report on customer success compensation that addresses these exact points.

Another metric that we're really encouraging companies to keep in their line of sight is burn multiple. And I'm sure this is one that you have all heard of at this point, but really in the most simplest form we're looking at for every dollar that you're investing into your operations, what is that generating from a net new ARR standpoint? And again here I think is where you can really see the shift in dynamic and how companies were incentivized to grow over the past few years with that burn multiple skyrocketing and us now really helping companies focus on bringing that back closer to the 1x or below standpoint. Another way to think about efficiency and productivity is on a per FTE basis. For most of you here, running companies, headcount is still your primary cost. I think for the most part we're still seeing it around 70% of total opex. And so looking at ARR per FTE as well as opex for FTE is a really healthy way just to make sure that you're continuing to get leverage out of your team as you scale and ideally generating more efficiency over time. These shouldn't come at the cost of one another. And what we typically have seen when we look at historical data over the last decade is right around that $100 million ARR mark, we see the relationship flip. So companies on average are able to generate more ARR per FTE than they are incurring costs. But what you can see here is over the past two years that hasn't quite been the case. And so again, really encouraging all companies to reorient towards a pre 2020mindset as they think about both the efficiency and the productivity of their Teams and to what end? So one of the key pieces again that we really are working closely with leaders to keep an eye on is their liquidity and their Runway. We are really focused on making sure that there's a line of sight across all companies towards at least two years of Runway. And that really hasn't changed. That's something that we've been encouraging and working with leaders on for the past couple years. But I think what's notable and what you can see here playing out over the past six plus months is a dynamic that we've been really heartened to see over the the past year or more. The ability of companies to really double down on efficiency and extend their Runway even without having additional financing rounds. So excited to talk through tactically what those look like.

So we've given you our views of the state of the market. We've offered a blueprint to help you navigate some of these current market conditions. But, but we also wanted to bring it to life a bit more through some of the conversations we're having with companies that have started to implement and operationalize some of this. From these conversations we tried to pull together a framework to help ourselves and the companies that we work with. Think about this in terms of prioritization. This somewhat resembles Maslow's hierarchy of needs. And so if we start at the bottom and work our way to the top, the bottom is about strengthening the foundation, strengthening the core. Hiring slowdowns and freezes. This is almost uniformly something that we've been hearing companies talk about. We actually ran a survey in September of last year and 80% of the respondents to that survey said that they had already or were planning to implement a hiring slowdown or freeze. So it is becoming very uniform in this environment. Tool rationalization. This is again a pretty dramatic pivot to the carte blanche that employees were given in 2021 where they could procure any tool that was, you know, helpful for them on a day to day basis. We're now seeing that those decisions being centralized and rationalized, focusing on, on the must have tools versus the nice to have tools, much more rigorous conversations with vendors to procure on an enterprise wide basis, those sorts of things. The next tranche up is about rethinking the operating model. A number of the companies that we spoke to have really taken time in this environment to rethink how they inject more operational discipline, rigorous excellence into everything they're doing. So that impacts org chart, that impacts culture, that impacts processes. We're also seeing companies explore again the offshoring of certain functions, which is something that we've seen sort of come in and out of focus over the years. We've actually done a very recent piece of work on that, which Christine will talk about in a moment. And disrupting the future. This is kind of more, you know, further out type initiatives, but experimenting with changes to pricing models just given this new environment that we're operating in. And I could not end this presentation without mentioning AI. It's here, it's being you know, initially used I think for improving customer experience and on the, on the product side. But actually we're increasingly seeing it more heavily adopted to help drive operational efficiency with which we'll get into in a few slides to kind of double click on a few of these things. What we're seeing now is SaaS companies forecasting much more conservatively for this year. And if we sort of look at this across from left to right across the slide, top line growth companies are on average forecasting 35% growth this year. And if you compare that to 2022 where the median year on year forecast was 56% and they actually landed at 42%, you can see kind of the conservatism and expectations for this year are markedly down on what people were expecting this time last year. Additionally, the people are expecting to invest much less in OPEX and, and headcount. If you look at the chart, 1 over opex growth is expected to only be 11% versus 53% a year ago. And on the far side, headcount growth is only expected to be 8% versus 40% a year ago. That hopefully will have the desired impact on ebitda which you can see in the middle here. But it is a very dramatic shift both in top line expectations and also further investment in opex. Reduction in force, reduction in headcounts. I'd say this is more common than not when we talk to companies that they've have implemented one, if not multiple reductions in force. If you look at just Q1 of this year alone, 68% of the companies that we surveyed have implemented a rift this year. Interestingly, if you actually break out that 68% which is the number below the 40%, below the 40% represents companies that are operating below a rule of 40, so less efficient. They also have less than two years of cash Runway. So you can think about that posture as kind of one more of, I don't want to say necessity, but more one of defensiveness and kind of extending the Runway. If you look the balance, the Delta between the 40% and the 68% are companies that are, they are rule of 40 companies. They do have more than two years of growth and they're doing that more to reallocate resources and doing it from a posture of strength. If we look at the median size RIF today, it's 14%. And most of the companies that we're talking to are not planning to increase or fill those positions for the rest of the year.

In addition to actually rethinking the size of teams and the organizations of teams, we've also seen a number of examples of companies really shift the way in which they're running different meetings and different tactical approaches to drive a culture of performance. And so we'll walk through a couple case studies here. But first, just to think back, it's hard to believe it was only two two years ago. But back in 2021 when we were amidst the so called talent wars, many companies were forced to take a very bottoms up approach when it came to recruiting and retaining their employees. As a result entering 2022 with quite bloated teams, but also in bloated incentives that didn't necessarily align with those of efficient and peak performance. And so from a cultural standpoint, what we've seen is companies really rethink how they are bringing their teams together and ensuring that they're all rowing in the same direction. We talked to a leader that was bringing not just their sales teams together at the beginning of each quarter, but including marketing, customer success and even product teams in the same room to make sure they were all aligned on what those performance metrics were and really rowing towards a path of profitability from an incentive standpoint, we've also seen some companies implement changes to drive non regrettable churn. So again, thinking through how do we retain and actually incentivize our top performers to continuing to drive that high performance, but make it a less attractive place for some of that bottom performing tier to work at. And so what we've seen is quotas have a minimal floor to them that have really been risen. Companies starting to implement clawbacks to a much greater extent and I think also looking to teams that historically we haven't necessarily measured performance against, including engineering. Another lever that we've seen companies increasingly use over the past year and expect to use even more so in upcoming years is offshoring. This is actually hot off the press. We ran an analysis in the past couple months and across the companies that we surveyed over over 70% were using offshore resources in some form or fashion. What was interesting is we might expect that this becomes more relevant as you scale your teams. But the most common timeframe in which companies did start to implement and utilize offshoring was when they had less than 25 employees. So again, just part of the way that they're building their teams and really getting more leverage. There's obviously a number of different roles that this may be relevant to, and as a result, different geographies that you might pull from. But we're still seeing geographies like Eastern Europe, the Philippines, India as well as Brazil and other parts of South America be most common. And on average are seeing a cost savings of about 50% for offshore resourcing relative to their equivalent counterparts. Again, I think from a role perspective, you can think about roles across G and A, accounting, recruiting, sales. We've seen some SDRs as well as, of course, customer success be offshored. And then finally engineering, which in addition to offshoring, we'll talk about a number of ways to really drive performance and productivity internally.

So engineering efficiency is now something that is becoming very top of mind for companies. One, an area probably that has been historically less scrutinized. This is a framework that we actually pulled together internally to help our portfolio companies really think about resource allocation of their engineering teams. The orange part of this pie chart we call keeping the lights on. This is the 10 to 15% of resources that you should allocate to ensure that you're meeting the minimum level of requirements that your customers, customers expect from you. The blue parts of this pie chart are really elective investments. And this is not to scale, but new capabilities. We sort of see that as 50% of resource allocation. These are things like adding a new product, adding a new feature, quality improvements. This is more focused on customer requests or increasing your security posture or things like that. This is usually 25, 30% or so. And then the balance is really focused on internal productivity. This is tools for your developers or how to reduce the size of the keeping the lights on bucket here. We're actually also seeing a number of software tools being built to help their VPNs or CTOs monitor this closely. And these are increasing in adoption across the companies that we're speaking to as this becomes more of a priority. I alluded to this earlier, but AI is here and is being implemented far and wide across the companies that we're talking to. Initially, this was largely being used for product enhancements and how to create a better, better customer experience. But increasingly. Which is the bottom pie chart here? 57% of the companies that we analyzed are now using AI for some internal productivity use case. On the previous slide we were talking about engineering efficiency. So you see things like Copilot being adopted for code generation and code review, but that also extends across lots of other functions in the enterprise. Sales and marketing people are using to generate copy, they're using it to generate call transcripts. And you know, customer support is another area where we've seen a lot of adoption with things like chatbots. So still in the early innings, but I think the pace of adoption that we've seen here has been incredible. And a lot of the advantage advice that the best technologists in our network are giving our portfolio companies is just get started and keep experimenting with these tools to start building that muscle and building these processes into your workflows.

So we'll end with just a few takeaways. As we started with again, the balance of growth versus efficiency has shifted and it's hard to say for however long. But I think what's clear is efficient growth is what matters. It's not just efficiency. Growth always has and always will matter and we're starting to see that come back into balance in the last quarter. In particular with that context, we are in a very challenging era and we've seen impact to growth efficiency across almost every type of company and every type of scale. With obviously certain companies in different sectors like Go to market and vertical SaaS being more heavily impacted than others. This isn't gone yet. The beginning of this year has continued to be challenging and although many companies have started to and will continue to implement really thoughtful ways to manage their costs, some of those impacts haven't yet caught up to the degradation and growth that we've seen. Cash conservation remains critical and so again, encouraging all the leaders and companies within our portfolio to really make sure that they have clear visibility into at least two years of Runway for the time being in order to do so. How are they tactically managing those costs? Again, we talked through some of those foundational changes that have really been implemented for the past over a year now, and thinking about the overall size of your teams, pausing, hiring, unfortunately needing to do rifts in many cases, as well as tool rationalization all the way up to more meaningful changes and how you're operating, how you're measuring productivity, how you're incentivizing your teams to really drive high performance, and then thinking about more novel ways to use AI and other means just to uplevel the efficiency of your overall growth, we'll end with just a few resources here. Again, we ran through a ton of data today and we are very excited to share a lot of this on our website. So Seth and I will hang around for a bit afterwards and we have some postcards with a QR code on it. You can scan and access all of this content. I also just wanted to reiterate what Seth mentioned around our go to Market series. I think no matter what sector you're in, what scale you are in, almost every board meeting is starting with a real deep dive into the go to market health. And so we have been really excited to put together a view of 200 plus data points of companies and how they're thinking about very granular pieces of go to market strategy incentives across sales, marketing, customer success org structure, what do their own tech stacks look like and how are they driving their strategies and it's this era. Thank you all. It's always a real pleasure to share our latest insights at Saster and as I said, Seth and I will hang around in the back corner if there's any questions. Welcome you to come up and look forward to engaging with many of you on an ongoing basis as well.

Thank you.

Ram. I. Sam baby. It. Sam. Sa. You. La. Sam. La. Sa. You. It's. It. Sam.

Please welcome Preangum's partner Peter Speck, Dawn Capital's principal Shamila Bankia and Open View's operating partner Kyle Poyer.

Hello.

How's everyone doing? Not all at once.

Great. Love the post lunch energy.

Yeah.

No thanks for thanks for joining us and welcome to the VC Ask Me Anything and the purpose of this session is really to have the audience ask any question you would like to ask us. We have gotten via social media before on Twitter and more a few questions from the online community that we'll go through here and discuss. But this session is really about engagement and so I encourage you to get up ask questions that you want to ask any of us or in general to the VC world. But before we kick it off, maybe we start briefly with each of each of you or each of us spending 30 seconds about the sweet spot of your firm and what your fund is doing.

Yeah everyone. Kyle from Open View. I'm on the operating side so I work our portfolio companies post investment but I can speak about both sides from an investment standpoint. We're on our seventh fund, it's around 500 million. We invest generally in series A, series B, series c in all B2B SaaS so extremely focused investment strategy. Other thing to call out is we think about investing in terms of the expansion stage. So post product Market fit. As you're scaling, go to market and hi everyone.

I'm Shamila, principal at Dawn Capital. We actually invest in very, very similar things to Open View. We're just chatting about that earlier. So Series A, Series B investments, B2B, SaaS and FinTech typically write in check sizes of anywhere from 5 or 10 on the low side to 30 or 40 on the high side. We manage about 3 billion in capital today and our last fund is about $500 million. So very excited to get to hear all your questions and nice to meet you all.

And rounding us off, I'm Peter from Crandom. Crandom is an early stage fund, Pan European, also an office in San Francisco focusing on seed. And Series A check size is typically between 1 and 20 million back companies like Spotify, Klarna, Isettle and many more. Also on the SaaS side. And yeah, kicking this session off here, my first question is one about investments and we got this online and maybe Shamila, you can tell more here. Tell us about your most recent investment or Dawn's most recent investment.

Yeah, and there's a question just to figure out why we did it, scale, etc. Yeah, cool. So I'll talk about one of my more recent investments first and then we'll talk about one of our later investments which was just announced a couple of weeks ago in a couple of minutes. So the last deal that I was involved in was a company called for Noa. It's a B2B tax automation platform. So think you know your Uber and you're trying to figure out how to effectively automate your tax taxes across your entire portfolio of riders, how to get your tax reported on time, correctly, accurately and without hassle to the team. So that was the Series B that we participated in. It was about a $60 million Series B. The reason that we loved that deal was for many reasons. The first of which was that it was an exciting market. I think there's lots of regulatory change happening from a tax perspective. As you can imagine, as we head into a recession, there's much more focus on actually collecting income by governments. So everyone's thinking about this very practically. The market is fantastic and growing and supports multiple competitors like Avalara, who you may have heard of, or Service or Vertex. The second reason, which I think is probably more interesting to you is the actual company performance. So the company was going extremely fast, to use use your words. Kyle had kind of proven out product market fit and signed over 20 different logos, big enterprise logos with extremely exciting ACVs and equally exciting economics. So the actual fundamentals of the business were exciting beyond the market, which made us super keen to invest there. And then the final reason was the team. So the guys who actually founded this used to work at Uber. They used to lead Uber's Croatia business as general managers, as they were GMs got hounded by the tax authorities for not filing their taxes on time. So it's actually inspired by an actual product they had built internally and then spun out. So they were the right people to actually take this forward and build the business. And actually Uber is one of their really, really big customers. So I think the story there in general is businesses that continue to be in exciting markets, continue to perform extremely well with great economics, are still raising a lot of capital in this environment. The second I'll mention is a company called flowx AI, which is a banking automation platform. So think about legacy banking companies. They have all this really, really, really old infrastructure and they need to figure out a way to actually build new applications with this super old legacy stack. So instead of ripping everything out and bringing a bunch of new, cool, exciting SaaS tools, they actually want to leverage what they have to actually build products efficiently and effectively. So that's a company based out of Romania. We just led a $20 million Series A round for that business as well. And again, similar dynamics, right? Great market where actually if you look at the different sectors that are spending today, banks are some of the only parts of the market that are still actively buying software. So lots of momentum driven by, driven by that trend. Legacy infrastructure isn't going anywhere. It's much more expensive for you to actually change your existing stack versus essentially try to leverage it and sweat your assets and build your products and applications on top. And really good economics going super fast with a very, very small team in Romania and a team of founders who've actually spent again, lots of time with Apollo. So I think across those two deals, you kind of see what our, our investment thesis and strategy is. It's very much, you know, hoping to be in large, exciting, fast moving, dynamic markets, hoping to work with businesses that are actually capitalizing on opportunity, growing extremely quickly to take advantage of opportunity ahead of them. But also keeping in mind core economics, such as paybacks, which are important, gross margins also important. And finally, teams that are particularly well suited to capture opportunity and attract talent that helps them build the business into, you know, hopefully both of these become multibandular outcomes out of Europe.

That sounds, that sounds very exciting. One question to, you know, one of these investments, how how have the your discussions, you know, internally been between like high growth and efficiency these dates when you think about these deals?

Yeah, well, I can kick it off on this one. On the investment landscape, one thing that people might not realize last year, investment pace, at least for our stage and the kinds of companies we look at that's in pace was down quite a bit. And I think part of that is relates to not just the economic environment, but a valuation mismatch. There were, there was a correction in valuations in the public market that happened very fast. But the expectations of founders, given past capital raises and just given, you know, past valuations, there wasn't a market clearing price where it was easy to get deals done. But VCs have a lot of capital, a lot of dry powder, a lot of them are looking to more actively invest. And at least from where I sit in the last quarter or two, we've seen deal pacing pick up pretty significantly. And so there is still capital available for efficient high growth businesses. And so I think that one thing just to get to Peter's question.

You.

Want to understand the characteristics of your business and your growth model. And there's a lot of advice right now around efficiency, efficiency, but efficiency means different things for different people. Really what we think about as a VC around efficiency is that the business has product, market fit, signs of repeatable go to market motion and is ready to scale up that motion and can do so in a way that might be burning capital today, but for every dollar they're spending, maybe they're getting 2, 3, 4, $5 back. And so you can prove out that it it's long term going to make a larger, more enduring business to be able to take that effort. And so I think the first thing is like understanding your model and how you're going to grow and how capital can support that, but also how you have to have alignment with your investors around how you're going to deploy capital, be honest with yourself around whether your motion is ready to scale. And also look at your end customers, the end markets. There are some buying environments where it is very hard to get a deal across the finish line. There are more stakeholders involved. Procurement is taking forever, right? Deal sizes are down, now might not be the time to scale in that type of buying environment, but there might be other verticals that you want to test. The areas where we've seen the most deal activity, at least for us lately have been in either vertical software companies or companies selling to a customer that it's a less affected by this economic environment. But in vertical SaaS, customers just have legacy tools that aren't working, are underserved by technology. And many of them have seen their businesses boom. It's very hard for them to hire staff. And so they want to use technology to automate processes. And so in those models, like, it's sort of like things were pre Covid days. Right. Where there's a lot of opportunity for fast forward growing companies. As long as you're efficient in how you deploy capital.

Yeah, I guess that the difference between what good look like 12 months ago versus now is probably night and day. We do this exercise to figure out across our whole portfolio what is the efficiency of every single company. So we did that exercise at the beginning of 2021, at the beginning of 2022 and at the beginning of this year. And, and frankly speaking, a lot of our companies were extremely inefficient because the market wasn't penalizing you for inefficiency. It didn't matter that you were burning $4 to make a dollar if you're growing 5x. Right. It was kind of like, well actually the value of that incremental revenue is so much stronger than your current burn. So you could raise money at really high prices, you could continue to aggressively gain market share. And the idea was that in the long run at some point your efficiency will look a lot better. I think looking at into this year, that's, that's kind of changed a lot. Right. I think growth expectations have shifted slightly, at least for most categories in software. I think there's pockets where it's different, like generative AI. But for a lot of categories of what you were saying around slower spending, especially enterprise software as a category, you know, 5x is kind of an anomaly now. It had become relatively normal actually a couple of years ago and now it's anomaly. What we're looking at more is, is actually are people growing 2x3x, are they doing that efficiently? And we aren't ever expecting anyone to be profitable as an early stage series A, series B business. But as Kyle was mentioning, I think for us it would be that for every two dollars you're burning, you're generating a dollar revenue. Right. So you're still not necessarily at one to one and you're not necessarily generating two bucks for every dollar that you're burning. But ultimately you're showing some signs of positive trends towards actual efficiency in your business. And the final thing that I'll say is obviously valuations have changed as well in a lot of categories, not all, but a lot of categories. I think we look at a lot of series B businesses as well. We have a big portfolio of series B plus companies, the Taiko Calibra, et cetera. And you know, a lot of those businesses are raising at 50, 60% discounts on a multiple perspective versus last year. So I think the realistic expectation for growth age businesses around exactly what prices should look like. Especially if you are in that 2x growth buckets with that 2 to 1 burn multiple are slightly different than they were 12, 18, 24 months ago.

Peter, let's take this to you. Let's say one of your companies were to say in the next year we're going to go from 1 to 4, but we're going to burn 10 million to get there. Is that a good plan, a bad plan? What do you say?

So that's roughly two and a half burn multiple, right? But I think for me actually, I mean for series B, the current expectations, our expectations, ideally you burn less than, you know, less than 2.

So.

So a bit similar to you, it's like burn multiple between 1-2x is what makes sense and the factors that influence is of course how high is your growth? Actually the slower your growth is, the more efficient your multiple needs to be. But it should be still in that benchmark of max 2 ideally. That said, if that company has three years of Runway and has a lot of cash on the bank and is, you know, is probably planning the fundraise in, you know, two years next, I think we are a bit more fine to saying like if you want to go aggressive, like one to four, one to four and a half this year we're fine with a two and a half export multiple as long as we have a good path to go, you know, lower than that. And the year that is leading up to, to the next fundraising process because there's sometimes market operation reasons why it makes sense to go slightly more aggressive in the early stage. But when it comes up into the 12 months before fundraising where these are the metrics that gonna count for that point in time, it's a 2x and below that is the right multiple. I think I'm pausing here and looking into the audience. Anyone has a question that he wants to ask Kyle or Shamila or myself about life, about the weather or maybe about VC stuff, There are two microphones, one here on the left, one here on the right.

Yes, please don't be forgot. VCs love to give unsolicited advice. So this is really up our alley right now. So Stephen, forth from Ibica So listening.

To the noise from your co colleagues, especially in the Bay Area, there's an obsession around investment in Gen AI stuff and I'm curious and there does not seem to be as much buzz around Gen AI at this conference as I had kind of expected.

What are your.

Either individual or funds thoughts on investments in generative AI and how you value these investments and how.

Those investments are going to get monetized going forward?

I know that's a lot of questions piled together, but maybe just the first one. What's your general attitude towards investment in generative AI?

I can start. Was recently asked this question actually by an lp. So I have a really nice, I hopefully helpful answer for you.

So.

I think there's lots of buzz about denibea in Europe as well. I would say from a company perspective at least at dawn, we're probably talking about 150 companies in Europe that are building something in the space. I think a lot of them are very, very early seed stage, some stuff coming up to Series A. It's probably been one or two Series Bs in Europe that have happened in the space. The market is extremely early. But I think the buzz exists and it's there. And I think what we at dawn are trying to think through is a framework to figure out, you know, how much of this is a trend and how much of this is hype. And I think the expectation for valuation depends whether it's a trend or whether it's hype. And what do I mean by that? I think there's lots of opportunities happening at the application layer. So you guys have probably all tried ChatGPT. It's amazing, it's incredible. Everyone's planning their trips on it, kids are doing their homework on it. It's an incredible application. And so a lot of businesses that we've seen at least are building something similar to that. A conversational engine that helps you write blog posts.

Costs.

Right. Bids. Right. Legal contracts.

Right.

Helping you essentially harness a lot of that power with some softer feature enhancement to drive that specificity that you need in your particular vertical or industry. I think for us, what good looks like there is very much, okay, great, you're doing something that's interesting and important. You're probably growing really, really fast because it's an important conversation right now and everyone's excited about. But for us, what we think of as a big scalable business in the space is something that does two things. One is something that ultimately fundamentally transforms your entire workflow. So for us, what that means is beyond going into ChatGPT and saying something, you're building a layer of charge that says something, kind of taking multiple steps that would have taken you months to pull together. That happening from a workflow perspective in minutes, hours, days is significant. And the actual attachment to that from an RI perspective is important as well. So how much does that workflow get you in terms of revenue? Does it increase Your revenue by 50% if you use the tool? Does it decrease your cost by 2x? Are you able to actually let go of half your team or save half their time by using this tool? So what are the tangible impacts of the workflow benefit to, to your business? And the second thing which I think is quite important is ultimately the market is large, right? I mean there's lots of big exciting players in the space, Both in the US and Europe, right? Stability AI is based here in Europe. In the US obviously OpenAI, there's a couple of other, there's multiple different large language models that exist and they will keep getting better over time because they've raised tens of billions of dollars. And so as a SaaS company, the question is how do you create defensibility for yourself in the space? And I think what's interesting to us there is people that somehow have managed to tap into use cases that actually use internal data that's not publicly accessible because that's all of a sudden advantage. So the things that we are excited about in the space are things that kind of hit those two different zones and those businesses are commanding premium multiples because ultimately those are game changing fundamental businesses that we believe will be big at the application layer and we're spending lots of time as well at the infrastructure layer. I mean, in the U.S. i think everyone has done a vector database which is like the semantic search that enables you to actually use large language models appropriately and actually create more enterprise applications. So a critical part of actually building enterprise SaaS use cases, and there's quite a few in Europe as well that have gotten funded and I think all the tools, the picks and shovels that actually help you build stuff there are also interesting, but again very early ultimately. The other interesting thing I'll share is a lot of our portfolio companies have already integrated OpenAI products or features into their products, right? So there's just so many different ways in which the angle is being played, but we're definitely not ignoring it. I think It's a massive SaaS trend. Not everyone has to to build something there. But it is possible, may I say likely, that several big companies will be built out of There.

Yeah, I just want to see more companies adopt AI in their internal operations. Right. And how they build products, how they go to market. All the hype is around what we're going to sell to the customer and it feels like we're in the very first inning of internal operations and AI. Final thought is if you don't have AI in your domain, no VC is going to be interested. Just a joke.

Next question from. From the audience, anyone?

Yeah, hi, it's Paul Ma here with Categorical.

Might just be me, but I heard a hell of a lot of negativity.

Around your valuations and expectations and you know, all the things that founders should do. Where's the positivity you think about? Could you maybe share, could the panel.

Share some of the categories that they think are unsung heroes, unlike gen AI and when there's a low data threshold.

You'Re talking about what they call a $0 billion market.

It's a brand new category, no proof points.

How do you guys go about evaluating.

Their worth to you guys, whether you're going to invest.

And maybe if you.

Really want to, you can share a couple of the categories you're interested for the future?

Yeah, well, a lot, a lot in that question. Thank you. I'm happy to kick off with some thoughts. I mean my take is from a VC perspective. I mean I'm not on the investment side, but if I were, I would look at now is when I'd actually want to make the most investments. Because we have companies that have proven that they have mission critical products that are sticky despite challenging selling environments. We have companies with efficient growth models that can grow without burning a ton of capital and we have valuations that are reasonable. And so from a VC perspective, this is the time that a VC is going to make a fund returning investment just based on those macro kind of economic factors. And so I think like from a VC standpoint, the sentiment from where I sit is actually much more positive than maybe what is the sentiment shared with founders. That's it. In terms of specific spaces around areas that we're getting excited mentioned vertical software before. So looking we do a similar exercise that Dom mentioned around looking at our portfolio companies. The folks that have been leased affected by any macroeconomic headwinds have been in industry verticals where unemployment rate is really low, there's not enough skilled workers in spaces like manufacturing, in hair salons. Right. And other kinds of specific industries. And so a number of our most recent investments have been vertical SaaS companies. The other thing in vertical SaaS is that we've learned the playbook for building a big company has a software component but there's also often an embedded payments component, Fintech opportunities Marketplace, potentially marketing or helping customers with marketing and lead generation. So the number of revenue streams within vertical SaaS makes the TAM much bigger than people thought. And so even one of our most recent investments that we announced was a series C in parts tech which is an automotive marketplace that connects essentially the local car repair shop with all the suppliers of the parts that they need to do a job. And so it's an e commerce like marketplace, very product led growth, very self service heavy but they have a competitive advantage around the data that they have access to and all the partnerships where they can get inventory on their platform and cars still need to be repaired even if the economy is not doing, doing well. Right. And for every hour a shop spends sourcing a part by you know, calling folks on the phone that time they can't spend billing a customer. So there's so many of those opportunities in SaaS that at least my vantage point like we are very much in the early innings of software adoption across all the places where it can live and AI is going to help us accelerate that software adoption but there's still plenty right Runway maybe maybe just adding.

On to that is whenever in venture we see new categories emerging rapidly, it seems like the excitement is extremely high in venture and everyone wants to find the next big new thing and new categories emerging. I mean think about crypto back then a few years back also one of the largest hypes and like categories emerging. And I think the excitement level of that is, is in the early days in particular high because the, because funds try to hit the early winners to take potentially large, large market share. I think for AI in particular or gen AI, it's is the fundamental belief that this will be a lasting long term trend and so relevant for so many industries. Which basically explains why so many VCs just look so closely into that area. Because the belief is high that the impact of this will be lasting and very large on many aspects in SaaS and technology in general. And that to the point you ask how can you evaluate market size and how big these things become. It's also part of psychology in VC I think where sometimes you can raise more on vision than on actual numbers. And as long as the vision is still like this is massive and it's emerging and we can approve everything yet it's also there that this is potentially massive and you can pay up because it can become Massive. So there's a little bit of the element of that it's still early days, it's harder to grasp. But VCs are also there to invest in sort of like big grand visions.

Hi, I'm Abhishek from Togai. We help companies do usage based billing.

I had a couple questions, not necessarily.

Related, a little bit of insight Scoop on how VCs work.

Right.

How do you optimize for fund versus partner?

Right.

So we've raised a couple of times.

From so far during building a company and almost each time we raised we've had scenarios where we wanted to work on with a certain partner in a.

Fund but somebody else had reached out.

And we didn't know how to navigate to the right partner. So that didn't go through.

Right.

So how does, how do you within a fund, how do you guys work with each other within partners, within deals flows.

Right.

That's one.

And the second one would be valuations.

I know everybody talks about how as a founder should we think of dilution?

Right.

Any broad rules or thumb rules on how much should we be diluting at each stage and how much should a founder be holding? You know, assuming the company eventually goes public and exit.

Right.

So yeah, thank you.

I'm happy to take the first one. So I think there are two things you can optimize for as a founder. Ending up at exactly the person or partner or check writer, which can be a principal as well or sometimes in some funds, investment managers ending up with the right person that you envisioned as hopefully the right fit for you or optimizing for conversion in general. And I think there are these might not be aligned in this aspect because typically the people that reach out to you are often the ones that are very excited about a specific area. And so if you would sort of ask me like hey Peter, you know, I'm building let's say in healthcare in that area. Like I would probably know internally who are the 23 most people that A are most knowledgeable about the area, but B where I would also feel that they have the biggest excitement about a certain area and thus sort of like increasing your likelihood of conversion. Because people have different preferences which from the outside is sometimes harder to see. And I think the benefit when people are when you have proactive inbound from check writers and funds is that those are likely the people who have more excitement for what you're doing and have sort of like an increased likelihood. While sometimes the person or partner that sort of like you want to reach out maybe doesn't have that. And so it's a little bit of a trade off in between. Like inbound interest from a certain person is sometimes increases your likelihood of conversion versus trying to get to a certain person. When you really like fixated on a certain person, you can still try to get an intro to a person. I mean, like if you got inbound, you can still try to get an intro to the right person, find good reasons for it, ask your existing investors or angels to make an intro to that person. But I think in general, I would say say that the people that reach out to you are typically also people that have a higher likelihood of conversion about your topic because interest is naturally there.

Yeah, I would agree. And I would say, I think kind of bits of it from that perspective is that we're all quite small collaborative funds. So we don't have hundreds of partners. We have really 10 people who effectively across all of them do our 20, 25 deals per fund. And so in our case, if you reached out to someone, for example, if you were a data business and you reached out to one of the fintech partners, they would happily take the call and bring the data partner on the call as well.

Right.

So I think you can also trust that a lot of funds are thinking actively about how to be helpful to you.

Right.

Because if I only know about fintech and your data business, I'm not going to be helpful to your board. So actually it makes no sense for me to be on your board. So you can also trust that you end up with the right person within the firm. Because ultimately the biggest successes seem to happen when there is a good amount of chemistry from a personal and sector perspective across partner and vc.

Right.

Because ultimately we want to help you. We don't want to just sit there and actually provide value to you. And then your second question on valuations I can start to help address. I had a session this morning specifically on valuations and how they've changed. So the reality is, if you look at the best data available, which is public market data, valuations have effectively halved in each single recession. So if you look at the combable things went from trading at 10 times, let's take a market, market cap of valuation revenue to five times. Right. In the span of a year.

Right.

So a 50% reduction in valuations at that point in time. If you run the same analysis on the go, financial crisis multiples went from trading at about 5x to about 3x. So a little bit less, but still a reduction, call it, you know, whatever, 40%, 30%. And if you look at where we are today, as of last year, public companies are trading about 13 times now at about, you know, 6, 7. Right? So again, 50% reduction. I think what's important is to translate that into what it means for you guys. Obviously a public multiple for a billion dollar SaaS company, trading effects doesn't mean as much to you guys. But I think what it means is that you can expect different levels of dilution on average, right? There will be exceptions that are higher on lower. But I think what you can say almost conclusively is corrections in terms of dilution are expected. So think about last year, lots of founders were rightly raising 10% dilution in their rounds, right? So based on this math that I've shared, you can perhaps expect that that would be 20%, right. With 15%. So I think have that expectation in terms of how things happened last year versus how they're going to happen moving forward. There will be a slight shift and for growth stage businesses, so everyone who is series B plus, you are going to be compared to public companies. So if there is no public company trading at 100x LTM revenue, which there isn't right now, it's unlikely, it's not impossible. I have seen these deals done. It's not impossible, but it is unlikely that you're going to get 100 times. So have the right expectations in mind, right? And that also helps you evaluate whether you're getting a good deal or a bad deal, right? Because you want to get the right deal for you, you want to be valued for what you're worth. But you must also have realistic expectations about exactly where you end up. So for example, all the deals that we've seen happening on average at series b are about 15 times forward, right? I think I can't comment on seed. I know nothing about seed. I don't even know how you think about in the seed. But that's a massive correction from two years ago where that number would have been 30, 50 times, right? So expect that change. And it's not a sign of death of the market and negativity, it's a sign of reality, right? The best SaaS businesses in the world, billion dollar businesses growing 50% are trading at seven times. So think to yourself, why should I trade at 100 when thinking about getting capital from investors?

One other thing I'll add. So this question of the partner versus firm is an interesting one. We do a lot of research on how founders make decisions, right, about what VCs they go with and the partner. The choice of working with a specific partner is often the number one decision criteria. That, and then followed by like, it's a fair terms, fair valuation. The firm criteria is normally towards the bottom. And if you think about like, where does value add fall? It's very low, I think, because there's not a whole lot of expectation that your VC can add value. It's like, let's, let's have them not hurt our valuation. I would challenge you to rethink about those criteria. And to me, folks, put too much pressure on the individual board member and there's so much opportunity in the broader firm across the platform, the network, the access to portfolio companies, the resources that you have available. And you could almost think about your board point as, yes, they're on your board, but they're also kind of your customer success manager, getting you access to everything. And so test them on that as part of the diligence process. Like, are they actually bringing you customers? Are they introducing you to the right people? Are they helping you or bringing in people that can help you grow your business? I think that that's going to be as important in the long run. Like, their partner could change. They could leave firms. Right. But you're with that firm for a very long period of time.

Next question here on the right.

You're right.

I'm presuming.

My name is Jeff Kaufman.