SaaStr 772: What Really Matters in SaaS in 2025 with Jason Lemkin and Dave Kellogg

Welcome to the official Saster podcast where you can hear some of the best Saster speakers. This is where the cloud meets up today on the saster podcast. Can AI really enable B2B companies to access more budget or is it all being shifted around by CEOs?

Yeah, so I hate to say this, but I think the answer is yes, I. E. Both. So what do I mean by that? I saw a recent study from Battery called the battery state of enterprise tech spending and they're showing what my gut was feeling in the data Tech Enterprise Tech spend sentiment index and it hit its low in the first quarter of 2023 at 50.2 and it's been coming up every quarter since. Its Latest reading is 65.1. So I do feel like we're coming out of the tunnel, if you will, of this downturn that people are opening up their budgets against. So look, I think if you look at the people who are growing budget, 59% expected and say the driver is experimental budget, which makes an enormous amount of sense given AI, right? And I think they are actually able to free up budget and I think the budget comes from headcount. If I want to pay for an AI sdr, I know where to get the money.

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Hey everybody, join me at the world's largest SAST event. It's Saster annual. We're back. It's the 11th. My gosh, 11th annual Saster annual in May 2025. We're back earlier in the year where we used to be when everyone has a little bit more energy than in the fall. So it's going to be great. May 13th to 15th back on our 40 plus acre campus in the SF Bay Area. It's gotta be one of the best ways to scale faster and use my code. November 20th for 20 off the last early bird tickets. That's November 20th at saster annual.com See you there. Cool. Hello everybody that is joining us live on workshop Wednesday. If you're watching on social media, go to saster.com and somewhere in the nav there's workshop Wednesdays so you can join live. Join us like a couple hundred folks will and ask folks like David meet questions in real time. But I thought it would be good before we get into 2025 and it's coming up. But before we get the year out, I thought I would just go over some of the things that I've been thinking about this year in SASS and Cloud and get Dave's thoughts. And for folks that I know a lot of you now follow Dave Kellogg. The blog is Kel Blog. He's got his own podcast and I know many of you in particular love his views on metrics. But Dave has not only been a successful SaaS and Cloud CEO, he's on the board of some great ones. He's on the board of Elation. Right. Which is pre IPO one, hundreds of millions. He's just joined another AI one that's very late stage in the financial compliance space and a bunch of others. So anyhow, I put together 10, 10 of the things that maybe not really matters but are going on in my mind and SAS and I wanted to get Dave's thoughts and maybe provide you two perspectives and that little fun. So, Dave, thanks for coming back and joining.

Yeah, thanks for having me. It's great to be here.

Yeah. I wrote a blog post yesterday on Saster and we're going to do another session on this on that. 2025 may be the year of Peipos because folks are giving up Genesis, which is as old as it gets in the call center software. This is a hardware company turned SaaS. They just filed to go IPO this week. The last I, I think they said they're at 1.5 billion in ARR and the last round was at 20 something billion by Salesforce at the peak of 2021. I don't think they'll be worth 21 billion with those metrics. But I think people are giving up and saying let's bracket, let's just, we got to get liquidity, let's ipo. Is that what do you see that too? Do you think there'll be a bunch of IPOs in 2025 just to finally get it done?

Think when PE buys relatively large software companies.

Yeah.

Like when you're buying smaller ones, it's easier just to flip it to another PE firm. There's a whole ecosystem and buy it at 20 million, grow it to 50 million, flip it, they grow it to 100, flip it again. But when you're getting to those big numbers like billions in ARR, I think the flip market is a lot smaller. So I do think it's going to end up pushing people towards IPOs. And as the IPO bar is just spectacularly high right now, I think it's around 500 million in ARR by my math. But the first company I worked at went public at 30 million. And back when I started at Host Analytics, I remember Zendex came out roughly at that time and they were at like 70 million or 80 million.

Yeah.

I was like, oh, if I can get to that size, I can go public. And then for a while I thought it was 200 million and now it's 500 million.

Yeah, it's crazy. Yeah. Box and HubSpot IPO'd at a hundred million, Box at a hundred million. Although they'd IPO Shopify. IPO'd at a hundred million, I think. But they all would IPO at an $800 million valuation. So they weren't even unicorns at the time. Yeah. And what. So one other PE question. Selling to PE when you're early, 20 million, 30 million, it's not super early. Right. It's a whole nother track besides the IPO track and to some extent the corporate M and a track where what are you seeing as the bar where PE will get interested, will make an offer to a SaaS company. In today's world, what sort of metrics is PE looking for today?

Yeah, so I think there's two things. One, one of the nice things about PE is this kind of large undiscovered world. There are PE companies that specialize in, I'll call it the bottom tier niche of buying even $10 million founder owned businesses. Completely bootstrapped.

Right.

And they're going to buy it, they're going to, in my words, professionalize it and then they're going to flip it to a bigger PE shop who will in turn use it as a tuck in or flip it again. So this ecosystem is really broad. Right. You have the giant cheque privates that make the news, but you also, all the way down, you find people buying $10 million companies, I would argue in the range you talked about, 30 to 50. The thing, the biggest thing I've learned about working with PE is I thought they were fixer, upper people and they'd buy, oh, it's 30 million and losing 20% EBITDA. But we'll buy it anyway because we know how to fix it. And I don't actually think many of them like to do that. They want it fixed first. That was probably the biggest insight. So if I was trying to sell a $30 million ARR company, I would not assume that, oh, I'll keep minus 30% free cash flow margins because the PE guys will assume they can come in, buy it and fix it. That's not the case. You get punished on the valuation, you should fix it yourself. Prove quote unquote that you can drive reasonable cash flow. And then, then it's going to be interesting for them. But they're not big buyers of the. This is why it's so hard. Because if you start out VC back and you're on this rocket ship trajectory with super high burn rate and the growth goes away and you still have the burn rate you need to readjust if you want to sell it to pe.

Yeah. My rough bar for and for folks that haven't. I don't know how many p firms buy SaaS and recurring revenue companies, but it's probably well over 100. Right. The big names are the Vistas and the tomo bravos for the big deals but there's tons of them we haven't heard of. And there's got to be a hundred. Right. And they're.

When I sold my last company, there were 70 on the bankers long list. 70. That was, that was like the number of sims we mailed out and that was after filtering. It's vast. The number of these firms is just mind blowing.

And they. That was for Host Analytics.

Yeah.

And they approve 70. But do you. You drove that process with a banker. How the hell did you talk to 70?

So we did have a banker and that was the long list. Right. We sit down with the banker and say who do you want to mail a teaser to? And they started with their long list, filtered it to the long list they showed me and that was like 60 or 70. I think those got teasers, very short brief. And then the ones who came back then got the confidence and were willing to sign an NDA. They got the sim, the confidential information memorandum that had considerable detail in the company. And then the next level of that filter is loi. Okay. Who's really interested? Give us a letter of interest. And then the next lever is going to exclusivity and selling.

Yeah. So for folks out there just. And I'm gonna. I've teased this over the years at Saster, but I'm gonna do more of it because the IPO bar is so high today. Right. Whether it's really 500 million growing 50% like the only three we've had since 2021 Klaviyo rubric and one stream. Whether it's lower, we'll learn next year.

Yeah.

But this is a great example. Host analytics had seven. There's gotta be over a hundred because you got 70 right. And so and to here's my. And this is why I want to get a vibe check from Dave. My rough rule of thumb today is 2030 0. So what I mean is to get a PE firm interested in you, you've got to hit 20 million ARR. I think it used to be 10 when I started but it's gone up because PE firms want to see truly recurring revenue. So this is and challenge this but I see it as 20 million ARR. You start to get the inbounds. Okay. Or just before third now not 100% growth, 30% or higher. I think below 30% they're concerned it's not enough. And then 0% has to be your losses. Like they want you not to be losing. Let's forget about Gap or Schmap or. But cash flow neutral would be ideal because then it's an annuity. Yeah, the 2030 zero is an annuity. And what will they pay? It could be 3 to 4x AR at the low range. I've seen some deals at 10x even with mediocre growth. When it's strategic, that's the hack. They're not these SaaS P firms are not trying to buy you at 1x EBITDA like old school folks are. It's not great. It's not stripe buying some crypto firm for 200x. Er, but the deals often are decent. Right. Objectively speaking. But the burn has to be almost nothing. Right. And the growth has to be good enough. Correct. And so when I see founders that are crossing the double digits, right, crossing 10 million, but they're not on the venture track, to be honest, I tell them you gotta aim for 2030 0.

Yeah, I support that advice. I think the hardest part is people who are not on the venture track who think they are and then they're going to make the wrong decisions. So you got to realize what track you're on. And we can talk about that if you want to. But I think your rule of thumb is, look, the ultimate thing, the crazy thing about the kind of minimum size is these people have to deploy large amounts of capital. So they have a minimum check size. Right. If they're going to pay 5x for a company and you're 20 million, they're going to pay 100 million. But if they have 1.5 billion to deploy, that's 15 deals. So they tend some of them have minimum check sizes of 50 million or a hundred million for what they'll write. So that's the other argument for why you have to Be a certain size. It's because some funds won't even talk to you because they need to deploy more capital. Yeah.

Yeah. Sometimes they're hap there. A lot of these deals are end up being tuck in deals. They'll combine it with another portfolio company that's at 100 million or more but it's a good.

And that's where they pay a strategic multiples. Since you touched on that. Because there's basically a financial multiple. Call it today 4 to 6x. That's what I would call it. Just thumb in the air. But you get strategic multiples like 10x today. When the PE is acting like a strategic. Right. Because they get the synergies of strategic. Because they're tucking you into a company that has a salesforce and getting leverage. That's the way you get a strategic multiple from PE firm. And it definitely can be done.

Yeah. And then the last one and then we can spend our whole time on this one. But it's a good topic. I do think when you do the math if this is just something for founders to think about that if you're stressed. Right. If you're like goodness, I can't be one streamer klaviyo.

Okay.

Let me be honest. I can't be like yeah worry about that. But if you can get to this 2030020 million ARR 30 growth or higher not burning you are. These offers will come in like they may not happen but they come in like clockwork because they're paying kids to hunt these and you gotta have the fourth one's a hundred percent. You gotta have a hundred percent NRR close or they're not interested is a learning but. But if you raise it much more than a hundred million valuation it may be hard. Right. That's the last. It just. That's where you lose. Optionality I think is an over discussed topic in some ways. I say burn the boat sometimes and build. Do what it takes to build a great company.

Yep.

But there's a point where this P goes away. Right. If like the unicorns are going to struggle to do PE deals. They're just going to struggle to. It's just going to be structurally impossible. Right? Yes.

Yeah. It's going to be very hard for the board to say yes even if it's a good financial deal. I have this thing called for those kind of deals to happen. The dream has to die. I know it's a horrible expression but you have to actually extinguish the hope of the board to sell it for a Financial multiple. And that requires like a sustained period of bad performance. So you actually have two issues, like one is it objectively a good deal and two, is your board ready to take it? And as long as they think we can get back on IPO track, get to a billion, all that stuff, then that's hard. So there's a psychological process as well.

Yeah, it's a good topic. All right, we're gonna do one. Andy from Logical. I think you've met Andy before, talked to him back in the day.

Absolutely. I know Andy.

I was the first investor. It was a rocket ship. Then it had a year and a half of zero growth and then he turned it around and they were. They sold for almost 300 million at 20 something million ARR to P. So they. He hacked it in a good way. He'll talk about the pain. But he did this thing, he got it back to 2030 0, 100% NRR. And it's another. It's a great exit. The last round was at 100. Right. It didn't make. It was no open AI, but it was a great return for all the investors. And it's just something founders should understand and even guide to in some cases.

Absolutely. I think 20300 rule is good. I think if you're certainly selling a PE, I might try and get some more EBITDA out of it. I might go 2030, 10 if I want to juice the valuation, if it's possible. And on Andy's story at Logical the thing, I think the story far better than I do. But the thing I liked about the company, when he was in that 20, that mode of get growth and profit, or at least negative even cash flow, he was still innovating. And that's what a lot of people sacrifice.

Yeah.

And when I would talk to him, he would show me some of the cool stuff they were doing while they were doing that. And that was magic.

Yeah, it is that. That's true. Yeah. No one's the. The last point I'll say on this thing is no one's stupid. They have different goals. No buyer, no VC. You think VCs are stupid or Pete, they're not. They may have different goals than you and I do. They may be product nerds, they may not. They be maybe marketing nerds, they may be NRR nerds, but no one's stupid. And people can smell when innovation dies. Right. There is a market for that, but it's a very niche market to buy.

That's where you get your 4x. Right.

That's or maybe there was one today, the old Infusionsoft. The ConvertKit CEO wrote this up. I think they got acquired for 05x ARR. I think they had acquired for 50 million or 60 million. At 70 million.

That's the right one, but the wrong kind.

Yeah. Yeah. All right, so let's talk about 2025 for a minute and we will do more on this P thing. I think in today's world it should be discussed more, but. Okay, so let's switch gears for a minute. This is something that you've talked about and written about recently. I have Tomas Tungas did a great presentation at Saster about this that we just wrote up, but this is a meta topic for me and whether we're in a bubble for AI. Dave, can AI really enable B2B companies to access more budget or is it all being shifted around by CEOs?

Yeah, so I hate to say this, but I think the answer is yes, I. E. Both. So what do I mean by that? First, I do a couple things. One, I saw a recent study from Battery called the Battery State of Enterprise Tech spending and they're showing what my gut was feeling in the data, which is they have a enterprise tech spend sentiment index and it hit its low in the first quarter of 2023 at 50.2 and it's been coming up every quarter since. Its Latest reading is 65.1. So I do feel like we're coming out of the tunnel, if you will, of this downturn that people are opening up their budgets again. 74% of the people say they expect their budget to rise in the coming year. So I think one of the mistakes we as humans make is we always extrapolate the future from the recent past and that doesn't work at inflection points. And I do think we're coming out of a tunnel, so we need not to be fully bunkered in on our growth plans. I'm encouraging companies to be optimistic for the first time in maybe eight quarters. So look, I think if you look at the people who are growing budget, 59% expect it. Say the driver is experimental budget, which makes an enormous amount of sense given AI. Right. So people like I think the data space is getting rated for budget right now. Just basic data transformation data, warehousing all sorts of basic data tools because people want the AI tools that deliver the business value, not the infrastructure. So that category is getting rated. Those guys need to position hard around why you need me for AI. And then the AI use case people I think are doing quite well and I think they are actually able to free up budget and I think the budget comes from headcount just to use a. If I want to pay for an AI sdr, I know where to get the money. I can try and get it through vendor consolidation on the SaaS budget I can try and get it from freed up per seat pricing. Like my joke right now is it's a rotten time to be a per seat point solution, right? Because point solutions are under pressure and people are reducing seats. So the worst case scenario is point seat based priced point solution. So there's money being freed up by those two things. The question is where it's going. First answer is to AI. But as a line of business owner if I want to do something I can find the money from headcount. So I think this is good for tech. I think it frees up budget. I think we're still under pressure in the ways I described. But yes, there's remixing but yes, if you've got real business value or is the best example I can think of because. Because I know exactly where to get the money.

I think I don't have the answers here for the. The AISCR one is interesting and there's. There's a couple, there's several vendors that have rocketed in their growth because of it and it's that especially for startups and small and a group of a tech company, it's very easy to grab 20k there or 30k there, right? Which see depending on where you come in SaaS that could seem like a lot of money. Like holy cow. Like I've struggled to sell my product for 6k and these guys over there got 30k from the SDR budget. The only thing I would say is so all these brilliant people on X and Twitter that aren't in the daily B2B pontificate that this is so many VCs too. It's going to be magical. We're just going to take all this people budget and shove it into software and I think there's some evidence of it.

My.

My canary in the coal mine. So you talked about STRS mine is in the contact center which you know a bit about too. Right? And I somewhat accidentally have invested so much in the contact center from Talk desk to Front to Gorgeous which you know to Maestro QA and a bunch of others. And instantly a lot of that budget went from. From support humans to AI. Okay, in talk about what we call what is experimentation or not I'm not even sure. But immediately people would attempt to fire 20, 30, 40% of their contact center and pay this dollar per resolution. Salesforce is doing it too. Intercom I've already seen some pushback some and it's more just that the ethic it's just like the the old days of IVR and others like it works there's and it's great and the question is whether the pendulum's going to bounce back and forth which I think it will. The question I just don't know and maybe we don't have the answer is so that's why I'm not sure it's enduring that this budget rate like I think you will get more money and dial Pad went from 200 million last year to already 300 million AR this year on an AI boost and they denounced it. That's pretty epic right re acceleration but I just don't know if we're there are really a million jobs we're all going to fire people and give it to SaaS. I just think I don't know what's going to bail us out per se.

So my take on that issue is and I want to speak not from the perspective of the Pure Play AI vendor but just from the lack of a better term regular SaaS vendor. I do believe there's experimental budget. I don't think firing 40% of your cost center is an experiment. Personally I think that's reckless. Right. I guess I'm conservative but I do think people are I think a lot of line of business heads are under pressure to say go figure out how AI can make us more productive and I would go for that money all day long.

Yeah, the budget's there like it's exciting. Right? I just am not. I just don't know. I don't complain to be superstar. I don't know if this is a decade long trend or if it will end or if I guess the meta question we could chat forever is look I if you Gartner's data is there's 300 billion of SaaS software spend out there. It's a lot of money. Right. I'm not sure AI is going to turn that into 400 million or 600 million or 3 billion 3 trillion on its own. That's my meta concern is that you can see these examples but I wonder and I just don't know. I just don't know that AI I believe AI is as much table stakes more table stakes at a tactical level than it is budget enabler at a meta level. At a high level. I think you have to do it and it's hard, but it may not actually increase your revenue.

I think my take is slightly different but not conflictary. I think it's a productivity booster. We'll see other use cases that are. But to me it's juice. I can juice your app. Right. I could juice your SDRs. And that I think is real value.

Right.

To me, the most interesting AI use cases. I'm a boring person. Is the boring stuff it does. Let's summarize the notes from the sales call. Let's extract data from the sales conversation and populate the CRM. Right? Oh, that's. Let's go generate a first draft email to a customer first outline for a sales presentation. Let's do that based upon all the information we know. That's all really cool stuff. It makes me more productive that one of the issues you're going to face with your argument, Jason, is when everybody has it, are you actually more productive? So there's this kind of arm when you're the first person in town, you are.

I can't even tell which note taker or meeting summary app is even being used. They all have them.

Yeah, true. Including today.

Is it the other one is the sales. I don't even know.

Yeah, period.

All right, so we next one. Okay. I know we're context switching a lot, but this is a personal passion topic. I just thought it'd be fun to get your thoughts. I can't think of something that I'm more passionate about because of just the horrendous experiences we have at Saster with our own handful of vendors. I've never had worse experiences the handful of vendors we use. I have not had worse customer success experiences in my career. When I started Saster 20 right in the stuff in 2012, so much of the original content was the power of customer success to drive nrr. I think it's almost dead now that it reports to the CRO. Yeah. What do you think?

So I'm going to take the opposite one on this one. So I will confess to being a true believer for a couple reasons. One, little known fact, the founder of Host Analytics, Jim Eberlin, was also the founder of Gainsight. So I. I've known Gainsight since it was born. Any case, I've had a long exposure to the space. I was a true believer. And ironically, I want to twist this one back on you because your book right predictable revenue says go specialize roles in sales. And that's all CS is supposed to be. I think CS lost the plot. I think it was a good idea. I think it was specialization. Just like SDRs or specialization, just like outbound with specialization. I think customer success slash account management and we can talk about the distinction between the two is all kind of valid specialization of sales that you argued for. And I don't know if you made this metaphor or not, but I love it. So I have to share it, which is salespeople are like airplanes. They only make money when they're in the air. So anything we can do?

That might have been Aaron Ross, but yes.

Yeah, I don't know who came up with it, but I love it. And we want to keep our salespeople in the air. And customer success helps you do that. Now, I will say that here's the part I agree with you with Jason on the customer success manager as best friend. That's dead. I think they lost the plot and it became your best friend. Not somebody saying, I own your nrr. My name is Dave and my job is to make you go from 100 to 120 at your renewal. And you're not going to do that unless you're happy and achieving business outcomes. So how can I help you do that?

But how can you help me do it when I show up to the QBR and hey, some account manager comes that we've never heard of before and asks us to buy more crappy product we don't want? That's the playbook in 2020, literally. We did a QBR the other day and I. I don't do all of them, but sometimes I join them to learn. We just ended it after 10 minutes because it was an account manager who didn't know what saster was, what our data was, and just said everything's great. Can I sell you this other crappy product for your community that you've never seen? Can I demo it to, you know, what is this? The quarterly? Let me know if it's a QSR or quarterly sales review and I'll decide whether I want to talk with someone I've never heard of before that doesn't know how to spell saster and thinks there's an E or U in it and hasn't even spent nine seconds reviewing what we do. This is 100% of our QBRs are this Dave. Some new AM. Now that customer success is reported to the CRO, an AM shows up to sell me something that knows nothing.

Yeah, nothing. Painfully absent of my definition of CSM is do QBRs. And I know a lot of CSMs make that like their job description. And I Just I think this is part of customer success. Losing the plot in my mind that we got to get back to what our job is because I'm a believer in customer success. And our job here is to make accounts worth more money. And yeah, I don't do that by showing up with some guy who knows nothing about the account saying, please buy.

Why do we care? Dave, let me just ask you and then I'll give you an anecdote after that. Why do we. Why does. Why do we care if customer success gets more money for the account? If the customer is insanely happy? Like, insanely happy? I actually think. And I literally just had this discussion with the CEO of Samsara yesterday. It was a great one. Epic.

Epic.

Samsara went from like 1 to 7 to 70.

Yeah.

Okay. And you, how do you do that? You need your customers so happy that they want to buy more products. And I talk to them. How did you go? Multi product at Samsara? How did you go? Did you do it because growth plateaued and telematics. No, actually our telematic, Our initial product1 is growing as fast as the overall company. It's not plateauing. It's that our customers begged us to build this functionality to track drivers and trucks when we're already tracking. They begged us, so we built it. That's how you drive NRR up when they love your product so much that they say, dave, please build more for this. Not when an A shows up and tries to trick you into buying something you don't want. I feel like we've lost the picture that if you are beloved, everyone, even little Saster, if you're beloved, I want to buy more from you. What else do you like? My favorite app right now is Opus Clip. I even invested. What else do you guys got? Like, they just, oh, I'll buy everything they got because it's beloved.

I think the question, look, the question to me is two things triggered by that. One is it's a matter of degree. Like how many CSMs per ARR? I have three things for 1. It's a matter of degree. Should we. Should we have zero CSMs or should we just change the ratio of ARR they're managing? The other is the distinction between CSM and AM account manager in that model. Like, I'm not a big fan personally of the three tier model where you have an am, an AE and I'm pick two. And the thing I like all the way, I guess. One last thing. It depends on how big the customers are, right? On my first, when I worked at Salesforce, the first sales call I went on was the Qualcomm. That ae, that was his one account. That was it. That was his whole territory. And okay, when we're doing enterprise sales and there's a million dollar account and we have one AE on it, then we don't need to see a SAM. Right. Firstly, the relationship is managed by the AE. But now flip it around. Say it's a 20k a year package that we're grinding out or a 5k a year package. The more you're in that kind of grinder mode, the more I want sales selling airplanes in the air and I want somebody else to be selling behind, going, hey, how's it going? You're successful, you're going to renew. Because I think it's a different skill set. To me, it's for the same reason you don't want salespeople doing cold calling. Right. That's why you want SDRs. So I think the tension here is. And your point's a good one, by the way. If there's nothing for them to sell, it doesn't matter. Right? If your product strategy isn't part of the program and all I can do is move you from silver to bronze or sell you 10 more seats, then there's not that much value.

Yep. Look, I'll the last one on this. I'll just tell you and get your thoughts. I'll tell you something that not only have our experiences internally been terrible with customer success the last 18 to 24 months as it's moved into sales, I'll tell you, I get there's probably three companies I invested in at the seed stage. Three that are north of 200 million, that have seen growth slow. Okay. That have seen growth slow. And I've gotten the same thing in the investor update. We moved customer success to sales. We should have done it years ago. Okay. Now I think most investors would say, great, that was, what a brilliant idea to, to move to as. But I actually see this as toxic, Dave. I see that when growth slows, you screw the base we. And I see it everywhere. I see it to us. I see it in the portfolio. Jesus. We miss we. Because at scale, my, my metric is if, at scale, if you can't grow your new logos 20% a year, you're in decay. Okay, 20% a year plus 120% NRR. I know it doesn't totally sum, but that's your 40% growth at scale. And so as that new logo growth dips and many folks in B2B2B are not growing their new logos 20% a year. What do you do as the CRO when your arse is on the line? You screw the base. And I've seen this so many times. I've seen. I've one of the things with the new sales leaders, they go in and they're like, oh, they look it up. Oh, post analytics got a sweetheart deal. I'm going to. They're screwing us. I'm going to go make them pay 10x because in 2016 they signed up. Yeah, it helps you make the weaker the quarter, but it doesn't help the company, does it? And so I'm seeing. What I'm seeing is I'm not seeing the folks that are growing like a weed moving CS to CRO. I'm seeing it a stress reaction that I personally think dramatically sacrifices the future of the company in the hopes of making the quarter correct.

And you'll see that by the way, during. So I'm also a SaaS metrics guy. One of my favorite metrics is expansion ARR or basically expansion including upsell and cross sell expansion ARR as a percent of new ARR. And I actually like that to be 30% which is. Some would argue that's low. But you saw it during the downturn hitting 50, 60%. And how do you get those numbers? You have a decaying. You stop being able to sell to new people and you go squeeze the heck out of your existing people. And that's not going to get a great reaction to your point. By the way. For whatever it's worth. I don't actually think customer success should report to sales. I think that's a stress reaction to save money. I think the company hits a downturn, there's too much sales expense, which customer success is usually classified as sales expense. The CRO goes I'll take it over, I'll slash it. It's over rotated the other way. Personally, I like it as an independent function to get that healthy tension. Because look, what I saw in the companies that I ran is shock sales can oversell and I like having CS as a kind of check and balance on that. I love designing orgs for healthy tension and that's attention I like.

All right, so maybe notwithstanding that you like this AM function more than I do, you are agreeing with me that reporting to the CRO can be a bad move that I agree with. Yeah. Neither of us support. Right.

Yeah.

At least as founders I would resist this unless I would especially as if it's a reaction to slowing growth. Right. You gotta.

Especially if you're in a grinder model. Right. If you're grinding lots of small deals, to me it's a function of a. I agree with your point. If it's a reaction to slowing growth. Yes. But also what's your business model? If you're doing million dollar deals, you probably don't need one. If you're grinding 5K deals and you want salespeople banging all day long, then somebody else has to take care of the customer.

Yep. Okay. Third one. We actually, maybe we hit this in our unplanned conversation on private equity deals, but I think this is the discussion. I'll tell you, Dave, I don't see this that much on social media. When we were in Sassa Europa this year, I know you, you couldn't make it this year, but thanks for coming to, even to Barcelona. But I was backstage with one of the top VCs at a top fund, okay. Many, many great names that you know. And I walked into the green room as his head was in his hands. You know what it was? Dive head in his hand. That's this thing right where your head's in your hands. And I'm like asked him what's going on? We're not close, but I've known him since I was a founder, right. He's I've got like 10 portfolio companies at nine figures in revenue growing in the teens or less. They're. They're what? What are they? What's going to happen? He didn't have an answer. So I, maybe I don't like this. I just. When I was writing these slides, I call them the slugs of sass just because I like assonance or alliteration. I don't know whether this one's assonance or alliteration. The slugs of sass. But when growth, especially if you're a unicorn or vent, just call it venture backed and growth is below 25%, what do you do? What do you do? If it's that you, what do you do?

Yeah. So let me start at the top on this one. Which is the real look in my mind, if you're a founder, the real opportunity cost you face is time. Right? We have only so many years in this earth, so many years to do things. And you don't want to find yourself running a zombie and just grinding along at 15% growth and 0 free cash flow. You can live a long time like that, but what kind of life is that? And you're not going to have room to innovate, your company is not going to trade for very much when you sell it in the end. So to me, there are fates worse than death. Worse than death to use the zombie equivalent. So I think you want to avoid becoming a zombie. So my answer is do something is the first thing. Like don't let yourself acquiesce to, oh, we're going to grow at 15% and trundle along at zero cash flow because it's going to be hard to keep your employees. You're not going to be able to innovate. You're never going to be worth any money. So the answer to me is some sense, go one way or the other. Either make a growth re acceleration plan if you have the cash. By the way, at Balderton, I can't tell you what we filled it in with, but we had a really cool quadrant which was growth rate versus quarters of cash in the bank. And it's a great way for an investor to look at something, right? And the people who are real trouble have the low growth and only a few quarters of cash. Right. That's the danger quadrant. And, but in any case, I love that quadrant. I think the answer is no surprise here, you got to go one way or the other, which is if you have a credible growth re acceleration plan, try and execute it. And if you don't, then in my mind, you got to drive up free cash flow. Rule of 40 works. Rule of 40 is very much in fashion right now. Companies that are rule of 40 compliant get higher valuations than those who are not. So if I was growing at 20% and I couldn't figure out how to grow faster, my next question would be, how do we get EBITDA to 20%?

Yeah, that's a good, that's a good, I think, board level, VC way to think about it. If you can't get the growth, you gotta get the cash flow. I'll tell you what, I have a slightly different perspective if it's helpful to folks that are watching or listening later, which is that I hate this idea. And this isn't a criticism of you or people that say it, but I hate this idea that there's that, that, that there's opportunity costs as founders. I'm not saying as VPs or executives, I actually absolutely believe that. Okay. I believe if you're a great SVP of sales and you're at a dog, I know it's brutal, but you should go join a high flyer, right? For your equity and your time as founders. I don't think we get as many chances as we think. I don't think most of us have a hundred great ideas. And if you can get to. Forget about 200 million, 20 million, if you can even get to $2 million in growing something, I actually think most of us can't do it again. Okay. As we're not all the Jody Bonsels or the Brett Taylors of the world. And so my challenge to folks is so I try to break it down a different way. The time you put in is sunk cost. It's gone one year, 10 years, 50 years. It doesn't matter. It's in the past. Right? If you have a sustaining business, I asked the founders two questions. One, is your NRR 100% or higher? Okay. And if you have 100% or higher NRR and millions or tens of millions in revenue and your growth sucks, it's up to you. Do you want to refound the company? Do you want to reboot it? Do you want to do it? Because on the one hand, it's. You could say it's hopeless. We're growing 18%. At 50 million, it's hope or 10 million. Right? Forget a 50. But on the other hand, you have 10 million of happy customers if they're happy to build on if you want it badly enough. So I try to kick people in the ass and say, do you want it badly enough? Are you willing? Because every five to 10 years, you have to refound a company. It's so hard just to keep up with bugs. It's so hard just to keep up with feature requests. It's so hard to build the product you built 10 years ago. Right. Are you willing to refound it? And I think it's hard, but I think the best founders can find a way out of this and refound it. Because I really think growth slows because you fall out of product. Market fit.

Interesting.

Too many people blame the markets or the VCs or the downturn, but there's no downturn in the US economy.

That's super interesting perspective. It's. I'm glad we agree on the opportunity cost for the operators. It's interesting as heck what you say about the founders. I've been privileged to work with some who do. Look, I think the hardest question that springs, and we're not gonna have time for it, is do you pivot or do you stop and start a new one? Because now, if you pivot, your cap table is now an anchor on the company, potentially, unless you do a recap. Right. I'll tell you the Kick in the ass. I give people. Which is different than yours. I heard yours. I'll tell you mine and mine is consistent with my advice, which is figure out a way to get 20% EBITDA. And if you can't, I guarantee you they're going to find somebody else who can. Right. We know. Because a lot of times founders think it's not possible and give that company to a PE person and I guarantee you they're going to have 20% even to maybe 30% even to a couple of years. It can be done. You may not be able to envision how to do it, you may not want to do it, but don't delude yourself into thinking it can't be done. Most SaaS businesses, you could do that.

Yeah, I think that's right. I don't know that most founders it is. I, I think you, I think if you want it badly enough, you can get to the 2030 zero. I think getting this 20% EBITDA for innovative businesses that require engineering and more. I just don't think most of us are wired that way. Software is complicated. Yeah.

Look, you may have to say I don't want to do that. But my only pet peeve is you say it's not possible and like it. It darn well is possible. You may not want to do it, but it is possible. There's an entire industry segment that makes a living doing that.

Yeah, I'm just any. Let's go to the next one. I just, I worry there's too much TikTok, Dave. I worry that too many. There's too much on TikTok telling people to quit. I feel like a lot of sales executives have taken it very literally. I'm worried that founders need more of a kick in the ass. I. I think you should be very careful walking away. Here's my last bit of meta advice.

This.

I think slugs of sass is tough as frack to be one, but I think if you walk away from a hundred, five hundred, a thousand happy customers, you may regret it your whole life. If they're happy.

Bear in mind, just to be clear, I wasn't saying throwing the towel. My answer to your question was do something. Don't just be happy to trundle along at 15% and 0 EBITDA. Do something.

Yeah, there was related to it. I want to go to the next one. Emergence published this great benchmarking data a couple months ago. I put it up on Saskra. You might have put it up too. And it talked about the quartiles for and they were all from only venture back from top funds and they talked about venture back at the growth stage and the bottom quartiles were pretty awful. We could pull it up. I think the bottom quartile was like 8% growth and the second quartile was like 15 and a founder said to me at 40 million ARR the other day oh we're great looking at this emergent state. I'm like it's not great, it's a version of this tik tok ism. But anyhow, okay, let's hit the next one. Yep. Because we've gone deep but this is one that you've talked about a lot and, and I'm not a debater but I actually have. I think I have different views than you, but I thought it would be very helpful to hear yours. I know you've done whole presentations on this, but has AI and everything. Has pricing really changed? Do people. Are people like super excited to pay $8 for for an agent or a chat? Do they really not want the predictability of fixed deals and per seat pricing? Because I worry we might be dragging founders down a rat hole Because I personally don't believe founders should innovate on pricing later. I think you should, But I think nine out of 10 of us should copy on pricing. So leaders right? But what do you carry your lunch?

My agreement may not be obvious from the presentations I've given, but I actually I do agree 100% with that. Which is unless your business plan is predicated on price model disruption, do what everybody else does. Period. I sold a database of arclogic. How do we price it? How does Oracle price price on the same model will charge a little more because it does different stuff. Right? You can tune the are you a little more or a little less but in my mind pick the standard model. Because in general my advice on startups is if it's not a key part of your unique selling proposition, do it the standard way. Because we don't want to have I just. When somebody says why did you price by whatever we price by? I just say because that's how databases are priced. Next question. Right? I want to tell you why to use my database. I'm not back at MarkLogic prior to host analytics, but why use mine? So we could talk about my presentations but my conclusion is actually the same. Unless you're a price model disruptor comma price the way everybody else does. The problem with AI right now is those standards are not yet set. So we're in that that swirling sea of confusion where everyone's doing differently but once it's set. So in my mind, if I'm a founder trying to figure this out, I'm trying to place a bet on what I think will become the standard. I'm not trying to win a clever competition. I'm trying to say at two years from now, how do I think my category is going to converge on a pricing model? And then I want to price basically using the same model as everybody else because I want reason people to buy me is not because I price in some orthogonal way to everybody else and it's just super confusing. I want them to buy me because I have a better product and I deliver the solution better and hopefully I can get a price premium for that when it comes to the dollars. But I want the model to be the same. So I think we're actually in more agreement than we think.

That's a good insight that it's not because I think again the VC isms and others on Twitter are very confusing here. I think that the guidance is don't it's not so much innovate on pricing but if the mo. If the. But at least if the model is in flux in some categories you got to skate to where you think it's going to be.

Yes.

If there isn't somebody to copy, I think there quickly becomes something to copy. Even in this sort of odd per resolution model. In in post sales support I think everyone Zendesk Intercom Customer gorgeous dial even Dial Pad even in other areas I think they all have converging on the same model. So I don't even know if it's innovative but I just worry that so many VCs out there are so excited that all of a sudden hey, we can charge another $8 for this and $9 for that. And if it's not standard I worry founders and sales and folks are getting read down let down a rat hole that's not going to work. It's going to add friction.

So even though I work a day a week at a VC firm, I'll take this opportunity to throw VCs under a bus for a brief moment. I think what happens in times like this is the VCs get super excited about charging for value and then we're delivering all this value. Let's go try and capture more of it for us. So if I'm saving you, if I can reduce three people at 100k each, I can save you 300k. Let's go try and get 200 or 250. Let's go get a bunch. What I always like to remind people is that value is the upper bound on pricing. I'm never going to pay more for something that is value. But the lower boundary is alternatives. I'll go back to host analytics. I would routinely we add a ton of value in that category, epm. So we just say hundreds of thousands of dollars in value. But my average deal size was maybe 50k and adaptive planning was 25. And the issue is I'd go in at my 50k price point and adaptive would come in at 25. What's driving it is not the value from the customer's perspective. There are two solutions, either one of which can deliver me $500,000 in value, but one cost 50k and one cost 25. And this is why I say marketers are in the business of differentiation because that's what I need my marketing department to have made it very clear to somebody why I'm worth more than 25. And I could. But basically those deals, typically we want them, but we didn't win them at 50, we won them at 35. And that's why I always told my board would complain about the cac. It was like our CAC gets destroyed on the last day. And I. And don't tell me it's because I can't get a price premium because I'm getting one. But my price still got hammered. And that's brutal.

But sometimes in oligopical markets when there's just a couple competitors, you can still partially win a deal by losing it if you destroy their deal size.

Oh yeah. Oh yeah. Hand grenading the deal as I call it.

Yeah, brutal. It's brutal. But a company I'm on the board of thought they were going to get their first million dollar deal. Okay, big deal for anybody, right? And it was brutal. And they lost at the end and they were pretty dejected, as they should be. It was a stretch, right? It was a stretch. But the vendor was going to switch from some of their pain. Much more from actually I got the story a little bit backwards. They thought they're going to get their first 4 or 500k deal from someone they were existing paying like over a million for. Right? And they lost it. But their big competitor had to cut the pricing on renewal by 60%. That's a tough situation for sales today. But it is weird. I hate this stuff. But it is true. Sometimes you can, in a very competitive environment, you can even win when you lose if you met mess with their if, especially if you're a lower price.

Vendor, Enterprise Software sales is a full contact sport.

Well, I hate. I, I mean but that's why. That's when a great VP of sales makes a difference because they know how to make the judgment calls. You can't make. You can't run every play yourself or.

You'Ll absolutely kill yourself.

All right, one last one. Fortunately I forgot five. So we're going to get through six, not just half. We could do a sequel if you want, but one last one. This is just a passion point for me. I noticed Atlassian and Atlassian's one of the great all time greats. Right? And in their last investor day they said worry not, we're going to raise prices again next year too. Worry not, don't worry. Our revenue is enduring because we're going to raise prices next year too. Is this forever? I asked the question general because I hate going to your US at 50k versus adaptive at 25k. I hate price increases without value being more than the price increase. Are we reaching limits? I note that Starbucks and McDonald's this quarter said we they had to discount prices have deflated at Starbucks and McDonald's because folks won't take it anymore. What's your thought? Can we. Has this become productized and will it last where we're just going to raise prices every year without value?

Yeah. So I'll go back to my prior answer which is always think of the two points, the value delivered and the price of alternatives. And the other thing I'd add to that equation is the switching costs, which is it doesn't cost me much to go to Burger King versus McDonald's or to go to Pizza versus Starbucks. The switching cost is zero. The enterprise software are always switching costs and what enables vendors to do that is say I'm going to raise your price to 15%. I know that's going to piss you off, but go ahead, switch to the other guy and you're going to say oh my God, that's a full project. That's months of work. That's going to cost me 50k. So that's the dynamic. It's a little bit abusive towards the customer, but you do have a position of power where you can do that. To your point, you can't do it forever. I remember when Wall street was all excited about the 180% NRR at Snowflake and I'm like, I hope their value is going up faster than that. Because if somebody was charging 1.8x every year, what I paid Last year I'm not going to like that for I want to be thinking about how do I stop that relationship. So I think NRR in some ways could be too high if it's especially if there's no commensurate value. If you're just cranking prices then it doesn't work. If you're adding new products and you're bringing new value then I think you can keep the prices going and the NR are going. But I do think what happened in the downturn is vendors started to abuse their power a little bit because they're having trouble finding new deal. Maybe they didn't have new things to sell. They brought in new hard headed sales management to your point. Right. They maybe slashed the customer success team and said let's go push these customers around because we can because it's going to be hard for them. And to me Newton's second law action reaction. They may renew that year but they may start a project mid next year to do your replacement. Right. It may come back to bite you in the rear.

Yeah. It takes for. It takes three years to really churn from a business process from one vendor to another. It takes a year to get upset, another year to qualify and that third year to do change management. And we think they're not churning but it Sometimes it's a 36 month process to lose a customer, correct? Absolutely. I just worry Dave that when we when I was coming up in SaaS we were allergic to price increases. Right. It was part of Slack's DNA. We're never going to do it. We'll never. Because it's just bad. Let's go earn new business. It's not worth the drama. And the NPS hit now I feel like this has become institutionalized like since for a variety of reasons. And now I feel like everyone wants to raise prices every year. And I guess my only challenge to founders especially is, you know, at least don't let the team off the hook. At least don't make this everyone that's missing the plan wants to raise prices more. It's the simplest way to make the plan isn't it? Is to raise prices more.

I grew up differently than you than this. I grew up an enterprise big kind of big enterprise. And I'll tell you my so we did pre prices every year always in my career and we try to use it as a compelling event at the end of the year. Hey, prices are going up next year. Get your deal done now. And my joke on enterprise software pricing is the goal of the pricing Model is to make it require at least 30 minutes for two customers who meet the user conference to figure out who got a better deal.

I hate that. I'll tell you what I hate, Dave. I have this rule. Teliston sales hates me for saying it. This is my rule. That when one of your customers talks to another, everyone should, no one should feel ripped off. This is what I want.

Correct.

Discounting is okay. You can't avo. A lot of us that are like, especially that are product engineering, we hate discounting. We think it's a dumb process. You can't avoid it. But I, I think it's disgusting when your customer goes to your conference and finds out someone else is paying three times or a third of what they're paying.

Correct. I think my point was. So we agree on that. I think I have a slightly different take on it. There's two ways to solve that problem. One is to have super consistent pricing, which in my experience, enterprise is very difficult. The other is to have very complicated pricing. So it's very hard for them to figure out who got the better deal. But we're both trying to avoid the same scenario. You don't want somebody to go to your user conference, come home mad feeling they got ripped off. That cannot happen.

This was great. Thank you to everybody and Dave, thanks. Thanks for having you back as one of our founder favorites. Really appreciate it.

Yeah, thank you. Happy to do it. Happy to do it again. And we'll revisit the long lost number five.

We'll find it somewhere. Thanks everybody.

So we'll find it.

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