The Most Important SaaS Metrics with Monday.com Co-Founders and SaaStr Founder Jason Lemkin

So this is very exciting for us because I think both Rory and myself define ourselves as SaaS geeks. And when we started our journey back in 2014, Saster was one of the only resources on the web that we could learn what SAS really is. Nobody knew what ARR was, what churn was, net retention. Anything that seems so common these days was not obvious. And we should give a lot of credit to Jason here because you've done so much for the SaaS community, so much knowledge and expertise. And I remember reading myself say, oh, there's a new article on Saster. See what Jason has wrote. And really, Jason, I want to say thank you. We've met before and I said it before, but really I want to use this platform to say thank you not just for us as Monday, but For the all SaaS community for your value that you created for us.

Great to hear. Thank you. Yeah, it's funny in some, in some ways, and we'll talk about it today, things are the same as 2014, right? But SAS is literally. We should do the math. It's got to be 100 times bigger in terms of spend, right? Just think about that's a decade of 20 to 30% annual growth compounding. It's just epic. Right? And so in some ways things are the same, but in some ways things are so much bigger. There's so much better instrumented. Right. We'll talk about. We actually know stuff now. We had to guess a little bit back then, cohort analysis and what higher NRR really means and what CLTV means. So it's just funny how things are both radically different in the same, but yet the same in some ways it's the same sales and marketing motions. Right. It's the same analysis, it's the same trying to figure out how far a dollar can take you. So it is interesting.

I wanted to ask you, Jason, should small startups use CAC in a different way than. Than scale up companies? How do you see it as an.

Investor, I think these metrics that we've been talking about for, for over a decade, cac, cltv and everything, it's important to understand two things. One, they're absolutely not gap metrics. There is no legal definition for these things, including nor nrr. Right. And I don't know how money does it, but I'll tell you, almost all public companies that sell the SMBs like exclude their smallest customers from NRR. There's always an asterisk or a dagger. It says does not exclude one or two seat deals, does not exclude Customers that churn in the first 90 days, that's NRR, that's bad enough. But the thing about CAC and CLTV is these are sort of manufactured metrics in some way. Some come from the B2C space where performance marketing has to be really, really, really good, right? But some come from VCs who are trying to decide and then founders as we scaled, how much money should we burn, right? And so for a VC with a large fund or founders going big, right, with a large war chest, a two year payback, a three year payback sometimes is fine, right? If you're serviced now and you sign five year contracts up front, maybe there's no problem with the three year because all the deals are five years. But you can also have pretty good CAC and long CLTV and go bankrupt. This is what I see with kids these days. And I put kids in quotes. You could be 60 or a 16 year old founder. They tell me how great their metrics are. Our CAC is so low, especially with SMBs. Our CLTV and NRR are so high and oh, and we're almost out of money like these. They can take these definitions and myths can take you down a rat hole. And so even CAC and I want to is one of the most fundamental questions for marketing spend is do you include the free and the additional ones or just the performance marketing ones. And Most marketers in SaaS will never hit their goals if you don't give them credit for the free ones for word of mouth because it's everything in marketing is expensive, right? It's so an adword is so expensive even YouTube YouTube ads aren't. I mean Mondays run a few, as I understand it, a few YouTube ads and an individual ad is actually cheap but mass scale is expensive. And so if you don't give marketers, if you don't let marketers sort of get credit for everything that closes versus their spend. They rarely can even afford to spend anything. So any I want, that's why these metrics you have, you got to measure them, you have to have consistent but then you have to have a brain and measure them against your net burn, right? Or folks will on your team will go off on crazy tangents. They'll go off on crazy tangents.

I have two comments on that. In terms of cac, I think, you know what Jason said kind of really resonates. I think there's a problem in, there's a problem with CAC and LTV that it doesn't measure cash flow. Sometimes you can Spend a lot of money on customers and you can have a reasonable ltv. But that doesn't say how fast you actually get the cash that you spend on marketing. And the way we've measured as a company since day one, we didn't care about GAAP return on cac, we cared about actual cash in the bank. So how much we spend, when do we actually spend the money and how fast we get it from customers in terms of actual collection into our bank. And I think that what made us efficient over time in terms of cash flow. And I think companies should focus more on adjusting those metrics into actual cash. So that's comment number one. My second point is that I think the SaaS community is now maturing and companies have become more mature. Most of their S and M expense is not spent on acquiring customers. Most of what they spend on is retaining their existing ARR. So if you think about their customer success, customer support, account managers, all that expense is to retain customers. While CAC only measures how much it costs to buy a new customer. So I think that sheds just a small light into the actual expense that it costs a company to buy and retain a customer. And I think we need to mature into more advanced metrics that actually measure not just acquiring a customer, but also how much it costs to maintain a customer.

Yep. One challenge today with being over metric in some ways is what I see across so many SaaS startups that I work with and it's actually super interesting for Saster itself. We have about 200 sponsors, so I get to watch what 200 CMOs and VP of field and demand gen are thinking in their brain. And what's happened is as we've transitioned from the exuberance of 2021 to 2023, marketers and SaaS have become super short term focused. Super short term focus. Now if you're Monday back in the day doing all Digital, doing all YouTube AdWords digital placements, that's fine. You actually can measure something in the funnel and what Monday probably converts from free to paid in 60 days or less or I'm making up that actually strategy works fine for free for a hyper S and B model, but it actually can be destructive in mid market and enterprise. I mean Monday's doing bigger deals today and I bet some of those deals take a year to close, right from initial contact to close. And so what's happened is marketers are now being judged on results this month rather than this year and it is leading to super myopic marketing. Right. Only stuff that gets me Leads and even closed revenue this month. And it what it's leading to and founders should think about this, I've already seen it happen is pipeline is drying up. Pipeline is drying up for sales teams going hooray. You, you cut your marketing spend in half and you only allowed instant roi. But if the sales team has no pipe going into the second half of the year, you're not going to hit your plan. Right. So here's where metrics can also take you down the wrong hole. And we've got to find a way in the, in the middle where marketers have some leeway to spend a budget as best they can. Right. That's the tension with metrics. You have to measure it, but you also have to trust your team to say, hey, your marketing budget this year is 1 million, 5 million, 15 million, 20 million. And it's stressful but you have to trust your marketing leadership to do the best job they can with the budget they have.

How can you reflect efforts you're doing on expanding your current user base, like expanding the number of seats of each customer. Is CAC serving these efforts or should you use different ones?

Exactly.

You know, I'm actually curious of Monday as a case study if it has a distinct customer marketing budget. This is something I talk about with every marketer. I was talking with a great SMB CMO yesterday joining a 50 million ARR startup, late later stage startup and all. And his number one question to me was does this startup have a customer marketing function? Right. And it actually doesn't. At 50 million AR it only has marketing, direct marketing for new business. Right. And, and if you don't do customer marketing, you're, you're, you know, you're here, you're, you're losing out on a huge amount. But it's a complicated topic to how much money, how much budget, how much people to allocate to customer marketing.

Yeah, I'll surprise you, Jason.

Surprise me.

We're not doing it almost at all right now. It's like a huge place for us to grow into. But I'll tell you what we do.

It's a good answer.

I mean it's an honest one. Then what we are doing in regard to short term, long term, what you talked about. So we, we were always like a product led growth company. Obviously in the beginning we didn't have sales and I think it made sense to be like we had to know what each dollar is buying. We gave it like a broad attribution but like we knew like day later what it's Going to bring. Okay, like and I'm not talking a month, like day one day. We gave it and did machine learning to know why? Because you want to optimize the campaign. Like optimizing the campaign a week later is like means you lost like 7x the money rather than a day later.

Yes.

And so that was the beginning. But afterwards we added the sales and things have changed dramatically. Obviously like people and it was mostly consulting style, but they have like a quota. Okay. So we can call them sales. But like the approach was like you already bought the leads, were paying customers and then the sales went in an up motion and kind of helped customers. They just like call them up, help them and then they scaled within the organization. So what we saw, and I think in this model, which is like the majority of how we do it today, it's like bottom up approach. You get to have both in many ways. You get to have like measurable short term return or results with the marketing effort you make. But then you also think long term with the customer and help them a lot over time. And so you see those returns and what we saw and how we do brand marketing, which we do a lot, which is billboards. We even did one super bowl thing, which you can't say. It's like short term wide lead generation tool. Okay.

I'm not sure if we ever gonna see that ROI coming back miserable.

Like we kind of measured, I think like 25% out of that spent like because we track. What we did was we track people mentioning it on calls and then saying leads being closed and deals being closed and kind of attributed that way. But the point is, is that we, we kind of allocate more or less around like 10, 15% of our budget to doing other stuff because we understand it's important, like not short term and, and those kind of thing. And even within the performance marketing, we have a test budget and we have the team running on various stuff because we want them to be creative, we want them to do other things and sometimes figure exactly how to measure them after we do some things.

Yeah. If nothing else, I think for founders, if nothing else, reflect on this customer marketing. It's so interesting that Monday with its incredible success does not have a customer marketing function. But again, I was just talking yesterday.

With spending a lot of money on it.

Yeah, but, and then, but here's an interesting met. I track this with SaaS companies and it's a niche metric, but it's super interesting in terms of long term health, which is the ratio of revenue growth to New customer growth on a percentage basis. So I like to see at least sort of a 2 to 1 ratio. Like if, if you're growing 50%, I like to see you adding at least 25% new customers. If you're growing 50%, you're adding 10% new customer. You're fatiguing your base, aren't you? And when things are stressful like they've been the last 12 months, you've seen these ratios get inverted even in public companies where the new logos aren't there and you see much more than, you know, a 2 to 1 ratio for revenue and new logo and you're sort of two parts of that one. If you do see that, you're, you're, you're overstressing your base too. If you think about it existentially, you, your marketing budget should be roughly related to that. How much of my revenue am I getting from growth in my base? How much am I getting from new customers? No one gets it right. No one gets it right in sales and no one gets it right in marketing. And. But if you could, if you can just put a little more of that budget into growth. Right. Versus new acquisition. Magic can happen. Right. Just a little bit. You want, and you at least want to make sure you're not stressing your base. Too much of that has happened the last year.

Yeah, I totally agree. And I think that companies that have both enterprise and able to acquire new SMBs, that's the Holy Grail. Those SMBs will become the enterprises of the future at some point. And something that was surprising, I would say in the last 12 months since the economy changed, is that we actually found that our SMB budget was more stable more than our enterprise segment. So the SMBs. NRR. Yeah. Was actually more stable. I think a lot of enterprise companies have reduced, you know, stopped hiring or reduced budget while, you know, SMBs continue to kind of be very stable. So I think that having both really contributes to the. Just reducing the volatility of the, the business.

Yeah. Just to like emphasize what you said, like the enterprise growth is still much higher. It's just more stable. The SMBs.

Yeah. It is interesting. Trying to figure out what's going on with the global economy is confusing. And that SMB, it's interesting because if you look at, you know, the U.S. in particular, we've. We've got 3% unemployment. Right. And still a pretty profoundly strongly growing economy, yet massive stress at the CIO level and in the enterprise. Right. And restaurants and small businesses, you know, and many of them Auto repair shops, they're at maximum capacity. They should be buying more software than ever. Right. And yet enterprises are all cutting the number of vendors trying to hold the line on budget. It's a, it's a, it's a, it's a strange world. It is interesting that you see that stability for SMBs. I think we should be seeing it, but we're not seeing it across all companies. Right. We're not seeing it across all companies.

Okay. I want to move on to the next metric because we do have a lot to cover. And I want to talk about ARR, which, which kind of started out as a, as a well defined metric, you know, and then it became something pretty fluid between companies. So I wanted to hear, Jason, your perspective on, you know, should all Companies, should all SaaS companies measure ARR? What changed since we started using it?

Well, look, I think the most. I think, I think we could probably all agree that. And this happens, this has happened even with terms like cloud or SaaS. It's gotten corrupted over the years. Right. And so ARR used to stand for annualized recurring revenue, and then fintech exploded and, and, and so they all wanted to claim they had ARR, even if a lot of fintech revenue is not recurring. Right. Not all stripe payments are recurring. Bank banking as a service is not recurring. But they still all claim they had ARR. Right. So we had that issue and then it, it wasn't.

It.

Nowhere in that ARR was the word SaaS or software, but it should have been. Because the other thing that happened is hybrid models for models that are services and software models that are hardware and software all started to claim it was air. Right. And I wrote up today on the Saster blog, if folks want to look Matterport, I don't know if you ever use Matterport. It's like that cool 3D software where you can walk through houses and buildings. It's like super cool. But half their revenue is from services and cameras. So their gross margins are in the 40s. Right. I think Monday approaches 80. Right. Or, you know, this, there's, there's some loose definitions of gross margin, but that's dramatically different margins than Monday, which is a software company in 80. Matterport, which is super cool. Right. I mean, that's. Software is hard enough to build. Imagine adding cameras and 3D. That's harder than software. But as a, as a, the, the, the margins are in the 40s, and for a while it didn't seem to matter. Twilio was valued the same multiple as a pure play Software company even with lower multiples. Others were. And, and now we're in this world where in this new world today there is a large discount if your gross margins are lower. Right. And VCs got drunk and VCs funded all revenue the same. Right. And there's many. There's many. I would, I'm. I'm going to guess that the most unicorns that go bankrupt in, in SaaS are folks that are hybrid models, that are services, that are other things or that are non recurring revenue. Right. If you're better.com and you sold mortgages at the peak and now there's no mortgages because in the US it's 7%. That was never SaaS. Right. It was never ARR. So my rambling point is now you just, you are who you are. Matterport isn't going to stop doing 3D tours or stop having cameras, but you have to and they're very honest about it in their public filings. You have to be religious as a founder, segment your business. This is software, this is services, this is payments. Right. Especially payments. And be honest about the margins because just like CAC and CLTV can kill you, low margins can kill you. Like there's so many SaaS, pseudo SaaS companies that have much lower margins than 70%. And as, as religious as Monday was in the early days. Right. With it, you have to be even more instrumented and careful as you're. When you have real costs. Right. When your gross margins are below 60, you have to be super careful. And people got sloppy. They got sloppy.

Yeah. I think this is a great point. I think my analysis of what happened was that people, founders have noticed that you get a great multiple for ARR as a SaaS company because it comes with all the benefits, stability, revenue growth and so on. So everything was marketed and packaged as ARR, consumption and usage. But there's a huge difference because consumption changes. Suddenly it's the holidays and you get more server load. Suddenly you get less bill. The point about ARR should be stable. It shouldn't be based on any time of year, it shouldn't be based on usage. And I think that was unfortunate. And I think even for SaaS companies there's so much nuance. Do you include discounts or don't. If you have upgrade in a renewal, is it ARR or do you not include it? There's so much nuance and maybe going forward as the industry matures, there might be like gap rules for what is actually ARR.

Yeah. At least realize that if you're not pure software. You're playing by a tougher set of rules nowadays, right? And as Iran said, it got masked in the boom, everything got called AR and no one looked under the hood. No one cared if the top line growth was there. No one cared.

And the funny thing is once you have ARR, you also have NDR. So if it's AR based on consumption, suddenly you have NDR of 180, 200% and it just doesn't make sense.

Yeah, my rule is if you're, if your ARR ever goes down, it's not ARR. AR may, it may grow slowly or more or more quickly, but when you see a startup where the ARR has gone up and down, I'm like, okay, I got to dig in here because whatever it is, it ain't, it ain't ARR. Right? It just doesn't, it just doesn't happen that way.

Yeah, it should be stable, that's the point.

But, but it is interesting in the world today. And actually I should know, I don't know. Does Monday do payments at all? Is it added added payments to the platform yet? I mean everyone under the sun pretty much has, haven't they? They've added payments in some fashion. Right. But we're all we all we are. The models are evolving. Right. And for example, you know bill.com as an S and P hero was a pretty good company before it had payments when an IPO'd. Now it's an epic company at 15 billion but the majority of its revenue is actually from high margin payments, not low margin. Right. It was $1 billion company to 15 by adding payments. Shopify margins aren't perfect. But the majority of Shopify's revenues are payments. Right. If Shopify was just a SaaS company, it would be a fraction of the Shopify we know. So there's all these hybrid models that are going to happen. It's just we've got to be more honest as founders about what is ARR and segmented. And I'll be direct, I would say that the two worst investments I've made and I haven't made very many bad investments but as time went on I made more bad investments, not less because we kind of let the bar expanded the box. Those were folks that claim stuff was AR that wasn't. They saw either massive churn or issues with their burn rate or other things and all. And I call it pseudo ARR. Right. All this, these problems are coming home to roost. So if it's you just be hyper aware and honest and transparent about what your sources and quality of revenue are. Because you may fool a few people in the early days. Right, but it will bite you later. You can't hide from low gross margins, you can't hide from these issues. So too many games. Every VC has a Theranos or two in their portfolio or an ftx. It's not just ftx, they're all over the place. And one of the great frauds was manipulating ARR in 2021. There are startups that lied about their ARR.

I got a follow up on this, Jason. What about the second, the other side of the spectrum. What about companies that might sign a contract for four or five years? When does ARR become perpetual license?

Well, in what, what, what? What's the question behind the question? Everyone would love in an ideal world if Monday could close a customer in 24 hours, that would do a five year contract. You'd probably take it, right? There's obviously a trade off between time and long contracts.

I'm not sure. Because I'll tell you what, you become blind to what the customer wants.

Well, you do. It has a downside, right. You become less customer centric when you can phone it in. Right?

Yeah. I think one thing that the SaaS industry has created is alignment between the customer and software company. So the customer can always kind of make a decision to leave the platform and you keep improving it as you want to retain the customers and let's say you in hyper growth and sign a lot of revenue into two or three year contract. You know, you might find out in three years that you have a huge turn wave coming up that you didn't predict.

Well, two thoughts on that. First of all, years ago, in the earlier days of disaster, we did an event at Cornerstone on Demand's headquarters in Santa Monica and the CEO was there at the time and he said something at the time I thought was crazy. But I know you guys will actually agree with this, which is I forced my team to only do one year deals and Cornerstone was more enterprise. It's enterprise learning management system and you could easily work your way to a three year deal for an enterprise purchase like Cornerstone on Demand. He's like, no, it kept us honest. It made sure we didn't do terrible deals, junk deals. We were honest. I did not want even two year deals and that, and I, I was much closer to being a SaaS founder than I am today. I thought, hey, that's, that's, that's almost dumb. I didn't say it that way. I said that's great. But he's right. Right? He's right. And the other thing I'll say, Iran, I'm going to challenge you. I think that in a good way. I think companies like Monday and Shopify and folks like that are constantly challenged. Right. Because you can leave any time. Right. But I will say across the spectrum of SaaS companies, I see the opposite. I see much worse behavior the last year and a half. I see threats constantly from customer success teams threatening folks to leave. I wrote this up. I will not name, I never name names. But a leading SaaS company, that is SMB sent us a bill where they quintipled our annual bill and told us we had to pay for four years up front. So four times five is 20. They sent us a 20x bill. And this is a leading public company where growth, but growth has slowed a lot. Right. Monday's growth is, I mean maybe it slowed a little bit is pretty good. Okay. But folks have been under a lot of pressure, a lot of pressure. And I. There's a lot of shenanigans, a lot of borderline unethical ways. Price increases have been done because look, you gotta be not being non transparent, hiding things because if you own the customer structured data, it's hard to leave. It's hard. Monday's a CRM and many other tools. Sure you can leave, there's a million other tools. But how do, can I really export all of my data and immediately get it fully structured into competitor. I'm not so sure. Right. Maybe you can tell me. Right. So there's always some data data lock. Right. And I've actually seen worse behavior, behavior I've never seen the last year as growth is slow. Just pressure on the, like we talked about too much pressure on the base when the top, when the new, the new logos aren't growing.

It's a good point on retention or stickiness.

Yeah.

We actually since day one aimed that Monday will be at the core of operation of, of every team. Okay. Like we didn't want to be the ones who get chucked out. You know, that's why you see the stability now with SMBs, you know, because they rely on us more, they consolidate on us because they run their operations. So I think we're super sticky in some areas. But regardless of that, when the economic crisis happened like we, we kind of took the opposite approach. We said we want to be a great partner for our customers. We kind of like took the approach of like extending their ability to pay and a lot of other things towards customers rather than doing the reverse. Yeah, in, in many ways. And so like I think that's like a more of a long term decision and I think it pays off once you think perpetual, you think recurring, you know, and you don't think short term because like you know every quarter is going to end like two years ahead. It's going to reach us.

Yes.

So we, we need to think like strategically with every customer.

Yeah. We need a metric in 2023 that we're talking about metrics. We need a metric that only founders can own and it's customer centricity. We need to know how customer centric the company is because you can brute force. You can brute force high NRR with longer term deals. You can brute force NRR if you threaten customers when they leave with an inability to get their data. You can, you can brute force NRR by having out of bound price increases 30 or 40% a year. One, one vendor we have where their largest customer, they raised prices on US 40% a year and didn't add a feature last year. I asked them why they did it and they said because we can, we need to, we need the revenue. I'm like that's not my problem. Like I'm trying to learn. I'm saster. I'm like that's a very honest answer and I do appreciate it. But you haven't earned that business. What you didn't ship a single feature that I've used in the last year. We've asked for like a hundred where you're single largest customer. We've gotten none. And you raised my prices 40%. And so there's so much pressure to do these things. And if the CEOs don't make sure that your customer centricity isn't staying high, bad behavior can slip in when there's growth pressure. Right. When, when there's growth pressure, I can.

Share our metric like our top line metric and the one we kind of like. I think after like a few years we, we kind of went to that. From new paying customers to web weekly active paying people.

Yeah.

So we cared. Like we said we don't want to learn about a customer problem when they churn or not. Like we don't want to see the revenue because that's too late. We want to see them churn when they use us less, we want them to use us more and more and we actually measure that. But it's a top line metric. It's really hard to move on an A B test. So like we had to find proxies And a lot of other metrics to kind of help improve that. And it's still like that today. Like we measure activity.

Maybe one last question before we move into the next metric. Jason, you talked about customer centricity and you know, using other metrics to support ARR. Do you think it should become a standard for public companies, you know, to, to put it in their F1 to like, what should they do to reflect this customer centricity? To, to, to reflect.

I don't know. You know, you know, for years people have been saying the problem with going public is it forces you to be too short term. Right. And the reality is there's truth to that, right? The reality is, yeah, Jeff Bezos convinced the world you can go long on investing right on the top line. But even there you still have met. He still had to hit, he still had to hit the metrics. Right? And so this is the existential challenge for founders. And I think it gets harder as you approach and then become public. Is staying super customer centric because you know that you'll get, whether you're bootstrapped, venture backed or public, the later stage you get, the more pressure you're going to get to hit every quarter and every month. And with startups, for example, if you're venture backed, let's say you just raised around, you've got five years of revenue, you have a software rough Quarter. The VCs are going to be like, okay, buck up, Roy Neron. Like things are pretty good. You know, everyone has a rough quarter. You know, it happens here. As a public company, it's a, it's a, it's a sucker punch. Even though you tell the team to be calm, it's just a quarter. Everyone feels it. So this is the, I think, I think this is what we've learned the last year and a half in Sass when we went into a tougher. I'm not going to call it a downturn because binds up, buying is not down, buying is up. But as it's tougher is founders just have to own this. And I don't know that it's a public company metric, but it's the secret founder metric, whether it's WAP or WAD or whatever you use. But it's too easy to let customer happiness just drop. It's too, it's too easy. It just. Because it takes some stress out of the system in the short term. Right. The classic one from is always when, for example, someone on the revenue side wants to shorten the free trial. This is the classic One from the beginning of the Internet, right. Someone comes in and they're like, oh, we have a 30 day free trial. Like, I'm going to switch this to 14 because we have too many free writers and we'll convert quickly. And there's always either some data or a spreadsheet that says that's a good idea. And sometimes the starters just say pause. Maybe we need a 60 day free trial.

Maybe.

I mean, I don't know what Monday is or all of it.

We've done the same thing from 30 to 14.

Okay, you did the classic 30 to 14.

Yeah. And I'll tell you why.

Yeah, why?

So we'll have a shorter input cycle towards media buying. Like, you know, we were really religious, right?

But is, are you sure it's better for the customers that it's shorter? Are you sure it's better for the customers?

It didn't change the metrics. Like really didn't change the metrics.

But are you sure? Look, Monday is. It's hard to argue with money because it's so successful. But are you sure it's better? Right. Because these are the metrics can confuse you. Talking about metrics. Right.

Back in the day, you know, we were not testing it every day, but like back then we did a very long term a B test and started. Didn't really move the metrics towards paying customers.

I think it depends on the product. If it requires longer implementation or like a professional to help you on board, then maybe it makes sense to do like a long trial. But for us it was very easy to get set up and get value from the beginning.

No, for sure. This is something that founders need. I'll give you a different. I'll give you a couple personal examples. Back in the day, in the early days of Adobe Sign, Echo Sign, where we had a truly viral product, DocuSign, Adobe Sign, these are very viral products. I measured in the early days how long it would take someone that first got a contract to sign to convert to paid. Okay. First they'd have to decide to sign up themselves and they'd have to try it. Then they'd have to do it. Then they might need to get three or four exposures in the wild, like marketing, right? It was eight months. It was eight months. Okay? Not eight months from someone doing a search for E Signature or something and finding you and buying. That was 14 days. But the true viral conversion coefficient was real. It was profound and it was slow. And no one. But no one cared except me. Right? Eight months is too long. No one cared. And when we, almost a week after I left after acquisition, that got ripped out of the product. The whole free thing, the whole free conversion. And, and because it didn't help anyone there. But then over the next three years there may be a variety and market share fell by 50%.

So these things compound. Yeah. Yeah.

And there was no one left at me. Even though the business doing what, 250 million say, there's no one there left to be the champion of the free, the champion of the long cycle, the champion of the metametric, the champion of the founder metrics. Because it always, it said to one of the most successful companies on planet earth and software, hey, we get rid of this like it's. There's no data, it's eight months, it's not going to, we're not going to make the quarter. Right. And, and, but it was wrong from the generational perspective. Right. We lost half the market share.

I'll tell you, like, our approach growing up as a company was that we want like, I always believe there is like a lot of ways to do things.

Yeah.

And like, why not pick the one that we have data or quick data on the path? You know, that's what we aim for all the time.

Yeah.

And so like, arguably there are like hundreds better ways to do it, but we just don't know. And we probably would have known like it happened to you, that if you don't handle that, if it takes you like eight months to get data and maturity of it, like maybe like, I don't know, 10 months. Okay.

Yes.

Then it's very slow to make decisions if you have to iterate on that all the time. And so like we kind of opted for the, you know, shorter term, like, and I, I don't know how to, how to do things on such a long term. You know, it's very hard.

I can't. I mean, Monday is wildly successful, so I can't be critical. But it's just interesting to think you could always be more successful. Monday could. There's no question even any company could be 5 to 10 more percent more successful. And over a decade that compounds to an awesome rate. Right. That, that incremental piece that's almost the, the existential, it's almost fun in a way. It's. What Saster is about is how can you be 5 to 10% better at everything? Do 10 of those and, you know, you change the course of a trajectory of a company. Right.

I agree. Yeah.

Yeah. The related one just Daria, maybe I think is super interesting on these metrics that has changed the last few years. Going to this point of what do founders need to own is NRR versus CSAT or NRR versus nps. And you know, when we started with Saster, I was kind of anti MPS because it seemed like a big company metric. But then we learned it kind of works like as a consistent way to measure things. You can use csat, you can use mps, they're not the same, but you could and you can game them and you can game the question you ask and you can pay bribe people. But if you do it the same way every month and every quarter and you track it over time, you can see trends. If it's better, it's good and if it's worse, it's bad. What has happened in the last year and a half is it has been abandoned by, by most startups in favor of maximizing nrr. Right. And as a CEO, you have to know, you have to be the boss as founders of this trade off of again NRR versus csat. You have to get the data. And if your CSAT or, or MPS is declining and your NRR is growing, you've got to jump in because no one in your team is going to jump in.

In.

This is something I hadn't seen ever in my history of SaaS, but I see it all over the place now. Is CSAT NPS down, but NRR up? This is a reaction to stress.

Yeah. Just like why, why do you think is the reason? Because it's, they don't necessarily have to, you know, they can go together.

Yes. Well, let's, let's give an extreme example. Let's say I'm Salesforce. Okay. So Salesforce is growing organically. I think like 15, 16%. Something like. I'm making that up. But it's like in the 19th, they just raised prices 7% yesterday. So you know what? Their NR is going to be great.

Satisfaction is down.

Yeah, NRR is going to be great. It's, I'm not saying satisfaction is going to be down, but they can hide for a year if they want. I mean Mark's pretty good. But they can hide for a year in that price increase at 7 when you're going 15%. If 7% gets you to 22% growth. Right. I mean it's, I'm simplifying a complex math. Like you've hit the plan for the year with one quick reconfiguration thing to here. But if, but going to Ron's point, if the customers are getting less happy behind the scenes, like you're sacrificing here, right? You're sacrificing here. Even if the team may hit their numbers.

Yeah, I totally agree. I think that getting more dollars from each user doesn't mean that they're more happy with your product. And I think that's part of the thing that. I actually have a question, Jason, because we had a lot of conversation with investors throughout the years about both net retention and gross retention. So first of all, I would love to know, what do you think about both? When you see a company, do you look more on the NDR or gross retention? What are the red flags that you look for and which one matters more? And what difference between NDR from enterprise focused company to SMB focused company?

And also, Jason, maybe just in a sentence, explain the difference between NDR and gross retention.

Yeah, it's a great question. And gross retention is what percent of your revenue or logos are you retaining without upsells? Stripping out upsells. Just what, what percent of your existing base or your existing logos are you retaining, period? And you know, when we start, when we all started in SaaS, it took us a while to even understand that NRR was this profound metric, right? And it's so profound. Monday, selling to SMBs, having triple digit NRR is so profound. It's so profound on a spreadsheet, right? And so it took us all, by the way.

Jason, I don't want to interrupt, but it's a great point because it's one of the only SaaS metrics that all SaaS companies report. Not ARR, NUTCAC, but almost all SAS companies are reporting NRR. Yeah.

Yes. So when SaaS started to take off, we. That we realized that was our holy grail. In fact, the first Saster post ever was, it was called it compounds, basically. And it was all because it was magical to folks in 2012 how this worked, right? And it went like viral and Aaron Levy reposted and David Sacks and everyone, because it was like an epiphany that now, now, I mean, this is as fundamentally based as it gets. And then I remember maybe in 2019, I was talking, I was doing an interview with Kyle Porter, who CEO at Sales off, which got bought for two and a half billion and they had crossed nine figures of revenue. And they were sort of early getting ready to go public, right? At 100 million plus, hired the CFO and he's like, the biggest change is everything's about GRR, not NRR.

Now.

Now we haven't seen that show up in the public companies Right. But his point, it was, it was an epiphany for me and I'm like, you're right. At the end of the day, the metric everyone's going to talk about is NRR going to Iran's point. Every public company reports it. But GRR is more important. GR is more important. If Monday is able to. I don't know what Monday's logo retention is. There's different way to calculate. But if you sell the SMBs and you have 90% plus logo retention, you're off the charts. Good. Right. You're off, off the charts. Good. And it, it is harder to hide games here. It is harder to hide issues and it is harder to hide people price increases and rip off deals and things. When you, when you aim for top decile logo retention in grr, unless you.

Sign a three year contract.

Yeah, yeah, we can have to, we have to talk about that. Like, yeah, I would try and say that like gross retention has to be stable. That's important.

It's a good insight. It's got to be stable, at least stable. Right.

But the number of it varies because if you're like, I'll give you some examples to cheat. Like one thing Iran said, if you have like three year contracts. So like we saw some companies with like 97% gross retention.

Yes.

They raised money as like crazy valuation and then they crashed because they, yes. You know, it was, they didn't see the churn.

Yes.

One way to hide it like long for sure.

And almost, you know, Monday would be a great one almost if we had more time. One of the most important things I can say for all of these metrics is you have to segment them. This is what too many founders don't do. You don't segment them like unless all your customers are truly homogeneous. The same always segment small, medium and large or at least small and bigger. Always segment because there's always at least two to three trends in your base. Right. And for GRR, you might see, you know, 75, 85, 95, like for example, that's what you could see. ServiceNow approaches 100. Right. Five year contracts can never leave. Right. Their GR approaches 175 might be pretty darn good for small businesses. In fact it might even be unachievable for one person shops. Right. But you got to segment it or you will miss the trends in the base. Right.

I think that's a great point. I think that's SMBs just by the nature of being. SMBs are more likely to churn just because going out of business. But they might have great NDR where enterprises. Once you get a software inside an enterprise, even if they're not using it, it's going to take a while before they leave. So just by selling to different sectors and segmenting your customers, you can do different measurements of gross attention in both NDR and get different results.

Yeah. I'll give you just one story. There's, there's a, there's a SaaS company I've worked at, invested in that's coming up on 40 million ARR. So, so pretty, pretty getting mature. Very SMB. Probably similar to Monday. And all the other investors were complaining that their, their NRR was only 90%. Like, you know, you guys, if you don't get to 100, you're just not going to make it. Right. And, and I'm like okay, that's right, that's true. And like I kept telling them these guys are so smart but I kept telling them segment.

It's.

Segment it, segment it, segment it. And they have a lot of single seat customers, one user. Right. And when they finally segmented it and you take out the single user, it was north of 100 from, from 3K ACV. Like you guys are like 2K. Like it's almost impossible to have 100%. And they did it. They went from bottom quartile to top quartile by segmenting.

That's exactly what happened to us in one of the rounds because like yeah, we were exactly the same thing. It was a 90 and we didn't know until we figure out to segment it and then we saw the difference.

Yeah. And it's interesting, this company I'm talking about is also one of the best instrumented and analytics but like you guys, but they just didn't do it right. Just like you did. You, you, you gotta, you gotta. And it just, I kept like month after month I'm like, I think your NRM might be better than you think. I, I just, it doesn't, it doesn't feel right giving you.

Doesn't make sense.

It just. I doesn't, I don't not. But okay, okay. And you got a segment and you got a segment how you attack your market. You know, it helps with marketing, it helps with. You got to segment your sales team as early as you can and your customer success teams and folks. Actually I find, and I'm not sure why, but it's interesting, Roy, what you said. I actually find founders and startup and SaaS companies segment later these days than they used to. They do it later, they're breaking their sales teams up into small, medium and large. They're breaking their marketing spend up their CS teams up later, 30, 40, 50 million. And we used to do in the old days we would do this at a couple million revenue. Like we have no choice. Like every lead was so precious, the markets were so small that you want to do you immediately realize specialization would help. Let's put, let's put Iran on the five deals, Roy on the 3K deals and Daria on the 10K deals. And we all. But, but now I actually see it happening later and later but I actually think it always works. It always works in the metrics and with teams. You always get a boost when you segment your teams and your data. Right.

You always, I, I think another insight that I can share is that companies are always looking to increase their MDR and often the way you think about it is oh, we need to improve the product. That's always kind of how you think about we need to improve the product. And that's obvious you need to improve the product. But I think another thing you should do is to create upsell opportunities because if you don't have upsell opportunities you won't be able to increase the contract price. So for example Monday we have, you know, is seat based. So the more people the company hires, the more seats we have, the more we expand. But we have an option to add more layers, more add ons, more features that we can upsell to customers. So I think that's another way to think about how can we add more value to customers, how can we offer more upsell opportunities? And that's a great way to think about how can we increase our NDR going forward.

It is just two thoughts on that. One, going to Iran's point of why every public company reports NRR for founders. As you scale this, as you approach later stage, this is the most important metric to investors. Whether it should be, we could debate it a little bit, right? Obviously mathematically it is but you will get incessant questions as you approach 30, 40, 50 million and beyond it will come. It'll be the number one question both private and public customers will ask is your they have become obsessed with the annuity factor of SaaS so understand it segmented, obsess about it and the related point is if you there may be an exception or two out there but from my knowledge for folks that sell two SMBs I do not believe anyone got past 100 that is single product, right? And HubSpot's the biggest example. HubSpot was stuck at 85% through 40 or 50 million. And they really never got past 100 until they added CRM and service to the piece. They never. They just had to be multi product. Going to Ron's point. And we could talk about why, but it's a fact of life, right? It's a. And I don't think Shopify got there without payments. We could debate whether that's multi product, but it probably is. But no one get. So you've got to figure out that strategy if for no other TAM is a big reason, but if you'll never get that stickiness without the second, third, fourth, fifth product ad. Right.

Yeah, I can share. We had a problem with that, with explaining it to investors because we grew too fast. Like. And when you have new cohorts. Okay. That they're not yet mature, it's very. It obscures everything when you're like cohorts from the new year kind of obscured the. All the rest and everything kind of like looks weird like you said. And we had to work so hard to show that. Even on the graph, like, when we did the graph, it looked weird because like, all the small cohorts looked flat. Like physically, when you looked at the graph, they looked flat. Only when you removed the new chords, which were bigger, you. You saw the same image of exponential growth. So it looks like, hey, all these chords are flat. Why are they flat? They're not flat. You just can't see it because the new ones, like, are three times bigger. So we did an animation in the ipo. We created an animation that we added the layers and everyone saw it the same thing because everyone, no one understood it's exponential when it looks. Appears like flattish because you're growing so fast. And other companies, when you're not growing as fast, when you're adding the same number of customers over the years, you know, then you have like a. It looks very healthy, like a layer cake that you can compare one to the other.

And Jason, I just want to add, I think something you said is really profound and I want to share my perspective as a founder when you start the journey. You mentioned that NDR is one of the most important metrics as you grow as a SaaS company for investors. And now I have a deep understanding of why. Because I think when you start the journey, especially in the few first years, you're just focused on acquiring new customers and growing business. But eventually, as you mature as a SaaS company, the majority of your revenue, majority of subscription is actually coming from existing customers. Even to the point where it's 95%, 98% of the revenue is from existing customers. Some of them might be more than a year, some of them might be five year old. So when you reach that point, MDR basically represents your growth rate. If you got 130% MDR and 95% of your revenue is coming from existing customers, your revenue is going to be about 30%. Just the law of nature. Your new customer is going to add to that. But eventually the company will converge into its NDR in terms of growth rate. Unless you add other engines into the mix.

Yeah, I remember when I joined Adobe, we were trying to merge our Salesforce instances and I said, well, where are the opportunities? Where are the leads, contacts and opportunities? They're like, well, everyone's an Adobe customer on planet Earth. We don't have opportunities, we just have upsell. And they didn't call them upsell going to your appointment. But they had a different term for like the size of the potential account and how much had been accommodated. But there literally was no need for lead conductor opportunities because there was nothing, not. Not a single sizable account. That at some level wasn't. Because it was, it was. My opening mind to the NRR is extreme, right? Is extreme. Which is there's nothing to do but maximize accounts. I'm sure it's true at Microsoft too, right? I mean, we can. Or Google. I mean everyone at some level is a customer. Right?

Okay, guys, we have just a few more minutes left and I want to still talk about one more topic, which is one major gap that I think we haven't talked about yet, which is how to measure, you know, cash flow and path to profitability. So, Jason, I wanted to hear your take on that.

Yeah, maybe. How do you optimize for it? I think because we know how to measure free cash flow. But as a SaaS founder, any tips or recommendation?

Yeah, let me, let me. You guys might even read this post in the early days. Maybe it was after you took off off. But I try to update this every year because I'm shocked at how few founders do. This is my number one tip. It always works. It always works. You, you have to constantly, every month do an L4M analysis. Okay? You do not need 20 people in finance or operations or planning to do this. Any founder can do is take your financials and all you need is your top line and your bottom line, how much your revenue grew and how much you burned. You don't need anything else. Average the growth rates of both the growth rate of your top line and the growth rate of your burn rate for. For the last four months. And just roll it forward, roll it forward. 12, 18, 24 months. That should be your real operating plan, okay? No matter what anybody tells you, no matter what it says. And if that says you're going to run out of money in 12 months, you're going to run out of money in 12 months. Okay? It doesn't matter what your OPS person says or your VC or finance person. The accuracy of an L form model is so high, right? It is so high, even at the earliest stages, it does it become inaccurate five years out, potentially, right? But if you're growing 6% the last four months, but you really want to grow 12, and your dumb model for the VC says 12, well, tough, okay? The L4 model says 6. And if you. Every month you say, well, our burn should be 200k. But hey, we had these legal expenses, and hey, we did this deal and we did. So, yeah, it was 400, 500, 400, but it's going to be 200 eventually. The L4 model doesn't care. It doesn't care about what your excuses are. It doesn't care why you missed the month. It doesn't care if the deal slipped a quarter. It doesn't. It just doesn't care. And when I. When I invest, when I work with founders, when I do anything, no matter what they say, I just take their financials and roll it into an L4M model. It's always correct. It's always more correct than what they say. And what I love to keep you, to keep you rigorous, is every month on the first of the month, because it should take you like 15 minutes. If you understand what I'm doing, redo it and either share it to the whole company or share it to the senior team. This is what the numbers say. Okay, I know where we want to grow 100% this year, but since last month it was only 3%. This is how it ripples our L4M model, right? This is how the burn rate. And you don't even need to know anything. You don't need to know. Headcount, schmed, count, cac. Smack, cltv. This L4M model is your best tool as a founder. It's never wrong, and you may not like what it says. I find many founders, the first time they do it, they get a little prickly. They're like, no, no, no, no, no. We're going to triple this year. Iran. No, no, no, no, Roy. We're not going to burn that much. But as this, the L4M model automatically updates it. Right? It's just average your last four months of your top line growth and your burn rate and roll it forward, it is better than the most expensive cfa, cpa, cfo, multimillion dollar team. It's better than all of them. I bet it even works on Monday. Today if I, if I took up your financials, I think I only get quarterly, but if I had the monthlies and I just rolled them forward, they'd be pretty darn accurate.

I think it would work better today than it did.

Yeah, maybe, right. I can tell you from experience is it absolutely works at a million in ARR. Like it works at half a million in ARR. It always works. Right? And, and this four months is just perfect because it gives you that extra month to take out the variability. Right? It gives you that extra perfect. It turns out it's the perfect amount.

Right.

Even if public, it probably gives you. It straddles a quarter. Right? It probably gives you that extra little. It takes a game out of the system. But yeah, it's interesting to work better. But trust me, it just do it, do it now. And if, and if you don't like the conclusions this is, then make the changes. You're gonna run out of money. You talked about cash flow. Forget about all the other metrics. They don't matter. What matters is how much cash have you been burning the last four months. And if you don't make any changes, if it's growing, if that, and if that burn rate's growing 3% a month, it's going to keep growing. This is the mistake so many founders make, especially if they de bootstrap. This is the number one. Another bit of advice I can give to folks that d bootstrap. A lot of folks that listen to this may de bootstrap, right? It's, this is not, it's not being venture backed or not being venture backed. A lot of folks will either be forced to ventures. It's hard to get venture capital, you guys, I mean you guys had to raise it at three and a half pre. Like it's hard. And so many folks will wait until 1 million, 2 million, 10 million, 20 million in ARR. Right? But the mistake I see again and again is if you folks, if they debute strap post revenue but pre scale is their intuition's wrong and they burn up all the money. Like okay, they don't get the fancy office they, they let, they let Roy and Iran have two more hires instead of one. Each month. But it's kind of the same. The sales comp plan doesn't go crazy. They're like, my gut is that's fine. And then 12 months later, half the money's gone. But if they did this L4M model, it wouldn't happen. They would see this creeping up on them in real time.

So I, I have like, a motivational tip that we did, and a lot of people loved it. We kind of. When we were in, in one room office back in the day, I kind of wrote on an A4 paper and stuck it on the door, like, do you want to live forever? How much customers do we need to get so we can live forever and not burn money on the current burn rate we had? So it's like the same thing you said. Like, I completely agree just with the motivational approach to, like, where, where we do need to reach to, to meet the goals we set.

Yeah. And Daria, just to finish up the point, the, the advice on the burn rate going to this. The flip side of the L4M model is the biggest danger I see with founders is they get a crap model from their finance team. I see this all the time. It's worst of all. The worst of all mistake is a lot of founders these days wait to hire a VP of finance or director of finance, let alone a cfo. Instead, they hire a director of operations, some smart kid from McKinsey or something like that, that's whip smart. And they're like, I don't want. I don't want a bean counter. I don't want to count. I want this guy that. The spreadsheet jockey, right? They can do it perfectly. The problem with the spreadsheet jockey is if, if, if he doesn't like that, they manipulate the inputs. Like if Monday.com goes and gives McKinsey $10 million to plan the future of their company, and then Roy and Iran don't like it. McKinsey goes back and just changes the variables. They just change the variables. And so these, these director of Ops, I see it again and again. And if you peer behind, you know what the model always looks like in Q1 will do 2 million. Q2 will do 2 million. Q3 will do 4 million. Q4 will do 18 million. Like, they just, they're just manipulating the model. And not only do they blow the top line, but they blow the cash. They blow the cash. And if you. And I see too many founders who just trust their director of ops, the, the McKinsey Kid, and they blow all the money, you've got to do it yourself. Like the models are terrible. They're terrible. And they, they put in assumptions that make sense for wildly profitable companies that have a margin for error that startups don't have. They're just, they're all terrible. I can tell you all the models. Very few people can update a dynamic model every month and predict your cash flow. You got to do it right.

You made the run. Laugh. It's like, yeah, yeah.

It sounds so familiar.

Be careful. Those guys can help you model your business. New product expansion, new NR. They're really good, these McKinsey folks, but they're awful at projecting your cash flow and your cash.

You know what they say, you know, an Excel sheet can absorb anything. That's always true. You can write whatever you want in Excel.

Yeah.

Tip for life. I know we have Jen, so maybe just each one of you, if you have any, one takeaway that you want founders to take from this conversation. One good tip. Jason, maybe we'll start with you.

I think my biggest tip is it is go long. Roy touched on this a little bit. Go and decide how long you want to go. If you have a good look, we're looking at two great co founders here. Okay. Two co founders is pretty special. It's what I look for. If you have two co founders, if you're Roy and Iran or better, then be honest and decide how long you want to commit for. If you're willing to commit for a decade in the beginning and 20 years as you go in, then you'll get through all this stuff, right? And you'll make the right decisions and you'll recruit the right people. If you're willing to commit for one year or two years, which is pretty common, you're going to have a very different outcome and different path. And I don't mean to be critical of it because 99.9% of people should not commit for 20 years. Right? It is no matter what you see on the Internet. But, but be honest. Be self aware of that to founders. And that's the. If you have 120% NRR and you have great founders, you can go as long as you want in this world. No one can stop you. If you have high NRR and great founders. That's my lesson. It's up to you now, maybe hard and I'll give you a last tip. I have the. The last investment of a batch I made in 2015 has been around for 20 years now. I didn't invest 20 years ago. Okay. Invested late. It de bootstrapped and they are now selling for many hundreds of millions of dollars, not billions, but many hundreds of million dollars. They just too great for. They just never quit. They never quit. And there's so many stories like this of founders that, that that want to do it. And they had higher NRR and they had times they went through where they were terrible at new acquisition, but that 120% NRR just powers them through. So if you can get to that high NRR and happy customers, my advice is it's up to you as founders, it's up to you if you want to push through the pain, if you want to push through the A4 note on their fridge that Roy left up, if you want to do it. Because no one can stop you. With great founders and higher NR, no one can stop you. And you get to 20, 30, 40 million ARR in SaaS. And if you're efficient, if you're burning nothing, you'll get good M and A offers. Every, every SaaS company I know of that gets to 30, 40 million that is profitable or cash flow neutral, someone wants to buy it because they're going to miss the quarter. Someone out there, it may not be Monday, but some public company or company about to go public would love an extra 30, 40 million of ARR to bolt onto their company. It's happening left right today is the people are thinking about ipoing again. So a rambly answer of high NRR great co founders. It's up to you. You cannot be stopped if you don't want to be stopped.

Yeah. My tip, first of all, I agree with Jason. You know SaaS compounds and it takes time but once it happens, it's just magic. So I totally agree with Jason. My tip will be everything that you want to measure and eventually become good at. Start measuring it today and start improving it today. You want to have great cash flow, start measuring that, start improving that. You want to improve your ndr. It's not magic. Put somebody there to analyze, churn. Put somebody to see what makes companies leave, create new upsell opportunities. It sounds obvious, but it's not. Sometimes you feel like this is your company destiny and you're stuck with it. But it's not. If you start measuring and work towards improving it, it's just going to happen.

Yeah. And I'm going to add to what Iran said and say that like the journey has never been easy for us. It looks maybe we're successful, but it was always tough and like we didn't really have a good NRR in the beginning. Because it was like very small customers and we kept improving the product all the time. But we looked to Iran's point, we looked at the metric and we saw where the problems were and we added the sales team. We didn't have that in the beginning. We improved the product. We went after larger customers. So we did everything once we saw where the problems were and, you know, we were like adamant about improving things all the time. So, like, it's not about like nailing it from day one. It's about persisting with the measurement and then it becomes successful and it's, it's like never easy. It's like never easy.

Okay, I think, I think we can end with that. So, Jason, thank you so much again for being here with us. True pleasure, yes.

Thanks for having me, you guys. It's great.

Thank you so much.

Thank you for listening.