Unveiling the Data Behind Effective Scaling | ICONIQ Growth Partners Doug Pepper + Christine Edmonds

Quick intro. My name is Doug Pepper. I'm one of the investing partners at Iconic Growth. I've been investing in software and SaaS companies for the last 22 years, all the way from seed stage to growth stage.

And I'm Christine Edmonds. I'm a partner at Iconic Growth, and I head up our analytics and data science team.

So before we get started, for those of you who don't know us, we both work at Iconic Growth. We're a venture capital firm whose mission really is to be entrepreneurs backing entrepreneurs. And what we mean by that is we have a very unique set of investors ourselves. Our limited partners are almost entirely individuals. They're CEOs, they're founders, they're business leaders of some of the world's most important technology companies, as well as Fortune 500 global companies. And they view Iconic Growth as their vehicle to back the next generation of iconic technology companies. And that's what we've been doing for the last decade. And as you'll hear later in the presentation, we've been lucky enough to partner with some of the most important new software companies of the last 10 years. I joined Iconic about three years ago because we shared a number of investments together, and I saw the really impressive impact of that unique network that we have of our investors as well as our platform. And one of the key pillars of our platform is our data science team and our analytics team that Christine heads up, and she'll tell you a little bit more about that.

Thanks, Doug. So the premise behind our analytics efforts is really the recognition that we are really fortunate to partner with the companies that we have. We have partnered with over 90 leading technology companies and really seen them grow through critical phases. So wanted to capture the learnings that we were gathering along with these founders and share them back with the broader community in a more proactive manner. We do that in a couple different ways. One is through broad thought leadership, some of which we are really excited to share with you all today. We also partner with our founders on a variety of different custom projects, analytics projects, and some strategic advisory. And then finally, we apply the same data frameworks and insights to various facets of our internal operations as an investing platform. So, as I mentioned, today we are really excited to share some insights from our latest growth and efficiency report. We've now published this report for the last four years, and this year in particular, we want to highlight some of the aggregate trends and insights we've collected over the past five, 10 years of partnerships, but in particular highlight how to think about these in the context of a 2022 environment. We are going to fly through a bunch of numbers today. Do not feel like you have to take notes furiously. You should each have some postcards on your table with a QR code. The full report is available publicly, so you can find it on our website and download it there. Just a quick note in methodology. Where is this data coming from? So, as I mentioned, we feel really fortunate to partner with some amazing companies and have seen many of them grow from a $10 million ARR stage all the way up and past IPO names, including Snowflake, Datadog, Procore, GitLab, Braze, and some amazing private companies still on that journey, like Miro, Service Titan and many others. We did want to note that for many of these companies, we actually now have almost a decade of data, and so we're talking about tens of thousands of data points. The result of that, though, is that some of the trends we're going to be speaking to today really reflect the past five to ten years of what Best in Class looks like. And again, we will be sure to try and point out where we recognize the past two years have been a little bit different. And how do we think about some of these metrics in that context? We also included a number of public companies that we deemed through another set of analyses that we do every year to truly be Best in Class in terms of their operation leading up to and at ipo. So feel like we have a really robust and representative data set of leading companies.

All right, so enough background. Let's dive into what we're talking about today. What we're really trying to do is address some of the key questions that every startup has, but especially those that have reached product market fit. They're at 10 million ARR and they're wondering, how do I continue to grow the top line? What are the components of that growth? What are the key measures and metrics that I need to be tracking and attaining? And then of course, in today's environment, what are the ways that I balance that growth with efficiency as well? And again, as Christine said, we're not presenting theoretical numbers. These are real numbers from some of the best companies that we've been lucky enough to work with. So hopefully you'll find this really helpful.

Great. So let's dive into some of the actual results. We're going to start with growth and then we'll spend some time on efficiency and bring it all together at the end with some 2022 insights. In the most basic manner, when we think of growth, we're looking at growth in ARR or annual revenue. And so to just put some real numbers behind this, first we want to recognize that it is hard to get to $10 million in ARR. It is very hard to sustain that growth through the 10 to 50 million benchmark and then on beyond that. And so what we look at, we see our top quartile companies consistently hit doubling their ARR in those first two to three years, but more notably continuing to have really robust growth in the years leading up to IPO with about 1.5x. And so you see here the net new ARR doesn't just level off, which is something that is very easy to happen, but it's actually grow by an incremental 15 to 25 million every single year. So what's driving this growth? Never before has it been more important to understand your customers. Their health, their size, the concentration. And much of that is because it does relate really closely to the various drivers of growth and understanding how to think about where your revenue is coming from. In every single year and every quarter. Fairly consistently, we see companies over time lean on expansion efforts more than new logo when they think about the contribution into gross ARR. There are also times like now where it can be much easier and really beneficial to be able to lean on that expansion motion. When markets are a little more volatile, demand may be less predictable. But we did want to highlight the importance of really nailing the ability to win new logos. All of you here who are founders have no doubt are in extremely competitive markets. And so building a really robust go to market motion and an engine that can sustain that growth but also capture a lot of those new logos early on is critical to have a strong base to actually expand into later on. That also makes sure that you won't have too high of a customer concentration, which of course can lead to some volatility when it comes to churn with every single customer mattering more.

Yeah, I was going to share an anecdote. I was lucky enough to be involved with Marketo from its founding and through IPO on the board for 10 years. And it was founded in 2006. It was actually one of the very first companies that was exploring this business model and many of these metrics. And I'll never forget a board meeting that we had probably around 150 million ARR where we all collectively realized kind of simultaneously that the chief customer officer who's in charge of upsells expansions had a bigger net new ARR number that year than the VP of Sales and it really reoriented how we thought about customer success and thinking of it more as a revenue generation function than simply account management. But I agree with what Christine said in the early years Marketo and most of our very successful companies are focused on new logo, velocity, winning the market, closing new deals from new logos. So speaking of expansions, obviously that's a key factor in what I think everybody in this room knows is a core metric to understand the health of a software business and that's net dollar retention. And we looked at our top quartile of companies over the 5 years after 10 million ARR and you can see one thing here very clearly, that these companies very consistently have extraordinarily high gross and net dollar retention. But I'll call out a couple of nuances here. One, these gross dollar retentions for anybody who's running one of these businesses probably looks quite daunting. These are big numbers and they are being dragged up as an average with some of the very top performing companies. When you look at the median, it's closer to 90 to 93 in terms of gross dollar retention. And even some of our businesses that are selling to SMBs for example, do very well in the high 80s gross dollar retention. On net dollar retention again you can see that consistency 120% or above. But we have a number of companies that do a whole lot better than that and they do that in a variety of ways. Take Datadog for example. They have just done incredibly well in rolling out new products and a land and expand motion as part of that snowflake. On the other hand, with their usage based model and amazing value proposition has shown, both of them have shown net dollar retentions well over 150% which when you look at how they're valued in the public markets, they're rewarded handsomely for that. So we've talked a lot about top line growth, components of top line growth, net dollar retention. Let's talk a little bit about efficiency. But before we get into the details of that metric, we thought this was actually a really interesting slide for indicating the importance of growth versus efficiency in the minds of public market investors. And I'll try to make this slide simple. So the green line is growth. It's all about kind of growth, maybe growth at all costs. The blue line IS rule of 40 which is a very normal measure of efficiency of growth. You're looking at revenue growth plus free cash flow. When the green line is above the blue line, public market investors are focused on growth above efficiency. And you can see kind of pre Pandemic. The blue line was above the green line. People cared about efficient growth. And then I think we all know the last two years it was all about growth. The green line is way above the blue line. And of course I think we've all felt the shift in the last few quarters where the blue line has made a dramatic move up. And now public market investors are really focused on efficient growth again, which is why I think everybody in this room is probably thinking about that more now than the last two years.

Great. So with that, we're going to spend a little bit of time talking through some efficiency metrics. The first question we often get when we start to talk about efficiency is does increased focus on efficiency come at the cost of productivity? And, and how do I make sure that I'm still feeding that engine and driving that growth as I shift focus towards efficiency? The short answer is no, they're not mutually exclusive. And one of the ways in which we look at this is on a per employee basis. For most SaaS companies, somewhere between 60 and 75% of your costs will be personnel related. So it's a fairly simple and really important way to understand both your revenue generation as well as the efficiency of the spend. As you'll see here, right around that $100 million ARR mark is where we see these begin to flip in relationship and actually being able to generate more revenue on a per employee basis than you are incurring costs. If we extrapolate this chart out leading into ipo, we actually see the trend continue. So companies are able to incrementally increase ARR per FTE while maintaining OPEX per FTE right around that 200 to 220k range.

So diving into efficiency by function, not a lot of surprises here. You can see again, year zero is when a company's around 10 million ARR. And this is kind of the average of this great data set. And then on to year five. And of course at that 10 million level, companies are spending a lot more than they are in revenue. But then over time, by year five, they're now spending less than revenue and flipping over into profitability. In those early years, of course we're all investing and backing and building product oriented companies. So you see R and D is a very significant expense in year zero, around 10 million ARR. But it shrinks as a percentage of opex from about 30% to 25% as you go through the years. But of course we all know these products don't sell themselves. And so interestingly, even as companies get more efficient overall. The they actually spend more in sales and marketing as a percentage of OPEX over time, kind of going from 50% of opex to 60% over those five years. To put some numbers on it, in our data set of our Companies, by year five, companies are spending typically about $100 million in R&D product and $160 million in go to market by year five. So obviously another metric that I'm sure you've all read about and heard about the last few years to measure efficiency is burn multiple. And it's a very simple but pretty effective way to measure the efficiency of growth of the businesses that we're all involved with. And you know the obvious definition there is for every dollar that I'm spending, what am I adding in net new arrangements? And you can see here again, this is our data set. And this is the average when a company's adding about 10 million net new ARR, they are typically burning about 20. And so it's 2x. This is actually an old slide. So the real number here that we typically see is 2x burn rate multiple and then it trends down over time, typically what we're seeing. And again, this slide is a bit off. We can give you the updated slide slide. By year five, companies are typically adding 50 million net new ARR and burning about 50 million. So it's kind of one to one. And this is obviously a bit confusing here, but I will make kind of a nuanced point. The data set again, as Christine said, is companies that are really far along. These are public companies, these are late stage private companies that largely went through this phase, call it five years ago or so. And what we've seen in the last two years, given the green line of growth, was much more valuable than efficiency. Companies really ramped their burn multiples. And we've been meeting with companies all the time the last two years that are burning three, four, five times what they're generating in net new ARR, which you could understand given they were being rewarded for that in the private and public markets. In terms of valuation, that's over. And so I think collectively investors, founders, entrepreneurs are having to reorient their burn multiples to what these great companies were doing five or 10 years ago. And that's a hard process. And we'll talk more about that.

Great. So on that note, let's start to think about growth and efficiency in the context of today and what's happening in both public and private markets. We're going to spend some time going into a few case Studies and anecdotes to share how our founders navigating this time and what are they doing. But before we do that, just wanted to level set in terms of what is the impact that we're actually seeing from a quantitative standpoint. So we'll start with 2021 here just to provide some context. And specifically we're looking at net incremental bookings and attainment to that. So, so if you were growing from, if you were planning to grow from 10 to 20 million of that 10 incremental million dollars, how much are you actually attaining in that year? 2021, I think we all know was an exceptional year across the board. And the median attainment for the companies analyzed here was very close to 100%. Q1 in particular tends to be a fairly healthy quarter, just given the proximity to annual planning and a little bit more visibility. But I think Doug and any investor that's been in the business for a long time can attest to the fact that never before have we seen so many companies outperform their plan, which I think just speaks to the markets in general last year. So what does that look like this year? Of course, early in the year there was some changes starting to happen both in public and private markets. But when we actually looked at the impact on attainment, it was still a very strong quarter. 99% median attainment. And that coupled with really robust balance sheets. Most companies had somewhere between two and two and a half years of Runway. So definitely in a solid place. I think the other way to look at this is the easiest reference point that most of us have in the recent past would be Q1 of 2020. So what happened in Covid when there was similar volatility and a lot of quick changes to buyer behavior in Q1, 2020, median attainment was closer to 80%. So I think really speaks to the health of many of these companies coming into the year. Despite some of those changes, of course, impact has accelerated through Q2 and now with early indications into Q3. So in Q2 that median attainment number moved from 99% down to 87%. The other way that we looked at this was for companies ending quarter in June versus July, what was median attainment and really did see each incremental month add to some of the pain and the misses that we saw here. So again we'll talk through some of the lessons that were applied in 2020 and how they're being used today to manage this. But I think one thing to point out here is just how quickly these Things can change and the importance of really getting ahead of some of the decisions that need to be made through times like these.

So that was the impact for the private companies. This is showing what we're seeing in terms of the impact in the current environment on the public companies. And it's actually quite a similar story if you look at the column on the left. That's kind of Q1 earnings. What were companies communicating to the street in terms of their results? And it was a great quarter. 95% of companies beat their management plan, 91% beat the consensus analyst estimates. And maybe most important, if you look at the box at the bottom, almost 80% of companies that announced in Q1 raised their guidance for revenue for the full year. It's a good sign, actually. Quite typical over the last few years. That's what analysts expect you to do. Q2 Things changed. The actual results of Q2 weren't that much worse a little lower. People were still largely beating their management and their consensus plans. The big change, and a pretty dramatic one, is that now only 50% of companies raised their guidance for the year. And that's communicating real conservatism, maybe pessimism about the back half and their ability to continue growing at the original pace for the year. And even those that did raise, you can see the median beat raise was like 2% raise on their plan. So even the raises were a little bit anemic. And so that's indicating, just like the private companies, that the impact of the demand environment is showing up more in Q2 and the pipelines for Q3 and Q4 than we may have have expected.

Great. So again, we'll get into some more tactical case studies in just a moment, but maybe one less quantitative view to share here. When we bumped up top line performance against bottom line performance. So we looked at how much are companies attaining of their plan from a revenue standpoint and how much are they spending relative to what they had budgeted. We found most companies fell in one of two buckets. So the first bucket is this top right corner quadrant in the light green. And these are companies that actually managed to both beat their top line plans while burning less than anticipated. One thing to note is on average these companies were about three times the scale as their counterparts in other cohorts, which again I think speaks to more mature go to market motions. Probably a more stable and robust customer base as well. The other bucket that many companies fell into were companies that were missing top line, but again were able to very quickly pivot some of their operations. To manage costs so they could extend their Runway. And that's the top left quadrant you have here. Again, 2020 was the first time that many of these leaders had to even think about scenario planning, think about how to manage costs, and make a lot of these really tough and emotional decisions. And I think in 2020, there were some companies that may have over rotated and hindered their growth by being too conservative when it came to cutting costs. And so what we're seeing so far is many of those lessons and learnings being put into action with a much more proactive and a much more measured response so that they can extend that Runway and not have to make as drastic decisions later on.

So this slide is outdated as well, but we'll still talk through the same topics, which is basically, how are companies reacting to this environment? And the key thing is that it's not a one size fits all, because every company is being impacted differently by the environment. And therefore their reaction, their playbook, needs to be unique to their own situation. And it is interesting, though, to note that everybody's feeling a bit of the same dynamic. And that dynamic I think probably most people in the room here can feel a little bit, which is the last two years during the pandemic, there really was a pretty extraordinary tailwind for the adoption of technology. Companies saw more growth rate than they expected in the last two years. And what happened was that they applied those similar growth rates to their planning for this year and next year. And given the new environment, rising interest rates, lower valuations, less demand, normalization of demand, most of those companies aren't experiencing the growth rates that they expected. Varying degrees. Right. Peloton would be the most obvious example of extraordinary demand and real normalization. Maybe zoom. But to some degree, every one of our companies that we work with is feeling that same dynamic. But the problem is they all built their spending plans to those more aggressive growth rates. And so what do they do? They've got to make adjustments. And so what we're seeing in our portfolio roughly is that about 20% of companies are doing rifts, they're doing layoffs. Those are the companies that maybe hired too aggressively or are seeing the biggest shock to demand. And they're laying off good people. And that's really hard to do. I think that's probably the hardest thing for a CEO to do. The truth is, months later, easy for us to say, but we often hear those CEOs saying, We're better off for it, we are more efficient, we're actually getting more done by having made that tough decision. So 20% layoffs, another 20% are really doing hiring freezes. So they're saying we can't hire anymore. We're really slowing down. We're not letting people go, but we're doing a freeze. The majority probably around 60%. Again, rough numbers are slowing hiring. They're still hiring, but much more selectively, much more slowly, and will probably end the year 10, 20% below in terms of headcount, what they otherwise would have. And so lots of new plans. And speaking of plans, it's really important to note that companies aren't just thinking about what's my plan for 2022 for this year. They're really needing to look out 2023 and more accurately predict demand and growth, because it's those expectations for 2023 that drive the hiring plan for the back half of this year. And so every CEO, every CFO in our portfolio is sharpening their pencils, usually multiple times to kind of come up with new plans for this year and next year to drive growth, but also better efficient spending against that growth. The other thing I'll say, and again, this slide is a bit different than what we expected. The other thing I'll say is that companies, rightly so, are not just focused on spreadsheets of planning and spending. They're thinking about how do I execute more effectively in a more optimized way in this environment in terms of go to market. And the watchword there, again around efficiency is focus. Companies are realizing that to do more, they actually need to do less. They're saying no more often. And so what are some examples of that? One might be they're not expanding internationally right now. If they were going to go into five countries, maybe they go into one. If they thought they'd go into Europe and Asia, maybe they just go into Europe or maybe they just stick to the US and so they're making tough decisions like that this year. Maybe they're not launching a new product that they were considering launching when it comes to customers. Maybe they don't launch a new vertical or a new segment and they continue to focus on a segment that they know is most willing to buy and seeing the greatest value proposition. Speaking of value prop, one of the biggest changes this year is that the line of nice to have versus must have has really gone up. And we're seeing companies that used to be must have with that line going up now falling below into nice to have and it's harder to sell. And so companies are really trying to iron out this value based selling how do they prove that their ROI is immediate and real and that kind of new motion is more important now than ever. And then of course, as always, they're really thinking about their teams. Do I have the right executives, the right second layer and go to market to, to really take us beyond 10 million and beyond that. So there's a lot of work happening with those kinds of go to market and team building efforts to kind of gear yourself for growth in a more constrained environment where efficiency does matter. But I'll end with one comment which sort of flies in the face of everything we've said. Despite everything, for better or worse, growth still is and always will be the most important metric. We're in competitive markets, they're big markets and you don't want to let your competitor beat you. And so I think every one of our companies, again, no one size fits all playbook is looking at their resources, their cash Runway, the value prop that they have, and making a determination of to what degree do they balance prudence with aggressiveness. Because in the end we have seen, as Christine alluded, a Number of companies in 0, 8 and 20 Use this moment if they're well positioned to vault ahead of competitors. And there's certainly cases of companies where we're advising them to do that.

Great. So I know we're just about of time here. We'll just point you to a few references and then Doug and I can stick behind and if there's any questions, welcome them. We included some key takeaways here. Again, these slides will be available after the fact.

Updated slides.

Updated slides. Yes. We'll make sure it's the latest. And then we also wanted to point you towards some other content we have available on our website. Of course not everything we do can be shared publicly, just given the sensitivity of some of the information. But we do have five key series that we continually update and all of those are available for download on our website. And then finally our contact information. We'd love to stay in touch, get in touch. And again, we'll stick around for a few minutes if any of you have questions. Thank you so much.