At About $2m in ARR, Every Great Hire Will Be Accretive.

Screen Shot 2014-07-21 at 2.14.14 PMRecently, I was talking to the CEO of a pretty successful SaaS company doing ~$3m in ARR, growing nicely, in a good space.  Doing just fine.

And he was proud he’d just hired a VP of Sales at a below-market rate.

Dude.  I told him.  That’s a negative.  Because at your size and growth rate, It Just Doesn’t Matter.  If she’s any good.

Because it turns out, once you hit just $2m in ARR, and maybe even much earlier — every great hire will be accretive.  Will make you more money than you pay them in cash.  I guarantee it, in fact.

Let me explain the math.  Let’s assume you are at $2m ARR, to make the math simple:

  • You hire a Great VP of Sales.  Accretive in 90-120 Days.  For say $300k OTE.  A great VP of Sales, within one year, can easily close 20-50% more business than you would have without him or her.  Even just 20%, the bottom end of the range … is $400,000 in additional revenue ($2m x 20%).
  • You hire a Great VP of Marketing.  Accretive in 90-180 Days.  Let’s say you’re at $2m ARR again, growing 80% YoY.  And you don’t have a great VP of Marketing yet.  Well, make that hire, and you really don’t think you can get another 20-30% improvement from your existing lead flow?  By properly communicating and marketing to them?  By doing better webinars, better city tours, better whatever?  Of course she or he can.  Another 20% is again … an additional $400,000 in revenue.  Even just a 10% improvement in your lead-to-revenue performance, even just another 10% in true qualified leads … will more than pay for the hire.
  • Every Great Sales Rep is Accretive at $2m in ARR.  In Just 2 Sales Cycles.   Even just at $1.5m-$2m, there’s enough momentum in the business, enough repeatability, that a great rep can really have an almost instant impact.  Take his or her leads, and make 20%-30% more out of them than a mid-pack or mediocre rep (and maybe more.  The best reps often can yield 50-100% more than the mid-packers from a given set of leads).  So that incremental Great Rep takes his or her say 500 leads a year, and instead of turning them into $350,000 like the last guy … she turns them into $500,000.  Again, more than pays for herself.  And fast.  And that’s just first year ACV.  
  • Every Great Engineer is Accretive at $2m in ARR.  In Just One Full Release Cycle.  You think engineers are cost centers, at least from a financial model perspective?  Not if you are selling into the enterprise.  What you’ll learn is that if you can get one more Needed-it-to-Close-the-Big-Deal feature every 3-6 months … that great engineer will pay for herself.  You need to lose a few five or six figure deals to a feature gap to get this, to see it.  But once you do, it will become crystal clear.  If you just had that one extra great engineer, you would have closed Google.  More than pays for herself, again.
  • Great Customer Success Managers Can Be Accretive Managing Just $800k-$1m in Existing ARR Within 9-12 Months.  A lot of mature SaaS companies use the metric of ~$2m in ARR per customer success rep.  But if you get a great team — you can hire a lot more aggressively than that.  A mediocre CSM might say retain 100% of your mid-market revenue on a net-of-churn basis.  But a great one might, by really creating true customer success, with upgrades, can get that same customer base to renew at 110-120% of last year’s ACV.  That incremental 10% … pays for the CSM right there (10% of $1m = $100k).  And that’s just one year’s worth of ACV.  If that customer lasts 3-5 years, and you see Second Order revenue from it … the ROI will be very, very high.  Even with a great CSM managing as little as $800k in ACV, he or she can be very accretive.  A great one.
  • Picking Up the Phone Can Be Accretive in 90 Days.  It’s even true in customer support.  No one picks up the phone.  It’s too expensive.  They want to do email tickets.  Which customers hate, 9 times out of 10.  They want someone to answer the da*n phone.  Imagine you save just 10 customers over the course of a year at a $4k ACV by picking up the phone.  That’s less than one saved customer a month.  And voila! — you’ve more than paid for an extra customer support rep right there.

I didn’t figure this out until $4m in ARR.  Once we got there, I saw all of this.  I told every manager at EchoSign to hire everyone they wanted.  No headcount limits.  No budgets.  Only so long as they were truly Great.  And hence, accretive.

Because I waited until $4m in ARR, with hindsight, I wasted a lot of time from $1.5m to $4m in ARR.  Because we should have just hired every single employee that was Great, no matter if it seemed expensive on paper.  

This only works if you have 12+ months in cash.  Because these accretive employees need time to close their deals, build their features, launch their campaigns.  So don’t make all these hires if you have < 9 months of cash in the bank and are too worried about money.

And this only works if the hires are truly great.  That extra rep, if she or he is mediocre, is mid-pack … may play a role in your org.  But she’ll just be taking leads from another theoretical or existing hire, she won’t be increasing revenue per lead.  The mediocre, incremental rep or engineer or CSM isn’t accretive.

But at $2m ARR, maybe even $1.5m ARR or even less if you have a repeatable process … everyone great is accretive.  If you meet one — hire him or her.  That day.  And just pay market.  Don’t quibble over salary for the great ones.  Because it doesn’t matter really, what you pay — if he or she is a profit center.


Image from here

I'd like to receive:

There are 16 comments

  1. jindoulee

    Wow. This is quite thought provoking and tremendous insight on the way to think about hiring within a SaaS growth company. Are there operational challenges in this stage or is it a case of “figure it out as you end into problems”?

  2. jasonlkn

    Nice micro case-study from LinkedIn:

    “Russ Hearl
    Vice President, Global Sales Development

    Love reading Jason’s insights… Pragmatic expertise from someone who has been there. Wish all the Influencer posts were this useful. My company, DoubleDutch executed this growth strategy last year when I hired 50 salespeople to build an outbound sales engine in a new market. We have a repeatable, relentless new business acquisition process and every hire is accretive in 90-120 days.”

  3. Doug Razzano

    Another great read from Jason. From the Founders/ CEOs we speak with regard to hiring “great talent” it’s locating and attracting the “right, great talent” at the exact time to hire as their the biggest challenge. Great talent isn’t looking and these types of professionals are in high demand. Partnering with Search firms that focus on early stage, Start-up professionals can accelerate this phase. Additionally, we add value by creating evaluation / selection criteria that generally has not been defined for each role.

  4. What the Second Time SaaS CEOs are All Doing | saastr

    […] Forgetting about optionality.  As first-time founders, optionality can seem very important.  I don’t want to raise too much, or I can’t sell for $X.  I don’t want to commit to too senior a hire until I’m clear it’s going to work.  Cash-flow positive as an end-goal even if it sacrifices growth.  There’s something to be said about optionality.  I get it.  I did it, sort of.  But I wouldn’t worry about optionality again.  Neither do any of the Second Timers.  Not just because you’ve already put a few bucks in the bank.  But because it can hold you back in SaaS.  It weighs you down.  You end up underinvesting, not just in monetary capital, but human capital, systems, and hiring ahead as well.  More on why all the great hires are accretive here. […]

  5. Sanjeev

    Great insights as always.

    In the case where a CSM pays for him/herself by growing 10% of revenue, are you attributing the 10% growth entirely to the CSM? How about retention and up sells? How should those be attributed?

    1. jasonlkn

      i think for most CSMs, you have to compensate them by net revenue retention (including upsells, and usually renewals), from their revenue under management. the exact % is going to depend on how much you retain today currently, and I’d target driving them up each year.

Post Your Thoughts