Great Session on the Pitfalls from $1m to $10m ARR

The other day Vlad Kachur from Startup Lessons Daily came by the office for a deep dive on some classic SaaStr topics on going from $1m to $10m ARR. The video is below and if you are interested, take a watch.

He did a great job doing a deep dive on a lot of classic SaaStr topics in a way we haven’t dug in before.

You can also watch-and-read at the same time here, with the transcript below.

Vlad Kachur:
Hi guys, we’re here today with Jason Lemkin. He sold his last startup for $400 million and his new company SaaStr is on track to do $25 million a year. And we’re here to learn some of the hacks, how we can build companies that are equally as big or even bigger if we can. So Jason, welcome to the show.

Jason Lemkin:
Thanks for having me. Thanks for coming here to SaaStr headquarters. So it’s good to have you here.

Vlad Kachur:
So we’ll just jump right in it because we have so many tactical points for Jason. So the first one is, let’s say once a team hits $1 million a year and they’re doing $1 million a year, what should the hiring plan look like? What does it look like to scale it to the next level from there?

Jason Lemkin:
Yeah, so a million … After I sold my last company to Adobe, as you talked about, I realized that a million, a million-ish, a million-and-a-half really is an inflection point. Unless your price points $1 million, in which case you only have one customer. But typically around then you have enough customers that maybe you’re frustrated because you’re not growing fast enough. Maybe you don’t have enough people, but you really have hit something. You have this sort of very initial traction, the bit of an engine going. And I think once we hit that, that’s also usually the natural transition point from founder-led sales. So we start thinking, “Oh my God, this is so hard. I need a VP of sales.” That’s the natural, that’s what 95 out of 100 founders think when they get to 100 and we can chat more about that.

And by all means you should do that. And I hired my VP of sales, my first one around a million and my second one around a million also. It was a rough time, but what I learned as I’ve worked with 25 other startups since then and I look back what I did, which was somewhat an accident. I hired my VP of marketing at 20K a month in revenue, so 240K in MRR, and she crushed it. She crushed it because even though we were earning a million, she brought in more leads than I needed to cover her salary. She helped work with my sales team, she helped professionalize my company. She built our webinars, she built our collateral.

So what you’ll find is when you get to that million, everyone wants to hire a VP of sales, but the real answer is do that, try, which we can chat about, but hire any great VP you can find. If you find the VP of marketing first, hire her. If you’re overwhelming your engineering team and you find a VP of engineering early, hire him. If you find the magical VP of product that can help you build more software, more workflows, do that hire, a VP of customer success.

You know what? A million is not too early to make your customers happy, is it? Most of us stumble because customer’s special fee sign annual contracts they don’t renew for a year, right? So by the time we get to a million, we haven’t had a lot of renewals, have we? So we tend to start thinking about the VP of customer service around three, four million in revenue. But what if you hired her at a million and she renewed another 10 or 20% extra, got another a hundred or $200,000 of money in next year? Would that cover the salary, at least a big chunk of it? Yeah. So hire any great VP you can find at a million. Do the salesperson, but not to the exclusion of finding anyone great.

Vlad Kachur:
Got it. Got it, and let’s say whenever we get ready to hire the VP of sales, whenever we get ready VP of marketing, VP of customer success, what are the key things to look for in these three positions to make sure we don’t mess it up?

Jason Lemkin:
So the single most important thing about a VP generally for most roles is ultimately as you scale, they’re going to be about attracting other talent to your company. So the single most important thing, and this is mostly true for the VP of sales, because the VP of sales is going to hire the most people, but at least if you hire a VP of sales, they have to have hired two good people. If you can hire two quota … even just quota meeting reps. You can hire four and you can hire eight and 16 and 32 and 64 and a 120. You really can figure it out, but the risk for a VP of sales in particular is never have having hired two great reps.

And what you’ll find when you meet with candidates is they’ll say they managed a team, but did they really hire them? Did they really recruit them? Ask them for those two great reps and then ask those reps if they’d come with her. If two of them would come with her, she’ll find a way to get you 20 great reps.

Vlad Kachur:
Come with her, you mean leave the company to join?

Jason Lemkin:
Yeah. If she’s really been a … even just a sales manager, forget about a VP, but just a manager, but had two reps under her that were good. Every great sales professional wants to work for a great boss. It’s such a risky job, you can get fired at any time, the company could change strategies, you could do your best and not be appreciated. And what sales reps want is a boss that lets them run with it, make a lot of money, not have a lot of politics and have fun. And they will stay with that boss until either they go up their own promotion path or the world changes.

Jason Lemkin:
So the best heads of sales can always bring a couple of reps with them from their last few gigs always. And if they can’t give you anybody that says they’d come with her that did well, don’t make the hire. So when you go to hire your first head of marketing, VP of marketing director, whatever you’re going to call her, but your head of marketing, there’s just one criterion you should look for, and nobody does this and they make a hire and the hire fails. You need just one thing. They have to have hit and held a number.

Jason Lemkin:
It could be a number of leads per year. It could be opportunities, it could be pipeline, it could be MQLs, marketing qualified leads, it could be sales accepted leads. It doesn’t really matter where they are in the pipeline. When you go to meet a so-called head of marketing, you will find, believe it or not, that 95% of the candidates you meet by hook or by crook, they never held a commit. They never owned a number in a pipeline.

Jason Lemkin:
So you can rule out 19 out of 20 candidates when you ask them, “What number did you hold at your last startup?” “Well, I didn’t … I mean I did. It was best efforts.” “Ah, okay. What number did you hold?” “I worked mostly on brand.” Later you’ll need brand, right? You need someone that held the number. “What was your number at your last startup?” “I generated 500 marketing qualified leads a month.” “Oh, okay. And what was your plan?” “My plan was 600 and I didn’t hit it.”

Jason Lemkin:
Horrible to hear that. But now you’ve got someone, they had a plan, they know they didn’t hit it and you can ask them why and you can see if they’re awesome, right? But don’t give on that. You can give on a lot of other things, kookiness, seeming inexperience, wrong industry, wrong everything. But they have to have held the commit in marketing.

Vlad Kachur::
And how about for the CS, when we’re hiring the VP of customer service what’re we looking for?

Jason Lemkin:
I think that it’s the same thing. It’s fluency in two numbers, at least one. How much revenue did you own as a customer service leader, and what were your goals to grow it into? Okay, My goal was to own 4 million of revenue and my goal was to retain 120% net. So I had to grow that four into four, eight next year. You will find that it won’t be as bad as marketing, but the vast majority of leaders will not be able to even tell you what their goal was to grow their accounts into. Listen to that and then talk about it from how they retain those customers, what the processes were, do they do QBRs, ask them how often they get in the field.

Jason Lemkin:
And then here’s the last thing. When you get excited, when they actually held the number, they knew what their NPS goals, they knew were in the field, ask to talk to just two of their customers and do this with your head sales leader. You’ll find that actually this works for sales too. Your head of sales or head of customer success, if they treated their customers well. And this is just as true for sales and customer success, they will have two ringers. They will have a Google, a Comcast, a Facebook that will return your email and say, “Yeah, working with Janet, she was freaking amazing. She was the best CS leader, account leader I ever had.” Then hire her.

Jason Lemkin:
And if they can’t give you two customers, and this includes salespeople. If a sales person … In SaaS sales is solving your customer’s problem, okay? We think of sales sometimes as yucky, like a used car or selling something like that. If you do SaaS right, it’s not that. A buyer is investing her time to solve a big problem at her company and the sales rep is the first person in her journey that solves her problem.

Jason Lemkin:
So if you do an incredible job as a sales leader, you will solve my problem in the enterprise and I will give you a reference. I will say George was literally one of the most helpful people in bringing cloud accounting, cloud marketing, cloud whatever, into my company. That person will take that reference call. And if a sales leader can’t get, just give you two of the 500 deals she’s closed in the last five years, do not hire her. The customers don’t like her, right? They don’t like her.

Vlad Kachur::
If your salesperson gets asked a question that he does not know the answer to, what does he do? Does he call across the office and says, “Hey Mike, what’s the answer to this?” I think that’ll be bad for your client and your salesperson. What you could do instead is use getguru.com. It’s an answer bank that’s also a browser extension that will have all the answers about your company added by your employees.

So now the same sales person, if he’s asked, “Hey, what’s the refund policy?” And he doesn’t know, he can type in guru, right? Guru is a browser extension on the side. He’ll type in refund and he’ll see answers. One of the answers would be the refund policy is you can get all your money back within 15 days if you’re not happy, added by your VP of customer success on this date. So now he knows when it was added, who added it from your company and the answer.

Vlad Kachur::
What are your thoughts about hiring people from bigger companies in the early stages? Let’s say you’re a Series A startup-

Jason Lemkin:
Well it never works and we know it never works, but let’s talk about why people do it and then why it never works. Because the second part isn’t [inaudible 00:10:35]. Now, first of all, especially first-time founders. We’re all attracted to logos and brands, we can’t help ourselves, right? This is a brand, right? Coca-Cola is a brand. I mean these are brands and so we don’t know what to buy. We don’t know who to hire. We don’t know who to hire, so what do we like? Dropbox, Salesforce, Slack, Zoom, but Zoom is doing 700 million in revenue.

Jason Lemkin:
And so there’s two reasons big company people don’t work. One is obvious, one is non-obvious. One is the company’s too big. They have too much help. They have sales operations, they have collateral built for them. They have their calendar built out. They have their laptop cleaned nightly, okay? They just have too much infrastructure and they fail when they’re in some old brick environment like we’re in, okay?

Jason Lemkin:
But most founders sort of know that, right? That these folks, they just aren’t going to survive without enough help. But they try and say, “Well maybe Lindsay here, it’ll kind of work. Lindsay’s scrappy, Lindsay whatever.” But there’s a second reason that folks from big companies never work at startups, which is they don’t have brand lift.

Vlad Kachur::
Brand lift.

Jason Lemkin:
Brand lift. Look, sales is always hard. You think Zoom is a rocket ship, right? Sales is still hard at Zoom, okay? The quotas are high, the deals are competitive, it’s sales actually never in some ways ever gets easier.

Jason Lemkin:
But what changes after when companies get bigger is they have brand lift. And when a prospect comes into Zoom today, they’ve heard of Zoom. And they’re positively biased and they’ve probably used the product. They’ve probably been on the other side of a Zoom 87 times. And so you have brand lift and the way you sell when a prospect is already inclined yes because of your brand is radically different when the prospect’s never heard of you, those folks melt because they have the wrong toolkit.

Jason Lemkin:
It’s a brand assist tool kit. It’s not easy, but it’s nothing like a startup that doesn’t have a brand. So you can’t hire folks that have only lived in a branded environment in sales and have them thrive in a pre-brand environment. It doesn’t work.

Vlad Kachur::
Yeah, I didn’t know that. We all focus on that one because they have so much structure, but we don’t think about this.

Jason Lemkin:
The brand, yeah. It’s just hard, and the other thing in a branded environment, so not only do they have a brand, but typically the competition’s limited. If you work at Salesforce, if you work at Zoom, you know who Slack … Read the newspaper, who is Slack competing with today? Microsoft. Microsoft is taking out ads, attacking Slack. Slack’s attacking … So how many vendors do you have to compete with if you’re at Slack? How many?

Vlad Kachur::
One.

Jason Lemkin:
How many FUD sheets do you need? How many tear sheets? How many questions are you going to get from your customer? What’s better Teams are Slack? Slack, here’s why. And you learn the four reasons, right? We integrate with Twilio, we do this, we integrate with Atlassian and Teams doesn’t. But Teams is free. Well there’s a reason it’s free because it’s not as good as Slack. I mean, it’s a very narrow … And it’s not easy because Teams is free, right? Or $5 but that’s very different than competing with a hundred vendors.

Jason Lemkin:
And I find that folks that have not worked in competitive environments, and this is important in sales, they melt in competitive environments. They just don’t know what to say when there are a hundred competitors.

Vlad Kachur:
Got it.

Jason Lemkin:
And they just quit. They’re like, Oh, I lost the deal. Our competitors better than us. Well, hold on. If you got to a million of revenue, and even if your competitors at 10 or 100 or 1000, they’re not better than you at everything, are they? There’s something you’re better at, and the great sales folks that are startups know how to hone in on what they’re really good at and be honest, but sort of buff away some of the weaknesses, right?

Jason Lemkin:
And they ask, “What do you care about?” If the only thing you do well is integrate with Zoom and the competition doesn’t. It’s in your first discovery questions, “Thanks for chatting. Do you guys use Zoom? Oh, you don’t, you use WebEx, okay we might not be the right fit.”

Vlad Kachur::
Got it. What are your thoughts about outsourcing the SDR function overseas?

Jason Lemkin:
It’s so alluring today. It’s so alluring. Look, let’s step back for a minute. It’s 2019 maybe 2020 when you see this video, the truth is we all have to learn to work with distributed teams. And many of the companies I worked with that are distributed, that have completely distributed engineering teams. There’s usually just one group that isn’t distributed sales. It doesn’t mean that folks don’t have multiple offices, but remote offices are not the same as distributed, are they?

Having a Tampa office having a London office? You send out a leader, the leader opens the office, the leader has your DNA, the leader works for you, and she or he reproduces that DNA. Remote offices we’ve had since the dawn of software. Distributed’s … it’s a new world, right? It’s a new world, but the world has changed. And if you want to have an elastic workforce, if you want to be able to compete when there’s so many startups, you can’t just hire people in San Francisco or Atlanta or New York or anywhere you’re going to run out of people.

Jason Lemkin:
So we have to do this. But I think sales is the last frontier. Sales is so collaborative, that sales pit, right? There’s the cheesy movie version of it, but the truth is sales learns by osmosis. And they feed off the energy and they feed off sharing. And you lose a lot when you don’t have that, but we have to learn it, okay? So look, the last thing you want is a bunch of … And so let’s talk about SDRs.

Jason Lemkin:
In a way, SDR is the hardest part to distribute. Why? SDRs need the most maintenance. They need the most micromanagement. They’re usually kids, with very little experience, with very high turnover, with a ton of questions and they make a lot of mistakes. They need the most training, the most supervision, the most listening through gong or chorus to their calls, the most oversight. And how do you do that distributed? You have to work harder.

Jason Lemkin:
So distributed SDR is great, elastic, maybe cheaper, but are you willing to do the work? Most folks aren’t. Most folks are not willing. You need a manager and you need a leader who will own the script and will turn over and listen to every call. And as hard as that is to do in an office, but can you do it distributed? But if you can, you have a superpower, right?

Jason Lemkin:
But you know what doesn’t work, hiring some firm off the internet, not writing the script, not doing the work and expecting them to get you a lot of leads. It works like a little bit. And I do believe in outsourced SDRs today, there’s enough firms that do it that if your product is like other products they sell, they can do a B-minus job of it. You can hire an agency, but your product needs to be similar to other ones. As soon as it’s quirky, as soon as it’s like in a different space or the questions are complicated or the value proposition’s novel, these outsourced SDR firms, it doesn’t go from low productivity, it just goes to zero.

Vlad Kachur::
What advice would you give to a VP of sales who’s … he’s not failing, but he’s not crushing. He’s not giving you the results you want. How would you approach it?

Jason Lemkin:
That’s a situation a lot of us are going to be in. And the question is how does the CEO deal with it or how does the VP of sales deal with it?

Vlad Kachur:
You as a CEO, and you’ve got to this VP of sales, he’s not failing you, but he’s not achieving the aggressive metrics you want him to do. What do you do with this guy?

Jason Lemkin:
Well, first question is, are you doing better than before you hired him?

Vlad Kachur:
Got it.

Vlad Kachur::
Are you?

Speaker 1:
Assume you are. Assume he’s bringing you more results.

Jason Lemkin:
Then you back them.

And you backfill them.

Vlad Kachur:
Got it.

Jason Lemkin:
Your job … Here’s the number one mistake that founders make, especially with this, they hire their first sales leader and sometimes it’s not even a VP, it’s just like a manager or a lead, and let’s say the founder was spending 40% of her time in sales, the CEO. She just goes like, “I don’t want to do sales anymore.” You know what happens when you go from 40% of your time to 0% of your time, the CEO in sales? Your sales fall, okay?

Jason Lemkin:
Let’s step back, you never get the time back. However much money, time, whatever percent of your schedule is in sales today, it will be forever. Now what you do will change. You don’t have to be the SDR over the years. You don’t have to be, the closer your time will become a middler or the upseller or you will get on the road more and you will meet with more customers. But that 40 to 50% of the time with the customers as CEO, you never get it back. You never.

Vlad Kachur:
Got it.

Jason Lemkin:
So mistake number one is they stop. They stop engaging with customers and the VP of sales struggles because they need help. They need their wingman, right? So do fix that and see if your sales go up.

Jason Lemkin:
If the results are okay, but not great. Now let’s assume that you’re helping. You’re doing everything you can. The sales are better than before, but not great. I’m going to suggest the problem’s on marketing. Get her more leads. The VP of sales job is to take your core metrics and improve them. Whether it’s to improve your revenue per lead, 20% or 100% or 200% or 22%. Situations can vary, competition can vary, product can vary, but it’s to tilt the curve.

Jason Lemkin:
Once your VP of sales has tilted the curve, if she’s truly trying, if she’s giving it her all, recruiting the best people you can, your job is to backfill. And the simply best way to backfill is with marketing. Get her another ally on the team so that she can tilt even just a little bit more.

Vlad Kachur::
What’s the best way to set up comp structure for the SDR for the AE and the sales leader? And the second piece to this is, what’s the difference between a sales manager and a VP of sales in the early stage, right?

Jason Lemkin:
It’s complicated. At the end of the day, there are two ways you can look at it. First of all, after the very early days, you have to pay market. You have to pay market. There’s too many startups. So there are exceptions. And I’m in awe of very charismatic CEO’s who are able to convince sales reps and folks to take very low salaries. But even if you can do that in the beginning, it doesn’t last. If you want to build 8, 10, 20, 200 sales, you have to pay. Whether you have to pay a high end of market or low end of market, but you have to pay market.

Jason Lemkin:
So before you even get there, you have to pay market at least for OT. And the sales reps have to eat. So let’s say you decide, I’m in San Francisco and the OT’s 150 but it’s going to be a 70 based and an 80K bonus, okay? But no one makes the bonus because it’s too hard. They’re only making 70K with 10 years of experience in the Bay Area. What’s going to happen? I mean, rent’s kind of high here, isn’t it?

Jason Lemkin:
So you have to develop a plan where most of your reps are hitting quota, okay? And they can eat and it’s competitive, you have to start there, okay? And you have to backsolve then into a comp plan where the company can make any money, okay? And so you have to start with people have to eat and be happy and feel comfortable coming to work and not feel like they’re going to get fired for doing a decent job.

Jason Lemkin:
So that’s the bottoms-up model. The tops-down model is if you raise venture capital, if you have a few extra nickels in the bank, you can play in the beginning. But ultimately the sales team, including the manager and including the SDRs, has to generally bring in about three times what they cost.

Vlad Kachur::
Three times what they cost. Got it.

Jason Lemkin:
Yeah. So if you’re just going to have AEs and they’re going to do it all on their own, maybe you can pay them a little bit more, okay? If you add in a sales manager, you usually need one manager for every eight AEs and 10 SDRs, that’s got to come from somewhere. So it’s kind of going to reduce, it’s going to increase the quotas to hit that number, but as a group, you got to bring in three times what you cost to make the business economics work. If you just raised a few million dollars, subsidize it, right?

Jason Lemkin:
When you hire your first sales rep, whatever you do, it’s great in the first 90 days if you can just break even on her, right? Because you didn’t have her before, but ultimately 3x is kind of the minimum bar as a team and sort of four to 5x for the individual AE depending on how senior they are.

Vlad Kachur::
Got it. How fast should a VP of sales deliver results? You brought this guy in, when should we expect?

Jason Lemkin:
One sales cycle.

Vlad Kachur:
One sales cycle?

Jason Lemkin:
One sales cycle. This is another rookie error.

Vlad Kachur::
Got it.

Jason Lemkin:
I found Linda, she’s from Google. The board loves her, she’s so poised, he’s so great, and nothing. You talked about the VP of sales doing okay, but not great. And I asked you did he improve the metrics? You said, yeah, but not enough. The mistake we make is after a quarter, nothing changes. If it doesn’t change after one quarter, it never will ever change. It will never get better. No matter how charismatic, well dressed, poised. No matter how much your investors love, why?

Jason Lemkin:
Well, imagine you come into VP of sales and you have a hundred leads, okay? This month and before there was a hundred. And let’s say out of those a hundred leads last month you turned into $100,000. If you hired a VP of sales and she can’t turn the next hundred leads into more than a 100,0000, what do you need the VP of sales for? She can’t close better. She can’t ask for more money.

Jason Lemkin:
And I’m not talking about new leads. I’m not talking about doing outbound. I’m not talking about changing marketing. I’m just saying take the same pipeline. If your VP of sales can’t get more working 50 hours a week with her own team out of a pipeline, than you as a CEO working 20 hours a week, something’s broken.

Jason Lemkin:
It shouldn’t be that hard. So I know, when I wrote this years ago that the VP of sales, you should see results in one sales cycle. People freaked out on social media. They’re like, “You’re throwing all the VP of sales under the bus. It’s totally mean, we need more time.” And then everyone thought about this and commented that you’re right. If I can’t take those same hundred leads and at least give you 20% more revenue. Not triple, see you can’t have these crazy expectations, but you need to see in one sales cycle improvement.

Jason Lemkin:
Because instead of you … Let me give you one simple example. Most of us as CEOs we’re really good middler’s. Customers love to talk to the CEO, they love to talk to the founder, talk about their product, and then at the end we’re like, we don’t want to blow the deal. We don’t want to lose the customer, right? So they’re like, “I need a discount.” And we go, “Okay, how about instead of 20,000, 10,000. We can’t help it as founders because we don’t want to lose the prospect.

Jason Lemkin:
You know what a VP of sales does? I hear you. How about 10%. So you went from 20 to 10 because you were nervous, the VP of sales just same customer, same lead. Just discounts from 20 to 18. What happened to your revenue? It went up 80%. That’s just getting better at discounting. Number one, let me give you another example.

Jason Lemkin:
As founders, we don’t want to lose the deal, right? It’s March 31st or it’s December 31st and the pilot’s been going well, but the contract hasn’t come in. Do you want to call the customer and yell at them on New Year’s Eve? Do you want to ask them for that?

Jason Lemkin:
As the CEO, you get nervous. You know what a VP of sales does? They call up on December 29th, “Linda this pilot’s been so great. Did we do everything you needed in the pilot?” “Yes. Brendan, you did a great job.” “Is there anything else that I can do for you?” “No, we’re in good shape.” “Can you do me one favor? Can we just get the deal done on December 31st so that my team can hit their number?”

Jason Lemkin:
They’ll do it. If someone really does you a favor in the world and you ask for one favor back and you’re going to buy the product anyway and they ask for a small favor, will you do it? Sometimes. So just by the VP of sales, getting better at discounting and shrinking the sales cycle a little bit, just a little bit. You’re going to see a bump in sales, aren’t you?

Speaker 1:
Yeah.

Jason Lemkin:
Yeah. So if it doesn’t happen in a sales cycle and it just never will.

Speaker 1:
Why do you think they’re not in a hurry? Like some of these VP-

Jason Lemkin:
Who?

Speaker 1:
Some of these VP of sales, why don’t they have some of that urgency?

Jason Lemkin:
Because they don’t know anything about sales. Because they worked at such big companies they didn’t do sales the way we do it in startups. There’s so much motion, so much energy at these huge companies that any deal doesn’t matter, right? And they’ve moved to quarterly or annual numbers, and there’s just not that many urgencies when it turns out there’s 22 VPs at Salesforce at the same role. It’s competitive, but it’s not the same urgency, right?

Vlad Kachur::
What are some of the most important metrics that we as founders need to watch and why?

Jason Lemkin:
Well, I think we all know the basic metrics of how fast, am I growing fast enough, right? So obviously growth is king. I think there’s two that are important. The first one, and this one really breaks my heart a little bit. If you’re lucky enough to raise capital, seed capital, angel capital, venture capital, it breaks my heart, how many founders that are data-driven, that track every lead, don’t track their burn rate properly. It really makes me cry.

Jason Lemkin:
Because they run out of money when they didn’t need to. Here’s what happens. I’ve never … I got let’s say your $1 million. I got all the way to $1 million, I did it bootstrapped, I maxed out my credit cards, I took no salary, finally got to a million. I’m growing 3x. One to three in one year, that’s pretty good, right?

Jason Lemkin:
And these VCs give me $5 million, okay? And you’ve never had a dollar in the bank, but it seems like so much money. You open up the bank statement, there’s $5 million and your burn rate’s zero. So you go to hire two more people, your burn rate goes up $20,000 does it matter? But then you sort of lose the discipline because you’ve never had it. And you wake up and that burn goes from 20 to 100, 100’s still okay. And then it’s 200 and then it’s … What happens is if your burn rate goes to 300,000 and you raised five million, how long does it last?

Jason Lemkin:
And what happens is there’s no finance team and there’s no experience. And so they’re so disciplined about the funnel, about the product, about the Gantt charts, about the air table and everything, and the burn runs away from them because they’ve never done it before. And they just burned half the money without even knowing where it went.

Jason Lemkin:
It’s like the middle of a bag of potato chips, right? You opened the first one and you savor it, right? And then you know those last five, you’re like, “What happened? Where’s the … I don’t even remember.” Do you even remember eating the middle of the bag? That’s what happens with venture capital. And so it’s a crying shame this happens to founders because it doesn’t even matter if you raise four million or six million if you eat all the chips in the middle, does it? You don’t get anywhere.

Jason Lemkin:
So if you’re lucky enough to raise money, know you’re zero cash date, when you run out of money and track it every month. Don’t make a joke out of it. Don’t be either pessimistic or optimistic. Figure out what your trailing burn rate is, average of the last three months and just divide it by the amount of cash.

Jason Lemkin:
If you’re burning $100,000 a month and you have 1.2 million in the bank, how long do you have? 12 months. And make sure you know it, everyone in your company knows it, every investor. Because I’m just shocked how many founders it just … They’re shocked.

Jason Lemkin:
So that was number one, and the second one, which takes a while to measure. So you asked what metrics matters? So growth, burn, and then I think what we’ve learned over the last 18 months when all these SaaS companies have gone public, this next generation, the Zooms, the Slacks, the PagerDutys, Cloudflares, that even the ones that sell the SMBs, the smallest … Zoom is almost all SMBs, zoom is very little enterprise. And Slack was SMB it’s now enterprise. PagerDuty is almost all SMBs. They still have 140% revenue retention.

Jason Lemkin:
We think of SMBs as high churn and for many. But ultimately your second most important metric is going to be revenue retention.

Vlad Kachur:
Got it.

Jason Lemkin:
Right? And so be religious about it. When in doubt overinvest in customer success, overinvest in instrumentation, over invest knowing every NPS, segment your NPS, make your frigging customers happy. One, they’re your brand ambassadors. Two, they’re your best marketers, right? And when you scale, let’s say you get to 10 million and you have 140% revenue retention, your at 10 million ARR. What are you going to do next year if you don’t close one new deal, where are you going to be next year with 140% revenue? Where are you going to be?

Vlad Kachur:
14 million.

Jason Lemkin:
14 million without one new lead. Do you know how much better 140 is than 100? Where are you going to be without one lead, right? And you look at amazing … a fun one to look at, HubSpot. And HubSpot is, in terms of revenue retention, is the worst of the best companies. They’re at 100% net revenue retention. And HubSpot,and I love everything about HubSpot, I love the founders, I love the application, but they have to work harder. They have to work harder at 100% than Zoom does, than even Slack does, than PagerDuty does.

Jason Lemkin:
And so look, you can’t change the physics of your marketplace. HubSpot can’t change the fact that it’s a marketing automation tool for small businesses and they go under and they go bankrupt, right? But if you can do everything humanly possible to get the net retention up without playing games, and it’s really just happy customers and additions, that’s how your life gets easier.

Vlad Kachur:
Got it.

Jason Lemkin:
Right? And so measure it as soon as you can. net revenue attention. And even before, like how can I measure revenue retention when I’ve only had customers for six months? You can’t, right? You literally can’t. But you know what you can measure NPS, and how happy are they? How many of them recommended me to a friend? That’s a proxy for where it’s going to end up.

Vlad Kachur:
And talk about burn rates. Is there something that you’ve seen getting way more than others? Or is it just very spread out what they’re usually [crosstalk 00:31:15]?

Jason Lemkin:
I don’t think there’s a pattern. I have found the most frugal founders, folks that literally went through the hardest times and got a little bit of money and just didn’t have fiscal discipline. I think in our guts, it’s like we know when we get an allowance or a small amount of pocket money, how much everything, how long it goes, right? If you have a base salary, you kind of know after rent how much you can buy.

Jason Lemkin:
But what if your salary tripled overnight or quadrupled? Would you even know what happened? And all of a sudden you leased a car, you got a nicer … You know what happens? You start going out to dinner and you forget. But those fancy restaurants they’re like 200 bucks for four? And then what happens when you go out to dinner 10 times a month? We literally don’t … the one dinner doesn’t kill you, does it? But those 10 or 15 a month, all of a sudden all the money has gone from my fancy salary.

Jason Lemkin:
And my point is we lack, most founders lack the frame of reference of the discipline, and their gut doesn’t tell them how much they’re spending. So they walk around the office and they’re like, “Wow, I bought a desk from Ikea. And we don’t have kind bars, okay? We have cheap coffee.” But who cares if you have cheap coffee? If you’re spending $200,000 a month on low-efficiency employees and other issues, right? That’s not where you lose money. We don’t lose money on kind bars and sparkling water. Not with 30 employees, that’s not what wrecks you.

Jason Lemkin:
So my point is most of us are wrong. We lose track of how much we’re spending and we get in deep trouble. And if nothing else, find an accountant, a controller, even a part-time controller. Here’s what you have to do. They have to have recurring revenue experience. If you hire an accountant or someone from some firm off Craigslist or off the internet or someone that your friends use, but they do clothing stores or they do hardware or manufacturing, but they don’t do recurring revenue. They won’t understand how the numbers work, they’ll get it wrong.

Vlad Kachur:
Got it.

Jason Lemkin:
How do the renewals flow into your model, right? What percent of my revenues should I be collecting? I see this, you know what I see happen all the time? I’ll give you one last thing. This is a tragedy that happens with founders when they raise money. I ask them, “How much did you book this month?” “We booked 100K in new revenue.” “Whoa, that’s awesome. 100K in deals, right? How much did you collect?” “I don’t know.” It’s usually like 80%.

Jason Lemkin:
They don’t get good financial help and they’re closing these contracts, patting themselves on the back, paying out the sales reps, and they’re not even collecting the revenue they get, because they don’t have the DNA. They move away from credit cards and tiny payments and they just don’t even have a collections department. That’s one example, but I see this all the time and I tell everyone you should be collecting more than 100% of your MRR. If you’re not, something’s broken in your department. Collect more than 100% of your MRR. Anyone can do it.

Vlad Kachur:
What else are some surprising learnings that you think a lot of founders don’t know? What else are surprising things that you learned over your experience that a lot of founders at this stage just don’t know?

Jason Lemkin:
Boy that’s a pretty big open question. I don’t know that I know. I think we talked about some of them, the revenue retention over time, the finance side. What are the ones? I’ll tell you something to really think about. This is what I learned. I didn’t really learn this until I started investing in other startups, and I didn’t realize it was an asset I had, it was an asset I didn’t realize I had.

Jason Lemkin:
The number one most important thing you can do for your team is get that NPS up, right? And really get the net revenue retention up because that’s your golden ticket quantitatively. But the best thing you can do to facilitate, that is to have a super agile engineering team.

Speaker 1:
Got it.

Jason Lemkin:
And when I watch, I was a seed investor in a company called Algolia. They just raised $110 million today, right? When I look, that’s just one example of some of my first investments. When I look at the ones that won, one thing they had was an agile team. And what do I mean by an agile team? What I mean is, especially let’s talk about, you do a little bit bigger deals where customers want custom features, okay? I want an Octa integration. I want an integration with Salesforce, I want this and that.

Jason Lemkin:
Let’s imagine you have six engineers, okay? Or whatever, four engineers and they can do one integration a quarter. This is what I typically hear. “Oh, you got to integrate with Shopify. We don’t know how to do Shopify. I’ve got to look up the … the API sucks, it’s 15 years old.” Everyone moans and groans. You do one a quarter.

Jason Lemkin:
What happens to your competition that can do two a quarter. What happens over a year, two years, three years? Agility compounds and it doesn’t matter in one deal and in one quarter, but the more agile competitors you turn around and they have built so much more shit that matters than disagile ones, they pull away.

Jason Lemkin:
And the best CTOs, the best engineering leaders build these agile teams today that are customer focused and in 18 to 24 months, your jaw starts to drop when you see what they’ve built versus their seeming peers or even competitors. And this is how you can pull away from competition a lot of times to have the most agile team as well.

Vlad Kachur:
It’s kind of similar to how Elon says that if you work 100 hours a week, you’ll cover in one year, what took them two-and-a-half years..

Jason Lemkin:
Could be the number of hours, but I think it’s really, I know this 10x engineer term is loaded and it somewhat became toxic. But nevertheless there are great engineers. Great sales reps want to work for VPs of sales that will take care of them and let them make a lot of money, right? That’s what they want. But the best engineers want to work for the best engineering leaders, the best they really want to work for the best. And so if somehow if you’re trying to find a co-founder or if you have a co-founder, you’re trying to find a VP of engineering, don’t just hire Mr. Nice. Don’t just hire Mr. Google. It’s not enough.

Jason Lemkin:
Hire someone that the best engineers would love to work for. Interview two of her hires. Ask her for two engineers that she could bring with you from her last job and see if they’re wicked smart. See if they’re off the charts good. And then you will be able to build an agile team. Don’t hire the VP of engineering that everyone loves. Don’t hire the VP of engineering that everyone loves. They’re never that great. They’re never that agile, they’re political. They sell up, don’t do that. Hire the VP of engineering that builds incredible software and can recruit an incredible team and you will destroy the competition.

Speaker 1:
What advice would you give to founders building outside of Silicon Valley?

Jason Lemkin:
It’s fine. I think it’s 2019. The Shopifys, the Atlassians proved a lot. I think here’s the thing, let’s break it down. If you’re really doing lower end or SMB sales, there are enough veterans in London, Paris, Ottawa, everywhere you can find kids. You can find kids to sell a $300-a-month product. You do not need to be here.

There may be some significant partnership advantages, because most tech companies are still here in the Bay Area. There still are capital advantages no matter what tells you. But from a sales marketing execution perspective, as long as you’re in a major city, you can build an SMB product anywhere.

In the enterprise, it’s different. That DNA is still heavily concentrated here. And so if you sell enterprise, you are disadvantaged, okay? It is a little bit harder for Datadog in New York to sell the enterprise than the Bay Area, but they’ve done okay. But what will happen is two things. If you’re not in the Bay Area and your customers are here, your partners are here or you want to go enterprise, fake it till you make it. Be here one week a month.

Jason Lemkin:
The Algolia team from Paris, they raised $110 million today. The CEO, Nicolas, when they started, they were all in France, and it was hard because he had kids. He committed to be here a week-and-a-half from 12K a month in MRR on. Now they live here and they moved here, but in the beginning he faked it, okay?And if a partner or a customer or someone wanted to meet him, he’d be like, “Well can we meet next week?” Because this week he’s really in Paris. But you can fake it, fake it with your partners and Zendesk your salesforce who wants to meet. Don’t do it on the phone, go there. So if you’re not here, fake it till you make it. Go to WeWork, do something, be here a week, commit.I know it’s hard, but this is all hard, isn’t it? So fake it until you make it. And then when you’re bigger … Atlassian has like 800 people in the Bay Area. When you’re bigger, you can flip it around and have a big team here.

Speaker 1:
What are your thoughts about … You mentioned that you should only let people stretch only one role. So if he’s doing this job, you should only let them stretch the one role. Can you kind of elaborate some on this?

Jason Lemkin:
I think what I was chatting about there was stretch VPs. So when you go basically to hire your first VPs, you’re going to have two choices. Everyone wants Ms. Perfect, the Goldilocks. I joined Dropbox when it was exactly your size. I hired a hundred reps, they were all perfect and now I want to join your startup again. That person does not exist. The person that joined Dropbox at two million ARR does not want to do it again. And she does not want to do it with no budget, no help, no capital, [inaudible 00:39:50] okay.

Jason Lemkin:
So Ms. Goldilocks, it will happen rarely, but pretend it’s impossible. So you have two choices. When you go to hire VPs, realistically, and even if Ms. Goldilocks exists, she’s going to go to the hottest startup on the planet, isn’t she? She’s probably not going to go to your company. So you can either have a wash-up or a stretch.

Jason Lemkin:
A wash-up is, there are plenty of folks that were mediocre at Dropbox, Salesforce, Google, Box. There are plenty of folks that were actually pretty bad sales managers, and they all need a job because they got fired. You can attract one of them to your startup and they will know the lingo, they all know the acronyms, they all know the vernacular. They will talk your ear off, but they won’t have two great people that can join them and they won’t meet it, right?

Jason Lemkin:
And many of you will make that mistake. Many founders will say, you know what, I’m so attracted to the logo. I’m going to hire the washout and it won’t work. And you’ll either figure that out in one sales cycle or you’ll burn through a lot of time and you’ll figure it out in nine months, but you’ll figure out the wash-up doesn’t work.

Jason Lemkin:
So you’re going to have to do a stretch. And a stretch is someone that hasn’t been a VP before, that’s been a director or maybe a senior manager or even a team lead. A team lead, especially for engineers, there’s a lot of team leads that skip a step and become leaders. What I found is the biggest mistake a lot of founders make is, “I’ve got to hire a VP of sales, I’m so stressed out.” They will hire the number one AE at a company. The number one sales rep, they’ll go find a Brex or a Talkdesk, or Algolia and they’ll hunt around, and they’ll find out that Lauren was the number one AE, or the number one AE in the West, okay?

Jason Lemkin:
And they will wine and dine her and take her out to the fanciest restaurants and meet the team and they’ll say, “Wow, you did two million last year and the next rep did 700,000 I want you to be my VP of sales.” And they’re ambitious and if they want the next step they’ll take that job. How many reps do you think the number one AE ever hired?

Speaker 1:
Zero.

Jason Lemkin:
Zero. Do you think their number one rep even knows how to train anybody? Do you think she knows where to find anybody good? I find that number one rep 0.00% of the time is successful, actually 1%. The only time she’s successful is when they join way early, which makes no sense because they have time. They have time to make a lot of mistakes. They have time for the first four sales reps to fail because they join almost as a founder. The ones that have joined almost as a founder, they can make … They’re a lot like the founders, they can make their own errors and they have a year to make up for the fact they never were a director. They never were a leader, but usually that double stretch.

Jason Lemkin:
It’s so appealing because everyone says Lauren was amazing at Algolia, can’t hire, can’t hit a number. They immediately hire mediocre untrained people. They freak out when they can’t hit the number and they implode again and again. So one level stretch from director to VP, from manager to director. One level stretch is the risk we should be taking as founders. That double stretch from individual contributor to VP, I mean pretty much no chance, right? Unless you can afford a year, unless you can train them on the job for a year. But that’s risky, it’s rare.

Speaker 1:
Last two questions, what are some of your thoughts about the future? What do you think we have coming in the future? What type of products? What are you excited about in the future for us?

Jason Lemkin:
I don’t know what’s coming in the future at all. I’m not that smart and I’m not that prescient. What I can tell you is if you’re in cloud, if you’re in SaaS be frigging bullish, okay? A couple of years ago we used to talk about what inning are we in of this SaaS thing? Second inning, third inning? This is what we talked about until about 2015. Then 2015 we’re like, “Oh my God, everything’s growing even faster.” No one thought there could be a Zoom that would IPO at 500 million growing 140% a year with no burn.

Jason Lemkin:
We didn’t know this was, this was even possible. And look, Zooms iconic company, but Zoom is benefiting from the fact that cloud is frigging huge. Even Oracle’s cloud business is starting to take off now. SAP it’s because the cloud is so huge. Bad news, more competition than ever, right? So many vendors, but if you hit it. If you hit it in your market, your market’s probably 10 times bigger than four to five years ago.

Jason Lemkin:
Look at AWS. AWS has grown 10x in the last five years. AWS, like your jaw drops when you look at the numbers. And that can happen in your space too. I don’t care if you’re in financial services, ERP, whatever. Whatever type of industry it is cloudifying faster than we ever thought. So find product market fit, find happy customers. Find the segment where you have that 80 NPS. And I know you’re not growing fast enough if it’s early, but lean in like hell because when you get that product market fit, you can have a chance in 2020 to grow much faster than even 2015 let alone 2010. Because these markets continue to just explode.

Jason Lemkin:
Whether we have a recession, an upcession, a procession, a sidecession, customers are still going to go to the cloud. They’re still going to take their one trillion of IT budget and buy this stuff, so just don’t burn too much. But grab hold when you have something because these are the best of times.

Speaker 1:
Got it. Can you tell us, last question, can you tell us about your company and this company SaaStr. What is it about, what are you guys doing?

Jason Lemkin:
Well, I mean SaaStr is a community for founders and executives. So it started off just as a blog that I started writing in 2012 after I left Adobe of all the mistakes I made as a CEO. I didn’t know if anyone would read it. But the first like we got from Aaron Levie of Box, and so I knew someone liked it and it became this very cathartic thing. So it’s been a few years. Oh my God, it’s been seven years. Almost seven years, it’s a long time.

Jason Lemkin:
But we did that and then in 2014 I’m like, maybe we’ll do a meetup. So we had a meetup with no content, just a meetup, but 600 people came to the meetup. I’m like, “Wow, that’s a lot.” So then we did the first SaaStr Annual with content in 2015 and we only had 90 days to plan and 1500 people came. And so we’ll have 20,000 people at the SaaStr Annual this year in March. We’ll have 3000 people at SaaStr Europa.

Speaker 1:
Awesome.

Jason Lemkin:
And so we’ve built this community. We have some other products, we have a training product called SaaStr Pro and we do other things. But we just took a community and our goal is just make the community happy. That’s all we do every day. Try to add more value, share more with founders and if we can on the side grow what we think is about, it should do about $25 million next year. And it also, for me personally keeps me young. Because you said you like my tweets.

Speaker 1:
Yeah, I love your tweets.

Jason Lemkin:
You know why my tweets are good? It’s not because of when I ran EchoSign in 2011, it’s because of all the mistakes I’m making today. So if we’re going to do 25 million next year, yes, SaaStr in a sense as like a media and content company, right? Such as it is. But the management mistakes, the mistakes I make, they’re the same ones you’re making. And I’ve done this enough times now I know how to distill it to 280 letters.

Speaker 1:
Yeah, it’s hard to do.

Jason Lemkin:
Hard to do and I’ve gotten … because this is the fourth time I’ve done it. So now I can say, “This is the fourth time I screwed up that hire, I have no excuse. So let me distill that into 280 characters.” So that’s what we’re doing. So if you’re watching this, check out saastr.com, check out our podcast, or just come to any of our events. Just come and it’d be great to have you.

Speaker 1:
And you’re also investing too. You’re also investing, right?

Jason Lemkin:
Yes.

Speaker 1:
If founders are building interesting companies, what is the best way for them to potentially to pitch you or to reach you? What advice, what strategy should they use to do this?

Jason Lemkin:
So just a couple thoughts we could spend tons of time on that one. Go to SaaStr Fund, saastrfund.com you can read about it. There’s some good investments there. But for me, everyone’s different. For me, if you want me as an investor, write me the world’s best email.

Speaker 1:
Got it.

Jason Lemkin:
Don’t ask me for coffee. Don’t ask me to come to the office. Don’t ask if we can chat. Don’t give me no information, okay? I like to do late seed, like half million, 250,000 to a million in revenues where you have got something going, not nothing. But no VPs, none of this crap figured out. You should know, who are your biggest customers? What’s your NPS? Are they happy? Do they love you? How are things looking? Like think … For me, SDR it or ABM it. Send me the world’s best email.

Speaker 1:
Got it.

Jason Lemkin:
And I can read that. We’ve been doing this for a while and I’ll tell you, I’ve done now three seed unicorns. My first investments are like 15x. I’m no Bill Gurley, but that’s pretty good, okay? And I can tell you that however I met the founder at the first time, they stand out in every way, not just as individuals, but even in that email. The best, if you know your space so passionately, if you know your customers, if you know your strengths and weaknesses and you can put that together into an email, you can explain it to the whole world and you can sell.

Jason Lemkin:
You can sell because selling stock is the same thing as selling your product, right? So if you want me for whatever quirky reason, email me, give me your deck, the best email in the world, all the metrics. And if it’s awesome and I think I can help, because I only want to invest if I can help, I will email you back probably the same day, probably the same day. I get so many emails. Here’s the last trick on fundraising. I get so many emails, so many LinkedIns, “Are you investing? What do you … ” I mean I don’t know how many I get a week. People exaggerate, but I probably get 40 emails a week asking for money.

Jason Lemkin:
Do you know how many amazing ones I get a week? Where your jaw drops off the floor?

Speaker 1:
One.

Jason Lemkin:
One, one a week, sometimes two. Do you think I have time to read one email? Of course I do.

Speaker 1:
Of course.

Jason Lemkin:
So write, don’t spray and pray, or if you do, pretend you’re not. Write the world’s best email to whatever investor you want. You want Bill Gurley, you want Aileen Lee, you want Hunter Walker. It doesn’t matter. If there’s someone you really want slow down, spend an hour or two like you would for a six-figure deal. Nail it, write the best email, attach the deck, don’t play games, don’t horse around. Because you’re only going … If someone on the other side that’s buying only gets one email a week, they’re going to open it.

Speaker 1:
I hope this video was helpful. My YouTube channel is all about entrepreneurship, it’s all about startups. If you enjoy videos about entrepreneurship and startups, subscribe to this channel and hit the like button if you enjoyed it. Thanks for watching.

Published on December 12, 2019

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