#1 most important thing after a rough quarter, or even a rough year …
Is that everyone knows >how< we are going to do better. The Plan.
It’s OK if it’s not going to happen overnight. Everyone will get that. It’s OK if it will involve change. Everyone will get that, too.
— Jason ✨Be Kind✨ Lemkin (@jasonlk) January 19, 2022
This is a classic SaaStr post I try to update about every 18 months or so. What to do when you do miss a quarter. And it’s time to update it again, as many of you are still struggling right now to get back to where growth used to be.
SaaS is a journey. 7-10 years to get anywhere good. And another 7-10 after that to get to the iconic level. Along the way, you are going to miss a quarter. Or 3. Or 5. (And likely even have one Year From Hell).
When it happens, and it will happen, let me just provide some basic thoughts.
First, is it a Soft Miss or a Hard Miss — I.e., were new bookings still higher than last quarter? The difference is super important. If you’d hoped to grow 35% last quarter, and came up short at 25% … but still added more net new revenue than the quarter before — that’s a Soft Miss. That’s a lot different than a Hard Miss. Because in SaaS, there sort of should never be a Hard Miss if you have it truly dialed in after $2-$3m in ARR or so. Not that we’re always doing it right, but if you are, there shouldn’t be Hard Misses after Initial Traction. By then, second-order revenue should be working. Customers should be happy, and buying more. Your sales team should know what they are doing. They may have a down quarter or two, in terms of goals. But new bookings should never really dip from last quarter (possibly in Q1 after a monster Q4, but even then, not really so much).
Because if you’re growing quickly, if you’re really hitting it — then the 30-40%+ growth in leads, in interest, should turn a potential Hard Miss into a Soft Miss. Think about the math.
So a Hard Miss, abstracted away from the details, is a sign something is amiss. That things, if nothing else, aren’t really dialed in yet.
If it’s a Soft Miss, just acknowledge it and move on. Bummer, but most likely, you’ll be back on track next quarter, I’m pretty sure of it. This doesn’t mean don’t take action. Take action after a Soft Miss. Improve stuff. Talk about how to do better this quarter. But a Soft Miss? Don’t see it as anything systematic to worry about. Yes, do better. Now. But if bookings are still growing quarter-over-quarter, you’re still mostly doing the right things. Just incrementally improve.
OK, now let’s talk about a Hard Miss. You closed $1m in new revenue in Q2, but only $500k in Q3. That’s a painful, hard miss.
First, let’s talk about what to do:
- Acknowledge it was a Hard Miss, and Identify the Genuine Root Cause. Note the root cause is not seasonality, or scaling reps, or any of that stuff. The root cause is mostly likely in the team. Because it’s not like the competitive landscape changes in just one quarter. Nor do buying patterns. And whatever challenges you had that quarter, well, stop. Stop that excuse. Because you had those exact same challenges the prior quarter too. What most likely happened was some part of the org isn’t scaling as hoped. Identify the root cause here and an action plan.
- Re-forecast cash — and Come Up With an Action Plan. Now. A Hard Miss will impact your Zero Cash Date, 8.5 times out of 10. If your cash is now going to stretch 12 months instead of 15, you may need to take action now. If you wait — it will be too late to make a difference. Do not wait a quarter here. Do this now.
- Acknowledge time alone won’t fix the hole from a Hard Miss. No, the cause of a Hard Miss was not deals slipping a quarter. Of course this happens. But it happens every quarter. One or two pushed deals can certainly cause a Soft Miss. But a Hard Miss is more than that. A Hard Miss if we’re honest, is clear almost from Day 1 of the quarter, if you look back. Even before the quarter started. So here’s the thing. No Excuses for a Hard Miss. Just Fixes.
- Redo your Last Four Month dynamic projections & plan. Let’s be clear — you cannot make up for a Hard Miss. It’s too much lost revenue. You cannot make it up the next quarter. Your trajectory, for now at least, has changed. You need to also be realistic about the fact that, best case, this sets back your goals a quarter or more. Do a new forecast. How to do that here. Do not stick with the old forecast. That is not OK. You cannot make it up.
- Be More Analytical, Less Defensive. The harder the miss, the more defensive we tend to become. The softer the miss, the more analytical. This is almost backwards. A soft miss doesn’t really tell you anything other than that you need to step it up a bit. Doing $900k this quarter vs. a $1m plan is not a huge deal. Don’t overreact in a soft miss. But the harder the miss, the more analytical you need to be. We need a root cause analysis, and an action plan. Save the excuses for a soft miss.
- Don’t Freak Out. You have customers. You have a real business. This can be fixed. Even more so: Don’t let them see you sweat. Strong SaaS companies with positive NPS and $2m+ in ARR cannot be killed. Unless you lose the faith. But you do need to take action now.
Most CEOs don’t do this reset after a Hard Miss. They don’t re-forecast cash properly or their ZCD. They don’t redo the growth plan, by being realistic about how the last quarter impacts projected growth. Instead, they sort of Face East. And hope / assume they can make it up next quarter. I’ve yet to see this happen.
Beyond that, there are things not to do:
- Don’t push “blame” around, especially not down the org. If you wanted to go from $1m to $4m in ARR this year, and you only hit $2.5m. That’s a huge miss, on the one hand. On the other hand — you grew 2.5x! 90% of your team probably did a great job. It’s important they feel that way. Transparency is good, but be careful what you share on expectations. Put differently, the team, IMHO, should feel good if you “merely” hit the base plan. Maybe you won’t, and a few VPs won’t. But you need to. You still need to celebrate the win at your Holiday Party. Period.
- Don’t not have both a Base and a Stretch Plan. You need both in a start-up. The Base Plan isn’t what you really want, but it’s a C-60+ plan. A plan you have 60%+ confidence you can hit. You can comp your VPS mainly on the Stretch Plan if you really want to (not the way I like to do it, but your call). But the company as a whole, as a team, needs to feel good about hitting the Base Plan. That it’s a victory.
- Don’t manage cash & burn to the Stretch Plan. I hope this is obvious, but it isn’t always. Manage cash to the Base Plan, always. Don’t assume Stretch Revenue comes in to make your runway and ZCD assumptions.
- Do a plan reset, but just once. You really should only reset the plan once a year, if at all. If you can’t meet a reset plan, then just take the miss. A double reset just destroys everyone’s confidence.
- Most importantly — don’t settle for slower growth. This is so important. Even if growth slows for a quarter or a spell, don’t settle for slow growth. It can seem like a smart tactical retreat. But once you settle into a slow growth phase, you rarely pull yourself out of it. The team gets used to slower growth. They stop trying as hard. Everyone gets OK with “mediocre”. And then, many of the best … leave. But the best are all OK with a tough quarter or two. They expect it — and rise to the occassion.
Net net, five summary things I suggest after a Hard Miss:
- First, re-forecast revenue and cash — immediately. For real. Do not wait.
- Second, assume you never make up for that quarter. It’s gone. Drive the team as you want, but realize no matter how much you crush the next quarter, you can’t make up for a Hard Miss.
- Third, if you still are doing even reasonably well. Make sure it’s still a win for the employees that got you whatever revenue you did that quarter.
- Fourth, bring in help. Today. At least an advisor, someone to take an analytical look at what happened. That has no agenda here. Bring in a veteran, at least as a consultant, a guru, to help you do the root cause analysis. Your board and investors cannot do this. They are not hands-on enough.
- Five, communicate the new plan and goals crisply. Startup folks know progress isn’t perfect, or linear. But they do need to see from the founders and leadership that there’s a thoughtful plan to get back on track.
And hang in there. All of us will miss a quarter or two. The real risk is two Hard Misses back-to-back. That’s a much tougher one to recover from.
That’s why you need to take action immediately after a Hard Miss. And not just hope the next quarter bails you out.
(note: an updated SaaStr Classic post)