Welcome to Episode 173! Jason Lemkin is the Founder @ SaaStr, the world’s largest SaaS event, with over 20,000 of the world’s best SaaS founders and investors attending every year. Jason also invests from SaaStr’s debut $70m fund and has made prior investments in the likes of Algolia, TalkDesk, MixMax, RainforestQA, and many more incredible companies.
In Today’s Episode You Will Learn:
* When is the right time to hire your first sales rep? What characteristics must those sales have? Why does Jason believe it is impossible to poach a rockstar from another fast scaling startup? Should you then hire the stretch VP or the more experienced, potentially burnt out exec?
* How does Jason think about aligning compensation to company objectives? Within the company, which functions serve as the best test areas for variable compensation? What must you be wary of when installing a system of variable compensation?
* When is a stretch VP a stretch too far? What must a stretch Head of Sales have done to make him ready? What must a VP of Product done before to make him ready? What resources can you build around stretch VPs to provide them with additional support?
* How does Jason think about the first time you spend to acquire customers? Why does Jason suggest just trying to make $1 for every $1 you spend? Why is it crucial to think of your marketing spend on a blended basis? How can you create alignment between the marketing teams number and the cadence of sales?
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Harry Stebbings: We are back on the official “SaaStr Podcast” with Harry Stebbings. You can find me on Instagram @hstebbings1996.
I’m so excited for the show today as we’re totally mixing it up with a different style. Today, we have Jason Lemkin breaking one by one the secrets to success is all things sales and marketing, when to hire your first sales rep, how much to pay your sales team, when is the stretch VP a stretch too far, and how much to spend on acquiring customers and much, much more. It’s a very special one.
I’d love to hear your thoughts. Again, I’m on Instagram @hstebbings1996. Jason Lemkin is on Twitter @jasonlk.
Plus, if you’ve not had the chance to check out the latest incredible work from team SaaStr, then it’s a must. Many CEOs have read SaaStr’s content and wondered how they can train their teams on SaaStr’s best practices.
SaaStr PRO now solves this problem. Sign up today at saastrpro.com/podcast. Let SaaStr train your team for you automatically, each week, sending your team a highly actionable lesson meant to help you grow faster and drive discussions on how to improve. Again, that’s saastrpro/podcast.
However, that’s quite enough from me. I’m now very excited to hand over to the one and only Jason Lemkin, founder at SaaStr.
Jason Lemkin: That’s perfect. I think we’re warmed up.
Harry: Jason is going to kick us off today with when is the right time to hire your first sales rep.
Jason: Been thinking a lot on why a lot of the first sales reps with startups I work with don’t pan out. There’s different vectors you can look at for the first sales rep, domain expertise, experience in SaaS, all that matters. I think the most important thing I’ve learned is that the first sales rep has to be low maintenance and high output.
Most sales reps from bigger companies get a ton of help. They have sales operations. They have a director of sales, a VP of sales. Someone makes collateral for them. Someone sets up Salesforce for them.
If your first one or two sales reps can’t figure it out on their own at least in the beginning with a little bit of help from you, don’t hire them no matter how great their LinkedIn looks and feels.
Harry: Apologies for the audio quality there. Sometimes these are recorded in the car. What can I say? Jason never stops. Next, we’re moving onto variable comp and how to tie bonuses to your next goals.
Jason: One of the things I’ve been thinking a lot lately is next generation variable comp, how to get bonuses tied to company goals. Because when you get it right, I find it very powerful in SaaS companies to hit those metrics. When you get it wrong, you can absolutely disalign interests because folks will only focus on what they get the variable comp from, even if it’s a relatively small amount.
Customer success is maybe one of the most interesting areas to iterate here on. When I built my own customer success team, I didn’t know what I was doing. Quickly I found that the best leaders here really could move the needle on upsell and retention. They could make a huge difference. When they did, I wanted to make sure they got paid out.
I experimented with different variable comp models, from one‑off to annual goals. I found I loved most of all reaching for improvements. If we increase net retention and we decrease churn, provide comp to customer success, around 20 percent of their salary.
Then I started speaking about this probably four or five years ago. I found most customer success leaders and professionals did not have variable comp. Even more interestingly, two of my favorite leaders in the space were opposed to it. They felt it disaligned their team. They wanted their team just focused on customer happiness and thought bonuses for revenue goals for customer success were bad.
Interestingly, fast forward a couple months ago, both of these customer success leaders are in new VP roles. Now they love variable comp for customer success. They have come around. They’ve realized that it does align interests. It’s easy to get this wrong.
What I love is measuring things. Segmenting retention and segmenting churn, say, between small, medium, and large customers, figure out how you’re doing, and then set an annual goal for improving it.
Drive up revenue retention from your medium‑sized customers from 105 to 110 percent, from enterprise, from 110 to 120, whatever it is. Then pay out your customer success team when they get it. I find it works like magic.
Harry: God, I have to say I’m so enjoying listening to this. Next, we have when is a stretch VP a stretch too far?
Jason: Lately, I’ve been thinking a lot about how to make really stretch VPs more successful because more and more founders are hiring not just stretch VPs but folks that are really a far stretch to be a VP even at an early‑stage startup. Let’s step back for a minute.
Most of us are going to have to hire a stretch VP because when you go to hire your first VP of sales or marketing or product, you’re going to have two choices. Do you want to hire someone that’s an up‑and‑comer, a manager, or a director? Or do you want to hire someone with the perfect LinkedIn?
If you go to hire someone with the perfect LinkedIn, probably either they didn’t do it, someone else did it but they got the title, or they’re just burnt out or washed up. It’s almost impossible unless you’re the hottest startup on the planet to lure that perfect VP from another successful startup to your startup. It’s not going to happen. Your best choice is a stretch VP.
Generally, my line that I like to draw is they’ve done at least some of it before. For a stretch VP of sales, they’ve hired at least two sales reps that have hit quota.
For a VP of product, they’ve at least actually put a product into production, maybe not every single product at a company, not the entire product line, but they’ve at least taken a core set of features, a core portion of a product, and they’ve own put it into production.
With marketing, it’s have they owned a number? Have they owned a lead commit, an opportunity commit, or something, some part of the demand gen funnel even if not all of it? If they have owned some of that, you can take the risk they’ve done more. If they’ve done none of it, it’s too risky. Some of you are still going to take even more risk.
What’s my number one learning? It’s help them get a mentor. When you hire a stretch VP, either give them a budget for options in cash and let them go find a mentor or you go find it for them. We all need these mentors.
The more of a stretch we are, the more we can benefit from a great one helping us. When you hire that stretch VP, budget 10 percent of her salary and her options for someone to help her.
Harry: I’m staying on the theme of mentorship. Let’s deep dive on that a little more particularly.
Jason: One important thing we touched on the other day was mentorship for your up‑and‑comers. In particular, I just want to spend a second talking about an idea I brought up, which is to have an explicit mentorship budget for all your VPs, especially your stretch VPs.
Here’s my new‑ish rule. Budget 10 percent of what you’re going to pay for the first year’s salary and for equity for each VP you hire. You give 20 percent to a recruiter just to find that candidate. What about keeping that candidate?
What about making sure they can do something great? What about finding someone who especially can help your stretch VP of sales, marketing, engineering, product do better? That’s one of the best investments you can make.
Where do you find these mentors? Two quick ideas.
One, tell them they have this budget. Ask them to go find the person. Probably 50 percent of the time, they’ll find their own boss or maybe their old peer who then went to another great role and became a VP or better there. Oftentimes, they’ll know the best person they’ve ever worked with and want them to use their mentoring budget. That’s number one idea.
Number two idea is you go find it for them. You go find the best VPs you know in the entire ecosystem and offer them a few shares and a few nickels to help mentor your team. That’s my idea number two.
Idea number three, if you don’t have either of those, use a service. Plato HQ has amazing VPs of engineering from amazing companies, from Lyft to Uber to Twilio to Twitch, that can help mentor your team for a few nickels per month. Or find another service. One way or the other, go find some third party to make it happen.
Whatever it is, make sure you have the budget. Make sure your VPs, especially your stretch VPs, know it’s there for them to help them.
Harry: Now from mentorship to marketing and how marketing really needs to own a number.
Jason: We’ve talked a ton on SaaStr over the years is how marketing needs to own a number. Marketing needs to have a lead commit or an opportunity commit or some number in the pipeline or you’re just not going to get the leads and customers from marketing that you want. We’ve talked a lot about that. I think a lot of folks have learned that lesson.
Two, we’ve learned that generally speaking when you go out to hire your first head of marketing, your VP of marketing, if she or he hasn’t owned a number in their last job, it’s pretty unlikely they’re going to be able to pull it off at your company.
Look for someone in their last job, whether it was a marketing manager, director, VP, that owned some commitment in the pipeline, owned a lead commit, an opportunity commit, even a revenue commit. Hire someone like that that you believe in. Things will go well for you.
I think the next subtle evolution of that to get right is not just that they owned a number but that there’s parallelism. This is what I see a lot of startups get wrong. Marketing does own up. They do own a number. We’re going to generate this many opportunities, this many leads, this much pipeline this month or this quarter. The timeline doesn’t sync up with sales.
If you want sales to grow X percent each, marketing needs to grow X percent each month. If you want sales to grow this much each quarter, etc. Make sure that not only do you have a number from marketing but that its cadence matches the same cadence as sales.
If you have monthly commits in sales, have monthly commits in marketing. Make sure everyone reports on it. Everyone knows how we’re doing. If they don’t sync up, you’re not going to achieve the goals that you want to achieve.
Harry: Then the big subsequent question, once you have your number for marketing, how much should you spend on acquiring your customers?
Jason: With most of the startups I work with, probably the biggest phase transition they have is when they start to actually spend anything to acquire customers.
Usually those first 10, 20 customers, you spend almost nothing at least directly to get them. You leverage relationships. You get put up on TechCrunch or Product Hunt. You hustle. You do whatever it takes. Usually the customer acquisition costs, the direct one is zero.
Then it gets time to spend a few nickels, especially when you hire your first head of marketing. That’s sometimes where some tension comes up. How much should I spend? You’ll read a lot on the Internet about CACs and all this stuff. Let me boil it down to a simple rule.
When you spend money on marketing, just try to make a dollar for every dollar you spend. You’ll think, “That’s not enough! I got to pay a sales guy. I got to pay rent. How is a dollar to a get dollar back enough? That may make my so‑called CAC extend far beyond 12 months.”
Here’s the thing. You’ve got to think of it on a blended basis. First of all, some of your customers you’re going to get for no cost. They’re going to find you through SEO, through press, through whatever. They’re going to find you through referral networks. You have to think about it all in what it costs to acquire a customer.
Second, remember, these are customers for life. Hopefully, these early ones will last a long time. You’ll get that viral referral in the second order revenue running. Third, remember, if you don’t close that customer, your competitor’s going to.
You really want to get as many points on the board as possible. Rough and tough, for every customer you pay to acquire in the early days, you’re going to get another one for free anyway. Your blended marketing costs is going to be much lower than it sounds.
When you hire that first marketer, just ask her, him to make every program they do pay for itself, to make a dollar back in the first year for every dollar he or she spends on marketing. You’ll work out OK.
It’ll help with trade shows. It’ll help with paid content and paid programs. You’ll make more money, you’ll grow faster, and your life will be more stressful if you ask marketing to get a dollar for a dollar at least in the early days.
Harry: Then we’re going to finish today on a slightly more meta. Is domain expertise overrated in SaaS?
Jason: I’ve been thinking a lot lately about exceptions to the rule that domain expertise is overrated. It’s still a rule. A mistake that almost all of us make is we hire a VP of sales, a VP of marketing, senior sales professionals because they have such great experience at industry. That rarely pans out for a number of reasons.
First of all, at some point, you’re going to have to be able to get your team up to speed on the nuances of your industry very quickly, in a matter of weeks. You’ve got to train people at some point even if you don’t do it in the beginning or you will never, ever scale.
Secondly, typically what’s more important to have skills at a certain ACV. It’s more important to know how to sell marketing support and ship products at 20K a year or 100K a year or 200K a year than at a much different price point in your industry.
Understanding how to manage the low‑end version of GitHub versus a very high‑end version of Datadog, they’re probably actually quite dissimilar in terms of the actual sales and marketing experience you need.
We all over‑index on domain expertise because we just want to do better. Don’t do it. If the only reason you shouldn’t do it is because you will be blind to the other risk factors. You’ll be blind to they’re not actually that good at sales or that they didn’t actually have a lead commit at their last company. Almost rule it out but not entirely, a few couple of exceptions.
First of all, in the early days, if your product is technical or nuanced or complicated to sell, a lot of reps will just struggle. They’ll struggle to sell to VPs of engineering, to sell to VPs of compliance, to sell to power. You need someone that can sell to power. You don’t need domain expertise. Sometimes it helps. Sometimes it’s a great hack to do it.
A second great exception is, this happens to most of us, especially more complicated industries, one of our customers wants to join us. I don’t think that works in sales or marketing or product. it can work in an early customer success role when customer success is a generalist role. If one of your biggest champions at your customers end up wanting to join you, I say do it once.
Harry: What an individual!
We would love to hear your feedback on the episode today and the new format which we will trialing and testing and mixing up with the standard interviews that you’ve heard before. We’d love to hear your thoughts.
You can send them to me on Instagram @hstebbings1996. Likewise, you can find Jason on Twitter @jasonlk. If you haven’t checked out SaaStr PRO, then that really is a must. You can find it on saastrpro/podcast. It’d be great to see you there.
As always, we so appreciate all your support and cannot wait to bring you next week’s episode.