SaaStr Podcast #179: Dave Kellogg, CEO @ Host Analytics On The Most Commonly Misunderstood SaaS Metrics

Welcome to Episode 179! Dave Kellogg is the CEO @ Host Analytics, the leader in cloud-based enterprise performance management (EPM). Previously, Dave was SVP/GM of Service Cloud at Salesforce and CEO at unstructured big data provider MarkLogic. Before that, Dave was CMO at Business Objects for nearly a decade as the company grew from $30M to over $1B. Dave has also worked in various capacities with the likes of Breeze, GainSight, Tableau and MongoDB and previously sat on the boards of ag tech leader, Granular (acq by DuPont for $300M) and big data leader Aster Data (acquired by Teradata for $325M).

In Today’s Episode You Will Learn:

* Why does Dave believe it is foundational to be an ARR first company? How does Dave think startups can show their ARR first mentality from the first investor meeting? How does this help drive operational efficiency? How  does Dave segment ARR into 3 distinct camps?

* Why does Dave argue that SaaS metrics are not nearly as simple as they seem? Which metrics does Dave believe most founders confuse? What metrics will the best VCs pick apart and dig deep on? How can founders respond with accuracy and confidence?

* How does Dave respond to multi-year deals? Under what conditions are they acceptable and not acceptable? How must they be reported in accounting? Where do many startups go wrong when considering multi-year deals? How important is it for them to be pre-paid?

* Why does Dave argue that renewals do not measure customer satisfaction?What is an accurate measurement to determine customer satisfaction? How often should this be conducted? What sample size of customer gives the right amount of data?

* How does Dave approach comp with regards to sales team cross-sell and upsell? Why is it not as black and white as boards often portray? Under which circumstances does Dave believe double comp is justified and not justified? How can you communicate this to your board successfully?

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Jason Lemkin
Harry Stebbings
SaaStr
Dave Kellogg

Transcript: 

Harry Stebbings:  We are back on the official SaaStr podcast with me, Harry Stebbings. The week has finally arrived. Yes, it is SaaStr Paris this week. What a show it will be. To see all things behind the scenes from Paris you can follow me on Instagram @hstebbing1996. It would be fantastic to see you there.

To celebrate the very special event being upon us, I have selected one of my favorite talks from SaaStr Annual this year with a prior guest of the show who, to me, is simply one of the greatest minds in this space.

I’m thrilled to welcome Dave Kellogg. Dave is the CEO of Host Analytics, the leader in cloud‑based enterprise performance management. Previously, Dave was SVP of Service Cloud at Salesforce and CEO at unstructured big data provider MarkLogic. Before that, Dave was CM of Business Objects for nearly a decade because the company grew from $30 million to over a billion dollars.

Dave’s also worked in various capacities with the likes of Breeze, Gainsite, Tableau, and MongoDB. Previously he sat on the boards of agtech leader Granular, which was acquired by DuPont for $300 million and big data leader Aster Data acquired by Teradata for $325 million.

You’ve heard enough from me. It’s time to get the notebook out and unpack some pearls of wisdom from Dave Kellogg.

[drumroll]

Dave Kellogg:  My intent for the presentation is tops of the waves. It’s 10 things that will hopefully make you think.

The first one, and you can accuse me of, “Whoa, isn’t this a presentation on non‑obvious things about SaaS companies? Why are you saying you should run the company about ARR?” The answer is lots of people seem to think they do run their companies in ARR but they don’t.

Just last night I met with a very smart entrepreneur, very cool company who wanted to show me his financials. The first line was all about ACV that was mixing new ACV, upsell ACV, and renewals ACV. I couldn’t make heads or tails of it.

Another time, people, they show me gap venues. I’m like, “You’re a SaaS company. Why is your first slide gap revenue?”

If everybody thinks they want to be ARR first but you only know you are based on the answers of these three questions. One, if you ask somebody how big a deal is do they answer in ARR? If they answer in any other unit your company’s not ARR first.

If I ask what the forecast for the quarter is, if you don’t answer in ARR…It’s about what I don’t say. You say, “What’s the forecast?” Do you answer in bookings? What do you answer in? If you answer in ARR, that’s correct. Then you’re ARR first.

What’s the first line of the first slide of your investor deck or board deck? If it isn’t ARR, then you’re not ARR first. Lots of people think they do this. It’s actually a dangerous form of denial in my mind. If you want to be ARR first, make this the first slide of your board deck or of your investor deck.

It’s not only my opinion. I met a couple years back with Doug Leone, a top guy at Sequoia. I showed him some financials in this format and he goes, “Every SaaS company should present their financials in this format.” It’s not just me. I have a second opinion on it.

What this shows you is what I call a leaky bucket analysis. A SaaS company is a leaky bucket full of ARR. Every quarter sales pours more water in the bucket. Every quarter customer success tries to keep water from leaking out of the bucket. Therefore, you can say we started the period with 100 units of ARR. We added 50 units. We churned away 10, therefore we ended up with 140 units.

I can tell you that the value of your SaaS company is determined by the water level in the bucket and by how fast that’s growing. When you do this analysis it’s very important. You can see things like people who are…Say they sell two million in new ARR but churn 1.5, so it’s a big bucket and they’re having trouble keeping it full. That company’s not worth very much because it’s not growing the water level in the bucket.

It’s got a big bucket but it’s not growing. That’s why we have the three growth rates down below. New ARR growth, any ARR growth, which really is the single most important thing for valuing your company, and net new ARR growth, now much incremental did you do to the bucket.

Everybody agrees we should be ARR first. The question is are you? If your default unit isn’t ARR and if you don’t show your financials with an immediate focus on the ARR bucket and what’s happening to it, I’m going to argue you’re not ARR first. Lord knows, please don’t show up with a gap P&L. These things will hurt you when you try to raise money because a VC wants to know that you get ARR and you are an ARR first person.

That’s our first point. Second point, SaaS metrics are a lot more complicated than meets the eye. A lot of us are intellectually lazy. A lot of us assume these things are simple. You can get yourself in trouble if you don’t take time to think about what goes into these calculations.

VCs are going to be looking at your company through a lens of these metrics. They’re going to look at LTV to CAC. They’re going to look at CAC. They’re going to look at churn. If you don’t understand and have a logical argument for how you calculate them, you can get yourself in trouble.

The purpose of this presentation isn’t to try and do a two‑hour course in subtleties of SaaS metrics but I do want to point out a few things that maybe you didn’t think of that will hopefully make you realize, “I should dig into this.”

For example, the CAC ratio seem simple. Prior quarter sales and marketing divided by new ARR in the current quarter. What could be easier? Does that new ARR include upsell or not? Most people would say yes but some people may want to make a new business focused CAC that didn’t.

Is sales and marketing all of sales and marketing? Is it just a variable like the sales commissions and the marketing demand gen or is it the entire base salary, the PR team, the whole banana? For most people, it should be the whole banana because the question we’re trying to answer is, how much does your company spend to acquire a dollar of ARR? That’s what the CAC ratio is.

Typically, it’s all sales and marketing costs divided by all new ARR in the quarter. Should it include upsell? Yes, but who does upsell at your company? If upsell is done by sales, then, wait a minute. If you ask finance where do they put the cost of customer success, it’s in sales.

You need to pull that out and say, “Wait a minute, my sales team does upsell, so therefore when I do my CAC ratio I shouldn’t include the cost of renewals because my customer success team just does renewals in that,” or vice versa.

If your customer success team does do a lot of upsell and you’re including upsell ARR in the denominator then, yes, you should include their cost in the sales calculation because most finance departments will classify customer success as sales expense.

The other nasty thing about sales expense, and this is probably for slightly bigger companies, but commissions get amortized. There is a question of whether or not you want to restate this on a cash basis, to say, “Wait a minute, if I’ve got screwed up comp plans that are over‑rewarding sales, I’m going to take those and divide them over the duration of the contract. It’s going to be very hard for me to see this with a broken CAC ratio.”

If I reset and do this on a cash basis maybe I’ll see reality more clearly. These are little niggling subtleties that make something that seems so easy difficult. LTV to CAC, first LTV to CAC is the ultimate SaaS metric. It’s what you paid for something on the bottom and on the top what it’s worth. It’s the grand balance.

What you paid for it is the CAC ratio, or how much you pay for a dollar of ARR. On the top you’re trying to say what is somebody’s lifetime value in terms of subscription margin. I have to run this service so let’s do this on a subscription gross margin basis. Let’s invert the CAC rate to get the lifetime and then divide it by the CAC ratio. That will get me a number. The bigger that number, the more it’s worth relative to what I’m paying for it.

It seems like a pretty simple metric but the first question is which CAC? I just talk to you about give different CACs you can do. Which CAC ratio do you use? That can be the same argument on churn. Which churn do you use? There’s a lot of different ways to think about churn, as well. Lord knows, what do you do when churn becomes negative?

The idea behind churn rates is kind of like you use it as a discount rate in a net present value formula. If I have this bucket of ARR, then imagine I have no upsell. Every year 10 percent of it leaks out. It starts out with 100, then it’s 90, then it’s 81, then it’s 72. I’m using it as a discount rate of the value of my annuity.

That works really good except when churn is negative. Then, all of a sudden, your lifetime value is infinite. You can go tell a VC that but they’re not going to believe you. What do you do?

If you exclude upsell it seems too pessimistic because, wait a minute, we really do do upsell. I really do have negative churn. It breaks your LTV to CAC math. These are the things you need to think about.

Here’s an even more interesting case, which is most of the thinking about land and expand in Silicon Valley is I sell somebody a $50 steak, and then I sell them a $10 glass of wine, and if I’m lucky another $10 glass of wine. I have the big purchase up front and I’m getting these little things on the back end.

I met a guy last night who sells a $10 glass of wine and then sells a $50 steak, then another $50 steak, then another $50 steak. He has a problem that looks like this. If he spends 100 units to get a customer or 50 on that initial purchase, it looks like his CAC ratio is 2.0, which is not good. A lot of VCs will run away if you tell them your CAC is 2.0. Is his CAC .33? I can tell you reliably that two quarters later these guys who I spent 100 to get are now worth 150.

What is my CAC ratio here? The question is, really, what do you mean by acquisition? In this guy’s case if you can reliably prove that that pattern’s going to happen then I think he should count the sales and marketing divided by the first‑year customer value, which is an unusual way of looking at it but if you have a small land big expand model, maybe it’s the right way.

Here’s another example. This is a churn example, my last metrics example to talk about how things can get confusing. We’ll take this simple case. Somebody buys 90 units of product A and 10 units of B. Six months into it they buy 15 more units of A. They’re happy, and then the renewal comes up.

What are we renewing? What’s the denominator in the renewal rate? Is it 100 or 115? Your inner fundraiser wants to say it’s 100 because you want to say, “Hey, I renewed 115 plus units off a hundred.” That’s what your fundraising side wants to say. Your operational manager side says it’s 115. I’m handing a CSM a customer worth 115 units. I want to get 115 or more units out of that customer.

There’s your first question, what do you do about off‑cycle upsell? How do you think about that? An answer is you certainly want to tell the CSM, “Go renew 115 or more.” The 15 units of upsell, finance typically takes it when it comes. Thus far into the discussion of loss credit for it. It kind of went away because it went to offset churn in some other period.

More subtly, on day 365 is your company going to count that as 10 units of churn and 20 units of upsell or simply as 10 units of upsell? Most sales ops people, if you talk to them about this, they look at customers on a contract basis. They’re going to say the value of that contract went up by 10 units so it’s 10 units of upsell.

The underlying flows get lost. Most systems don’t track it. Most companies don’t track it. I call it account level churn. You’re looking at it through an account lens, not through a product lens.

What about those 15 units of upsell? How do I get credit for them? The answer is that’s why they made retention rates because retention rates are cohort based. You say, “Take all the people who bought in 1Q ’17. What are they worth now in 1Q ’18 in aggregate? That’s my retention rate.”

Those are good. This is a simple calculation. It actually shows what happens to a group of customers and how they expand or shrink over time. You don’t have to worry so much about the timing issues because you’re taking snapshots.

All this stuff, though ‑‑ This is just tops of the waves ‑‑ hopefully points out that, gosh, there’s a lot more going on here than maybe I think. It’s worth drilling into these things because when you’re raising money, VCs and private equity guys, they’re very familiar with these metrics. They’re going to ask those questions.

If you don’t have credible answers that are well thought out, you lose a lot of credibility. On the flipside, take my friend who sells the $10 glass of wine. Most VCs would run away from him and go, “Wow, he spent a bunch of money to get just this $10 order.” If he comes in with a good story that says, “Wait a minute, 8 out of 10 times they buy a $50, then buy a $50, then buy $50 again within one year,” his CAC ratio goes from 2 to 0.3.

They’re like, “Holy cow.” It goes from unacceptable to amazing, based on how he was able to frame it. This stuff matters. They do react to the metrics.

Third point, public CFOs may not get SaaS metrics. This was fascinating to me. I put it up here mostly as a bonus because one day I met with the CFO of a well‑known pubic SaaS company. He started asking me all these questions about CAC, and LTV, and renewal rates.

I’m sitting there thinking, “How can this be? This person is a CFO of a public SaaS company and he doesn’t understand a lot of these metrics.” The light went off and I’m like, “Wait a minute, he lives in the world where investors look through a veil at the company. They can’t see all the metrics that you show VCs and private equity guys. They look at the company through a veil, so he only understands these outside in metrics, like billings.”

Billings is revenue plus change in deferred revenue. It’s a way to try to hack bookings. It doesn’t necessarily always work, but that’s what they’re used to.

Even though he’s the CFO, by the virtue of his job he places himself outside the company and looks in because that’s what all his investors do. Therefore, he doesn’t actually know much about all these internal metrics that the VC world gets to see.

First, it was amazing to see. Second, I would say, “Look at how this might apply to you,” because boards love to hire the CFO you need three years from now. That’s great as long as that person can do the job you need done today. This guy can’t. This guy would not be a good CFO at a private company that needs to raise two more rounds before an IPO.

My advice is don’t let your board push you too far ahead and hire some CFO who’s going to be wonderful at the IPO when you’re three years from an IPO and need to raise two rounds. You need somebody who can do the job right now. It’s a fairly common pattern.

Number four, multiyear deals make sense in certain situations. This is heretical, so I put the heretical warning on it. If you say this in polite SaaS company, you are likely to offend someone. Hardcore SaaS purists think it’s all annual. Multi‑year deals are evil. You’re accounting TCV.

That scares me because TCV may or may not ever be realized. You’re taking your ARR and multiplying by five for a five‑year contract with annual payments. Who knows if you’re going to get the money? Are you inflating the size of your company 5x in the process? Scary, scary, scary. That’s the thought process that happens if you talk about multi‑year deals recklessly.

The reality is these contracts are effectively rolling the dice. If you’ve got a 90 percent churn rate, I’m effectively exposing you to an annual dice roll, where your contract comes up. We roll the dice. 9 times out of 10, it says, “Renew.” One time it says, “Not.” That’s the way we should think about the renewal rate.

If I were to offer you a discount that was less than that churn rate, am I better off? I can expose you to a 10 percent decay from the churn rate, or I can expose you to a 5 percent decay from a discount. My belief is whenever the discount I offer you for a multi‑year deal is less than the churn rate, that you win and I win. It’s actually a win‑win transaction.

At my company, we offer these to customers. We do it at the very end of the sales cycle. We say, “You’ve done a full evaluation. You’ve chosen Host Analytics. Would you like to save a little extra money?

You seem pretty sure it’s going to work for you. You just spent six months evaluating it. If you’d like to do that, we could talk to you about a multi‑year deal. Here’s a kind of discount we can do.”

Half the time, people say, “Great.” About half the time, they say, “No, thanks.” I don’t mind, because if I’m offering the discount at the right level, I’m actually fairly neutral. I’m like, “Go ahead. I’ll put you against the dice.” That’s roughly the discount I was offering, anyway. It’s mathematically equivalent.

That a deal needs to be prepaid, very important. I believe if you’re a sales force and you sign a multi‑year deal that’s not prepaid, and the customer defaults on you, you’re probably going to sue them. You can collect that money. If you’re a $10 million SaaS company, you’re not. You’re not going to have the money to sue them.

I believe that multi‑year non‑prepaid deals for small SaaS companies are a terrible idea. Why? Because they look a lot like renewals that are done by Finance, not Customer Success.

If it’s on a one‑year cycle, you’re going to tell Customer Success, “Go love this customer. Make sure they’re ready for a renewal. Do all your normal love process, so when that contract comes up, they’re ready to renew.”

If you hand it to Finance and say, “Hey, there’s a collection due in 365 days,” they’re not going to call anybody. They’re not going to be nice. They’re not going to treat it like a renewal. They’re just going to mail an invoice at month 11. If the customer is unhappy, they’re just not going to pay it.

All of a sudden, you’ve got effectively a renewal. Finance is going to say, “It’s a contract. You owe us the money.” If the customer is not using the software, they’re going to say, “Pound sand.” Then where are you? You’re nowhere. You gave away a price lock. You gave away a discount. You got nothing in return.

Our argument is if you want to play this game, the deals have to be prepaid. Multi‑year non‑prepaid deals to me don’t make a lot of sense for small companies. Your ability to collect those out‑year payments is virtually identical, whether or not the contract is in place.

If they’re using the software and they’re happy, they’re going to pay. If they’re not, they’re not. It doesn’t matter what the contract says. They can make sense in certain situations.

Another heretical idea is that bookings is not a four‑letter word. If you say the word “bookings” in a polite SaaS, you’re likely to offend. We must be careful when we say the B‑word. If you define bookings sensibly, then you can talk about it. Defined sensibly, bookings are things that turn into cash in 90 days.

Everybody cares about cash. They’re going to like talking about something that turns into cash, as long as you don’t mean TCV bookings, which is not prepaid. See prior sermon. If you’re talking about something you’re going to get collection on soon, then people are happy to talk about these.

At our company, I said about half the time, somebody will do a multi‑year prepaid deal. We end up, on average, with two years prepaid. If you look to the billed of our financials, I’d say in a period, we did 100 units of ARR.

We did 200 units of what we call “new subscription bookings.” That’s prepaid subscription bookings. Our NSB‑to‑ARR ratio is the, effectively, average prepaid contract duration, in effect. We add renewal bookings to new subscription bookings. That gets total subscription bookings. You add services bookings on top to get total bookings.

This is a great way to build this. If you’re smart, you put the focus on what I call “TSB,” total subscription bookings. If you care about cash, whether it’s a renewal booking or a new booking, if you have subscription gross margins of 80 percent, it’s going to generate 80 percent of that money in cash for you to go spend.

That’s not true for services bookings, as we’ll see in a minute. Most of you, 50K of services earnings generate 0K of cash. Let’s get that out of the way. Let’s focus on subscription bookings.

If you’re offsetting deficits in subscription bookings with services bookings, you may feel great about hitting your bookings target. You’re going to find yourself at a real cash shortfall, because they don’t have the same gross margin. Bookings is not a four‑letter word. If you think about bookings, it’s something that turns into cash.

Renewals. A lot of us feel like renewal is a proxy for customer sat. It’s not. It’s a pretty simple point. We lose customers who are very happy because they get acquired by a PE firm. The PE firm says, “Here’s our standard tool set.” They hired a new CFO. The CFO says, “We use Hyperion because I’ve always used Hyperion.” That happens in our lives. Those were happy customers.

On the flip side, you often have unhappy customers renewing, typically because they didn’t have their act together. They missed the auto‑renew, 60‑day thing in the contract. They were trying to get a new system up and couldn’t get it done.

You could find both cases, where unhappy customers renew and happy customers don’t renew. Let’s not pretend that renewals are a perfect proxy for CSAT. Let’s go measure NPS instead and then try and look at the relationship between the two. A pretty simple point. The net of it is go measure NPS. Do it ideally four times a year with a quarter of your base each time.

This one is fun. You can’t analyze churn by analyzing churn. This is a slide we show on our board meetings. This is what I call the “churn taxonomy.” It takes all the churn that happened in the period and talks about why 1,000 units lost to lost accounts, 300 to shrinking accounts, on the lost accounts, blah blah blah. The 750 was business related. 250 was product related.

It’s a way to show your board and to show your team churn by reason. What are the reasons people churn? Great slide. Useful slide for any board deck. The problem is it doesn’t actually answer the question you really care about. The question you really care about is, “What predicts someone churning?”

We’re going to use an example here, a fairly well‑known example about World War II. As bombers came back from missions, they would put little dots for where they’ve been hit on these planes. At the first order, people said, “Gosh, these are where our planes are getting hit. Let’s go reinforce them in those spots. Let’s make them stronger in the places that they get hit.”

One day, a very smart person came along and asked a simple question, which was what? “What about the planes that don’t come back? [laughs] Wait a minute. Shouldn’t we worry about what separates the planes that don’t come back from the planes that do come back? Maybe the planes that don’t come back are the ones that get hit.”

They complemented this pattern. They get hit in an engine, or they get hit where the pilot sits. There’s basically a survivor bias. We were analyzing how to make the plane stronger by only looking at planes that survive the mission, when we should have been looking at what differentiated planes that didn’t survive the mission from those that did.

When you analyze a bunch of customers that churn, you’re doing exactly that. If you just grab, “Here are all the customers that churned last quarter. Let’s go analyze the heck out of them,” you’re making this mistake.

What you want to do instead is go get a table of all the customers ‑‑ those that churned and those that didn’t ‑‑ with a bunch of input variables. “Who did the services? How big is the company? How big is the ARR? What industry are they in?” Things about the customers in the first columns.

In the other columns are, “Did they churn or not? Were they happy or not?” Then try and figure out the relationship between these inputs and those outputs to see what differentiates people who churn from those that did not. That’s what I mean by saying you can’t analyze churn by analyzing churn.

You need to analyze who churned and who didn’t and try to compare them. Finding your own hunter‑farmer model is hard. People do Hunter‑farmer because they want to focus their reps on new business. That’s a very noble intent. They want to pay lower rates on renewals and upsell because that’s less hard work than winning new business.

Now something to know if you don’t know it already, boards hate paying sales‑type commissions on renewals, and they’re right to. If sales people in SaaS make maybe 10 or 15 percent commissions, you don’t want to pay that on a renewal. Boards hate double compensation. Another word not to say in a board meeting is “double comp.”

If you say it, everyone’s going to sigh. It’s going to be a bad meeting for the next 10 or 15 minutes if you ever say those words. [laughs] Never say “double comp” in a board meeting because boards hate it. Sometimes they’re right, and sometimes they’re wrong. My opinion is we need to let intelligence not dogma drive this. The first thing, you need to be aware of the dogma.

There’s a lot of religion. If you’ve got a standard fries‑with‑your‑burger cross‑sell, it’s not really hard to sell the fries if you’re buying the burger. That’s what a lot of Hunter‑farmer is. They say to the sales guy, “Go sell the burgers. The CSM will go sell the fries.” It’s not that hard, so I can get a relatively low‑skilled CSM. That’s Hunters and farmers.

Well, say the expand is more sales‑y, that it requires more sales skills. Those are people often called account management. There’s some salespersonship required to do that. That might require a famers‑with‑shotguns model, we call it. We still have hunters and farmers, but the farmers are armed. They’re more sales and profile. They make more money. They come from a sales background.

Say it’s a really hard cost sell like we have. We sell planning and budgeting to the FPDA people. We sell consolidations to controllers. Different buyer, different product. It is definitely not fries with your burger. In that case for that sale we’ll use farmers track for hunters.

When a customer’s success manager finds a consolidation opportunity, we send the sales person right back in. If you don’t, if you send a CSM to try and sell consolidation to that controller, you’re going to end up with a dead farmer because you put your farmer against somebody else’s hunter. That’s something you don’t want to do. You need to figure out how your competitor is treating these models as well.

Finally, to beat the metaphor to death, if you have the small‑land and big‑expand like the guy with the wine‑steak‑steak, that person actually has an inside sales team that’s pretty cheap selling the wine glasses.

All their enterprise reps are install‑based reps. It’s a crazy model. He calls it hunters at a zoo because they’re in the zoo. They’re in cages. He’s got these enterprise reps shooting at them. It’s a great model for [laughs] that sort of business.

Number nine, you don’t have to lose money in professional services. I was shocked when I found this chart in the key back pack crest study, but only 20 percent of SaaS companies lose money on services today. I think it was a lot more in the past.

People have figured this one out on their own. To me, the right model is you have a relatively small team of high‑skilled high‑price people. You shoot for single‑digit margins, and things should go pretty well. You’ll set a nice price point to lead your ecosystem of partners. You won’t have the problems you have if you have heavy losses because heavy losses cause two problems.

One, they hurt your blended gross margins, which isn’t that bad because a lot of people will just look at subscription. The real problem is that I’ve seen this happen, a clever PE or VC guy will look at your services losses and add them back to your CAC.

That could be a very bad moment for you because you’re sitting there going, “Hey, I’ve got a pretty good CAC, but I’m losing 25‑percent margins on services.” They go, “Well, if it’s going to cost you a 25‑percent loss on services to sell that software, that’s actually acquisition costs. Hmph.” Then you’re like, “Oh, damn.” [laughs] Bad moment, right? Think hard about that.

If you think you can fool somebody by subsidizing a lot of sales cost in negative professional services, there’s a lot of smart people out there who’s going to correct for that error. Finally, the last point. Look. You need not sacrifice long‑term team members at the altar of experienced talent.

I’m a big believer that Silicon Valley boards are a little too quick to kick out the people who helped build the company. They’re a little bit heavy‑handed with them. I think we’ve been in a more relatively founder‑friendly era for the last 5 or 10 years.

As you face these moments where your VP of sales who’s been so good for the past two or three years is starting to run out of gas, what do you do? The board will very [laughs] quickly say, “Let’s bring in a new one [laughs] and get rid of the old one. There’s no way we can keep them.” I think if you’re creative, you can find a way to keep them.

In Salesforce, I wasn’t there that long, but they were phenomenal at this. They valued people. They valued talent. If you scaled out of your job, they’d try and find you a new one. They try a couple times typically because they wanted to keep you with the company. I think VC boards are a little too quick to boot people out. I don’t think you need to make these sacrifices.

These boards are correct in some ways, incorrect in others. I think the thing you can do to your company is create a culture of change, not a culture of stasis. If everything’s the same every year, it’s very hard to take one person out and move them down. If every year you re‑organize and say, “You try this. You try that. You try this,” then it’s much, much easier to do that.

You can get to a place where you can get everyone in your company to understand that they’re going to have more fun and make more money if they worry about being on the right bus, i.e. your company. Let’s worry about getting on the right bus. That’s how you make money. That’s how you have fun. It’s not all about the seat. It’s all about the bus.

If I want the VP of North American sales to run central region sales for a year and he or she doesn’t like that, just do it. In a year from now we’ll see what happens. Who knows what happens? I don’t know, but you’ll still be on the right bus. You’ll still be vesting your options. If you do great in that role and love it, great. If you don’t, we’ll talk.

Let’s talk in a year because we’re going to change everything anyway. It’s a great way to retain your people, which is really the most important thing you can do as you build a startup. Thanks very much. Follow me at Kellblog, and check out Kellblog.com.

[gong]

Harry:  What did I tell you? You’re just such an incredible speaker. As Dave said there, you can find him on Twitter @Kellblog or on the Internet at Kellblog.com. That really is a must. Likewise, we’d love to see you behind the scenes for this very special SaaS to Paris week. You can join us on Instagram at HStebbings1996 with two Bs. It’d be fantastic to see you there.

As always, I so appreciate all your support. I cannot wait to bring you a set of wonderful episodes next week.

Published on June 15, 2018

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