Welcome to Episode 186! Tom Bogan is the CEO of Adaptive Insights, the company that proves a new generation of business planning software for finance and beyond. Prior to their reported $1.55Bn acquisition to WorkDay, Adaptive Insights raised over $175m in VC funding from the likes of Bessemer, Salesforce Ventures, Norwest Venture Partners and many more incredible investors. Prior to Adaptive Insights, Tom was a partner at Greylock Partners where he focused on enterprise software investments. He was also president and COO at Rational Software until its acquisition by IBM. Before Rational, Tom served as CEO at Avatar Technologies and Pacific Data. He began his career as a financial officer in both public and private companies, serving as CFO at SQA and Orange Nassau, Inc., as well as vice president of finance at SCA Services.
In Today’s Episode You Will Learn:
* How Tom made his way into the world of SaaS, came to be a Partner with Greylock and then made the move back into operations with Adaptive Insights.
* Elad Gil has previously said the role of CEO is to “find product market fit, ensure the company does not run out of money and ensure the team does not implode”, how does Tom define his role as CEO of a $100m+ SaaS company? How does the role of CEO fundamentally change over time? What aspect of the role does Tom find most challenging?
* What core role of CEO is constant throughout the lifecycle of the company? From seeing many of the world’s best SaaS CEOs, what are the commonalities in how the very best CEOs hire the very best execs? How does Tom think about the debate of hiring externally or promoting from within? How does Tom look to reduce internal discontent when hiring externally rather than promoting?
* At $100m Jyoti Bansal said on the show, this stage is about “creating and sustaining operational efficiency.” What have been Tom’s biggest learnings on the creation and maintenance of operational efficiency? What has worked? What has not worked? How does Tom think about internal asset allocation?
* Why does Tom believe that ultimately, ARR growth is the metric to rule them all? How does Tom think about and prioritise the metric stack in SaaS? How does he approach payback period vs CAC/LTV? In terms of services components of businesses, does Tom believe these should be baked into the CAC? What should the financial targets be for these services businesses?
Tom’s 60 Second SaaStr
* What does Tom know now that he wishes he had known at the beginning?
* Tom’s favourite business reading material and why?
* What would Tom most like to change in the world of SaaS today?
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Harry Stebbings: You are listening to the official SaaStr Podcast with me, Harry Stebbings. It would be awesome to see you on Instagram @hstebbings1996 with two Bs. There you can both suggest guests and questions for future episodes. I’d love to see you there and hear your thoughts.
However, to the episode today, and it’s not often that we can say we have a guest on the show who’s been both a leading VC and enjoyed huge success on the operations side of the table, now running a $100 million SaaS company.
I’m very proud to welcome Tom Bogan, CEO at Adaptive Insights, the company that provides a new generation of business planning software for finance and beyond. Prior to their reported $1.55 billion acquisition to Workday, Adaptive Insights raised over $175 million in VC funding from the likes of Bessemer, Salesforce Ventures, Norwest Venture Partners, and many more incredible names.
Prior to Adaptive Insights, Tom was a partner at Greylock Partners, where he focused on enterprise software investments. He was also president and COO at Rational Software until its acquisition by IBM. Before Rational, Tom served as CEO at Avatar Technologies and Pacific Data. Such a phenomenal career and I really love this conversation.
Enough of these dulcet British tones. I’m now thrilled to hand over to Tom Bogan, CEO at Adaptive Insights.
Announcer: Good. That’s perfect. I think we’re warmed up.
Harry: Tom, it’s absolutely fantastic to have you on the show. I’ve heard so many wonderful things from the team at Greylock. Thank you so much for joining me today.
Tom Bogan: Harry, it’s great to be here. Thanks for having me.
Harry: Thank you so much. I’d love to kick off today with you’ve got this incredible storied career from the Greylocks, to CEO, to Adaptive Insight. Tell me, Tom, how did you make your way into the world of SaaS?
Tom: I think I started in software because, early in my career, I thought that’s where the opportunity to build value would be over the course of my career. It was predicated on a belief that software would fundamentally change the world. The way we operate, the way we work. It would be highly influenced by software.
In traditional companies, the software content of their product and their services was increasing over time. That was a belief, many years ago. If we look at it today, that’s exactly what we see. SaaS is the natural evolution of what we’ve seen through many generations of software which enables us to deliver more value to our customers now in a very efficient and timely manner.
Harry: Can I ask, you’ve seen the evolution of the industry over many years now. Some say that we’re coming to the end of the cycle and others say we’re just at the very start. How do you think about where we are in that inflection moment for the SaaS industry?
Tom: I think that this generation of technology, the SaaS generation, will last for a fairly extended period of time. Every generation appears that it will be the last in terms of an innovation cycle, and something else displaces it.
We’ve seen technology and generations go from 10 or 15 years to 20 or 25 years. The SaaS generation brings that all together. I think the ability to host applications in a multi‑tenant environment and to bill on a subscription basis, which shares the risk of success between customers and the software vendor.
I think that SaaS is the generation that has a lot of the fundamentals of delivering high quality and that to our customers. I think the life cycle will be longer for the SaaS generation.
Harry: As a SaaS investor I’m naturally thrilled to hear that.
I do want to break the interview today up into a couple of different components, starting with your role and position as leader and CEO, then moving to the company itself in all its scaling glory, and finishing on the metrics and the tactics that it takes to get there. Does that sound good?
Tom: It sounds great.
Harry: If I wanted to start on today, your position as CEO. We recently interviewed Elad Gil. He said the role of the CEO is to find product‑market fit, ensure the company doesn’t run out of money, and ensure the team doesn’t implode.
If we start on this, this is a very different description to your role today in a $100 million‑plus SaaS company. How do you view your role as CEO today?
Tom: It changes over time. I agree that in the early stages of the company, it’s determining the right product‑market fit and whether we have the right resources focused on the proper markets.
It really does shift to scaling the business and being able to repeat our success in meaningful and repeatable ways that allow us to build scale into the business.
Harry, I’d say the one thing that’s constant, whether we’re a start‑up in a garage, or we’re a $100 million‑plus business the way we are at Adaptive Insights today, I think the one constant is it’s always about recruiting team.
Either as an investor or an operator, if we look at correlation to success in software businesses, it’s most highly correlated with building world class, passionate, dedicated teams.
Harry: Can I jump in and ask, you’ve worked both as an investor with Greylock and now leading Adaptive Insight. What have you found is the commonalities of how the best CEOs recruit the best execs and the best talent?
Tom: I think it’s having a clear vision for what is possible in the business, being able to articulate in a very transparent fashion where the company and the business is today, and the way we’re going to evolve that to create sustained value for our customers, our team, and our investors.
I think the best companies and the best CEOs tend to be intellectually honest about where the opportunities as well as the challenges are in the business and share that with prospective teammates as we’re recruiting them.
I think that if there’s anything that new teammates are disappointed to see, it’s surprises. Being really transparent during the recruiting process is one of the keys to being able to build highly empowered and engaged teams.
Harry: The one question that always strikes me when recruiting new talent to the team is ‑‑ and I’d love to hear your thoughts ‑‑ How do you handle and manage the existing team who maybe thought they were in line for that promotion, but then an external hire is brought in? How do you manage that internal discontent or dissatisfaction? How do you think about that?
Tom: It’s a great question. I think in two ways. I think the first is before we make a decision to make a change, being really straightforward and honest with our existing team members, being able to articulate what we’re trying to accomplish with this part of the organization or this position, and having a really frank dialogue about where that individual is, making sure we understand their career aspirations and mapping that to what the company needs.
After we make a change I think, again, it’s important to continue that transparency. I think if we’ve done our jobs properly, then the existing team member gets to see and appreciate the differences that the new individual brings to the organization.
I think it often ‑‑ and I can think of some of the changes and the evolutions that we did here at Adaptive Insights, if we do this well, I think it does provide a learning and growth opportunity for the existing team members.
Harry: We had Mark Mader at Smartsheet on the show. He said that when adding to the team too much emphasis today is placed on culture, and raw IQ is actually paramount. How do you think about the combination of culture and IQ? Would you agree with Mark there, or would you take an alternative tack?
Tom: I think they’re both important. I think, in addition to intellectual horsepower, raw IQ, I would add skills and experience in a particular job to the equation.
I think culture’s important. I think that if individuals aren’t successful in a particular position, it can be because of a skills mismatch. It can be because of intellectual capability, and it can be because of culture.
We screen very heavily for culture, but we don’t stop there. You can have a great cultural fit, but perhaps have somebody that doesn’t have the skills or the experience to be successful in the role. That won’t work.
We can also have somebody with a great set of skills, but if they cultural fit isn’t right, then it’s much harder to get the team aligned. The value of getting the team to align around a common vision, a common mission, and the acceleration that comes with that is really important. It’s hard to achieve that without culture.
Harry: I’m being very naughty here, and I’m going totally off schedule, but I’m too interested. When someone doesn’t work out, I hear conflicting advice. Some founders tell me you’ve got to rotate them within functions in the organization and find their fit, and others say it’s paramount importance to fire fast.
How do you think about rotating within organization to find that fit or the importance of actually starting again?
Tom: I think if there’s an opportunity inside the organization, we should always look to place that individual in a situation where there’s a better fit for their skills or their capability, and for the organization.
I think that’s always a first choice and a preference, but that’s not always possible, and sometimes the best thing for the individual is to find another situation which is a better fit for their skills, their capability.
I think that it is a mistake to not have that honest conversation with individuals. We owe it to them. It’s part of our obligation to help them develop and align their careers.
I think if there is an opportunity in the company, that’s always our preference, and if it isn’t, then I think dealing with that situation in a very straightforward, transparent way, and that includes a two‑way dialogue with that individual, is important.
Harry: Before we move away from you and your role, I do have to ask, Tom. You’ve really been there, seen it and done it all, but I would love to hear today, where do you find the most challenging aspects of your role?
Tom: It’s the most important aspects are about building the right team and making sure that we’re always focused at all levels of the organization on having the right team members in the right jobs, driving alignment in terms of what we’re trying to accomplish overall for the organization.
Within, whether it be the various departments and functions within our organization or the various individuals working, making sure that we have clear goals, clear alignment. I think that combination of team along with clarity about mission and what we’re trying to accomplish is the most critical.
Harry: Absolutely. We mentioned earlier that you were breaking the $110‑million mark. A huge congratulations to you for that, first.
Tom: Thank you. I appreciate that.
Harry: Byron Deeter said before that only one percent of companies ever break $100 million, so starting on an element of causation, having seen so many scaling businesses, why do you think it’s so hard for SaaS companies today? Let’s start with that.
Tom: I think there are a couple of reasons. First of all, SaaS in terms of a category is a relatively new approach. Some of the companies just naturally are earlier in their development and investment cycles. I think that’s part of it.
I think the critical element in building great software companies is the intersection of tremendous market opportunities, and as we’ve discussed over the course of the last several minutes, building great teams.
SaaS obviously, because we use a subscription billing model, our businesses don’t build and scale as quickly as perpetual software businesses did. There’s this natural evolution that because of the customer engagement and billing model, the SaaS businesses will take longer to build.
Harry: Considering that 99 percent don’t get there, for the 1 percent that do, how can a company go where that 99 percent haven’t been able to?
Tom: It starts with market opportunity and having a solution that provides a great product market fit. I think it also takes having a world class team with clear alignment around a big vision to be able to drive transformation for customers.
I think about our space, the planning space, and the things that we can do when we put planning into the cloud are so much greater than what we could accomplish with on‑prem software.
By having planning in the cloud, we can deliver world class planning capabilities to more companies than we ever could in the perpetual model. I think this is one of the areas that SaaS actually contributes to growth and accretion in markets.
Harry: We’ve mentioned the team multiple times before in this interview. It’s a difficulty scaling the team, and there’s often an inflection point, or even breaking points in the scaling of SaaS teams.
I’m really intrigued personally. Where have you seen the biggest breaking points?
Tom: That’s a great question, and I’m not sure this is a perfect analysis, but I do think there is a $0‑$10 million component, a $10 to probably $25 or $30 million component, and then $30‑$100, and then $100 to $500, and then I think of it above a billion as logical break points.
I think in building and assembling our teams, we always have to be looking at the next target. When I joined Adaptive, we were about a $40 million business, and I thought about the team we had to build to scale and build a $500 million business.
When we looked at adding team members to Adaptive, we looked for people who had experience building software businesses that had scaled far beyond our next milestone, which was the $100 million, and yet had the ability.
I think in smaller companies, it’s successful people, smaller organizations, take a lot of personal ownership, which is sometimes the challenges you have as companies get large and they scale.
We wanted the right cultural characteristics of individuals who took personal ownership, would drive initiatives, who would be involved in the details of the business along with having the skills to understand how to build scale inside software companies, that $500 million business.
Harry: You mentioned that personal ownership and targets, two really interesting components, because often in large businesses, people are known to set maybe less ambitious targets in the fear of not hitting them. How do you ensure kind of a risk mentality with scale and those target setting?
Tom: A couple of ways. I think the first is that we try to have a culture that we really believe that we have to make a certain number of mistakes to be successful. If everything we do is successful, then we haven’t set our targets aggressively enough.
There is a philosophy here that it’s important to set targets that are achievable and realistic, because if we don’t have that, that’s demotivating. It’s also important to set targets that have stretch in them.
We’ll often, for certain initiatives, set a baseline target along with a stretch goal associated with that target. When we evaluate how we’re doing, we’ll look at both.
We’ll look at whether we’ve achieved the baseline target, and often we’ll set our financial plans around that baseline target.
Then we’ll set our aspirational organization orientation around those stretch targets. I think it’s important to have both.
You’re right. In some organizations, whether it be larger companies or smaller companies, there is sometimes a culture of setting targets that will be highly achievable, and I truly believe if we do that, we won’t accomplish everything that we’d like to as an organization.
Harry: Speaking of achieving targets, so to speak, we had Jyoti Bansal, former founder of AppDynamics on the show, and he said at the state that you are at, it’s all about creating and sustaining strong operational efficiency.
I’d love to hear, what do you think have been key to your success, both in the creation and sustaining of this operational efficiency?
Tom: I think having a clear set of metrics measuring all parts of the business are critical to being able to establish a strong operational discipline.
I think it’s also having a very clear perspective on what the right metrics are that we should be measuring, and what the right targets are. What are the benchmarks that we should use to establish where our business should get to? Obviously, having a great planning product is one of the things that helps us to do that.
Within our business, as you would expect, we use Adaptive to run all aspects of our business, and we have a process adaptive on Adaptive we share with many other SaaS companies to show them the metrics that we use to measure our business.
All our leaders are able to go into the Adaptive platform, see the metrics that are applicable to their part of the business and understand in a real‑time basis how they’re doing, how they’re tracking against those metrics, based on the plans that we’ve established as well as historical results.
Harry: How can I not dig in now on metrics being a SaaS nerd? Talk to me. You’ve seen both the hundred million dollar mark and then you’ve also seen the early stage startup founder mark. What can startup founders do in determining which metrics to track and measure in their SaaS business?
Tom: I think ultimately at all stages, we all need to focus on ARR growth and ARR under contract. I think that is one of the key metrics and the key determinants of success.
For development teams, I think it’s important that we are able to articulate a road map and have ways to measure our progress against that road map.
The agile development process is well suited to capture a number of essential metrics, whether it be value delivered for various releases, and other metrics that we use to measure efficiency in our development process.
They probably, on the scale, become relatively more important in some of the early stages of the company. As we begin to scale and grow the business, we’ll measure marketing efficiency based on marketing investments, the kind of leads we can generate through our various marketing channels.
In our case, we look at number of deals per sales rep, average deal size per sales rep. We look at our cost of customer acquisition, the lifetime value associated with those customers and those ratios.
We also look at our spending on a percentage‑of‑revenue basis, because that is one of the key metrics that are available to benchmark to other SaaS companies, to make sure we’re within an acceptable zone for our stage of development and where our company is.
Harry: You said about ARR growth and ARR being of paramount importance. We had Shan Sinha, founder of Highfive, on the show recently, and he said that payback period’s the most important. I’m interested, how do you think about payback in the hierarchy of SaaS metric’s importance?
Tom: We look at it through customer acquisition cost. That’s essentially we look at that in terms of payback period associated with that. I think they’re correlated. I think we have to have an efficient model of customer acquisition.
You can afford, obviously, to pay more for customer acquisition if we have very high renewal rates and therefore a higher lifetime value associated with those customers.
If we have high gross profit margins associate with our subscription service, that allows us to have somewhat higher customer acquisition costs up front, but I think it’s a blend.
A lot of companies, Harry, as you know, look at the lifetime value‑to‑CAC ratio, and that encapsulates all those concepts of how efficient are we acquiring customers? What’s the gross margin associated with that service, and how long do customers stay with us?
Ultimately, that’s the value we’re trying to capture inside our business is, what’s the lifetime value over the course of our customer relationship, and what is the cost of acquiring that customer today?
Harry: I had a company pitch me recently, and they had a large services component to their business. I’m interested, do you think that should be included in the CAC, given that it’s probably a large determinant of whether someone buys or doesn’t buy? How do you think about that?
Tom: I think about services in two ways. I think that for us, services are about making sure that we deliver the right value to the customer, and we get them started the proper way. We don’t look to drive large gross margins associated with services.
It’s really about enabling that customer relationship and driving a longer‑term opportunity through our subscription revenue from the delivery of our SaaS service to the customer.
I think that for some companies who are looking at services, and they have large…Maybe they’re losing money on their service business. That has to be factored in as part of that customer acquisition cost, if that’s your business model, to lose money on services.
Our business model is to be profitable in services. We try to drive between a 0 and 10 percent gross profit in services. We think that’s an effective way to run that business that delivers value to our customers, and really accomplishes the goal of getting a customer started in a successful way.
Harry: Can I ask, before we dive into the quick fire round, how have you seen your approach in attitude to the metric stack, and maybe metrics themselves, change over time?
Tom: I think that we have moved from a world that we looked at our cost structure based on percentage of revenue to one that we have much more fine‑grained analysis as to the underlying drivers behind those percentage of revenues.
Some of the items we just discussed like the CAC ratio and lifetime value are customer renewal rates, which are extremely important. Obviously, I think we’re always looking for root causes.
For example, we can look at our customer renewal rates, but that’s more an outcome of what’s happening with our customer satisfaction and our engagement levels.
Part of our culture is to deliver high degrees of customer satisfaction, and so measuring that NPS score earlier in the cycle is critical, because by the time it gets to customer renewal rates, it’s almost too late.
The evolution that I’ve seen is that we’ve moved our metrics analysis from things that are actually outcomes to being more effective at measuring root causes earlier in the cycle.
Harry: I absolutely love that focus on root causes, but I would love to discuss, and my favorite of any interview being the quick fire round. Essentially, I say a statement, and you give me your thoughts in 60 seconds. Are you ready, Tom?
Tom: We’ll find out, but let’s go.
Harry: Let’s do it. [laughs] Thank God for editors. As a former chair of the board with Citrix, what’s the best advice you have for dealing with your board?
Tom: I’d be extremely transparent. Don’t try to spin or manage or hide problems. Be absolutely transparent, and you can have a rich, meaningful dialogue with your board members.
Harry: Do you like the CEO to bring in other exec members ‑‑ CTOs, Head of Sales ‑‑ and engage more than just the CEO itself?
Tom: I do, and what we do at Adaptive Insights is that the whole exec team attends a portion of the board meeting. We’ll normally start with an executive session. It’s an opportunity for me, with the board, to frame the issues, to hear the things that are on their minds, to make sure we get to those in the meeting.
We’ll close with an exec session to hear some of their reactions. Frankly, most of the feedback they have, we try to share in the open session that includes all the team members, because it’s important for our team members to hear that directly from our board team without me filtering it.
Open dialogue, transparency, I think that’s critical for successful board engagement.
Harry: A moment in your business life, Tom, that’s changed the way you think?
Tom: I think it’s more of an evolution, that the model we have today with SaaS businesses, the moment we started to look at this model, the subscription model, which transferred the risk of success from our customers to be shared by the software providers and customers together, that makes inherent sense.
It’s a better way of doing business. It’s better for our customers. It aligns objectives, and I think that’s been the most important evolution of the software business over the last two or three decades.
Harry: What would you most like to change in the world of SaaS today?
Tom: I’d love to have 100 percent renewal rates with all our customers.
Tom: I think we could use some clarity on what cloud is, and for me ‑‑ because there were several elements. One is that it’s a service delivery model, and particularly around multi‑tenant architectures.
It’s also a billing and customer engagement model where we have subscription billings as opposed to perpetual software ownership. I think getting more clarity around what truly are SaaS cloud companies versus some other companies perhaps trying to attach to that moniker because it’s popular and hot.
Harry: It’s a rainy day. What book would you most gift to a young SaaS founder?
Tom: “Father, Son, & Company,” which was Tom Watson’s book he wrote about 10 years after he retired from IBM. He talked about the experience of his father in building the early stages of IBM.
Then he talked about his personal experience leading IBM through mostly the 1960s.
I think he may have written that book as late as 1990. I reread it every couple of years, because the insight and wisdom that he had and the humility in which he framed his contributions to that business, what they did, was inspiring to me early in my CEO career. It’s something I recommend to many CEOs.
Harry: I love it, and I haven’t read that, so I’m adding it to the list. I do want to finish today, Tom, with what do you know now that you wish you had known at the beginning? You can choose the beginning point being the beginning of your time at Adaptive Insight, the beginning of your SaaS career, but at the beginning of…
Tom: The beginning of my CEO career, the thing that I think you learn is that you have to be thoughtful about the way you frame your perceptions, because I can remember offering a perspective on a particular issue early in my career.
I was offering an opinion, because I didn’t think I owned the issue, and a couple of weeks later, we were implementing some of the things I was suggesting, and I felt like I didn’t have the framework to know enough about that problem space.
Other people in the organization owned it, and so one of the things I think I did learn is to really be clear about when you’re expressing an opinion, and when you’re making a decision. Your process for making decisions, and who owns decisions, and having high clarity around that, I think, is critical for success.
Harry: Tom, I’ve moved off the schedule multiple times, but I was just too intrigued, so thank you so much for such a fantastic interview and for joining me today.
Tom: Harry, it’s an absolute pleasure. Thank you so much for doing this. Thanks for taking the time.
Harry: What a wonderful guest to have on the show, and again, I want to say a huge thank you to Tom for giving up his time today. It really was incredible to have him on there. We’d love to see you behind the scenes here at SaaStr. You can find us on Instagram @hstebbings1996, with two Bs. It’d be great to see you there.
As always, I so appreciate your support, and I cannot wait to bring you an incredible episode next week with Christoph Janz, founding partner at Point Nine Capital.