Ep 245: David Skok is a serial entrepreneur turned VC at Matrix Partners. He founded four companies: Skok Systems, Corporate Software Europe, Watermark Software, and SilverStream Software and did one turnaround with Xionics. Three of the companies he founded went public and one was acquired.
Jason Lemkin is the Founder @ SaaStr, the world’s largest SaaS community and leading early-stage SaaS fund with investments in Automile, TalkDesk, Algolia and more.
Jason Vandeboom is the Founder of ActiveCampaign, a sales and marketing automation platform that enables small businesses around the world to meaningfully connect and engage with their customers. Since 2013 with their transition to SaaS have grown to more than $50 million in ARR in less than five years, while maintaining profitability.
Dave Kellogg is a leading technology executive, independent board member, advisor and angel investor. In his most recent role, Dave was the CEO @ Host Analytics where he quintupled ARR, halved customer acquisition costs and increased net retention rates before selling the company to a private equity sponsor.
Fred Shilmover is the CEO and co-founder of InsightSquared, one of Boston’s premiere tech startups paving the way in the sales intelligence space. Throughout the InsightSquared journey, Fred has raised over $25m in VC funding from the likes of DFJ, Bessemer, Salesforce and Atlas Venture.
In Today’s Episode We Discuss:
* Does David Skok believe that ACV should sit at the top of the metrics stack? What are the 4 metrics that fundamentally matter in your business? What can founders do to their pricing model to extract as much value from each customer? How do the very best businesses structure their pricing for value extraction?
* If ACV increase is a core focus for our startup, should we hire a sales rep solely selling to enterprise? What are the biggest mistakes founders make in this scenario? What can founders do to optimize revenue per lead? How does on need o approach lead targeting according to the individual skills of their reps?
* Is it best to start at enterprise and work down to SMB or does SMB and work up to enterprise work best? How does the product have to change with the scaling to enterprise? How does the messaging need to change with the scaling to enterprise? How do you need this change to be reflected in your pricing?
* What does it truly mean to be an ARR first company? What is the right way for founders to calculate their differing ACVs? What is the right way to present that when pitching VCs? Where do many founders go wrong in how they present and discus ACVs with investors?
Ep. 246: Dropbox Chief Customer Officer Yamini Rangan draws on 20 years of experience to challenge five common misconceptions about SaaS success. From beating the competition to over (or under) relying on Outbound, she offers a practical perspective on the frameworks that are holding businesses back from reaching their full potential in a changing landscape.
SaaStr’s Founder’s Favorites Series features one of SaaStr Annual’s best of the best sessions that you might have missed.
This podcast is an excerpt of Yamini’s session at SaaStr Annual 2019.
Missed the session? Here’s what Yamini talks about:
- How to increase the odds of reaching $1B in ARR
- What is the pull upmarket, why do companies focus their attention there?
- Common go-to-market myths and lessons.
If you would like to find out more about the show and the guests presented, you can follow us on Twitter here:
Below, we’ve shared the full transcript of Harry’s episode on ACVs.
Harry Stebbings: Hello and welcome back to the official SaaStr podcast with me, Harry Stebbings @hstebbings1996 with two Bs on Instagram. I’ve just gotten back from SaaStr Paris and really had time to digest some of the conversations and what so many of the founders were discussing was ACVs. What’s good for each segment? How do I increase them? When does SMB pricing turn into enterprise and mid level pricing and so much more. Today we’re answering that question from the minds of David Skok, Jason Lemkin, and the founders of Chargebee and InsightSquared just to name a few and I’d love to hear your thoughts on this type of episode. Really the feedback is so helpful for me and so do ping me on Instagram at hstebbings1996 with two Bs and I respond to all messages there directly. But you’ve heard quite enough from me. So now without further ado, I’m delighted to dive into this deep dive on all things ACV.
Harry Stebbings: So first I want to start on the matter and if we hear ACV so much, average contract value, just how important is it and is it the most important metric? Today we’ll hear from David Skok on this one.
David Skok: If you don’t mind, I’m going to answer that question by lifting it up a little bit first and then coming down to that one. I think the picture I want to play out here is why our metrics are important? What role do they play in an organization? You highlighted the most interesting thing here, which is we are moving to a very data-driven decision making world and I think the reason for this, this was beautifully summed up by Lord Kelvin who made the statement, if you can’t measure something, you can’t improve it. One of the ways that I have of really highlighting this to entrepreneurs is the following situation: I’ve been in a number of board meetings where the company involved has missed the sales number. They’ve, you know, they projected they would hit x in the way of bookings and they missed it by a significant amount.
David Skok: The really bad companies, you kind of get that statement from them, well, we missed the number and then you ask them the question, well why did you miss the number? The quality of the company will be determined by the quantity of the answer that you get. So the bad company will kind of shake their heads and say, well, we’re not really sure, but we think it might’ve been some seasonality or it could have been something to do with a political issue that was going on or the economy or something like that. The really good companies will jump in and they will be able to break that down and tell you, well, wait a second. When we looked at what was going on, we can tell you that our eastern region performed just as well as they have done in the past.
David Skok: But our western region didn’t, so they missed planned. Then you dive in a second, you say, okay, so what happened there. Well, you know, we had three salespeople that we just hired as new and their productivity didn’t ramp according to what we expected it would do. Let’s go and look at what was the cause behind that. And then they will also be able to look at things like did their close rate from opportunities that they had to close deals or their win rate against a competitor, which are all metrics and data that you use to analyze whether [inaudible 00:04:43], they’d be able to tell you whether those stayed the same. If you knew your opportunity to close rate had stayed the same, then you know that there’s nothing super substantially different. If it had gotten worse, then you ask the question, well why did it get worse? Was there a new competitor that had a feature that we didn’t have or were we not selling as well against them?
David Skok: You’re able to actually figure out how to go and fix that problem and understand why it happened. And that to me is, that’s sort of the essence of why metrics is such a fundamental part of how you run a business. I think this is a really, you know, we entered a new era around about the 2008 timeframe when, finally, we started to get the data that people in sales and marketing wanted to be able to make data-driven decisions. And that was the new era that got ushered in as a result of that. You know, interesting other thing about metrics here is if you’re a CEO and you want to align your company around achieving something, one of the best ways you can do that is to pick a small number of metrics and make them highly visible inside the company and then constantly revisit how are you going to do against those metrics.
David Skok: What happens automatically is the moment you put a bunch of those metrics in front of your team without you having to do anything else, they will automatically know that you’re going to be looking at those and they will start to improve them. So it’s just a terrific technique for aligning a company around what you want to get done and getting improvement in that area then. And then the, you know, the last comment I’d make here is that the metrics are a hierarchy. What do I mean by that? Well, I thought about this and realized that if you actually took the highest of high level things that people care about in the business, particularly if you’re investing in that business, there’s only four metrics that you really care about. They are profit, cash, growth, and market share. If you only have those four, why do you need to follow with the other ones?
David Skok: Well the answer is that if your growth rate was lower than you expected it to be, you need to dive deeper, drill down to figure out why. So just as I kind of outlined how you drill down into missing the forecast on a sales number, we would now need to create a hierarchy of the metrics that go together to create, you know, what happened to our profitability? Well that’s both top line gross margin expenses. If we look at our growth rate, well that’s really funnel metrics. Were we successful at adding the number of new leads into the top of our funnel and converting that funnel at the same rate at which we’d hoped to. Then you, when you start looking at that and you start asking questions, well, did our sales force perform? Did we have enough salespeople? Did they, did they all achieve quotas as appropriate?
David Skok: Hopefully that concept of a hierarchy comes out. I think people can get confused with metrics by diving too low, too quickly and not realizing, well why are we tracking this? What’s the purpose of this? I think the purpose of that is to recognize it’s these four top-level metrics and what we’re trying to do is build a way of understanding the components that drive our business and use those as great techniques for managing the business, for understanding when things are going to go wrong, anticipating it before they go wrong and being able to fix it before they go wrong, et cetera. I’m sorry that I missed, I didn’t answer your question directly, but I didn’t want to dive straight to like a pinpoint metric without really giving that framework there because that, I think, allows you to understand that when you do jump to a pinpoint metric, it is, you know, as, as a result of being able to support one of those four very high level metrics that you’re trying to achieve in the business.
Harry Stebbings: Absolutely love that answer but if we go back to the core question of ACVs and what we can do to fundamentally increase them, what do we think that we can do in terms of changing or altering pricing models to really increase that ACV?
David Skok: So the top piece of advice I would give to SaaS entrepreneurs once they’ve gotten product market fit and are well on their way to understanding the sales and marketing process, is that they should turn their attention to figuring out how to get negative churn. You know, how to find a way to upsell and cross sell into their installed base so even though they lose some customers, that ultimately they’re still going to end up with more revenue from the cohort that began when they signed up that group of customers a year later than they started with at the beginning.
Harry Stebbings: What does that do to the pricing axes?
David Skok: Excellent question. Yeah, well spotted Harry cause that, that is … The first question I get from many startups is, well wait a second. We’ve only got one product and it all costs $2,000 so how are we going to get more money out of those customers? This was actually exact story at Hubspot. It took us a while to educate ourselves about this. We had a single product that sold at $500 a month and there was nothing to upsell there, so we couldn’t go back to the install base and get more money out of them. The first thing you realize with this is well, how do we sell something more to them? The answer is there’s two things you could do. You can take your current product and have variable pricing axes so that even though they’re using the same product, you’re not selling them something different, you’re going to get more money from them as they use it more.
David Skok: A good SaaS product will have at least one variable pricing axis and possibly more. So a common one you’ll hear is how many seats of people are using this. But in many cases, that’s not a good metric because you don’t actually add more users. But you can be still be delivering more value. So in Hubspot’s case, they chose to pick the number of leads that are in the database as a good method of determining how much value the customer is getting out of the system. As you add more leads, you pay more money to them, you’ll find many different things. Dropbox, for example, uses the amount of storage that you’re using as a metric for increasing how much you pay them. And I’m sure all of you are familiar with different pricing schemes out there, but the important factor there is to look at your pricing scheme and ask if you’ve got variable pricing axes.
David Skok: Don’t worry about doing this if you’re a very, very early stage company, because actually in truth and they’re really early stage, you just want to keep things simple and sign up customers. This is kind of a slightly, it’s like secondary thing you start to work on as you get a more mature and successful SaaS company. The second thing you could obviously do is you could add more products so you can have a pro version and you could have an enterprise version and you could charge more money for those. You have different feature breakouts, but those are different versions of the primary product and then you could have some add on products which are really, you know, cross sells to a different thing. You’re selling them a reporting module. I think ultimately when you look at mature SaaS businesses, even though the customers may not love this, mature SaaS businesses probably have to break their products down into lots of different modules and price that way.
David Skok: The reason for this is pretty simple. You’re going to find that some customers are very comfortable and happy to pay you 2 million a year for your product and yet some other customers will only be willing to pay you $10,000 a year. How on earth do you come up with pricing that lets you sell to both of those without accidentally finding that you’re, instead of getting the $2 million from the high end customer, you’re only getting 20,000 from them because you didn’t come up with a good pricing scheme which allows you to capture their willingness to pay you that high pricing differential there. I think the way to do that is to end up with segmenting of the product into different elements so you recognize that the $20,000 a year customer really doesn’t need certain features, so you take them out, but you know that the two million-a-year customer, it’s really important to them to have, you know, global security features or things like that and you put those into the, the version that they want to purchase.
Harry Stebbings: Okay, so now we have this enterprise grade version of the product. Should we hire specific enterprise sales people to really sell just this version of the product? To discuss this, we’ll chat to Jason Lemkin at SaaStr.
Jason Lemkin: What’s the number one mistake we make besides being anxious, we set the wrong expectations for sales reps before we have that great VP. If you’re gonna early hire a sales rep and just have her or him work on big deals, are you going to give her two quarters before she closes anything? It’s pretty stressful. This will be stressful when you’re at 20 million or 50 million ARR, but at least you’ll be able to blend it against all your other reps and all your other channels to acquire customers. So my biggest suggestion in the early days is if you’re going to hire any in the early days just to do bigger deals, don’t let that be all she does or you’ll be anxious for quarter after quarter if you’re paying her salary and her OT will probably be the highest in the company and you’ll be stressed out when in the first two quarters she closes nothing.
Jason Lemkin: Instead split her leads 50/50 between big and large and later let her just do all the large ones. That’ll make your life better.
Harry Stebbings: if we dig a little deeper there now from the reps to the leads that they work on and really optimizing them for value extraction, so to speak. Jason Lemkin will now walk us through how we should think about kind of revenue optimization on a lead basis.
Jason Lemkin: There’s a metric that we talked about a lot in the very early days of SaaStr: revenue per lead, that I’ve really never seen anyone talk about since. But I actually think this is one of the best tools for you as a CEO or founder for growing faster from, say, sales rep three through number 20, and it’s knowing revenue per lead and what we all get really good at is understanding how much revenue a sales rep is generating.
Jason Lemkin: We know exactly how much Linda or Bob or Joe booked last month, but how did they get it done, how much revenue did they generate per lead. And for your first two reps, you’ll know. Typically if you have two reps, you’ll split the leads in half. Bob will get half and Linda will get the other and you don’t need to know the revenue per lead, but it’s hard to keep track from reps three through 20, and here’s the key. Once you can start granularly knowing how many and which leads to send to which rep, you’ll learn so much more. On my first team, I learned that some reps couldn’t possibly process more than 50 leads per month, because as soon as I gave them 51 they didn’t generate any more revenue, but some of our top performers could handle a hundred or even 150 leads per month because they were so efficient.
Jason Lemkin: In other cases, there were follow up time issues. Some reps were great at following up in 60 seconds, some took hours, and you need to know how many leads of which type to route to each rep, and it’s work. But if you can do this, typically you can get about 20% more revenue out of however many sales qualified leads, or just leads in general, as you would otherwise if you’re always routing the right lead to the rep that can process some of the most. So try to figure that out after about 20 reps , after as many as you can fit on one sheet, one PowerPoint slide. It’s too many and you just have to judge reps and the whole process from lead to close based on how much revenue each human generates. But from three to 20, get each lead into the hands of the right rep for that lead and you will grow much, much faster.
Harry Stebbings: I hear you. We’re going quite deep into the granularity on enterprise pricing. And so the other side of the equation is, well, do I need to design for enterprise? Can I not just start at SMB and stay there or can I start with SMB and scale up? I’m delighted to be joined by Jason Vandeboom at ActiveCampaign to discuss that now.
Jason Vandeboom: Pushing to go enterprise early on sort of bothers me. For some businesses that works really well, but for a couple of reasons why, like some [inaudible 00:15:11] why I think it’s a good entry point and to even stay there would be [inaudible 00:00:15:14] an idea, a higher volume of points of feedback and possibly most importantly, you can design for what your looking to actually do and achieve. Meaning, you’re not designing for a known need within an enterprise that will hardly revolutionize a market or something like that, typically. That’s just solving for a known need. So if you have an idea and that’s a little bit beyond that, starting with the SMB will allow you to do that because you don’t have a single company that’s going to just push you into a direction of their own choosing.
Jason Vandeboom: The other thing I’d say is, everyone always says, like, don’t design for an outcome, like an acquisition and IPO, et cetera. I say don’t design for enterprise, meaning go SMB first, allow midmarket enterprise to buy from you and it gives you a unique advantage in which you can sort of apply pressure to the enterprise space in a way that the space hasn’t seen or hasn’t requested. If you start with enterprise first, you’re hardly going to shift the way of thinking there and you’re just going to create something that’s known and likely something that’s similar to something in the space.
Harry Stebbings: No, I couldn’t agree with you more there and two kind of concerns or questions that come to my mind really lie around … and the ACVs that are inherent within SMB, I have to admit I’ve been prone to, myself, along with other VCs, that kind of immediately say to founders “Ah, with those ACVs, it’s going to take twenty thousand, thirty thousand customers to scale to x number of revenue.” How do you respond to the common VC statement of, Ah, such small ACVs, the difficulty with the go to market? How do you [crosstalk 00:16:37] that?
Jason Vandeboom: Yeah, well bluntly, I’d probably just say, who cares? That’s just a–I’ve seen the power of compounding and also, like, if you’re providing that much value and whatnot, mid market enterprise will start buying from you. That’s always a situation I’d want to be in first before trying to sell to them. Meaning that they’re seeing enough value to come down and buy and you’re not forcing something on them.
Jason Vandeboom: Even early on, like when it was just myself and I was in art school and whatnot, I had businesses like IBM, Pixar, Texas Instruments, all buying licenses. It’s like I was not going after the enterprise and half the time you start with an enterprise in a department or some small organization within that, right? It’s not obsessing about that. They will come to you, and we’ve seen this with so many other companies that have been SMB first. I think it mostly just pushes from enterprise. It’s just like it’s every playbook. It’s every thought. It always goes down to that, like ACVs are terrible. Yeah. On a blended basis, your ACV may be low, but you will start finding ways to get some larger ACVs in there as well.
Harry Stebbings: It’s fascinating to hear that perspective from Jason, because one of the conversations I had at SaaStr Paris was while one found is that it’s so much easier to actually start an enterprise where you build out fully the product in all its greatness, and then you can actually take it to all segments of the market and move down to SMB. I wanted to talk to Fred Shilmover at InsightSquared to discuss whether that’s true and whether he agrees with that.
Fred Shilmover: No, I fundamentally think the exact opposite. I don’t agree with that. So the space that we’re in, business intelligence, it’s been around for 35 years and largely unchanged, just essentially a better version of Microsoft Excel. So BI is typically, you know, more rows of data, relational data, different sources, you know, faster queries. But, fundamentally, it hasn’t changed and part of the reason is it’s been sold to enterprises and it’s a little bit of technology, essentially a data warehouse with a ton of professional services wrapped around that. We thought, okay, wait, if we can reinvent business intelligence for the cloud, how would we do it? We would absolutely not do it that way. So starting SMB actually worked better. So my cofounder’s our head of product, and he likes to say a product manager’s job is losing the war to complexity as slowly as possible.
Fred Shilmover: And I think if you start with enterprise and you’re essentially an outsource development shop for an IBM or a GE, you’re never going to build a repeatable, scalable product. I think Clay Christiansen, his whole theory of disruption, he wrote the book “Innovator’s Dilemma” is based on this idea that if you start at the small end of the market with a simple product, over time you develop the performance. When we started, I think the incumbents looked at us and said, oh, InsightSquared is just a, you know, a toy app. It’s, you know, cute sales visuals.
Fred Shilmover: Over time we built a ton of power into the product, and all of a sudden we started getting pulled into enterprise deals. But by keeping our roots and a big part of our customer base in SMB and sort of squarely in mid market, it forced us to have discipline where we actually have, we do have a professional services team, but it’s a relatively small portion of our revenue because the product has to be simple and flexible enough for midsize companies to use and one of the reasons that we’re pulled into enterprise–so like we work with large publicly traded companies that have a BI team and have millions of dollars of business intelligence and the line of business sales, sales operations, they aren’t getting what they need from that.
Fred Shilmover: It’s too complicated. Every time they want to ask it a question they have to go through an analyst because there’s this sort of mathematical thing you can’t escape. If you say whatever data you have, whatever question you have, we have a tool that can answer that. That’s fundamentally a very complex problem set that you’re trying to solve for. One of the things we did early on is actually picked a major, unlike any other of our competitors. We said our major is going to be revenue, our major is going to be sales. I think we picked the right one. If I think about what keeps me up at night, it’s not will our rent or our T&E change, because I think our accountants are pretty good at forecasting that. It’s how much are we going to book in Q4 and you know it’s 15 days or 12 days until the end of Q4 and that’s, there’s still a ton of variability.
Fred Shilmover: I think we picked the right spot to sort of drive value in an organization and by delivering something that’s simple enough for a small and mid sized company to use to the enterprise, that’s how we differentiate against the rest of the market. I think it’s really hard to move with a very complex, heavy, professionally services-driven product down market. I think it’s much easier for us to add flexibility to our products. And that’s something we did. So after many years of being in business, we launched a product sort of right about a year ago that was there to extend the flexibility of what InsightSquared can do. The product is called Slate and in Slate you can sort of extend our use cases or bring in additional data, but I’m glad we did that years after we started the product versus at the beginning.
Harry Stebbings: Now I want to finish today with one of the godfathers of SaaS in the form of Dave Kellogg, and he’s discussing today how we should calculate ACV and what it really means to be an ARR first company.
Dave Kellogg: Just last night I met with a very smart entrepreneur, very cool company. He wanted to show me his financials and 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, show me GAAP revenue, and like, you’re a SaaS company. Why is your first slide GAAP revenue? If–everybody thinks they want to be ARR first, but you only know you are if, based on the answers to 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 for the forecast for the quarter is, if you don’t answer in ARR, right? It’s about what I don’t say. I’ll just say what’s the forecast?
Dave Kellogg: Do you answer in bookings? What do you answer it? If you answer in ARR, that’s correct, right? Then you’re ARR first. What’s the first line of the first slide of your investor deck or board deck? And 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, but 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 had a couple of years back with Doug Leone, 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. What this shows you is what I call leaky bucket analysis because a SaaS company is a leaky bucket full of ARR. Every quarter Sales pours more water in the bucket.
Dave Kellogg: Every quarter Customer Success tries to keep water from leaking out of the bucket. Therefore, you can say we started a period with a hundred units of ARR. We added 50 units, we churned away 10, therefore we ended 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 and it’s very important, like you can see things like people who are, say they sell 2 million of new ARR but churn one five so it’s a big bucket and they’re having trouble keeping it full. Well that company is not worth very much, right, 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, ending ARR growth, which really is the single most important thing for valuing your company, and net new ARR growth.
Dave Kellogg: How 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 and Lord knows, please don’t show up with a GAAP P&L, right? These things will hurt you when you try to raise money, right? Because a VC wants to know that you get ARR and you are an ARR first person.
Harry Stebbings: Quite a good question to end on there. Are you an ARR-first company? And if you’d like to see more from us behind the scenes at SaaStr you can on Instagram at hstebbings1996 with two Bs. I would love to see you there. As always, I cannot thank you enough for tuning in. Really, it’s been such a pleasure and I cannot wait to bring you another fantastic episode next week.