- Why, as enterprise tech startups grow, they follow the rule of 1s and 3s
- An effective rev ops function is essential
- The “people, process and tech” that enable a startup achieve a particular revenue boundary are unlikely to deliver on the next
- Why pricing is an art and founders need to become masters
- Why your customers are your best salespeople
Setting the scene
For any enterprise cloud startup the journey to scale is one that is built around inflection points, which are critical to success. You need to find product market fit, moving beyond founder-led sales to go-to-market fit and then onwards; each layer builds on the previous, with new capabilities and often new people, processes and tech. Few people in Europe have as much pedigree in this than Andy Leaver, Operating Partner at Notion Capital. Andy operated at the most senior levels – from Series A / B to IPO – at Hortonworks, Workday, SuccessFactors, Bazaarvoice and Ariba. He’s had an amazing career and is now bringing that experience with him to the Notion Family.
Think of the inflection points at startups in 1s and 3s
I credit this framework to John Kreisa, who I worked with at Hortonworks and who is now the CMO at Docker. It crystallised just a lot of things for me from all the companies I’ve worked with.
Why 1s and 3s? Well think of journeys from $1 million ARR to $3 million, from $3m to $10 million, and then $10 to $30 million and finally to the magic $100 million revenue – many companies hit those revenue points and stall. It’s not necessarily that something’s broken, but they need to take a breath and say, “how do we build on the people, processes and tech that have got us to this point, to get to the next revenue boundary?” I’ve met so many companies that have been stalled at these different points, so it’s a very useful concept.
There are some particular “1s and 3s” warning signs to look out for
Below $1 million ARR founders spend a lot of time looking at product market fit (PMF). They look for the signs to say they have achieved it, asking themselves, “Are people paying for our products? Are those viral effects starting to take off? Do we see a lot of inbound and referral going on? Do people love our product and tell everybody about it and the value they are getting?”
I think the next phase is that $1m to $3m which is where a company has to move beyond founder sales. If the founder is still in every meeting and is critical to every deal that’s a red flag.
At $3m and beyond is when things get really interesting. A company needs to challenge itself to ask, “Are we go-to-market fit?” and scale beyond what I call the ‘CEO privilege’. A CEO-Founder has the ability to know everything that’s happened, they know everything in the product and they can alter the engineering product timeline. They can make deals in the room because they have the authority to do that. But go-to-market fit is about moving beyond the CEO to a first generation sales team. I loosely call go-to-market fit when a sales team can make a sale without the founder in the room. And I think that’s a pivotal moment in that $1m to $3m journey,
If you now think about the $3m to $10m journey, the go-to-market challenge is to create the playbook, start building the growth engine and make it a repeatable process. It’s also the time to think about the customer journey, all the way from initial contact through to customer success. SaaS companies are up for reelection every year so they never stop adding value, never stop selling, and need to make all of that repeatable and scalable. Something else you typically see is moving from inbound and referral to a repeatable outbound sales process. If you’re in more of an open source environment then at this stage you start thinking about how to layer value on top of the open source, whatever model you choose, be it open core, a support model etc.
The $10m to $30m is where you start to really focus on sales efficiency. There’s a lot of emphasis on sales efficiency in this COVID world. Start to think about the cost of acquisition, lifetime value of customers and obsess with those unit economics. What also happens at this stage is companies need to think about how to get out of where they started. So start to think about: Which verticals or geo’s I am in? What size of customer am I serving? And then start to break out the product and layer on new value as well.
As you go beyond the C Round, and you start the $30m to $100m journey, that’s when you need to really think about organisations with depth of management: managers managing managers.
At this stage, and above, company culture really comes into play. Do you have enough identity as an organisation to scale? When you get beyond that first 50-100 employees this becomes very important. We all know from the very famous book ‘Tribes’ by Seth Godin that you can only deeply know around 50 people. And what I mean by knowing is I can walk down the hall, shake your hand, know who you are, know about your family, ask you what you did on the weekend. Beyond 50 people you start to get to that level of not quite knowing these people, but your company culture makes sure everybody has those same values and those same ways of doing things.
At all those barriers, things can go wrong. I said “people, processes, tech” very glibly, but the tech that sits behind this – your CRM, your marketing, automation – will all need upgrades as you go. You may start very humble perhaps with an open source solution, but you need to upgrade.
Along the journey you’ll need to invest in repeatable processes and metrics – at the heart of this is Rev Ops. So when you start to build that growth engine and get that repeatability, you need somebody that can measure progress, keeps founders honest, and tells them when they’re on a good path.
As you go through these barriers, you’ll often find that people can end up in the biggest job of their career and they’ll need help: they’ll need mentoring, they’ll need coaching, they’ll need training. Founders may need to think about filling in the C suite with people that can knit these parts of this together and take you to the next stage. Throughout the journey you need to up-level your teams.
Pricing is one of the hardest things for founders to get right.
I find that a lot of founders doubt the value of their own products. In the early days of SaaS, people would write contracts and say, “Here’s the metric we use for how we price. And when we get to the renewal, if the customer pays the same amount, we’re really happy.” But the fact is, two things have changed in the first 12 months of that contract. One is you’ve added a ton more value to that software that wasn’t established in the price 12 months ago. So you’ve got the right to go back and say, “Look at all the other stuff we’ve added into the software,” because that’s SaaS, constantly adding value. And the second thing is, your clients may push back and say, “This should be cheaper, because the cost of compute and the cost of storage is going down.” But that’s more than offset by RPI, CPI, plus all the value added back in. So you must establish the value you’ve created. When you go back and say, “we’re actually going to charge you more,” then this is a good test of product market fit, to see if a client comes back and says, “that seems fair, we receive a lot of value and we see all the extra features in the product.”
So I would say to founders, don’t be scared of going back and establishing value, hence giving yourself the opportunity to ask for more money.
The other thing on pricing is that it has really evolved and we see now a lot of thought going into “what is the proxy for value?” that we could use. It could be a larger organisation, a growing employees count, more revenue you’ve gotten them, hence now of course you’re providing more value to the customer as they grow. That’s kind of on the simplistic side. But now we see other models coming along in terms of support on open source, a charge on transactions or a proxy based on integrations on API software. It’s really what metric shows the customers results or engagement with your products.
There are a lot of different ways to think about how you price but I’d resist the temptation to say, “our software is great, people will come and use it. And they’ll just keep on using it”. Have a think about what your investors want, which is some actual way of saying, “we know where the revenue is going, and we know what’s going to be booked”. You need to think about that initial contract, what’s the baseline? And then how do you layer value on top of that, so that you can produce revenue forecasts? Pricing is becoming a bit of an art – the sooner you can get that better in your organisation, the better.
There are plenty of companies that specialise in this to really help startups unlock pricing value, ensuring they’re not leaving money on the table.
Product marketing is increasingly important, but in Europe we are late to the party
In Europe, we are late to the product marketing party and haven’t seen the value in this until quite recently. But I’ve been fortunate to see some orgs that do this really, really well. But to me, we get product marketing and product management very confused.
Product marketing, to me, is who is the person that’s living with the customer, and understanding the usage of the product, what’s good, what’s bad, where the friction is what needs to be accelerated on the roadmap, how you use a customer advisory board to drive the roadmap, how you use NP to unlock to feedback into the sales cycle, highlighting the things you should focus on in terms of selling.
A really good product marketing person lives in that space, right between the customer and product and understand all facets of what we’re doing well, what we can do better, what sales should be really focusing on and then feeding back into product to say, “this is where I think customers want us to go next.”
Companies tend to build what they think customers want, not necessarily what they need, and I’ve been encouraging a lot of companies I work with to establish customer advisory boards, for instance, to get close to customers and for executives to get close to customers rather than just sales.
RevOps knits the whole growth story together
For me the biggest question as building a growth engine is, “how do we know if it’s working?!”. I sit in too many meetings where sales looks at marketing and asks, “where are the leads?” and marketing looks at sales and asks “we’re giving you leads, why aren’t you accepting them?” and then customer success pipes up and says “when are the deals coming through?” And I think that whole story needs to be joined up.
In a traditional funnel, as you go from MQL (Marketing Qualified Lead) to SQL (Sales Qualified Lead) and then from SQL to SALs (Sales Accepted Lead) do we even know what they are, do we know how they convert and do we know what there worth? So if we put X in the top, how much comes out of the bottom and turns into revenue?
A lot of companies resort to “ we think marketing is doing well, sales is doing really well and customer success is doing really well.” But it’s all in isolation. They don’t have the ability to tune that model, because they don’t have all the data connected together. And some of the best in class companies can’t answer simple questions, such as “I’ve got a month to go in the quarter, and I’ve x millions of required revenue, what do I need to do?” They need to be able to answer basic questions, “are there deals that can accelerate? Are there things I can do on the marketing side, are there things in customer success?” And they need to have the data to be able to do that. A really good RevOps person is almost telepathic with the CRO or CEO, because they will sit in meetings and make recommendations as to where the engine can be tuned and things that can be done better.
I imagine a lot of companies are starting to think about how they’re going to finish 2020 and a question when planning for 2021 is “how much discretionary marketing spend should we have? When we run campaigns, how are they going to convert?” We hinted at it earlier, marketing got a lot more complex. I say, “start at the end result. Think about where you want to be and then work backwards.” That will inform you the tactics you choose; if you have the right people in the right place, how many more people you should be hiring? You need to actually think about the efficiency of your organization as well as you move through some of these revenue boundaries.
Across the customer lifecycle, customer success, NPS and other success measures come together to drive retention, revenue expansion and activating referrals.
Using NPS to unlock insights into customer success is really important. If customers are really happy, you earn the right to ask them for referrals. And I think we’re always a bit shy of asking, “who else do you think could get value from what we do?” And if you ask it, often if they are happy, they’ll say, “Oh, I’m really good friends with Jane, my equivalent at this organisation.” We shouldn’t be afraid of that in terms of referrals, our customers are our best salespeople!
Secondly, NPS is a really, really good way to figure out – if you do it in enough granular detail – what customers value in the product and the bit that, if you took it away, would be painful for them. That feeds back into the product strategy and into sales cycles. Because what customers really care about is what you should be selling to new business customers, because that’s the stuff that’s really being valued. NPS also allows you to start unlocking adjacent product development, upsells, and cross sells into an organization.
A word of advice when you run a customer advisory board is don’t let sales run it, because they’ll just lead with selling more.That’s not the purpose of the customer advisory board, it should be probably led by product marketing. And it should be about learning, listening and data gathering. Secondly, don’t let NPS look like an overly sales-led questionnaire. It should really be about what can we do better, how can we improve?
But if you get an amazing NPS score, it’s actually of little use to you, as it doesn’t tell you anything or give you any room for improvement. So anyone who tells you we’ve got this perfect NPS score, then you need to rethink it and drill in harder, because there will be parts of the product and parts of the process and parts of the customer experience that customers will be unhappy with. If you’re just getting good news, you haven’t got opportunities for improvement. So you need to mine for that.
The current pandemic is a tailwind for enterprise cloud businesses.
The acceleration of cloud and SaaS adoption is apparent, so anybody that’s helping in that customer digitalisation journey is getting a tailwind right now, because it’s just shown companies that they need to be far more nimble and offer a fully digital experience for their customers; they need the transformational ability innovative cloud providers offer.
That means a lot of startups are finding their customers are leaning in more, in effect saying, “we need to do more with you,” which is giving them growth opportunities.
But that also creates two problems. One is how do I interact with my customers when I’m not seeing them physically? And secondly, is how do I manage fully remote teams?
That creates a couple of challenges.
One is the health of your organisation, because there’s certain functions that really need interaction between team members to have that spark of creativity and that osmosis of learning and I think, in particular, this applies to customer success and engineering.
Overall companies need to make sure they’re addressing the fact that not everyone’s super comfortable remote working and it will go in ebbs and flows, so I think you need to get ahead of that. Good companies have task forces that think about remote working in the implications. Sales and marketing people tend to be more self reliant, they will pick up the phone and look for the interaction, so I worry about them a little bit less.
The second part is in this new world, how do we interact with customers and prospects?
We obviously see events being replaced by virtual events. I’ve got mixed feelings about virtual booths and online demos, and how well they work. But I think there are some companies doing some really good things there and I see the quality of the events going up.
The big change for me, which is very positive, is that I think the accessibility to senior people in organisations has become far easier and I see time and time again, where the ability to reach that senior decision maker is opening up. I’ve worked with some of the Notion companies, companies selling to very large organisations, and they’re moving up the decision stack to the C suite because of the availability of people. The advice I would give is, don’t be shy in terms of being able to sell at a slightly higher level, because I think there are opportunities opening up to reach those people.
While there are certain verticals in a world of hurt right now (and I hope many of those will bounce back) there are a lot of companies doing very well this year, probably ahead where they thought. Back in February and March we were all hunkering down creating plans: ‘what if’ plans, raising more money plans, cash runway plans, cut back plans, putting new hires on ice. But a lot of businesses I’m working with have actually come through the other side to say, “we were cautious going into Q4 and planning for 2021, but actually, we’re way ahead of where we thought we’re going to be!”. What we have seen is that this environment has proved the value of a digital first, cloud-led world for customers, meaning many providers are leaning into that.
Why I believe the story of computing is one of abstraction and the best is yet to come.
We talked a lot about the actual operation of building orgs and teams, and joining this up and scaling to the next level. But from an investor viewpoint, people often say, “what are the changes you’ve seen in computing over the years?”.
I think the story of computing is one of abstraction: I think back to when I started in computing, it was writing machine code, and then we had interpreters, then we had compilers, and then we had windows, now we’ve got voice assistance and AI. We’re abstracting further away and I think that just opens up more opportunities. Now I see that the skills for all those new areas of tech are distributed across Europe. It’s not like they are just in hotspots of funding, or hotspots of education – we see it everywhere.
We’re on a good path with enterprise software in Europe.
If you look at my history, I’ve been fortunate to work with a lot of US companies that have had great outcomes and I’ve been taking some of that and paying it forward into Europe. Now I can see enterprise cloud companies in Europe creating that virtuous circle of success. We are seeing some of those names come through both in Notion portfolio and elsewhere. I think it’s all just really good for the ecosystem. So when you talk about my background, I’d love to feel that if we have this conversation again in 3-5 years, we’ve got far more experienced enterprise operators that have been on that journey that can pay that forward to get into the next generation of founders.