Welcome to Episode 180! 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. In 2001 David joined Matrix Partners, who had backed his last two startups, as a General Partner. David’s successful exits as an investor at Matrix include: HubSpot, JBoss, AppIQ, Tabblo, Netezza, Diligent Technologies, CloudSwitch, TribeHR, GrabCAD, OpenSpan and Enservio. David currently serves on the boards of Atomist, CloudBees, Digium, Meteor, Namely HR, Salsify, and Zaius. You can also find David’s amazing blog here! Huge thanks to Hardi Meybaum and Jason Lemkin for the intro to David today.
In Today’s Episode You Will Learn:
* What are the leading indicators that early stage VCs dig deep on to assess the strength of product market fit? What level of traction both in enterprise and SMB would an early stage investor deem exciting enough to pursue? What levels of engagement are sufficient enough to suggest cause for a much larger and increased round?
* How should founders assess sales rep productivity? What can they do to actively shorten the ramp time? How will early stage investors analyse the ramp time? What suggests repeatability of process?
* Why does David believe there is no point focusing on CAC/LTV in the early days? What is the single biggest thing that founders can do to show repeatability of process and revenue as fast as possible?
* What is the most common reason that people miss plan? How must the mindset of the founder switch from extreme frugality to hyper growth scaling? When is the right time for this transition to take place? What are the inherent challenges to this switch?
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Jason Lemkin
Harry Stebbings
SaaStr
David Skok
Transcript:
Harry Stebbings: Welcome back in my world. What an incredible few days we’ve just had in Paris for SaaStr Paris. If you made it, I hope you had a blast. If you did not, I hope you get the chance to experience SaaStr in person in San Francisco or in Paris next year. It really is very special.
Back into the show. This is The SaaStr Podcast with me, Harry Stebbings. It would be fantastic to see you behind the scenes on Instragram @hstebbings1996. You can suggest questions for future episodes there.
However, to the episode today and to celebrate the best content that SaaStr events have to offer, I wanted to share one of my all time favorites with the one and only David Skok of Matrix Partners.
For those that don’t know, David is a serial entrepreneur turned VC, having founded four companies. Skok Systems, Corporate Software Europe, Watermark Software, and SilverStream Software, and did one turnaround with Xionics. Not a bad track record, also. Three of the companies David founded went public and one was acquired.
In 2001, David joined Matrix Partners as a general partner. David’s successful acts as an ambassador of Matrix include HubSpot, Jboss, AppIQ, GrabCAD, OpenSpan, and Enservio, just to name a few.
Enough of these dulcet British tones. I’m now thrilled to hand it over to the one and only David Skok, General Partner at Matrix Partners.
[drum roll]
David Skok: If you read my blog, I think many of you will know that what I try to do is take complicated topics and make them simple. Clearly, trying to run a startup from zero to 50 couldn’t be a more complicated topic. Let me see if I can do some job here of simplifying that for you.
What I want to do in order to help that is talk about the phases that I see in a startup, because one of the key things that I’ve learned is a lot of startups attempted to try to jump ahead simply to force progress to happen. That causes a lot of damage. By knowing where you are, it really is extremely helpful because that gives you the road map of what you should be working on at that moment in time.
I think most people out there in the startup world have talked about the startup phases in two phases. One is the search for product/market fit. The second one is the phase of scaling the business. I think there’s a really important third step in there, which I define as creating a scalable and repeatable sales process that’s also profitable.
It’s that middle phase that I’m going to focus on the most, because what I see is that most founders actually come from an engineering or a product background and aren’t used to building a go to market machine. This is a whole new learning for them.
One thing I’d like to start with is link raising capital with the same question of what to do at each phase. What I’ve found in my board meetings is the most important question that I can ask that really helps a startup focus on what they have to do is to ask them to look at when they’re going to run out of cash, and then ask the question, “Are they going to be well placed to raise the capital because they’ve hit the appropriate milestones?”
That raises some questions. What are those appropriate milestones? Let’s start off here by looking at what I recommend you do, which is have a graph in your board deck which shows you when you’re going to run out of cash. Then, step back three months from that because that’s roughly how long you need to allow for fundraising.
This chart is going to likely send a shiver of alarm through you because it will give you a sense of how little time you have to get everything done. Hopefully, that will shock you into a series of thoughts about, “We’ve got a lot to do here. How are we going to get this done?”
What I’ve discovered is that there’s one way only to get things done. That is to be…Really, the focus is crucial, but what do you focus on?
Cash. Let’s look at cash because it’s crucial to your survival. We want to look at these milestones that you need to effectively raise your next round.
I do talk to some founders who have an understanding in their minds that, “Well, if we looked at our last round and we raised it six months ago, we must be more valuable than then because six months have gone by.” Anybody agree with that one?
[laughter]
David: The answer is no. Obviously, you could have actually gone backwards in valuation. What does cause the change in valuations? It’s really hitting these crucial milestones. That’s what I want to focus on here. What are those?
To put yourselves in the mind of a venture capitalist, they think about risk. The risk curve I’m showing you here is a growth stage venture capitalist’s way of looking at the world. They only judge a venture as risk free when they can see sales numbers that are growing and profit numbers, cash flow numbers, that give them a strong sense of comfort.
They’re not really looking at the subtle signals there. Fortunately for you, there are also other types of investors out there. These are earlier stage investors. They are actually more capable of reading earlier stage signals. They recognize that risk is gradually reducing as you’re going through this journey of building a repeatable, and scalable, and profitable growth machine there.
Fortunately for us, this helps us understand valuation. As risk reduces, your valuation rises. That gives you the opportunity to recognize, again, this is how you drive that next successful fundraise, is by showing progress along the search for a repeatable, scalable, and profitable growth machine here.
I won’t spend tons of time talking about the product/market fit phase, because that’s been well covered by Eric Ries and the lean startup movement, but I will quickly talk about what a VC is likely to look for in the way of signals of product/market fit. These are some number of customers that are referenceable and happy that have purchased from you, paid money.
The number will vary depending on how large your selling price is. If you’ve got a $10,000 selling price, expect to have at least 10 customers and the more, the better. If you have a smaller selling price, many more customers than that. If you have a much higher selling price, possibly less than that, maybe five customers might do.
Expect to be asked to look at engagement data because are the customers really using the product is very fundamental. For me, the graph that I’m going to look at is I’d like to see, customer by customer by customer, what happened to their usage patterns over time to make sure that the product’s actually still being used by them as opposed to they purchase it and it’s just gone away into being shelfware.
Are they realizing the benefits of it? Are they expanding usage? Are your churn numbers low?
That one, I think, is relatively straightforward. Let’s get into this more interesting stage here. First, let me outline something interesting for you. If you can get to growth stage investor, your valuation will have jumped significantly. These are the people that are out there paying the very high valuations for companies that you’re all looking at and thinking, “How do we get one of those to happen?”
It’s worth understanding what’s the mindset of this investor. The mindset of them is they don’t really care about the features of your product and all the stuff that you’re deeply passionate about describing to them. It’s got this amazing new AI and ML. They want to see something incredibly simple, which is proof that you’ve created a machine where they can pop in $1 of cash, turn the crank, and get out three or $4 some number of years later in the process there.
Once you understand that, I think you can put yourself in the mode of thinking, “What proof points have we got to deliver to show that we’ve actually got this?” To me, the number one graph, the single most important graph that you can go for is this one.
This is the graph that shows your bookings, not your revenue, growing constantly, quarter after quarter. I will say that this is the easiest graph for me to put up but the hardest graph imaginable for you guys to achieve because this is the struggle. This is what I work with with all of my portfolio companies all the time, is, “How do we make this happen?” It’s hard.
Let me quickly explain something here. The word bookings is super dangerous in the SaaS world. It can be a whole load of things so I really don’t like to use it. Let me define what I actually mean by it when I do use it.
In the SaaS world, what’s worth understanding here is if you have flat bookings your ARR will still look good, as many of you probably know, because you may have done this yourselves. The number one chart that people love to show a VC is this ARR chart. The first thing I do when I look at this, is I run a division on that. If it’s a straight line, I know they’ve got flat bookings.
What I’m looking for is to see this, the ARR is going to be exponential if you’ve got these increasing bookings there.
Get this. Let’s quickly talk about the definition of bookings in a SaaS world. I’m looking for net new ARR, which is the combination of these three factors ‑‑ new customers, plus expansion revenue that came from your existing install base, minus the churn that you have. That’s the most important set of numbers for you to run and manage your business on.
What I believe is the key graph for running a SaaS business is this one. This is those three components summed together for the thicker line in red. I’d strongly like to see every board pack have this chart in it. Without this, I cannot understand, and read the business, and know what’s going on in it.
My recommendation would be throw a dotted line for your plan next door to each of these lines, as well, so you can see whether you’re on plan for new bookings or expansion bookings there. This is a key chart. This is what’s going to help you. We want to see this red line going up quarter after quarter.
Then, you break this phase down into a few steps here. The very first beginning of this is to get your early access sales done and make those customers successful. After that, I recommend you start focusing on finding a predictable and repeatable motion and then try to make it scalable. Lastly, work on making it profitable.
Here, I have to apologize because I think it was 10 years ago I started writing about CAC and LTV. I think I was the first person in the SaaS world to do this. I did all of you a huge disservice because I totally failed to tell you when to worry about CAC and LTV. I made a lot of people worry about it way too early.
It’s no point in trying to get your LTV to CAC ratio and your time to recover CAC right, and focusing on that is a desperately important thing, until you’ve gotten a scalable and repeatable process. It will change dramatically. You won’t have enough data to get it right there.
Let’s go into this a little bit more detailed. If you think about the beginning of this journey, it’s like a forest where there’s no path through it. At the end of the journey, we have a really clear understanding of how to execute a sales motion that’s repeatable to make a sale happen. Where would you start to create this path?
My starting point, I believe it’s really important to pick one target market. Founders really struggle with this because they’ve got an opportunity to sell to, maybe, ExxonMobil that’s in a different category to where they’ve been selling elsewhere. Then maybe this other big customer comes along. They’re attractive and appealing.
This is super hard, but if you don’t pick one target market….I’ll show you in a second why you will suffer from it, but it’s not just a single target market. It’s actually a single use case that you need to go for, as well, you can start to think about…
This is the important aspect of something being repeatable because if you sell to a different use case one day and then a completely different over here you haven’t proven that that’s something that’s repeatable. The quickest way to do that is to pick the single use case here.
Once you have that, you can fix this messaging problem, which is really creating a message that your customers want to hear. As most product founders, we’re absolutely in love with the features that we have built into our product. We want to talk about those, but your customers don’t care about that at all. They care about their business problem, and do you solve their business problem?
You cannot message that unless you’ve picked this use case because the only way that message makes any sense is to describe their use case as being the problem and then how you solve that.
You’re going to take an initial guess at what you think your sales process looks like. What I’ve seen here is that many people will do this by coming to a conference like SaaStr. They’ll go and hear some very successful company. They’ll go back and say, “They did this. We need to do the same thing.”
What’s going wrong with this is we’ve got vendor centric thinking about, how do you want your funnel to look? In my view, that leads to all sorts of problems. The right way to solve the problem is to do buyer centric funnel design.
I’ll give you a super quick story here. When I did my very first startup, I was a techie who had gotten himself into a business selling to architects with a nine month sales cycle. One day, I sat down and I just went through putting myself in the buyers’ shoes and asking, “Why is this taking nine months?”
I can’t tell you the full details because I don’t have enough time, but it’s a pretty fascinating story. I ran an event. At the end of the event, something weird happened. Somebody came up to me and said, “Do you have an order form?” I had never thought that would happen to me. I had my assistant quickly run down and Xerox a whole bunch of hand typed order forms.
We did four million dollars’ worth of business in one day. This approach…I never quite repeated that level of success, but I have had tremendous success with this approach of buyer centric funnel design since then with most people. That’s what I’m going to walk you through a little bit here.
To do this well, the next starting point for you in this journey is to build a buyer persona in detail. I don’t have time here to give you that but the slides, when they’re available, will give you the details of the questions that I like to ask to get this buyer persona built so you can understand, how do they buy? What do they care about? What process do they have to go through internally that you can then use to define your buying process.
At the end of that, my recommendation is that you have a flowchart. The cool thing I’ve seen is that if you flowchart this and actually put it up on a board, you create the brainstorming framework that causes ideas to flow amongst your team members about how to solve your sales cycle and get this nine months down to the one day or the shorter level that you can get to.
You’re seeing this here. What we’re trying to do is understand the mindset of our buyer as they’re going through your sales process. What are they thinking? What we quickly realize is that they are unlikely to buy your product without looking at some other vendors out there. Why not help them by shortlisting those vendors and creating a competitive features matrix?
They are also going to need to produce a ROI for their boss to perhaps get this thing purchased. Generally speaking, buyers are terrible at this. Can you help them by creating that ROI for them and giving them something where they just put in a few inputs and you spit out a slide deck for them?
Do you have some special concerns that they might have like security, where perhaps you could address those concerns by getting a third party to do an audit and create a credible white paper that you can hand them that gets rid of those concerns?
One other common one is, is this a safe choice? Will I be putting myself at risk going with this startup? The best way to address that is tons of customer stories. Sometimes even that doesn’t work. One of the answers that I’ve seen work really well is go and find a safe channel like an IBM, or an Accenture, or somebody like that to actually take the order in to them. That will get around that problem for you.
I have lots of stuff on this. It’s a shame to have to cut the subject short because it’s such a fun subject. It’s really helpful but it’s in another blog post for you.
Once you’ve got that step done, fire up an initial lead source. Generally, the best one of the lot here is Google AdWords. Just get some level of lead flow coming in and then start fixing with A/B testing all the things that you’re starting to see are going wrong in your funnel.
One of the things that I’ve found is critical is to get together regularly a funnel optimization meeting. Normally, people have these meetings very siloed. They have the sales group and the marketing group having separate discussions.
What I believe is needed in a SaaS world is to recognize that you need a growth team. The growth team has to cross the boundaries of sales, marketing, and product, and customer success because we have to retain these customers. That group is the group that can look at this flowchart, and identify these funnel choke points, and work on getting them solved for you.
Let’s quickly look at staffing here. For the early access sales, my personal view is that the founders need to do this. It’s a mistake to go and hire salespeople before the founders have proven that they can actually sell the product because many times, you may find that your product isn’t yet ready to be sold. You will have frustrated salespeople that just aren’t happy because they can’t get the job done there.
Once you’ve got some evidence that you can get some sales, then you want to find a predictable and repeatable motion. To do that, I’d recommend hiring a sales director unless one of the founders is very good at sales management and then adding one more sales rep so that you’ve got a team of two in case one of them fails to get that repeatable and predictable sales motion there.
These people are what I call pathfinder trailblazer reps. I’ll explain that in a second. If they’re successful, they should hire two reps to test that it’s successful. If that starts to work again, hire another two reps, and then hire another two reps as you start working on scalability and profitability in that process there.
I mentioned this pathfinder trailblazer salesperson. Once you’ve got a motion that is repeatable, the last thing you want is your salespeople to be out there creating new strategies, new presentations, new pricing ideas, new people to call on. You want a normal salesperson, but in the early days, you don’t actually have that figured out.
You need a person who actually is capable of working without any of that structure and who can figure out which target market, help you understand where in the organization to sell to, what messaging’s going to work, what pricing, all of those other different elements there.
It’s a very different personality type to your regular salesperson there.
One cool thing about the phase after this, when you are actually starting to work on repeatable sales, is your bookings are driven by some really, really simple math. I love it when I can simplify things to this level. The math is this. How many salespeople have you got in your team multiplied by what is the average productivity per rep? Not the quota that you’ve assigned them but how much they’re actually achieving.
This is pretty cool because if we drill into this here, we can see that we’ve got to get very good at hiring on time. I will tell you that this is one of the most common reasons that I’ve seen in my portfolio companies where they’ve missed plan, is that they’ve failed to hire salespeople on time. They think it’s OK because they’re saving money, but it’s not OK because the whole business is not going to hit its plan.
You’re going to have expenses like in your engineering department that won’t be covered. You will need to build a recruiting function and bring that in house as soon as you hit this point of starting to hire salespeople and become excellent at recruiting.
That will help you with the second piece of the thing, which is productivity per rep because that’s driven by the quality of sales hires that you make, as well as by what good of a job you do with coaching, training, and onboarding. One thing that I believe founders can do here is do a much, much better job of onboarding because they actually assume that the salesperson’s going to know what they know.
Of course, it’s not true. It often will take you only as little as a couple of weekends of work to create the PowerPoints to help educate these new salespeople about your market, about the problem, about your product, etc. That will be a very good investment that can pay back in the productivity per rep there.
This is a key slide for investors and for me in particular. This shows you reps by quarter and shows you whether they’re hitting plan or not. What you’re aiming to see is in the final column there lots of green where they’re all above plan.
Maybe I can give you a different way of thinking about this here, which is if I’m looking at these other graphs here, I would look at how many reps are above 75 percent of quota. In an ideal world, I’d like to see that it’s 75 percent or more. How many are above 100 percent of quota?
I’d like to see that at 50 percent or more and a trend that’s moving in the upward direction because that says that you’re doing a better job of onboarding and a better job of coaching. Very hard to achieve, very easy for me to say, but this is the challenge in this phase here.
One other key thing you need to have to drive great sales is adequate lead flow for your reps. There’s no point in hiring tons of reps if you don’t have the right lead flow for them.
The right way to do this here is to look at your funnel backwards and figure out, for a single deal to close, how many raw leads do you have to have. Multiply that by the number of deals that have to close per rep for them to hit quota. Make sure that that is being generated by marketing or your sales development reps.
This is a crucial way that you tie sales and marketing together, is you create this contract between them. You create the plan for what bookings you want to achieve. Marketing can compute what it has to deliver to sales in the way of marketing qualified leads to make sure sales can actually hit its plan. This is how most people align sales and marketing, a very critical function then.
Quickly, some more lessons we can learn from this diagram here. First, there are several subphases in this. I’m not going to run through this because I don’t have too much time. The number one mistake that I see is people jumping ahead, trying to force progress before it’s really ready, particularly with VCs that are inexperienced on the board that come in and say, “We need to hire 10 more salespeople because that’s how we’re going to…”
They’re not really looking at the fact that the product’s actually not ready to be sold. It’s got a major flaw. Your churn is still too high and you’re losing customers. This is the wrong time to do that. What happens when you make that mistake is you typically burn cash at a much faster rate.
Flying through this here quickly, because I do want to get to one last thing here before I run out of time.
One thing I’ve learned here is that it’s not predictable how long it’s going to take to solve finding product/market fit or a repeatable scalable growth process. That tells me that you want to save cash and keep your burn rate as low as possible during that phase.
At a certain point in time, suddenly, you do flip into scaling the business phase because you’ve actually got it repeatable. There’s a huge mistake that I see companies make, which is they don’t now start hiring salespeople fast enough. They’ve got to change the mindset so drastically.
I remember the board meeting at HubSpot where we told them that they had to start hiring two salespeople a month. The incredulity on their faces that we were advising them to spend money finally, after they’d been in several years of not spending money. It is a significant mind shift. It’s a definite failure point here.
I have one last thing I want to do here. I’m going to rush a little bit here. This is to talk about the most important thing going on right now, which is turning the product into your salesperson instead of using salespeople themselves. If you can take touch out of your sales process you will dramatically lower CAC. It’s literally a factor of 10X, the difference between higher touch sales processes and lighter touch sales processes.
The way to do that is with the product as your salesperson. I like to think about, what is your time to wow in your product?
Wow is interesting to define. The full wow is the moment where your customer’s seen enough proof in your product demonstration to know exactly that this is something that they’re willing to spend money on and pay for. There could be a mini wow where they see something cool that keeps them motivated and excited about your product but still not your get ready to buy.
With that, we should look at how many steps does it take them? How much time does it take them? How much friction is involved? Then, remove the steps and friction.
To bring this to life, I want to use one of my portfolio companies called Salsify as an example. I need to quickly give you a quick sense of what Salsify does to explain this.
I’d like you to think about yourselves as an ecommerce shopper going to a website like B&H. When you look at this product entry, there’s a bunch of crucial things here like videos, and descriptions, and features, and things like that are needed before you would actually buy this.
It turns out that these elements are actually very hard for the brands, Nikon in this case, to assemble. Then once they have assembled them, they struggle to actually export them to each portal because B&H wants it in a completely different format to Amazon, to Adorama, and to Best Buy.
Salsify solves that problem. Let’s look at their free trial experience here. They had a sign up process. Then what they did was they created a sandbox for the demo. They couldn’t actually put you right into the demo after you do the things. You had to wait for an email with that thing, notification that the sandbox was ready.
Then you went into that. You opened up the app and you had to learn the user interface for it. As soon as you saw that user interface, you now had to locate content to bring into this, which was difficult because that generally came from different third parties in your organization.
Lastly, to get the full wow moment, the most powerful thing that Salsify could do would be to show you that you can drive new revenue. It would do that by letting you export to a brand new retailer and get you online with a new channel. Quite hard to do that, too, because you need a contract with specially agreed pricing things for that new retailer.
Let’s look at what we did there. Starting point was this horrible looking landing page where you had lots of fields in it and not really very appealing. After that, you’d have to wait for the email before you were actually able to start the trial. When you got into the trial, here’s a complicated product that’s got a blank UI. Is this a tool inviting or friendly? No, not really at all.
Let’s go back and see what we have to do here. All of the red boxes are high friction boxes where there’s no payback for the customer and just work involved for them to do. The first thing we did was get rid of this need to wait for the portal to be ready.
You sign up and get dumped into a redesigned page that has a single field in it. That single field just requires your email and encourages you with some stories of other people have have successfully used the product to get you going.
Then you land directly in the app, but it’s still a blank app. It leaves a problem of how do you input the content and what to do with it. The next thing they did is they worked on this problem. They realized, “We can solve this by giving them some sample data to play with.”
Now, you would arrive inside of Salsify and see the option to explore some sample data to see how this thing works. It leaves you with another risk, which is this product is hard to navigate. It’s a sophisticated product. There’s a good chance that they won’t find their path through to wow.
The next thing they did was they added in a product called Appcues to help guide the navigation to make sure that they’ve found the right, appropriate place in the demo to get to the wow. That created a 3X uplift in conversion after they’d done those steps. The real problems were still left behind, which was, how do they sign up a new retailer?
A cool thing happened here. We looked around and we found that Google had a new product offering. It’s actually called Google Shopping. Google Shopping, in order for it to work when you go in and type in “DSLR camera” it gives you a way of searching through products. It’s their attempt to stop you from going to Amazon to search for products.
It needs you to export to Google in a very specialized format. It’s like another portal for another retailer. What these guys were able to do was add in an export button to export to Google and immediately give all of their customers an instantaneous new channel that they had before that drove new sales for them. This was a cool solution to this problem of cutting out the need to go and navigate and negotiate a new deal with a new retailer.
It still left the last remaining problem area, which was a very painful thing, where you have to go and get content from multiple different people in the organization. It can often take months.
They had another brainstorming session and realized that they could solve that problem by going out and actually scraping the content from the web off of the existing retailers like B&H or Amazon and immediately prepopulate the system so that the moment you land in the system you’ve gotten some data that you can see there.
If you look at what we’ve done here, we took that very complex process that was filled with reasons why they would never get to wow and we’ve shortened it up to sign up. Your data’s immediately populated inside of this app. You can instantly hit the publish to Google button and get yourself some new sales that you’ve never had before.
Hopefully, this just gives you a way of thinking, a mindset of thinking about putting yourself in your buyers’ mind as they’re going through the journey of navigating your free trial, navigating your whole sales process, and how you can optimize that.
A quick last summary for you here. Recognize where you are in the life cycle. Don’t try to force getting ahead of where you are at this point in time. Avoid underfunding. This is a common mistake. Make sure you’ve got enough cash to get to the key milestone that you need for that next fundraise. Use those cash out and financing milestones to drive focus on alignment in your organization.
Thank you very much indeed. I apologize for having run over, but I really appreciate all of you coming to here.
[applause]
[gong]
Harry: As always, so fantastic to hear from David. I want to say huge thanks to him for giving up the time to do that. If you want to see more from David, which I highly, highly recommend, then you must check out his blog, forentrepreneurs.com. That really is incredible.
Likewise, we would love to see you behind the scenes here at SaaStr. You can find us on Instagram @hstebbings1996. It would be fantastic to see you there.
As always, we so appreciate all your support and cannot wait to bring you some phenomenal episodes next week.
