Author Archives: Dave Kellogg

Come to My Session at SaaS Metrics Palooza: The Impact of AI on SaaS Metrics

While I was unable to make SaaStr Annual this year, I am pleased to announce that I will back at SaaS Metrics Palooza, an entirely virtual conference (where I don’t need to walk on my recovering knee) focused entirely on SaaS metrics, and hosted by my SaaS Talk co-host Ray Rike.

I’m speaking this year on The Impact of AI on SaaS Metrics at 9:00 AM Pacific on 10/8/24.

I picked this topic because I wanted to force myself to learn more about it (the reason I write many Kellblog posts) and that process seems to have worked. I started out asking how will SaaS metrics change because of AI? That led me quickly to pricing models. And that led me all the way back to the existing weaknesses in SaaS metrics created by violations of the simple SaaS model (e.g., usage-based pricing, or anything else that drives variation in monthly spend).

Here’s what we’ll cover:

  • How we got here: a brief, salient history of SaaS metrics
  • When SaaS metrics break — e.g., when monthly spend varies or contracts are prepaid
  • How ARR has become the Achilles’ Heel of SaaS metrics, a big problem given that virtually all top SaaS metrics depend on ARR
  • How proxies for ARR have emerged as a result
  • How and why public companies don’t generally report ARR, and how analysts use Implied ARR instead
  • The four impacts of AI on SaaS metrics, specifically (1) rethinking ARR, (2) the need to consider cost (he says, gasping), (3) rethinking pricing model drivers, and (4) how the heavy lifting will move to the pricing model
  • A quick case study on Piper, the impressive AI SDR from Qualified, how she is priced, and some nuances in estimating the value she delivers when you “hire” her.

The presentation will feature a brief moment of melancholy, a reflection back on the history of software gross margins.


The best aside will be when I present my three rules of pricing.


You can register to attend SaaS Metrics Palooza here. My session is at 9:00 AM Pacific time on Tuesday, October 8th. I will do a separate post after the presentation with a link to the video and a link to the slides.

I hope to see you there and thanks for attending!

The “Idea Bake Sale” and Why It’s a Bad Idea to Have One

“Phew, we sure have a lot of challenges right now,” the frustrated CEO mused after completing a day at the annual planning offsite. “While my executive team is pretty solid day to day, they’re too in-the-box. They’re not creative. They never have any new ideas about how to fix our problems.”

“Other than asking me for more headcount. They’re pretty darn good at doing that,” the CEO chuckled, gazing pensively over the whitecaps from the patio of the luxury resort where the executive leadership team (ELT) was huddled.

“Wait. I’ve got an idea. We can rely on our people. They’re great. They’re out there every day with our customers. I bet they have tons of ideas on what we can do better. How we can improve our organization and processes. What features we should put into the product to make customers happier. And maybe even what new products we should build.”

“Eureka!” the CEO thought. “Since we feel kind of stuck here, I’ll declare the Leverage Our Super Team initiative. We’ll ask every employee for a good idea about how to improve the company. They’re going to love this. People are going to feel so engaged and they’ll love that all their voices are being heard.”

The road to hell is paved with good intentions. And there are plenty of good intentions here. Intentions are not the problem.

But what happens Monday morning, when everyone sees the company-wide message announcing the new initiative?

By noon, half the company is polishing up their resumes. And that’s after having called their significant others to delay any pending large purchases.

This is what you might hear, if you could eavesdrop by the virtual watercooler:

  • We’re screwed with a capital S.
  • Jeez, I thought we were in trouble before, but now I’m sure.
  • Our leadership team is quite simply out of its depth. Nice people, but they don’t know how to run the company.
  • We’re caught in a strategic squeeze and the best they can come up with — after three days at an offsite — is asking us what to do?
  • Don’t they get the big bucks in order to actually run the company?
  • Sure, we’re in a tough situation right now, but we can get out of it. What we need is leadership, but this ain’t it.
  • Did anybody notice that the acronym for the new, save-the-company initiative is LOST? Leverage Our Super Team. That’s just perfect.

This happens all the time. I’ve seen it at just about every company I’ve worked at for 30+ years.

The first time I saw one of these initiatives, it came complete with a marketing graphic, a depiction of teamwork featuring an eight-person crew boat with everyone pulling together — but missing the coxswain.

You literally cannot make this shit up.

The point here being:

  • People expect leaders to lead.
  • They get scared when they don’t.
  • People understand when the company’s in a tough spot.
  • All they generally want to hear is that leadership is aware of the situation (i.e., not in denial) and has a reasonable plan to address it.

As for the “idea bake sale” (think: sales will make brownies, marketing will make cookies, and finance will make cupcakes to save the company), it’s a terrible idea because it does the opposite:

  • Leaders abdicate instead of lead.
  • It clearly demonstrates that there is no plan. (Let’s hold the idea bake sale to make one.)
  • In some cases, it’s patently absurd. (Let’s ask the receptionist what new products to build.)
  • And, if everyone were doing their job, for the most part we wouldn’t need one.

Isn’t it PM’s job to know what features customers want? Isn’t it management’s job to work on improving our processes? Isn’t it the CEO, CPO, and CTO’s job to work on product strategy, including product line expansion? If those processes aren’t working, let’s fix the root cause. Not have an idea bake sale.

I’m all for the odd hackathon to flush out potential new features. Or the brainstorming meeting with PM to discuss product line strategy. Or the town hall with the sellers to hear concerns about our sales process. Or the partner summit where we can hear from people outside the company about how we’re doing. These events harness energy and drive discussion. And they’re all normal parts of a leader’s job.

But that is not the same as throwing your hands in the air and effectively saying, “we don’t know what to do — what do you people think?”

The moral: one day, if you find yourself in a meeting where somebody suggests an idea bake sale, do these three things:

  • Kill the idea off quickly
  • Directly address any failing core processes that made it seem necessary
  • Ensure that you’re doing the usual communications and strategy events

Most importantly, recognize that the bake sale might just be a distraction from an elephant in the room, and what needs discussion is the elephant, not the bake sale.

You can use The Crux to help you do that.

Back to Finance: Why I’m Joining the Board of Vic.ai

You can’t run a financial planning company for six years and not develop a certain affection for working with the office of the CFO. It doesn’t hurt when, despite your exterior marketing shell, there’s an inner finance person down there underneath.

Since selling Host Analytics five years ago, I’ve tried to stay in touch with my finance roots. I’ve done some advisory work on the FP&A side of the house (e.g., advising the rocketship that is Pigment) and kept in touch with up-and-comers like Mosaic and Causal. I’ve worked with CPQ disruptor CacheFlow. I’ve kept an eye on next-gen spreadsheets like Rows and invested in a sense-maker called Decipad. But, other than being lucky enough to make an investment in FloQast, I’ve not done much on the other side of the house: the land of accounting and controllers. Until now, that is.

I’m pleased to announce that I’m joining the board of directors of Vic.ai, a company focused on bringing the benefits of AI to the accounting department, selling solutions used by hundreds of firms worldwide. Vic.ai has raised over $110M in VC financing from top-tier investors including Cowboy Ventures, Notable Capital, and Iconiq Growth.

Here are some of these reasons why I’ve decided to join the board:

  • Founder/CEO chemistry. The independent director role is all about working with the CEO on the challenges of building and scaling a company. In the past few months, I’ve spent quite a bit of time with Alex and am certain that we’ll enjoy working together to accomplish great things.
  • Working with Alex is like teaching the 301 class, not the 101 class. He’s already a successful entrepreneur, having built and sold his first company in 2014 after nearly a decade’s work. So it’s a more challenging and demanding job than usual. He keeps me on my toes.
  • I like marketing and selling to finance teams. They’re busy people. They’re not the most experienced buyers (unlike marketing or IT they don’t buy a lot of stuff). They’re a staff function so priorities can change overnight. They don’t like fluff. Finance is the show-me state of corporate functions. That makes marketing and sales somewhat more challenging, but more rewarding once you nail it.
  • I like what Vic.ai does. The product solves practical problems for busy people who know they need to be experimenting with and learning about how AI can help them improve operational efficiency. I think the product-market fit is outstanding.
  • The benefits are real and tangible. With due respect to my Future of Work friends, we’re not selling intangibles like stronger culture or improved collaboration. We’re selling improved cash flow, time saved, money saved, and errors reduced. Hard benefits. Yum.
  • The VC investors are great. It’s been great to meet Ted and Will from Iconiq, Jeff from Notable, and Jillian from Cowboy. While I have worked with some of their partners in the past, I’ve not yet worked with them and am super excited to do so. It’s also great to reconnect with Greg from Costanoa with whom I worked closely for years at Alation.

I don’t know the whole team executive well yet, but have been psyched to meet the CMO Mark and the CRO Ben, and any Kellblog reader will know I have one message for them: sales & marketing is a three-legged race, so let’s perfect the art of working together.

Finally, I also look forward to working with cofounder Kristoffer and to helping him and Alex take Vic.ai to the next level.

Why Great Marketers Look at Pipeline Coverage, Not Just Pipeline Generation

“How’s it going at StartCo?” I asked.

“Great,” the CMO replied. “We hit 105% of our pipeline generation (pipegen) goals last quarter, and with a healthy pipe/spend ratio of above 10.”

“Nice,” I said. “How is sales doing?”

“Oh, that’s another matter,” the CMO said. “They landed at 82% of new logo ARR plan.”

Quick: what’s wrong with this conversation?

Answer: if the purpose of marketing is to make sales easier, marketing cannot be “doing great” when sales is 82% of plan. Period. Always.

What’s driving this problem? Part of it is me-, me-, me-oriented metrics like pipegen. Or more specifically, pipegen from marketing, which is about how marketing did relative to its pipeline generation goals. But let’s remember the point of pipeline is to ensure sales has a shot at success every quarter. And that marketing is not the only pipegen game in town. And that different pipegen sources have different conversion rates (or, as I like to say, nutrient density). Oh, and even if the entire pipegen machine is firing on six cylinders, that we can still end up with pipeline shortages.

What’s the underlying problem? Call it myopia, parochialism, or stovepiping. Or (as my English friends might say) that marketing is simply missing the bloody point.

Let’s use a table to make things more concrete.

The first block shows that the company, with one small exception, is generally delivering on its pipegen targets and that they hit 105% of plan last quarter.

The second block shows that our friends in sales are struggling. Sales performance has consistently decreased for the past six quarters, from beating plan with 109% to coming up well short at 82%.

The third block shows that while pipeline conversion has been pretty stable at around 34%, starting pipeline coverage has been steadily deteriorating from 3.1x to 2.4x. Most companies can’t make plan when starting with 2.4x coverage. It’s clear that we have a starting pipeline problem.

But the fourth block shows that while the performance across pipeline sources is somewhat varied, that we don’t have an overall pipegen problem. While SDRs and sales are struggling, their contributions are a small part of the mix (10% each) and the gap is more than offset by above-target contributions from marketing and alliances. Moreover, because alliances pipeline usually converts at a higher rate than SDR- or sales-generated pipeline, the mix change should impact yield favorably.

So, what the heck is happening? How are we consistently beating our pipegen targets, but consistently behind on starting pipeline? Three thoughts come to mind:

  • Our model is wrong. We built a model for pipeline generation targets that relied on assumptions about win, loss, and slip rates as well as pipepline expansion and shrinkage. Somewhere that model is deviating enough from reality that we are hitting pipegen goals but missing starting pipeline coverage goals. Maybe we made mistakes in the first place or maybe reality has drifted away from that model. But let’s remember that God didn’t send us the model on stone worksheets and that hitting model-driven targets is not the point. Generating sufficient pipeline coverage is.
  • The most common reasons for model drift are decreased win rates, increased average sales cycles, and decreased average deal sizes. But here we’re seeing healthy and consistent week 3 pipeline conversion which makes me want to look elsewhere for an explanation.
  • This is actually a tricky situation to diagnose. We’re hitting increased pipegen targets, but starting pipeline is flat. The normal diagnosis would be increased loss and/or slip rates, but starting pipeline conversion is both healthy and consistent. Hum. This leads me to think that timing is off — while we’re generating the right amount of pipeline, not enough of it is landing in next quarter, suggesting that buying timeframes may have lengthened. This is one reason why I care so much about pipeline segmented by timeframe and not just rolling four quarters or all-quarters (aka tantalizing) pipeline.

Back to our main argument: the point of the entire pipegen machine is not to beat model-driven pipegen targets. It’s to give a sales a chance to make the number each quarter. And that is far better measured by starting pipeline coverage than by pipeline generation. And that’s why great marketers look starting pipeline coverage first and then pipeline generation after that.

Good marketers say, “I hit my marketing pipegen goals. Go me!” Great marketers say, “We helped tee-up sales for success this quarter. Go us!”

And the best marketers don’t think their work is done at stage 2 — they know there’s plenty marketing can do both to increase close rates down the funnel and expansion in the bow tie thereafter.

But that’s the subject of another post.

Hump? What Hump? Why You Should Listen When Someone Says You’re Doing It Wrong.

Lack of savoir faire, like hypertension, is a silent killer.

There are few symptoms, other than the odd cringe that often goes unnoticed. But the outcomes are clear if the reasons are not:  you’re omitted from meetings, passed over for promotions, underperform in nine-box reviews, find advisors suddenly too busy to work with your company [1], and VCs surprisingly passing on your financing round [2].

The problem is that nobody wants to tell you what’s wrong. It’s like this scene from Young Frankenstein.

Frankenstein: You know, I don’t mean to embarrass you, but I’m a rather brilliant surgeon. Perhaps I could help you with that hump?

Igor: What hump?


It’s just easier to move on.

But make no mistake, these problems can kill your career.  Or, more commonly, simply stall it out. Nothing is more lethal to a career than these eight words: “Kelly’s a great director, but not VP material.” [3]

Savoir faire is related to savvy in English, but not quite the same. I think of savoir faire as know-what as opposed to know-how [4]. Diplomats have great know-what when it comes to knowing what to say or do in a delicate situation. Vintners have great know-how on the subject of making wine.

Savoir faire is thus a social skill and largely about adherence to unwritten rules of conduct. In Silicon Valley, land of engineers, we don’t talk much about social skills [5]. We prefer our numbers, facts, and figures.

But to say these rules are unwritten is not to say they don’t exist [6]. I’ve been repeatedly reminded of them in the past few months, courtesy of several encounters with people who were simply, for lack of a better term, doing it wrong.

More interestingly, when I tried to give these people feedback, the reactions I got were defensive and sometimes hostile. You can argue this is about me, my direct style, or my not having earned the right to offer such feedback. But I believe it was primarily about the nature of the feedback itself.

While giving feedback is always tricky — see Jason Lemkin’s recent announcement that he’s going to stop giving feedback in 2024 — feedback about savoir faire is different:

  • It’s personal, about behavior, and thus even more likely to cause offense
  • It’s seemingly subjective or arbitrary, particularly when you don’t know the rules
  • It’s not up for debate. We’re not debating strategy A vs. B. I’m telling you that you don’t treat a successful founder who just sold his company for $600M like a used-car salesperson.

And this is why most people don’t offer it. There’s almost nothing but downside. It’s easier to simply:

  • Not invite the guest who talked politics to the next dinner party
  • Not return the recruiter’s call seeking a blind reference on the executive who wrote an inappropriate social media farewell thread
  • Become too busy to advise the executive who bungled the introduction to a high-value contact
  • Ghost the founder who wants copious free advice, but who just can’t get around to signing an advisor agreement
  • Say “I need to go mingle” to the clueless employee who challenged you on the utility of MBAs at the company reception [7]

It’s simply not worth the time or risk to explain to these people how dumb they look. And they probably won’t listen anyway. So on they go, like Igor with his hump, unaware of the problem, yet inexplicably not getting results that they want.

If I were to make a tagline for this problem it’d be this:

Savoir Faire: If You Don’t Have It, You Don’t Know.

Almost definitionally [8].

So, this is why, if you ever find yourself lucky enough to be on the receiving end of “you’re doing it wrong” feedback, you should do the following:

  • Realize that you’re receiving it. Think: “Hey, we’re not debating options here. I’m being told I mishandled a situation.”
  • Understand that you’re being offered a gift. The giver certainly knows it’s potentially offensive, but is offering it nevertheless.
  • Recognize that this is likely your last interaction with the giver if you don’t handle the situation well.
  • Avoid defensiveness or debate. They’re telling you the equivalent of “use the silverware from the outside in” or “don’t wear white pants after Labor Day.” They’re not looking for a debate.
  • Avoid rationalizations like “oh, they’re old and that’s how it used to be done.” A lot of things change in Silicon Valley over time. But a lot don’t.
  • Consider the possibility that they may be right. You obviously disagree because they wouldn’t be offering the feedback if you didn’t. The odds of them being correct increase with the size of the experience gap between you.
  • Thank them for offering the feedback. Remember that most people wouldn’t, their intent is likely good, and they probably wouldn’t bother if they didn’t see something they liked.
  • Apologize if you feel it’s indicated. I literally once told a founder, “you mishandled that introduction so badly that it embarrassed me,” and was told in response, “there’s no reason it should have embarrassed you” [9]. This three-fer wiped out working with me, my friend, and quite probably the VC firm that referred him to me. All because they refused to hear what I was saying (“you embarrassed me”) and offer a simple apology in return.

I hope this post helps you develop your career by explaining why, when someone tells you that you’re doing it wrong, that you should perk up and listen.

# # #

Notes

[1] Despite oddly having time for an exploratory meeting.

[2] Despite saying, “we love what you folks are doing and stay in touch.”

[3] Often, in my experience, such damning statements go unchallenged in a group setting, particularly when made by the boss.  The typical response is nods, “oh yes,” “it’s a shame,” and “the world needs directors, too.”

[4] This is an imperfect simplification.  I remember it by defining know-how as about tying a bowline or making beef bourguignonne – i.e., knowing how to do something – technical knowledge.  Know-what is knowing what to say or what to do, particularly in a difficult situation – social knowledge.  Unfortunately, you could just as easily define the latter as know-how:  knowing how to behave at a funeral or knowing how to handle a drunk relative at a party. 

[5] And when we do it’s about arguably naïve ideas like radical transparency. While I like it as a correction to our default behavior, taken literally, it breaks down quickly:  are you going to be radically transparent about the CRO who steps down to enter a rehab program or the planned acquisition that falls through?  In the latter case, such transparency is not only ill-advised, it’s typically a breach of contract (e.g., an NDA).

[6] This begs a question about privilege. You could (correctly) argue that a wealthy upbringing teaches you proper table etiquette at a country club and thus that people who grew up in the bottom wealth quartile would not typically have access to that knowledge.  (See the infamous SAT oarsmen-to-regatta analogy question.)  But I am not talking about either standardized tests or immutable traits, I’m talking about behaviors that can be learned.  While privilege might afford you the advantage of already knowing some of these things, it might not. And the good news is that, either way, they can be learned if you are willing to admit there might be things you don’t know, and if you are lucky enough to encounter someone willing to teach you. 

[7] In this case, the perpetrator was the 28-year-old me squandering a once-in-a-lifetime chat with Bob Waterman, co-author of In Search of Excellence (and a Stanford MBA), by asking a stupid question. You see, there’s a reason why I’m passionate about this topic. I needed a lot of help myself and was usually — but not always — lucky enough to get it.

[8] A derivative of a tagline we once used at Business Objects — Business Intelligence: If You Have It, You Know.

[9] I’m the one who decides if I’m embarrassed, not you.  Whether you would have been, or whether you think I should have been, is beside the point.