Category Archives: Growth

PLG Resources and Wrap-Up

I put blog ideas into a to-write folder which contains more than 300 files full of brain dumps, outlines, and rants, all in various forms of disrepair. It’s my process. In that folder, there are 21 posts with PLG (product-led growth) in the draft copy and 5 with PLG in the title. It’s a topic I’ve always been interested in, but two things have prevented me from attempting a seminal post on PLG.

  • There is so much great work out there already. Every time I start to write, I hear stand on the shoulders of giants ring through my head followed by, “Dave, stop. Stop, will you? Stop Dave.”
  • I still consider myself more student than master. I grew up in enterprise. I have experience with market-seeding strategies and open source. I work with some velocity SaaS businesses. I’ve debated founders and boards on how enterprise companies should think about a PLG motion. But I’ve never run a PLG company and I’ve never worked in-depth on a PLG process.

Thus the drafts remain unfinished. But after having learned a fair bit, met many interesting people, located some great resources, and developed some strong opinions, I didn’t want to just drop everything. So I decided to write this summary report to provide links to PLG resources and share a few PLG thoughts before moving on.

PLG Resources

Thoughts and Opinions

Here are some opinions forged by my PLG research and conversations.

  • Don’t do PLG just because a board member wants you to. Try introducing a PLG product or motion if and only if you (as CEO) want to. While we are past peak-hype on PLG, there can still be a lot of pressure to try it because everyone else is doing it. Resist.
  • Try PLG if you think it can help your business. There is a lot to learn from PLG companies so I don’t recommend resistance for its own sake. But, if you weren’t born PLG, the odds your enterprise product will be ready overnight for a PLG motion are low, so keep expectations in check. Here’s a great post to help you get started on the journey. Alternatively, you could run PLG motion on a teaser product to pull people into your overall offering (e.g., Clearbit’s de-anonymization can lead to a later purchase of enrichment, Moz’s online presence can lead to a later purchase of its SEO).
  • I like growth teams. In general, I like silo-busting where you take groups of experts in different functions and aim them at a business goal. ABM does this, uniting sales, marketing, and SDRs in the quest to crack target accounts. Pods do this, uniting different sales and marketing functions, typically within a geography or vertical. Growth teams do this, uniting product managers, designers, marketers, sellers, and analytics team members on maximizing PLG conversion rates. They’re a good idea.
  • The product doesn’t sell itself. Knowing how expensive sales and marketing people can be — with S&M expenses typically running at twice R&D in a typical software company — I think for some people the PLG dream was to elminate S&M with a product that sold itself. That didn’t happen. In PLG, most of the time, the product helps sell itself. That’s certainly a lot better than not helping (I’ve seen that too), but we’ll still need those pesky sellers and marketers after all. See the McKinsey paper.
  • PLG ain’t cheaper. While a few PLG companies end up ahead on the S&M vs. R&D expense trade-off, most end up spending more on both. See the Tunguz post or the McKinsey paper. Don’t do PLG to save money. Do it because you think you’ll have a better product, grow faster, take market share, and build leadership. PLG is not a cost-cutting strategy.
  • PLG still needs marketing. How do you think we get people to do all those trials anyway? Yes, you may have a viral product or a strong community (word of mouth), but you’ll still also rely on marketing to drive people to your trial via SEO, SEM, and making TRY-IT the primary call-to-action on your website. (This always makes me think of Boston with the anaphoric “listen to the record” on the back cover of their debut album.)
  • If you’re starting a new company, try to be born PLG. For example, were I to start a new EPM company, I’d try hard to build a PLG motion in from day one. That’s not particularly easy in a space with separate buyers and end-users (where end-users need to be connected to the corporate system), but I’d sure try. You’ll likely end up with a better product as a result. Or a teaser product linked to a core one.
  • PLG is another pipeline source. Traditionally we’ve had four pipeline sources (marketing/inbound, partners, sales/outbound, SDR/outbound). When do you PLG, you’re not only adding any direct revenue, you’re also adding a pipeline source (with its own vernacular, e.g., PQLs) much as ABM adds a pipeline source (with its own vernacular, e.g., MQAs).

How to Fix a Broken Go-To-Market Motion Using a Steady-State Funnel

In my consulting and advising work, I’ve worked with a number of enterprise SaaS companies that get stuck with a broken go-to-market (GTM) motion.  What do I mean by broken?

  • Chronic plan misses, and not by 5-10%, but by 30-50% [1]
  • Weak sales productivity, measured either relative to the company’s model or industry averages (median $675K) [2]
  • Scarce quota attainment, measured by percentage of reps hitting quota. Instead of 80% at 80%, they’re more like 80% at 40% [3]
  • High sales turnover. Good sellers quit when they’re not making money and they perceive themselves in a no-win situation.
  • Poor pipeline conversion, closing perhaps 10-20% of early-period pipeline instead of 30% to 40% [4]
  • Poor close rates, eventually winning only 5-10% of your deals as opposed to 20-30% [5]

In such situations, it’s easy to conclude “that dog don’t hunt” when examining the company’s go-to-market.  It’s harder to know what to do about it.  Typical reactions include:

  • Fire everyone, a popular response which is sometimes correct, but risks wasting an additional year due to chaos if the people were, in fact, not the problem.
  • Pivot the company, making a major change in strategy or sales model. Let’s go product-led growth (PLG).  Let’s sell our platform instead of our application.  Let’s do only enterprise accounts and account-based marketing (ABM).  While these pivots may make sense, many companies should get called for strategic “traveling” because they pivot too often [6].
  • Hope it will get better. If I only had a dollar for every time that I heard a CRO say,” all the changes are on track, the only thing I need is time for them to work.”  Maybe they will, maybe they won’t.  But what are the tell-tales will let us know before we miss three more quarters and execute plan-A, above?

It’s an utterly soul-sucking exercise to watch sales, marketing, and finance talk about these issues when the players are not all quantitative by nature, using the same metrics definitions, using the same models, all aware of the differences between averages and distributions, and all having a good understanding of ramping and phase lags [7].  That is, well, the vast majority of the time.

So, if you’re in this situation, what should you do about it?  Three things:

  • Agree on the problem, which is often shockingly more difficult than it appears
  • Build a steady-state funnel, which among other things focuses everyone on the present
  • Ensure your leadership team is part of the solution, not part of the problem

Agree on the Problem
You can’t make a coherent plan to fix something unless you have a clear, shared, data-driven understanding of what’s causing it.  To get that, you need to block a series of meetings with a single topic:  why are we missing plan?

You want a series of meetings because you will likely need to iterate on data collection and analysis.  Someone will assert something (e.g., saying that pipeline coverage is weak) and – unless your metrics are already in perfect shape — you’ll want to look at the data you have, clean it up, get historical data for trend analysis, and then reconvene.  It’s more effective to have a series of meetings like this than it is to have one mega-meeting where you’re committed to leaving the room with a plan, but you’re simply debating opinions.  As Jim Barksdale used to say, “if we have data, let’s look at the data; if all we have is opinions, let’s go with mine.”  So, get the data.

There will invariably be some blame games in this process.  Focus on the assertions, not who made them, and focus on the data you’d need to see to back them up.

Example:

CMO: “I think conversion rates are the problem.”
CEO: “Based on what data are you arriving at conclusion?”
CMO: “Overall pipeline is up, but the results are flat.”
CEO: “Please put up the slides from the last QBR on pipeline conversion.”
CEO:  “OK, this only shows one quarter so we can’t analyze historical trends, and it’s looking at rolling four-quarter pipeline so we can’t tell if actual current-quarter pipeline is sufficient.  Salesops, how can you help?”
Salesops: “I can make a trailing-five-quarter count- and dollar-based, week 3 pipeline conversion chart and make a pipeline progression chart that shows a better view of how the pipeline is evolving.” [8]
CEO: “Great, do that, and let’s reconvene on Friday to see what it says.”

Finally, ensure that you keep the conversion moving by forcing people to answer questions.  Call out people who “Swiss village” their answers [9].  Ask people who are being defensive to focus on the go-forward.  Interrupt people when they’re waxing poetic.  Time is of the essence and you can’t waste it.

Build and Focus on a Steady-state Funnel
To make things simple, concrete, and focused on the immediate future, I think the best thing you can do is build a steady-state funnel model.

If you’re missing plan consistently and significantly, there’s no need to have in-depth future hiring, ramping, and capacity conversations, phase-lagging lead generation to opportunity creation and then opportunities to deals.  That’s all besides the point.  The point is your model isn’t working and you need to get back on track.

Here are the magic words that change the conversation: “what if we just wanted to add $1M in ARR per quarter?”  No ramps, no phase lags, no ramp resets, none of that planning for future scaling that actually doesn’t matter when you’re presently, chronically missing plan [10].  None of the complexity that turns conversations into rabbit holes, all for invalid analytical reasons.

Think:  how about before we start planning for sequential quarterly growth, we start to consistently add ARR that closely resembles the plan number from two quarters ago that we never came close to hitting?  Got it?

Here’s what that steady-state funnel model looks like:

Let’s be clear, you can build much more complex funnel models, and I’ve written about how.  But now is not the time to use them.  The purpose here is simple.  Think: “team, if we want to add $1M in ARR per quarter …”

  • Can we get (usually down) to 7 sellers?
  • Can we get the deal size to $50K
  • Can each seller close 4 deals per quarter?
  • Can we generate 112 oppties per quarter?
  • Can we close 25% of early-period oppties?
  • Can we generate oppties for $3.5K?

For each assumption, you need to look at historical actuals, have a debate, and decide if the proposed steady-state model is realistic.  Not, “does finance think the math works,” but “can the GTM team sign up to execute it?” If you’re trying to move the needle on a metric (e.g., taking deal size from $30K to $50K) there has to a clear and credible reason why.

If you can’t convince yourself that you can deliver against the model, then maybe it’s time to let the company find someone who does.  It’s far better to part ways with integrity than to “fake commit” to a model you don’t believe in and then unsurprisingly fail to execute.  Or, if the whole team can’t commit to the model, or you can’t find a model to which they would commit that produces an investable CAC ratio, then maybe it is time to pivot the company.  These are hard questions.  There are few easy answers.

Ensure Leadership is Part of the Solution   
As you move forward, you need to ensure that your leadership team is part of the solution and not part of the problem.  This is always a difficult question, not only for relationship reasons, but for more practical ones as well.

  • If you replace an exec, what are the odds their successor will be better? If you have a solid, competent person in place, odds are the next person (who will be knowingly joining a company that’s off-rails) will be no better.  But who’s to decide if someone’s solid and competent?  Board members, your peer network, and advisors can certainly help (but beware halo effects in their assessments).  So-called “calibration meetings” can help you make your own assessment, by simply meeting – not in a recruiting context – other CXOs at similar and next-level companies.
  • If you replace an exec, how long will the resultant turmoil last? Four quarters is not uncommon because the new person will frequently rebuild the organization over their first two quarters and then you’ll need at least two additional quarters to see if it worked.  A failed replacement hire can easily cost you (another) year.  It’s criminal to incur that cost only to replace reasonably-good person X with reasonably-good person Y.

Other questions you should consider in assessing if you want to weather the storm with your current team:

  • Do they really believe in the plan? Execs can’t just be going through the motions.  You need leaders on your team who can enlist their teams in the effort.
  • Are they truly collaborating?  Some execs don’t internalize the Three Musketeers attitude that’s required in these situations.  You need leaders on your team who want to see their peers succeed.  One for all and all for one.
  • Are they still in the fight? Sometimes execs decide the situation is hopeless, but lack the nerve to quit.  They’ll pay lip service to the plan, but not give their best effort.  You need leaders on the team who are still in the fight and giving their best each day.

If you’re going through a rough situation, my advice is stay strong, stay data-driven, leverage the resources around you, and demand the best of your team.  Focus on first diagnosing the problem and then on building and attaining a steady-state funnel model to get things back on track.

It may feel like you’re going through hell, but remember, as Winston Churchill famously said, “if you’re going through hell, keep going.”

# # #

Notes

[1] Plan meaning New ARR bookings and not Ending ARR balance.  The latter can mask problems with the former.  If we’re trying to measure sales performance, we should look the amount of ARR sales pours into the SaaS leaky bucket and not what happens to its overall level.

[2] New ARR per seller per year.  Remember this is a median across all SaaS companies and my guess is enterprise is more $800K to $1200K and SMB is more $400-500K.  Introducing ramping to this discussion is always a superb way to burn a few hours of your life.  The pragmatic will just look at ramped rep productivity, excluding momentarily the effects of ramping reps.  Pros will use ramped req equivalents and then look at ARR/RRE.

[3] See prior point.  The pragmatic will look only at ramped rep attainment.  Pros will look at attainment relative to ramped quota.

[4] For companies on quarterly cadence:  new ARR booked / week 3 new ARR pipeline.

[5] Don’t confuse early-period pipeline conversion with opportunity close rate.  The former looks within one period.  The latter measures what closes in the fullness of time.   Example:  you can have a week 3 pipeline conversion rate of 33% (which suggests the need for 3x starting pipeline coverage) and an opportunity win rate of 20%.  See my post on time-based close rates for more.

[6] In the basketball sense that a player is called for a traveling violation when they pivot off more than one foot.

[7] Phase lags here meaning the time between generating a lead and it becoming an opportunity or generating an opportunity and it becoming a deal.

[8] This begs the question why those charts aren’t in the QBR template.  Hopefully, going forward, they’ll ensure they are.  Odds are, however, that they don’t exist so hopefully a good debate and a Google search on Kellblog pipeline will help people find the analytical tools they need.

[9] The expression is based on this quip: “When you ask them the time, some people tell you how to build a watch.  Some tell you how to build a Swiss village.”

[10] To state the obvious, for your company that magic number might be $2M, $5M or $10M – but the same principle applies. Let’s pick a steady-state, per-quarter, net-new ARR number and keep focusing on it until we start to achieve it.

How Quickly Should You Grow to Key ARR Milestones? The Rule of 56789

Question:  what do you call a 10-year old startup with $10M in ARR?
Answer:  a small business [1].

When you make a list of key SaaS metrics, you’ll rarely find age listed among them.  That’s correct in the sense that age by itself tells you little, but when size is measured against age, you get a rough measure of velocity.

It’s a lot like people.  Tell me you can play Mozart’s Piano Concerto No. 23 and I’ll be impressed [2].  Tell me you can play it at age 12, and I’ll think you’re an absolute prodigy.  Tell me you have $10M in ARR after 10 years and I’ll be impressed [3].  Tell me you have it 3 and I’ll run for my checkbook.

All this begs the question of growth velocity:  at what age is a given size impressive?  Towards that end, and working with my friends at Balderton Capital, I’ve come up with what I’m calling the Rule of 56789.

  • 5 years to break $10M
  • 6 years to break $20M
  • 7 years to break $50M
  • 8 years to break $75M
  • 9 years to break $100M

Concretely put, if you walk through the doors to Balderton’s London offices with $54M in ARR after 7 years, you’ll be in the top quartile of those who have walked before you.

Commentary

  • I’m effectively defining “impressive” as top quartile in the Balderton universe of companies [4].
  • Remembering 56789 is easy, but remembering the milestones is harder.  Once you commit the series {10, 20, 50, 75, 100} to memory, it seems to stick [5].
  • Remember that these are milestones to pass, not ending ARR targets, so this is not equivalent to saying grow 100% from $10M to $20M, 150% from $20 to $50M, and so on.  See note [6] before concluding {100%, 150%, 50%, 33%} is an odd growth trajectory.
  • For example, this is a 56789-compliant growth trajectory that has no whipsawing in growth rates.

Three Situtions That Break The Rule
Rules are made to be broken, so let’s talk about three common situations which confound the Rule of 56789.

  • Bootstraps, which are capital constrained and grow more slowly.  Bootstraps should largely ignore the rule (unless they plan on changing their financing strategy) because they are definitionally not trying to impress venture capitalists [7].
  • Platforms, that require years of time and millions of dollars before they can go to market, effectively resetting the starting clock from company inception to beta product release [8].
  • Pivots, where a company pursues strategy A for a few years, abandons it, and takes some salvage value over to a new strategy B. This effectively resets the starting clock from inception to pivot [9].

Alternative Growth Velocity Rules
Let’s compare the trajectory we showed above to similar one generated using a slightly different rule, which I’ll call the 85% Growth Retention Rule, which says to be “impressive” (as defined above), you should:

  • Pass $1M in ARR at a high growth rate (e.g., above ~180%)
  • Subsequently retain 85% of that growth rate every year

I view these as roughly equivalent rules, or more precisely, alternate expressions of nearly the same underlying rule.  I prefer 56789 because it’s more concrete (i.e., do X by Y), but I think 85% growth retention is somewhat more general because it says no matter where you are and how you got there, try to retain 85% (or more) of your growth rate every year.  That said, I think it stops working at 8-10 years because the asymptote on great company growth is somewhere around 40% [10] and some would argue 60% [11].  It also fails in situations where you need to reaccelerate growth.

There’s one well-known growth velocity rule to which we should also compare.  The triple/triple/double/double/double (T2D3) rule, which says that once you hit $2M in ARR, you should triple to $6M, triple again to $18M, then double three times to $36M, $72M, and $144M.

Let’s compare the 56789 and the 85% Growth Retention rules to the T2D3 rule:

Clearly T2D3 is more aggressive and sets a higher bar.  My beef is that it fails to recognize the law of large numbers (by failing to back off on the growth rates as a function of size across considerable scale), so as an operator I’m more intuitively drawn to the 85% Growth Retention rule.  That said, if you want to be top 5% to 10% (vs. top 25%), then go for T2D3 if you can do it [12].  You’ll clearly be creating a lot more value.

I like all of these rules because they help give you a sense for how quickly you should be getting to a certain size.  Growth conversations (e.g., trying to get a CRO to sign up for a number) are never easy.  Rules like these help by providing you with data not about what the average companies are doing, but what the great ones are.  The ones you presumably aspire to be like.

The limitation, of course, is that none of these rules consider the cost of growth.  There’s a big difference between a company that gets to $100M in 9 years on $100M in capital vs. one that does so on $400M in capital.  But that’s why we have other metrics like cash conversion score.  Different metrics measure different things and these ones are focused solely on size/growth vs. age.

A big tip of the hat to Michael Lavner at Balderton Capital for working with me on this post.

# # #

Notes

[1] See the definition of small business, which is somewhat broader than I’d have guessed.

[2] Even though it’s only classified as “less difficult” on this rather amazing scale from less difficult to difficult, very difficult, extremely difficult, ridiculously difficult, and extraordinarily difficult.  (Perhaps CEO’s can use that scale to classify board members.)

[3] It’s not as if just anybody can do either.  Founding a company and building it to $10M is impressive, regardless of the timeframe.

[4] Balderton universe = European SaaS startups who wanted to raise venture capital, who were sufficiently confident to speak with (what’s generally seen as) a top-tier European firm, and who got far enough into the process to submit performance data.

[5] I remember it by thinking that since it’s still pretty early days, jumping from $10M+ to $20M+ seems more reasonable than from $10M to $25M+.

[6] Don’t equate this rule with a growth vector of {100%, 150%, 50%, 33%} in years 5 through 9.  For example, years in which companies break $10M often don’t conclude with $10.1M in ARR, but more like $15M, after having doubled from a prior year of $7 to $8M.

[7] The rule would probably be more useful in projecting the future of VC-backed competitor.  (I think sometimes bootstrapped companies tend to underestimate the aggressiveness of their VC-backed competition.)  This could help you say, “Well, in N years, BadCo is likely to be a $50M business, and is almost certainly trying to be.  How should that affect our strategy?”

[8] That said, be sure you’re really building a mininum viable product and not overengineering either because it’s fun or it allows you to delay the scary of moment of truth when you try to sell it.

[9] Financings after a pivot sometimes require a recapitalization, in which case the company’s entire lifeclock, from strategy to product to cap table, are all effectively reset.

[10] Current median growth in Meritech Public Comps is 32% at median scale $657M in ARR.

[11] 0.85^10 = 0.2 meaning you’ll cut the starting growth rate by 80% after ten years.  So if you start at 200% growth, you’ll be down to 40% after 10 years with 85% growth retention.

[12] I’ll need to take a homework assignment to figure out where in the distribution T2D3 puts you in my data set.

 

My Perspectives on Growth (Presentation)

In my new capacity as an EIR at Balderton Capital, I recently gave a presentation to a leadership meeting at a high-growth, Balderton-backed startup offering my perspectives on growth and the challenges that come with it.

I discussed these five challenges:

  1. Next-levelitis, an obsessive focus on scaling everything to the next level.  (Which is great if not overdone.)
  2. Absorbing new leaders, (aka, “FBI guys”) and the challenges that come when hiring the wrong next-level people and they blow themselves up at the start.
  3. Conflation of regional culture and opinion, a common problem in international expansion.  (What’s a bona fide regional difference vs. a difference of opinion masked as one?)
  4. Missing an opportunity that you want (aka, getting “passed over” for a promotion) and what to do about it.
  5. Getting things wrong to get other things right.  Startups are 100% about getting what matters right.  Which begs the question, what matters?

The slide deck is below.

By the way, you have to watch the referenced Die Hard videos; they do a superb job of portraying what it feels like in these situations:

“I’m Dwayne Robinson … and I’m in charge here.”

“Not any more.”