Category Archives: Marketing

Should Your Startup Have a Quota Club? (And How Much to Spend on It.)

December is when most SaaS startups are closing out the year, trying to finalize next year’s operating plan (hint:  I know a software company that can help with that), starting to get a clear view on which salespeople are going to make their number, and thus beginning the process of figuring out who to invite to the annual “Quota Club” (a.k.a. President’s Club, Achiever’s Club, or Sales Club).

In this post, I’ll discuss why Quota Clubs are so controversial and how I learned to think about them after, frankly, way too much time spent in meetings discussing a topic that I view nearly as difficult as religion or politics.

Quota Club is always highly controversial:

  • It’s exclusionary.  Consider this quote my friend Lance Walter heard years ago (I think at Siebel): “the last thing I want at Quota Club is to be lying on a chaise lounge by the pool, roll over, and see some effing marketing guy next to me.”  Moreover, the sales personality tends not to blend well with other departments, so a well-intentioned attempt to send the top documentation writer on a trip with 30 sales people is as likely to be perceived as punishment as it is reward.
  • It’s expensive.  The bill can easily run in the hundreds of thousands of dollars for companies in the tens of millions of annual recurring revenue (ARR) and in the millions for those above that.  That doesn’t help your customer acquisition cost (CAC) ratio.
  • Even the basics of qualification are somehow complicated.  Now, on the face of it, you might that “making quota” would be sufficient to qualify for Quota Club, but in some people’s minds it’s not:  “no, at this company we expect people to make quota, so Quota Club should only be for those at 120% of quota.”  (The idea that maybe quotas are set too low doesn’t seem to occur to these people.)  That’s not to mention minimum attainment rules required to avoid accidents with ramped quotas (e.g., a new rep who sells $400K on a $200K quota.)  Or the intractable problem in decentralized organizations where Country A runs large numbers of junior reps at low quotas while Country B runs small numbers of senior reps at high quotas — so someone who sells $1.25M in Country A attends club while someone who sells $1.75M in Country B does not.
  • Invitations beyond quota-carrying reps (QCRs) are always controversial.  Do consultants who hit their utilization target get invited?  (No.)  Do sales development reps (SDRs) who hit their opportunity goals? (No.)  On what basis do sales consultants (SCs) get invited?  (Depends on SC model.)  Do CSMs who hit their renewals goals?  (Maybe, depends on your customer success model and how much selling they do.)  What about the executive staff?  What about a regional VP or CRO when he/she didn’t make their number?  Who presents the awards to their people?  And this isn’t to mention companies that want to inclusionary and invite some hand-picked top performers from other departments.
  • Guest policies can be surprisingly tricky.  Normally this is simple — each qualifier gets to invite a spouse or partner, with the implication that the company wants to reward the chosen guest for the sacrifices they made while the qualifier was working long hours on the big deal and doing extended travel. What if the guest is a friend as opposed to spouse or partner?  (Well, that’s OK if not quite the intent.)  But what if that friend is coworker?  (Hum, less so.)  What if that friend is another quota-carrying rep who failed to make their number?  (Even harder.)  Or, changing angles, what if their spouse is a sales rep at your top competitor?  What if they run competitive intelligence at your top competitor?
  • Opinions diverge on family policy.   Should qualifiers be encouraged to bring their children?  How about Grandpa to watch them?  Are these family members invited to any events or activities?  Can their pay their own way on the snorkeling cruise if they want to?  Is babysitting covered?  Is the reward for spending too much time away from your family a mandatory vacation away from your family?
  • The business meeting can be a religious issue.  Many sales VPs think Club should be a 100% reward — a complete vacation with no work.  If so, the CFO will take an income tax withholding from each qualifier.  Hence most companies have a business meeting that keeps Club a business affair  — and off the W-2s of the attendees.  Some sales VPs thus think:  do the absolute minimum to stave off the tax man.   More enlightened folks think:  what a great opportunity to meet with our top performers to talk about the business.
  • People can’t even agree on the dress code.  Should the awards dinner be California Casual, Summer Soiree, Creative Black Tie, Brooklyn Formal, or just a regular Black Tie Affair.  (And where do they get these names?)
  • Picking the location is difficult.   The Caribbean isn’t exotic for East Coasters and Hawaii isn’t exotic for West Coasters.  Some people think Clubs should always have a beach location, some think European cities are more exotic.  (By the way, try to find a reliably warm beach location in February or April.)  Should you invest your money in flights to a relatively inexpensive place or get cheaper flights to a more popular and presumably expensive place?  And this isn’t to mention any debates about hotel brands and their significance.
  • In-room gifts can jack up the price.  Club planners seem to love to include special gifts each night.  A welcome bottle of champagne the first night, a beach kit the second, a Tumi backpack the third, and a farewell mini-Margarita kit can quickly add up to $500 in extra cost per qualifier.
  • Planning is intrinsically difficult.   It’s inherently hard to plan when you have 30 QCRs and you’re not sure if 10, 20, or 30 are going to qualify — this is particularly difficult when you plan sales-only Clubs because you have less to fudge in terms of non-QCR attendees.  What do you do mid-year when you’ve planned for 20 and forecast that only 10 are going to make it?  Devalue Club by dropping the qualification bar for some reps or (the same act seen through a diametrically opposed lens) preserve the incentive value of Club by making it a realistic goal for the reps who otherwise had no realistic hope?

Holy Cow, just making this list gets my blood pressure up.  Are we sure we want to do this?  My answer remains yes.

Most startups, once you’re beyond $5M to $10M in ARR, should have some sort of Quota Club.  Here is my advice on how to do it:

  • Define it as the CEO’s club.  You can call it Quota Club or President’s Club, but make it clear to everyone that it’s the CEO’s event.  It’s a big expense (with a huge opportunity to waste a lot of money on top) and it’s full of decisions that are both subjective and polarizing.  Listen to what your current sales VP wants, but make those decisions yourself.
  • Start small.  At MarkLogic our first Quota Club was something like 10-15 people for two nights at the Bellagio in Vegas.
  • Leave room to make it incrementally better each year.  This is what I call Narva’s Rule, after my friend Josh Narva who came up with it.  (By the way, had we better applied his rule, we’d have held the first MarkLogic Club at Caesar’s Palace, saving the Bellagio for the following year — but at least we got the two days part right, leaving room to later expand to three.)  Don’t cover every bite or drink that goes in someone’s mouth in the early years:  folks can get a breakfast croissant at Starbucks or a drink by pool on their own nickel. You don’t need a group breakfast and a pool party to cover it.
  • Be inclusive of other functions.  This lets you recognize a few folks outside of non-quota-carrying sales each year.  (It also makes planning a little easier.)  Don’t be so inclusive that QCR/QCM attendance is less than 50%.  But take all your qualifying QCRs and quota-carrying managers (QCMs).  Add your selected SCs.  Add your qualifying CSMs (according to whatever rules you establish).  Then perhaps add a few folks — based on their helpfulness to sales — maybe from consulting, marketing, product, or salesops.  Helpful e-staff are also good candidates and can benefit from the direct feedback they will get.  Think:  I’d rather run a bit less luxurious event and invite a few more folks from across the company than the converse.
  • Do it at a beach in April, alternating East and West coasts.  Or, if you have a strong ski contingent, alternate between a ski resort in February and a beach in April.  Beware the sales VP will gripe about too much first-quarter time in meetings with a January kickoff and February Club.  But who says you can’t still ski in April?
  • Be family-friendly.  Be clear that kids and family are welcome at the event (at the attendee’s cost) and at most, but not all, activities.  If you have two dinners, make one a bring-the-clan affair and make the awards dinner spouse/guest only.  Let family opt-in to an any easily inclusive activities like snorkel trips. Help folks find and/or pool babysitting.
  • Take the business meeting seriously.  Run the meeting on the morning of day 2.  I like doing attendee surveys in advance (e.g,. via SurveyMonkey) and then doing a detailed review of the results to drive discussion.  This sets the tone that the event is for both fun and business and that the company isn’t going to miss the chance to have a great conversation with its top performers.  Discussing business at Club isn’t a party foul.  It’s part of why you have Club.
  • Stay aligned with event planner, particularly in the early days when you are trying to run a discount event as they will, by default, try to run a standard one.  Skip the bells and whistles like custom event logos, fancy signage, custom beach bags and towels, in-room gifts, and all-meals coverage. Define what your program is going to be and deliver against that expectation.  Then make it better next year.
  • Make and hold to a sensible budget.  Know, top of mind, the total event cost and cost/attendee — and remember that cost/qualifier is about double the cost/attendee, since each qualifier invites a guest.  As part of Narva’s Rule, increase that cost every year. Because I like to make things concrete, I think cost/attendee should range from $2.5K to $5.0K as a function of your typical salesperson’s on-target earnings (OTE) and your company’s lifecycle.  This means the “prize value” of the Quota Club invitation is $5K to $10K, equivalent to a roughly 2-4% bonus against typical OTEs.  On this sort of budget, you can offer a very nice, high-quality event, but you won’t be doing the truly unique, memorable, over-the-top stuff that some CROs like.
  • If you want to have an ultra-club do what we did at BusinessObjects.  While during most of my tenure at BusinessObjects we ran in nice-but-not-crazy mode, towards the end of my tenure there was a movement to make Club truly exceptional and unique.  That first led to discussions on how to trim down Club in order to increase the spend/qualifier, including potentially increasing the attainment bar from 100% to 125% and ending our inclusive philosophy.  I’m glad we didn’t do that.  Instead, we ended up creating an intimate ultra-club as a few days tacked on to the end of Quota Club.  It provided some niche cachet when the attendees were whisked off onto their continuation trip.  It allowed “the movement” to do some truly exceptional things for a small number of people.  Most of all, I think we correctly figured out who the “right people” were — not the one-hit wonder reps who had one big year, but instead the consistent reps around which you truly build a company.  I believe we set 5 years of consecutive Quota Club attainment as the criteria for an invitation to the ultra-club.  I’d invest extra in those people any day of the week.

 

The Two Archetypal Marketing Messages: “Bags Fly Free” and “Soup is Good Food.”

There are only two archetypal marketing messages, exemplified by:

  • Bags Fly Free, a current advertising slogan used by Southwest airlines.
  • Soup is Good Food, a 1970s campaign slogan used by Campbell’s soup [1].

Screen-Shot-2014-12-29-at-11.26.14-PM

soup

Quick, what’s the difference between these two messages?

Soup is Good Food answers the question “why buy one (at all)?” while Bags Fly Free answers the question “why buy mine?”  Soup is Good Food markets the category while Bags Fly Free markets one vendor’s product/service within it.  In short, Soup is Good Food is about value.  Bags Fly Free is about differentiation.

Once you see things through his lens, you will be shocked how many marketers confuse one with the other.  Some never get the difference sorted out in the first place.  Others mix up value and differentiation messages, because they are bowing to adages or dictums [2] (e.g., “always sell value” or “benefits, not features”), instead acting based on the company’s business situation.

The simple fact is that some situations call for messaging value and others call for messaging differentiation. Somewhat perversely, the hotter your market, the less you need to message around value.  The cooler your market, the less you need to message around differentiation.

Why?  Hot markets definitionally have lots of buyers.  Those buyers already understand the value of the category and are trying to figure out which product to buy within it.  That’s why in hot markets you need a strong differentiation message.

During our hypergrowth phase at BusinessObjects nobody called up saying “why should I buy a BI tool?”   Everybody called up saying, “I’m going to buy a BI tool, my boss said to evaluate three, and Gartner said to look at BusinessObjects, Cognos, and Brio.”

When that buyer asks “why should I buy BusinessObjects?” think about how stupid you’ll look if you answer like this (thinking you need to sell value):

“Whoa, slow down there.  First, let’s talk about the business benefits of using BI in general.  We’ve found that compared to writing your own SQL queries and doing centralized report generation that you can lower IT support costs, reduce the backlog of requested reports, and empower end users to do their query and reporting.  This is why someone should buy an BI solution.”

The whole time you’re blabbering, the customer is wondering if Cognos or Brio can do a better job of answering their question.  In a hot category, you better be darn good at answering “why buy mine?” in a clear and compelling way.

Similarly, in hot categories, people don’t typically ask about return on investment (ROI) [3]:  they already know they want to buy one.  Ironically — and this surprises some — when you have a lot of people asking about ROI, you are probably in a cold category, not a hot one [4].

This is why some salespeople have such a hard time when they move from hypergrowth market leaders to early-stage startups.  In their prior job, all they had to sell was differentiation — “let me explain why mine’s better.”  In the new job, they can’t survive without selling value — “wait, before you hang up, please give me a second to explain why to buy one at all.”

If you’re not sure whether you’re in a hot or a cold category, I will refer you to Kellblog official Simple, Definitive, One-Step Hot Category Test:

If you have to ask whether you’re not a hot category, you’re not in one.

If you were, you’d be too busy to ask.  You’d be growing too fast.  In too many deals.  Running around with your hair on fire.  If you have time to sit around in meetings debating whether you’re in a hot category, I can assure you that you’re not in one.

Let’s look at cold markets for a bit.  I’ll pick the early days at MarkLogic when we were selling an XML database system.  There were two not-so-subtle indicators that it was not a hot market:  first, we had the time to ask and second, Gartner had literally published a note declaring that it wasn’t (“XML Database:  The Market That Never Was“).

The value of our system (to the information industry) was that we could help companies build new, powerful information products faster.  The differentiation was that we used a unique termlist-based indexing mechanism that allowed us to process essentially any XQuery statement with constraints on both structure and text at extremely high performance.

Imagine calling the SVP of Digital Strategy at McGraw-Hill and delivering the differentiation, instead of the value, message.

Sales:  Hi, I’m from MarkLogic and we have the world’s best XML database system.

Customer (if they didn’t hang up already):  I thought XML databases were, like Snake Plissken, dead.  Gartner said so.  Nobody’s using them, I need to —

Sales:  — Wait, don’t worry about that.  Let me explain for a minute why we have the best XML database because how we use termlists instead of traditional b-tree indices to process queries.

Customer: [dial tone]

You’re telling the customer why something she doesn’t want to buy is different from something else she doesn’t want to buy.  Instead, imagine delivering the value message, telling her why she should want to buy one:

Sales:  Hi, I’m from MarkLogic and we help media companies quickly build powerful information products.

Customer:  I’m in charge of our strategy for doing that.  Who uses you and what are they doing?

Ah.  Much better.

Another way to look at this is from a Geoffrey Moore lifecycle perspective:

messaging value vs diff

Early on, you need to message value — why do you want to buy one?  Once you cross the chasm into the high-growth “tornado,” you need to message differentiation — why buy from me. Once the market cools down, you need to start working to expand it by once again messaging value.  In three phases, Soup is Good Food, then My Soup’s Better, then Soup is Good Food.

All marketers should be able to answer both questions (e.g., why buy yours, why buy one at all) [5] about their product.  But which one you develop most deeply and push most in the market should be a function of your business situation.

Think value:  Soup is Good Food
Think differentiation:  Bags Fly Free

# # #

Notes
[1] And in my humble opinion much better than current messaging:  “Discover Flavor.  Convenient tasty solutions for everyone and every occasion.  Campell’s soups are made for real, real life (TM).”  First, let me save Campell’s $50K in legal fees — don’t bother registering that trademark — nobody’s ever going to steal it.  Presumably Discover Flavor is an attempt at differentiation, but … do the other guys’ soups really lack flavor?  I thought Campbell’s was getting hit at the high-end by tasty premium soups, not at the low-end with cheap, flavorless ones.  Seen in that light, Discover Flavor seems more a defensive message than either a differentiation or value message.  (“I know you may not think it, but our soups have flavor, too!”)  Finally, I can’t even classify “made for real, real life” as a message (other than as puffery) because it doesn’t mean anything.  Are other soups made for “fake, real life” or “real, fake life”?  Drivel, but I’m sure somehow it “tested well” in focus groups.

discover flavor

[2] Apologies to my high school Latin teacher, Mr. Maddaloni, for not using the more proper, dicta.

[3] As I often said when I lived in France, “ROI is King” (in cold categories, at least).

[4] The exception would be in a hot category where the ROI is quite different among competing solutions.  Usually, this is not the case — the return is generally more a property of the category than any given product.  When there is a difference, it’s typically due not to return, but investment — i.e., the total cost of ownership (TCO) can often vary significantly among different systems.

[5] We’ll leave the next logical question (“why buy now?”) for another post.

The Domo S-1: Does the Emperor Have Clothes?

I preferred Silicon Valley [1] back in the day when companies raised modest amounts of capital (e.g., $30M) prior to an IPO that took 4-6 years from inception, where burn rates of $10M/year looked high, and where $100M raise was the IPO, not one or more rounds prior to it.  When cap tables had 1x, non-participating preferred and that all converted to a single class of common stock in the IPO. [2]

How quaint!

These days, companies increasingly raise $200M to $300M prior to an IPO that takes 10-12 years from inception, the burn might look more like $10M/quarter than $10M/year, the cap table loaded up with “structure” (e.g., ratcheting, multiple liquidation preferences).  And at IPO time you might end up with two classes common stock, one for the founder with super-voting rights, and one for everybody else.

I think these changes are in general bad:

  • Employees get more diluted, can end up alternative minimum tax (AMT) prisoners unable to leave jobs they may be unhappy doing, have options they are restricted from selling entirely or are sold into opaque secondary markets with high legal and transaction fees, and/or even face option expiration at 10 years. (I paid a $2,500 “administrative fee” plus thousands in legal fees to sell shares in one startup in a private transaction.)
  • John Q. Public is unable to buy technology companies at $30M in revenue and with a commission of $20/trade. Instead they either have to wait until $100 to $200M in revenue or buy in opaque secondary markets with limited information and high fees.
  • Governance can be weak, particularly in cases where a founder exercises directly (or via a nuclear option) total control over a company.

Moreover, the Silicon Valley game changes from “who’s smartest and does the best job serving customers” on relatively equivalent funding to “who can raise the most capital, generate the most hype, and buy the most customers.”  In the old game, the customers decide the winners; in the new one, Sand Hill Road tries to, picking them in a somewhat self-fulfilling prophecy.

The Hype Factor
In terms of hype, one metric I use is what I call the hype ratio = VC / ARR.  On the theory that SaaS startups input venture capital (VC) and output two things — annual recurring revenue (ARR) and hype — by analogy, heat and light, this is a good way to measure how efficiently they generate ARR.

The higher the ratio, the more light and the less heat.  For example, Adaptive Insights raised $175M and did $106M in revenue [3] in the most recent fiscal year, for a ratio of 1.6.  Zuora raised $250M to get $138M in ARR, for a ratio of 1.8.  Avalara raised $340M to $213M in revenue, for a ratio of 1.6.

By comparison, Domo’s hype ratio is 6.4.  Put the other way, Domo converts VC into ARR at a 15% rate.  The other 85% is, per my theory, hype.  You give them $1 and you get $0.15 of heat, and $0.85 of light.  It’s one of the most hyped companies I’ve ever seen.

As I often say, behind every “marketing genius” is a giant budget, and Domo is no exception [4].

Sometimes things go awry despite the most blue-blooded of investors and the greenest of venture money.  Even with funding from the likes of NEA and Lightspeed, Tintri ended up a down-round IPO of last resort and now appears to be singing its swan song.  In the EPM space, Tidemark was the poster child for more light than heat and was sold in what was rumored to be fire sale [5] after raising over $100M in venture capital and having turned that into what was supposedly less than $10M in ARR, an implied hype ratio of over 10.

The Top-Level View on Domo
Let’s come back and look at the company.  Roughly speaking [6], Domo:

  • Has nearly $700M in VC invested (plus nearly $100M in long-term debt).
  • Created a circa $100M business, growing at 45% (and decelerating).
  • Burns about $150M per year in operating cash flow.
  • Will have a two-class common stock system where class A shares have 40x the voting rights of class B, with class A totally controlled by the founder. That is, weak governance.

Oh, and we’ve got a highly unprofitable, venture-backed startup using a private jet for a bit less than $1M year [7].  Did I mention that it’s leased back from the founder?  Or the $300K in catering from a company owned by the founder and his brother.  (Can’t you order lunch from a non-related party?)

As one friend put it, “the Domo S-1 is everything that’s wrong with Silicon Valley in one place:  huge losses, weak governance, and now modest growth.”

Personally, I view Domo as the Kardashians of business intelligence – famous for being famous.  While the S-1 says they have 85 issued patents (and 45 applications in process), does anyone know what they actually do or what their technology advantage is?  I’ve worked in and around BI for nearly two decades – and I have no idea.

Maybe this picture will help.

domosolutionupdated

Uh, not so much.

The company itself admits the current financial situation is unsustainable.

If other equity or debt financing is not available by August 2018, management will then begin to implement plans to significantly reduce operating expenses. These plans primarily consist of significant reductions to marketing costs, including reducing the size and scope of our annual user conference, lowering hiring goals and reducing or eliminating certain discretionary spending as necessary

A Top-to-Bottom Skim of the S-1
So, with that as an introduction, let’s do a quick dig through the S-1, starting with the income statement:

domo income

Of note:

  • 45% YoY revenue growth, slow for the burn rate.
  • 58% blended gross margins, 63% subscription gross margins, low.
  • S&M expense of 121% of revenue, massive.
  • R&D expense of 72% of revenue, huge.
  • G&A expense of 29% of revenue, not even efficient there.
  • Operating margin of -162%, huge.

Other highlights:

  • $803M accumulated deficit.  Stop, read that number again and then continue.
  • Decelerating revenue growth, 45% year over year, but only 32% Q1 over Q1.
  • Cashflow from operations around -$150M/year for the past two years.  Stunning.
  • 38% of customers did multi-year contracts during FY18.  Up from prior year.
  • Don’t see any classical SaaS unit economics, though they do a 2016 cohort analysis arguing contribution margin from that cohort of -196%, 52%, 56% over the past 3 years.  Seems to imply a CAC ratio of nearly 4, twice what is normally considered on the high side.
  • Cumulative R&D investment from inception of $333.9M in the platform.
  • 82% revenues from USA in FY18.
  • 1,500 customers, with 385 having revenues of $1B+.
  • Believe they are <4% penetrated into existing customers, based on Domo users / total headcount of top 20 penetrated customers.
  • 14% of revenue from top 20 customers.
  • Three-year retention rate of 186% in enterprise customers (see below).  Very good.
  • Three-year retention rate of 59% in non-enterprise customers.  Horrific.  Pay a huge CAC to buy a melting ice cube.  (Only the 1-year cohort is more than 100%.)

As of January 31, 2018, for the cohort of enterprise customers that licensed our product in the fiscal year ended January 31, 2015, the current ACV is 186% of the original license value, compared to 129% and 160% for the cohorts of enterprise customers that subscribed to our platform in the fiscal years ended January 31, 2016 and 2017, respectively. For the cohort of non-enterprise customers that licensed our product in the fiscal year ended January 31, 2015, the current ACV as of January 31, 2018 was 59% of the original license value, compared to 86% and 111% for the cohorts of non-enterprise customers that subscribed to our platform in the fiscal years ended January 31, 2016 and 2017, respectively.

  • $12.4M in churn ARR in FY18 which strikes me as quite high coming off subscription revenues of $58.6M in the prior year (21%).  See below.

Our gross subscription dollars churned is equal to the amount of subscription revenue we lost in the current period from the cohort of customers who generated subscription revenue in the prior year period. In the fiscal year ended January 31, 2018, we lost $12.4 million of subscription revenue generated by the cohort in the prior year period, $5.0 million of which was lost from our cohort of enterprise customers and $7.4 million of which was lost from our cohort of non-enterprise customers.

  • What appears to be reasonable revenue retention rates in the 105% to 110% range overall.  Doesn’t seem to foot to the churn figure about.  See below:

For our enterprise customers, our quarterly subscription net revenue retention rate was 108%, 122%, 116%, 122% and 115% for each of the quarters during the fiscal year ended January 31, 2018 and the three months ended April 30, 2018, respectively. For our non-enterprise customers, our quarterly subscription net revenue retention rate was 95%, 95%, 99%, 102% and 98% for each of the quarters during the fiscal year ended January 31, 2018 and the three months ended April 30, 2018, respectively. For all customers, our quarterly subscription net revenue retention rate was 101%, 107%, 107%, 111% and 105% for each of the quarters during the fiscal year ended January 31, 2018 and the three months ended April 30, 2018, respectively.

  • Another fun quote and, well, they did take about the cash it takes to build seven startups.

Historically, given building Domo was like building seven start-ups in one, we had to make significant investments in research and development to build a platform that powers a business and provides enterprises with features and functionality that they require.

  • Most customers invoiced on annual basis.
  • Quarterly income statements, below.

domo qtr

  • $72M in cash as of 4/30/18, about 6 months worth at current burn.
  • $71M in “backlog,” multi-year contractual commitments, not prepaid and ergo not in deferred revenue.  Of that $41M not expected to be invoiced in FY19.
  • Business description, below.  Everything a VC could want in one paragraph.

Domo is an operating system that powers a business, enabling all employees to access real-time data and insights and take action from their smartphone. We believe digitally connected companies will increasingly be best positioned to manage their business by leveraging artificial intelligence, machine learning, correlations, alerts and indices. We bring massive amounts of data from all departments of a business together to empower employees with real-time data insights, accessible on any device, that invite action. Accordingly, Domo enables CEOs to manage their entire company from their phone, including one Fortune 50 CEO who logs into Domo almost every day and over 10 times on some days.

  • Let’s see if a computer could read it any better than I could.  Not really.

readability

  • They even have Mr. Roboto to help with data analysis.

Through Mr. Roboto, which leverages machine learning algorithms, artificial intelligence and predictive analytics, Domo creates alerts, detects anomalies, optimizes queries, and suggests areas of interest to help people focus on what matters most. We are also developing additional artificial intelligence capabilities to enable users to develop benchmarks and indexes based on data in the Domo platform, as well as automatic write back to other systems.

  • 796 employees as of 4/30/18, of which 698 are in the USA.
  • Cash comp of $525K for CEO, $450K for CFO, and $800K for chief product officer
  • Pre-offering it looks like founder Josh James owns 48.9M shares of class A and 8.9M shares of class B, or about 30% of the shares.  With the 40x voting rights, he has 91.7% of the voting power.

Does the Emperor Have Any Clothes?
One thing is clear.  Domo is not “hot” because they have some huge business blossoming out from underneath them.  They are “hot” because they have raised and spent an enormous amount of money to get on your radar.

Will they pull off they IPO?  There’s a lot not to like:  the huge losses, the relatively slow growth, the non-enterprise retention rates, the presumably high CAC, the $12M in FY18 churn, and the 40x voting rights, just for starters.

However, on the flip side, they’ve got a proven charismatic entrepreneur / founder in Josh James, an argument about their enterprise customer success, growth, and penetration (which I’ve not had time to crunch the numbers on), and an overall story that has worked very well with investors thus far.

While the Emperor’s definitely not fully dressed, he’s not quite naked either.  I’d say the Domo Emperor’s donning a Speedo — and will somehow probably pull off the IPO parade.

###

Notes

[1] Yes, I know they’re in Utah, but this is still about Silicon Valley culture and investors.

[2] For definitions and frequency of use of various VC terms, go to the Fenwick and West VC survey.

[3] I’ll use revenue rather than trying to get implied ARR to keep the math simple.  In a more perfect world, I’d use ARR itself and/or impute it.  I’d also correct for debt and a cash, but I don’t have any MBAs working for me to do that, so we’ll keep it back of the envelope.

[4] You can argue that part of the “genius” is allocating the budget, and it probably is.  Sometimes that money is well spent cultivating a great image of a company people want to buy from and work at (e.g., Salesforce).  Sometimes, it all goes up in smoke.

[5] Always somewhat truth-challenged, Tidemark couldn’t admit they were sold.  Instead, they announced funding from a control-oriented private equity firm, Marlin Equity Partners, as a growth investment only a year later be merged into existing Marlin platform investment Longview Solutions.

[6] I am not a financial analyst, I do not give buy/sell guidance, and I do not have a staff working with me to ensure I don’t make transcription or other errors in quickly analyzing a long and complex document.  Readers are encouraged to go the S-1 directly.  Like my wife, I assume that my conclusions are not always correct; readers are encouraged to draw their own conclusions.  See my FAQ for complete disclaimer.

[7] $900K, $700K, and $800K run-rate for FY17, FY18, and 1Q19 respectively.

Talking Competition: Methinks Thou Doth Protest Too Much.

From time to time marketers and executives need to talk about the competition with those outside the company, including analysts, partners, and prospective investors.  In this post, we’ll cover my 4 rules for this type of communication.

Be Consistent. 
The biggest mistake people make is inconsistency, often because they’re trying to downplay a certain competitor.   Example:

“Oh, TechMo.  No, we never see them.  They’re like nowhere.  And you know their technology is really non-scaleable because it runs out of address space in the Java virtual machine.  And their list-based engine doesn’t scale because it didn’t scale when the same three founders, Mo, Larry, and Curly, did their last startup which used primarily the same idea.  And while I know they’re up to 150 employees, they must be in trouble because in the past 6 months they’ve lost their VP of Sales, Jon Smith, and their VP of Product Management, Paula Sands, and that new appexchange-like thing they launched last week, with 37 solutions, well it’s a not real either because 15 of the 37 solutions aren’t even built by partners, and they’re more prototypes than applications, and — another thing — I heard that TechMo World last week in Vegas had only 400 attendees and customers didn’t react well to the announcement they made about vertical strategy.  Yes, TechMo’s nobody to us.  We hardly ever see them.”

— Would-Be Dismissive Product Marketer.

What’s the one thing the listener is thinking on hearing all this?

“Holy Cow, these guys are tracking TechMo’s every move.  They sure know a lot about somebody they supposedly never see.”

Or, in other words, “the lady doth protest too much, methinks.”  (Hamlet.)

Don’t be this person.  Stay credible.  Be consistent.  If you’re going to be dismissive of someone, dismiss them.  But don’t try to dismiss them, then bleed fear and guilt all over the audience.  Line up your words, your attitude, and your behavior.

Cede, But Cede Carefully.
Some people say never cede anything at all, but I think that’s dangerous, particularly when dealing with sophisticated audiences like industry analysts, prospective investors, or channel partners (who work in the field every day).

I think ceding builds your credibility, but you need to be careful and precise in so doing so.  To take an old example, from BusinessObjects days:

  • Bad/sloppy:  Brio is doing pretty well.
  • Good/careful:  Brio is doing pretty well — in the USA, with companies where the end-users have a strong voice in the process, and they prioritize UI over security and administration.

It’s called positioning for a reason.  You’re supposed to be able to say what you do well, what your competitors do well, and what the difference is.  If you just go on singing “anything you can do I can do better, I can do anything better than you,” then you’re not going to build much credibility with your audience.

  • Bad/sloppy:  Competitor X seems to have some traction in the market.
  • Good/careful:  Competitor X is appearing in high-end deals, has a “fake cloud” offering, and competes well against entrenched Oracle product Y.

Don’t give competitor X an ounce more than they deserve and don’t forget to point out their limitations along the way.  When it comes to credit, give it where due, but be stingy — don’t give a drop more.

This will build your credibility in being reasonably objective.  More important, it also forces you to build some positioning.  As long you are claiming universal superiority — that no one will believe — you’re letting yourself off the hook for doing your job, in building credible positioning.

Keep Your Facts Straight
Be sure of what you say.  It’s far better to say less and be correct than to add just one more point you’re not sure of and get quickly contradicted.  Why?  Because your credibility is now in question as are all your other assertions — even the correct ones.

If you’re sure about something, then say it.  If you’re not sure but think it’s probable then weasel-word it — “we’re hearing,” “I heard from customers that,” “you can see several reviews on Glassdoor where former employees say,” or simply “we think.”  But don’t assert something as fact unless you are sure it is and you’re ready to defend it.

Read the Audience to Avoid the Blindside Hit
I warn every marketer and product manager I know about the blindside hit.  When you’re doing a briefing with hardened industry analyst on a market they’ve covered for 20 years, you’re as vulnerable to a blindside hit as an NFL quarterback.

You make some assertions, and you’re feeling good.  But you stop paying attention to the audience.  You don’t notice the body language showing that they’re not buying it anymore.  You don’t read the warning signs.  You miss the building tension in their voice.   You don’t know that the vendor you’re attacking is the analyst’s favorite and they just had a big steak dinner at the roadshow they did last week in Cleveland.

And then you make one too many false claims and then like a safety on a blitz, the analyst sees a hole in the offensive line, accelerates through it, and hits you in the back at full speed.  BOOM.  You awake a few minutes later and discover you’re strapped to a stretcher with a neck collar on and the CMO and the analyst relations director are carrying you out of the meeting.

“Sorry, Brian got a little ahead of himself, there.  Bob will take it from here.”

quarterback blindside hit

Product marketer carried out of industry analyst briefing. Don’t let this be you.

 

How to Walk From a Deal

Like it or not, once in a while it’s appropriate for a vendor to walk away from a prospective deal.  Why might you want to do that?

  • You think your product is a poor fit with the customer’s needs.
  • You believe there is insufficient budget to achieve success on the project.
  • You feel like the deal is wired for another vendor, i.e., you think you are column fodder in the evaluation process.
  • You (and all your fellow reps) are fully booked with other more qualified opportunities.

One day I should probably write a post on how to make the critical stay vs. walk decision.  But today, I want to focus on something downstream of that — I want to focus on how to successfully walk from a deal once you’ve decided that it’s necessary to do so.

A good walk-away process should pass three tests in the mind of the customer.

  1. The customer should feel like they were treated respectfully.
  2. In the future, the customer should remain interested in buying from both you individually and your company, should circumstances be different.  (Ideally, they will be more interested in buying from you because you walked.)
  3. The customer should feel like the decision was not unilateral.

Given these three tests, here a few ways NOT to walk away from an opportunity.

  • Calling five minutes before a meeting to say you’re too busy to work on the opportunity because you don’t think it’s qualified anyway.
  • Leaving a voicemail in the middle of the night saying that you’ve decided to stop pursuing the opportunity.
  • Telling the customer their problem is too simple and/or their people are not sufficiently sophisticated to use your software.
  • Emailing to say that they are running a rigged process in which you can no longer, in good conscience, compete.

And there are lots more.  In short, there are a lot of WRONG ways to walk from an opportunity.  The right way involves doing the following things:

  • Bring it up quickly.  Once you realize there’s good reason to walk, you immediately get in touch with the customer.
  • Get the key contact on the phone and saying you’re considering dropping out and would welcome the chance to explain why.
  • Have a meeting or call to discuss the reasons you believe you should no longer participate in the sales cycle.
  • Ask for their feedback on those reasons.
  • Unless you hear otherwise in their feedback, thank them for their time.
  • Check back in later (e.g., in a few months) to ask how things turned out.

Amazingly, a lot of salespeople are afraid to walk away correctly.  So they procrastinate and then, suddenly, at the 11th hour, burst out saying “we’re not coming.”  This leaves a terrible impression on the customer and denies them the chance to correct potential misunderstandings in the logic that led to the walk-away decision.

My company has won deals by walking away in the right fashion.  To be clear, I am not advocating bluffing; when you say you’re walking you need to be prepared to do so.  But I have seen cases where the walk-away attempt revealed either a misunderstanding of the problem or the fact that no other vendor was willing to tell the customer what they didn’t want to hear.

I’ve seen cases where we get invited back six to eighteen months later and then win the deal.

I’ve also seen cases where the rep mangles the walk-away process, the customer goes ballistic and I, as CEO, need to jump in, eat a large piece of humble pie, figure out what’s going on, and assign a new rep to the deal.  We’ve won a few of these as well.

A fair number of salespeople like to brag about walking from deals, yet relatively few are mindful in how they do it.  Those who are mindful, and who follow the rules and steps above, will sell more in both the short- and long-term than those who are not.

Using Time-Based Close Rates to Align Marketing Budgets with Sales Targets

This post builds on my prior post, Win Rates, Close Rates, and Milestone vs. Flow Analysis.  In it, I will take the ideas in that post, expand on them a bit, and then apply them to difficult problem of ensuring you have enough marketing demand generation budget to hit your sales targets.

Let’s pretend it’s 4Q17 and that we need to model 2018 sales based solely on marketing-generated SALs (sales accepted leads).  To do that, we need to decompose our close rate over time because knowing we eventually close 40% of SALs is less useful than knowing the typical timing in how they close over time.

decompose closed

In a perfect world, we’d have 6-8 cohorts, not two.  The goal is to produce the last line, the average of the in-quarter, first-quarter, second-quarter, and so on close rates for a SAL.

Using these time-based average close rates, we can build a waterfall that takes historical, forecast (for the current quarter), and planned 2018 SALs and converts them into deals.

waterfall

This analysis suggests that with the currently planned SALs you can support an ARR number of $16.35M.  If sales needs more than that, you either need to assume an improvement in close rates or an increase in SAL generation.

Once you’ve established the required number of SALs, you can then back into a total demand-generation budget by knowing your cost/SAL, and then building out a marketing mix of programs (each with their own cost/SAL) that generates the requisite SALs at the targeted overall cost.

Win Rates, Close Rates and Milestone vs. Flow Analysis

Hey, what’s your win rate?

It’s another seemingly simple question.  But, like most SaaS metrics, when you dig deeper you find it’s not.  In this post we’ll take a look at how to calculate win rates and use win rates to introduce the broader concept of milestone vs. flow analysis that applies to conversion rates across the entire sales funnel.

Let’s start with some assumptions.  Once an opportunity is accepted by sales (known as a sales-accepted opportunity, or SAL), it eventually will end up in one of three terminal states:

  • Won
  • Lost
  • Other (derailed, no decision)

Some people don’t like “other” and insist that opportunities should be exclusively either won or lost and that other is an unnecessary form of lost which should be tracked with a lost reason code as opposed to its own state.  I prefer to keep other, and call it derailed, because a competitive loss is conceptually different from a project cancellation, major delay, loss of sponsor, or a company acquisition that halts the project.  Whether you want to call it other, no decision, or derailed, I think having a third terminal state is warranted from first principles.  However, it can make things complicated.

For example, you’ll need to calculate win rates two ways:

  • Win rate, narrow = wins / (wins + losses)
  • Win rate, broad = wins / (wins + losses + derails)

Your narrow win rate tells you how good you are at beating the competition.  Your broad rates tells you how good you are at closing deals (that come to a terminal state).

Narrow win rate alone can be misleading.  If I told you a company had a 66% win rate, you might be tempted to say “time to add more salespeople and scale this thing up.”  If I told you they got the 66% win rate by derailing 94 out of every 100 opportunities it generated, won 4, and lost the other 2, then you’d say “not so fast.”  This, of course, would show up in the broad win rate of 4%.

This brings up the important question of timing.  Both these win rate calculations ignore deals that push out of a quarter.  So another degenerate case is a situation where you win 4, lose 2, derail 4, and push 90 opportunities.  In this case, narrow win rate = 66% and broad win rate = 40%.  Neither is shining a light on the problem (which, if it happens continuously, I call a rolling hairball problem.)

The issue here is thus far we’ve been performing what I call a milestone analysis.  In effect, we put observers by the side of the road at various milestones (created, won, lost, derailed) and ask them to count the number opportunities that pass by each quarter.  The issue, especially with companies that have long sales cycles, is that you have no idea of progression.  You don’t know if the opportunities that passed “win” this quarter came from the opportunities that passed “created” this quarter, or if they came from last quarter, the quarter before that, or even earlier.

Milestone analysis has two key advantages

  • It’s easy — you just need to count opportunities passing milestones
  • It’s instant — you don’t have to wait to see how things play out to generate answers

The big disadvantage is it can be misleading, because the opportunities hitting a terminal state this quarter were generated in many different time periods.  For a company with an average 9 month sales cycle, the opportunities hitting a terminal state in quarter N, were generated primarily in quarter N-3, but with some coming in quarters N-2 and N-1 and some coming in quarters N-4 and N-5.  Across that period very little was constant, for example, marketing programs and messages changed.  So a marketing effectiveness analysis would be very difficult when approached this way.

For those sorts of questions, I think it’s far better to do a cohort-based analysis, which I call a flow analysis.  Instead of looking at all the opportunities that hit a terminal state in a given time period, you go back in time, grab a cohort of opportunities (e.g., all those generated in 4Q16) and then see how they play out over time.  You go with the flow.

For marketing programs effectiveness, this is the only way to do it.  Instead of a time-based cohort, you’d take a programs-based cohort (e.g., all the opportunities generated by marketing program X), see how they play out, and then compare various programs in terms of effectiveness.

The big downside of flow analysis is you end up analyzing ancient history.  For example, if you have a 9 month average sales cycle with a wide distribution around the mean, you may need to wait 15-18 months before the vast majority of the opportunities hit a terminal state.  If you analyze too early, too many opportunities are still open.  But if you put off analysis then you may get important information, but too late.

You can compress the time window by analyzing programs effectiveness not to sales outcomes but to important steps along the funnel.  That way you could compare two programs on the basis of their ability to generate MQLs or SALs, but you still wouldn’t know whether and at what relative rate they generate actual customers.  So you could end up doubling down on a program that generates a lot of interest, but not a lot of deals.

Back to our original topic, the same concept comes up in analyzing win rates.  Regardless of which win rate you’re calculating, at most companies you’re calculating it on a milestone basis.  I find milestone-based win rates more volatile and less accurate that a flow-based SAL-to-close rate.  For example, if I were building a marketing funnel to determine how many deals I need to hit next year’s number, I’d want to use a SAL-to-close rate, not a win rate, to do so.  Why?  SAL-to-close rates:

  • Are less volatile because they’re damped by using long periods of time.
  • Are more accurate because they actually tracking what you care about — if I get 100 opportunities, how many close within a given time period.
  • Automatically factor in derails and slips (the former are ignored in the narrow win rate and the latter ignored in both the narrow and broad win rates).

Let’s look at an example.  Here’s a chart that tracks 20 opportunities, 10 generated in 1Q17 and 10 generated in 2Q17, through their entire lifetime to a terminal stage.

oppty tracking

In reality things are a lot more complicated than this picture because you have opportunities still being generated in 3Q17 through 4Q18 and you’ll have opportunities that are still in play generated in numerous quarters before 1Q17.  But to keep things simple, let’s just analyze this little slice of the world.  Let’s do a milestone-based win/loss analysis.

win-loss

First, you can see the milestone-based win/loss rates bounce around a lot.  Here it’s due in part due to law of small numbers, but I do see similar volatility in real life — in my experience win rates bounce within a fairly broad zone — so I think it’s a real issue.  Regardless of that, what’s indisputable is that in this example, this is how things will look to the milestone-based win/loss analyzer.  Not a very clear picture — and a lot to panic about in 4Q17.

Let’s look at what a flow-based cohort analysis produces.

cohort1

In this case, we analyze the cohort of opportunities generated in the year-ago quarter.  Since we only generate opportunities in two quarters, 1Q17 and 2Q17, we only have two cohorts to analyze, and we get only two sets of numbers.  The thin blue box shows in opportunity tracking chart shows the data summarized in the 1Q18 column and the thin orange box shows the data for the 2Q18 column.  Both boxes depict how 3 opportunities in each cohort are still open at the end of the analysis period (imagine you did the 1Q18 analysis in 1Q18) and haven’t come to final resolution.  The cohorts both produce a 50% narrow win rate, a 43% vs. 29% broad win rate, and a 30% vs. 20% close rate.  How good are these numbers?

Well, in our example, we have the luxury of finding the true rates by letting the six open opportunities close out over time.  By doing a flow-based analysis in 4Q18 of the 1H17 cohort, we can see that our true narrow win rate is 57%, our true broad win rate is 40%, and our close rate is also 40% (which, once everything has arrived at a terminal state, is definitionally identical to the broad win rate).

cohort7

Hopefully this post has helped you think about your funnel differently by introducing the concept of milestone- vs. flow-based analysis and by demonstrating how the same business situation results in a very different rates depending on both the choice of win rate and analysis type.

Please note that the math in this example backed me into a 40% close rate which is about double what I believe is the benchmark in enterprise software — I think 20 to 25% is a more normal range.