Category Archives: Silicon Valley

You Can’t Fix a CAC Payback Period: The Operator vs. Investor View of SaaS Metrics

Just a quick post to share the slides for the presention I gave today at SaaS Metrics Palooza, entitled You Can’t Fix a CAC Payback Period: The Operator vs. Investor View of SaaS Metrics.  (For those with Slideshare issues, Google Drive share is here.)

The presentation discusses:

  • The ways VCs can use metrics in discussions with founders and CEOs.
  • A deep dive into CAC payback period (CPP) itself, how it’s defined, what it measures, and how its often “corrected.”
  • How investors like compound metrics (e.g., CPP, Rule of 40) whereas operators are best focused on atomic metrics — e.g., you should set accountability and OKRs around atomic metrics.
  • How some metrics are stealthly more compound that you might think — e.g., CAC based on net-new ARR or gross profit (or both).
  • Why I like to say, “you can’t fix a CAC payback period.”  It’s a compound metric which can be driven by at least 5 different factors.
  • How to apply my observations to everyday SaaS life.

The slides are below.  Thanks to Ray Rike for inviting me to the palooza!

The More Cons than Pros of the Backdoor Search

You’ve decided you need to replace one of your executives.  Hopefully, the executive already knows things aren’t going great and that you’ve already had several conversations about performance.  Hopefully, you’ve also already had several conversations with the board and they either are pushing for, or at least generally agree with, your decision.

So the question is how to do you execute?  You have two primary options:

  • Terminate and start search.  Arguably, the normal order of operations.
  • Start search and then terminate.  This is commonly known as a backdoor search, I guess because you’re sneaking out the back door to interview candidates.  More formally, it’s known as a confidential search.

Yes, there are a lot of sub-cases.  “Search” can mean anything from networking with replacement CXOs referred by your network up to writing a $100K+ check to Daversa, True, and the like.  “Terminate” can mean anything from walking the CXO out the door with a security escort to quietly making an agreement to separate in 60 days.

As someone who’s recruited candiates, been recruited as a candidate, and even once hired via a backdoor search, let me say that I don’t like them.  Why?

  • They make a bad impression on candidates.  Think:  so, this company is shooting their CMO and that person doesn’t even know it yet?  (Sure, I’d love to work for them.)
  • They tie the recruiter’s hands behind their back.  Think:  I have this great opportunity with a high-growth data workbench company — but I can’t tell you who it is.  (Call me when you can.)
  • They erode trust in the company culture.  The first rule of confidential search is there are no confidential searches.  Eventually, you get busted; the question is when, not if.  And when you do, it’s invariably a bad look for everyone involved.
  • They are super top-down.  Peers and employees are typically excluded from the process, so you neither build consensus around the final candidate nor let them meet their team.
  • You bypass your normal quality assurance (QA) process.  By involving fewer people you disregard a process that, among other things, helps vet the quality of candidates.  If the candidate turns out a mishire you are going to feel awfully alone.
  • If you somehow manage to pull one off, the candidate gets off to a rough start, typically never having had met with anyone on their team.

That said, the advantages of confidential searches are generally seen as:

  • No vacant seat.  There’s no awkward period where the CXO’s seat is empty and/or temporarily filled by one of their direct reports.
  • Short transition period.  You elminate the possibility of an extended period of ambiguity for the CXO’s team.  Colloquially, you rip off the band-aid.
  • One transition, not two.  Some positions (e.g., CFO, CMO) have active fractional (or rent-a-CXO) markets.  If you terminate first, hire an interim replacement, and then search for a permanent replacement, you end up putting the team through two transitions.

I’d argue that for conflict-averse CEOs, there’s one bad “advantage” as well — they get to put off an unpleasant conversation until it’s effectively irreversible.  Such avoidance is unhealthy, but I nevertheless believe it’s a key reason why some CEOs do backdoor searches.

All things considered, I remain generally against backdoor searches because the cost of breaking trust is too high.  Lady Gaga puts it well:

“Trust is like a mirror, you can fix it if it’s broken, but you can still see the crack in that mother f*cker’s reflection.”

So what can you do instead of a backdoor search?  You have three options:

  1. Run the standard play, appointing an interim from the CXO’s directs or doing it yourself.  (If you have the background, it’s relatively easy and sometimes it’s even better when you don’t —  because it helps you learn the discipline.  I’ve run sales for 18 months across two startups in this mode and I learned a ton.)
  2. Run with an interim.  In markets where you can do this, it’s often a great solution.  Turns out, interim CXOs are typically not only good at the job, but they’re also good at being interim.  Another option I like:  try-and-buy.  Hire an interim, but slow starting your search.  This de-risks the hire for both sides if you end up hiring the interim as permanent.  (Beware onerous fees that interim agencies will charge you and negotiate them up front.)
  3. Agree to a future separation.  This is risky, but a play that I think best follows the golden rule is to tell the CXO the following:  “you go look for a job, and I’ll go look for a new CXO.”  A lot can go wrong (e.g., undermining, hasty departure, mind changing) and you can’t really nail it all down legally (I’ve tried several times), so you can only do this option with someone you really trust.  But it allows you to treat the outgoing CXO with respect and enables them to not have to ask you for a reference (as they’re still working for you).  You’re basically starting a search that is “quiet” (i.e., unannounced internally), but not backdoor because the CXO knows it’s happening.

Hat tip to Lance Walter for prompting me to write on this topic.

The Board Boss Delusion

I talked to a founder a while back who felt like they’d lost a year or two thanks to some strategic distractions foisted upon them by a well-meaning board of directors.  While most startup boards try to follow the Hippocratic Oath, some — like well-meaning but overbearing parents — smother their founders and their companies with love.  This was, in my opinion, such a case.

It wasn’t the first time I’d heard this tale, so I thought I’d write a quick post on the topic, which serves as a follow up to my previous post, Whose Company Is It Anyway?

Most of the writing I’ve done on board relations focuses on the hired CEO for two reasons:

  • That’s the path I personally took, having been a hired CEO at two startups.  I could write about it first hand.
  • I thought it was the harder path.  Alas, the grass is always greener, so I always assumed life was easier for founders because they possessed the irrevocable moral authority of being founder and accompanying invisibility cloak [1] that shield them from the same level of termination risk as a hired CEO [2].

But some founder/CEOs — particularly younger, nicer, and/or first-time ones — suffer from a dangerous delusion that we need to challenge.  When I asked the aforementioned founder how they ended up in this situation, they said this:

“I was younger then.  I was still under the impression that the board were my bosses.”

That’s it.  The board boss delusion:  the belief that a founder/CEO should try to please the board in the same way that an employee wants to please their manager.  Why is this a delusion?

  • The board is not a person.  It’s a committee.  It’s not of one mind.  It may literally be impossible to please everyone, and often is.
  • The board does not want to be the boss.  Despite appearances otherwise, the board always wants the CEO to be boss.  Admittedly that may be more apparent with some boards than others, but even the most idea-generating, directive [3] boards do not want the CEO treating them like the boss.  They’re just adding value by providing ideas.
  • As CEO you are accountable for results, not for pleasing people.  You’re not a director executing someone else’s plan who is rated on execution and congeniality.
  • There is no get out of jail free card.  If a founder/CEO fully executes exactly what a powerful board member said and it fails, they do not get to say, “but, but we agreed that was plan.”  The invariable response if you do:  “you’re the one running the company and you decided to do it.”  It’s on you.  It’s always on you.
  • The board is usually not qualified to be boss.  How many of your board members would make the short list in a search for your replacement?  Some, maybe, even ideal in cases.  But most?  No.
  • The board doesn’t work there.  You spend 50-70 hours/week at the company.  They go to six four-hour board meetings per year and sit on 8-10 other boards.  Informed outsiders?  Yes.  But outsiders.
  • It’s your company.  As a hired CEO it’s metaphorical, as a founder/CEO, it’s literal.  Either way, you need to run it.  The board’s there to challenge you, give you ideas, pattern match, and leverage their networks.  You’re there to run the show.

If you don’t believe me, try one of these ideas:

  • Ask your board members, over a coffee (not in a board meeting), if they want to be treated like the boss.  They will say no.
  • Throw them the keys.  A few of the gutsier founders I know do this when the board gets too directive.  They literally take their car keys out of their pocket and throw them across the table:  “if it looks so easy, you can do it.”  They will throw them back.
  • Ask them to tell you a story about CEOs who got replaced.  Drill into those stories.  Find out whose plan the CEO was executing.  Ask if the board approved the plan.  Ask if the CEO failed executing an agreed-to plan, particularly if they were executing it well but it just wasn’t working, why they got replaced?  They’ll say, in the end the CEO decided to execute it, so it was their plan.

Whose company is it?  Yours.  Run it that way.

Is the board your boss?  No.  And the faster you learn that, the better.

# # #

Notes
[1]  Potentially including actual control provisions.

[2]  I am not saying this is bad, by the way.  Having “it’s my company” moral authority makes founder/CEOs less vulnerable to termination in ways that I believe are more good than bad.  Yes, in the end, if someone is continually failing they need to be replaced. But, on the flip side, if it now takes 13 years (i.e., 52 quarters) to go public, there is a virtually 100% chance of bad periods along the way and, particularly on a VC board where there are N stakeholders with potentially divergent opinions, it can be difficult to survive such downturns without either a protector (i.e., alpha) on the board or the moral authority of being a founder.

[3]  You should do this!  You should do that!

How Should CEOs Answer the Question, “What Keeps You Up at Night?”

I’ve always felt that “what keeps you up at night?” was a trick question for CEOs.

There’s one part of it I’m quite sure about.  There cannot be anything that you control that keeps you up at night.  Why?  Because you’re the CEO.  If something is keeping you up at night, well, do something about it.

Stress, as I like to say, is for VPs and CXOs.  They’re the ones that need to convince the boss about something.  They’re the ones worried about how something might look.  The CEO?  Well, you’re accountable for results.  You get to make or approve the decisions.

If you’re a founder/CEO then you shouldn’t be particularly worried about how things look to the board.  It’s your company.  You’ve got an invisibility cloak that your hired CEO counterparts lack, and which you should use when needed.  Think of founder privilege the way the kitschy Love Story described love:  it means never having to say you’re sorry.

For what it’s worth, and I won’t claim to have been God’s gift to CEOs, I lived by the control rule — that is, if I controlled it and it woke me up in the middle of the night, then I was going to do something about it.  That’s why one of the worst things I could say to one of my VPs was, “I woke up last night thinking about you.”  If that happened, and it sometimes did, then either our working relationship or their employment status was changing soon.

I put this in the same “listen to your gut” class as the I don’t want to talk to you anymore rule.  If you’re one of my VPs, then you’re running a key part of my company, then I should look forward to speaking with you each and every time.  If I don’t look forward to speaking with you, it’s a massive problem, and one I shouldn’t ignore.  After all, why wouldn’t I look forward to speaking with you?  Who don’t I like speaking to?  People who:

  • Don’t listen
  • Don’t follow through
  • Can’t keep up
  • Grinf-ck me
  • Can’t or won’t change
  • Are negative
  • Are mean

There are probably other classes, but the point is if I don’t want to talk to someone, it’s a huge signal and one I should dig into, not ignore.

Waking up in the middle of the night is an even bigger signal.  If you agree that CEOs should not wake up in the middle of the night over things they can control, then we can move onto the second category:  things they can’t control.  Should CEOs wake up in the middle of the night over them?

Again I say no.  Why?

Making bets is a big part of a CEO’s job.  Based on available information and working with the team, the CEO places a set of strategic bets on behalf of the company.  The company then needs to execute those strategies.  While the quality of that execution is under the CEO’s control (and should be high to remove execution as a source of noise in the strategy process), the outcome is not.

Why be stressed while the roulette wheel is spinning?  It’s a natural reaction, but does it change the outcome?  You’ve placed your chips already.  Does stressing out increase the odds of the ball landing on your square?  Does not stressing out decrease it?  No.  It changes nothing at the roulette table.

I’d argue that in business, unlike roulette, stressing out can effect the outcome.  A CEO who’s constantly under stress while the wheel is spinning — e.g., waking up in the middle of the night — is likely to perform worse, not better, as a result.

  • A tired CEO does not make great decisions
  • A haggard CEO does not inspire confidence
  • A grumpy CEO does not handle delicate situations well

I’m not trying to minimize the very real stress that comes with the CEO job.  I am, however, trying to provide a rational, contrarian, and hopefully fresh point of view that helps you better frame it.

In the end, there are two types of things that CEOs can potentially stress about:

  • Things they can control.  They shouldn’t stress over these because they should do something about them, instead.
  • Things they can’t control.  They shouldn’t stress over these because doing so will not change the outcome.  Worse yet, it may well change the outcome — for the worse — over the things they can control.

Ergo, CEOs should never stress about things.  QED.

As Warren Buffet said, “games are won by players who focus on the playing field — not by those whose eyes are glued to the scoreboard.”  Focus on what you can control and, as Bill Walsh says, the score will take care of itself.

Congratulations.  You’re the CEO.  You’ve got the best job in the world.  Enjoy every day.  And sleep well every night.

# # #

Notes

  • To reiterate, none of this is to trivialize the stress that comes with the CEO job nor to suggest that CEOs shouldn’t work hard.  It is to say that I believe they will be happier and more effective if they find a way to sleep well — as most senior executives do.
  • To look at this from an outcomes perspective, while I was pleased with the operational results at both companies I ran, I was not particularly pleased with the outcomes.  Did I work hard and obsess about things?  Yes, in general.  If I worried more and slept less do I think it would have improved my outcomes?  No.  Were some of the worst decisions I made in part due to being worried and stressed about things?  Yes.  Did I in general sleep well?  Yes.  I have always naturally focused on running plays well and believed that the score would then take of itself.  In my experience, sometimes it does, but sometimes it doesn’t.
  • In writing this post, I found a few anecdotal, fun, and one somewhat ironic article on success and sleep.
  • This Bill Walsh quote seems to undermine my argument.  “If you’re up at 3 A.M. every night talking into a tape recorder and writing notes on scraps of paper, have a knot in your stomach and a rash on your skin, are losing sleep and losing touch with your wife and kids, have no appetite or sense of humor, and feel that everything might turn out wrong, then you’re probably doing the job.”  That said, he’d use this as an opener to speeches which were largely about focusing on what you can control.
  • Walsh’s other quote on sleep was more proactive:  “If you want to sleep at night before the game, have your first 25 plays established in your own mind the night before that. You can walk into the stadium and you can start the game without that stress factor. You will start the game and you will remind yourself that you are looking at certain things because a pattern has been set up.”

How to Lead a Strategic Board Discussion

Have you ever been to a board meeting where 60 minutes were allocated on the agenda for discussion of a strategic topic?  What happened in that session?

  • You probably started late because board meetings are hard to keep on time.
  • Some exec, maybe the CEO, probably presented a “few slides” to “tee up” the discussion.
  • “A few” turned out to be 23.
  • Two or three questions were asked by the one board member closest to the topic.  The others said nothing.
  • Time ran out because you needed to get to the administrative section, approving prior-meeting minutes and such.
  • Everyone politely said, “great job,” but left the meeting frustrated.

This happens a lot.  Execs who dysfunctionally view survival as the goal of a board meeting might be happy with this outcome.  Think:  “we survived another one; now, let’s get back to work.”

For those execs, however, who actually want to both tap into the board’s expertise and build board-level consensus on a strategic topic, this is a terrible outcome.  No expertise was tapped.  No consensus was built (except perhaps that the company doesn’t run good board meetings).  So what went wrong and what should we do about it?

What Goes Wrong in Strategic Board Discussions
Startup boards are a tough audience.  They are homogenous in some ways:  everyone is typically smart, outspoken, successful, and aggressive [1].  That means leading any discussion is cat-herding.

But, when it comes to strategic discussions, the board is heterogenous in three critical dimensions [2]:

  • Operating experience
  • Technology understanding
  • Financial knowledge

Startup boards are typically VC-dominated because, as a startup goes through the A, B, C, D series of funding rounds, it typically adds one VC board member per round [3].  Thus the typical, sub-$100M [4] startup board has 1-2 founders, one VC for each funding round [5], and one or possibly two independents.

Patagonia vests [6] aside, not all VCs are alike.  When it comes to operating experience, VCs generally fall into one of three different categories [7]:

  • Deep.  Former founders, who founded, grew, and eventually sold their companies, or highly successful 10+ year executives from brand-name companies.  In high school, members of the former group were in the programming club [8].  You’ll find these people working at early-stage VC firms.
  • Moderate.  People who worked for roughly 4 to 10 years, often in product but sometimes in sales or corpdev, at a larger tech company, often with an MBA sandwiched in the middle.  Often they studied CS or engineering undergrad.  In high school, they were in the entrepreneurship club.  You’ll find these people at a wide range of VC firms.
  • Light.  People who typically majored in economics or finance (sometimes CS), worked for 2 to 4 years in management consulting or at a tech firm, attended a top business school, joined a VC firm as an associate, and then worked (usually hard and against the odds) their way up to partner.  In high school, they were in the investing club.  You’ll find these people at later-stage VC firms.

Independent board members come in different flavors as well:

  • General managers.  Active or former CEOs of startups and/or business unit GMs at big companies.  These people typically have a good overview of the business and know the functional area they grew up in, these days typically sales or product.
  • Go-to-market executives.  Active or former sales or marketing leaders, i.e., CROs or CMOs.  These people understand go-to-market, but may be light on both technical understanding and financial knowledge.
  • Finance executives.  Active or former CFOs who lead the audit committee and who work the company’s CFO to ensure the company’s financial affairs are in order.  These people are typically light on technical understanding and go-to-market (GTM) knowledge (but they know that GTM is too expensive and they don’t like it).

Now, imagine having a deep conversation about {multi-cloud, serverless, re-architecture, UI/UX, positioning, pricing, branding, ABM, PLG, company strategy, category consolidation, international expansion, channels} with a group consisting of two product-oriented company founders, three VCs (one deep, one moderate, and one light in operating experience), and two independent directors (one former CEO with a sales background and the other a former CFO).

As the saying goes, “you can’t fix what you can’t see.”  Hopefully in this part of the post we’ve shined a bright light on the problem.  You want to discuss an inherently difficult issue (otherwise it wouldn’t have made the agenda).  You’re working with one heck of heterogeneous group. And, for the cherry on top, most of the group members are type-A personalities.  No wonder these sessions are hard to lead [9].

How To Lead a Strategic Board Discussion
Since this exercise is almost a Kobayashi Maru, sometimes the smartest strategy is change the rules.  Rather than teeing up an impossible discussion, instead propose to create a working group of those members who are most interested (and presumably expert) in the chosen topic.  Team those board members with the relevant executive staff, run a series of meetings that dive deep into the topic, and then report back into the larger group. Sometimes, as the WOPR computer concluded in War Games, the only wining move is not to play.

The benefits of these working groups are many:

  • You engage the board members and really tap into their expertise.
  • The smaller group size and more informal setting lead to more interesting and interactive discussions.
  • You create an opportunity for the executive staff to increase their visibility and build relationships with board members [10].

Personally, I’ve participated in numerous such working groups on various topics (e.g., pricing, metrics, GTM planning and modeling, sales process, positioning/branding, product strategy, and reluctantly, compensation) and find them invariably superior to jumping into a hard topic with a big heterogeneous group.

That said, once in a while you do need to lead such a discussion, so in that situation what should you do?  Do these five things:

  • Make a deck.  If you start the discussion from scratch without a tee-up, it will likely be a mess.  Use a deck to frame the topic and maintain control.  However, that deck is not a presentation.  It should be built specifically to lead a discussion.  Don’t just cut and paste slides from your internal meetings.
  • Baseline the audience.  Writing for the person in the room with the least expertise and familiarity with the topic, write 3-5 slides that describe the challenge you are facing and the decision you need to make.  Try to decompose the overall question to three sub-questions about which you will lead a discussion.  This will likely clarify your own thinking on the question greatly.  If it’s a one-hour session, this part, including explanatory Q&A, should take 10 minutes.
  • Ask three questions. The final three slides should each have one question in the title and blank body.  Stay on each one for 15 minutes.
  • Balance participation.  Remember your goal is to enable a discussion, not necessarily to make the final decision.  So lead a discussion.  It’s not a discussion if you and the alpha board member are the only people talking.  (That’s called watching two people talk.)  Keep track of who’s talking and do so naturally, i.e., without “going around the room” (which also isn’t a discussion, it’s a serial Q&A).
  • Summarize what you heard and either promise to get back to them with your final decision, propose splitting off a working group, or some other concrete action so that they know the next steps going forward.

Remember if you’re clear on the goal — to have a good discussion — and you build the deck and lead the group to stay focused on that goal, you might not arrive at an easy decision in 60 minutes, but you will indeed have delivered on what you promised — a good, board-level discussion about a complex issue.

# # #

Notes

[1]  As is well known, they are also often homogenous in other, undesirable ways (e.g., race, gender) that I will acknowledge but not address as it’s not the purpose of this post.  For more on this topic, you can start here.

[2]  This is why pattern-matching across portfolio companies, executive staffing, and compensation are popular topics with boards.  They are safe topics, in the sense that everyone gets to participate in the discussion.  On the other extreme, it’s why product and major engineering decisions get so little time relative to their importance.  Go-to-market lies somewhere in the middle.

[3]  This is somewhat less true in today’s markets because (a) many VCs are more willing to invest without taking a board seat and (b) some, more indexing-oriented, later-stage VCs do not as a matter of practice want board seats because their business model is about deploying large amounts of capital across a broad range of companies.

[4]  Around $100M they may typically start reconfiguring in preparation for an upcoming IPO.

[5]  Where that number, using an Excel formula, is = code(uppercase(last-round-letter)) – 64.  You’re welcome.

[6]  A little satire from Fortune and/or my favorite scene from The Internship, which is about academic elitism in Silicon Valley in general and not VC in specific.

[7]  These buckets are definitionally stereotypes with all attached strengths and weaknesses.  While I was tempted to write “typically” and “often” before every sentence, I elected not to for word parsimony.  Place accept in the spirit given.

[8]  I add this colorful detail, which will invariably be wrong a lot, both for fun and to help paint the picture.  In each instance, I know at least one person, and usually more than one person, who fits this profile.  But no, I don’t always ask people what clubs they were in during high school.  To ensure contemporary naming (e.g., back when I was a member, it was called “computer club”), the club names come from the list at the high school that most of my children attended.

[9]  This why boards frequently talk about “safer” topics (in the sense that everyone can more easily participate) such as pattern matching across companies, executive staffing, and compensation — and a key reason why major engineering and product decisions get low airtime relative to their importance on many boards.

[10]  One of the smartest things e-staffers can do is to build relationships with their VC board members.  This isn’t always easy — everyone is pressed for time, sometimes it can make the CEO uncomfortable, and it’s not strictly necessary — but five years later when the VC is looking for a CXO for a hot portfolio company, whether you get the call or not may well be a function of that relationship or lack thereof.