Category Archives: Startups

Hiring Profiles: Step 0 of a Successful Onboarding Program

Happily, in the past several years startups are increasingly recognizing the value of strong sales enablement and sales productivity teams.  So it’s no surprise that I hear a lot about high-growth companies building onboarding programs to enable successfully scaling their sales organizations and sustain their growth.  What’s disappointing, however, is how little I hear about the hiring profiles of the people that we want to put into these programs.

Everyone loves to talk about onboarding, but everybody hates to talk about hiring profiles.  It doesn’t make sense.  It’s like talking about a machine — how it works and what it produces — without ever talking about what you feed into it.  Obviously, when you step back and think about it, the success of any onboarding program is going to be a function of both the program and people you feed into it.  So we are we so eager to talk about the former and so unwilling to talk about the latter?

Talking about the program is fairly easy.  It’s a constructive exercise in building something that many folks have built before — so it’s about content structuring, best practice sharing, and the like.  Talking about hiring profiles — i.e., the kind of people we want to feed into it — is harder because:

  • It’s constraining.  “Well, an ideal new hire might look like X, but we’re not always going to find that.  If that one profile was all I could hire, I could never build the sales team fast enough.”
  • It’s a matter of opinion.  “Success around here comes in many shapes and sizes.  There is not just one profile.”
  • It’s unscientific.  “I can just tell who has the sales gene and who doesn’t.  That’s the hardest thing to hire for.  And I just know when they have it.”
  • It’s controversial.  “Turns out none of my six first-line sales managers really agree on what it takes — e.g., we have an endless debate on whether domain-knowledge actually hurts or helps.”
  • It’s early days.  “Frankly, we just don’t know what the key success criteria are, and we’re working off a pretty small sample.”
  • You have conflicting data.  “Most of the ex-Oracle veterans we’ve hired have been fish out of water, but two of them did really well.”
  • There are invariably outliers.  “Look at Joe, we’d never hire him today — he looks nothing like the proposed profile — but he’s one of our top people.”

That’s why most sales managers would probably prefer discussing revenue recognition rules to hiring profiles.  “I’ll just hire great sales athletes and the rest will take care of itself.”  But will it?

In fact, the nonsensicality of the fairly typical approach to building a startup sales force becomes most clear when viewed through the onboarding lens.

Imagine you’re the VP of sales enablement:

“Wait a minute. I suppose it’s OK if you want to let every sales manager hire to their own criteria because we’re small and don’t really know for sure what the formula is.  But how am I supposed to build a training program that has a mix of people with completely different backgrounds:

  • Some have <5 years, some have 5-10 years, and some have 15+ years of enterprise sales experience?
  • Some know the domain cold and have sold in the category for years whereas others have never sold in our category before?
  • Some have experience selling platforms (which we do) but some have only sold applications?
  • Some are transactional closers, some are relationship builders, and some are challenger-type solution sellers?”

I understand that your company may have different sales roles (e.g., inside sales, enterprise sales) [1] and that you will have different hiring profiles per role.  But you if you want to scale your sales force — and a big part of scaling is onboarding — then you’re going to need to recruit cohorts that are sufficiently homogeneous that you can actually build an effective training program.   I’d argue there are many other great reasons to define and enforce hiring profiles [2], but the clearest and simplest one is:  if you’re going to hire a completely heterogeneous group of sales folks, how in the heck are you going to train them?

# # #

Notes

[1] Though I’d argue that many startups over-diversify these roles too early.  Concretely put, if you have less than 25 quota-carrying reps, you should have no more than two roles.

[2] Which can include conscious, deliberate experiments outside them.

 

 

Slides from My SaaStr Annual 2019 Presentation (5 Questions CEOs Struggle With)

Thanks to everyone who attended my session today at the amazing — and huge — SaaStr Annual 2019 conference in San Jose.  In this post, I’ll share the slides from my presentation, Five Questions SaaS CEOs Wrestle With (and some thoughts on how to answer them).

The folks at SaaStr recorded the session, so at some point a video of it will be available (but that probably won’t be for a while).  When it is up, I will also post it to Kellblog.

In some sense definitionally, there were two types of people in the audience:

  • CEOs, who hopefully received some fresh perspective on these age-old, never-quite-put-to-bed questions.
  • Those who work for them, who hopefully received some insights into the mind of the CEO that will help make you more valuable team members and help you advance your career.

As mentioned, please send me feedback if you have examples where something in the presentation resonated with you, you applied it in some way, and it made a positive impact on your working life.  I’d love to hear it.

Here are the slides from the presentation.

Rule of 40 Glideslope Planning

Enterprise SaaS companies need a lot of money to grow. The median company spends $1.32 to acquire $1.00 in annual recurring revenue (ARR) [1].  They need to make that investment for 14 years before getting to an IPO.  It all adds up to a median of $300M in capital raised prior to an IPO.

With such vast amounts of money in play, some say “it’s a growth at all costs” game.  But others hold to the Rule of 40 which attempts to balance growth and profitability with a simple rule:  grow as fast as you want as long as your revenue growth rate + your free cashflow margin >= 40%.

The Rule of 40 gets a lot of attention, but I think that companies are not asking the right question about it.  The right question is not “when should my growing startup be Rule of 40 compliant?” [2]

For more than half of all public SaaS companies, the answer to that question, by the way, is “not yet.”  Per multiple studies I’ve read the median Rule of 40 score for public SaaS companies is ~31%, meaning that more than half of public SaaS companies are not Rule of 40 compliant [3].

So, unless you’re an absolutely amazing company like Elastic (which had a Rule of 40 score of 87% at its IPO), you probably shouldn’t be unrealistically planning to become Rule of 40 compliant three years before your IPO [4].  If you do, especially if you’re well funded and don’t need additional expense constraints, you might well compromise growth with a premature focus on the Rule of 40, which could shoot off your corporate foot in terms of your eventual valuation.

If “when should we be Rule of 40 compliant” is the wrong question, then what’s the right one?

What should my company’s Rule of 40 glideslope be?

That is, over the next several years what is your eventual Rule of 40 score target and how do you want to evolve to it?  The big advantage of this question is that the answer isn’t “a year” and it doesn’t assume Rule of 40 compliance.  But it does get you to start thinking about and tracking your Rule of 40 score.

I built a little model to help do some what-if analysis around this question.  You can download it here.

r40-1

In our example, we’ve got a 5 year-old, $30M ARR SaaS company planning the next five years of its evolution, hopefully with an IPO in year 8 or 9.  The driver cells (orange) define how fast you want to grow and what you want your Rule of 40 glideslope to be.  Everything else is calculated.  At the bottom we have an overall efficiency analysis:  in each year how much more are we spending than the previous year, how much more revenue do we expect to get, and what’s the ratio between the two (i.e., which works like kind of an incremental revenue CAC).  As we improve the Rule of 40 score you can see that we need to improve efficiency by spending less for each incremental dollar of revenue.  You can use this as a sanity check on your results as we’ll see in a minute.

Let me demonstrate why I predict that 9 out 10 ten CFOs will love this modeling approach.  Let’s look at every CFO’s nightmare scenario.  Think:  “we can’t really control revenues but we can control expenses so my wake up in the middle of the night sweating outcome is that we build expenses per the plan and miss the revenues.”

r40-2

In the above (CFO nightmare) scenario, we hold expenses constant with the original plan and come in considerably lighter on revenue.  The drives us miles off our desired Rule of 40 glideslope (see red cells).  We end up needing to fund $42.4M more in operating losses than the original plan, all to generate a company that’s $30.5M smaller in revenue and generating much larger losses.  It’s no wonder why CFOs worry about this.  They should.

What would the CFO really like?  A Rule-of-40-driven autopilot.

As in, let’s agree to a Rule of 40 glideslope and then if revenues come up short, we have all pre-agreed to adjust expenses to fall in line with the new, reduced revenues and the desired Rule of 40 score.

r40-3

That’s what the third block shows above.  We hold to the reduced revenues of the middle scenario but reduce expenses to hold to the planned Rule of 40 glideslope.  Here’s the bad news:  in this scenario (and probably most real-life ones resembling it) you can’t actually do it — the required revenue-gathering efficiency more than doubles (see red cells).  You were spending $1.38 to get an incremental $1 of revenue and, to hold to the glideslope, you need to instantly jump to spending only $0.49.  That’s not going to happen.  While it’s probably impossible to hold to the original {-10%, 0%, 5%} glideslope, if you at least try (and, e.g., don’t build expenses fully to plan when other indicators don’t support it), then you will certainly do a lot better than the {-10%, -32%, -42%} glideslope in the second scenario.

In this post, we’ve talked about the Rule of 40 and why startups should think about it as a glideslope rather than a short- or mid-term destination.  We’ve provided you with a downloadable model where you can play with your Rule of 40 glideslope.  And we’ve shown why CFOs will inherently be drawn to the Rule of 40 as a long-term planning constraint, because in many ways it will help your company act like a self-righting ship.

# # #

Notes

[1] The 75th percentile spends $1.92.  And 25% spend more than that.  Per KeyBanc.

[2] Rule of 40 compliant means a company has an rule of 40 score >= 40%.  See next note.

[3] Rule of 40 score is generally defined as revenue growth rate + free cashflow (FCF) margin.  Sometimes operating margin or EBITDA margin is used instead because FCF margin can be somewhat harder to find.

[4] I’m trying to find data a good data set of Rule of 40 scores at IPO time but thus far haven’t found one.  Anecdotally, I can say that lots of successful high-growth SaaS IPOs (e.g., MongoDB, Anaplan, and Blackline) were not Rule of 40 compliant at IPO time — nor were they well after, e.g., as of Oct 2018 per JMP’s quarterly software review.  It seems that if growth is sufficiently there, that the profitability constraint can be somewhat deferred in the mind of the market.

SaaStr 2019 Presentation Preview: Five Questions SaaS CEO Wrestle With

I’m super excited for the upcoming SaaStr Annual 2019 conference in San Jose from February 5th through the 7th at the San Jose Convention Center.  I hope to see you there — particularly for my session from 10:00 AM to 10:30 AM on Tuesday, February 5th.  Last year they ended up repeating my session but that won’t be possible this year as I’m flying to Europe for a board meeting later in the week — so if you want to see it live, please come by at 10:00 AM on Tuesday!

saastr 2019

I’d quibble with the subtitle, “Lessons from Host Analytics,” because it’s actually more, “Lessons From a Lifetime of Doing This Stuff,” and examples will certainly include but also span well beyond Host Analytics.  In fact, I think one thing that’s reasonably unique about my background is that I have 10+ years’ tenure in two different, key roles within an enterprise software company:

  • CEO of two startups, combined for over ten years (MarkLogic, Host Analytics).
  • CMO of two startups, combined for over ten years (BusinessObjects, Versant).

I’ve also been an independent director on the board of 4 enterprise software startups, two of which have already had outstanding exits.  And I just sold a SaaS startup in an interesting process during which I learned a ton.  So we’ve got a lot of experience to draw upon.

SaaS startup CEO is hard job.  It’s a lonely job, something people don’t typically understand until they do it.  It’s an odd job — for what might be the first time in your career you have no boss, per se, just a committee.  You’re responsible for the life and death of the company.  Scores or hundreds of people depend on you to make payroll.  You need to raise capital, likely in the tens of millions of dollars — but these days increasingly in the hundreds — to build your business.

You’re driving your company into an uncertain future and, if you’re good, you’re trying to define that future your way in the mind of the market.  You’re trying to build an executive team that not only will get the job done today, but that can also scale with you for the next few years.  You’re trying to systematize the realization of a vision, breaking it down into the right parts in the right order to ensure market victory.  And, while you’re trying to do all that, you need to keep a board happy that may have interests divergent from your own and those of the company.  Finally, it’s an accelerating treadmill of a job – the better you do, the more is expected of you.

Wait!  Why do we do this again?  Because it’s also a fantastic job.  You get to:

  • Define and realize a vision for a market space.
  • Evangelize new and better ways of doing things.
  • Compete to win key customers, channels, and partners.
  • Work alongside incredibly talented and accomplished people.
  • Serve the most leading and progressive customers in the market.
  • Manage a growing organization, building ideally not just a company but a culture that reflects your core values.
  • Leverage that growth internationally, exploring and learning about the planet and the business cultures across it.

Basically, you get to play strategic N-dimensional wizard chess against some of the finest minds in the business.  Let’s face it.  It’s cool.  Despite the weight that comes with the job, any SaaS startup CEO should feel privileged every day about the job that they “get to” do.

But there are certain nagging questions that hound any SaaS startup CEO.  Questions that never quite get answered and put to bed.  Ones that need to asked and re-asked.  Those are the 5 questions we’ll discuss in my talk.  And here they are:

  1. When do I next raise money?
  2. Do I have the right team?
  3. How can I better manage the board?
  4. To what extent should I worry about competitors?
  5. Are we focused enough?

Each one is a question that can cost you the company, the market, or your job.  They’re all hard.  In my estimation, number 4 is the trickiest and most subtle.  There’s even a bonus question 6 – “are we winning?” — that is perhaps the most important of them all.

I look forward to speaking with you and hope you can attend the session.  If you have any advance questions to stimulate my thinking while preparing for the session, please do send them along via email, DM, or comment.

You don’t need to be a CEO to benefit from this session.  There are lots of lessons for everyone involving in creating and running a startup.  (If nothing else, you might get some insight to how your CEO might think about you and your team.)

I hope to see you there.

Two Natural Reactions That Great Managers Suppress

Most employees tolerate their managers more than love them.  According to a year-old survey in Forbes:

  • Only about 50% of employees say the boss values their opinion.
  • Only 35% of employees feel inspired by their boss.
  • Some 25% say they can do a better job than their boss does.
  • Almost 20% say that their boss takes credit for their work.

Given this, there should be no surprise that employee-manager relations sometimes flare up and that when they do employees often feel uncomfortable bringing the problem to their manager.  According to a different survey, 68% of employees are afraid to complain about their boss, fearing retaliation for so doing.

Great companies recognize these, perhaps sad, facts and try to manage around them.  For example, when I ran Host Analytics I would end virtually every piece of employee communications with the following:

If you have a problem with your boss and feel comfortable raising it with them, then please do so.  If you are not comfortable raising it with your boss, then please tell someone.  Talk to HR.  Talk to your manager’s manager.  Talk to any e-staff member.  Talk to me.  Talk to our coach.  I know that when employee-manager relations are the issue, it’s often impossible to raise the problem with your boss.  So please tell someone else.

In addition, beyond setting that as a policy, you can use other mechanisms to detect these issues.  Periodic, ideally anonymous, employee surveys do a great job of finding “hot spots” where an entire team is having problems with its manager.  (We used Culture Amp for employee surveys and its slicing-and-dicing lit up hot spots right away.)  Open-ended questions and comment fields also often reveal troubles on a more individual basis.  So does just walking around and asking people how they’re doing.

The goal from the company’s perspective is to surface these problems so they can be addressed.  Some managers, however, often react in a way that defeats that intent.  When a problem is surfaced via an indirect channel, many managers first instinct is say two things to the employee:

  1. “Why didn’t you bring this to me directly?”
  2. “Why didn’t you bring this to me sooner?”

Both are wrong.  Both not so subtly blame the employee — the first indirectly calling them a coward and the second indirectly accusing them of perpetuating the problem because you can’t fix an issue you don’t know about.   Both show that you care more about yourself and your reputation than you do about the employee.  Banish them from your management vocabulary.

Great managers don’t react this way.  They replace the above two reactions with two far superior ones:

  1. “Thank you for raising the problem to someone.”
  2. “Please tell me more about the problem so we can work on it.”

Maybe three months in the future, once and if the problem is clearly fixed, then the manager can safely say, “by the way, why didn’t you feel comfortable raising that problem to me anyway?”  In that context, the question will sound like genuine interest in the feedback.  In the heat of the moment, all it sounds like is “blame.”

Assume that, regardless of channel used, raising a working relationship issue is very hard for the employee and was probably preceded by some combination of sleepless nights and tears.  So thank them for doing the difficult thing and raising the issue — regardless of how — and respect their courage by jumping in immediately to learn more about it.

Top Kellblog Posts of 2018

Here’s a quick retrospective on the top Kellblog posts (as measured by views) of 2018.

  • Career Development:  What It Really Means to be a Manager, Director, or VP.  The number two post of 2018 was actually written in 2015!  That says a lot about this very special post which appears to have simply nailed it in capturing the hard-to-describe but incredibly important differences between operating at the manager, director, or VP level.  I must admit I love this post, too, because it was literally twenty years in the making.  I’d been asked so many times “what does it really mean to operate at the director level” that it was cathartic when I finally found the words to express the answer.
  • The SaaS Rule of 40.  No surprise here.  Love it or not, understanding the rule of 40 is critical when running a SaaS business.  Plenty of companies don’t obey the rule of 40 — it’s a very high bar.  And it’s not appropriate in all circumstances.  But something like 80% of public company SaaS market capitalization is captured by the companies that adhere to it.  It’s the PEG ratio of modern SaaS.
  • The Role of Professional Services in a SaaS Company.  I was surprised and happy to see that this post made the top five.  In short, the mission of services in a SaaS company is “to maximize ARR while not losing money.”  SaaS companies don’t need the 25-35% services margins of their on-premises counterparts.   They need happy, renewing customers.  Far better to forgo modest profits on services in favor of subsidizing ARR both in new customer acquisition and in existing customer success to drive renewals.  Services are critical in a SaaS company, but you shouldn’t measure them by services margins.
  • The Customer Acquisition Cost Ratio:  Another Subtle SaaS Metric.  The number five post of 2018 actually dates back to 2013!  The post covers all the basics of measuring your cost to acquire a customer or a $1 of ARR.  In 2019 I intend to update my fundamentals posts on CAC and churn, but until then, this post stands strong in providing a comprehensive view of the CAC ratio and how to calculate it.  Most SaaS companies lose money on customer acquisition (i.e., “sell dollars for 80 cents”) which in turn begs two critical questions:  how much do they lose and how quickly do they get it back?  I’m happy to see a “fun with fundamentals” type post still running in the top five.

Notes

[1]  See disclaimer that I’m not a financial analyst and I don’t make buy/sell recommendations.

[2] Broadly defined.  I know they’re in Utah.

Host Analytics + Vector Capital = Growth

I’m delighted to say that Host Analytics has signed a definitive agreement to be acquired by Vector Capital, a San Francisco private equity (PE) firm with over $4B in capital under management.  Before diving into some brief analysis of the deal, I want to thank Host Analytics customers, employees, partners, investors, and board of directors for everything they’ve done to help make this happen.

Going forward, I expect the company’s top three priorities to be growth, growth, and growth.  Why?  Given a large market opportunity and a company that’s executing well, it’s the right time to add fuel to the tanks.

Large Market Opportunity
To wit:

  • The total available market (TAM) for Host’s enterprise performance management (EPM) products is $12B.
  • The market, somewhat amazingly, remains less than 10% penetrated by cloud solutions, which means there is an enormous on-premises replacement opportunity.
  • The market, equally amazingly, still over-relies on Microsoft Excel for planning, budgeting, reporting – even sometimes stunningly consolidation – which represents an enormous greenfield opportunity.
  • Recent consolidation in the market (e.g., Workday’s acquisition and, in my opinion, up-market hijacking of Adaptive Insights) creates new space in various market segments

Executing Well
Host is wrapping up an excellent 2018 with strong sales growth (e.g., new subscriptions up 50%+ this quarter), record ending annual recurring revenue (ARR), historically high customer satisfaction (i.e., net promoter score), above-benchmark employee satisfaction — and we’ve been doing all that while transitioning to positive cashflow.  On the product front, we’ve been pumping out innovations (e.g., Host MyPlan, Host Dashboards) and have an exciting product roadmap.

Simply put, the company is executing on eight cylinders.  Strong execution plus large opportunity usually calls for one thing:  more fuel.

Shareholder Rotation
Host was well ahead of the market with its vision of cloud-based EPM and raised its first venture capital in 2008.  As some of our early investors are thinking about how to wrap up those funds, it’s the right time for a shareholder rotation where our last-phase investors are able to get liquidity and the company can get new investors who are focused on the next phase, i.e., the next five years of growth and scale.

That’s why I think “shareholder rotation” is the right way to think about this transaction — the old shareholders rotate out and Vector rotates in.  And I should note that our largest shareholder, StarVest Partners, is not rotating entirely out — they will remain a significant shareholder in the company going forward.

In many respects, things won’t change.  Host will remain focused on:

  • Delivering a complete EPM suite
  • Providing solutions for the Office of Finance
  • World-class professional services and support, and our desire to create Customers for Life
  • Partnership, working with other leaders to provide our customers with complete solutions
  • Product innovation, finding novel ways to help finance better partner with the business
  • Core values: trust, customer success, and teamwork

Other things will change.  We’ll see some new faces as we evolve and grow the company.  We’ll get the benefit of Vector’s internal management consultancy (i.e., the value creation team) to help drive best practices.  You should expect to see us accelerate growth through both organic means (e.g., scaling up sales, launching in new geographies) and inorganic means (e.g., follow-on acquisitions).

Thanks to our founder, serial entrepreneur Jim Eberlin, for creating the company.  Thanks to everyone who helped us get here.  Thanks to our board for its foresight and support.  Thanks to Vector for taking us forward.  And thanks to StarVest for coming along for the ride.  Onward, full speed ahead!

# # #