Kellblog covers topics related to starting, leading, and scaling enterprise software startups including company strategy, financing strategy, go-to-market strategy, sales, marketing, positioning, messaging, and metrics
Just a quick post to let you know that I’ll be presenting at SaaStr’s Workshop Wednesdays this week, on 5/3/23 at 10am Pacific. Our topic will be The Seven Things Founders Need to Know About Sales, which non-coincidentally happens to be the first section of the Balderton Founder’s Guide to B2B Sales that I wrote and we published last November.
I’ve not done one of these sessions before, but the format looks to be pretty intimate in terms of size and pretty interactive in terms of content (i.e., some lecture but a lot of time allocated for Q&A).
I’m writing to propose that we limit discussion of my top, pet-peeve SaaS metric: ending ARR.
Wait, but aren’t you the guy who said that if you only knew two things about a SaaS company and needed to value it, one would be ending ARR and the other would be its growth rate?
Yes. That’s true. But the primary business of a SaaS company isn’t valuing itself. And, as an operational metric, ending ARR stinks. I dislike talking about ending ARR for the same reason I dislike talking about revenue. In a SaaS company, revenue is a result, not a driver. Revenue is a math problem, not a key performance indicator (KPI). The same is true for ending ARR. It’s a math problem; just a simpler one.
Let’s use an example to show my point. Imagine you’re at a post-quarter board meeting and one of the executives presents this leaky bucket …
… along with this narrative: “blah, blah, blah … well, it was a good quarter, we landed at 96% of plan … blah, blah, blah.”
How does that narrative make me feel? Generally, angry. How angry? Well, that depends a lot on who’s saying it:
If it’s the VP of New Customer Sales, then very angry. They landed at 60% of plan, not 96%.
If it’s the VP of Sales (responsible for all new ARR), then still pretty angry. They landed at 73% of plan, not 96%.
If it’s the VP of Customer Success (and they’re responsible only for churn), then not angry at all. They were spot on plan though we had a little more shrinkage ARR and a little less lost ARR than plan. Good job, but I have a few questions.
If it’s the CRO, responsible for both new and churn ARR, then back to very angry. Net new ARR (new ARR – churn ARR) was $825K, 60% of plan, not 96%.
Look, bad quarters happen. I’m not angry about the bad quarter. I’m angry when people try to pretend a bad quarter was good one. Or, even more scarily, at the prospect that someone might actually believe that a bad quarter was a good one.
Talking about ending ARR is like a giant, “Hey look over here!” distraction. It’s the green arrow that I added above. Executives should talk about their area of responsibility and characterize theirquarter based on performance in that area.
When a VP of Sales who’s at 60% of plan talks about “a good quarter on ending ARR,” I ask myself when did they get promoted to CFO? When a CRO who’s at 73% of plan says, “As shareholders we should be happy that we grew the ending ARR 67% year over year,” I think: no, as shareholders, we pay you to hit the new ARR plan and you’re at 73%.
The CEO and CFO can talk about ending ARR. But even they need to get the delicate narrative right — remembering that for a SaaS company at the above scale, it’s all about acquiring new customers to join your NRR expansion flywheel. Here’s the right narrative:
Overall, it was a weak quarter. We landed at 73% of the new ARR plan. While we got close on expansion ARR at 93%, new logo ARR was a dismal 60% of plan — something we’re going to drill into with Kelly in the next section. On the churn side, things were pretty good. We hit the churn target of $625K and while we were able to beat plan on lost-customer ARR, we had $50K more in shrinkage ARR than plan, which Reese will discuss. The net result is that we ended the quarter at 96% of ending ARR, a gap of $550K which we think we can close in 2Q.
Why is this the right narrative?
It talks about by performance by area, where action and accountability happen, and not in aggregate.
It’s transparent. It doesn’t pretend a bad performance is a good one, or that 93% of plan is good.
It tees up subsequent discussion by the relevant leaders. Trust me, leading that discussion is a form of accountability all by itself.
It discusses ending ARR correctly: both as a result and as a cumulative metric, which means that, unlike the other period metrics, it’s one that we should strive to re-catch.
The last point is subtle. Instead of using ARR as a mathematical keel to damp underperformance (by a factor of around six), we’re doing the opposite. We’re recognizing that even if we hit every other plan number for the rest of year, that we will still end the year with $550K shortfall. We’re recognizing that and making a commitment to try and catch back up.
We’re using ending ARR to increase accountability, not dampen it. Goosebumps.
Hopefully, this explains my modest proposal: unless you’re the CEO or CFO and it’s the finance section of the meeting, you should never talk about ending ARR. Talk about what drives it, instead.
(Republishing this 5/7/18 post that got deleted in a recent clean-up, and it’s easier to repost than restore)
As CEO of a company, I can’t tell you the number of times, I get emails like this:
Dave,
I know our policy is that we don’t pay both the salesreps their high-rate commissions on low-profit, one-of items, but we ended up doing a $50K/year pass-along storage fee for Acme, because they are managing a huge amount of data. Because it recurs we’re considering it ARR at the corporate level. The rep is OK because they are being paid well on the rest of the $500K deal, but I worry that the sales managers and sales consultants who also get paid on new ARR bookings won’t get 100% of their payout if we don’t pay them on this – can we please do that?
Thanks/Kelly
I find this email a non-actionable, incomplete proposal better suited for a philosophy class than a business discussion. The message does eventually ask for approval, so you might think it’s actionable – but is it really? What’s missing? Three things.
A complete, concrete proposal: taking everything into account – all groups, any existing relevant policies, and any relevant precedent — what do you want to do? Suppose the SDRs are also paid on total bookings, have you simply overlooked them and will be back asking again once you’ve figured that out, or are you saying you don’t want to pay them like the sales managers and SCs?
Numbers: what’s it going to cost the company? First principles are fine, but you must translate them into recommended actions and identified costs. I don’t mind back-of-the-envelope calculations, but I do need to be sure you’ve included everything in your analysis. If the issue is complex or expensive, then I’d want a well thought out and clearly documented spreadsheet cost analysis. I get the qualitative arguments, but if you are just giving me passion and philosophy with no idea of what it’s going to cost, then I have no way of answering.
One or more alternatives: if I don’t want to approve your primary proposal, do you have a preferred backup? What is your plan B and what would it cost the company and why do you prefer plan A to it?
Bonus: a proposal to change existing polices so this situation won’t be ambiguous in the future and require another escalation.
So, let’s re-craft this email into something I’d rather receive:
Dave,
Per our policy we didn’t payout the salesrep on the $50K of ARR we took as a pass-along storage fee on the Acme account. That’s OK with the rep because such one-of items are clearly excluded in our compensation plan terms and conditions [link], but I’ve discovered that the SC and manager compensation plans lack the same exclusionary language. Ergo, this time, I recommend that we pay out the SCs and the managers on this $50K of ARR (total cost $2.5K as it pushes some folks into accelerators). Additionally, I intend to immediately update and re-issue the T&C document for sales management and SC comp plans. Can I get your approval on this proposal?
By the way, if you’re opposed to this, can we please just go and payout the SCs (total cost $1.0K) because I believe it’s more important to them than the managers. Either way, these are small numbers so let’s get this behind us quickly and move onto more important items.
Thanks/Kelly
Ah. I feel better already.
The proposer is referring to our existing policies – even providing me with links to them – applying them, noticing problems with them, and making a concrete proposal for what to do about it, along with a backup. Kelly’s telling me correct costs – e.g., not forgetting the impact of accelerators – for approving the proposal. And even correcting our policies so this situation won’t ever again require an escalation.
Just a quick post to share the slides from the presentation I gave today at the KiwiSaaS conference to discuss the SaaS metrics that matter in 2023 and 2024.
Second, a three-step set of recommendations for what to do about that: (1) extend your runway, (2) make a plan to re-earn your last round valuation, and (3) enable your next round, likely in 18-24 months, by focusing on the metrics that matter in this new world.
Phrasing these strategies in terms of songs/albums: (1) Staying Alive, (2) Get Back [to where you once were valued], and (3) Born to Run [convince VCs that, “tramps like us, baby, we were born to run” — i.e., that we have a lean machine where ARR is a predictable output of VC investment.]
Third, a one-slide-per-metric review of the set of metrics that matter in 2023: ARR growth, free cashflow margin, Rule of 40 score, subscription gross margin, burn multiple, ARR/FTE, CAC ratio, CAC payback period, NRR, and GRR.
This includes an explanation of why I excluded (what I view as old school) churn, lifetime value (LTV) and LTV/CAC analysis from those metrics. That explanation is also available in considerably longer form in my SaaStr talk: Churn is Dead, Long Live NDR.
Thanks to KiwiSaaS for inviting me, the audience for putting up with a remote live presentation, and to the sources I included as data in the slides — particularly RevOps Squared, on whose 2022 SaaS Benchmarks survey I relied fairly heavily.
When I came back on-grid last night, I quickly discovered that the world, or more precisely, my Silicon Valley business world, had basically exploded while I was flyfishing in Patagonia.
A few weeks ago there had been talk of a mass extinction event for startups in 2023. It was about funding, not banking, and the prediction was for the second half of 2023. But perhaps it had come early and for a different reason.
Instead of writing yet-another explainer article, I’ll do two things:
Provide links to the best explainer articles I’ve found thus far
Share some of my own views on the situation, reminding readers that I am go-to-market person and former CEO (and not a finance person or former CFO)
The Best Explainer Posts I’ve Found
Since I like original sources, the FDIC press release. Of note, as of 12/31/22 SVB had $209B in assets and $175B in deposits.
Note that how those assets are valued depends on whether they are classified as hold-to-maturity (HTM) or available-for-sale (AFS) which leads us to this article, The Demise of SVB, by Marc Rubinstein.
The best we-could-have-prevented-this (if we uniformly applied regulations) article comes from the FT, SVB is a Very American Mess.
The best sardonic soundbite comes from Eric Newcomer: there are no atheists in a foxhole and no libertarians in a bank run.
My Personal Views on the Situation
I’ll quickly share my personal views on the situation here:
Almost every company I work with uses SVB. They are the default startup bank in Silicon Valley. Many keep all their cash there because it’s a fairly standard term of an associated venture debt loan. If depositors lose their funds I believe large numbers of startups could fail, eliminating the thousands of jobs that they provide. The Alderaan scenario. I think it’s unlikely, but absolutely must be avoided.
Startup death is a natural part of the Silicon Valley ecosystem, the Darwinian process that produces the innovation that drives a large part of our economy. Startup death is a natural part of the process — but it should result from a bad idea or a unworkable product. Not from your bank failing.
There is a blame game with three primary parties involved: VCs for provoking the bank run, the Fed for raising rates (which devalued SVB’s long bonds), and SVB for putting themselves in an weak position. Who you blame seems to say more about you than the situation. People who like SVB blame the Fed. People who dislike VCs blame them.
Answering the question “what happens to us if rates go up?” seems absolutely core to the operation of a bank. (Think: it’s what we do here.) SVB put themselves into a situation where the liquidity rumors couldn’t be easily dismissed. Yes, VCs likely provoked the bank run, but SVB put themselves in a place where they couldn’t stop it and bungled communications on top of that.
You cannot overstate the interconnectedness around SVB. I know startups with all their money there. I know VCs who are unable to provide bridge loans to startups because all their working capital is also at SVB. I’ve heard of founder/CEOs who have all their personal money there as well, so they are unable to even use their own funds to bail out their companies. The single worst story I’ve heard is a startup who had all their money in SVB successfully arranged a loan to cover payroll and wired that money to their payroll provider … who then put it in SVB. Additionally, startups often sell to other startups, so the web is intereconnected not just across investors, but companies and customers.
SVB’s depositors must be protected. I’m not talking about bailing out SVB investors or management. I’m talking about protecting depositors, thousands of startups, the jobs they provide today, and their potential to become world-leading tech companies — the next Oracle, Cisco, or Salesforce might be killed off if we don’t.
Personally, while I’m not an expert in banking, I am uncharacteristically optimistic because SVB owns plenty of high-quality assets and, as mentioned above, those assets exceed deposits in value (though that is a function of valuation method as discussed in the Rubinstein article).
They are not sitting atop a pile of incredibly complex, thinly-traded derivatives (e.g., CDOs, CDO swaps). They are sitting atop a pile of long government bonds. This is not 2008. SVB is not Lehman Brothers. Because of this, I think there is a good chance that someone acquires them this weekend (or soon thereafter), finding opportunity in SVB’s wreckage and ending this industry-wide liquidity crunch.
I’m Dave Kellogg, advisor, director, blogger, and podcaster. I am an EIR at Balderton Capital and principal of my own eponymous consulting business.
I bring an uncommon perspective to enterprise software, having more than ten years’ experience in each of the CEO, CMO, and independent director roles in companies from zero to over $1B in revenues.
From 2012 to 2018, I was CEO of Host Analytics, where we quintupled ARR while halving customer acquisition costs, ultimately selling the company in a private equity transaction.
Previously, I was SVP/GM of the $500M Service Cloud business at Salesforce; CEO of MarkLogic, which we grew from zero to $80M over six years; and CMO at Business Objects for nearly a decade as we grew from $30M to over $1B in revenues.
I love disruptive startups and and have had the pleasure of working in varied capacities with companies including Bluecore, FloQast, Gainsight, Hex, Logikcull, MongoDB, Pigment, Recorded Future, Tableau, and Unaric.
I currently serve on the boards of Cyber Guru, Light, Scoro, TechWolf, and Vic.ai. I have previously served on boards including Alation, Aster Data, Granular, Nuxeo, Profisee, and SMA Technologies.
