Analyzing sales pipeline is vital for forecasting future growth and learning where your product and GTM process needs to improve, but too often we see startups turn to unreliable heuristics like top-down growth goals or how the sales team “feels” when making key decisions. Below, we detail the key pipeline metrics you should start tracking in order to make data-driven decisions.

1. Pipeline Generation Metrics

For most SaaS companies, pipeline generation is the rate-limiting factor on growth, so this is the most important place to start. 

• Opportunities Created

When a sales rep talks to a lead and determines they are qualified to buy the product, an opportunity is created. If the number of new opportunities is growing month-over-month, growth will be greater than linear, and the company should hire more sales reps. Conversely, if new opportunities are flat there is a demand generation problem, and more resources need to be put into marketing. Breaking down opportunities created by the marketing channel they came from can help focus the business on the highest ROI channels.

• Pipeline Value Created

Sales teams should track the expected dollar value (typically in ARR) of each opportunity– summing this amount for new opportunities shows the Pipeline Value Created. This amount tends to be more accurate for later-stage pipeline; when opportunities are created a rough estimate is entered, and as sales learns which products the prospect is likely to buy this number becomes more precise.

• Win Rate

Win Rate is the percentage of created opportunities that eventually become won deals. While there is a general heuristic that win rates should be ~20%, this can vary dramatically based on how individual companies define qualified opportunities and sales cycle dynamics. Multiplying pipeline value by win rate produces an expected ARR value from newly generated pipeline. To get a more precise forecast, you can break down these metrics by variables like segment (e.g. SMB, mid-market, enterprise), industry, and region.

2. Pipeline Conversion Metrics

Pipeline Conversion metrics detail how opportunities move through the sales funnel and answer two questions: 1) how long will it take for opportunities to close, and 2) where in the sales funnel is there room for improvement? 

• Sales Cycle Length

Sales Cycle Length is the number of days opportunities take to be won. While pipeline value and win rate show how much pipeline is likely to close, Sales Cycle Length suggests when it will close. Understanding Sales Cycle Length is essential for capacity planning: sales reps can only work so many deals at a time, so longer sales cycles means more reps are necessary. If your Average Selling Price (ASP) isn’t sufficiently high to support long sales cycles, CAC can explode and the business can become inefficient. Long sales cycles can also be a sign of weak product-market fit – generally speaking, the more the product addresses customer needs, the faster customers will buy.

Make sure to evaluate Sales Cycle Length by segment. Enterprise deals will have long sales cycles, but their high ASP can make the extra time worth it. Conversely, SMB deals should have short cycles to go with lower ASP. In every segment, find the balance that keeps CAC payback fast.

• Cohorted Win Rates

Sales Cycle Length shows the average time to close, but in practice opportunities will have a wide distribution. Knowing when in the sales cycle opportunities are won, and when they are lost, is vital for forecasting ARR.

Cohorted Win Rate groups opportunities by the period they were created and tracks the percentage of opportunities that are won, lost, and remain open in each subsequent month. This metric requires creating a full history of each opportunity so you can see a “snapshot” of an opportunity’s details at a specific point in the past. This is much easier to do with software like SaaSGrid:

This cohorted view often reveals unexpected trends. For example, you might learn that many opportunities are lost in the 2nd month, but opportunities that are open past then are won at a very high rate, even if the sales cycle drags on several more months. This can help focus your team on getting your prospects through the most difficult parts of the sales cycle and eventually increase win rates.

• Stage Conversion Rate

Opportunity stages are how a company defines the steps in their sales cycle. While this will differ company-to-company, standard stages will look something like:

1. Discovery

2. Qualification

3. Overcome Objections

4. Proposal

5. Negotiation/Review

6. Closed-Won

Stage Conversion Rate is the percentage of opportunities that reach a certain stage and subsequently advance to a later stage. For example, a Stage 2 conversion rate of 40% means 40% of deals that reach Stage 2 eventually hit Stage 3 or later. 

Stage Conversion Rates can reveal why opportunities in the pipeline are being lost, for example product gaps, pricing, or problems getting executive sponsorship. Focusing on stages with low conversion rates can be the highest ROI way to improve overall win rates.

Another variation of this metric is to look at Win Rate by Stage, which is the percentage of deals that reach a certain stage and eventually make it all the way to a Closed-Won opportunity.

• Average Time per Stage

Average Time per Stage layers in the number of days your opportunities spend in each stage. A long time in a stage implies either opportunities are getting “stuck” and you should explore ways to accelerate, or opportunities are actually moving down the funnel during this time, and more stages should be added to better record status.

3. Active Pipeline Metrics

With a firm understanding of how your sales funnel operates, you can use your active pipeline to build highly accurate forecasts for the next 1-2 quarters.

• Open Pipeline by Close Date

All opportunities have a “Close Date,” which indicates the sales rep’s best estimate of when the opportunity will close. Having reps be diligent and realistic with close dates is key to pipeline hygiene. Looking at the currently open pipeline by close date will tell you which opportunities will make or break the quarter. Segmenting pipeline by stage provides more detail on where these opportunities sit in the funnel.

• Weighted Pipeline

Weighted Pipeline is the sum of ARR x probability for open opportunities. The probability of an opportunity closing is assigned based on the opportunity’s stage. For example:

If stage probabilities are accurate, the Weighted Pipeline metric is a good representation of how much ARR will be added. Many companies use arbitrary probabilities, which hurts accuracy, but SaaSGrid produces highly accurate stage win rates you can use to update your CRM, making Weighted Pipeline a reliable metric. Once probabilities are accurate, you can look at Weighted by close date to pinpoint where the team will land.

• Pipeline Waterfall

Once you understand your Weighted Pipeline for the quarter, it’s time to get tactical and review the individual opportunities. “Deal review” meetings are where the sales team’s qualitative feedback meets quantitative sales pipeline metrics: by combining what you know about likelihood to close from your pipeline metrics with your rep’s analysis of buyer sentiment, you can start to strategize using tactics like discounts, customer references, and founder calls to get your deals across the line.

During deal reviews, the Pipeline Waterfall is a powerful tool for visualizing pipeline momentum. The Pipeline Waterfall  tracks how pipeline changes between two points in time. Most helpfully, you can see how your pipeline closing this quarter has changed in the past 30 days from factors like:

• New opportunities created with a close date in this quarter

• Opportunities increasing or decreasing in value

• The close dates of opportunities “slipping” to a future quarter (an often missed category of sales forecasting)

• Opportunities won and lost

Reporting with SaaSGrid

Three years ago, we released SaaSGrid to the world as an easy way to dashboard your SaaS metrics. Now we’re excited to announce that all of your sales pipeline metrics can now be tracked through SaaSGrid as well. 

SaaSGrid integrates directly with your Salesforce or HubSpot account and automatically produces standardized and auditable pipeline metrics. These metrics can then be combined with the growth, retention, and efficiency metrics that SaaSGrid already tracks to create customized dashboards that serve as the single source of truth for your business.

You can read the details of how SaaSGrid calculates these metrics in our Metrics Library. To learn about using SaaSGrid at your own company, book a meeting with the team.

Conclusion

Sales pipeline metrics are essential to the SaaS reporting stack. When done correctly, they help you: 

• forecast growth more accurately; 

• learn about the strengths and weaknesses of your team; 

• build a better GTM engine. 

Because many of these metrics require complex data engineering to calculate, however, we often see them missing from companies’ reporting stacks. Thanks to SaaSGrid, you now have a shortcut to solve this problem.

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Special thanks to SaaSGrid investor Brian Strubbe for his insights and feedback on this blog.

Legendary investor Charlie Munger famously said: “Show me the incentive, and I will show you the outcome.” To that, I would add “and the unintended consequences.” All sales incentive plans are based on Munger’s aphorism, but without that second part, the lesson is left dangerously incomplete. 

An aggressive sales team can be a fast-growing startup’s greatest asset or its greatest liability. Sales is the only team in the company that operates under a strict incentive plan, which dictates that sales reps hit quota to earn commission or get fired. While this incentive structure is necessary to motivate and retain the best sales people, it also creates a crucible of pressure which can breed bad behaviors. 

Problems often occur when founders are too trusting of the alignment created by a sales incentive plan. Many founders believe that once the incentive is set up, the Sales team will largely take care of itself without much need for supervision. This “set it and forget it” mentality can lead to a rude awakening when perverse incentives arise and produce unexpected results. As a well-known sales adage warns, “you get what you inspect, not what you expect.”

I will first describe ten perverse incentives that sales plans can create, then provide ten solutions to correct them. Together, these solutions comprise a “sales compliance regime.” This is the essential companion to the sales incentive plan that I’ve written about previously. Both are needed to scale a fast-growing startup — one to unleash the “animal spirits” of the sales team, the other to tame and control them. 

Sales Incentive Problems

Problem #1: Over-selling 

Sales incentive plans are very specific about quotas — numerical targets specifying how much should be sold. They tend not to specify what is being sold, as that is taken for granted. As a result, the rogue or mercenary sales rep is liable to sell anything to make quota, whether the company actually can deliver that product or not.

A dramatic example of this occurred at my company Yammer when a new sales rep closed a million dollar deal out of the Middle East his second month on the job. As this was our first deal from that territory, we were all quite pleasantly surprised, and the new rep was being lauded and hoisted on shoulders — until we scrutinized the deal and discovered that he had sold our source code. As Yammer was a cloud service, our source code was most definitely not for sale.  

This comically extreme case was easily corrected. The more common case is that sales reps will puff or over-sell their product’s capabilities to a point where the future customer will be disappointed in the product actually implemented. This behavior will typically fly below the radar until the downstream effects on churn and NPS are felt in customer support, by which time it’s not the sales rep’s problem anymore.

If sales reps thought only in terms of the company’s equity value, a sale that results in a churned customer would make no sense, but the pressure to hit a quota can produce more short-term thinking. 

Problem #2: “Drive By” Reps 

Even the best sales people will hear the word “no” many times on the road to getting to “yes.” But how they handle a “no” matters a great deal. A prospect who says “no” today could be a “yes” in six months or a year, especially in a bottom-up SaaS context where the prospect remains a free user. However, if that prospect has a bad experience with a sales rep who torches the relationship, your company will lose them forever as a potential customer. Worse, you will likely never know why as companies have no way to track the NPS of prospects who never become customers. 

So you don’t want “drive by” sales reps who burn a prospect just because it can’t help them achieve the current quarter’s quota. At the very least, reps should be recording the reason(s) the customer is not a sale today. You want reps thinking long-term and continuing to interact positively with potential customers in the hopes that at some point, the product and customer will be a match and a deal can be closed. 

Problem #3: Poor Customer Handoffs

Sales is incentivized to close deals with customers, not to implement the product for those customers. The salesperson typically hands off the new customer to the Customer Success team. If the salesperson immediately forgets about the customer, the handoff will be poor. If the salesperson remains involved, the handoff is smoother and reduces the possibility of churn. One way to encourage better collaboration between Sales and CSM is to withhold quota credit for a sale until the customer has been successfully implemented. Tie handoffs to commissions and you will get better handoffs. 

Problem #4: Conditional Revenue 

You cannot allow Sales to determine when a deal is really a deal. If you leave “revenue recognition” in the hands of the sales team, you will get a lot of “deals” that are conditional. In other words, they will only generate true ARR in the event certain conditions are met, or they allow the customer to withdraw after a probationary period or to cancel at any time. Such deals do not meet the standard “rev rec” definition and shouldn’t count for quota credit. It should be left to the Finance department to define a rev rec policy and determine if a deal truly belongs in ARR.  

Problem #5: Statements of Work

Statements of Work (or SOWs) are an offshoot of the conditional revenue problem that are pernicious enough to warrant their own category. As a general rule, I am opposed to SOWs attached to deals that promise specific features or components to be delivered later as a condition of the deal. These hamstring your company in two ways. First, it makes the revenue from the deal conditional, and conditional revenue should not be counted in ARR. Worse, it undermines the flexibility of your product roadmap, tying it to the mast of a customer’s particular, often idiosyncratic demands. 

It’s tricky because you want your Sales team to sell the vision of your product roadmap. SaaS vendors are selling ongoing subscriptions, and customers want a sense of how the product will evolve and improve over time. But if you allow your Sales team to give customers control over how your product roadmap evolves, it hijacks the engineering lifeblood of your company. In the extreme, it turns your company into a consulting shop, solving idiosyncratic problems for individual customers instead of shipping new products and features to all customers. 

Even if you think you know how your product will evolve, you don’t want to attach SOWs to sales contracts. It’s hard to foresee product evolution even 1-2 quarters ahead and you could get locked into a feature that ends up being deprioritized. If you absolutely have to agree to a SOW to win a critical deal, then only do so if the feature is already in development and you know its delivery date. 

Again, it’s fine to sell the vision of what your product is going to be, and even to share a product roadmap deck with customers. But don’t let them attach SOWs as a condition of the contract. 

Problem #6: Contractual Liability 

Sales should never be exclusively in charge of negotiating the legal agreements required to consummate deals. Sales incentive plans specify quotas but not deal terms, so sales reps will sacrifice deal terms to hit quota if given the chance. If you allow sales reps to redline contracts, for example, it becomes too tempting for them to agree to changes and effectively give away the store. You should give Sales reps a menu of approved options they can agree to, but beyond that the deal should be referred to Legal for final negotiation and signature. 

Problem #7: Metrics Creep

If the Sales department is responsible for its own metrics, the metrics will inevitably evolve in ways that make it easier for them to hit their numbers. It’s not uncommon to find sales leaders in the midst of a tough quarter coming to the CEO to explain that the previously agreed upon metrics or goals are not the best way to track success. The sales leader will suggest new metrics that are more “accurate” or “aligned” and just happen to make it easier for them to look successful at quarter’s end. In some cases the sales leader might actually have a point, in which case adjustments to the next quarter’s goals and quotas may be warranted. But you don’t want “metrics creep” mid-quarter just because things aren’t going well. Just like with contractual liability and conditional revenue issues, the way to deal with this is to take these strategic decisions out of the Sales department’s control. Let Finance define and report the metrics, just as it has responsibility for revenue recognition. 

Problem #8: Regulatory Compliance Failures

As a general rule, if you make Sales responsible for both commissioned and noncommissioned activities, only the commissioned activities will occur. If the noncommissioned activities include legal compliance, you have a big problem. Salespeople will inevitably view the rigors of legal compliance as a lot of hard squeeze for no juice. While they can be forgiven for this perspective given their incentive structure, you cannot allow your company to sacrifice compliance. Legal requirements must be enforced on the Sales team by a compliance team that it is not part of the sales incentive plan. What you don’t incentivize, you must require. 

Problem #9: Toxic Sales Culture 

Your VP of Sales sets the cultural tone for the Sales team. If your sales leader is myopically focused on hitting the number at any cost, that attitude will pervade the entire Sales department. This will typically happen with a first-time sales manager who has been promoted from an AE role and is still thinking like one. You need their focus to shift toward emphasizing quality control while still hitting the number. If they prioritize correctly, the Sales team will do a better job of policing itself and make your job easier. 

Problem #10: Sales-only CEOs

This is a more extreme version of #9 where it is the founder-CEO who has a sales mentality and whose mind is still wired around the particular pressures and incentives of a salesperson. In theory, there is nothing wrong with a founder whose skills were forged in the crucible of sales. In fact, it can be a huge asset, and I have often recommended that founders with a technical background partner with someone with sales experience. But if a sales-oriented person does rise to the rank of CEO, they must think like a CEO first and a salesperson second. It isn’t just about hitting your numbers when you’re in the big chair; you must also consider your company’s culture and reputation. You have to balance the incentives of sales with quality control, honest accounting, and legal compliance. 

If sales-oriented CEOs don’t adjust their thinking, they will allow some or all of the bad behaviors documented above to fester until the company faces a crisis. They will dismiss legitimate concerns as “antagonistic” and excuse compliance failures as clever hacks. They will push growth at any cost, and view the time spent on audits, inspections, and legal compliance as slowing down the vital business of the company. They will disregard prudent concerns about burn or unit economics, which should act as a governor on growth. They will always side with the Sales team against other departments which are properly tasked with reining them in. 

A company might survive a VP of Sales being too narrowly obsessed with “crushing it” at the expense of all other factors, as long as the CEO provides supervision and balance. But if the CEO is also wired that way, your company could be headed for a crash.  

The Sales Compliance Regime 

The unintended consequences of the sales incentive structure can be balanced and corrected by creating a sales compliance regime to go along with the incentive plan. That consists of the following elements:

#1: Leadership

Immature sales leaders believe their job is to hit quota, as if they’re glorified sales reps. More seasoned sales leaders see it as their job to enforce the right behaviors (compliance) without missing the number. It’s really just an adjustment of emphasis whereby hitting the numbers is balanced with maintaining the integrity of the numbers.

#2: Culture

Breeding a strong culture helps sales reps stay focused on the big picture and avoid short-term, mercenary behavior. This is why you need sales kickoffs every quarter, which not only set quotas but also define the terms and boundaries of what and how you’re selling. Make sure everyone is brought together for that – I question whether fully remote teams can truly scale the type of culture necessary to maintain sales compliance. 

#3: Training

Provide strong product training for the sales team that gets refreshed every quarter. This will keep sales reps up to date on the features and capabilities of the product. Product managers should present at sales kickoff every quarter, showing off the new features and what’s on the roadmap. Every sales rep should dogfood the product and know how to demo it. Training the team on objection handling also reduces the temptation to improvise answers that may not be accurate. Sales reps are much less likely to make it up as they go along if they are informed and taught best practices for closing deals. 

#4: Qualification 

Develop your ideal customer profile and qualify leads early in the sales process. If Sales is chasing its tail going after customers that aren’t right for your product, then reps will be more tempted to change your product on the fly to make a customer right for it. 

#5: Equity

Compensating early reps with meaningful equity, not just cash, will help align them with the company’s long-term success. The earlier in the company’s life, the more it makes sense to give reps equity. Those early sales people are going to help you figure out key aspects of your sales motion and strategy, so you want to strategically align them like other critical employees. As the company gets more structured and has stronger guardrails, the incentive plans can focus mostly on cash. But when Sales isn’t a machine yet, equity can help balance incentives. 

#6: Customer Success Feedback Loop

You need to have some sort of feedback loop and control mechanism so the wrong customers aren’t sold and the right customers aren’t over-sold. Some startups will claw back commissions if a customer churns in the first three to six months. Sales reps absolutely hate clawbacks because they feel like they’re being charged for a customer support mistake. Invariably this leads to angry finger-pointing between Sales and CSM. But at a minimum, quota credit should require the successful implementation of a customer, not just their signature on a contract. 

#7: Common Denominator Product Feedback

Sales should have a strong voice in the evolution of the product roadmap since they are hearing the front-line objections from potential customers. But this feedback must consist of common denominator issues across customers, not just the latest idiosyncratic feature request that a salesperson needs to close the deal at hand or ad hoc suggestions based on the latest sales call. A good way to synthesize sales feedback is to track loss reasons for every deal and then review monthly to find the common denominators. 

#8: Checks and Balances 

Never let foxes guard the hen house. Noncommissioned but vital activities like rev rec, analytics, and regulatory functions should be owned by teams outside of sales who are not compensated based on the company hitting quota. This is not a reflection of a lack of trust in Sales, but rather a recognition that Sales doesn’t have the incentive to focus on noncommissioned activities at the expense of commissioned ones. 

#9: Auditing and Inspection

Sales leaders should constantly inspect the sales pipeline. To enable this, sales reps should be required to keep deal status up to date in a tool like Scratchpad. You can also use AI-enabled call monitoring software like Orum and conversational intelligence tools to record and audit every sales call. If you find reps are “churning and burning” prospects who say no, or are over-selling or making impossible promises to customers to get to a yes, they either need retraining or shouldn’t be sales reps at your company.

#10: Repeatability

Sales is all about creating a repeatable machine. To achieve this, you will need to define every stage of your sales process and refine it over time. This is how large companies are able to scale huge sales forces with fairly consistent results and quality levels. You will get better at everything over time; just realize that putting reps on an incentive plan is a necessary but not sufficient condition for getting the results you want. 

Conclusion

Incentives work powerfully well, perhaps in some cases a little too well. If you don’t inspect and supervise your sales practices carefully, you could find yourself unpleasantly surprised by some of the behaviors you end up incentivizing. If you establish and maintain an effective sales compliance regime, your incentive plans will drive healthy growth in your company. Fail to do so, however, and you will find undesirable behaviors growing as well. 

The Problem

Having evaluated or worked with thousands of SaaS companies, we’ve observed three major problems: 

1. SaaS founders are not properly instrumented.

2. Even when they are, the metrics often contain errors.

3. Even when the metrics are accurate, they are not available on a real-time basis.

The reason for this is that creating charts is a manual and time-intensive process that involves pulling data into warehouses and CSVs, cleaning up messy data and correcting edge cases, and writing SQL queries and Excel formulas. There is a lot of room for errors to creep in, and the process is burdensome enough that the full package of SaaS metrics is produced only periodically (eg for a quarterly board meeting or financing process) instead of being available continuously. 

The Solution

We built SaaSGrid to change all of that. After connecting data sources including Salesforce, Hubspot, Stripe, Quickbooks, and spreadsheets, SaaS teams have instant access to the metrics they need – including some they might not have known they should be tracking.

Our collective experience building, running, advising, diligencing, and investing in hundreds of SaaS companies has allowed us to identify the most important metrics, and how to calculate them: 70 essential metrics, including mission-critical calculations such as MRR, ARR, Net Dollar Retention, CAC Payback, Burn Multiple, and Runway can all be transformed into real-time dashboards.

With SaaSGrid companies can:

• Build dashboards for leadership, sales, and customer success teams

• Prep the numbers needed for board meetings in minutes

• See every ARR movement in real-time

• Track Net Dollar Retention

• Understand how this quarter’s renewals are trending

• Report efficiency metrics like CAC Payback and Burn Multiple

• Compare bookings to billings

• Know exactly how much runway is left 

SaaSGrid works seamlessly with existing tools so companies don’t have to change their workflows. 

History of SaaSGrid

SaaSGrid CEO and co-founder Ethan Ruby developed an early prototype of SaaSGrid to help the investment team at Craft Ventures run metrics for prospective investments. In 2021, we wrote a blog post called The SaaS Metrics that Matter. At that point, SaaSGrid was just a free tool.

The “Aha!” moment for creating a new SaaS company was when Ethan saw founders using our tool not just to provide metrics for financing rounds but to monitor their business performance on a daily basis. At that point, we realized that SaaS companies needed their own dashboarding tool. 

Surprisingly, despite broad agreement on which metrics are most important for SaaS businesses, there have been no dashboarding or business intelligence (BI) tools that calculate them automatically. By verticalizing a BI app for a specific industry (SaaS), we can provide a much greater level of convenience and value. SaaSGrid has an exciting product roadmap and intends to instrument and benchmark all the controls that SaaS founders need to run their business.

For the last two years, Ethan has been working to develop SaaSGrid as a stand-alone product. Ethan’s brother Teddy Ruby, formerly at Affirm, joined as the third co-founder to lead engineering and a startup was born.

SaaSgrid is now fully independent of Craft. It’s SOC 2 compliant and already the source of truth for KPIs for hundreds of SaaS companies. There’s no longer an excuse for messy data, calculation errors, and tracking the wrong metrics. SaaSGrid will set the new standard for SaaS metrics. 

Bottom-up SaaS (Software as a Service) is a go-to-market strategy in which a SaaS company targets individual users, teams, or small business units within an organization, rather than targeting the organization as a whole from the top down. The goal of the bottom-up approach is to gain adoption and popularity among end users, who then become advocates for the product within their organization, leading to broader adoption across the entire company.

Key characteristics of the bottom-up SaaS approach include:

1. Product-Led Growth: In a bottom-up SaaS model, the product itself is the primary driver of growth. The focus is on creating a user-friendly and valuable product that can be easily adopted by individual users or small teams. The product often includes features that promote collaboration and sharing, encouraging organic growth within the organization.

2. Freemium or Free Trial Model: Bottom-up SaaS companies often offer a freemium model or a free trial to attract individual users. The freemium model provides a basic version of the product for free, with the option to upgrade to a paid version that offers additional features or capabilities. A free trial allows users to try the full-featured product for a limited time before deciding whether to purchase a subscription. These models lower the barrier to entry and allow users to experience the value of the product without making an upfront financial commitment.

3. Virality and Network Effects: Bottom-up SaaS products often have built-in features that encourage sharing and collaboration, leading to virality and network effects. As more users within an organization adopt the product, its value increases for all users, creating a positive feedback loop that drives further adoption. For example, a team collaboration tool becomes more valuable as more team members use it to communicate and share information.

4. Grassroots Adoption: In the bottom-up approach, adoption typically starts with individual users or small teams who find the product useful for their specific needs. As these users become advocates for the product, they may recommend it to colleagues, leading to wider adoption within the organization. Eventually, the product may gain enough traction to attract the attention of decision-makers and executives, who may then consider an enterprise-wide deployment.

5. Self-Service and Ease of Use: Bottom-up SaaS products are often designed to be self-service, meaning that users can sign up, onboard, and start using the product without assistance from the vendor's sales or support team. Ease of use is a critical factor in the bottom-up approach, as users are more likely to adopt and advocate for products that are intuitive and require minimal training.

6. Expansion and Upselling: Once a bottom-up SaaS product has gained traction within an organization, there are opportunities for expansion and upselling. The SaaS company can offer additional features, integrations, or higher-tier plans to existing users. They can also engage with organizational decision-makers to negotiate enterprise-level contracts that cover a larger number of users or provide enhanced support and services.

Overall, the bottom-up SaaS approach is a powerful strategy for gaining widespread adoption within organizations. It relies on delivering a high-quality product that meets the needs of individual users and teams, and then leveraging their advocacy to drive broader adoption across the organization.

Please let me know what you think of this answer in the comments. Did ChatGPT miss anything important?

This chart illustrates the concept: 

There are four quadrants: 

1. Bottom right: Sales cycles are long, but they are rewarded with high annual contract values (ACVs). This is the classic Enterprise sales model, which typically involves proactive identification of high-value accounts. Common lead generation strategies include account-based marketing (ABM) and outbound sales. 

2. Top left: ACV is low, but velocity is high, so lots of small deals add up to a big number. This is the SMB model, or sometimes selling to individual teams within larger companies. This model is usually fueled by product-led growth (PLG) or inbound marketing. Targeting SMBs through outbound sales is challenging due to their sheer number. 

3. Top right: This rare and coveted quadrant features both high deal sizes and high deal velocity. This exceptional model can occur when a SaaS company has won its category and benefits from order-taking. Or it can be found when a PLG company matures and begins to close enterprise deals. In that case, bottom-up adoption by employees precedes the sale, compressing the sales cycle.

4. Bottom left: This is the only quadrant that doesn’t work. Deals are both small and slow. For example, a startup that takes 6 months to close a $25k deal is not sustainable. However, during a startup’s first year, closing $25k enterprise deals is acceptable as a proof of concept (POC). Just understand that a real enterprise deal doesn’t materialize until you renew for at least $100k+/year.

In summary, a low-ACV model can succeed if it has high velocity, and a high-ACV model can afford to have low velocity, but low ACVs with low velocity spell disaster. 

How do I get out of the losing quadrant?

Suppose your average deal size doesn’t align with the appropriate cycle time. In that case, you need to focus on moving right (to higher ACVs) or moving up (to quicker sales cycles). Here are some suggestions:

1. Push ACVs higher 

• Reevaluate your pricing model: Ensure your pricing model aligns and scales with the value you’re providing. Consider monetizing usage instead of seats (or vice versa), and implement tiered pricing to capture more value from different customer segments.

• Improve your product: Enhance your product with additional features, integrations, or customizable solutions that address more valuable pain points or that help you engage new budget holders. Make sure that your features appeal not just to end users but to decision-makers who have the budget and authority to buy your product.

• Target larger customers or verticals: Shift your focus towards larger customers with bigger budgets or specific industries that can derive more value from your solution. If you’re a horizontal app selling small deals to departments, consider verticalizing and targeting a particular industry to drive more value for a more defined set of buyers (leading to larger deals). 

• Expand within accounts: Identify opportunities to land and expand or upsell existing customers to higher value plans or cross-sell complimentary products or services. 

2. Increase velocity

• Conduct an audit of your sales engine: Assess your sales team setup, pipeline availability for your reps, lead qualification processes, and the definition of when a lead becomes an opportunity. Evaluate whether reps can create the necessary urgency to drive deals across the finish line. Find the compelling event that makes your product an immediate need to some buyer.

• Track the time a prospect spends in each stage of your sales process: While most SaaS startups have accurate data around their ACVs, they often lack good data on deal closing times because they don’t properly classify when an opportunity enters the top of the sales funnel. Tracking cycle time will help you identify bottlenecks or inefficiencies that slow down deals.

• Implement lead scoring to prioritize high-quality leads: Focus your sales efforts on leads that are more likely to convert quickly to shorten the sale cycle. 

• Consider how you might introduce PLG into your distribution model: Freemium offers can compress cycle time and drive more top-of-funnel activity. 

Conclusion

Either a high-velocity, low-ACV or high-ACV, low-velocity sales motion can work as long as all the pieces – including the type of customer, lead gen strategies, and sales processes – are aligned. Go-to-market strategies that take a long time to close small deals are prohibitive. If you’re in the losing quadrant, you must determine whether tactical improvements (getting better at sales, changing pricing, or improving efficiency) can solve your problem or if your situation requires a pivot. If things are trending in the right direction, keep going. If you’re in the losing quadrant and don’t see progress, it’s time for a deeper discussion about your product-market fit. 

Jigsaw and the Give-to-Get Model

Jigsaw Data Corporation was founded in 2004 by Jim Fowler and Garth Moulton. The company’s primary product was a large, crowdsourced, searchable database containing millions of business contacts across various industries. In the days before everyone had a LinkedIn profile, this was particularly valuable to sales people looking for prospects.

Jigsaw’s crowdsourcing model revolved around a points system. Users could create a free account on Jigsaw’s platform by contributing their own business contact information. They could also add new contacts to the database to earn points, which they could then spend to see contacts posted by others. Users who didn’t want to contribute their own data could purchase points. Jigsaw also encouraged users to verify the accuracy of contact information in the database by rewarding them with points for each correction made.

In 2010, Salesforce.com acquired Jigsaw for $142 million, rebranded it as “Data.com” and integrated it with the Salesforce.com ecosystem. This allowed users to access updated business contact information within their CRM system directly.

The Give-to-Get Model for AI

The give-to-get model, where users earn points by contributing data and spend points to access services based on that data, could be an effective approach for AI startups. In many industry verticals, obtaining a rich proprietary dataset will be the key challenge to producing a differentiated AI model. By incentivizing professionals in that industry to share the necessary data, AI startups can rapidly train and improve their models to serve those professionals.

For example, an “AI architect” startup could give users points for contributing architectural plans and CAD drawings. Users could then spend points by asking the AI to design new plans. This approach could be used across a variety of industries where users have proprietary data and would be willing to contribute some of it in exchange for harnessing AI capabilities.

Incentivizing users to crowdsource could be a cost-effective way to acquire large amounts of data, as it leverages the efforts of a community rather than relying on paid data collection services. As users contribute more data and use the AI’s services, the model can be iteratively improved, leading to better performance and more valuable insights.

There will be some important issues to work out. Ensuring the quality and accuracy of the contributed data is critical. Startups may need to implement verification processes, such as peer review or expert validation, to maintain data quality. Handling proprietary data also comes with privacy and intellectual property concerns that will need to be addressed. Startups may need to ensure that certain data will be used for training purposes only and be transparent in how the contributed data is used. Compliance with industry-specific regulations is also crucial.

Finally, the need to monetize must be balanced against the points-based system; otherwise users may prefer to use the platform for free forever by contributing data rather than paying for services. Points could be limited so that users earn a discount or are awarded more queries as opposed to receiving the service completely for free.

Opportunities in Diverse Industries

A give-to-get, crowdsourced data collection approach could be applied to a number of industry verticals where the target users are in possession of the training data. Here are some examples of where this approach could be useful:

1. Medical and health data: AI models can greatly benefit from access to diverse patient data, such as electronic health records, medical imaging, and genomic data. Users (patients or healthcare professionals) might be willing to share anonymized data in exchange for points, which could then be used to access AI-driven health insights, personalized treatment suggestions, or early disease detection.

2. Legal document analysis: Law firms and legal professionals often have access to large collections of legal documents, such as contracts, court rulings, or patent filings. By sharing these documents, users could contribute to training AI models for legal document analysis, and in return, gain access to AI-driven legal research tools or contract review services.

3. Art and creative work: Artists and designers may possess large collections of their own artwork, sketches, or designs. Sharing this data could help train AI models for artistic style transfer, generative art, or design assistance. Users could then access AI-driven creative tools or personalized design suggestions.

4. Finance and investment: Financial professionals and investors may have access to proprietary trading algorithms, portfolio data, or market analysis reports. By sharing this data, they could contribute to AI models for financial analysis and predictions. In return, users could gain access to AI-driven investment advice, risk assessment, or market forecasting tools.

5. Scientific research data: Researchers in various fields might have access to valuable datasets generated through experiments or simulations. By sharing this data, they can help train AI models for data analysis, pattern recognition, or predictive modeling in their respective domains. Users could then access AI-driven research tools or personalized research recommendations.

6. Manufacturing and production data: Companies involved in manufacturing and production may possess proprietary data on production processes, quality control, and equipment performance. Sharing this data could improve AI models for predictive maintenance, process optimization, and quality assurance. Users could then gain access to AI-driven optimization suggestions or equipment monitoring services.

Conclusion

Obtaining rich proprietary training datasets will be the key challenge for startups looking to create AI models for industry verticals. Crowdsourcing this data from the professionals who work in these industries may be an excellent approach to solve this problem. Moreover, crowdsourcing should create a flywheel: as users contribute data to the model, the model gets smarter and more capable, which draws in the next set of users, who provide the next set of data. This data network effect should create a strong moat around the business. That said, potential risks or downsides related to the give-to-get model, such as data quality, privacy, and intellectual property concerns, must be addressed proactively by startups in order to ensure the long-term success of their AI models.

I used ChatGPT-4 to help me write this blog post. You can see how we worked together here. I look forward to your comments.

We’re also releasing our internal tool, SaaSGrid, which we’ve used to analyze KPIs for hundreds of SaaS companies, as a free publicly-available tool to help founders calculate metrics (anonymously if they wish) for their own startups.

1. Growth

The starting point for understanding a SaaS business is revenue growth – the best proof of product-market fit.

• MRR or ARR: Annual Recurring Revenue (ARR) is the standard for SaaS companies that sell annual subscription contracts, or Monthly Recurring Revenue (MRR) for those selling monthly subscriptions. If your company sells both, choose the metric that represents the majority of revenue. ARR is always 12 x MRR. Note the requirement that the contract is “recurring” (ongoing); one-time revenue, such as for professional services or pilots, does not count towards MRR or ARR.   

  • For startups seeking a Series A funding round, the old benchmark used to be $1 million in ARR. But recently, the threshold has been around $500k ARR, as rounds get preempted and happen earlier.

• CMGR: What’s the best way to measure growth in MRR? Simply looking at month-over-month growth rates is likely to be very lumpy. To normalize for this, use a CAGR calculator but on a monthly basis (h/t Jason Lemkin). This is called Compound Monthly Growth Rate (CMGR). For example, if you began the year at $100k ARR and ended at $1M ARR, you would enter those starting and ending values over 12 periods, for a CMGR of 21%, an outstanding result. 

  • For startups seeking Series A or B funding, we like to see a CMGR of at least 15% below $1M ARR and 10% above $1M ARR. A CMGR of 10% is about 3x year-over-year growth.

• MRR Components: Breaking down MRR into its key components helps to understand changes in MRR over time. For any given period, we want to understand the contribution of the following: 

  • Retained – MRR retained from existing customers;

  • Expansion – MRR added from existing customers;

  • New Sales – MRR added from new customers; 

  • Resurrected – MRR added from former customers;

  • Contraction – MRR lost from customer downgrades; and  

  • Churned – MRR lost from churned customers.

  

• Customer Concentration: Is growth being driven by a few big contracts or many small ones? It’s a potential red flag if too much revenue is concentrated in too few large accounts. If one or two customers make up the majority of revenue, that’s a significant risk to the business that needs to be vetted. On the other hand, if the largest customer is less than 10% of revenue, that indicates low customer concentration. 

2. Retention

Retention is analyzed by grouping customers into “cohorts” according to their sign-up period (month, quarter or year), then tracking what percentage of the original cohort remains over time. Understanding retention rates of monthly cohorts, typically at months 12 and 24, is vital to the health of the business, as a fast growth rate in new signups can mask high churn rates in older, smaller cohorts. Only when growth slows down will this “leaky bucket” become obvious. There are two main ways to analyze retention:

• Dollar Retention: Also known as Net Revenue Retention (NRR), Dollar Retention measures how much revenue a cohort is generating in each period relative to its original size. Dollar Retention takes expansion revenue into account, and can be greater than 100% if expansion exceeds churned and contracted revenue. The best SaaS companies have 120%+ Dollar Retention each year. Dollar Retention of less than 100% per year is evidence of a Leaky Bucket and is problematic.

  

• Logo Retention: Logo Retention measures the percent of customers that stay active (non-churned). Logo Retention can never be higher than 100% since the number of logos can’t expand. As a result, Logo Retention is usually much lower than Dollar Retention. Logo Retention is typically a function of customer size: 90-95% is common for enterprises, 85% for mid-market, and 70-80% for small businesses. Logo Retention below these benchmarks could be evidence of a problem. That said, Dollar Retention is much more important than Logo Retention.

3. Sales Efficiency / Unit Economics

It’s important to analyze sales efficiency to ensure that growth is efficient and sustainable. “Fake” growth can always be achieved through uneconomic levels of spending. Several related metrics help to understand sales efficiency by comparing the value of new customers to the cost of acquiring them:

• New Sales ARR vs S&M Expense: How much did the Sales & Marketing (S&M) departments (inclusive of all programs and personnel) spend compared to how much New Sales ARR (ARR from new customers only) was added in the same period? Ideally, New Sales ARR is equal to or greater than S&M spending.

• CAC: Customer Acquisition Cost (CAC) divides S&M expense in the preceding period (month or quarter) by the number of new customers in the current period. The lag is intended to reflect the time it takes for S&M investment to materialize in new sales. Longer or shorter lag may be appropriate depending on the length of the sales cycle.

• New ACV vs CAC: It’s useful to compare Annual Contract Value (ACV) of new customers to their CAC. Ideally, ACV is greater than CAC, meaning that customer acquisition does not cost more than first year’s revenue.

• CAC Payback: To determine how many months it takes for a customer to produce enough gross profit to pay back its CAC, divide S&M spend by MRR x Gross Margin. Lower margin products with high CAC do poorly on payback.

• Magic Number: Magic Number is the Net New ARR in a period divided by S&M expense from the prior period. Ideally, the ratio is greater than one. 

4. Margins

• Gross Margin: Gross Margin reflects a company’s margin after subtracting the cost of goods sold (COGS) from revenue. For SaaS companies, COGS typically consist of hosting costs, any data or software needed for the product to operate, and the cost of frontline operations. There can be good reasons for lower gross margins early in a company’s lifecycle, but in the long-term, SaaS companies should have a Gross Margin of at least 75%. Persistently low Gross Margins can be evidence of a Mechanical Turk problem, whereby the company is using humans to perform the product capabilities (i.e. it’s not a pure software company).

• LTV: Lifetime Value (LTV) is the cumulative gross profit contribution, net of CAC, of the average customer in a cohort. Therefore, LTV incorporates CAC, Dollar Retention, and Gross Margin to show overall company health. If Dollar Retention is greater than 100%, LTV can increase indefinitely. However, if customers churn, LTV will flatten out and stop increasing. Healthy cohorts cross the $0 LTV line before month 12, and LTV grows to at least 3x original CAC over time. 

  

5. Capital Efficiency

• Burn Multiple: The Burn Multiple is a company’s Net Burn divided by its Net New ARR in a given period (typically annually or quarterly). This formula evaluates burn as a multiple of ARR growth. In other words, how much is the startup burning in order to generate each incremental dollar of ARR? The higher the Burn Multiple, the more the startup is burning to achieve each unit of growth. The lower the Burn Multiple, the more efficient the growth is. For fast-growing SaaS companies, a Burn Multiple of less than one is amazing, but anything less than two is still quite good. If a startup has a high Burn Multiple but low CAC, that could indicate that S&M costs have been miscategorized.

• Hype Ratio: Another popular way to measure capital efficiency is the Hype Ratio, which equals Capital Raised (or Burned) divided by ARR. But we prefer Burn Multiple because it focuses on recent performance.

6. Engagement

Traditionally a consumer metric, user engagement has taken on new relevance for SaaS startups, as free trials or freemium users are more likely to convert to paid accounts when they have high engagement. Once paid, highly engaged accounts are also less likely to churn. There are two main measures of engagement:

• DAU/MAU: The ratio of daily active users to monthly active users. A good metric for most SaaS startups is 40% DAU/MAU during non-holiday weekdays, meaning that the typical monthly user visits the site at least two weekdays per week or 8 times per month. In general, you can see the non-holiday weekday usage by eyeballing the crests of the chart:

  

• DAU/WAU: The ratio of daily active users to weekly active users. A good metric for most SaaS startups is 60% DAU/WAU during non-holiday weekdays, meaning that the typical weekly user visits the site 3 out of 5 weekdays. 

In both cases, SaaS startups may want to remove the noise created by free users. The resulting metric of “Paid Engagement” would show activity levels for paid seats.

Introducing SaaSGrid

At Craft, we analyze these metrics for every SaaS investment we consider. SaaSGrid helps us do this efficiently, and identify startups with the very best growth, retention, and economics. 

We’re now excited to now make SaaSGrid public and free to use. With SaaSGrid, founders can anonymously enter their MRR data and a few lines from their P&L, and instantly get a beautiful dashboard with the metrics and benchmarks above.

Our hope is that founders can use this tool to evaluate the health of their business, assess their readiness for fundraising, and easily share their metrics with advisors and investors.

24-Hour Guarantee

If you send us your metrics already formatted in SaaSGrid, Craft Ventures can tell you whether we’re interested within one business day. Just email a link to your SaaSGrid dashboard to saasgrid@craftventures.com.

We look forward to seeing your SaaSGrids!

This post was co-authored by Ethan Ruby, Craft’s Vice President of Analytics.

Below are some target org charts that a new Series A, Series B, or Series C stage SaaS startup should be staffing towards. While there is no one-size-fits-all org chart for every SaaS startup — important differences will result from the particularities of your model — these frameworks and rules of thumb can be helpful as a starting point.

Series A Target — 50 Employee Org

• CEO (50)

  • CTO (12)

    • Front End (4)

    • Back End (2)

    • Client Applications (2)

    • Core Services/Platform (1)

    • Analytics (1)

    • Dev Ops/Infra (1)

  • Director, Product (5)

    • PM (1-2)

    • Design (2)

  • VP, Sales (12)

    • Enterprise AE (2)

    • Mid-Market AE (2)

    • SMB AE (2)

    • SDR (2-4)

    • Sales Ops (1)

  • Director, Customer Success Management (9)

    • CSM Enterprise (2)

    • CSM Mid-Market (2)

    • Implementation / Solutions or Sales Engineer (1-2)

    • Support Rep (1-2)

  • Director, Marketing (6)

    • Demand Gen (1-2)

    • Product Marketing (1)

    • Sales Enablement Marketing (1)

    • Events/Community (1)

  • Director, Finance (6)

    • FP&A Analyst (1)

    • Accountant (1)

    • HR (1)

    • Ops (1)

    • Recruiter (1-2)

Series B Target — 125 Employee Org

• CEO (125)

  • CTO (40)

    • VP, Engineering (28)

      • Director, Web (15)

        • Front End (8)

        • Back End (6)

      • Director, Client Applications, plus 5 devs (6)

      • Director, Core Services/Platform, plus 3 devs (4)

      • QA (2)

    • Director, Infrastructure, plus 2 devs (3)

    • Director, Security, plus 1 dev (2)

    • Director, Analytics, plus 3 analysts (4)

    • IT (2)

  • VP, Product (11)

    • PM (5)

    • Design (5)

  • CRO (45)

    • Director or VP, Sales (15)

      • Enterprise AE (5)

      • SMB & MM AE (8)

      • Renewals Specialist (1)

    • Director, Sales Development, plus 5 SDRs (6)

    • Director, Sales Operations, plus 2 sales ops (3)

    • Director or VP, Biz Dev/Partnerships (1)

    • VP, CSM (19)

      • CSM Enterprise (6)

      • CSM SMB & MM (5)

      • Director, Implementation / Solutions, plus 2 solutions or sales engineers (3)

      • Director, Customer Support, plus 3 CS reps (4)

  • CMO (15)

    • Director, Product Marketing, plus 3 PMMs (4)

    • Director, Demand Gen, plus 3 marketers (4)

    • Director, Sales Enablement, plus 2 marketers (3)

    • Director, Brand Marketing (3)

      • PR & Analyst Relations (1-2)

      • Events/Community (1)

  • CFO (13)

    • FP&A director and analyst (2)

    • Controller, plus 1-2 accountants (2-3)

    • Director of Recruiting, plus 3 recruiters (4)

    • HR (2)

    • Ops (2)

Series C Target — 400 Employee Org

• CEO (400)

  • CTO (114)

    • VP, Engineering (92)

      • Director, Web: Front End, plus 2-3 managers, plus 26 devs (30)

      • Director, Web: Back End, plus 1-2 managers, plus 16 devs (18)

      • Director, Client Applications, plus 13 devs (14)

      • Director, Core Services, plus 13 devs (14)

      • Director, Acquihire Project, plus 8 devs (9)

      • Director, QA, plus 5 devs (6)

    • Director, Infrastructure, plus 5 devs (6)

    • Director, Security, plus 2 devs (3)

    • VP, Analytics, plus 4 analysts and 2 data services devs (7)

    • VP, IT, plus 4 IT support (5)

  • CPO (23)

    • Director, Product, plus 9 PMs (10)

    • Director, Design (12)

      • Designer (8)

      • User Research (2)

      • Copywriter (1)

  • CRO (185)

    • VP or SVP, U.S. Sales (73)

      • Director or VP, Enterprise Sales, plus 9 AEs (10)

      • Director or VP, Mid-Market Sales, plus 9 AEs (10)

      • Director or VP, SMB Sales, plus 15 AEs (16)

      • Director, Sales Development, plus 2 managers, plus 22 SDRs (25)

      • VP, Sales Ops, plus 5 ops (e.g. for SFDC admin, comp plans, territories, analytics, quota credit) (6)

      • Training (5)

    • VP, CSM (52)

      • Director, Enterprise CSM, plus 16 CSMs (17)

      • Director, Mid-Market CSM, plus 6 CSMs (7)

      • Director, Implementation/Solutions Engineering, plus 11 Solutions or Sales Engineers (12)

      • Director, Customer Support, plus 10 CS reps (11)

      • Renewals Coordinator (1)

      • Training (3)

    • GM, Europe (60)

      • Director, Enterprise Sales, plus 9 AEs (10)

      • Director, SMB & MM Sales, plus 9 AEs (10)

      • Manager, Sales Development, plus 8 SDRs (9)

      • Director, Customer Success, plus 16 CSMs (17)

      • Sales or Solutions Engineer (5)

      • Recruiting (3)

      • Ops (5)

    • VP of Biz Dev plus 2 partner managers (3)

  • CMO (33)

    • Director or VP of Product Marketing plus 6 PMMs (7)

    • Director or VP, Demand Gen (6)

      • Ad Manager (1-2)

      • Brand Marketer (3)

    • Director or VP, Sales Enablement (5)

      • Solutions Marketer (3)

      • Competitive Intel (1)

    • Director or VP, Corporate Marketing (14)

      • Public Relations (2-3)

      • Analyst Relations (1-2)

      • Events (3)

      • Community (2)

      • Creative (5)

  • CFO (39)

    • Controller plus 5 accountants (6)

    • VP of Recruiting plus 16 recruiters (17)

    • VP of People plus 3 HR (4)

    • VP of FP&A plus 2 analysts (3)

    • Ops (8)

  • General Counsel (1)

Typical Ratios

• 10% G&A : 40% R&D : 50% S&M

• 1 Manager : 5-10 Reports

• 1 SDR : 2 AE

• 1 Sales Ops : 10 AE

• 1 PM : 5-8 Dev

• 1 DevOps : 15 Dev

• 1 Design : 5-10 Dev

• 1 User Research : 10 Design

ARR per Employee

• Series A:

  • $1 million ARR

  • 40-50 employees

  • $20,000-25,000 of ARR per employee

• Series B:

  • $5 million ARR

  • 100-125 employees

  • $40,000-50,000 of ARR per employee

• Series C

  • $20 million ARR

  • 300-400 employees

  • $50,000-66,666 of ARR per employee

• At IPO (average)

  • $100 million ARR

  • 1,000 employees

  • $100,000 of ARR per employee

Further Reading

• https://avc.com/2012/06/mba-mondays-optimal-headcount-at-various-stages/

• https://www.forentrepreneurs.com/bridge-group-sales-development/#:~:text=The average ratio is 1,be attributed to company size.

• https://www.sellingbrew.com/insights/right-ratio-sales-ops-salespeople/

• https://www.nngroup.com/articles/ux-developer-ratio/

• https://www.reddit.com/r/devops/comments/cb6afp/devops_developer_any_stats_on_this_ratio_at/

Agenda

1) CEO Update: 30 minutes 

The CEO’s overview should start at the 30,000 foot level and then dive into more detail. Remember that your audience is not as immersed as you are in the business and may need their memories refreshed in terms of where the last board conversation ended. Here are some helpful ways to structure the presentation:

What’s Going Well, What’s Not Going Well

I like seeing this on a single slide, two-column format, using bullet points. What major progress has occurred since the last board meeting? What are the biggest problems? What’s keeping you up at night? From my time as a founder, I know that no matter how well a startup is doing, there are always existential risks and problems. So nothing makes me queasier than receiving an all-positive update. This suggests that founders are either not aware enough or not paranoid enough about the real problems, or simply don’t trust the board enough to confide in them. It’s important to recognize that board members are not there to sit in judgment of you but rather to collaboratively problem-solve with you. If you’re not able to discuss the company’s biggest problems with them, you’re much less likely to make meaningful progress. You should choose your board members accordingly. 

Strategic Learnings

The CEO should discuss their strategic learnings from the quarter. I like to think of this as the “diff” on the investor presentation: if you were to write your investor presentation today, what would be different compared to the last time you wrote it? What have you learned about your target customer since the last board meeting? How have you changed your market thesis? Are there any pivots you need to make? If you were to chain these diffs together, you should be able to see a clear path through the “idea maze” from one financing round to the next. I’ve noticed that unsuccessful startups tend to repeat the same conversations in every board meeting. The issues don’t change because there’s no progress through the idea maze. Don’t be afraid of making changes to the original plan; change indicates learning.

Company Priorities

What are the company’s top 3-5 priorities this quarter? In light of the strategic learnings mentioned above, CEOs should constantly be prioritizing and reprioritizing the most important initiatives. If you do OKRs, then this list of priorities can provide a first draft of your quarterly objectives. The board meeting is an opportunity to take in advice and feedback before distributing goals with your entire team. To avoid thrashing, create high-level alignment with your board, your exec team, then the whole company.

Context Setters and KPIs

Every SaaS business has a handful of KPIs that should be covered up front to gauge the health of the business and set context for the rest of the meeting. Here are the ones that I always like to see:

• Runway. It’s always good to know how much cash is in the bank, the current monthly burn, and how much runway you have. Don’t bury the lede here. Nothing is worse than getting to the end of the meeting only to learn the business is almost out of cash and doesn’t have the degrees of freedom required to execute its plan. In that case, the board needed to have a completely different conversation. 

• Revenue growth. How fast is revenue growing on a monthly basis? If you primarily sell annual contracts, you should use ARR as your key revenue metric. If you primarily sell monthly contracts, use MRR. 

• Net revenue breakdown. It’s important to understand how churn and expansion, as well as new sales, are contributing to your top line number. This can be shown on a single chart:

• Cohorted retention. It’s also important to look at revenue retention by cohort to understand whether your subscriber base is growing or shrinking over time. 

• Engagement. Traditionally a consumer metric, user engagement also has relevance for bottom-up SaaS companies. The key metrics are DAU/WAU and DAU/MAU. Look at the crests to understand workday usage. Differentiate paid from unpaid users. It’s also helpful to see engagement for your top 10 customers.

• Capital efficiency. Finally, I like to see metrics like Burn Multiple and CAC to understand the efficiency of growth. 

2) Sales Update: 30 minutes

SaaS companies should hear from the head of sales in every board meeting. Since most of the company’s KPIs tether off sales, it’s the first departmental update. The head of sales should review:

• The previous quarter’s results. What is the new ARR? Which deals closed? Provide color on major deals won or lost. What are common loss reasons, objections, missing features? What’s the competitive landscape?

• The upcoming quarter’s pipeline. What is the forecast? What major deals are in the pipeline? What are the weighted pipe and coverage ratio? What changes are needed to hit the number? 

• Team performance. Rank the performance of sales reps by quota attainment. Who’s hitting or missing plan, and what can we learn from that to make the sale more repeatable? Do we have enough quota capacity to achieve our goals? What is the hiring plan for additional reps?

Finally, sales forecasts should be tracked using a waterfall chart so nobody forgets what was originally promised in relation to what was delivered:

3) Other Departmental Updates: 20 minutes

It’s good practice for the CEO to bring in department heads to present on their team’s progress. This helps to break up the meeting, give the CEO a break from presenting, and allow board members to get to know key executives. But usually, there’s not time for more than one departmental update per meeting, aside from sales.

Usually this is a product update. A discussion of sales objections naturally leads into a product roadmap conversation (because new features solve objections). Ideally, the roadmap should fit on one page (optionally, you can include mockups). While numerous product features launch every quarter, only the top priorities need to be discussed at the board level. The board’s job isn’t to micromanage product releases, but rather to make sure the roadmap is in line with the company strategy. 

Other departmental updates are optional, and should not occur in every board meeting. You can rotate between departments, focusing on the one that has something important to report. For example, marketing might present after the annual user conference, telling us how it went. What was the reaction to the product? What are major stakeholders saying?

4) Financials: 10-20 minutes

This is an opportunity to dig deeper into financial topics. For example, if you’re planning to raise a new financing round, or if there’s a gross margin problem, or some other financial issue, this is the time to discuss it. For early stage companies, this section will be more brief; for more mature companies, the CFO will need to present in greater detail. As headcount and opex increase, more scenario planning is required in order to help a fast-growing startup avoid running into a wall.

5) Team: 10-20 minutes

This is an opportunity to discuss hiring needs and/or culture. Similar to strategic learnings, I find it helpful to focus on the “diff.” What does your ideal org chart look like compared to the one you have today? What areas are most on fire with the greatest need for new hires? In practice, you should focus on hiring roles that the team is desperate for, not ones that are a luxury item. Hiring is an area where board members should be able to help.

6) Administrative Matters: 5-10 minutes

Handle administrative matters at the very end, in closed session. There’s nothing worse than beginning a board meeting with housekeeping; it sucks the energy out of the room and will always expand to fill the time allowed. Board meetings should focus on strategic matters. (Housekeeping can also be done between meetings via Docusign.) Closed sessions are also an opportunity to handle any sensitive personnel matters. 

Scheduling and Format

Here are the things to keep in mind as you schedule your board meetings:

• Frequency. Board meetings should be quarterly. If your business is going through hard times and needs more frequent meetings, add a one-hour mid-quarter check-in. Monthly board meetings are counterproductive – if the team can’t execute the previous meeting’s decisions and measure the results within a month, what’s the point? 

• Length. Board meetings should be 2 hours long. When I was running companies, I used to think that 3 hours was the proper length. But now that I’m on the other side of the table, I can assure you that there are sharply diminishing returns on attention span after two hours. 

• Timing. For sales-driven companies (which almost all SaaS companies are), schedule your board meetings shortly after the quarterly close, so the sales data is conclusive and fresh. You don’t want to be speculating about how the quarter is going to go. You want to know how you just did. It fosters a much better conversation. 

• Location. Board meetings should be held in a private location. This is a non-issue in the Zoom era. But in real life, I’ve attended many an awkward board meeting in a glass conference room with paper-thin walls where no one felt comfortable discussing employee stock option grants, for example. When meetings go back to physical locations, choose a secure conference room, and if your startup doesn’t have one, then do it at the office of your VC firm or law firm.

• Materials. Send the board materials 1-2 days ahead of time so board members have a chance to review the night before the board meeting. Also send a standard deck of KPIs; you won’t cover all of these in the board meeting, but it’s useful for the board to see the same metrics package every quarter. If you don’t yet have a standard set of KPIs for your business, hold a separate session with your Series A board member to discuss what that should look like. Our board deck template provides a good starting point.

Scratchpad is a workspace for sales teams as well as others in revenue-related functions. It provides a beautiful and lightning-fast interface to take notes, record to-dos, and update the status of deals – with everything instantly flowing back into Salesforce. Sales reps love it for its speed and ease of use, while sales management and operations love it because it encourages real-time updates and data hygiene. 

What got us most excited about Scratchpad is its viral spread within sales organizations. Its freemium model lets any sales rep sign up, connect their Salesforce.com account, and start using the product. Once a rep starts using Scratchpad, two things tend to happen: 1) it becomes a daily habit, and 2) they share it with their teammates.

I wrote about its habit-forming nature in my blog Measuring SaaS Engagement. The data in that blog is actually from our Scratchpad diligence. While not at first apparent, when we dove into the product usage data and isolated weekday usage among paid accounts, we saw that sales reps use Scratchpad almost 4 work days every week, which is best-in-class. This explains Scratchpad’s viral spread: once one rep uses it, it takes hold in an organization and the number of users grows rapidly.

With rapid adoption and habitual usage among sales reps, plus alignment with sales ops and sales management goals, Scratchpad has a natural entry point to negotiate paid contracts. I’ve described this Enterprise Freemium approach as a “best of both worlds” sales motion because it combines enterprise budgets with the velocity of an SMB-like sales cycle. Scratchpad has used this sales motion to rapidly add customers from great sales organizations like Autodesk, Brex, Front, ProductBoard, Sendoso, Snowflake and Twilio – and they’re just getting started.

Scratchpad joins Craft’s portfolio of bottom-up SaaS companies like ClickUp, Sourcegraph, and OpenPhone who have mastered this type of go-to-market motion, which combines B2C growth tactics with a B2B revenue model. There’s nothing better than when ARR goes viral! This keiretsu of bottom-up SaaS companies are already sharing best practices and learning from each other. 

The founders of Scratchpad, Pouyan Salehi and Cyrus Karbassiyoon, have been working together for almost a decade, having previously founded PersistIQ, an email automation tool for sales. They are extremely sharp product minds who have an ideal background to lead and grow Scratchpad. We are excited to support them in their mission to transform the workflows of sales reps.

Scratchpad founders Pouyan Salehi and Cyrus Karbassiyoon.

Teams > Individuals

There are three main reasons for the superior economics of Team products:

1. Deal Sizes

Team products have larger initial contract values as a result of the ability to sell multiple seats. By contrast, the small deal sizes of Individual products may be insufficient to justify the cost of a sales team. Unless the Individual product is highly viral, it will be easier to build a distribution strategy for a Team product.

2. Retention 

Team products are stickier than Individual products. To use a gaming analogy, multiplayer mode is more engaging than single-player mode. Users can do more interesting things when coworkers are part of the experience; value creation is higher. 

Once a team is collaborating in a product, no single user can easily make the decision to leave. The decision to migrate to another tool requires coordination (aka a “rip and replace”). By contrast, a solo user can leave an individual product at any time. 

Finally, collaboration provides constant opportunities for reactivation. A subscriber who stops using an Individual product is likely churned whereas an inactive user on a Team product is just one notification away from being reengaged. As long as the team maintains some minimum threshold of engaged users, it will avoid churn at the account level. 

For all of these reasons, account-level churn rates for Individual plans are commonly around 5% per month, but only 1-2% per month for Team plans. This translates into much higher revenue retention for Team plans. 

3. Seat Expansion 

Team plans have the ability to add new seats as the product spreads within a company, creating revenue expansion. As a result, successful Team products have “net negative churn,” meaning that expansion from retained accounts exceeds revenue lost from churned accounts. This beautiful property is illustrated by this famous chart from Slack’s S-1:

Revenue from annual cohorts of Slack customers keeps increasing year over year, not because there is no churn, but rather because seat expansion exceeds churn. 

Without the benefit of seat expansion, Individual plans suffer from a one-sided attrition. Cohorts keep shrinking rather than growing. To counteract this dynamic, Individual products can try to upsell more expensive plans or new products, but this is much harder than adding new seats. 

As a result, it is not uncommon for Individual plans to suffer ~50% per year churn in subscribers and revenue. At that level of churn, the SaaS vendor is effectively rebuilding its business from scratch every two years. It’s impossible to build an extremely valuable SaaS company this way. 

B2B > B2C

The ability to offer Team plans is a major advantage of B2B SaaS. By comparison, B2C SaaS is limited to Individuals plans. Frankly I’m skeptical of valuations in this category. Investors are currently paying SaaS multiples for these companies because they are ARR businesses, but without seeming to understand the difference between cohorts that are shrinking versus those that are growing every year. With only ~50% per year retention, these B2C SaaS businesses are effectively an arbitrage on marketing CAC (customer acquisition cost). There’s no long-term business. 

Two highly successful B2C subscription businesses are Netflix and Peloton. Why have they done so well? Netflix spends billions per year on original content to retain subscribers. Peloton takes over a room in your house, physically reminding you to engage with the product. These are exceptions that prove the rule because they have unique retention strategies. Both companies are selling more than a short-term subscription.

Individual plans are a good business only when retention is unusually high (e.g. churn under 2% per month) or if the retention rate approaches a long-term asymptote (so initial churn may be high but there’s a “cohort within the cohort” that sticks around forever). Moreover, a business can afford high churn rates only if CAC is very low or free. 

Hybrid Strategies

When a B2B SaaS company has both Individual and Team plans, how should it think about the quality of its revenue? As an example, Craft recently evaluated a Series A investment that had both types of plans. Taken together, revenue retention for the Overall business looked unimpressive, at about 85% for the year:

But when we broke apart the Individual and Team plans, we saw a very different picture. The average masked two extremes. The Individual plan had about 60% annual revenue retention, which is poor (but not uncommon for Individual plans):

On the other hand, the Team product had roughly 200%+ net revenue retention, which is fantastic:

Most importantly, revenue cohorts for the Team product were compounding over time whereas revenue cohorts for the Individual product were shrinking. This is the key point: The Team product was creating a growing revenue base whereas the Individual subscriber base was steadily deteriorating. 

How does Craft evaluate a business like this? We placed zero value on ARR from the Individual business but valued the Team business at a very high ARR multiple. We ended up leading the Series A. Other VC firms that didn’t analyze Teams vs Individuals, and just looked at the Overall chart, completely missed what we were so excited about.  

When Individual Plans Make Sense

Although Team plans have superior economics, there are cases where it may make sense to focus on an Individual plan first. 

First, it may be easier to build single-player mode than multiplayer mode. Some SaaS products need to figure out how to create a great experience for one user before they contemplate how to bring value to a whole team. Certainly, if the experience of each individual on a team is mediocre, expansion will be difficult. 

Second, Individual plans can be valuable as an engine for lead generation. This is why a lot of SaaS products offer “first user free.” This is a smart pricing strategy. Since most Individual plans don’t create a lot of long-term value on their own anyway, why not give them away in order to drive acquisition for the Team business? (However, “first user free” won’t work if teams can loophole pricing by going through a single user, so try to develop features that make this impractical.) 

Finally, if there are real costs to offering the service, you may need to charge power users under an Individual plan. But unless retention is unusually high, don’t confuse what is effectively a financing subsidy with what is the real long-term business. Customer revenue cohorts that grow forever should be the goal.

Conclusion

In general, B2B SaaS companies should focus on Team plans, with their magical property of compounding revenue. Team plans build on a solid long-term foundation whereas Individual plans are the definition of a Leaky Bucket. In those cases where it makes sense to build the Individual plan first, try to find the use cases for sharing and collaboration as soon as you can. Teams are the ultimate destination.

Individual Plans

Let’s start with the sales plan for an individual sales rep, or “account executive” (AE). The key elements of an AE sales plan are:

• Base Salary;

• Quota;

• Commission Rate;

• Variable Pay (Quota times Commission Rate); and

• OTE (“on-target earnings”), the sum of the AE’s Base Salary and Variable Pay. 

This sounds like a lot of variables, but two industry standards allow us to simplify greatly:

1. The standard commission rate for SaaS products is 10%. For example, closing a $100,000 ARR deal generates a $10,000 commission.

2. In constructing an OTE for an AE, a 50/50 split between base and variable compensation is typical. For an AE who’s hitting quota, their variable pay will equal their base salary. 

Taken together, these standards generate a third rule: the typical quota will equal 10x base salary. I call this the Rule of 10. This generates the following pay scale for AEs:

For simplicity, I’ve presented annual numbers, but quarterly sales plans are actually ideal. (I explain why in The Cadence.) Just divide the numbers by 4 to put your AEs on a quarterly plan.

Once an AE hits quota in a quarter, their commission rate should increase to 15% on incremental sales. This “accelerator” incentivizes the best AEs to keep pushing past their target, instead of slowing down at a perceived finish line.

For new AEs, the industry-standard time to hit productivity is 4 months, but this can be longer or shorter depending on how long it takes to learn the product and develop a pipeline. Most sales orgs set a ramping schedule, during which time new AEs have a lower quota and higher guaranteed comp (known as a “draw”) to make up for lack of commission. For example, a 50% draw would mean that the AE is granted half their variable comp for a quarter. If an AE is still not productive after 2 quarters, you may need to let them go or put them on a performance improvement plan.

It’s better for all AEs at the same level to be on the same plan. One-off promotions or raises can become a slippery slope. That said, if an AE consistently exceeds quota, the Rule of 10 provides a basis for giving them a raise. For example, if an AE reliably generates $600k in new ARR, then it’s fine to increase their base salary to $60k. However, their quota would now need to increase from $500k to $600k. Be careful to avoid raises that turn a successful AE who’s hitting quota into an underperforming AE who’s missing quota. 

Team Plans

“Quota Capacity” (QC) refers to the total team quota. For example, if you have 10 AEs with quotas of $500k each, the team’s quota capacity will be $5 million. If you are forecasting $5 million in new ARR for next year, but have only 2 AEs ramped ($1M of quota capacity), you are very unlikely to hit your goal. Hence the value of the QC concept.

The average team attains about 70% of their QC, so some over-capacity is needed to hit your goal. In planning, make sure you also allow enough time for new AEs to ramp. 

A manager’s quota should be set at 80% of their team’s QC. The manager’s OTE (also 50/50 between base and variable) will be set by market rates for a manager, director, or VP in their position. Commission rate will be the dependent variable. For example:

• Let’s assume a manager of 10 junior AEs ($5M QC) makes $200k OTE.

• $200k OTE means $100k base and $100k variable.

• 80% of quota would be $4M New ARR.

• Their commission rate at $4M New ARR needs to generate $100k of variable. 

• Therefore, their commission rate is $100k/$4M = 2.5%.

If the team is hitting over 80% of QC, that’s a sign you can hire more AEs. In fact, anything above 70% could warrant additional hiring as long as you have enough leads being generated at the top of funnel. Do not hire more AEs unless you can “keep them fed.” In my experience, AEs are rarely self-feeding and need marketing support to generate inbound leads. A great AE will generate at most 50% of their leads through their own outbound effort. 

Outbound motions are much harder than inbound so don’t assume production from any outbound channel until it is proven. Bottom-up SaaS products are a special case where all the leads are generated by the product, making growth much more predictable and efficient. In general, bottom-up SaaS vendors shouldn’t waste their time on outbound; they should focus on creating greater awareness.

Territories

The last part of an AE’s sales plan is their territory. A territory describes the boundaries within which the AE can sell. To avoid channel conflict and ensure adequate coverage, the world should be divided into territories that are “M.E.C.E.” (mutually exclusive and collectively exhaustive). There may be some parts of the world that you’re not selling into yet. That’s fine – inbound leads can go into an inbox until those territories are ready to be assigned. 

There are a few different ways to divide up the world:

1. Geos. Most commonly, leads are assigned to geographic territories based on their location (typically company headquarters). APIs connected to Salesforce (such as Clearbit or Zoom Info) can do this assignment automatically. Territories should be roughly the same size, not in geographic area, but in terms of the number of leads they generate. If the world is divided up fairly, AEs should be largely indifferent to the territory they get. 

   As more AEs get hired, existing territories need to be broken up to create new patches for the new hires to work. As a SaaS vendor gets bigger and bigger, the territories get smaller and smaller. Offsetting this challenge for the AE is the fact that sales get easier as the vendor becomes more established and successful. Continued growth means that the vendor is able to extract more from less.

2. Verticals. Instead of using geos, some SaaS vendors will create territories based on industry verticals. This makes sense when the product is highly specific to a particular type of customer. Specializing by vertical allows the AE to master those use cases.

3. Round-Robin. Finally, early-stage startups will often divvy up the leads round-robin. This makes sense for small teams that don’t want the overhead of maintaining geos or verticals. This is a good place to start.

New territories, quotas, and plans should be rolled out quarterly at Sales Kickoff. This is also a time to retrain the sales team on product changes and best practices. You should figure out what your top AEs are doing right and seek to replicate those behaviors across the team.

Expansion and Renewals

A perennial question is who should get credit for expansion and renewals.

I like to let an AE keep the account for 12 months from the initial close to incentivize “land and expand” deals. Any expansion in the account during that time is considered New ARR for which the AE receives full quota credit. 

After 12 months, the account becomes a renewal, which is subject to a separate quota and commission rate and may be worked by a different rep. Commission rates on Existing ARR should be much lower than for New ARR.

There are several different options for assigning renewals, and each has its advantages and disadvantages:

1. Original owner. Renewals can stay with their original owner – the sales rep who is most familiar with the account. The advantage is obvious, but the problem is that tenured reps will build a “book of business” and spend less and less time closing new business. This turns the best “hunters” into “farmers.” Eventually there will be a need for some kind of reassignment. 

2. Territories. Renewals can be assigned based on geographic territories just like new business. If an AE expands the deal, the expansion is considered New ARR and applies to their new business quota. This approach is the most democratic, because it assigns juicy opportunities for expansion to the entire team, but it can also result in important renewals being assigned to newer and less experienced reps who could mishandle them. 

3. Specialists. Renewals can be handled by specialists, typically elite sellers selected for the significant potential of these opportunities to impact ARR. This is what we did at my company Yammer, and it proved effective at maximizing these opportunities. 

4. CSMs. Finally, in some companies, CSMs handle the renewals. I am not a fan of this approach. While it can be fine for mature vendors, in the early years of a startup, AEs are much more likely to maximize the value of the renewal or to save a troubled deal. Thus, I prefer to see CSMs partnered with AEs and bonused based on customer retention, rather than owning the renewal themselves. 

Sales Productivity

Finally, the Rule of 10 yields some insights about sales productivity. 

If an AE is unable to generate at least $400k/year in New ARR (implying $80k-100k OTEs), a sales-driven distribution strategy may not pencil. Moreover, if your product requires very high-paid, experienced sellers, then it also needs to generate the contract sizes that justify their quotas. If your product generates only small contract values, that’s fine as long as sales velocity is high and junior reps can be hired to sell it.

Since OTE is 20% of sales, the fully-loaded cost of an AE will represent about a 25% cost of sales. Sales overhead (management, operations, sales development) will typically cost another 15-25% of sales. That means you can spend about 50% of New ARR on Marketing CAC (lead gen) and still keep your payback under 12 months. Of course, these are just rules of thumb – be sure to check the actual numbers. 

I see a lot of companies implementing sales ad hoc, and they usually come around to some version of these principles, after experiencing some confusion and pain. If you stick to these simple math-based rules, it will be much easier to build out your sales function.

Glossary

• Accelerator – the increase in Commission Rate that an AE receives once they’ve hit quota in a given period.

• AE (Account Executive) – a sales rep.

• Base Salary – the AE’s guaranteed compensation.

• Commission Rate – the percent of New ARR paid to the AE as an incentive, typically 10%.

• Geos – geographic territories, a process for assigning leads based on location.

• M.E.C.E. (“mutually exclusive and complete exhaustive”) – a principle for dividing up the entire world into non-competing territories. 

• OTE (“on-target earnings”) – the sum of the AE’s Base Salary and Variable Pay. 

• Quota – the New ARR that an AE is expected to close within a given period.

• Quota Attainment – the percent of Quota actually hit by an AE (as opposed to the amount specified in plan).

• Quota Capacity – the sum of the individual quotas on a team; the amount of new sales generated if everyone on the team hits quota.

• Ramp – the period where a new AE becomes productive. Ramp times vary based on your product and industry. Sales comp should factor in a ramp schedule so new reps have time to hit full productivity without their OTE being penalized. 

• Round Robin – lead assignment process where all sales reps are assigned leads in a rotational order.

• Rule of 10 – Typical AE quota should equal 10x base salary. Most other compensation math hinges on this rule. 

• Territory – the boundaries describing where an AE can sell. 

• Variable Pay – the incentive compensation that the AE receives for hitting quota (i.e. Quota times Commission Rate).

For consumer products that monetize an audience, a DAU/MAU (the ratio of daily active users to monthly active users) exceeding 50% is considered the Holy Grail. This indicates that the typical monthly user visits the site at least every other day. This is Facebook-level engagement, or what some investors call a “daily habit.” 

But in my experience, it is rare to see a SaaS product — even a valuable one — with 50% DAU/MAU. For one thing, workdays are only about two-thirds of the year for the typical employee. Moreover, free users can create a lot of noise in the data. Hence it takes a little work to adapt this B2C metric for B2B SaaS.

To illustrate the point, let’s look at Company X, a bottom-up SaaS startup that we recently evaluated for a Series A investment. Enthusiastic customer references told us that they used the product every day, so we were expecting high engagement numbers. However, Company X reported a DAU/MAU of only 24%. To understand this disparity, we engaged in the following analysis, which might be helpful for your SaaS startup:

1. Adjust for the effect of weekends and holidays. 

Unlike consumer engagement, SaaS engagement needs to adjust for times when users aren’t working. The best way to do this is not to change the formula but simply to graph it. For example, the DAU/MAU over time for Company X appears as follows:

The high-frequency curves are characteristic of SaaS engagement charts. The highest levels of engagement occur on weekdays, followed by very low engagement on weekends. More pronounced troughs occur around holidays like the Christmas-to-New Years period. What’s important is not the troughs, or even the average of the curves, but rather the average of the crests. This is when people are working. You can generally eyeball the chart to spot the average workday crest — in this case, about 35%. This implies the average monthly user uses the product about 7 out of 20 workdays per month. 

2. Separate Customer Engagement from User Engagement. 

Free users who sign up to explore the site but don’t become paying customers will increase MAUs but generate few daily visits, bringing down the average. When DAU/MAU is limited to paid users only, we can call this “Customer Engagement” rather than User Engagement. For bottom-up SaaS products, which allow anyone to sign up, this is an important distinction. For Company X, limiting DAU/MAU to paying customers lifted the crests to 40-45%, implying average usage of 8-9 workdays per month for the average monthly user. This was a meaningful improvement: 

3. Look at Customer Engagement for key accounts.  

Next we looked at the DAU/MAU charts for each of the top 10 customers of Company X. Most accounts showed engagement levels above the average, with some cresting as high as 70%. This explains the gap between what we heard in customer reference calls and the original DAU/MAU of 24%. Charting Customer Engagement at key accounts shows the upside that’s possible if the startup can make all of its customers as successful as its top accounts. 

4. Look at DAU/WAU as well as DAU/MAU. 

Finally we looked at DAU/WAU in addition to DAU/MAU to round out our understanding. DAU/WAU shows how many days per week the average weekly user uses the product. For Company X, the DAU/WAU for paying customers looked like this:

This DAU/WAU chart crests around 60%, much higher than the 40-45% crests for DAU/MAU. In other words, the average weekly user returns to the site 3 out of 5 workdays per week whereas the average monthly user returns 2 workdays per week. For engaging products, it is not uncommon for DAU/WAU to be about 50% higher than DAU/MAU. 

Conclusion

When measuring engagement for bottom-up SaaS startups, you can't just look at a single DAU/MAU number. You need to look at both DAU/WAU and DAU/MAU, and make two further adjustments: First, look at the average crest of the chart, rather than the average, to understand workday usage. Second, remove free trials and freemium users to understand Customer Engagement as opposed to User Engagement. Finally, you should chart Customer Engagement for the top 10 accounts to understand what best case looks like. 

What is a good result? A SaaS product should strive to be used all 5 workdays in the week by its users. You should have key customer accounts near this level, a trend toward this level in other customer accounts, and an explanation for customer accounts where engagement isn’t trending in the right direction. Across all users at paid customers, a SaaS product with excellent engagement might have a DAU/WAU that crests at about 60% (3 workdays per week) and a DAU/MAU that crests about 40% (8 workdays per month). 

When you see these levels of engagement among the initial customers, you know the team has nailed the early beta period and is ready to scale with a Series A round. We ended up making the investment in Company X — which we might have missed if we had simply considered a 24% DAU/MAU to be the end of the story. I’ll be excited to tell you who Company X is as soon as they’re ready to announce.

In the business-school case study, the startup always begins with a brilliant insight. The founders perceive a gap in the market relative to incumbents, then build a product to fill it. It’s all very logical. In reality, we know that startups are messier than that. Founders usually start with a product idea. They know users will like it but may be a bit hazy on the exact market, buyer, or business model. Those details get filled in over time. By launching the product first and learning from its adoption, founders discover the market insight, then build the organization they need to operationalize it. 

These thoughts occurred to me as I watched Lex Fridman’s recent podcast with Jack Dorsey about the founding of Square. It strongly resonated with my own experience at PayPal, which I’ve written about here. Here’s how Jack explained it (edited for length and clarity):

If there’s one word that represents what we're trying to do at Square, it's access. We weren't expecting this at all. When we started, we thought we were just building a piece of hardware to enable people to plug into their phone and swipe a credit card. And then as we talked with people and dug in some more, we found a consistent theme: many of them weren't even allowed to process credit cards. A lot of them would go to banks or merchant acquirers and waiting for them was a credit check looking at a FICO score. Many small businesses don't have good credit or a credit history. They're entrepreneurs who are just getting started, taking a lot of personal financial risk.

It just felt ridiculous to us that for the job of being able to accept money from people, you have to get your credit checked. As we dug deeper, we realized that wasn't the intention of the financial industry, but it's the only tool they had available to them to understand authenticity of intent, a predictor of future behavior. So the software really came in terms of risk modeling. We started with a very strong data science discipline because we knew that our business was not necessarily about making hardware. It was more about enabling more people to come into the system. [To do that] you have to lower the barrier of checking that that person will be a legitimate vendor.

I think a lot of the financial industry had a mindset of distrust and just constantly looking for opportunities to prove why people shouldn't get into the system. We took on a mindset of trust and then verify, verify, verify. When we entered the space, only about 30-40% of the people who applied to accept credit cards would actually get through. We took that number to 99% because we reframed the problem. We built models and had this mindset of we're going to watch, not at the merchant level, but at the transaction [level]. So come in, perform some transactions. And as long as you're doing things that feel high-integrity, credible, and don't look suspicious, we will continue to serve you. If we see any interestingness in how you use our system, that would be bubbled up to people to review, to figure out if there's something nefarious going on. 

Let’s unpack that, to understand the process that led to the creation of a $60 billion market-cap company. It has three steps: 

Step 1: Create the product hook. 

Jack’s starting point was not an understanding of how the legacy incumbents were broken or how that brokenness created a huge gap in the market. That understanding would come, but the starting point was to conceive of a simple product that would create tangible value: “When we started, we thought we were just building a piece of hardware to enable people to plug into their phone and swipe a credit card.” The original Square reader is a great example of what I’ve called a “product hook” -- a simple repeatable transaction (in this case, a swipe) that entices users to engage with a larger product. It also came with a “distribution trick”: its distinctive design, underscored by the Square logo and brand, created real-world virality. PayPal started in a similar way: our product hook was to “email money,” which also created the first distribution trick (email virality). 

Step 2: Discover the market insight.

The market is discovered as a result of seeing who uses the product and why. Square discovered that there was a huge under-served portion of the market -- small business owners and entrepreneurs that didn’t have the credit history necessary to get a traditional credit card merchant account. At PayPal, we stumbled onto a similar insight with eBay sellers, who didn’t conceive of themselves as professional businesses and were unable or unwilling to go through the lengthy underwriting process that eBay had set up with its payment partner Wells Fargo. Both Square and PayPal realized that they could increase access to a new and under-served market by eliminating the upfront requirements and approaching fraud detection in a different way. While PayPal was originally confined to payments that could take place on a desktop PC, Square was built for the online-to-offline era, where ipads and iphones have extended apps to every nook and cranny of the physical world.

Step 3: Operationalize the insight.

To operationalize the market insight, Square (like PayPal before it) built fraud expertise at the transaction level to replace hoops at the merchant level. It built a data science team, predictive models, and a team to review suspicious transactions. Over time these efforts grew more sophisticated and became a moat. Undoubtedly, it helped that Square brought on two PayPal Mafia veterans -- Keith Rabois as COO and Roelof Botha as board member. Hiring people who have done similar things in the past can provide a tremendous shortcut. Historically, this was a big advantage of starting a company in Silicon Valley. Even as technology companies become more geographically diffuse, it is worth spending the time to find talent who can help you avoid reinventing the wheel. Finally, Square deserves a lot of credit for expanding its product line over time. Once it discovered the theme of access, it had the “north star” to continually expand its offerings.

Square and PayPal are both examples of the philosophy that “if you build it, they will come.” But users will only come if you build it the right way: The company starts with a product hook to grab users and a distribution trick to find them, pays attention to the organic use of the product to discover the market insight, then leans into that insight to build the company. It helps that Square and PayPal are consumerized, broadly horizontal products; the strategy would be less suitable for hyper-vertical or deep-stack enterprise products. But with the consumerization of the enterprise, the product-first approach is increasingly relevant for SaaS as well as consumer apps.

During this campaign season, many of us are reflecting on how change is created and political movements take hold. There is an analogue between grassroots politics and startup evangelism. The best founders talk eloquently about their mission and the change they want to make in the world. They speak about something larger than dollars and cents. They articulate a vision of the future that attracts adherents. They create a movement.

If you want to understand how Tesla can become the most valuable car company in the world without needing to spend a dime on advertising, while its competitors futilely buy Superbowl ads, or why 170,000 people pilgrimage annually to Dreamforce for the opportunity to be sold Salesforce products, the answer is that the founders of these companies have created a movement. Obviously, it couldn’t happen if they didn’t also make great products, but marketing is the amplifier of all their other efforts. If sales is like hand-to-hand combat, great marketing is like having an air force.

There is a playbook for this. I call it Movement Marketing. It is also known as “earned marketing” because you can’t just buy it, you have to earn it. Unlike paid campaigns, there is no formula for ROI. Earned marketing is about brand, messaging, press, influencers, content — all the things that define who you are. This is undeniably crucial, but since the metrics are hard to quantify, founders often have trouble with it. Like a math whiz who aces the Math section of the SAT and flunks the Verbal, many founders are comfortable stacking up small quantifiable wins on lead-gen campaigns while never attempting the step-change that great marketing can bring. Here’s how to do it: 

1. Define a larger cause. 

Political movements rally people to a cause larger than themselves. So too do startup movements. Tesla begins all of its product unveilings by explaining the need to move the world to sustainable energy. Salesforce talks about moving business to the cloud. What is the larger cause that your startup stands for?

Peter Thiel has said that the best startups are like a cult that believes in something true. A sense of mission is important for both internal morale and external marketing. You need to be able to describe the change you seek to bring about, why it’s important, and why people will benefit from it. 

Whereas paid marketing buys people’s attention, earned marketing obtains it for free. In order to do that, founders have to stand for a cause larger than just their self-interest. 

2. Articulate the problem better than anyone else.

All campaigns are about the need for change. But the starting point in describing the need for change is to articulate the problem. Speak to the pain that users are experiencing. Grab onto news, anecdotes, or data that illustrate it. Describe how the world would be better if the problem were solved. As marketing guru Christopher Lochhead has pointed out, if you speak more articulately about the problem than anyone else, people will assume you have the solution. 

Successful political movements do this. They connect on a deeper level than just policies and programs. They begin with a critique of the status quo and then make the case for change. When the audience connects with that critique on a visceral level, they are much more likely to embrace the political program.

Many founders are like bad politicians — they are “policy wonks.” They just want to talk about their features. I’ve got news for you: Nobody cares about your features. At least not yet. First people need to understand the problem you’re solving. Then they need to understand your solution. Only then will they be interested in your features. 

3. Attack the status quo. 

Your startup has an opponent, but it’s not your competitors; it’s some version of the status quo. You need to name this enemy. Marc Benioff convinced the world that software was the enemy. He articulated an “End of Software” mission, and created a NO SOFTWARE logo and a phone number to go with it: 1-800-NO-SOFTWARE. Did Benioff mean all software or just the kind that has to be installed? Presumably the latter — but those are the kinds of details that can be explained once you have someone’s attention. 

At my company Yammer, we identified our enemy as a rigid org chart that trapped information, stifled dissent, and created bureaucracy. Our description evolved, as we were constantly searching for better ways to articulate the problem. Just as we iterated on our product to achieve greater product-market fit, we would iterate on our messaging to achieve greater resonance. The more vividly you describe the need for change, the more obvious the need for your product will become.

Inevitably, as your startup becomes more successful, it will attract competitors. Don’t fall into the trap of seeing copycats as the enemy. Treat them as validation that the world is moving to your point of view. When a legacy car company introduces a new electric car, Elon welcomes them to the market. The real enemy is fossil fuels.

4. Define a category. 

The category is the solution to the problem. After articulating the need for change, it’s not quite credible simply to posit yourself as the solution; rather, what you do is the solution, and the category is the shortest, crispest way of describing that. Elon has said that Tesla will be successful if it moves the auto industry to electric cars, even if Tesla itself does not survive. That is putting the category before yourself!

Of course, if you create the category, or define or redefine it, people will naturally look to you as the leader of it. This is particularly important in enterprise software. The modern version of the old saying that “nobody ever got fired for buying IBM” is that “nobody ever got fired for buying the category leader.” The perception of early category leadership often becomes self-fulfilling as customers, investors, and talent all want to go with the category leader. I describe this in greater detail in my post The One Who Defines the Category Wins the Category. The very best founders create a category and a movement. 

5. Build the right team.

Once you’ve articulated the cause and the category, it’s time to win the campaign by using the right talent and tactics. To start, your campaign needs the right team. As mentioned, “marketing” is like the SAT. It has two sections: Math and Verbal. The “math” part is performance-based marketing to generate leads. This is highly quantifiable and you want people who are good at running tests and stacking up incremental gains. The “verbal” part consists of press, influencers, branding, and content — the things that define you. Here the metrics are more elusive. In my experience, it’s almost impossible to hire someone who is an expert in both domains. Rather than wasting time looking for a unicorn hire, it may make more sense to hire experts in each area and build out two teams. 

6. Use “grassroots” customer testimony. 

As Benioff explains in his book Behind the Cloud, the most powerful marketing weapon you have is customer testimony. People will naturally be suspicious of any claims that you make. Your message will be most credible coming from others, especially customers who can testify to their first-hand success with the product. Make sure you get customer logos, press releases, case studies, and reference accounts. There’s nothing as convincing as grassroots support for a campaign.

7. Release news in lightning strikes, not dribs and drabs. 

Good political campaigns don’t just try to win news cycles; they try to penetrate the clutter with a strong announcement that can redefine the race. For startup movements, the equivalent is a lightning strike. Don’t just blog about features. Only super-fans who are already using your product care about new features. To get the world’s attention, you need to up-level and combine news about products, customers, milestones, and partnerships. Remind people about the larger problem that you’re solving; keep providing context, and time lightning strikes for maximum impact.

8. Organize events to focus attention.

Rallies build momentum for a political campaign. The equivalent for startups are launch events. They focus internal and external attention and remind everyone, from employees to prospects, about the importance of your movement and the change you are creating in the world. Founders sometimes believe that nobody will show up for their event, but they would be wrong. You will be surprised and amazed at who turns out and what you learn. Make these events the focal point for your lightning strikes. As I described in my post The Cadence, events provide tremendous motivation for everyone inside the company. Let the entire company attend by webcast so they feel renewed purpose and motivation. Then focus them on the next one.

9. Nurture your community.

A community is a place for your customers and supporters to learn from each other. Some founders are hesitant to let customers mix — and vent — freely, but the gains outweigh the risks. If customers are going to post something negative, it’s better that they do it in a context you control than on Twitter. You need to hear that criticism anyway. If it’s unfair, your fans will jump in to defend you, which is better than trying to do it yourself. 

If your community can be built on top of your own product, that’s ideal. At Yammer, one of our superpowers was the “Yammer Customer Network,” a place for customer admins to collaborate with us and each other. Otherwise, startups should focus their attention on at least one channel — it could be LinkedIn, Instagram, Facebook, or a customized network — to galvanize the energy of the community, encourage people to share their enthusiasm and wins, as well as seek help and advice.

10. Pick noble fights.

Great political movements engage in noble fights, even when they sometimes have to pick them. Likewise, startups should look for opportunities to draw sharp contrasts with a legacy incumbent. Elon’s Cybertruck did a masterful job of challenging Ford’s F-150 pickup truck (the #1-selling pickup truck), and Ford looked weak when it backed down from the challenge. If you’re going to pick a fight, just remember to always (1) punch up, not down (it should be against a bigger competitor), (2) stay product-focused, and (3) keep the tone positive. Because your opponent is really the status quo, not another person or company, you should avoid personal attacks or mudslinging. Stay focused on touting the advantages of your solution. 

11. Strive for a large tent. 

Great political movements try to find ways to work with both parties when possible, and not unnecessarily alienate either side. Similarly, startups would be well advised to stay away from partisan political battles. The country is deeply divided over politics and you don’t want to bring that polarization into your company, where everyone should work well together as a team. There’s also no point in alienating half your potential customer base. Note that the most popular politicians have only a 50-55% approval rate. That’s actually pretty bad. There’s no reason a tech company with a great product can’t have a 80-90%+ approval rate. 

12. Work with press and influencers in the right way.

An influencer strategy is important, and that includes working with press in the right way. It is often possible to draft off the headlines by using news hooks and narratives that are interesting to the press. For example, if you’re a cyber-security company and there’s a major breach in the news, you could use that to talk about how such breaches can be avoided in the future. 

That said, don’t depend on the press to tell your story for you. You have to tell it yourself. Talk about what’s important to you. Remember that many of the things Silicon Valley reporters want to talk about (like financing plans and valuations) are inside baseball and not relevant to your movement. Talk about customer success and the change you want to make in the world. Make sure you are serving your movement, not the insiders’ game. 

13. Stay grounded. 

All of this said, it’s important not to go too far with Movement Marketing.  Keep the conversation grounded and focused on business value. This is, after all, just business. We are not “elevating the world’s consciousness,” as WeWork claimed. Using grandiose language like that will subject you to mockery and ridicule. Don’t clown yourself. Make sure you back up your claims and avoid aggrandizing and arrogant language. 

Finally, avoid crazy projections. Revenue projections are part of the insiders’ game. It’s fine to talk about your past accomplishments in detail, as they bolster your credibility, but future plans should be up-leveled. It’s fine to say that you did $10 million in revenue last year, but don’t say that you’re shooting for $100 million next year — all you’re doing is putting a target on your back. Making lofty future claims is unnecessary. Your actual accomplishments will be sufficient to impress. 

Conclusion

In this election year, it is easy to see the power — often the destructive power — of political movements. One of the reasons I love startups is that they are a different kind of change agent. 

Startup movements have two key advantages over political movements. First, politics inspires equal and opposite groups to spring up in opposition to anything one wants to accomplish, whereas successful startups inspire imitators (e.g. Tesla and electric cars). So it’s actually easier to effect change with a startup movement than a political movement. 

Second, politics tends to be a zero-sum game, whereas startups increase the solution set by introducing new products. Tesla has moved people to electric cars not with a government mandate but rather with a better car that people choose voluntarily. Startup movements operate creatively, not coercively. 

Most startup founders are naturally passionate about making a change in the world. In fact, that is likely why they became founders in the first place. Their message is authentic and real. It often just waits below the surface, ready to break forth, and ignite a movement. When founder authority, authenticity, and leadership are combined with the techniques of Movement Marketing, the results can be transformative.

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Let’s face it: most startups are a shitshow. Perhaps the most pervasive problem afflicting venture-backed startups, once they achieve a basic level of product-market fit, is managing the organizational chaos that results from rapid growth. Almost by definition, this is a chronic challenge of Series A-C stage startups since the rapid expansion of the team to chase a new market opportunity is the purpose of that venture funding in the first place. During this time, the growing pains of the startup will reach such a crescendo that the founders and board will cry out as one, “we need a COO!”

As with any potential problem in a startup, it is possible to posit that a perfect hire could solve that problem, but the more direct route is simply to solve it yourself. Putting your startup on an operating cadence is the way to do that. The Cadence is an operating philosophy that I first learned as COO of PayPal (during the so-called “PayPal Mafia” founding era) and then adapted for SaaS as founder/CEO of Yammer, which Microsoft acquired in 2012 for $1.2 billion. To this day, Yammer is still the fastest unicorn exit among SaaS startups, and a lot of that success is due to the Cadence. The Cadence helped us scale to almost 500 employees and $56 million in annual sales in 4 years.

The Cadence is most needed when scaling from 50 to 500 employees. This is when a pivotal transition in the way the startup operates is required. Before then, all of the employees fit into a single room (either physically or virtually), everyone knows what everyone else is working on, and founders can easily run around telling everyone what to build and what to do.

But at around 50 employees, this approach stops scaling. So the org chart is broken into silos for sales, marketing, customer support, and other functions, and product managers are hired to guide the development process. These new levels of hierarchy create a feeling of compartmentalization and disconnect in the organization. Meanwhile, a lack of leadership for some functions creates a sense of disorganization. Disconnect plus disorganization equals chaos. Ironically, the better the startup is doing, the more chaos there is. This is one of the few startup problems that growth doesn’t solve — in fact, it’s caused by growth.

Ironically, the better the startup is doing, the more chaos there is. This is one of the few startup problems that growth doesn’t solve — in fact, it’s caused by growth.

The Cadence is designed to synchronize the major functions of a SaaS startup so that the team works together in lockstep. It brings order to the chaos; it turns the shitshow into an army. It brings together disconnected areas so everyone understands what is happening and what they should work on. It replaces erratic release dates and sales targets with concrete milestones for shipping and selling. The impact of hitting those milestones, quarter after quarter, has a huge compounding effect on the performance of the business and its culture.

So what is the Cadence? It’s based on a few simple insights:

1. First, the four major functions in a SaaS startup — Sales, Finance, Product, and Marketing — are all best run on a quarterly cycle.

2. However, it’s not the same cycle. Sales and Finance are on one calendar; Product and Marketing are on another calendar. I call these the Sales-Finance System and the Product-Marketing System.

3. If you snap these two calendars together, it will create a single operating cadence for the company.

4. The key milestones and events in these systems create opportunities for company-wide communication and collaboration — a kind of superstructure for the organization.

This is a simple approach that every startup can use, yet few actually do. Let’s describe each function and then how they fit together.

The two key systems in a SaaS startup are the Sales-Finance System and the Product-Marketing System. Synchronizing them creates an operating cadence.

The Sales-Finance System

Sales and Finance are the first two functions that work together on a calendar.

The Sales Calendar

For the early-stage startup that is still doing everything ad hoc, moving to a written quarterly sales plan instantly makes the sales team feel better. Constant changes to quotas and territories undermine morale. Putting the team on a predictable quarterly cycle instills confidence that the goalposts won’t change.

Why is quarterly the right tempo? Annual quotas are too slow to judge performance in a startup and don’t easily allow for mid-course adjustments. By contrast, monthly sales are too volatile to impose a monthly quota for individual sales reps. Unless the startup has an extraordinarily quick and predictable sales cycle, a quarterly quota is the Goldilocks plan.

Once sales is on a quarterly plan, the sales leadership can create a series of milestones within the quarter. Every quarter should begin with a Sales Kickoff (“SKO”). At that kickoff, the sales team receives their new quotas, commission plans, and territories. Learnings and best practices from the most effective sales reps are shared across the group. Product managers present the latest product changes as well as the product roadmap. (Since SaaS startups are selling ongoing subscriptions, not just today’s version of the product, it’s important that every sales rep be able to sell the roadmap and vision.) PM involvement in SKO is an important opportunity for cross-functional collaboration.

The second month of the quarter revolves around pipeline inspections. Sales leaders make sure the team is on track to hit their goal, advise reps how to close deals, and help make adjustments. Meanwhile, the marketing and product teams are generating news, awards, and recognition (described further below) that sales can use to warm up prospects and put deals over the top. In the third month, the sales team should be heads-down on closing and making their number.

The Finance Calendar (Fiscal Year)

Every company runs on a fiscal year as an accounting requirement. This finance calendar should be synchronized with the sales calendar for reporting reasons. When the books close on a fiscal quarter, the numbers should reflect a complete quarter’s sales activity, not an incomplete mid-quarter picture. The leadership and board will have a much better sense of what’s happening in the business if sales plans are snapped to fiscal quarters.

There are two choices for the fiscal year. The most standard is a December 31 year-end. However, many sales-driven companies choose a January 31 year-end to avoid closing out the year during the Christmas-to-New Year period. Invariably, a lot of deals come down to the wire, and it’s miserable to be scrambling to hit the number when everyone is on vacation. Smart customers also know to demand discounts at the end of the year. Vendors improve their leverage if reps aren’t under pressure to hit quota at this time. If these reasons apply, I recommend a January 31 fiscal year-end. This means that sales quarters will end in January, April, July, and October. Similarly, it means that Sales Kickoffs will occur in February, May, August, and November.

Board Meetings

Board meetings should also be snapped to the Sales-Finance calendar to ensure that the Board reviews sales results while the data is fresh. Ideally, board meetings occur two to three weeks after the end of the previous quarter. So on a January 31 fiscal year, Board meetings will occur in February, May, August, and November. Preparing for those meetings will preoccupy the finance team during this time. More pieces of the SaaS calendar are falling into place.

The Product-Marketing System

In the same way that Sales and Finance work together on one calendar, Product and Marketing work together on another calendar.

The Product Calendar

In order to scale software development, startups create multiple independent dev teams working in parallel, with a product manager assigned to each major product area or strategic priority. Ideally the PMs own and manage their own product roadmaps in a decentralized way. However, the overall product roadmap should get reprioritized and resourced quarterly as part of a formal PM and design review process.

This review should ensure that every project that goes into development can be shipped within one quarter. The rule we had at Yammer is that projects would be assigned 2 to 10 engineers for 2 to 10 weeks. Similar to Jeff Bezos’ two-pizza rule, this meant that the absolute biggest strategic priority could get 10 engineers for 10 weeks. If the product couldn’t ship in that time, it needed to be shrunk down to something more MVP. This requirement improves the reliability of release dates and allows for user feedback before over-investing in a new product.

A good analogy for product management is filling a jar with rock, pebbles, and sand. The rocks are new products, pebbles are features, and the sand are small fixes. If you want to fit the most stuff in the jar, you put the rocks in first, then the pebbles, then the sand. If you put the sand in first, somehow there’s not enough room for the rocks. Product management is like that. It’s about resource planning — maximizing the amount of stuff that you can push through the system with a fixed amount of resources. You will actually fit more through your roadmap by planning the rocks on a quarterly cadence.

When rapidly scaling startups don’t have effective product management, one of two things happens. First, they just ship sand. They polish and fix bugs and usability issues, but they don’t ship tentpole features, new products, and major releases. Or when they do, they end up going wildly over schedule. A product that was supposed to take one quarter will still be in development multiple quarters later. “V2”s that were supposed to take a couple of quarters end up being years late and paralyze the company. This happens because the product was never scoped correctly. The quarterly discipline ensures that you do big stuff — rocks, not just sand — while scoping correctly. None of this is to say that code can’t be shipped weekly or even daily for code management reasons, but PM planning should revolve around quarterly or seasonal releases.

The Marketing Calendar

Now that you know there will be a major quarterly product release, you can plan marketing around that. This is why marketing and product are on the same calendar. Startups are product driven, and most news that the company puts out will feed off of new product releases.

A quarterly tempo works well for marketing. It’s more compelling to aggregate news into four big “lightning strikes” than to release it in dribs and drabs over 52 weeks. The lightning strike combines live product demos with news about customers, financing, market share, metrics, or other milestones. Using a launch event to focus the world’s attention is a simple trick that has been foundational to the success of Elon Musk, Steve Jobs, and Marc Benioff. If event-based marketing has been effective for the most successful founder/CEOs in the history of our industry, why aren’t you doing it? Just putting out press releases doesn’t penetrate the clutter.

Using a launch event to focus the world’s attention is a simple trick that has been foundational to the success of Elon Musk, Steve Jobs, and Marc Benioff. If event-based marketing has been effective for the most successful founder/CEOs in the history of our industry, why aren’t you doing it?

Launch events are a critical part of the Cadence. It’s not just about the external marketing value: There’s a huge internal benefit from setting dates and deadlines in order to hit a public launch. If the team at Tesla knows that Elon is going on stage to present the Model 3, they have to hit those deadlines. The same is true with Marc Benioff at Dreamforce. Sending your CEO onstage to showcase a new product is tremendously motivating for the team inside the company. The date has been set, the invites have gone out, the world is waiting, and there’s no choice but to hit the goal.

Launch events also force company leaders to think about prioritization in a different way. They know they will have to go on stage to present the new product and explain why it matters. This forces the leader of the startup to think months in advance about what is going to be important to customers. This makes the Product-Marketing System more like the Sales-Finance System in the sense of being customer-centric. Sales doesn’t work unless the customer buys what you’re selling. That’s a good dynamic because you get market feedback. Similarly, having to think about the customer reaction while you’re planning the product calendar is a great thought-exercise for the company.

For startups, I recommend one user conference per year and three smaller webinars or city events. The events don’t all have to be huge; the point is to force discipline and make sure that what you’re working on matters. In the age of Covid, it is fine for these to be virtual events or webinars. What’s most important is having an audience.

If you have product-market fit sufficient to raise a series A or B and are scaling from 50 to 500 employees, you have a fan base. You can engage this community. It may start small. It may only be a few dozen people at the first event, but it will grow.

A common objection I get from founders is that they think no one is going to come to their event. That was my fear at Yammer when we did our first annual user conference called YamJam. But even in our second year as a startup, enough customers, prospects, and industry observers showed up to fill a hotel ballroom. If you have product-market fit sufficient to raise a series A or B and are scaling from 50 to 500 employees, you have a fan base. You can engage this community. It may start small. It may only be a few dozen people at the first event, but it will grow. Just look at Dreamforce: starting from modest beginnings, it is now the largest tech conference.

Snapping the Systems Together

Now it’s time to snap these two systems together. In bringing the two calendars together, it’s important to offset the peaks. The Sales-Finance System culminates with the quarterly close, and the Product-Marketing System is oriented around the launch event. You want to space out these key events by about half a quarter apart to avoid lighting everyone’s hair on fire at the same time. It creates too much chaos in the organization, and it’s not good change management. Product demos shouldn’t change right when sales is trying to close the quarter. By the same token, when lightning strikes occur in the middle of the quarter, the positive press coverage helps to drive leads and advance deals.

Step by Step

Snapping the calendars together with an offset creates a single operating cadence for the company. Here’s how to do it:

1. First decide your fiscal year. It’s going to be December 31st or January 31st. That will decide your fiscal quarters.

2. Second, snap your sales plans to the fiscal quarters. This will determine when quarterly closings, SKOs, and Board meetings occur.

3. Third, schedule a marketing event in the middle (second month) of each fiscal quarter.

4. Fourth, plan your product cycle to hit those event deadlines.

This simple system will create a superstructure for everything happening inside of the company. Each month of the quarter takes on its own character and theme. For example:

• Month One: “Plan”

Month One is going to be dominated by planning. It starts with Sales Kickoff. The Sales Ops team distributes new sales plans, territories, and quotas. The PMs also present at SKO. Meanwhile, the finance team closes out the books on the previous quarter. The exec team works on Board meeting prep. The Board meeting happens towards the middle or end of the month. The strategic insights discussed at that Board meeting are immediately fed back into the company. The product roadmap is reviewed and reprioritized for the following quarter’s release.

• Month Two: “Launch”

Month Two is dominated by preparations for the big launch event that will happen in week six or seven. Keynotes are written. Marketing collateral is finalized. QA and testing begin on the release, and some features are already in closed beta with customers. Meanwhile, the product managers, when not testing, are racing ahead to get ready for next quarter. After the event, you debrief as a company. How did the launch go? What did customers say? Those learnings are internalized. This is also a good time to recognize employees for the great work that made the launch possible.

• Month Three: “Close”

Month Three is a heads-down period. The sales reps are focused on closing deals and hitting quota. Hopefully the launch event generated positive news that they can use to put deals over the top. Meanwhile, the engineers are focused on coding the next release. Remember that in month two, the PMs finalized planning for this release while engineers were bug fixing. This is a time for minimal distractions, as the team cranks out code and closes deals. Once the quarter ends, the cycle begins anew, with the next SKO, quarterly close, and Board meeting.

All-Hands

Knowing the big milestones inside the quarter makes it easier to plan all-hands meetings. For example:

• After the quarterly close, review sales results with the company.

• After the board meeting, review strategy.

• Before the big launch event, preview the new release.

• After the launch event, debrief on how it went, what was learned, and where the product roadmap is headed.

Each major event creates the opportunity for an all-hands meeting to keep everybody up to date and synchronized.

Summary

The Cadence puts the four key functions in a SaaS company (Sales, Finance, Product, Marketing) on a quarterly calendar. Human beings are wired for seasons so this is a natural way to work. The Sales-Finance System is oriented around a quarterly close as its central event, while the Product-Marketing System orients around a launch event. Synchronizing these calendars creates a single operating cadence for the company.

The compounding effect of operating on a cadence is huge. You will ship four great quarters per year. Most big companies are lucky if they have even one. If you run the Cadence quarter after quarter, year after year, your SaaS company will graduate from a chaotic startup into an unbeatable army.

Related content on this subject:

• Watch my interview on This Week In Startups.

• Watch my SaaStr talk.

• View slides on Slideshare.

Today Craft Ventures is excited to announce that we are leading the $35 million Series A in ClickUp, and I will be joining the board. This is one of our largest Series A investments to date, which reflects our confidence in the team and product.

ClickUp is a team collaboration platform offering tools like task management, docs, wikis, chat, and integrations with dozens of popular tools. Collaboration is a crowded space, with lots of startups competing for users and mindshare, so what made ClickUp stand out? A few unique characteristics that we’ve never seen before in a Series A startup.

First, the company has been completely bootstrapped until now. Founder/CEO Zeb Evans maintained an independent path, resisting the urge to raise venture capital for the first two years of the company’s life. Despite this (or perhaps because of it!), the company has grown like a weed on the strength of its product. In the last year, ClickUp’s ARR has grown over 600%. Over 100,000 teams at companies including Google, Nike, Uber, Airbnb, Netflix and Ubisoft are already using the product. Most impressively, this is all organic growth; the company has spent no meaningful amount of money on marketing.

Any time you have bottom-up adoption like this, we take notice: it shows that users love the product and are spreading the word. As we stated with our previous bottom-up SaaS investment in SourceGraph, bottom-up adoption is a key indicator that a startup is on to something very special because end-users are literally pulling the product into their company. We also love the Freemium business model: Freemium usage enables SaaS vendors to cheaply fill their pipelines, prove value quickly, and accelerate the sales cycle. This is priceless for startups as they move upmarket because it compresses what can otherwise be an interminably long enterprise sales cycle. I’ve described enterprise Freemium as a “best of both worlds” sales motion because it combines enterprise budgets with an SMB-like sales cycle.

The second unique trait that made ClickUp stand out immediately is Zeb’s vision. ClickUp is solving the challenges of the collaboration category comprehensively, as opposed to attacking just one niche within it. Zeb and the ClickUp team are creating one collaboration platform to rule them all. Some of the most popular apps within ClickUp are Tasks, Docs, and Goal tracking — but there are over 80 apps that can be turned on or off based on team needs. And that leads to the other compelling aspect of the vision — the highly customizable nature of the product. Zeb surprised us when he explained that most collaboration products are too opinionated. They want to dictate how people work based on how their founders think people should work, instead of letting the users decide for themselves. This is why ClickUp provides a level of flexibility not unlike a No Code tool. In fact, a community of ClickUp consultants has sprung up organically to help customers create extremely customized environments. This rare combination of ambition (comprehensiveness) and humility (customization) is what has made ClickUp the choice of teams ranging from 2 to 2,000.

The third unique trait is culture. In order to create a product that is both so robust and so flexible, ClickUp has relentlessly focused on shipping. They ship new features every week and have done so almost every week for the past 2 years. The team is infused with an energy and passion that enables them to constantly incorporate customer feedback and move quickly. It’s safe to say that rapid feature development is ClickUp’s superpower.

In 2019, collaboration software was already a $45 billion market globally — and that was before Covid arrived. With the advent of remote work, it’s likely that collaboration will not only be the biggest SaaS category but also the most important and fundamental to the way we work. We’re excited to support Zeb and the ClickUp team in their mission to transform and lead this category.

Pictured: ClickUp founder Zeb Evans.

Harry Stebbings was kind enough to have me on his podcast The Twenty Minute VC. That episode dropped today and you can listen to it here.

Here are some of the topics we talked about:

1) Building startups in the time of COVID

On creating startups during an economic crisis:

Innovation doesn’t stop during a downturn. My own experience was that the two unicorn companies I was involved in creating were primarily built during downturns. PayPal started in 1999, but it was really built in the wake of the dot com crash in 2000–2001. We IPO’d in 2002. Similarly Yammer started in the wake of the 2008–2009 economic crash. So my experience with downturns has been that it’s still very possible to create great companies. And in fact, there are things that get easier during downturns. It’s easier to recruit talent because there’s less competition. There can also be fewer copycats crowding a space. The one thing that gets harder, obviously, is fundraising. But innovation doesn’t stop during a downturn and you can still create great companies.

How the sales pipeline will be affected by the downturn:

There are going to be air pockets ahead. Nobody is going to be immune. What we’re going to see over the next several months is who is truly mission-critical and who’s not. There’s always been this mantra in SaaS investing that you want to invest in painkillers, not vitamins. Well, during good times, people are willing to buy vitamins, but during a downturn, it really does shift to painkillers. And you’re going to see over the next several months which services really are mission-critical.

On whether startups should give discounts:

If the underlying customer is in a very hard hit industry and can make a case for some relief, it can make sense to invest in the goodwill of that relationship and not demand things like increased deal sizes, and it may even make sense to offer discounts or defer payments. But the thing that startups have to keep in mind is that there is increasing transparency on the customer side in terms of these discounts. You have to expect that what you’re doing for some customers, other customers may find out about.

[Since recording this podcast, Craft announced its investment in Vendr, a service that helps companies manage their software spend. It’s a no-brainer for any company that wants to reduce its software bills.]

Do all founders need to be wartime CEOs now?

The short answer is yes. They do need to be wartime CEOs. And what I associate with a wartime CEO is somebody who is not afraid to make tough decisions, who is not afraid to flip on a dime and do the tough things that are necessary. The reality is, if your business just dries up overnight because of COVID and no revenue is coming in the door, obviously that implies that your Burn Multiple has become horrible. You’ve probably got some really tough decisions to make because you go from having an acceptable burn rate to one where the company is going to die in a number of months if you don’t react. And wartime measures are called for.

Reacting to a crisis:

The most important thing is you have to react to the new facts, to the new situation on the ground. Where people go awry is that they’re trapped in some sort of legacy thinking — they’re too anchored on the past. They’re too anchored on what the old plan was or what they thought they were going to be doing at this time. The old sales plan, the old hiring plan. So they’re slow to react. Another version of this is just having rose-colored glasses on. They don’t want to acknowledge the new tough realities, and that causes them to be slow to react.

How do you feel around the “celebration of failure” culture?

Frankly, I hate it. I don’t believe in celebrating failure. I think that being a founder is so hard. Running a startup is so hard, and I’ve never seen a case where a successful startup didn’t almost die multiple times. Certainly when we were doing PayPal, the company came so close to death many times. When I was doing Yammer and it had to compete head-on against Salesforce, we had all these really scary challenges. I think that psychologically speaking, if you allow yourself to think that failure is acceptable, you’re much more likely to succumb to it. Psychologically speaking, you’re better off burning the boats, so to speak, and saying that failure is not an option, it’s not acceptable, and we will do whatever we have to do to survive and persevere.

Now, at the end of the day, we know that in reality, failure is an option. It can happen and we’re not going to hold that against somebody. One of the great things about Silicon Valley is that when there is a failure, everyone just kind of dusts themselves off and they move on to the next one and that’s okay. It’s not like hundreds of years ago where we sent someone to debtor’s prison or something like that. So on the one hand, we do allow for failure, but I think that it’s better for founders to pretend like it can’t actually happen.

Whether to invest in startups that are seeing a boost from Covid:

You need to ask the question whether the growth is a flash in the pan or is part of some larger trend that’s being accelerated. You’re seeing both effects. What COVID is doing in a lot of cases is accelerating an underlying trend that was already there. If that’s the case and the startup is benefiting from it, then you would give them credit for that.

2) SaaS Metrics: Unit Economics, CAC, Churn, and Capital Efficiency

How to think about unit economics:

What you want to avoid is a situation in which the company is basically selling dollar bills for 90 cents. That’s the classic unit economics problem where you’re selling a product for less than what it costs you to make on a variable basis. And the reason why this has taken center stage is because over the last decade, as software has eaten the world, you’re seeing more and more startups have a hybrid software/real-world model. It’s not just a pure software business; there’s some physical world component to it. It could be a restaurant delivery service where it’s not just a mobile app, you actually have a driver delivering the food. And in these cases, you have to make sure that the cost of providing the service does not exceed what people are willing to pay for it.

The tricky thing is separating the unit costs, which are costs associated with each incremental order, from corporate expenses, which would be, say, the cost of developing the software. It’s the lack of that proper attribution that can get startups in trouble because they don’t even realize that they’ve got a gross margin (unit economics) problem.

On whether I agree with Peter Fenton that the biggest challenge for startups today is that there’s no free and open distribution:

I would agree, but I would divide the problem for B2C versus B2B companies. For B2C, you typically do need some sort of new platform or new distribution channel. Consumer startups typically need to grow virally to get to large user numbers because you can’t afford to spend a lot on CAC (customer acquisition costs). The long-term value of any particular customer is low, so you can’t afford to spend a lot on CAC. B2B is different because B2B companies lend themselves towards more of a sales-driven approach. The customers have higher long-term values (LTV), they tend to have lower churn, they stick around for a long time. As a result of that, you can afford to spend money on CAC. It pencils in a different way. I would agree that in the absence of new consumer distribution platforms, it’s very hard to get a new consumer company to pencil.

Rules of thumb for CAC:

There are a couple common rules of thumb around CAC. One would be that you don’t want to spend more than first year’s revenue acquiring the customer. I think that’s a pretty good rule of thumb. Another good one is that the longterm value of a customer should be at least 3X the CAC. I would agree with that, but say that it’s got to be even higher than that because a 3X LTV-to-CAC ratio implies that the customer is churning after about three years. It’s about a one-third churn rate per year, which is way too high. So I like to see a situation where on a revenue basis, if you’re looking at cohorts, that the revenue cohort is always growing year after year.

On blended CAC:

This is something I’ve warned about. You really want to separate your CAC by channel. What can be misleading about blended CAC (reporting CAC across all channels) is that any startup that has good word of mouth will get a bunch of customers through inbound, where there was no CAC. People just came calling. And if you average the CAC from that organic growth with other types of programs, it will give you an exaggerated sense of the efficiency of outbound channels and you’ll end up over-investing in those channels. It may take you some time to realize that some of those channels don’t actually work. What’s really working is inbound, and you’re spreading that peanut butter of good inbound CAC over a bunch of bad outbound channels.

On the virtue of selling to startups versus enterprises:

In deciding whether to sell to enterprises or SMBs — and startups would be an extreme version of SMB selling — it’s really a trade-off between the value of a customer and the difficulty level of selling to that customer. I don’t dispute that enterprises are the most valuable customers to have. You see that especially during a downturn, where enterprises are much less likely to go out of business, whereas startups see a lot of attrition. But the flip side of that is that startups are so much easier to sell to. Therefore they can provide a great entry point into the market for other startups, which may find that the difficulty level of trying to sell to a Fortune 500 company is just too high.

On logo churn:

Logo churn is unavoidable. All startups are going to have some logo churn. It’s just impossible to avoid. But what you really want to see is that the expansion from the accounts that stay with you exceeds, in dollar terms, the churn from the customers that you’re losing. On a revenue cohort basis, you want to see net negative churn aka net positive expansion.

What’s a good churn rate:

Good (or not bad) churn would start at 100% retention on a revenue basis. Otherwise your bucket has some holes in it. And it’s very hard to build a subscription business for the long-term if on a revenue basis, the revenue is attritting every year. So you really want to start with at least 100% retention on a revenue basis. Certainly if you can get up to something like 130%, that would be industry leading. We’ve seen some startups get all the way up to 200% when they have a land-and-expand strategy. They might start in an enterprise with a smallish deal, but are able over time to grow that onto a lot more seats. That’s a fantastic scenario when it happens.

How to think about capital efficiency:

I’ve defined a metric that I call Burn Multiple, which is the net burn in any given period divided by the net new ARR. It’s thinking about burn as a multiple of the growth that you’re achieving in that month, quarter, or year. It’s a very useful way of thinking about why you’re burning so much money. At the end of the day, the reason for burn in the first place is that you hope to achieve growth. So you want to think about, how much burn is it costing me to achieve each unit of growth?

The burn multiple will vary by stage. In the earliest days of a startup, invariably the burn multiple will be bad because the company has to invest in R&D. Obviously if the startup is pre-revenue, the multiple won’t even compute because the denominator will be zero. So in the earliest days where burn is high and new ARR is low, you’re going to have a pretty bad burn multiple. But the burn multiple should be improving over time. In order for any company to become profitable, which is the goal at the end of the day, its burn must go to zero. So the burn multiple should be approaching zero over time. If you see it going in the wrong direction, that’s a sign that something isn’t working and that you need to be more disciplined.

What Burn Multiple gets you excited as an investor:

Certainly, if the burn multiple is less than one, which means an early stage startup where they’re able to burn a million dollars or less to achieve a million dollars or more of net new ARR, I would qualify that as being in the amazing category. We have seen a few deals like that recently that Craft has done.

The flip side of it is, if you’re burning more than three times your net new ARR, I would define that as being suspect or bad. And that’s the case where burn needs to be very closely scrutinized. In other words, you’re burning a lot, but you’re not growing that much in relation to burn. The question then is, why are you investing so much? What is it really getting you? Are you over-investing?

On whether startups should “do things that don’t scale”:

I strongly disagree with that mantra. I think it’s one of the shibboleths that gets startups in trouble. The whole point of technology is to find the elegant, scalable approach. The sooner you do that, the better off you’re going to be. When you start to glorify doing things that don’t scale, you end up with a startup that doesn’t scale, which is kind of the opposite of the whole point.

3) Founder Psychology and Board Dynamics

On whether founders need to be “crazy”:

Founder psychology is a really interesting topic. Founders are often described as “crazy.” When everything is up and to the right, that means something positive. Then when the wheels have come off, it means something negative. So the question is, how can you tell the difference between good crazy and bad crazy? My view is that founders do need to be far more aggressive than what the average person might think. They need to have these traits of being visionary and pushing and being able to run through walls. Just having a “sane” level of these traits may not be enough. But where things go wrong is when founders lose perspective and become immune from seeking advice or listening to good advice. That’s when you’ll see a situation where founders can go off the rails.

We always try to do reference checks on the founder to understand the person. But you can’t always tell in advance what’s good crazy versus bad crazy. And the reality is that founders are the ones who choose their board members more so than the other way around. It’s really up to founders to decide who their board members are going to be. And so when I talk about the founder psychology issue, I’m really hoping to give advice to founders who would see the wisdom of seeking to balance their psychology by having a board member who supports what they want to do, but can also give them some constructive feedback.

On the right board member:

The nice thing about a board is that you’ve got multiple people on it. So you can build a team that is well-rounded. Everyone can bring their strengths. Some board members are fantastic because in their previous career, prior to investing, they were a CFO, so they bring a very rigorous, numbers-based approach. They might scrutinize the numbers and give advice on that dimension. You can have board members who are very good at supporting the founder emotionally and have a high EQ and play more of a cheerleader role. And then, you can have board members who are better at strategy. Everyone should bring their strengths.

On the lack of trust between founders and VCs:

The analogy I’ve made is that over the last decade, a little bit of that Hollywood auteur mentality has crept into the tech world, where founders want total creative freedom like Hollywood directors. They want final cut. That’s as it should be. At the end of the day, founders are the ones running these companies. It’s their company, they’re the ones who should be making these decisions. But if it blinds the founder to seeking advice or seeking to balance their psychology or their perspective, I think that’s dangerous. So I would counsel against that sort of mentality. Founders should realize that everyone’s on the same team. I always had great relationships with my VCs and board when I was running Yammer. The relationship should be constructive.

4) Being a VC

Why found Craft Ventures instead of just angel investing:

I spent about 20 years operating and founding companies and being on the founder side of the table. I got to a point where I wasn’t really interested in running companies anymore, but I still love startups and working with founders. So I decided to move from more of a player to a coach role. Once I decided to invest full-time, I liked the ability of a fund to write bigger checks and lead rounds. It also allows you to have a team. We have a really great team at Craft, and it would be hard to have a team like that if I was just angel investing.

On time allocation within the portfolio — do you focus on the winners or losers?

For me, I don’t really think about it that much because I’m there for my founders whenever they need me. So when somebody calls up with a tough problem, it’s not like I think, “Well, I don’t want to spend time on this because this isn’t one of the putative winners.” You don’t think about questions like that when the founders call and need your advice and need your help, you just react. So I’m always there for founders when they have a question or a problem, and that’s always my highest priority.

You tweeted Silicon Valley is no longer a place it’s a way of doing business. What did you mean by this?

Especially as we all move to remote work, but even before this, we were seeing startups pop up all over the world and start to use the Silicon Valley template. That template consists of a few critical elements: One is that all the employees are owners of the company. They have broad-based stock option pools. The second is the way that VCs and investors participate in the company, which is to provide true risk capital. Nobody is too upset if they end up losing 100% of their investment, which is not the way the rest of the world works. A lot of places in the world, if you go to the investors and tell them you lost all their money, they’re going to say, “No no, where is it?” And send a guy to break your legs. This combination of risk capital combined with broad-based employee ownership and support for the very best ideas is something that started in Silicon Valley, but it’s now spreading to many other places, and it’s a great thing.

ESPN’s new series The Last Dance is an extraordinary behind-the-scenes look at Michael Jordan’s sixth and final championship run in 1998. Through flashbacks it also tells the story of Jordan’s career and the Chicago Bulls’ dynasty that dominated the NBA in the 1990s. It is full of lessons not just for basketball fans but for anyone who wants to build something great. Here are the lessons that should resonate with founders:

1. Expect to be under-estimated.

Jordan was cut from his high school varsity team as a sophomore. But instead of quitting, he used his frustration as fuel to get better. Later, after winning a college national championship at UNC, he was picked only third in the NBA draft. If the future GOAT was under-appreciated, you will be too. Don’t brood over the passes. If you want to be great, focus on proving it on the court — with your performance.

2. A missing piece of talent can bring it all together.

Jordan played with the Bulls for six seasons before winning his first championship. It took years of finding the right pieces, like Scottie Pippen and Dennis Rodman, to build around him. It didn’t all come together until Phil Jackson became head coach and instituted the triangle offense. Phil was the missing “cofounder.” Adding a missing piece of talent is often the big unlock for doing something great.

3. You can’t do it alone, no matter how great you are.

Phil’s key insight was that an offense based solely around MJ was too predictable and therefore easy to defend against. Prior coach Doug Collins’ playbook was “give the ball to Michael and get out of the way.” Phil’s triangle offense was all about creating threats including but not limited to MJ. It was a flexible system that allowed every player to contribute their strengths and complement each other. Being the best player on the court only gets you so far. To win big, founders need to surround themselves with other greats and role players, working in a system that brings out the best in everyone.

4. Tolerate eccentricity if it helps you win.

Phil and MJ let Dennis be Dennis, allowing him to take “vacations” as long as he brought it on game day. A more corporate coach wouldn’t have tolerated Rodman’s eccentricities. The genius of Phil Jackson was knowing how to manage the personalities and giving Dennis the room he needed while cultivating the loyalty that would pay off on game day. A lot of big corporations lose that 10x engineer because they don’t know how to accommodate eccentricity. Startups have the flexibility to manage like Phil.

5. The team wants to be pushed.

After losing to the more physical Pistons in 1990, MJ pushed the team to work all summer, lifting weights, adding muscle. The team responded to that leadership: they wanted to be pushed to greatness. The Bulls came back and won their first ring in 1991. There was no looking back after that. Founders who lead from the front can push the team much harder than anyone else.

6. The path to greatness can be a lonely road.

In his rookie year, on an away game, Jordan walked in on his teammates partying hard in a hotel room. He turned around and walked out. “I was on my own after that.” Rather than bending to peer pressure, he was content to take a solitary path and eventually bent the team to his will. It wasn’t just his competitiveness on the court, it was also the discipline, practice, and quiet decisions off the court that reflected MJ’s will to win. If you want to be great, you often have to take the road less traveled.

7. Choose equity in yourself over the security of an established brand.

Jordan’s manager David Falk, another brilliant teammate that MJ chose early on, insisted that Jordan get his own shoe line, rather than a simple endorsement deal. While the other NBA superstars signed with established brand Converse, Falk and Jordan eschewed safety in numbers and cut a deal with upstart Nike. This put Jordan in his own category, with far greater upside. Sure enough, Air Jordan reinvented the sneaker market and catapulted Nike to market leader. The security of established brands tends to be overrated. Better to choose equity upside in yourself when you have the opportunity.

8. Avoid drama.

The final season was filled with off-the-court drama involving contentious contract negotiations with Scottie Pippen and Phil Jackson. Jordan expressed support for his teammates but avoided criticizing management. He didn’t let himself get drawn into the drama. Throughout his career, the media scrutiny on Jordan was intense, but he managed to stay positive, classy, and focused. Drama is a waste of time and energy that the best seek to avoid.

9. Keep it pure.

When Jordan came back from an injury late in his second season, management limited his minutes, possibly to tank their playoff chances and secure a better spot in next year’s draft. MJ didn’t go in for those kinds of shenanigans. He risked management’s ire by pushing to play more minutes and win a playoff spot. Founders get in trouble when they try to game the stats. Keep the competition pure and let the chips fall where they may.

10. ”Overnight success” takes time.

Jordan’s reputation before the first championship was that he was a spectacular performer but couldn’t win championships like Bird or Magic. There was nothing easy, automatic or guaranteed about MJ becoming the GOAT. There were six long years of trial and error before the dynasty took hold. Jordan admits that he was bothered by the talk that he couldn’t win the big one; of course, he proved them all wrong in typical Jordan style. Founders should remember that the reputation you end up with isn’t necessarily the one you start with.

11. When you find the winning formula, press it — and keep winning.

The last dance (6th championship) almost didn’t happen because GM Jerry Krause wanted to go into a “rebuilding year” by trading the veterans and letting Phil Jackson go. Jordan countered: “the Cubs have been rebuilding for 42 years.” He insisted he would only play for Jackson, forcing ownership to keep him for another year. The team stayed together and squeezed out an extra ring. The second 3-peat cemented Jordan’s GOAT status. It’s so hard to create a winning formula that once you do, fight to keep it together as long as possible. If you’re lucky enough to reach the promised land, appreciate what you have and make the most of it.

These lessons are based on Episodes 1–6. There are 4 more episodes in the series.

Photo Credit: clutchpoints.com

As the economic crisis deepens, capital efficiency becomes a more pressing issue for startups. Not only is it necessary to maximize runway, it also plays a larger role in how investors evaluate companies. While growth is always prized during good times or bad, investors increasingly scrutinize burn and margins during downturns. Startups whose burn is too high relative to their growth will find it hard to fundraise. Founders should be prepared for this shift in emphasis. This post provides a framework for how to think about capital efficiency.

How to Measure Capital Efficiency

Two simple ways to measure capital efficiency are the Hype Ratio and Bessemer’s Efficiency Score:

1. Hype Ratio = Capital Raised (or Burned) / ARR

2. Efficiency Score = Net New ARR / Net Burn

I think Bessemer has the right idea but I prefer to flip the numerator and denominator, so the ratio is an annualized version of the Hype Ratio. I call this the Burn Multiple:

Burn Multiple = Net Burn / Net New ARR

This puts the focus squarely on burn by evaluating it as a multiple of revenue growth. In other words, how much is the startup burning in order to generate each incremental dollar of ARR?

The higher the Burn Multiple, the more the startup is burning to achieve each unit of growth. The lower the Burn Multiple, the more efficient the growth is.

For venture-stage startups, these are reasonably good rules of thumb:

I like this ratio because it’s an easy way to judge whether burn is too high in any given month, quarter, or year.

For example, Q1 just ended and it’s time for a board meeting. The startup reports that it burned $2M in the quarter while adding $1M to its ARR. That’s a 2x Burn Multiple — reasonable for an early-stage startup. On the other hand, if the company burned $5M in Q1 to add $1M of net new ARR, that’s a terrible Burn Multiple (5x). It should probably cut costs immediately. That company is spending like a later-stage company without delivering later-stage growth.

Too many startups report their growth without contextualizing it as a function of investment. If extraordinary investment (3x burn or more) is required to deliver that growth, it’s an indicator that product-market fit isn’t quite what it appears to be or there’s some other problem in the business.

A Measure of Product-Market Fit

One can understand why VCs might want to use the Burn Multiple to help assess the quality of product-market fit. The startup that generates $1M million in ARR by burning $2M is more impressive than one that does it by burning $5M. In the former case, it appears that the market is pulling product out of the startup, whereas in the latter case, the startup is pushing its product onto the market. VCs will make inferences about product-market fit accordingly.

A Proxy for Everything Else

The beauty of the Burn Multiple is that it’s a catch-all metric. Any serious problem will eventually impact the Burn Multiple by either increasing burn, decreasing net new ARR, or (most tricky) increasing both but at disproportionate rates. For example:

• A gross margin problem — If the company spends too much on COGS in order to deliver the product or service, its burn will increase rapidly as it scales. If there’s not operating leverage in the business, the Burn Multiple will not improve with scale.

• A sales efficiency problem — If CAC is prohibitive or sales productivity is diminishing, burn will increase relative to new ARR, causing the Burn Multiple to worsen even though growth continues.

• A churn problem — Churn will net against the denominator of the Burn Multiple, causing the multiple to increase. A leaky bucket makes it hard to grow efficiently.

• A growth challenge — If growth is stalling, the company may seek to compensate by spending more on marketing, give-aways, discounts, or promotions. That will be picked up in a higher Burn Multiple, as burn rises faster than new sales.

• A founder leadership problem — If the founder lacks the skill or will to control burn, that will show through in the Burn Multiple.

When is “Bad” Acceptable?

When is a “bad” multiple acceptable? Mostly in the earliest years, when sales are incipient and the product is still being built. Obviously if the startup is pre-revenue, net new ARR will be zero so the ratio will not even compute. That’s fine if a startup is still in the Wilderness Period; the founders should focus on keeping burn low and crossing the Penny Gap as quickly as possible.

In theory, a longer R&D period can be justified if there’s a substantial tech moat. However, if you believe the extra burn will create a tech moat, you should also believe that there will be less competition later on, so your Burn Multiple should catch up rapidly once you start selling.

A startup that over-burns is effectively claiming that its sales will be spring-loaded. The fact that this rarely turns out to be true is an argument for getting to market quickly with the lower-burn “embarrassing” version of the product and then iterating.

Burn Multiple by Stage

The Burn Multiple should improve as the startup matures. For example, a seed stage company might have a Burn Multiple of 3 because it just started selling. After the Series A, it might drop to 2. After the Series B, when the sales team should be operating at scale, the expectations for efficiency increase even more. Eventually, for a company to become profitable, burn must reach 0, which implies that the Burn Multiple should also approach 0 over time.

If the Burn Multiple is going in the wrong direction as the startup matures, that’s a indicator that something is wrong, even though headline growth might still be increasing in nominal terms.

What Founders Can Do

The Burn Multiple suggests some concrete steps that founders can take. First and most obviously, they should keep salaries and expenses low in the early days — not just to extend runway but also to strengthen the impression of product-market fit for when they go out to raise a venture round. It’s an easy way for founders to put their best foot forward.

Second, founders can always improve their Burn Multiple by cutting costs, because Burn Multiple instantly adjusts to the most recent period. By contrast, the Hype Ratio is based on total capital raised, and therefore permanently dings a startup for wasted time and money. The Burn Multiple doesn’t care about sunk costs and always gives founders the chance to improve.

Finally, the Burn Multiple suggests just how far founders need to go to reduce burn to a reasonable level for a given level of growth. It may even be worth giving up some revenue (e.g. unprofitable growth) if it brings the Burn Multiple down to a much healthier ratio.

Conclusion

In a tough fundraising environment, it won’t just be growth but the efficiency of growth that are seen as the key indicators of startup performance. Tracking the Burn Multiple is an easy way for founders to make sure that burn isn’t getting ahead of traction. Over time, it also reveals important information about whether incremental spend is working.

As everyone in the startup ecosystem scrutinizes their runway and makes tough decisions about how to extend it, the Burn Multiple is a useful rule of thumb for founders and investors alike to keep in mind.