A colleague recently shared with me Benedict Evans’ tech trends for 2023 presentation. It’s amazing — 104 slides of compelling data that make sense of a dizzying range of topics, from interest rates to consumer behavior to global power-shifts to a new breed of digital gatekeepers. Before proceeding, I have two admissions to make: (1) I was previously somehow unfamiliar with Evans’ work; but I will pay closer attention going forward. (2) Although macro tech-trends conceptually interest me, I sometimes find it difficult to connect them back to our seemingly more pedestrian work of building small-scale B2B SaaS businesses. With these confessions in mind, this blog post is for practitioners like me. It cherry-picks just a few of the presentation’s many awesome slides and highlights points that struck me as particularly relevant to SaaS operators. It does not attempt or purport to summarize the presentation; and it’s certainly not comprehensive. Rather, it’s just a quick-share of my top takeaways — a codification of those points that I plan to revisit and bear in mind in the day-to-day fray throughout 2023. And they are…

1. Big Tech Layoffs (Slide 13):

Is it now time for the little players to have their day from an employment perspective? It was difficult during the pandemic for small-scale SaaS businesses to hire / retain top talent. To use a basketball term, the “possession arrow” in the resource economy seems to have shifted from employees back to employers. More specifically, with a quarter million veterans of big tech firms newly unemployed, what kind of a recruiting opportunity does this present for us? What roles could these people fill in our businesses, how best to recruit / on-board them, what support might they need to make the transition to small companies and to thrive in a less structured environment? This feels like a great, but fleeting, opportunity, let’s make the most of it.

2. Glass half empty, glass half-full (Slide 16):

This slide reminded me of an oft-cited pearl from the best software investor I know, “when it’s going well, things are never as good as they seem; and it’s never as bad as it seems when they’re not.” As a SaaS investor-operator, I found this slide encouraging. Particularly the last bullet: every market, every value-chain, every workflow, every customer engagement, every dataset is being rethought and remade — and there is still a ton of work to do on this front. When it can sometimes feel like every industry has already gone through digital transformation, this is an important point to remember. The following slide (about enterprise workloads in the public cloud) struck me as using different data to reinforce this same point.

3. Fragmentation (Slide 49):

This slide specifically addresses the steadily declining share of Nielsen ratings among the top-rated US TV shows over numerous decades. So, what does this have to do with small-scale B2B SaaS? What it highlights for me is that today’s most successful, top-performing shows only draw 10% of the available viewership. And they’re still winners. Perhaps not to the same degree as I Love Lucy back in 1955, but still massively successful. There are many niches, within which B2B SaaS businesses can thrive. And while they may need to garner more than 10% market share if they operate within a particularly small vertical, they don’t need to be all things to all people in order to prosper. If “focus is the friend” of SaaS operators, this is good news.

4. The ‘innovators’ dilemma costs real money… (Slide 55)

It’s hard to argue against being fist to market. But being the challenger does have advantages, and a lack of legacy baggage is one of them. This slide hammered home for me what small-scale SaaS operators inherently feel: it’s often more efficient / liberating / plain-old-fun to go-to-market as an innovative fast-follower than as the incumbent with tons to lose. Small-scale SaaS business should embrace that mentality and its many benefits.

5. Advertising is the price you pay… (Slide 69)

I’d never heard this fascinating 2009 quote from Jeff Bezos. And, although Evans goes on to illustrate that Amazon has since become the world’s largest advertiser, it’s a great reminder to budget-conscious SaaS operators.

In short, it puts a premium on ALWAYS focusing on ensuring that a business’ products are differentiated from those of competitors. Moreover, this highlights what is true in many vertical SaaS markets — that there are other, more effective means of communicating one’s go-to-market message (e.g. thought leadership content, earned media, word of mouth, customer references, community marketing, conferences, etc.). Said another way, should direct their energy into scalable and high-return organic marketing initiatives, rather than costly PPC efforts (aka advertising). Focus there.

6. The end of the American internet (Slide 95)

The “focus is your friend” axiom has a downside; and that is that it can foster short-sightedness. I found this slide to be a good reminder that even small-scale businesses should always be scanning the horizon to grow TAM and identify new opportunities to win customers. Wow, this slide is a mindblower — although the US may continue for some time to be the largest single market for B2B SaaS, other markets demand serious consideration.

I have no big finish to this post. Rather just a big thank you to Ben Evans for his fantastic work. It really is helpful, not just to the large players on which much of his work focuses…but also to small-scale operators who can learn from the trends he highlights.

As I’ve written previously, I’m not a fan of the term “playbook,” despite it being a metaphor that is used with reverence in many private equity circles. In my view, the reality facing small-scale SaaS businesses is too complex for 1-size-fits-all playbooks to be universally valuable. But I have also observed that a set of core disciplines consistently catalyzes the sustainable growth of capital-efficient SaaS businesses; and we regularly leverage several frameworks to reinforce these concepts. I was recently made aware that my enthusiasm for such frameworks or mental models had turned me into the proverbial “hammer,” to which everything looks like a “nail.” At the time, I was in a discussion with one of our portfolio company CEOs about a particularly thorny issue they were facing. As I unhelpfully tried to solve the issue with 2x2 matrices, “pattern recognition” drawn from other businesses, and a wealth of publicly available SaaS benchmarks, the business leader kindly said to me, “Hey…you know…not everything is a F8*%^&! framework.” Boom — direct hit.

This simple reminder got me thinking about situations in which a framework or mental model (or a playbook(!)) really are NOT helpful to operators of SaaS businesses. I’ve shared a few of these below. My hope in doing so is that it helps leaders of small-scale SaaS businesses to distinguish between the many situations when a pre-established framework / approach can be extremely helpful…versus those critical instances when a totally unscripted response is not only warranted…it is needed.

Hard Things: In his epic work The Hard Thing about Hard Things, Ben Horowitz argues that building a software business reveals countless problems for which there just aren’t any easy answers for leaders. Those include firing friends, poaching competitors, and knowing when to call it quits (among many others). These are very real, very important, very “anti-framework” type problems. Sometimes things are just…hard. In those situations, it’s important for leaders to stay true to their values, safeguard the company’s vision / mission, and…just keep moving forward. Particularly in situations with no seemingly pleasant options, overly analytical mental models rarely help. Instead, they can delay the inevitable and prolong the agony for all involved. Better for leaders to pull their socks up, and just get on with it.

Art & Science: Some aspects of SaaS businesses are clearly more science than art (examples include financial bookkeeping, constructing entrance / exit criteria for sales stages, and collecting statistically valid NPS data from customers). Still, others are a blend of art and science. For example, we can use a carefully researched product framework to help empathize with, and prioritize input from, customers (science). But it’s a far more artful endeavor to incorporate that input into a brand that faithfully captures the essence and a resonant market-promise that we want to non-verbally convey to all stakeholders. Art doesn’t need a framework; art needs to touch-off the right note in people’s System 1 brains. Note of disclosure: We admittedly do use a number of frameworks to assist in a carefully considered re-branding process. But at a certain point, it’s all about the output and not at all about the process imbued through framework-type thinking.

Unique Problems: It’s been written that “there is nothing new under the sun.” And while I won’t debate this point on a fundamental level, there are exceptions in small-scale SaaS businesses. Although there are a finite number of moving parts in SaaS businesses, fact-patterns often arise for companies, where they are facing challenges that present themselves in completely new and unique ways. For these situations, frameworks are relatively helpful; rather creativity is required. I’m reminded of a platform-upgrade and related migration challenge that we experienced at one SaaS business. The SaaS world has seen countless upgrades / migrations, so we looked to past precedent and roadmaps to inform the initiative. But the specific combination of business context / use-case idiosyncrasies / uptime requirements / seasonality of our customers demanded that we establish a completely unprecedented approach to the migration. A mixture of creativity and ruthless pragmatism carried the day; frameworks were unhelpful.

Make to Scrap: Software is all about efficiency, and we SaaS leaders hate re-creating the wheel. With this in mind, we err toward thoughtfully building our products and processes with attention to ensuring scalability and re-usability. But some situations demand speedy action for a pressing moment, with little thought to future needs. This might mean spinning up a (true) MVP, filling an urgent personnel need with outside resources, or addressing a surprise market condition with a one-time targeted offering. In any of these cases, one-time-only action may trump frameworks.

In closing, and to be clear, mental models greatly assist SaaS operators in countless situations. But it’s also important for SaaS leaders to leave room in their brain to recognize those less frequent situations when frameworks are less helpful, possibly even counter-productive. Where fortitude, creativity, speed, and situational decisiveness are what’s needed most…not everything needs to be a F8*%^&! framework.

“Digital transformation is a foundational change in how an organization delivers value to its customers.” -CIO

“Digital transformation is the process of using digital technologies to create new — or modify existing — business processes, culture, and customer experiences to meet changing business and market requirements.” -Salesforce

“The essence of digital transformation is to become a data-driven organization, ensuring that key decisions, actions, and processes are strongly influenced by data-driven insights, rather than by human intuition.” -Harvard Business Review.

Digital transformation is clearly a hot topic that is top of mind for many business leaders. But for small-scale SaaS businesses, digital transformation can feel like something foreign that “doesn’t really happen here.” Maybe this is because the topic is often portrayed as being unimaginably massive in its scope and implications (per the above quotes); whereas growth businesses must focus near-term. There’s also a “feast or famine” aspect to this depiction; it implies that digital transformation is best suited to either (1) old-school industries with a pressing need to modernize-or-die (the “famine” camp), or (2) highly capitalized, bleeding-edge tech firms pursuing reality-bending innovations (the “feast” cohort). Neither is typically the case in small-scale SaaS businesses, nor is this positioning particularly helpful. Rather, we observe digital transformation within small software companies as taking place one step at a time; and it helps to avoid overthinking it. In this way, digital transformation looks less like otherworldly “foundational change” and more like workflow automation that is pragmatic, targeted, and high-impact. Below are some simple examples from the real-world of Lock 8’s portfolio companies, followed by a few takeaways from these cases.

Marketing and Sales:

• Site Visitor Alerts: When a prospect visits the website’s pricing page more than two times, reps who have been assigned those contacts receive Hubspot alerts. Similar alerts get triggered when prospects download assets from the website or submit inquiries. These allow for contextual and timely outreach by reps that optimizes engagement of that prospect. Klayvio offers a similar email management solution.
• Opportunity Management: A renewal Opportunity is automatically created within Salesforce as soon as an initial sale is made. This also kicks-off assigned Tasks for various team members beginning 120 days prior to the renewal date. Tools such as Affinity can support managing relationships through this process.
• Qualification-to-Demo: A new coverage model helps address high “no-show” rates among qualified prospects on scheduled demos. Specifically, work-flows and hot-transfer capabilities allow Sales Development Reps (SDRs) to connect prospects with designated Account Execs (AE’s) in order to enable an initial demo to take place immediately upon qualification.
• Pipeline Updates: Alerts go out to people across a range of functions when an Opportunity is created / converted from Lead, and as that Opportunity progresses through material stages of the sales cycle (and also sends high-fives when deals are won). Importantly, this allows all parts of the business to know what’s in the pipe and what may soon influence their own workload.
• Sales Conversion: Traditional sales training can be difficult to track Digital tools such a Jiminny can help sales teams improve their pitches and get the yes.

Product and Client Success:

• Go-Live Notifications: Clear, consistent automated communications around client implementations are an easy and impactful way to ensure different departments are on-point for clients with no lag…and also to celebrate go-lives.
• New User Training: When a new user logs into the platform for the first time, it automatically initiates a brief orientation and initial “get-started” user-tutorial. Users can access this self-serve training again at any time without having to speak to anyone.
• Usage-Based Nudges: Automated Task creation occurs based on client / user behavior. For example, a Task prompts account managers to reach out to customers who have not logged into the platform in the last X days.
• Contextual Help: In product chat / chatbot offers support (through services like Intercom) when a customer has difficulty using a specific feature or workflow. This has the dual benefit of improving the client experience real-time, while also identifying areas for product / UX improvement.
• Revenue operations: Billing and invoicing can be an incredibly manual task, even with tools like QuickBooks to help. By leveraging CPQ tools to automate billing and SaaS metrics reporting tools (like Ordway) to automate reporting, revenue operations can be moved from time consuming to seamless.

These examples help illustrate a few key takeaways related to digital transformation. First, purists would likely argue that the above are all pedestrian / tactical in nature; and they don’t truly represent digital transformation. Fine — potato // po-tah-to. As long as they contribute to meaningful advances in our ability to execute, we don’t care what they are called. Second, tackling such minor improvements is habit-forming. We’ve found that implementing each of these small improvements tends to reveal other worthwhile processes that can be enhanced with minor automation. Third, every aspect of the business is a candidate for such project-lets. The examples above focus on a few departments, but we’ve seen a focus on Sales and Marketing (for example) very quickly shed light on potential workflow changes in Finance, HR, and other parts of the business. And, finally, we’ve found this works best when everyone is invited to play in this game. There may be one person who is particularly talented in business systems — and that person can lead execution — but process improvement ideas need to come from anywhere and everywhere within the org.

Just as every great journey begins with a single step, the road to digital transformation starts with some simple workflow automation — don’t overthink it.

A prior post made the case in favor of hiring first time CEOs to lead small-scale SaaS businesses; and this piece picks up where that one left off. Specifically, it expands on characteristics to prioritize when screening CEO candidates, some questions to help assess them, and — most importantly — ways to support executives in deepening those attributes once they are in-seat as CEOs.

Per that earlier post, “We prioritize candidates with high levels of humility / coachability, EQ (emotional quotient), systems-thinking, and prioritization skills; and the odds of their success are greatly improved by supporting them in an intentional, structured, and consistent way.

These supporting activities are critical: it is perfectly reasonable to ask rookie CEOs to lead effectively; but it would be naïve to ask them to do so without a support network or a shared commitment to their ongoing development. This post shares what that support can look like in practice by diving into “what / why / how” behind these particular characteristics and how fostering them can help position CEOs for success.

I. Humility / Coachability

• The What / Why: First time SaaS CEOs confront countless unknowns every single day. They make most decisions with imperfect information; and they are understandably wrong an awful lot. This can be unnerving for even the most self-confident and growth-minded among us. For perfectionists with fixed mindsets, this can be downright debilitating. To thrive in such an environment, successful CEOs will consistently adopt a “beginner’s mind” of openness, eagerness, and a lack of preconceptions. They approach their responsibilities with a learning lens: what can I learn from this experience; and how can I apply those lessons learned in a scalable way on a go-forward basis?
• The How (to Assess): When evaluating CEOs, it helps to frequently revisit a simple question: what did you learn from that experience (aka: what would you do differently next time)? This is a common question, but usually asked in the context of evaluating a prior failure. We think it applies equally to all experiences: from great successes, to flaming failures, to mundane everyday circumstances…and strong CEO candidates will have no shortage of substantive responses when repeatedly asked this question.
• The How (to Support): We look to help CEOs strengthen these “inspect-and-adapt” muscles a couple different ways. First, we believe in executive coaching, as outlined here. All Lock 8 portfolio company CEOs are strongly encouraged (but not forced) to work regularly with outside executive coaches. We know of no better way to cultivate a safe space where CEOs can regularly ask / answer uncomfortable questions to support their own ongoing development. The second is confidential peer-to-peer support among executives. Let’s face it, being CEO can be quite lonely, particularly for first timers. Surrounding oneself with execs in similar circumstances can foster an amazingly strong network. Among Lock 8’s portfolio companies, we’ve established a structured CEO Forum that is modeled after YPO Forums, which for decades have been providing CEOs with insight and perspective only trusted peers can provide.

II. Emotional Quotient

• The What / Why: EQ is “the ability to understand, use, and manage your own emotions in positive ways to relieve stress, communicate effectively, empathize with others, overcome challenges and defuse conflict.” The importance of this for CEOs cannot be overstated; the very essence of their role is to balance the (often conflicting) needs of a diverse set of stakeholders. High EQ depends on many strengths, most especially a leaders’ self-awareness. To deftly manage complex, goal-oriented, conflict-laden situations, CEOs must first understand their own perspective / biases and appreciate how their actions, words, and tone can impact others. This skill also enables leaders to recognize their own weaknesses, which helps them know when / where / whom to ask for help.
• The How (to Assess): There are many ways to test for EQ, the most useful one being time — spend enough time with someone, and a clear picture will emerge of how that person will respond to most situations. But time is the scarcest resource we have, so we resort to interviews as a shortcut. One go-to interview question to suss out self-awareness is: “what is a common misperception that people have about you?” It’s a deceptively hard question, and you can learn a ton about a person from how they respond — most notably, their level of EQ and willingness to share their awareness of self. Also useful is to ask how someone else (a manager) would describe their areas of improvement. Responses give an indication of confidence, self-awareness and active participation in learning to work differently.
• The How (to Support): Although they can be controversial, we like formal assessments. To be clear, we do NOT use these to evaluate CEO candidates, nor do we make hiring decisions based on them. Rather, execs complete a set of diagnostics once they are in-seat; and then they are provided with a detailed briefing and analysis of their results from a trained testing professional. We’ve been using the following four assessments over the past few years; and we think they offer a well-rounded assessment of the executive: Hogan Personality Inventory (HPI), Hogan Development Survey (HDS), Watson-Glaser Critical Thinking Appraisal (W-G), and Raven’s Advanced Progressive Matrices (RAPM). Again, the goal is not to determine whether someone is smart versus very smart…rather, it is to establish a shared baseline for understanding that exec. Most importantly, this practice elevates that person’s self-awareness to better understand themselves, raise their own EQ, and self-identify where they will need help.

III. Systems Thinking

• The What / Why: This is about interconnectivity. CEOs are the ultimate general manager, responsible for optimizing the performance of complex, multifaceted organizations. This requires a keen understanding of how all of the parts / departments / functions fit together and how an action in one impacts all of the others — and to make the best decision for the whole
• The How (to Assess): Case studies are a great way to investigate how someone thinks; but we’ve found these can be challenging to implement with more senior roles. As far as interview questions go, we like to focus on the concept of alignment. Getting CEO candidates to unpack circumstances where organizational alignment led to successful outcomes (and misalignment undermined otherwise promising enterprises) is a rich vein to mine.
• The How (to Support): This may be the area to which we dedicate the most time and resources to support first time CEOs on an ongoing basis. The foundation is a year-long process of periodically revisiting and revising the roles / responsibilities of all parts of the organization, and how they support one another. A number of exercises and artifacts support this effort, including: the Cascade of Pain (described here), the Give-Get Grid (described here), and this graphic that we think is a bit like the old board-game Othello (“A minute to learn, a lifetime to master”). To decode it just a bit, it helps CEOs take a structured approach to assessing the totality of a SaaS business and how the core disciplines interrelate to one another and to the all-important product / solution.

IV. Prioritization Skills

• The What / Why: One of my go-to parenting aphorisms is: “life is a series of choices; choose wisely.” Nowhere is this truer than for first time CEO’s in small-scale SaaS businesses. Their very existence is defined by a series of tradeoffs, where there are never enough resources / capital / hours in a week. Hence, world-class prioritization skills are paramount.
• The How (to Assess): It will come as no surprise that we like to put a twist on some pretty standard interview questions to test for this skill. One favorite is: “please describe a time when you prioritized the wrong thing, and it worked out anyway.” This is often followed by: “please share a time when you prioritized the right thing, and it failed anyway.” These tend to elicit provocative discussions about prioritization, which offer a valuable indication of a person’s interest level in the process behind making smart tradeoffs.
• The How (to Support): Our approach to this topic is a bit contrarian. Common wisdom suggests that goalsetting is a foundational task, which then informs a set of activities in pursuit of those goals. Unfortunately, this can be pretty arbitrary in small-scale SaaS businesses, leading to overly ambitious or under-informed goals. We prefer to delay goalsetting a bit, at least until that exercise can be better informed. This generally entails soliciting input from multiple stakeholders, through things like a Listening Tour (described here) and triangulating budgets from different perspectives (described here).

In sum, these characteristics are critical to help first time CEOs survive. And, while we certainly test for them in the interview process, we spend a lot more time and energy in helping to support the ongoing development of those attributes in CEOs over time.

A quick closing aside: these characteristics are crucial as CEO differentiators; separating the good from very good. They are “spices” that makes the meal compelling and something of unique value. The “main dish,” though, is comprised of a core set of must-haves that were summarized in a prior post as an exec’s ability to (1) Get it, (2) Want it, and (3) Capacity to do it. This latest post does not intend to suggest ignoring or in any way under-valuing such must-haves. Admittedly, without these staples, those spices would be wasted and without substance.

Last week I had the opportunity to speak with three different SaaS execs about their careers. Each had valuable experience within high-growth software businesses. Each brought deep management and functional experience, having led critical departments within their respective companies. Each presented themselves as personable, passionate, and articulate about their work. And yet, they were all grappling with how to take the desired next step of their career journeys — to land the CEO gig at a growing SaaS business.

These folks are not alone; countless aspiring leaders struggle to make this leap. This is unsurprising: although many executives harbor the lifelong dream of leading a company, the chief executive role is uniquely challenging; and the sheer numbers are stacked against elevating to this level. Likewise, seemingly everyone wants to get in on SaaS these days, making the odds even longer for would-be tech leaders. And yet, making the jump to SaaS CEO is far harder than it should be. In fact, like many things in life (such as college admissions, securing student internships, earning a roster spot on competitive teams), the “right to enter” can be even more prohibitive than the required qualifications to succeed. Why is that?! This post aims to identify, and hopefully poke a few holes in, some of the less obvious reasons for why it is so hard to navigate the path to becoming a SaaS CEO.

The Founders Path: The surest path to becoming CEO of a SaaS business is to start one. Again, this is unsurprising: founders are the natural choice to lead the entrepreneurial endeavors they initiate. After all, who better to rear the brainchild than the person who hatched the idea in the first place? This founder-as-CEO model has been reinforced for decades in our minds by the many well-known and truly remarkable individuals who have not only started successful businesses, but also subsequently led them through extended periods of growth. Thomas Edison, Steve Jobs, Jeff Bezos, Jack Ma, Payal Kadakia, and countless others have made this extraordinary achievement seem almost commonplace — it’s not. It is rare and amazing, and it should be celebrated as such. And yet, founders often remain CEO of their business until either (a) the business goes belly-up (bad outcome, but statistically the likeliest), or (b) the business succeeds and grows to the point of needing a hired-gun executive (good outcome, but often an emotionally fraught one).

This whole dynamic can be cruelly ironic in a couple ways. First, a fair portion of founders end-up learning that have little appetite for many of the CEO’s duties (such as: leading people, managing a board, exec selling, or sweating the financials). Rather, founders often prefer to start things…not finish them. Conversely, many executives yearn for the top-spot in a company and have invested heavily in developing related skills…but simply don’t possess the founder-gene. Consequently, one of the most viable paths to becoming a SaaS chief executive is blocked to countless qualified leaders simply because they “don’t have a great idea for starting a business.” As a short aside, many would-be CEO’s do end up choosing to start businesses, at least in part as an entrée into the corner office. Although this absolutely can work out well, it is generally a “tail-wagging-the-dog-ish” bad idea. Anyway…where exactly does this leave the non-founder SaaS exec who has the itch to prove herself in the CEO role?

Which Came First? For non-founders, the obvious route to “CEO-dom” is to work one’s way up the ranks. Unfortunately, this is also a narrow path with many pitfalls, including the fact that climbing the corporate ladder can take years or decades (with plenty of brain-damage and no guarantees along the way). To further complicate matters, not many employers actively recruit non-founder, first-time CEO’s. Traditional VC / PE investors, who often are responsible for hiring SaaS CEO’s, rarely (if ever) actively seek out rookie CEO’s. Again, hardly surprising: these financial stakeholders have a fiduciary responsibility to maximize returns while minimizing risk. Accordingly, very few are keen to take a chance on an unproven executive in the one role that will arguably have the greatest impact on the outcome of a given investment. Likewise, self-aware founders seeking to replace themselves generally tend to prioritize a proven track-record when considering their successors — and certainly not less-experienced first time CEO candidates! All of which begs the question: if one needs to have already been a CEO to become a CEO…how does one initially break-in? That is precisely the vexing chicken-and-egg problem that the executives described above are striving to crack.

The hard truth is that — like so many things in life (e.g. skydiving, performing in a live production, asking someone out on a date) — no training can adequately prepare CEO’s for the real thing. Sure, aspiring CEO’s could / should strengthen their CV by amassing increasing levels of leadership experience and developing valuable functional expertise. Sales, marketing, finance, and product management are all proving grounds for future chief executives. General management roles, particularly ones with accompanying P&L responsibility, are also “as good as it gets” in terms of prepping future SaaS CEO’s for the stress and complexity of “sitting in the big chair.” But even with such undeniable preparation, the first-time CEO remains about as appealing as an understudy on Broadway — highly suspect unless and until he / she demonstrates the ability to handle the moment and shine when the lights come up. These and other forces combine to create a stacked deck against aspiring CEO’s. But this doesn’t have to be the case.

Contrarian Closing: Why we like first-time CEO’s

With respect to all of the points above, we beg to differ. When it comes to early-stage SaaS businesses, we dig first-time CEO’s. While there are many undeniable benefits of prior CEO experience, there is also a lot to like about first-time CEO’s in this environment. First, they tend to be quite energized by the opportunity to “make something their own.” This typically translates into a high “want-to” factor, the importance of which simply can’t be overstated (as outlined here). This is particularly true when a leader marries that enthusiasm with a high-level of capacity / competence, which is overwhelmingly characteristic of anyone who is a legitimate CEO candidate. As another short aside, this point reminds me of this gem from Simon Sinek…so, so true). First-timers also tend to have a healthy respect for the complexity of the role / situation into which they are stepping. This encourages them to be open-minded and coachable; and it discourages them from prescribing before diagnosing. This is a crucial point; some of the biggest mistakes leaders make can result from defaulting to the assumption that they’ve already “seen this movie” (aka: fully understand a situation, before having completed exhaustive discovery). Rookies, on the other hand, rarely fall into this trap. Finally, sub-scale SaaS businesses tend to be scrappy and under-resourced; and first-time CEO’s can easily jump-in with both feet. Specifically, they are in a great position to leverage up-to-date expertise that draws on their functional background…and, in the process, to help the business punch well above its weight.

In fairness, not all departmental / functional leaders can successfully make the leap to CEO. We prioritize candidates with high-levels of humility / coachability, EQ (emotional quotient), systems-thinking, and prioritization skills; and the odds of their success are greatly improved by supporting them in an intentional, structured, and consistent way (both of which seem like topics for future posts).

In sum, though, up-and-coming execs can offer a great option as CEO’s of sub-scale SaaS businesses…much more so than is suggested by the narrow paths available for them to get there.

I recently wrote that business dashboards are instruments of control. That observation and the related post, while hopefully helpful, made some general assumptions in discussing dashboards. So, this post takes a crack at addressing an ongoing open point about the existential nature of dashboards: what exactly is their purpose?

Although Stephen Few provides an excellent definition, it leaves room to debate dashboards’ ultimate objective.

Definition: A dashboard is a visual display of the most important information needed to achieve one or more objectives; consolidated and arranged on a single screen so the information can be monitored at a glance. — Stephen Few

Our observation is that the primary purpose of most dashboard initiatives lies somewhere between two general approaches, which can be loosely described as Reporting on one end of a spectrum, and Analytics on the other. The problem many operators face is that their efforts can wind-up betwixt and between the two, often without even realizing it. These two poles offer useful guardrails when considering the objective of any dashboard initiative; and examining and choosing between them helps to clarify many aspects of that dashboard. This kind of clarity, in turn, can help align and ultimately exceed stakeholder expectations.

Five seemingly simple (but deceptively challenging) questions offer a good start toward getting people on the same page:

1. What problem should the dashboard address?
2. Who is it for?
3. What is the time horizon?
4. Where does it originate?
5. How might it look?

Although they’re a good start, these questions can admittedly be a bit opaque for practical application. To make them more actionable, we expanded the questions into a “quasi-diagnostic” table. This table captures attributes and examples of each approach, to help leaders identify and intentionally choose how best to prioritize and proceed.

Identifying these characteristics and having open conversations about each can certainly de-mystify the purpose of dashboards and put an organization in a better position to optimize its time and resources.

A few caveats / qualifiers / comments about the above:

• There is no right / wrong or better / worse across these two approaches. Both are valid and valuable to a business. The unique context of a given business will determine which takes priority. Reporting may be more valuable at one stage, while Analytics could take priority at a different phase.
• These two approaches are not mutually exclusive; and they can certainly co-exist. For example, financial and operating metrics often live side-by-side. Totally true.
• But where a lot of dashboard efforts go off the rails is misalignment on which column (or where on this spectrum) the initiatives strives to be at any moment in time. And, because it really is challenging (impossible?) to optimize for two different objectives simultaneously, it helps to make an intentional choice about what you are trying to solve and what takes priority.
• Our experience is that the hardest problems to solve are the ones that cut across multiple departments (i.e. everyone has a hand in solving them). These include challenges like renewals / net dollar retention, packaging and pricing, delivering a seamless client experience, executing a market-driven product strategy). These tend to require cross-departmental collaboration and demand that organizations eventually evolve (over time) beyond a Reporting mindset and into a more Analytics / Operating one.

In closing, it seems worth following-up with one of my favorite go-to questions: So what? Why does the debate about dashboards’ purpose even matter?! Quite simply, intentionality matters when it comes to metrics measurement. Contrary to popular lore, it’s not so much that “what gets measured gets managed;” Danny Buerkli does a great job debunking that familiar trope here. Rather, as Buerkli succinctly argues, “Not everything that matters can be measured. Not everything that we can measure matters.” So true. And because sub-scale SaaS businesses operate in a world of big dreams but small teams, focus is our friend. Like any other product or service, dashboards should have a clear approach, objective, and target stakeholder…lest they lose their incisiveness and value. So, when considering dashboards, as with all things related to business building — choose wisely and with intent.

I’ll admit that I love a good dashboard. As an aid to SaaS operators seeking to optimize business performance, dashboards can be invaluable.^[1] Stephen Few defined a dashboard as, “a visual display of the most important information needed to achieve one or more objectives; consolidated and arranged on a single screen so the information can be monitored at a glance.” This is a useful definition that makes clear: dashboards are instruments of control. Specifically, just as dashboards within vehicles aid in the controlled navigation of those machines, company dashboards help leaders drive organizations forward while controlling speed, direction, and business health. And yet…the irony of dashboards is that before advancing any aspects of a business, sacrifices must first be made in the very same areas that leaders seek to optimize. To go fast, you must first go slow. To go far, start with steps backward. To increase control, make a conscious decision to loosen oversight.

With these contradictions in mind, this post strives to flash a warning light (see what I did there?) by dispelling any illusions leaders may have about scoring easy wins with dashboards. Rather, it introduces some questions to ponder and detours to explore when considering dashboard initiatives. Hopefully these will help folks achieve the goal of getting past the entry-ramps and using dashboards to confidently drive the business forward in the fast lane.

Control: This is What Democracy Looks Like? Advocates of dashboards sometimes tout them as nobly delivering democratization of data. But do dashboards inherently reinforce the notion of one person, one vote? Not necessarily (the term “executive dashboard” seems to succinctly refute this point). Rather, a key question to be answered early in a dashboarding effort centers around data roles, rights, and privileges. Who gets access to what data? Is the dashboard’s audience the CEO? The Leadership Team? Every team member within a business (including / excluding contractors and consultants)? Should there be a curated / filtered set of data for each? Oh, and, what about the board of directors?

A related question centers on how dashboard information is consumed — on a push or pull basis? Purists might argue that dashboard users should be able to “pull” information. That is, they should be able to access what they want, when they want it, and manipulate the information to suit their needs. The problem, of course, is that this is horribly inefficient and variable — we humans rarely know what we want until someone presents it to us as a solution to our needs. That view supports the position of what I call “curators” who believe dashboards are best served up on a push basis. In an extreme version of this model, some analyst-type packages up KPI’s into a report and shares it with a defined set of stakeholders on an agreed-upon cadence. This approach is certainly efficient / prescriptive, but not at all a beacon of data democracy.

My own experience here is that the middle is marvelous. Dashboard information is most valuable when shared broadly with a large number of stakeholders and with minimal access constraints. But the dashboard should also be structured and streamlined, not just a filtered database that can be used to spin-up infinite ad-hoc reports (after all: if everything is important, then nothing is). Finally, regularly scheduled all-hands reviews of the dashboard by company leaders are key to offering commentary and context. This helps provide all stakeholders with a clear understanding of “what matters, how we’re doing in those areas, and what each of us can do about it.” In this way, leaders can absolutely gain more control over their business through dashboards. But they must first be prepared to loosen the reigns on potentially sensitive data and to make themselves vulnerable by sharing it (in good times and bad). I’d argue this approach doesn’t represent a pure (data) democracy, but perhaps it is more like a high-functioning (information) republic.

Speed: Slow is Smooth, and Smooth is Fast: This useful adage from the Navy SEALs has been widely analyzed (e.g. here, here, and here). The general gist is that “the best way to move fast in a professional setting is to take your time, slow down, and do the job right.” This is particularly prescient in connection to implementing business dashboards. As leaders, we want dashboards to serve as an accelerant: to provide early alerts about deviations versus plan, to streamline our decision-making, and to speed the pace of collective results. But…to go fast, we need to start slow. A big-bang approach simply doesn’t work when creating dashboards. Never have I seen a version 1.0 dashboard that was worth a darn. In fact, “if you move too quickly, you bump and bounce and veer from that path because you are frantic, trying to do too many things at once.” Rather, a deliberate and iterative approach to creating dashboards allows leaders to test, learn, adapt, and develop a dashboard that truly serves the needs of the business — over time.

A corollary to leaders’ “need for speed,” is the desire to automate the updating of dashboards. Like a scene from Minority Report, the dashboards in our imaginations should miraculously and effortlessly pipe future-illuminating intelligence directly to our brains on a continuous loop. It’s a compelling vision; and automated updates to dashboards are totally doable — eventually. But a fair degree of manual work is necessary to get a dashboard stood-up. Manual data-entry (the antithesis of tech-enabled efficiency) is often required at the outset of a project, particularly in the early iterations described above. Even after graduating from data-entry, labor is needed to enable efficient and error-free data feeds from different company systems. It. Just. Takes. Time.

In my view, balance is helpful in navigating the tension between slow and fast. Having botched overly ambitious dashboard initiatives, I’ve learned to start small and slow. It’s wise to avoid throwing out an otherwise valuable metric, simply because it is hard to collect — report what matters to the business, even if it requires manual data entry. Conversely, don’t prioritize the automation of data collection early in a dashboarding effort. Doing so can mean “letting the great be the enemy of the good;” and technical glitches have killed countless promising projects. One of my all-time favorite dashboards (a snippet of which is included below) took 18 months to get right. Initial versions were brutally tedious to update — manually. And even in its prime, it was never visually impressive. But, by taking our time, we eventually created an astonishingly valuable tool that helped accelerate the business.

Horizon: Is Real-Time Really the Best-Time? Another common hope among leaders is for dashboards to help predict the future. This translates into wanting to (a) report the most up-to-date information and (b) measure that information in shorter and shorter chunks of time — by month, week, day, hour, and even by the minute. This works well for many metrics, where recency really matters. For SaaS businesses, such metrics might include website visitors, numbers of qualified leads, product usage metrics, or volumes of support tickets.

But other metrics evolve on a slower cadence; and measuring them over short time horizons is less helpful. As a correlate, I’m reminded of the recommended method for taking one’s pulse: top medical organizations advise counting someone’s pulse over a 60 second span. Although it would be a lot more efficient to measure someone’s pulse for only 2 seconds and then multiply the result by 30…that would give a far less accurate reading. Similarly, many metrics in SaaS businesses require measurement over a longer period, lest the results be useless or misleading. This is particularly true in enterprise businesses selling large dollar subscriptions over long sales cycles. In such cases, one week’s worth of data can have very limited utility; rather, we need to see data over a quarter or even multiple quarters. Examples of these longer-lead metrics include: sales and marketing conversion rates, contracted new bookings performance, measuring execution against hiring plans, or quantifying employee engagement. All of these tend to take a long time to materialize and are inherently “lumpy” in nature.

Where this can lead to dashboard-related trouble is when we try to measure all metrics on a uniform cadence over consistent time horizons. Rather, leaders need to approach dashboard projects with realistic views on just how real-time their measurements should be…and apply time horizons unevenly across different metrics.

To further complicate this issue, today’s results are often best interpreted by looking backward in time. This is challenging for many reasons. First, we often don’t have access to good historical data, which is commonly the motivating factor behind the dashboard project in the first place. Looking backward in this way also contradicts every instinct of the future-focused leader who has undertaken a dashboard project for the stated purpose of more proactively looking ahead. While real-time data is certainly appealing, successful dashboard efforts must also consider both current and past data over long time-horizons.

Conclusion: In sum, dashboards can yield valuable results for businesses and offer great benefits to thoughtful business leaders. Specifically, they can increase the control, speed, and foresight with which the business operates. But none of these benefits comes without a cost. And that price is often paid in the form of leaders first making sacrifices, or investing time and resources, in the very same aspects of the business that they wish to ultimately optimize.

Footnote:

[1] Dashboards are also imperfect and highly variable, as argued well here and here.

As he does in his blog with astonishing frequency, David Cummings last week put his finger on a pervasive problem in startups: complexity of messaging. To cap-off a characteristically well-constructed case for communicating with simplicity, the post concludes with this guidance to operators: “The next time you describe your product, competitive position in the market, or value add, reduce the complexity of the verbiage. Increase the understandability. Make it clear.” Such great advice; and I’ve been thinking about it all week. But, like many things in life, it is easy in theory // difficult in practice. So, I’ve tried here to stand on the shoulders of a giant, and offer 10 tips & tricks that we’ve employed in our own efforts to follow David’s counsel toward clear messaging:

1. “Fuzzy writing = fuzzy thinking”: My first boss repeatedly used this line to admonish against messaging that lacked crispness. His point: before you put pen to paper, take the time to REALLY think the messaging all the way through. Doing so will materially tighten the output and save time.
2. Go Solo: For heaven’s sake, don’t group draft. So often sub-scale companies strive for inclusivity and seek to incorporate input from many parties into their messaging. It’s painful for all and rarely produces good results. Many perspectives are absolutely good / needed…but many voices are not. When it comes time to codify the message, have one person own it.
3. Go Pro: All middle school students allegedly learn to write. So, it stands to reason that even the smallest of startups has the resources to craft its own messaging. But clear, concise, compelling writing is deceptively difficult. There is no shame in outsourcing this responsibility to experts.
4. Go Pro 2: To further plug the outsourcing model, professional writers are often surprisingly affordable. And, beyond their sheer expertise, outsourced writers bring valuable perspective / objectivity to the task. Finally, the mere act of engaging someone to ghost-write forces real up-front clarity of thought within the company (see point #1 above).
5. Go Analog: In today’s digital world, even the earliest messaging drafts tend to start on a keyboard. But, with apologies to trees, a piece of scratch-paper can be an invaluable aid to crafting one’s message. Writing down by hand one’s ideas tends to allow for total freedom and enable non-linear thought (which is surprisingly hard to replicate digitally). On the other hand, when one can easily cut and paste with a click of the mouse, it tends to breed more verbiage — frequently at the expense of brevity.
6. 10–20–30 Rule: In his classic book “The Art of the Start,” Guy Kawasaki promotes an approach to startup pitch-decks that includes a simple rule: “A PowerPoint presentation should have ten slides, last no more than twenty minutes, and contain no font smaller than thirty points.” This is a great forcing mechanism for clear messaging — it really is hard to comply with the 10–20–30 Rule while using a lot of jargon and buzzwords.
7. 80/20 Writing Rule: Spend 20% of your time on the first draft…and 80% on editing / un-writing. This is likely a terrible strategy for journalists with strict deadlines…but there is no end-date on optimizing company messaging. Take advantage of that fact to let the message marinade and evolve over time.
8. 80/20 Presentation Rule: A corollary to the rule above is to dedicate 20% of presentation prep time to slide creation, and 80% to nailing the talk-track. Rarely is this rule followed. But, in terms of clarifying the message, it really pays off.
9. Solving versus Doing: Some of the most jargon-laden company messaging results from trying to explain “what the company does.” Instead, focus on “what problem the company solves.” The Jobs-to-Be-Done framework can help a lot here.
10. Go Metaphorical: As humans, we like stories and images. They are powerful and we can remember them. These are attributes worth striving for in company messaging. Leveraging metaphors can help reduce the complexity of messaging, while also making it far more appealing. But, a few words of caution: (1) test to ensure the metaphor is truly clear and valid — mixed or inaccurate analogies are actually counterproductive, and (2) unless the business / product actually relates to war or sports, avoid metaphors that use those topics. I’ve made this mistake…just…don’t.

In short: David Cummings was dead-right — in terms of company messaging, make it clear! Hopefully these tips make it a bit easier to do so.

In September of 2020, I attended SaaStr Annual and wrote about it here. It was my first fully virtual multi-day conference; and there was a real novelty factor to it. Seven months and several digital conferences later, I’ll admit to eagerly awaiting the return of in-person industry events. Still, I was pretty fired-up to take part in SaaStr Build this week; and it did not disappoint. The return on my time-invested was high, with a mix of valuable takeaways and follow-up research to do. My hope in this post is to succinctly share some of my personal highlights with anyone interested but unable to attend the event. Specifically, below are 5 content takeaways and 5 general observations, hopefully in under 5 minutes of reading. Ready…go.

CONTENT:

1. Growth Endurance: As at SaaStr Annual in September, the “State of the Cloud 2021 with Bessemer Partners” was a total highlight. If you can spare an hour, spend it watching the session (and you’ll still have 3 minutes left over to make a cup of tea). Among the gems was Mary D’Onofrio’s explanation of Growth Endurance (Current Year Growth Rate / Last Year Growth Rate) as a new key SaaS metric and a good explanation for (a) high current SaaS multiples and (b) the differences among the Good, Better and Best SaaS players. For the time-constrained, her introduction of this important concept begins at the 28:15 mark of the video.
2. Go-to-Market Rules: From the same session, Elliot Robinson offered a great summation of three G-t-M strategies deployed by top SaaS companies: (1) product led growth, (2) usage-based pricing, and (3) cloud marketplaces. While they are all compelling, I find the usage-based pricing topic to be most easily applicable to virtually all SaaS businesses — and one that we so often get wrong. As he eloquently nets it out, UBP is when customers can say, “I’m paying for what I’m getting value from.” Easy to say, hard to do. Jump to minute 38:51 of the vid to pick up at this topic. Separately…I was also excited to see Elliot include in Bessemer’s predictions for 2021 this forecast: “The vertical SaaS wave becomes a tsunami.” Yaaas!
3. Leadership: Another bright spot was a session led by Roy Mann and Eran Zinman, co-founders of Monday.com: “Our Top 5 Mistakes in Scaling with Monday.com.” Like millions, I’m a user of Monday.com; and I was intrigued to learn from Roy and Eran. They shared 5 things that worked well for them and 5 that didn’t; and they were disarmingly candid and self-effacing throughout. I particularly enjoyed the “5 things we’d do differently,” which picks up at the 24:42 mark of the recording. Noteworthy to me among these was, “Just because you have leadership…doesn’t mean you have a leadership team” (which picks up at the 30:59 mark). Oh man, so true…and so worth the effort to get it right. I’m reminded of Patrick Lencioni’s “5 Dysfunctions of a Team” and the concept of the “First Team” espoused by the protagonist Kathryn (beginning on page 135). This video and that book both hammer home this critical point.
4. 5 Metrics: My hands-down favorite session of the event was Tomasz Tunguz’ “The 5 Metrics You Should Track to Maximize Your Company’s Valuation with Redpoint Ventures.” The clarity and simplicity he brought to this confoundingly complex (but extremely important) topic is impressive and rare. Although there are no real surprises among the five metrics discussed (revenue growth, gross margin, cash-flow margin, net dollar retention, and sales efficiency), the double-click into each was invaluable. For me, the most enlightening was the explanation / discussion of Sales Efficiency (aka Payback Period) which starts at 15:24 in the video). That said, I feel this whole session is an instant must-watch for any SaaS company leadership team. Tomasz also referenced a forthcoming blog where he will explain how he translates these metrics into an actual company valuation. I’ve not seen that yet, but I believe will become available here soon — can’t wait.
5. Is This Cheating?: Truthfully, there are too many more content takeaways for me to concisely share here. So, I’ll cheat a bit and list three other sessions that were chock-full of goodness, and well worth the time to view: (1) “3 Reasons Why You Need Support Ops to Scale with Assembled and Stripe,” (2) “How to Make Customer Insights An Integral Part of Product Development & Company Strategy with Asana,” and (3) The Future of Events: What’s Next and Why Everyone’s Focused on Building Community with SwapCard.” Yeah, that probably is cheating…sorry about that.

GENERAL REFLECTIONS:

1. Monster Year: 2020 was awful in countless ways. But the last 12 months have been absolutely insane (in a good way) for SaaS. And while SaaS’ growth is commonly acknowledged by anyone who follows the industry, this conference really put it in perspective for me. Armed with a trove of statistics to make their case, the Bessemer team described the recent past as a “monster” time, which seems pretty apt. A good reminder: when pandemic fatigue can make every day seem like Groundhog Day….that’s definitely not the case in the SaaS world.
2. To COVID or Not to COVID: As in every industry conference the world-over, there was a ton of talk about coronavirus — no surprise. What was remarkable to me was the dichotomy between references in the present tense (“…in a COVID world…”) versus a soon-to-be-past tense (“…as we emerge from COVID…”). It struck me that while the SaaS industry has generally gotten a lift from COVID, it will be interesting to see whether / how smart companies think ahead to the next phase of our reality while avoid being stuck in a moment that will hopefully soon pass.
3. No More “New Normal:” It’s official: my least favorite pandemic-era term is “the new normal.” Aside from it being an unwelcome reminder of bad-news and tedious lock-downs, I wonder whether it is instantly obsolete. “The new normal” strikes me as unnecessarily self-limiting, particularly for an industry as dynamic and fast-evolving as SaaS. The only thing that seems “normal” is a constant state of rapidly accelerating change…and that isn’t really new. Rather, anything normal seems fleeting. Okay…I’ll get off of my soap-box now.
4. Efficient, not Effective: In reflecting on my own participation at SaaStr Build, I realize that I have undeniably become more efficient in participating in virtual events. I’m better at navigating the sessions, flagging content I want to revisit, and simultaneously managing my typical non-conference workload. But was I a more effective attendee? No way. I was frequently distracted, more likely to miss scheduled sessions (though I could certainly access recordings), and generally more likely to session-hop (similar to how I flit around at in-person events). To be clear, this is NOT a commentary on the quality of content at the event — that was bomb-proof. This is more of an introspection around the limits of my own digital endurance. I’m reaching the end; and I suspect others might be also.
5. Freemium Wins Again: Many SaaS businesses have optimized around an effective freemium model. SaaStr appears to be one of those businesses. Admittedly, I opted for the free attendance package to this event; and I am quite grateful to SaaStr for the opportunity to consume such valuable content at no charge. So much so, that I definitely plan to upgrade next time — not because I didn’t get value from my free options…but, rather precisely because I DID. Freemium wins again.

Parting Thought: To make up for having cheated above, I’ll add one last point. I commented in September on the general air of uncertainty at that time and the silver lining at SaaStr Annual of a related (and welcome) vibe of community / humility among attendees. With SaaS multiples at all-time highs, that uncertainty seems to have been replaced with open bullishness at SaaStr Build; and the event certainly offered ample grounds for optimism in the space. My hope for the SaaS community in the coming quarter+ is that we continue to experience sustained market strength…AND / BUT that the same sense of community also endures. Here’s to 2021.

Valuations for publicly traded SaaS businesses are bananas right now. At the time of this post, Zoom’s enterprise value relative to its last twelve months of revenue (EV / LTM) was an eye-popping 58.41x. Veeva’s EV / LTM ratio was 37.02x; and “lowly” Salesforce’s was 10.03x. And it’s not just the stock market; valuations for privately owned SaaS businesses are also flying high. Against this backdrop, a colleague recently shared with me commentary from a similarly frothy time for software businesses. In mid-2011, legendary venture capitalist Bill Gurley tackled the topic of business valuations in his Above the Crowd blog with this article: “All Revenue is Not Created Equal: The Keys to the 10X Revenue Club” (5/24/11).

In this piece, Gurley makes a compelling case against the use of revenue multiples as a means for valuing businesses (“…the crudest valuation tool of them all”). But, seemingly acknowledging the ubiquity and simplicity of revenue multiples relative to his favored Discounted Cash Flow analysis, he then goes on to comprehensively explain the characteristics of high-quality revenue companies versus low-quality revenue companies. These differences, he argues, are what accounts for high valuations (10x+) for some companies, and not for many others. In some ways, the article offers a fun look-back to a seemingly quainter time (e.g. LinkedIn had just gone public that week in 2011, and analysts were skeptically scrutinizing its implied multiple of 11.8x — 15x forward revenues). But it is also a timeless study, with many insights that remain applicable today. With that in mind, below is a quick re-cap of Gurley’s Top 10 business characteristics for gaining entry into the “10x Club,” along with some added thoughts about how these apply today within Lock 8 Partners’ core focus area of small-scale SaaS businesses:

• Sustainable Competitive Advantage: This is a question of barriers to entry or “moats” as Warren Buffet famously described them. Gurley references Coca-Cola for its deep moat (sophisticated distribution channels, global brand, secret recipe) relative to that of RIM (fleeting and difficult-to-maintain tech advantage). Given their small size and relative immaturity, early-stage SaaS businesses tend not to have well-established barriers to entry. Feature sets, ease of use, and customer service are often cited by operators as competitive barriers, but those are (at best) shallow moats. A notable exception, in our minds, is deep domain knowledge or subject matter expertise in vertical SaaS plays. Additionally, SaaS businesses that provide workflow automation become so embedded in their customers core processes, it’s difficult to imagine the business operating without them. In combination, these tend to be hard to replicate, particularly when used to cultivate an active community of loyal advocates (more on that below).
• Presence of Network Effects: Per Gurley, “In a system where the value to the incremental customer is a direct function of the customers already in the system, you have a powerful dynamic that tips towards winner take all.” In other words, it’s the customer base, stupid! We’ve seen this for years with social networks and telecommunications networks, where the addition of an incremental user makes the network more valuable to all other users . The company that seems to have nailed this recently is Peloton (currently trading at 29.18x revenue). Competitors can certainly manufacture sophisticated exercise equipment but replicating / combatting Peloton’s loyal, networked community is going to be a tall order. A less traditional network effect can show up in small-scall B2B SaaS businesses when a solution emerges as an industry standard within a vertical market, and administrators start self-identifying and touting their expertise in that solution. We saw this in the early days of both Blackboard and BoardEffect; we knew we were going to be tough to beat when people started connecting the brands to their job descriptions on LinkedIn.
• Visible Predictability: The world has evolved quite a lot since 2011; and the benefits of SaaS subscription models that Gurley describes in detail are now well understood, de facto standards. In our minds, the predictability of a SaaS subscription model is its most important and valuable attribute. Irrespective of whatever else goes on in a business, if it maintains a gross dollar retention rate of 95%+, it has a rock-solid foundation on which to build. With high renewals: investments in the future can be confidently made, slow-growth years can be endured, and hiring mistakes can be overcome. And while there is a lot of justified attention on Net Revenue Retention these days, we still prize high gross dollar retention above virtually anything else when evaluating a business.
• Customer Lock-in / Switching Costs: This is about lowering customer churn; and it is inversely related to the prior point (retention). Businesses with low churn have higher customer lifetime values, and they are rewarded with higher company valuations. As Gurley points out, “Switching costs can take many forms — technical lock-in, data lock-in, high startup costs with a new vendor, and downstream revenue dependencies are just a few.” We’ve observed that such lock-in can either be voluntary (“why would we ever want to leave vendor X?!”) or involuntary (“we’d love to switch, but it’d be too painful.”). And since small-scale SaaS businesses simply don’t have tons of market power, their stickiness is far better and more sustainable when based on loyalty versus “hostage taking.” This can be assessed through customer calls, Net Promoter Scores, and social media sentiment. Although a bit contrarian, we value voluntary loyalty-based switching costs far more than technical or data lock-in.
• Gross Margin Levels: Gurley nails this one head on: “…You cannot generate much cash from a revenue stream that is saddled with large, variable costs.” Because of their low marginal costs (more on this to follow), SaaS businesses tend to be blessed with attractively high gross margins. But not always. Particularly in smaller, bootstrapped SaaS businesses, management teams will try to complement their software revenue with a services component, implementation revenue, or embedded third-party products — all of which tend to have lower than average gross margins (versus pure SaaS product revenue). Furthermore, gross margins can be easily overstated in smaller businesses, as management teams sometimes don’t properly allocate personnel expenses (often accidentally); and we’ve learned that this is an area worthy of close examination when assessing small-scale SaaS businesses.
• Marginal Profitability: According to “The 10x Club” marginal profitability is when, “all things being equal, higher revenues create higher profit margins.” This is also sometimes referred to as “flow through.” Positive flow-through is a benefit of scale, and SaaS businesses typically do well in this regard. Why? Because each new unit from selling existing software to a second customer (or third, or 1,000th) introduces very little in terms of new, incremental expense. As small-scale SaaS businesses prioritize growth, profitability will certainly decline, but incremental expenses tend to be concentrated in sales and marketing (not COGS, per the point on Gross Margin above). As a result, its easy to see where even small-scale SaaS businesses can achieve positive flow-through as they begin to scale.
• Customer Concentration: Given the importance of visible predictability (Point 3), “all things being equal, you would rather have a highly fragmented customer base versus a highly concentrated one.” This is almost a matter of course in big, publicly traded companies — it’s hard to get too terribly big without a diverse customer base. But countless small-scale businesses are sustained by a few large anchor clients. Such concentration makes any investor nervous. Ideally in our minds, no customer accounts for more than 2.5% of revenue, so the pain of any customer drop is minimal. Lowering that bar to a real-world standard, we prefer that the top 10 customers in aggregate account for less than 25% of a business’ top-line. Beyond that, the higher it is, the scarier it gets. For bootstrapped businesses, it is also worth comparing annual free cash-flow against the revenue from a cohort of top customers. If losing any of those top customers would result in a cash shortfall, it’s likely time to further diversify the customer base or manage spend until doing so becomes possible.
• Major Partner Deficiencies: “Investors will discount the price/revenue valuation of any company that is heavily dependent on another partner in some way or form.” There is often a great deal of tenuousness among businesses that overwhelmingly base their model on behemoths such as Google, Facebook, Microsoft, Salesforce, and others. As Gurley points out: “No one wants a partner policy or algorithm change to have unpredicted negative impacts on a public company. These risks are accounted for with lower valuation multiples.” This risk is even more pronounced among small-scale businesses that have virtually no influence over their larger partners; and we are admittedly skittish about such situations.
• Organic Demand versus Heavy Marketing Spend: “All things being equal, a heavy reliance on marketing spend will hurt your valuation multiple.” Interestingly, Gurley’s article doesn’t mention the word “viral,” but today’s readers will recognize this description of companies that grow even without heavy marketing spend. This concept has even evolved into a popular KPI (Viral Coefficient) that measures the average number of new users an existing user generates. Calendly is a current solution that seems to have truly nailed this — admittedly, I signed-up to pay for my own account after the very first time I saw someone else use it. Although virality tends to play less of a role in B2B SaaS (particularly at the enterprise level), word of mouth marketing still exists, particularly in vertical markets. We look for segments where prospective customers do not necessarily compete with one another (i.e. in healthcare, non-profits, education, and local governments) and are willing to collaborate with peers from other organizations. Client references abound in these segments; and those remain the cheapest and best marketing a company could ever hope for.
• Growth: “Nothing contributes to a higher valuation multiple like good ole’ growth.” Unless that growth is accompanied by sustained losses, which Gurley explains with valuable nuance. In recent years, the Rule of 40, has made this concept even easier to grasp. In short, this establishes a benchmark whereby the combined (A) growth rate + (B) profit margins should exceed 40% among top-performing companies. Some extremely discerning growth investors have even raised the bar to the Rule of 60% or higher. The message is clear: businesses should balance growth with profitability. Unless, of course, a business is growing astonishingly fast; in which case, it can also be wildly unprofitable, still exceed the Rule of 40, and remain a hot commodity (at least until growth cruelly begins to slow).

Conclusion:

Managing this 10X Scorecard can seem daunting; many of the components are interdependent. And in small-scale, resource-constrained SaaS business, the tyranny of the urgent can overwhelm even the best laid plans. While year-end brings the customary focus on the planning for the New Year, aligning those plans with your equity value aspirations is good discipline. Because, regardless of whether you’re doing $1M or $10B of revenue — and regardless of whether it is 2011 or 2021 — the characteristics of what makes a quality business remain broadly the same: sticky product, competitive moat, high gross margins, and bankable counterparties are critical for long-term success…and the market will value your business at its discretion.