Repeatability 2022, held in November and co-hosted by DTCP and Stereo Capital, was a great success with more than 500 investors and company operators registering for the event. We hosted two keynotes and two panels (on pre and post investment topics). Thanks to our fantastic panelists for their insights –  Arvind Purushotham (Citi Ventures), Bilal Chaudhary (Blackstone), Brian Rose (Viking), Chris Lee (Deel), Christine Edmonds (ICONIQ), Eric Andreson (Scale Ventures), Fred Wang (Adams Street), Kiran Hebbar (Alloy), Stephanie Buscemi (Confluent), Sumant Sridharan (Homelight), Tom Tunguz and Vito Brandle (Abnormal Security).

Below we highlighted some interesting data points, perspectives and anecdotes that were discussed. If you’d like to chat about these or related topics, feel free to reach out to Aurin Bhattacharjee or Dmitry Dakhnovsky 

Repeatability is a resource for growth stage software and technology founders, operators, investors and advisors. It provides the best thinking on scaling recurring revenue technology businesses. 

 

Financial and Operating Metrics

  • A good place to start when evaluating enterprise SaaS/PaaS growth stage businesses are Christine Edmond’s (ICONIQ) benchmarks (based on data from top tier SaaS/PaaS businesses). The Enterprise 5 (with top-tier benchmarks) are ARR growth (doubling in each of the first 2-3 years after crossing $10M ARR), Net $ Retention (120%+ even at scale, with ~95% GDR), Rule of 40, Net Magic Number (>1.0x), and ARR per FTE (growing from ~$100K at $10M ARR to $230K after $100M ARR). For most SaaS companies, ~60-75% of Opex will be personnel related. The burn multiple (FCF/Net New ARR) is also informative. At $10M ARR, companies on average have burn multiples of 1.9x. When they get to $50M ARR, that drops to 1.0x
  • Christine also identified resiliency benchmarks – Net New ARR squared (>90%), Rule of 40 (>40%), Y/Y ARR growth (>75%), runway (>2 years) and Operating Income forecast attainment – Q1 is easiest to forecast, even in 2022. Leading indicators of GTM and demand include (with ‘20 and ‘22 medians) Inbound as a % of Pipeline (45%, 40%) and Sales Cycle (10 weeks, 13 weeks). Lagging indicators include % Gross New ARR from New Logos (50%, 53%), Gross ARR Retention (95%, 93%), Renewal Rate (85%, 87%), Win Rate (35%, 35%), Net ARR Retention (120%, 128%), Deal Size/ACV ($93.5K, $103K)
  • Tom Tunguz looks at second order metrics such as Total ARR/Total Cumulative spend, Pipeline (total value of potential bookings for the quarter) to Quota Ratio. Many companies are operating with 3x pipeline coverage. And, most SaaS businesses are closing 15% of sales accepted leads. SaaS execs now want smaller sales teams that operate with much higher quota coverage ratios, mainly because sales cycles are lengthening 
  • Tom surveyed 550 companies and found the top quartile were operating between 14-18 months payback on a gross margin adjusted basis. He thinks shorter sales cycles and land & expand motions are better in this market vs. elephant hunting 

 

Financing Options

  • Early growth companies can do a discount to the next round with a cap. That is an elegant solution because it is hard to come up with a valuation for companies that are early in maturity right now. For later stage companies, options include a discount to IPO.  
  • One key reason companies avoid multiple liquidation preferences is that those make subsequent fundraisings more challenging. If you do a round with a higher liquidation preference, you need to make sure management still has “skin in the game” and is excited. To do that, you can upsize the employee stock option pool
  • Some VCs encourage their portfolio companies to have debt facilities in place but not include them as part of their runway. If the company is showing promise and needs time to see return on S&M and R&D investments before the next equity round, debt is helpful 
  • A consideration is that VCs will not want their capital going to retire debt
  • One company recently closed a round and used that balance sheet strength to get no-covenant debt to extend its runway for a short time. If a company takes covenants, the financial modeling must be very accurate 
  • Most early stage companies are so focused on growth that they don’t have their audits done, finance org built out, books properly organized, etc. These things need to be ready for when the IPO market opens

 

Board Building

  • The size of the boards (e.g. growing from 3-5 to 7-9) changes engagement in and out of quarterly meetings. Apart from the broader board, having good chairs of committees, (e.g. Audit or Compensation), that work well with Finance or People teams is important. 
  • Many early private companies have boards with VCs and founders. The best boards consistently have a balance of cross-functional operators. If a company is a bit early for non-investor and management board members, look to board advisors. 
  • Founders must build a robust board pipeline early. Companies should take the approach that diversity drives better thinking – innovation, productivity, etc. 
  • Going public requires more non-financial reporting metrics, particularly in the EU and US. CEOs can start sharing ESG strategies and reports before going public, including formal data reports. 

 

Go To Market Strategy & Revenue Operations

  • New sales rep ramp-ups could be longer than 6-9 months, because sales cycles are longer. SaaS companies are trying to shorten sales cycles by reducing legal touches, utilizing click through, setting pricing and preferred channel partners
  • Bravado (similar to Glassdoor for Salespeople) surveyed 275K people. 63% of salespeople missed quota in Q3, up from ~30% that missed in Q2 – ~ 100% increase
  • SaaS companies should have a portfolio of customer acquisition strategies – sales led, marketing led, product led, etc. The greater the variety of strategies (including PLG), the more they can experiment 
  • A good place to be is an inside motion closing $20-$40K ACV deals with < 45 day sales cycles and strong NDR. Selling $150-500K deals with 9-18 month sales cycles, that will be a tough road right now
  • SaaS companies need an optimal mix of awareness, land and expand spend. It is more effective to identify how much marketing is responsible for in terms of land vs. expand. Sales can more easily drive expansion 
  • It is valuable to analyze recent pipeline data – what is happening in the last quarter and month? 
  • Recently, some companies have been testing freemium models to get customers in the door and then upsell them down the line. Others are shifting emphasis to expansion vs net new and on signing multi-year agreements
  • When deciding between consumption vs. subscription monetization, executives should recognize the former has more variability, but can achieve growth faster. In a downturn, consumption businesses will see slow downs faster, but subscriptions will eventually have lower renewal rates. Many investors don’t take a strong view on whether consumption or subscription is better. Also, SaaS/PaaS sub-sectors often have established, hard to change norms of monetization. Some have evolved pricing to be both subscription and consumption. This gives customers predictability on most of their costs and flexibility to go over if needed
  • Financial stability of the customer base is important. Software companies selling to cyclical, low gross margin businesses might not be as easy to invest into today. To invest in a company selling to a cyclical sector, investors might agree with the company to keep the burn low till the company’s customer base has a better outlook

 

Navigating the Current Environment

  • There is likely to be a weak demand picture for SaaS and PaaS in 1H23. But, it is unclear how bad. Companies should have a 1H23 plan and then revisit mid-year vs. planning the whole year. Hitting a plan builds confidence with the board and employees. Many are optimizing to meet plan on expenses and burn first and foremost 
  • ICONIQ’s research indicates orgs more susceptible to IT budget include the Chief People Officer or CHRO org. Next are the CRO and CMO teams, followed by the CFO and COO. The least susceptible are the CTO and Chief Information Security Officers
  • Even cybersecurity budgets are seeing cuts. Buyers are sharpening their pencils on what the open attack vectors are. IT purchasers are consolidating to two or three cyber providers vs. 10. The idea is cutting costs but not reducing protections. A year ago, additional protections were more easily approved
  • ICONIQ’s strategies for navigating the macro environment include spend reductions, re-forecasting/adjusting plans, hiring slowdown/freezes, reductions in force, changes to GTM strategy and leveraging off-shore resources
  • Tom Tonguz mentioned that at the beginning of the current SaaS downturn, VCs recommended 12-18 months of runway. Now, the recommendation is 24 months. If a company is sitting on a high valuation multiple, they need time to grow into their valuation to raise a flat round
  • Growth is still the biggest value driver in VC portfolios. If S&M efficiency is good, companies should continue spending. The bigger the disconnect between the last round pricing and where it would price today, the more a company might be guided to slow burn to create time to grow into the last valuation

 

Product Led Growth (PLG)

  • Tom Tunguz sees a preference for product led growth. In 2008-10, top decile companies were growing $1-$3M, then that increased to $1-$5M, enabled by early stage investors willing to accept inefficient businesses for high growth. Now, the preference is for companies growing $1-4M with a 16 month payback vs. a $1-6M with a 36 month payback. 
  • Tom pointed out that the US VC industry has grown 40x over the last 10 years with 80-85% of that going into infrastructure and application software. Lots of that is used on S&M spend. Each S&M channel becomes less efficient and more competitive. Efficient market channels included open source and cloud platforms, which are becoming saturated. Now, PLG is the efficiency channel where the product does the qualification work that a sales professional or user might have to drive efficiency
  • Tom mentioned that top decile PLG companies are seeing NDR of 180-220%, because customers start with one seat and then that person convinces another person, etc. Top tier PLG companies close ~4% of people who sign-up to a paying seat without sales involvement. With sales, it goes up to 15-20% in the top quartile. Figma and Notion have end users in the hundreds of millions, but PLG is harder for a niche product 
  • Shifting to PLG is a board-level decision that involves changing core parts of the product and code-base. It is a multi-year, iterative process. PLG demands different priorities from the product roadmap than a sales-led motion. In the latter, a seller finds a customer and promises to eventually give more than the product has and asks the product team to build new features. PLG focuses on conversion of the masses, whereas the sales-led motion focuses on individual customers. PLG is not nearly as much of a science as the account executive driven motion