From “Growth at all cost” to “Efficient growth”: What this means for sales & marketing teams with Broan Murray

Trinity Nguyen:

Hey everyone. And welcome to another episode of The First 100 Days. A show for revenue practitioners by revenue practitioners, exploring how to build an aligned revenue engine. One practical tip at a time I'm Trinity Nguyen

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Christian Kletzl:

And I'm Christian Kletzl this season, we are talking about building revenue alignment by asking high performing teams how they got it done.

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Trinity Nguyen:

Hi everyone. Welcome to another episode of The First 100 Days. Joining us today are Brian Murray and Ethan Ruby, both partners at Craft Ventures and have worked together for more than five years. Together their operating experience covers product, sales, customer success and operations. Brian is also a co-founder of Cabal, a tool that helps founders get more from their investors and advisors. And Ethan is the creator of SaaSGrid, a tool to help companies track their KPI, keep businesses on track, and helping them raise followup funding. So in this season, we discuss all aspects of revenue alignment, and alignment comes first from having the same goals and metrics, especially now during a downturn. So the term efficient growth is on top of every revenue leader's mind right now. What does that mean and what is considered good in 2022?

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Ethan Ruby:

I think what's good in 2022 is what's always been good for business. If you really go back to the fundamentals, the point of businesses is to sell valuable products and services and get really good return on their investment. Put in a dollar, get multiple dollars of revenue out, ultimately create profit that can be shared between shareholders and employees, et cetera. And those are what you would call business fundamentals. And I think that's what investors and in general what's good now. Right? People want to see businesses that have really good efficiency, that can invest in sales and marketing very profitably, and then continue to sell their products with high gross margins. I think the real anomaly was that in 2021, due to a whole bunch of factors that I think everyone's well familiar with, we kind of got away from that. It's not that the things stopped mattering it's that people started focusing so much on the extreme leading indicators of growth, but it's not just growth that matters. It's running an efficient business. And I think that's what is going to be a focus across the board in 2022.

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Trinity Nguyen:

So what are the most important things revenue leaders should be thinking about, especially this year?

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Brian Murray:

Revenue leaders should not purely be thinking of quota and attainment, but also the sales and marketing expenses. One 2021 mindset is just about number of reps. And how many reps can I recruit so that we can hit our number? And what they were not thinking about is all of the ancillary GTM hires that were supporting those reps, like sales enablement and sales ops and marketing ops and rev ops and all of these things and management. And those costs started to add up and balloon, and it diluted the burn multiple or the magic number, meaning they were spending a lot of money in go-to-market and not getting the same amount of yield that other companies or efficient companies would be getting. So the new mindset for GTM leaders is think about both revenue, but also cost.

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Ethan Ruby:

I totally agree with everything that Brian said there. I mean, I think if you are a revenue leader and you're managing an org, I think your challenge should be to be thinking about your efficiency for your entire org, not just your AE team or not just your SDR team, everyone supporting you should be running efficiently. And the business, and this aligns even outside of the revenue org to product and company leadership, the product and the business and the go-to-market strategy should really be oriented around that. All these inputs are efficiently creating outputs.

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Christian Kletzl:

My thought is always these ancillary roles. For example, let's say revenue enablement should actually be a multiplicator that makes everyone a little bit better and more efficient. So is that something that ... How does this break at scale?

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Brian Murray:

That's true. You have these ancillary roles like enablement and operations that are supposed to be a force multiplier on your revenue generating headcount. However, teams, because they raised a bunch of money, they had the resources, they just started hiring all these people out of the theory of that revenue expansion or multiplication. But they kept hiring without seeing it actually manifest. So they weren't watching the impacts of those roles on increasing quotas. And that just wasn't happening, so I think that was the big miss. It's not that those roles aren't useful and they don't actually help with expanding ACVs and expanding quotas, but it's that teams were not waiting to see those impacts manifest before they continued hiring.

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Ethan Ruby:

The pitfall that we often saw is okay, you're a small startup, you have two AEs, things are going really well. You're generating new ARR very efficiently. However, now you try to jump straight from two AE to eight AEs, plus two managers and a director and two SDRs and one sales ops and one sales enablement. So it's not really like the sales enablement or sales ops aren't doing their jobs well. But actually if you do that entire jump and you go from two reps to eight reps and all of a sudden quota attainment for whatever reason, because there's not enough leads dips down to 60%, you have so much overhead that instead of having a slightly inefficient org, because quota attainment is at 60%, things are completely busted. This whole org is costing $5 for every dollar of ARR you're generating. So that's really the pattern and the pitfall that can be fallen into.

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Trinity Nguyen:

The reason why companies scaled so quickly last year, also because of the expected revenue or the target being high last year. So with everything that's happening this year and the fact that everyone's trying to grow efficiently, do you see across the portfolio companies that the revenue target expectations grows slower, but more efficiently? Is it the new kind of mantra for this year?

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Brian Murray:

It's a very difficult question because I think for businesses that want or need to fundraise again in the near future, and of course the VCs are still going to want to see 2.5 X plus year over year growth changes based on the scale. Once you get to be in the eight digits of ARR, then things change a little bit. So they still want to see that, but they want to see it done efficiently. And that seems very, very challenging. But I think maybe the reframing is that maybe all businesses were a little unhealthy in 2021, a little too big and they just shouldn't have been that big, and they shouldn't have been growing that fast back then.

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Brian Murray:

When I think of high level what's happening this year, is that we are all going on a diet. We're all getting a lot leaner and tighter and we're focusing on delivering value to our customers. And then we are going to incrementally grow our GTM teams as market demand affords us those opportunities, rather than hiring based on the last fundraising round we did and we have tons of money, so we might as well hire a zillion people

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Christian Kletzl:

For me, this sounds a little bit like just chicken and egg. I think the VCs are waiting to see what, how startups can grow right now. And I feel like the startups, the same thing. I can't adjust my expected growth unless I know what VCs are expecting. And because based on this, if I want to raise another round, I need to know what they're looking for and how I can hit it. So I feel like there's this ... and I think this leads to the uncertainty where fewer rounds are done and at least CEOs I believe, don't have a lot of idea right now what should the goal be.

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Brian Murray:

Well, I think there's things that you can know right now, which is that everyone should be focusing on efficient growth. Not to get into your business, but UserGems has always been an incredibly efficient business, but that's a simple thing. And if to get to efficiency, it means you need to dramatically lower your growth expectations, then so be it. You have to do that, because efficiency means you have more time to figure it out. You have more time to figure out your business model and create more value in your product to increase ACVs, but that's priority number one. And then you can afford yourself the luxury of thinking about how to increase my ARR growth multiples. Your mindset can continue to be in how do I expand my ACVs, how do I work up market, how do I increase my dollar retention? But you're right, Christian, it's a very challenging, confusing time for everyone.

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Christian Kletzl:

I like that thinking about actually from the sales team. And I think this is mostly based on the sales team, focused on the attainment, and let the attainment drive whether you should hire new AEs in this case, AEs or ADRs, or the rest of the sales team. I think that's a very interesting way to look at it. I think it's in line with the magic number you mentioned.

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Ethan Ruby:

I think that's super important, but you have to also do the math to make sure that you have the right attainment. So actually another pitfall that we've seen is it's actually possible to be very inefficient with a hundred percent attainment, because you haven't actually done the math to back out. So what I recommend companies do is you basically start from a magic number of one. And what that means is that for every dollar you spend in your sales and marketing organization, you get a dollar of ARR out. It's a pretty simple ratio. It keeps you on a short payback period. If you have positive net dollar expansion, you'll have a very healthy business with a magic number of one.

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Ethan Ruby:

So if you work backwards from there, you can be like, "Okay, well I have a sales rep, but I'm also going to have underperforming reps and ramping reps and SDRs and management and software have to buy. So if I kind of work backwards from all that, what does se quota have to be for my magic number to be one?" If you do that, then you can hire to attainment, and that can be super productive, and you can hire batches of AEs. And as they start to attain, you can confidently go forward. But the only caution on doing it based on attainment is that you have to be quantitative and diligent and derive what the quota needs to be for your business.

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Trinity Nguyen:

With the focus on the efficient growth, do you see that more companies, pivoting quicker or adding the PLG motion as part of the product offering to kind of offset the cost of GTM?

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Brian Murray:

I have not seen that yet. I mean this, all these changes have happened so suddenly, and shifting to a PLG distribution model, that is a big effort. That's a many quarters endeavor. The way I think about that is what is your ... We actually drew up this chart, Ethan and I, where on one axis you had ACV, and on the other axis you had deal velocity. So you can have a low ACV, if you have high deal velocity, meaning you can turn out deals fast. That would be like a traditional PLG company.

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Brian Murray:

You can also have low deal velocity long sales cycles, but you need to have high ACVs. That's like an ABM model. And I think it's important to understand who you are. What's your identity as a business? Where do you fit along that continuum? And if there are opportunities to introduce new distribution models, like having a PLG version of your product or something like that, great. But I think there are more short term actions that need to be focused on to improve efficiency rather than your distribution model. I think you have less control over that than people think.

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Christian Kletzl:

I think that along these lines, we talked a little bit about sales, but looking at all the levers. What are things for example, either in sales or in marketing that I can do right now to mitigate the situation? I mean, we've heard about layoffs, but what are things that you see more outside of that, just to be more efficient in spending or in generating revenue?

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Brian Murray:

Generally speaking, if you're in a position where you're seeing opportunity, I would make sure that's where you're focusing your sales and marketing efforts, because those dollars will retain better. The ACVs will be larger, [inaudible 00:12:08] I would focus on that. And then everybody's talking about how they can frame their product as a revenue generator or a cost saver, more so than they ever have. So moving from the luxury good category to the need to have category, that's kind of obvious and people, everyone should be trying to do that. But I think step one is having a really keen understanding of the inputs and outputs of your business. I've been surprised at how few businesses understand their spend at that level. So the thing Ethan's built, that we've deployed at Craft SaaSGrid, very useful free tool to figure these things out, and sort of observe your business in that way. But I think it all starts with knowing your current situation and then you can diagnose what the best things to do are to improve your situation.

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Christian Kletzl:

Just wasn't necessary to understand the situation last year, at least when it comes to spending money.

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Brian Murray:

Well, like I said, UserGems has always been incredibly efficient, so you guys are unique. But most businesses weren't and raised a lot of money and spent a lot of money. And those, you find yourself in a tough spot. I think another thing is there's like these stages of acceptance of this new reality, and the faster you can move through those stages of acceptance and just into positive action, the better off your business will be. It's especially true of leaders. Another thing is to be the steady hand and the source of positivity and confidence, despite a tough situation. That's very important for revenue leaders out there.

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Trinity Nguyen:

So far, I'm kind of recapping all the tips that revenue leaders can do today immediately, so trying to move upmarket where you can, trying to watch out for inefficient channels, trim fat, think about the efficiency in terms of the sales rep's performance. Is there any other tips or playbooks that you've seen from other companies, or from your personal experience in the past as operators, that maybe people are not looking at, or considering, that you think right now would be a good playbook for someone to adopt?

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Ethan Ruby:

There's obviously a lot of levers that you can pull I think one super tactical and unutilized one is just raising quotas, basically getting more out of the reps that you have. And it can be surprising. Human psychology is complicated, but it's shocking just so much. You probably have a few reps on your team who are consistently overperforming. And if you ask everybody to move to that level and set that as a new baseline, many will, and you'll figure out the ones who can. And that can very quickly kind of be a force multiplier in your business also. And pricing is a very similar dynamic to that. And oftentimes increasing pricing and quota goes hand in hand, oftentimes, especially with an early stage startup, pricing is such a discovery process, your contract sizes, aren't increasing, just because you're not asking. And if you go in and confidently ask for that, you could do that. So just trying to do more with what you have can oftentimes lead to surprisingly good results.

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Trinity Nguyen:

Yeah, how to increase pipeline without spending more is like a billion dollar question.

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Ethan Ruby:

Well, pipeline is a different story. That all kind of assumes that the pipeline, or at least you have AEs that generate their own pipeline. And that's why we really talk about this, kind of being in the bottom up, or at high ACV camp, at least being in one of the two of them. If you're in both, that's heaven. That's what you're looking for. But on the high ACV side, where reps are generating their own pipeline and you're in a large market, that can be productive. You do have a PLG bottom up motion. A lot of that is getting smart with how you mine those leads for larger contracts. It's hard, especially depending on the type of tool you are. If people are signing up with Gmails or you have like these two or three person team signing up, being very data driven and getting really good at identifying which of those have the profile of a larger contract and getting those into your more enterprise sales cycle, most companies that have robust bottom up motion have room to play with there.

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Trinity Nguyen:

I have your permission to put that slide that you mentioned, the X and Y axis, the chart, in the show notes so people can refer to. But just for the specific context, so what would be considered as high ACV, because everyone has a certain definition of what is high, so what do you guys see from your end?

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Brian Murray:

Well, it depends on the company. So I think it's more about the trend line than the absolute number. So at a seed stage, you can't expect to be selling six figure contracts. If you can, that's amazing. But that usually doesn't happen. Usually you're starting out in the single digit thousands for annual contract, and then you just add more product, and you build more capabilities, and your customers value what you're delivering more, and you're able to serve larger customers with bigger budgets. Then you move into, you go the five figure contracts. And then when you crack the six figure contracts, that's when you really are onto something big. If a company is willing to pay you a hundred thousand dollars a year or more, that's a big deal. But again, I think more important is the trend line of your ACVs. And what does that look like?

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Ethan Ruby:

I'm willing to put a number on it. From my experience, if you primarily generate pipeline through an outbound channel, mostly through SDRs, that model almost never works if ACV is less than 20 K and hopefully it is like much healthier than 20 K, but I can't think of any examples of really efficient, successful companies where their primary channel is outbound and they have less than 20 K ACV.

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Trinity Nguyen:

Yeah. I'm glad you put the number, because whenever, the moment I share this chart, this picture, people going to be like, "What is the number for ABM?" So I'm glad to put the number to it and kind of add some colors into the chart.

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Ethan Ruby:

And hopefully it's much better than that. I mean, to be honest, I think even at 20 K it's difficult. But I've seen it done well at 20 K. I've never seen it done well again, without [inaudible 00:18:08] at like five or 10.

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Brian Murray:

Yeah. Another thing we kind of have talked about this, but just to reinforce this point, the economics of your go-to-market part of your business, one of the key points is quota and OTE for the reps. So in boom times, when everyone was desperately trying to recruit the best reps, good AEs had the leverage in those talent negotiations. And what would they do with that leverage? They would ask for higher OTEs at the same quota. Or they would ask for higher commissions or lower variable to base compensation. That's just a normal part of the talent market at the time. Now the talent market's going to be changing. So those things will change, but because those changes, you're contributing less dollars back to the business. Because more of it is going to the rep. I'm not saying this to be anti rep. I'm saying this to be purely economical about creating a startup and making it work. And these are the types of things to be observant of and sensitive to.

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Christian Kletzl:

Just generally speaking, once again, maybe I'm just speaking from my experience, but we didn't have a good picture of the gross margin until right now where it became urgent or important to look at the number.

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Ethan Ruby:

Yeah. So look, gross margins are critical for SaaS businesses. SaaS businesses are traditionally very high gross margins. And frankly there's often time an assumption that they're very high gross margins, which is why they get the revenue multiples that they do. But if they're not, it's a big issue. So if you really are a pure SaaS business and the human labor that goes into your customers [inaudible 00:19:41] implementation, customer support, customer success, if that's minimal, if the software does most of the work, that's not something you need to spend a bunch of time combing through. You're probably in good shape.

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Ethan Ruby:

But if you see yourself doing significant hiring in customer success, in implementation, in support, if there is a lot of labor going into making your customer success with your product, you definitely need to be measuring that and understanding what your gross margin is, because if it slips too much, then either one, you need to find a way to correct that and spend less there. Or if that's just the reality of what your customers need to be successful, which it is for some businesses, that means you have to be even more efficient on sales and marketing in order to make the economics of the whole business work.

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Trinity Nguyen:

My last question is about, just to understand that the burn multiple, which a lot of people talk about as well, just for the context for the audience listening, can you guys explain the burn multiple, and what's the best way to calculate this?

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Brian Murray:

And by the way, I remember when I was running a sales team, these things were not top of mind for me, the sort of economics of the sales and marketing, magic number, things like that. As a venture investor, they are very top of mind. And I think now given what's happening in the market, it should be top of mind for all leaders. So Craft, David Sacks wrote this sort of seminal blog about the burn multiple, which was a new kind of way of thinking about a business. The burn multiple takes the overall company burn, and so that's one number. And then the other number is how much net new ARR was generated in that same period. So how much was burnt to create a dollar of revenue? And we have recently come out and said, what companies should be targeting is 1.5 or less burn multiple.

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Brian Murray:

So for every dollar of new ARR, you're burning 1.5 dollars or less. That's a tall feat, but it is a very good metric to capture the overall health of the business. You can just see very quickly. Am I spending too many dollars to generate too few dollars? Or do I have a lot of wiggle room here? Should I be spending more dollars to generate the revenue? The next level down would be the magic number. So magic number is only looking at the sales and marketing side of your business. It's sort of excluding G&A and R&D, like the product and engineering and the administrative functions. And then that's looking at the efficiency of just your sales and marketing group. So it's a little bit like, let's use these metrics to diagnose the health of the business, and we'll use them to kind of point us in the direction of where there might be problems. And then we can double click on those areas and see what should be done to improve those metrics.

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Trinity Nguyen:

So go back to the formula you mentioned. So the new ARR generated for calculation of burn multiple, does it include the renewal as well? On the point of renewal, is it considered as new ARR or is it, this is net new business ARR?

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Ethan Ruby:

No, it's not just that new, it's your total increase in ARR. So just take your ending ARR in June, minus your ending ARR from May. So it's everything that you add from new business and expansion and upsell. So the net sum of everything you do, both with your prospects and your customers, divided by how much you burned in that same period. And so if you have a magic number of one, that basically means that your sales and marketing team has to burn multiple zero. Because assuming that your customers are paying you up front, you get that a hundred thousand dollars immediately. And so basically you've broken even on your sales and marketing org. And now all the R&D and overhead right now, you basically have 1.5 X. Whatever that ARR figure was, you could spend on still overall be a very efficient business.

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Brian Murray:

You have a solid magic number, but you have a bad burn multiple, it means you're overspending in product engineering or the administrative functions. And maybe overspending is not the right word, but you are choosing to invest a lot in R&D. And sometimes that's the right choice, depending upon what stage of business you're at. And sometimes it's not. But in either case, these are, just think of these metrics as tools to observe the health of your business and kind of instruct you on changes that should be made.

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Ethan Ruby:

Brian, let me be a little more specific there though. For companies that find themselves in that case, most likely they actually have low gross margins and that's what's pulling down the burn multiple. It's most likely the people, heads that are getting added in customer support and customer success and implementation. It is true, there can be a very high investment in product and engineering. But obviously that has good long term dividends. And frankly, at least to date, the hiring market has, I think, prevented most early stage startups from overspending in that department.

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Christian Kletzl:

I think I want to highlight what Brian told me in this case where, I think the goal of investing in product and engineering is ultimately getting a higher ACV. And I think that's really the right way to think about this. I mean, ultimately there's a timeline to this, but it needs to, ultimately you should need to see that the ACV increases there. And I think the other thing that I'm hearing, I'm hearing a lot of numbers here. And I think as a sales and marketing leader, it's really the first time where we need to stop. We already have some numbers in our dashboard. But really looking at what am we missing in order to make actually the right decisions in this environment.

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Brian Murray:

There's two other things to keep in mind. One is it's coming to an end. It just means that you need to improve it. If you believe in what you're building, which you probably do if you're working there, then it's a function, if you have bad metrics, it means improvements need to be made. And it could be a lot of different improvements there. But importantly, it's not to let your energy turn negative, but turn your energy to being productive and sort of a mindset of affecting positive change rather than negativity, because that will infect your team and it'll just end up poorly.

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Trinity Nguyen:

Absolutely. I love that now these metrics at the business level, it becomes so transparent, where revenue leaders can actually take a look at it besides as a revenue target and then the budget that each department has. I feel like this is kind of like getting all the teams to look at the same setup number, maybe using SaaSGrid and see the dashboard of how healthy the business is. And that will also help company aligns all their teams, not just within the revenue team. Thank you so much for staying over guys. This has been really, really awesome.

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Brian Murray:

Thank you very much. It was fun to chat with you guys. This is a topic that we care a lot about.

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Ethan Ruby:

Yeah. Thanks guys.

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Trinity Nguyen:

Thanks for joining us on this episode of The First 100 Days. Be sure to hit that follow button as we get more revenue teams to share their stories.

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