The Cadence; Tech-Enabled Companies #95
The Cadence; Tech-Enabled Companies #95
A Review of David Sacks' posts on operating cadence for SaaS companies and the challenges with tech-enabled companies
While I don't necessarily pay attention to startups/high growth companies as much as I used to, it's been interesting to observe and learn from investors and founders of early-stage/high growth companies.
David Sacks is one of the few that I follow very closely given all the work he has done in the payments (Paypal) and SaaS ecosystem (Yammer) as an operator. It's somewhat rare to see a great operator evolve into an equally capable investor (Facebook, Slack, CloudKitchens, Palantir, SpaceX).
Here are a couple of my favorite posts published by David.
The Cadence
The difference between chaos and organized chaos can be all the difference when a startup grows past ~30 employees. David's process around build a sales-finance and product-marketing cadence is fairly prescriptive and quite helpful for many founders.
The Sales-Finance Calendar
When companies are doing great, there isn't much of a sales cadence at all. It's practically assumed that the 'good times' will continue. Alternatively, when companies aren't doing great, there is immediate pressure on reviewing the pipeline and understanding how to build momentum. The reality is that neither approach is a recipe for success. Sales management, especially for enterprise customers, requires a lot of foresight.
In this case, David recommends a quarterly cadence. "Annual quotas are too slow to judge performance in a startup and don’t easily allow for mid-course adjustments. By contrast, monthly sales are too volatile to impose a monthly quota for individual sales reps."
Every quarter to should start with:
Sales Kickoff
Receive new quotas, commissions and plans
Learnings and best practices from the most effective sales reps are shared across the group
Pipeline Inspections
Make sure the team is on track to hit their goal, advise reps how to close deals, and help make adjustments
Marketing and product teams are generating news, awards, and recognition that sales can use to warm up prospects and put deals over the top
Closing Deals
Sales team should be heads-down on closing and making their number
To complement this cadence, David asserts that the finance calendar should match the sales quarterly cadence. The alignment will allow management/board to have a better view into the performance of the business without having to worry about mid-quarter results. Given the typical end of year rush, David recommends having a Jan 31st year-end vs. a Dec 31st year-end.
Side note: M&A origination doesn't work too much differently except having to deal with a longer 'sales cycle'. Assuming you have a pipeline of existing relationships/opportunities, it's truly a tale of two halves. You essentially cycle through building a list of opportunities, prioritizing and pushing forward certain targets based on probability, and working to close deals (perhaps sign LOIs) towards the end.
The Product-Marketing Calendar
A key part of having an effective product calendar is to make sure that you're breaking down initiatives into digestible chunks and making sure that there is a balance of small, medium, and large projects.
Here are a couple of problems that startups run into:
Shipping 'Sand': They polish and fix bugs and usability issues, but they don’t ship tentpole features, new products, and major releases.
Shipping 'Boulders': A product that was supposed to take one quarter will still be in development multiple quarters later. “V2”s that were supposed to take a couple of quarters end up being years late and paralyze the company. This happens because the product was never scoped correctly.
The goal of a quarterly product plan is to make sure that the projects are scoped accordingly. A decent rule of thumb is to make sure that projects would be assigned 2 to 10 engineers for 2 to 10 weeks. Similar to Jeff Bezos’ two-pizza rule, this meant that the absolute biggest strategic priority could get 10 engineers for 10 weeks. If the product couldn’t ship in that time, it needed to be shrunk down to something more MVP.
The marketing calendar (similar to the finance calendar) should compliment the product release calendar. When it comes to marketing, David pushes the idea of having launch events vs. a constant underwhelming stream of press releases. It’s not just about the external marketing value: There’s a huge internal benefit from setting dates and deadlines in order to hit a public launch.
Launch events also force company leaders to think about prioritization in a different way. They know they will have to go on stage to present the new product and explain why it matters. This forces the leader of the startup to think months in advance about what is going to be important to customers.
The events will likely be bigger than you think when you combine the entire universe of employees, prospects, and customers.
Order of Activities
To get your company's activities in order, David recommends the following steps:
First, decide your fiscal year. It’s going to be December 31st or January 31st. That will decide your fiscal quarters.
Second, snap your sales plans to the fiscal quarters. This will determine when quarterly closings, SKOs, and Board meetings occur.
Third, schedule a marketing event in the middle (second month) of each fiscal quarter.
Fourth, plan your product cycle to hit those event deadlines.
Here's a presentation of David at SaaStr that goes into this in more detail:
Tech-Enabled Companies
I've started to come across a number of companies that may have some software elements to the businesses but are truly dependent on people to make the entire solution work. Oftentimes, the strategy is to build a product and customer base by a combination of software and people with the goal of eventually making it entirely software over time. To be fair to founders in this space, it is a fairly effective way of tackling incredibly complex problems.
However, David, in this post, points out how most of these companies suffer from a gross margin problem. The key, when measuring the success/size of these types of companies, is to focus on net revenue (e.g. remove any direct costs).
As a founder, this means that you cannot focus purely on innovation but rather need to keep a very close eye on operational efficiency. In practical steps, this includes:
Understand how to attribute costs directly to your revenue line. The more predictable your COGS is, the easier it is to scale your business.
Having strict pricing guidelines. Unlike SaaS companies, you cannot simply be happy with the fact that people are willing to pay for your product/service. The key is to make sure that the product is priced in a way where you're not losing money at the unit level (vs. the corporate level).
Focusing on the 0 to 1 stage. While it’s attractive to start scaling, it's important to get the operation working at a small scale, in one geo, with the right teamwork and culture, before expanding. Competitive pressure often makes founders feel that they must prematurely scale.
Too many times, I've seen companies prematurely scale a tech-enabled services business with relatively low gross margins and even lower profit margins with the pitch to switch to SaaS over time. While it may sound feasible, it's incredibly difficult to execute that strategy given the need to prioritize the core business while having to build a SaaS business on the side with limited resources.