Bend the curve with Average Contract Value (ACV)

SaaS entrepreneurs know how hard it is to scale their companies from zero to their first few $M in revenue. I’ve posted before about misconceptions about scaling SaaS businesses – namely that adding more sales pods will lead to exponential growth. While pod additions are part of it, the single most powerful lever in driving exponential growth of a SaaS business is increasing Average Contract Value (ACV). I’ll assume for this article that ACV also equals annual contract value.

The other day our team was reviewing portfolio performance, and I nearly fell off my chair when I saw the power of ACV in the chart below (scale, years and a few data points adjusted to protect the innocent):

SaaS startup example revenue and customer growth

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While after Q2 2013, monthly customer growth of this company stays relatively constant on average (meaning customer count grows linearly), revenue is a hockey stick. Why? Incredible gains in ACV of new customers.

The chart below distills this in more detail. In fact, below, monthly customer additions do increase but go up only a bit more than 2x from a relatively steady average of ~7 in 2013 to ~16 in 2014. However, new ACV grows from $5K in the early days to nearly $25K in the most recent months shown, a 5x increase. WOW!

New customers and ACV per monthpic 2.png

For those of you who like calculus, the 2x and 5x represent multipliers in a sort of second derivative of the ARR revenue level – the change in the change that bends the curve. In other words, over a period of a few years, the company is adding 2x * 5x = 10x per month more in ARR than it did early on. Yet it is doing this while only adding twice the number of customers per month than it used to. Assuming sales people remain as efficient from a # of customers per month perspective, the company is doing all this with only a 2x the size sales force. In fact, this company added more sales people than that because higher ACV also comes with somewhat longer sales cycles and higher levels of support. However, even if sales person deal efficiency is half of what it was, overall ARR efficiency of the sales force is still up 5x * 50% = 2.5x. I would invest in that all day and night.

So how did they do this? (you can do it too)

Mature your product (fast): A SaaS MVP usually lacks integrations, enterprise functionality and other controls and features – just enough for small to medium size businesses to find value in. To increase ACV, you need to give something to get something.

Who are the key adjacent software players in your ecosystem? More importantly, with which ones have your early customers expressed a desire for integration? Then there are the common MB and enterprise asks: single sign on, administrative controls, reporting, etc. Once you integrate a few key adjacent platforms and basic enterprise functionality, you suddenly have a means other than number of seats/users to drive price. Want Salesforce integration with SSO? Sure, that’s our “pro” version for 2x the price.

You don’t get what you don’t ask for: Early on, the startup game is about getting a few customers, any customers. You don’t really care what your early customers pay. Often they are friendlies and have agreed to iterate with you on product and feedback, so you’re fine with giving them a deal. Unfortunately, this can anchor you and your sales team to bargain pricing. While being conscious of competitor and comp pricing in your space, take off the gloves and ask for more. You need to prove that you can do this for yourself and your sales team. If your ACV is $10K when you hire your 4th, 5th and 6th sales rep, it’s likely to stay that way until you prove to them it can be higher. The only way to break the habit is to land some higher ACV sales yourself – as a company leader – and set a new precedent. You will both show your sales team that it can be done and get mad props.

Puff up your fur with killer marketing: Animals puff their fur in a fight to make themselves look bigger. Smart startups do this too. Our best SaaS companies are spending surprisingly large parts of their budgets on sponsoring key industry conferences. It’s how you look bigger than you are, help customers overcome startup aversion and grease the sales skid with name recognition.

 

Time to Heal, Learn, Unify

Like many of you, I was surprised by election results.

As we each individually decide what is next, what we do next, we need to see this in the context of 250 years of peaceful transitions across all imperfect leaders. We are so fortunate to be upset or ecstatic at the functioning of democracy rather than suffering war, coup or famine as in so many other places.

Now we – in our fortunate state – need to heal, learn and unify.

Heal: When I suffer loss, I find an immediate passing of time to be the strongest salve. Last night a low, then sleep, this morning fellowship in absorbing the discontinuity – whether you think it good or bad. By noon, back to business and the needs of our companies/customers, investors and team. Then sleep and more normalization tonight. The half-life of despair and joy in an otherwise good life (and we are all very lucky in the tech world) is short. By natural selection, our discount rates are too high to get stuck in any one experience in time. This is also known as hope, and hope is our greatest mechanism for survival and putting one foot in front of another.

Learn: We recently suffered a setback in our portfolio. That goes with the territory, but it got me thinking about the failure modes of startups. CB Insights has aggregated 166 post-mortem blogs posts and exposés from CEOs of failed startups. I read most of them. Yes, there are the obvious primary modes of failure: execution problems, PMF failure, no market, bad business model. But there is also an observable meta trend – high functioning people internalize blame amidst a search for truth. This is a powerful combination.

Today, if you don’t like the election result, what could you have done differently. Donate? Phone bank? Did you do those things? If not, do you have a right to complain?

More importantly, while some on either side may be “deplorables”: racists, misogynists… or crazy liberals, I am loath to cast stones. History will judge all of us as it inevitably does. In vast majority, millions of good people voted for both sides, including Trump. Outside of our ivory tower of high education, high class tech – where talent of a failed company is reabsorbed by the job market in mere weeks – millions of our fellow citizens feel left behind with limited education, diminished prospects and stagnant real wages.

What are we doing to help them? It’s our right and common mode not to do anything for others, but then do we have a right to complain about how others vote? “Of the people, for the people and by the people” means everyone, so this is on us too, on all of us.

Unify: The greatest signal of the strength of our democracy is an outpouring of calls for unity among leaders and citizens. As many continue to mourn or celebrate internally, we need an intentional period of unity to give a new government the chance to embrace all constituents. Partisan rancor early in a term, or before one starts, only sets precedent for an ineffective future and gives both sides excuse for irresponsible and non-inclusive governing.

If you are a democrat hug a republican; if a republican, hug a democrat. We all get the chance to fight again in four years. And remember, there was at least some good news for all of us last night. More states voted to legalize pot, and we get another 4 to 8 years of Alec Baldwin on SNL. Some levity, especially in combination.

Punch, type, click, swipe, gesture, speak, THINK

The user interface (UI) has markedly changed in the past few quarters. From “mobile first, native vs web and responsive” story lines, founder and investors’ dreams now echo the next revolution of UI, voice (or is it gesture?).

The chart below defines a recent history of internet/human interface device sales, starting with broad adoption of the keyboard + mouse via PCs in the 90s.

lines

Source: PCs, Smartphones – BusinessInsider, Tablets – Digitimes, Echo – Meeker/KPCB, various

The transition from Static Epoch to Mobile Epoch coincides with an explosion of smartphone and tablet sales. This is not only a “mobile” story, however, it is a UI story as well. The mobile explosion was enabled by the development of small/cheap touch screens. Suddenly you could be connected and do anything anywhere with your fingers alone. Lugging a keyboard and a mouse around – or for that matter, typing on a Blackberry keyboard – were just inadequate for seamless mobile work. We are now entering a new age, moving from the Touch Age to the next. The question is whether it is voice or gesture or both.

Both voice and gesture have been around for a while. Most premium handset manufacturers have had voice (Siri, Google Now, etc) and gesture integrated in smartphones since 2013, and Kinect has been around since 2010. While these applications of voice and gesture had highly anticipated launches and early adoption, none proved to be mainstream. Few people I know talk with or gesture to their phones, and no one I know – save for a few overgrown gamers – own a Kinect. Tech cheerleaders would say the underlying technology had not yet been perfected enough for prime time, with burdensome training needs, reliability challenges and high battery use. However, my time as an engineer taught me that failed UI launches usually come from a lack of user insight rather than technology gaps.

It is simply weird to gesture or talk to my phone in a busy elevator or sitting among my colleagues at work. For kicks, I recently and unexpectedly “okay, googled” my Nexus 6P to setup a calendar invite, while sitting near my four quietly working colleagues. When I afterwards asked them on a scale of 1 to 10 how annoying it was to listen to me (10 being insanely annoying), they said 2, 6, 7, 4. That’s pretty annoying.

Context of use is everything. Mary Meeker’s 2016 report cites that 43% of voice search occurs in the car while 36% occurs at home. That doesn’t leave a big slice for work and social pursuits. Not so surprising; google glass wasn’t much of a hit around other human beings either, but the car and home do make sense as environments where social challenges are minimal.

I don’t believe either voice nor gesture will become as ubiquitously horizontal as touch, but they will both play big roles in parts of our lives. Here is how I see it:

checks

As you can see above, I am more bullish on voice. Outside of VR (I broadly consider VR to be part of gesture), gesture is mostly a natural extension of touch with a few more degrees of freedom and planes of movement. For many use cases, touch is simply easier and more efficient than gesture. Voice, on the other hand, allows you to be in control when your hands are otherwise occupied or aren’t near a device, opening up a far broader range of new use cases.

Platform domination of gesture and voice a risk for entrepreneurs

The “so what” for entrepreneurs is that the tech giants are rapidly assembling their claims to be the voice and gesture platforms of record. The impact of this to startups depends on whether you are a pure voice or gesture technology or a voice or gesture enabled application.

Launching a pure gesture or voice technology is a tough road for startups because it means long sales cycles selling an embedded software to very large companies like Samsung, HTC, Google, Apple, Moto etc. Alternatively, it means a direct-to-consumer hardware device like Thalmic Labs’ Myo Armband. They seem to be doing well for now, but few startup hardware devices have happy endings.

Soon every B2B and B2C software company will be considering its voice and gesture enablement strategies much as companies endeavored upon mobile strategies en masse 5 to 7 years ago. This may evolve analogously to the iOS and Android app stores. Early in their lifecycles, app stores were a meaningful and sometimes differentiated distribution strategy for a software/app company, at least enough so to get viral adoption from an early base of consumers and hungry investors. No more. There is too much noise, and the data now show the vast majority of people spend their time on just three apps. The same will happen on Alexa and Oculus. Alexa is particularly problematic in that without any visual cues, I won’t remember to use that niche birthday reminder skill I downloaded last week. So, should you launch an Alexa skill or Oculus app? If they channel a UI that your customer demands, yes, but as a business model unto their own, no.

I feel you hearing what I’m thinking. Yup, gesture and voice are not the end game. It might be 10 years, it might be 25, but UI by thought is the final frontier. Companies like Muse and Neurable are in the earliest stages of commercializing this possibility. In the mean time, we have a few more years to keep our thoughts to ourselves.

Ethics of failure and the rule of transparency

Benedict Evan’s outstanding recent post “In praise of failure” pointedly demonstrates how startups and venture work: a few big successes making up for many failures (and some middling outcomes). This is like no other business – imagine a world where Fortune 1000 companies posted for Senior Directors of Operations who are “right at least 50% of the time”.  Startups are as much or more about failure than success… and so startup ethics are too.

downloadWhile the power law of venture is well understood, ethics in the context of this asymmetry are much less discussed. The basic business code of ethics that we learn in our early careers is designed for the established company, the going concern. Is it any different for startups? Recent fraud and ethics accusations about Theranos and UBeam, Penny Kim’s recent expose of startup employee scamming, as well as a few positive recent experiences got me thinking about this. Lots of startups spend time outlining their values (a critical exercise), but few explicitly consider ethics in this exercise. They go hand in hand.

The rote modern core of business ethics says when working with customers, employees and investors alike:

  • do what you say you’re going to do
  • communicate directly
  • be honest; don’t steal
  • be diverse and embrace diversity
  • don’t break the law
  • do no harm to the external world (society, environment, etc)

These seem good and obvious, but ethics are not about the 95% of unethical situations that are black and white – stealing from the till, sexual harassment in the workplace, swiping confidential information – they are about the gray areas: (1) promising something to a customer you think you have a 50% chance of delivering on-time, (2) influencing a customer RFP process outside of the rules, (3) signing up for a competitor’s account or demo, or (4) not telling your employees you only have 9 months of cash left (how about 6 or 3?). These situations come up in Fortune 1000 companies, but slower growth trajectories, established products, hierarchical command/control, and years of established process reduce the frequency and breadth of the gray area. Not so in startups. The two common themes that permeate these examples are an asymmetry in risk consciousness (as in (1) and (4), you are aware of risks that others aren’t) or hidden conflicts of interest as in the case of the customer RFP.

If I polled 100 startup founders and VCs on each of the four gray areas above, I would expect a lot of disagreement over what is ethical and what is not. Okay, I did, and here’s what they said:

CLICK HERE FOR RESULTS

Here is the thing about gray areas – there isn’t a right answer. I certainly have my opinions and offer some guidelines below, but I know startups that operate consistently on either sides of these ethical dilemmas. Given the “front page of the newspaper” rule, tracking on one side or  the other is not just a question of preference, but also a question of how much risk a startup takes. Within a startup and across its employees, approach should be consistent as to what path a company takes – the high road, or the less-high road. An ethically lower-risk organization is only as pure as its weakest link; conversely, if you decide to take the less-high road, you’ll need to find employees who are comfortable with that added risk. My view: it’s best to avoid the gray areas with transparency.

Avoiding ethics gray areas with “the rule of transparency”

I think about startup ethics along their three main constituencies: customers, employees and investors. The rule of transparency is simple; being transparent with these groups tends to resolve conflicts of interest and risk asymmetries that create ethical gray areas.

Transparency solves almost every ethical issue with investors and employees. When you take on new investors, make sure they know the risks of startups, and then communicate, communicate, communicate as you go. Few who understand the risks up front – and who are kept informed along the way – will fault you for bad news you’ve warned them about. Experienced angels and VCs know what they’re getting into, but the rub can be with “friends and family”. They may not understand the true level of risk at a startup. Think twice about having Uncle Joe or Aunt Marge on the cap table unless they’ve done a lot of startup investing before.

Employees follow a similar vein. Most startup employees are fairly wise about the level of risk they are taking in a new job. They have clearly signed up for medium and long term risk, so there is little asymmetry on risk perception when an employee starts, assuming you are being honest about the current state of the business (something Penny Kim didn’t benefit from). The trouble comes with short term risks during employees’ tenure, when you are running out of cash in a few weeks or a few months. Be transparent. Employees probably already know about problems through the rumor mill. If you habitually communicate and then eventually have a big layoff, your employer brand has a better shot at weathering the Glassdoor gauntlet. I’ve also seen employees rally and drive big turnarounds when they truly understand the risky state of a company. There is nothing like a good shared crisis to drive progress.

The customer constituency is more complicated. Your investors and employees know from the beginning that you are more likely than not to fail, but should customers know this? Herein lies the tension: If startup customers knew there was at least a 50% chance a startup fails, startups would never have customers… or at least not many. So evolved the “fake it until you make it” mentality in startups. It is simply not practical to telegraph every risky point in a startup’s arc to customers, but that’s not an excuse to leave customers hanging if your startup is about to hit the wall. Indeed, founders, executives and boards should take heroic efforts to provide continuity for customers in the down state. We owe them that for taking the risk on us.

I recently saw this in action when a company we were involved in reached the end of its runway with all paths exhausted and employees soft landing at another company. With nothing left for founders and investors, the Board shifted focus from traditional “shareholder” interests to ensuring continuing operations for customers, finding someone to acquire the asset for a song to keep the lights on. Despite the big fail, this is one of the most inspiring startup moments I’ve ever seen.

This is not to say looking out for customers at the end absolves you of being transparent along the way. It is a fine line to walk, but customers are often more forgiving and understanding the more they know. If you didn’t have a better/differentiated product, they would just go to Salesforce, Oracle, or Cisco – that’s why you have their attention in the first place. You can then induce their taking some risk with discounts, development partnerships and strong personal selling.

If you haven’t already, check out the ethics poll results HERE and please share your thoughts below on this topic.

 

Career advice: don’t listen to it, but if you must…

For endeavoring on a career with a statistically low chance of success and being qualified for little if I fail (a good motivator), I receive a surprising number of requests for career advice. My first rule on career advice is not to listen to anyone – it is easier to give and receive advice on almost any other topic where there is a specific problem, set of options and relatively quick feedback on outcomes. Careers, however, take years to play out, are immensely idiosyncratic and are as much a matter of the heart as the mind. Career decisions lend themselves not to prescriptive advice but to frameworks that guide decisions, to be applied and ultimately answered by the beneficiary (or victim)!

There are four questions/dimensions that I think matter most in framing a career opportunity decision:

  • People: Do the opportunity’s people energize, teach and motivate you?
  • You: Are you a Judge or Builder, and does this opportunity fit your preference?
  • Immediacy: Is this a stop on the journey or a final destination?
  • Optionality: Is this opportunity “option expanding” or “option limiting”?

In visual form:

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This framework evolved through my own career as follows: I went to college to EXPAND MY OPTIONS. With an engineering degree, I could have done many things (engineer, finance, consulting, academia). Not knowing much about my options, I became a mechanical engineer… seemed obvious. This was OPTION LIMITING as it’s hard to move out of the tech side of big business once you’re in.  I was lucky to learn early, however, how working with incredible PEOPLE multiplies your own experience, growth and enjoyment. By chance, my bosses and co-workers at Raytheon and GE were phenomenal. In my five years as an engineer I also found the first evidence that I am a JUDGE and less so a BUILDER. While 90% of mechanical engineers design and build stuff, I found a fit in analyzing others’ designs to see if they would break or overheat.

In 2008, I went to business school because I wanted to (re)EXPAND MY OPTIONS. Engineering was too narrow. I wanted to see how the whole business machine worked and did a number of internships in b-school – JOURNEY PITSTOPS – to learn and try new things. Several internships were in analytical investing roles, JUDGING. New to business, I wasn’t ready to pick a path at the end of b-school and so went into management consulting at BCG. This was both a JUDGY and OPTION EXPANDING decision.

Something else happened in business school. I found an incredible business partner, Ira Weiss, and the taste of an enticing career in startup investing as a venture capital intern. While Ira was the PERSON I probably would have followed into anything, fortunately we both settled on tech investing. Since 2012, I’ve been a VC, which is very OPTION LIMITING but I also hope my FINAL DESTINATION. I love it and will stick with it as long as it lets me.

PEOPLE: Much has been written about choosing the right colleagues, so I won’t go deep here, but certainly picking the right people to work with is something often overlooked amidst other factors like activity of the role, title, compensation, commuting distance, etc. Spend time with the people you will work with both 1:1 and in team settings. Talk to others who have worked with them.

BUILDER vs JUDGE is less obvious. Do you like creating products, teams, relationships or companies? Or do you prefer to review and analyze others’ work. Here are how a few professions fit in:

Builder:

Salesperson – build a book and relationships

Engineer – build a product

Executive – build a team and a business

Marketer – build a brand

Startup Founder – build a company

Judge:

CFO – analyze finances and judge performance

Accountant – analyze financials

Strategy analyst – analyze new opportunities

Investor – analyze businesses

HR – analyze people

Truly this is a spectrum, not binary. I do have some builder in me, and that’s why I was drawn to building a new investing firm with my partners rather than joining another. Yet 90% of what I do is judging. I’ve seen builders trapped in judge roles itching to go start something new. Fit is important.

JOURNEY vs DESTINATION is a classic tradeoff in career opportunities. Is the opportunity a pitstop on the journey to your aspiration or is this the aspiration itself? Many suffer through banking to get into private equity or work at a scaling startup to better position as a founder of one themselves.

OPTIONALITY in a career opportunity is often overlooked. Does the role qualify you for many new positions or paths later or reduce your flexibility to switch roles or careers? As an example, venture capital is one of the most option reducing careers: we don’t manage people, have P&L responsibility, create products or execute large projects – at least in the common sense. Consulting, on the other hand, is the ultimate option expanding role. Following, you can work at a big company, become an investor, jump into a startup, etc. Time in a role is also a factor; optionality tends to grow the longer you are in an option expanding role and decrease the longer you are in an option reducing role. Using my timeline this looks something like below:

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It is worth remembering that optionality isn’t a measure of whether you can move to other roles or careers, but rather the ease of doing so based on qualifications, personal network and experience. Anything is always possible.

Balance the dimensions, but don’t compromise

It is best not to compromise at all on people or much on builder vs. judge fit. Giving in on those begs unhappiness, and your significant other doesn’t want to hear about it every day.

The other two dimensions (optionality and journey vs destination) balance against each other as shown below:

Img 3

In a perfect world, we would all be in the upper right nirvana quadrant – in a role we see as our final destination that ALSO creates optionality. This can happen. I know some Senior Partners at BCG and highly successful executives for whom this is the case. Most of us end up in quadrant II or IV. I am in quadrant II, happy in an option limiting role that I want very much to be my terminal career. As a consultant, I was in quadrant IV (career growth) and also happy, but there as a stepping stone. In general, it’s okay to limit options if you think you are somewhere for good, but if your stay is fleeting, you should be growing your options. Quadrant III (limiting your options on a pitstop) is high risk. Even if it’s a step on the way to where you think you want to go – a singular egress can pile up with bodies when a company’s fortunes shift or the market turns.

I haven’t mentioned money at all. If you are motivated and energized in your work, monetary rewards will follow if they are important to you.