Protect the Hustle | A SaaS Podcast
00:21:24 · Doug Pepper
[00:21:24] S2: Yeah. I mean, I think there's a few housekeeping things we think about to start. You know, we're looking at... And I'm talking, like, at the the most basic level and then moving beyond that. You know, number one is how much cash do you have in the bank, and what are you burning on a monthly or annual basis and what's your runway? And the good news is when we looked at our portfolio in 2020, during the start of the pandemic, the average runway was eighteen months. Earlier this year, when we looked at the runway of our portfolio, it was over thirty six months. So the good news is the runway, and this is not exclusive to our portfolio, runways are much longer. But of course we have companies that are less than two years. And as we look forward and, you know, don't have visibility into how long this is going to last, the first question is what's your runway and how can we lengthen that? And that's number one. And we really do look at that burn multiple. You know, what's your burn rate relative to the net new ARR bookings you're adding every month? And if that metric is well over two, it feels like we're really inefficient and we're burning more than we should relative to the business we're adding. And so those companies with shorter runway or with higher burn multiples, those are the ones where, you know, we're all, with the founder of course, aggressive about changing some of those metrics. When we get beyond some of that housekeeping and make sure we feel like we've got an appropriate runway, then we're starting to look at the metrics we really care about always. But I'd say in an environment like this, retention rises to the top for a number of reasons. Obviously, those that are nice to have versus must have, that shows up in the retention and in the churn. And so one of the quickest ways that we can get a sense for how is the company in this environment going to fare in terms of selling new business? It's the churn of their existing customer base. And if their customers are churning, man, it may be that it's even harder to sell to new customers because they're not seeing the value. Do you have the product market fit that you thought you did? Maybe not. So we really look at gross and net retention. Obviously, retention includes the upsells and expansions, and we're seeing some of those metrics degrade right now.
00:23:44 · Doug Pepper, Andrew Davies
So there is that retention piece. But let's be honest, even in this environment, we're working with smaller, growth oriented startups that are trying to take share typically from larger companies. Growth matters. And the companies that we're excited about today and will be tomorrow, you have to be more efficient, Yes. You have to have great retention and runway, but you still have to be growing pretty fast as well. And so we do look at that metric still, you know, as a very important top line metric. [00:24:14] S1: So we've got a bunch of competing priorities here and the most obvious is managing burn without destroying growth because growth is still important. So how do you think about, you know, keeping costs under control, keeping that burn multiple low whilst not, you know, destroying the future growth of the business?
00:24:31 · Doug Pepper
[00:24:31] S2: I think we had that conversation in every board meeting I've been in in the last two weeks, and it's delicate balance and one that we talk about a lot. And the good news is I think most of the companies we're involved with have found ways to do both. And the reason it's possible is that I think we've all maybe come to the realization again that you don't have to be growing 3x to have impressive growth, obviously depending on your scale. If you're sub 10,000,000 ARR, you probably do want to be growing over 2X, maybe 2.5, and ideally 3X. But as you get to greater scale, I think we've all realized that you'd rather grow 80% year over year and burn less than grow 100% with an incredibly high burn. And this is the big change that I think all of us and founders are able to adjust to is that if you just dial back your growth from 100% to 80%, which is still very attractive, and you're gaining share versus larger companies that might be growing 10% or 20%, then you can do it a lot more efficiently. With, you know, we looked at rule of 40, for example, and really start to dial in that rule of 40, you know, with a slightly lower growth rate. So those are the trade offs that we're making. But yes, whenever we're thinking about reducing that burn and burn multiple, we talk about what are those investments that we still need to make. Usually it's in product and forward looking innovation that we want to maintain so that we're really strong foundationally, that when we come out of this economic challenge, call it in early twenty twenty four, I'm making that up because nobody knows that we're strong from a foundational perspective and really thinking through those types of investments that we can't give up. And maybe today there's certain investments in geographic expansion, for example, or a new segment of customers that we've never attacked before that maybe can wait for another year.
00:26:39 · Andrew Davies, Andrew Davies
[00:26:39] S0: Next up, Doug talks about how to survive to thrive in 2025. [00:26:47] S1: So you mentioned uncertainty, and software buyers are facing that uncertainty. That means they're probably not making as many decisions as they were previously to buy software. And, also, all of your boardrooms that you're sitting in will be facing uncertainty in terms of the time frame for which they should plan. So what's the time frame on which your boards are planning? We saw Salesforce recently say that they're not planning as far out as they used to be because of the uncertainty. So what are the timeframes across which people can plan robustly?
00:27:13 · Doug Pepper
[00:27:13] S2: Yeah, it is uncertain. And I don't think anybody really has a crystal ball. And so in some sense you have to plan further out as a result of that. I did hear an interesting quote that some companies are subscribing to, which is survive to thrive until 2025. And that's because, you know, we don't know when things are going to get better, so plan for the worst. Make sure you have runway until 2025 where it's likely the environment and fundraising environment will be more attractive. You know, how are we planning? We have to plan multiple years out. And the reason is because you can't measure your spend for next year without knowing what your plan is for the following year. Because it's the following year plan that determines your hiring for next year. And so we do have to do a multiple year forward looking plan to accurately assess the hiring and the spend for the current year. And so we really do look at multiple year plans. Obviously, year two and year three plans are less certain, but we have to have a model to measure against. And we're really encouraging our companies to think of this as not a one year event, but something that could be challenging for a couple of years and then hope to be surprised and make adjustments. On that point, you know, it used to be for a while there, it was like a one year plan, set it and forget it. And the truth is the plans now are much, much more adjustable and flexible, and we're looking at these plans quarterly. And so the idea is to set a plan that's conservative, that gets us out that two year runway to 2025. But then if the environment changes or we're seeing real performance and demand above those expectations, well, then we can unlock investments and say, Okay, we did great in the first half of next year. Let's unlock that new product line in the back half or unlock that geographic expansion. So I think companies are much more nimble now around their planning as well.
00:29:20 · Andrew Davies
[00:29:20] S1: So we see top down planning, bottom up planning. What's a healthy planning process from your perspective when there's that natural sense of tension between a CFO and then the different department leaders who have got to manage their own, you know, budget and their own OpEx?