David Sacks and Ethan Ruby on launching SaaSGrid | E1803

0:00Even in the non-internet world, you always had that voice on a customer support call that say your call is being recorded for quality assurance. Yeah. You call the bank or something. So I think that, you know, almost all of our sales calls, almost all of our customer support calls, they will ultimately be recorded. And then the AI will be able to understand what people are saying. And so in the context of a sales team, it'll be able to tell the, like the VP of sales, here's the top five objections that you got from prospects. Here's the top five reasons you lost deals. here are the top rebuttals i mean this is where it starts getting more sophisticated here are the sales reps who powered through those objections with rebuttals that worked and here you know and then you could double click and you could you could actually listen to the responses of the best sales reps rebutting the objection that's gonna tilt best sales reps who are like consider it their secret weapon how they get through these things or whatever because you're basically saying also get out this week in startups is brought to you by house of macadamias is the next big health trend.

1:05Get a free box of Namibian sea salted macadamia nuts at house of macadamias.com slash twist. Plus, get an extra 20 % off your order by using code twist 20. Vanta. Compliance and security shouldn't be a deal breaker for startups to win new business. Vanta makes it easy for companies to get a sock to report fast twist listeners can get$1 ,000 off for a limited time at Vanta.com slash twist and FitBod tired of doing the same workouts at the gym FitBod will build you personalized workouts that will help you progress with every set get 25 % off your subscription or try out the app for free when you sign up now at fitbod.me slash twist all right everybody welcome to this week in startups you might be confused because you see my bestie david sacks here and you think huh is this like a new version of the all-in podcast no today we're not going to talk about ukraine russia bricks g6 2024 venture macroeconomics none of those topics sorry if you're here for that just wait a couple of days on friday you get your red meat you'll get your all in uh podcast i'm here to boost your ratings it's a crossover thank you yeah it's a crossover episode which literally is what all in is to a certain extent right all you guys were on i was just watching our first podcast you were the fifth episode on this week in startups here we are 1800 episodes later yeah and so i was looking at the video of us more hair a little bit skinnier less gray uh but man that was like over 10 years ago talking about sass back then and uh with david sacks today is um ethan ruby who is a partner at craft uh focused on analytics and you two have been in the laboratory actually building kind of a startup or service i'm not sure how you're framing the sacks but welcome back to the program welcome to the program ethan maybe tell us what you've built and why it's important.

3:15Yeah, so it's called SAS Grid. It is a product. It's a new type of dashboarding and business intelligence tool. And it's built specifically for SAS companies. So if you think about how SAS companies do their metrics today, what they typically have to do is create a data warehouse or export CSVs, they download the data from their CRM tools like Salesforce or HubSpot. They get their finance data from QuickBooks. And they basically download all this data and put it in spreadsheets and they calculate their SaaS metrics. And what we've discovered looking at those metrics as investors for thousands of companies over many years is that these companies get it wrong all the time.

3:59The formulas are wrong. The data contains all sorts of edge cases because you're downloading them from systems that weren't specifically purpose-built for SaaS companies. So we've seen that the data has lots of mistakes, the formulas have a lot of mistakes, and it's very time-consuming. And the only time founders even take this time to put this package of metrics together is when they go out for fundraising. The rest of the time, they're just looking at maybe their high-level ARR, but they're not looking at all of the metrics that they should. Which is really opposite of what it should be. You should be looking at the metrics continuously.

4:34Yeah, it's better for the, it's more important for the founder to be looking at them than the investors to a certain extent, right? They're running the business every day. Right. And I think the problem is the reason why the founders aren't, they're not properly instrumented the way they should be. It's just how much time it takes to do this. So with a sort of a business intelligence tool, that's not specifically verticalized for SaaS. So if you think about it, if you were to go use, you know, Looker or Tableau, your data analytics, people, like I said, would have to set up a data warehouse, import all of this data, write all the SQL formulas or the SQL code to get the formulas.

5:11They'd have to like manually construct this whole thing. And our view on it was after, again, working with thousands of these companies is why is there a tool that just does this automatically? Like, why can't you just connect your data sources? And then boom, it'll just give you your dashboards automatically because we know you're a SaaS company. So we felt like we should be able to create really a new kind of business intelligence company, a verticalized BI tool just for SaaS companies. Because we know you're a SaaS company, we can do it better than any of those other tools. We can just make it work automagically.

5:42Again, connect your data sources, boom, we give you all the dashboards that you need. So with that, why don't we have Ethan? Ethan is the CEO. He was Kraft's partner for analytics, like you mentioned. he has been in the weeds working with thousands of companies on their sass metrics has seen all the ways that these companies make errors they get the formulas wrong the like the data doesn't translate properly he's been fixing all these problems and so he came with the idea wait a second we can do all this work automatically for companies and this is actually a new sass tool yeah so this is a sass tool for sass companies uh this isn't a tool for craft to give away for free to get an edge on investing in SaaS companies, to be clear.

6:25Because when you told me the idea, I was like, oh, wow, that's an incredible tool for you to just keep for your companies. This isn't an internal tool for your companies, for any company who wants to buy it. Well, it started. It started as an internal tool. But then we realized, wait a second, there is so much more here. Like I said, this is really a verticalized BI tool that it could be its own company. Okay. Business intelligence. So frankly, we saw this opportunity. So it's completely spun out now. It's completely independent of craft. We funded it. So we funded the seed round. But it's a completely separate company now, and it has a profit motive for itself.

6:56And Ethan is the CEO. Okay, Ethan, why don't you show us what you've built? And congratulations on the launch. Yeah, thank you, Jason. Yeah, I'm more than happy to. So this is a SaaS for dashboard. This is what you get when you plug in your data, and with just a couple clicks, get going. And I'll scroll through a little bit so you can see. But we have all the metrics that you would think of when you're tracking a SaaS company. So obviously, the first thing you want to know is your ARR. And you want to understand the difference between ARR from new deals you sold, from expansion. You want to be able to look at your churn.

7:32You want all those things at your fingertips. And with SAS Grid, because we plug into your underlying data sources, you can actually click on any data point and see how that number got calculated. So I clicked on my expansion ARR from last quarter. I see the customers that had expansion last quarter. I can go to that customer and look at specifically how they have grown over time. And you can even click directly from the Salesforce records that we're pulling from. So we really have the ability to let you go far deeper on all your metrics and understand not just what the high level numbers are, but what are all the numbers driving that.

8:11Jumping back to the dashboard, so that's ARR, which is obviously very important. other metrics that David has talked a lot about and that we often look at when we're evaluating companies, net new ARR, ACV, customer concentration, a very important one, looking at your cohort, your cohorted retention. This is something, retention is a little bit tricky to understand. And it's something founders often get, get wrong, trying to understand like, okay, how do I track the same group of customers over time to understand, do they churn? Do they expand? Do they contract? How often do they renew? We are able to do all of this out of the box.

8:55And one difference from some other tools that exist out there is that we don't do just the revenue numbers. We do the efficiency numbers as well. So we pull in data from Stripe, HubSpot, Salesforce, but we also pull in data from systems like QuickBooks. So you can understand both your revenue and your expenses and be able to look at things like burn multiple, which is really important, right? Especially in today's market, you can't just be growing fast. You have to be growing fast, efficiently. And we give you all the tools to enable you to track that well. Let me tell you about House of Macadamias.

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10:45Take a second David and explain burn multiple because a lot of the stuff we talked about here people understand the lifetime value of a customer cohorts analyzing how the people you sold last year in September you know how many of them have expanded or grown and are still using the product all that stuff that's been table stakes for a decade here in the SaaS world and Silicon Valley obviously uh but some of these um are new ones that you had a big part or did create so maybe explain that one yeah magic number is for a given period it could be the last quarter or the last year you take what was your burn during that period and then you divide that by your net new arr and what that gives you the multiple is it is for each dollar of net new arr did you that you generated, how much did you burn to create that?

11:35Not how much did you spend? So if you spent a half million and you burned a half million, you're not dividing into a million, you're dividing into 500. Right, just your burn. So for example, if your net new ARR increased by a million dollars over the past year, and you burned a million dollars over the past year, you'd have a burn multiple of one, which is very good. If you spent$2 million to not spend, burned$2 million to achieve that level of growth, your burn multiple will be two. My rule of thumb for this is that any burn multiple above two when you're spending burning more than$2 per unit of growth is too much.

12:13A burn multiple between one and two is pretty good and a burn multiple of one and less is outstanding. So this really is efficiency. You're looking at how efficient is the startup. So startups that are spending too much in office space, overpaying employees, maybe giving too high of commissions to the sales team you know uh spending too much on marketing it all comes out in the wash here because you can't fake it and so this incentivizes people in this new climate we're in we're not in a zerp environment anymore zero interest rate um this incentivizes people to lower their burn in order to be more efficient yeah absolutely so you know one of the things i've always said is that when you're in a boom market the three things that matter are growth, growth, and growth.

12:58But when you're in a bear market, the three things that matter are growth, burn, and margins. So it's not that growth stops mattering. It's just that investors have a more balanced view. And yes, they want growth, but not if it is uneconomic, inefficient growth. They want to know that your burn and your margins are sound as you're growing. And it's better to have a company that has good, not just growth, but efficiency of growth as opposed to a super fast growing company that's unsustainable. And in a market like this, those companies get flushed out real quick. And they get flushed out because there's nobody left to fund them.

13:36Correct. Eventually the tide goes out, their burn multiple. What's the worst burn multiple you've seen? What would you say is like in the ZERP time period? Well, the burn multiple can vary based on the stage of a company. So it's tolerable to have a higher burn multiple when you're a very early stage company and you just don't have much revenue yet. You know, if your company just doesn't have any net UARR at all, then the formula won't even compute. So when you're very early seed stage, you know, early series A, high burn multiples are okay. But you want to see it going down over time to two or less.

14:16when you have a late stage company, it's called a growth stage with a burn multiple of three, that's bad news. You know that the dogs are not eating the dog food. It's costing them too much to push that growth in, you know, sort of through the market. What you want to see is mark a pull, not that the company has to kind of like push this thing out using a lot of money. Now, the thing I love about burn multiple is that, like you said, you can't fake it. So there are other efficiency metrics here that matter, like CAC, like CAC payback period. Those are very important too, and we certainly plot them and show them to people.

14:50However, CAC or customer acquisition costs, that depends on your company accounting for the expenses in a completely proper way. So, for example, a lot of companies might have apparently a great CAC, but it turns out that they've been spending a lot of money on marketing programs, and they didn't think to include marketing and CAC. They just saw it as a sales expense. So, they may have miscalculated. It's very easy to miscalculate CAC by misattributing an expense to the wrong column in QuickBooks. Right. And so, the thing I've always liked about burn multiple is it just includes everything. Right.

15:30It just includes everything. massage the story if you will not that anybody's trying to be dishonest necessarily but if you were spending money on some conferences podcasts you know whatever google ads facebook ads whatever it happened to be you can't uh hide that in another column it has to go in to the calculation at the end of the day right um and so i get that in the early stages ethan the early stages is like a fixed cost to the business, right? There's a certain number of million dollars it takes to build a SaaS business. What is that steady state number? Because if you've seen so many companies, I'm curious in today's market, what's like table stakes?

16:11You know, we knew when building an app company, you needed about a dozen people and probably$2 million a year to get a basic app out the door on two platforms, you know, two or three developers on each platform, product manager, et cetera, customer support. What's table stakes in terms of the fixed cost of a SaaS business today? Yeah, I mean, it certainly changed a lot, right? The fixed cost structures that you see today are much different than the fixed cost structures that you looked at a few years ago. But I think it's really reverted to a lot of the traditional success metrics, meaning you should be able to rate, SaaS companies should be able to raise a relatively modest seed round, let's call it$3 to$6 million total across a couple of tranches.

16:54and that should be enough to get them to a million dollars of ARR and raise a series A. Now, obviously, the burn multiple is going to be higher during that seed period, right? You're probably going to spend three, four million of that to get your first million of ARR and get yourself in a good position. And that's okay, right? Like David said, in the early stages, you are paying people to code before you have a product to produce any ARR. But once you hit that series A stage, once you have a couple of sellers and somewhat ever predictable motion, that's when you can start saying, okay, I can get my burn multiple to around two.

17:30Yes, I'll still have some upfront expenses and R &D, but it's somewhat predictable about what I spend on marketing, what I spend on commissions, getting the ARR out. And then more and more of the growth companies that you see today in 2023 that are actually doing well, Burn multiple is often a very important KPI, and they are targeting to be at one or lower. I was just meeting with one of the growth companies that's actually performing very well right now, and they had, while maintaining a healthy ARR growth rate, had worked their burn multiple well below one. So I think that's starting to become the gold standard, especially for these later states businesses that are looking towards IPO-ing in a few years.

18:14So David,$3 to$6 million to get to$1 million in ARR, that seems... you know, not easy, but doable. We see that happen often. When you look back on your 20 years in SAS, what are the milestones that, you know, you see people sort of hit a roadblock? Is it like one, five, 10, 25 million? When does it get harder and harder? And maybe you could describe those characteristics. Yeah, I mean, I think you're constantly leveling up in SAS. I mean, you're so getting to that first million dollars of ARR, you're sort of navigating the wilderness, You're trying to find product market fit. Then I think the next milestone is about 5 million of ARR.

18:54That's sort of where the Series B historically was. Then you're trying to get to 20 million. That's where Series C was, and so on down the line. And I'd say at each stage, you have to learn something new. And I think when you start talking about 5 or 20 million of ARR, you have to get pretty good at building a sales organization, knowing how to scale that. So, you know, that first million of ARR you can get by with founder sales and with maybe you hire one sort of very entrepreneurial salesperson to help the founders. I actually like doing that. I don't like to see product founders being their head against the wall, trying to do sales which are unnatural to them.

19:31I much prefer when they get like a sales partner to help them. but you know once you once you get past that and you want to get to five or 20 or and beyond you absolutely have to have a vp of sales who knows how to scale a sales team you know 20 million of arr uh you know if your goal remember that's that's just a fixed point ideally you're going to be on your way to doing 50 the next year so if you know if you need to do an incremental 30 million of arr think about the size of that sales team maybe hopefully you get five to 10 of that 30 that you need from expansion. Hopefully, it's not all coming from new customers.

20:09But let's say that you're looking to get another 25 from new business. You're going to need, let's say your quotas are a million dollars per sales rep. You're going to need about 30 sales reps to hit that. I mean, that's just trying to get to a pretty meaningfully sized sales organization. And that's just for account executives. You're going to need marketing to keep all those AEs fed with new leads. So you're going to need marketing programs, you're going to need communications, and so on down the line. So every step, it scales up and gets harder and harder. There are organizations that work with SMBs or don't believe as much in sales until you hit a certain number.

20:48HubSpot, Atlassian, Jira, they've built incredible businesses without outbound sales. In fact, Jira was like, hey we're not going to have sales teams but they i just had um i just had the co-founder on and scott was explaining that they do have it for the larger clients now what are your thoughts on you know what size client how to service each size of the client so you're i think you're charging 500 bucks a month for this product as an example uh or 500 and up is that is that right ithen yeah exactly yeah so the pricing starts um at 500 a month so a six thousand dollar annual contract goes up from there based on the size.

21:28I mean, from a metrics perspective, the way that you price and the way that you sell has to do with the ACV that you can sell, right? You have to work backwards from the types of deal you can sell. And so using SaaS for example, we're very committed to serving startups well and being a good partner to early stage companies in the ecosystem. And so we actually give away the whole product for free until companies have a million of ARR. Oh, okay. So that's great. And they know when they have a million of ARR because they use our product to track their ARR. Yeah, it's built in. Exactly. And so then we can say, and so then once they hit that million of ARR place, we can say like, okay, like you actually have some real revenue.

22:08You probably have a pretty big budget. You have some, you've raised some capital. Now we know that actually a$6 ,000 price point to start is pretty reasonable for you. And so, and you know, at$6 ,000, we were like, okay, like we, yeah, outbound sales probably isn't going to be a good motion for us if that's our, if that's our ACV, because that can be, can cost$6 ,000 just to get a qualified lead with outbound sales. But if we, if there's good word of mouth in the ecosystem and we get inbound sales,$6 ,000 is plenty to justify having a sales rep, me right now, but sales reps in the future, work those inbound leads.

22:44So that's kind of the thought process that companies have to have. They really have to work backwards from what their ACV is. Yeah. Your thoughts generally on building sales teams? Sorry, what's that? Oh, I was just going to ask your thoughts on building sales teams, what you learned over the years and seen. Yeah. I mean, where I thought you're going to go with that question for a second is when you're talking about outbound. Like when does outbound make sense? Yeah, that's sort of what I'm getting at. Yeah. Yeah. I think that's a really good example of you have to have a go-to-market strategy that matches up with the types of customers that you're serving.

23:14In my experience, outbound doesn't work at all when your target customer is a small business, is an SMB. And the reason for that is that when you think about the activities of what an outbound SDR, outbound AE would be doing, those activities can be scaled much better with a marketing program. So instead of having a sales rep or an SDR sending emails one at a time to a potential prospect, basically cold email or cold calling, why won't you send a million emails at a time? So outbound has never really made sense to me when you're talking about SMBs. Where I think it makes sense is if you're a SaaS company that's going after enterprises and you've kind of got a defined account strategy, let's say you're selling to the Fortune 500.

23:57Well, there's only 500 Fortune 500 companies. So you can simply make a list of who all those companies are and you can figure out who's my buyer within those companies. If it's the CIO, you can make a list of the 500 CIOs of the Fortune 500. And then it might make sense to have SDRs calling on them, either through a dialer or maybe you're emailing them in a more one-on-one way. So that would be more of like an account-based marketing strategy. So who your target customer is and the best way to reach them really defines how your go-to-market strategy should be structured. And, you know, it's really important then as a founder to think about when you're hiring that all important first VP of sales, what kind of sales leader am I looking for?

24:40Because, you know, you could end up hiring a sales leader who's got the wrong skill set. Like they could try to bring, they could try and bring a big outbound program to your startup. But if you're selling SMBs, it'd be a lot better to have a sales leader who's experienced in like bottom up, you know, and letting the product do the work of generating the so-called PQLs or product qualified leads. So you got to like, you know, make sure all the pieces of your strategy are aligned correctly. If you're a SaaS or services company that stores customer data in the cloud, then you need to be SOC2 compliant.

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25:55We all know that. Listen, it's a hard year. Last year was hard. You can't lose those major customers because you don't have your compliance dialed in. Just work with Vanta. Get your compliance automated and tight, and tight is right. Lock down those big deals. Here's the best part. Vanta is going to give you$1 ,000 off. That's 10 hundies. Get$1 ,000 off at vanta.com slash twist. That's Fanta.com slash twist for$1 ,000 off your sock to a lot of headwinds against SAS makes for a good reason to build these tools. Huh? Like if you have more insight, you can measure it, you can manage it a bit better.

26:26Let's talk about a couple of those headwinds. Companies are building products that maybe span across multiple categories. So if you were using notion, my team was looking for like a to do list task manager slash project management tool. It turned out two of the products we pay for already, Coda and Notion had that built in. And so that's one headwind is that people seem to be making multifunction products. And then, of course, the other one is competition. So, you know, David and I'll let you either either of you take it. Those two headwinds are are they getting more pronounced now? Is it getting more dogged out there and fighting because of these issues?

27:06Yeah, absolutely. So, first of all, in terms of just the overall environment, we're in a software recession. I mean, I don't know what's happening in the larger economy and how the larger economy seems to be doing so well, but there's no question that Silicon Valley and the software industry in particular are in a recession. There is major headwinds to buying behavior. Sales cycles are taking longer. Buyers are sharpening their pencils. They are trying to consolidate vendors and software companies on their part are kind of moving into each other's turf. So, for example, we're seeing in the sales enablement category, there are a bunch of categories that used to be separate in terms of selling to sales teams.

27:45There was forecasting, there was caller intelligence, there was pipeline management. Now all these things are converging and all these different companies are trying to compete with each other. clary which used to do sales forecasting is competing with gong which used to be exclusively caller intelligence so you know all these companies are kind of moving into each other's turf and it's going to create i think more competition and um and it's just you know it's raising the bar even further we saw that happen i think ethan with microsoft apple competing on like office suites google inserting themselves into all that you had you know if you go with you know microsoft you're going to get a presentation software, you're going to get a Google sheet, you know, you buy Google sheets, you're going to get email, everything just seems to be bundled and packaged.