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Speaker Details

Jermey Donovan

EVP, Sales & CS
Insight Partners

Session Transcription

Okay, everyone, welcome to this session here at Saas Metrics Palooza 23. One of my favorite things about doing Saas Metrics Palooza is the relationships I get to develop. And Jeremey and I, I think I met him about two years ago. He is the Executive Vice President of Sales and Customer Success at Insight Partners. And we were geeking out about linear regressions and coefficients and correlation. And I'm like, all right, I think I found one of my fellow metrics nerds out there. Hey, Jeremey. Hey, great to see you. And yeah, it's all very fun to geek out with folks. I was actually at dinner last night with another sales nerd that I'll have to introduce you to as well. So one of the Chief Revenue Officers at one of our portfolio companies. Perfect. Well, thank you for taking 30 minutes to talk about, especially since you have such a broad view across the Insight Partners portfolio, talking about the impact and value of GTM metrics. So with that, take the show, Jeremey. Yeah. I'll dive right in. I'm not a big person on intros. If people want to look me up, they can certainly connect with me or follow me on LinkedIn. I work for Insight Partners in our Sales and Customer Success Center of Excellence. So the job at the end of the day is to help our portfolio companies grow efficiently. And we support, our team supports over 500 portfolio companies. We have over $80 billion of assets under management, all focused on B2B SaaS companies. So the good news is I do bring data, which I think Ray was why you and I have been true birds of a feather. My background originally was in engineering and I don't really believe anything until I see it. So when I got two years ago into this world over from the operating side, I had heard of Rule of 40 and it took me a minute to be able to figure out, okay, what does that actually mean? And of course, it's the addition of your ARR growth plus your free cashflow margin. My next question was like, why are people so excited about this thing? And is it actually statistically correlated with valuation? So a few months back, suppose a year or so now, I went and tried to figure out, okay, what are the correlations look like? So I took all about 105, 110 public companies and I figured out what's their next 12 months revenue and what's their market cap. And then what's their Rule of 40 based again on their revenue growth and their free cashflow margin. And what you can see as a result here, so the left-hand side is, is the multiple, right? So the multiple of their market cap to their next 12 months revenue on the X axis is bins of what their Rule of 40 number is. So you know, if they're in that leftmost bin, their Rule of 40 is under 40, right? So if you add ARR growth and free cashflow margin together, that's a negative percentage. So those companies have a multiple on average of less than 5X. And then you can see all the way to the right, what happens is you get this nonlinear thing. So like, why is Rule of 40 so important? You can see it here that you have relatively flat multiples in that four to six range until you hit a Rule of 40, 40 or above, and then boom, your, your valuation accelerates as you go above that. I mean, obviously I could redo this analysis now. I was satisfied at that point that, that, you know, there is a good correlation here with valuation and that you can decompose this and I won't do it now, but I've decomposed this to each of the individual components to figure out, okay, at a given time, and this does change, right? So there was a time, and I think a lot of, a lot of people have talked about this. There was a time, you know, you, you have Ray and David Spitz and Kyle Poyer, like plenty of people have been talking about this, that the, the, the impact has shifted, right? That it used to be growth at all costs. Now it's efficient growth. So free cashflow margin didn't used to matter as much as it does today. Yeah. And I will tell you, Jeremey, you know, we did a couple other sessions before you, one with Meritech Capital and Alex Clayton, and he really deconstructed using a correlation analysis, free cashflow versus growth. And yeah, it used to be, you know, like 11 to one growth was a higher correlation. Then actually free cashflow about nine months ago was higher than growth, but now we're back to about a 2.4 times higher correlation for growth than free cashflow. Yeah. It shifts. It does. It shifts over time and logically it should. I mean, free cashflow was a major concern because companies, yeah, I think the larger companies were at less risk of running out of cash, but certainly private companies who were, you know, they were intentionally growth, hyper growth, right? You know, they had, they definitely had risk and we'll see a little bit of that as we go, as we go through this. So yeah, speaking of the decomposition, right? So this is at least a top level decomposition of the rule of 40 into its constituent components. We're not going to have time to look at every single one of these. So I'm going to pick selected ones. We'll look at growth. We'll look at net retention. We'll look at win rate on the top and on the bottom, we'll take a look at free cashflow margin and sales and marketing over revenue. So we do deconstruct all of these for our portfolio companies. If you want like this chart, I have a much deeper deconstruction. I'll flash at the end and provide a URL if you want to download the deconstruction, the data you'll have, you know, you'll have what's in here. And then obviously if you're an insight portfolio company, we not only give you the data on the full decomposition, but we also give you the 25th, 50th and 75th percentile on each of these things. So let's start with the first bit, which is ARR growth. And we looked at both public companies. This is that kind of a hundred plus public SaaS companies, revenue growth. We don't have their ARR growth. It's a little harder to come by for all those companies. Some disclose, some don't, I guess most do. And then also for private companies, for top private companies. So, you know, you kind of see what happened here. The public companies relatively, you know, stable over the last 12 months, a little bit of decline, not, not, not tragic. And then private companies, because they were in hyper growth mode, right, and have had to have had to pare back as the market has softened, particularly, and I should say the market has softened, you know, from what, from my vantage point, it's, it's tech companies selling to other tech companies is where the real problem is. And a lot of people were just so dependent on having their ICP be people like them. We have lots and lots of portfolio companies that I see that are selling into manufacturing or education or healthcare, right, into financial services, insurance, right? So these other verticals have been much more insulated from, from the softness. So I think it's worth emphasizing that, you know, one, one could kind of tear this apart a little bit more, and you probably find that the company is selling into, you know, tech, maybe more aggressively down, and those companies that are more diversified are going to be, you know, maybe even up into the right for many of them. I think that's kind of, you know, telling the story of why there's a little bit less of impact on the public companies, right? Because they're far more diversified in their, in their customer base of not being exclusively exposed to, you know, to technology, like if you're Snowflake or Salesforce or whatever, right, you're selling, you're selling all over all over the place. So you know, growth rate, not a not a not a new story for people. Let's dive into net retention and look at how that one's has has evolved over time. So for net retention, same deal, public and private companies, public companies on the top here, definitely been a gradual erosion over over time, and that erosion has continued into q2. The same we're seeing the same thing on the private company side. We know what I what I had observed, basically, right, I think what we all observed was when things slowed down, companies doubled down on trying to expand and expand with their existing customer base. And you know, they squeeze and squeeze as much as they could. And I think we're getting to the point where, you know, it's getting, obviously, I don't think the data proves it, that we're getting to the point where it's a lot harder to, you know, a lot harder to squeeze these folks, squeezes, maybe not the best, the best word to describe it. But you know, to sell more to those folks and give more value, of course, I guess would be the positive spin on on that. But yeah, that's decelerated a little bit. I think people are starting to focus a lot more on, you know, how do I start to crank up my new logo engine a bit more, because what you know, when they had paired back, I think a lot of that pairing back did did affect their their new low acquisition. And this is all behind this is all cohort analysis based. And you know, your cohorts may start out with very high net retention. And then when you're a couple years into having a customer, in many instances, the net revenue retention of that particular cohort is going to start to decline. So you know, this will necessarily happen to you if you're not acquiring new logos at a at a sufficient pace. And you know, how to improve net retention, because this is sort of the what, right? I think the how is the more is the more valuable piece. And you know, there's there's no magic wand here, right? It's great product and improving the quality of your product, and then great customer success and great value from your product. So a lot of companies obviously focused on now quantifying, you know, what is what is value from after onboarding, right? So to get that time to value, sped up as rapidly as possible, improve the onboarding, focus on your quarterly business reviews, you know, make sure that you're, you're doing everything to keep your NPS up. So you know, no major, no major surprises, I think on that front. So we'll switch over here now go and kind of further to the right on this tree over to to win rates. And this is something you know, it's basically impossible to get to for public companies, but we are actually able to collect this data, again, across our across our 500 plus company portfolio. And so here's a look at how win rates have trended. So this was quite interesting to me, because I think if you if you kind of read the anecdotal zeitgeist out there, the anecdotal zeitgeist is that win rates, you know, came down significantly. And you know, you can see, actually, there, it was, to some extent, true, we saw an erosion of win rates into the first quarter of 2023. And then in the second quarter, when rates started to tick ever so slightly back up, there's a pretty big sample of companies in here. So this is probably statistically significant variation in what's happening, you know, it's, it's stable, but the you know, the good news is, we're not continuing to trend downward on on win rates at this point. Jeremey, I got a double click on that one with a question. These are very high win rates from what I'm used to seeing. This tells me that the insight partners and your operating partner group must have very stringent advice on what goes into a qualified opportunity stage two, because the only way you can get win rates this high typically, is that stringent qualification coming into the pipeline? Is that true about partners? Two things are happening here. So one is yes, this is qualified pipeline or qualified opportunities as opposed to like, you know, free, sometimes people define an opt at stage one, where the meeting was set. But there's not necessarily been a disco demo held, the rep hasn't necessarily deemed to be qualified. So yeah, this is qualified opportunities. But then the second thing is that this cut is 75th percentile. So this is not Oh, okay. Yeah. Helps a lot. So do you know what the meeting is? It's a I don't have it handy. But it is more like the conventional, whatever, 20 plus or minus percent that you and I would be used to. So yeah, this is the Thank you for clarifying 75th percentile here. Okay, yeah, this one, this one 75th percentile. So yeah, that definitely, definitely explains it. And then yeah, improving win rates, again, like how to, I think the thing I'm, a couple things I'm seeing, right, I would say the number one thing I'm seeing is a lot more executive alignment happening that I have had seen historically, I think of that I've had to pick one thing that's substantively, substantively different. It's executive alignment. I mentioned I was out to dinner last night with a CRO of one of our portfolio companies, and they're not massive. And that that CRO is evaluating buying some sales tech. You can tell I'm a little cheeky, because I'm forbidden from mentioning all kinds of companies by name, public and private. But, but a, you know, the of a very significant, you know, easily 100 million plus maybe 200 million plus ARR sales tech company called this CRO last night and had a call with them to help get him over the line on a deal. Like, I don't know that they, they do that with, you know, all smaller companies, but for whatever reason, they deem that to be a, you know, a strategic sale for them. But that's just an anecdotal example of something that I think is, is like more broadly true is, is making sure that your executives are well aligned on on deals. And, you know, obviously you're not going to get, you know, if you, if, if, if I think having a rule of thumb works right is to say if it's over, you know, for some companies it's deals over a million dollars for some companies, it's over deals over $100,000, like whatever it is, but just kind of have a rule in place that you can get those executives involved in, in some of the larger deals. Beyond that, it's, it's a lot more disciplined on deal reviews, making sure you've got, you know, probably medic, if you're doing $100,000 plus enterprise deals, probably bad if you're doing something below, but I've seen a lot more codification of, of exit criteria inside of CRM in order to make sure that, that there's discipline on, on, on deals. So that, that really is, is a good discipline and good opportunity hygiene is, is the key along with that executive alignment. Hey, Jeremey, can I ask you one more question on that? If you go back, you talked about cascading objectives or cascading leading indicators to lagging indicators here. One of the things that I always recommend companies to do is understand if your win rate changes by 1%, 3%, 5%, how does that impact your pipeline coverage ratio, your pipeline generation requirements? I even have them look at cap and ratio and cap payback period. Is that a discipline you think is really good for CFOs to get into a habit of? I do. Yeah. I'm going to talk, I don't think I show it in here, but I definitely, we definitely watch pipeline coverage very closely and it's not, there's a, there's a conventional wisdom out there, right? That pipeline coverage should be three X, but I also sort of say why, right? But there's math behind, behind that and, and three X may or may not be the right target coverage for you. So the right target coverage for you as a function of, of a few things, one is win rate, like one over the win rate, which is kind of where the three X thing comes from. But a lot of people don't make two critical adjustments and, or one or two critical adjustments and one of the critical adjustments is how much business gets created and closed in the, in the quarter. So that, if you're, that could be that you're a transactional business and you just have less than 90 day sales cycles, but you could also be selling enterprise where enterprise upgrades happen often in short, you know, like in short bursts that can have under 90 degree sales cycles. So if you have a lot of create and close in the, in the period, then your, your target pipeline coverage ratio could be lower because right, you're going to just create stuff in quarters. You don't have to come into the quarter with as much or have as much at any given time. And then the other piece that you have to adjust your coverage ratio for is what percentage of the business gets pushed. So if you have a significant amount of push out of the quarter, then you're obviously going to need more pipeline at any given time. So you do, you do need to make those adjustments. So when, you know, as we're looking at our own portfolio companies, we do calculate and help them calculate a target pipeline coverage ratio. That is a function of win rate, a function of create and close and a function of the push rate. So yeah, super important for CFOs and CROs to do that. Perfect. Okay. Let's keep going here. What else do you got? Let's keep rocking roll. So just two more things. So we're going to talk about free cashflow margin, which, you know, just on the sales side could be a little more abstract, right on the CFO and finance side, far less abstract. They sweat over that all the time. I'll just spend one more second on this before I transitioned to the data that we'll talk about sales and marketing over revenue as well. So for those who are not as familiar with free cashflow margin, a bunch of components to that. So one is your gross margin. So that depends heavily on effectively your cost of goods sold. So what is it costing you to actually deliver, to actually deliver the product CS costs are obviously a significant piece of that. And for SaaS companies, they're hosting costs, right? Infrastructure and operations and so on. You know, I'll also go in there, your OPEX margin, which I've broken out here, which is sales and marketing, R and D and G and a, that's more familiar to folks. And then a couple other pieces. I'm not going to go into working capital or, or CapEx right now, but let's, let's just look at free cashflow margin overall, and a little bit different of a view that I've shown so far. So this is like an index basically. So I said, okay, I'm going to peg Q3, 2021, the left side here as the start. And then I want to look at how free cashflow margin has evolved over the course of the last eight quarters. The top line as, as we've been seeing so far is public companies. The bottom is, is private companies. And we're looking at the change in free cashflow margin relative to that beginning point. So again, just to explain the graph a little bit more, if I look at the second period, Q4, 2021, this basically says that for public companies, their free cashflow margin improved by 10%. In that window for private companies, their free cashflow margin actually fell by 15% during that time. And you know, you sort of see that for, for both of them, there was a little bit of a timing difference by, by a quarter here, but you saw, and this is why alarm bells went off right in Q2, 2022 was like free cashflow margins really cratered into Q2 and for the private companies and then quick, you know, start of a, of a significant reaction to that. And then the public companies lagged by one quarter and then began to recover. So, you know, how do people get their free cashflow margin better? Well, it's, it's pulling all these levers on this other side, a bit harder to pull you know, things like gross margin, working capital and CapEx, especially because SaaS companies don't tend to have a lot of CapEx. A lot of the levers that were pulled were inside of, of OpEx margin, right? So if revenues are not increasing, free cashflow margin can only be fixed by trimming sales and marketing costs, trimming R&D costs or trimming G&A and we definitely saw companies do that. It's not always people, right? It could also be programs to, to you know, to make those changes. So lately I found a new, new to me marketing podcast that I quite like called Revenue Vitals with Chris Walker. And you know, he's a, he's a, he's got some very provocative ideas, but he talks a lot about, for example, ways to trim marketing expenditure. And I'm, I'm by no means a marketing expert. Maybe once upon a time I had some knowledge there, but I can, I can parrot, you know, some of his advice, which is things like really take a deep look at whether your unbranded search engine marketing is paying off. Really take a look at whether sponsoring a booth at a big national trade show is, is, is paying off. Really take a look at whether or not content syndication is paying off. And the payoff he points out is not just generating MQLs because you, you know, as many, as much money as you put in, you can generate as many MQLs as you want. The question is whether those MQLs that are being generated actually lead down the road into closed one business. So I, you know, he does have one, I think, asterisk, which is you should devote a certain percentage. And I agree with this wholeheartedly. You should devote a certain percentage of your marketing budget to like, he actually says building the category. So not just brand building, but category and not, I don't, I wouldn't necessarily call it category creation. It could be, but you could just be in the category that you're, you know, that you're at promoting and that's, you can't really measure the return on that. So you got to carve some piece out that you don't measure the return on, but you know, that was, those are examples of where there was programmatic rather than, rather than people. And sure. Yeah. Yeah. I'll pause there. Jeremey, I just wanted to thank you for highlighting a session that we have on Thursday. Chris Walker is going to be talking about those exact things at 10 45 AM Pacific. So I encourage everyone who wants to see how you can increase marketing ROI and decrease some of your program spend. Come listen to Chris. Awesome. And I think they must've had him on your podcast previously, because I think I heard you and him on an episode together or you were on his one of the two. Yeah. Jeremey, as you know, anyone who comes on my podcast has to come to SaaS Metrics Beliza. Perfect. Perfect. Awesome. All right. Well, last one is sales and marketing over revenue. It's, it is, we don't have time today, but it's useful to decompose this by the way, further into sales as a percentage of revenue and marketing as a percentage of revenue. With public companies, you really can't get that. They don't make that breakout, but again, it's something that, that we are able to look at. So again, this is, this is, this is a public and private companies, remarkably similar and remarkably and remarkably stable. So just kind of gives people a guideline of where to go. I talked briefly or not briefly, I guess, at my hyper New York speed about how to control your marketing expense. Obviously you want to get your revenue up, how to control your sales expense. You know, is that there are definitely a lot of, a lot of tool expenditures. So like non-people expenditures that you can look at some things that we've been seeing people do in order to control sales expenses, taking a look at span of controls and spans of control. Sorry. With the spans of control, what happened, what was happening was the right thing, which was there was relatively low span of control while companies were hiring aggressively, especially the private companies. And cause you needed those managers to be able to have bandwidth in order to, you know, interview select train on ramp their reps as the industry has slowed a bit and hiring has slowed down. You know, we have the luxury of increasing the span of control for a lot of companies. So you definitely have seen, seen that happen, right? So to go from, you know, not a typically four or five person span of control to the more target range of, of six to eight, which is what we recommend for, for a span of control inside of a sales leadership. So that sometimes results in, you know, removing a layer depending on, on what things look at, you know, so, so that the span of control is probably one of the first levers to pull and I'll credit a former IBM CEO, Gina Rometty, who that was one of the levers she pulled. If you read her awesome new, new-ish book, I forgot the name of the title, the title of that book, but it's a really good read. And she definitely talks about that as being one of the, one of the key cost control levers that she pulled is to, is to just get those spans of control in line across the organization. Yep. All right. And I think this is classic Zoom. You know, hopefully the audience is able to hear me now. I love the fact that you actually highlighted David Spitz, who was a founder of the benchmark and survey at KeyBank Capital Market style bench sites, him and Jocko from Winning by Design have got this new metric, which is the sales of marketing divided by net new ARR. And they are actually the next session, and they're going to be showing those benchmarks in 30 minutes from now. So I encourage everyone to stay and listen to Jocko and David, because they have some great insights here. Yeah. We'd like to say that was planned, but totally, totally not planned. And yeah, it's, I have seen the data. It's awesome data. And it is, I mean, the holy grail, right, is that, you know, your sales and marketing on new business over your net new ARR. So that's an even, you know, that's an even better metric if it were attainable. I think it's difficult. So at least sales and marketing over net new ARR is a great way to look at it. And yeah, indeed, that per that data is, is really moving in the unhealthy, inefficient direction for, for public SaaS companies over the last several quarters. So that's something really, really critical to, to, to lean into. And yeah, I guess the question is like, why is it happening and, and how to fix it? So hopefully David will, we'll have the time to, to get deep into some of that, like root cause analysis and, and recommendations for how to address. Jimmy, let me challenge you a little bit, because the way we grow as an industry is we always, you know, stretch. I truly believe calculating the new CAC ratio, which is to percentage of your sales and marketing allocated to the pursuit of new logos, dividing that by the new logo ARR, I think that's such a critical efficacy metric. Do you try to do that in your portfolio companies at Insight? It is something that's new to, I would say it's new for us. I actually a thousand percent agree that it's, it's a critical metric to track because then you don't hide, right? You can't hide behind total ARR in the way that this kind of graph does, right? Because when you do that separation, even if you just take total sales and marketing, you see that up into the right, bad, inefficient trajectory. So yeah, I do think that's something critical and it is something we are starting to work on with our, with our portfolio companies. I would say that the marketing side is marginally easier in terms of allocation of cost because you can allocate most of the marketing costs to new, you know, within, within reason, right? I mean, you may have some customer marketing and community and so on, but the majority of your spend could be 90% plus is probably reasonable to attribute to, to new. The trickier part a little bit is on sales is like, okay, a lot of companies have hybrid AEAMs. How do you do the allocation? But I think you can be directionally correct in like, what is the split of new versus expansion ARR? You're going to get directionally good enough on that. You are. And I would say doing one or two weeks of time study analysis, because you want to know how your AE versus AM are spending their time anyhow, you're going to find, even by just surveying them, how much of your time do you think you allocate? You're going to be directionally correct enough. Yeah. Yeah. I can't remember who it was within the last week or two, like somebody did a time study in their company. You're right. It just takes a couple of weeks and you can even possibly just do a, you don't even need to shadow that, right. It's like, just peek over their shoulder at their calendar with them and have them, have them classify their time as, as working with existing companies or having meetings with existing companies versus meetings with that new logos prospects. And you can figure that out. And I love that. Yeah. I love that idea of doing the time allocation as opposed to the revenue allocation. So it helps you get, get the pencil a little bit sharper on that so you can, so you can track that and obviously take action to improve it. What else you got here? What's next? That's it. So that, that brings us to the end. So this is my eye chart. You don't have to look at the left-hand side, but this is the full decomposition of that rule of 40. I stick everything, I stick many things I should say on, on this, on this blog-esque thing called revenue playbook. So if people want to wander over there, they can get the, the this sort of where are all the levers that you can pull in order to improve the factors that themselves tie to the rule of 40 and it's ungated content. So easy for people to get. All right. No lead collection here at SaaS Metrics Palooza. Jeremey, I'm going to ask you one more question and I highly recommend people to follow you at LinkedIn. You put out some of the best content, especially both metrics and sales related content. But I'm questioning, a lot of the CFOs in this audience are going to be, you know, in that 10 to $50 million range. And the debate is, when is the rule of 40 relevant? So from an insight partner's perspective, when do you start looking at that as one of the key metrics that you want to understand in your portfolio? Yeah. I got to look at the exact data. I can tell you under 10 million, there's, there's like limited to no value and looking at the rule of 40, right? I mean, the, the free cashflow margin is deeply, deeply negative and you really just driving growth as much as, as fast as you can, obviously without running out of cash, but you're driving growth as fast as you can there. But above 10 million, the rule of 40 definitely starts to kick in. So we start, we're looking at it, we're calculating it for every single portfolio company. But we don't really start to really think that much about it until you get north of 10 or 20 million. Same that I do. I just talk to people about instrument your metrics as early as possible. Understand if you're a series A company, what series B investors are going to look at or series B company to look at series C and instrument and have your metrics ready to go many, many months, about quarters before you even think about raising that next round. Yeah. I should add, by the way, we, one thing we do for every, not just these metrics that we showed now with rule of 40 and so forth, but we track about 50 to 60 metrics. And for those 50 or 60 metrics, we actually have, as I mentioned, 25th, 50th and 75th percentile for all of those split by, by band. So we have the zero to 10 million band. Our next band is 10 to 20, then 20 to 50, then 50 to a hundred and then a hundred plus million ARR. So, and companies are like when, when they get on the verge, like, let's say you're an $8 million ARR company and you're on the verge of, you know, going above 10, then we provide them right with the benchmarks for and targets for the next, the next wave. So yeah, I think it is really key to, to understand that and, and you know, not just those benchmarks, but for CFOs, right. Getting more, I get a lot of these questions from our portfolio companies getting more in the weeds of, okay, but what does that mean in terms of, you know, AE to sales engineer ratios and what does that mean in terms of CSM coverage per million dollars of ARR, like, you know, on and on and on and on, right. You really want to think about what those target benchmarks are for the way you do your capacity plan, which I assume a lot of people are doing right now for 2024. And for everybody, if you don't follow insight partners, just do a Google search on insight partners, benchmark or insight partners, research report. You'll be amazed at how many free pieces of amazing content you generate. Jeremey, thank you so much for being our speaker here at SaaS Metrics Palooza. Yeah. Awesome to be with you. Okay. Everyone, Jacco and David Spitz are coming up next.

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