The Science of Re-Establishing Growth: Where

Mark Roberge, Managing Director @ Stage 2 Capital

Sales & Marketing Stage
Ascent Conference 2020

[00:00:04] All right. I’m going to give it a go here. A little bit of a preamble, what we’re talking about today, something I’ve been studying the last couple of years. My name is Mark Roberge. I I’ve been an entrepreneur for 15, 20 years.

[00:00:22] The last gig I did was HubSpot, part of the founding team there. There was a handful of us from MIT that started the company in 06, and my job was the head of sales. I scaled them to about one hundred million in revenue through the IPO and then was recruited into Harvard Business School to teach sales at the MBA level, which I’ve been doing since then. It’s been a blast and at that time was basically parachuting into one company a quarter to spend a day a week to help them with their sales challenges. I did a lot for venture capital firms, securitizations, big companies. A couple of them are went on to be unicorn’s. I worked for really big companies through BCG as a senior advisor and in the last two years have transitioned all that work to the venture capital side and looking at deals and helping, you know, hopefully the next class of of of Unicorn’s through their early go to market growth.

[00:01:21] And whether you’re bringing a new venture to market, which I know a lot of you are, or you bring a new product to market in a larger company, I’ve been intrigued by a couple of questions that I think are contributing to a much larger failure rate within those situations that is necessary. And the questions are when is it time to scale sales? I primarily focus on B2B, so when is it time to grow? In a new venture like that and how fast and so I’ve been working the last couple of years on a much more quantitative data driven framework to help entrepreneurs, to help general managers bringing products to market, to approach those key questions with more science. And that’s really what I want to unveil for you today. And so, you know, it’s funny I ask. I wish I could chat with you, but I usually ask people like, let’s just focus on entrepreneurs for a second. When is it time to scale?

[00:02:27] And they’ll say, oh, when you have product market fit, so kudos, great answer, thank gosh for the work of Eric recently in Startup and Steve Blank and all these amazing thought leaders over the last 20 years for us to go away from this vaporware selling vaporware entrepreneur Acadians to to the lean startup to, you know, rapid, agile software development that involves the customers and, you know, accelerating our product market fit before had a bunch of salespeople. The problem is what I asked 10 entrepreneurs, like what is product market fit? I get 10 different answers and that is concerning.

[00:03:07] That is concerning to.

[00:03:10] Have such a critical concept and critical answer to this question and having a bit of confusion in the market on what it. Actually is actually most people tell me product market fit is when they hit like a million in revenue and I couldn’t disagree more to think that product market fit is associated with a revenue. All that means is you were able to sell someone, it’s like. Market message fit or something.

[00:03:40] Has nothing to do with product market fit, you know, you got others to say when you have a workable product in a big market, but that is just too subjective to me. Sean Alice probably says it best if you look at his work. He says when when you survey your customers and 40 percent of them say they can’t live without your product, that’s nice.

[00:03:58] It’s more focused on the actual value creation and is quantifiable. My only concern is surveys. They’re riddled with false positive responses. People love to tell entrepreneurs what they want to hear in a survey. It’s so hard to design them so they don’t. Right. And so what I’ve looked at over the last two years and used quite a bit of practice, we even use this at HubSpot is I if I had to pick one metric would be customer attention. Someone let’s assume a lot of you are from SACE, you know, if you’re not, it’s like it’s like buying more stuff from you. I’ve done this for sweatshirt companies where we associate with, like a customer success review or something like that. But is this like, you know, customer retention? And, you know, we have pretty good definitions of what like world class customer retention is in the world versus one hundred percent revenue retention, 90 percent lower retention. The big problem, though, is. That’s a lagging indicator. Like, if we’re a new venture, a new product on the market and we’re signing up 10 customers a month, 10 customers a quarter, like it could take a year.

[00:05:08] For us to truly understand their attention. And we don’t have that time to learn.

[00:05:14] So what I really encourage entrepreneurs to do is to think through what their leading indicator to customer retention is.

[00:05:22] What is it that you can observe in the first week, month, two months or whatever of a customer’s life life span with you? And whatever that observable event is that they do will strongly correlate with long term retention, if you can figure that out, it’s magical within your company.

[00:05:45] And so the framework that I I don’t think there’s a universal answer like they set up the product, they use the product, don’t weekly active usage. All those are reasonable answers. But it’s just it is circumstantial to each business. There’s a little bit of artistic strategy and selection here on what it would be. But I like to define it like this. If percent of customers achieve events within t time, just isolate it down to three variables. P percent of customers achieve events within t time. Right. So just let’s bring it to life. And these are pretty close to what happened in these companies. If 70 percent of customers send 20 messages in the first 30 days.

[00:06:22] Damn.

[00:06:24] I like that so much better as a good product market fit definition, I mean, their communication collaboration company, I mean, if 70 percent of customers sent 20 messages in the first 30 days like hell. Yeah. Much better than revenue, right, Dropbox’s of 85 percent of customers upload one file in one folder on one device within one hour, YOLO time and effort to value. You can see that time very quickly. I know this is the case for HubSpot and unfortunately, we hit like 10 or 20 million in revenue by the time we figured out that this is. Really important and critical to us turning around our attention. We had product market fit of eighty five. Eighty percent of our customer use five or more features in the twenty five feature platform in the first 60 days. Right. So as you think about these variables for your company, I don’t think key is that important. I find it to be somewhere between like 60 and 80 percent. And I’ll show you later why it’s not that critical to have a precise, definite like precisely right there. The T is also pretty easy to figure out, like you want to as soon as possible, like in a month or two. And I think most businesses you can get in a month or two if you’re really freemium like Dropbox, you can do it in hours, days and weeks, which is great. And if you’re selling like huge systems to big companies like Workday Solange, like the Fortune two hundred, like a whole new H.R. system, it could take six months, unfortunately, and you can’t do anything about it. But, you know, usually the T is in about a month or two and the E that’s where that is critical. That’s the hard one. But the E has to be it has to be like quantifiable. It has to be instrumental, which means like you’re not here, you’re not like asking the CSM, what do you think that’s like too subjective and it’s not automatable because we’re going to measure this forever. And ideally, it’s aligned with our unique value. Prop like HubSpot was really powerful there because we were the all in one system competing against all the solutions. So of course, the breadth of product usage, feature usage and the platform that was super powerful to align the entire organization for marketing, sales, customer success and product with this particular measure on our our unique differentiation.

[00:08:45] If we got one a customer to use one feature which is not protected, like there’s better solutions out there when they’re using five and those features are talking to each other, that’s where we shine. OK, so just a couple of guys on on how to select them. And then I love to set them up in these customer cohorts to identify product market fit as early as possible. I want product market fit ID to be accurate, but also early. Right.

[00:09:09] So what this does is organize our customers into the month in which they required.

[00:09:15] And then each month shows me what percent of them have hit the leading indicator of retention.

[00:09:22] Right, so we just stick with our slok example of our lead indicator, meaning they sent over 20 messages, you know, in this company. They acquired twenty four customers in January and only three percent had achieved that event after the first month. In fact, after seven months, only 44 percent had. That’s pretty bad, right? And so but look what they did. They changed the types of customers. They sign up, they change how they sell to them. They change the unboring. They change the product. That kind of stuff. And by September, they acquired 50 customers and 60 percent after two months had achieved that event, up from twenty seven percent. I just look down these columns to do comparison. So I think this company had product market for somewhere in the October, November timeframe. And they can validate whether that statistically and you showed after a year or so to see if you chose the right leading indicator, if it truly correlated with retention. So in this case, like, say, the company acquired 68 customers a while ago.

[00:10:23] Right. So somewhere between 12 and 18 months ago, they acquired 60 AA customers and the average retention rate was 82 percent for them. Right now, 55 of those customers has had hit the lead indicator retention within 30 days.

[00:10:39] And 13 did not. And so the ones that did ninety three percent stuck around for the ones that didn’t. Only thirty nine percent are left. Wonderful.

[00:10:48] This is a statistically proven leading indicator of retention. You learn something very special and important about your business. OK, now down below they have it right. Same thing. In 68 this year, customers required between 12 and 18 months ago. Eighty two percent retained 55 had hit the early indicator retention and 13 had not. But the only difference here is the retention rates just weren’t different in those cohorts for the ones that hit the early indicator. Eighty four percent stuck around for the ones that didn’t. It was it was it was 77 percent. Just not too big of a difference. Right. So we’re got to try something else. Now, you didn’t hurt your business by choosing the wrong one. Like if you chose to get people to send 20 messages if you’re black, you did not hurt your business by focusing the organization and getting people to to send positive messages in your in your collaboration software.

[00:11:38] It’s just maybe the numbers too low. Maybe it’s more about like how many people are on the platform. And the good news now is if you track all that data, you can just go back and run analysis to figure out what actually does correlate with retention. So you have to wait another year to figure it out, OK? All right. So that’s the if you’re a if you’re a product founder, Pip, you can geek out on this. More computer programing oriented definition is you have product market fit if you’re leading to get a correlates with long term retention and you get it so that percent of customers achieve events within TI time. All right. All right. So you got product market fit. You ready to scale?

[00:12:16] Not yet. OK, so here, here’s the deal like.

[00:12:21] The stage, a product market. I’m going to show you how, like once you identify these stages in a very scientific way, the implication it has on your go to market design, I’m going to show that to you. And I will tell you that during the product market fit stage, this is a great a great time to listen to Paul Graham, founder of Why Commandeers advice of DU Unscalable Things early du unscalable things early because all we’re talking about in product market fit stages, you’re going to sign up customers and very predictably make them successful. That’s what we’re talking about. I didn’t say anything about profits and scale and my friend David Cancer, who ran a product for us at HubSpot and then went off and found adrift. If you talk to him in the early days of Dreft, he was flying to go see customers and personally on board customers that were paying him 50 dollars a month. That doesn’t scale if you’re the founder and you’re flying to the on board customers, paying you 50 dollars a month. But it’s beautiful behavior at that stage. It is so hard to come up with an idea and to make it successful among most customers. So throw everything in the kitchen sink at them. But once you prove that, then you have to achieve what I call go to market fair, and that is do that scalable. Do that profitably before you start adding 10 reps a month to this thing. We need to make sure that we can do this scalable and profitably and in sass and a lot of software businesses. We talk about you in economics, right? The problem here is similar retention is that’s a lagging indicator. I signed up 20 customers this month or quarter. I don’t know the economics on that average for like six to nine months. I don’t have that time. So I have to extract it back to leading indicators, which is more of a more consistent, more universal process. So here’s just some take a big slug, your coffee like here’s some numbers for you. If you like math, you like this. If you don’t, it’s going to be confusing. But I’m going to post these slides for you, so it’s so you can kind of stare at it. But these are numbers we know lifetime value, cost of customer acquisition. Ask you. Well, let’s say in this case, we’re trying to get an LTV of three. That’s pretty common in terms of good economics. So, Altovise, usually how much the customers paying us every year times the gross margin divided by the annual churn. Right. So I can extract the CCAC that the bottom denominator to CCAC of the marketing plus the sales. Right. And I can do the back of the marketing is how much I pay per lead divided by the close rate. If I pay one hundred bucks a lead and I close a hundred percent of them, my my marketing costs hundred bucks. If I close 10 percent on my marketing costs a thousand bucks. And on the sales side it depends how much I pay. My salespeople divide over how many customers they sell and how many customers they sell. It depends how many leads I give them. Times are close. Right? So what I’ve basically done is I have this goal of LTV, the cap at three, but I’ve extracted it back to how many leads are being set, what’s the cost per lead, what’s their close range, what’s the average spend per customer, which are much more leading indicators. So this is an example of a business model that makes sense, a leading indicator inputs that put out good unique analytics. And now I have to do is dashboard that.

[00:15:36] OK, if I want an altitude of Calcaterra, how many meetings a week to my have to set up if I want an altitude of of three, what is my close range from stage one to stage two to stage three to close? The customer doesn’t need to be to to do that. And now I can just dashboard it. And as long as my blue line stays above the red, guess what? I’m going to have me in economics and I’m going to have go to market fit. OK, so that is my answer to when are you ready to scale? You ready to scale when you have product market fit and go to market fit? I recommend you do those sequentially. And I provided you a scientific data driven approach to figuring out what stage you’re in. And now it’s all about these lead indicator dashboards. This becomes your speedometer. So when we ask the question, how far should we scale? Oh my gosh. Literally like 50 out of 50 startups I’ve talked to last year all did this.

[00:16:30] They raised their series A.

[00:16:32] As a great congratulations, that’s awesome. Tell me about your company. It’s awesome. We’ve got like 50 customers. They love it. You know, we’re like half million or million in revenue. We like to salespeople. And I’m a great you just raise like ten million bucks is awesome. What are you doing? Is like we’re going to hire 10 reps next month. Why do they do that? I know why. Because the VC tells them to because they sold this, like, big valuation story, because they’re the next hot, like unicorn and they can hire 10 reps in one month at that stage. Do you know any interviews that is? Do you know how much demand and that is who’s going to manage those people? How are you going to get on board then? You’re not ready to hire 10 reps a month. So when you think about scaling, now that we have product mark and go to market fit, don’t think about lump-sum hires at the beginning of the year. Think about a pace.

[00:17:26] Think about one rep among for five months, do that and watch the speedometer. If the speedometer stays green, the early Keita’s retention early ahead of you in economics, then go to two reps a month and do that for five months and then go to for about a month and then go to eight months a rep.

[00:17:42] And guess what? You’re crushing it in your own unicorn status. It’s very scientifically driven. It’s very controlled. You’re still ahead. Triple, triple, double, double. I have nothing against that score like crazy. We have to produce a huge return, a huge IRR if we’re going to get venture capital. But make sure you’re ready and have some science behind the pace. Don’t just go like, oh, my my VCs told me to hire 10 reps in the first in one month. I’ll tell you what, you have one rep left after a year, it’s going to kill your business. OK, so so do as a pace and watch the speedometer and then where should we scale to finish up? There is, you know, this as we start to scale up. Oftentimes, we’re looking at the indicators and we’re spitting out in economics and we’re like, wow, the business is going great. This particular business has a churn rate of like 10 percent. And unless ultimately CCAC on average of three, it’s fantastic. So, like, scale, scale, scale. But if you don’t look under the hood and segment as you scale, then you’re going to scale the wrong areas. OK, so what this company does and and when I think about segments, I think about product market channel, those three attributes. OK, so this this particular company has now had 30 million. They have two products, a legacy one and a new one that they’re starting to sell. They have two channels. They go to market through direct and then also through partners. And they also sell the two different markets, the mid-market, as well as the enterprise. And so if you look at these these buckets, these folks have nailed the product market, go to market, fit in the direct funnel to mid-market enterprise. They have not through channel. It’s just like the ultimate costs are too low. The returns are way too high in the mid-market and they have no experience in the new product. Now, this particular company, if they didn’t do this analysis, I most of the time what I see is they’re going to add a lot of Rabson to the new product.

[00:19:31] Even though it’s not proven or maybe add it into the partner channel, even though it’s not scalable because the unit economics are bad, and that would be a really bad mistake. And over time, they’re you’re not going to blow up on them just for math, just for math, not even execution. So what this segmentation allows you to do is identify where you’re ready for scale, where you want to experiment and where are you going. Ignore the very important founder decision on what to do. And sales leaders and market leaders help your founders understand this.

[00:20:02] Right. And so when you add people in all the green boxes, here are new hires and the blue folks are existing team. My new hires go into the scalable buckets. I put them into the direct channel in mid-market enterprise. My experiment bucket stays small, cross-functional, so I can learn fast and turn them into scale buckets. If I start scaling the experiment bucket, it’s going to kill the business. OK, so hopefully a little more insight on where. So let’s finish up on what does this mean for our go to market. OK, so we have our we have our three sequential phases. We have extreme science and data figuring out where we are in in that sequence. And so when we’re in the product market fit, we already talked about do unscalable things. The rep that I hire there is like a half PM product manager, half account executive. Right. The comfort like an account executive talking about money running a sales process, have objections, but the ability to step back from 20 customer calls in a week and summarize it for the engineering and product team so they can build the right product. Usually that person doesn’t even hit quota when you’re scaling very different from the coin operated rap and don’t have the coin up rep right now. Don’t hire the rep. It’s like, give me my quota, give me the sales playbook and and the target list and let me go make a lot of money. Bad, bad, bad hire at that stage. I mean, this comes out of the sales learning curve with the Renaissance rap all the way on twenty years ago on how they codified that and similar like manufacturing, learn the learning process. You know, let’s let’s not talk about don’t worry about the management at this point. Don’t stand up a cold call on team. You should be able to get enough customers to try to prove product market fit from your network. And do not be talking about pricing and compliance at this point. I usually don’t even put my reps on a complaint at the stage. And pricing model doesn’t matter unless the whole business is predicated on a pricing risk which is rare in software. I’m fine given my customers 80 percent discounts just to give them on the software. At this stage, I just want to show them I can make them successful as long as they’re committed. Free is not good, but like I don’t really care when I’m charging them. Now that all changes at the go to market stage. Now we have to hire a rep that can build the process. I have four reps at this point with at least one of them. That’s a process builder can build the playbook. Right. I need at least one demand channel. I need an inbound marketing program. I need a cold calling program. I need something that I can scale. I need my playbook to be codified. Now, it’s not win at all costs. I need to build out the product and the pricing and Compline matter a ton here. This is what drives the unique economics. What’s that formula? I pay my reps one hundred ten thousand half base, half commission. The court is six hundred thousand dollars a year and they’re hitting it like at least the early indicators of it. Right, that that we need that formula in place and then once you have it ready to go. Right. So now you’ve got a management team that’s reinforcing the playbook. You have the coin operated salesperson. Let’s give me the playbook in the quote in the target list and let me go. And, you know, you’re thinking about more like promotion pass sat on your pricing and comp.. OK, all right. So hopefully that gives you a good view on how much more science and rigor around the critical questions. When should I scale sales?

[00:23:24] Where should I scale sales and how fast? OK, so if you haven’t heard, I have a venture capital firm now. I founded two years ago at JPL called Stage two Capital. We’ve got a lot of material here on our blog and ebook resources that you can download if you’re interested. I’ve got a bottoms up funnel to help you work out these metrics. You can read the forty five page ebook that I wrote on this topic. If you want to go back to certain topics and learn more, I’m just, you know, stage two is the first venture capital firm running back by sales and marketing leaders. I think we’ve got we’re raising funds right now. Halfway through this, you’ve got about one hundred thirty Serros and Kormos and has a customer success from most of the public software companies in the country. So you can you can see the list of elastin, zero of Dropbox, of your present of Tesla’s KMO at Survey Monkey just really humbled by the backing and support of all these folks. As we’ve gone out and made investments, we made 11 investments out, a fun one, and we’re successful in getting ten of them to the next round so far. And the eleventh one is not. Is this more recent investment? I hopefully we can go one hundred percent and in our performance of getting the companies we get into to the next round and ultimately to a successful exit and longevity company of longevity and I continue to teach at this is you can go check out. I’ve written 11 cases on sales and marketing if you want to check those out on my faculty page. And then finally, I did write a book. I’ll read another one on this topic in the next year or two. But I wrote a book called The Sales Acceleration Formula. It’s become a bestseller. Thank you all for the support there.

[00:25:04] One hundred percent of the proceeds are donated to build and if you don’t know, build, they parachute into the worst, toughest three high schools in every major city and teach these kids who have probably not been dealt the deck of most folks on this call in terms of the life they’ve been given as a childhood. And they teach them entrepreneurship as a freshman high school with the intent to get into college. And they are super successful. They get ninety nine percent of those kids through high school and eighty five percent of them into college. So if you do support the book, know you’re supporting a great organization. It’s three twenty five Eastern. That is my rap. Appreciate your time and enjoy the rest of the show. Thanks.

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