Evolution of Customer Success by the Numbers - Kellie Capote, Chief Customer Officer Gainsight

Imagine being a senior product leader at Microsoft for one of the leading "cloud products" in the industry, Azure Data Factory, and deciding to leave the stability, security, and prestige behind to launch your own B2B SaaS company. This is exactly the decision and journey that Anand Subbaraj began five years ago.

Anand spent 13 years at Microsoft but was fortunate to be involved with five different product launches (V1) over 13 years, with a primary focus on understanding the market and customer requirements. By being part of the founding team at Azure Data Factory, Anand learned what it took to take on established industry leaders, with a product that had not previously been introduced to the market.

Anand's experience with new product introductions at Microsoft, Anand had a personal experience in servicing his refrigerator at home, which served as the catalyst that customer service was ripe for transformation. After having three different service technicians have to make six visits to fix the issue, Anand was sure there had to be a better way to leverage automation to transform field service.

As a result, Zuper was launched. What learnings has Anand had starting, growing, and leading his own company? First, Anand gained an understanding that Marketing is about investing to build a brand and market awareness, and is more science than art.

Anand also learned a lot about cold calling, and what is required to make the first sales in a newly formed B2B SaaS company. By taking the lead on all initial outreach for Zuper, Anand was able to directly hear from the market on what they wanted and/or needed to consider transforming how they were managing the field service process. 

Anand also learned that without the "Microsoft" brand, that persistence in cold calling was critical to gaining early traction.

Anand executive the "founder-led sales" model from $0 to $1M ARR. By taking this responsibility himself, not only did he have direct access to product requirement input from the market, but he could also hand over a "sales process" that worked to acquire the first $1M ARR. Anand leaned on "Marketing" first to create awareness and demand before hiring his first professional Sale resource.

Identifying a gap in the marketplace is a key ingredient to the idea to launch a new company. At Zuper, Anand identified that many companies were viewing field service management automation as an extension of CRM. Second, consumers now expect a seamless experience like Uber, while companies require the ability to configure their processes within an automation platform, not to force their process to adapt to take advantage of the B2B SaaS platform.

Understanding and being able to measure the business value delivered to the customer is critical for early-stage B2B SaaS companies. First, the ability to improve efficiency in the business process being automated, second is improving the productivity of the field service workforce, such as spending less time on driving to the next appointment and more time on fixing the customer's issue. In the Zuper example, measuring the "first-time fix rate" of new service tickets is a key benefit, and the Zuper customers see a 30% increase in the first-time fix rate by having the right technician, the right parts, and the right tools.

When asked what "SaaS metrics" Anand uses, here is what he shared:

Top Lagging Indicators Used:

1. ARR and ARR Growth
2. Customer Churn
3. Burn Rate
4. Cash runway

Top Leading Indicators Used:

1. Product Usage
2. Customer Acquisition Cost
3. Customer Lifetime Value
4. CAC Payback Period (new)

If you are a product leader or in a large stable company today, but considering launching your own B2B Saas company, this conversation with Anand Subbaraj is a great listen!

Excel is the #1 tool B2B SaaS companies use for many financial tasks, including calculating SaaS metrics to surface insights for operating decisions and investor updates.

Ali started his career in tech as an auditor at Ernst and Young, with a priority focus on revenue recognition and reporting. While auditing a top tier B2B SaaS company, he was provided multiple spreadsheets with thousands of rows of data, and it even required almost 10 minutes to just open the Excel file, and almost 6 months to complete the audit. The primary challenge, finding all of the data required for the audit in an extremely large and poorly structured Excel model.

What are the top signs that a founder/CEO will see to know it might be time to move beyond Excel? Ali suggests at $1M and above that Quickbooks is a fine General Ledger, but the initial issues are associated with revenue recognition and the associated reporting. Often, this is due to not having the right human resources who truly understand revenue recognition policy, and then the manual required to create a model and the appropriate formulas for revenue recognition.

One sign that Excel might not be doing the job, is if revenue is being recognized on a cash basis. Another sign might be when an investor asks what your "MRR or ARR" is, and you realize it includes professional services or one-time fees. Why is getting revenue recognition important to an early-stage company? It becomes important when external stakeholders, like existing or potential investors, ask for things like GAAP revenue growth rates, and ARR growth rates and you cannot provide the answers because the financial foundation and reporting infrastructure have not been established.

Inevitably if you are quickly heading to $1M ARR or already above that level, founders and CEOs are expected to know their numbers. One common tactic is to hire an external accountant, and ask them to set up revenue recognition and other financial reporting in Excel - the challenge with this is that it is not scalable, and if the "rent an accountant" goes away, it is hard for the next resource to understand the excel model.

Next, we discussed the reality of ASC 606 (GAAP accounting policy), and how it impacts the need for more advanced financial reporting capabilities. ASC 606 includes very complex and nuanced accounting rules that Excel is just not well positioned to be the primary solution for modeling and reporting GAAP revenue and the associated financial metrics such as Gross Profit, EBITDA, and Net Income.

The most important initial SaaS metric is Contracted ARR, and ARR including growth rates. Quickly following is the ability to understand Sales and Marketing expenses and the associated customer acquisition cost efficiency metrics including Customer Acquisition Cost, and CAC Payback Period. Cash burn and cash runway are other critical insights that a founder/CEO needs to ensure are available and accurate early on.

When I asked Ali about other SaaS Metrics, he highlighted a recent example where a company wanted to start reporting their CARR and ARR, and they close a majority of deals mid-month. They were confused about how they report ARR for the month the contract was signed, and how those decisions impact the associated recognized revenue (GAAP revenue).

If you are an early-stage SaaS company and are having challenges with Excel to capture, calculate and report basis SaaS financials including GAAP revenue, CARR, ARR and the associated SaaS performance metrics the conversation with Ali Rizvi is highly informative.

The Alexander Group works with many of the leading companies in the B2B SaaS industry, and I was recently joined by Ted Grossman, their co-lead of the technology industry practice, and Davis Giedt, Director of Research and Analytics.

Based upon Ted and Davis' unique insights and understanding of B2B SaaS due to the discussions and data from over one hundred customers, coupled with their historic Sales Compensation research and benchmarks with has become an industry standard.

My first question was how has the use of SaaS metrics evolved. Ted's perspective is the core metrics have not changed that much over the past few years - rather it is the weight that is placed on specific metrics, especially growth vs profitability. As an example in 2021 and the first half of 2022, the weight was much higher on growth rate versus profitability metrics. One example is the Rule of 40 has increased in importance as measured by R-Squared by 3x over the last 6 months. As such "Margin + Growth" is much more balanced in 2023.

Ted highlighted "expense to revenue" as a top priority at the macro level. This is also a very easy metric to benchmark against the industry. Then you can dive down into more granular revenue growth efficiency metrics such as "Profitability by Sales rep. Other things like the CAC Payback Period which measures the amount of time to pay back the acquisition of a new customer. Net and Gross Retention Rates are also high-priority metrics to understand the efficacy of retaining and expanding revenue with existing customers.

What about the importance of changing the mix of revenue growth from new customers versus existing customers? The story varies in every company and depends on company-specific attributes such as do they have multiple products, or do they have a product that can expand usage to additional users, departments, or business units within an existing customer.

When I asked Davis the "top" metrics he prefers, they included:

• Sales and Marketing expense to revenue which tests for every dollar invested in revenue growth, how much is returned on both a new and top-line revenue basis. Davis shared a 35% - 40% S&M expense to revenue as a good benchmark for growth companies
• Cost of Growth, sometimes known as the SaaS Magic number measures the top-line revenue growth versus

Sales and Marketing investment, which has a range of .5 (poor), .75 - 1 (good), and > 1 (best)

• CLTV:CAC measures the amount of Gross Profit (or Revenue minus Cost of Goods Sold) generated against the revenue a new customer generates over the life of a customer. A CLTV:CAC ratio of 3x is good, though has been increasing over the past 2-3 years. CLTV:CAC ratio is a long-term ROI measurement

Next, we discussed the topic of "consistency of metric calculation" when using industry benchmarks. Davis highlighted that for their clients they use one standard metric calculation formula to ensure when they are benchmarking it is an apples-to-apples comparison. One specific example was if you are trying to measure the efficiency of growing new customer ARR versus existing customer growth ARR, things like a "time study" may need to be conducted to properly allocate expenses to the pursuit of each growth ARR type.

If you are a B2B SaaS company leader, the discussion with Ted and Davis provides some unique insights and perspectives that only come with the unique visibility they have across hundreds of leading B2B companies.

In Episode #1 of this 2-episode conversation, Ray discusses the key findings from the Bessemer Venture Partners (BVP) annual "State of the Cloud" report for 2023 with Janelle Teng, Vice President and co-author of this year's report.

Janelle is involved in many different research programs at BVP, including the "State of the Cloud" and the "Scaling to $100M ARR" reports.

In this first episode of the "State of the Cloud 2023" report, we focus on the change in B2B Cloud company valuations in 2022 and the current state of the industry.

Public cloud companies experienced the "SaaSacre" of 2022. Interest rates shocked the cloud industry in 2022 resulting in a greater than 40% reduction in public cloud company value. The forward trading multiple of public cloud companies is now below the long-term average and were halved in 2022.

There are glimmers of hope from the Q123 timeframe. One example is Microsoft reported better than expected earnings in Q1, fueled by the interest in AI. These large tech companies are a great index for the smaller, private Cloud companies. The Cloud index is up about 5% in Q123, which provides hope for the re-emergence of Cloud valuations.

Even with the aggressive pullback in public cloud company valuations, the average BVP Index cloud company has grown 50% faster than a traditional company - over a 10-year horizon.

When will "Venture Capital" funding return to a more normalized state? Janelle asked the 60 investment professionals at BVP when will be the best time for a founder to raise VC money? The top timeframe forecasted was 2H24' with 1H24' being the second forecasted period for raising a round from Venture Capital. However, 1H23' was still in the running - highlighting the excitement around the current AI boom.

The number of VC deals and the amount of VC funding in Q123 was down from the previous year and the previous quarter, so the turnaround in VC deal velocity is still in front of us.

In the second half of my conversation, Episode 2 with Janelle, she shares the TOP 5 predictions for the Cloud in 2023!

State of the Cloud 2023: Top Five Predictions:

#1: Efficient Growth

Adopt new solutions to gain control of their Cloud and SaaS spend, including the infrastructure cost to deliver SaaS Solutions. Tools include Cloud FinOps tools, SaaS Spend Solutions, and engineering productivity tools to improve R&D processes.

One of the areas of focus is on Cloud Spend as a way to manage the Cost of Goods Sold and thus increase Gross Margin which sets the ceiling for Saas profitability. Public SaaS companies with Gross Margins under 50% have a hard time driving Free Cash Flow of 20% or greater which is critical to enterprise value multiples.

Some examples of tools to gain control of Cloud Spend are included in the Bessemer Ventures technical playbook of 40 tactics to drive profitable growth - this playbook can be found on Atlas on the BVP.com website - the report is called the "CEOs tactical guide to drive profitable growth".

#2: Climate Software will drive the Green Energy Transition

With the increase in consumer activism and government regulation, the green energy revolution is here. To support this green economy, cloud software that is tailored made to power the transition to green energy will explode. Examples are software dedicated to solar, infrastructure, sustainable design, and fossil fuel infrastructure transition.

#3: Initial value of AI will be to the user

The AI and Large Language Model business ecosystems are evolving quickly. Bessemer believes the ultimate winner is the user to increase individual productivity at work and in their personal lives. AI research is now democratized so end users can have access to and build upon the latest AI capabilities.

One example is ChatGPT being released to the general public and acquiring over 100 million users in the first three months - the faster-growing internet site ever!!!

Bessemer calls the current AI revolution a B2C2B motion. This highlights the consumer excitement about the benefits of AI, which will in return bring these tools and techniques to the corporate workplace.

#4: The application layer is where the most impact from AI will happen first

Due to the democratization of access to AI, the power of AI will be available to any company, that can embed AI without their own AI team. This will make horizontal B2B SaaS companies to provide AI driven workflows and processes without the need for a large internal AI development team.

With the number of transactions in many SaaS platforms, the opportunity to accelerate the insights to enhance business process efficiency.

#5: AI companies will grow twice as fast as traditional B2B Cloud companies

Bessemer predicts the time the best AI companies will require to grow from $100M to $1B will be 50% faster than the historic fastest growers like Canva, Zoom, and Twilio. That is truly impressive as these companies scaled from $100M to $1B in four years or less!

If you are a student of the Cloud industry or just SaaS-curious about where the industry is heading - the Bessemer Venture Partners "State of the Cloud 2023" is a great read and this podcast discussing the top five predictions is a must-listen!

Matt Wolach is the founder of Xsellus and host of the Scale your SaaS podcast. Matt is one of those guests that have taken over a year to be on the Metrics that Measure Up podcast. Matt has hosted over 250 episodes of "Scale your SaaS" and was one of the inspirations for this podcast.

The first question I asked Matt was about the common attributes that successful SaaS founders exhibited. By being a podcast host, Matt found he often learned more than he shares. However, one of the common themes of the most successful founders was the amount of time they invest in getting to know and understand their potential customers. Those discussions to dive into the mind of their potential customers was a key to success, and Matt recommends the goal should be to have about 50 of those discussions, versus the 3-5 that far too many founders conduct.

What are the top three challenges that Matt sees early-stage companies face:

1) Lead generation/Pipeline which often early-stage companies over-index on one or two channels. Matt recommends finding 4 - 5 channels that work, and then continuously optimize each channel. Matt says there are 18 ways to generate leads in a B2B Saa company, including commonly missed lead sources such as a defined lead referral process with current customers. Other missed lead sources such as influencers and affiliate programs are undervalued.

2) Ability to close qualified leads is another inconsistent competency of many early-stage companies, which is especially dangerous if significant money is being invested in Marketing and lead generation activities. Matt suggests fixing the qualified lead to Closed-Won process before investing more in additional lead generation.

3) Lead form/demo form to demo completed is surprisingly a big leak for many early-stage companies. Matt shared the story that one of his new customers did not even measure the number of people requesting to be contacted or have a demo. 

The inbound demo request-to-demo completed ratio is a critical conversion rate that far too many companies do not measure. Matt said that an average of 42% of people who request a meeting or demo actually end up having a meeting with the vendor - meaning 58% of high-intent leads are not actually being followed up with timely.

What metric does Matt like for B2B Saas companies in the $1M - $5M ARR range? Matt said the Customer Lifetime Value to Customer Acquisition Cost Ratio (CLTV:CAC Ratio) is one of his favorite metrics. Essentially with the industry standards that Matt shared a 3:1 CLTV:CAC ratio is a good goal, it means that for every dollar you invest in Sales and Marketing, $3 of gross profit is generated. The latest RevOps Squared benchmarks show that a 4:1 CLTV:CAC Ratio is the new benchmark.

If you are an early-stage B2B SaaS company, this conversation with Matt Wolach, the founder of Xsellus is a great listen

In 2023 many SaaS companies are searching for what market(s) are going to drive their next phase of growth - and international markets, especially English-speaking countries are often considered by U.S. B2B SaaS companies.

Rick Pizzoli, moved to Europe over 25 years ago to launch the European presence for U.S. based software companies. Based upon that experience, Rick and Sales Force Europe has helped over 500 companies enter and/or expand their presence beyond the United States or a single country in Europe.

Rick shared that the majority of U.S. companies first start to consider entering the European market in the $5M - $10M ARR range. European companies begin to expand beyond their home country a little earlier, often in the $2M - $3M ARR range due to the more limited breadth of each country in Europe.

Understanding your positioning, messaging, value proposition, and efficiency of your "home market" customer acquisition motion as measured by metrics are critical foundational elements to planning for an entry into a new country. If a company has not captured and documented the keys to success in its home country, it will be impossible to be successful in a new country.

Another key factor to consider when entering into the European market is do you have a "lighthouse" account in a country you can build upon, and/or do you have a product that is localized for countries beyond English speaking? Rick's perspective is conducting market research to determine the "best" initial country is a better strategy than just saying let's just go to the United Kingdom, as it is the most like the US market and they speak English. At the same time, the UK market, especially in London is probably the most competitive market to enter, as so many U.S. based companies use the same "we similar" mentality.

Bringing on local talent that understands the local market, has relationships in the local market, and can translate the "messaging and positioning" that works well in the U.S. to the local European country. There are nuances of the "talent profile" that works in one country versus another, which suggests having a local team with local leadership will yield a faster return on investment than parachuting in one or two resources from the home country.

One key to success is seeding the market awareness and engagement with top-of-funnel activities beginning with a digital marketing strategy 3-6 months before having a local, on-the-ground presence. Having local Sales Development resources in place for at least 3 months before having a local Account Executive will also increase the productivity of those first 1-2 AEs. Having a local presence shows a true "commitment" to the local market and will make the majority of in-country buyers more comfortable with purchasing from a recent entrant to the local market.

Should a company start with a single or at least two resources when first entering into a new country? Two resources are always better, and could also allow for additional language skills for the second target country that is being considered in a pan-European presence. It also eliminates the "resource" vs "market" specific challenges.

If you are considering or just beginning the evaluation process to expand your U.S. or single European country B2B SaaS company into or across Europe, this conversation with Rick Pizzoli and Sales Force Europe is highly informative.

SaaS Spend Management is an emerging and rapidly evolving category - yet Ryan Neu, Co-Founder, and CEO of Vendr has a unique vision for how the category needs to evolve.

Ryan has a background in public accounting, and then transitioned to software sales, including a role in the early days at Hubspot. During his career selling, he realized that selling great products is hard, takes too much time and the distribution is quite inefficient - thus the catalyst to founding Vendr in 2018.

Vendr was created as a new way to buy and sell software....and it is the "SELL" comment that is unique amongst SaaS Spend Management 

Eric Christopher, the founder, and CEO of Zylo is sitting on top of one of the industry's largest SaaS spend data repositories and thus benchmarks, a key reason I knew I needed to have Eric as a guest on the podcast.

What was the catalyst for founding Zylo? It started with Eric's experience as a revenue leader in two social media platform companies. Eric realized that by introducing new solutions directly to the Marketing department, it was becoming difficult for companies to manage and govern SaaS spend.

"A business idea with complexity is worth pursuing" - the words an advisor shared with Eric which was part of the motivation to founding Zylo! 

Since anyone in a company can be a buyer of a SaaS solution, coupled with the existence of thousands of vendors with very different features and pricing, buying a SaaS product is complex. Moreover, measuring the value is very difficult and often, ill-defined.

How does Eric define SaaS Spend Management? "Helping companies manage, measure and maximize value from every SaaS application purchased". 

The lifecycle of a SaaS solution starts with understanding how to receive the best price, and then how to optimize the value received. Questions to ask include, are employees using the product, are they receiving value, and how does the value compare to other solutions with similar functionality? 

Zylo uses a "value framework" that starts with understanding every application being used through a discovery process. Next, is being able to manage adoption and usage, which may be as much about maximizing value versus reducing costs. Next, identify opportunities for cost avoidance, while considering the renewal process to know the best terms based on the current utilization rates. Finally, gaining visibility into the existence and usage of every SaaS product in a company materially increases the ability to have the governance and controls in place to purchase, utilize, renew, and purchase the right products in the future.

One surprising aspect of SaaS sprawl is that many organizations do not know what SaaS solutions are being used by their employees and the associated expenses! The best SaaS Spend management programs start with the ability to conduct "discovery" to identify all the SaaS tools being used in a company....but when is it the right time to consider implementing a SaaS Spend Management solution?

Eric highlighted that when you are hitting $1M - $2M in annual SaaS spend is one milestone. Another milestone is that at 500 employees if you do not have a SaaS Spend Management program in place - alarms should be sounding. ...however, Eric shared that it is never too early to introduce a more structured SaaS purchasing, management, and governance process.

Zylo is sitting on a treasure trove of "SaaS Spend Management" data from over $30B in annual SaaS spending across industries including a few of the below :

• SaaS spend by employee has increased by 50% over the last 2 years
• SaaS spend has been increasing by over 20% per year for several years
• Total SaaS spend is underreported by 50% due to decentralized purchasing 
• The average company has over 300 "paid" SaaS subscriptions
  • This increases to > 1,000 in Enterprise companies

Interestingly, the cost of the SaaS spend may not be the primary opportunity for many companies, it may be minimizing the risk of not managing and governing the flow of data outside of the company!

Several new trends in SaaS spend will be disclosed in the Zylo Benchmark report being published on April 4th, 2023!

If you are interested in the evolution of purchasing and managing SaaS spend in your company, this product with Eric is a great listen!