"Efficient Growth" DemystifiedJun 01, 2022
Now the reality is finally setting in that we are entering the first major downturn in the professional life of many founders and many VCs, I find it incredible how most of the advice you hear from VCs and commentators after the “slash burn” (ie: fire your people) advice is… …“grow efficiently”. And they pretty much stop there.
It’s no surprise I guess. How many VCs and commentators have been operators? And how many have been operators in a major downturn? The overlap in that Venn diagram is pretty small!
Unless you’re aged 45+ you’re unlikely to have led a team or company during a major downturn, so what’s clear is founders need lots of practical help at times like this.
Advisors and VCs - show your worth!
It’s at times like these that the best VCs and advisors prove their value to founders.
It saddens me to see VCs advise founders to abstract themselves from sales, by spending 10% of their remaining runway on a CRO when the founder arguably does not have product-market fit and definitely does not have go-to-market fit.
This is the fastest way to increase burn, and is also a desperate move that smacks of failing to know how to work with the founder to deconstruct where the gaps are in their sales maturity, and a failure to offer focused counsel on how to close those gaps.
Piling on a CRO to the cost base who will want to build go-to-market, versus fix underlying sub-structure problems will almost certainly only add pressure on the founder.
And worse, if they are not at break-even this could send the startup into a death spiral, where they are forced to raise capital on bad terms just to stay alive.
What the advisor should be doing is helping reduce the pressure, and extend the runway but the best will do it in a way that also helps the founder increase the strength of GTM sub-structure.
The best way to do this is to directly support the founder to be a stronger GTM leader themselves, offering practical advice on how to optimise key efficiency metrics.
3 ways to break-even
It’s very rare that an early-stage startup can get to break-even quickly, however it’s not impossible - especially in enterprise SaaS where I specialise. I have led this successful move in all of my last 3 startups, and the value of infinite runway gave me and my team the breathing room to make the right decisions for the company.
Runway extension is critical for founders at times like this. There are typically 3 ways to extend runway:
Raise more capital - if you have this option on terms you are happy with from investors that you believe will be strong partners, go for it.
Many don’t have this option right now. This leaves 2 obvious options
The easiest is to cut costs - and this is the default position of founders because it’s the fastest way to cut burn/extend runway.
The less obvious way and one I like to focus on BEFORE I consider cutting is increasing productivity
Whilst it’s important to understand in environments like this it’s all about “survival of the quickest” to extend runway, it doesn’t have to take long to assess your ability to increase productivity too.
Increasing productivity however requires expert guidance, here are 5 ideas for you to consider.
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1. Increase your average sale price (ASP)
Easier said than done, but if you have a hunch your value exchange is under-valued, then you should prioritise testing that hypothesis.
The most obvious way I have done this is to do the following:
a) Establish the true value being exchanged by asking your early customers to help you quantify the value they are seeing from your product in real terms.
It doesn’t have to be direct $ value, it can be time saved, or productivity increased or net new strategic insight for example.
b) Use that insight to skew your narrative from tactical to strategic.
For example: if you are selling to manager level users of your product they will only appreciate the tactical value of your product. If you do not have a relationship with someone at a more senior level, then the strategic value being exchanged is either not being felt or not being valued accordingly, and therein lies your opportunity.
Even the most commoditised of products can be presented strategically, so don’t give yourself excuses here.
c) Sell your value both on a tactical AND strategic level successfully and one of two things will happen, or both:
The unit value of your product/service will increase when the strategic buyer decides your product/service is core to their plans.
The unit value of your product/service will stay the same, or maybe reduce with scaled discounts, but the deployment will increase (seats/usage) as the strategic buyer encourages wider spread use of your product/services, something the user-buyer doesn’t have the influence to do, which in turn increases the over ASP.
Increasing your ASP, increases rep productivity and directly decreases burn and therefore increases runway (by putting more cash in the bank for every deal that’s signed), which serves as a double efficiency driver.
2. Increase Net Revenue Retention (NRR)
The cost to acquire net new customers is much greater than to retain and grow an existing customer.
Landing then expanding is a long-used strategy in SaaS, that is increasing in fervour as product-led growth go-to-market strategies make their mark.
If you have happy customers who plan to increase their usage of your product or service, now would be a good time to lock in a favourable multi-year price with them, which sees them take a calculated gamble on increased product usage.
Securing their business guarantees your runway, but increasing their commitment extends your runway. Leaning into your strongest customers at times like this is a wise move.
3. Don’t hire the VP of Sales/CRO, yet
The “go faster” mentality pushed on startup founders by VCs often sees them encourage founders to spend significant capital on a CRO or VP of Sales. In this market a good CRO will cost $600k ($300k + $300k).
In early-stage startups where they are still figuring out product-market fit (PMF) and don’t have go-to-market fit (GTM Fit) hiring a costly senior executive is only going to work out if you are confident they can quickly impact the underlying revenue metrics of your startup.
In this market, if you are burning capital on a relatively short runway (< 18 months) and not sure you have PMF or GTM Fit, hiring a CRO or VP of Sales is risky, to say the least, and ill-advised in my opinion. Yes, you might get lucky, but you’re more likely to get it wrong and enter the cash flow death spiral.
Rather, the business founder should lean into their own skills as a GTM leader until they are sure they have PMF and GTM fit, with a goal of break-even before making this investment.
As the founder, if you don’t feel you have the skills or experience to own GTM at this stage of growth, hire an advisor or consultant who has seen your stage of growth before. Have them by your side and set them the task to get you and your team into a position to successfully exit the growth milestones that will get you to break-even and ready to hire your first VP of Sales/CRO 6-12 months down the line.
This is a quadruple-win
You upskill as the founder - you need to know and understand GTM regardless, abstracting too early does not set you up for success further down the road
You burn less than making the CRO/VP of Sales hire, which is likely premature anyway.
You still get the sounding board you need, at a fraction of the cost of the full-time hire, and potentially with more experience
You might find in making the advisor hire buys you the time to train and upskill someone in-house to make that jump to VP of Sales/CRO when the time is right.
4. Full-cycle sales
I’ve long questioned the value of SDRs in certain sales scenarios, especially in early-stage enterprise SaaS startups. SDRs can be a very useful friction point at scale when top of funnel is being juiced with a high volume of leads that need an extra layer of qualification in order to optimise the time of sales reps.
In reality in enterprise SaaS where you might need 4-5 deals to do your year, which might mean you work 20-30 deals max in a year.
If the majority of those deals are generated via outbound activity or trade shows, then an SDR might actually decrease the efficiency of the funnel whilst increasing your costs (burn) and reducing runway. A double-negative hit!
The truth is SDRs are often a luxury in early-stage enterprise SaaS startups, especially if you’re still largely an outbound motion.
However, if sales reps have got used to having SDRs in the mix, that’s a challenge. SDRs can make reps lazy. Your job, therefore, is to motivate reps to own the whole funnel in order to increase accountability and efficiency - which is especially relevant in these market conditions.
Full cycle reps will likely be more efficient AND save you the cost and management of SDRs.
5. Increase win rates with win/loss analysis
One of the very first things top salespeople do when they join a company is go straight to closed lost and re-ignite those conversations, with their new and fresh angles.
The result is very often quick deals for the new salesperson, which jump-starts their deal flow, their confidence and their future pipeline.
It’s always been a challenge to get existing reps to do an analysis of why they both win and lose deals. There is no doubt that this analysis will not only increase the efficiency of the pipeline but add net new ARR that was otherwise deemed lost.
To wrap up:
Major downturns are tough, and it’s likely that a hybrid of increasing efficiency and cutting costs is required but if you can focus on growing your way efficiently out of these inevitable cycles, this might be the making of your startup.
However, what you’ll find is that most startups are unable to do this even though it’s within their control. They fail simply through lack of knowledge, drive, or just plain bad advice.
For those startups that have the knowledge, and the determination to succeed and surround themselves with strong advisors, these downturns serve as an opportunity to put distance between themselves and the rest of the pack.
Downturns will separate the weak from the strong, and in my opinion, present a significant opportunity for every healthy startup to win, and win big as the cycle inevitably ends anywhere between 6 to 24 months from now, depending on which economist you listen to.
Good luck out there folks!