דריה: היי לכולם, אני דריה ורטהיים ואתם הגעתם ל– startup for startup, רגע לפני שהפרק יתחיל, רציתי לספר לכם שהשבוע אנחנו בפרק מיוחד ומרגש במיוחד עבורנו. השבוע אירחנו את ג'יסון למקין, שהוא המייסד של SaaStr , למי שלא מכיר זו פלטפורמת ידע מדהימה ל-SAS  והוא נחשב באמת לאחד האנשים הכי משפיעים בעולם ה– Saas ובפרק הושבנו את ג'ייסון יחד עם ערן זינמן ורועי מן, הושבנו אותם ווירטואלית לשיחה על מטריקות SaaS ב-2023 והם דיברו על למה המטריקות שאנחנו רגילים אליהם כבר לא בהכרח רלוונטיות, ואיזה מטריקות חדשות כדאי לנו לאמץ. אז הפרק צולל עמוק לתוך המודל העסקי של חברות SaaS ומיועד למי שבאמת מכיר ושוחה במושגים כמו– CAC,ARR,NDR ועוד מושגים רלוונטיים, והפרק כמובן באנגלית. האזנה נעימה. 

  [Intro Music]

DARYA:  [00:01:08] Today, we’ll be discussing SaaS metrics 2.0. Meaning, the new approach for SaaS metrics, which ones are not as relevant as before, and which ones we should focus more on. So, with me here today to discuss this are Eran Zinman and Roy Mann, Monday’s Co-Founders and Co-CEOs. Hi, guys.

ERAN:  Hey, Darya.

DARYA:  And we have a very special guest for the first time, Jason Lemkin, Founder of SaaStr, the world’s largest community for business software, and can I say the Godfather of SaaS?

JASON:  You can. Yeah. It’s so great to be here with two of my very favorite SaaS founders and one of my very favorite companies. Monday’s like, especially for those of us that sell to SMBs and up, I can’t think of a better case study actually than studying Monday, how they built their company, what their metrics are like. 

  So, it’s fun that we’re going to talk about metrics today because this is one of the most metric-oriented companies I study as well and right up on SaaStr. So, I love the 360 here, where the Padawans become the masters and I get to learn from some of my favorite founders. So, thanks for having me.

DARYA:  Really, really happy to have you here. And today, just in a sentence, I want to say that we’ll talk about three key SaaS metrics, ARR, NDR, and CAC, and we’ll talk about how we should look at them today in 2023. So, Eran, before we start, I actually wanted you to share why we’re doing this episode and why we wanted to do it with Jason. I think there’s a nice story behind it.

ERAN:  So, this is very exciting for us because I think both, for you and myself, define ourselves as SaaS geeks. And when we started our journey back in 2014, SaaStr was one of the only resources on the web that we could learn what SaaS really is. Nobody knew what ARR was, what churn was, net retention, anything that seemed so common these days was not obvious.

  And we should give all the credit to Jason here because you’ve done so much for the SaaS community, so much knowledge and expertise. And I remember Roy and myself say, “Oh, there’s a new article in SaaStr.” See what Jason has wrote, and really Jason, I want to say thank you. We’ve met before, and I said it before, but really, I want to use this platform and say thank you, not just for us as Monday, but for the whole SaaS community, for your value that you created for us.

JASON:  Great to hear. Thank you.

DARYA:  Yeah, and Jason, I wanted to ask you, why is it important that we talk about SaaS metrics today in 2023? What changed?

JASON:  Well, I actually think the number one thing that has changed over my entire journey in SaaS since 2005, for me, 2014, for Roy and Eran, is efficiency. And in the early days of SaaS, efficiency mattered, because there was no capital. We had no choice, right? I don’t know how much money Monday was able to raise in the early days, but I can guarantee it wasn’t that much, right? 

  So, you were forced to be like you didn’t have to actually worry about efficiency for the most part, because capital was very limited, right? I mean, even until 2018, 2019, you’d be lucky to IPO at $800 to a billion dollars. Box’s IPO was worth barely a billion. HubSpot was $800 million. 

  And so when the values were smaller, you could only raise so much, right, over the whole lifetime of your company. And so we had to be efficient without knowing it. But as the capital went up, especially later stages, in the early days, you always have to be efficient. We all got confused. We all got confused. 

  And then when we learned that customers could last decades, at least on paper, I think — I don’t know what Monday’s NRR is, but I know even for SMBs, it’s like 120 % or 100 — it’s jaw-droppingly good. So, you can build a spreadsheet, and you can say, hey, a Monday customer will last 284 years with this NRR. You literally could justify these insane investments, because — and so it warped everything. 

  And then we went into lockdown, where all everybody cared about growth, like to an extreme. And then what’s crazy is, now we’re, for the first time, where both private companies and public companies truly have to prove efficiency. I mean, Salesforce finally got efficient at $20-something billion in revenue. 

  And that means we all got to get much smarter about our metrics, right? Today we’re in a world where you have to both grow and be efficient, right? And it’s a new world in many ways, right? We never really had to do both.

ROY:  And I think like this is some of the things we can shed light on, what is good growth and misunderstood growth. Because in the beginning, for us, when you look at our P&L for example, we burned money. Okay. We spend a lot of money on marketing and people say that’s not sustainable. You’re just throwing money to get paying customers. 

  But essentially we knew because we saw the data. We knew, we saw the cohorts and that’s maybe my first point and one of the most important ones. Like I think the data is in the cohorts. It’s not in the month over month looking at things. And we saw that we have cohorts that are maturing that become profitable. But the new ones were always bigger or even significantly bigger. 

  So, if you look on the P&L side or on the month by month side, it looks like we’re continuously losing money. While when you look on the cohort level, you see like each cohort is like a goose that lays a golden egg, right? Like you spend money to buy it, but then it gives so much more. So, it gave us the confidence, it gave investors the confidence. But the trick is to build that view of cohorts. That is like to separate the things. And for that we had to build Big Brain. It’s like a huge effort.

DARYA:  Yeah. We’ll just say in a sentence that Big Brain is Monday’s team that is responsible for measuring every single thing in the company and making sure that we’re basing everything we do on data.

ROY:  Yeah. Maybe it’s worth mentioning like the first thing we built Big Brain for was to measure ROI on our marketing spend. Like to know for each dollar we spend, how much time it takes for that dollar to come back to us and then multiply itself.

JASON:  Yeah, I think you said — I think you told me earlier two interesting things on that, which I think are interesting for folks. One is that I think you said you built this data analytics, Big Brain, when you still had a single digit number of employees, right? I think you said something like that.

ROY:  Yeah.

JASON:  And I think you also said, and correct me on the second one, I think you said you hyper-aligned on an eight-month CAC. Like, you tuned the dials and the knobs, you had a primarily self-serve motion at the time, right, or probably all self-serve. And so you said, we need the date, we’re going to build this data early so that we can be efficient enough to have an eight-month CAC, right?

ROY:  Yeah, and I would emphasize the CAC part to be like cash-on-cash return, because you can interpret CAC as a lot of things. We wanted to see the cash spent on performance marketing coming back within less than eight months.

JASON:  Well, let’s talk about that, because that’s a super interesting point, because people do this very differently. You had, I’m sure once you got going, a majority of your leads were from referrals, word of mouth, a little limited amount of virility, right? So, you didn’t include those in your CAC. The CAC literally had to be digital spend, produce, digital customer.

ROY:  So, in the beginning, actually, we kind of assumed that everything — we should attribute everything to performance marketing. Why? Why? Because we had a lot of word of mouth, like you said, but in new countries, we had zero. In some countries, we had zero. And then we started doing performance marketing. In the beginning, we had zero word of mouth around attributed traffic. 

  After two weeks, you started seeing 20%, 25%, even more unattributed traffic. So, it was very clear to us that it was originated from the performance marketing initially. And so the aggressive thing to do was to attribute it to the performance marketing. I don’t think it’s true for us today, we have to separate at this scale. But in the beginning, I think it was way more correct and also helpful for our growth.

DARYA:  So, I really want to dive more deep into this metric. And I wanted to ask you, Jason, Roy gave an example of how CAC today at Monday, we’re not looking at it the same as we did at the beginning of our way. So, I wanted to ask you, should small startups use CAC in a different way than scale up companies? How do you see it as an investor?

JASON:  Well, let’s step back. And I do want to hear Eran’s thought. I think these metrics that we’ve been talking about for over a decade, CAC, CLTV and everything, it’s important to understand two things. One, they’re absolutely not gap metrics. There is no legal definition for these things, including — nor NRR, right? And I don’t know how money does it, but I’ll tell you, almost all public companies that sell to SMBs, exclude their smallest customers from NRR. 

  There’s always an asterisk or a dagger that says, does not exclude one or two seat deals, does not exclude customers that churn in their first 90 days. That’s NRR, that’s bad enough. But the thing about CAC and CLTV is these are sort of manufactured metrics in some way, some come from the B2C space, where performance marketing has to be really, really, really good, right? 

  But some come from VCs who are trying to decide, and then founders as we scale, how much money should we burn, right? And so for a VC with a large fund or founders going big, right, with a large war chest, a two-year payback, a three-year payback sometimes is fine, right? If you’re a service now and you sign five-year contracts up front, maybe there’s no problem with the three-year because all the deals are five years, but you can also have pretty good CAC and long CLTV and go bankrupt. 

  This is what I see with “kids” these days. And I put kids in quotes, you could be 60 or a 16-year-old founder. They tell me how great their metrics are. Our CAC is so low, especially with SMBs, our CLTV and NRR are so high, and oh, we’re almost out of money. These definitions and myths can take you down a rat hole. 

  And so even CAC is… One of the most fundamental questions for marketing spend is, do you include the free and the additional ones or just the performance marketing ones? And most marketers in SaaS will never hit their goals if you don’t give them credit for the free ones, for word of mouth, because everything in marketing is expensive. And Adword is so expensive. Even YouTube ads aren’t… I mean, Mondays run a few, as I understand it, a few YouTube ads.

ERAN:  A few, yeah.

JASON:  An individual ad is actually cheap, but mass scale is expensive. And so if you don’t let marketers sort of get credit for everything that closes versus their spend, they rarely can even afford to spend anything. So, that’s why these metrics, you’ve got to measure them. You have to have consistent, but then you have to have a brain and measure them against your net burn, right? Or folks on your team will go off on crazy tangents. They’ll go off on crazy tangents.

ERAN:  I have two comments on that in terms of CAC. I think what Jason said kind of really resonates. I think there’s a problem with CAC and LTV that it doesn’t measure cash flow. You know, sometimes you can spend a lot of money on customers and you can have a reasonable LTV, but that doesn’t say how fast you actually get the cash that you spend on marketing. And the way we’ve measured it as a company since day one, we didn’t care about like a gap return on CAC. 

  We cared about actual cash in the bank. So, how much we spend, when do we actually spend the money, and how fast we get it from customers in terms of actual collection into our bank. And I think that’s what made us efficient over time in terms of cash flow. And I think companies should focus more on adjusting those metrics into actual cash. So, that’s comment number one. 

  My second comment is that I think the SaaS community is now maturing and companies become more mature most of their SNM expense is not spent on acquiring customers. Most of what they spend on is retaining their existing ARR. So, if you think about their customer success, customer support, account managers, all that expense is to retain customers. 

  While CAC only measures how much it costs to buy a new customer. So, I think that sheds just a small light into the actual expense that it takes — it costs the company to buy and retain a customer and I think we need to mature into more advanced metrics that actually measure, not just the acquiring the customer, also, how much it costs to maintain a customer.

JASON:  One challenge today with being over-metri-cated in some ways is what I see across so many SaaS startups that I work with and it’s actually super interesting. For SaaStr itself, we have about 200 sponsors. So, I get to watch what 200 CMOs and VP of field and demand gen are thinking in their brain. And what’s happened is as we’ve transitioned from the exuberance of 2021 to 2023, marketers and SaaS have become super short-term focused, super short-term focused. 

  Now, if you’re Monday, back in the day, doing all digital, doing all YouTube, Adwords, digital placements. That’s fine. You actually can measure something in the funnel. And Monday probably converts from free to paid in 60 days or less or I’m making up. That strategy works fine for a hyper SMB model, but it actually can be destructive in mid-market and enterprise. I mean Monday’s doing bigger deals today and I bet some of those deals take a year to close, right, from initial contact to close. 

  And so what’s happened is marketers are now being judged on results this month rather than this year and it is leading to super myopic marketing, right? Only stuff that gets me leads and even closed revenue this month. And what it’s leading to and founders should think about this, I’ve already seen it happen is pipeline is drying up. Pipeline is drying up for sales teams going, hooray, you cut your marketing spend in half and you only allowed instant ROI. 

  But if the sales team has no pipe going into the second half of the year, you’re not going to hit your plan, right? So, here’s where metrics can also take you down the wrong hole. And we’ve got to find a way in the middle where marketers have some leeway to spend a budget as best they can, right? That’s the tension with metrics. You have to measure it, but you also have to trust your team to say, hey, your marketing budget this year is $1 million, $5 million, $15 million, $20 million. And it’s stressful, but you have to trust your marketing leadership to do the best job they can with the budget they have. 

  But here’s an interesting metric — I track this with SaaS companies and it’s a niche metric, but it’s super interesting in terms of long-term health, which is the ratio of revenue growth to new customer growth on a percentage basis. So, I like to see, at least sort of a two to one ratio. Like, if you’re growing 50%, I like to see you adding at least 25% new customers. If you’re growing 50%, you’re adding 10% new customers, you’re fatiguing your base, aren’t you? 

  And when things are stressful, like they’ve been the last 12 months, you’ve seen these ratios get inverted even in public companies where the new logos aren’t there and you see much more than a two to one ratio for revenue and new logo and you’re sort of… Two points to that. One, if you do see that, you’re overstressing your base. Two, if you think about it existentially, your marketing budget should be roughly related to that. 

  How much of my revenue am I getting from growth in my base? How much am I getting from new customers? No one gets it right. No one gets it right in sales and no one gets it right in marketing. But if you can just put a little more of that budget into growth, right, versus new acquisition, magic can happen, right? Just a little bit. And you at least want to make sure you’re not stressing your base. Too much of that has happened in the last year.

ERAN:  Yeah, I totally agree. And I think that companies that have both enterprise and able to acquire new SMBs, that’s the Holy Grail. Those SMBs will become the enterprises of the future at some point. And something that was surprising, I would say in the last 12 months since the economy changed is that we actually found that our SMB budget was more stable than our enterprise segment. So, the SMBs —

JASON:  That’s interesting.

ERAN:  — NRR, yeah, was actually more stable. I think a lot of enterprise companies have reduced, stopped hiring or reduced budget, while SMBs continue to kind of be very stable. So, I think that having both really contributes to just reducing the volatility of the business.

ROY:  Yeah. Just to emphasize what you said, like the enterprise growth is still much higher. It’s just more stable than SMBs.

JASON:  Yeah, it is interesting. Trying to figure out what’s going on with the global economy is confusing in that SMB — It’s interesting because if you look at the US in particular, we’ve got 3% unemployment, right? And still a pretty profoundly strongly growing economy, yet massive stress at the CIO level and in the enterprise, right? 

  And restaurants and small businesses and many of them, auto repair shops, they’re at maximum capacity. They should be buying more software than ever, right? And yet, enterprises are all cutting the number of vendors, trying to hold the line on budget. It’s a strange world. It is interesting that you see that stability for SMBs. I think we should be seeing it, but we’re not seeing it across all companies, right? We’re not seeing it across all companies.

DARYA:  Okay. I want to move on to the next metric because we do have a lot to cover. And I want to talk about ARR, which kind of started out as a well-defined metric, you know, and then became something pretty fluid between companies. So, I wanted to hear, Jason, your perspective on, should all companies, should all SaaS companies measure ARR? What changed since we started using it?

JASON:  Well, look, I think the most, I think we could probably all agree that, and this happens, this has happened even with terms like cloud or SaaS. It’s gotten corrupted over the years, right? And so ARR used to stand for Annualized Recurring Revenue. And then FinTech exploded, and so they all wanted to claim they had ARR, even if a lot of FinTech revenue is not recurring, right? Not all Stripe payments are recurring. Banking as a service is not recurring, but they still all claim they had ARR, right? 

  So, we had that issue. And then it wasn’t, nowhere in that ARR was the word SaaS or software, but it should have been. Because the other thing that happened is hybrid models, models that are services and software, models that are hardware and software, all started to claim it was ARR, right? And I wrote up today on the SaaStr blog, if folks want to look, Matterport, I don’t know if you ever use Matterport, it’s like that cool 3D software where you can walk through houses and buildings. It’s super cool, but half their revenue is from services and cameras, so their gross margins are in the 40s, right? I think Monday’s approach is 80, right? 

  There’s some loose definition of gross margin, but that’s dramatically different margins than Monday, which is a software company in 80, Matterport, which is super cool, right? I mean, software’s hard enough to build, imagine adding cameras and 3D, that’s harder than software. But as the margins are in the 40s, and for a while it didn’t seem to matter. 

  Twilio was valued the same multiple as a PurePlay software company, even with lower multiples, others were. And now we’re in this world where, in this new world today, there is a large discount if your gross margins are lower, right? And VC’s got drunk and VC’s funded all revenue the same, right? And there’s many, I’m going to guess that the most unicorns that go bankrupt in SaaS are folks that are hybrid models that are services, that are other things, or that are non-recurring revenue, right? 

  If you’re Better.com and you sold mortgages at the peak, and now there’s no mortgages, because in the US, it’s 7%, that was never SaaS, right? It was never ARR. So, my rambling point is now you just, you are who you are. Matterport isn’t going to stop doing 3D tours or stop having cameras, but you have, and they’re very honest about it in their public filing. You have to be religious as a founder. Segment your business. This is software, this is services, this is payments, right, especially payments, and be honest about the margins. 

  Because just like CAC and CLTV can kill you, low margins can kill you. Like there’s so many SaaS, pseudo SaaS companies that have much lower margins than 70%. And as religious as Monday was in the early days, right, you have to be even more instrumented and careful as you’re, when you have real costs, right? When your gross margins are below 60, you have to be super careful and people got sloppy. They got sloppy.

ERAN:  Yeah, I think this is a great point. I think my analysis of what happened was that founders have noticed that you get the great multiple for ARR as a SaaS company because it comes with all the benefits; stability, revenue growth, and so on. So, everything was marketed and packaged as ARR; consumption and usage. But there’s a huge difference because consumption changes. 

  You know, suddenly it’s the holidays and you get more server load. Suddenly you get less billings. And the point about ARR, it should be stable. It shouldn’t be based on any time of year, it shouldn’t be based on usage. And I think that was unfortunate. And I think even for SaaS companies, there’s so much nuance. 

  Do you include discounts or don’t? If you have upgrading and renewal, is it the ARR or do you not include it? There’s so much nuance. And maybe going forward as the industry matures, it might be like gap rules for what is actually ARR.

JASON:  Yeah. At least realize that if you’re not pure software, you’re playing by a tougher set of rules nowadays, right? And as Eran said, it got masked in the boom. Everything got called ARR and no one looked under the hood. No one cared if the top line growth was there. No one cared.

ERAN:  And the funny thing is, once you have ARR, you also have NDR. So, if it’s ARR based on consumption, suddenly you have an NDR of 180-200% and it just doesn’t make sense.

JASON:  Yeah. My rule is if your ARR ever goes down, it’s not ARR. ARR may grow slowly or more quickly. But when you see a startup where the ARR has gone up and down, I’m like, okay, I got to dig in here because whatever it is, it ain’t an ARR, right? It just doesn’t happen that way.

ROY:  Yeah, it should be stable, that’s the point.

JASON:  But we’re all — The models are evolving, right? And for example Bill.com as an SMB hero, was a pretty good company before it had payments when an IPO’d. Now, it’s an epic company at 15 billion, but the majority of its revenue is actually from high margin payments, not low margin. It was a billion dollar company to 15 by adding payments. Shopify margins aren’t perfect, but the majority of Shopify’s revenues are payments, right? If Shopify was just a SaaS company, it would be a fraction of the Shopify we know. 

  So, there’s all these hybrid models that are going to happen. It’s just we’ve got to be more honest as founders about what is ARR and segment it. And I’ll be direct, I would say the two worst investments I’ve made, and I haven’t made very many bad investments, but as time went on, I made more bad investments, not less, because we kind of let the bar expand the box. Those were folks that claimed stuff was ARR that wasn’t. They saw either massive churn or issues with their burn rate or other things. And I call it pseudo ARR. All these problems are coming home to roost. 

  So, if it’s you, just be hyper aware and honest and transparent about what your sources and quality of revenue are, because you may fool a few people in the early days, right? But it will bite you later. You can’t hide from low gross margins. You can’t hide from these issues. So, too many games, every VC has a Theranos or two in their portfolio or an FTX. It’s not just FTX. They’re all over the place. And one of the great frauds was manipulating ARR in 2021. There are a ton of startups that lied about their ARR.

DARYA:  Maybe one last question before we move into the next metric. You talked about customer centricity and using other metrics to support ARR. Do you think it should become a standard for public companies to put it in their F1? Like, what should they do to reflect this customer centricity?

JASON:  The related one, just Darya, I think is super interesting on these metrics that has changed the last few years. Going to this point of what do founders need to own is NRR versus CSAT or NRR versus NPS. And when we started with SaaStr, I was kind of anti-NPS because it seemed like a big company metric. But then we learned it kind of works, like as a consistent way to measure things. 

  You can use CSAT, you can use NPS. They’re not the same. And you can game them, and you can game the question you ask, and you can bribe people. But if you do it the same way every month and every quarter, and you track it over time, you can see trends. If it’s better, it’s good, and if it’s worse, it’s bad. 

  What has happened in the last year and a half is it has been abandoned by most startups in favor of maximizing NRR, right? And as a CEO, you have to be the boss as founders of this trade-off of, again, NRR versus CSAT. You have to get the data. 

  And if your CSAT or NPS is declining and your NRR is growing, you’ve got to jump in because no one in your team is going to jump in. This is something I hadn’t seen ever in my history of SaaS, but I see it all over the place now is CSAT and NPS down, but NRR up. This is a reaction to stress.

ERAN:  I actually have a question, Jason, because we had a lot of conversations with investors throughout the years about both net retention and gross retention. So, first of all, I would love to know, what do you think about both? When you see a company, do you look more on the NDR or gross retention? What are the red flags that you look for and which one matters more? And what is the difference between NDR from enterprise-focused company to SMB-focused company?

DARYA:  And also, Jason, maybe just in a sentence, explained the difference between NDR and gross retention.

JASON:  Yeah. It’s a great question. And gross retention is what percent of your revenue or logos are you retaining without upsells, stripping out upsells? Just what percent of your existing base or your existing logos are you retaining, period? And when we all started in SaaS, it took us a while to even understand that NRR was this profound metric, right? And it’s so profound. Monday selling to SMBs, having triple digit NRR is so profound. It’s so profound on a spreadsheet, right? And so, it took us all a while to… [crosstalk]

ERAN:  By the way, Jason, I don’t want to interrupt, but it’s a great point because it’s one of the only SaaS metrics that all SaaS companies report, not ARR, not CAC, but almost all SaaS companies are reporting NRR, yeah.

JASON:  Yes. So, when SaaS started to take off we realized that was our holy grail. In fact, the first SaaStr post ever, it was called “It Compounds,” basically. And it was all — because it was magical to folks in 2012 how this worked, right? And it went viral and Aaron Levy reposted and David Sacks and everyone because it was like an epiphany that now, I mean, this is as fundamentally basic as it gets. 

  And then I remember maybe in 2019 I was talking, I was doing an interview with Kyle Porter who was the CEO at Salesloft, which got bought for two and a half billion and they had crossed nine figures of revenue and they were sort of early getting ready to go public, right, at a hundred million plus hired the CFO. And he’s like the biggest change is everything’s about GRR not NRR now. 

  Now, we haven’t seen that show up in the public companies, right? But his point, it was an epiphany for me. And I’m like, you’re right. At the end of the day the metric everyone’s going to talk about is NRR, going to Eran’s point. Every public company reports it. But GRR is more important. GRR is more important. If Monday is able to, I don’t know what Monday’s logo retention is, there’s different ways to calculate it. 

  But if you sell the SMBs and you have 90% plus logo retention, you’re off the charts good, right? You’re off, off the charts good. And it is harder to hide games here. It is harder to hide issues and it is harder to hide price increases and rip-off deals and things when you aim for top-decile logo retention GRR.

ERAN:  Yeah. Unless you sign a three-year contract.

ROY:  Yeah, yeah. We have to talk about that.

ERAN:  Yeah.

ROY:  So, I would try and say that like gross retention has to be stable. That’s important. [crosstalk]

JASON:  Yeah. It’s a good insight. It’s got to be stable, at least stable, right?

ROY:  But the number of it varies because if you’re like, I’ll give you some examples to choose. Like one thing Eran said, if you have like three-year contracts. So, like we saw some companies with like 97% gross retention and they raised money like crazy valuation and then they crashed because it was, they didn’t see the churn.

JASON:  Yes.

ROY:  So, that’s one way to hide it like long-term [inaudible 00:31:34]

JASON:  For sure. You know, Monday would be great, and almost if we had more time, one of the most important things I can say for all of these metrics is you have to segment them. This is what too many founders don’t do, you don’t segment them. Like, unless all your customers are truly homogeneous, the same, always segment small, medium, and large or at least small and bigger, always segment because there’s always at least two to three trends in your base. 

  And for GRR you might see you know 75, 85, 95, like for example, that’s what you could see. Service now approaches 100%, right, five year contracts can never leave, their GRR purchase, 100. 75% might be pretty darn good for small businesses. In fact, it might even be unachievable for one person shops. But you got to segment it or you will miss the trends in the base.

ERAN:  I think that’s a great point. I think that’s — SMB is just, the nature of being SMB’s are more likely to churn just because going out of business, but they might have a great NDR. Where enterprises, once you get a software inside an enterprise even if they’re not using it, it’s going to take a while before they leave. So, just by the selling to different sectors and segmenting your customers, you can do different measurements of gross attention and both NDR and get different results.

JASON:  Yeah, I’ll give you just one story. There’s a SaaS company I’ve worked at, invested in that’s coming up on 40 million ARR. So, a pretty good mature, very SMB probably similar to Monday, and all the other investors were complaining that they’re NRR was only 90%. Like, you guys if you don’t get to 100 you’re just not going to make it. And I’m like okay that’s right, that’s true. 

  And I kept telling them these guys are so smart, but I kept telling them segment it, segment it, segment it, segment it. And they have a lot of single-seat customers, one user. And when they finally segmented it and you take out the single user it was north of 100 from 3K ACV. You guys are like 2K. It’s almost impossible to have 100 % and they did it. [crosstalk] They went from bottom quartile to top quartile by segmenting.

ERAN:  That’s exactly what happened to us in one of the rounds. Because like, we were at exactly the same thing. It was a 90, and we didn’t know until we figured out how to segment it, and then we saw the difference.

JASON:  Yeah, and it’s interesting, this company I’m talking about is also one of the best instrumented and analytics, like you guys, but they just didn’t do it, right? And it just [inaudible 00:34:01] rate like month after month, I’m like, I think your NRM might be better than you think. It doesn’t feel right given your [inaudible 00:34:07] position. But okay, okay. And you got to segment it, and you got to segment how you attack your market — It helps with marketing, it helps with — you got to segment your sales team as early as you can, and your customer success teams. 

  And folks, actually I find, and I’m not sure why, but it’s interesting, Roy, which I actually find founders and startup and SaaS companies segment later these days than they used to. They do it later, they’re breaking their sales teams up into small, medium, and large, they’re breaking their marketing spend up, their CS teams up later, 30, 40, 50 million, and we used to do, in the old days we would do this at a couple million in revenue, like we have no choice. 

  Like, every lead was so precious, the markets were so small that you wanted to, you immediately realized specialization would help. Let’s put Eran on the 5K deals, and Roy on the 3K deals, and Darya on the 10K deals, and we all… But now I actually see it happening later and later, but I actually think it always works. It always works in the metrics and with teams. You always get a boost when you segment your teams and your data, right? You always get a boost.

ERAN:  I think another insight that I can share is that companies are always looking to increase their NDR. And often, the way you think about it is, oh, we need to improve the product, that’s always kind of how you think about it, we need to improve the product. And that’s obvious, like you need to improve the product, but I think another thing that you should do is to create upsell opportunities, because if you don’t have upsell opportunities, you won’t be able to increase the contract price. 

  So, for example, Monday, we have — seed base. So, the more people the company hires, the more seats we have, the more we expand. But we have an option to add more layers, more add-ons, more features that we can upsell to customers. So, I think that’s another way to think about, how can we add more value to customers? How can we offer more upsell opportunities? And that’s a great way to think about how can we increase our NDR going forward.

JASON:  It is just — Two thoughts on that. One, going to Eran’s point of why every public company reports NRR for founders. As you scale this, as you approach later stage, this is the most important metric to investors. Whether it should be, we could debate it a little bit, right? Obviously mathematically it is. But you will get incessant questions as you approach 30, 40, 50 million and beyond. It will be the number one question both private and public customers will ask. 

  They have become obsessed with the annuity factor of SaaS. So, understand it, segment it, obsess about it. And then the related point is, there may be an exception or two out there, but for my knowledge, for folks that sell to SMBs, I do not believe anyone got past 100 that is single product, right? And HubSpot’s the biggest example. HubSpot was stuck at 85% through 40 or 50 million and they really never got past 100 until they added CRM and service to the piece. They never. 

  They just had to be multi-product, going to Eran’s point, and we could talk about why. But it’s a fact of life, right? And I don’t think Shopify got there without payments. We could debate whether that’s multi-product, but it probably is, but no one gets — So, you’ve got to figure out that strategy. If for no other reason, TAM is a big reason, but if you’ll never get that stickiness without the second, third, fourth, fifth product add, right?

ROY:  I can share, we had a problem with explaining it to investors because we grew too fast. And when you have new cohorts, okay, that they’re not yet mature, it’s very, it obscures everything when you’re like cohorts from the new year, kind of obscures all the rest and everything kind of looks weird, like you said. And we had to work so hard to show that even on the graph. 

  Like, when we did the graph, it looked weird. Because like all the small cohorts looked flat. Like physically, when you looked at the graph, they look flat. Only when you remove the new cohorts, which were bigger, you saw the same image of exponential growth. So, it looks like, hey, all these cohorts are flat. Why are they flat? They’re not flat. You just can’t see it because the new ones are three times bigger. 

  So, we did an animation in the IPO. We created an animation that we added the layers and everyone saw it’s the same thing because everyone — no one understood its’ exponential when it appears flat-ish because you’re growing so fast. And other companies, when you’re not growing as fast, when you’re adding the same number of customers over the years, then you have like, it looks very healthy, like a layer cake, that you can compare one to the other.

ERAN:  And Jason, I just want to add, I think something you said is really profound. And I want to share my perspective as a founder. When you start the journey, you mentioned that NDR is one of the most important metrics as you grow as a SaaS company for investors. And now I have a deep understanding of why, because I think when you start the journey, especially in the first few years, you just focus on acquiring new customers and growing business. 

  But eventually, as you mature as a SaaS company, the majority of your revenue, majority of subscription is actually coming from existing customers. Even to a point where it’s 95%, 98% of the revenue is from existing customers. Some of them might be more than a year, some of them might be five-year-old. 

  So, when you reach that point, NDR basically represents your growth rate. If you got 130% NDR and 95% of your revenue is coming from existing customers, your revenue is going to be about 30%, just a law of nature. Your new customer is going to add that, but eventually the company will converge into its NDR in terms of growth rate. And yes, you add other [inaudible 00:39:48] into the mix.

DARYA:  Okay. Guys, we have just a few more minutes left and I want to still talk about one more topic, which is one major gap that I think we haven’t talked about yet, which is how to measure cash flow and path to profitability. So, Jason, I wanted to hear your take on that.

ERAN:  Yeah, maybe how do you optimize for it, I think, because we know how to measure free cash flow. But as a SaaS founder, any tips or accommodation about… [crosstalk]

JASON:  Yeah, you guys might have even read this post in the early days. Maybe it was after you took off. But I try to update this every year because I’m shocked at how few founders do this, is my number one tip, it always works. It always works. You have to constantly, every month do an L4M analysis. 

  Okay. You do not need 20 people in finance or operations or planning to do this, any founder can do this. Take your financials and all you need is your top line and your bottom line, how much your revenue grew, and how much you burned, you don’t need anything else. Average the growth rates of both; the growth rate of your top line, and the growth rate of your burn rate for the last four months and just roll it forward. Roll it forward 12, 18, 24 months. That should be your real operating plan. 

  Okay. No matter what anybody tells you, no matter what anyone says. And if that says you’re going to run out of money in 12 months, you’re going to run out of money in 12 months. Okay, it doesn’t matter what your ops person says or your VC or finance person. The accuracy of an L4M model is so high, right? It is so high, even at the earliest stages. Does it become an accurate five years out? Potentially, right? 

  But if you’re growing 6% the last four months, but you really want to grow 12, and your dumb model for the VC says 12. Well, tough. Okay. The L4M model says six. And if every month, you say, well, our burn should be 200K. But hey, we had these legal expenses. And hey, we did this deal and we did… 

  So, yeah, it was 400, 500, 400, but it’s going to be 200 eventually. The L4 model doesn’t care. It doesn’t care about what your excuses are. It doesn’t care why you missed the month. It doesn’t care if the deal slipped a quarter. It just doesn’t care. And when I invest, when I work with founders, when I do anything, no matter what they say, I just take their financials and roll it into an L4M model. It’s always correct. It’s always more correct than what they say. 

  And what I love to keep you rigorous is every month on the first of the month, because it should take you like 15 minutes, if you can understand what I’m doing, redo it and either share it to the whole company or share it to the senior team. This is what the numbers say. Okay. I know we want to grow 100% this year, but since last month, it was only 3%. This is how it ripples to our L4M model, right? This is how the burn rate… 

  And you don’t even need to know anything. You don’t need to know headcount, [inaudible 00:42:34] count, CAC, smack, CLTV, this L4M model is your best tool as a founder. It’s never wrong. And you may not like what it says. I find many founders the first time they do it, they get a little prickly. They’re like, no, no, no, no, we’re going to triple this year on. No, no, no, no, Roy, we’re not going to burn that much. 

  But the L4M model automatically updates it, right? It’s just average your last four months of your top line growth and your burn rate and roll it forward. It is better than the most expensive CFA, CPA, CFO, multi-million dollar team, it’s better than all of them. I bet it even works at Monday today. If I took up your financials, I think I only get quarterly, but if I had the monthlies and I just rolled them forward, they’d be pretty darn accurate.

ROY:  I think it would work better today than it did [inaudible 00:43:22]

ERAN:  I was about to say that.

JASON:  I can tell you from experience is it absolutely works at a million in ARR. Like, it works at half a million in ARR. It always works. And this four months is just perfect because it gives you that extra month to take out the variability. It gives you that — the perfect. It turns out it’s the perfect amount. Even if you’re public, it straddles a quarter. It probably gives you that extra little… It takes a game out of the system. It interestingly works better, but trust me, just do it now. 

  And if you don’t like the conclusions, this is — then make the changes. You’re going to run out of money. You talked about cash flow. Forget about all the other metrics. They don’t matter. What matters is how much cash have you been burning the last four months. And if you don’t make any changes, and if that burn rate’s growing 3% a month, it’s going to keep growing. This is the mistake so many founders make, especially if they de-bootstrap. This is the number one… 

  Another bit of advice I can give to folks that de-bootstrap, a lot of folks that listen to this may de-bootstrap. It’s not being venture backed or not being venture backed. A lot of folks will either be forced to. Ventures, it’s hard to get venture capital. I mean, you guys had to raise it to three and a half pre. It’s hard. And so many folks will wait until 1 million, 2 million, 10 million, 20 million in ARR, right? 

  But the mistake I see again and again is if they de-bootstrap, post-revenue, but pre-scale, is their intuitions wrong? And they burn up all the money. Like, okay, they don’t get the fancy office. They let Roy and Eran have two more hires instead of one each month. But it’s kind of the same. The sales comp plan doesn’t go crazy. They’re like, my gut is that’s fine. And then 12 months later, half the money’s gone. But if they did this L4M model, it wouldn’t happen. They would see this creeping up on them in real-time.

ROY:  I have a motivational tip that we did. And a lot of people loved it. We kind of, when we were in a one room office back in the day, I kind of wrote on an A4 paper and stuck it on the door, like, do you want to live forever? How much customers do we need to get so we can live forever and not burn money on the current burn rate we have? So, it’s like the same thing you said, I completely agree just with the motivational approach to like where we do need to reach to meet the goals we set.

JASON:  Just to finish up the point, the advice on the burn rate going to this. The flip side of the L4M model is the biggest danger I see with founders is they get a crap model from their finance team. I see this all the time. It’s the worst of all, the worst of all mistake is a lot of founders these days wait to hire a VP of Finance or Director of Finance, let alone a CFO. Instead, they hire a Director of Operations, some smart kid from McKinsey or something like that, that’s whip smart and they’re like, I don’t want a bean counter. 

  I don’t want to count — I want this guy, the spreadsheet jockey, right, they can do it perfectly. And the problem with the spreadsheet jockey is They manipulate the inputs. Like, if Monday.com goes and gives McKinsey $10 million to plan the future of their company and then Roy and Eran don’t like it, McKinsey goes back and just changes the variables. And so these director of ops, I see it again and again. And if you peer behind… You know, what the model always looks like? In Q1 we’ll do 2 million, Q2 we’ll do 2 million, Q3 we’ll do 4 million, and Q4 will do 18 million. 

  Like, they’re just manipulating the model. And not only do they blow the top line, but they blow the cash. They blow the cash. And I see too many founders who just trust their director of ops, the McKinsey kid and they blow all the money. You’ve got to do it yourself. Like, the models are terrible, they’re terrible. And they put in assumptions that make sense for wildly profitable companies that have a margin for error that startups don’t have. They’re all terrible, I can tell you, all the models. Very few people can update a dynamic model every month and predict your cash flow. You got to do it, right?

DARYA:  I know we have to end. So, maybe just each one of you, if you have one takeaway that you want founders to take from this conversation, one good tip. Jason, maybe we’ll start with you.

JASON:  I think my biggest tip, it is go long. Roy touched on this a little bit. And decide how long you want to go. If you have a good… We’re looking at two great co-founders here, okay. Two co-founders is pretty special. It’s what I look for. If you have two co-founders, if you’re Roy and Eran or Better, then be honest and decide how long you want to commit for. 

  If you’re willing to commit for a decade in the beginning and 20 years as you go in, then you’ll get through all this stuff, right? And you’ll make the right decisions and you’ll recruit the right people. If you’re willing to commit for one year or two years, which is pretty common, you’re going to have a very different outcome and different path. And I don’t mean to be critical of it because 99.9% of people should not commit for 20 years, no matter what you see on the internet. 

  But be honest, be self-aware of that to founders. If you have 120% NRR and you have great founders, you can go as long as you want in this world. No one can stop you if you have high NRR and great founders. That’s my last — It’s up to you. Now, it may be hard, and I’ll give you a last tip. The last investment of a batch I made in 2015 has been around for 20 years. I didn’t invest 20 years ago, okay, I invested late, it de-bootstrapped, and they are now selling for many hundreds of millions of dollars, not billions, but many hundreds of million dollars. They just never quit. They never quit. 

  And there’s so many stories like this of founders that want to do it, and they had high NRR and they had times they went through where they were terrible at new acquisition. But that 120% NRR just powers them through. So, if you can get to that higher NRR and happy customers, my advice is it’s up to you as founders. It’s up to you if you want to push through the pain, if you want to push through the A4 note on the fridge that Roy left up, if you want to do it. 

  Because no one can stop you with great founders and high NRR. No one can stop you, and you get to 20, 30, 40 million ARR in SaaS, and if you’re efficient, if you’re burning nothing, you will get good M&A offers. Every SaaS company I know that gets to 30, 40 million that is profitable or cash flow neutral, someone wants to buy it because they’re going to miss the quarter. 

  'Someone out there, it may not be Monday, but some public company or a company about to go public would love an extra 30, 40 million of ARR to bolt onto their company. It’s happening left and right today as people are thinking about IPO’ing again. So, a rambling answer of high NRR, great co-founders, it’s up to you. You cannot be stopped if you don’t want to be stopped.

ERAN:  Yeah. My tip, first of all, I agree with Jason. SaaS compounds and it takes time, but once it happens, it’s just magic. So, I totally agree with Jason. My tip will be everything that you want to measure and eventually become good at, start measuring it today and start improving it today. You want to have great cash flow? 

  Start measuring that, start improving that. You want to improve your NDR, it’s not magic. Put somebody there to analyze churn. Put somebody to see what makes companies leave. Create new upsell opportunities. You know, it sounds obvious, but it’s not. Sometimes you feel like this is your company destiny and you’re stuck with it, but it’s not. If you start measuring and work towards improving it, it’s just going to happen.

ROY:  Yeah. I’m going to add to what Eran said and say that the journey has never been easy for us. It looks, maybe we’re successful, but it was always tough and we didn’t really have a good NRR in the beginning because it was very small customers and we kept improving the product all the time, but we looked, to Eran’s point, we looked at the metric, and we saw where the problems were and we added the sales team. We didn’t have that in the beginning. We improved the product. We went after larger customers. 

  So, we did everything once we saw where the problems were, and we were adamant about improving things all the time. So, it’s not about nailing it from day one. It’s about persisting with the measurement, and then it becomes successful, and it’s never easy. It’s never easy.

DARYA:  Okay. I think we can end with that. So, right before we’ll say goodbye, I’ll just remind our listeners that if you have any questions or feedback, you’re welcome to check our website, startupforstartup.com, where you’ll find all of our other content as well. And if you want to know every time we have a new episode, don’t forget to subscribe to our show on your preferred app. Jason, thank you so much again for being here with us. True pleasure.

JASON:  Yes. Thanks for having me, you guys. It was great.

ROY:  Thank you so much.

DARYA:  And thank you, Roy and Eran. Thank you for listening.

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