T2D3 Software Update: Embracing the Founder to CEO (F2C) Journey
It’s been four years since TechCrunch published my blog post The SaaS Adventure, which introduced the concept of a “T2D3” roadmap to help SaaS companies scale–and, as an aside, explored how well my mom understood my job as an “adventure capitalist.” The piece detailed seven distinct stages that enterprise cloud startups must navigate to achieve $100 million in annualized revenue. Specifically, the post encouraged companies to “triple, triple, double, double, double” their revenue as they hit certain milestones.
I was blown away by the response to the piece and gratified that so many founders and investors found the T2D3 framework helpful. Looking back now, I think a lot of the advice has stood the test of time. But plenty has also changed in the broader tech and software markets since 2015, and I wanted to update this advice for founders of hyper-growth companies in light of the market shifts that have occurred.
Perhaps the most notable change in the last four years is that the number of playbooks for companies to follow as they sell software has expanded. Today, more companies are embracing product-led growth and a less-formal, bottoms-up model–employees are swiping credit cards to buy a product, and not necessarily interacting with a human salesperson. Many of the most high-profile, recent software IPOs structure their go-to-market operations this way. T2D3’s stages, by contrast, focus quite a bit on scaling a company’s internal sales function to grow. Indeed, both a product-led and a sales-led approach are viable in today’s growing B2B-tech market.
What’s more, the revenue needed for a software company to go public has increased dramatically in the last four years. This means that software founders need to focus not only on building a scalable product and finding scalable go-to-market channels, but also building a scalable org chart. These days, what is scarce for software founders isn’t money from investors; it’s great human talent.
So in addition to T2D3, my firm and I are now focusing on another founder journey: F2C, or the transition from founder/CEO to CEO/founder. This journey can take many paths, but ideally it starts with the traditional hustle to find early product/market fit. Then, founders should start morphing into real CEOs by focusing on building their first org chart and establishing the core cultural DNA of the company; hiring talented senior executives and nurturing homegrown talent; and, finally, building a mature company that can support five levels of management and even more levels in the future.
Why F2C matters now
The data really tells the story here. According to a Battery analysis of all SaaS IPOs since we published our T2D3 piece, using data from CapIQ, the average revenue at the time of IPO has skyrocketed for these companies to $328 million this year, up from $133 million in 2015. The number of employees at IPO has also risen significantly–to 1,469 from 820.
Interestingly, the time it takes for SaaS companies to get to an IPO has not increased. That number has stayed steady for the last four years, at 11 years from company founding to IPO, according to CapIQ data.
That means that compared to when we wrote our original SaaS Adventure post, companies that eventually go public are growing much faster and reaching massive scale much earlier. The new reality is that you will manage 1,000 employees, and probably $200 million in revenue, far sooner than you might have a few years ago
Founders have to be smarter, nimbler and more resourceful to keep their companies on track today. The stakes are higher now for getting things wrong. A single mistake can cost you a year of growth and cause you to cede your #1 position in the market, which is crucial to success now.
When you look back on the company you’ve built, you should be equally proud of your founder title AND your CEO title. You earned the founder by virtue of being there at the beginning of your company journey–itself an awesome feat. But the company’s ultimate success will depend on how you developed as CEO and tackled operational and management issues. Obviously, not all of that will come easily. Here are a few lessons learned from witnessing this journey at many SaaS companies.
1. Find a CEO mentor fast
Many founders are essentially VPs of product for the first couple of years, not thinking much about organizational scaling. That can be a good thing: Many product transitions happen during the private phase, which often plays to product-oriented founders’ strengths.
But founders have to think more like managers at the same time. If the new reality is managing 1,000 people in the first decade of a company’s life, that means you’ll be running an organizational chart with five levels and possibly more. That demands a different mindset. Founders need to be recruiting other leaders earlier in the company’s journey.
With such pressure to scale, your venture investors can help you grow operations only so much. You’ll need a CEO mentor or executive coach, and finding a great one won’t happen by accident. Both your VCs and your board can help you connect with those operational experts.
Sprinklr* CEO Ragy Thomas recognized his need for CEO mentorship early on. One of his board members introduced him to Cisco’s legendary former CEO, John Chambers, who joined Sprinklr’s board in 2017 and shared insights with Ragy on CEO leadership. “There are a limited number of folks in the universe that have operated at that scale,” Ragy told me recently.
Specifically, he said the ex-Cisco chief helps him “pattern match” in certain situations, discerning key trends based on past experience. John is obviously an incredibly busy person–he’s recently written a book and is advising the governments of France and India on tech innovation–but he generously shares his time and insights with Ragy on leadership, hiring and other issues. But these types of mentoring courtships often take time to play out. In the case of Ragy and John, the mutual getting-to-know-you process took at least 12 months. Being a CEO can be a lonely job, so start cultivating your support network now.
2. Hire an internal HR leader sooner
Founders need to embrace the role of “Chief Recruiter”, as Databricks* CEO Ali Ghodsi describes his role. Helping the company scale through smart recruiting is just as important as scaling through product improvements and moving into new markets.
Even as you embrace that title, we feel strongly that you should hire a VP of HR around 100 employees; this will allow you to scale effectively to 1,000 people. By VP of HR, we mean not just someone focused on tactical issues like benefits, but a true partner to senior leadership. Too many founders don’t embrace strong HR and pay for it later (headlines today are riddled with these companies). Simply put, product, go-to-market and, now, organizational architectures can make or break a company. It’s important to get all three right to be first to market, as those winners now capture the vast majority of category value. Pivoting your product or go-to-market strategy is painful, but you can recover. Hiring the wrong team is a far more fatal flaw.
The CEO of Glassdoor*, Robert Hohman, recently told us that “businesses are nothing more than a series of one thousand decisions laid back to back, and the folks making these decisions are your team members.” These decisions become exponentially more detached from the CEO as you add new branches and nodes to your org chart. It is nearly impossible to restructure and maintain the #1 position in any market, so lean on a great HR leader to make sure you’re doing it right the first time.
3. Get your direct reports ready to scale, too
While speaking at an all-hands meeting at startup LogRocket* recently, I asked those in the room: “How many people here joined the company last year?” Three-quarters of folks raised a hand. In my experience, at a rapidly scaling cloud-software startup, the percentage of newbies stays roughly steady at this rate year after year. Next year it’ll likely be 60% newbies again, and 50% the year after that. It’s surprising in some sense, but founders need to get used to thinking this way–you are hiring so rapidly that most employees will be new each year.
How do you ramp up so quickly? Referrals are a great way to hire, so you want to rev up your best employees to refer great people like them. Everyone has a day job, but your night job is recruiting people you love to your company. If you do that, you’ll be working with great people. If you don’t, you’ll be rolling the dice on whom you sit next to.
Once you are at significant scale, say around 200 people, get your direct reports to share the org charts of their groups and ask them: “If you got hit by a bus tomorrow, who would be ready to take your position?” VPs should always be recruiting and grooming top-notch leaders, not just worker bees.
In my experience, the average startup that reaches 1,000 employees will probably have at least 100 managers that have never managed people before. Giving first-time managers the training they need to be effective is another critical HR focus for scaling companies.
4. Embrace a multi-office mindset
Rapidly growing startups often worry when it’s time to expand their office space. Will they function as seamlessly when everyone isn’t located on the same floor of the same building? Or, eventually, when people are in a different city, or a different country?
Founders need to think and act differently to stay on top of this facet of company expansion. The truth is you’re going to blow past that single floor sooner than you think, and it’ll be fine–provided you’re laying solid foundations for employees to collaborate effectively regardless of location.
Great talent can live anywhere, and they’re tougher to hire than ever. Scaling fast operationally means staying open to remote work and other flexible arrangements. Our portfolio company InVision* embraces 100% remote work and has no headquarters at all. Approaching culture, teamwork and collaboration with such an expansive mindset will be a huge enabler of scale.
5. Emphasize diversity in your hiring immediately
My colleague Kelly Kinnard wrote an excellent post encouraging startups to hire for gender balance from day one instead of trying to fix the problem further down the line. Her advice applies to all diversity balances, not just gender, and is more important than ever in today’s marketplace. Jyoti Bansal, the founder of AppDynamics* and co-founder and CEO of Harness, agrees. He told me recently that an early focus on diversity is essential, since “diversity of people drives diversity of thought—and that helps you drive the right decisions at a fast-moving startup.” AppDynamics started an internal “Women in Technology” group several years ago, for instance, to better attract and support women at the company.
Indeed, it’s nearly impossible to fix diversity imbalances once you reach 1,000 employees, especially if you want to encourage your employees to recruit from their personal and professional circles. Think of this in terms of your core, founding “Team DNA”. Evolving to a more inclusive team will be harder the longer you wait.
Many companies are now using versions of Rooney Rule, an NFL policy requiring teams to interview candidates from under-represented groups for head coach and general manager positions. The Rooney Rule doesn’t obligate you to hire those candidates, just to make sure they’re always under consideration. It’s one tactic to use as part of a broader focus on diversity and inclusion. CEOs should seek out best practices and outside counsel on this topic in the same way they are constantly iterating on product.
The F2C journey is challenging but very rewarding. Embracing the “CEO” title, and focusing on scaling personally just as much as you focus on scaling your quarterly metrics, is often the missing link in building an enduring software company. I’ve been lucky to work with many founders who have gone through this journey, and it’s a personally rewarding experience seeing this transformation happen.
As we discussed in our Software 2019 report, released this past May, there’s never been a better time to be a founder of a cloud company. However, given the ever-quickening pace of growth for start-ups, it’s possibly the hardest time to be a great CEO. But when you stretch your skills and help others develop as a team, it is an extraordinary feeling. So game on—and welcome to the #F2C journey.
This article originally appeared on TechCrunch.