A VC’s Tips: Communicating with Your Board During Tough Times
The sudden market movement in the wake of COVID-19 has been surprising to many businesses, and we wish the very best to companies navigating these uncertain times.
The shock, however, may just accelerate the movement to more efficient, cloud-native operating models for enterprises and tech companies alike. In the near term, travel bans and the inability for decision makers to meet in person to close business deals mean sales executives may need to think outside the box. Instead, well-designed products may engage customers on their own, and proof-of-concepts and trials will move to new cloud marketplaces.
In the mid-to-long term, enterprises across all industries managing cost cuts and capex reductions will likely accelerate their move to cloud-native tech products and services, and rapidly deploy microservices in increasingly popular public- and hybrid-cloud setups, among other strategies. This will allow them to innovate more rapidly to get businesses back on track. Necessity is the mother of invention, as they say. So, if you’re a start-up founder or CEO selling to enterprises navigating this “new normal,” how do you structure your product strategy and go-to-market approach to align with these market shifts, and navigate the uncertainty ahead?
Lately we’ve been working with several prominent, cloud-native companies with “bottoms-up,” as opposed to “top-down” sales motions– for the uninitiated, that means selling your product first at the lower levels of an organization, usually directly to software developers, product managers, data scientists and business analysts, instead of initially focusing on securing big, enterprise contracts with a CIO or CISO (chief information security officer). We’ve written extensively on this topic, including in our November State of the OpenCloud 2019 Report.
These companies and other cloud-native leaders have built best practices in this emerging space, and these lessons are all the more important in this volatile market environment. The learnings relate to how to best build sales, marketing and customer-success operations; price products; compensate key executives; work with specific distribution channels; and expand internationally. Given that, we’re collecting these learnings into a five-part “Cloud-Native Entrepreneur’s Playbook” that we’ll publish here over the next several months.
Indeed, many experienced go-to-market (GTM) leaders who have built some of the world’s most successful tech companies in a top-down way are still early in this transition, and are quickly learning that the traditional ways of structuring a sales organization often don’t cut it in this new, cloud-native world. So, just what are the best practices for building a bottoms-up, high-velocity sales machine in a cloud-first environment? Here are five ideas:
1. Build your product to delight target users and provide immediate “time to value”
Before you even think about structuring your GTM machine, the best sales tool you have is your product itself. With bottoms-up offerings, it is critical that your end users can create immediate value with your (great) product without needing to speak with a salesperson or pre-sales engineer. Whether that first trial of a product comes via freemium trial on cloud marketplaces or download as a free open-source product, the value of your product should be immediate and obvious.
Delightful products that provide instant gratification will naturally create a viral community of engaged users. Also, given a choice, you would rather engage your users on a cloud marketplace or in a SaaS trial in which you can track their interactions with your product, rather than engage them through an open-source download with no telemetry. Remember, prominent open-source companies Elastic and Docker count more than 350 million (per Elastic S-1) and one billion downloads of their products to date, respectively, but those figures don’t really reflect the real number of users actually actively engaging with those products. Several of them may be GitHub pulls without corresponding to an actual user. Even when users stop engaging with your product, you have no idea when and why! We encourage our companies to think of cloud-trial expenses as a substitute for brand or search-engine marketing. Knowing that users from Fortune 500 companies are actively engaging with your solution can help you create a more-targeted, product-qualified lead, rather than spraying and praying brand marketing dollars across a broad, unenthusiastic audience.
Now that your user base is (hopefully) starting to grow, your next step is to harness the broader community to promote active collaboration around using your product. Rather than having users come to you with questions and issues, create Slack channels, or Stack Overflow outlets for them to discuss issues with each other, such as live or online meetups and forums. The more your users complain (and often suggest solutions to each other), the more they care!
2. Structuring self-service vs. enterprise sales playbooks
When running a bottoms-up sales playbook, it’s important to remember that THE most important asset you have is your community, as discussed above. That said, as your community grows to thousands or even millions of users, it would be impossible–and highly inadvisable–to use significant internal sales resources to continue to serve them all.
From our experience, even at relatively large companies, it still makes sense for many sales—and upsells–to continue to happen through a self-serve motion on the company website. This means individual users and/or sub- ten person teams can sign up for freemium products, usually paying with credit cards, and organically grow their own usage without having to touch sales. Within these user tiers, we advise adding on relevant capacity limits through levers such as number of users, volume capacity, API calls, or other items relevant to your business. This will allow you to maximize the value of your freemium/self-serve offering. For example, a collaboration-oriented tool such as Slack provides capacity based on number of users and limits the number of historical messages users can see; alternately, data-analytics tools such as Sumo Logic’s* sets limits based on data volume processed.
Once users or teams have realized the value of your product on their own, and are ready to expand their usage, have a team of inside-sales reps (ISRs) ready to manage these leads. Rather than focusing on every single account that touches your platform, this team of ISRs can focus on accounts that have shown a clear propensity to grow. With this approach, your resources are only leveraged later in the sales cycle on targeted accounts which can add scale to your business.
This is the beginning of the “land-and-expand” motion you were hoping and expecting to see!
3. Engage strategic account reps to expand enterprise logos and sell the way customers want to buy
At some point in the journey of every cloud-native, bottoms-up company, new and old sales paths converge, and it becomes time to also sell in a “top-down” way.
But rather than forcing your user community—which already has shown a willingness to pay for your product and expand usage–to unnaturally commit to large enterprise contracts before they might be ready, allow them to organically expand their usage until their own, internal procurement processes require a larger license agreement. This way, the “pull” for more sales comes from the customer and their procurement team, not your sales team. Also, often even large enterprises may prefer to engage in a pay-as-you-go fashion rather than commit to an annual contract upfront. While this does not give you upfront cash collections, we find that enterprise customers can on-ramp much faster with a smaller, usage-based deal, and ramp quickly to naturally engage in larger, annual deals.
In order to prepare for these larger contracts, it’s paramount that you hire a team of enterprise account executives (AEs) to identify the right customers and to engage them at the point in their journey at which they are ready to sign up for a larger agreement. To do this more seamlessly, it helps to offer layered-on, enterprise features, which can come in many different forms and allow customers to continue to gain product value as they move up pricing tiers. These features may include customer support, dashboarding, analytics, significantly increased volume capacity and other perks a customer would not receive via other usage plans. For example, Postman touts 10 million developers on its platform driven by its powerful freemium offering; however, users move up pricing tiers to gain collaboration, security, monitoring and other essential capabilities.
In a later playbook blog post, we plan to discuss pricing and specific sales quotas in detail. But we typically see enterprise AEs bear quotas beginning at $1 to $1.2 million in ARR, with ramp times of perhaps six to nine months, and flexibility to retire quota partially with pay-as-you-go deals as well to reduce friction in the purchasing process
As you work through your annual planning and your ARR/revenue targets, make sure to evaluate whether your ARR goals map to your ramped sales capacity and provide targeted leads to reduce AE ramp time from nine months to four to six months.
4. Align your extended sales teams with the enterprise customer’s journey
But remember–AEs don’t do all your selling on their own. Business development reps (BDRs), sales engineers (SEs) and customer-success managers (CSMs) work closely with the AEs to close deals and retain customers, and they are a critical, supporting part of your sales playbook. Many companies will put together a cross-functional, growth-hacking team that coordinates touchpoints across the customer journey.
The journey usually starts with engaged users that are either 1) fading away and becoming disengaged, meaning the marketing team needs to provide in-product resources to re-engage them, or are 2) hitting the free trial paywall. In that case, BDRs must engage with them to qualify purchase intent. These product qualified leads (PQLs) can combine with marketing qualified leads (MQLs) gleaned from events, developer meetups, or search queries to drive combined pipeline for enterprise-focused reps. Then, enterprise reps may either sign customers with a PAYG account, through which customer success execs can guide further usage to drive the customer to an eventual annual or multi-year deal.
Alternately, some customers may have enough validation and/or budget to engage the AE in an annual deal upfront. In these cases, SEs can be very valuable for customers who need to address specific technical issues before signing a deal. As you map out your sales-organization structure, consider a ratio of SEs to AEs of 2 to 1, and BDRs to AEs of 1.5-1 or 1:1 depending on volume of qualified users.
CSMs, on the other hand, can be mapped to 1 for every 50-100 accounts, and it is important to incent CSMs to work with your enterprise customers from the day a transaction closes to drive usage, rather than engage only when the contract comes up for renewal.
By this point, your mature, enterprise-ready organization has a full sales staff across AEs, SEs and CSMs, and you’re well-set to execute an end-to-end, bottoms-up and top-down motion. So, what’s next?
5. Track success closely!
You’ve done all the right things. You created a “sticky” product that your community loves; you allowed users to communicate amongst themselves; and, finally, you inserted yourself into the enterprise-procurement process at the perfect time, just when your customer was ready to lock in a big contract. The next critical task is for you to monitor your customers’ ongoing success. This means, first, measuring your AEs closely against their assigned quotas to make sure they’re selling as expected. This is critical if you want to hit your overall company financial goals.
At renewal time, monitoring the success of your customers becomes one of the most important metrics that investors in your company will evaluate. The common way to track this is by looking at gross and net ARR and customer logo retention. Not only is it critical to ensure you’re retaining your existing customers (gross retention), but you also want to make sure they’re expanding their usage of your product (net retention). Aim to keep gross retention as close to 100% as possible; best-in-class, net retention usually runs around 140%. Prominent, cloud-native companies Datadog* and Zoom had 146% and 140% dollar-based net retention, respectively, when each company filed its S-1.
It’s a long but rewarding journey to become a successful, bottoms-up GTM machine in today’s cloud-native world, and the need to move in this direction is exacerbated further by the macro environment. But by following some of the tried-and-tested tactics to reduce your customer-acquisition cost and enhance your customers’ lifetime value, you can be well on your way to building an enduring software powerhouse with products customers love using.