Tech investing isn’t what it used to be — even compared to six months ago.
Investors are applying greater scrutiny to deals. Many wonder if the days of the mega round that produced the likes of Snapchat, Uber and Magic Leap are fading quickly. Founders are realizing they can’t favor growth over profitability, or vice-versa — both are crucial to success. There’s a reason VCs are calling for “a return to fundamentals” — they don’t want to see newly minted unicorns shrivel into unicorpses.
Companies need to spend their capital carefully, with an eye on steady, sustainable growth. As the pendulum continues to swing more toward smart growth, startups are naturally forced to rethink their approach to operations. Based on my experience advising portfolio companies and consulting, I believe that data-driven operations is the new table stakes for survival today. Here are a few fundamentals of data-driven ops I’d share with any company straddling that line between high-growth and sustainability.
Pick the right universe of benchmarks
One of the most important decisions is choosing a set of benchmarks and metrics that will actually help you measure progress toward specific goals — whether it’s profitability or growth. Don’t reinvent the wheel — look at how other companies measured up at similar stages. If you’re an enterprise SaaS company, for example, compare yourself to other SaaS startups rather than any type of company. Another best practice is to look at the data in aggregate — don’t rely on one company’s experience. I advise portfolio companies to use cumulative data (not just anecdotal evidence), whenever possible, to inform operational decisions.
Many VCs keep detailed data on key metrics, like employee compensation, sales & marketing spend, rent and other big expenditures. For example, Scale developed the SaaS Index, which tracks the performance of 58 companies, to benchmark the metrics key to the success of subscription-based software businesses. AngelList, PitchBook, Mattermark and CB Insights are examples of other resources that index startup metrics.
Know what drives your sales
Sales efficiency is a key indicator of sustainable growth. You need to know the levers that drive sales efficiency — whether it’s lead costs, conversion rates or sales productivity — in order to thrive and make smart decisions. Think about sales efficiency as an ecosystem that you must constantly nurture. While it’s difficult to boost your sales efficiency with any single decision or policy, it’s easy to see it slip if you’re not keeping your eye on the ball.
Whether you think we’re headed for a downturn or not, there will always be ups and downs in the market.
In gauging sales efficiency, I recommend our portfolio companies use our Magic Number, which measures the efficiency of your go-to-market model. The Magic Number is a relatively straightforward calculation: (Revenue change x 4)/Last Quarter’s Sales and Marketing Spend. A high magic number (x>0.7) might mean it’s time to step on the growth pedal, while a low magic number (x<0.7) could indicate trouble down the road. Regardless of which situation you find yourself in, it’s important to understand your company’s financial health.
Explore other KPIs
While sales efficiency is important, there are plenty of other meaningful benchmarks and KPIs that are important for businesses to monitor. You might study customer churn, sales rep productivity or net promoter score (NPS) to gauge how your company is tracking toward its goals. It’s important that everyone on your team or company is aligned on the definitions for the KPIs you choose. Once you’ve done this, you can make sure you’re improving on those KPIs against your historical performance, as well as the benchmark universe you’ve decided on.
(A funding) Winter is coming
Whether you think we’re headed for a downturn or not, there will always be ups and downs in the market. Right now, there is more of an emphasis on sustainability, given current uncertainty over the economy, criticism over companies that are running out of money and an uncertain IPO market.
No matter the economic climate, you should think about incorporating data-driven benchmarking into your approach to scaling your business. Keeping a close eye on how you’re tracking against your metrics enables you to have a clear understanding of your performance, and provides you with early indicators that you are doing well or that you need to course-correct.