This episode of the Official SaaStr Podcast is a special one as we’re celebrating reaching episode 500! We’ve had some legendary SaaS greats over the years. From the very first episode with Tiago Paiva, Founder, and CEO of now $10B Talkdesk to Mark Roberge, our most downloaded podcast episode of all time, our podcast has been host to the very best in SaaS since 2016.
If you’re curious as to how SaaStr, the Annual event, the podcast, the community, and the SaaStr Fund, got its start, SaaStr CEO and Founder, Jason Lemkin, explains at the start of this episode: “When the Cloud was much harder (than) today, when there was one unicorn called Salesforce, I was the first one that didn’t pretend, that didn’t always claim every day was great. And I just started blogging my mistakes and that blog (SaaStr) took off. And then one of the VCs that had invested in me, Storm Ventures, brought me in as a partner. I’d never done any investments before, but I just invested in some of the founders that were fans of the SaaStr blog and it worked out okay. The first four investments eventually became unicorns, five out of the first six. And so it kind of took off organically, but I certainly didn’t intend to invest out of that or build a huge community. It was just to share my learnings and mistakes and I had nothing to hide.”
Nearly a decade and 500 episodes of the podcast later, we invited back our original SaaStr podcast host, Harry Stebbings of 20VC for a catch-up chat with Jason to discuss the world of venture today and how to scale a successful SaaS sales team from the bottom up.
SaaStr Podcast Episode #500 Transcript: Part One, The State of Venture Today
Harry: Jason, this is such a joy to do my friend. It’s been such a long time. I’m so excited to have you here, but thank you so much for joining me.
Jason: Harry. Thanks for getting us back together. I’m very excited.
Harry: When you look at those five out of the first six, I mean, I know the company is that it is an incredible cohort of companies. When you look back at that, are there some lessons that you have from those early investments that you take with you today and impact how you think about investing today?
Jason: I would say two things. One certainly, especially in the last 20 months, the world has changed. The funny thing was back even five or six years ago in SaaS and cloud, you could meet with every good SaaS founder. I remember waking up when I read that Mamoon had invested in Slack back in the day. I’m like, “I didn’t see that deal.” Now, 90% of the unicorns, I never heard of them, the universe is so big. So that’s changed. The sheer scale of the cloud obviously is a hundred X what it was five years ago, a thousand X, what it was 10 years ago, which is difficult to wrap your brain around. So that’s changed. You were saying before we went on some great deals you missed, you should miss tons of deals today because there’s too many good ones.
Jason: I’ll tell you what hasn’t changed when I look back over the years is you’ve got to be crazy to be a founder and build a decacorn. You have to be crazy. It’s so hard. It is easier today. Let’s be clear. It is easier to build a SaaS company today. The tools are there, the systems are there, the markets are larger. They’re more understood, but the best ones, the decacorns and the unicorns, these founders were insanely committed to building something huge in a way that almost doesn’t make rational sense. And Harry, you have a little bit of that with the 20 empire. I see it, that’s why I’ve always known it would be wildly successful. But when you don’t see that my rule is. And I’ve made this mistake since don’t invest, no matter how much you love the found, you can love them as humans, they can be doing very well. But if you don’t have this crazy 20 year commitment to building something huge, it’s hard to make money in venture.
Harry: The one thing that I continue to see here from VC is the markets are a thousand X as big or a hundred X as big as you mentioned. And so ownership doesn’t matter as much anymore. How do you think about that?
Jason: I think it’s a great argument on a spreadsheet. Certainly owning 2% of a Datadog, 1%. And we look back, we look at all the individual investors in Uber that became deca millionaires out of it. And you’re like, “Wow, I could have done that.” I don’t know, I’m not smart enough, but when I look over my eight year history of investing, it’s the ones with the double digit ownership that move the needle. And for better worse, when I’ve had my own fund, when I look at what the companies I’m sitting on today, obviously you regret ones you missed, or you didn’t. But all of my core positions are double digit ownership, largest investor in most of them. And that one puts you in a good position if you get a unicorn. Owning 20% of a unicorn still works today. If you give up a decacorn, it was a miss.
Jason: So I guess it all boils down to I think there was one rule when I started investing that the folks I worked with disagreed vehemently, but it certainly turned out to be true. When you meet a winner, you buy all the shares. Now, if you can buy a quarter of the company, you buy a quarter of the company. If you can buy 2% of the company, you buy 2% of the company, but you either buy all of them or none. And I think that’s the way you solve through this. And if all you could buy was 2% of a decacorn and you get 200 million, that’s pretty good. But buying less doesn’t help.
Harry: Would you agree that venture is less collaborative now than ever before? Someone said that to me on the show the other day.
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Jason: Without question. And without question, it’s better for founders. Every element of venture that is… And I’m being binary when it’s of course more subtle in this, but much of the collaboration in venture did not benefit founders. The fact today that the craziest thing to me in venture isn’t anything you’re saying. The craziest thing to me in venture is there are over a hundred founder and operator led funds of over 50 million. That means if you are connected… And this is for the privilege, which we could talk about. But if you’re connected, you might never need a VC until series B. If you can raise 10 million from founder-led fund, operator funds, rolling funds, and that works for you, you can get it done in a week or two, why would you deal with a bunch of collaborative VCs that all want to own 15 or 20% of your company when value is not consistent with ownership? That’s the underlying tension that we’ve been talking about for years, but we’re realizing is we get value out of our cap table. We don’t get value consistent with ownership.
Harry: I totally agree with you.
Jason: And for me, it’s hard. I’m sure it’s hard for you, Harry. I get so many inbounds and they’re like, “Jason, would you join our round? We have a 100 or 200K left.” And I can’t do it because they’re asking me to recruit their VP of sales, build their two team for less than 1% of the company. And if I was angel investing, I might do it, and if I had time on my hands, but I can’t do it. You get so overloaded, but that’s a smart thing for a founder to do. And if the founders can get a great operator, great CMO, CRO, X founders with time on their hands to all do this, I mean, it’s amazing.
Jason: And I invested in a lot of French startups, Algolia and Front and Gorgias, and Plato. It’s interesting, Olivier from Datadog would invest in all of them back in the day, they all knew him, he was a hub. And Datadog went public, he got a little busy. But back in the day, he was so helpful on every cap table. Why wouldn’t you want him for 1% versus some fund that complains that the board meetings are inconvenient for his schedule. Why wouldn’t you want to Olivier in your cap table, of course you would, right?
Harry: No, I’m totally with you. One final question before we dive into the meat of this. Bluntly, when we look at funding environment state, I call it the ‘foie gras-ing’ startups, which is especially in SaaS far as meat, because you give the 60 million when they’re at 25K MRR or 50 MRR, and suddenly they hire 20 sales reps, 10 in marketing, and they don’t have a playbook and they don’t have repeatability. Do you see this too? Are you as concerned by it as I am?
Jason: I’m not concerned by it. I believe that with help… And this is why you need good advisors. You need good capital. The best founders eventually hire great VPs. Sometimes they screw up a few VP hires, oftentimes they’ll fall in love with the logo, they’ll want someone from Datadog or Dropbox, whoever. Everyone makes that mistake, maybe your advisors help you avoid it. The great VPs, the truly great ones, not the good ones, the great VPs know how to spend the money. The mediocre ones fall into a hole. What happens is you hire a mediocre VP of sales and let’s say, oh my God, the CEO promised we’re going to go from 1 million to 10 million this year. That’s what I promised when I raised the money. I didn’t promise one to two or one to three, even one to three was the old days was a lot. I probably seen one to 10. And we’re seeing at least one to five, one to six all the time these days. So I did the promise.
Jason: What does a mediocre VP of sales do if there’s 60 million in the bank, they spend it all. The mediocre ones, a hundred percent of them spend it all. The marketers spend everything. Harry, you and I have that multiple times, a mediocre CMO will come in or just a misfit, more often, it’s a mismatch CMO, and they’ll spend everything on advertising and media. But the great ones, you know what, they spend maybe 50% more, the great ones don’t hire crummy reps, the great sales leaders, they build amazing teams. They just might hire a bigger sales enablement team, a bigger RevOps team to support them, than you otherwise would. The great marketers don’t spend money on programs that don’t perform. So I think this is true, but I blame the CEOs for lowering the bar on hiring for VPs. I don’t see them blowing through all the money. I never see it, I haven’t seen it.
On Hiring and Building Out Your Sales Team:
Harry: I think you’re right definitely, in terms of the best always hire the best VPs. So I get you there. I do want to dive into the meat of the show though, because I think, obviously one area where we’re both very passionate is sales and it’s where I get the most questions I think from founders in particular. Start on the master, which is like fundamentally, does the founder need to be the person who creates the first sales playbook, or can that be distributed to a sales rep or head of sales?
Jason: Well, look, I think I would say the majority of B2B companies that are successful that you and I have worked with Harry, the majority, but not all, the founder been the first head of sales. My first decacorn SaaStr podcast, 001, you did with Tiago from Talkdesk. He was the only salesperson through the first 2 million of revenue. That’s where I learned.
Jason: On the other hand, sometimes it’s just not you. Sometimes you cannot be a great sales rep. And when I look at my second investment back in the day, another unicorn Algolia, Nicholas who you’ve interviewed was okay at this, but he brought in Gaetan like his chief business officer really as almost a late co-founder. He was probably employee number one or two because these engineers just weren’t great at sales. And it became clearly that the search API had a sales element.
Jason: If you don’t have that DNA find that great almost co-founder like salesperson early and it can work. But hiring that person over Craigslist or over LinkedIn or whatever, that’s the one that fails. So we all believe in this early founder led sales and it’s true most of the time, but it’s not true all the time, but you sure better find a co-founder-like person to pick up the slack.
Harry: If you think about the first sales hires, often founders do, say they’ve built the playbook and they’re at a million in ARR, say whatever, some number they go, “Should I hire ahead of sales who brings in the team around them and cross that team? Or should I bring in two sales reps and build it from the ground up?” How do you advise founders in that situation?
Jason: Well, we’ve learned over time there’s this snare that works 80% of the time, but you don’t have to run that playbook. What works 80% of the time is 80% of the great cloud SaaS CEOs we’ve worked with, they hire two quirky sales reps and get them doing pretty well, hitting quota or beyond. Often one of them just crazy good. And we can talk about what that persona looks like. And when you’ve hired two, you’re generally ready to hire a VP to hire 3 to 300. You have just enough of an engine, just enough of a playbook, just as importantly, a playbook that works that you can start reproducing that playbook from 3 to 300.
Jason: If you don’t have those two AEs and you hire VP of sales, 80% of the time it doesn’t work because there’s nothing for them to work with. And the good ones and importantly, today, a good VP of sales usually really won’t join a startup of that phase. That’s one thing that’s changed the last five years we could chat about, is the great VP of sales are waiting for 10 million. The ones that used to join at 1 million, they’re all waiting for a 10 million ARR startup today, or a unicorn, whichever comes earlier, all of them. But if you possibly can get two performing reps yourself, it’s going to make that whole process 10 times easier.
Harry: I want to talk about those two reps you mentioned there, what do we want in those two reps? What do they look like? What are the character types? What makes you go, “This is a 10X rep and we want you in our team”?
Jason: Well, let’s be clear that 10X reps in the early days are not the 10X reps later. Hopefully they stay forever, the best ones stay. If you’re lucky, keep them. But they’re different. But I will tell you how to hire them and what they look like because they’re two different things. The 10X sales rep in the early days has one and a half criteria. It’s really the simple. First, make sure they’ve sold at your price point, at your ACV. If you’re a 5K ACV startup do not hire someone from a million dollar a year group, no matter how much you love them, it’s the wrong toolkit. The toolkit is roughly the same for every startup at a given ACV, at a given price point. So make sure they’ve sold in cloud, in SaaS, at your price point, otherwise don’t fall in love with them.
Jason: Two, and most folk folks screw that up. The second one, all the founders screw this up. Harry, would you buy from her? They listen to the buzzwords and they listen to the talk and they do the reference check. But Harry, if you’ve sold the first hundred copies of your product, if you sold the first 200 sponsorships at 20, you know whether you can trust these precious leads to somebody else. And whenever I talk with the founder and I mouth, “How did it go?” “Well, my first two reps didn’t work out.” I’m like, “What happened?” And I always ask them one question, “What would you have bought from them? Would you have bought your own product?” The answer is always no. So you can give on a lot.
Jason: You can give on the fact that they were never great, that they were always mid pack. You can give on the fact that they sold at a six tier competitor. You can give on the fact that they never got to 20 million in their lives. You can give on a lot of things. ACV’s tough to give on and the fact that you would buy from them never works. So that’s the criteria. And if they just pass those two criteria, they will work for you, and they can stay for a decade.
Jason: Now I’ll tell you what makes them 10X. What makes them 10X, and it took me a long time to figure this out, is that they can change their playbook. 90% of sales reps, and this works out the bigger you get, they sell exactly the same way. “Harry. Hi, this is Jason from 20 Media, we have a podcast sponsorship. We start at $100,000 a month, where can I send the PO?” Now, when 20 gets really big, that actually will work eight times out of 10. But think about the early days. I mean, it wouldn’t work. Actually 90% of sales reps, no matter how… They just run the same playbook again and again and again. And the bigger your brand gets, the more that works. But the great ones, especially in the early days, they change the playbook based on who the prospect is. And that may sound obvious because as founders, we do this intuitively, but it’s not how many great reps are trained, they’re trained in a process in a system. They get really good at the 10 questions in the script.
Jason: So those early reps can be great just if they’re at your ACV and you would trust your lead, that’s enough, hire her. But if they actually can sell three or four different use cases, they understand the different buying personas already, that’s when the magic just happens and you get the 10Xer. And that’s the criteria of every time rep at any SaaS company I’ve talked to is they can completely change the sales playbook based on the prospect, based on the buyer.
How to Set Quotas, Enterprise Sales Cadences and Founder Dependency
Harry: One thing I find very, very challenging, it’s quota creation. How do you advise on the right quota that is both ambitious and it’s hard to get, but also it’s not too ambitious so it’s just too far out of reach? What’s the right balance?
Jason: Well, the good news is, the middle’s hard, but the beginning of this process and the end are easy. When you are really early stage, your quota should be enough that the sales rep won’t quit, that they can eat. So you need to make sure that at least the first three to six months, if you’re sub 1 million to 2 million in ARR that they get a boost. And often it’s simplest to almost give them, I know it can sound crazy, sometimes it’s almost easy to give them a hundred percent of what they close, if it’s hard. You close 10K this month you take home 10K, it’s really simple. Obviously that’s not profitable, but it’s almost a hundred percent, they take home a hundred percent.
Jason: That can be okay for the first three months, you have to train people, you have to onboard them, it’s not the end of the world. It doesn’t work at scale. But you need to back into it. “I’ve hired this new rep, Harry, he’s got to make a 100K a year. Let me be honest with myself. If he can close 200K, it’s so early, that’s a gift. So I’m going to pay Harry half of what he closes.” You have to be analytical, they have to eat. And then at scale, we end up at these 3X, 4X, 5X numbers. Which is quotas are an SMB, usually 3X, your fully burden comp, you’re on target earnings, your OT up to 5X in the enterprise.
Jason: So that’s the way it works. 3X, 4X, 5X. It’s actually worked since in the… it’s always been three to 5X of profits, going back to automobile sales, anything you could sell, pool supplies. It’s just because software approaches a hundred percent gross margin, sales reps could keep three to 5X worked for revenue, not the profit. But that’s the way it works. So at scale, if you want to make $200,000 a year as a sales rep, great. In SMB, you got to bring in 600, mid-market 800, enterprise a million. And then the question is in the middle, especially if you have capital or if you don’t, where do you want to bend those rules until you’re at scale? But ultimately at some point as you approach IPO or something, your metrics have to be normal, don’t they?
Harry: Absolutely, they do. My question is also, when you look at enterprise, given the conversion length in terms of the sales cycles, it’s very difficult to know if your reps are actually good.
Jason: It’s very stressful.
Harry: What assigns them when you have a founder that goes, “Jason, they haven’t closed anything, but they’ve only been here four months.” How do you know if they’re good?
Jason: Yeah. There’s a startup I invested in, it’s taken a while. They’re founded in 2017 and the beginning of this quarter, they’re at 2 million since 2017. This quarter, they finally closed a million, so two to 3 million in one quarter. Not a single enterprise rep has ever worked out. You keep waiting and waiting and waiting. When you’re at scale you know because long sales cycles don’t matter at scale. North of 20, 30 million in revenue, you’re lining up so many deals at the same time that long sales cycles don’t matter. Because if you have a hundred deals in flight, it actually starts to happen very predictably. But you need like a hundred long sales cycle deals, not phony-baloney pipeline, but actually in flight that are going to close before this gets de-stressed. And how many startup founders have a hundred enterprise deals in flight? It takes a while.
Jason: So there’s really only two answers and it’s stressful there’s no great answer. One is, I found that in true enterprise, real enterprise, the founder is often the VP of sales until 10 million. I’ve seen this again and again and again. Now, I’m not saying they don’t have a VP of sales. But I think in SMB you can be hands off at a million or two in revenue, even if you did found the line sales. I find that an enterprise they’re so good at speaking to the big customers, they’re so trusted. Harry, we know, we trust him, all the customers trust him. Google trusts him, whoever trusts them. And so Harry is already in every deal until this brand is so established that Harry just gets pulled into the deal.
Jason: So I actually think to tell founders that are pulling their hair out in enterprise, keep pulling it out, because it’s not going to get better. It’s just going to get more repeatable and you will be the head of sales till 10 million. And so what that means is the big mistake that I see founders that are true enterprise make is they just have too much faith in these AEs. You have to see more progress. You have to judge it. And even if you have a nine month sales cycle, you have to say four months in, “Are these deals really moving at the pace they did when I run them? Are they really working as well?” Because otherwise it’s fake. It’s fake energy. Isn’t it?
Harry: It totally is. The thing I worry about is founded dependency. And I think about this with me now, dealing with sponsorship management, how do I extricate myself in the process because you don’t want to be in every process where it’s founder dependent.
Jason: Well, Would happen to SpaceX if Elon Musk was gone or Tesla? Founder dependency is part of the game. I think it’s one of these existential risk for investing too. What if something happens? I got an email over the weekend from a great, literally one of the best founders I’ve known my entire life saying his co-founder is kind of transitioning to an IC role. I’m like, “God, that’s high risk.” That’s higher risk than losing a customer, or some sort of other existential issue. Because a founder dependency is an existential problem. Making yourself obsolete is the dream of every founder, but maybe you could only come close. And it’s true in sales.
Jason: When I started doing these SaaS events, I would interview all the CEOs. In the early days, I would add ask the Jeff Lawsons from Twilio and the Peter Gassner from Veeva. I would say, “How much time do you spend in sales?” In the early days before they were all bigger and they’re like, “More than ever.” I’m like, “Really, Jeff? You just went public at Twilio in 2017. You’re a developer focused company, you’re spending more time in sales than ever?” “Yes.” Now sometimes that means more time with customers, it’s not always prospects. As you get bigger, you talk about 10 year customers, you want to move your time as CEO more to customers and prospects, but it never goes down. And I think that’s emblematic of this level of founder dependency.
The post How to Scale a Successful SaaS Sales Team with Harry Stebbings of 20VC and SaaStr CEO Jason Lemkin (Podcast Episode 500!) appeared first on SaaStr.
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