# The Metrics That Matter in SaaS Today; Why CaC Payback is Flawed & CAC Ratio is Better

Why You Need to Hire Three Sales Reps at a Time, How to Forecast in 2024 & Biggest Mistakes Made Forecasting & How to Make Customer Success Sell More with Dave K

20VC · Jan 31, 2024 · 70 min · 15,768 words
Speakers: Dave Kellogg, Harry Stebbings
Source: https://www.996.fm/episodes/20vc--ep-8b79c724/

## Cold open

**Dave Kellogg** [0:00]:

I can summarize all of Jeffrey Moore in one sentence, which is people buy when they think people like them use your solution. ICP, Ideal Customer Profile. ICP starts out as an aspiration, and over time, it becomes a regression. There's three different types of calls. Let me just define what I think the calls are. There's a forecast call. There's a pipeline scrub, and there's a deal review. The single biggest sin in SaaS is putting your farmer against someone else's hunter.

**Harry Stebbings** [0:25]:

This is 20 VC

## Intro

**Harry Stebbings** [0:26]:

with me, Harry Stebbings, and I think Dave Kellogg is one of the smartest people in SaaS, period. He is a master of metrics. And today, we dive into the metrics that matter in SaaS today. Dave was previously CMO at Business Objects, where he helped scale the business from $30,000,000 to a billion dollars in revenue. Dave's also been a CEO twice, once scaling the business from 0 to $80,000,000 in revenue, and the other business from 8 to $50,000,000 before selling it. But before we dive into the show's

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## Conversation

**Harry Stebbings** [3:07]:

Dave, I am so excited for this. I always learn so much from our discussions. I got so many messages from our last show years ago from people who literally stopped to take notes, which I think is probably one of the biggest compliments a podcaster can get. So thank you for joining me once again.

**Dave Kellogg** [3:22]:

Well, it's great to be here, Harry. It was great to see you again, and

**Harry Stebbings** [3:24]:

congrats on all the success. So lovely to see you again. I do wanna ask for those that do not know the Dave Kellogg brand, what would you say is the career highlight, what you're best known for to date?

**Dave Kellogg** [3:36]:

Sure. I'm probably best known for one of two things. Operationally, being the CMO of Business Objects for nine years as we grew from 30,000,000 in revenue to 1,000,000,000 in revenue, not market cap, but revenue, and from 240 people to over 4,500 people. So that was probably my biggest operating accomplishment. I I have run two companies, one from 0 to 80,000,000 after that, and I run another one from eight to 50 and sold it. But but the biggest one has gotta be the Business Objects run.

**Harry Stebbings** [3:59]:

I love that clarification of revenue, not market cap as well. Important in all markets. Knowing all you know now before we dive in, what do you know now that you wish you'd known when you started your career in SaaS?

**Dave Kellogg** [4:10]:

Well, it's a tough question, Harry. For me, I'm not sure how applicable this is gonna be to everyone in the audience, but power. I never really understood power. If I could go back in time twenty years and just say one word to myself, it would be understand the power structure of corporations. Because I I tend to be a call it as I see it always kind of person with kind of blatant disregard for power structure, and that has got me in trouble over the years.

**Harry Stebbings** [4:34]:

Why is it important to understand? Because I'm the same as you. I'm incredibly direct. I always think, you know, it's better to be clear and direct upfront. Can you unpack the importance of understanding power just so I understand it?

**Dave Kellogg** [4:45]:

I I think for me, Harry, because I'm something of an idealist, I I always thought that kind of being right would win in the end. Like, if you had the best argument, you would win always. And by the way, I'm a pretty good arguer, and I won a lot. But it's not always the case. Right? Sometimes you you need to and this, by the way, is why I spent most of my career in marketing, not sales. Right? The first time I had a quota, was a CEO. Right? I I know a lot about sales as we'll talk about. Spent a lot of time supporting them, but but let's be clear. Come at it from the marketing perspective. Now I think the difference between a salesperson and marketing person is I tend to be more theoretical, what is correct, what is right, whereas a seller is reading the room very closely. Who who cares about what? Who has what interests? So I had some famous board conflicts. I I mean, Bernard probably should have fired me at least four times at Business Objects. I would have fired me in hindsight. So so yeah.

**Harry Stebbings** [5:34]:

Listen. I wanna start on where we're at today. Everyone seems in SaaS to be saying, well, budgets are all centralizing. They're going back to the CFO, and the CFO is not buying. I'd love to understand how do you think about efficient growth and what it really means to you today?

**Dave Kellogg** [5:49]:

So certainly, it's tougher now than it's been with with the CFO doing their best to to keep budgets under control. I think for a SaaS company, efficient growth to me, it ultimately means I mean, on metrics first, you know that. We gotta look at our CAC and our CAC payback period and see how much we're paying for a dollar of growth. And the easiest way to do that is to go understand what's working. But the low hanging fruit on efficient growth is a dispassionate calm analysis of what sectors do we sell to with the higher win rate, with the faster sales cycle, with the better ASP, with the higher NRR. There's a lot of just good old fashioned analytics you can do to say, what's working? And so much of SaaS success is based on this, Harry. You just have to ask the question, what's working? And then double down.

**Harry Stebbings** [6:32]:

How do you know when you have enough data to know what's working? Like, if you have a million in ARR, you know, you work with, say, Balderton who invested in series a, a lot of series a's are pegged at, like, a million in ARR. Is that enough data to know what's working, or is it 10,000,000? Can it be a 100 k ARR? When is that point of I have enough to know?

**Dave Kellogg** [6:50]:

Yeah. One of the reasons I like working with smaller companies is it's a mix of art and science. Because by the time we're 300,000,000,000 or 500,000,000,000, it's it's just a math problem. But but but when you're, you know, 1,000,000, it's very difficult. So so to me, ICP, Ideal Customer Profile, ICP starts out as an aspiration, and over time, it becomes a regression. Right? And what does that mean? Right? It means in day one, it's an aspiration. We want to sell the companies who look like this. We think this buyer will buy us to solve this problem. Right? It's a company buyer problem. That's the aspirational phase of the ICP. And by the time you're, you know, a 100,000,000,000 in ARR, it's it's a regression. Right? We just look and say, okay. Who expands the most? Who sells the fastest? Who has the highest win rate? Right? So so you're along that continuum.

**Harry Stebbings** [7:34]:

What should founders be looking to achieve to know if they have that efficient growth? When you look at that segment of the audience, what should they be looking to achieve to know they have efficient growth versus not efficient growth? You said that, like, you wanna know what's working.

**Dave Kellogg** [7:47]:

Yeah.

**Harry Stebbings** [7:47]:

Are there glaring signs of not efficient growth?

**Dave Kellogg** [7:50]:

Sure. I mean, let me do the glaring signs of not efficient growth first, like a CAC payback period of over twenty four months, maybe over thirty six months. At some point, VCs won't call you back. That was always my joke. You talk to a VC and you say, hey. My CAC period's thirty my CAC payback period's thirty six months. They it's so nice to meet you, Harry.

**Harry Stebbings** [8:07]:

But does that matter? Okay. I'm just pushing you. Yeah. Does that matter if your LTV is eight years?

**Dave Kellogg** [8:13]:

Darn. You beat me too, Harry. Yes. That's gonna be the question, which is what you pay for something should be a function of what it's worth. It's that simple. So I don't love it. That's why I was trying to pick kind of an egregiously high CAC where where it's high enough that at some point. At thirty six months, I might not actually care what your LTV is. I mean, I do know companies. I just talked to one yesterday that does, like, ten year contracts with big insurance companies. Okay. So they might be an exception, right, because all their customers seem to last ten years. But the answer is very much what you pay should be a function of what it's worth, and therefore, I can't make a hard and fast rule. I do think somewhere around twenty four to thirty six months, people stop calling you back, so you have different problem. Right? It doesn't matter how good your story is if you don't get the meeting. And the CAC ratio couple will be somewhere around two point o. I think people stop meeting it.

**Harry Stebbings** [8:55]:

Does the good payback period depend on the ACV size? And so if you are selling, I don't know, a 100 k ACVs, it should be a much smaller payback or shorter payback than if you have longer ACVs, or is it actually pretty much the same?

**Dave Kellogg** [9:11]:

To be clear, CAC Payback is not my particular favorite metric here. I like the CAC ratio the best. I know a lot of VCs are very focused on CPP. I like CAC ratio because it's simpler. What's CAC ratio for for me? Sure. CAC Ratio is just sales and marketing expense divided by new ARR. So in English, it answers the question, how much do you spend a poor dollar of ARR in the bucket? So in in my mind, it's the purest measure of sales efficiency because VCs, god bless you all, tend to like compound metrics because you're in screening mode. Right? And in screening mode, if the CAC Payback period's forty eight months, I don't need to beat these people, and I don't care why. Right? It it's a great screening metric. But if you're actually trying to fix things, I wanna look more granularly. So CAC ratio does not include gross margin, for example. If I wanna know what your gross margin is, I can ask you what your gross margin is. Whereas if I just wanna know, what do you spend to put a dollar in the bucket without asking what happens to it once it's in, that's the CAC ratio.

**Harry Stebbings** [10:04]:

Can I ask you? You said that the sales and marketing divided by the, you know, net new revenue, you can always fudge numbers. We see numbers get fudged a lot. Is there a way to fudge the numbers that you put in in terms of those sales and marketing? Well, that one doesn't count because of x. Or actually, for founders trying to understand this, is it a very simple one?

**Dave Kellogg** [10:24]:

Yeah. Well, first, the other reason I like simpler metrics is there's less to fudge. So you you're gonna find me a big fan of simple basic metrics because there's fewer kind of cheat dimensions. I could cheat, yeah, on on CAC ratio. Popular hacks include excluding the cost of customer success. Another popular hack is let is using GAAP sales commissions, which get amortized, which are gonna understate sales commissions, so they really should be done on a cash basis.

**Harry Stebbings** [10:51]:

But you should include sales commissions and customer success in that sales and marketing cap ratio?

**Dave Kellogg** [10:56]:

Correct. And you shouldn't amortize the sales commissions. You see the I can't remember the term for them, but not capitalize them, expense them. Do do them on a cash basis, probably the way to say it. Right? Because it in SaaS now, with ASC six zero six in The US, you spread them out over the life of the contract, which which kind of greatly understates them. What's a good cap ratio then? I'd say 1.5 or less is in enterprise. I mean, here we are back to your question. The bigger the deals, the more permission you have. So in enterprise, I might go one five. In SMB, I might go one o. And and the presumption there is an enterprise has bigger deals, longer lifetimes, and that SMB flips faster so you can afford to pay less. So CAC ratio of one means you spend $1 in sales and marketing, put $1 of ARR in the bucket. Now you did a little slide of hand on me a minute ago. I didn't wanna raise it. You said net new ARR, and you've definitely transitioned to VC. Because as a VC, that's what you care about. You care about how much do I spend to make the water go up by a dollar in the bucket. As an operator, I'll actually just do it on new ARR. My first order CAC is just it's not net new because net new introduced churn. You just made my metric more complicated. Right? You you made it easier to cheat. You you you took away something that's meaning. It's what you care about as an investor. I did a talk once, Harry. I can't remember where, but it was on operator versus investor view of metrics. And I get why the investors look at what they look at. But if you wanna know what I'm spending to put a dollar in the bucket, I should just do new ARR, not net new. Net new is now bringing into question what happens to ARR once it's in. And if you wanted a sales and marketing efficiency, right, you didn't ask about kinda overall productivity or business building productivity.

**Harry Stebbings** [12:24]:

I get you. But for someone who wants to understand the trajectory and health of the business, net new is better. No? Because new yeah. I could be adding one and losing 10. It'd be a bad investment. So

**Dave Kellogg** [12:35]:

yeah. You're definitely a VC, Harry. Yeah. It is. Because you wanna understand the health of the business. I wanna know if sales and marketing is broken. And just say it's a crappy product, I might be able to pour water in the bucket for 80¢. Right? I may have fantastic CAC ratio, but horrific churn or horrific gross margins, and that's gonna show up in other metrics. It'll show up in CAC payment period. It would show up in net new CAC. By the way, you you calculate new ARR CAC or net new ARR CAC. There's a lot of ways to see it, but I I like what I call atomic metrics because I'm looking at one thing. It's harder to cheat. I know exactly what I'm looking at. And if I have a different question, I'll ask the different question.

**Harry Stebbings** [13:09]:

What other ways do investors kind of bastardize metrics? You mentioned it there, but the most common that you see again, I wanna be the best investor I can be, Dave. Like, really teach me. That's why I love my job.

**Dave Kellogg** [13:20]:

Yeah. We've stumbled into my favorite example, which is CAC Payback Period. It's it's a compound metric that if done on a net new ARR basis, it it's looking at gross margins. It's looking at sales and marketing efficiency. It's looking at churn. Right? It's looking at everything. So it's a great screening metric. Don't get me wrong, Harry. If I were screening companies, I tend to want to use compound metrics. The more I'm trying to fix broken things, the more I want atomic metrics. The CAC ratio is another one. We hit it, but but the purest form to me is just how much is it for a dollar of new ARR. You can do it on a gross margin basis. You can do it on a net new ARR basis. The

**Harry Stebbings** [13:59]:

CAC has got better or worse over time. I'm constantly struck by this because you can think in the early days, actually, it's cheaper to acquire them because they're the most aligned customers to your product. They feel the need the most. But then you can also think, actually, over time, they get cheaper because you have brand marketing, word-of-mouth, virality. From your experience, do CACs go up or down over time?

**Dave Kellogg** [14:18]:

So my experience, they should go down. Startups have this tendency to believe in what I would call the low hanging fruit problem, which is, oh, darn. The CAC has to go up over time because we picked all the long hanging fruit. All the easy customers we found up, and there are fewer competitors on on the word on the search terms that we pay for. I think most startups, when they make that argument to me, I think they're vastly underestimating the size of their market. That if you have a really, really big market, that you haven't picked all the low hanging fruit. I personally think it's kind of a cop out, but, look, I would accept that as a problem. If somebody's CAC is going up and they say they picked all the low hanging fruit, I will eventually accept it, but not in the first round. I'm gonna say, show me that, show me the data, show me why you believe that because you're a $5,000,000 company, and and it's a 10,000 foot tree. And I just don't believe it.

**Harry Stebbings** [15:04]:

I have to ask. You said about NRR earlier. For those that don't know, can you explain NRR before we dive into this?

**Dave Kellogg** [15:11]:

Sure. NRR net retention rate, it's a metric that measures, in my mind, what happens to ARR once it's in the bucket. So CAC is how much does it cost to pour stuff in the bucket, churn is how fast the stuff leak out of the bucket. NRR is what happens once it's in the bucket. The way you calculate it typically, it's a and this is gonna get controversial, but in my mind, the official definition is basically take a set of customers from one year ago, take their ARR a year ago, put that on bottom, take their ARR today, put it on top, divide the two, and that's NRR.

**Harry Stebbings** [15:42]:

Got you. Okay. You said before though that actually we need to focus on GRR also. And I was like Yes. Again, as an ambassador, I'm trained on NRR. What is GRR, and why should we focus a lot on this also?

**Dave Kellogg** [15:56]:

So GRR is gross retention rate, and it's basically NRR before expansion. So if we go back and take that year ago cohort of customers and we put that at the bottom, their ARR value, but on top, rather than putting their current value in their current value just boom what it is today, you exclude expansion. So you're only counting shrinkage. So the theoretical maximum GRR is a 100%. NRR varies anywhere from one zero five to one twenty up to kind of snowflake levels at one sixty, but GRR varies between, I'd say, 70 and a 180 and a 100, but theoretically, it can never be greater than a 100.

**Harry Stebbings** [16:31]:

So what's good NRR in your mind, and what's good GRR? Just so we have a benchmark. Yeah. This

**Dave Kellogg** [16:37]:

has changed. So if you'd asked me two years ago, I would have said one twenty. If you wanna have an NRR, the people go, yeah. That's good. One twenty would have been it. I think it's closer to $10.08 today if I had to just pick a number. It's come down One zero eight. With the downturn. Yeah. One zero eight, one zero five. Wanna see one zero five to one zero eight in that range is is what I see. That's because the increased churn levels we've seen with buyers. Yes. Because the downturn, most of that is driven by increased shrinkage. Is that increased churn, or is that lack of expansion? I think it's increased churn most of the time. When I look at companies, it's usually increased churn. They're still expanding reasonably well. I mean, I've seen companies where it's both. And by the way, if if you asked, like, the most recent study, I think, said 01/2005. The reason I said 01/2008 is I just can't make my mouth say one zero five. But I I think it may have come down from one twenty to one zero five, to be honest. And I think it's through a mix of increased churn and decreased expansion, and I think increased churn is leading the list.

**Harry Stebbings** [17:35]:

Are we seeing the changing structure of SaaS companies today? Because I I spoke to Henry Chuck at ZoomInfo, and he was like, before, everyone used to come back and just upsell and expand their seats. Now, not only are they not upselling, we're fighting to keep them as customers. And so we're having to create basically data teams to prove the value that we're providing just to keep them as customers. Are you seeing incredible pressure to prove value for existing vendors? And are we seeing changing structure of SaaS teams to prove that value?

**Dave Kellogg** [18:10]:

Absolutely. I mean, CFOs are trying to reduce SaaS spend. SaaS spend ended up being kind of a sprawl. Let's say there are now vendors whose mission is to drive your churn. Right? They kind of SaaS spend rationalization vendors. So, yes, it's a short answer. Renewals are not a given. Getting four or 5% increase, not a given. You're lucky to get 95 to a 100¢ on a on a dollar order. They're trying to cut their budget, right, not grow it. So that pressure does show up in renewals. Not surprised at all. He talked about creating data teams to prove value because these renewals are not easy to get. People are doing rebids. He didn't mention that, but they'll just bake you off and say, hey. You know, we've decided to rebid the work, so you guys are a nice vendor, and there's some switching costs leaving you, but we're doing an evaluation. And one of your competitors will do this deal for 80 units a year, you're charging a 100. Right? And you may have to cut your price to 90 to to keep that customer.

**Harry Stebbings** [19:02]:

What are the best customer success teams that you see today doing to manage in what is an incredibly turbulent and stressful time?

**Dave Kellogg** [19:10]:

First, they're not getting slooping or or or blown up. A lot of CS teams forgot what their job was, and those people are getting blown up.

**Harry Stebbings** [19:17]:

How did they forget what their job was, Dave?

**Dave Kellogg** [19:19]:

You know, I've seen this happen to companies, and it's just painful. Somehow they decide they're in the customer satisfaction business and the customer love business, and they end up kind of hand holders, grief counselors. They end up just being the customer's kind of hug buddy. Like, oh, things aren't going well. Give me a hug, and I'll talk to you about your problems. And that doesn't work. Right? There's no value out there. Sometimes they end up being advanced tech support, which adds value, but but the question is, should we just create a premium support package and sell that? Right? Should it kinda be free? But it sometimes it sends up sales. To me, there's three roles. There's kind of the huggers who just give you a hug and can't really do anything other than commiserate. There's the tech support people who probably should be premium support package, and there's the sellers. I like to define customer success by how you introduce yourself to the customer, and I think the best introduction is my name is Dave. I'm your account manager. My job is to get your renewal and grow your account. And anything I need to do to do that, please let me know. I'll be doing quarterly health checks, and I'll be checking in. But my job, I'm going to be asking you for money.

**Harry Stebbings** [20:20]:

Do you think we should get rid of CS teams? And the reason I say that is because as you I mean, I just had Chris Degman on the show who's the CRO at Snowflake and has been since day one. You know, he he's I got rid of CS because as you said, technical support is very valuable, but we have that in, you know, professional services. So if Huggers are not useful and the others should be professional services, is there a room for CS in modern SaaS companies?

**Dave Kellogg** [20:43]:

Yeah. Personally, I think there is. Look. If you if you do 100 k, 500 k, million dollar deals and you have big accounts and grow them, then maybe not. Then maybe you can push back to sales. Right? I've worked at companies. When I ran MarkLogic, I had a rep at well, I had one account. They're an $80,000,000,000 company. They have one account in the same, and their job is to grow NSA. Right? When my first sales call at Salesforce, I went to Qualcomm. The rep, one account, Qualcomm. My job is to grow Qualcomm. So when you're doing real enterprise, I I don't think if you have one account that you need to CSM. Right? You could do that on your own. So the less you look like that, the more I think you need CS. So I think CS should exist. I'm a big believer in CS. I just think it needs to understand that it's a selling role. I'm going to ask you for money. My job is to get your renewal. So I wanna talk about that. And if you have tech support question, I'll connect you. If you need professional services, I'll connect you.

**Harry Stebbings** [21:33]:

Should you be that upfront, and does that not add an element of transactionalism to what you want to be a trusted relationship of alignment?

**Dave Kellogg** [21:40]:

I think it is trustworthy personally, it would be potentially a chair in here, Harry. But I think the most honest thing you can do is tell people what your job is and how you're measured.

**Harry Stebbings** [21:48]:

Totally. But then but then you're not necessarily aligned because you wanna squeeze every dollar out of me and upsell me as much as possible, and that may not be in my interest always. Like, you will try and sell me more seats than I maybe need.

**Dave Kellogg** [21:59]:

Well, it's a good point, Harry, actually, because I wanna argue. In my self introduction, we can go listen to the tape. But, hopefully, I said my job is to get your renewal and to expand you. My primary job is to get your renewal. So so I'm actually not here to upsell the heck out of you. In my mind, the upsell should be split across sales and CS, and I've got a portfolio of you. So I don't need all of you to expand at a 120. I need some of you to expand a lot and some of you just to stay on as customers. In fact, I don't think the mission is to squeeze every penny out of the customer. I think the mission is keep the customer happy, get them renewing, and spot upsell opportunities. So to

**Harry Stebbings** [22:33]:

me, it's slightly different. What do you mean when you say the upsell should be split between sales and CS? Because normally, it's put in one bucket for sure. It's either sales or CS.

**Dave Kellogg** [22:42]:

Yeah. And in my mind, and this is again kind of a minority viewpoint, but I just think that creates a lot of unnecessary conflict. Because as soon as you do that, now they're fighting over whose order it is. There's what I call a fries with your burger upsell. Right? Anybody could do. Harry, you want fries with your burger? Right? And you go, yeah. Right? You want five more seats? Hey. We got this add on product. Let the CS person do that. Why am I taking a 300 k a year enterprise seller and having them do that order? So my answer is if you credit both of them on the upsell and the math will work, we could go through it if you want to, but the math works that you could credit both of them. And that way, the work flows where it needs to work, it needs to be done. If I'm the enterprise seller and I care about my productivity and I've got a CSM who I trust and there's some fries with your burger, hey. Go ahead and get that one. By the way, more importantly and conversely, say there's a cross sell and it it's not looking like fries with your burger. It's looking like selling, like, for example, Host Analytics. We sold planning and consolidation. Consolidation is sold to a different buyer, same boss, same CFO, different buyer, different competitors. Right? If I'm the CSM and I find a consolidation opportunity, I should call my seller and say, I found a cross sell of the consolidation module. Can you please do this? And I don't want to incent. Right? The single biggest sin in SaaS is putting your farmer against someone else's hunter, right, because they will lose. What do you mean by your farmer

**Harry Stebbings** [24:00]:

against someone else's hunter for people who know So

**Dave Kellogg** [24:01]:

a lot of people use the SaaS analogy of hunters and farmers that the the salespeople are the hunters. They go out and kind of kill new accounts. They're very aggressive. Right? They bring food back, you know, for the other people to eat. And the farmers are the the CSMs that they've just farm the land and keep the accounts and keep them warm and nice. And it's not a bad metaphor. And all I'm saying is you don't wanna put your farmer against someone else's hunter. I do you want your CSM trying to sell that consolidation deal against a one stream rep who sells consolidation for a living who's really good? Your person will probably lose. You get on sports, they always talk about a mismatch. Right? You always try to tee up. It's the same thing. We oh, we've got a mismatch here. We've put an enterprise rep up against CSM. So get the ball to the enterprise rep because he's gonna win.

**Harry Stebbings** [24:43]:

I always think about that. I think it's Charlie Munger or Warren Buffett. One of the two. So just show me the incentive, and I'll show you the outcome. What's the right in incentive structure for CSM teams today, do you think?

**Dave Kellogg** [24:53]:

I think the right incentive is to give them a portfolio and say, I want this portfolio to be worth a 105 units. It was worth a 100 in the day I handed it to you. I want it to be worth $10.05 or $1.10 a year from now. And how you get that is up to you. How you spend the time is up to you, and you get to use the sales rep because they're gonna pay you both on any expansion. So if you need help, you ask for it.

**Harry Stebbings** [25:13]:

As a founder today, when we think about CS teams and expectations of them, how do we approach churn analysis? And what I mean by that is, like, similar to sales forecasting, churn forecasting is really hard right now. How can I think about churn forecasting accurately and plan ahead of time?

**Dave Kellogg** [25:32]:

So churn forecasting to me is actually easier than new sales forecasting. I think new sales forecasting is really hard because because you're in a bake off against multiple people. If they're a sophisticated buyer, they're deliberately denying you information. They're not gonna tell you you in the first place because they wanna negotiate the best price. Right? In an enterprise, there's lot of different constituents. No one may actually even know who's winning. Right? Because the VP of sales wants this, the VP of finance wants that, CFO wants this, there's a committee. Right? So I think the hardest thing is new sales forecasting, which we can talk about if you want. Personally, I think chart forecasting is relatively easy. Why? First, because you can look at product usage data. So you have a massive advantage in terms of data. Right? Like, are they using the thing? Is the usage going up or down? Can I see anything in the usage pattern? Are they dumping a lot of data out of the system? Are there any signs that they're actually spinning up one of my competitors in the background, which you could find? You also have relationships. And usually, if you're a good CSM, part of that job, I've been honest with you about my role, be honest with me. Are you guys thinking about switching? Are you are you spinning up an eval? So so I just think CS for it. If a VP of sales misses their forecast, I'm somewhat understanding. To me, it's, I'm not very sympathetic to a VP of CS who misses their forecast. Because how is it that you didn't know? You better show us a record of the customer absolutely lying to you, like a bunch of emails saying, we're gonna renew. We're gonna renew. We're gonna renew. And then they don't. And if you have that paper trail, then okay. I guess you were really misled. But otherwise, I just don't think it's as hard.

**Harry Stebbings** [26:54]:

So if churn forecasting is actually more science and there's data that makes it very evident, how do you think about sales forecasting? Because this is a hard one in 2024. How do you think about sales forecasting and an advice to sales leaders approaching it today with 2024 ahead?

**Dave Kellogg** [27:09]:

If I had one word, it would be triangulate. What does that mean? It it mean, you know, if you're lost in the woods, right, you say there's a mountain this way, there's a mountain that way. Right? You're taking shots to try and figure out where you are. You can do the same thing with sales forecasting. First, make your own official forecast, which you will make, then look at the sum of your managers, look at the sum of your VPs, look at the sum of the reps, look at the stage weighted expected value, look at the forecast category weighted expected value, look at the week seven conversion rate if you're in week seven. There's so many numbers you can look at, and you should try to view each number as an independent shot as to where you are. This also has implications, by the way, on operations because if a sales manager tells a rep what their forecast is, you're undermining this process. I'd like a rep's forecast to be what they think they're gonna do, and I like the manager's forecast to be what they think that some of their reps will do. But at some companies, managers kind of muscle reps.

**Harry Stebbings** [27:59]:

Yeah. So for me as a sales manager, I should say to my team of reps, go away, look at the accounts that we have, look at Pipe, and come back to me with targets?

**Dave Kellogg** [28:09]:

Make me a forecast every week. Basically, that's what I would say. Every Sunday night, I want you to put into a Google Sheet or the CRM system your forecast for the quarter. I wanna watch how that number changes over time, and I want it to be your forecast for the quarter is the main point here. What does

**Harry Stebbings** [28:23]:

a good forecast look like, and what does a bad one look like?

**Dave Kellogg** [28:25]:

So as soon as you do this weekly approach, you now get to look at the shape of the curve. And a good forecast looks like this, gently upsloping to the actual number you sell. Notice I never talked about quota because forecast is not about quota. That eventual what you sold may be well above your quota, it may be well above your quota, but you didn't ask what a good sales performance was, you asked what a good forecast was. And a good forecast is gently upsloping, landing at the number that you actually sell because that means I'm not misleading my boss. And in aggregate, we're not misleading the company about how much we're gonna sell. We're always slightly lowballing it. Right? If it's super lowball, it's very hard to run the business. The more common problem, if it's super optimistic, where I'm gonna sell a million, I'm gonna sell a million, just kidding, I sold 300 k. Right? It's impossible to run the business.

**Harry Stebbings** [29:10]:

Should forecast always be slightly unachievable? Should you always be 70% of the way there, 80%, but never quite there? How do you approach that?

**Dave Kellogg** [29:18]:

So a forecast in my mind it's a very important point because it relates to the other thing I said. A forecast in my mind is your prediction as to what you're gonna sell for the quarter, period. Here's the thing that I think is the worst thing ever for forecasting. Harry, how much you're gonna sell? You go, 100. I go, come on, Harry. You can sell $1.20. What about the Jones deal? $1.20. You could do $1.20. Step up. Man up. Come on, Harry. And you say, okay. I can sell $1.20. Right? They say, okay. I wanna write down $1.20 for your forecast. That one twenty is a useless number for predicting the business. And this is where some sales managers use the forecast as a club to kinda push the reps around. Like, if I could just, in a moment of weakness, get you commit to one twenty, then I can hold it against you for the rest of the quarter. First, I don't if you ask great sales management, but you have other guests you can interview about that. I know it's bad forecasting. I don't want that one twenty number. I wanna know the 100 number because that's what you thought you could sell before you were twisted.

**Harry Stebbings** [30:09]:

Do you not think you were just getting the best out of the reps by pushing them? Everyone has a stretch.

**Dave Kellogg** [30:14]:

There's a lot of talk about that. I've worked for bosses and very successful people who think you always keep the carrot in front of the donkey. So you're never happy. You're always wanting a little bit more. Personally, as you know, Harry, I I grew up in enterprise software. I started at the bottom. I think it's a terrible way to be managed, so I've never wanted to manage people that way. You because, basically, you're constantly failing. And particularly for forecasting, there's no way to forecast. So all all I'm saying is when you make your forecast, just write down what you think you're gonna sell. And then I can have a different conversation about, Harry, why can't you sell more? I think you can sell, but it's not about your forecast. That's already been sent off to finance.

**Harry Stebbings** [30:50]:

That's motivation from a leader or someone higher than you in the chain, so to speak. A lot of people say that you should hire reps two at a time so that they kind of have a hunger games to compete, so to speak. Do you agree with hiring reps two at a time, especially in the early days? Or actually, do you feel that it's overhyped?

**Dave Kellogg** [31:08]:

So I I like hiring three at a time, but not for the hunger games effect, for the controlled experiment effect. Because if I think a rep of a certain profile with a certain background right? So you worked at Salesforce for five years, you've sold CRM, you've done deals in 50 to 100 k, and you sold to Fortune 500 companies. If I think that profile is the one that's gonna work for me, selling to banks in New York, I'd like to hire three of them. Why? Because I want a good experiment. Because if I hire one and they fail, what do I know? Maybe I've got an outlier. Maybe I got a clown. Right? I would say your job in the early days is to run good experiments. And it means if it works, we know what to replicate, but if it fails, we know what not to do. And when you hire module one, you don't get that. Even module two, you'll get if I hire three of them and they all look really good on paper and they had that profile and all three fail, I'm pretty like, let's not do that again. And conversely, if it works really well, like, hey. Let's go get six more. Let's get nine more.

**Harry Stebbings** [31:58]:

Dave, how fast do you know if

**Dave Kellogg** [31:59]:

a rep's not good? Yeah. That's a really hard question. I would say somewhere between six and twelve months in enterprise. Woah. That that long? Well, in enterprise, I did say, because because you got six to nine month sales cycles, so so it's hard.

**Harry Stebbings** [32:12]:

But that's on converted sales. Like, you a month in, you can be like, hey. Show me what you've got, and you can go, that pipe is not great. The number of calls you've had in the last week is not great. The cool notes Yeah.

**Dave Kellogg** [32:22]:

Are not Yeah. I guess the the word that got me was no. Because I only know once I've seen what they've done. I can guess. I can have a feeling about it. Look. Talk is cheap in sales, Harry. Talk is cheap. Do you know what think

**Harry Stebbings** [32:35]:

you know from looking at the cool notes, from looking at pipe, from looking at how they spend their time?

**Dave Kellogg** [32:41]:

These are all indicators. Let me let me answer the question constructively. I'd listen to call recordings or go on calls with them. That that's a very important data point, and you could tell pretty quickly if you think this person's doing the right thing. And and as usual, wanna give you the opposite case, Harry. The hardest case is not firing somebody who's not selling. That's easy. The hardest case is keeping somebody who's not selling. And if you haven't listened to calls, you can't do that. I'll give you a concrete example. At MarkLogic, we sold most of our sales in two verticals, media and government, but I had reps outside those verticals. That was hard slog. You had no support from a company, no reference customers. I could have fired every one of those reps and we never would sold anything because they couldn't sell anything. Right? So every year, I had to look at it and go, you know, Mike, I've listened to your calls. I've been on calls with you. I think you're doing the right stuff, and you came in at 80% or 70%. I might even give you extra money to keep you around because you're doing the right things. And I know you're doing the right things because I'm close enough to you to know that. So that's the hardest case. And that's zero to one, you gotta do that, Harry. Any clown can fire. At a big company, you have a 100 reps, and you gotta fire the bottom 20%. That's easy. What's what's hard is knowing when you have three reps who you keep and who you fire, and when no one's selling.

**Harry Stebbings** [33:49]:

Okay. So we do the cool recordings. That's one way of, like, reviewing. When we think about, like, sales reviews, how often we're an early stage company, and when we think about the audience, it's mostly 100 k ARR to 10,000,000 ARR. Because not actually many companies beat the 10,000,000 ARR. When we think about that as a range, how often should the CEO slash sales leader be doing sales sales reviews? Reviews?

**Dave Kellogg** [34:12]:

So in in my world, there's three different types of calls. Let me just define what I think the calls are. There's a forecast call, there's a pipeline scrub, and there's a deal review. Purpose of forecast calls, come up with the forecast, should be all numbers. One of my signs to fire a sales manager is a forecast call. It's all storytelling. Oh, I talked to Joe, Joe talked to Mary, Mary said this, but I need to ask you that. Asked how much you're gonna sell this quarter. Right? So that's forecast call. Pipeline scrub is all about scrubbing the four key value fields of an opportunity, value, closed date, stage, and forecast category. Right? So let's validate those validate those are real data. And then a deal review is, to me, a very collaborative exercise where we get as many people who wanna come, and we say, you're the rep, Harry, how are we gonna help Harry win this deal? Harry tells everything about this deal. Let's help you win. So when you see sales review, I'm not sure what you mean if it's one of those three things I can talk. Otherwise, you gotta define it for me.

**Harry Stebbings** [35:03]:

I would say a sales review in terms of the third and final one.

**Dave Kellogg** [35:06]:

Because to me, a lot of people use sales review as a scary mean thing, and that's why I like my framing of it. It's not scary at all. We're trying to help you win. So tell us everything. It's your peers. It's your bosses. It's the CEO. And by the way, if you're talking about because you've been you mentioned some pretty big deal sizes there, Harry. If you're a small company doing 500 k or million dollar deals, MarkLogic, we did those. I would always think, how could I ever explain to the boss if I the board if I wasn't in the million dollar deal? If we had a 5 or a $10,000,000 quarter and there's a million or $2,000,000 deal and the board says, what went wrong? And I say, I don't know. You need to ask Joe. Right? That's a terrible answer. So as a CEO founder, I think you just need to look at the materiality of the deal to the quarter And, like, are you negligent in your duties? Like, at some level, if the deal is material in the quarter, you better be in it deep. And that's not just a deal review. That's meeting the customer. Have you flown out? Talk to them? Do you know the names of the people? Because that that's what it is, two big deals.

**Harry Stebbings** [36:02]:

I sit in many board meetings, and often they have the heads of sales there. And we say, well, why did we miss numbers? And they go, ah, you know, the Jones account the Jones account, it just slipped into next quarter. Next quarter, slipped. What do I say to that? Like, what's a good reason to let an account slip into next quarter versus not?

**Dave Kellogg** [36:22]:

I think there are almost two types of companies. Those were slip as an acceptable thing and those that aren't. Because some level I mean, let me just be a a jerk for a minute. Okay. Wait a minute. You don't make the software, so your only job is to sell the software. You're not a technical resource. You don't help customers deploy. So this is kind of the you had one job argument. Right? Like, you had one job, and it's it's like, let's just remember, that's what you do in sales. So I'm not super sympathetic to slipping. Right? And as part of your one job, you're supposed to tell me how much you're gonna sell and when. So I start with a pretty hard position. Let me just go in order. That's the first thing, which is my philosophy is not, oh, slips happen, you know, all inevitable. No. It's your job is for not to be having this conversation. So I'm immediately unhappy. The next question is how much slipped into this quarter? Because people love to be asymmetric. They love to say, oh, We made the quarter except for this deal that slipped out. I'm like, well, that's funny because 2,000,000 slipped in that should have been made last quarter. So if we're gonna do this slipping game, let's do it in a symmetric manner because I've noticed your tendency is to only wanna kinda artificially pull things in, like, count the first week of next quarter, you know, week fourteen, of the quarter, as I say, you know, day three sixty six of the year. Right? No. That doesn't happen. The last point I'd say on slips is that it on a given deal, I'd ask why. And it for me, the here let me give you an example of an invalid excuse and a valid excuse. Invalid. The purchasing agent was on vacation. Well, gosh. Nobody could have known that was gonna happen. Like, we could not have called. Like, here's I make a thing called the close plan, and that's actually one of the questions. Who is gonna sign the document? Whose name is gonna be on the ink on the document, and are they around that week? Right? And you can make a list of those questions. By the way, everyone should have a close plan. Every time you hear one of those excuses, it should go out of the close plan. You know, his uncle in Toledo got married and no or whatever it is, but we're never gonna let this happen again because your job was to get the paperwork by midnight on the last day of the quarter. So anything about we didn't know this, we didn't know that, or another popular one. Oh, the last minute, there was a committee that needed to approve it. You had one job. Your job was to know about the existence of that committee. Did you ask the buyer if they'd ever done a deal of this size? Well, I asked them if they did a deal before, the biggest deal they did was two hundred k hours, 500 k that required extra level approval they didn't know Your job was to know that. Right? Put that question in the closed plan to make sure we never get bit by that again. So so in general, I'm pretty unsympathetic, Harry.

**Harry Stebbings** [38:46]:

The thing I love about our conversations is you just say so many things where I'm like, I can just go in so many different ways with this. A close plan, I don't hear people talk about that often, Dave. And I interviewed a lot of sales leaders. When should we create a close plan? What are the standard steps? Are they standard? And how do you think about good versus bad?

**Dave Kellogg** [39:04]:

To me, the close plan, in some ways, it's the anti slip plan. Right? It it's the list of things we need to know to make sure we can close the deal this month. So it's not strategic. In my mind, it's a list of answers to questions like what day is the deal gonna close, who's gonna close it, what committee needs to approve it, do they have budget authority, what's the do we understand the process for getting a project authority? To a certain extent, just think of a close plan as a list of questions that over time you build every time a deal slips that you could have known about. Like, by the way, I should give you to be nice, I'll give you a valid difference. The company got acquired on the last day of the quarter. All purchasing got frozen. Okay. That we couldn't have seen coming. Right? But it needs to literally be that level of act of God, right, before it's an excusable reason for slip. But back to the closed plan, I I can go dig one up and share it with you later. But it's just literally all the stuff that can go wrong is your it's super mechanical.

**Harry Stebbings** [39:57]:

Have you have you ever shared one publicly before?

**Dave Kellogg** [39:59]:

Never. No. I've not.

**Harry Stebbings** [40:01]:

Would you do it with the show?

**Dave Kellogg** [40:02]:

Yeah. It would take me half an hour, but I'll I'll go anonymize it. I actually consider a real one from 2005 or something.

**Harry Stebbings** [40:08]:

I I I think it would be a phenomenal resource that so many sales teams would love in terms of a template of, like, actually, what are all those questions? Cause a closed plan that misses two of the questions that you think are crucial is useless because then they could be one of the two and the closed plan doesn't work. So I'd love that, and I think so many people would. Is that okay? Yeah. Absolutely. How do you think about buyers exaggerating? And what I mean by that is every buyer says, oh, I'm the buyer. Yeah. Yeah. You're speaking to the buyer. How do you know if you're really speaking to a buyer, Dave?

**Dave Kellogg** [40:39]:

Yeah. So I'm a big believer in a semi obscure salesman off methodology called selling through curiosity by Barry Ryan. And the whole first principle of selling through curiosity is just I'm curious. So so my my answer to that, I'm curious, Harry. Who else would so I understand you're the buyer, Harry. Who else might be involved in this process? Hey. I'm curious, Harry. Whose budget is this gonna be coming from? I'm curious, Harry. Have you guys ever spent this much budget before in this kind of system? I'm curious. Aren't there other people? Who else is impacted by this decision? Don't they get a vote, Harry? Could you just explain this to me? And by the way, the last time you did this kind of process, can you tell me what went down, how it worked, what the timing was? Selling through curiosity is just amazing because most salespeople are some ways, they're too busy trying to prove how smart they are, be tough and confident, and it's just so humble a place to come from, which is, Harry, I'm really curious. Have you done this before? And I'm not saying, Harry, you're not the buyer. Come on. They're not gonna let you spend a $150. No. It's gonna be more You're

**Harry Stebbings** [41:33]:

a moron. Why would they give you a That'd be hilarious. So it's an interesting reverse sales tactic, isn't it? I love that. In terms of getting to that close, we get to the close, and then they go, Dave, the price is just this is quite high, and we're looking at other options as well. Can you give me a 25% discount? How do you think about discounting today in 2024? Because it does depend on macro, I think. How do you think about discounting today, and how do you advise sales teams on the best way to approach it?

**Dave Kellogg** [42:04]:

Yeah. First, it's best not to get into them in the first place, and second, it's best to come armed. So a lot of the argument the valid argument for value selling is, Harry, I thought we agreed that the system was gonna save you $5,000,000 a quarter. Why are you coming to me for a 100 k discount on the last day of the deal?

**Harry Stebbings** [42:20]:

I get you, but I've I've got, you know, two other options, and they're offering it to me at that. And so I just have to make the business decision.

**Dave Kellogg** [42:27]:

Got it. So that that there's gonna be a series of fallback strategies here, Harry. None none of them is gonna work. But but what I'm trying to do is make sure at least I have cards to play. The next card I would play is so the first card I play is value. Harry, this potentially delays the deal because because I need to go get approval on my end, this could push it back a a month or two. I'm not sure we could do it. And if we do, you're still gonna lose a month or two of benefits. So it's gonna cost you more than the discount right there. So that's with the first card I play, which is the risk of delay and value. The next card I'd play would be if you're managing the sales cycle as a series of give gets, which you should be. So, Carrie, we talked about this. We talked about pricing before when we cut it the last time. Right? Remember, we had a negotiation. We took it down from 2,000,000 to $1.08. Yeah. You may recall this. I said, I can get you $1.08 if you can commit to me that we would do this deal, and you committed me to do this deal. So that'll be the next card I'd play. Right? Like, hey. We had this conversation already. You're effectively using the last negotiation as a starting point for a new round of negotiation. And I'm calling foul, and I was saying the company may not do it. My boss may not let me do it, but I could try. Because to some weapons sales as a seller, you need to kinda play powerless as well, because I'm kinda your advocate too. So, like, hey. I could try. I'm really disappointed because my boss is gonna kill me because when I came down from two to one eight, you promised me you could get this deal done. And you might just say, can't. I literally can't. The competitor's in at one seven, and they're gonna buy that. So then then I have to take it back to the company. I mean, at some point, I'm gonna play these cards. They may not work. The most common in my experience was competitors because I tended to work in competitive spaces. And then you have to take it back to the VP of sales and say, how many times have we done this? Do we believe them? If I cut it to one eight, are they gonna come back and ask for one six on, you know, eight hours later? Like, how are we gonna get this deal done, Don? Like, how can I trust your word anymore? It's hard, Harry, but most of the great salespeople I know will try very hard not to collapse. They're not gonna be scared. Like, oh my god. We can get it at one seven and instantly cave because I was signaling to you that why not ask for one six? There's a there's a great metaphor, Harry, which is when do you stop squeezing a wire rack? When the water stops coming out. Right? So as long as there's water coming out, I'm gonna keep squeezing. And then even then, when the water stops coming out, what do you do? One last twist. So you gotta imagine yourself on the receiving end. Right? You're the wet rag and they're squeezing you. Water's coming out, and then you're gonna get one more. And you gotta say no because otherwise, you're gonna keep squeezing.

**Harry Stebbings** [44:48]:

You know, Dave, we could maybe move to one six, but you are a great brand logo customer. I need your logo on the website, and I need a customer reference. How important are customer references? And are sales teams right to place a lot of weight and give for them?

**Dave Kellogg** [45:05]:

So I think they're important, and I think a good customer will do one anyway. So I don't love it as a negotiating chip. If I'm doing right by your business and if I'm delivering value and if we have a good relationship, you should do it anyway. And if you're only doing it because I have a gun to your head because you promised you'd do one, then I'm not sure how good a reference you're gonna be anyway. So I don't love it. I think you do that as a last resort to try and maintain some shred of quid pro quo that that I have to ask for something. But in reality, it's not me. You should build a customer reference program.

**Harry Stebbings** [45:35]:

So this customer actually they wouldn't pay, and they decided to go elsewhere. We need to go outbound again, Dave. You said before that outbound, many found coal in their outbound stocking. I saw this, and I just loved it. What did you mean by many found coal in their outbound stocking?

**Dave Kellogg** [45:52]:

I think for a lot of people, outbound was this kind of great savior. We talked earlier about the low hanging fruit problem, and they went, oh gosh. We've picked all the low hanging fruit, and we could possibly improve execution over there because I'm not gonna start questioning my people because they're telling me it's all picked. So I guess the only thing I can do is outbound. At least I can be in control of my destiny, and I can give the salespeople something to do when they don't have enough leads, and I can quiet all the salespeople barking at me for not getting enough opportunities for marketing. So I don't know exactly what causes kinda outbound fever, Harry. And I'm a big believer in outbound in the right circumstance. Right? Typically, ABM, very targeted account selling big deals. Outbound is a is a wonderful part of the strategy. But I'm not a believer in, oh, we can't generate enough inbound, and we don't know what to do, so let's do outbound. So we're just gonna call random people. Like, wait. We don't have a targeted account strategy, so we're just gonna call a lot of people and try and make them show up to meetings, and we think that's gonna convert better than just getting more content out there that makes them interested in us and come to our events and download our white papers. Maybe we could we could try it, but it converts slow. As a VC, can I offer an

**Harry Stebbings** [46:53]:

alternative suggestion, which is we saw the proliferation of outbound tools and the sophistication of outbound tools, which many bought? And then they're put on sales teams as like, hey, we're now using this outbound tool which helps you craft the perfect email for outbound targets. And I would be interested to see the correlation between the buying of outbound tooling and the proliferation of outbound activity.

**Dave Kellogg** [47:16]:

What's the other problem, Harry, is it's an arms race, which is now everybody has that tool, and everybody has the perfect email, so the buyer becomes numb to it. I think outbound actually worked better four years ago than it does today because I think everyone's doing it, and people are getting flooded with it. And they they don't like getting called in their cell phone. They're not answering their regular phone. And you can do email sequences, but they're covered in email. And I think there's new spam rules going in effect, but maybe they're not gonna happen. I'm not sure. I just think everything about outbound is inherently difficult and gotta get harder. By the way, the point of that statement was I actually literally saw that happen. I saw CEOs who were two years ago were telling me outbound is the big savior, and I'm like, are you sure? And now they're back at me going, forget outbound. I thought it was gonna save everything, and it didn't.

**Harry Stebbings** [47:56]:

Is there any point in investing in outbound? If you can invest in great content marketing, is there any point in investing in outbound?

**Dave Kellogg** [48:03]:

Put it this way. If the juice is worth the squeeze, as I say. Because good outbound is expensive. You're gonna spend a lot of money stalking a company. Let's just say, for example, I'm an early stage start up. I've sold two big insurance companies, and there's 10 more that I think need me. Stock the heck out of them. Right? You're doing big deals. It's gonna be worth it. So you get an you get an outbound SDR, you get a sales rep, you get marketing, you do retargeting, and you stop these customers. Literally, like, you don't know it yet, but we're your destiny. Right? So, like, you're gonna buy from me. That can work very well because you're replicating a use case in the industry. Right? You've got good reason to believe that these people need your software and they don't know it yet. I'm all in favor of targeted marketing in that case because it's a big deal. If you're selling a a $5,000 a year system to anybody as a generic productivity tool, I have a lot more trouble getting excited about Apple.

**Harry Stebbings** [48:57]:

Why does it make sense and why does it not? Is it like when you cross the 100,000 ACV and you have a very limited number of buyers? Is that the differentiator?

**Dave Kellogg** [49:06]:

Or or you've deliberately limited the number of buyers because you're gonna do a vertical expansion strategy. So let's just say, right, because because your tool might be sellable to everybody, but let's just say you've got some traction in insurance and you've got you wanna go replicate within insurance, then I'd go do it. And it's not to say the product is only useful insurance, but I'm deliberately gonna constrain my go to market strategy so I have useful references. I can summarize all of Jeffrey Moore in one sentence, which is people buy when they think people like them use your solution, period. Do people like me use your solution? And I get to decide what's like me. Well, some of the questions, what's like me, me? Right? And it means my industry, my use case, my problem, my size. So so much of sales is, can I prove that people like you have bought this and it helped them? So and and the problem with sales reps is they're very quick to say, oh, you both breathe oxygen, therefore, you're like each other. Right? It's like, I have nothing in common with this person whatsoever. Right? The customer gets to define who's like them.

**Harry Stebbings** [50:03]:

If you're a sales rep, how do you prove that people like you, Dave, use and love my product? Customer references, logos, name dropping? Oh, well, I was talking to x the other day.

**Dave Kellogg** [50:16]:

Yep. All of the above. Look. Vertical strategies work because the people like me effect, they're inherently limited, and and they're a little bit high cost because you now have to learn a lot about all your customers in that industry. But I think all of the above. Name dropping, say, do you know the company x and company y uses us in their leadership space, demonstrating understanding of the use case. Is it when Harry meets salary when they when they're recoup when they're completing each other's sentences. Right? No. No. That's Jerry Maguire. When you're describing your problem, I could finish your sentence. That builds credibility. It's like, woah. This guy actually understands my problem. He's complete my sentences. And he says they're using me at the competitors down the street, and the SC just helped implement a system at one of those competitors. Right? It's that whole effect of, oh my gosh. People like me. And and by the way, yeah, a vertical dinner. Right? So you get invited to a dinner, and you you find literally people like you there. It's very important.

**Harry Stebbings** [51:10]:

So in verticalized product marketing, it's kind of easier. You have a very specific industry you're targeting. They tend to have the same pains. They have tend to have the same data in many respects. Great. Much harder when it's horizontal to effective product marketing. When you're Notion or Airtable, you're selling to developers and also to mothers and dentists and everyone in between. I love that everyone always uses dentists as the random analogy. It was a weird one to say, why dentists? But you said before and so that's like a freaking hard product marketing challenge. And you said before product marketing take a back seat. I was intrigued what you meant by product marketing take a back seat. Use

**Dave Kellogg** [51:49]:

case is the answer. So I have three layers I can fall back to. Right? I can say, hey, Harry. People like you use this. They're in your vertical. They're solving your problem. They're in your size range. The next level is just use case, where I need to convince you that your use case is similar to someone else's use case. That this case got people like you, oh, are people who have this task manager problem. Or I'll give you a real example. For me, one of the stranger ones I had, I had to try and convince JetBlue Airlines that they were like McGraw Hill publishers. And as well, we fly planes, they sell books. I'm like, this is not gonna be easy. Right? And I said, well, what's your problem with JetBlue? And they're like, well, you know, every plane is different, and therefore, the documentation for every plane is different. And the plane can't leave the gates without a custom piece of documentation for that specific plane. And even if we change the coffee pot in a maintenance operation, I can't fly the plane unless the chapter on how to fix the coffee pot is changed. So every document is unique. And I said, you know, tell me if I'm wrong here, but it sounds to me that it's a lot like what we do with McGraw Hill because they sell educational textbooks and evolution in California is a theory, whereas in Kansas, it's actually just a hypothesis. It's been downgraded. Some people think. So, therefore, in order for them to sell a book or if they wanna talk about Native American tribes, they need to use the local tribe in Oklahoma versus the one in California for the sidebars. So if you wanna sell textbooks in any state in The United States, the book needs to be customized. I think that problem sounds similar to you. Right? And that's how we sold that use case. Got a million dollar deal by different industry, same problem. And the issue is you kinda need to lead the horse to water there because it doesn't matter if I think it's the same problem, they need to think it's the same problem.

**Harry Stebbings** [53:26]:

I love that, and I think that's a very smart alignment. It's a challenge. What do you advise founders, though? Because I think the biggest problem I see, honestly, Dave, with early stage founders is as launch day comes, they broaden the ICP in fear that they're not gonna get anyone use their product. And so they go, ah, we're not just actually for for product managers now. We're for anyone who needs a to do list or whatever that is, in terms of the biggest product marketing mistakes that founders and early product people make, what are they that you see most often? So

**Dave Kellogg** [53:59]:

there's a lot in that question. I wanna tell you a story first. So I worked at an object database company, Harry, and object databases was a grim space back in the day. It was right after relational database. Everybody thought they'd be the second coming. So there was a whole generation of companies. Raised about 100,000,000,000 in aggregate, which is a lot of money at the time. And everyone tried to sell the stuff horizontally. And I joined. I'm running product marketing, and it doesn't work. Nobody wants to buy because they're just learning how to adopt relational databases. And so one day, come to work, they literally fire the entire executive team. And I get my first VP of marketing job. Hey. Battlefield promotion to VP of marketing, and they bring in a new CEO. We And say, you know what? Let's focus on what's working. Let's double down on what's working. And he said, Dave, Larry, you guys, go figure out what's working. So me and Larry went off, and we came back and said, well, you know, we're only a $5,000,000,000 company, so there's not a lot working here, but we think telecommunications network management and this new standard is working. He says, great. Let's bet everything on that. All chips on telecom network management. And we grew that business from, say, two of the five to 15 over the next two years. And back in those days, the company could go public at thirty. So they actually went public at thirty off that strategy. But as they're getting ready for the IPO, I'll never forget this because there's two reasons I went to Business Objects. One was I was very attracted by moving to France, loved the founders, loved the space. The other was I had watched Versant fail trying to be everything to everybody, succeed with this razor sharp focus as we approach the $30,000,000 IPO. No. No. We gotta broaden, broaden, broaden. So now it's good for finance, it's good for health care, it's good for telecom, and they literally went public at $6 a share. It stayed at $6 a share, fell down to 3, and then kinda went out of business or got acquired. So I literally watched the whole life cycle of no focus driving nothing, intense focus driving success, and then the financial types coming in and saying, this won't sell on Wall Street with no regard for the marketplace. So the short answer to your question is external pressure driven with good intent by people who don't understand the business. That that's the biggest risk.

**Harry Stebbings** [56:00]:

I think what I see also is, like, a need to meet valuations that were 2021 valuations, and the only way to do that is to expand into verticals or use cases that are not aligned, not beneficial, but do we need to.

**Dave Kellogg** [56:15]:

Yeah. And those hops are dangerous, Harry. The other thing so I imagine this all as a matrix of vertical versus use case. And every time you're hopping a cell, it's danger. You know how to sell the custom publishing use case to publishers. Can I sell it to airlines? First, the first one is really, really hard. Right? And once you've got one, then you can start to replicate. But anytime you're hopping in this matrix, you should put a big yellow, this is gonna be difficult flag. And if you think you could just kinda knock these things down like dominoes, no way.

**Harry Stebbings** [56:45]:

We hail engineering founders today, Dave. And engineers are great. No disrespect to them. But with that praise or idolization, we denigrate GDM focused, GTM focused founders in some way less pure. How do you think about that? And what do you think they most often do not understand?

**Dave Kellogg** [57:05]:

I'm a tough person to answer this question because I view my personal specialty as working with technical founders to explain sales and marketing. Like, that's my superpower. So my favorite thing to do is take, you know, a a PhD dropout or PhD student who who's founded a business and try and help them understand.

**Harry Stebbings** [57:21]:

Do you find they respect it? I find most often they're like sales and marketing fluff.

**Dave Kellogg** [57:25]:

Well, because I think most people do a terrible job of explaining it. So that is the typical reaction, but I don't blame the founder. I I blame the explainer. And I think this is actually what I think I'm good at, Harry. We've hit the one superpower. Think I have I think I'm really good at explaining that. And what I find is that they're really good you know, turns out PhDs are really good students. And if they think you're credible and you could teach them something, they learn incredibly fast and they're super interested. You try to feed them bullshit? No. They're not interested. Right? Or you just say, well, it worked at, you worked at Cisco or worked at Salesforce or worked at wherever. That doesn't work for them. But if you could structure it and explain it, I I find, in general, they're phenomenally good to work with.

**Harry Stebbings** [58:02]:

Do you think we denigrate GTM focused founders?

**Dave Kellogg** [58:05]:

I don't actually know. I would say the fashion right now is product oriented founders for sure. I would say product, not engineering, by the way. That seems to be the best. Like, I was advising a young person where to go, if you wanted to found a company in two or three years, I'd say product, not engineering. Back in the day, it really was engineering because I think product is seen as a kind of less intense form of engineering. Like, they're technical enough. They understand the product. Like, do you really have to understand exactly how to build a product? That's my perception of the preference of the industry right now. Because because back in the day, it really was engineering. I mean, it was they were engineers. They weren't product people. Because some product people aren't that technical, which creates its own set of problems. Right? Because they're they're neither fish nor foul. I think if and GTM founders are revered if they're selling GTM tech. So I think that's the case where people want them. Right? Because they understand the buyer and the problem. I think the other interesting pattern to look at, and I don't have data here, but my sense is if and when you replace a founder, which was extremely unpopular for the last five years, but I think will get more popular going forward, you will tend to replace them with a GTM person. That has always been the pattern in Silicon Valley that you replace product and engineering oriented founders with GTM oriented people. And Jason Horowitz, in my opinion, put that trend on hold for a decade or more. I can tell you back when I was a CEO, if you went to Buck's in Woodside or had, you know, lunch on Sandhill Road, you'd hear founder issues, founder issues. We gotta replace the founder. There's a sell by date on the founder's head, and, like, replacing founders was, like, super common in those days. And then Andreessen came along and said, no. And the whole industry kinda followed suit. They were very, very founder friendly.

**Harry Stebbings** [59:37]:

Why do you think that pendulum will swing back and we'll see replacing founders returning more commonly?

**Dave Kellogg** [59:43]:

Because I think, like any extreme, it's wrong. And I think we were too far the other way before. We were too quick to throw out founders. I personally think a founder is the best person to run the business. I am super founder friendly, but, no, they're not. I used to say they had a invisibility cloak. They they literally they seem like a founder could do anything. Part of it was jealousy because I was a nonfounder CEO, and I watch my back every day because I knew they could fire me and would. Whereas some founders just act like and sometimes by contractual terms, they are, but they act unfireable, and I think it's not good. None of us should feel like we're invincible.

**Harry Stebbings** [60:17]:

I would also say that replacing a founder does not mean removing them from the company. I still see incredible value from having them in a role where they can empower teams, empower customers, television. But bluntly, CEOs know how to make money printing machines. I think of, you know, MongoDB with Dev. Dev is a phenomenal CEO. Very, very few founders are as good a CEO as Dev is, and it takes a very different CEO to run a public company than to scale to a million in ARR. You can still have them in the company, but they're just not the CEO and leader.

**Dave Kellogg** [60:51]:

Agreed, by the way. And that was always my position, and that's what I did at MarkLogic, by the way. There were two Ph. D. Founders who founded it. I viewed myself as their Sherpa. I was gonna get you to the top of the mountain. Right? Because I I like technical founders. I know what I'm good at and what I'm not good at, especially with selling platform, software. You need these geniuses driving the vision and the product. So totally agree with you, Harry, that replacing the founder as CEO doesn't have to mean if ego doesn't get in the way and things are properly handled, it doesn't have to mean they're not at the company anymore. They can be in a very important role. But, basically, I just think the pendulum has swung too far. I I think we're too quick to replace them in in the nineties and early two thousands. I think for the last, whatever, fifteen years, we've been too many lives. Cat has nine lives. It's like, wow. Founders just have unlimited lives. They can make as many mistakes as they want to, and at some point, you need to replace them. And what I think is we're swinging back to a more reasonable middle ground.

**Harry Stebbings** [61:43]:

I do wanna touch on sales tooling and AI before we move into a quick fire. We've seen this explosion of AI sales tools. How do you advise SaaS founders who are sitting looking at this landscape going, what do I do? How do you think they should approach it?

**Dave Kellogg** [61:57]:

Yeah. Play with stuff. That's what I think. I mean, if you're a vendor in my mind, get out there and know you're playing musical chairs. And when the music stops, you're either gonna be a player or not. So if I were a founder of one of these companies, I'd be very aggressive right now to get myself known and established in the market because this market will organize. Right? We're in the chaos phase of the market. And so from the vendor side, this will organize. There will be winners or losers, and it will happen overnight, well, you know, eighteen months from now. Do you think it will, or do you think it'll

**Harry Stebbings** [62:23]:

be baked into existing vendors?

**Dave Kellogg** [62:24]:

I I'd include that in market organizing. Yeah. It might be done through m and a. It might be through turning companies into features. There's a lot of ways the market can organize. The the thing I know is it's not gonna be a 100 different companies with too many names, and we can't understand who does what. But my advice is rather than try to pick winners, I mean, VCs have that problem, customers can just play with tools and and just go get yourself familiar with these things. That's what I advise people. Yeah. Try to pick the tool you think is gonna win so you don't have to switch later. But more important than that, don't sit on the sideline waiting for a winner to emerge before you figure out how this tool can help your business. Just go play. Tell tell your sales ops head, I want 30% of your time playing with new tools. Just go out and try new stuff because we need to understand what these things are and how they can help us because they can make phenomenal improvements in productivity.

**Harry Stebbings** [63:09]:

How much of an impact do you think AI tooling will impact sales in SaaS over the next five years?

**Dave Kellogg** [63:15]:

Well, you know, Battery came up with a famous slide where they basically said, I'm gonna get them I think to support 30 sellers, they argued that today it takes a 110 person organization, and then tomorrow it'll take 75. So they're saying for the same quota, for the same number of quota carrying AEs, you can cut the org a 110 to 75. So it's on the order of a 30% cut, and I don't think that's necessarily wrong. So they're saying the AI transformation of sales will be a 30% increase.

**Harry Stebbings** [63:42]:

Is there anything that you think people misunderstand or or don't don't appreciate when applying AI and the new AI sales tooling to SaaS?

**Dave Kellogg** [63:50]:

I don't, Harry, because I think there's an enormous amount of drudgery in sales, and I just think this stuff's gonna eliminate I don't think it's gonna eliminate quality work. It's gonna eliminate

**Harry Stebbings** [63:59]:

Is is outbound gonna become more or less important in an AI world?

**Dave Kellogg** [64:03]:

I can be too quick on these things, Harry, but but I think it's gonna saturate. Once everybody has great outbound tools, once I'm getting 50 ultra personalized emails a day, I'm gonna ignore them all. I mean, I I just think it's a transient advantage, and that's why I come back to inbound. So go use it. Right? Transient advantage is still an advantage. Right? So go use it while it's there, but don't rely on it as your strategy because, no, a year from now, all your competitors are gonna have these tiers.

**Harry Stebbings** [64:29]:

Dave, I would love to dive into a quick fire round. So I say a short statement. You give me your immediate thoughts. Does that sound okay? It sounds dangerous, Harry. What worries you most in SaaS today?

**Dave Kellogg** [64:39]:

Subscription pricing. It's a religion, and and religions scare me. I mean, I think there's time and a place for it. I think we're now past the peak on it, but I get nervous whenever VCs show up to CEOs and say, do this. Everyone's doing it. It's the future. And if there's no underlying real reason other than everyone's doing it, I don't know if VCs know how distracted they can be to CEOs. Because I listen. When I was a CEO, listen. My VCs told me to do something. I'd do it. And you have to understand there's an opportunity cost of me looking at it, building a model, trying to make a model that's some hybrid. So just I don't know. Be careful what you ask for, and I just worry that subscription pricing during the ZERP days was the greatest thing in the world because the money was flowing and everybody was expanding. And now the tide's going out, to mixed metaphors, and we're seeing the downside of it. And by the way, the the great paradox right now is the people who are in subscription pricing generally have been hit harder than those who are not, but they're nevertheless still growing faster. So put that little braid twister on.

**Harry Stebbings** [65:37]:

What's the biggest mistake founders make when expanding into enterprise? Product. They

**Dave Kellogg** [65:43]:

think that the product will work in enterprise without understanding requirements. In enterprises, what's the expression? A big company is not a large small company. Right? I've never heard that before, have I?

**Harry Stebbings** [65:56]:

What would you say is the biggest mistake founders make when hiring sales teams?

**Dave Kellogg** [66:00]:

Hiring a VP on pedigree value who turns out just to have been in the right place at the right time. How do you know if

**Harry Stebbings** [66:08]:

they're right place, right time?

**Dave Kellogg** [66:10]:

Very hard to know. Right? Because you want somebody who's got a track record of success. You wanna see good brand names on the resume, and you need to try and figure out how much were they just riding along versus how much were they driving.

**Harry Stebbings** [66:21]:

And sometimes attribution is not even reliable in a way that, like, the person who sold the Uber account at Twilio. It was like an entry level sell. They probably just monitored it and then turned into a monster monster account.

**Dave Kellogg** [66:32]:

Yeah. We had at MarkLogic, this is way back in the day, but we we had one rep had one of the house accounts, and most of the people in the company really didn't like working with that rep and thought it was kind of semi incompetent, kind of bumpy. And the board was like, we need more Schmedley's. Schmedley's amazing. Right? Because if you just look at the numbers, Schmedley was amazing, whereas most of the people who had to drive it was just like, oh my god. Schmedley's kind of a pain in the neck. So much as I love numbers, you you need to look beyond them. I think if you ask why questions about how decisions got made, you tend to find out if they're making them.

**Harry Stebbings** [67:03]:

What will be the biggest challenge faced by SaaS companies in 2024?

**Dave Kellogg** [67:07]:

Efficient growth. We learned how to do an efficient growth really well in the last four years.

**Harry Stebbings** [67:12]:

What in SaaS would you most like to change? If you could change one thing in the world of SaaS, what would you most like to change?

**Dave Kellogg** [67:18]:

I think it's already changed, which is the funding environment. I honestly don't believe that foie gras in startups, as they say, stuffing them full of cash is a healthy behavior. Some are actually good. I I knew a few that seem good at raising money and not spending it and saving it to grow later. But most people, when you stuff them full of money, they go spend it, and it's a shame. So I'd like the funding environment to change because I don't actually think it's been healthy.

**Harry Stebbings** [67:43]:

Well, do not worry, my friend. I think that's changed. But listen, Dave. I love it with you because as I said, I always, like, listen to you, and then I have 10 subsequent questions as you can see from my arm. Ah, okay. But Dave, I've loved this. So thank you so much for joining me. I mean, what a fantastic discussion that was. If you wanna see the full video, you can check it out on YouTube by searching for 20 VC. I always love to see you there. But before we leave you today,

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