Recently, I met with a sales leader I’ve known for years, and he told me The Most Curious Story. His SaaS CEO asked him to stop selling so much.
Slow down. You are doing too good of a job, the CEO said. We can’t afford it.
First, this SaaS company has a mix of freemium customers and sales-driven customers (with higher ACV, lower churn). The freemium ones really have no acquisition costs at this point (the main lead source is mini-brand). The sales-driven customers are very profitable on a CAC basis, since their lead cost is $0, and so the ‘Magic Number’ or CAV/CLTV ratio is very favorable. But … still … the sales team’s commissions consume cash in the very, very short term.
Second, this SaaS company had a very tight balance sheet. About $1m in cash for a $5m ARR business.
And here, they just couldn’t safely invest. Because every $10k, $20k, $50k customer they closed … Hooray!! … but … that sales commission, just put them into Danger mode on the balance sheet. Even though in 4 months, they’d be in the Black here … for years to come …
A crying shame, really.
We get that, but what’s the “right” answer? Many of us can’t raise a $50m Series Seed, and many others of us don’t want to get diluted to 0.0001% ownership.
I think in SaaS, and I learned this from an insight from Josh Stein at DFJ (first VC in Box, SugarCRM, etc.) at a board we’re on together, what I’m going to inelegantly call “The 0.5x Balance Sheet Rule.”
Which is, one you are post-Initial Scale, past $3m-$4m in ARR or so, even if you have 80%+ gross margins and a very efficient sales and marketing engine … once your cash dips below 50% of your ARR … you’ll have stress, and importantly — underinvest. And this is the worst time to underinvest. Because when you get here, every great hire starts to be accretive (more on that here) — as measured in 12 months or less. But you need enough capital to make these hires and let them pay for themselves in 12 months or less.
I made this mistake myself, with hindsight. I was proud we got cash-flow positive at $4m ARR or so, and shortly thereafter, I figured out the “everyone great is accretive thing” and told all the managers to hire whomever they want. But … I should have gone further. At ~$7m in ARR I think we had about $1.5m in cash on the balance sheet, plus some venture debt. If I’d had $4m on the balance sheet, I would have made far, far more investments. At $7m in ARR and cash-flow positive, I didn’t have to worry about failing. But I still had to worry about the costs of making data-driven, well-thought through, but unproven mistakes.
Now I’ve watched this in action again and again, and Josh Stein is 100% spot-on. Having 100% of your ARR on the balance sheet is a luxury. Do that if you can. But at least, once you’re at Initial Scale, make sure you maintain 50% of your ARR on the balance sheet. It will destress all your investments. Let you really go for it. And let you be OK if the amazing team you’ve hired makes a few more mistakes on the way to $100m in ARR.
As CEO/founder, once you’re at even just $3m or so in ARR, and have a few good VPs on the team … really your #1 job is to empower them. They need enough of a safety net, and enough runway, to do amazing things.
“Slow down, you’re selling too much.” It can happen, at least, as a construct, to anyone. Don’t let it be you.
(Cross-posted @ SaaStr)