5 Remote-First Principles from Brex

One area I’m really interested in right now is the trend away from traditional office structures for companies. All employees sitting in the same building for 40+ hours per week has felt antiquated for years. Now, with the pandemic, many of us have been forced to work from anywhere for 6+ months, and most people never want to go back to the previous office usage patterns. Of course, purely remote work isn’t the answer for everyone, and there are a number of good reasons to work in an office. Remote-first/work from anywhere has been getting the most attention lately, so let’s dive in there.

The best post I’ve found is Remote-first at Brex. Here are a few notes from the piece:

  • Principle #1: Clone the internet, not the office
    • Use internet best practices, not traditional office best practices, for distributed work
  • Principle #2: Async decisions by default
    • Written word becomes the most powerful tool, not meetings and people’s in-person personalities
  • Principle #3: Intentional relationships
    • Cultivate relationships more thoughtfully
    • Frequent company and team in-person meetings, at least once every two months
  • Principle #4: Physical-mental balance
    • Every person needs four things: an uninterrupted work space, connection to tribe, connection to nature, and physical activity
    • Office hubs in major cities for people that want to go into an office
  • Principle #5: Iteration
    • Everyone is learning and experimenting, expect remote-first work styles to evolve

Remote-first is a fascinating trend that is only growing in importance. Look for the trend to influence all types of companies, and many new best practices to emerge. I’m excited to see what the future holds.

The Four Ways to Calculate SaaS Churn

Dave Kellogg just published an excellent new post titled Churn is Dead, Long Live Net Dollar Retention! Slides from my SaaStr 2020 Presentation. In the post, Dave argues that churn is too easily manipulated and that Net Dollar Retention is the better metric, to which I agree and have argued in the past (see Churn, Churn, Churn and Compounding Revenue’s Value in the Future).

One of the most important items of the presentation, which isn’t as well understood in the market, is that churn calculations can be done a variety of ways, and therefore manipulated.

From the presentation, here are four ways to calculate churn rates:

Let’s break out those four ways to calculate churn:

  • Gross ARR – Take the annual recurring revenue (ARR) lost at the end of a period (e.g. the end of last year) and divide that by the ARR at the start of the period (e.g. the beginning of last year). So, assuming $1 million of ARR lost last year, and $10 million of ARR at the beginning of last year, the churn would be 1/10 = 10%.
  • Gross ATR – Available to renew (ATR) is similar to the ARR calculation with one major difference: you don’t get credit for any multi-year contracts that transcend a calculation period. If a customer signs a three year contract, under the Gross ARR model, you assume they renew in year one and two for calculation purposes. Under Gross ATR, multi-year contract customers are removed and only customers that are available to renew are counted.
  • Net ARR – Similar to Gross ARR, but you add any expansion or up-sell revenue and deduct any contractions or downgrades within the cohort.
  • Net ATR – Just like Net ARR, but within the available to renew cohort.
  • Bonus – Churn can be calculated against logos (customers) instead of revenue, making for even more ways to calculate churn. And, there’s additional funny business that can be done in calculating upgrades and downgrades to determine Net ARR and Net ATR.

Churn is one of the most important things for SaaS entrepreneurs to know cold. Go watch Dave’s presentation and get a deep dive on churn and net dollar retention.

Startup State of the Union Slide Deck

Early in the Pardot days, it was clear things were going well and we had something special. Only, we were inexperienced and didn’t know what we were doing (does anyone, really?). My concern was ensuring we grow faster than the market, and to do that we had to ensure our employees’ personal growth was even faster than our company growth. For me, my needed personal growth was around communications and company alignment.

To facilitate communications and company alignment, I focused on things like simple strategic plans, daily check-ins, weekly team update, weekly all-hands meetings, and monthly strategy dinners.

Recently, I was introduced to a new idea: the Startup State of the Union. Generally, the idea is to map out all parts of the business in a slide deck that is updated monthly and available to the team.

As an entrepreneur, you are a cartographer making the map, not following someone else’s map. The Startup State of the Union is your internal map.

Let’s take a look at what slides would go into the Startup State of the Union

  • Purpose / Vision
  • Simple Strategic Plan
  • Why Now, Why Us
  • Customer Testimonials
  • Product Screenshot
  • Technical Platform
  • Leadership Team
  • Board / Investors
  • Departments
    • Customer Service
      • Consider team, renewal processes, etc.
    • People Operations
      • Consider team, recruiting process, employee development process, etc.
    • Marketing
      • Consider team, definitions of qualified leads/accounts, ideal customer profile, tech stack, etc.
    • Sales
      • Consider team, AE + SDR + CSM alignment, territories, etc.
    • Finance
      • Consider team, financial forecasting process, etc.
    • Product
      • Consider team, product planning process, pricing/packaging, etc.
    • Technology
      • Consider team, development process, etc.

Overall, the big idea is to have an internal slide deck, updated regularly, that captures where the business is today, where it is going, and how it is run to get there.

Organizational alignment is hard, and only gets harder as the company grows. Consider a Startup State of the Union internal slide deck to capture the most important details and re-evaluate them regularly.

The Great Reset for Startupland

Last week I was talking to an entrepreneur and he shared the latest progress for his startup. The story was a familiar one in the time of pandemic:

  • Growth slows, sales cycles lengthen, uncertainty clouds decisions
  • Layoffs to conserve cash and reflect new growth expectations
  • Recognition that metrics needed to raise more money on ideal terms won’t be met
  • Reset business expectations for measured growth with a focus on getting to profitability/breakeven
  • Realize profitability/breakeven relieves an artificial pressure, providing a newfound freedom

This is the great reset for startupland.

Most startups were negatively impacted by the pandemic. A small percentage were positively impacted. All expectations were changed.

Look for this reset to play out in a number of ways:

  • Revenue growth and profit margins, also known as the Rule of 40, will be one of the most important metrics
  • Hiring, going forward, will be more measured. Entrepreneurs will start paying greater attention to revenue per employee.
  • Work from anywhere, and the corresponding hire from anywhere, will change huge numbers of companies forever, in a way that has a positive benefit for the world.
  • Costs, especially office space, will be more scrutinized, resulting in leaner, more efficient organizations.
  • Investor expectations are lowered and more attention will be paid to existing portfolio companies.

We’re living through the great reset for startupland and the impact will be felt for years.

The Hallway / Zoombomb Values Test

A few weeks ago I was going through a series of simple strategic plans with a group of entrepreneurs. When we arrived at the section on core values, the average plan had 10 values with highly detailed explanations. After seeing this pattern, I offered up the Hallway Values Test:

  • Independently stop 10 employees in the hallway
  • Ask each employee to write down the company values
  • Compare the answers to the actual core values
  • Assess the percent right and grade it on a typical letter scale

What’s the chance your company gets an ‘A’?

After going through this exercise with a dozen entrepreneurs, it’s clear that every company would get an ‘F’.

In today’s pandemic environment, the Hallway Values Test isn’t doable. Instead, run it as a Zoombomb Values Test. Drop in on a Zoom call and ask each person to type up the values in a local notes app — no cheating. Then, when everyone is ready, copy and paste the answers into the Zoom chat window. Now, see how many were right and assess the results.

Of course, the next question is how to improve the grade on the Hallway Values Test.

A few ideas to improve on the Hallway Values Test:

  • Have 3 – 5 Values – As much as we want to capture an extensive list of values as part of the constitution of our company, try limiting it to three, and no more than five values. Less is more when it comes to people remembering, and upholding, core values.
  • Incorporate Values in Regular Communication – Repetition, repetition, repetition. Put the core values in the Weekly Update Email, talk about a different value at each Daily Check-in, and give out a lawn gnome to the employee that most embodies a value each month
  • Require Culture Anecdotes at Quarterly Reviews – Update the quarterly check-in process with the question “how are you following the values?” and require an anecdote for each value.

The Hallway Test is a great way to assess the strength of values in a culture. Personally, I believe culture, including values, is one of the most important things an entrepreneur can instill in a business, and when done well, becomes one of the most powerful and sustainable advantages.

Ready to assess the strength of your values? Run the Hallway Values Test.

Start Thinking in Systems, Stop Thinking in Goals

Last week I was asked about my personal goals, what keeps me going at this point in life. My answer was simple: I don’t have any goals. Instead, I have systems that I believe will lead to positive outcomes. I want to help spread the magic of entrepreneurship, and make an impact on the world. My systems will help me do my best, not striving for goals.

Start thinking in systems, stop thinking in goals.

I can control the systems. I can control the effort I put in. I can control where I spend my time.

I can’t control if I hit the goal of creating 100 successful startups. I can’t control if I hit the goal of creating 10,000 high paying jobs.

This type of thinking really crystallized for me while at Pardot when we did our quarterly and annual planning. Yes, we had goals. Yes, we cared about hitting the goals. Only, we couldn’t guarantee that we’d hit the goals. This idea of control, or lack thereof, made me go deeper. Primarily, what can we control?

We can control the required number of sales activities to likely achieve quota.

We can control the on-boarding steps necessary to ensure customers have a successful experience.

We can control the product planning process to ensure the most important enhancements.

So, we set goals and focused our energies on the systems we could control.

When I see goals, and talk to entrepreneurs about their goals, I try to tease apart if the goal is within his or her control. If it isn’t, I work at helping reshape the goal to something that is more controllable, and share the idea about systems.

Control what you can control.

Start thinking in systems.

Rise of the Startup Studios

Last week I read about the new Share Ventures startup studio and realized we might be at a tipping point for this newish type of venture. Startup studio is the modern name for what was called an incubator back in the dot-com days. Thankfully, the tech infrastructure and scale of Internet users make startup studios more viable now, 20 years later.

For startup studios, the big idea is to have a core team help create and grow multiple companies at the same time using shared resources and expertise.

I’ve followed startup studios for years and have personally been doing a form of it for 13 years now (see Atlanta Ventures). Today, the largest and most well-known in the SaaS world is High Alpha out of Indianapolis. High Alpha has already launched dozens of companies and has built a tremendous team.

Locally, I’m excited to see more entrepreneurs launch startup studios. Here are two of the newest:

Rule 1 Ventures – Founded by serial entrepreneur Todd Erlich (FactorCloud, Kill Cliff, Triserv), Rule 1 focuses on B2B SaaS, an area of local strength. Todd and his team have a background in SaaS, FinTech, and consumer. Look for a number of new startups to emerge from Rule 1.

Outlander Labs – Founded by Leura and Paige Craig, Outlander Labs positions their firm as an investing incubator with a hands-on program. Leura and Paige have long startup backgrounds with investments in over 100 startups. Look for a broad range of startups to emerge from Outlander Labs.

My prediction: startup studios are going to be even more prevalent as it costs next to nothing to test ideas and entrepreneurs realize more at-bats will increase their chance of homeruns.

Startup studios are an excellent advancement in the startup world and will have a major impact over the next 10 years.

Start It Up Georgia Kick-Off

We announced Start It Up Georgia last month as a way to jump start entrepreneurship in the state and help with the many dislocations in our world. The response was overwhelming. Over 700 entrepreneurs signed up for the program — 706 to be exact. Amazing! We never knew there would be this much demand.

Now, for the fun part. The program kicks off tomorrow with the first of 12 lesson labs:

Jermaine Brown – Entrepreneurship: Do You Have What It Takes?

Dr. Lakeysha Hallmon – Turning an Idea and Skill Into a Business.

Rachel Ford – Testing Your Idea: Will Someone Pay You For It?

Christina DeVictor – Company Creation: The Practical Steps Required to Establish a Business.

Jacey Lucus – Developing Your Online Presence: Creating a Website and Social Media.

Lauren Patrick – Marketing Your Business and Developing Your Brand.

Matthew May – Financial and Accounting Basics for Business Owners.

A.T. Gimbel – Pricing and Product: Creating a Profitable and Sustainable Business Model.

Ethan King – Operation Management: How to Run Your Business.

Kyle Porter – Company Culture and People Management.

Amy Zimmerman – Hiring: Sourcing, Training, and Leading a Team.

Kim Seals – Funding Opportunities and Raising Capital.

In addition to the 12 lesson labs, taught live over Zoom and available as recordings, we have small accountability groups for the entrepreneurs. With a cohort this large, we had to find a significant number of volunteer mentors. Of course, the community stepped up and we have 44 mentors to lead the small groups. It’s incredible to see so many people helping entrepreneurs realize their dreams.

Finally, the program culminates with a demo day where the entrepreneurs present their ideas and progress. Donors have already donated over $10,000 in grant money to help the demo day winning entrepreneurs continue their journey and grow even faster.

Start It Up Georgia is a grand experiment with lofty goals. I’m sure we’ll have bumps along the way but we’ll do our best to help hundreds of entrepreneurs start and grow new companies. We believe entrepreneurship is one of the greatest forces for good, and we’re working hard to increase the chance of success of everyone involved.

SaaS Generations 1, 2, and 3

Last week I listened to an interview of Benchmark partner Eric Vishria where he talked about the three generations of Software-as-a-Service (SaaS). I like how he framed the idea and wanted to capture the concept here. I’ve thought deeply about the first and second generations of SaaS, but haven’t spent enough time thinking about the third. Let’s dive in.

1st Generation SaaS

The 1st generation of SaaS is defined as moving legacy enterprise applications into the cloud and delivered as a service. Sometimes the technology is literally the legacy solution (previously called Application Service Provider) but more often it’s a new product that’s natively SaaS. Like traditional enterprise software, it’s sold by salespeople, typically with contracts and the usual enterprise process. The huge innovation is the ability of the software vendor to abstract away most of the customer headaches that come with managing software and deliver it as a monthly or annual fee. This, combined with more efficient product development, due to customers always being on the same version, makes for an excellent business and customer model.

Examples: Pardot, Salesforce

2nd Generation SaaS

The 2nd generation of SaaS reimagines business software as more of a consumer product where you can sign up for a free trial or a free, limited version without talking to a salesperson and become productive immediately. This category is often called bottoms-up or freemium as it starts with functional business users getting a job done and spreads in organizations without I.T. involvement. 2nd generation SaaS is bought differently than 1st generation SaaS and feels more natural as both a buyer and user of the product.

Examples: Calendly, Slack

3rd Generation SaaS

The 3rd generation of SaaS is SaaS delivered exclusively as APIs — a way for software programs to talk to other software programs without a user interface. APIs are the building blocks of modern software development representing re-usable components that make programming faster and more productive. APIs can now power many aspects of software that 5-10 years ago would have been custom including user authentication/oAuth, sending/receiving email, video conferencing, payment processing, recurring billing, testing, visualizations, reporting, analytics, and much more.

Examples: Twilio, Sendgrid

All three generations of SaaS are growing fast and have tremendous runway ahead. Look for the 2nd and 3rd generations to grow even faster and become more commonplace.

SaaS is an incredible segment of the software industry and understanding the three generations helps frame the thinking about product types.

Ask Investors How They Think About Zeroes

Over the years I’ve invested in a number of venture funds as a way to learn about venture in general, dive deeper in selected startups, and see what’s out there. One topic that’s popular now in VC fundraising decks, but was non-existent five years ago, is the firm’s historical loss ratio.

A historical loss ratio is represented as the number of previous investments that the venture firm has lost money on, most commonly going to zero (an investment that’s completely worthless). I’m not an insider in the venture and limited partner industry, so my guess is that a paper became popular arguing that the better venture returns came from firms that didn’t lose money very often on individual deals (update: here’s a paper). Venture capitalists that have to work hard to raise money from LPs (most firms!) have glommed on to this theory and worked hard to paint themselves as good at not losing money.

Of course, more focus on limiting the downside can be inverted as more focus on limiting the upside. The greatest returns in venture don’t come from limiting the downside, they come from the positive outliers — the power law of distributions.

Personally, it’s more interesting to attempt something with a 1 in 50 chance of succeeding as opposed to something with a 9 in 10 chance of succeeding, assuming the upside is correspondingly larger. Yes, we want to control our own destiny, but we also want to take big risks that have the opportunity for big impact.

Humans are conditioned to feel more pain from losing money than gaining the same amount of money. Losing hurts more than winning.

As an entrepreneur, it’s important to understand where a potential investor stands. Is the investor more oriented towards maximizing upside, or minimizing downside? Don’t know? Just ask.

There’s nothing wrong with having a low or zero loss ratio — there are many paths to success. I know a number of excellent investors and entrepreneurs than minimize the zeros and execute incredibly well.

Ask investors how they think about zeroes and you’ll understand a critical part of their core psychology.