Remote Work’s Role in the Future of Work

Remote-first companies, once an odd side-show with few household names (Automattic is likely the best known), has now become a daily topic with major companies like Shopify, Twitter, Square, most of Facebook, and more announcing that they’re moving to a remote work model permanently. The world was slowly moving this way, and Covid-19 accelerated it by 20 years — that’s a good thing.

Now, I’m not a fan of the name “remote work” to explain that employees don’t have to work in a corporate office, but I understand the rationale. Other terms like “work from home” don’t capture the freedom of being able to work anytime, anywhere (wanna work from the beach? go for it!). Shopify’s CEO, Tobi Lutke, calls it “digital by default“, which is interesting, but too difficult to understand for it to win the naming game. My favorite choice: work.

Work is work, regardless where you want to do it. “Work” becomes the default and “office work” is going into the office to do work. We’re already working at home, at the coffee shop, on the train, etc. even if we have a traditional office job. Work has been detached from an office for years.

With work moving away from being office-centric, how do offices fit in? Offices are still critically important. Only their size and design needs to dramatically change. Face-to-face collaboration is superior to digital collaboration, but most collaboration doesn’t need the overhead of in-person meetings. Office space, whether shared or dedicated, becomes primarily for collaboration, meetings, and the subset of employees that don’t have access to a high quality work setup (e.g. poor internet connection or kids at home).

Some companies will want dedicated offices that have their own style and feel. One CEO described it as wanting to have 10 cities each with one floor of office space instead of having 10 floors in one building in one city. Employees still don’t have to be in one of those 10 cities. Work is work. If an employee does like going into an office (hello extraverts!), plenty of cities are available.

Co-working spaces are going to get even more popular. As companies move to the modern work arrangement, and away from traditional, dedicated offices, co-working fills the space need for in-person meetings and collaboration, but in a way that is 10x more flexible and affordable. Need five desks for employees that have a six-month project? Done. Need an event center to have a 100-person all-hands meeting once a month? Done. The company’s needs are met with lower cost and greater flexibility.

The human-to-human connection has never been more important, yet now has to be more intentional than colleagues sitting together in the same place.

Remote work is now just work. The future has arrived and we’re better off for it.

19 Ideas for Workplace Covid-19 Upgrades

Floor signs indicating hallways that are one-way

For the last month we’ve been researching and implementing ways to make the physical space at the Atlanta Tech Village safer for everyone in light of the Covid-19 pandemic. While any building carries risk, there are a number of ways to make existing spaces better. We consulted several resources with two of our favorites being the Back to Work Toolkit and the Black Sheep Restaurant.

Here are 19 ways we upgraded our workplace due to Covid-19:

  1. Free re-usable masks for everyone
  2. Requiring masks be worn entering the building, the kitchens, and while riding the elevators
  3. Napkins to be used instead of skin to touch elevator buttons and open certain doors that can’t be automated
  4. Hand sanitizer with reminder signs in every community area
  5. Health declaration signs at building entrances asking people to not enter if they have any exposure or symptoms related to Covid-19
  6. Signs throughout the building reminding of the need for physical distancing
  7. Addition of HEPA air purifiers in all common areas
  8. Installation of automatic door openers activated by a contactless hand motion for dozens of doors
  9. 3D printed door handle modifiers to make certain doors openable via the elbow
  10. Removal of community doors, where possible, to minimize touching of shared resources
  11. Floor signs indicating one-way hallways and direction of traffic flow
  12. Stairwell signs indicating one-way walking (one going up and the other going down)
  13. Circles on the floor six feet apart in any area where a line might form like the coffee machines and the check-in iPads
  14. Circles on the floor in the elevators indicating where to stand and limiting elevator occupancy to no more than three people
  15. New side screens for desks that can’t be moved six feet apart in private offices
  16. Removal of certain chairs in conference rooms to promote physical distancing
  17. Removal of certain desks in co-working areas to make the remaining desks six feet apart
  18. Increased building cleaning frequency to multiple times per day
  19. Added non-toxic disinfecting misting once per day

We’ll continue to upgrade and make changes as more people use the building and new best practices emerge. Right now, we believe the enhancements make the Tech Village safer for everyone. We’re eager to continue helping entrepreneurs increase their chance of success through community.

Strategies in Our Control and Scenarios Outside Our Control

While many startups have already done brutal layoffs and expense cutting, there’s still the same amount of uncertainty, if not more, in the world. Sequoia Capital has an excellent post up titled The Matrix for COVID-19 with a visual way to think through potential strategies in the control of the entrepreneur vs macro scenarios outside the control of the entrepreneur.

Entrepreneurs generally have a strong locus of control and extreme uncertainty exacerbates the desire to control things. The best course of action? Develop multiple plans to address potential scenarios. In the example matrix above, it references three scenarios with lockdowns ranging from three months to 12 months along with three plans range from no change in operating expenses to cutting operating expenses by 25%. For many startups, cutting expenses by 25% won’t be enough, and a more aggressive plan is necessary.

Entrepreneurs should develop multiple plans under different scenarios and do their best to control what they can control.

Startup Cash Considerations in Crisis

With most startups in crisis mode, one of the top considerations is cash management. The ability to raise capital has been greatly diminished and things are likely to get more challenging before they get better.

Steve Blank has an excellent post from Jeff Epstein titled Action Today for CFOs with recommendations like:

  • Evaluate your when you run out of cash in a worst-case scenario
  • If you don’t have 24 months worth of cash, consider the following:
    • Draw down your lines of credit and view the interest payments on them as buying insurance
    • Sort all vendors by how much you spend and call each asking for a discount or loan to spread out payments further into the future
    • Cut marketing programs that don’t have a demonstrable ROI
    • Implement a hiring freeze
    • Let people go
    • Cut all salaries by a certain percentage
    • Tightly monitor collections and mitigate problems

Some more cash saving ideas:

  • Eliminate all discretionary expenses (require any purchases over X to go through the CFO or CEO)
  • Remove any subcontractors or consultants
  • Determine which vendors you much have and which ones are nice-to-haves
  • Suspend the 401 (k) match
  • Ask employees to take unpaid time off, convert to part-time, or a leave of absence

Entrepreneurs are generally optimistic, glass-half-full people, and now is one of the most challenging economic climates we’ll see.

Cash is always critical, especially so in a crisis.

The number one reason startups die is that they run out of cash.

Churn, Churn, Churn

For years I’ve been telling entrepreneurs that a high net renewal rate (and net dollar retention) is one of the most important SaaS metrics. While net renewal rate is important, two people in the last week have told me gross churn — both logo and dollar — is more important. And I believe them.

Why is gross churn more important? Let me count the ways.

  • Black and White Value – With gross churn, the math is straightforward: how many customers (or dollars) are up for renewal at the start of the time period vs how many renewed. Pretty easy. Now, for net renewal rate, things get more complicated. Do temporary upgrades/downgrades count? What about deals with subsidiaries or related businesses? You could ask 10 different SaaS companies how they calculate net renewal rate and get 10 different answers. Gross churn calculations should always be the same.
  • Ability to Understand – Similar to the first point, it’s much easier to rally the team around a gross renewal rate since it’s easier to understand and calculate. Say we start the year at $10 million in annual recurring revenue and have 20% gross churn, we know directionality that we need to sign more than $2 million of new recurring revenue to grow (assuming no upgrades/downgrades). Now, if we can get better and only have 10% gross churn, we only need to sign more than $1 million of new recurring revenue to grow. Pretty simple.
  • Recurrence of Upgrades – People love talking about their > 100% net renewal rate, myself included. Only, it’s much more nuanced than upgrades outweighing churn and downgrades. Are the upgrades across every cohort or do customers primarily upgrade in their first year (implying they’re still rolling it out) and not upgrade after that? Do customers often downgrade in year two or three implying they finished a component of a project or transformation? Are the upgrades primarily from a specific vertical and has that vertical been tapped out? Net renewal rate can become less compelling with a more detailed analysis of the cohorts.

SaaS entrepreneurs should focus on the gross churn rate and ensure it’s as low as possible (under 20% annually for SMB and under 10% annually for enterprise). The old saying that’s it cheaper to retain a customer than sign a new one has never been more true, and is even more important with SaaS.

Make fighting churn a top priority of the company.

Rule of 40 and Startups

Last week I was talking to an entrepreneur and he asked what valuation I thought the market would bear for his startup’s next round of funding. I asked for the business state of the union and standard financial metrics like recurring revenue, growth rate, gross margin, burn rate, cost to acquire a customer, renewal rate, and net dollar retention.

After hearing the metrics, I shared that they’re below the Rule of 40 or better. Confused, he asked what that meant. The Rule of 40 is the growth rate, as a number, plus the burn or profitability percentage, as a positive (profits!) or negative (losses) number, added together.

If the business is growing 100% year-over-year, and is burning the cash equivalent to 40% of revenue, it would be 100 + (-40) = 60, which is 40 or better.

If the business is growing 50% year-over-year, and is burning the cash equivalent to 30% of revenue, it would be 50 + (-30) = 20, which is below 40, and not as good.

Let’s look at a more specific example:

  • $10 million of revenue
  • 50% year-over-year growth rate
  • $1 million in trailing twelve months burn (burn is 10% of revenue)

Here, the Rule of 40 calculation would be 50 + (-10) = 40. So, they’re in good shape and are right at the Rule of 40.

Another way to think about the Rule of 40 is that if the startup has a high burn rate relative to revenue, it needs to have a high growth rate. If the startup has a low growth rate, it needs to be profitable.

If some extreme cases like dramatic user growth (e.g. Facebook in the early days) and amazing net dollar retention (existing customers buy significantly more product every year and outweigh the customers that leave), the Rule of 40 is less applicable. For most startups, it’s very relevant.

The Rule of 40 is a great way to assess how a startup is performing in an objective manner and should be a regular topic of conversation for entrepreneurs.

Reforecasts and Communication

Two years ago I was sitting down with an entrepreneur debating what to do next. It was early in the hyper growth stage of the startup and things were growing fast. Only, with limited operating history, growth expectations were even greater than reality, and there was no way the annual forecast was going to be achieved.

Accountability was tied to the forecast.

Goals/OKRs were tied to the forecast.

Bonuses were tied to the forecast.

What to do?

This challenge is much more common than expected. Fast growing startups are inherently unpredictable. Even with bottoms-up and top-down forecasts, reality is different from the spreadsheet. At some point, trying to hit a forecast that is no longer possible is more demoralizing than motivating — it’s time for a reforecast.

A reforecast is simply redoing the budget and expectations after the year has already started to reflect new information. The key is to get all the stakeholders together, work to make the new forecast as accurate as possible, and then communicate it with the team.

Communication is the most important part.

By over-communicating, including why the reforecast was necessary, learnings from the experience, and go-forward expectations, team members are more bought in and more accepting of the changes. People don’t expect leaders to be perfect; people expect leaders to lead and be transparent.

Reforecasts are part of normal startup life. They shouldn’t happen yearly, but they do happen in the normal course of business. When a reforecast is necessary, make the changes and over-communicate with the team.

Segment Customers, from Flies to Whales

For the last two days I’ve had the opportunity to spend time with entrepreneurs from around the world through Endeavor. In our group, we had entrepreneurs from Venezuela, Columbia, Greece, Argentina, and Saudi Arabia all sharing stories of challenge and opportunity. As part of the program, we spent time talking through their customers using a simple naming convention:

  • Flies
  • Rabbits
  • Deer
  • Elephants
  • Whales

Now, these names aren’t meant to degrade or belittle certain customers. Rather, they’re for the entrepreneur to understand what is, and what isn’t, working within segments of the business.

For each segment, here are some common metrics:

  • Cost of customer acquisition
  • Average revenue
  • Renewal rate
  • Lifetime value

Only, by looking deeper, new insights emerge.

Instead of investing resources to grow all segments, invest in the most important segments.

Segments are divided based on a variety of characteristics including:

  • Number of employees
  • Revenue
  • Potential usage (users, locations, etc.)

Initially, as the business is growing, it’s best to keep things simple. Once some level of scale is reached — say 100+ customers — it’s good to segment the customers and understand the business in a more fine-grained way.

What else? What are some more ideas on segmenting customers?

SaaS Enemy #1: Churn

At time we sold Pardot several years ago, our monthly gross churn was 1.4%. On an annualized basis, it was roughly an 80% renewal rate. Back then, we had next to no upselling of customers due to a poor pricing model (it was subsequently changed), resulting in a net renewal rate (upsells less downgrades and cancels) that was essentially the same as the gross renewal rate.

With a growth rate of 100% year over year, we weren’t concerned with plateauing where new customer signings are negated by customer churn resulting in a no-growth business (general ballpark, depending on a number of factors, is that the growth rate goes down 20% per year e.g. 100% year one, 80% year two, 60% year three, etc.). Only, without a much better net renewal rate, ideally over 100%, it was clear that in the next few years the customer base would get so large, and the new customer signings larger, but not large enough, that the business would no longer grow.

Customer churn is the #1 enemy of SaaS startups.

So much shine wears off a startup when it isn’t growing fast, and the fastest way to ensure that it keeps growing, is to not have any churn (nearly impossible save for software to large, enterprise customers), or low churn plus upsell, resulting in growth even if no new customers are signed. Everything from custom professional services to great customer support to heavy qualification of the potential customer before they’ve signed should be employed to ensure the highest probability of customer success, and thus the greatest chance of being a customer for life.

Churn is part of the SaaS experience, but everything possible should be done to minimize it and maximize the chance for net negative churn.

What else? What are some more thoughts on churn as the #1 enemy of SaaS startups?

How an Employee Stole $50,000 from Pardot

One of the more challenging stories I haven’t told is how an employee stole $50,000 from us at Pardot back in 2012. At the time, we had this great receptionist that was thoughtful, attentive, and a great culture fit. We were running a program where if a customer referred a prospect to us that did a demo, we rewarded the customer with a $100 Amazon.com gift card. To make it more personal, we’d physically mail the gift card to the customer with a handwritten thank you note.

The program had been running a couple months and was growing in success. To take some load off the sales reps that were doing it, we had everything go through the receptionist. Now, things were humming and the receptionist was ordering a number of Amazon.com gift cards on a regular basis, yet we weren’t tracking who requested what and how much was being spent on these gift cards (mistake #1).

The receptionist, being nefarious, tried adding a couple extra gift cards to an order to see if anyone would notice. Nope, no one noticed.

Next, the receptionist figured out that because we were constantly exceeding our Amex credit limit (fast growing company!) we were now paying the credit card bill twice a month such that there was a two week window from when you could put items on the Amex and someone would check the online statement (mistake #2).

Finally, it was time for the big move by the receptionist: max out the credit card with gift cards right before it was about to paid off, wait until he heard accounting made a payment on it, and then go for the kill. Being the receptionist, he took delivery of all the Amazon.com packages daily, so he decided to order a number of expensive personal items, and more gift cards with next day deliver. The very next day, several packages arrived for him and he promptly took them to his car and left calling in with a fake family emergency. We never saw him again.

After putting the pieces together, including analyzing the Amazon.com purchases, the receptionist had stolen $50,000 from Pardot. Naturally, we called the police to report him but there was no interest in pursuing a non-violent white collar crime. He got away free and clear.

As an entrepreneur, this is one of those bummer moments that’s a good learning experience. We didn’t see it coming and we made sure it wouldn’t happen again. In the end, we moved on and it turned out to be a small event in the overall story.

When it comes to money and situations like this, put in some basic processes and controls — don’t make the same mistake we did.