Measuring ROI In Enterprise Software

One of the main topics I talk to founders about is how to measure the ROI of their product and how to communicate that ROI to a prospect. This topic almost always comes up in sales conversations, and it’s important to be able to lead this conversation with clarity and authority.

I like to use a simple framework for how to think about a product's ROI, using three broad categories of measurement:

1/ Product usage and engagement. Registered users, monthly active users, transactions, data delivered, etc. Depending on the product, this can be more or less impactful. This is a useful way to think about ROI for a product that doesn't need to be used by a user (like an employee discount program or coaching software). This is not a very effective way to measure ROI for things like expense reporting or benefits management where users are required to use the product to accomplish something.

2/ User satisfaction. This is a bit of a step up over usage metrics in that it measures not just whether or not users use a product, but whether or not they like it. This can be an effective way to measure the ROI of an enablement tool where usage is not optional and financial gain is difficult to measure. NPS is a good measurement for this but I love the way Superhuman tracks this using this question: 1. How would you feel if you could no longer use Superhuman? A) Very disappointed B) Somewhat disappointed C) Not disappointed. There’s a great First Round article on this topic that’s worth reading.

3/ Revenue/Cost savings. This is of course the most impactful way to talk about ROI. It’s especially effective when a company is trying to create a category. In the early days of selling Zocdoc (an online appointment booking software for healthcare clinicians) revenue generated from the service was a crucial part of the ROI conversation. Most doctors didn't feel like they had to put their schedules online, so the only way they'd buy is if they were comfortable that they'd make money. While this was always important, it became less so over time. Online appointment booking became a standard. They had to do it. So other metrics and measurements became more important (e.g. does the staff like using it?).

Depending on the stage of category creation for your product as well as its competitive dominance, it’s important to understand where your product sits in the framework above. Some products need a hard financial ROI, others don’t.

The canonical example of the latter is Salesforce.com. A few years ago, I asked a Salesforce sales rep how they talk about ROI with their customers and he looked at me like I was crazy. The CRM category has been created and it’s now quite mature. Almost all companies of a certain size need a CRM. It’s sort of like calling Verizon and asking them about the ROI on your cell phone. At some point, you just need it. So Salesforce doesn't need to convince you that your sales teams will make more sales because you're using Salesforce, they just need to convince you that everyone uses it or uses something like it and that you need it too. They can validate their ROI by showing usage stats (the bottom of the stack). And if your team isn't using it, that's likely your own fault because you haven't done enough training or promotion to get employees to use it. And of course, they'll be happy to sell you a service that will do that for you.

When taking a product to market, it's important to recognize where your product sits on this stack. Are you selling something that will only be purchased if there’s a crystal clear ROI, or are you selling something that is required to keep the lights on?

___________________________________

Footnote: If you’re interested in learning more about category creation, I highly recommend the book Play Bigger by Al Ramadan.

Footnote 2: Generally, when talking about ROI you have the buyer and not the user in mind. However, it’s important to understand how both are thinking about assessing the ROI of your product.

Footnote 3: Eventually, all ROIs come down to dollars and cents. As an example, user satisfaction might lead to better employee retention which saves your customer money. But don’t go there if you don’t have to. ROIs generally have lots of assumptions that are easy to disagree on and challenge. Striving to show a financial ROI when it’s not needed can complicate/undermine the story you’re trying to tell.

Learning How To Learn

Perhaps the most valuable skill one can have today is the ability to learn new things. The world is changing so fast. Static, top-down learning and development programs are quickly becoming outdated and irrelevant. 

The good news is that there is so much information available for free. Any self-motivated individual can learn almost anything on their own — assuming they know how to learn in a self-directed way.

In my mind, there are three steps to being proficient at self-directed learning:

1/ Identify what you don't know that's important to learn.

2/ Find resources to learn about the things you don't know.

3/ Do the work to learn about the things you don't know. 

Identify what you don't know. This is the hardest part. Because often you don’t know what you don’t know. This is where it's helpful to have mentors that can help identify your blind spots. It's also helpful to have a network of other people who are doing your job or the job you want to do. 

For an aspiring sales leader, here’s a list of things they should be learning as they climb the ladder from individual contributor to a sales manager to an executive.

Individual Contributor:

Sales tactics (discovery, outreach, access, presenting, proposals, objection handling, creating urgency, closing, etc.).

Understanding your buyer and your buyer's industry (business model, competitors, motivations, priorities, org chart, decision framework, regulatory, etc.).

Sales Manager:

Management (hiring, firing, employee engagement, giving feedback, setting priorities, territory management, performance management, etc.).

Sales strategy (forecasting, OKR management, customer segmentation, prioritization, leadership reporting, etc.).

Executive:

Management against industry metrics (e.g. in SaaS - CAC/LTV, Rule of 40, Payback period, growth rates, gross margins, etc.). 

Company strategy. Setting mission and vision. High-level qualitative goals and financial goals. 

Thinking like an investor. Understanding how financial metrics, storytelling, and a long-term plan connects to a company’s valuation. Understanding the mindset and motivation of investors that would invest in your company. 

Find resources. This is relatively easy these days. Use Twitter to follow experts in your areas of interest. Setup a Feedly account to get a feed of blog posts related to the interest area. Setup your podcast feed to receive daily podcasts on the topic. Read the best books on the topic. Join communities (such as Pavillion or SaaStr) to interact with peers. Leverage your investor networks (First Round Capital has a great one). Find a coach. Find a mentor.

Do the work. Once you've identified the learning area, start to obsess about it and immerses yourself in content. You'll quickly identify areas that you didn't know you didn't know. Learn about those things. Create habits that force you to keep learning. Listen to one podcast per day. Read 50 pages per day. Set a goal of having coffee with at least one mentor or person that does the job you want to do each month. Repeat. 

Discipline In Company Buildling

I love this Tweet from Dan Hockenmaier.

It's very common for early-stage startups to over-title people to get them in the door. Often they don't have the clout or the cash to get great people, so they use a senior title as a way of convincing someone they like to join the team. This is a mistake and causes all kinds of issues down the road. When the company is finally able to recruit people that are legitimately at the Director or VP level, those people are going to look at their peers and demand a higher title.

The company will then have a similar problem at the VP or C level. It will result in a disjointed and confusing org chart that will need to be blown up. And if the company wants to hire above the person they over-titled, they may have to let that person go or give them a demotion (which will likely cause them to leave). The hard work will have to happen at some point. Over-titling people in the early days just kicks the can down the road. In his book, the High Growth Handbook, Elad Gil points out that, in the early days, Facebook and Google gave employees the lowest titles possible (VPs that came over from Yahoo! or eBay came in at the Manager or Director level).

With all of that said, the much more significant implication of Dan's Tweet is less about a decision around what title to give someone, and more broadly around the topic of discipline in building a startup. Startups are so hard to build and there will be all kinds of temptations to cut corners, delay hard decisions, and take the easy way out. Some examples:

• Give away free pilots.

• Build one-off features to close a deal.

• Agree to overly flexible payment terms.

• Hire an experienced person even if they're not the right fit with the team.

• Delay terminating an employee that is damaging culture.

• Partner with a well-known brand even though it doesn't align with the company strategy.

• Raise more capital than is needed.

• Pivot product roadmap based on a few customer requests.

I could add 100 more things to this list. The startups that consistently resist these temptations are the companies that win. Eventually, a lack of discipline will catch up to the startup and will make success even harder than it should be.

When joining a startup, look for signals of good discipline. You might not get the title you want, but that’s a small price to pay to get a seat on a rocket ship.

Irreplaceable vs. Replaceable

Here's the story of a company and a founder that has been told many times.

A company has become huge. They've had overwhelming success. But they've become slow and bureaucratic, and innovation has slowed. It's become a boring place to work.

A star employee, let's call her Jane, sees a clear opportunity to improve the company's situation. She has some great ideas on how to breathe fresh growth into the company. Jane's ideas are ignored. Nobody listens to her.

But Jane can't get her ideas out of her head. She needs to pursue her idea. So she leaves the company, raises some money, and builds a product and a company around her idea.

In order to succeed, Jane needs to build a great team. Because there are so many challenges in launching a new company that will beat the incumbents, she needs a team of superstars. She needs to hire people that are amazing. People that are able to run through walls. People that are irreplaceable.

So Jane builds a team full of stars.

And it works. The team of stars is able to take market share and grow rapidly. They have lots of success. They scale and have hundreds of employees. Soon they have thousands of employees.

Now, Jane's burden isn't to disrupt a business or industry; her burden is to protect what she's built. At this point, Jane needs to hire people that are replaceable. If someone is irreplaceable, that's a problem. She needs to build systems and processes and support around her employees so that no single employee is critical to the company's success.

Jane's company has gone from requiring people that are irreplaceable to requiring people that are replaceable. And the cycle continues…

As startups grow, they shift from breaking new ground to protecting their ground. This shift happens gradually and impacts some functions and roles before others. It's very difficult for companies to make this shift. It requires adaptable people, different people, and lots of process building. And you obviously will always need lynchpin employees in some roles.

The irreplaceable vs. replaceable concept is a simple framework for how to think about company building in the later stages of growth.

LTV, CAC, & B2C

Whenever I consider investing in a B2C startup, I immediately ask about the company's LTV/CAC ratio. From the Corporate Finance Institute:

”LTV stands for "lifetime value" per customer and CAC stands for "customer acquisition cost." The LTV/CAC ratio compares the value of a customer over their lifetime, compared to the cost of acquiring them. This metric compares the value of a new customer over its lifetime relative to the cost of acquiring that customer. If the LTV/CAC ratio is less than 1.0 the company is destroying value, and if the ratio is greater than 1.0, it may be creating value, but more analysis is required. Generally speaking, a ratio greater than 3.0 is considered "good."

I’m less interested in the actual numbers than I’m interested in how the company is thinking about improving the numbers over time.

You could argue that a startup shouldn't be overly concerned with this metric in the early stages because they're still building the initial product or trying to find product/market fit and get the company off the ground. I disagree. B2B startups can get away with deprioritizing this metric in the early days because a good sales team can reliably acquire large amounts of users and revenue in large batches. And because of the way decisions are made within an enterprise, churn is typically significantly lower.

For B2C companies, LTV/CAC should be a part of the story from the beginning. Acquiring individual users is difficult and expensive. And since Facebook and Google, there haven't been that many widespread and effective ways of acquiring new users. Most of the high-quality channels are saturated. 

Ideally, B2C startups can bake user acquisition into their fundamental product offering; e.g. a supplier in a marketplace might bring their customers to the platform at no cost to the platform. AirBnB is a good example where landlords will often ask renters to book rentals through AirBnB.

Obviously, this won't be possible for every company. But the point remains: user acquisition and churn mitigation are critical considerations for any B2C startup right from the start.

Employee Stock Options & Funding Rounds

A friend of mine sent a link to a press release about a company that just closed a huge funding round at a huge valuation that expects to go public over the next few years. He wanted my thoughts on other companies that he could join that have had similarly successful funding rounds. His thinking was that he could make a lot of money on the next few financing events, even an IPO.

I think job searchers need to be careful with this kind of thinking. A successful funding round with great investors is a very positive signal. And it's always tempting to jump on the latest rocket ship. But there are a few things potential employees should consider before joining a company following a large funding announcement:

You're not going to get credit for the company's past success. If a company raises a Series B round at a $100M valuation, following a $10M Series A round, the company's valuation has grown by 10x. That's a lot of value creation. But if you join the company after the Series B has closed, you've missed out on all of it. The stock options you receive will be priced at the post Series B valuation. So you're starting from zero. You'll only get credit for the value you create going forward. You have to place a bet on the company's ability to continue to build value on top of what they've already created. A small caveat here: there's often a difference between the valuation investors paid and the company's fair market value, as determined by auditors. So employees that come in after the round might not pay as much as investors paid.

Valuations are super high right now. Because private company valuations are typically marked against the public market, and the public markets are on a 12-year bull run, valuations are arguably inflated at the moment. If the bull market continues, this isn't a problem. But if prices come back down to earth, valuations could come down, and you may find that your options are underwater (meaning they're worth less than the price you'll have to pay for them). 

The later you join, the less equity you'll get. Startups reward early employees with lots of equity (potential upside) in return for taking the risk of joining before anything has been built. As time goes on, this risk decreases, and so does the amount of equity the company needs to grant to attract great people. Less risk typically means less equity.

The less senior you are, the less equity you'll get. Generally, the really material stock option grants (.5% to 2% of the value of the company) are reserved for the most senior executives. Employees at lower levels will receive a fraction of that.

Your options have to vest. In most cases, you won't just get an equity grant. You'll have a vesting schedule. Typically over four years with a 1-year cliff. Meaning you won't have the right to buy your options unless you've been at the company for more than a year. 

Your vested options aren't liquid. Not only do you have to create value on top of the last funding round, but you also have to find a way to cash out at some point. Generally, this is only done through an acquisition, a secondary offering where an investor buys some amount of employee shares, or an IPO. While IPOs have made a resurgence, it's enormously rare that a startup makes it that far; of the tens of thousands of startups out there, less than 200 companies went public in 2019. 

With all of this said, don't get me wrong, funding rounds are an exciting thing. And they're absolutely a signal that the company is onto something. And I’m a huge fan of investing in private companies as early as possible. My point is that potential employees should act like an investor and dig deep on how much value they believe can be created following the big announcement, and what share of that value they'll receive, and the likelihood that that value will be liquid within a reasonable time frame. 

This is particularly important for salespeople as they negotiate job offers. There's a tradeoff associated with optimizing for your own success (cash from commission) versus the success of the larger organization (equity). Depending on the circumstances, one can be a lot bigger than the other. The above considerations are important inputs into how to think about the company you might want to join and the compensation plan you want to advocate for as you negotiate an offer.

Superhuman & Enterprise Software

I was thrilled to see Superhuman announce a $75 million Series C last week. Superhuman is a $30 per month email application that sits on top of Gmail that promises to get you to inbox zero in half the time. Paying for email sounds like a crazy idea these days, but this product is worth it. Superhuman is easily the best software product I've ever used. They've created keyboard shortcuts that effectively "gamify" getting to inbox zero. The product makes it easy to get into a flow state and plow through emails in a flash. I'd talk about the features I like here, but there are too many to list.

With the funding, Superhuman plans to build a version for Outlook and other email applications, build calendaring functionality, and build integrations into apps like Grammarly and Salesforce. I'd also expect that they begin to go deep into B2B, which will be great for the larger enterprise software industry.

I've written at length about the broken, top-down incentives that exist in enterprise software procurement that allow bad products to get widespread distribution. Superhuman has taken the opposite approach. It's a consumer app that costs $30 per month and competes with many other high-quality, free email applications. The only way that works is if the software is of extremely high quality. That's what Superhuman is. They overinvest in design and user experience and have a hard ROI around time savings.

Increasingly, employees are demanding that the software they use at work be of the same quality as the software they use in their personal lives. Superhuman's expansion into the enterprise will only help accelerate that trend.

Put A Stake In The Ground

When you start a new venture — a company, a team, a job, a product, a project — setting goals around its success can be stressful. You don't know how fast things will move and how successful you'll be.

Further, lots of people are afraid of being held accountable, much less being held accountable for something that isn't yet understood.

So there's a temptation to just get started without setting goals and see how things go.

For example, I've seen many startups not set sales goals in the early days because they feel like they don't have enough information.

This is a bad idea.

Setting a goal gets you and your team rallied around a target. If you meet or exceed the target, the team will feel great, and you can celebrate. If you miss, you can surface learnings and insights relative to the goal you set.

If you're hitting or exceeding your goals, surfacing learnings is less important. If you're missing, learning is crucial. A learning that isn't connected to a goal is much less powerful and much less interesting than one that is. This will also create the habit of being held accountable and reporting on failure as much as you report on success.

Put a stake in the ground. Set a goal. If you hit it, great. If you miss it, you'll feel a great deal of pressure to surface high-quality learnings that will get you closer next time.

Best Books For New Sales Leaders

The other day a friend of mine asked me what books an individual contributor that just took a sales management job should read. Here's what I told him:

For tactical management, I’d have to recommend the Effective Executive by Peter Drucker. I try to read it every few years.

For higher-level leadership concepts, I’d recommend Leadership and the Art of Self Deception: Getting Out of the Box by the Arbinger Institute. 

For culture, read What You Do Is Who You Are: How to Create Your Business Culture by Ben Horowitz.

And for tactical sales process and leadership, definitely read The Sales Acceleration Formula: Using Data, Technology, and Inbound Selling to go from $0 to $100 Million by Mark Roberge. 

How To Structure A Commercial Organization

There are several different ways to structure a commercial organization. Markets, products, segments, etc. The model I prefer is to structure the teams around metrics. This does a few things:

1/ It ensures that the organization has a metrics mindset. Sometimes people forget what metric their work moves. Building the org around metrics makes this nearly impossible.

2/ It ensures everyone knows they’re contributing. There’s nothing worse than coming to work each day and doing a bunch of work that doesn’t actually contribute to a business objective.

3/ It helps with prioritization. Teams should prioritize their work based on the impact it’ll have on the metrics. Focus on low effort/high return work, and avoid high effort/low return work. It’s amazing how few people have this mindset.

I separate a commercial org into three buckets. If you’re not directly contributing to one of these three buckets or supporting someone that does then you’re on the wrong team. Commercial orgs only do three things:

1/ They sell stuff.
2/ They implement stuff.
3/ They retain stuff.

Everyone should be impacting at least one of those things. Then assign a set of metrics with targets against each. Here are some examples:

1/ Selling stuff (bookings, upsells, expansions, new logos).
2/ Implementing stuff (speed to go-live, quality of implementation, cost of implementation).
3/ Retaining stuff (retention, renewals, net promoter score, user activity).

I’ve found that structuring the team around these three activities and some set of metrics ensures that everyone has clarity on their role, their value, and how they’re impacting the business in a positive way.

The Job Of A Sales Leader

A sales leader’s job isn’t to hit the number.

A sales leader’s job is to hit the number while simultaneously ensuring that those prospects that choose not to buy have a positive experience and that the sales team doesn’t overcommit or redirect product and engineering resources.

The best way to do this at scale is to hire a sales leader that shares this perspective and knows how to build the right kind of sales culture from the start. It’s extremely difficult to change a sales culture once counterproductive norms have been established.

*adapted from this podcast with David Sacks.

Honor Your User

Content marketing seems to have fully taken over as the way to generate leads and grab the attention of potential customers. Instead of putting a billboard on the side of the road telling people to buy your new sales forecasting software, the best marketers will write a blog post on the "top 10 ways to improve your sales forecasting" with a short blurb about their product at the bottom of the article. Content marketing is a lower-cost, passive way to generate attention that will spread much faster than a traditional advertisement, and it generally lasts forever.

For founders, the question becomes: what kind of content should we create?

I think the guiding principle for content creation should be to honor your user. Create content that highlights and compliments your users’ work or lifestyle and helps them get better at whatever it is you help them do.

Let's use the sales forecasting software example that is being sold to VPs of sales. Some content that would honor the VP of Sales:

A case study on how a similar company used the software to improve forecasting.

A Q&A and profile of a very successful VP of Sales.

A roundtable that VP of Sales of potential customers could participate in with a published transcript.

A podcast about issues facing VP of Sales.

Producing this kind of high-quality content that helps and highlights the work of your users drives attention, virality, and trust and is the guiding light for the best marketers and brands. If you’re looking to model another company, Gong does this really well on the B2B side, and Whoop does a great job at B2C. It’s worth checking them out.

The 10 Best Books I Read In 2020

2020 was a year to remember for a lot of reasons…but that's a topic for another day. Today I'm talking about the best books I read last year.

I read some great books on business, history, self-development, healthcare, politics and lots of other topics. I also developed a minor obsession with Navy SEALs and how they train and as a result ended up reading a bunch of books about their training and missions. I find this community to be fascinating. Their dedication to something larger than themselves and to their self-improvement and being the best in the world is just incredible. While obviously very, very, very different, I do think that much of the way they go about their training is applicable to the startup world. I'll try to write a post on what I mean by that at some point.

Anyway, here are the best books I read in 2020. You can find past lists here.

1/ The Almanack of Naval Ravikant: A Guide to Wealth and Happiness by Eric Jorgensen. I wrote a short post on this the other day. Naval is the founder of Angellist and is just an incredibly insightful person. I couldn't put it down and probably made more notes and highlights than any book I've read. From the book:

"When you’re young, you have time. You have health, but you have no money. When you’re middle-aged, you have money and you have health, but you have no time. When you’re old, you have money and you have time, but you have no health. So the trifecta is trying to get all three at once."

2/ SEAL of Honor: Operation Red Wings and the Life of LT. Michael P. Murphy by Gary Williams. Michael Murphy grew up on Long Island dreaming of being a Navy Seal, and he became one of the best. He died in an operation in Afghanistan that was depicted in the movie Lone Survivor. Such a pleasure to read about this incredible person. This quote from the SEAL ethos really underscores the amazing commitment these guys make to our country:

”I will never quit. I persevere and thrive on adversity. My Nation expects me to be physically harder and mentally stronger than my enemies. If knocked down, I will get back up, every time. I will draw on every remaining ounce of strength to protect my teammates and accomplish our mission. I am never out of the fight. We demand discipline. We expect innovation. The lives of my teammates and the success of our mission depend on me—my technical skill, tactical proficiency, and attention to detail. My training is never complete. We train for war and fight to win. I stand ready to bring the full spectrum of combat power to bear in order to achieve my mission and the goals established by my country. Execution of my duties will be swift and violent when required yet guided by the very principles that I serve to defend. Brave men have fought and died building the proud tradition and feared reputation that I am bound to uphold. In the worst of conditions, the legacy of my teammates steadies my resolve and silently guides my every deed. I will not fail.”

3/ 438 Days: An Incredible True Story of Survival at Sea by Jonathan Franklin. This book was just nuts. I loved it. It's about a really cool guy that leaves the coast of Mexico for a two-day fishing trip and survives 14 months lost at sea and travels more than 9,000 miles before being rescued. Obviously, this is an amazing story of survival, but the writing is magnificent. You really end up feeling like you know this guy.

4/ 10% Happier: How I Tamed the Voice in My Head, Reduced Stress Without Losing My Edge by Dan Harris. I've believed for a while now that people will soon think of meditation the way they think of having a gym membership. We've known that we need to take care of our bodies for a long time. Now we're realizing we have to do the same thing for our minds. I started listening to Dan's podcast (also called 10% Happier) a year or so ago and I knew I needed to check out his book as well. It feels like meditation is taking over the world these days. For those of you that are new to it, this is a great way to get started. Dan is definitely the kind of guy that would think meditation is a silly waste of time. But he became obsessed with it. This book tells you why and how much it can do for our mental health.

5/ Invent and Wander: The Collected Writings of Jeff Bezos by Walter Isaacson & Jeff Bezos. I continue to be immensely interested in anything written by Jeff Bezos. He gets a lot of criticism these days but the money machine that he has built is unbelievable. There are some great insights in this one. Including the fact that the idea for Amazon Prime came from a junior software engineer. A great, quick read.

6/ The Operator: Firing the Shots that Killed Osama bin Laden and My Years as a SEAL Team Warrior by Robert O'Neill. This is the biography of a kid that grew up in Montana not knowing how to swim who broke up with his girlfriend, got angry, and decided to join the Nacy SEALs. Years later, he became one of the most decorated combat veterans in the United States and found himself standing face-to-face with Osama Bin Laden and his wife in the middle of the night at a house in Pakistan. This book is extremely well written and easy to read and really helps you understand how this warrior found himself in this spot.

7/ The Upside of Stress: Why Stress Is Good for You, and How to Get Good at It by Kelly McGonigal. This book was recommended to me by several people and I finally got around to reading it. It piles on top of some of the books I've read by Jim Loeher, who consulted for a company I worked with a while back, who thinks about stress as a muscle that you need to build. Just like your bicep, you need to strain it and then rest, and then do it again with more weight. Stress is similar. If managed well, it's a great thing for your health. This book helps you understand how to think and manage it that way.

8/ Leadership and Self-Deception: Getting Out of the Box by the Arbinger Institute. This one is kind of a clunky read. It's set in the form of a guy starting a new job and having conversations with his new boss and several other people in his new organization. But the lessons are wonderful. To lead well, we need to get out of our box and get inside of the context of the people we work with. This is extremely difficult to do but this book makes clear why it's so enormously crucial. From the book:

”When we find ourselves in situations of disagreement or conflict (which may have as its roots self-deception) we encounter the other person’s “box.” Each person then provokes the other and like a well-choreographed dance, we have the “dance of the boxes.” Each helps to create the very problems they blame the other for and justifies a reason for staying in the box.

It works something like this: let’s assume that you were just promoted to a manager’s position and assigned to lead a cross-functional team. You believe that a manager’s role is to achieve results and that it’s important to build a cohesive and trusting team environment. It’s your intention to do so. It’s now six months into your role as manager and things have not worked out as you envisioned. Team members are not collaborating, schedules are not being met and trust is low. If you were acting from within the box, seeing your team through the filter of self-deception, you would most likely see them as the problem and try to change their behavior. This is a common in-the-box problem-solving approach.

It’s important to note that being in the box does not mean that the team’s behavior does not need to improve. Remember though, when we’re in the box it’s a distorted view of other’s in which we place blame on them or circumstances to justify our self-deceit.”

We have to get out of the box!

9/ Blue Mind: The Surprising Science That Shows How Being Near, In, On, or Under Water Can Make You Happier, Healthier, More Connected, and Better at What You Do by Celine Cousteau. I've had an obsession with the ocean since I was a kid. Swimming in the ocean is a magical experience for me. I've always known there was some deep reason why. Blue Mind unpacks our obsession with being near the water. A great one for the beach.

10/ What I Talk About When I Talk About Running: A Memoir by Haruki Marakami. This is a fascinating memoir from an accomplished writer about his journey to prepare for the New York Marathon and the overlap he finds between writing and running. This is a fun, introspective read that I highly recommend.

I mostly read nonfiction, but I always like to end with a fiction recommendation. So I'll recommend Severance by Ling Ma. A fascinating, sort of apocalyptic book, about a woman who continues to show up at her Manhattan publishing job even as a plague takes over the city. Not typically my style, but a great one nonetheless.

I hope you enjoy some of these.

Leverage

Over the weekend I read the Almanack of Naval Ravikant. Naval is an investor and entrepreneur and the founder of AngelList. The book gives his unique perspective on building wealth and enjoying life.

I flew through this book. I literally couldn’t put it down. The part I enjoyed the most was his perspective on leverage. He believes that leverage is the thing that leads to wealth. You can get leverage from people working for you. You can get leverage from investing your money. But the highest form of leverage — the new form of leverage — is to spend time selling or building products with no marginal cost of replication. This is easy to do in the digital age. You can write some code that can create infinite value, well beyond the time you put into writing the code. You can create a podcast that millions of people can listen to. These are things where the output is disconnected from the input. This blog post is a form of this leverage. It only took me a few minutes to write, but it can be read by millions of people for years to come.

As Naval points out in the book:

A general contractor has more leverage than the person that repairs the house.

A real estate developer has more leverage than the general contractor.

A money manager of a real estate investment fund has more leverage than the real estate developer.

Zillow has more leverage than all of them.

You see that as you climb the ladder, the value created gets more and more disconnected from the input. Zillow, in addition to having labor-based leverage (employees) and money-based leverage (venture capital), also has code-based leverage (leverage that can scale infinitely with near-zero marginal cost). Whereas the person repairing the house has none of that. That person is paid an hourly wage that is tied perfectly to the amount of time he or she puts in.

I really like this way of thinking about modern-day wealth creation. Spend your time on high leverage activities and projects, particularly those that are digitally-oriented. This is one thing I think people miss when they point to tech stocks being overvalued. These companies can get really big really quickly. That can be hard to wrap your head around.

The full excerpt on leverage can be found here. I highly recommend giving it a read.

First Principles

If you believe the world is going to end tomorrow, and your significant other doesn’t, you’re likely going to have very different opinions about what to have for dinner tonight.

You'll be inclined to go to an expensive restaurant and live it up. Maybe a great steak with some expensive wine. Why not? It's all going to end tomorrow. Your partner, on the other hand, may just want a quiet, normal night at home. Maybe order a pizza or have leftovers or make something with whatever is in the refrigerator. You may end up having a big argument about what to have for dinner tonight.

But that's not the thing you should be arguing about. You should be arguing about the first principle: whether or not the world is going to end!

This happens all the time inside of companies. Colleagues argue about the small, day-to-day issues on the ground and forget about first principles. This is perfectly understandable. When you're moving fast, you're going to run into one another on micro issues that you're not aligned on. The key is to recognize when this becomes a trend, and then pull your head up, get the right people on a call, and get aligned on the high-level first principle that’s causing the disagreement.

Here are some examples of first principles inside of a company:

We err on the side of being transparent with employees.

We should pay employees above market.

Profit margins will suffer for a while while we invest in new products.

Diversity, equality, and inclusion inside of our company is a high priority.

Employees should be able to make their own decisions on how to spend company dollars.

Often, getting alignment on first principles is easy. The hard part is pulling up and out of the day to day noise and recognizing and calling out the misalignment. It's important to create forums — meetings, Slack channels, or some kind of document — that allows people to easily surface the misalignment. Companies that do this well can avoid an enormous amount of friction and will move much faster and smoother as a result.

Management Lessons From Keith Rabois

Keith Rabois is a very successful operator and tech investor. A couple of weekends ago, I listened to this talk he gave at the First Round Summit back in 2013. He shared some great insights on management and leadership in here, so I jotted down some notes on the things that resonated with me the most:

1/ Optimize around hiring people that are "relentlessly resourceful". 

2/ When managing someone, ask yourself if you're "writing" or "editing" their work? If you're writing for them, you need to fix it or replace them. For a sales leader, are you closing their deals for them, or are you coaching and tweaking little things?

3/ Everything can't be perfect. One of the hardest things President Eisenhower found when he became president was that he had to sign letters that were below his writing standards. There's too much to do. Get comfortable with 80% perfect for most things. Seek out the things that are important and get those right.

4/ A huge piece of hiring someone that can scale is finding someone who knows what they know and what they don't know. Knowing the difference is so important. People that know what they don't know will avoid big mistakes. 

5/ Be transparent. Seek to be so transparent that everyone on your team would make the same decision that you're making because they're operating under the same context.

6/ Politics in a company is driven by different people having different information. Avoid widespread politics by giving everyone the same information.

7/ Hire thought diverse people but pay attention to important first principles (particularly when hiring leaders). e.g. if you want to build a closed software platform, hire people that support that approach. Otherwise, you'll spin and keep coming back to first principles. 

8/ Hire and promote people that see things you don't see. This is invaluable. And create an environment where they can freely tell you what you're missing.

Sales Forecasting: Supply & Demand

A common mistake made by sales leaders when building out a sales forecast is only considering the "supply-side" of their forecasting model.

That is, the model will include some version of the following inputs:

• # of Reps

• Quota

• Discount on quota

• Ramp-up time

• Rep turnover rate

They'll put all of those inputs into a spreadsheet and come up with a projection. 

This is a crucial step in the process. If you want to generate $100 million in revenue, you need a model that will tell you how many reps you'll need to hire; e.g what is the "supply" of reps you need to get to your number? 

But this is only half of the equation. The other half of the equation is the demand-side. You have enough reps to sell $100 million but is there enough market demand to sell $100 million? If there isn't enough demand, you now have two problems: 1/ you're not going to hit your number and 2/ you have too many reps.

To avoid that outcome, a sales leader must put an equal amount of energy into the demand-side of the model. Typically, that will include these inputs:

• Total addressable market (TAM): this is the number that you could hit if you sold to every potential buyer of your product in the current period.

• Serviceable addressable market (SAM): this is the number you could hit if you sold to every potential buyer in the markets that you serve in the current period. For example, if your product is only live in half of the U.S. market your SAM would be 50% of TAM. This could also be limited by specific verticals or buyer types that you’re currently servicing.

• Serviceable Obtainable market (SOM): this is the amount SAM that you can realistically obtain. Because of competition, delivery constraints, etc. you're not going to be able to sell 100% of SAM.

So, in order to be comfortable that there's enough market demand to get to $100 million, your SOM must exceed $100 million. There's no doubt that great salespeople and great sales teams can create demand that isn't there, but this doesn't scale and it’s a dangerous assumption to make. It’s crucial that sales leaders understand the actual market demand for the products they’re selling as it exists today.

The demand-side of the model is often more difficult to calculate than the supply-side because it's generally harder to understand and control — particularly in the early days. But there's a long line of sales leaders that made the mistake of not paying enough attention to demand and thus over-hired and missed their numbers. That’s the kiss of death for any sales leader. Applying equal rigor to both the supply-side and the demand-side of a sales forecast is the best way to avoid that outcome.

The Rule Of 40: Which Side Are You On?

In the early days, a company with solid product/market fit and a great team will grow extremely fast. Revenue growth can be 1,000+%. But as a company becomes established, things come back to earth. Tripling revenue when you have $50k in revenue is a lot easier than tripling revenue when you have $50MM in revenue. Over time, the company will eat up all the low hanging fruit. Competitors will enter the space and apply pricing pressure and reduce win rates. Scaling becomes even more difficult. Things just start to slow down.

This flattening of growth is nothing to be ashamed of. It's a natural curve for any product or company — even the iPhone's growth has flattened.

Apple iPhone worldwide unit sales from 2007 to 2018 (in millions)

The way to break out of this natural flattening is to innovate. As Jeff Jordan says, “to add layers to the cake.” But eventually, even the greatest companies will see their growth rates begin to level off.

To maintain a high valuation despite slowing growth rates, companies will often point their energy towards becoming profitable or increasing profitability. One of the biggest challenges of a maturing company is this: should we step on the gas and continue to grow like crazy, or should we shift our focus to profitability?

The Rule of 40 provides an excellent framework for how to think about this question. The Rule of 40 states that a company's growth rate + profit margin (EBITDA) should exceed 40%. Companies that can stay above 40 will continue to be on the high end of valuations — 10x, 20x, 30x revenue multiples. According to a study done by Bain, software companies that are above 40 have valuations that are double those that fall below the line.

So as growth slows, it's useful for executives to ask, what side of the Rule of 40 do we want to be on? That is, are we going to continue to achieve the 40% via revenue growth or do we need to begin focusing on profitability.

The Rule is just a framework; it shouldn’t be taken as gospel. But it provides an extremely useful framing for how to think about one of the most challenging questions high growth companies face.

Slack Connect & The Future Of Business Software

Slack recently announced Slack Connect, a product that allows disparate companies to collaborate inside of a Slack channel. They now have more than 40,000 customers using the product.

For those interested in business software, I think there's reason to believe that products like Slack Connect — software that allows users across different companies to collaborate inside the same instance of that software — will lead to a trend that's even more impactful than the shift to the cloud.

Slack Connect users can have a shared Slack channel with their customers, vendors, partners, and prospects. I haven't used the product yet, but I recently collaborated in real-time with a customer to build a presentation using the same instance of Google Slides. It was so much more efficient. Imagine finance teams collaborating on complex invoicing issues inside the same instance of Netsuite. Or project managers at separate companies collaborating inside of SmartSheet. Or a salesperson collaborating with on a customer's buying process inside the same instance of Salesforce.

Moving core, cross-company business activities into a shared workspace will be enormously valuable to the users inside of each company. And even more impactful is the impact on distribution and go-to-market. Suddenly, Netsuite, SmartSheet and Salesforce have native network effects (e.g. their software is more valuable to each user when more users use it). This is why Slack Connect is so interesting. Slack already had network effects inside of a company, but growth was limited to the size of each individual company. Slack Connect enables unlimited network effects.

Don't get me wrong, like the move to the cloud, there are enormous challenges for software vendors that pursue this strategy. There's a reason I don't collaborate on Google Slides with the majority of customers. Most large companies aren't using Google's applications, and thus users don't have a log-in and aren’t authorized to use their personal one for work purposes. There are significant privacy and adoption challenges that need to be overcome.

Slack has an advantage here in that their core customer base is still startups, small businesses, and tech companies (though they’re rapidly moving upmarket). This core allowed Slack to get Connect into market much more quickly than Microsoft could've with its Teams product.

The irony of Microsoft being behind on this is that they own the one asset that could've accelerated the growth and adoption of cross-company messaging — LinkedIn.

LinkedIn already knows most professionals’ "professional social graph." These social graphs are the underlying infrastructure that enable a network to grow. Consider Whatsapp, who built a nice messaging app and then tapped into your phone's address book (your social graph) to seamlessly build out its network. They went from 0 to a billion users in just a few years. They never could’ve done that if they didn’t have access to people’s personal address book. LinkedIn is the world’s professional address book.

LinkedIn messaging could've been a far better and faster-growing version of Slack Connect. But LinkedIn underinvested in its messaging feature to the point that it's almost unusable. The spam is overwhelming, and the poor user experience makes it impossible to use productively.

This miss isn't really a surprise, and I'm not playing Monday morning quarterback. Microsoft hadn't built its initial software around connecting disparate companies. In fact, it was quite the opposite. And turning the tide isn't easy. Also, LinkedIn's core customers are recruiters and marketers; use cases where the value of cross-company collaboration isn't obvious.

So, all of this is to say that there's an enormous opportunity for emerging SaaS companies to build native cross-company collaboration tools into their code, use cases, and culture from the outset. It's hard to predict that any trend is business software will be as impactful as the shift to the cloud, but if there's one out there, this might be it.

People At Work Podcast

The nice folks at Jostle were kind enough to have me on their People at Work podcast. We discussed a variety of topics around leading teams through hypergrowth. You can listen to the podcast on Apple here or Spotify here.