State of the heart

State of the heart

The role of emotions in storytelling

"At the end of the day, words and ideas presented in a way that engages listeners’ emotions are what carry stories. It is this oral tradition that lies at the center of our ability to motivate, sell, inspire, engage, and lead.”

- Peter Guber

Thank you Peter and Harvard

Most of what I’ve learned from good storytelling has came from the writings and speeches of people like Peter Guber, and quality research publications like Harvard Business Review. We simply want to acknowledge their impact on our team and thank them for their contributions in this important leadership skill.

Who is Peter Guber?

Peter Guber is a remarkable human. At 77 years old there isn’t much he hasn’t done. In his heart though, deep down, he is a self-proclaimed storyteller. His stories have been captured in movies: 44 in total, which have grossed $3 billion worldwide, and earned 50 Academy Award nominations. Peter has also written stories: 3 books, one of which is titled Tell to Win and was a #1 NYT bestseller. In his spare time he co-owns 4 sports teams, e.g. Golden State Warriors, Los Angeles Dodgers.

Truth in storytelling

Peter suggests that every good story must embody 4 indispensable truths:

  • Truth to the teller: authenticity, vulnerability, honesty

  • Truth to the audience: respect their time, engage them, fulfill their emotional needs

  • Truth to the moment: prepare rigorously, tailor your message, improvise, clarity/brevity matter

  • Truth to the mission: appeal to something greater than us, speak with passion, don’t pander

Putting into practice

Peter has delivered riveting, wall-shaking keynotes to the largest companies is the world, e.g. Cisco, Twitter, Intel, Under Armour. But once you’ve drafted your message, its time to put your story into practice. One low-risk way to get started is to drop-in on a local Toastmasters group.

There are over 80 chapters in San Francisco alone, and almost 200 in the Bay Area.

What story do you want to tell?

What does scaling actually mean?

What does scaling actually mean?

Scaling, today

The term “scaling” is used frequently in the software industry. Have you heard it this week? Maybe today? The Google search “how to scale my business" returns an astounding 1.08 billion results. But with such heightened use comes confusion and diluted meaning.

Scaling, one might argue, has descended into that lowly pot of platitudes along with “good” and “awesome!” Today scaling seems to ambiguously mean: “all things growth.”

In the current tech market cycle—which has indeed valued growth over profitability—perhaps we’d be wise to investigate the definitive use of “scaling” so we can:

  1. Increase internal alignment across teams

  2. Understand the nuance of “scaling” as it applies to execution (and our success)

What scaling means to tech leaders

We asked a handful of software executives & founders to define scaling in their own words:

  • “Growing the infrastructure and processes that support growth.”

  • “Tactically, it's mostly hiring. More abstractly it’s upgrading your organization’s firmware in order to support another burst of 10x growth, i.e. processes, team structures, key managers, executives.”

  • “Put the pedal to the medal.”

  • “Based on X inputs, you having a working model to deliver Y outputs. Scaling is all about tweaking and tuning that working model to exponentially grow Y outputs as X grows linearly.”

  • “Scaling = growing + evolving + maturing the people + processes + organization of your company in service of predictably growing revenue.”

  • “To me it means taking a bunch of manual processes that are necessary at the beginning of a startup and automating them. This usually is a forcing function due to excessive sales interest.”

Even in this small sampling we see disparate domains: infrastructure, hiring, process, team structure, automation. Therefore, let’s start from first principles and attempt to build a common vocabulary—and questions—to (hopefully) improve our collective ability to communicate and execute toward scale.

The “official” definition of scaling

To the extent we believe wikipedia, scalability is defined as: the capability of a system, network or process to handle a growing amount of work, or its potential to be enlarged to accommodate that growth. Therefore, scalability can refer to a capability or a potentiality. The latter meaning introduces execution which is required to realize said potentiality.

Clarifying Question #1:

Are we talking about current capacity or future capacity?

For example, you’ve built an app that has attracted 10,000 monthly users. Your app could be said to be scalable if 1) your app can safely handle 100,000 monthly users right now, or 2) it has the potential to be enlarged to accommodate this growth by adding stuff*.

*Adding stuff; types of scaling

  • People: hiring and enhancing the human capital in your business

  • Process: revamping/expanding existing processes to handle accelerated output

  • Technology: increasing the capacity of a distributed system (also called load scalability), e.g. servers, etc.

Clarifying Question #2:

Are we talking about scaling our team, a process, or technology?

The nuance of scaling

The most overlooked nuance of “scaling,” it seems, is the financial part: the ability to accept increased volume without impacting the contribution margin (revenue − variable costs).

In this way, scaling resembles fractal geometry: rapid growth while replicating the economic integrity of the base shape.

From this perspective, scaling does not mean “growth at costs” or “put the pedal to the medal” [at the expense of fuel efficiency]. This nuance is critically important for successful scaling and commands a deeper understanding of unit economics, a fun topic we’ll save for another article (primer).

Nevertheless, the point is: scaling must be done efficiently with regard to contribution margin, i.e. your variable costs should increase at a rate equal to—or less than—your revenue growth.

Why SaaS is unique

However, technology/SaaS business models are unique: they have HUGE gross margins, typically 70-80%. This is because the “Cost to Serve” is highly efficient: I can serve another 1,000 customers and receive another $5 million in annual revenue simply by adding a few AWS servers (which you can prepay for to reduce the cost even more).

Therefore, the most significant variable cost is almost always people, e.g. a CSM or Professional Services team, which you can ideally manage to 9-11% of revenue.

The importance of forecasting

Assuming contribution margins and unit economics are in check, the biggest challenge becomes successfully scaling people, process and technology to meet demand. It is here we encounter what Scott Belsky calls The Messy Middle in his fantastic book by the same name.

Part of navigating a messy, unknown future is getting good at forecasting. Failure to do so often results in painful realities:

  • Mid-Market Account Executives with no leads in their queue (Marketing over-forecasting lead gen)

  • Stressed out CSMs and support reps working at 10pm (GTM under-forecasting new business or over-forecasting CSM requisite bandwidth)

  • Product performance issues (ENG under-forecasting cyclical product usage and requisite capacity)

  • Laying off 20% of your workforce (C-team over-forecasting demand and/or headcount needed)

This is your captain speaking. . .

Forecasting is like a flight plan. Before a flight, pilots use data and tools (wishlist item: G1000) to approximate the flight path and anticipate changes. Attempting to scale without forecasting is like taking off without a flight plan—incredibly risky.

The best pilots also regularly monitor reality vs. plan. To low? Climb. Too high? Descend. Off-course? Course correct. Similarly, the best companies don’t just create a forecast then put it on the shelf. They use it! Monthly, if not weekly.

  • How are we tracking on leads vs. AE hiring?

  • Where should we adjust CSM capacity?

  • What happened to usage last holiday season?

  • What are the leading indicators of being over-hired?

As you plan your own flight, we hope your understanding of “scaling” is a bit deeper and more nuanced, and your forecasting habits take you to unprecedented heights.


Drinking from waterfalls, staring at squares

Drinking from waterfalls, staring at squares

The largest waterfall in the world

Kaieteur Falls is the largest plunge waterfall in the world. Located deep within the Amazon rainforest in Guyana, this unique waterfall spews a record-setting 175,044 gallons of water—every second—over an 822-foot cliff.

If you’d like to visit, you can fly into Kaieteur International Airport which is a 15-minute walk from the waterfall. It looks like this:

Why are we talking about waterfalls?

The record-setting volume of Kaieteur Falls—175,044 gallons per second—is comparable to the modern human’s inundation with digital content. The “drinking from the firehouse” metaphor no longer applies. We are are now in waterfall territory. The water is being produced by the usual suspects:

  • Instagram: 50 million images/videos uploaded per day

  • Facebook: 350 million images/videos uploaded per day

  • Netflix: 120,000+ hours of stuff to watch (the tastiest water, it seems)

  • Twitter: 500 million tweets per day

  • Not included: Linkedin, YouTube, Snapchat, Reddit, news outlets, etc.

How thirsty are we?

  • The average Instagram user drinks 1,060 images/videos per day

  • The average Facebook user drinks 1,160 images/videos per day

  • The average Netflix subscriber drinks 10,260 video-seconds per day

“Staring at squares”

It’s a silly observation, but have you noticed our cell phones, laptops, tablets, desktop computers and TVs are all square-shaped? And we stare at them. A lot. Humans are spending 11 hours per day staring at our screens. Let’s take a moment to let that sink in.

In other words, we spend 11 hours per day “staring at squares”.

Of course, having near-infinite information at our finger tips is fantastic. The proliferation of information via the internet has powered immense innovation, education and commerce. But the fact remains: we spend 11 hours per day staring at squares.

Sidenote: Staring at Squares would make an excellent band name.

The value of focus

As author and hedge fund advisor Adam Robinson put it, “The one thing humans need to know is how to control attention.” (podcast interview by Shane Parrish, Winning at the Great Game - Part I) Even if we can wrap our minds around the 11 hours per day figure, the questions becomes: what are we focusing on? Or, more appropriately, are we focusing at all? Or are we just standing underneath the waterfall getting pummeled?

It is important to figure this out because focus is how we direct our energy, and where we direct our energy determines our course/happiness/results in life.

Excuse me, why are you staring at your square?

  • “F&*^% you man, I’m reading the news!”

    • News is a commoditized exercise in confirmation bias. Can you tell me one piece of news from last week that impacted your life? Actually, can you recall any piece of news you read last week?

  • “Sorry, I’m at work. Can I help you?”

    • Looks like you have Slack, Chat, and email open (squares within squares!) Do any of these sub-squares have anything to do with your #1 priority for today or this week? Digital distraction is a real-thing at work.

  • “I bring my phone with me for my morning poop. It’s what I do.”

    • TMI, but maybe bathroom breaks are a good time to collect your consciousness, count a few breaths, relax, and regain your focus vs. directing it elsewhere. What if you took advantage of these natural breakpoints in your day?

  • “Oh, I’m just checking social media while waiting for the 30x bus.”

    • The data suggests you spend 2-3 hours per day on social media. Can you share one meaningful interaction that social media created for you last week? Liking baby pictures doesn’t count.

  • “Hey I’m just trying to unwind after work and watch some Netflix.”

    • The data suggests the typical Netflix customer consumes 20 hours of Netflix per week. That equates to 19% of your non-sleep life. How has Netflix made your life better?

New Year resolution

It’s become fashionable to HATE how people are “always on their smartphones,” but I think that’s avoiding the inevitable. Smartphones are here to stay, we just need to moderate our usage and understand how and WHY we use them.

Therefore, my resolution for 2019 is to be more intentional with how I consume digital content. I want to go to the waterfall with a water bottle, fill it up, and then leave. I want to avoid mindlessly standing beneath Kaieteur Falls with my mouth open getting drenched.

As Warren Buffett has said, “I can buy almost anything. What I can’t buy, is more time.”

Appendix/data

Source: Domo, 2018

The science of goals

The science of goals

Story highlights

  • I set goals on a quarterly basis—below is my report card since 2014.

  • My goals are divided into two types: binary and recurring. Binary goals are accomplished by doing the thing, i.e. usually a one-time deal. Recurring goals are actually habits and accomplished by doing 80% of the things, i.e. activities.

  • On average, I complete 59% of my goals (overall). This doesn’t seem good.

    • On average, I complete 85-90% of the underlying recurring activities. This seems good.

    • On average, I complete 62% of my binary goals, and 56% of my recurring goals. This also doesn’t seem good.

  • Reasons for failure include: lack of habit triggers/systems, lack of passion or motivation for a particular goal, or it was a crap goal to begin with, i.e. not SMART.

  • Over the last 4-5 years my # of goals (per quarter) has increased from 22 to 61 (almost 3x increase); so maybe I’m setting too many goals, thereby undermining focus.

How I track goals

Below is a chart with 4 colorful lines. In descending granularity I track:

  1. Goals (overall): Blue. Success rate for all goals, both recurring & binary.

  2. Goals (recurring): Red. Success rate for just the recurring goals, i.e. habits.

  3. Goals (binary): Yellow. Success rate for binary goals, i.e one-time things.

  4. Activity: Green. The completion rate of all the underlying recurring activities, e.g. for Q3-2018 it was 1,035 total activities (of which I completed 845).

Goals that are actually habits

We’ve all heard the saying: If you can’t measure it, you can’t manage it. Perhaps I took that too literally, but a few years back I was getting frustrated with not knowing whether or not I was doing stuff. I’d defiantly declare, “I’m going to floss!” and then a few months would go by and I wouldn’t know if I was actually flossing, if I remembered at all.

So I made this nerdy chart to track stuff. It started with only 6 things in 2014, now its up to 32 things and a little out of control. But suffice to say, this is how I measure whether or not I do things I say I’m going to do. Recall that “success” is defined as doing 80% of the thing. These are recurring goals.

These 32 habits are comprised of 1,035 individual activities. Over the course of Q3-18, I did 845 of the 1,035 activities, or 81.6%. This is where I get the green line in the first chart.

Recall “success” is doing 80% of the activities. By this definition, of the 32 habits, I completed 19 of them, or 59.3%. This is where I get the red line in first chart.

Why I fail

I’ve learned that failure in the recurring category is usually due to 3 flaws:

  1. Lack of a systematic trigger: I failed to incorporate the habit into my conscious life. Some people set reminders. Others use calendar triggers. Another strategy is linking or stacking habits on other ingrained habits (James Clear really excels here). This is hugely important because humans aren’t computers and generally suck at repeatability.

    Example: “I will lift weights for 45min 2x/week” - I didn’t have a trigger. No calendar, nothing.

  2. I committed to a goal I wasn’t passionate about: each goal should have a reason, a WHY. Humans are deeply emotional creatures, so unless there is an underlying passion or motivation to do something, we’ll likely run out of steam pretty quick. The solution requires extra work: after reflecting on the WHY, the best goal-setters write it down so each goal has a clear purpose and emotional foundation. Sometimes I don’t do this extra work.

    Example: “I will meditate 4x/week”. I’ve heard meditation is generally a good thing, but I didn’t think deeply enough about the WHY or visualize the personal benefits (or write it down).

  3. My goal/habit was poorly defined: this is a failure in goal-setting 101, but basically it happens when I didn’t run the habit through the SMART filter and the goal/habit is ambiguous. I rushed and set a crap goal.

    Example: “I will reflect on the week 2x/month. WTF does that even mean? Poorly defined.

My goal sheet

Below is my Q3-2018 goal sheet. It is comprised of both binary and recurring goals. It is the one-stop-shop for what I aim to accomplish in a given quarter. Last quarter I had 61 goals. I completed 33 of the 61 goals, or 54%. This is where I get the blue line in the first chart.

Looking for patterns

I really want to understand why I fail at certain goals. If I can unlock this, the impact over a lifetime could be massive. Before hypothesizing too much, I ran correlations on the data sets for the # and % of goals completed each quarter:

goal correlation.png
  • a: Goals (overall)

  • b: Goals (recurring)

  • c: Goals (binary)

  • d: Activity

The highest correlation (91%) is between b: Goals (recurring) and d: Activity. This is logical because activity completion is a component of recurring goals, i.e. if I did 100% of the activities, I would accomplish 100% of the recurring goals. The next highest correlation (86%) is between a: Goals (overall) and b: Goals (recurring) which tells me that nailing recurring goals/habits really is the cornerstone of a strong quarter overall.

Notice that there is a striking negative correlation between c: Goals (binary) and d: Activity. This means the better I do at one, the worst I do at the other. This might suggest a “crowding out” effect as activities per quarter has increased 500% from 201 (Q4-2014) to 1,035 (Q3-2018)—too many activities is putting binary goals at risk.

How did I do in Q3-2018

  • Goals (overall): 33 of 61 completed—or 54%.

    • Goals (binary): 14 of 29 completed—or 48%.

    • Goals (recurring): 19 of 32 completed—or 59%.

      • Activity: 845 of 1,035 completed—or 82%.

What I learned

  1. Less is more: I’ve recently been sucking at binary goals and perhaps need to set fewer, higher-quality goals. Having 29 binary goals in a single quarter seems like too much. Less is more.

  2. Avoid the 3 flaws: While I’m competent at completing the activities, I need to ensure the recurring goals I set avoid the 3 flaws identified above.

  3. Refocus on balance: Perhaps I need to step back and re-evaluate the whole system. Life is about growth, happiness, and balance. Maybe I should abstract the whole system to focus on happiness & overall balance vs. goal-attainment in isolation.

More feedback needed: I’d love to get your thoughts and suggestions. If any of this is interesting to you, or you’d like to receive copies of the goal templates, send me a note:

luke (@) dbtventures.com

Other visuals/data

Verbs, not adjectives

Verbs, not adjectives

Article Highlights:

  • How we communicate defines how we are perceived.
  • Verbs and adjectives—while both entirely critical—have different implications.
  • Leaders who embrace a growth mindset would be wise to utilize verbs over adjectives.
  • While adjectives are best suited for understanding nuance, verbs are most useful for inspiring action and forward progress.

Swimming in the pool

I was swimming in the pool in Marin, and it occurred to me: verbs are much more powerful than adjectives. An adjective is typically a description at a point in time. A snapshot. A best guess. Adjectives usually describe a static state (unless of course the state is in motion) and capture more of the “being” versus the “doing”—solid vs fluid.

Conversely, verbs are kinetic energy in action. Dynamism, evolution, growth, change!

How it affected me

After reading Think and Grow Rich by Napoleon Hill a few years ago (at the recommendation of my good friend, Chris Escher), I was inspired to create a personal ambition statement which I read aloud to myself twice per day: morning and night. I've been partaking in this ritual for 2+ years now and have come to appreciate it's impact.

However, last week I applied a critical eye to it. What I noticed: lots of adjectives, few verbs. So I rewrote it to be more action-oriented:

Before: "I am smart. I am successful. I am doing big things. I will earn $5m dollars by the time I'm 35 by providing quality consulting services to young, growth companies and an innovative picture frame design for sale." 

After: "I am learning. I am growing. I am getting stronger. I am doing big things. I will earn $5m dollars by the time I'm 35 by providing quality consulting services to young, growth companies and an innovative picture frame design for sale." 

See the difference? Verbs. Emphasis on the doing. The work. This change was inspired by Carol Dweck’s book Mindset which, if you haven't read it yet, is a game changer. The book paints a remarkably poignant, evidence-based picture of two types of mindsets: growth vs. fixed. This book came highly recommended from over 70% of the CEOs we advise.

What's next?

We've started analyzing the publicly available executive communications of "good" vs. "bad" executives. Since our team obviously doesn't have access to internal leadership presentations, we are focusing on publicly available video, podcast and written talks.

Source: https://stackoverflow.com/questions/10674832/count-verbs-nouns-and-other-parts-of-speech-with-pythons-nltk

Using Python we are basically combing through lots of executive-speak (literally) to understand the relationship between verbs, adjectives (and nouns) to see if there's a correlation. Additional information here (frequency per 1,000 words):

LEXICAL WORDS

CONVERSATION

  • Adverbs 50
  • Adjectives 25
  • Verbs 125
  • Nouns 150

ACADEMIC PROSE

  • Adverbs 30
  • Adjectives 100
  • Verbs 100
  • Nouns 300

FUNCTION WORDS

CONVERSATION

  • Pronouns 165
  • Primary auxiliary verbs 85
  • Prepositions 55
  • Determiners 45
  • Coordinators 30
  • Modals 20
  • Subordinators 15
  • Adverbial particles 10

ACADEMIC PROSE

  • Pronouns 40
  • Primary auxiliary verbs 65
  • Prepositions 150
  • Determiners 100
  • Coordinators 40
  • Modals 15
  • Subordinators 10
  • Adverbial particles 5

These figures can give only a crude picture and show only the figures for one kind of written English. In general, though, nouns and verbs are the most common words, and conversation seems to use a higher proportion of verbs, adverbs and pronouns, while written English uses a higher proportion of nouns and adjectives.

Who did you meet with last week?

Who did you meet with last week?

Article Highlights

  • Many tech startups face similar challenges, e.g. hiring, product fit, growth, retention, etc.
  • There is a temptation to solve problems in a vacuum and "go it alone."
  • While learning from first principles is unequivocally important, leaders often benefit more from building a habit of interviewing at least one expert per week to improve their thinking on their #1 challenge.

Where I'm coming from

I've noticed a trend. Having been an advisor to high-growth startups for 4-5 years now, one thing stands out: most of the companies I work with are trying to solve very similar problems, but often do so in isolation. This allows me to add value by connecting people or sharing some best practices, but I challenge them: "Who else did you meet with to explore this topic?"

Ray Dalio's landmark book, Principlesoffers some additional guidance in the form of two principles that leaders could benefit from:

Principle 3.2 Practice radical open-mindedness. a) Sincerely believe that you might not know the best possible path and recognize that your ability to deal well with "not knowing" is more important that whatever it is you do know.

Essentially, Ray Dalio is encouraging us to embrace intellectual humility. Start with what you know you don't know. If you're new to an industry or company, this list is likely to be quite long. That's okay. The most important part of all this is a sober appraisal of what is known vs. unknown.

Later, once you've done you're preliminary research and assembled some viewpoints, its time to spar, intellectually, with other people. Ray suggests seeking those with high "believability" which he defines as having done X with success 2-3 times and a cogent rationale to go with it:

Principle 3.4 Triangulate your view with believable people who are willing to disagree.

As he says it, "By questioning experts individually and encouraging them to have thoughtful disagreement with each other that I can listen to and ask questions about, I both raise my probability of being right and become much better educated."

With this in mind, leaders could benefit from building a habit of interviewing at least one expert per week to improve their thinking on their #1 challenge.

Here are a few practical services that can help you get out of your own head and absorb perspectives from other people with (potentially) high believability:

  • Meetupa community-managed service that brings people together on a common interest. I've attended and spoken at numerous meetups from topics ranging from Ethereum to Leadership to Customer Success. All were worthwhile because I got to interrogate other folks with relevant experience (to learn), and have others challenge my beliefs (to iterate).
  • Shapra popular new service that's described as Tinder for professionals. Swipe for 1 minute per day and get matched with other professionals.
  • Quoraask a question, hope for high-believability responses.

Ready. . . Aim. . . [check smartphone]

Ready. . . Aim. . . [check smartphone]

"More companies die of indigestion than starvation."  —David Packard

Article Highlights:

  • Focus is a critical ingredient for personal and professional success.
  • Distraction is the enemy of focus.
  • Smartphones are one of the greatest sources of workplace distraction.
  • Small changes in habits can have a profound impact on personal and professional focus.

Focus beats capital

Focus is the ultimate competitive advantage: an inspiring vision, cultural alignment throughout the org, clearly defined goals, and a strike zone everyone is aiming for. If your company doesn't have focus, no amount of capital will make your successful. Venture capitalist Bryce Roberts describes the phenomenon better than I:

This isn't a rant on smartphone addiction

Today's smartphones are perhaps the most impressive consumer product ever made. You have, at this moment, more access to information than the US President did 20 years ago. Insane! Smartphone technology has unleashed unprecedented connections, convenience and creativity.

Smartphones at work

But at the same time, perhaps you've noticed a coworker checking their smartphone at work. I'm certainly guilty of this. And why not? Today's knowledge workers are blessed with near limitless information and options {*cough* checking Instagram}. 

checking smartphone.jpeg

Digital distraction

The average person checks their smart phone 75-100 times per day (conservatively). Today's workers are barraged with inbound texts, pings, and notifications. The tradeoff? Our focus.

I'm what you might call a "conscious" smartphone user—I try to think about the intent and tradeoffs—and below is my cell phone usage over the last few months. On average, I check my phone 39 times a day and spend 2:32 hours on my iPhone each day (mostly during the workday: 9-11am and 2-4pm). At work, I'm on my phone about ~20% of the work day.

How to break the cycle

In order to personally reduce smartphone consumption and increase focus, I started experimenting. After trying dozens of "productivity hacks," below are the 3 habits/changes that had the biggest impact and had staying power:

1. Switching to grey scale

The iPhone's neon color palette is visual heroine. Enable the option to turn it off. Kudos to Alex Timmons for this tip (and also Chris Escher). Here's how to do it on an iPhone (Apple makes it quite difficult): Settings > General > Accessibility > Accessibility Shortcut > Color Filters

2. Pull instead of push

A smartphone is a resource. A tool. You should engage it (pull) more than it engages you (push). A good rule of thumb is to turn off notifications from machines (not humans). Social media will likely be the worst offender. If it's automated, you likely don't need it. Exceptions: calendar reminders can be helpful.

Set aside 5-10 minutes to control how and when your smartphone notifies you:

3. Buy an alarm clock

When I realized I was starting and ending my day like a glow-faced zombie, I decided to buy an old-school alarm clock. It has made a *world* of difference. Of the three habits/changes, buying an alarm clock has had the biggest impact: peace of mind, morning reflection, more time with my lady. Everything is better. Don't use your smartphone as an alarm clock. Take that time back.

Other resources: https://www.helpguide.org/articles/addictions/smartphone-addiction.htm

 

What is the capacity of a CSM?

What is the capacity of a CSM?

"If all you have is a hammer, everything looks like a nail."  —Abraham Maslow

 

How many accounts can a CSM handle?

Spoiler: It's not about the # of accounts. Why? Because all accounts weren't created equally.

tree size.jpg

One of the biggest challenges Customer Success leaders face is operationalizing a capacity model that reflects reality. If done correctly, your CSM team can scale to $250 million in revenue with optimal output and reduced burnout. If done incorrectly, churn can metastasize while your customer retention costs balloon to 15-20% of revenue. But what's the right approach?

The origins of "account"

Perhaps some of the confusion lies in the nebulous word itself: account. Derived from Old French and Late Latinaccount was primarily a financial term referring to "a count" of something, or a reckoning of money to be paid. Around the 1600s, the definition of account garnered some nuance: "course of business dealings requiring records"—but it never ventured far from its original purpose: counting stuff.

But this poses a challenge for leaders, their CRM software, and the CSM organization. IBM and Nuts.com are very different accounts.

Let's start from the bottom

Many Customer Success executives will boldly prognosticate: "An enterprise CSM can handle 15 accounts, and a corporate/mid-market CSMs can handle 150 accounts" — or some variation thereof. Are they guessing? Yes, mostly. And that's okay early on as you test & tinker with your Customer Success model.

But cavalier guesswork can get you in trouble, especially as you begin to scale from $20M to $50M and sales begins closing dozens of deals per week.

Most leaders miss a vital input: How much TIME can my CSM team actually spend with customers?

To answer this question, we monitored my CSM team's activity for 12 months and measured how many hours they were spending with customers. Since logging calls in Salesforce is (very) prone to human error, I pulled the data directly from their Google Calendars (using a powerful software called Datahug), and inferred account names from the email domains on the accepted calendar invite.

What we learned: 15 hours per week

Sustained over the long term, the maximum amount of time a CSM can spend with a customer is 15 hours per week. At first glance, 15 hours per week might not seem like a lot, but think about it: that's three 1-hour customer calls per day, or six 30-minute customer calls per day. After you account for meeting preparation, internal meetings, administrative overhead and lunch, you run out of daylight pretty quickly.

To help build our capacity model, we can consider this a viable upper limit.

Not coincidentally, 15 hours/week was the output of one of our top-performing CSMs who typically worked 50 hours per week, so 30% of her time was spent talking to customers (either on the phone or in-person meeting). An absolute workhorse, she also had the highest product usage and often the best net retention on the team - but these are topics for another day (the r-squared between CSM "customer time" and net retention was 0.82, i.e. very strong correlation). 

Highest value activites

The next piece of the puzzle to consider: if we know that CSMs can spend ~15 hours per week with customers (max), what is the highest-value use of that time? The answer depends on your product and customer profile, but the list usually looks something like this:

  • Discovery: learning about the people and business of the "account"
  • Product training: education on features & functionality to drive value for customer
  • Business reviews: some sort of recurring value visibility/validation exercise
  • Project management: systematic growth of product users and consumption over time
  • Marketing: obtaining customer references, testimonials, case studies
  • Sales: asking for referrals, identifying upsell/cross-sell opportunities
  • Product: seeking feedback on current & future product experience; "voice of customer"

From the bottom to the top

Now that we've 1) established a rubric for CSM bandwidth—a precious 15 hours/week engaged directly with customers—and 2) reflected on their most valuable activities, we can zoom up and outward to think about your customers:

Who are they? What industry are they in? What do they need from you? Where are they getting stuck? Where are they in their lifecycle? How would you assess their maturity? How many teams/people will be using your product? Have they bought multiple products? What is their growth potential? With these answers, you can begin to assess what your customer needs from your Customer Success programs.

It is in these gradients that we come to appreciate all accounts aren't created equal. Some customers simply require—or deserve—more time, and it is in these tradeoffs that you begin to craft your CSM strategy: being proactive, while acknowledging the reactive. Here are the customer profiles that tend to require the most time:

  • New customers: onboarding requires heavy training and implementation work; you might consider creating a separate team that focuses exclusively on new customers, e.g. we called them our valiant "Launch" team which launched dozens of customers per week via a virtual launch program delivered via interactive Go-To-Webinar.
  • Low maturity: teams with less experience in your technology (or software in general) will require more work to generate the education and enthusiasm needed to create sustained behavior change; your CSMs have to literally help them build the habit of using your tech.
  • Bottom quintile ARR: the old saying "the squeaky wheel gets the grease" is often true of smaller customers; often resource and time constrained, these customers often tax your entire Customer Success team and must be planned for with education & support programs at scale.

Other considerations:

  • Cost: depending on the nature of your product and maturity of your company, the cost of your CSM team will typically be between 1-4% of TTM revenue.
  • Work/life balance: companies inadvertently create a burnout culture by constantly increasing CSM portfolios. This is unsustainable in the long run.
  • Customer segmentation: how you categorize your customers—industry, geo, what they pay, what they bought, company size (revenue), company size (seats)—will help determine what they need, and what you want to provide them
  • CSM service level: how you structure and stratify your CSM offering is the most important decision to manage bandwidth/capacity effectively; aim for the lowest common denominator.
  • Account potential: what customers pay today is not indicative of what they could be paying; therefore, you might consider a dual-classification system to quantify both, e.g. A1, A2, A3, B1, B2, B3, C1, C2, C3. In this system the letter is what they pay you today (A = top decile/quintile ARR), and the number is the potential extrapolated from your value metric (1 = high potential/top decile in employees). This will enable you to OVER-serve your B1s, and C1s to capitalize on their potential despite modest ARR right now.

Finding your north star

Finding your north star

True north

Since 400 AD, the North Star has helped sailors stay on course by revealing true north amidst the chaos of the high seas. Known formally as Polaristhe North Star is "special" for three main reasons:

  1. Brightness: one of the brightest in the night sky.
  2. Steadfast position: due to its alignment with Earth's axis, it consistently appears true north.
  3. Alaska state flag: while star iconography is common on US state flags (14 of 50), the North Star is only specific star to be depicted on a state flag: 
alaska state flag.png

Popularity in Silicon Valley

When euphoria combines with oozing metaphorical potential, its not surprising that Silicon Valley seized this celestial icon to create the North Star Metric (NSM) to symbolize the single metric most indicative of customer value.

Simple. Straight forward. Singular.

Due to these attractive qualities, a thoughtfully-nominated NSM can be particularly useful in 1) goal setting, 2) organizational alignment, and 3) product development—areas we'll expand upon in a future post.

No business runs on one metric

But the truth is, no business runs on one metric. Can a North Star Metric be useful for goals and alignment? Absolutely. Like a sea-bound armada, by all means lets trim our sails toward the North Star. But when it comes time to do the work, operational complexity sets in:

  • Customer acquisition cost
  • Dollar-based net retention
  • Cohort subscription expansion
  • Churn rate
  • Cash burn rate
  • Lifetime customer value
  • AE ramp rate / productivity
  • Unit economics
  • Net working capital

F*$^%# this just got hard

And before you know it, the naivety of a single metric is awash in operational winds and waves.

sailboat.jpg

So what does a good captain do?

A good captain 1) inspires the crew, and 2) sets achievable goals. Of course, good/smart goals will inevitably include metrics, but goals are more inspiring than simply making a single number get bigger.

The North Star is actually three stars

Meanwhile, perhaps Mother Nature was hiding the answer from us the whole time. Did you know that the North Star is actually three stars? It's true. Polaris is in fact a multiple star comprised of Polaris Aa, Polaris Ab, and Polaris B. The three Polaris stars orbit happily some 400 light-years away (or 123 parsecs for the space junkies out there).

Screen Shot 2018-03-13 at 11.20.34 PM.png

So instead of just ONE north star we have THREE, and instead of North Star Metrics we might consider North Star Goals. Stephen Covey calls these Wildly Important Goalsor WIGs.

3 North Star Goals

What are your 3 North Star Goals? What are the 3 biggest things your company need to accomplish this year? What are the input and output metrics that will determine goal attainment, and what are the prioritized initiatives that will thrust you towards true north?

Closing top talent

Closing top talent

Why

A customer recently asked our DBT Ventures team: "What recommendations do you have for closing top talent during the recruiting process?" Fantastic question. Let's explore this together.

What motivates top talent to join your company?

Top talent is usually motivated by 3 reasons:

  1. People
  2. Product
  3. Pay

Let's call them The 3 P's so we sound all snazzy. It's important to understand these are broad categories, so let's dive into each one:

1. People

Humans are social creatures. The influence of other people throughout the recruiting process can not be overstated. The most talented candidates are often sound judges of character, authenticity, and intelligence. They also likely won't be swayed by smooth talk and lofty claims of success or ambition. They'll want to know about your:

  • Founders
  • Leadership team
  • What schools did they go to? Where did they work prior? What projects did they drive?
  • Quality of peers and management
  • Reputation of VC backers
  • Other VC portfolio companies (social proof)
  • Glassdoor reviews

The degree to which you showcase the above in a compelling way will directly influence your close rate of top talent. The best acceptance rates are often 90-95%+. This is also an area where Recruiting can help craft a memorable candidate experience to ensure the right people meet the candidate.

2. Product

The existential purpose of a company is the product and/or service offered. The product has a utility value (ease of use, accomplished X in Y time), and also a visionary value. Average candidates will typically orient around utility and insure the product is stable and works as claimed. Top talent will typically seek to appraise the visionary value of your product. Therefore, you'd be well served to nail the following questions:

  • What key problem are you solving for humanity?
  • What does the future look like in the fully-realized vision and value of your product?
  • How will the product evolve next year? What is the process that drives that evolution?
  • Does your company have a feedback loop to inform sustained product iteration?
  • How big is the total addressable market for your flagship product?
  • What other products are on the roadmap?

3. Pay

To attract (and close) top talent, you will need to offer above-market compensation in the following categories:

  • Cash (salary, bonus, sign on)
  • Equity (ISOs, grants)
  • Benefits (healthcare, meals, perks)

The relative importance of the above comp mix will vary from candidate to candidate, but be prepared to put your best offer out first. Top talent doesn't want to play low ball / high ball (with the exception of a few sales roles where negotiating might be expected). Lead with your best offer. You can also offer flexibility in the salary/bonus mix, e.g. 60/40 vs. 90/10 which more risk-averse candidates will appreciate.

If your company is <3 years old, make a point to be especially transparent about equity: # shares, ownership %, strike price, valuation. This is the only way the candidate will be able to evaluate the equity component which is often the biggest motivator to join a young company.

The 3 P's: People, Product, Pay.


Good luck! We hope you find this information useful to attract and close talented people for your company.

Cryptic movements

Cryptic movements

Why

Based on requests from readers, we are publishing this abbreviated post for two reasons: 1) provide insights on the recent volatility, and 2) share cryptocurrency resources.

Recent volatility

The cryptocurrency market has been volatile recently with some coins down 75% (see: Ripple). While severe, this level of volatility is not unprecedented and should be expected:

Resources

Given the extremely rapid pace of innovation, there is a true opportunity of informational advantage. Both individual and institutional investors can benefit from staying abreast of new developments and tapping various networks for insights. Because published content can become stale within a week in the crypto world, we've divided this partial list into static and dynamic resources:

Static

Dynamic

Disclaimer

Past performance is not indicative of future returns. Invest at your own risk, and only invest what you can afford to lose.  As cryptocurrency hedge fund manager Dan Morehead describes it: "This is high-octane stuff."

The Bosu brain

The Bosu brain

What can we learn from a simple fitness device?

A Bosu trainer caught my eye at the gym yesterday:

Bosu Trainer.png

For the uninitiated, the Bosu Balance Trainer is a simple fitness device designed for one thing: intentional instability.

By design, the Bosu's partially inflated rubber dome creates a shape-shifting shit show of a workout that, at first attempt, seems near impossible to balance upon.

But aside from the physical torment the Bosu inflicts, the concept of intentional instability stayed with me for a while seeking deeper inspection.

Intentional instability

I asked myself: What would it look like if I applied intentional instability to my brain?  It seems beneficial to challenge my cognitive strength by putting it in wobbly situations where I not only question my assumptions, but also exercised new ways of thinking, i.e. my "stabilizer neurons" if you will. 

The Bosu brain

That same day my best friend Chris happened to text me this link: https://www.farnamstreetblog.com/mental-models/

Mental Models.png

What Chris had shared with me—compliments of Farnam Street—was a list of 113 different mental models, each of which constitute a mini-Bosu exercise in cognitive stability. My Bosu brain training program had arrived!

If there's one thing you take away from this blog post: bookmark this link. It provides a cognitive exercise regiment of compelling value.

The good people of Farnam Street took the time to compile a fairly exhaustive list of heuristics and mental models humans can use to think about challenges and opportunities in new ways. The end goal of all this is to make better decisions, and think more deeply.

For example:

What mental model will you explore? How can you embrace the Bosu brain?

Skimming the trees

Skimming the trees

The tallest tree in the world

The tallest tree in the world is 380 feet tall. The tree is named Hyperion (a nod to the Greeks) and estimated to be 600-800 years old. The exact location of this coastal redwood is kept secret to avoid tourism and damage to the tree's ecosystem, but we know Hyperion exists somewhere in Redwood National Park along with 10 other giant redwoods, each over 360 feet tall.

One of the few verified photographs of Hyperion was taken by Michael Taylor, one of the discoverers in 2006:

Source: Michael Taylor

Zip-lining revelations

Rather than drive 310 miles to go searching for Hyperion, the girlfriend and I drove 68 miles and went zip-lining in Occidental. At ~$110 each for 2.5 hours of scream-inducing thrills, it was hands down one of the best adventure experiences we've ever had (book it for yourself).

The girlfriend (Kristen) on "The Big Kahuna"—the longest zipline at 1,500 feet.

The girlfriend (Kristen) on "The Big Kahuna"—the longest zipline at 1,500 feet.

As we zipped from tree to tree brimming with adrenaline, I started to appreciate the metaphorical insights that ziplining could offer in business and in life:

  • We take calculated risks: Statistically, zip-lining is safer than driving a car. However, flying across the treetops at 40mph while 250 feet high risks certain death. But we assessed the quality of our harness/trolley/gear and intelligence of our guides. We were able to distinguish probability from possibility.

  • We expect reward: with considerable risk comes expectation of reward. Our expectation of reward was generously surpassed given the overall experience and cost. The reward was the feeling we had and the memories we made. After all, not all rewards are financial.

  • Perspective: one can't appreciate the vastness of the forest from within the trees. Each tree is magnificent in its own right, but to have depth of vision you have to climb atop the canopy and find true north.

Don't forget about the roots

Considering coastal redwoods—or sequoia sempervirens—are the tallest trees in the world, one might expect them to have deep roots. Not so. Redwood roots seldom go deeper than 10 feet.

Pop quiz: So how does such a shallow root system support such massive trees of 300+ feet?

If you guessed "the roots extend outward up to 100 feet and bind with other root systems" you are 100% correct. This natural phenomenon got me asking some questions:

Video of me pushing a redwood tree while 150 feet high. Shallow roots, flexible strength.

Take us home, Emerson

“In nature, every moment is new; the past is always swallowed and forgotten; the coming only is sacred. Nothing is secure but life, transition, the energizing spirit.” —Ralph Waldo Emerson

The "LIFE" method for journaling

The "LIFE" method for journaling

An interesting trend. . .

What do Albert Einstein, Marie Curie, Charles Darwin, Thomas Edison and Mark Twain have in common? They all kept a journal

Journaling is a form of reflection. Reflection is important because it helps humans source creativity from within, forge emotional tranquility, and ultimately perform better at our endeavors.

For this reason, many great thinkers—and leaders—journal. If you're still not swayed, you might consider 'To Be An Effective Leader Keep a Leadership Journal' (Forbes), and 'Want to Be an Outstanding Leader? Keep a Journal.' (Harvard Business Review) for further reading.

The "LIFE" method for journaling

Having kept a journal for 10+ years, I've found myself experimenting with different formats—trigger questions, specific topic for each day of the week, etc.—but nothing really stuck.

I always found myself drifting back to unstructured prose which, although fun, wasn't entirely useful for purposeful writing, or scanning past journal entries for insights or trends.

As a solution, I created a new method to ensure I covered the four topics most important to me: learnings, ideas, feelings and experiences. When I realized these four words formed the acronym "LIFE" I immediately vaulted my hands in the air and expelled a much-too-loud, teeth-clenched "YES!" which evidently scared the crap out of everyone in the SF Public Library.

Moving on.

The "LIFE" method for journaling has four main components:

  • L - Learnings:  What did I learn today? Whether by podcast, book, blog, or conversation, this ensures I capture the most important things I learned today. It also reinforces my daily learning habit for personal development. 
  • I - Ideas:  What new ideas did I have today? It might be an idea for an invention, or a nuanced observation. The goal here is to capture creative imagination, or your next million-dollar business idea.
  • F - Feelings:  How did I feel throughout the day? I think of this as taking a daily emotional inventory to ensure I'm reflecting on how I'm feeling: afraid, happy, proud, grateful, angry? At first, this process felt like dredging but it got easier w/ practice.
  • E - Experiences:  What did I experience today? What was fun, interesting, or notable? What color was the sunset? What did dinner taste like? How did the beach smell that afternoon? I try to add a thick sensory layer to prevent myself from laundry-listing the day.

It's going to get a little weird

Journals have historically enjoyed the vaunted status of "strictly private" usually reserved for classified CIA documents. I'm going to break the rules today and show you a page from my personal journal so that you can see the LIFE method in action.

That's it

I hope you find the LIFE method for journaling useful to you in some way. If you give it a try, who knows. . . it might stick. 

The opera ticket

Ah, one thing we didn't cover was the opera ticket at the bottom of my journal entry. Since I'm terrible at rereading past journal entries, I've began quasi-scrapbooking every so often which brings the pages to life and makes reading past entries more enjoyable (and frequent). 

How is your company like the human brain?

How is your company like the human brain?

The human brain

The human brain is the most complex manifestation of intelligence in the universe. The brain is composed of an astounding 86 billion neurons which generate 50,000 thoughts per day (on average). Our brain's memory has the potential capacity to hold 2.5 million gigabytes of data. Shaped by 200,000 years of evolution, the human brains exemplifies brilliant design worthy of inspection.

Source: Beyond Adversity, 2014

What if your company was a brain?

Grossly oversimplified, the human brain has two main parts:

  • Neocortex: planning, thinking, movement, perception, language, vision
  • Limbic system: our emotions, behavior, long-term memory, sense of smell

Additionally we have the cerebellum (14 above) and the brainstem. The lower part of the brainstem is called the medulla oblongata which controls our breathing, heart rate and blood pressure (pretty important, right?). At your company, what departments or groups best represent the various parts of the brain? Who does the strategic planning? Who "keeps the motor running"? Who represents the eyes, ears and voice of your company?

What the brain doesn't do

What if your medulla notified you every time it was time to take a breath. . . 23,000 times per day?

What if you consciously had to pump your heart. . . 115,000 beats per day?

Thankfully, your brain doesn't do this. Phew! But this is where the brain metaphor starts to get interesting: internal communication. Why? Because companies today have an insatiable desire to over-communicate which decreases productivity/output.

Signal vs. noise

Most executives would agree: the modus operadi of business today favors noise over signal. Across email, apps, chat and internal systems, the typical knowledge worker receives over 400 signals each day!

As a result, most executives are on neural overload with dwindling attention spans to prove it. Did you know our attention spans have shrunk 33% over the last 17 years to only 8 seconds

Below are a few methods to:

  • Turn the volume down.
  • Enable relentless focus on your biggest goals.
  • Reduce distraction.
  • Delegate to increase trust.

Methods executives use to stay in control

 

1. Meticulous management of notifications

  • Select only certain people for which you will receive notifications, e.g. CEO, other executives, direct reports
  • Eliminate notifications (on desktop and mobile) from automation/machines
  • Reporting
    • Daily stats (do you really need this at all?)
    • Weekly stats
    • Monthly stats
    • Quarterly stats
    • Annual stats

2. Categorization of things that truly need your attention as priorities:

  • Client emergencies
  • Board-level matters
  • C-level communications
  • Significant Competitive intel
  • New product launches / new milestones to celebrate
  • Sensitive HR issues
  • Helping with a big deal

Tip: have you tried the Ivy Lee method? In the evening, write down the 6 things you need to accomplish the following day. Historical fun fact: Once this method was implemented at the executive level of Bethlehem Steel in 1918, the boss (Charles M. Schwab) was so impressed that he paid Ivy Lee a fee of $400k in today's dollars for his consulting efforts.

3. Create a culture of effective communication

  • Slack/chat guidelines: please, please consider this
    • Do you really need to @here / notify the whole channel
  • In-person meeting guidelines (examples from Google, Apple, Amazon and Facebook)
    • When to meet in person
    • When NOT to meet in person
    • Why are we meeting? Agenda, intention, outcome
  • Personal ownership over the breadth of your message

Demystifying data science

Demystifying data science

A primer on data science

Described as the "sexiest job of the 21st century" by Harvard Business Review, data science has penetrated the annals of business history in the last decade. Leaders today would be wise to harness this powerful capability, and consider the recent guidance from McKinsey & Company's 2017 quarterly report:

"While CEOs and other members of the executive team don’t need to be the experts on data science, they must at least become conversant with a jungle of new jargon and buzzwords (Hadoop, genetic algorithms, in-memory analytics, deep learning, and the like) and understand at a high level the limits of the various kinds of algorithmic models. In addition to constant communication from the top that analytics is a priority and public celebration of successes, small signals such as recommending and showing up for learning opportunities also resonate."

Click image to download the McKinsey Quarterly report (PDF)

What does data science mean

Data science is defined as:

An interdisciplinary field about scientific methods, processes, and systems to extract knowledge or insights from data in various forms, either structured or unstructured, similar to data mining.

Additionally, data science is a "concept to unify statistics, data analysis and their related methods" in order to "understand and analyze actual phenomena" with data.

Why data science matters

The complexity of data science lends itself to rabbit holes, corner cases, and the risk of getting mired in a blackhole of minutiae. So let's first agree on why data science actually matters: IT HELPS BUSINESSES MAKE BETTER DECISIONS. That's about it. 

Having personally endured dozens of data science briefings, the most valuable outcome is unequivocally a better informed decision.

Technology has spawned a galaxy of information that's so big Google requires 4-5 million servers just to keep up. Today's executive have, at their finger tips, more data than any team of humans can analyze. Therefore, we must employ new tools and tactics to make sense of the information.

Data science helps you connect the dots, allowing you to see patterns. A regression model might reveal a constellation in the night sky you've never seen before. A classification model might yield an insight as important as the north star. Valuable knowledge awaits.

Knowledge = Power?

Contrary to popular thought, however, knowledge by itself is NOT power. It is simply potential power. Knowledge + ACTION = power. And it is here where so many brilliant data science endeavors fail to launch.

To address this conundrum, it is recommended your data science/analytics folks form a working relationship with your business operations team. This handshake is crucial because each data science output, e.g. churn predication score, etc. must be accompanied by an operational rollout plan with an expectation of accountability from management.

Resources to share

If you are considering starting—or furthering—your data science efforts, below are a few resources & tips you may wish to share with your team:

The DBT Ventures team hopes this information will help your team make sense of the night sky that is today's business canvas.

 

What is Netflix really costing you?

What is Netflix really costing you?

The true cost of Netflix

When Netflix IPO'd in May of 2002, the company was valued at a mere $300 million. Over the last 15 years Netflix has been on a rampage capturing 100 million subscribers and $81 billion in market cap. Yet Netflix has apprehended something far more valuable: our precious time.

Of course, there's a time and a place for entertainment: who doesn't enjoy getting into a good show every now and again?

However, this entertainment comes at a dear cost far exceeding the $11.99/mo membership fee. If you believe time is our most precious commodity, than we must acknowledge the massive opportunity cost that we sacrifice every night in front of the screen.

Let's start with some facts

  • The average subscriber spends 20 hours per week on Netflix
  • . . . That's 80 hours per month
  • 70% of Netflix users binge-watch shows
  • Netflix streamed 10 billion hours last month
  • The Netflix catalog is approximately 115,000 hours of content (21 years; waking hours)

Sources: DMR, CinemaBlend, Variety

20 hours per week is a lot

Let's start by acknowledging the obvious: 20 hours per week is a LOT of time. In most states, 20 hours per week is considered part-time employment. With 55 million subscribers in the US, you can say that 17% of Americans have a part-time job watching Netflix (US population = 323 million). This absurd reality provokes a crucial question: is this really the best use of our time?

The importance of personal development 

The short answer is no. Watching Netflix for 20 hours per week is likely not the best use of our time. Life is short. Really short. And for life to improve, we must heed the guidance of legends like Jim Rohn when he writes:

"Learn to work harder on yourself, than you do on the job."

Side note: if you haven't read The Art of Exceptional Living by Jim Rohn, it comes highly recommended from most of the executives we work with.

Only by building the habit of daily personal development can we truly improve our personal and professional wellbeing. Netflix is kryptonite to this endeavor.

"Want to watch a show?"

The question sounds innocent enough. Enticing, even. But next time you ask—or get asked—this question, make sure you keep this perspective in mind:

  • The typical human is awake for 15 hours per day, or 105 hours per week
  • As stated, Netflix is commanding 20 hours per week (on average)
  • 20 hours / 105 hours = 19% of our waking hours are devoted to Netflix

Breakdown: How we spend our time in a given week

Hours per week. Source: https://graphics.wsj.com/time-use/

What else could we be doing?

Below is a chart of Netflix binge sessions and their personal development equivalent.

On Netflix you could watch: Or you could: Time required
1 episode - Archer Run 2-3 miles 22 minutes
1 episode - House of Cards Write a blog post 50 minutes
2 episodes - The Blacklist Bike 20 miles 1.4 hours
3 episode - Orange is the New Black Read 82pp. of a book 2.75 hours
4 episodes - Stranger Things Learn 5 new subjects on Khan Academy 3.2 hours
Season 1 - House of Cards Complete Stanford's CS101 online 10.8 hours
Season 1 & 2 - Orange is the New Black Learn how to program in C 23.8 hours
All 5 seasons - House of Cards Train for a marathon 54.2 hours
All 7 seasons - The West Wing Become conversational in Italian 112.9 hours
All seasons - HoC, OitNB, The West Wing Read 34 of the 51 Harvard Classics 227.1 hours
21 weeks of Netflix (at 20 hours/week) Build the first version of Facebook 420 hours

You are always choosing

So the next time you're tempted to binge of Netflix, keep the above list in mind. Realize that you are always choosing: a choice to watch Netflix for 3 hours is also choice to NOT learn 5 new subjects on Khan Academy. A choice to weekendbinge on 2 seasons of your favorite show, is a choice to NOT learn how to program at a basic level. 

Every decision has tradeoffs, and the more we keep this in mind, the better off we'll be on our quest for transformative personal development.

Next episode playing in. . .

You can also disable autoplay: https://help.netflix.com/en/node/2102. This one decision could help reduce your Netflix consumption by up to 50%. I'm curious: what would you do with the extra time?

How much are you spending to retain customers?

How much are you spending to retain customers?

Why the CRC ratio is critical to an exit

We've investigated important SaaS metrics before (see: Want to blow up your SaaS business? Ignore C4), but today we will expand upon Customer Retention Cost, specifically by exploring the virtues of the CRC ratio.

But first, let's recap how CRC is defined

CRC = Customer Retention Cost ($). It typically includes the following components:

What is the CRC ratio?

The CRC ratio typically takes the CRC and divides it by total subscription revenue over the same time period. For example:

  • Customer Retention Cost (annual) = $10M
  • Total Subscription Revenue (annual) = $85M
  • CRC Ratio = 11.76%

Pretty straightforward.

So why is the metric critical to a successful exit?

Two main reasons:

  1. CRC too high: the exorbitant spend could derail your path to cash flow positive resulting in: lower valuations, down rounds, or possibly a fundraising crisis.
  2. CRC too low: you may be underinvesting in Customer Success which will inevitably manifest itself it gut-wrenching churn across all customer segments.

How to benchmark your CRC ratio to public companies

Since GAAP has yet to catch up to the economic realities of the recurring software subscription revenue, this gets a bit tricky for one main reason: GAAP includes CRC in the reported Customer Acquisition Cost (CAC). Therefore, public benchmarks for CAC are inflated by about 20-25%.

To isolate CRC, we recommend taking 20% of the CAC. Therefore, if CAC = $5M, your extrapolated CRC would be $1M. Let's take a look at a few data points for Salesforce, Workday, ServiceNow, NetSuite and Marketo:

[click to enlarge]

For these five companies we can see that the CAC ratio ranges from 0.08 (Workday) to 0.13 (Marketo). But these are mature, publicly traded companies. . .

What should you benchmark your company on?

Based on analysis of 24 private companies with strong churn fundamentals, here are a few guidelines for CAC ratio based on how long you've been in business:

  • Year 1: 25%
  • Year 2: 25%
  • Year 3: 22%
  • Year 4: 20%
  • Year 5: 18%
  • Year 6: 15%
  • Year 7: 14%
  • Year 8: 13%
  • Year 9: 12%
  • Year 10: 11%

You can also use this as a budgeting tool to ballpark total Customer Success spend for a given year. But remember: the money spent on retention isn't about "revenue protection". Your customers don't care about that. They care about adoption and value realization which is ultimately what drives the mechanics of churn and renewal rates.

The best leadership teams figure this out early on: investing early in Customer Success is worth its weight in gold. Yes, growth is critical and everyone likes to high-five and ring the gong when a big deal is closed. But the Customer Success program will chart the path towards realizing Customer Lifetime Value which is what the SaaS game is all about.

 

3 Words to Describe You

3 Words to Describe You

Two guys grabbing dinner in San Francisco

I recently had the pleasure of catching up with one of my old teammates from Optimizely. He's doing well: director-level position, managing a growing team, and meanwhile hyper-focusing on how he can take it to the next level as a leader.

So I asked him a question:

"If I were to meet with your team over drinks, and I asked each of them to describe you in three words, what would you want them to say?"

Simple question. Long, thoughtful answer.

His final answer: 

  • "Caring, consistent, and challenging."  [Three C's FTW]

While the answer was revealing, the true value was in talking through the various tradeoffs one makes as a leader:

  • Friend vs. boss
  • Lenient vs. stern
  • Strategic vs. tactical
  • Inspirational vs. directive
  • Spontaneous vs. predictable

And while none of the above are mutually exclusive, a leader has limited time. Very limited. So you have to explore: what is your management philosophy? How do you want to be perceived? Even. . . remembered?

So I challenge you:

What are the 3 words you would want your team to describe you?

If you're still staring instead of thinking, below is a insightful list of questions your team is likely asking themselves right now.

Credit due to Fred Kofman’s book, Conscious Business, in which he crafted these questions about communication clarity, mission, shared values, respect and teamwork.

  1. Do I know what is expected of me at work?
  2. Do I have the materials and equipment I need to do my work right?
  3. At work, do I have the opportunity to do what I do best every day?
  4. In the last seven days, have I received recognition or praise for doing good work?
  5. Does my supervisor, or someone at work, seem to care about me as a person?
  6. Is there someone at work who encourages my development?
  7. At work, do my opinions seem to count?
  8. Does the mission/purpose of my company make me feel my job is important?
  9. Are my co-workers committed to doing high-quality work?
  10. Do I have a best friend at work?
  11. In the last six months, has someone at work talked to me about my progress?
  12. This last year, have I had opportunities at work to learn and grow?

The DBT Ventures team hopes this article has been helpful in urging you to proactively control what 3 words describe you as an executive.

What are your private stock options worth?

What are your private stock options worth?

With the majority of all software equity still held privately—typically in the form of stock options—let's investigate what drives the value of these options.

For good measure, here is a primer on the two main types of options and their tax treatment:

Before we begin, there are a few realities we must acknowledge:

  1. Most software/tech employees do not have a finance background.
  2. The financial IQ of software/tech employees < their IQ.
  3. It's not always comfortable to ask about things you don't know about, e.g. preferred shares, dilution, post-money valuations, 83(b) elections, secondary markets, etc.
  4. Lots of software/tech employees get screwed when it comes to equity.

One might also recall that the current market cycle—a rampant bull market fueled by low interest rates and flippant increases to the money supply—is nicely balanced with some sobering advice from Latin archives:

"Something is only worth what someone is willing to pay for it."   - Publilius Syrus, 50 B.C.

Let's start with an example using Square's private stock sale prices:

  • Series A: $0.216
  • Series B: $0.982
  • Series C: $5.798
  • Series D: $11.014
  • Series E: $15.463

These prices represent what VC investors were willing to pay for preferred shares. Reminder: you, the employee, don't own preferred shares. However, preferred share prices indicate what the most recent investors are willing to pay to own a piece of the company. This is the price that private companies use to extrapolate their valuation by multiplying it by the # of shares, e.g. Square had about 388M fully diluted shares after their Series E so, math: 388M x $15.463 = $6 billion. 

But this doesn't answer the question: What are your private stock options worth?

When appraising value for private options, we must first acknowledge the macro forces that impact valuations:

  1. The fundraising climate [see chart below]
  2. The federal funds rate

Along with company-specific forces:

  1. Revenue multiples and cash flow
  2. Recent exits and secondary market considerations

MACRO FORCES

1. Let's start with the fundraising climate

saas-fundraising-seed-series-c

Dollars peaked in 2015 with $4.2B venture dollars entering SaaS company bank accounts (SVB = happy). In 2017 we are on track for a bell curve-shaped result of around $3B. The general trend is a relatively large pool of capital is being invested in a smaller pool of companies. As one might expect, round sizes have increased.

Based on the data, the fundraising climate is good which increases your company's chances of executing toward an outcome.

2. The federal funds rate

The federal funds rate is about 1.25%. That is historically low, as it has been, since 2008. This is important because it induces our federal banks to move money freely which has all sorts of second order effects, e.g. credit availability, consumer interest rates, spending.

The federal funds rate is low (credit friendly) which is generally a good thing for the value of your stock options.

COMPANY-SPECIFIC FORCES

1. Revenue multiples and cash flow

The reason cash flow is important is its a primary driver of the multiple your company can earn. Based on the research from April 2016, companies that are FCF positive (or nearing it) are valued at 6-10X sales. Companies that are NOT profitable from a cash-flow perspective are earning a meager 2-4X sales for their valuation, i.e. the company is worth 50% less because their businesses are less efficient.

So ask yourself:

  • Is my company cash flow positive or nearing it?
  • At the last fundraising round, what was our valuation and implied revenue multiple?
    • e.g. if the latest round was at a $700M valuation with $90M in revenue, the multiple would be 7.8 (fairly strong).

This will give you a rubric to assess the value of your stock options.

2. Recent exits and secondary market consideration

One must make a study of market activity to stay abreast of current valuations. Every data point is a signal. A story. For example, when Oracle acquired Moat for $850M in April of 2017, it sends a signal. At the time Moat had revenues of $78M so the multiple was 10.9 (or thereabouts). This implies a very strong signal for SaaS companies, especially in the ad tech space.

Similarly, when Cisco acquired AppDynamics for $3.7B in January of 2017 it had revenues of approx. $211M. This implies a multiple of 17.5 which is extraordinary. Another signal. 

So ask yourself:

  • What companies have been acquired in my industry?
  • What was the revenue at time of acquisition?
  • How does this revenue multiple compare to my company?

A note on secondary market considerations

One of the least talked about equity topics is secondary markets. If you own private shares, there are other people—entire firms, actually—that are willing to purchase your private shares from you. There is some legal paperwork involved, and some approvals, but the process is pretty straightforward: you sell them your private exercised shares in exchange for money.

Who is currently providing liquidity in the secondary space?

There are more, but these are the ones we have heard good things about.

Secondary prices will often trade at a discount to preferred share price. For example, if your company is about 1 year away from IPO and the current preferred share price is $20, you might expect the secondary provider to come back to you with a 25% discount, or $15 per share.

This puts you in a position: money now vs. potential money later. We have included this last note on secondary markets because we respect the age-advice mentioned earlier:

"Something is only worth what someone is willing to pay for it."   - Publilius Syrus, 50 B.C.