Diving deep into B2B SaaS metrics with Mark Khavkin, CFO at Pantheon

Episode Description

In this episode of Diving Deep, Subscript's CEO, Sidharth, has an engaging conversation with Mark Khavkin, CFO at Pantheon.

Sidharth and Mark go deep into B2B SaaS metrics as they discuss:

The art and science of uncovering strategic insights from SaaS metrics
How to plan for 2023 despite so much uncertainty
The key SaaS metrics to obsess over in a challenging economy
Why deeply understanding data is more important than ever for a strategic CFO
The non-obvious challenges of calculating SaaS metrics
And more!

Show Notes

Follow Sidharth: https://www.linkedin.com/in/sidharthkakkar/

Follow Mark: https://www.linkedin.com/in/markkhavkin/

Follow Subscript: https://www.linkedin.com/company/subscript/

About Diving Deep with Subscript

Diving Deep with Subscript is a video series where we dive deep and explore SaaS metrics with leading investors, CEOs, and finance leaders.

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Episode Transcript

Sidharth Kakkar
What are the metrics that you track most religiously at Pantheon?

Mark Khavkin
Yeah, well, thanks, glad to be here. So the religious one is net dollar retention and the reason is effectively net dollar retention is the foundational metric in SaaS and the expansion and low churn being able to upsell is why SaaS economics work. This is why SaaS companies are valued as they are. This is why multiples are on revenue. This is why we have been so fortunate to be enjoying, at least over the last few years, excluding the last couple of quarters, fairly solid growth and investment into SaaS companies. Because you get a customer and the expectation is that the customer stays and actually expands the usage. That is what's net dollar retention NDR measures. You can have constituents, you can have derivatives, you can have flavors, gross dollar retention and so on. But effectively that's the religious metric of Pantheon.

Sidharth Kakkar
That makes a lot of sense. Do you like balance that with gross customer retention? Because I've come across businesses where like the net dollar retention is amazing, but the gross customer retention is a little more middling and it's always unclear how much to be concerned in that situation.

Mark Khavkin
Ours is exceedingly healthy. So I don't track it as religiously because it's so good a point here or there. For us, thankfully, it doesn't matter. We are a very sticky product. We are trying to create levers for upsell and increased adoption and adoption of different tools and adoption by more people that shows a net dollar retention. But gross dollar retention is very healthy. So I look at it, but not religiously.

Sidharth Kakkar
Yeah, that makes sense. A lot of the traditional sort of like sales efficiency metrics, whether they be payback period or LTV:CAC or whatever, they often sort of ignore the growth part of the net dollar retention, like the over 100%. I'm wondering how you think about a very healthy net dollar retention, how that translates into what you're willingness to spend on sales and marketing is.

Mark Khavkin
Yeah, well that's different. As you said, those are different metrics. The goals for sales and marketing efficiency could be different depending on your net dollar retention, frankly, also depending on your gross margin. But the economics of staff are definitely driven in large part by net dollar retention. The higher the net dollar retention and gross margin can you can afford to spend a little bit more on sales and marketing. But there is a way we measure sales and marketing which is not dissimilar to how other SaaS companies measure it. We just have the luxury of goaling ours to what we goal because of net dollar retention and gross margin.

Sidharth Kakkar
Got it. That makes sense. How much effort do you invest in slicing and dicing up some of the sales and marketing sort of spend? Like how deep do you go?

Mark Khavkin
Never enough. And frankly it changes from not necessarily quarter to quarter but it changes depending on where we see the issues with the business. What is it exactly that we're trying to improve? Are we trying to improve top of the funnel, middle of the funnel, bottom of the funnel? Are we going through a pricing review and so on. So are we working on introducing specific products? Have we just introduced a new product so that we need to track that? Are we working on understanding what's happening with a certain customer cohort? So we would slice and dice it by that, but you can slice and dice it in effectively infinite number of ways. So the art of finance is to figure out which slice is important for the problem you're trying to solve now and will the slice this is critical, will the slice be actionable by the business? Because if I slice it by which day of the week a deal was signed, well, what am I expecting sales reps to do? Don't sign it on a Wednesday and sign everything on Thursday if that shows higher net dollar retention? No. So it has to be very thoughtful and sliced by something that can actually be acted on.

Sidharth Kakkar
That's such good advice. I really love that definition of the art in finance and I'm curious, maybe this is hard to do without a specific case but you tell me, but I'm wondering if there's generalized advice on how you can determine what are the slices that might matter most for your business?

Mark Khavkin
Look at your alterations and you look at where the levers are in your gotomarket process. Is the lever in top of the funnel and you have some flexibility into how you go to market. You have maybe explored events but not demand gen online or maybe you've explored partner program but not something else and you're in the process of exploring that and this is how you slice and dice but you start with your go to market motion and your customer as well. Which customer are you pursuing? And the combination of that gives you some notion of what could be impacted. What are you working on to impact? Some things could be incredibly important but if you can't make an impact fairly in the near term then it's useless. Of course they could be things that you decide to act on in the long term, maybe through product innovation. So you just have to be very thoughtful about what kind of impact where slicing and dicing could lead to.

Sidharth Kakkar
What is your sort of like why of why you care about metrics and data? What is the thing that drives you and why do you think it's important?

Mark Khavkin
Yeah, it's what can the organization act on and achieve the highest possible strategic return in the shortest possible time with the smallest possible investment? And that could be something in product, that could be something in org design, this could be something in pricing, in cost of goods sold and so on. So it's important to understand which actions move those metrics so that the organization can impact them. Or at least diagnose that this is a problem and then have a thoughtful conversation about how to correct that.

Sidharth Kakkar
And what are some of the challenges that you've seen in actually calculating SaaS metrics?

Mark Khavkin
What I've seen, and different CFOs may have different experience, for us a challenge is aligning on customer hierarchy. What is defined as a customer? Is that a company at an aggregate level? Is it a department? Is it the team? Is that a subscription? Is that the partner? It's not trivial, but the difference in how you think about it would lead to vastly different definitions and vastly different processes of measuring things. Different definitions across the company could also lead to massive misunderstandings and misdiagnosing the problem as well as incredible operational pain. So that is a big one and then going down the list. Late renewals are a big one for SaaS. Sometimes the company keeps negotiating with an important customer after the renewal deadline, and it happens to us when we're a client and it happens to us when we are the vendor. But thinking about how to account for those days and lack of subscription on a certain date is a challenge. Another one I came across going down the list, sometimes there's inconsistency in how Finance thinks about those metrics and how sales thinks about those metrics specifically for purposes of calculating variable comp for reps.

Mark Khavkin
But you're going down the way. There are plenty of issues. The last one, you have one result for the company, and as a result, if you add up all the variable compensation across the sales team, you may get different payouts. That just creates a little bit of a churn. But as long as you can reconcile the two, and as long as you don't incentivize the wrong type of behavior, you're fine. You can work through that.

Sidharth Kakkar
Yeah, that all makes a ton of sense. Do you have sort of like a framework for thinking through some of the customer hierarchy stuff? Because it can result in vastly different numbers depending on how you look at hierarchy.

Mark Khavkin
I wish I could give a better answer. We have a number of frameworks and that's probably the problem. But one framework is product based. It's an account. In our case we call it organizational dashboard. It would be based on the commercial relationship. There are multiple subscriptions, but billed to the same address, the same email, if you will. It could be legal relationship. Multiple agreements are subject to the same legal framework. There could be third party validations. There are different companies that commercially compile sort of trees of company hierarchies. So all of that is possible, but you don't have competing priorities and you need to reconcile those. One competing priorities is finance has its own set of stakeholders, internal and external. Sales has the occupational considerations. Marketing has to be consistent with Sales to be in line, but it has its own set of notions and motions for how they reach out to prospective prospects with account based marketing and certain other marketing methodologies. So those are the issues, but the plenty of methodologies, it's figuring out which one to use and how to reconcile trade offs.

Sidharth Kakkar
Yeah, I guess that's the art of finance.

Mark Khavkin
That's the art of finance, exactly. You have to make sure to align the whole company. Run a certain set of definitions. Or you have to agree as a company that you're going to have different definitions for different use cases and then agree to reconcile when. You know. When needed as necessary.

Sidharth Kakkar
Like a form of organizational debt that you take on.

Mark Khavkin
Or just an additional organizational capability and investment that you need to develop.

Sidharth Kakkar
For sure, yeah, fair enough. We're recording this in late September, 2022 and it's been a pretty challenging sort of 2022 for many SaaS companies. And how do you think about sort of the broader economic environment and how does that impact decisions that you have to make as a CFO?

Mark Khavkin
I try to focus on things that I can control. Now, having said that, we are fortunate to have been funded about 13 or 14 months ago last summer and received an infusion of significant infusion of capital. We raised $100 million in July of 2021. So we were well funded until profitability. Of course, the challenge and the opportunity is to create a forcing function creative mechanism so that we can achieve more from the same resources going forward. This is not about every company going to different. This is not about trying to achieve the same from fewer resources. This is about achieving more from the same resources. So of course we are fortunate in that extent, but we are not operating in a vacuum, even though I can't necessarily control the global macro picture. But it is what it is and you have to be mindful of that. And I'm sure a lot of other CFOs and companies are dealing with the same thing. It's a healthy exercise. It is a very healthy exercise. How do we structure our work processes or systems, our go to market, our product and engineering efforts such that we accomplish more from the investments we have made in 2022 and in 2021?

Mark Khavkin
And it's not easy, but it's definitely doable. We all as a company, everybody knows that we can grow our customer base, we can grow our revenues, we can produce innovation, we can satisfy more use cases for more customers and do it better with the same level of investment. It's just different. How do you organize your work?

Sidharth Kakkar
Yeah, when times are volatile like this, planning becomes significantly harder. And I'm curious how you think about that, because the range of sort of projections of what 2023 will look like are now wider. The spread is quite wide and that makes trying to make decisions about the future super hard. Curious how you handle that level of uncertainty.

Sidharth Kakkar
In some cases it's harder, in some cases it's easier. You have more constraints. When you have more constraints you don't have to make as many decisions. On the top line, yes, there is a greater, as you said, spread of possible outcomes so the answer to that and what I'm actively trying to instill in my own organization at the company at large is not trying to predict perfectly it's trying to build a system and a process that we can adjust the forecast and act on the adjustment as the year goes through. So I know I'll have a plan for 2023 prepared for the board meeting and I need to prepare it for and I know it's going to be wrong. The objective is not to be right the objective is to be reasonable and build processes in place and align on expectations with the broader company that we will evaluate throughout the year and if the plan has x additional headcount or the plan has us engaging in this particular initiative in July we will reconsider this come April or whatever time it may be. So again, that's coming back to the art of finance. That's the art. The art is not to be precise. The art is to guide actions in near real time in a way that is consistent with corporate objectives.

Sidharth Kakkar
I think this has sort of come up a couple of times in this conversation where the art of negotiating and working with the others because finance is inherently a role that has to sort of span across the organization and I'm curious how do you think about your role visually the other leaders at Pantheon. How do you conceptualize what your job is relative to the functional leaders of the various divisions?

Mark Khavkin
Yeah. It's a large degree aligning everyone on same set of priorities and objectives making sure that as a company they're efficient not each department but as a company we are efficient and really helping people see how shareholder value is created based on actions of each team. If not each individual within their department but again. Most of it is aligning and demonstrating the sort of flow through of actions into a financial result.

Sidharth Kakkar
That's great in an ideal world what's a level deeper that you wish more finance teams would go into SaaS metrics.

Mark Khavkin
Each company would be different and each finance team would be different specifically because each business model is different and each issue at any given point in time is different so even within the same company that should change based on objectives at a particular time yeah. I'm going to throw Anna Karenina at you and Tolstoy each happy family is alike family each family is unhappy in its own way or something similar but each companies are the same. All successful companies have much more in common than companies that have a lot of room for improvement and so it's on finance to create the right drivers and understanding of those drivers and how those drivers translate into financial results and to track those. But broadly speaking, all of this falls into two buckets. One is operational data and tracing from actions of each team or individuals. And the second bucket is customer data, customer lifecycle data. So how customers are engaging in your product experience, what are they using, what are they not using, what are they using, more or less and so and so forth for a lot of companies that have product with rose elements and allow customers to experience the product upfront.

Mark Khavkin
So what are those trends? How does that translate into future buying behavior and how do you create, forecast and tying those two to the financial model is the Holy grail again, what is being, what specifically is being tied into the financial model would be different for every company and would be different for each company at different points in time. But the holy grail again is combining those three and that would be really changing for how management is conduct. This is a different way of running the company that with the modern data and tech stack, finance department, finance leaders can help companies that's great at the stage.

Sidharth Kakkar
The stage that Pantheon is a lot of folks, and I'm sure this is true for you, are looking ahead to potentially IPOing at some point in the future.

Sidharth Kakkar
And I'm curious as you think about sort of that path of a company, how do the things that especially from a metrics perspective, the things that you think a lot about or spend most of your time obsessing over, how does that change over time and how do you think it will change as you get closer to that milestone?

Mark Khavkin
They haven't changed for me. Net dollar retention is still the main one and close to 100% of SaaS companies refer to it in their public filings. So I think you started the conversation with which metrics I pay religious attention to. It's definitely the same. Other ones are easier: billings, bookings and things like that. It's not like you need to provide a dozen metrics when you go out because once you go out with them, you kind of have to stick to them for several years. But it's unquestionable that net dollar retention would be one of those. I think when you go public, like the focus changes and the level of expected consistency changes and the notion that you can't go back or you can't change them at will, that's there. But the focus is still on the most important points.

Sidharth Kakkar
That's a good point. You almost have to be even more focused as to what is going to matter in the long run because you can't be reporting once that one quarter on a different quarter. Yeah, totally. Some of these metrics, especially like the retention metrics, are kind of interesting because they're recorded as one number. But really it's not just one number, it's like a whole set of numbers. You can only communicate so much generally, but especially to a broad audience. I'm curious how you think about sort of retention metrics on a cohort basis versus like one number and how to interpret and think about it and how to operationalize it.

Mark Khavkin
My job is to present Pantheon in the most favorable light that clearly articulated what I'm presenting and true to form. But at the end of the day, I am there to sell the company to shareholders and prospective shareholders. So I do pay attention to that and think about IR part of my job. But of course I need to be clear, transparent, timely, accurate, and present the company in the most true light but also in a favorable one.

Sidharth Kakkar
Yeah. When it comes to presenting the company versus operationally, making decisions, how do you think about sort of like you kind of need almost more detail, right?

Mark Khavkin
On an operational level, of course you need more details. I track components. For example, if net dollar retention there is upsell. Upsell sometimes happens at Renewal, sometimes upsell happens mid stage. Why does it happen? Do in our case, customers add more sites or do they add more tools or do they use more support and all the pricing levers that we have? That's important for me to understand, but it would be way too much information and frankly, that information would be very hard to despite for an outsider and it has no impact. What matters is the total result presented consistently from period to period and forecasts of those numbers, those are important. But operationally, of course, you need to go level deeper and the level depends on the corporate objectives. What are you trying to improve? If we're trying to introduce more products that you want to sell, then maybe mid cycle upsell is important because we want to call the customers and tell them, hey, we just released our newest feature. You want to try? If you go through a pricing exercise you really want to keep track on. Okay. What is happening when people at Renewal are asked to switch to a new pricing schema?

Mark Khavkin
So that really depends and activation. It will change from change every quarter, but it will change its objective.

Sidharth Kakkar
Change makes sense. I still have one last question for you, which is our core audience are Series D and C company finance leaders. And having seen everything that you've seen over your career, what's a piece of advice that you would offer that group.

Mark Khavkin
Yeah, what I haven't done really well, and I would do differently if I could do it again, is to incorporate more of operational metrics and products and customer lifecycle metrics into the core of my model and then at least getting to develop the muscle of incorporating that. And again, what Executives incorporated could change, but it would force discipline on other departments. It would even force different way of thinking about product development. You want to make sure that in your product organization, data is first class citizens, that they think about Data as they think about the product, not as an after thought. Let's develop the product and then see how we can extract Data out of it. That doesn't work, but if the organization doesn't understand how the finance will use that, or other teams will use that directly or through finance, then it's harder to argue that Data has to be first class citizen, and it's true for tracking operational activities as well. So I think that would be a much more improved finance decision making, but also just a much more improved way of operating the company and as a leadership team looking at the company not at the board level necessarily, but definitely at the level of executive team decision making.

Sidharth Kakkar
Yeah, that makes a ton of sense to me. Amazing. Thank you so much for all the time and all the insights. Really appreciate it.