Diving deep into B2B SaaS metrics with Rajeev Dham, Partner at Sapphire Ventures

Episode Description

In this episode of Diving Deep, Subscript's CEO, Sidharth, has an engaging conversation with Rajeev Dham, Partner at Sapphire Ventures.

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

Two traits that set the greatest CFOs apart from the rest
The new responsibilities strategic CFOs must embrace to keep up
Three concrete pieces of advice for navigating an uncertain economy
Why the next generation of finance will be driven by the convergence with data science
And more!

Show Notes

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

Follow Rajeev: https://www.linkedin.com/in/rajeev-dham-79332812/

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.

Watch the entire series of Diving Deep with Subscript

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Episode Transcript

Sidharth Kakkar
So the first thing I wanted to ask you about is: the times are changing, obviously, and many SaaS companies are moving away from growth at all costs and starting to focus on actually building a strong business. What is the advice that you are giving to some of the companies you work with as these times are changing?

Rajeev Dham
Yeah, it's a good question. I'm actually coming out of two board meetings here in the last couple of weeks, so it's pretty fresh in my mind. I think the bottom line is, I'm involved with companies that are between 5 million in revenue to hundreds of millions in revenue. And even those at the later stage are just having an incredibly hard time forecasting, predicting their top line, what is the demand from customers? And these are great companies with great value propositions. My reasoning to management teams and CEOs is like, hey, if you can't predict how much revenue and cash we'll bring in, let's just be super careful in investing behind that growth. We don't know how much yield we'll get for every dollar of investment. And so that's kind of a basic sort of mantra I think many others are telling our management team. Wait until the dollars are more valuable. It's not just about preserving the runway because multiples have come down and you don't want to raise a down round because that has ramifications. It's more about, why don't we just wait until we know what we can get out of every single dollar we invest? We know we can get more out of it. Right now, we just have no idea.

Rajeev Dham
And that's become even more evident, I think right now in the middle of Q3 coming up to the end of Q3 for many companies, or Q3 already ended. And then the second thing is it's a little bit of a softer, but just as quickly organizationally. I think oftentimes this message gets through to the CEO and CFO and then the functional leaders will come in and sort of present and you can tell there's maybe not that alignment. So I've sort of told some of the founders and CEOs I work with, it's not about growth at all costs. It's not doom and gloom either. But let's get everyone on the same page. Talk to your leaders, have them talk to their managers and their employees. Let's all orient towards more efficient growth. Maybe it's a simple metric like ARR per employee that's become very popular, but something firm wide that everyone can rally against, really understand, something that's tangible. Get everyone on the same page. I think that's pretty important as well.

Sidharth Kakkar
It's so funny you mentioned ARR per employee. I was running my last company in 2018 and at that time ARR per employee was like suddenly a metric that came into vogue and then like by mid 2019, everyone forgot about it. So everyone tracked it for a solid six months and then it was like, oh, no need now.

Rajeev Dham
Yeah, and it all comes back to that, because if you look at SaaS businesses, we're all in the business. 80% to 90% of your expenses are going to be people. Right? And yet some people have individuals in lower cost sort of countries in areas, but by and large, that's what it's going to be. And you kind of need to be at 300K plus of ARR per employee at scale to even be at that sort of place, given where salaries and overhead benefits are today. And so it's worth it, honestly. I'll be a three, five million ARR company and if they give me an employee headcount, I always know right away, is this going to be efficient or not?

Sidharth Kakkar
That's a good point. I like the 300K benchmark at scale. Do you have sort of benchmarks in your mind of how you build up to 300K, your first million? It's not going to be like 300K, you're not going to be three people.

Rajeev Dham
Right.

Sidharth Kakkar
But obviously at some point it needs to come down. So do you have ways to think about that in your head?

Rajeev Dham
I do, in my head. We've run some analysis on this, on our portfolio, as well as companies we look at. And to be clear, I look at companies typically whether three or five of ARR at the earliest of post product market fit, and then all the way onwards. If I'm seeing a company that's kind of five to 20 there, ideally I would love for them to be at $50k per employee. So if you're 5 million of ARR and you have 100 employees, that's fine. The last company I got close to investing in three, four, five months ago was 5.5 of ARR and 55 employees. It was $100K of ARR per employee already at that scale and going from one to seven in their first in that kind of second year of selling. That's obviously the ideal case. Not every company can be like that, but the lower end is usually that 50K is my feel where they should be at that scale and then hopefully grow into it and get even more efficient as they get to the $250 ARR scale.

Sidharth Kakkar
That's so good. That's like a really helpful benchmark. And then I guess, like, pre product market. Do you think it matters or you should just be looking at different things?

Rajeev Dham
I don't think you can hire 50 employees in general if you know that product market fits. It probably 5, 10, 15, 20 to kind of figure it out and experiment and build some products to build something for a year and look at that. Actually, it's interesting. I remember looking at Figma in the early days and incredibly efficient go-to-market engine once it started growing, but they spent a decent chunk of capital. But when you looked at what they build in the multiplayer and rendering of people collaborating, the design, surface and Prototyping all in one, and I remember talking to customers when they're three or four, oh, I get it. This is not just a simple SaaS point solution. They got to spend a lot on product development. So for me, in those earlier days, it's a little bit hard. It's really, once they start to go to market, how efficiently they're doing it company wide.

Sidharth Kakkar
So good. One of the things I think about when it comes to preserving cash now and then making sure that you're deploying it in a way that's going to have the highest ROI. I think about the fact that in like one, two, three years, the best in class companies are still going to look like ones that didn't necessarily have like a huge slowdown or didn't have like a huge dip or something. You can imagine the best in class companies are going to look like pretty impressive the whole way through. And that makes me wonder, for folks operating in 5 million plus ARR businesses today, how do they give themselves the best shot at being one of the best in class companies while also making sure that their capital spend isn't dumb? It seems like a very hard sort of balancing act. I don't know if you've seen people who are exceptionally good at it or anything like that.

Rajeev Dham
It's hard. And a lot of things you're obviously speaking to me at a time period where the current environment is just omnipresent and is going to be filtered. Everything that I'm saying is in the context of the current environment, which I do expect, frankly, to last for the next two to three years. And I do think it's a healthy way to build your business. Regardless what I look for with companies that are pitching me or building the next sort of great business is more productivity around. Again, managing the runway, managing the hiring. Being a little bit more conservative in this environment, I think is going to be critical at the same time not to get overly excited on either side of the coin. Right. Again, let's hire 100 people because we had one great quarter. It's hard not to do that, but you got to kind of stay even keeled and then again, be proactive, do things before you feel like you really need to do them. From being somewhat sort of conservative. I think those are the management teams and CEOs being measured. That's going to instill confidence in the rest of their organization as well.

Rajeev Dham
I think that's going to be critical here. And actually, I would posit something different. I think even there's 0.1% of companies, Sidharth, that you may not see any slow down this year relative to last. I think there's 99.9% of companies, even the best and the best that especially relative to the last two years, there will be some slow down doesn't mean they're not great companies. It means, okay, let's slow everything down. Let's reevaluate what's working, what's not, and then let's emerge out of the other side, whether that's next year or the year after, or year after that, hopefully not that long. We can kind of invest in really strong growth more. At least that's what we're seeing across a lot of companies.

Sidharth Kakkar
Yeah. How do you think about, let's say it is the year after or you have to plan around that. Then you start having to ask yourself about the amount of runway you have to make it that long, especially if it's the year after. The year after. And you kind of have to start thinking about availability of VC dollars at that point. And it's like everything is fuzzy right now. Right. Like no one knows what the future holds. But yeah. Do you feel like for great companies, they'll have avenues to be able to survive that long?

Rajeev Dham
Yeah, if you're a high performing company in the top, maybe decile of startups that are out there, there's going to be plenty. Even if some crossover funds maybe invest less, some funds may be less. Maybe private equity funds that thought they wanted to do venture investing they close up shop. You look at Sapphire, I mean, our capital basis grown significantly over the years. We're managing over $10 billion of capital. That might be don't quote me on that, but three to five X just in the last sort of five to seven years. Right. And that's similar to a lot of funds. Like, Sapphire has been doing this for two, three decades. And so just right there in more institutional sort of capital, basically there's plenty of capital left with the best of the best companies. And we're eager. It's not people, entrepreneurs like, hey, are you active or not active? As if I don't want to be active. I want to be active. A lot of companies are raising because a lot of them have capital and they're always advised to go raise because we're sitting at maybe a high valuation. And why take down dilution.

Sidharth Kakkar
We talked about ARR per head. Are there other metrics that you think are really important to generally obsess and then obsess over now?

Rajeev Dham
Yeah, I mean, we all know the gross and net retention, the magic number, I would say a couple that are probably less scrutinized, but I think should be more now and in general, frankly, are one, gross retention. Everyone always talks about this net retention, 130%, you trade a lot better in the public market. I actually think I love companies that can have, ideally 90%, 95% plus gross retention. Just super sticky again, particularly in an environment like this where upselling, if you're due to seats or otherwise might be hard, but you can protect and really take care of your installed base and earn the right to sell them more later on. If you're doing that, I think that's super sticky and super valuable to any business. So I try to pay close attention to that. I know there will be some slippage here because companies will be challenged to renew, but I look at that as a critical metric. For example, if a company has 70% gross retention but 130% net retention, even though it's 130 net, I would still be wary of investing in that company. And then the second I've been thinking about this a lot and I want to find a way to quantitatively measure it outside of percentage of revenue, but R&D efficiency, I think there is this.

Rajeev Dham
The reason why we're all venture capitalists and maybe not private equity folks is because we do geek out to the product too. Even at Sapphire, with Series B onwards I love a really good product that I can feel is solving it. And there's been this conventional wisdom to point at sales and marketing. We know the quota and attainment and reduce this. Your magic number, there's no R&D efficiency metric outside your R&D as a percentage of sales relative to data is not as good. So fix it. That's not good enough. So I do look at those benchmarks and I try to look at really great companies because I think in the last five years, people have spent a lot of R&D and a lot of initiatives that haven't worked for velocity or productivity up there. So I look at the benchmarks of companies from three to five years ago and aligned them to my companies. But I also honestly is about keeping, and it's somewhat challenging the head of product or head of engineering say, what were the milestones you said you were going to achieve? Did you achieve them? How much did you spend to achieve them?

Rajeev Dham
What's the yield? What is the yield on this new piece of product? Those are conversations that for the last five years we haven't had. It's like, oh, that's a great new product that they want. Let's go do it. What's the market opportunity? What's the first two years ARR relative to the engineering spend? Getting a little bit more numerical and accountable on R&D, I think is critical. It's not just a sales quota issue. When people talk about efficiency.

Sidharth Kakkar
How do you think about yield in those situations?

Rajeev Dham
Yeah, one is just holding them accountable. Right. I think that's the first step. How long will this take and is it taking sort of longer than expected? And two is having some sort of multiplier that you think will be sticky. I mean, part of that is also the decision process that they go to. Are we building new products for the sake of building new products? Or can this product, is it being wanted by our customers? Are we listening to the feedback? And is there a big sort of market opportunity? If it's, hey, we have a 100 million dollar business and we think this can grow to a ten, $20 million opportunity and that's going to take five to seven years, that's less interesting to me versus, this is going to be the next leg of our growth, the next 100 million of ARR in the next five to seven years. And therefore let's staff a lot of engineers against it, particularly when you have opportunity costs of not focusing on the core platform. So it needs to be a big enough opportunity and then look back every quarter, two quarters and say, hey, we thought we were going to achieve three of ARR, we achieved 300K. Is this really working or not? Is that because the salesforce is not enabled or maybe the product wasn't good? I think we kind of lost a little bit of that hygiene in time.

Sidharth Kakkar
I totally agree with that. I really think that product and engineering teams should sign up for or take responsibility for ARR in almost the same way that the exec team does. Or, you know, it's not quite the same as a sales leader, but like, they should take a little bit more sort of responsibility for the fact that they do actually drive ARR. They do drive customer retention.

Rajeev Dham
They develop this new product, and I think it's going to deliver 3 million of ARR. If it didn't, that should be part of their KPIs. Right. Right now it's not really. It's like, well, the salespeople didn't sell it enough. Again, everyone has a responsibility in it. I think that's the mantra I'm trying to bring to the boardroom is get everyone aligned, ask everyone, what is the yield? How much are you spending? You'll realize even if there's not a perfect benchmark, an engineer cost you two hundred and twenty five K, and they need to produce that. Even though I do think we should get to that level of regularity in the future, like on a per FTE basis. Per function. What is the yield? We don't have that in SaaS today. Even if it's not that just forcing the conversation kind of helps people second guess and figure out, what do I really want to focus on? Right?

Sidharth Kakkar
When companies are pitching you and you're trying to figure out do they actually have a great product, how do you go about figuring that out?

Rajeev Dham
It's not easy. I probably get it wrong more than I get it right you know, one of the things that we do to at Sapphire is we do a lot of outside in work. I think there's nothing that substitutes great customer references and customer work. And we actually try to talk to customers that churned as well to figure out how negative was it really? Or is it something that can be developed that they would actually go back to the product? So the customer references and diligence that we do is critical. It's nuanced, right. Because you can always find in a customer some persona that absolutely loves the product, but they may only spend $1,000 on it. And there may be ten other tools in that enterprise that they're that enterprise is spending $50k or $100k but that one person you got to loves this thing. Right. But that's the only person in the organization. So you've got to be more nuanced. Is it nice to have? Is it a must have? What's your willingness to pay. What if the price doubled next year?

Rajeev Dham
Or the year after? Would you still pay for it? Interested? Those are the questions that you can okay. I don't just love this product because it helped me out here and there. I would almost want to move jobs if my company did not have this tool. Right. And so we try to get to that level of qualitative understanding in addition to quantitative rank this from one to five with every single customer. And then, of course, from a metrics perspective. Yes. You can have an amazing sales force at selling a bad product and doing so efficiently. But ideally, if it's a really good product, you should see it flying off the shelf in terms of how much inbound and converting the pipeline generation the sales attainment. Usually those are tied relatively well versus pushing a boulder uphill with a product that isn't developed well, or is in a market that's just maybe too small or isn't ready for it.

Sidharth Kakkar
That's such a good point. It's funny because it's a very customer focused view on it. And I personally believe that the expert on my product is not me or our team. The expert on my product are the users who are using it regularly because they understand it a deeper level than even we understand it. It makes so much sense to take a super customer oriented view on what is the quality of the product.

Rajeev Dham
And again, it's about pressing it in six different ways and we rank it on an NPS scale and we measure that versus all the other customer references, calls from the Figmas to the Gongs to this that we've done some of the best calls that we've done. And so that's kind of how we gauge whether there's really strong conviction.

Sidharth Kakkar
It's interesting because some of these companies, they're all phenomenal companies, right? But then there's the fact that they're sort of B2B companies and many of them are top down. And when you're selling top down, sometimes you do end up selling a product that checks all the boxes rather than is like the most wonderful thing in the world to use. And I'm wondering, do you find that like there's cases where you've either invested in or not invested in but looked at businesses which are spectacular businesses by all of these measures, but the product is like kind of crap.

Rajeev Dham
Yeah, well, I would never out any of my companies or any company I looked at to be like that. No, you know, what you just hit on is the reason why. What you do is because it's almost inevitable, right? You're a young company, you have an amazing product that no one else has really done and you sort of do it. Do it. There's copycat, you learn, you grow, you become big and at some point you have so many bells and whistles it becomes complex. Or it's a top down sale. And your distribution is so strong with C-suite executives of Global 2000 Enterprise that the product innovation doesn't really need to keep up because your salesforce and your go-to-market is so strong. So that complacency happens, that will happen, then starts a new company that disrupts that company. Right? And so that's why everybody now, fortunately, we are trying to get it again, with series B, C, D, where we get to ride that trend. Yeah, but we've seen it many times before. We invested in Exact Target way back when and now we're investing in Braze. Right? And maybe there will be a next generation of Braze. I hope not.

Rajeev Dham
So there's always this next generation of business. That's inevitable. We usually don't get in that late stage. I'd like to think all of our companies and products are the amazing ones of the year or decade, hopefully. But that is just a natural form.

Sidharth Kakkar
Yeah, makes a lot of sense. As the market environment has changed and people are focusing more on metrics that they maybe weren't looking at for a while or different things become really important. Like the gross customer retention point is such an important point when net revenue retention is going to be much harder to achieve since you can't get seat based upsells and all that stuff. So, as some of that transforms, I'm curious, what do you think is the role of the CFO in sort of the new environment that their companies are living in?

Rajeev Dham
Yeah, it's a great question. It's so interesting how it's changed. It used to be, hey, CFO, how do I just unlock investment for me so I can grow well. Can you tell a great story to Wall Street when we go public and kind of be a cheerleader a little bit? And I think, again, the last two to four years was just atypical the role of the CFO should be kind of what it is today. And I think the best ones, frankly, from what I've seen, they need to gain the respect, really, of not just a no person, but gain the respect of all the functional leaders, but also be able to stand up to the CEO, the founder CEO, which isn't easy to do in many cases, when they see something that's sort of not right or they think they think they should do something differently, those are the best CFO's that kind of work within the team. They're true top partner. They have the respect of everyone. They can take a holistic view of what makes the business. And it's not just a quick outfit to a financial spreadsheet, but there's people and there's nuances and rhythm to every business and market behind it.

Rajeev Dham
And again, they can kind of stand up to that CEO, the great CFO's I've seen, or can understand trade offs really well. Hey, we're not investing in this. This is what it's going to cost us. But instead we're going to do this. And here's how they pass the three year model. That level of nuance is incredibly helpful. And they give other people framework we were just talking about engineering, right? They give other people framework to think about spend versus yield. And all this reporting in that way, I think that's critical. And then finally giving those functional leaders, particularly the CEO HR leaders, that they have to make decisions is the language they use internally. Obviously, the founder CEO, that's largely comes from them. Right. And their inspiration and storytelling ability and leadership ability. But CFOs can be great leaders too and they should learn. They know the language also to use to kind of walk that line in an organization.

Sidharth Kakkar
Super good point, actually. Related earlier this year, you and your team wrote an awesome blog post called The Rise of the Next Generation CFO. And you wrote about sort of the CFO's expanding area of responsibility. What do you think is the expanding part and what are they being asked to take on? At least the best CFO's and the CEOs who know how to get the most out of their CFO.

Rajeev Dham
Yeah, a large part of that is what we just talked about: becoming more strategic, not just for investors, but internally being a glue person around all of these functional areas versus kind of being the "bean counter" that's just reporting out on things, actually in the decision making process for these things and being a respected leader. So that's one critical area. I also think it's gone beyond purely financial data reporting. I think there's a lot of operational data that, in conjunction with RevOps or other leaders, the CFO is being asked to kind of help understand and understand implications for strategy and market positioning and again, product and engineering. What does the customer journey look like? Analyzing pipeline and funnel metrics. What's driving Net Dollar expansion and splitting that out? The level of detail that we're asking CFO's to go in on these more operational KPIs and then again, drawing that to how does that impact the strategy and positioning of the business? Again, that used to be sort of all the CEO, but the CFO could come up with a lot of these insights based on these more operational metrics as well.

Sidharth Kakkar
Yeah, I mean, as a CEO, it's kind of the dream of someone who's really able to help you think through some of these things and take it kind of to the next level.

Rajeev Dham
Exactly. I think the CFO in this context is kind of the most I mean, the one a most important person in the room in terms of not taking anything away from the other functional leaders. And again, not just because they're saying no and trying to cut costs. It's developing a really nuanced view in the scenario, modeling and protecting the business in an uncertain demand and market.

Sidharth Kakkar
So if you call all the things you just said as like the ideal of what you want your CEO to be, and then if you think about what is sort of the gap that either is true for some companies or a lot of companies, what makes it hard to be at that ideal? Like, what are the barriers for the ideal CFO, for the CFO to be able to do their absolute best, most ideal work? What can leave them not empowered enough?

Rajeev Dham
Well, I think there's a couple of things that's a tricky question. One is always going to be a person, but most things in life are personality, interpersonal skills, EQ. And so every person should always find a setting where they're interviewing and getting along with the folks and they feel like they have a founder or CEO that is willing to be their thought partner right. And willing to be receptive and coachable. And by the way, the best is tricky because the best entrepreneurs and founders and CEOs I've worked with are coachable, even at big scale from their management team and from investors. But at the same time, they take all of that data and they still kind of do the whole thing half the time. And that's what makes them great. And. They end up being right four or five times because they have this gut feeling about their business, but they gotta be coachable. You have to have an open and honest conversation. That's more of a more of a personality thing, I would say, that is there for the CFO. I mean. There's a lot of things from the technology and data perspective. Frankly. That I think just to do the actual tactical work for a CFO or finance team that make it hard.

Rajeev Dham
Whether it's data and all these different silos of billing information or your CRM or your ERP or your general lender. How do you get that into a view of your business that makes sense? That's consistent. ARR can be defined in 20 different ways across 20 different systems? There are those things, of course, as well, that are real challenges.

Sidharth Kakkar
Totally true. It's interesting you just talked about systems. And one of the things that you talked about in the article that I also have found to be I really also believe is that in the future the next generation of finance will be driven by the convergence with data science. And I was wondering if you could talk a little bit more about it and why you believe that to be the case.

Rajeev Dham
Yeah, I think we are seeing, well one, there's all these different data sets. So how do you sort of combine them together and make use of it? That's kind of a data problem in and of itself. One of the things that we're seeing also is that people are dumping all of that data into a central cloud data warehouse, a Snowflake or AWS. And the question is, how do you extract that and make the best use out of that data for insights for the rest of the business, but also for the CFO and finance department. So I do think there is this data sort of science element, whether it's transforming the data or modeling the data or setting up the data schema that is now more involved. I do think that there hopefully will be a next generation set of tools that won't require super deep data expertise, frankly, within the finance organization in order to get access to it. But today I think that's certainly the case.

Sidharth Kakkar
Yeah, I mean, we're very familiar with the requirements of the data knowledge requirements of the finance team because that's obviously the world we live in. So preaching to the choir on that one. The other thing that was sort of one of the predictions you all had was around demand for real time financial data. Why is real time so important for finance leaders to have?

Rajeev Dham
Yeah, it goes back to the environment as well. Although I think from a hygiene perspective, it should always be that way. It just allows folks to react quickly to changes in the market environment right. And better predict the future. I think being able to review your metrics on a daily basis, whether it's a CFO or even transmitting portions of that data to the founder and CEO, I think is critical, particularly for early stage businesses, but I think even for later stage businesses when it comes to certain decisions around again, for example, marketing allocation and resource allocation for certain areas. So if you just make sure you don't have wasteful spending, you're not surprised at the end of the month on how much you burn, how much you spend on certain things. That allows you to be a little bit more nimble and agile and make these resource allocation decisions.

Sidharth Kakkar
Yeah, it's sort of like the CFO's job is to kind of nudge the business on a daily basis to go on the right path.

Sidharth Kakkar
And those nudges kind of add up.

Rajeev Dham
Yeah, that's exactly right. Yeah, they may not touch something right then, but they may get alerted to something that went from sort of a greenish area in their mind to a yellowish area. And then it's worth having a conversation about it and understanding why are things becoming that way.

Sidharth Kakkar
You've invested in some really incredible companies, like best in class companies in their category and SaaS broadly, and presumably you work with some incredible CFOs in the process. So I'm curious, in your mind, what sets a really great CFO apart?

Rajeev Dham
Yeah, I think it kind of goes back to what I mentioned before. An ability to not just read out on the financials. You get the kind of board deck and then they get to the financial section and they're sort of reading every line. Everyone sort of can understand that. But what are the implications of that? Being able to double down and double click on certain sort of misses or spend areas or KPIs and really understand at a very granular level why that particular thing happened and what the implications are going forward. Not just in terms of investment, but again, relating that to product, relating that to market positioning, market maturity. What are they seeing and what are they hearing? Again, it should be someone who's the liaison and gaining the trust and respect of all the other leaders in the organization. So that doesn't mean just Sales give me your budget, Marketing give me your budget, but really hear what's going on. What is the nuance? What is the customer feedback? I always think everyone in the organization should sit on calls with customers and kind of learn what customers are thinking. That includes the CFO. Not just a product person. I think becoming a strategic thinker and a thought partner from that perspective, I think really sets the greatest CFOs apart. And again as I mentioned, not easy to do, but those who can sort of stand up to the CEO. Maybe I'm painting a bad light on CEOs, I love all my CEOs, but it's gaining the respect. Gaining respect of the founder CEO, so they can have a conversation, the feedback is taken, and then maybe persuade them to change their mind from time to time if need be. Very hard to do but the best ones can do that.

Sidharth Kakkar
I mean, that's a total sense. We are all blind to whatever we're blind to and having someone who can sort of alert us to some of those things is just net positive, no matter who you are and how good you are at it.

Rajeev Dham
Completely agree.

Sidharth Kakkar
One of the things that we've seen in working with the companies and CFOs that we work with is the stage at which companies decide to sort of invest in the finance team can vary a lot. Like a lot a lot. And so two part question here how do you think about the right stages to invest and grow the finance team? And two, who is the right type of top finance leader in your company, whatever the title may be at various points in the company's journey?

Rajeev Dham
Yeah, and feel free to ask follow ups if I don't exactly. I think the earlier the better. Do you need a strategic CFO who's taking the company public if you're $2 million of ARR? Probably not. But what I'm finding, one or two or three of ARR the CEO Founder or some other person with great Excel skills is doing all of that work. I'd love to see some sort of even Director of Finance at sub 5 million of ARR who can really dig into the data, understand it, who's done it maybe one time before. You're already out there raising your Series B and that's real money and real capital investment that you're asking from investors and so having your house in order and understanding what it all means is critical not just for investors, but of course for running their business. I think you can categorize, these are just rough, you need a VP of Finance from 5 to 20ish and really have the CFO that you hope can take you to probably 100, maybe not IPO, but probably 100, as you get to about 20 or 25 of ARR.

Sidharth Kakkar
Cool. I think the message that is helpful here is sort of like as soon as you have numbers that are worth paying attention to, make sure you have someone whose job it is to pay attention and guide the business. But then the level of the person will sort of vary as there's more complexity associated with it. Does that sound like a rough summary? Cool. I'm sure you've seen points in your companies when a new CFO comes on board. What do you sort of see the best ones do in their 1st 90 days at least from your perspective. I know that you probably aren't there day to day, but I'm sure you get some exposure as a board member.

Rajeev Dham
It's hygiene in closing the books, even talking about real time. I noticed some of my companies where eventually they realized, gosh, we need new CFO. Maybe I asked them in two weeks after they close and they kind of don't know right, or they're unsure. The first thing that they said was hey, we need to clean this process. We need to clean up this process of being able to close the books as much as you can, and we're not all publicly traded companies and be able to report that out to investors internally. How did we do? And that goes from being quarterly to monthly. And hopefully, as we mentioned, the fantasy is continuous monitoring, which there's barely any tools out there to help you do. But that's kind of the first thing that they do. Yes, of course, they bring in those three favorite people from their prior job. That's any operating leader. Right. But that is interesting in terms of that. That's a trend I've noticed that they kind of started with as well.

Sidharth Kakkar
It kind of ties back into our point earlier about data quality.

Rajeev Dham
Yeah, it really does.

Sidharth Kakkar
That's cool. And one main last question for you, which is as an investor in growth stage businesses, in an ideal world, what's a level deeper you wish your exec team could go in either financial data or SaaS metrics or the way that they like, sort of understand how the business is doing? What's a level deeper that you sort of consistently find?

Rajeev Dham
I'll be honest, even investors don't have the perfect answer to it. It's what I discussed before, which is we all have sales KPIs and even somewhat marketing, but I would like to see more there. Right. Sales, marketing, marketing, variable spend. How should it turn into revenue? R&D. What is good engineering efficiency versus product efficiency. And trying to really tie that to revenue and at least everyone talking about it, I think is critical. But then eventually we're going to get to a place in a B2B SaaS business where we are able to tie that to actual productivity sort of metrics. The other thing I've been thinking about a lot recently is sort of like this natural rate of growth of companies, because we're asking a lot of companies now, okay, you're growing 70%, you're earning $50 million. If you grow 40%, maybe you'll burn proportionately less. I don't think that's the case. Businesses, like, there's like almost like an efficient frontier of growth versus efficiency for businesses based on the product they have, the market and the quality of their team and the market that they're operating in.

Rajeev Dham
Some businesses, the natural rate of growth might be 30%. And that's okay. Let's not keep putting money against this market. If 30% is the rate of growth and we can do that at break even, that's a great business. You could do that for five, seven years ago you'll wake up to this wonderfully, huge business, that creates a lot of value for shareholders. Some businesses can grow at 80% a year and do that without burning too much. So what is that sufficient? It really depends on the business and market maturity. There's not enough discussion around that. I think in the last few years, capital was so free and flooding that everyone was like we just need more capital. That's just not the case. There is some efficient frontier based on the business. What does this business really feel like? They're 20 today. When it hits 200 of ARR, what will it look like?

Sidharth Kakkar
I really like that. I've always been a huge fan of Rule of 40 and found that the companies maintain the Rule of 40 for much longer than one would have thought. It doesn't actually change so much over time.

Rajeev Dham
I agree. That's a great one too. And there's actually a new a lot of VCs now pushing toward Rule of 60, because the top ten or twelve companies, of course, that are valued at 12, 14 X revenue still are kind of more than 60%. But no, I mean, I think 40 is great and something hopefully all of our companies should aspire to hit.

Sidharth Kakkar
Yeah, does look like a lot of folks went a lot below the Rule of 40s. So I feel like 40s is a good place for this and need to start. But you have to get to 40 on the way to 60.

Rajeev Dham
Last year, companies move so fast and so well and relatively efficiently that coming into Q Three and Q Four, you were sitting in budget conversations with companies saying, well, hey, look at us. We just grew 100% at big scale, 50 million, 100 million of ARR. We all had a lot of these companies. Now let's put the pedal to the One X magic number and burn ratios. Let's put the pedal to the medal and hire a lot. And as a board member and as an operator, like, yeah, okay, that kind of makes sense. You just killed it and do it again. Now let's spend more against it, especially if we grow another 100% at scale. And then it's not that the companies became worse necessarily. It's that the demand environment became softer. Now the labor environment became harder too. You have to hire that many people. And unemployment rates, how do you keep the quality bar that high? Right? So between that and the demand environment, it becomes hard. So, yeah, Rule of 40 this year is tenuous, but I do think the best of the best companies will find a way to make sure decisions and get there in the next sort of two years.

Sidharth Kakkar
Yeah, okay. All amazing points. This is awesome. I really appreciate you at the time and all the insights. That's so good.