Pavilion Revenue, Valuation & Funding (2024)

[00:03] I'm Sam Jacobs, and we're really gonna be talking about this shift that I've been writing about on social media from growth at any cost to profitable efficient growth and what the tenets of profitable efficient growth are and how to achieve it for your business and a couple quick steps and hints because a lot of what we're doing and talking about, we try to implement and embody within Pavilion, the company, in addition to Pavilion, the community. So [00:30] raise your hand if you're familiar with Pavilion, the community. All right. So Pavilion is the world's largest go to market community for high growth executives in the world. It's 10,000 members all over the world. It's a paid membership organization. So people pay to be members, companies pay to be members, and we provide education. We provide peer based support. We provide incredible in person experiences, not dissimilar from this. And hopefully, help people accelerate their careers by giving [00:58] them the tools they need to be best in class go to market operators. So that's what the business of Pavilion provides back to its members. It's a recurring revenue business. It's not a software business, but it is a recurring revenue business paid for through primarily through membership dues. And again, I've been talking my name is Sam Jacobs. I'm the CEO. And we've been in the shift from a world where investors were driving a lot of the [01:23] value for organizations to a world where now customers are driving value because growth is driven for at least for us through profit. And so our journey, it should say investor value on the left. But over the last couple of years, particularly in 2020, 2021, investors were driving a lot of the value creation for enterprises. And that's because when capital was not constrained, when there was free money, it meant that people could invest in businesses and growth [01:53] at any cost, and that's where this phrase comes from, growth at any cost was worth something. And the reason for that is because of not exclusively, but because of interest Because if you understand about the net present value and time value of money, you understand that a dollar at 0% interest rates in twenty years is worth the same as a dollar today. And as interest rates go up, that dynamic shifts. It's not the only thing driving [02:14] the compression of multiples in public technology companies and in private technology companies, but it's part of it. And we're not immune from that either. I didn't think when I started this business that it would be a venture backed business, but it turned out three years ago that a company called Elephant Ventures got in touch with me and they wanted to invest 25,000,000. And so even though I lecture and write about go to market alignment online, we [02:37] immediately fell victim to all of the mistakes that we comment other people embody and employ. So we were growing very, very quickly through last year when the tech recession ultimately hit us. And we're not immune. Right? So since the since the summer of twenty twenty run, growth rate of public SaaS businesses have been cut in half. The cost of acquire and this is I just actually did a webinar today. This is this is the mean. Right? [03:05] So on on average, there's been a dramatic increase in the cost of sales and marketing spend to acquire 1 new dollar of annual recurring revenue. If you take out some of the best performing companies from the cohort that did this analysis, which includes companies with incredible net revenue retention like Snowflake, it's actually there are certain public companies that are spending $5 and $6 in sales and marketing investment to acquire $1 of new ARR. So we're in [03:32] a dramatically different environment, and the cost of getting somebody's attention and converting them to a customer has conservatively doubled over the last couple of years, if not tripled or grown four x, while net revenue retention has also declined. And that's particularly problematic because all of these fundamental assumptions are assumptions that underpin the idea from a couple of years ago that SaaS businesses and software businesses are worth 10 times revenue, right? And we used to hear that [04:02] that was a conservative valuation and you could be valued on a multiple of revenue. In today's environment, the actual multiple is five to six times, and that's provided that you have growth. So even though we're moving away from a growth at any cost world to a world where efficiency is prized, the reality is that growth is still worth three x more than profit. But even in even in that environment, it's not worth anything close to what [04:24] it used to be worth. And that's because the technology sector, but particularly the SaaS industry has faced so many different headwinds. So we're moving, and again, I'm sorry about the formatting, but on the left, it should say investor value, and on the right, it says customer value. So what do successful companies need to do in this environment? And none of this is gonna be rocket science, but I wanna make sure that it's 35 slides and and [04:48] fourteen more minutes. So I wanna make sure I hit the bid so that my friend Guy Rubin can speak. So what do you do differently in this modern world? And none of this should be rocket science, but I wanna underscore a couple of things that you can do to align your business around profitable efficient growth. What we know is that, again, no no nothing revelatory here. Retention drives all valuation for recurring revenue businesses. Right? And that [05:12] sounds obvious. And yet, if we go into a boardroom, most of the time, historically, we've been talking about the sales funnel all the way up to the point of sale. We've been talking about new business acquisition, new logo acquisition as the primary driver of enterprise value. But when we do the analysis, we understand that actual enterprise value from recurring revenue businesses is exclude not exclusively, but primarily driven through retention. Again, that's not surprising, but it is [05:39] surprising that we talk more about the presale funnel in most board meetings and most revenue meetings than we talk about the entirety of the customer journey. And so one of the things that we need to do is we need to build up a go to market organization that is focused on talking about the entirety of the customer journey that builds algorithmic customer health scores that lead to retention so that we can understand exactly the behaviors that [06:01] are gonna correlate to retention because retention is the thing that ultimately drives value. So we are focused. We were in a world where we got $25,000,000. We spent it in a lot of different directions. We lack prioritization at the same time that we hit this tech contraction, and there's a big compression on learning and development budgets. And that's why you've seen some flatness in 2023. But now we're growing again. And how are we growing? We're growing [06:27] slower than we were growing from 2020 through 2023, but we are growing, and we're growing profitably and efficiently. So over this is not public information, although it is being recorded, that's okay. But really, since we raised money, we were a business that during COVID had 30% operating margins and was growing 3x from 2019 to 2020. That growth slowed and we weren't 30% operating margins. We were generating significant amounts of cash. From 2021 in February when we [06:58] raised the round through last year, we burned $8,000,000 of capital, which we'd never done before. Now we are generating cash again, we are profitable again, and we're growing. So the question is, you know, what exactly did we do differently? How do we do it? [07:16] Some tenets about profitable efficient growth. All of it fundamentally is about prioritization and alignment. So I can speak specifically about the things that Pavilion did. But the most important thing that I would say up on the screen is capital efficiency is prized in the current market. And what that means is doing more with less. So this year, we're making we're on our top line has grown 15% this year, and we have half the people that we [07:41] had a year ago. If you look at some of the stats that Alina and Nicola presented from Chili Piper, Chili Piper has doubled their ACV, cut their customer acquisition costs in half and also dramatically increased revenue per employee up to $200,000 per employee all over the course of the last year. So part of what efficiency means is prioritization, and part of what efficiency means is really just understanding that you can do a lot of things with [08:07] the same number of people using offshore resources, using AI, and using automation that maybe you didn't think were possible. So a couple of the things that we want to focus on and that I want to focus on right now as we go through this. So first of all, understanding and ensuring that the team understands unit economics. So profitable efficient growth, which is the phrase that I sort of pioneered, but it was inspired by Jocko from Winning [08:31] by Design. Profitable efficient growth doesn't mean no growth. It means efficient growth. Well, to understand if you have efficient growth, you need to understand your unit economics. So a couple of and it's this is a frustrating because the fonts you can't see. So let's see what we can see. What's next? No. Dang it. I'm sorry. What you see here is customer acquisition cost, gross margin, lifetime value, LTV to CAC, payback period, and churn. Right? Those are [08:58] the the key metrics. The point is, there's there's four fundamental assumptions that underpin, you can't see anything. It's a blank screen. I'm I'm spinning a story here. This is it. This is the most important slide that you will see over the course of the next three years in your career, and it's all in white. So here's the point. There are four fundamental assumptions that underpin recurring revenue businesses, right? You spend a certain amount of money to [09:28] acquire a customer. They pay you back over a certain amount of time. It costs you a certain amount of money to service them, and then they stick around for a certain period of time. And all of those fundamental assumptions are the reason why in any given period, we can spend more than okay. Oh, that's good. We're fixing it on the fly. There we go. Oh, it's beautiful. Alright. There we go. There we go. Okay. So the [09:53] point is, does your team understand how all of this works? Do you understand how to calculate customer acquisition cost? Many people say that they do, but then they don't do the calculations properly or they leave critical things out. Do you understand how to calculate lifetime value? It's gross margin contribution per customer. It's not revenue per customer. Do you have an accurate assessment of lifetime value? Again, what the the fundamental premise of profitable efficient growth is that [10:16] you understand what efficiency is. Can we do the same thing that you just did for the subsequent slides before I click over to him? There we go. Good thing he's not an AI bot. I know. He's he's act he's more he's quicker and it's less generic. So the point is the first thing that we do is we publicize and we publish our unit economics to the company on an ongoing basis. And we've got thresholds that tell [10:40] us when we want to invest and when we don't want to invest. We're trying to solve backwards from five to one lifetime value to customer acquisition cost. David Scott, the founder of Matrix Partners, one of the early investors in HubSpot, he talks about three to one being the benchmark. But the point is, if your company doesn't know what your unit economics are, if you don't know how much you're spending, then it's really hard to drive efficiency [11:01] because it can't tell you how to throttle forward or back. The reason that unit economics are important is because they tell you, can you spend a certain amount of money on growth or not? Right? If you have very, very high churn, it doesn't mean that you're not allowed to have a company. It does it just means you can't spend as much on sales and marketing as you would normally. So higher retention, the more you can spend [11:24] on sales and marketing to acquire a customer. Again, the fundamental premise of all recurring revenue businesses is we can spend more on acquiring a customer because we have a point of view on how long they're going to stick around. So if we don't have a point of view on how long they're going to stick around or we don't have any predictability, then obviously, we can't spend as much to acquire them. What they also tell you though [11:44] is whether your business is in alignment with growth or not. So I wrote this week, you know, growth is not a right. It's the privilege of companies with good unit economics. The point is your business will tell you when it wants to be invested in, it will tell you when you shouldn't be invested in. Anything below three to one LTV to CAC, and in my experience, again, this is a little bit more controversial you see on [12:05] the screen, but this is payback period. And, you know, we've been told for a long time that twenty four to thirty six month payback periods are acceptable in SaaS. I would posit to you in a world of higher interest rates that really we need to be solving backwards from twelve to eighteen months. And so again, we can talk about how to calculate magic number calculation is revenue, really gross margin contribution in this period compared to sales [12:31] and marketing spend in the prior period. But the point of it is that we want to solve for payback period. We want to solve for LTV to CAC. So what does that mean if you have a 2.5 to one LTV to CAC or you're getting paid back in thirty six months? What it means is that you have a problem with your business that is manifesting in retention, and what you need to do is slow down your [12:49] growth investments so that you can fix the retention problem because fundamentally, retention is what drives enterprise value. So What's the count again for payback period? Can you slow down on that? Yeah. Sure. Payback period would be sales and marketing spend, customer acquisition cost over average revenue per customer, right, roughly. And then you take that in a given time period, it could be over a year, it could be over thirty days. What you would do is match [13:13] it to the sales cycle, typically. So if you have a thirty day sales cycle, how much do you spend on sales and marketing in that period, customer acquisition costs over your average revenue per customer in that period, right, however much they contributed per new customer, right? But it's really average gross margin contribution per customer. So if you have 80% margins, they pay you $10,000 on average. It's $8,000 in terms of gross margin contribution. You compare that [13:40] to what you're spending on sales and marketing. And obviously, again, this is not rocket science. And nevertheless, many people don't do these calculations. So let's say you're spending $8,000 on sales and marketing in January and you get $8,000 back from customers on average in February, you've got a very good business there because you spent $1 you get $1 back. Then everything that happens after that, there's subsequent renewal periods, all of that is free cash flow that [14:10] contributes to your operating expenses, right? So what would be a bad situation? A bad situation would be, you spend $20,000 to acquire a customer that contributes $5,000 in gross margin contribution. Then it's going to take you four of those periods to pay get paid back. Now why is it and again, this hopefully, this isn't life changing information, but why why is it bad? Why is it bad to be paid back over a longer period of time? [14:33] The first is it ties up your capital in that sales cycle, right? So it's bad for your balance sheet, but it also requires a much higher predictability and point of view on what's going to happen in the future. So imagine that you have a three year payback period. What that means is you put a dollar in at the top of the machine in 2021, and you don't get that full dollar back until 2024. Well, has the [14:56] world changed from '21 to '24? I would think we would all agree it's changed a lot. So the other problem with long payback periods is it requires a point of view on the future in a world that is increasingly uncertain. The benefit, the other side of that equation is what happens when you put in a dollar at the machine and you get back a dollar very quickly. It means you can accelerate growth because you can put [15:16] that dollar back into the top of the machine again and again and again. And that's why we like quick payback periods. Yeah. How [15:25] do you shorten it? You shorten it by spending less on customer acquisition or you increase your average revenue per customer. So those are the two ways. So how do you do that? Well, you know, that's a story for more than three minutes from now. So we can talk about this, and I'll stick around afterwards. But the fundamental point, because it's a a condensed time period is, do you know your unit economics? If you don't know your [15:49] unit economics, you should calculate them. The next logical question you will ask is, we're a seed stage business. We really don't we only have five customers. Is it logical to calculate unit economics? The answer is no. Not really at that point. But once you get past ten, fifteen paying customers, you're approaching 1,000,000 in recurring revenue, then it does become useful and important to calculate them. But regardless, let's have a point of view on it. What you [16:10] should see over time at the beginning, because you're not paying yourself very much money if you're running a start up, you've got a bunch of contractors, you don't have an executive team yet, you'll see very, very high LTV to CAC. That'll come down over time as you staff up the team. But what you always want to be doing is monitoring it on a trailing ninety day basis to figure out, am I in or out of product [16:29] market fit? Because your LTV to CAC and your payback period, those are indications of, am I in product market fit or not? Because they indicate whether the cohorts are renewing. If your cohorts are not renewing, then you're out of product market fit. Okay. So that's thing number one, and that took all of the time that I have. So I'll run over just a little bit to say the next thing we want to do because we're driving [16:50] efficient growth, and efficient growth is driven by retention, is driven by retention. So we need to map and analyze the customer journey. This is the customer journey that we have mapped and analyzed over the course of twelve months with a new Pavilion member, a customer of ours. You don't have to do it this way, but you do need to do it. And here's the point of the customer journey mapping that I would encourage you to understand. [17:11] We're looking for time to value. We're looking for the moments that light up and that drive delight and that lead to overall retention and engagement. What you see there is the bow tie. This is the good path again in all white, so we'll skip to the next slide. But here's the point. Your customer journey, if I can leave you with one takeaway because somebody approached me in the hall and said that this insight changed his business [17:36] the last time I gave this presentation. So here's the one takeaway. You're analyzing your business. You're looking for profitable efficient growth paths, and you think that the issue is pricing and packaging. Most of the time, is not pricing and packaging. Right? So most of the time, the reason that you have the the easiest thing to solve for if you are solving for retention for your customers is failure to launch, which means your onboarding isn't designed properly. [18:00] So when we've looked at our business, the original inclination was it's a bundle. Our membership business is a bundle. Add more stuff to the bundle. Maybe one of the things in the bundle will drive to will lead to higher retention. What that did was create a lot of confusion and uncertainty about how to use the product. And when we looked at how many customers were actually onboarded when they signed up and completed their onboarding journey, it [18:22] was a very low percentage. So one of the things you can do for your business is just make sure, does every customer not just get assigned an implementation manager, but do they complete an onboarding experience? The purpose of that onboarding experience should be directly tied to an activity or action that you believe drives high customer engagement leading to renewal. So I'll give you a specific example from one of the great SaaS businesses, Salesforce. So at first, [18:47] Salesforce had this idea, right, that all you needed to do is load your data into Salesforce and that would drive retention because they had act they had all of your data. They did a bunch of analyses and they realized that that's not what drove retention. And what actually drove retention, the quick time to value, was getting people to build dashboards in Salesforce that were then emailed out to key stakeholders. So they redesigned their onboarding program to [19:11] align towards that high value action, which was getting somebody to build a dashboard as opposed to getting them to just enter the data into Salesforce. So again, map your customer journey, identify the high value actions and activities, and then make sure that you're driving your onboarding experience towards activities that you understand are differentiators for your product and that will lead to high engagement post onboarding, which would be, you know, the period from really thirty days into [19:36] the customer journey all the way up to the first renewal. Alright. Almost done. Last thing I will tell you is if you are an outbound driven or a human driven sales and marketing engine and you wanna think about, you know, how do I make more money? How do I lower my customer acquisition cost? One it's ugh. Sorry. This doesn't work. Alright. So the point is, next year, we'll do it better with black font. Here's how you [20:04] do it. You just understand. Raise your hand if you know what the calendar test is. Okay. So the calendar test is before you hire any new reps, open up the calendars of your existing account executives and figure out how many meetings are they having with external parties every day or week. And the answer is if they're having fewer than 15, and it doesn't have to be net new meetings. But if you imagine that to do a [20:27] really good job, you're using some kind of tool to do meeting transcription and follow-up action items like Ebsta or Otter or something like that, you can probably have about three good high quality meetings with external parties every single day. That's about 15 a week. So if your reps don't have 15 meetings a week, then what that means is one of the ways that you can drive improved efficiency is by reducing the number of reps. I'm sorry [20:50] to be callous like that, but the point is great companies are routing more resources, meaning their best leads, to high performing reps. And what you'll realize when you do the math is that you can actually generate more money because there's a compounding effect from routing more leads to fewer reps. The first is improved win rate. So if you have a rep that has a 10% win rate and a rep that has a 15% win rate, obviously, [21:13] that's every time you send a $10,000 average deal size, you're losing $5,500 every time you send it to the lower performing rep. The second thing that happens though is that better reps tend to have higher average deal sizes as well. So they have higher close rates and higher deals average deal values, which means that that compounds to a much it's probably something like 50 greater productivity or 75% greater productivity from a higher performing rep than an [21:39] underperforming rep. So again, what does all of that mean? And there's companies like ZoomInfo that pioneered almost like a Champions League idea of relegation and promotion where to get the best leads, you need to perform at a certain level. And if you perform under that level, then you you go down to the tier b. You get b leads until you can demonstrate that you're achieving a certain level of performance to get to the a leads. But [22:02] the point is, just understand, if you look at your sales team, it can be true for five people, 20 people, or three people, you open up their calendars and you say, there's capacity in this system. There's capacity because, again, a great person that does all the follow-up, does all the meeting prep, has a really engaging conversation with a thirty to forty five minute discovery call, that person can do about three calls a day. That's 15. Most [22:25] of the time when you open up your meeting and you x out all of the you open up the calendar for your reps and you x out all the internal meetings, maybe it's two, three, four. You know, in a world where cost of acquisition has dramatically increased, it's because it's harder to get somebody's attention. That means that every lead that we have is even more precious. And that means we need to route them to the people [22:43] with the higher win rates and and the higher average deal size. So let's see. I'm not going to do that. I will send these slides out to everybody afterwards and make sure that they're not written in all white. But the point is close rate and ACV drive the engine. And you can have much better experiences with a smaller sales team routing all your leads to those people. So the three things I would encourage you to do. [23:07] Again, remember that the first thing is make sure that your company understands unit economics and that you understand where your unit economics are. Your unit economics will tell you if you're in or out of product market fit as you approach at least a million in ARR all the way up to a billion in ARR. Right? So that's the first thing. The second thing is orient, map your customer journey and figuring out where do you need to [23:29] align activities that create the highest engagement for your customer so that that can lead to retention because retention drives recurring impact, which drives recurring revenue. Right? So and and the specific tip I would give you is don't assume that everything is pricing and packaging. Assume let's start with onboarding. Let's start with making sure that we're clearly explaining how our product works, and we're orienting the customer around high value actions that we think will lead to renewal. [23:53] And the third thing is you can probably make more money with fewer salespeople. That's it. Thanks very much.

[00:00] Quick context. This was recorded March twenty eighth and twenty ninth. So a couple weeks ago at my live event, saasopen.com. We had a thousand software CEOs there. If you missed it, we hope to see at the next one, September fifth and sixth in New York City, saasopen.com. But for now, let's jump into the recording. [00:21] >> Let's kick it off. I'm gonna be talking about really the themes if you're familiar with sort of what I've been talking about on LinkedIn. It's a combination talk, the history of my company Pavilion. Raise your hand if you're familiar with Pavilion. Okay, great. There you go. So you know what it is. Hopefully, it's the largest community for go to market executives and rising executives in the world. Our goal is to help everybody in this room and [00:47] >> everybody at high growth companies unlock and achieve their professional potential, which really means there's learning, there's community, there's events, and there's insights that we bring together to help you get where you wanna go in your career. At the same time, Pavilion is also a company. And what I wanna talk about over the next fifteen or so minutes is just the evolution of our company because as much as I pontificate on social media as if I have [01:12] >> all the answers, the reality is that I've made all of the mistakes that I'm commenting about in the world at large. So why not dive a little deep and build in public and show you some of the decisions that we've made, where we've emerged on the other side and how I think about the future because 2024 is a very different world than, 2021 or 2020 as we all know. So, this is how we got started. This [01:36] >> is our one of our very first dinners in New York City. Pavilion emerged really as a support group for chief revenue officers, VPs of sales, specifically in New York to come together and to help each other. I had no, real intention of building it into a large business, but it turned out that we had a point of view. We had a point of view that revenue executives needed support, they needed education, and also they needed information [02:00] >> about not just how to run their companies but how to manage their careers more effectively. And that idea took hold all over the world and we we developed chapters. We have a chapter here in Austin. We have a chapter in San Francisco. We have chapters all over the world at this point and we have over 10,000 members. And so this was a picture from probably from GTM twenty twenty three in Nashville, was our big conference. So [02:21] >> this was primarily intended to be a bootstrap business and for the entirety of our our existence, this is just some additional demographic data, but it's not really that interesting. I think what's interesting about this talk and the reality of the world that we live in is really this line compared to this line over the course of the last couple of years. And so and it for better or for worse, it coincides pretty closely with, our taking [02:49] >> in outside capital, which doesn't mean that outside capital is necessarily a terrible thing. But I want to talk about the shift from profitable efficient growth, really from growth at any cost to profitable efficient growth. You can see that our journey, I started working on this full time really five years ago, in this city. So five years ago, pretty much this month, I had moved to Austin for a couple of months and I had begun working on [03:13] >> Pavilion full time and it was completely and and really really largely, to this day remains almost entirely word-of-mouth driven, almost entirely organic social media driven. We don't really do paid acquisition. We don't really have at this point, and I'll talk about that evolution. We don't have much of an outbound, go to market machine, and we've learned a lot of lessons along the way. And then what happened coinciding with really the the tech, economy downshifting, the rise [03:42] >> of interest rates, and the, entry of the world that we live in is that our growth really, has has shrank. Right? And we've moved from a world where we were growing and all through here, all through 2021, we were extremely profitable. And then what happened at the beginning of 2021 was that I got a call, from Elephant Ventures. And again, effectively Pavilion has been really a dinner club, a membership organization and association. Never intended it to [04:10] >> be a venture driven business, but I got a call and this was sort of the height of the bubble, right, or the height of peak ZERP as you might say, peak zero interest rates and Elephant Ventures emailed me. I had just had a conversation with a friend. We'd just gone from $1,000,000 to $4,000,000 in ARR, and a friend of mine had said, you're probably worth one to 1.2 times revenue. And I said, I don't really [04:31] >> know of any company that grows four x in a year and is only worth one times revenue. And that was the moment that Elephant Ventures emailed me and they said, if you give us a look at your financials, we can tell you what we think the relative valuation is. I said, well, I just had a fight with my friend, so I would love to get your read on the relative valuation. And, I sent them, by quarter, [04:51] >> they came back and they said, we think it's worth roughly [04:57] >> $80,000,000. We're gonna put in this amount of money post money valuation. We think it's gonna be we're gonna put in $25,000,000. It's gonna be worth roughly $100,000,000 to $105,000,000. And, I said, wow. Okay then. And and that was the beginning of a of a different, period of evolution for us. And again, coinciding, it we had good growth in 2021, but for the last couple of years, the growth has slowed a little bit and I've made a [05:24] >> number of strategic errors, I would say. But also, it's been emblematic of the times, I think. So what are we talking about in this world? Well, in a world of growth at any cost, investors control the company largely. Right? So what is the shift that's happened over the last couple of years? The shift that has happened as we've begun to focus on efficiency. When you're burning capital and when and when you have 0% interest rates, what [05:50] >> do 0% interest rates represent about future cash flows? Right? Fundamentally, if you go to finance class, you'll you'll you'll learn that companies there there are multiple ways to value a company, but the essence, the foundation of how to value a company is discounting all of the future cash flows back to the present day. Right? And what happens when you have 0% interest rates, when you have free capital, is that the optionality of future cash flows even [06:15] >> in years ten, twenty, thirty are equal to the value of cash flow today, which is why it made sense in the old world to burn capital so aggressively. Because if even there was a chance at realizing some kind of outcome in years ten, eleven, 12, thirteen, '20, right, all of those years, those out years where you were making a bet on the future, all of those years were effectively worth the same as the years today. Now [06:41] >> that's not historically true. Right? Historically true, is that interest rates themselves discount the cash flow so that cash in ten years is not worth the same as cash today. Cash today is worth much more than cash in ten years. But in a 0% interest rate environment, that's not true. Any optionality on the future is equal to the value of today. If you think there's even the slightest chance that you can generate a $100,000,000 in cash flow [07:05] >> in 2055 in a zero interest rate environment, it makes sense to invest against that reality. And that's fundamentally why there was quote unquote growth at any cost, and that's why the equities markets were so inflated because there's a direct relationship. It's not perfect, but there is a direct relationship between the value of equity, right, and the discount rate that you're applying to it, which is effectively the cost of money. So in that world, and we were [07:30] >> we fell victim to that world in a way because what happens when you take in all that capital is that the race for market share becomes the preeminent and predominant race. And what we saw over the course of the last couple of years is that all of the companies were driven by investors determining the outcomes because we needed to deploy that capital. And when you deploy that capital and you're burning capital, right, when you're spending more [07:55] >> than you make, at some point, one way or the other, the people that own the company are the investors. Right? Now what happened over the last two years as the Fed and other central banks have raised interest rates is that we've shifted to a different world. Again, mathematically, mathematically, as we shift into a different world, the value of dollars today becomes much more valuable than dollars tomorrow or dollars in ten years. Right? That's one of the [08:22] >> things that happens. The other thing that happens is that efficiency becomes more valuable because again, profit becomes more valuable because again, money isn't free, profit becomes more valuable. And as a consequence of profit becoming more valuable, maybe we look at the relationship between growth rate and profit. But one of the great things about the world that we live in, it's a diff it's a different world. And one of the points that I wanna make right here [08:45] >> is that even even in a world of zero interest rates, right, I don't think this is not a moral judgment and there's no moral condemnation about companies spending more, than they bring in. It's a rational reaction, to the markets that we were in at the time. But we moved to a different market. What are the one of the benefits of this market? The benefits of being a profitable company is that your customers control the company, not [09:07] >> your investors. And that's really the essence of this slide. It's a harder route, right, because your customers are in many ways more demanding, more rigorous, and you need them to stick around, but it's also a more effective route because you know that there's real value that there's that you're generating. So that's, you know, and we were in a world so using pavilion as a specific case study, how did we approach this world where all of a [09:29] >> sudden we had $25,000,000 that we never had before? Well, we expanded dramatically in a lot of different directions. That's one of the things that we did, right? So we had been a small bootstrap business and a lot of what Nathan talks about at Founderpath and through this conference is about the value of bootstrap businesses and I'd always been proud to be a bootstrap business. But all of a sudden, had this big balance sheet, and I felt [09:51] >> like we needed to gain market share and we needed to go go go. So what did we do? We built out a large b to b sales organization. You'll hear about that later from LG who who who is there and who we worked with. We built out a large learning organization and we started paying our instructors a lot of money to build Pavilion University, which was a new strategic investment. And we also built out a product [10:12] >> and engineering organization to build our own software. And one of the great lessons that I would share with you as you're thinking about your own growth is not not to invest in the future, it's to size your bets, to size your investments so that that they're proportional to your balance sheet and they're proportional to your ability to absorb them. But what happened for Pavilion over the course of the last couple of years really ending last year [10:35] >> was that we didn't really size those bets relative to our balance sheet or to our ability to absorb them. So we built out a large for us, large product and engineering organization, large learning organization, large sales organization. Right? And we didn't we didn't really have the the data to tell us that we should. And all of a sudden, we went from being extremely profitable and this was really, you know, I I've talked about this on my [10:58] >> podcast top line. If you I think it's pretty good. So if you wanna subscribe to it, you should. But the point is I've talked about how we took a business in 2021. We did we had, I think, 30% operating margins. Now remember, a community business in 2021 and 2020, not the same thing because we had no hard physical costs. Right? We weren't doing this. Everything was on Zoom, very high margin on Zoom, low margin to come [11:22] >> here, fly here, eat food, and, and hang out together in person even though it's much better. So we went from, really profitable immediately to burning significant capital in 2021, 2022, and 2023. Right? And all of a sudden, we were in a very different posture and a very different position. So what are the lessons that I learned? Well, a year ago, a year plus ago, as we were facing, what became, you know, twenty twenty three, which is [11:49] >> really difficult year for tech, I went to the board and I said, well, what do you think the business is worth? And they said, well, if you if you get to profitability at this growth rate, it's worth this, which was effectively like two to three times revenue, which isn't a great outcome. They would have lost money on that deal if I tried to sell the business. One of the other lessons by the way is if you're [12:10] >> asking your board what the company is worth, it's probably not worth very much. And if you want to sell the company, it's probably not worth very much. Companies get, bought not sold. So I said, well, what if the business has this growth rate but is unprofitable? And they said, well, then it's worth zero. Then it's worth zero. That's a pretty tough message to hear. We had 10,000 members all over the world. We have chapters all over [12:30] >> the world. We help a lot of people do a lot of great things in their lives. For me to process that idea that, the business could potentially be a zero over the course of last year was really, really difficult. So we had to take action. At the same time, over the last couple of years, we're not the only ones. Right? So we've moved from this world of growth at any cost, growth rates, this is across a [12:51] >> data set of a couple thousand both private and public companies. This is taken from Winning by Design, one of our big partners, but we know that growth rates have declined while client acquisition cost as a percent of revenue has also increased. So as we moved into this world that I'm describing from 2023, that was the environment that we were operating in and we had to make a really difficult decision about what the business was going to [13:14] >> look like going forward. So net revenue retention also decreasing, right? It was a lot easier to have high net revenue retention in a seat driven model if everybody was hiring more people and every sales team was expanding in a world where everybody's consolidating down to more rep efficiency, seat driven model is going to be questioned and there's a lot of people talking about usage based consumption pricing, not seat driven pricing because buyers want more flexibility in [13:41] >> how they allocate costs. Right? And at the same time, you've got a bunch of other disruptive forces right now for growth stage b to b businesses, largely automation, offshoring, and AI. That means that a lot of services that were premium services, the most prominent example of which would be call transcription and recording, that used to be a whole company worth $7,000,000,000. Now that's a feature of most revenue platforms and a commodity feature at that. Right? So [14:06] >> we're in this really difficult environment where NRR is falling, client customer acquisition cost is increasing, growth rates are decreasing. Another data point that I would give you that was just verified is that, you know, it used to be growth at any cost, which means that growth really was worth almost not infinitely more, but probably maybe 15 to 20 times what free cash flow was worth. Today, we're in a world where growth is still more valuable than [14:31] >> free cash flow, but only three to one. Right? So growth is now compressed from being worth probably 15 to 20 to one down to three to one. We still want growth. You still are not gonna get a premium valuation without growing, but efficiency and cash flow, is is much better for the business. So this is the world. Now what builds durable business is what builds great businesses. It's really retention. Right? It's really retention. And so we [14:59] >> and if you look at the companies that drive kind of logarithmic exponential growth, the companies that drive the best growth over time, those are the companies that are focused and obsessed about their customers. And when we talk about customer driven value, that's what we mean. We mean customer driven growth. And one of the problems that we saw both at Pavilion and with many other businesses is this lack of an understanding about how to orient instrumented architect [15:23] >> customer driven growth. Right? And what you need to drive customer driven growth is you need some kind of concept that views the customer journey not just as the presale funnel. Right? So this is the bow tie. This was popularized by Jacco at Winning by Design. But the point is as we in a in a growth at any cost world, the world that we used to live in, the left side of, this of this, idea, was most [15:48] >> prominent. Right? And raise your hand if, in most of your board meetings, spent most of the time looking at pipeline, most of the time looking at new business acquisition, most of the time looking at your win rate. Why is that? That's because your funnel presale is really well architected. We know what leads are. We know what SQLs are. We know the dollar value of pipeline. We know is the close rate, but most people have not had [16:11] >> the right side meaning post acquisition. Most people have not had that part of the funnel. They don't even think of it as a funnel, to be completely honest with you, and it hasn't been architected. And and when it when it's architected, it needs to that can drive the behavior. So what are the things that underpin this bow tie? The first thing is a common set of data, a common set of data and governance around who controls [16:34] >> the data. One of the things that the bow tie gives rise to is the rise of revenue operations as a critical department within the go to market organization. And that's because you don't want the sales team and the marketing team and the CS team to all have different datasets. There needs to be one set of data and you need to have that data that aligns customer intervention, customer activity, effectively a customer health score, but that clearly [16:55] >> correlates it to renewal and to customer delight. Right? And that's perhaps obvious, and that's why, you know, there have been the rise of platforms like Catalyst and Totango, but it still hasn't been done. It's still true that most of the time we're going to look at new business. We're going to default back to what's happening on the new business side, and we're not gonna be looking as closely or as rigorously around what's happening on the retention [17:16] >> side. And again, what's the point that I'm making? The point is this was okay if we only looked at this half in a world of growth at any cost because the only thing that mattered was growth. So we could throw as much money as we could at growth that would drive valuation. We'd get 40 times ARR or some crazy multiple, and it wouldn't really matter what retention looked like or what our ongoing customer, activity looked like. [17:38] >> It was still true that we talked about best in class companies like Snowflake with 180% net revenue retention, but the fundamental fact was that we weren't instrumenting. We were talking about it a lot, but we weren't instrumenting the customer journey against our businesses in the way that would drive ongoing relationships with the customer. So that's now we're in a different world where we have to focus on the customer because we are not allowed to spend as [18:01] >> much money as we would wanna spend on growth at any cost. We're in a world of profitable efficient growth. It doesn't mean we don't wanna invest in growth. It means we wanna size our bets in growth so that we understand what the relationships are, what the unit economics are, but we really want to worry around the customer because we know that the customers are fundamentally the things that are going to drive long term value for the [18:20] >> business. Now of course, again, if you're in the world of recurring revenue business or really in any kind of business, that's always been true, but it's more true and more acute today than it ever has been. And that's why, you know, what's one to do coming out of this brief talk because I only have a minute and fifteen seconds left. One to do is let's make sure you have a data layer that integrates post acquisition with [18:41] >> pre acquisition. Let's make sure that in the board meeting we're talking about customer health. We have an algorithmic perspective on customer health that unites the activities that we think drive value and that lead most closely to retention. Third, let's make sure that we're using some kind of framework you can call it SPICED, it could even be MEDDIC, but let's use a methodology post sale in the same way we'd use a methodology presale. Right? So guy will [19:07] >> tell you that that sales teams that use MEDDIC or some kind of qualification methodology presale close at much higher rates than people that don't. We need the same kind of methodology for renewals. When we're committing a deal for renewal, it can't just be I think they're gonna renew. It has to be against a specific methodology in exactly the same way we would expect the pipeline presale. Right? So those are some of the lessons that I think [19:29] >> we've learned. Now what, you know, what's the world that we live in today and and what's sort of like the end of the story? By the way, this slide right here, this is just a a spread away. This is how HubSpot thinks about designing their post sale funnel and their presale funnel. And one of the things that they do is they try to articulate specific activities that are gonna drive each of these behaviors. What's my favorite [19:54] >> example of these kind of time to value activities that you can use in your pre and post sale funnel to drive retention and expansion. Here's my favorite example. In the old because it's not always intuitive. Right? So in the old days when Salesforce was still was was first coming up, there was a belief within the CS organization at Salesforce that getting your data getting your data into Salesforce was the single biggest thing that would leave lead [20:20] >> to retention. Right? Once they have your data, it's very hard to get it out. That would likely lead to retention. It turned out that that was not true, and that the thing that led to retention most closely and the clearest time to value within Salesforce wasn't getting the data in, it was building a dashboard that, you know, those beautiful visualized dashboards that I feel I first saw them through Salesforce. Sugar CRM did not have them when [20:42] >> I was looking at CRMs in 2003. That, a beautiful dashboard that was emailed to a key stakeholder like an admin or a key economic buyer or decision maker. If you got the Salesforce pipeline dashboard or activity dashboard emailed to a key stakeholder within some period of time, it was probably sixty days within signing up for Salesforce, that was the activity that most closely led to retention. Right? So once they knew that, all of their onboarding activities [21:07] >> directly drove to getting the dashboards emailed to a key stakeholder. And that is an example. Now HubSpot, of course, is, you know, view Salesforce as one of the biggest competitors, but the point of this exercise is how do we identify the key activities particularly particularly post onboarding and through onboarding. One more thing I'll say before I wrap up, the talk, there are a lot of different reasons why people churn. And if you're facing a retention issue [21:31] >> in your business right now, those I don't know if I can remember all of them off the top of my head, but I will tell you that most of the time everybody in this room is gonna think that pricing, packaging, and effectively what you would describe as product market fit, meaning features are the reason that people are churning. And it's possible but not likely that those are the reasons. The biggest thing that you can do to [21:54] >> drive up retention is not change your price and is not add a new feature. It is fix your onboarding process to drive time to value. Most companies and most vendors do not spend enough time and you have a whole category of customers that you would consider to be failure to launch. They never get to the right place through the onboarding process or it doesn't happen quickly enough And as a consequence, they never enter your ecosystem in [22:18] >> the way that it maximizes their opportunity for success. So if you're thinking about and related to failure to launch, meaning poor onboarding is poor communication, poor product marketing. Right? So you think that it's my price is too expensive. I need to lower the price. Need to add more stuff, take out some stuff. Really what it tends to be is communication product marketing and then effective onboarding. Those are levers that you can do without changing anything else [22:41] >> about your product that can improve your retention and drive higher LTV. So wrapping up, where did we get to? And in Pavilion, using Pavilion as an example of some of these ideas, we were in this world of growth at any cost, we moved to profitable efficient growth. What does that mean for Pavilion? For Pavilion, that means that we entered 2023 with 62 full time employees. Today we have 27 full time employees. What is other, what's another [23:06] >> ramification? The biggest change that we made is and there's twofold and I'll get to them and then we'll bring on the next speaker. But there's two big changes that we made. So again, first is if you're looking to grow size your bets, right? So one of the things that people ask me these days is they say, how are you thinking about hiring? And I'm saying, I think about hiring in ones and twos, not fives and tens, [23:28] >> right? So again, your business and your access to capital might be different, but I would encourage you to think about hiring in a tranche way, tranche relative to your balance sheet. So not hiring 20 people when you just have three account executives. Let's hire two people and let's see how they do. So that's thing number one. Thing number two is let's focus on what we're good at. For us for us, we're a community business. We're effectively [23:51] >> an events business. We're good at content. You know what we're not good at? Building software. We're actually not very good at building software. I didn't start this as a software company. I'm nontechnical. And all of the people that said you need your own software in order to build a big business, those people I don't agree with actually. And I realized when we were looking at our balance sheet and we're looking at our p and l and [24:12] >> our income statement that the size of the product and engineering organization almost exactly matched our monthly burn. And I also realized that the stuff that we were building was actually pretty commoditized. We use a platform called Hivebrite, which is an Insight Venture Partners company to launch our member hub. We were building our own member hub internally. It would take in two years and was about $2,500,000 a year to spend on the product engineering team, and it [24:36] >> was gonna be about one one hundredth as effective, interesting, or exciting as the member hub that we launched two months ago in in January. Right? So that if you're a software company, that doesn't mean stop building software, but that means you might not be a community business, you might not be an events business, and you gotta focus in a world of profitable efficient growth on what are the things that you are truly differentiated at, what are [24:58] >> the things that you're truly exceptional at, and tripling down on those things, and then stop doing the things that you're not gonna be great at. What good is it for Pavilion to build an its own software when there's commodity software off the shelf that is 10 times better, that has a mobile app, that has all kinds of data and analytics? So that was the biggest change that we made over the course of last year. So where [25:19] >> are we today? Today, we're growing again. Today we are generating cash. We've generated we're cash flow positive in January, February and March. Our unit economics are back to healthy margins. We're four to one LTV to CAC on both our corporate membership side and our individual membership side. We're ready to invest in growth again now that we've stabilized the business, but it took a lot of hard decisions. Those are decisions that a lot of us have made. [25:41] >> And the last thing is what's the number one initiative currently inside of Pavilion? What do we just spend an entire off-site on? We spend it on the member journey. We spend it on our customers. We are not talking about growth. 2024 is not intended to be a year of massive growth. 2024 is intended to be a year of focusing obsessively about the experience that our members have, everybody in this room, focusing on the customer, being prescriptive [26:05] >> about the journey that you're intended to go on, mandating onboarding. Right? Mandating onboarding. We have a self sign up flow. Those people churn at three times the rate that people that have an interaction with a customer success manager or an enrollment manager. Right? So that's a channel that has some issues. We're gonna fix onboarding, we're gonna focus on the member journey, we're gonna be prescriptive about the activities that you need to take in order to get [26:27] >> value from the membership. That will drive down churn to some organic level, and at that point, we'll be even more ready to invest in growth, which will happen over the course of 2025 and 2026. So that's my message. Thank you for coming to my TED Talk, but I'm also the host of this wonderful series of sessions. So next, if you wanna learn about thank you. [26:52] >> We've got a full lineup of speakers. So if you wanna learn more about pavilion, SaaS Open twenty four gives you a coupon code. I don't these things oh, there are a few people. Most of the time you put up the QR code for, like, buy my thing and everybody's like, okay. What's next? But I do see some some cameras out there. So God bless all of you. Even if you don't intend to buy anything, you're making [27:12] >> me feel good. I appreciate it. [27:17] Hey, folks. If we haven't met yet, my name is Nathan Latka. Launched and sold my first software company back in 2015 and went on to write a book about it, it, which you guys made a Wall Street Journal bestseller purchasing over 30,000 copies. Thank you so much for that. After the book, I launched this show and one went on to create founderpath.com. I raised a large fund to do non dilutive deals with B2B software founders. So [27:44] far, we've invested in over 400 software founders totaling $150,000,000 Here in 2024, we're doing three to four new deals per week. So if you're looking for capital and don't wanna give up equity, go sign up at founderpath.com for free to get your offer.