Pavilion Revenue & 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.

Introduction and Background of Pavilion quick context this was recorded March 28th and 29th so a couple weeks ago at my live event SAS open.com we had a thousand software CEOs there if you missed it we hope to see at the next one September 5th and 6th in New York City SAS open.com but for now let's jump into the recording let's kick it off I'm going to be talking about uh really the themes if you're familiar with sort of what I've been talking about on LinkedIn um it's a It's a combination talk the history of uh my company Pavilion raise your hand if you're familiar with pavilion okay great there you go so uh so you know what it is hopefully it's the largest community for goom Market Executives and Rising Executives in the world our goal is to help everybody in this room and everybody at high growth companies unlock and achieve their professional potential which really means uh there's learning there's Community there's events and there's insights that we bring together to help you get where you want to go in your career at the same CEO Sam Jacobs's Journey and Pavilion���s Evolution Time Pavilion is also a company and um what I want to talk about over the next 15 or so minutes is just the evolution of our company because as much as I pontificate on social media as if I have all the answers the reality is that I've made all of the mistakes that I'm commenting about uh in the 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 uh 2021 or 2020 as we all know so uh this is how we got started uh this is our one of our very first dinners in New York City uh 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 uh real intention of building it into a large business um 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 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 uh 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 2023 in Nashville which was our big conference so this was a primarily intended to be a bootstrap business and for the entirety of our um of 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 uh over the course of the last couple of years and so and it For Better or For Worse it coincides pretty closely with um our taking in outside Capital which doesn't mean that outside capital is necessarily a terrible thing but I want to talk about this shift from profitable efficient growth really from growth at any cost to profitable efficient growth Initial Challenges and Building Community you can see that our journey uh I started working on this full-time really 5 years ago uh 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 Pavilion full-time and it was completely and and really really largely uh 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 uh goto Market machine um and we've learned a lot of lessons along the way and then what happened coinciding with really the the tech uh economy downshifting the rise of interest rates and the uh entry of the world that we live in is that our growth really uh 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 DI Dinner Club a membership organization and Association never intended it to 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 uh Peak Zer as you might uh say Peak zero interest rates and um elephant Ventures emailed me I had just had a conversation with a friend we had just gone from 1 to 4 million in in ARR and a friend of mine had said you're probably worth 1 to 1.2 times revenue and I said I don't really know of any company that grows 4X 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 a get your read on the relative valuation and um I sent them uh by quarter they came back and they said we think it's worth roughly uh uh uh roughly $80 million we're going to put in this amount of money post money Transition from Bootstrap to Venture Funding valuation we think it's going to be we're going to put in 25 million it's going to be worth roughly 100 $105 million and um I said wow okay then uh and and that was the beginning of a of a different uh period of evolution for us and again coinciding it h we had good growth in 2021 but um for for the last couple of years the growth has has slowed a little bit and I've made a number of strategic errors I would say but also um you know it's emblematic of the times I think so what are we talking about in this world well in a world of growth at any cost uh 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 begun to focus on efficiency when you're burning capital and when and when you have 0% interest rates what 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 in years 10 20 30 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 10 11 12 13 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 that's not historically true right historically true uh is that interest rates themselves discount the cash flow so that cash in 10 years is not worth the same as cash today cash today is worth much more than cash in 10 years but in a 0% interest rate environment uh 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 $100 million in cash flow 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 is a direct relationship uh 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 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 than you make at some point one way or the other the people that own the company are the investors Impact of Economic Changes on Growth Strategies 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 10 years right that's one of the 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 want to make right here 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 uh than they bring in it's a rational reaction uh to the markets that we were in at the time but we move 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 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 they're 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 sudden we had $25 million that we never had before well uh 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 you know a lot of what Nathan talks about at founder path 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 I had this big balance sheet and I felt like we needed to gain market share and we needed to go go go so what did we do we built out a large B2B sales organization you'll hear about that later from LG who who who was there and who we worked with Shifting Focus from Rapid Expansion to Profitable Growth uh 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 um built out a product 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 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 a sudden we went from being extremely profitable and this was really you know I've talked about this on my podcast Top Line uh if you I think it's pretty good so if you want to subscribe to it you should um but the point is I've talked about how um 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 here fly here eat food uh and uh and hang out together in person even though it's much better so we went from uh 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 um as we were facing uh what became you know 2023 which is 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 uh um it's worth this which was effectively like two to three times Revenue uh which isn't a great outcome they would have lost money on that deal if I had tried to sell the business one of the other lessons by the way is if you're 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 uh bought not sold so I said well what if the business uh 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 the Importance of Customer Retention and Community Building world we help a lot of people do a lot of great things in their lives for me to process that idea that uh 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 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 ined while client acquisition cost as a percent of Revenue has also increased so as we moved into this world that I'm describing from uh 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 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 body is 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 uh buyers want more flexibility in how they allocate costs right and at the same time you've got a bunch of other disruptive forces right now for growth stage B2B 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 to be a whole company worth $7 billion now that's a feature of most Revenue platforms and a commodity feature at that right so 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 um 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 free cash flow but only 3 to one right so growth is now compressed from being worth probably 15 to 20 to1 down to 3:1 we still want growth you still are not going to get a premium valuation without growing but efficiency and cash flow uh is is much better for the business so this is the world now what builds durable businesses what builds great businesses it's really retention right it's really retention and so we and if you look at the Learning from Mistakes and Refocusing on Core Strengths 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 instrument at architect 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 pre-sale funnel right so this is the bow tie this was popularized by Joo at winning by Design but the point is as we in in a growth at any cost world the world that we used to live in the left side of uh this of this uh idea uh was most prominent right and raise your hand if uh in most of your board meetings you 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 pre-sale 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 the right side meaning postacquisition Mo 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 the first thing is a common set of data a a common set of data and governance around who controls 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 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 data sets 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 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 Tango 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 going to be looking as closely or as rigorously around what's happening on the retention 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 AR or some crazy multiple and it wouldn't really matter what retention looked like or what our ongoing customer uh activity looked like 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 Current Business Metrics and Future Plans much money as we would want to spend on growth at any cost we're in a world of profitable efficient growth it doesn't mean we don't want to invest in growth it means we want to size our bets in growth so that we understand what the relationships are what the unit economics are but we really want to or around the customer because we know that the customers are fundamentally the things that are going to drive long-term value for the 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 15 seconds left one to do is let's make sure you have a data layer that integrates post-acquisition with 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 it could even be medic but let's use a methodology post sale in the same way we use a methodology pre-sale right so guy will tell you that that sales teams that use Medic or some kind of qualification methodology pre-sale 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 going to renew it has to be against a specific methodology in exactly the same way we would expect the pipeline pre-sale right so those are some of the lessons that I think we've learned now what uh 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 a spread a way this is how HubSpot thinks about designing their postale funnel and their pre-sale funnel and one of the things that they do is they try to articulate specific activities that are going to drive each of these behaviors what's my favorite example of these kind of time tovalue activities that you can use in your pre- and postale funnel to drive retention CEO Advice on Navigating Changes and Focusing on Efficiency 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 uh there was a belief within the Cs organization at Salesforce that um getting your data getting your data into Salesforce was the single biggest thing that would leave to lead 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 I first saw them through Salesforce Sugar CRM did not have them when I was looking at crms in 2003 um that uh 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 60 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 directly drove to getting the dashboards emailed to a key stakeholder and that is an example now HubSpot of course is you know the used Salesforce is 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 uh the talk there are a lot of different reasons why people churn and if you're facing a retention issue 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 um most of the time everybody in this room is going to 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 drive up retention is not change your price and is not add a new feature 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 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 that it's my price is too expensive I need to lower the price I Q&A with Audience 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 about your product that can improve your retention and drive higher LTV so wrapping up where did we get to and uh 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 uh what's another ramification the biggest change that we made is um and there's twofold and I'll I'll get to them and then we'll bring on uh 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 um you know how are you thinking about hiring and I'm saying I think about hiring in ones and twos not fives and tens right so again your business and your AA uh your access to Capital might be different but I would encourage you to think about hiring in a a tranched way tranched 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 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 non-technical 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 were looking at our p&l and 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 uh 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 uh member Hub internally it would takeing two years and it was about $2.5 million a year to spend on the product engineering team and it was going to be about 1/100th as effective interesting or exciting as the member Hub that we launched two months ago in uh 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 got to focus in a world of profitable efficient growth on what are the things that you are truly differentiated at what are the things that you're truly exceptional at and tripling down on those things and then stop doing the things that you're not going to 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 uh o over the course of the last year so where 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 were 4 to1 LTV toac on uh 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 and the last thing is what's the number one initiative currently inside of Pavilion what did we just spend an entire offsite 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 about the journey that you're intended to go on mandating onboarding right mandating onboarding we have a self- signup flow those people turn at three times the rate that people that have an interaction with an a customer success manager or an enrollment manager right so that's a channel that has some issues we are going to fix onboarding we're going to focus on the member Journey we're going to be prescriptive about the activities that you need to take in order to get value from the member ship 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 um thank you for coming to my TED talk but I'm also the host of uh this wonderful series of sessions so next um if you want to learn about thank you um we've got a full lineup of speakers so if you want to learn more about Pavilion SAS open before 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 uh 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 me feel good I appreciate you hey folks if we haven't met yet my name is Nathan Latka I launched and sold my first software company back in 2015 and went on to write a book about 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 went went on to create founder path.com I raised a large fund to do non-dilutive deals with B2B software Founders so far we've invested in over 400 software Founders totaling $150 million here in 2024 we're doing three to four New Deals per week so if you're looking for Capital and don't want to give up Equity go sign up at founder paath for free to get your offer