How Pavilion Grew From $1M to $4M ARR, Raised $25M, and Cut From 62 to 27 Staff to Get Cash Flow Positive (CEO Sam Jacobs at SaaS Open 2024)

Event Context and Introduction

Nathan Latka

00:00Quick 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.

What Pavilion Is and Its Mission

Sam Jacobs

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

Community Origins and Global Chapters

Sam Jacobs

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

Bootstrap Roots and Organic Growth

Sam Jacobs

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

The Elephant Ventures Call and the $1M to $4M ARR Year

Sam Jacobs

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,

The $25M Round at a Roughly $100M Valuation

Sam Jacobs

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

Growth at Any Cost: Why Zero Rates Rewarded Burn

Sam Jacobs

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

Profitable Efficient Growth: Customers Control the Company

Sam Jacobs

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

Strategic Mistakes After the Raise

Sam Jacobs

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

From 30% Margins to Burning Capital

Sam Jacobs

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

The Board Says the Business Could Be Worth Zero

Sam Jacobs

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

The Market Shift: Falling NRR, Rising CAC

Sam Jacobs

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

The Bow Tie Framework and Customer-Driven Growth

Sam Jacobs

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

Three To-Dos: Data Layer, Customer Health, Post-Sale Methodology

Sam Jacobs

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

HubSpot, Salesforce and Time to Value

Sam Jacobs

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

Why Customers Really Churn: Onboarding

Sam Jacobs

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

Headcount Reduction: 62 to 27 Employees

Sam Jacobs

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

Shutting Down the Software Team

Sam Jacobs

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

Cash Flow Positive and Healthy Unit Economics

Sam Jacobs

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.

Fixing Onboarding, the Member Journey, and 2025-2026 Growth Plans

Sam Jacobs

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.

Nathan Latka

27:17Hey, 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

27:44far, 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.