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Episode 21

Building Revenue Architecture for Startup Success





Episode details

This week on the Expert Voices podcast, Randy Wootton, CEO of Maxio, speaks with Jim Delaney, CEO of Traction AI, and Kristian Marquez, President, CEO, and CFO of FinStrat Management. Randy, Jim, and Kristian discuss the significance of pairing robust revenue operations with meticulous financial strategies to foster startup growth. Jim shares his experience at Canvs AI and the intriguing role AI plays in gauging human emotions—a significant leap from traditional social media monitoring tools. He highlights the importance of unifying marketing, sales, and customer success teams with integrated systems to drive performance metrics. Kristian, with his telemedicine and financial expertise, unlocks the mystery behind early-stage fundraising and financial management, guiding founders through the journey from inception to exit by crafting solid financial foundations and leveraging key metrics to fuel growth ambitions.

Speakers

Randy Wootton
Randy Wootton
CEO, Maxio
LinkedIn
Jim Delaney
Jim Delaney
CEO, Traction AI
LinkedIn
Kristian Marquez
Kristian Marquez
Founder & CEO, FinStrat Management, Inc.
LinkedIn

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Video transcript

Randy Wootton (00:04):

Hello, everybody. This is Randy Wootton, CEO of Maxio and your host of SaaS Expert Voices, where we bring the experts in SaaS to you to talk about what's happening today and what they think is on the horizon. This is the first time we'll do a two-on-one. I'm really excited to have Jim Delaney and Kristian Marquez join us. Jim is a four-time CEO, COO at both big companies and small companies. One company I want to talk a little bit more about is Canvs AI. It is about measuring emotions. I had no idea about this, but we're going to chat a little bit about that. But, currently, Jim is CEO of Traction AI, which I think of as a revenue accelerator. It's a RevOps team, focused on data and tech, and helping startup companies build out their revenue operations, drive efficiency throughout the go-to-market process.

(00:50):

Kristian, also a two-time CEO. First time was in telemedicine. Interestingly, then moved to financial management with a company called FinStrat, where he is now, offering accounting, finance, and reporting services. Think of it as what we've talked about before as client advisory services, targeting B2B SaaS companies, venture backed, PE backed. Also, has a CFA versus a CPA. We might chat a little bit about that in the introductions.

(01:17):

One common denominator of the three of us is we all went to the Naval Academy, which is interesting that here we are ending up in B2B SaaS, talking about metrics and financial operations. I think our commanders of old would be quite surprised this is where we landed. So we will maybe talk a little bit at the end. But welcome, Jim and Kristian. It's really great to have you guys.

Jim Delaney (01:39):

Thank you so much for having us, Randy.

Kristian Marquez (01:41):

Thank you, Randy.

Randy Wootton (01:42):

So, Jim, let's start with you. We've known each other a really long time. We've been in France together. We were in English classes together. We've been in and around each other. I've always been super impressed by your career and just what type of person you are. Tell me a little bit about Canvs AI and measuring emotions? It totally fits with what I know about you as a person, and your emotional intelligence, and how you like to connect with people. So tell me a little bit more about that company, what type of AI it was using, and how did it work, and what were you trying to achieve?

Jim Delaney (02:12):

Yeah, well, once again, thanks for having me, Randy. The Canvs AI experience was an interesting one. And, actually, I was attracted to the opportunity because of a failure in a previous role. So I was formerly the CEO of a company called Sysomos, which was a social media monitoring company where, effectively, we would do a lot of data mining against the public exhaust of the social media platforms, be it Facebook, or YouTube, or Twitter, et cetera. And it was always an attempt, through that data mining and a lot of the natural language processing, to be able to glean what people were talking about, and how they were thinking and feeling about it. And that can be pretty powerful to companies like Procter & Gamble that's maybe releasing a new toothpaste line, et cetera. But in the early days of social media monitoring, natural language processing, and particularly the ability to understand how they were feeling, was really a function of, was it positive, was it negative, or was it neutral? And it was limited to associating positive words and negative words with those emotions.

(03:23):

And so because we didn't do it particularly well, I had originally been reached out to by one of my former sales leaders who had joined the firm, and said, "Hey, Delaney, we have an open board director position. We'd love you to fill it." So I interviewed, I got the board director role. But this was a very young company at the time. It was about a million and a half in annual recurring revenue. And it became really clear, with some of the young leadership, that maybe I'd be better served in taking more of an operational role. And so I took on the role of the Chief Operating Officer and assisted the CEO with growing this company. And it was really fascinating because, effectively, they created a taxonomy where it was no longer as primitive as just positive words, negative words. But really applying a Nobel laureate psychologist who came up with a model that measured intensity of emotion and the various emotions that we have. So the tagging was against different words, different thoughts, against this emotional spectrum. It was called the Plutchik model. And that was really the genesis of my taking that role.

Randy Wootton (04:35):

That's awesome. Another overlap in our backgrounds, I was at a social media management company called Percolate for a bit, and we were doing social advertising into the space. We didn't have the social monitoring. But super exciting space. And to your point, it was a pretty blunt instrument at the time. And so I think, now, with the advent and the evolution of AI being able to process information in large language models versus more of the predictive analytic models, we're in a whole new world of being able to understand intent and preference. Which is applicable obviously for B2C brands, but also I think for B2B, understanding where buyers are and how they're thinking about the world.

(05:12):

And so then you made this transition from that into Traction AI. Obviously, there was something attracted you about getting early stage companies up and running and helping them be more efficient. Do you want to say a couple of words about Traction AI? We'll talk about how it applies to stage companies in a little bit, so zero to one, one to five. But, just broadly, what are you seeing that compelled you to take another jump into a small company, get something up and going, and solve this problem?

Jim Delaney (05:41):

Well, Randy, like you, I had been working as a professional CEO for various different sized companies. And I constantly faced the same problem and had to reboot and solve it again and again. And it became clear... And that problem was fragmented teams between marketing, sales, customer success, fragmented systems. So a marketing automation platform that did not tie well or talk well with the CRM and/or into applications like Maxio, a subscription order management platform. And then, also, from a performance measurement perspective, the metrics that matter, they were not unified metrics across the sales / marketing / customer success team. And so over the course of several ventures, we were building out playbooks, we were building out SOPs, we were connecting systems. And it just became clear and obvious to me that for entrepreneurs like me of series A, B, C backed companies, they could really benefit from the expertise and the professionalization of RevOps. And we deliver RevOps as a service to these small and growing companies. It's always B2B for us and preferably SaaS.

Randy Wootton (06:54):

That's great. Yeah, I think I've talked a little bit about this before, and just the evolution of marketing ops, sales ops and service ops into this broader unified operations group, go-to-market ops, or RevOps, where you're connecting the data and the tech, the process. And enabling people to understand from order to cash what's going on, how things... Are you rolling out different campaigns? And how they pick up. And so I do think at Maxio we happen to have a wonderful woman, Liz Barton, who oversees that for us. And there's enormous power, and enormous unlock, in having a view of RevOps versus individual siloed ops.

(07:28):

So that's probably a great segue to chat. Kristian, you're a two-time CEO as well. You were in the telemedicine base for a bit. And, now, you have, I guess, out of that experience, decided that you wanted to focus on financial management, probably similar to Jim, identifying this core issue in terms of how people do their accounting, and finance, and measurement. And thinking you're going to help bring financial acumen to the startups. I'm not trying to speak for you, but can you tell us a little bit of how you ended up where you are, and the core capabilities that you're offering at FinStrat?

Kristian Marquez (08:01):

Yes, happy to, and thank you for having me on, Randy, excited to be here and spend this time together. So always enjoyed numbers, very objective, as compared to English, which I never enjoyed as a subject, too subjective for me. I ended up getting hired as a financial analyst for what, at the time, was a small consulting shop. Employee number eight, effectively early stage. And the CEO was a go-getter, Ivy League, Harvard Medical, Johns Hopkins residency. And then decided he did not want to pursue a career in medicine, instead of business. Was wildly successful. Today, he's one of the wealthiest people in the state of Maryland, having since IPOed his company for over four billion a year after I left.

(08:50):

So nine year stint, I get pulled in from was financial analyst to product manager. My career with the company culminated as a GM/VP over one of the company's three lines of business. So I had about just north of 100 million in P&L responsibility. Really exciting story. So right place at the right time, Obamacare comes out. We were already working with health insurance companies. So our clients included United, Aetna, Blues, regional health insurers between Puerto Rico and Hawaii in the continental US. And ended up having a material hand in creating an intra business that went from zero to 80 million in annual revenue within the course of two years. Combination of predictive analytics as well as clinical interventions. This was geared towards Medicare Advantage populations. And so had a phenomenal amount of success, and had a whole host of friends and mentors who encouraged me to move on. And so I left the company and then saw an opportunity in telemedicine. Long story short, ran out of money, closed the doors.

Randy Wootton (10:09):

Oh, so the other side of the equation.

Jim Delaney (10:14):

A true entrepreneur.

Randy Wootton (10:15):

There you go. You got the battle scars, uh-huh.

Kristian Marquez (10:18):

But phenomenal experience, learned a ton. And most importantly, what not to do. A whole host of fun stories in there for your audience because I... And this is going to dovetail into FinStrat. But one of the reoccurring themes is this mystery that's raising a priced equity round or just funds from investors. So I ended up doing two and a half million pre-revenue for the telemedicine company. On my LinkedIn profile, if you go to Projects, I've posted the pitch deck that I used to raise the round so anyone can go out there and see what it looks like. Ironically, this is pre-ChatGPT, there's a 50-page business plan that I've also posted as well. So I don't think anyone does these anymore, but this also will dovetail into FinStrat.

(11:08):

But needless to say, great experience, closed the doors, and realized that healthcare had pulled me in, if you will, given my success I had. The name of the company was Novalon. But that I really wanted to get back to my financial analysis. So you had mentioned I'm a CFA charter holder, this year marks two decades. And just always had a passion for financial and investment analysis. And so ended up connecting with a gentleman, Grant Elliott, who was the founder, president, CEO of our Arlington, Virginia based Ostendio. They were one of our vendors when we were doing the telemedicine company. And had lunch with Grant, and I originally thought that I would use FinStrat to assist founders raise capital. And Grant said to me, "I've had poor experience with consultants in that space but, frankly, what I really need are dashboards, and by consequence, accrual accounting. Can you do that for me?" And being the good entrepreneur that I am, I said, "Yes." Fortunately, I already knew-

Randy Wootton (12:18):

[inaudible 00:12:18].

Kristian Marquez (12:18):

And so FinStrat was born. So, today, it's fractional. So we have multiple lines of business. Simplest terms, they're geared towards founders and investors, both high net worth and venture capital, accounting, finance, and reporting. Where I saw an opportunity was an opportunity to combine CFO-level expertise with debits and credits and back office. And it's relevant because, so often, I'll see standalone consultants who don't prepare the financials. You'll find accounting and bookkeeping firms who are limited in their CFO expertise, let alone to say whether it's for SaaS companies or venture backed businesses.

(13:01):

And since then, this is year eight, count my blessings, very fortunate, I've had a tremendous amount of success. Took a lot of the lessons that I learned earlier in my career. A big part of it is just putting polish on everything that we do. It absolutely had a material hand in our success, growing that company to over 100 million, that went public. You can imagine our United's and Aetna's purchasers were very discerning. And it required us to only bring our A game, appreciate the role of smart and effective people in an organization, and also constantly innovate. Back then, we were doing things that are a bit more common today. But we ended up creating predictive analytics models that I didn't know anyone else was doing. This was 2010, 2011.

(13:49):

But we also saw material success. So a quick little sidetrack, but at the time this was CMS Star Ratings. And so Obamacare ended up tying compensation to performance in their quest for medical performance. We ended up, by virtue of the business, we had a materially statistic sample over the course of one full year. So we had about a quarter of all Medicare Advantage members in the country enrolled in our quality improvement program. And after the course of one year, and they published the entire market's Star Rating performance, we had outbeat the market, a statistically valid performance of over two standard deviations. And so learned a tremendous amount, and just the better appreciation for data, minimizing human biases, but really being objective with the members.

Randy Wootton (14:44):

Wow, that's great. I've talked to a lot of folks in the world of CPAs and accounting firms, and there's 50,000 in the US, according to the AICPA. And I think to your point, a lot of those folks grow up as accountants, and they grow up as controllers, and dotting Is, crossing Ts. And some folks are describing them as chief compliance officers. And I think what you're describing is, look, that's really important. You got to have the accounting right, dotting Is, crossing the Ts, especially in a business where you have very sophisticated investors and want the numbers to be right. At the same time, the opportunity, which is what you're leading, Kristian, is this idea of how do you move from the back office to the front office? How do you become an advisor to a CEO? Where you're able to speak the language of accounting, translated into a broader finance strategy to help people understand where they are today.

(15:31):

And if they want to get funded, obviously you have that experience as well. What are the set of things? How do they shape the business using the right metrics, which we'll get into in a second, at different stages? What really matters to break through? Because very few companies actually do get venture funded. And so it's like ringing the bell. If you're not going to do it bootstrapped, how do you ring the bell and get the investors? I say this regularly, but Battery, the money behind Maxio, screens 5,000 deals a year, and they only invest in 20. And they're one of the top tier investors right up there with Sequoia, GTV, Lightspeed, First Round, which were investors in my last company where I was CEO. But it is just amazing how few actually get through.

(16:14):

And so I think the service that you're offering, Kristian, the reason we brought this together, was to talk more broadly about this idea of SaaS in a box. So how do you get your back office coordinated, aligned, working in a coherent way? And then how do you get the front office, which is what Jim's team does, the revenue operations, going and tuning? And so maybe we'll shift into that right now. One of the ways we framed this was the SaaS in a box monetization. So monetization is about how are you going to get paid? It's the sum of your pricing models, recurring price, usage based pricing, one-time fees, and your revenue collection strategies, so cash management. We think of it as what's the offer you put in the market? How do you acquire people? How do you provision them? How do you invoice them? How do you collect cash? How do you report revenue? How do you close books? How do you analyze? And then, moving into that value add service which you're describing, Kristian, is then, how do you understand what's going on? How do you do the game plan?

(17:10):

And then, with Jim, how do you then think about enhancing the go-to-market? So how do you launch your new package? And it's a synergistic flow of you take the data that you're getting from the systems that you're looking at, and reporting by product, by segment, by region, by country. And then, how do you use that to adapt in real time to what's playing out? So just before we go into the what works and what are the lessons learned in the zero to one, the one to five, and maybe to the five to 10, can you guys give me a bit of perspective, maybe we'll start with you, Jim, in terms of that SaaS in a box monetization strategy? And what you're seeing in terms of the information that you need to collect that then you turn into insights to help your CEOs that you're supporting be more efficient in the way they drive revenue.

Jim Delaney (17:57):

Yeah, absolutely, Randy. And we've talked a little bit about this over the last couple of years as we talk about where revenue operations meets finance operations. Kristian and I, we share a number of common customer accounts, and we've got a lot of great respect for what Kristian and his team do. But we believe that there's a great importance in building an end-to-end revenue architecture that integrates, as I talked about earlier, marketing, sales, customer success. And that integration lives alongside of integrating business applications, processes, and the metrics. And then being able to extend that such that it also talks well and plays well with financial business applications, applications like Maxio, financial processes and metrics. And where RevOps meets FinOps, when you have a seamless and effective partnership there, it will lead to more reliable, predictable, accurate cash flows.

(18:55):

But, also, when you do it well, not only will you get the financials in terms of describing the success of what happened with the business, but you also begin to be able to unlock insights into, well, why did it happen? So why are we closing certain products faster than other products? What's our net gross revenue metrics indicate about our sales and customer success strategy? And then, once you start to understand the diagnostic of what happened, then you can make some adjustments. Double down on what's working, stop what's not working, and experiment around some new ideas about what may work. And so you'll have an opportunity to predict what will happen. Everything from how well am I going to improve my sales forecasting capabilities, to what should we be doing in terms of being more prescriptive about the changes that one can make around their ICP, their buyer persona, their buyer's journey, et cetera.

Randy Wootton (19:56):

Yeah, I think that's great. I know, for us, think of us like a series C, series D company. We have about 2,300 customers, closing 30 to 40 logos per month. One of the things we've had to move to, or we are moving to, is a segment based approach. And so segmented marketing, sales, and service. And how do you think about your strategic accounts versus your small accounts? How do you get to unit cost economics to understand the profitability of those different customers and how much you can afford to invest to acquire them? And so I think, to your point, that whole revenue architecture gives you a lot of that data, in terms of days to close, win rates, average sales. And being able to parse it out by segment, which combines then nicely with the financial operations.

(20:37):

One of the things I find is, there is this huge wall between the tech stack that RevOps relies on, and the tech stack FinOps or CFOs rely on. And so, Kristian, as you think about connecting RevOps with FinOps to support this monetization strategy, we get packages out in the market, we get people up and running, we want to invoice them. Can you talk a little bit of why CFOs don't want people like Jim in their kingdom? And how do we connect the two systems, the technologies, to process the data so that we can have that efficient flow of information to inform insights?

Kristian Marquez (21:15):

My experience has been, generally, it's finding common interests and starting from there. And if we boil it down to brass tacks, a chief revenue officer and a chief financial officer, ultimately, have the same aim. And that's to increase enterprise valuation. And where I think about doing it is, CFO is really thinking of it from a data integrity and cashflow perspective with some interest in the top line. Whereas, a chief revenue officer's really thinking about, "Let me be frontline and drive sales so that we can very objectively increase enterprise value." So those are, to me, the common interests. Question just is then, what's the most appropriate way to set up the system? Not as exciting, but there's elements of the business that's going to dictate the direction you take, whether or not a subscription base. Sometimes, you see usage, whether or not there's hardware sales, professional services that are involved. But end of the day, if you unpack everything, it really just comes down to accurately invoicing a client, ensuring you're getting that cash in the door as fast as possible, and that the revenue is appropriately being reflected on your P&L.

(22:26):

And so the two, in their departments, working in tandem, are usually going to do that because you're using tools like Maxio to appropriately recognize revenue in accordance with ASC 606. Making sure that, when invoices do go out the door, they don't get paid because a client doesn't agree to set up auto-pay that you have your collections department appropriately checking that down and sharing that information, either with customer success and/or sales. And then, just normal close, quarterly updates, tracking actuals to budget. My experience, both parties should be in the room, talking to each other, and making sure that they're on the same page. Then if there's any course corrections that have to take place, we understand what the root cause is so that both parties can act accordingly.

Randy Wootton (23:12):

Yeah, I think that's right. At the end of the day, I think of CFOs as owning cash. And you just can't make a mistake and you got to pass your audit. And so I think CFOs lock down the people who can touch their systems to just them and the controller. And then everyone else can get outputs in terms of reporting, or they can play in FP&A tools, like a Basis or a Forecast or a Jirav. And they're able to do what you were describing in terms of the budgeting and forecasting. But at the end of the day, CFO does... I can't even touch our GL. They're not letting me anywhere near that.

(23:46):

And I think, Jim, one of the big challenges that I've found, having grown up in go-to-market tech, was anybody can touch the account in Salesforce. Anyone can become a Salesforce admin and screw you up and not associate the right SKU, et cetera. And so I do think there's a lot of data hygiene that you have to worry about on the RevOps side before you bring it across into the financial operations tech stack. So there is different degrees of comfort with uncertainty and reliability of numbers.

(24:18):

Jim, in your Traction AI, you have this wonderful way of looking at the world, and I'm sure a bunch of this stuff is available on your website. But could you talk a little bit about the hierarchy of measurement? Because I think what we're starting with is this idea of data being, and the financial data being, descriptive. And then how you move into the diagnostic, the predictive, and the prescriptive. I've seen that model in other areas, but I think your perspective in how RevOps and FinOps work together to get a common understanding of truth, like this data, and then how they build insight together to drive the revenue engine. Maybe just talk through the four steps of the model?

Jim Delaney (24:58):

Yeah, I touched on this a little bit earlier, Randy. And I think frameworks often help us simplify things and get to what's the data that really matters? And what are the right questions to answer? And keeping it real simple and just building off of something that Kristian just talked about, that when there's good partnership between the CRO and the CFO, something as simple as what's going to close this month.

Randy Wootton (25:25):

Right, forecast, they're locking down a forecast.

Jim Delaney (25:27):

It's locking down a forecast, something as simple as that. And how well and accurate our forecast really says so much about our level of professionalism because of all the things that are incorporated in that. But especially with earlier stage ventures, where you're thinking about your cash-out date, you're thinking about your cash burn, you're thinking about your current cash position. How much cash is actually coming through business, your cash flow from operations, the business is actually closing, it's absolutely imperative that, as I mentioned earlier, it be predictable, it be reliable, and it be accurate. Because we're making funding decisions at board meetings about whether or not we're going to go hire those next two or three sales guys or customer success. So that's the basis of why it's so important.

(26:14):

But as I mentioned earlier, this descriptive foundation of your financial systems and what they report, strong systems like Maxio that give so many insights as to the performance of the business, financial and performance metrics of the business. But then, as you try to operate the business, now that you know what has happened and the descriptive foundation, you have to begin to say, "Okay, well, why did it happen?" And that's where, as you're slicing and dicing and racking and stacking by segments, you talked about looking at enterprise type of accounts versus smaller accounts. Looking at it by product cohorts, maybe looking at it by vintages. What's changed? A lot of that diagnostic around why things are happening can inform decisions about, "Well, what might we change? How do we improve the packaging, the position, the pricing to be able to alter some things?" Because, clearly, you're going to identify things that are working well where you want to double down, and things that are not working where you certainly want to stop.

(27:15):

And then, most importantly, like, "Hey, what else could we be doing? What are we seeing here that might be early signs of a new market opportunity, a new product, a new pricing strategy?" And then, finally, get to a point in terms of being prescriptive because you can identify your best performing campaigns, your best performing channels. And then, conversely, your worst campaigns and your worst channels. And we'll talk about different types of metrics that matter the most, but a lot of folks will talk about the customer acquisition cost. Look at CAC payback period. Todd Gardner recently wrote some pieces around internal rate of return associated with CAC. These can become very important metrics that we can use to help guide what we should do next in terms of being prescriptive.

Randy Wootton (27:57):

Yeah, I think, just the thought experiment for people, the two people who are listening to this podcast, other than our mothers, is what percent of the time you, as a CEO or CFO, do you spend per month trying to gather data and ascertain whether it's accurate? Versus using the data, trusting that it's accurate, and working on the diagnostics, that allows you then to be out in front and make decisions. And I think we spent so much time in my old life arguing between, well, the sales funnel versus the marketing funnel, marketing attribution by channel. And then, customer success, where the retention was coming from, where the churn was coming from. And we were just arguing about the data. We weren't even talking about what was happening. So that's a great construct that. And, again, I think people going to your website can pull down some of these slides and see how you frame this.

(28:50):

Kristian, I'd like to shift to the conversation we were having. I asked you, "Well, how do you think about monetization ecosystem?" And I thought you were going to talk about, "Well, Randy, you talk about these reporting and you put all this together." You're like, "No, no, no, no. When I start with a client, I start with the end in mind and, specifically, what do they want to get out of their venture?" Can you talk a little bit about how you think about aligning? Because I think that's very different than a classic CPA or bookkeeper would approach a client engagement. You're starting with, as an entrepreneur, as someone who's seen extraordinary success multiple times, what is your definition of success? What is your aspiration? Can you talk through how that works? And how you get down to the seven companies that you've helped sell already?

Kristian Marquez (29:32):

Sure. I think it starts with just the founder being honest with themselves. I say, "Don't tell me what you think I want to hear. Tell me in your heart of hearts what it is that you want." And in my experience, eight times out of 10, they say, "I want to be financially independent." Two out of 10 times, they say, "I don't care what I make. I just really want to leave behind a legacy that benefits everybody." That said, in either case, generally speaking, when I'm working with early stage companies, I find that they eventually want to sell their company, versus handing it down to their heirs. Or at least the companies that I've worked with to date.

(30:13):

And so if I think about selling the company, I think about it the same as if I was building a house. Before you pour a foundation or think about putting up framing, you need a plan. You hire an architect. Identical concept. So my role, as a CFO, I'm asking the question, "Well, how much would you like to walk away with after taxes?" And understanding there's a whole host of variables that go into that, whether it's an asset sale, if it's a stock sale. What's your timeframe? How much percent ownership do you have? Are you a corporation? Are you going to be able to take advantage of the government's tax incentives associated with holding onto a business for over five years? Once we answer all of those questions, and understanding that we're dealing with SaaS companies, and taking an average multiple of what may exist in the market either today or in the future based on their timeframe, we can then construct a financial model that represents what they're looking for. And from there, we just work backwards.

(31:15):

Now, the harder part is timeframe and expectations. So if someone said to me, "I'd like to sell my company. I started my company today and I'd like to sell it in a year for a billion." And I'd say, "Well, unless you're Sam Altman and you're OpenAI, good luck with that." We need to take a big step back and look at historical growth rates to confirm that, whatever your expectations are, are grounded in reality. And so that's key, and that'll give us a sense of how revenue should grow over time. But then, from there, they're just derivatives on cost of sales and the three OpEx buckets, product development, sales, and marketing, G&A.

(31:57):

A large part of what we do is benchmarking. And so examples would be is there's no shortage of benchmarks that will tell you what profitable and non-profitable SaaS companies spend as a percentage of revenue on cost of sales and what their subsequent gross profit is. Product development, sales, and marketing, and GNA. Those are not law or gospel by any stretch, they're what I consider to be guideposts. And it's also influenced by the stage of the company. Are you just starting out or are you more mature? But using that, we can then start to create a budget. And that informs how much you have to sell. And you can just unpack it from there as well. Who are we selling to? What's our average revenue per account? And really start to stress test this, just from a pure logical perspective. Are your assumptions in line with reality? And it's generally that straightforward.

(32:52):

In all things we do, we try to keep it as simple as possible. I think there's a great lesson to be learned in there. By virtue of our species, for some reason, we're drawn to complicated things. I've heard Warren Buffett say that. I think there's a tremendous amount of truth. And I think part of our job as a CFO to say, "Hey, I appreciate you love your 1,000 tab model, but it doesn't have to be that involved. Really, we need you to just understand your core assumptions and drivers. Fine, if you want to do a bottom up model, let's do it." I think it's a great intersection with the CRO, and doing a probability adjusted pipeline in order to inform a revenue forecast.

(33:28):

I don't want to undersell myself, but in my experience, it's that straightforward. Now, obviously, bringing it all together, and updating it every month, really is a reflection of how mature and organized and disciplined your underlying processes are. It's one of the ways that we would sell as an actual organization. But it's a long way of saying I know it can be done. Because, today, we have nearly 40 clients that we do it for.

Randy Wootton (33:51):

And you've helped, I think, seven companies sell too.

Kristian Marquez (33:54):

That's right.

Randy Wootton (33:54):

So they realized their dream. They had a number, they were able to get somewhere close to that number. They felt good about it. And it came from this disciplined approach to thinking about the end in mind. Just two comments on that and then, Jim, I'll turn it over to you.

(34:09):

One, when I was public company, CEO of Rocket Fuel, we were struggling. We had this great business. Like you, we'd grown a business within a business to 100 mil, but our core business was degrading. And we were like, "What are we going to do?" And public company shareholders don't have appetite for radical transformation. And I remember a mentor of mine said for me in one of the board meetings to literally just go around for everyone on the board and say, "What's the number we should sell at?" And get alignment on that. So there was this common expectation in terms of what success was going to be. And at this point, you don't have the VCs anymore. We have one VC on the board. But you have the people who are there with fiduciary responsibility, they have some incentive because they have stock. But, in general, what do we think about? Because we were going through a process and we had a range of multiples. And it was, well, certainty of close, overall value, and time, how fast was it going to take? But each of those was a different variable.

(35:04):

So I think as much as you talk with bootstrap companies, talking with investors as well. The second story is, I got really clear coming into a PE backed company. So Battery put a bunch of money to bring two companies together, SaaSOptics and Chargify. We’re the biggest investment for Battery across their 130 portfolio companies, so no pressure. But one of my big a-has was within about a year... Was it a year? Coming on board, coming up with a three-year model. And saying, "Look, if we want to exit at this, Battery, you need this return for your portfolio," three to five X, standard PE math. This is where we are today, this is what we need to be tomorrow. Or in three years, if we want to do an exit, what does that look like? Where's that growth going to come from? Is it going to come from the core business? Is it going to come through acquisitions? What are those assumptions?

(35:51):

And I think some people will say, "Well, gosh, it's just a goofy model. You can plug in whatever assumptions you want and you make it the answer that you want at that period of time." But I think what you're suggesting Kristian is no, no, no, you double click on those assumptions. You double click down on the levers, like growth rate, gross retention, gross margin, CAC payback. You use benchmarks to triangulate what world class is. And you use historical performance to be able to, say, plot the trajectory. If you're growing at 20% per year, for you to hit that number, it's going to require you to get to 30%. Well, show me where that's going to come from? And so I think, once a year, doing the three-year plan with the end in mind, in terms of this is what we're all trying to achieve. This is what we're gunning for. What does it look like?

(36:37):

So, Jim, before we move to the, hey, what do you need to know at each stage, do you have some thoughts or experience? You, too, have had this incredible career of growing companies, selling companies. This end in mind the number, and how much time and effort you spend on building a financial model that you know is wrong, but it at least frames a conversation.

Jim Delaney (36:58):

Yeah, without question. And I couldn't help myself, Randy, as you were sharing that story, I was looking at my own battle scars, having been in similar conversations. Once upon a time, that company Sysomos, that social media monitoring company, we had taken it from about... I actually came in as the CEO when we were doing about 15 million annual recurring. And we grew it to just under 50 in 30 months. We had some pretty good growth. And at the time, SaaS companies, we were getting multiples on revenue based on growth rate. And I remember, based on our three year CAGR and our last 12 months of growth and what we were projecting, Adobe had expressed interest in buying us. And I think the multiple that the board was expecting was between six and eight X. And, yet, we had an offer on the table about 5.3 X. And it was one of these things where, over about $10 million, it was the difference between, "We want a number that begins with the number two," meaning 200 million.

(37:57):

It turned out to be a disastrous outcome, in that, we didn't take bird in hand with Adobe at the time. And then, a few months later, we had Sprinklr come along, and they made a deal, but that was about $30 million less than the previous offer and an all stock deal. So, anyway, I had to relive some of that as you're describing it. But I think it's really important this point about beginning with the end in mind, and being very realistic about how and where you're going to get growth. A number of the startups and early stage companies we work with, after they believe they've found good product market fit, they believe that go-to market is just a function of saying, "Okay, well, we have X number of sales guys and they've got $1 million quoted, and they've got an achievement rate of 80%. All we need to do is hire five more and we're going to get that."

Randy Wootton (38:49):

Yeah. Or the marketing, "We know we're spending this many dollars on an SAO, and this much money on search. Just put more money in the search funnel and we're going to drive leads. If we can have a conversion rate of X, and our sales people are hitting 80% of their commission, boom, we got it."

Jim Delaney (39:04):

And then you've got a disaster. And so I would just simply add to Kristian's point around the end in mind, you really have to go not only top down but bottoms up. And you really have got to find ways to look at how fast are we entering new leads into the top of the funnel? What's our MQL to SQL conversion? How many of our SQLs are converting to opportunities? What are our conversion rates by stage, by product line? And then you really got to be honest with yourself about, "Well, where's all this growth suddenly going to come from if it's not sitting in your pipe and it takes on average four to six months to close a deal? Help us understand how you're going to triple your revenue next year?" So I think this idea of top down, bottoms up, and just being ruthlessly pragmatic with metrics that uncover what is our ability to get new leads, nurture leads, convert leads, and then retain customers and grow customers.

Randy Wootton (40:01):

Amen. All right. Well, let's take that construct in terms of... We've talked about the monetization system and using reliable data to inform the decisions and some of the things, starting with the end in mind. But, now, put yourself in the shoes or the seats of the people listening to this podcast. The target is between, call it, zero and 10 million. And we're going to break that up into three tranches, the zero to one, the one to five, and the five to 10. And try to cover this in the next 10 or 15 minutes in terms of, what do they need to be thinking about? What's the goal? How long does it take? What are the key things to think about in terms of data tech and process?

(40:36):

And so, Kristian, maybe turning it over to you, we were chatting a little bit about the zero to one million ARR. It's about product market fit, getting customers to pay you over time and renew. You actually get them and you renew them so you're starting to have some good gross retention. I think the thing that was interesting in our conversation is you said, "Randy, really..." Because I've never been in that slot. I've never been a zero to one guy. I always come in 20, 30 million at that expansion opportunity. You were like, "Look, that's usually about three years. And that if after year one, you're at $225,000 ARR, you're tracking pretty well." So maybe it help set some context around what does success look like for zero to one, the product market fit? And then, what's the tech? And specifically around the financial operations, when you're walking into one of these, and you're like, "Hey, guys, you need X, Y, and Z for us to be able to get to that next stage of that one to five million."

Kristian Marquez (41:32):

Yep. So in simplest terms, it's, will somebody give you money for what you have? And then, will they do it consistently? And that's my definition of product market fit. And I'll use a million ARR as a threshold. Somewhat based on my own experience, but I do find that once you see that you have a great handle on your new sales, on your churn, you're in a spot where you can start to say, "I have something on my hands here. Let's see where this goes." In terms of systems, from managing that, I'd say at this point, QuickBooks Online or just an accounting platform, I like QuickBooks Online, is a great place to start.

Randy Wootton (42:13):

What percent of the people, excuse me for interrupting, but what percent of the people do you find are on QuickBooks versus other systems. For us, we... Sorry, 70?

Kristian Marquez (42:13):

Over 70.

Randy Wootton (42:21):

Over 70, yeah, we find that to be true. It's actually more than that. All of our customers are B2B. We find folks in Europe will be on Xero. But in the US, B2B SaaS seems to be the default to QuickBooks Online. Is that similar to you, Jim, in what you found? Or do you find a broader set of accounting GLs?

Jim Delaney (42:39):

No, I think that's right in line. And perhaps it's a function of the fact that we skew earlier stage A, B, C, but absolutely.

Randy Wootton (42:46):

Got it. Okay. So they got QuickBooks, they use Excel. What else do you see as the technology that is essential for them to have their financial operations house in order and get ready for that next stage of growth?

Kristian Marquez (42:59):

Yeah, I'd say, after that, there's a lot of nice to haves. The nice to haves would be a competent payroll provider. Very difficult business in my opinion, but we're fans of Gusto. But there's a whole host of tech enabled companies out there rippling that. Especially for early stage businesses, they're priced affordably and their scope of their tech is all encompassing. And then, maybe, after that, there's an expense management tool. That can take the place of just something for vendor pay and/or credit card management. But understanding that you're sending invoices out of QuickBooks, you've got most of your bases covered through [inaudible 00:43:41].

Randy Wootton (43:40):

Awesome. And then one of the things we talked about was, well, do you need a billing module at this point? And you had a distinction between B2B and B2C. Can you talk a little bit about that?

Kristian Marquez (43:48):

Yeah. The way I think about it is, really, what's your scope? Or said another way, is how many clients are you managing or billing, are you managing in any given month? The reason why there's a distinction between B2B and B2C is, generally, you have a lot more customers in B2C. And so, then, there could be a need for a payment engine to assist manage that. Because, odds are, you're using credit cards on your portal and you don't want to do that manually. But in the world of B2B, in my experience, these days, it's generally ACH or credit cards, QuickBooks is a great way. But if there's something very unique or nuanced about your business, then having another payment engine in there, even with B2B, and we see that as well.

Randy Wootton (44:32):

Awesome. And then, I think the final piece, and then I'll turn it over to you, Jim, was the people. And we talked about a lot of early stage companies have their uncle acting as their CPA or their bookkeeper. And even when you're at a million bucks, if you've been in the business for three years, your recommendation is, if it's not you, hire a professional bookkeeper. Because you're coming in at that point or a little bit after, what are the biggest challenges you find when people have their uncle doing the books that you have to untangle, if you're trying to get people set up for professional investment, VC investment?

Kristian Marquez (45:06):

Yeah. And I'm going to do a quick caveat here. For people who know me really well, I really try to stick to the, if you have nothing nice to say, don't say anything else at all. Okay, so I'm going to make an objective statement here that I can make. 10 out of 10 sets of financials that we inherit when we onboard a client are a mess.

Randy Wootton (45:22):

10 out of 10, so 100%. And what are the three things that you note that make them a mess then?

Kristian Marquez (45:30):

Charter of accounts are not appropriately effective for a B2B SaaS company where it's absolutely important for purpose of calculating metrics and putting together a meaningful budget forecast. Inability to use QuickBooks, using journal entries instead of invoicing. And then not being able to understand what your AR summary looks like at any given point in time. And then, especially in the B2B SaaS world, no attention to detail as it pertains to accrual accounting, whether it's rev rec or prepaid expenses. All of these things have material consequences.

(46:02):

And so, whenever we onboard a new client, we spend anywhere from two to four months righting the ship. And I appreciate the founder's perspective. In their heart of hearts, they understand that accounting is valuable. But what they really love are their dashboards and their models. And as some of our CFOs love to say is, "I can put framing up now, but if your foundation is built on quicksand, what difference does it make?" And so we have to set... Someone has to set expectations that we're going to be doing a lot of cleanup. And we've become very adept at it. And I share with our founders and our CEOs, "We don't like cleanup any more than you guys do. We like standard repeatable processes." But it's absolutely essential. And so those are the three things. Big focus on getting everything right because it's the old garbage in, garbage out. Dashboards and models are meaningless if the underlying data is wrong.

Randy Wootton (47:03):

And we find, actually, that our best customers are multiple time CEOs, where they've gone through, and they identify a problem, they have technology solution for it. But then, they struggle with the financing. And the number one deal killer for financing with VCs and/or acquisitions as an accounting error, specifically tied to rev rec and ARR. And so this becomes the whole premise of what the three of us have been chatting about, this putting SaaS in a box for FinOps out of the gate. To your point, it's not what the CEO is excited about. But if they don't have the systems in place, they take three steps back to go one step forward, in terms of having everything, all their stuff in one sock, to engage with professional investors. It looked like, Kristian, you were going to say something on that?

Kristian Marquez (47:44):

Yeah, so we're pragmatists. We don't like doing things for the sake of doing them. So we'll ask you questions like, "What's the relevance of this?" And for the founders who are listening to this, even investors, very practically speaking, what we've seen is investors beat founders over the head on poor financials. And absolutely use that to their advantage when it comes time to decide on a multiple.

Randy Wootton (48:06):

Totally. And trade down, they find something wrong with the ARR, and they didn't represent this churn appropriately. Like, "Oh, well, now, we're going to go from X to Y." But, Jim, gosh, we could do this for two hours, but can you give us your quick summary on the zero to one? We were talking about systems process tech in that zero to one million. What you see, what you recommend under this broader construct of SaaS in a box? What do they got to get right so that they can build for the next inflection point?

Jim Delaney (48:35):

Well, I think we've... I guess this comes down to how do we simplify the way we think about it so that we can be pragmatic and take action? And, for me, zero to one is when you're trying to establish the market product fit, product market fit of the product. So you're in the go-to-product stage. And you really need to be thinking about establishing that strong market fit, things that you can do to validate that there is a market need, that you can serve it well and you can serve it profitably. So as you're beginning to come out of that, you're moving into the go-to-market.

(49:13):

And some of the best framing that I've ever seen around that is your friend, Bruce Cleveland, in a book that he wrote called Traversing the Traction Gap. For those listening, it took me 20 years of a lot of mistakes to finally read that book, and say, "Hey, Bruce, where the hell was this 20 years ago?" But it really helps you think about the order of operations. And what needs to be provided when, in the context of your product architecture, your revenue architecture, your team architecture, and your systems or business application architecture. Because you'll see a lot of good money thrown against bad investments, let's say, building out a sales and marketing team, before it's time.

(49:54):

And so I would just encourage those in the zero to one to be patient about bringing in and hiring a HubSpot, or bringing in... Let's get that product market fit well established. Make sure that you've got your well-defined category. Make sure that you're meeting the need reliably well. And then, after you're able to demonstrate repeatability and some level of predictability, in terms of having a defined business model, pricing model, a well-established ideal customer profile, along with personas, that's when you can begin to double down, if you will, in terms of, let's say, a marketing automation platform or CRM. Maybe even some of the advanced financial applications that are out there. And then, at the same time, and you were talking about hiring your uncle, the examples are abundant in terms of not getting the right team architecture. So many startups hire the wrong people for the wrong role. And early team members are unavailable to actually evolve within the company. So just being mindful of that is probably a very helpful tip for some early entrepreneurs.

Randy Wootton (51:04):

I am so glad you brought up Bruce Cleveland's book. He's a friend and just an extraordinarily successful investor. And that book, Traction Gap, I was actually part of the input to it and helped teach some courses on it. And we've applied it at each company I've been part of. And the big paradigm shift is moving from the idea of series A, B, C to this idea of minimum viable category, minimum viable product, minimum viable revenue engine. And then using these four architectures that you described, they all have to be happening in parallel. And you're only going to go as fast as the least developed of the architecture. So super, super helpful.

(51:43):

Gosh, well, let's do this. We got five minutes. I'm going to pause here. Maybe we'll come back and get into the one to five, which I think is a really interesting conversation for part two. I think for people, humanizing this a bit, as we think about the speed round, what's your favorite metric, Kristian, and why?

Kristian Marquez (52:01):

MRR.

Randy Wootton (52:01):

Okay. Say more about this? I thought you were going to say CAC payback, because of our earlier conversation. But what is it about MRR then versus CAC payback that you're-

Kristian Marquez (52:13):

Yeah, so I know this is a speed round, but so I'll be quick. So as I think about early stage investing, I know, today, there's a bigger emphasis that's placed on profitability. So something like CAC payback period, Rule of 40, are very valuable metrics because they give insight into how the company's performing. That said, I still, and from where I sit, see investors who are absolutely interested in growth source. So getting back to how are we growing top line? Because when I think about the risk associated with early stage companies, it's not necessarily about being breakeven or profitable. It really is coming back to, I'll call them the glory days, if you like, where top line is triple triple double double, and just showing above market.

Randy Wootton (52:58):

Yeah, the T2D3. Even Battery says that they still are seeing the winners doing that. There's a whole bunch of people that are just in the middle, but the winners are that. And so to your point, growth rate is always, and all the data is showing right now, growth rate multiples have a premium to EBITDA multiples. Jim, favorite metric and why?

Jim Delaney (53:15):

Yeah, I think that we focus and work with a lot of companies that are in the go-to-market phase. And, for us, it's about finding the hot spot, finding what an ideal customer profile looks like, what type of product cohorts. So we work a lot around CAC efficiencies, whether it be customer acquisition cost, in terms of ratio, payback period. I really like this idea of thinking about it like eternal rate of return, thinking about your sales and marketing investment as an investment, competing to be worthy of that investment. And I'd mentioned this earlier, final comment, that being able to understand what marketing channels, what marketing campaigns, are winning and losing, and being able to act accordingly and quickly. The CAC payback period, the CAC ratios, the internal rate of return, in terms of how you think about that, is really effective in allowing our companies to be more efficient with their spend. And more effective with their productivity, getting to the gross and net revenue retention numbers that Kristian was thinking about.

Randy Wootton (54:14):

Yeah, I would just underscore with three explanation points. I came into a third time gig, CEO, been in SaaS web-based applications for a long time. And I was a big fan of the marketing spend as a percent of revenue, or sales and marketing as a percent of revenue benchmark. And Battery disabused me of that, and got a religion around CAC ratio, new CAC versus expansion. And just really digging in on that, in terms of how many dollars are you spending, and what are you getting on the ARR? So I think that's, especially as you're dialing in that go-to-market stage, understanding is the engine working or not, or are you just throwing money away.

Jim Delaney (54:50):

Right on.

Randy Wootton (54:51):

All right, guys, well, thank you very much. I really appreciate it. This was great.

Jim Delaney (54:53):

All right. Thanks for having us, Randy, very much.

Kristian Marquez (54:56):

Our pleasure. Thank you, Randy.