Mark Roberge: The Framework for How Startups Should Scale into the Enterprise -Stage 2 Capital|E1176

1. 0:00 – 0:51

   Intro

   1. MRMark Roberge0:00

      I was consulting to HubSpot when it was, like, one or two people and eventually joined the company as the fourth employee. The skill necessary to get a million dollar deal done, there's so much in there in terms of, like, how do I identify and build a good champion? How do I understand the political dynamics? How do I differentiate between an economic buyer, a technical buyer, an end user, a coach, and a champion? How do I, like, deal with procurement? How do I deal with legal? My million dollar seller that sells to healthcare has all those skills.

   2. HSHarry Stebbings0:27

      Ready to go? (instrumental music plays) Mark, I am so excited for this. I just mentioned, I've loved your content for a while now, so this is really exciting. Thank you so much for joining me today.

   3. MRMark Roberge0:48

      Oh, yeah, sure, Harry. I'm honored. Thank you for saying that.

2. 0:51 – 2:37

   Entering the World of Sales

   1. MRMark Roberge0:51

   2. HSHarry Stebbings0:51

      Now, I would love to start, how did you first make your way into the world of sales, and when did you know that, like, sales was really one of your loves?

   3. MRMark Roberge0:58

      It was a- a lot, like a lot of the wins in my career, it was completely serendipitous, uh, almost accidental. (laughs) Um, you know, I was, uh, at 23, I discovered that I wanted to be an entrepreneur. And even to this day, I kinda consider myself more of an entrepreneur than a sales leader. Even though I was a founder CEO coming out of school, I knew I wanted a functional alignment and I was torn between marketing and sales. I was like, I really, like, there's not a lot of MBAs that go into sales, so that's weird, but I really love the art of the deal and I know generally speaking in tech, salespeople make more than marketers and I had a young family and, like, I was the financial, you know, f- you know, re- responsible for that, so, like, that was important and an ingredient. But I felt like the MBA provided you more for marketing. Marketing was going more in a data-driven direction. I was consulting to HubSpot when it was, like, one or two people and eventually joined the company as the fourth employee, and that's where it serendipitously kicked in 'cause Halligan was the co-founder and he is a sales guy, you know? And he was like, "If we're gonna use you one day a week to consult, then I want you to sell." And so that's how I got into sales. Like, I didn't, I was like, "All right, cool. Like, Dharmesh hired me for one day a week, you're now the CEO, if you want me to sell, I'll sell. If you want me to write code, I'll write code." Like, 'cause (laughs) it- it is what it is. So that's how I got into it and it would actually, worked out beautifully because I was not only in sales, but I was selling cutting edge marketing software. So I- I got to learn all about both, which was completely accidental, but awesome.

3. 2:37 – 4:40

   HubSpot's Early Days: Customers & Funding Status

   1. MRMark Roberge2:37

   2. HSHarry Stebbings2:37

      Where was HubSpot at that time? Did they have any customers? Did they have any funding? Just, I'm just fascinated.

   3. MRMark Roberge2:44

      I had sat next to Dharmesh in school at MIT in '05 in a class. And it was one of those classes where you, there's like 50 students, everybody shows up with a business idea on, like, one page. That night you read them all, you vote, and 10 people get picked to be CEOs. And I got picked to do mine, which is in the social networking space, and Dharmesh got picked, and his was HubSpot. So that was, like, the first time I met HubSpot. And then, like, he and I s- became friends. We would grab, like, Chinese food, like, once a month or so, talk, and got to know each other. And then when I was like, "Hey, by the way, I'm actually gonna do mine and raise some money," he's like, "I'm in. I'll be an angel." I'm like, "Great." And then at some point through that journey, he was like, "I like working with you. Why don't you... Can I pay you as a consultant too to help me with HubSpot? I'm sure you, like, need money, you have this big loan from MIT and all this stuff." And I'm like, "Sure." So, like, when I first got engaged on that level with HubSpot is, it was just Dharmesh, he was, Brian was in venture capital, but had been working with Dharmesh at MIT on the concept and D- Dharmesh was trying to recruit Brian. And so about a couple of months through into my consultancy with Dharmesh, he said, "Hey, I- I was, successfully recruited Brian to be my co-founder and be CEO." And so we sat down and Brian's like, "I like Mark, let's keep Mark on, but Mark, just do sales if we have you one day a week." So I did that for about six or seven months, and then he took me to a Red Sox game and was like... So at that point now we've acquired, between Brian and I, we've probably acquired like 40 customers. We're probably at like couple 100,000 in ARR, you know? And we brought in Mike Volpi as CMO, and Brian took me to a Red Sox game and was like, "Hey d- listen, General Catalyst is coming in for our A round, um, we're gonna raise five million bucks or something like that." He's like, "Why don't y- why don't you come join full time and be our first salesperson and

4. 4:40 – 7:59

   Transition Tips for Founders Moving to Team-Led Sales

   1. MRMark Roberge4:40

      sales leader?"

   2. HSHarry Stebbings4:40

      Can I ask, in terms of the evolution, I think th- the hardest thing is often for founders to transition from a founder-led sales motion to a sales team-led sales motion. What do you advise founders who are struggling in that transition?

   3. MRMark Roberge4:57

      Yeah, it's a really hard one and it's a key piece to the Stage two Capital, um, thesis, is that's exactly the entry point that we like to come in at. 'Cause usually these, like a founder, a lot of founders today are product and engineering oriented and don't have a lot of experience in sales so they gravitate toward, like, uh every time I ask them, "What are you looking for?" They always say the same thing, "10 years of experience selling a product like mine to a customer like mine." (laughs) And there's tremendous research that shows that that mindset correlates with lack of succe- like, doesn't work out. And it's not that it doesn't help, it's just that there's a whole bunch of other things you need to assess, largely around sales skills, that are not looked at. And because of that, you end up with the bottom 25% performers in your industry. And so that- that's the biggest pothole. Now, how do you teach a founder... Essentially what that means is a founder needs to learn how to assess a seller on sales skills.

   4. HSHarry Stebbings6:00

      Yeah.

   5. MRMark Roberge6:01

      And that's like saying to a salesperson...... challenging them to assess an engineer and how well they write Java. It's hard to do, but you almost have to go to school for five years. So it's kinda the same thing. So it's, it's difficult. I can't just, like, say a statement and, like, you learn it in a minute. But what I can say is go find an advisor, Harry. Go find an advisor 'cause, like, advisors are cheap. They're, they're, like, usually a little bit of equity. Go find someone that's hired a bunch of salespeople. Particularly that, in this case, it could be okay that it's in your domain, you know?

   6. HSHarry Stebbings6:34

      Okay. Couple of questions.

   7. MRMark Roberge6:35

      Yeah.

   8. HSHarry Stebbings6:35

      One, does the founder have to create the first sales playbook or can they actually bring in a sales leader from day, well, day one on revenue?

   9. MRMark Roberge6:44

      It depends on the aspect of the playbook, Harry. So in terms of, like, a Sandler level or Winning by Design, like, method- force management methodology, that's gonna take a professional leader to, like, bring in and, and navigate. Like, even things like how do you manage the first meeting and do discovery well? Nah, I don't see a lot of product founders coming up with that. But one of the underlying pieces of the sales playbook is a buyer journey. So, like, what are the different ways that buyers describe the problem you solve or the opportunity that you create, and how do they look to solve that, and how do they look to make that decision? That's something that a founder should be working on from day one, just to start crystallizing that. Another piece is the ideal customer profile. You know, so what are the attributes of, like, what a home run fit is for us versus not? The other attribute is, like, just the general value proposition that we're pitching. Like, these are typically areas where founders can make a lot of progress on their own. They might get it to, like, 70% of the way there, and then a professional seller is gonna come in and take it the final mile and add the details like cold calling, getting the appointment, doing discovery calls, tailoring the pitch, handling objections, dealing with negotiations,

5. 7:59 – 9:37

   First Sales Hire: Prioritizing Deal Size or Customer Category Experience

   1. MRMark Roberge7:59

      all that kind of stuff.

   2. HSHarry Stebbings8:00

      I'm loving this. So we're gonna... You- I am a founder in your portfolio and I'm just... I don't know what I'm doing here, so you're gonna help me. Um, for my first sales hire then, I've got us to 700K in ARR.

   3. MRMark Roberge8:11

      Yeah.

   4. HSHarry Stebbings8:12

      Um, do I have someone who's sold to customers like mine before or do I have someone who's sold deal sizes like mine before? If you could have one deal size or, uh, category that they've experienced before, which would you rather it be?

   5. MRMark Roberge8:27

      I have strong conviction that deal size has a higher weight in correlation to success. Let's just say we, we sell million dollar deals to banks and I have two candidates. One candidate sells $10,000 deals to banks and one candidate sells million dollar deals to hospitals. The skill necessary to get a million dollar deal done, it's just, like, there's so much in there in terms of, like, how do I identify and build a good champion? How do I understand the political dynamics? How do I differentiate between an economic buyer, a technical buyer, an end user, a coach, and a champion? How do I, like, understand medic as a sales process? How do I, like, deal with procurement? How do I deal with legal? My million dollar seller that sells to healthcare has all those skills. My person that sells to banks, but they sell $10,000 deals has none of those skills. So I'm much better, I'll be much easier for me to teach the million dollar seller about banks than it is for me to teach a $10,000 transactional seller how to do all that

6. 9:37 – 13:52

   Essential Questions for Hiring Sales Reps

   1. MRMark Roberge9:37

      other stuff.

   2. HSHarry Stebbings9:37

      Okay. I'm in this process hiring our sales rep or our first sales addition. What are the must ask questions, Marc, that I should ask?

   3. MRMark Roberge9:46

      I love getting into a role play, you know. And so, like, that's the most important part is this part where it's like, "Okay, Harry, you know, um, let's say we're selling, we're, we're hiring for HubSpot." It's like, uh, "Let's just pretend you're a, a small business owner and you downloaded the HubSpot inbound marketing e-book yesterday and you got the lead. Let's just do the first call." And so we'll do the call and I'm looking at things like really good open-ended questions, follow-on questions to do discovery and qualify need and quantify need. And I'm, I'm hoping that there's no show up and throw up and they give me, like, a five-minute commercial on HubSpot that I could have just read online. Otherwise, we gotta... Probably not gonna hire them. And then I'll stop the interview couple minutes in, "Have you..." And then I'm gonna assess coachability because, like, you know, in most startup contexts, no one's gonna come out of the gate hitting their productivity in month one. Like, they have to learn the product, the methodology, the customer. So I'm assessing their ability to be coached. And so I'll have you self-assess and if you're like that, "I was awesome, I have no feedback for myself," then that's a red flag. Most people are pretty introspective and, and can analyze their pros and cons. Every interview, I give a piece of positive feedback and a piece of need for improvement. So I give a positive, I give a need for improvement. I watch how they take the coaching, and then usually I have them redo the role play. And then if, if we're gonna do another meeting, I'll say, "We're gonna do it again." (laughs) So I'll let you think about it for two days and then come back, and that's a big part of my assessment.

   4. HSHarry Stebbings11:24

      How fast do you know when you've made a mis-hire?

   5. MRMark Roberge11:27

      It takes a while. I haven't had a lot of those situations where, because I think we've been pretty rigorous on hiring, that, like, we would have weeded that out. And I have a lot of situations where I had a rep that was in there for three or four months and we weren't sure and they weren't hitting it, but we gave it a shot, and seven months in, they were toward the top and they stayed there. So that was perplexing to me, Harry, because, like, I want, I want a lot of early knowledge and lead indicators. So, but I've seen that happen quite a bit. It just took them a little while, them a little while to get there. And the only thing I can say early on kinda comes back to that coachability again. If, like, if I have a manager come to me and say...Oh, yeah. Pete's not working out. And I'll say, "How do you know?" They're like, "Well, look at their numbers." And I'm like, "Okay, well what are you coaching Pete on?" They're like, "Well, we're trying to get him to do a little better job on sense of urgency development." And I'll say, "Okay, how are you coaching him?" So now I can assess that the manager's got a good diagnosis and good coaching model. And then I'm like, "Okay, when you're coaching them, are they staying? When you move them up a little bit, are they staying there or are they, are they there for a week and then they go down?" If they're going up for a week and go down, yeah, we probably need to make a cut. But if they're staying there, it's just taking a little while, let's hang in there. I think we're gonna get there. That's the best I can see to get an early signal as to whether this person's gonna make it.

   6. HSHarry Stebbings12:52

      In, in terms of the hiring process, when it comes to titles, what are some of the biggest lessons in terms of the title discussion and what it might reveal about someone joining a company?

   7. MRMark Roberge13:01

      It's probably a red flag if they're over-obsessed with it. Uh, a little bit of ego-stroking, and that's not gonna be great for culture, especially early on when it has to be like, "Let's roll up our sleeves and do whatever it takes."

   8. HSHarry Stebbings13:13

      Should young companies be worried about giving away VP of sales or head of sales too early because it makes it difficult to layer, or not?

   9. MRMark Roberge13:20

      I don't think it does. You know, I, I... To your point, I think it's a red flag for the candidate. But if I have a star and I have to give them a VP of sales title instead of director, or a CRO title instead of VP, to get them to do the job I see for them for the next 18 months and then assess, I don't see it being an, being an issue. Like it's like, okay, I hire someone, they kill it for 18 months, and then after that we decide we've got to up-level them. In one case, their, their title is director of sales. In another case, their title is VP of sales. I don't

7. 13:52 – 19:03

   Designing Sales Incentives for New Teams

   1. MRMark Roberge13:52

      think that's harder.

   2. HSHarry Stebbings13:52

      What about money and incentive packages? Any big lessons there on what... Advise me. I've, I've never hired a sales team before, never hired a rep before. How should I do it? How should I structure it? What do you advise me?

   3. MRMark Roberge14:06

      What most people do, which is, I think, a big mistake, is they hire a sales person or leader and sort of delegate it to them because they sort of like are the functional experti- expert on it. And then that person uses the sales comp model from their last company. That's really broken. That's not good. A lot of founders don't realize is, you can get pretty creative here, especially in the early stages. And the best way to devise a comp plan is to think about what you need the business to do in the next six to 12 months, strategically. Don't even think about sales. Just strategically, holistically. Are any of those reinforceable with salesperson behavior or action? And if so, that's gonna start deciding your comp plan. So, I'll give you some really common examples. First off, which is like semi-related to that point, I don't like commission plan salespeople in the journey to product market fit. Like, I just want pure equity people. Like if I, if we're trying to find product market fit, if we have three design partner customers and we need to get to like 20 to understand product market fit, I'm gonna bring on a salesperson to help us do that, and that person's making, say, 150, like 75 base, 75 commission, I don't wanna put them on a comp plan. I wanna, like... I'm gonna say like, "Listen, I'm gonna pay you like 125 flat out, no matter what, with some equity." That's the right person. Because like we're sitting around and we're pivoting, pivoting, pivoting. We're, "Shoot, we've got it wrong. We have to kind of go back to the drawing board and fr- it's gonna take us three weeks to build this thing." All the engineers are making their salary, paying their mortgage, and the sales rep is like desperate and sweating. I don't need that.

   4. HSHarry Stebbings15:49

      (laughs)

   5. MRMark Roberge15:49

      And then furthermore like, that's not the rep I'm trying to attract right now. I'm trying to attract a rep that like enjoys that design journey, is sitting there, you know, shoulder to shoulder with the engineers and not sweating making the mortgage payment or thinking short term. But then like once we get into, okay, now we have product market fit, then this is a classic example where it's like, um, now we need to get like go-to-market fit, but we have to make sure that as we scale, we keep customer value and success top of mind. And so, I wanna make sure that my reps are not just selling customers and revenue, they're selling healthy customers, customers that are in my ICP, they're gonna see a lot of value from our product. Most comp plans don't motivate that, don't incentivize that. But here's an example of what we talk about, like think about your strategy and align it with a comp plan. It's like, "Okay, Harry, when you sell a deal, you're gonna make, you know, 5% on that deal. I'm gonna give you half of the commission when the customer pays, and half the commission when they hit their leading indicator of retention, which usually happens in the first 30 days." So that, that could be as simple as like, they set up the product and process, their first transaction. Okay? So as long as that leading indicator of retention is something meaningful, that again, can happen in the first 30 days of the customer's life, but if it happens, they're probably gonna be with us for a long time. And if it doesn't happen, they're probably gonna churn. And you'd be shocked how much like the sales process, in terms of what's discussed, how the product is presented, um, what types of customers are pursued, drives that. And that's like a, a not commonly used compensation plan, but should be at that stage and is aligned with the strategic objective of the company.

   6. HSHarry Stebbings17:43

      Are there any big fuck-ups that you see portfolio companies make on comp plans for sales teams that you're like, "Harry, don't make this mistake"?

   7. MRMark Roberge17:50

      Yeah. So many. I mean, that's like, just one of them is like... So like, one of the ones that we've talked about recently, I just launched a podcast last week on this, how if you're pursuing like PLG or land and expand, the sales compensation plan can really eff that up. Right? Um, because most sales compensation plans put most of the payment, the commission on the first-...ACV from the customer, and have very little, if any, on expansion. And that's the opposite of what it puts the sales person at odds with how you want customers to buy your product. 'Cause when you're in PLG, or land and expand, the buyer wants to start small, to test it out, and then expand it. Whether that's with other functions or departments, whatever. And you, as a company, a startup, your strategy is to do the same thing, make it easy for customers to just, like, give it a shot and expand it. But if your reps are paid in that way, they want the opposite. They want you to buy everything up front, and you're likely to contract or churn. So that's a huge fuckup that we

8. 19:03 – 20:17

   Scaling Pricing Strategies for PLG Products

   1. MRMark Roberge19:03

      see a lot.

   2. HSHarry Stebbings19:03

      What's the right way to solve that then? Because I s- I'm just taking you to say it's like a 10K PLG product line. A 10K is kind of the entry price, but we want them to scale to 100K. As a company, you don't wanna pay 100K up front, get hit with cashflow problems in that way.

   3. MRMark Roberge19:18

      I would do something like this, Harry. You're a salesperson. Your job is bringing customers. I'm gonna pay you, um, you know, 3% rate on the first ACV from a customer, and 5% on any expansion revenue. So now it's like, "Oh, sweet. Okay, I get it." So I will make the most money if I sell customers on a very small ACV to start, and expand them later. Yes, that's what you do. When... And then the salesperson is like, "Wait, wait, wait. Am I a CSM now?" No. No, you just go hunt. You, you go hunt, you sign up customers, and we have a CSM team that onboards them, and they, they expand them. They have their own comp, different comp plan. They have their incentives too. That's just how yours works. If you sign up good, healthy customers with good expectations, you make a lot of money. If you sign up a bunch of crappy customers that don't stick around and don't expand, you're not gonna make a lot

9. 20:17 – 22:54

   Optimal Price Point for Introducing a Sales Team

   1. MRMark Roberge20:17

      of money.

   2. HSHarry Stebbings20:17

      The thing that worries me, honestly, and the biggest problem I see, even in our portfolio companies today, is, like, sales-led growth with PLG pricing that doesn't expand. And what I mean by that is traditional large sales teams selling 3K ACVs and they say, "Ah, but, you know, if we prove it, and if we do this and this and this, then it'll expand to 30K." And truth be told, it rarely does. And so we have this kind of enterprise sales cost base for a PLG pricing that doesn't often expand. At what price point does it make sense to have a sales team?

   3. MRMark Roberge20:54

      You know, like, even in HubSpot we started at like 3,000 a year. I would say that's on the lower end, okay? Now, that required a lot of inbound leads, right? So, like, the... There's a big missing part to that is, like, the ACV is only one portion to answer, like, whether or not our go-to-market motion is working, whether we have a salesperson or PLG, or we're using marketing and inbound, or we're doing cold calling, whatever. The absolute right answer comes down to unit economics, and there's a couple different ways to measure unit economics. Let's just say payback period, which is the, um, the CAC divided by the ACV is, you know... You probably should take ACV times gross margin, but, like, let's just say... So it's like, let's keep it simple. Someone pays us t- um, $10,000 a year, then the, the CAC needs to be $10,000 for us to have a payback period of a year. Right? So if someone pays us $10,000 a year and it costs us $10,000 to acquire them, we get paid back in 12 months, right? Anything above that, you start to question whether your unit economics work. Anything below that, it's, it's really good. So the problem is ACV is only one part of that formula, Harry. So the CAC is the other piece, and the CAC for outbound sales teams is all over the place, because it depends on, like, how many calls do you have to make to get an appointment? How many of those appointments turn into a demo? How many of those demos close? Right? So, there's a lot of different variations in there, right? Like of, like, are you calling CMIOs of hospital systems, or are you calling, like, landscapers of small businesses that pick up the phone a lot? Right? So, there's so many variations. So, it really comes down to, like, the, the absolute academic and practical answer is you have to have good unit economics. The CAC and the ACV have to match up, but the, uh... It's not always like at 3,000 ACV you can have a sales team and at 2,000

10. 22:54 – 25:07

    Evaluating Payback Periods

    1. MRMark Roberge22:54

       you can't.

    2. HSHarry Stebbings22:54

       When you look at payback periods-

    3. MRMark Roberge22:56

       Mm-hmm.

    4. HSHarry Stebbings22:56

       ... as an investor today, what are you like, bad, good, great?

    5. MRMark Roberge23:01

       At the IPO, um, less than 12 months is excellent. 12 to 15 is good. 15 to 20 gets concerning. Above 20, it's gonna be a real problem. 20 months, okay? Uh, at the series A, less than 12 is, uh, ama-... It's almost like you're probably being too efficient. (laughs) Like, we could probably, like, try to grow faster. Um, 12 to 15 is really good. 15 to 20 is fine. It's kind of like, "That's fine for now, we'll have to work on it later." Above 20, it gets concerning. Yeah. So you kind of have, like, some semblance, but there's a little more flexibility at the series A, because we know that there's a lot of, there's a lot of improvement that's just gonna come with scale potentially, um, and then there's a lot of opportunities and low-hanging fruit for us to get to that just isn't a priority right now.

    6. HSHarry Stebbings23:56

       So I see a lot of two to three month paybacks, which se- at series A-

    7. MRMark Roberge24:01

       Amazing.

    8. HSHarry Stebbings24:02

       ... which to your point would be that, hmm, ah, there's always a game with numbers though-

    9. MRMark Roberge24:06

       (laughs)

    10. HSHarry Stebbings24:06

        ... Mark, isn't there? What- what's included in your CAC? And I've had some where it's like-

    11. MRMark Roberge24:11

        Mm-hmm.

    12. HSHarry Stebbings24:11

        ... "Well, it's just my marketing spend."

    13. MRMark Roberge24:14

        Mm.

    14. HSHarry Stebbings24:14

        Or, "It's just my outbound sales team."

    15. MRMark Roberge24:17

        Mm-hmm.

    16. HSHarry Stebbings24:17

        And it's like, well that doesn't, that doesn't count.

    17. MRMark Roberge24:20

        Yeah.

    18. HSHarry Stebbings24:20

        It's not quite that se-... What should be included in a CAC for a founder to truly understand their actual payback?

    19. MRMark Roberge24:27

        Yeah. So at scale it's gonna be, like, on your income statement, the entire sales and marketing align.... is going to be the CAC, and you divide that by the number of customers that are acquired in that period, let's say in a quarter that you're evaluating. Now, that gets challenging at the series A because if the founders are selling, well, then you have to attribute a part of their salary, hypothetically. And if, like, you're throwing just general networking events for the company and that's leading to leads, is that quote... So there's always these squishy costs but, like, at, just to keep it simple, everything you're spending on marketing and salespeople and sales leadership and sales ops and all that kinda stuff needs to go in there.

    20. HSHarry Stebbings25:05

        Okay. The one thing that we

11. 25:07 – 28:41

    Analyzing LTV in Early-Stage Companies with Limited Data

    1. HSHarry Stebbings25:07

       didn't discuss though, actually, is the LTV. And it does matter because if we look at, like, I don't know, banking customers, for example, or phone customers, and I'm taking them 'cause they are generally the longest serving customers. You know, they last for seven to 10 years. And so you can actually have a higher CAC if your LTVs are much longer. How do you think about that when analyzing early stage companies, where we have, in the UK we would say, "Fuck all data."

    2. MRMark Roberge25:38

       (laughs) Yeah, so, you know, there's multiple ways to measure uneconomics. There's payback and then there's LTV to CAC. For whatever reason, the industry talks about an LTV to CAC greater than three. It's a little bit of a farce but it's not, like, a terrible measure. It's good to know what your LTV to CAC is. And so that's where you could find that, Harry, and that's gonna be tricky because theoretically, the lifetime value should be your ACV divided by your churn rate. Um, and, like, you don't know your churn rate really for five years (laughs) or more. So you have to make some pretty heavy assumptions there.

    3. HSHarry Stebbings26:16

       Do you not think you know your churn rate? So if we take, like, you know, HubSpot. Why did so many investors pass on HubSpot? Oh, you serve SMBs, don't they go out of business-

    4. MRMark Roberge26:25

       They, they certainly do. Absolutely.

    5. HSHarry Stebbings26:25

       ... at such a high, high rate?

    6. MRMark Roberge26:27

       Right.

    7. HSHarry Stebbings26:27

       The churn rate's gonna be horrible.

    8. MRMark Roberge26:29

       Yep.

    9. HSHarry Stebbings26:30

       I think actually, I, I think there's some discrepancy, and I'm not blaming anyone, but on, I think, the, the early HubSpot churn rate, at some points it's been said to be, like, 3 to 4% and some 8%. Um-

    10. MRMark Roberge26:43

        Yeah.

    11. HSHarry Stebbings26:43

        Point just being SMBs go out-

    12. MRMark Roberge26:45

        A month.

    13. HSHarry Stebbings26:45

        ... of business-

    14. MRMark Roberge26:46

        A month-

    15. HSHarry Stebbings26:47

        Yeah.

    16. MRMark Roberge26:47

        ... by the way. Yeah, it was high. Eight was the highest-

    17. HSHarry Stebbings26:49

        Yeah.

    18. MRMark Roberge26:49

        ... it hit in February of 2008. Throughout 2008, it was mostly between three and four, which is terrible. I mean, even at three or four, that's 40 to 50% a year churn. It's really bad.

    19. HSHarry Stebbings27:01

        You're an investor today, do you invest in a company that serves SMBs with 3 to 4% churn rates?

    20. MRMark Roberge27:07

        We do invest in companies that serve SMBs. That's become, like, a really great starting point, and you can build a healthy business there. But more importantly, use that success to move upstream to the mid-market when your product and brand and your sophistication justifies it, and then eventually to the enterprise potentially. These are very common plays. But, um, yeah, with 3 to 4%, no, not a lot. I mean, you have to have a lot of other things going right because actually you just don't have a business. Now, when you a- if you do wanna make your business work in SMB, you just need a really healthy up, expansion motion. Because, like, just macroeconomics, because of, like, small business bankruptcy and budget sensitivities, uh, if you're doing really well, you probably have an 80%, 85% logo retention in SMB. So, you need to have at least a greater than 15% revenue expansion to get your business to be solid, to get your revenue retention to be above 100%. Which is like, it's doable, and that's why PLG is beautiful, because, like, most, in PLG most starting ACVs is zero. It's all expansion. Right? And so only the people that have already seen value in your product start with revenue, and that usually sticks very nicely and then continues to expand. So, SMB is very doable, it's just, like, you probably have to start them on low ACVs and you have to have a really strong expansion

12. 28:41 – 32:37

    Gross vs. Net Revenue Retention

    1. MRMark Roberge28:41

       mechanism.

    2. HSHarry Stebbings28:41

       Can I ask, I had Dave Kellogg on the show there, and he said that he loves, uh, GRR, gross revenue retention, and it's much more telling than net revenue retention. How do you think about net revenue retention versus gross revenue retention for founders listening going, "Oh, which one?"

    3. MRMark Roberge28:57

       I think they're both needed. I probably put more weight in, uh, net revenue retention because at the end of the day if you have 120% net revenue retention then you're gonna grow 20% a year without acquiring any customers. That's really powerful, okay? Whether that means you have 90%, you know, customer retention with 30% expansion and that's how you get to the 120, or you have 50% customer retention with, um, 70% revenue expansion and that's how you get to 120, either way you're gonna grow by 20% a year if you keep that up. Now, that's wh- that's why I think that's the most important. Okay, now if... The problem with the latter of having 50%, uh, you know, customer retention with 70% expansion, yeah, the customers that stick with you are seeing a lot of value and paying more, but that means half the world out there are being like, "Yeah, I tried Harry's product and it didn't work for me." That's not good. That's why I wanna look at customer retention, but, like, I kinda think net revenue retention is more i- more important, this is my view.

    4. HSHarry Stebbings30:08

       Is that not good? Like, I, I think if you have a tight ICP-

    5. MRMark Roberge30:11

       Mm-hmm.

    6. HSHarry Stebbings30:12

       ... and you're very clear in terms of who your customer is, especially in a PLG world, there'll be people who pick it up and try it-

    7. MRMark Roberge30:18

       Sure.

    8. HSHarry Stebbings30:19

       ... and it's not for them and they're like, "Yeah, it was never meant for you."

    9. MRMark Roberge30:22

       For sure, for sure. I mean, like, that's fine but, like, I- I just worry that, like, some customers don't, you know, know that. Like, I know this company selling yoga software and they sell it specifically for, like, you know, more of, like, multi-location...... yoga studios. But yogas, yoga own, t- uh, yoga studio owners talk to each other and, like I think when one, when they're at, like a retreat together and they're like, "Oh yeah, I tried that and it didn't work for me," I don't think they're like thinking, "Oh, were they an ICP or not?" You know what I mean?

    10. HSHarry Stebbings30:53

        (laughs)

    11. MRMark Roberge30:53

        I just think like-

    12. HSHarry Stebbings30:54

        (laughs)

    13. MRMark Roberge30:54

        ... there's a reputation. So-

    14. HSHarry Stebbings30:57

        Ah.

    15. MRMark Roberge30:57

        ... yeah.

    16. HSHarry Stebbings30:57

        I'm not that ICP. Ah, good.

    17. MRMark Roberge30:59

        Yeah, exactly. Right, right, right. Well, you're different than me, you know, like oh, so.

    18. HSHarry Stebbings31:03

        When you're investing, say, a net revenue retention of 120 is good for founders? Like how do you think about good and great?

    19. MRMark Roberge31:11

        At some point you need to get above 100% because if you're not above 100% net revenue retention, that just means you're like, in order to grow you have to outsell that gap with new customers. Okay? So like if you're at like 10 million in revenue, that's not that hard. If you're at 10 million in revenue and you have 90% revenue retention, that means that you start the year, your customers are paying you 10 million, and those customers will be paying you 9 million at the end of the year. And so you just need to sell a million dollars of new software to s- to break even, to, to, to maintain flat, and you need to sell five million of software to grow by 40%. That's not that hard. But once you get to a billion in revenue, and you have a 90% net revenue retention, that means that at the end of the year, you're gonna have 900 million. So you have to sell $100 million of new contracts to new customers just to remain flat, and 200 million of new software to new customers to grow by 10%. That is hard. Versus if you're at a billion and you have 110% net revenue retention, you can do nothing in new sales and you're gonna grow by 10%. So at some point it just like, you can't outs- outsell a net revenue retention

13. 32:37 – 37:07

    Advising SaaS Founders on Scaling to Enterprise

    1. MRMark Roberge32:37

       less than 100%.

    2. HSHarry Stebbings32:38

       One of the favorite things I love about HubSpot is the way that you just like broke the SaaS law of SMBs in terms of it being a great business to serve, and not needing to scale necessarily into enterprise. But you invest today in amazing SaaS founders and I'm sure you see them say, "Ah, we're thinking about scaling into enterprise." How do you advise founders that you work with, or advise me-

    3. MRMark Roberge33:01

       Yeah. Sure.

    4. HSHarry Stebbings33:01

       ... in terms of when is the right time-

    5. MRMark Roberge33:04

       Yeah.

    6. HSHarry Stebbings33:04

       ... or if at all, to scale into enterprise?

    7. MRMark Roberge33:07

       Both answers could be correct. Uh, I will say that it is extremely rare that you wanna go into enterprise south of a couple of million in revenue. Extremely rare. You almost have to like, like obviously like a company like SpaceX, there's no SMB play. You know what I mean? Like (laughs) you're selling, your proposition is to put satellites in space, like (laughs) you're selling to major governments, whatever. So that's fine. That's a great business. But you gotta raise like a hundreds of millions of revenue before you even have a customer. Just a different type of business, different type of ambassador. That's not what stage two does, it's not what I do. So it's a little bit of a trap for most entrepreneurs to wanna go to the enterprise too early. A lot of my students do this. You know they're like, "Oh, if I can just get that huge logo, everybody else will follow." Well, two problems with that. Number one, you don't under- you really underestimate what it's like to get that logo. It's gonna take a long time, maybe a year and a half. And whoever's your championing you might quit their job in that time. And by the time you get to the finish line you're gonna have to do SOX compliance and show all this stuff, and you don't have it. So it's like it's just gonna kill you from a capital standpoint. And so your better bet is to figure out what your product is, what your offering is, figure out your total adjustable market, and carve out the lowest part possible. Now it's not always like a couple of people. Like we have an AI, um, uh, an A- IA product company for, um, for support teams. It doesn't work if you only have two support reps, it just does not make sense. You have to have at least 20. But that's fine. Like we can, we can go sell companies with 500 employees and 20 support reps. That's fine. That's not trying to close a huge bank. So you just have to carve out the smallest possible and then I've asked a lot of people from Chris Deignan, one of our LPs or the s- founding CO of Snowflake, to like, you know, um, Kevin Eagan who I did a podcast, who took like Salesforce, and Dropbox, and Atlassian and Slack upstream, and the answer on when is always the same from them, it's like when you get pulled. That's what they say. 'Cause like you're making hay in the SMB, you're going one million, three million, seven million, and like big businesses start hearing about you. In fact, you're probably turning away big businesses before you're starting to sell them. And then at some point you just get pulled up, yeah.

    8. HSHarry Stebbings35:25

       That's why I di- (laughs) take the bold stance of disagreeing with Deignan and Eagan, right?

    9. MRMark Roberge35:30

       Great. (laughs)

    10. HSHarry Stebbings35:30

        That's why I dis- it's why I disagree with him though, 'cause you might actually get pulled at one million in ARR, and actually very often I find enterprises can distort strategy and product roadmap before they are ready for it.

    11. MRMark Roberge35:43

        Yeah.

    12. HSHarry Stebbings35:43

        And people do not un- um, a- like do not understand what it truly means to be an enterprise company, as you said, SOC 2, all compliance is different. So no, not when they pull you.

    13. MRMark Roberge35:54

        Yeah, you, I agree, eh, you were actually in agreement, Harry, I probably didn't say it right. They would say like you're not gonna go unless you're pulled, but if you're being pulled it doesn't mean you should go. Okay? So that, I think we are, we're on the same, you're on the same page with them, Harry. And like classic example, I mean, I think we were at two, three million in revenue at HubSpot and one rep, uh, brought Facebook to the table as a customer. It was like a $3 million contract. It would have doubled our revenue and he said no. We were being pulled, said no. 'Cause you like, it just, it, everything's gonna go bad at that point like they're gonna start controlling your product roadmap, we're not built for that, it's not gonna go well, things are gonna get around, it's gonna distract the company. Like it's just... And the other thing that happens too, Harry, is like if one of them, I had another company recently that did this where like a friend of the CEO at a big company came in and bought-And it was, like, a huge contract. Up until then, they'd been selling $15,000 ACVs, and this one was, like, 200,000. And all the salespeople were like, "Whoa, look at that. I made my annual goal in one sale." And everybody will start doing that. And now all of a sudden, you have no sales because you don't know how to sell those deals. That was, like, a lucky inbound. It's a real, real big trap.

14. 37:07 – 40:49

    The Impact of Large Logos & Social Validity

    1. MRMark Roberge37:07

    2. HSHarry Stebbings37:07

       Yeah. In terms of, like, you mentioned that, like, the logo that drives social validity. To what extent do large logos drive social validity in subsequent sales? Does having Dropbox, Tesla, da-da-da, does that really work, or is it like, "Meh"?

    3. MRMark Roberge37:21

       Not as much as people think. You know, like they're, they're always gonna say... Just case studies in general, you throw a case study, "Well, that's a bank, and I'm in healthcare." "Okay, well here's one from healthcare." "Well, that's in oncology, and I'm a dermatologist." "Okay, here's one in oncology." "Well, that's in this type of oncology, and I'm more this type." (laughs) You know what I mean? It's like... Or, "They're on the West Coast, and we're on the East." Like, they're never satisfied, you know? So it's like, um, yeah, it, it helps a little, but not as much as people think.

    4. HSHarry Stebbings37:50

       And do you think that when you're advising founders, it's great to get, like, just sheer volume, number of customers through the door, volume, volume-

    5. MRMark Roberge37:58

       Definitely.

    6. HSHarry Stebbings37:58

       ... or actua- or quality of those logos and those big-

    7. MRMark Roberge38:02

       Well, okay, good, good question. Like, you have to be specific about your ICP and, like, deci- to, um, pushing folks out. Now, very early it's a hypothesis. So let's say, like, if you take the whole world (laughs) and ultimately your ICP is gonna be, say, like, 5% of that. Well, I might be okay on selling to, like, 10 to 12% and drawing a little bigger circle 'cause we just don't know. But, like, there's some folks... I like to do, like, a green, yellow, red. I have different attributes like, you know, how many employees? Where are they located in the world? What sectors are they in? These types of things, right? And the green is, like, we have strong conviction that those are good fits, right? Between, between 50 and 500 employees based in the US in tech. That's green. And we're gonna go after those all day. So when our SDRs are cold calling, they're only cold calling those people. Then there's reds where we have strong conviction we will not sell. In fact, you cannot sell them. Okay? So that might be outside of English-speaking territories. Uh, that might be, um, healthcare, nonprofit government, and it might be, like, greater than 10,000 employees. Those are red. You are not allowed to sell them. Yellow is you can sell them if they're inbound. So we're not gonna cold call them, but if they come inbound, we don't have enough conviction to know that they're not a fit. We also don't have enough conviction to, like, go outbound. So, that's how I kinda try to think about it in that green, yellow, red mindset, at least to start. And then over time, you can start to evaluate customer success, performances, et cetera, to get more conviction on it.

    8. HSHarry Stebbings39:34

       What was your inbound to outbound ratio at HubSpot?

    9. MRMark Roberge39:37

       Ridiculously high. Like, I, I, like, I don't know if any company has ever had it th- Like, it's rare to see it that high. It was... I think 100% of our customers came inbound for the first two or three years.

    10. HSHarry Stebbings39:48

        (laughs) How did that change over time?

    11. MRMark Roberge39:51

        I would say, I, I'm guessing here. I would say year four... And we also built a vibrant channel partner program, a very fragmented channel partner program through, like, very small channels, so, uh, s- channel partners. So, I would say by year five, we were probably, like, 50% inbound, 30% channel, 20% outbound. And then, like, at around the IPO, it becomes very blurry because at that point, you tend to just, like, uh, go to territories. And the brand becomes so strong that, like, it's really not clear what an inbound versus an out- Like, if someone does a cold call and they're like, "Oh, yeah, I, I know you just cold called me, but I'm already a HubSpot customer." And you're like, "What do you mean I'm a HubSpot customer?" They're like, "Oh, I've been using your marketing grader, your free marketing grader product for two years." Like, "Oh, yeah. Like, you're not really a customer." Or like, "Oh, I heard about you guys. I saw you at an event." So it's like when you hit brand scale, the bl- the lines start

15. 40:49 – 45:20

    Common Mistakes Startups Make with Channel Partnerships

    1. MRMark Roberge40:49

       to get blurred.

    2. HSHarry Stebbings40:50

       I, w- so, I'm so enjoying this. Uh, you mentioned channel partners. I think so many founders go, "Well, we're gonna get a channel partnership with SAP or Workday, and then they're just gonna sell for us and..."

    3. MRMark Roberge41:02

       Oh my gosh, so many.

    4. HSHarry Stebbings41:03

       "... fill up with cap-"

    5. MRMark Roberge41:04

       Huge pothole.

    6. HSHarry Stebbings41:05

       So, so, okay, so tell me, what are the biggest mistakes startups make with channel partnerships?

    7. MRMark Roberge41:10

       Yeah, exactly what you said, Harry, which is just, like, a complete underestimate of what it takes to actually mobilize that partner. And it's- I get why they're doing it. It's like we're going back to our product founder and they're like, "Yeah, we have, like, 10 design partners and- th- 10 design customers and now we have to go acquire a bunch of customers. And I have two options. Option A is hire a big, expensive, scary sales team that's gonna destroy my culture and I don't know how to hire salespeople. Or just go partner with Workday who already has 5,000 salespeople, and I'll just give them 20% of my profit. Why wouldn't they ever wanna do that? That's, it makes perfect sense." And it's just like, first off, do you even know how to get into Workday's program? Like, you need to, like, really have good alignment with, uh, as high up as possible to do that. Second off, do you even know how to get the mindshare of the rep? Imagine being a Workday salesperson. You worked for hours to get 30 minutes with a customer. What are you pulling out of your bag to show them? Some startup's little product that I get a 5% spiff on? No. You know what I mean? So to really mobilize, you have to understand what the strategy at the C-level is and make a case that your product aligns with that. And then convince them to spiff the crap out of their reps so they're motivated to pull it out of their bag. Hard.

    8. HSHarry Stebbings42:29

       How do I, how do I convince them to sp- spiff? Wha- I'm so sorry, what is spiff in the UK that some-

    9. MRMark Roberge42:35

       Uh, it's like a, it's like a commission bonus. Okay, so let me give you an example. This happened-

    10. HSHarry Stebbings42:39

        Do you know what, do you know what? It- in the UK, it's marijuana. (laughs)

    11. MRMark Roberge42:43

        (laughs) Okay.No, not ince- (laughs) Not incentivizing with drugs. No. So I'm sorry. Oh, there you go. Speaker

Episode duration: 45:11