This Week in Startups - E1084: David Sacks on “The Cadence”: an operating philosophy he developed at PayPal which helped him lead Yammer to a billion-dollar exit without a COO

Episode Date: July 14, 2020

David Sacks’ recent Medium post: https://medium.com/craft-ventures/the-cadence-how-to-operate-a-saas-startup-436aa8099e8 Follow David: https://twitter.com/DavidSacks Follow Jason: https://linktr.ee/calacanis

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Go to Fiverr.com and use code Twist to receive 10% off your first order. Hey, everybody, welcome back to this week in startups, the podcast where we talk about building startup companies. And here in Silicon Valley, there are two individuals who are considered really. three, who are considered the greatest operators of all time. One would be Cheryl Sandberg from Google, fame, and also Facebook. You got Keith Rabe, gets a lot of credit for Square and some other companies that he's co-founded and operated within. And of course, there's David Sacks, who was the CEO of PayPal, created Yammer, which was the quickest SaaS billion-dollar

unicorn sale ever going from zero to over 50 million in revenues at about four years. I think I have that number correct. You know him. He's one of my best friends in the world. And he has now making his one, two, three, four, five, six, seventh appearance on this week in startups. You can see his first one. He was actually episode five back in May of 2009. Thank you for doing it back in the day when nobody knew what podcasting was. And you can find a large range of these. But David, like myself, is focused on investing in companies. And he co-founded and is the general partner of Kraft Ventures, which has, I believe, three funds and over $700,800 million under management.

He'll correct me in a moment. And it's become, I would say, easily top seven venture capital firm in terms of venture capital founders asking me for introductions. And then when it comes to SaaS, specifically software as a service, really David is one of two that I get asked along with Jason. Lemkin, who does a great job and runs the Sastro Conference. David, welcome back to the program. Yeah, good to be here.

I see you're getting some light reading. And for those of you watching the video, I see, I know there's so many nuggets in that book behind you that you need multiple copies to write all the notes and the side notes. But thank you for that. For those of you listening, he's got a stack of 50 copies of Angel behind him, which is hilarious. Well done. So just correct me if I got anything wrong there.

Craft is, you're on the third fund. There we go. There we go. There we go, Kraft. Let me promote myself for a second. Yeah, exactly. It's Kraft logo. Yeah.

So, yeah, Kraft Ron Fund, too. It's a $500 million fund. We, you know, do classic early stage venture, seed series A, series B. And three funds? We're on our second. The first one was $3.50. So it's $850. million total. Great. And yeah. And, you know, like you said, we do consumer SaaS and

marketplaces primarily, and I tend to focus on bottom up SaaS. But what does bottom up SaaS mean? It's SaaS, it's business software where the users or the employees of the company pull the software into the company like a consumer would. So it's kind of consumerized business software. And that was the that was the go-to-market strategy or the idea that Yammer really pioneered about, you know, a dozen years ago. We were a bunch of consumer internet guys, you know, me after PayPal, I had done consumer, who decided to attack, you know, business software. And we didn't really know anything about it. But in those days, business software was distributed via a sales team. And it was done through the IT department.

And our idea was that we can make it viral and kind of go over the heads of the IT department. This eventually became known as Shadow IT. And we sort of pioneered this concept of, you know, consumerized business software. Yeah, I mean, the old days Oracle was famous for having the greatest sales training program in Silicon Valley where they would try to sell some chief technology officer, chief information officer on some $10 million a year license. and then everybody in the company found out one day, okay, we use an Oracle or okay, one day we're using IBM or whatever it was.

And then because the software was subscription-based and you didn't have to install anything on a server, people could log into a website and just start using it. So there were a couple different pieces there that allowed it, right? Yeah, the prerequisite was software moving to the cloud. You know, back in the early 2000s, it was still all, you know, on-premise. It had to be physically installed on a server behind the firewall. And once that requirement got lifted because, you know, software moved to the cloud, you could then have users or employees in the company just start adopting it like they would any other product.

But that was a big change. So we're sitting here today in 2020 and it's very easy to start a company in the SaaS space. However, what is really hard is to scale it. And you and I see this all the time, me as an early seed stage investor and you as a seed series A, series B investors just slightly down the road. We overlap a bit there. But you wrote a phenomenal piece, which it resonated so deeply with me, and I don't do this often. But when I see a piece that's written by an expert that gives actual practical advice, that's not some rehash bullshit that I see all the time on Medium, I immediately say, hey, can you come on the podcast and can we just chop it up into pieces and walk people through it step by step? And the title of the piece is you think you need a COO, a chief operating officer, which you were one of the elite ones here in Silicon Valley.

But what you say here in the headline is what you really need is an operating philosophy. So I want to get right into this with you. So I'm sure you have had this experience. I've had this experience. You're at the board meeting. The startup starts feeling like it's coming apart. the seams and it's basically chaos, right? I think you use the word shit show in your piece in the first sentence. So somebody raises their hand and says, we need a COO. You're saying

you don't need a CO, which you need is an operating philosophy. So explain what the operating philosophy we're talking about here is that you explain. And if you type in, you think you need a COO, what you really need is an operating philosophy into Google, you'll find this, or it's in the show notes. Right. So the, yeah, the title of the piece is the cadence. And it's about how you put your startup on an operating cadence to reduce the sense of chaos and synchronize all of the efforts of the employee so that it's not, you know, a shit show. And this is this is specifically meant for startups that are scaling from, say, 50 employees to 500 employees. That's the time period when this really matters. In the early days of a startup, the biggest problem is not,

you know, sort of how to rein in the chaos. It's just how to find product market fit. that's a separate blog post I wrote. You can check it out called The Wilderness Period. But this blog post, the cadence is about how you, once you do find product market fit, how do you scale the company an elegant way so that you can solidify the initial traction that you have and to scale this thing without it degenerating into just chaos. And when you're under 30 people in my experience, everybody's in the same right. room. Everybody's in the same, you know, earshot of each other. So you haven't broken up into tribes. You haven't broken up into functions as explicitly. And even if you had, you know, you can kind of sit in on each other's meetings. But once you get past 50 and you got 20 people, there's no conference room. And if you did have a conference in big enough, it's chaos. Correct? So, right. So this is what happens is that in the early days, in the beginning of a startup, everybody is in the same room, either physically or virtually, you know, in the days of COVID.

As a result, everybody knows what everybody else is doing. Everybody is pretty much a generalist. And the founders run around telling everybody what to do and what to build. And that's the way the startup works in that seed stage all the way to say series A. But around 50 employees, that approach stops scaling because there's just too many people in the company for the founders to just sort of tell them what to do on a task level. And so you start setting objectives. you have to start managing teams and people. And you start divvying up the organization.

You start breaking up the org chart into silos and functional areas. You've got to, you'll create a team for sales and customer support and, you know, obviously, you know, R&D, engineering, marketing. And then you'll also hire your first product managers. And so you'll go from the product roadmap being dictated ad hoc by the sort of the founder's CEO to, to, you know, the founders have to work through product managers to guide the development of the startup. And so this is sort of the fundamental change as you get above 50 employees on your way to, say, 500. And, you know, what, what typically happens is that because of this, these new functional silos in the company, it starts to feel very compartmentalized. And, and so people

kind of feel isolated or disconnected. And at the same time, time, you've got other functions which are underdeveloped. They may not have mature leadership yet. They may not have any leadership yet. And so you've got other functions that, you know, just aren't quite working. And the result of this sort of disorganization and disconnect is chaos. And so the cadence is designed to describe my operating philosophy that I started using a PayPal as COO, kind of figured it out there. And then I adapted it for SAS at Yammer. And it's sort of an operating philosophy I think everybody can use and it basically tells you how to organize the four major functions of a SaaS startup and then how to synchronize them.

Okay. So when we get back from this quick break, we are going to go over those four groups in the company and then how to establish this cadence. And I'm going to crack open a cold course right now because it's Friday. And there's nothing like I love more than responsibly having a crisp course light on the pod. When we get back, more with sacks. All right, everybody, if you don't have your SOC2 compliance buttoned up, well, you're not going to be able to close those giant enterprise customers. It's really that simple. And if you already have a SOC2 report, don't you want to make it easier to maintain it year after year after year? Of course you do.

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Just go to vanta.com slash twist. that's V-A-N-T-A-com slash twist T-W-I-S-T for $1,000 off. What a great deal. Thanks to Vanta for supporting independent media like this week in startups. All right, David Sachs is on the podcast, and we're talking about his recent medium post.

You think you need a CEO, what you really need is an operating philosophy and we're going to chop it all up. You know, I was just thinking, what precipitated you, you said you implemented this at PayPal, Was there a moment that precipitated this where PayPal really became chaotic and felt like it was coming off the rails and you said, you know what, we need something? Or was it just an eventual, you know, evolution? Well, PayPal definitely felt that way. I mean, it definitely felt chaotic. And eventually I got promoted to COO to rein in that chaos. And so we, you know, over the course of that, that was kind of my first startup experience. We learned how to how to manage a, you know, a startup that has hundreds of, you know, a startup that has hundreds of, you know,

of employees and still wants to be very productive and, you know, ship and sell and, you know, all those kinds of things. So Peter Thiel is trying to keep it together, but there's only one Peter Thiel to go around. You've got nobody who's actually creating this operating philosophy or acting. Well, Peter, yeah, I mean, Peter, you know, Peter was never very interested in being kind of an operator per se. He was always interested in more of the financial side.

You've great strategist, tremendous strategist, but he was, you know, very happy to kind of hand off a lot of the internal operations. And then when I got to Yammer, I took a lot of the things I learned. Like I said, I adapted it for a SaaS startup. You know, the main difference being that SaaS startups need a sales team. And so we learned, you know, how to do enterprise sales. And then, you know, in order to enable the sales team, you need a marketing team, knows how to create the right kind of collateral. And so on. So we sort of adapted this operating philosophy.

Again, I call it the cadence for a SaaS company. And at Yammer, I was basically my own COO. We didn't have a COA Yammer, and it worked quite quite, it worked fine. Okay, so we mentioned there were four different key components of this. Sales and marketing. Some people consider that the same thing, but you break it into two pieces that are kind of sharing the bunk beds there, I would assume. Yeah. So, yeah, sales and so I identify four functions that I think are critical at a SaaS startup.

There are sales and marketing, but there's also product management and finance. And those are really the four key functions. Now, sales and marketing are related, but they're actually in my system, they're on very different schedules. So the first, there's a few sort of key insights to the, to the cadence. Okay. So one is that you have the four key functional areas that I've just mentioned. The second is that sales. and finance are on the same calendar.

Okay. And all four of these functions are best run on a quarterly cycle. That's one of the things we should get into. But they all make more sense. They run more harmoniously on a quarterly cycle, but it's not the same quarterly cycle. Sales and finance are on one cycle and then product and marketing are on another cycle. And you actually want to offset those two cycles by about half a quarter. But when you snap them together with that offset, that is what creates a

single operating case for the whole company. And once you have that, you can then define your events, your all hands meetings. You can create, you know, again, this operating rhythm to the company that, you know, alleviates this feeling of chaos and disorganization. So most people would say, okay, everybody's on the same quarter and we're going to have a quarterly review. Sales goes up first. You know, marketing talks about what they did to drive that product tells us what's going on and finance tells us if we're still in business and how many months of run will we get. you're saying put two in between what would be the traditional quarters of January to the end of March, put one of those right on February 15th. Right. You actually don't want to light everybody's hair on fire at the same time.

Ah. So finance and sales are going to be on the same calendar, and that is going to be the fiscal calendar. Okay. And so the fiscal calendar, every company as an accounting requirement has a fiscal year, and they'll have fiscal quarters. And so the first question you have to answer is, well, you know, what, what is my fiscal year end going to be? You know, most companies default having a December 31st year end, but for a sales driven SaaS company, it can often make sense to have the calendar and the fiscal year end on January 31st. For the simple reason that you want to be closing out the year during that sort of holiday period, that Christmas to New Year's period, it can be pretty rough on your sales team to be trying to close out. the number trying to hit your number for the entire year during that holiday week. And so what I recommend for most sales driven SaaS companies, they actually have a January 31st fiscal year.

Which can be confusing if you don't know it, but it's just alleviates that brutal thing where the salespeople come to you and they're like, I could have closed this, but it was Christmas and they're going to sign it. And it's just dumb that they're forced to sprint when everybody else leaves on the 19th. Right. It's inhumane for your sales reps. And also, smart customers know to demand discounts during that last week of the year because they know everyone's scrambling to try and make some number that they've promised the board. So I just generally find that it's better to kind of, like, opt out of that whole thing and just have your fiscal year end on January 31st. So you got November, December, January is Q4. Yes, exactly. February 1 is Q1. I love it.

That's right. So Q1 is February, March, April, and so on down the line. Okay. So that's the first thing you do. Now, the reason why sales is on that same calendar is because you want your fiscal quarters and your sales quarters to be, you know, snapped together. When your board reviews your quarters, you know, it reviews the data that your finance team puts together, you don't want to be, you don't want to be reporting out half-baked sales numbers, right? Yeah, true. You want to see a complete quarter sales activity to know how the sales team did. And so what you're going to do is you're going to put your sales team on a quarterly plan that coincides with your fiscal quarters. So, you know, on a, say, January 31st year end, you're going to have February, March, April will be

your first quarter sales plan. And, you know, what I mean by sales plan is when you think about the quotas for your sales team, you know, they're going to be quarterly quotas that end on, you know, at the end of April and so on down the line. So if you say, hey, we want to hit a million dollars in Q1, we have 10 account executives. Everybody's responsible for $100,000 in AR in Q1, and you know, it's a little more in Q2 and a little more in Q3, et cetera. When you report your financials, you can actually predict the financial need of the business vis-a-vis fundraising and you know, hey, we're 110% on plan or we're 90% on plan. And this is where the cash runs out because that's the other thing is you have everybody starts gaming the board i don't know if

you've been in this board meeting where the sales team is sandbagging or exaggerating with the pipeline the finance team can't get a handle so they get conservative and everybody's kind of finger pointing right right so what you want to do is um well this is partly why sales and finance need to be synchronized or coordinated right is the quarter begins um i think every fiscal short quarter should begin with a sales kickoff where you bring your wholesale organization together and you hand out their new sales plans. And the sales plan is going to contain their territory, it's going to contain their quotas and their commission rates. And if there's any spiffs or objectives, that will all get handed out at the beginning of the quarter. Explain a stiff, by the way. The spiff is just an objective where the

company says, okay, we want to, you know, we want to incentivize the sales team to do something. And maybe a non-financial goal. Got it. So if we get to, if we hit any of these 10 lighthouse customers, high profile customers, everybody in the team gets an extra $1,000. Right. Or we want to encourage engagement at customers. And that may not immediately translate into higher revenue, but it's still a valuable objective for the company. Got it. So it could be something like that. But the important thing generally are the quarters and territories and commissions. And you want to put your sales reps on a quarterly plan because, well, as most, we, mostly by process of elimination. Annual plans don't let you adjust things enough in a startup. They're too slow. Yep. And then monthly plans are too volatile.

The sales results are just too volatile for an individual rep on a monthly basis. And so you generally want to put your sales reps on quarterly quotas. And, you know, for the startup that is doing everything ad hoc. And the founders are just running around telling the sales reps what to do. And they're constantly changing the sales reps, quotas and territories. Putting them on a written quarterly plan will, instantly make the whole sales team feel better. They'll feel like the goalposts aren't being arbitrarily changed.

Right. And it'll boost their morale. And so you want to put them on these quarterly plans and you want these quarters to be synced your fiscal to your fiscal year. And quarterly is great because, like you're saying, not too short, not too long. Right. Because sometimes sales executives are very interesting creatures in terms of management. incentives actually matter to them more than anybody, right?

They pick that profession because they like the incentive. They like breaking the incentive. So if it's yearly, you know, it's just too long. The feedback loop is too long. And if everybody crushes it, you're the manager. Let's say everybody crushes the quarter. If you're on a yearly plan, well, maybe they're going to all ease off in Q2. Whereas you can change the quota for key,

Q2, reasonably because you told them you were going to. Hey, great job. Everybody was at 120%. The reward for being at 120% is you got that extra 20% spiff. Q2, yeah, it's going to be a little bit higher. We did great Q1. So now you get to change it without it feeling like it was an unfair change. You pulled the rug out from under them.

Or as you said, move the goalposts. Right. Am I correct? Yes. And too many startups do that where they're just constantly changing things on the sales team and it undermines the morale of the sales team. And that's why moving to this idea of a quarterly plan with defined milestones. So starts with sales kickoff.

And then that's the first month of the quarter. And then the second month of the quarter, you'll typically have a lot of pipeline inspections. And then the third month of the quarter is this heads down period where people are really focused on putting their deals over the top and hitting their numbers. Let's talk about it. Salesups like that routine. They like that routine. Kickoff, pipeline inspection, and heads down, let's close. pipeline inspection explain yeah so one of the biggest issues I see with in startups you know that

haven't kind of nailed the sales function is that they never know how much business are going to close in a quarter right it's like to your point it's that sales forecast that is never correct and one way or the other one way or the other and and and so inspection is really the art really by a sales leader to ask the right questions of the team to come up with a reliable forecast or estimate in terms of what they're going to do that quarter.

And there's software to do this now where we track, for example, just for the sales of ads for this podcast, we track you know, everybody's deals one, the proposal's been sent out, a demo has been done, done or a phone call has been done. And sometimes people grade leads as hot, warm, cold.

What is the best practice for a SaaS company in terms of the different status of a client? And then where do the sales executives get queued and maybe massage that you have to undo that investigation? You know what I'm saying? Yeah. So Salesforce, you know, it's the default CRM system. Yep. They will let you define or will let you define the stages of a deal. And then the sales reps will kind of advance the deal. And then typically those stages will have a percent probability assigned to them. And so you can come up with a weighted pipe. But that's what a sales rep will do. It's really up to the sales leader to conduct the inspection on those deals so that you actually can make sure that those estimates are reliable. And what a good sales leader will do is ask the right

questions. Like, you know, who exactly are you talking to in this organization? Is this the decision maker or they merely have influence. Are they simply a champion? Do they have budget? Where is the budget coming from? You know, if IT is a stakeholder in the decision, have they approved us yet? You know, do we have, have we passed security review? Have they sent us security questionnaires?

Got it. You know, are we talking to the CFO yet? Like, you know, are we talking procurement? I mean, there's all these telltale signs. And so, like what an inexperienced sales rep will do is, and I experienced this is they'll come running over to the founder and say, oh my God, I've got a million dollar deal. We're going to close it.

Right. And, you know, then you find out, well, wait, you know, what they've really got is they had one good conversation with a low-level champion at a giant enterprise. And that, you know, that low-level champion loves the product and would love to see their Fortune 500 company buying it, but they don't really have the cloud to make it happen. All right. So now we have nailed the sales and the finance part. when we get back from this quick break,

let's talk a little bit about product and marketing and why you would bundle those together in the six-week period between the financial quarters when we get back with David Sacks, C-O-O of, you know, one of the best CEOs, I think, of all time in Silicon Valley when we get back on this week's startups. Imagine you're about to launch a marketing campaign and it tested really well.

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Thanks again, LinkedIn. You support everything we do and I really do appreciate that. All right, let's get back to this amazing episode. All right, welcome back to This Weekend Starters. We have the honor and privilege of having Mr. David Sacks on the program for the seventh time. This has only happened with five guests, by the way, for those of you counting at home. It's very rare that somebody has been on the program.

In this case, getting close to being on the program. once a year, essentially, but some folks are busy like Mr. Sachs. I really feel like I know there I deeply understand the finance and the sales piece. Right. Now, marketing, I thought marketing was supposed to be with sales. Now, you've broken it and put it on a different cadence. Why? Well, sales feeds off marketing, but marketing feeds off product.

Okay. So that's why marketing is on the same cadence as product. It's amazing. Just saying that, it's so logical, but nobody's written that down? It's so obvious. Product gives marketing something to market, and then marketing gives those leads to sales. Yeah. So basically in a startup, most news that a startup generates will somehow be product news, right?

Sure. So marketing feeds off product. Product gives marketing the grist for the mill. If the startup stops shipping, you know, the market news starts becoming kind of fake and manufactured, right? Oh, we had to hire. We hired somebody or we raised money. It's not we released this new feature that is going to blow you away. You need a demo of this feature.

Startup news should really be product-centric, right? Because if you're not shipping great product, what's the point? Yeah. I mean, it's, it's, it's, it's, it's innovator die, right? I mean, and this is why our friend, uh, Elon is just, or Steve Jobs, they, or, or, or, or Benny off, you know, they've become incredibly good at this cadence of releasing product after product. Now, some of them are duds. Some of them are not important.

Some of them fall flat. But some of them, like the cyber truck, people won't shut up about. Okay. So that's a great point. Those are the examples I give. in my blog. And here's the trick that they figured out is that you need to have a launch event to focus the world's attention.

So just putting out a press release is not good enough. It doesn't penetrate the clutter. You have to combine a live demo of your new product. And then, you know, you add other things. You talk about new customer logos. You talk about your growing market share. You talk about financing news. You can include, you know, the new metrics or milestones that you've hit.

you can include partners in the announcement in customer stories and anecdotes all of that matters and you can include it but the heart of it it always starts it revolves around a live product demo and so what we're really talking about here is a launch event and you know if you think about like what bennyoff does with dream force every year um i mean it's you know dream force is a launch event i mean they do all the other stuff too there's partners and customers and all of it but they're always presenting a ton of new products. Which is a forcing function for the product team. So now the marketing team has said, we rented this space.

We put our asses on the line. We got skin in the game. Right. We need to show something. Right. When Elon says we are doing the Model 3 or the cyber truck unveiling on such and such a date. And we've been to some of those things that we get the invitations and advance. advance. Like, the engineers have to hit that. They can't miss it. No, there can be,

there has to be a cyber truck at the cyber truck launch. Right. Right. And so those, those events, those launch events get scheduled months in advance. And the invitations go out. The press, there's a press announcement. And so the whole company, I mean, starting with the leader, puts their, you know, butts on the line to hit that launch date. Skin in the game. Just like the sales team, right? The sales team has skin in the game because they got that quarterly review. If you don't hit your number, now you're on a PIP, a performance improvement plan, you don't hit your number two quarters in a row, you're out, right? Is that how you ran it? Yeah, I mean, what's, what's really helpful about sales is you get customer feedback right away, right? So like if the, if the customer's

not buying what you're selling, you find out real quick and you can make adjustments. And the great thing about a launch event is it works the same way. I mean, if people hate it, you're going to find out really quickly. And that's a good dynamic to have. Now, a lot of founders. don't want it's scary a lot of founders are too scared that they might hear something they don't want to hear but i think but that's a bad that that's not it's it's better to just get the news um you know the other thing that i think a lot of founders are scared of you know what they'll say in response to this is well no one's going to show up at our event they're worried they're going to declare it they're going to build it no one will come and you know my experience with yammer even in the second year of yammer as a

startup, we're able to fill a hotel ballroom and get people to go to our user conference. And so, you'd be surprised. I mean, again, we're talking about startups. They're at that 50 to 500 employees stage. And so they've raised a series A or B or C. And, you know, if they've done that, there's enough of a community of support that they can rally that community and fill, you know, a, you know, a room. Now, in today's sort of post-COVID environment, it may not, it's not going to be a hotel ballroom anymore. It's going to be a virtual event, a virtual conference. That's fine. It could just be a webinar, you're not going to have a giant user event every quarter. You know, you may just have some sort of webinar. And that's, that's fine. What's really important is that you have an audience

so you can see what the reaction is and that you set the date in advance and send out the invitations because it's not just about the external benefit of generating all that positive marketing. It's about the internal benefit of motivating the team to hit a deadline that you specify in advance. Which is the point of this blog post, which is why it resonated so deep. I think with me and many people is, you know, you're trying to reduce chaos. So to reduce chaos and make people feel good, you have to introduce some accountability. Accountability, which is called the date and, you know, manifests itself with the date or the sales target. Accountability actually reduces chaos. And that's a, what I would assume you would think is a healthy

stress of being at a startup. Yes. It increases accountability. It also increases transparency because everyone knows what they're working towards. We know that two and a half months from now, we're all going to be convened together at this user conference and we're going to have to, you know, deliver. And so everyone's working towards the same goal. And that creates, you know, tremendous amount of, it synchronized everybody. It creates, you know, a lot of espri de corps. And for those of who you don't speak French, esprit de corps means, I think you're spirited to your core. Like, call it fellowship, right?

Everyone feels like... Sprite d'ore means the spirit of the group. Right. So you all feel like you're working on the same team, right? It's kind of like the Super Bowl effect. You know, the Super Bowl is coming. The amount of hype of the Super Bowl, they give it that nice, like, I don't know, if it's three weeks up until the Super Bowl, get this nice, like, energy building

towards it. Thinking about a small company that's releasing, you know, every six months or something. And it's new. It's in year one or two. Would it not, in today's COVID webinar environment, where you can not show how many people showed up, why not start this?

You know, if the clubhouse, which is the hottest startup right now in the consumer space, if Clubhouse just said on, you know, October 1st, we're going to be opening to the public, we're going to show three new features, and they did it in a webinar and 10 or 100 people show up, who cares? It at least has the same effect.

So what would you say to a year one startup if they wanted to do something like this? Well, it might end up being too much structure for a first year startup. There are advantages to, you know, when you're, say, a 10-person team, just having the founder telling everybody what to do and building very quickly and you're doing, you know, one or two weeks sprints. And because you're just basically throwing spaghetti against the wall, seeing what sticks. you're iterating towards product market fit. And so, you know, maintaining that very fluid, highly experimental approach is probably the right approach for, you know, that pre-product market fit startup. Now, you could do what I'm saying.

It wouldn't be necessarily a bad thing, but I don't know that you need all of the structure that I'm introducing. But like I said, around 50 employees, it's just too big for, you know, it starts becoming too much for the founders just to manage it an ad hoc way. And certainly as you get to hundreds of employees, you need some sort of unifying structure for the company. Okay. And any other advice in that marketing department that is a best practice for a SaaS company? Like what is in state of the art today in 2020 that didn't exist in, you know, in the Yammer Day? That's, you know, certainly didn't exist in the PayPal days because things do change over time. Yeah. I mean, I think,

I think the whole idea of being of this sort of event-driven marketing is still fundamentally correct. I think the change right now is just going to be more virtual events. Right. But again, remember that like the key thing from my point of view is that the launch event has both an external benefit and an internal benefit. The external benefit is you create what's sort of a more of a lightning strike marketing event, right? Like just putting out a press release doesn't really get it done. And what you want to do is a big lightning strike where you get the whole world focused on you for, you know, a couple of days.

That's what Beniof is or Elon has, they have done brilliantly with their, their events. And then internally, you know, the one thing I would just add is obviously it's very motivating for the team to send their CEO on stage to showcase a new product. But it's also a really good thought exercise for the leaders of the company for the CEO, starting with the CEO to think about, they have to think about, well, wait, in two months, I'm getting on stage. what am I going to be talking about? What am I going to be announcing? Why is it going to matter?

Right. You know, why should the audience care? Yeah, and if you write that script, you know, there was a great thing that Jeff Bezos makes his people do, which is write the press release for the product they want to build, right? In this case, having people, I just thought of this, it's kind of the new version of it, forcing the leader, the CEO, to actually give the product demo with the, just, you know, with, you know, fake slides. Right.

And say, how would, you know, the Wall Street Journal, how would tech crunch, how would, you know, our top 10 customers receive this? Do people even do that? No. And, you know, and it's, you know, it's a really good thought experiment to think about, you know, why is anyone going to care when we showcase these products? Now, what a lot of founders would say is, well, we're doing business software. It's not that interesting.

You know, it's not like Tesla where they do these really sexy products. But again, I would say, well, look at Salesforce. I mean, that's CRM software. It's pretty dry as far as, you know, it's not. Yeah, I mean, how salespeople track their sales. Right. No offense, Salesforce. It's essential.

Right. It's important. Right. I'm not sure where it sits in the parthion of excited. That's right. And so what Benioff shows is that everybody can do it. I mean, not everyone's as good at Benioff. I think he's uniquely good at it. But you can still achieve a lot by emulating what they do. And the thing to think about is why is what we're going to ship in two or three months and announce this launch event? Why is this going to matter? And you have to start justifying that. That's an important segue into product. So when we get back from this quick break,

we're going to get to that fourth piece of the puzzle as we're building this structure here. with David Sacks and talk about product breast practices. We can get back on this week's first. It's been a crazy couple of months. We all know that. And the way we are working now is completely different than it was at the start of the year. And if there is one thing we have learned, it's having access to the right resources is essential when you need to adapt your business. And we're all doing a lot of adapting.

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and for the generous offer of 10% off. That doesn't mean a lot to us. Okay, let's get back to this amazing episode. Hey, everybody, welcome back to this week in startups. We've got David Sacks with us. You're at David Sacks on Twitter or D-O-Sax. You have David Sacks on Twitter. and if you have a SaaS company and you want to have one of the greats on your cap table,

I can tell you there is no better investor for your company than David Sacks. And he is David at CraftVentures.com. I'm certain nobody else stole your email address. And you open your emails. When a SaaS person sends you an email, you open it, right? Yeah, I do. I mean, you know, I may have someone on the team look at it if it's not referred by somebody I know, but, but yeah, we will get them.

Now, when you open that email, what emails have you, what have you seen in the top of an email above the fold for a SaaS company that makes you say, you know, to, you know, the Great Laney or, you know, whoever on your team, get them, you know, Billy, whoever, just get on it. What do you see on the top half of the email? It's typically we want to see, I'd say like month-of-a-month growth rate is a pretty important thing to see. Got it. I mean, that would definitely get our attention. You know, if you're growing, you know, anything above 10% is good, but certainly in that 15% or 20% month-over-a-month, that's going to get our attention.

As you're, you know, get closer to that million-dollar error milestone, you know, that certainly would get our attention. Got it. So if you, if the email said, uh, we, you know, 17% average month over month growth last three months, uh, Mr. Sacks. I saw you on Jason's podcast. Right. Um,

we built SaaS software for blank. Yes. And, uh, we are 62% of the way on our current run rate to hitting your million dollars. Would love to, uh, take a deeper dive into it. Even a short email like that's going to make you click on the link. Shorter is better. I mean,

you really have to say, well, because all I really need to know is that you believe you're the early category leader in, you know, X SaaS business software and that you're kind of getting close to what we call a series A milestone, which would be, you know, a million dollars or hundreds of thousands of dollars of ARR and that you're growing at that month over month growth rate. That's all I need to know in the email to know that we should take a look at it. And then, you know, the team's going to, you know, either me or someone on the team's going to look at it. There's no reason. for me to write three paragraphs about my last two failed startups. I mean, it is the email we get, right?

I mean, and it's amazing how founders work against their own best interest. Even the ones who have the goods will write three or four paragraphs of their life story. And it's TLDR. It's too long, you know, and people forget how many emails we get. Yeah, or, you know, the first couple of paragraphs will be talking about how much they love my blog on X, on X, Y, Z, which I'm happy about, but that doesn't, you know, it's, it doesn't matter, right? Yeah, one cent is okay. Read your blog post about X, it resonated with me.

Right. Then let's get to brass tax. Right. And the timing in which you, you contact an investor is so important. I mean, I don't know, how many emails do you get with people saying I have an idea or I'm building a product and they just haven't launched it yet? Yeah. I mean, I get a zillion of these emails, but I get very, very few that are in the format that I mentioned.

It's such an unlock. Yeah. Well, it's an unlock if you actually have those metrics. I mean, I wonder if the reason I don't get those emails, because most companies don't, most startups don't have those metrics. It is hard. I mean, we've been very intentional about telling people, hey, if you have five, 10 customers and five to 10K in revenue, even as little as 2K, we'll talk to you about the accelerator. And that's really helped us with the true north. And I think you just saying explicitly, hey, when you're trending towards a million,

and if you're over 10, but more in the 15, that's good. If you just keep putting it out there, it does work. Now, we've gotten through finance and sales, being in cadence on a quarterly basis, starting with the February 1st quarter so you don't get caught up in the crazy end of your rush when people ask for discounts. Now we got marketing. We've got the ten pole event. We're working backwards.

But the product we have not gotten to yet. And we all know that at the end of the day, you have to have a great product. Correct? There's no great product. There's no great product. There's no business. There's no way around that. There's no way around. It's table stakes.

Yeah. So it's the raison d'etra. Use another French word. Okay. Of having a start up in the first place is to build a product that is net new to the world. Right. And for those of you don't speak French, raison d'etre means the raisin of the day. It means reason for being.

Ah, yes. Another translation of it, another transaction. There's no actual raisins. There's no actual raisins in it. There's no raisins in raison dendra? That was the, when you, I thought that's how they made witties. They put some raisins in there one day. Okay.

You know what? This is like deja vu all over again. I still don't understand French. I've been trying for years. Okay. What do we, what do founders in SaaS companies need to know about product? cadence. Okay. So good product management is like filling a jar with rocks, pebbles, and sand. Have you ever seen people try to do this? You've got kind of like big rocks. It might be like size of your fist and there's like smaller pebbles and then there's sand. Well, in product terms, the rocks are like the new products. There are sort of temp hole products or features. They're the big stuff. That's cyber truck. Yes, for sure. That would be like a big rock. then you've got features which are you know important and take time they're not not quite the level of like a temple but they're certainly very important self driving 2.0 yes exactly it's usually a you know and some new version of something that already exists it's some some better some some new and improved version of something you've ready of a product line you've already got and then you've got sand which are the bug fixes the UI fixes usability improvements it's

the polishing. No one cares. Nobody even notices probably. Well, it matters in the aggregate quite a bit, right? And it might matter in terms of reducing your customer service caseload, which might have an important impact on your gross margins and things like that. So it certainly matters in the aggregate, but no one of them typically matters all that much.

It's certainly not something you would make news over. You wouldn't. Fixing something is not something you do at your tent pole event. It's not something you do in a press release. it's something you quietly do to polish it up so that less calls come into support and less people churn. So for every 20 of those you do, you might save 1% of churn or something. So it's critically important. It all adds up.

It all adds up. It's not going to be something that's on the main stage. Got it. Okay. So that's product management. And what you want to do with product management is you want to put the rocks in the jar first. You want to plan those first. So the way you fill the jar is you do the big stuff first, the rocks.

the pebbles, then the sand. If you try to fill the jar with sand first, what you find is that somehow the rocks just don't fit. And what happens in companies, startups that don't have effective product management, is that either they just never do the rocks, they just never get around to shipping new temp hole features. They only ship sand. They only end up doing small stuff. Or they will try to do the rocks, but they will just be wildly over schedule. You know, one of those big temple features that was supposed to take one quarter will be you know quarters late you'll still be talking about it in that board meeting two or three quarters later yeah there you go so you see in this screenshot here the jar on the left put the sand in first and the rocks don't fit the other jar did the rocks first the sand fits so you want to plan the rocks on a quarterly cadence to make sure that they get done and you also want to do that to make sure that they're scoped correctly because you want to plan the rocks on a quarterly cadence to make sure that they're scoped correctly because The reason why, like, these big rocks end up being years late is no one scoped them correctly because they weren't on a quarterly product management cadence.

They just basically assigned projects whenever they felt like it. And you just expected them to get done whenever. Which in the throwing spaghetti, you know, winding first year trying to find product market fit, it's fine to wake up one day as a CEO where the founder and say, wait a second, I figured it out. Stop what you're doing. Right. We're going to do this.

drop everything drop everything this is we have to test this and know in the next two weeks if this works because if it does it's the game changer all game changers right that's right and that's okay yeah that's year one that's totally okay year one is all about finding silver bullets um got it and so you don't want that overhead you do want the flexibility to drop everything and go all in on that new greatest idea that you came up with how do you communicate to the team since this has come up hey, we're moving from, you know, drop everything mode, and now we're going to be having this cadence mode. Do you do a kickoff meeting or does it just happen organically? Well, you've got to remember that the team is growing. And so what's going to happen is you're in the process of making this

transition from this very spontaneous founder directed mode of operating. And now you're in the 50 and then hundreds of employees. And so what typically happens is that the chaos reach is such a crescendo in the company that everybody seems to cry out at once. We need a COO. The board says it. The founders say it. They're all like, this is just too chaotic. We need to get somebody in here to help us manage this.

And, you know, maybe that would help. But my point is that if you put your startup on the cadence, that if you use this operating philosophy I'm talking about, you will actually, you may not need that person. Right. that person is typically the person who would implement the system perhaps or give people the feeling of this. But it's actually not that complicated the way you explain it. It's overly complicated. It's in a way having this discussion with you reminds me of discussions I've had with people about growth and trying to add growth to a startup.

People sometimes say, hey, we just need the growth person. And then other people say, well, maybe what you need is a growth mindset. So you don't have a growth person come in. and just look at the whole company and say, here's what you each need to do. You have each person understand where the churn is happening in their part of the product, etc. And everybody moves to a growth mindset. Is that my correct in that? Yes.

Yes. I mean, so it's for any startup problem, it's possible to posit that there's a perfect hire who can fix it for you. But as soon as you say that, and so, you know, most board meetings that I've been in, it always devolves into hiring, into a hiring conversation because, the board identifies all these problems and then it's all who's going to fix them and then the company says, well, we don't have anyone to fix them

and then you start talking about hiring people to fix them. And the problem with that is you're essentially deferring the solution to the problem. I mean, once you identify what the problem is, you should just be able to fix it. You shouldn't have to hire someone to fix it for you. Nothing is that complicated.

I mean, if we were talking about, I mean, perhaps if you're in a startup that needs to do something in computer vision and artificial intelligence that is so niche that you got to use LinkedIn, talent, job solutions, LinkedIn.com slash twist to do it and get fit that all that's off. Maybe. All of a sudden I'm talking about was learned on the job,

just learning by doing. Just do it. And, you know, this white night, you know, Superman's going to land, Spider-Man's going to come out of the shadows. Batman is going to swing in and, you know, ride his Batmobile in and save the day. It's unnecessary.

You've got 10 people or 20 people. You've got 50 people in the company. Just solve it. Right. And you also don't have time to, to wait to find that Unicorn hire. Slow, yeah, it could take weeks,

months, that somebody turns over, you lose a candidate. Okay, what else on product do do founders need to know as we rounded third base year? Yeah. So, you know, I like Jeff Bezos' two pizza rule at Yammer, the way, which is basically

that, you know, every feature they worked on, it had to be done by a team that was no bigger than could be fed by two pizzas. At Yammer are the way we implemented this rule was that we said that any project would have between two and 10 engineers, so 10 at the absolute max, for two to 10 weeks. So the absolute biggest strategic priority in the company could get 10 engineers for 10 weeks. That's it. And, you know, maybe that would,

that's a lot, by the way. That's a lot of resources. We might have had one or two of those a year. So everything had to be shippable within 10 weeks. And we forced all of our products, all those big rocks to be scoped down to the point where they could be shipped within 10 weeks. And that helped improve the reliability of our release dates tremendously. It also helps. Doesn't it also help with morale because, you know, if it is something that is so big in scope, you just never get to feel like you accomplished anything. It's better to break it up, right? Yes. You MVP it. You MVP it. You shrink it down into an MVP. And that allows you to get customer feedback so you don't, you know, end up over investing in a product that people don't actually want.

Again, it's a very good thought experiment to think about what's the most MVP version of this. How do we get it out? And then let's see what people think about it. And then we reevaluate. And so this philosophy, this product management philosophy, ties in with the launch event very well. Because, you know, what you do is you basically reverse engineer the launch. You start with a date. You send out the invitations.

you declare that you're going to do this user conference. And then you basically start building towards that. And you can't miss. What can we build in those 10 weeks? That's right. If it takes 20, then break it in two. Right. You must ship it by that launch event or you're going to miss the train.

Yes. The train is leaving the station. So that is the way you work. And it's it forces a tremendous amount of discipline because either you can declare a launch date. and then scope the project to hit that launch date, or you can basically just decide what's in a product and have no release date. And that's sort of the problem is that, you know, without the forcing function of that release date,

things don't get properly scoped and people don't make effective tradeoff decisions. You know, one thing you mentioned was just the human nature in how we're wired for the seasons, how we're wired for quarterly in some way or in these short springs. Maybe you can unpack that a little bit in terms of what you've learned. about human nature and work in relation to this framework. That's right. So everything we've talked about is on a quarterly cycle.

You know, quarters are seasons. You know, humans are wired for seasons. I think there's fundamentally something very organic about this way of working. So let me kind of snap it all together, okay? Please. So you're going to have a fiscal year. You know, it's an accounting concept, but you're going to use it to generate your reporting, the finance team will.

and your sales teams are going to be on quarterly sales plans are snapped to those fiscal quarters. So, you know, let's assume that Q1 is now going to be February, March, April. And just to be clear, when you say fiscal versus calendar, fiscal just means how the finance department defines three months. A year. Yeah. Or a year. That's right. When you say calendar, it just means the calendar. Because people get caught up on what is the fiscal year.

Right. That's all it means is that, you know, which months are we going to use in Q1? So let's assume that we use, we say Q1 is February, March, April. Yeah. So that means that the quarterly close is going to be in April and the sales kickoff is going to be in February. Now, what I would do with the launch event is slotted in March. So this is the offset. And for the simple reason that you don't want to set everybody's hair on fire at the same time,

you don't want the sort of product marketing cycle, which revolves around this launch event, to be peaking at the same time that the sales finance team is sort of on that. They're hitting their kind of... You being the founder in this because the founder's attention is also important. It is exhausting as a founder to have to do, you know, three, two-hour meetings with four departments. That's right. And that's 12 hours. So if you're doing it, you know, on this cadence, yeah, you know, the sales team's off.

They're in there, pipeline review and optimization and check. But we're getting ready for the launch of the new product. Right, right. Exactly. So what ends up happening is under the system, when you snap it all together, month one of the quarter is very dominated by planning. You've got this idea of sales kickoff. I would also always do my board meetings in that first month of the quarter right after for the finance team closes the books on the previous quarter. That's right. I would always do it in the second or third week of the quarter. Why? Because the data is still fresh. You want the board to look at the freshest sales data as soon as it gets reported out. that makes total sense right and then on the heels of that board meeting you're going to you're going to basically you're going to be prioritize your overall product roadmap so you're going to take those strategic insights that you just have the board meeting you're going to reprioritize the roadmap not for the current quarter because your launch event's about to be in a few weeks but for the following quarter okay

so that's month one is dominated by the idea of planning then you go to month two month two is dominated by the idea of this launch event right so first couple weeks of the month, month two, you're finalizing the event details, you're finalizing the marketing collateral, you're finalizing the presentations. There's a lot of work that goes into that. It's, you know, marketing centric work. And then on the heels of that launch event and say the second or third week of month two, right in the middle of the quarter, you're going to do a lot of debriefing. You know, you've just had this big launch. How did it go? You're going to take all the customer learning so you just got through all those conversations and you're going to,

you know, feed them back into the company and internalize. that. Okay. And then month three is and then you know and then immediately right after that, that launch event, the engineering team is going to start working on the next quarter's release, right? And so month three is this very heads down period in the company where the engineers are focused on coding and the sales people are focused on closing. And it's this, it's basically, you know, it's, it's closed. It's a time for heads down. It's quiet time. It's a nice quiet time, no distractions. On the not. right now list, et cetera. What have you learned about board meetings and financing the ability to

raise money when a company does adopt this? Well, everything discussed a lot more predictable. I mean, that's really what you want is to have, you know, more predictability. And, you know, you want your board to weigh in when the numbers are fresh, right? So, you know, if you don't do your board meeting, if you do your board meetings the same. month two or three of the quarter, then either you're further away from the last, you know, from the last fresh data, so you're two or three months away. So the data you have isn't as fresh or, you know, or it's, it's rough estimates. You're, you're dealing with, say, a half, half baked quarter. Right. And so then you get the excuses. Oh, maybe it's actually, we always do

better towards the last six weeks. Anything can change or we're off to a strong start, but I don't know if it's going to keep up. Right. It just becomes this sort of circular madness. Right. Yeah, exactly. So, and then this, the last piece of it is, is all hands meetings, which, you know, is a very important way, especially as a company gets bigger and bigger for you to keep everyone coordinated is to have, you know, a steady stream of all hands meetings. And what the cadence does is give you the topics for those meetings. So, so immediately, right after the end of the quarterly close, I think it's a really good idea for the CEO to go in front of the company. explain how we just did, right?

Like what were the numbers? How do we do? Exactly. What were the sales results? Okay. Yeah. Then you're going to have a board meeting. And right after that, I like going in front of the company and recapitulating the strategy

of the company, right? So because board is, you know, board meetings are a time to take a 30,000 foot view of the company and, you know, think about your strategy. So I like the idea of after the board meeting, you present that strategy to the board. If it hasn't changed in the last three months, that's fine. There may be a lot of new employees who need to hear. the strategy of the company, but maybe there's some adjustments that you're making and you need to explain that. Then you've got the launch event coming up. And what I like to do is I like to put

the product managers in front of the company and you preview what's going to happen at that launch event. You tell people what's coming. Okay. And then after the launch event, you do a big company-wide debrief. How did it go? You know, what was a reaction? You know, the marketing department might show press highlights. You know, it's, but you basically do a big debrief and you feed those insights back into the company. Should all hands be monthly, weekly, or every two weeks? Because I, you know, in the early days of Google, they were doing weekly, I think. Facebook, I think, was doing it twice a month. Is there some cadence to that that you buy into? Or is it just a stylistic preference of the founder? I think, you know, every two weeks is fine. I think, you know, weekly is fine too. But I think that

if you want to do it as frequently as weekly, what I'd recommend is that every other all hands, somebody else in the company go up and present. Got it. So I think it's good for the company to hear, you know, especially as the company gets bigger and bigger, right? You get this compartmentalization. People don't know what's happening in other parts of the company. I think it's very useful for people to hear from the engineering leader, the sales leader,

the, you know, analytics leader, and so on down the line. They can tell the whole company what's happening in their teams. So that's what I would do because I think it gets to be a little bit much if the founder's CEOs is getting up there every single week. Yeah, too much. Also, you run out of things to say. Therefore, what you say is diluted. That's right.

Therefore, you just sound like you're droning on. You know, it just becomes too much. Right. David, this is just a, it's your best piece of work. And writing is, I always tell people, you know, writing is clarity of thought. And you clearly have nailed it with this one. And so we're going to link in the show notes to the piece. And we thank you again for taking the time to be on the podcast for the seventh time.

Also, David is part of the quartet that we do the All In podcast with. So we just taped episode five. And you can all check that out. Just do a search for All In with Chimoth, Jason and Sax and Friedberg. Great job. And I really appreciate you doing. I think we missed? No, I think we got it.

I think we now did, right? Let's keep it tight. Let's keep it tight. Tight is right. All right. We'll see everybody next time on this week in startups. Bye bye.