A Mantra for SaaS Success with Neeraj Agrawal, General Partner at Battery Ventures

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If you end up being No. 2 in a category, it used to be a pretty good outcome.  When I first started venture 10, 15 years ago, No. 2 was pretty good.  You still made a lot of money.  Now, if you’re No. 2, you get your money back maybe a little bit but you got to be No. 1 in the category.

Neeraj Agrawal is a General Partner of Battery Ventures, a global VC firm.  He’s worked with many world-class founders over a 15-year tenure in venture including many B2B SaaS enterprise software companies such as Marketo, Omniture, Guidewire, Bazaarvoice and Sprinklr.

Given the number of amazing $Billion dollar SaaS Companies Agrawal has invested in and worked with and the research he’s undertaken to study the proven path of go to market success for SaaS companies, I had to have Neeraj as a guest on The SaaS Revolution Show podcast so we could share his insights and mantra for success.

You can listen to the full podcast below, and read the transcript. Subscribe on iTunes or Stitcher and never miss an episode.

A Mantra for SaaS Success with Neeraj Agrawal, General Partner at Battery Ventures by The SaaS Revolution Show

Neeraj Agrawal, General Partner at Battery Ventures talks to Alex Theuma about the 7 phases of go to market success for SaaS companies, a mantra abbreviated to T2D3. Listen to the episode to find the ‘proven’ path to becoming a $Billion dollar company


Alex Theuma:  Before we get into the theme of today’s show, can you intro yourself and Battery Ventures?


Neeraj Agrawal:  Sure.  Happy to do that.

Battery is a global venture firm.  We’ve been around 30-plus years now.  We’re investing out of Battery 10, that’s a $900 million fund.  To give you context, Battery 1 was a 1984 fund with only $34 million.  Both Battery and the industry have come a long way in the last 30 years.

I’ve been in Battery the last 15 years and I’ve really watched the entire SaaS ecosystem develop during that time.  It’s been a really fun space to think about, to invest in, to help reach the next level.

But overall, Battery as a firm, we’re investing Battery 10 which is $900 million fund.  What’s a bit unique about us is how stage agnostic we are.  We probably do roughly a third of our investments in seed and Series A companies.  For example like Sprinklr, we’re the largest shareholder and a Series A investor there.  Then all the way through to pre-IPO rounds, which is when we got involved with companies like ExactTarget and Marketo.

What we’ve realised over the years is that if we’re working with great companies, great founders in product markets that are inflecting based on real customer demand, great things will happen.  So the sooner we can get involved the better, but we’re happy to get involved at any stage along the journey.


AT: I mentioned some of the names, some great names there, Marketo, and you mentioned Sprinklr, Bazaarvoice.  I think now you’ve invested in AppDynamics and quite a few, if it’s still okay to use the word, unicorns there.


NA:  Yeah, that’s right.  I think these companies are great companies.  Whatever people want to call them is somewhat less relevant.  But another example is a company like Coupa which we’ve been an investor in now 7 years and for the last 3 or 4 years it’s really grown very quickly and been impressed quite a bit.

I think that we’re still in the early innings of the SaaS revolution as you pointed out and we’re going to see a lot of market cap created in this overall category.


AT:  Recently, I published an episode of the podcast talking about building engines of growth with Lincoln Murphy from Gainsight and Sixteen Ventures.  Moving from engines of growth, I thought it was kind of a neat segue to discuss with you a formula or perhaps the more appropriate word, could be a mantra for SaaS success or Go-to-Market success.  And perhaps further even defining what success is because that could mean many things talking about becoming a billion dollar business.  Does that sound okay with you to talk about?


NA:  Yeah.  Let’s do it.


AT:  Part of the reason for picking that theme is beginning of 2015, February I think, I read The SaaS Adventure on TechCrunch.  Not being a sycophant here but it really was one of my favorite and most memorable pieces of content I read in 2015, and I read a lot of content in 2015, so kudos for that.

I think in that article, which I’ll link to in the show notes, you talk about seven phases of Go-to-Market success for SaaS companies.  Looking at the path to $100 million ARR and the billion dollar valuation having researched the path of those that have done it before like Marketo and ServiceNow and Zendesk, you picked out seven phases which you centre around a mantra which I understand is called T2D3, which is not a robot on Star Wars but a mantra.  T2D3 that stands for “Triple, triple, double, double, double.”  If that’s right?


NA:  Correct.


AT:  Okay, excellent.  Awesome.  Just wanted to make sure I had enough triples and doubles in there.

So there’s seven phases of T2D3 and I think it’s super interesting that we go through them this 2016 refresh for the podcast listeners.  Let’s jump into the first one.  This was the first phase was establish a great product/market fit.  Now, how do you do this?


NA:  Yes, sure, Alex.  Maybe to give you a little context why we thought this would be an interesting framework to develop, it really… we interacted with a lot of SaaS founders and ultimately, I think venture capitalists are pattern recognisers at their core.  It became clear to me that we were getting the same questions from these great founders who kept asking a couple of things.  One is what is success?  What is appropriate level of growth?  How should I think about those journeys?

It was very interesting because they’re very focused on the here and now but not the kind of roadmap of how do you get from here to success.

Interestingly, almost all of them had a very common perspective on success.  They all wanted to get to $100 million of ARR and they all wanted to get to ideally a billion dollar outcome.  But the path from where they were to get there was not clear to them.  Should they grow from 1 to 10?  How do they think about this and then how do you resource against it to actually make it happen?

So we realised with the companies we were working with that there was this kind of pattern that was developing and there’s kind of a natural way to sequence growth both from a financial perspective but also operationally.  Kind of what are the key gotchas along the journey.

There are some kind of counterintuitive risk points along the journey.  You think that the bigger you get, the easier it should get.  And there are some points along the journey which I would argue are incredibly risky points that if founders aren’t thinking about in advance, they could be gotchas for them.  So that was kind of the reason we developed this journey and this framework.

Basically, at a high level just to capture it, we think about the first phase as product/market fit, second phase is get to $2 million ARR and then from there the T2D3 pattern takes over.  So you go 2 to 6 to 18 and then double, double, double to get to 100 plus recurring and I think a billion dollar outcome.

Coming back to your question about product/market fit, this is something that as investor, we spend a lot of time thinking about.  There’s two things that come to mind here.  One is when an entrepreneur is starting a company there is this thing that happens sometimes which I call Happy Years.  Which is they’ll spend a lot of time really talking to anybody who will return their call.  At the end of the day, it’s really hard to choose the path to being an entrepreneur.  I think that that early phase is maybe not respected enough because the amount of risk that people are taking both professionally and personally to make this journey happen it’s really hard.  You’ve got to be willing to take a lot of stress and risk to make it happen.

During that journey, if you kind of have people talking to you, you’re like, “Oh, great.  This is exciting,” and let me get some feedback from these folks.  What you find is a couple of things.  One is when you do that sometimes you don’t end up with a common pattern of pain point amongst your early customers.

What I look for is if you can talk to 5, 10 prospects and really get a sense of what their day-to-day life is like and what’s the pain point that they have.  If they use similar words to describe their pain point, I think at that point you have a good sense of kind of at least consistency on the pain point and then the product you develop will ideally address that initial pain point.  But having consistency on the pain point and ideally having consistency around the titles of the folks you’re selling to will make the future phases of T2D3 much more achievable.  So that’s what I think about product/market fit.


AT:  For somebody as well myself who kind of within the last few months has gone into the entrepreneurial sort of journey, not launched a SaaS company but still it’s at the early stage.  Taking on those risks is something that definitely hits home with myself as well as probably many of the entrepreneurs listening as well.

If we look at then the second phase, this is from establishing great product/market fit to getting to $2 million ARR.  Now this, I guess, a lot of SaaS entrepreneurs listening will really be interested in because I think most of them will be in this really sort of early stage.  How do you go about doing this?


NA:  Sure.  A couple of things come to mind here.  One is one of the founders I work with, his name is Jyoti Bansal.  He’s the founder and CEO of AppDynamics.  I interviewed Jyoti recently in a video interview and Jyoti mentioned something that… he actually said this a few years ago during this interview and it really resonated with me and I want to share it with your audience.

He basically said, “Ask the person you’re talking to,” so your championing at a customer, “ask them, ‘Hey, how would you justify this purchase with your boss?  Kind of what’s the business justification for this technology?’”  And that I thought was it sounds so simple.

But again, people are very happy talking to you, prospects are happy talking to you.  Nobody wants to say no.  Nobody wants to be the person that says your idea is not a good idea.  And having a crisp way to articulate the value of your offering to make sure that people are willing to pay for it and that they’re willing to prioritise it.  Those are two different things that both need to come together for your company to achieve this kind of $2 million in ARR.

It’s got to be high enough priority pain point and they got to be willing to bring it to their boss and just by spending money on it.

The T2D3 framework is a little biased towards what I would describe kind of mid-market and enterprise customers.  We think about it as $30,000 – 80,000 average deal size.  I do want to mention that because there’s another playbook and we’ve been thinking at some point to really articulate that one which is much more kind of an SMB-centric, pure freemium-centric playbook that also is a good playbook, and we can come back and talk about that.

But the one that I’m focused on right now in this article and I think for this interview is really the mid-market and enterprise customers.  In that I think once you can get to this 30k to 80k deal size, you do the math that probably means 40, 50, 60 customers to land.  What I find here is the CEO is really the person selling all of these deals.  They’re bringing it in.  They’re looking for that commonality in pain point.  It’s a challenging stage.  I would describe this one as probably one of the hardest ones to get to because you have to be willing to tolerate rejection.

But the thing that I would say I’ve noticed is many founders, they don’t value maybe their time as highly as I think they should in this phase.  I think about getting to a “no” quickly with a prospect as being equally valuable as getting to a “yes.”  This is where Jyoti’s kind of insight is duly important.  By forcing that conversation about, “Hey, how are you going to justify this business, justify this purchase with your boss”, really forces the, “Hey, I’m actually interested,” versus, “I’m interested in my checkbook.”


AT:  Yeah, absolutely.  I think great point there.  In fact, before my entrepreneurial career, I’ve had 11 years in sales.  The amount of time that you spend on deals that are going nowhere that you can see actually getting a quick no is very valuable.  Also to the point of the founders doing the early sales, I think from all the interviews I’ve done on the podcast, I think this brings to mind like Kyle Porter for instance and also Michael Litt of Vidyard.  I just sort of remember them saying that they were leading sales and making 100 calls a day.  That seemingly is what’s needed at this initial phase.

We move from that Phase 2 then.  We’ve got let’s say $2 million in ARR and we’re moving into Phase 3 which is triple that $2 million to $6 million in ARR.  Now, let’s talk about that.


NA:  Definitely.  So a couple of things come to mind here.  One is just figuring out why is triple kind of a good framework for success.  Sometime we’ll meet founders that think, “Hey, doubling is great.  Why is that not good enough?”  A 100% when GDP is 3% it sounds like a pretty good outcome, right?

I would argue that what we’ve noticed in the pattern is if you can triple in this phase, it really sets it up well for the next triple, which is actually the hardest part in these first few phases.  There’s really that $6 million to $18 million.  A lot of the infrastructure for that gets built in this phase, and I’ll come back and talk about that.

Some companies have experienced faster than triple.  I believe that founders are now kind of feeling that, hey, maybe tripling is not good enough.  I would argue that it’s not getting to triple in this phase.  It’s really kind of it’s good enough but what’s really important is getting to the $18 to 20 million in the next phase.  When you get from $2 to 6 million or $2 to 8 million doesn’t really matter but if you have the infrastructure lead to get to $18 to 20 going forward that’s super important.

We noticed in the pattern than if you can triple here, that’s a good goal.  That’s a good goal from a hiring perspective, team-building perspective, cash consumption perspective, so that’s why we said triple here is probably the right goal.

Now, there’s two ways to get there.  I’ve noticed that once you can get to $2 million, it’s actually not that statistically hard to get to $6 million.  Meaning if an entrepreneur is good enough to get the $2 million, they will sell and do really well and probably end up close to $6 million, at $6, almost regardless of their approach.  But what I realised is this is the phase where they have to shift from being product/market-focused, customer-focused, deal-focused to being much more organisation-focused.  And that’s actually a very hard transition for founders or some founders to make, especially technical founders.

Some technical founders believe that salespeople are overpaid.  That the hard work is being done by the engineers but the glory is being captured by sales folks.  I’d make the argument that if you can build a company that has great product and great distribution and you put those two together, you’ll have an awesome outcome.

This is really a journey about building a Go-to-Market machine and the foundation for that gets laid in Phase 3.

There’s two approaches.  I call it the hero approach, which is the CEO selling everything, or the sales organisation approach, which is hiring a sales VP, hiring 5 to 10 reps and getting them to actually sell, where the CEO might be involved in a handful of deals but there are many deals closing that the CEO had no involvement in.  That’s kind of a magical moment in a company’s journey.

Sometimes it’s hard for founders to appreciate that stuff can happen if they’re not 100% involved in a sales cycle but I always notice this kind of light bulb goes off.  As soon as that happens they realise that, oh, my God, we can scale this thing and get $50, 100 million ARR now because I’ve got this next formula figured out.  I just need to hire reps, get them productive, figure out how to train them, recruit them, develop them, hire leaders, hopefully grow leaders from within.  And that foundation gets laid in Phase 3 so I think this is a super important phase.

I would actually say most companies today are more in tune with doing this the right way.  I think a couple of years ago, I probably saw the hero approach 70% of the time.  I think that was kind of a callous rush writing about this.  Today. I think I see it more like 30% of the time.


AT:  Okay.  That’s a big shift there.  I guess a company like HubSpot may have taken the sales machine approach rather than the hero approach doing that phase with Mark Roberge and building out their sales machine at that time.  I don’t know if we know that for sure but it sounds about right.

So the SaaS company, the SaaS startup has reached $6 million in ARR or they’ve tripled and then moving on to phase four in their journey tripling again to $18 million this time.  I think as you said before, this is where the magic kicks in.  So tell me a bit more about how they can achieve that.


NA:  Okay.  Two things I’d like to point out to your audience.  One is this phase I believe is the most predictive phase of long-term success.  It’s if you go from $6 to 10 million, I think that you’ll have a good outcome but it won’t be a great… it won’t be one of the iconic SaaS companies.  So really getting to this kind of $18 million, tripling this phase is I think critical and it sets up a lot of success.

The engine that gets built here requires probably somewhere in the order of 15 to 20 sales reps to really do this right and that usually requires a second level of sales management.  Let me explain what I mean about that.

So early on, the CEO is selling everything.  Then I mentioned the prior phase, you hire a VP of sales who might have 4 or 5 reps.  That team is selling.  But the CEO and the founder, that person is only two levels removed from an individual deal.  So it’s pretty easy for that person to walk down the hall and talk to the individual rep and maybe have a sense of what’s going on just by kind of brute force.

In this next phase when you get to 20 reps, and they’re usually I find that somewhere around 6 to 8 reps there’s kind of an ideal breakpoint to introduce a leader.  So once you’re at this point, one VP of sales can’t manage 15 to 20 people.  So you almost by definition need another layer of management.

Now you have a CEO, a VP of sales, a director of sales and then individual reps.  You are three levels removed from an individual rep which means you’re pretty far removed from the actual sales cycle and what’s happening, and your ability to kind of walk the halls and know what’s going on, which is 20 reps is much harder.

And so, why do I bring all this up?  I bring this up because this is where all of your kind of training, your hiring, the profiling really matters.  If you get this wrong and you got to re-boot your entire sales team, you’ve probably lost 12-18 months.  That usually is the difference between ending up being the winner in a category and being No. 2 in a category.

If you end up being No. 2 in a category, it used to be a pretty good outcome.  When I first started venture 10, 15 years ago, No. 2 was pretty good.  You still made a lot of money.  Now, if you’re No. 2, you get your money back maybe a little bit but you got to be No. 1 in the category.

It’s asymmetrical risk reward, I’d say, in this phase because if you get it wrong, you will lose a couple of years and you probably lost winning the category.  If your competitor gets this right, they’re likely to end up in that No. 1 spot.  Then once they end up there, it’s hard for you to catch up.

This is why I think this phase is critical.  Building the right sales infrastructure, thinking about leaders and reps is important in building out this kind of multiple layers of sales management early in the cycle.  Sometimes what you’ll find with founders is they will wait as long as they can before hiring what I affectionately call overhead.  They might have this point of view that if someone is not an individual contributor, they’re kind of expensive and they’re not actually doing specific work.  An individual developer or an individual sales rep is more important.

I’d make the argument that actually hiring in these leaders is critical because two things happen.  One is the leader typically hires better individual reps.  That’s great from the beginning.  The second thing is when a new leader comes in many times they’re going to churn out half the people below.  If they churn out half the people below them, that’s another 9-month air pocket for you to deal with as a founder.

So shifting the mindset to hiring top-down versus bottom-up is important.  That actually happened in Phase 3.  That’s when you thought about your VP of sales.  Is that the right person to build kind of a much larger framework for a sale model or are they going to tap out after 10 people?  I think these are the organisational things that are critical to get right in Phase 3 and 4.


AT: So Phase 4 there, the most critical phase.

I think for the sake of time on the podcast and for, also, the audience who are predominantly, I would say, early-stage SaaS founders, then perhaps we should focus on Phase 5 as the final stage within this podcast and we can perhaps neatly summarise and sort of wrap up on Phase 6 and Phase 7.  I just think it’s perhaps sort of unlikely that we’ve got too many within those stages that are listening, not to say that it is an interesting thought for the audience.

If we jump into Phase 5, the double then from $18 million to $36 million in ARR, et me ask you how does the SaaS founder and the SaaS company go about that?


NA:  Sure.  So a couple points come to mind.  One is I have seen if you can successfully triple in Phase 4, in general, statistically speaking you will likely double in Phase 5.  So you might say, well, what’s the magic then?  If it’s going to happen then why are we talking about this?

I would argue that similar to Phase 3 when you’re laying the foundation for future success, Phase 5 is one of these phases where you’re layering in the foundation for future success.  What I mean specifically for that, especially for U.S.-based companies, is really getting international operations up and running with the right foundation for success.

What I’ve noticed over the years is companies, when they think of international, they tend to go wide instead of going deep.  I’ve come to the conclusion that it’s better to do less and do those countries right rather than trying to cover up all of the waterfront at once.  When I talk about international I usually mean if you just get the U.K. working, if you can get the U.K. working, hire 3 or 4 reps in the U.K., get the right reference accounts, think of it as a mini startup and really get it successful, that’s a great outcome.  Then if you can replicate that in Germany, in France, in the next year and then you can replicate that in Asia-Pac and Latin America after that.

Many times, I’ll meet founders who will put up one person in the U.K. and one person in France, one person in Germany, one person in Singapore.  Usually those people churn out.  There’s not enough critical mass in their office.  They’re not learning from each other.  They don’t have reference accounts in the market to cultivate and use as reference calls for future prospects.  But when you can kind of increase the density within one geo you get this kind of virtuous cycle going.

I think that’s an important thing to think about in this next phase.


AT:  Yeah.  I think that’s really good advice.  Actually, personally again in my experience in sales, I’ve seen the Go-Wide versus the Go-Deep approach.  I guess those that have seen that have gone wide I don’t think any of them have become billion-dollar companies.  I think there’s a lot to be said for that.

It does sound right that going deep should be the right approach there.  Really good insights there.

I think then we’ve gone through Phases 1 to 5 which, I would say, certainly for our listeners, the most interesting phase is, whilst I think perhaps many of them hopefully want to become billion-dollar businesses, if we would just sort of quickly perhaps summarise the Phase 6 and 7 of the T2D3 mantra then I think we can kind of neatly come to an end of this episode of the show.  Then perhaps, you never know, in the future we may have a different growing audience that we focus more on the latter stages and we come back to this.

Do you want to kind of quickly summarise 6 and 7 before we close out?


NA:  Sounds good, Alex.  Well, a couple of things I’ve mentioned, in Phase 6 and 7, really there’s a lot more operational complexity to a business.  I would also argue that most founders have a very hard time dealing with these kind of latter phases of growth.  They tend to be very good at product/market, hiring the initial team, a smaller segment of them get excited by managing hundreds of people and making sure their organisations are really humming.

But in these phases, there’s some really important operational decisions.  Usually it’s around sales leadership.  Should you hire somebody who’s a CRO who manages both sales and customer success?  Kind of what happens there?

I know you’ve mentioned Gainsight, which is a Battery, and they’ve got a lot of great lessons in customer success.  It almost stayed to my mind a parallel track we could talk about for customer success in addition to sales like we just did.  But customer success and kind of how upsells run, how the needles work, how that interface with sales becomes a very challenging, operational question in these phases.

Then sometimes there’s this question about hiring a COO.  I think that is a tricky one as well for founders to figure out because there’s a question around, well, what should report to the COO, what should report to the CEO.  Are there two leaders in a company or is there one decision maker?  That’s near the complexity.

The last one I’ll highlight is partners and re-sellers.  There’s this hope that somebody else will help you sell your product and get you to success of $100 million recurring.  I’ve just never really seen that in my career.  Many times, I think founders will invest significant cycles in Phase 2, 3, and 4, trying to get a reseller or network resell and networking.  I just think it’s not a great use of time.

Until you get to at least $50 million in recurring and, I’d argue, even $100, nobody really cares.  You have to control your own destiny.  You have to figure out the secret playbook for selling.  Once you’ve got that figured out then you can maybe teach it to others.

Those are some of the operational issues I see in these later phases, Phase 6 and Phase 7.


AT: Thanks, Neeraj.

I’d say this podcast is gold dust for SaaS founders in that you’ve done all the hard work there, Neeraj, looking at the path of companies like Marketo, ServiceNow, Zendesk, I think Workday as well that have reached the billion dollar magical number in terms of valuation and they’ve gone through these phases. Hopefully, the founders that are listening will take a lot out of this and they will be humming the T2D3 mantra every day and reading about it, listening to it and drilling it into them.

I think it’s great that you’ve come up with this.  Really, thank you for that.


Neeraj Agrawal:  Anytime.  Hopefully, the SaaS founders will be successful and the industry will be so successful that there will be a T2D3 character in Star Wars 8.

Last thing I’d just mention, there’s a lot of additional content that we’ve developed here at Battery around the definition of SaaS success.  It’s available on our website.

We think about it as billion dollar IPO companies that are north of $500 million.  We’ve analysed I think there’s probably 50 to 60 of them and we’ve identified, there’s actually some really interesting patterns amongst the founders and their backgrounds.  I’d encourage your audience if they have interest to check out the SaaS Adventure section of the Battery.com website.



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