PODCAST 64: How to Analyze a SaaS Business Effectively w/ David Skok

analyze saas business podcast image
ChoiceCongaPartnerSales Operations

This week on the Sales Hacker podcast, we speak with David Skok. He is one of

the pioneers of SaaS. He is a serial entrepreneur. He started his first business in 1977.

Three of the four businesses that he was involved with went on to IPO. He is an early investor in HubSpot and Zendesk, leading the way to the development and language of SaaS.

If you missed episode 63, check it out here: PODCAST 63: Translating Big Companies Principles to Small Companies w/ Ben Wright

What You’ll Learn

  • How to develop a point of view and a perspective on business at an early age
  • How to understand what your customer wants
  • How to effectively analyze a SaaS business
  • The formula for a successful business

Subscribe to the Sales Hacker Podcast

Show Agenda and Timestamps

  1. Show Introduction [00:09]
  2. About David Skok: An Introduction [02:25]
  3. Developing Business Acumen Early On [08:54]
  4. How to Effectively Analyze Your SaaS Business [18:20]
  5. Scalability and a Profitable Growth Model [24:38]
  6. Sam’s Corner [44:43]

Show Introduction

Sam Jacobs: Hey, everybody. Welcome to the Sales Hacker Podcast. It is your friendly neighborhood podcast host and impresario, Sam Jacobs.

Today’s show is David Skok. You should know who David is. If you don’t, that’s on you. David is one of the pioneers of SaaS. He is a serial entrepreneur. He started his first business in 1977. He’s an incredibly successful entrepreneur and an investor. This is one of the great interviews and really, really informative, so I’m glad you’re here.

We’d like to thank our sponsors. Conga is the leading end-to-end digital document transformation suite. With Conga, you can simplify documents, automate contracts, and execute e-signatures so you can focus on accelerating sales cycles and closing business faster.

Our second sponsor is Outreach, the leading sales engagement platform that enables sales reps to humanize their communications at scale, from automating the soul-sucking manual work that eats up selling time to providing action-oriented tips on what communications are working best. Outreach has your back.

About David Skok: An Introduction

Sam Jacobs: We’ve got a very, very special guest on the show today. Some might call him the godfather of SaaS, one of the most well-known thinkers, investors, entrepreneurs focused on the entire growth and evolution of the recurring revenue business model.

I’m talking about David Skok. David is best known for his blog, forEntrepreneurs.com, which covers many startup topics such SaaS, and how to build a repeatable, scalable, and profitable growth machine. He’s a serial entrepreneur, who founded a total of four companies and did one turnaround. Three of those companies went on to IPO.

He’s been an early investor with exits in HubSpot, JBoss, AppIQ, Tabblo, Netezza, Diligent Technologies, CloudSwitch, TribeHR, GrabCAD, OpenSpan and Enservio. He serves on the Boards of Atomist, CloudBees, Digium, Namely, Salsify and Zaius. David, welcome to the show.

David Skok: Hey, Sam. It’s great to be here.

Developing Business Acumen Early On

Sam Jacobs: From a very early age, you’ve been in charge, leading organizations that, even by today measures and inflation adjusted dollars, are incredibly successful. How did you develop a point of view and perspective on business at such an early age that equipped you to lead of all these different organizations?

David Skok: A lot of it came from just plain gut instincts of how to survive. Because the business, fortunately, grew pretty slowly, I had time to learn a lot of lessons that, ordinarily, in today’s startup world, you just don’t have that time. Everything’s moving at a much faster pace. Your competitors are moving at a faster pace.

One of the most interesting things that triggered some of my later on thinking was, I had this nine month sales cycle in my very first business, selling to architects. I sat down one day and I said to myself, “This just doesn’t make any sense. What’s going on in this sales cycle? Why is it taking so long, and what could we do to make it work better?”

I created a single day event, brought these people in, the architects in. I had a network set up and it was able to show exactly how several architects could share documents together. I had this room where we had a whole bunch of customers and their drawings everywhere around this room, so you could see and talk to customers. We, effectively, tried to address every part of the sales cycle.

A strange thing happened, at about 2:00 that day, the first customer came over and said, “I want to place an order.” We never expected that would happen, all of a sudden, in that one day, we did $4 million worth of business, which was more than we’d done the whole 12 months previously.

That particular event has been highly influential for all of my later stage work that was all about how to bring more of the scientific process to what, up until recently was never really thought of as being a very scientific and measurable metrics or a data oriented, process oriented thing.

How to Effectively Analyze Your SaaS Business

Sam Jacobs: You popularized, if not invented/created/derived a lot of the key frameworks with which we analyze SaaS businesses. Walk us through the evolution of how you came to use all of these different frameworks to analyze a business effectively.

David Skok: The thing that I realized was that when I talked to my partners about what was going on inside of a SaaS business, they would struggle because they would see us burning a lot of money, and they wouldn’t know why we were burning that money. Their constant request to me is, “Let’s reduce the burn rate of this company.” I said, “Well, no. You don’t want to do that because this business is really successful.”

The reason why this was happening was that they were used to using traditional GAAP accounting statements, P&L and balance sheet to understand if the business was doing well. Those totally fail to describe what’s going on in recurring revenue business because you end up spending a fortune to acquire the customer in the early stages of the relationship with them.

Only if you manage to keep that customer for several years do you really start to become profitable on that investment. If you take that across many, many customers, you end up with, again, a very serious cashflow problem or at least a profit and loss problem for the business.

That’s why I thought unit economics were by far and away the best solution to that. That really meant looking at LTV of that customer and the CAC for that customer, and realizing that if you’re going to have a great business, you’d have to have much more LTV than it cost you to acquire them.

My guess was that LTV to CAC should be at least three times, and that you should try to get months to recover CAC to be less than 12.

That’s really a metric that talks about how capital efficient the business will be. The really great businesses are definitely in that 12 months and below range. They consume very little capital, so the funders end up owning tons more of the business by the time it reaches some kind of a point where there’s liquidity and they can get some kind of exit for their shareholding.

RELATED: The SaaS Metrics Blueprint: How to Define, Measure and Display What Actually Matters

Scalability and a Profitable Growth Model

Sam Jacobs: I worry that early stage companies describe and discuss and present LTV data that is completely unrealistic given their age as a company. Do you ever worry that LTV gets dramatically inflated and sort of optimistically presented?

David Skok: You’ve just raised a great point. One of the most valuable ideas that I came up with is the notion that one of the big mistakes made by startup founders is that they try to rush through the stage that they should be focusing on and jump to the next stage too quickly.

It’s super important to recognize that you’re just too early to calculate LTV to CAC when you’re still trying to find product/market fit, or if you’re in the early days of trying to figure out a repeatable sales motion.

It’s only when you’ve got something that’s fully repeatable, that you also know is scalable, and have figured out what it costs you when you start to scale it. Because now, you’ve got to generate leads at scale. You’ve got to find salespeople at scale. Then you finally end up with valid metrics for CAC and you have a decent enough picture of what your LTV is.

I came up with a nine-stage model to get to what I think really gives you a successful business. That is when you have a repeatable and a scalable and profitable growth model.

There’s two big phases. The first one is really all about finding product/market fit. The second phase is all about building this repeatable, scalable and profitable growth process. Once you’ve got that, you hit the accelerator pedal and start scaling like crazy.

After you’ve found product/market fit that you start trying to figure out, how do you sell something? I think the first step is that the founders need to get out there and figure out if they can actually sell the product, and figure out at the point in time where what they’re doing is repeatable.

At the end of that, you should have this really defined notion of who you’re selling to, what price point you’re using, what message you use when you talk to them, what the objections are that they come up with, and how do you typically overcome those?

That’s when you start working to see, “Is this thing repeatable when I bring in just ordinary, standard reps?” Then once it is repeatable, “Can we scale this?”

Now, you’ve become very, very good at signing up lots and lots of customers and you start realizing, “Okay. Not all of them are sticking around as long as we should do, so how do we solve that? How do we reduce CAC and how do we optimize the lifetime value, and make sure we’ve got our metrics in order for us to really hit the gas on the thing.”

If you can make that motion repeatable and scalable and also profitable, you’ve actually built a cash generating machine and it’s really something that you want to run as fast as you possibly can, to put as much money into it as you can. Because every time you put money into it, it scales and it repeats and it generates profit for you.

Sam’s Corner

Sam Jacobs: What an incredible interview. It was really just an honor to have David on the show. You can hear from the enthusiasm in his voice how excited he is to help founders, entrepreneurs and their teams grow and scale businesses. You really need to go to his blog, forEntrepreneurs.com and go through some of the materials.

What We Learned

  • How to develop a point of view and a perspective on business at an early age
  • How to understand what your customer wants
  • How to effectively analyze a SaaS business
  • The formula for a successful business

Don’t miss episode 65

Before we go, let’s thank our sponsors. Conga is the leading end-to-end digital document transformation suite. With Conga you can simplify documents, automate contracts, and execute esignatures. Our second sponsor is Outreach. Outreach is the leading sales engagement platform.

If you want to reach out to me with feedback, you can reach me on LinkedIn.

I look forward to talking to you soon. See you next time.

This is a sponsored guest post from a Sales Hacker partner.

Sam Jacobs is the Founder of Aqueduct Revenue Advisors and the New York Revenue Collective and regarded as one of the top start-up CROs in the tech community.

He has has over 15 years of experience scaling companies from post-revenue to ~$300M, has helped raise over $400M in institutional capital, and has helped companies of all sizes achieve an average annualized revenue growth rate of 48% over the last 15 years.