Don't be foie gras

If 2016-2020 was the golden unicorn age of SaaS, 2021 nearly hurtled us into the foie gras* era. I say “nearly” because the current market correction may head off the trend of overstuffing private software companies with capital in the hope they grow faster. 

*h/t to harry stebbings for the metaphor

An overabundance of capital is bad for most businesses. Inside a company there should always be healthy competition for investment, bordering on intense. Vigorous debate between product, marketing, sales, and finance leaders about what gets funded and what gets cut is critical to maintaining high ROIC. 

This debate should trickle down the org. Regional and segment sales leaders should make their case for more budget based on opportunity in their territory. Nearly all ideas for features/products from PMs should be killed rather than funded. Brand, field, and demand gen marketing leaders should be knives out (nicely) over their slice of the pie.

Too much money means too many things get funded and the initiatives that are funded are overfunded. Roles are staffed with people too senior for the job (leading to more hires, because senior people don’t do execution). Too many sales people are hired, leading to quota attainment cratering and an uptick in unwanted attrition. People get promoted too quickly, resulting in a lack of best practice and poor execution. Over the top offsites and parties get thrown all in the effort of “maintaining culture.”

Most importantly, the focus of the CEO gets pulled in too many directions. This diffusion of attention usually leads to less getting done, despite more investment. Additionally, a culture of excellence focused on return on investment is not built. Standards for excellence are not defined and enforced. Due this, growth often disappoints, and hard decisions have to be made (usually management changes, reorgs, hiring freezes, and RIFs) to recalibrate.

Don’t be foie gras.

Know what flies

It is hard not to foie gras yourself in today’s environment. Abundant capital increases category velocity, putting pressure on companies to do unnatural things to stay ahead of competition. Abundant capital also drives valuations up, putting more pressure on management teams to grow faster in order to raise more money in the future. This pressure trickles down to functional leaders who will always want more budget. So it is important to benchmark at the functional level and at the corporate level.

The most successful software companies today went public while generating at least $0.34 of new revenue for every $1 of opex. The absolute monsters (ZM, DDOG, SNOW, NOW) generated over $0.50 of new revenue for every dollar spent on opex. Some of the least successful companies of the last decade were below the $0.34 threshold (Box, Cloudera, Hortonworks, Domo, Yext, Dropbox).

Embrace efficiency path dependence 

If you create a culture of efficiency and excellence, you are more likely to stay efficient and excellent. The best SaaS companies are efficient when they are private, stay efficient through peak demand of their initial product cycle, then often become less efficient over time.

There are very few examples of successfully slamming on the brakes and pivoting to a culture of operational excellence from one of excess. Looking through the benchmark of pre-2019 IPOs, really only MongoDB successfully went from inefficient ($0.23 two years before IPO) to above the $0.34 threshold. FIVN (which is not in the benchmark) went from highly efficient to inefficient due to decelerating demand. The company adjusted as a public company and has since thrived, but suffered through an ugly period of underperformance in the process of recalibrating (stock went from $7 to $3.50). UIPath is in the midst of a transformation from foie gras to efficient company, but it is too early to know if it will be successful.

So if you have a bunch of cash on the balance sheet and are receiving pressure from investors to “go big” (or are pressuring your companies to “go big”), just make sure you aren’t getting too fat instead.