Having been in business for 15 years, we have seen our ups and downs. While there is always volatility internally, the macro environment has been anything but steady. I remember reading somewhere that anyone who started a business in the 2000’s hasn’t seen a “normal business cycle.”
Scott and I founded the company in early 2001, so this certainly feels true. In fact, after 6 months in a family room, I pulled into our first office on September 11, 2001.
THE FLEXIBLE BUSINESS MODEL
From 9/11 to the .com crash to the recession, our norm was constantly moving. Lucky for us, we were growing. And growth covers for a lot of mistakes and macro volatility.
It also covers the need to have a good budget model. You know, the thing that tells you if your plane is flying into a mountain. We were young entrepreneurs who were making the Inc 500 list multiple times. Our gut was our model. If we needed more cash, we would just sell more. Ah, to be young and bulletproof again!
A funny thing happened around 2007 – our ‘gut’ started to ache. All the things we ‘knew’ started to seem a little shaky.
- At first, it was a slowdown in new customers. There were rumblings coming from the sales floor about the markets we were serving.
- Our existing customers stopped spending as much because they were “tightening up.”
- Then came the cash balance starting to fall.
With the benefit of hindsight, we were serving a market that was one of the earliest to the recession (high-priced consumer goods). But things went from bad to worse… quickly.
We were in a full reactive state. We couldn’t find the bottom. After all was said and done, our revenue was cut in half in less than 18 months, and our team was reduced from 90 employees to 40. It was awful!
Experiences like that stay with you forever. And for me, knowing the recession took a lot of the responsibility off us, I also know we could have been much less reactive.
Our lack of a business model took all our control away. We were flying blind. Zero ability to see trends. Zero ability to adjust inputs or outputs as information came available. Zero ability to see what would happen if those input/output changes.
Thankfully, we managed to survive. It broke the business, but not the culture (that’s another story!). We used it as an opportunity to adjust the vision and strategy, trying to make good out of a terrible event. I am thankful every day for this second chance, while never forgetting that it can all go away tomorrow.
Fast forward to today, and we are very much in startup mode, having launched our SaaS product in the middle of 2015. We are lucky enough to be right back in the middle of growth. It is coming fast and furious.
What’s the difference this time? Our business model. It’s bad-ass. I take pride in it. I can’t imagine flying the plane without it. Who knew Excel could be so cool?!
It has continued to increase in complexity as our business has grown, but I crave the information it provides. We built the model 5 years out, but the later years don’t matter so much. They are very rough estimates. The closer we get to today, the more specific we get. The estimates turn into expectations.
Every quarter we adjust the remainder of the current year and the following year. Adjustments include revenue, hires, and timing, ARPA (average revenue per account), quota attainment by rep, retention and churn, etc.
Then, we look at the unit economics it spits out to see how we are doing. We ask ourselves questions like, “Should we slow down? Should we speed up that Client Success hire? Are we being too aggressive with the next release and the corresponding ACV?”, etc. These are all good questions to dive deeper with the leadership team.
At the end of the day, these outputs give me peace of mind and are my center. Sure, vision and strategy provide the direction, but a good business model is the fuel that keeps you on the road.
Taking the time to build the model is an easy thing to overlook and an even easier thing to dismiss because so much is changing. Don’t let that be you! Build an MVP and add complexity as you can. Adjust it monthly at first, then the quarterly as the business gets a little more predictable and repeatable.
A good model should tell you 3 very specific things:
- Cash flow: As in, how much do you have now and in the future? Tying it to revenue projections for real time changes is imperative. We make changes to revenue and expense and go to a tab and see how that impacts cash. It’s awesome even if we don’t like the answers sometimes.
- Unit economics: There is nothing worse than hitting your goals and the outcome isn’t attractive. SaaS has these beautifully crafted metrics with clear benchmarks that tell you how much to spend and where. Use them and compare them to your model.
- Hiring Calendar: A good model sets the ratio for rep’s quota attainment, clients per Client Success hire, % of R&D to revenue, NRR expectations, etc. Ratios like these drive the hires you need and when they should start. This allows you to prepare well ahead of time for recruiting…. which always takes longer than you want.
While my idea isn’t revolutionary by any means, and I am sure there are a few of you that are saying “no kidding, idiot,” — well, this post isn’t for you. It’s for the people who are doing well and keep putting the model off because they feel the “gut” is all they need.
Take the time. Build it. And enjoy the control! Your gut will thank you.