20Sales: Biggest Lessons Scaling Hubspot from $0-$100M in ARR, The Framework for How Startups Should Scale into the Enterprise, How to do Channel Partnerships Right and How to Construct Sales Comp Plans Early On with Mark Roberge

Mark Roberge is a Co-Founder and Managing Director at Stage 2 Capital and a Senior Lecturer at the Harvard Business School. Prior to these roles, Mark was the founding CRO at HubSpot, where he scaled ARR from $0 to $100 million and expanded his team from 1 to 450 employees. Mark was ranked #19 in Forbes' Top 30 Social Sellers in the World. He was also awarded the 2010 Salesperson of the Year at the MIT Sales Conference. In Today's Episode with Mark Roberge We Discuss: 1. Biggest Lessons Scaling Hubspot to $100M in ARR: What are Mark's biggest lessons in what worked in their sales strategy in scaling to $100M in ARR? What elements of Hubspot's sales strategy did not work? What would he have done differently with the benefit of hindsight? What does Mark know now that he wishes he had known when he started at Hubspot? 2. How the Best Startups Scale into Enterprise: What are the single biggest mistakes startups make when scaling into enterprise? When is the right time? What do founders get most wrong on timing of scale into enterprise? What do you need to have in place both from a team and product perspective to make the transition? 3. Second Product and Second Channel: When is the right time to launch the second product? Why does Mark believe that you should be turning down customers in the early days? Why is not every customer right for your company? How does Mark think about channel diversification? Does Mark agree you only need one channel to scale to $50M in ARR and two to scale to $100M in ARR? 4. 99% of SaaS Founders Do Partnerships Wrong: What are the single biggest mistakes founders make when doing channel partnerships? What can and should they do to set channel partnerships up for success? What do the channel partners need to have to be equipped to sell the partner solution? What level of buy-in and from who on the channel partner side is needed for the partnership to be successful? What did Mark learn from Hubspot's partnership with Salesforce scaling to 10% of Hubspot's revenue?

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Speaker 00

  I was consulting to HubSpot when it was like one or two people and eventually joined the company as the fourth employee. The skill necessary to get a million dollar deal done, there's so much in there in terms of like, how do I identify and build a good champion? How do I understand the political dynamics? How do I differentiate between an economic buyer, a technical buyer, an end user, a coach and a champion? How do I like deal with procurement? How do I deal with legal? My million dollar seller has all those skills.

• 0:27Harry Stebbings?

  You are listening to 20 Sales with me, Harry Stebbings. Now 20 Sales is the monthly show where we sit down with the best sales leaders in the world to reveal their tips, tactics and strategies to scaling the best sales teams. And there is no one better than today's guest. HubSpot is one of the generational defining companies of this era of SaaS companies. And our guest today was the fourth employee and their first sales hire. So as the founding CRO at HubSpot, Mark Rubeges scaled ARR from zero to a hundred million dollars and expanded his team from one to 450 employees. In this episode, we unpack the biggest lessons from scaling HubSpot from zero to a hundred million dollars in ARR. But before we dive in, we need to talk about our sponsor for the day, Clari.

• 1:12Harry Stebbings?

  Clari is an industry-leading AI-powered revenue platform that is purpose-built to help companies optimize their end-to-end revenue process. With over $4 trillion in revenue under management, Clari's customers have a material advantage to optimize their enterprise revenue process across all teams, from rep to the boardroom, by leveraging the world's largest and fastest-growing AI reservoir of enterprise revenue expertise. More than 1,500 organizations, including Okta, Adobe, Workday, Zoom and Finextra, run revenue on Clari to improve win rates, prevent slip deals, forecast with accuracy and boost the productivity of all revenue-critical employees. To learn more about how you can create, convert and close revenue with Clari, visit clari.com.

• 1:57Speaker 00

  You have now arrived at your destination.

• 2:00Harry Stebbings?

  Mark, I am so excited for this. I just mentioned I've loved your content for a while now, so this is really exciting. Thank you so much for joining me today.

• 2:07Speaker 00

  Oh yeah, sure, Harry. I'm honored. Thank you for saying that.

• 2:10Harry Stebbings?

  Now, I would love to start. How did you first make your way into the world of sales? And when did you know that like, sales was really one of your loves?

• 2:17Speaker 00

  Like a lot of the wins in my career, it was completely serendipitous. Almost accidental. At 23, I discovered that I wanted to be an entrepreneur. And even to this day, I kind of consider myself more of an entrepreneur than a sales leader. Even though I was a founder CEO coming out of school, I knew I wanted a functional alignment and I was torn between marketing and sales. I was like, there's not a lot of MBAs that go into sales, so that's weird. But I really love the art of the deal. And I know generally speaking in tech, salespeople make more than marketers. And I had a young family and like I was the financial responsible for that. So like that was important and an ingredient. But I felt like the MBA provided you more for marketing. Marketing was going more in a data-driven direction.

• 2:59Speaker 00

  I was consulting to HubSpot when it was like one or two people and eventually joined the company as the fourth employee. And that's where it started kicked in because Halligan was the co-founder and he is a sales guy. And he was like, if we're going to use you one day a week at consult, then I want you to sell. And so that's how I got into sales. Dharmesh hired me for one day a week. You're now the CEO. If you want me to sell, I'll sell. If you want me to write code, I'll write code. Like it is what it is. So that's how I got into it and it actually worked out beautifully. Because I was not only in sales, but I was selling cutting-edge marketing software. So I got to learn all about both, which was completely accidental, but awesome.

• 3:36Harry Stebbings?

  Where was HubSpot at that time? Did they have any customers? Did they have any funding? Just, I'm just fascinated.

• 3:43Speaker 00

  I had sat next to Dharmesh in school at MIT in 05 in a class. It was one of those classes where you, there's like 50 students. Everybody shows up with a business idea on like one page. That night, you read them all, you vote and 10 people get picked to be CEOs. I got picked to do mine, which is in the social networking space. And Dharmesh got picked and his was HubSpot. So that was like the first time I met HubSpot. And then like he and I became friends. We would grab Chinese food like once a month or so, talk and got to know each other. And then when I was like, hey, by the way, I'm actually going to do mine and raising money. He's like, I'm in, I'll be an angel. I'm like, great. And then at some point through that journey, he was like, can I pay you as a consultant too, to help me with HubSpot? I'm sure you like need money. You have this big loan from MIT and all that stuff. And I'm like, sure.

• 4:28Speaker 00

  When I first got engaged on that level with HubSpot is It was just Dharmesh. He was, Brian was in venture capital, but had been working with Dharmesh at MIT on the concept. And Dharmesh was trying to recruit Brian. And so about a couple of months through into my consultancy with Dharmesh, he said, hey, I was successfully recruited Brian to be my co-founder and be CEO. And so we sat down and Brian's like, I like Mark, let's keep Mark on, but Mark just do sales if we have you one day a week. So I did that for about six or seven months. And then he took me to a Red Sox game and was like, so at that point now, we've acquired between Brian and I, we've probably acquired like 40 customers. We're probably at like a couple hundred thousand in ARR.

• 5:10Speaker 00

  We brought a Mike Volpe as CMO. Brian took me to a Red Sox game and was like, hey, listen, General Catalyst is coming in for our A round. Um, we're going to raise five million bucks or something like that. He's like, why don't you come join full time, be our first salesperson and sales leader?

• 5:24Harry Stebbings?

  Can I ask, in terms of the evolution, the hardest thing is often for founders to transition from a founder-led sales motion to a sales team-led sales motion. What do you advise founders who are struggling in that transition?

• 5:38Speaker 00

  Yeah, it's a really hard one and it's a key. A lot of founders today are product and engineering oriented and don't have a lot of experience in sales. Every time I ask them, what are you looking for? They always say the same thing. 10 years of experience selling a product like mine to a customer like mine. And there's tremendous research that shows that that mindset doesn't work out. And it's not that it doesn't help. It's just that there's a whole bunch of other things you need to assess, largely around sales skills, that are not looked at. And because of that, you end up with the bottom 25% performers in your industry. That's the biggest pothole. Essentially, what that means is a founder needs to learn how to assess a seller on sales skills.

• 6:18Harry Stebbings?

  Yeah.

• 6:18Speaker 00

  And that's like saying to a salesperson, challenging them to assess an engineer and how well they write Java. It's hard to do. Like you almost have to go to school for five years. So it's kind of the same thing. It's difficult. I can't just like say a statement and like you learn it in a minute. Go find an advisor. Advisors are cheap. They're, they're usually a little bit of equity. Go find someone that's hired a bunch of salespeople, particularly that in this case, it could be okay that it's in your domain.

• 6:43Harry Stebbings?

  Okay, couple of questions. One, does the founder have to create the first sales playbook? Or can they actually bring in a sales leader from day one on revenue?

• 6:52Speaker 00

  It depends on the aspect of the playbook, Harry. So in terms of like a Sandler level or winning by design, like method of force management methodology, that's going to take a professional leader to like bring in and navigate. Like even things like, how do you manage the first meeting and do discovery well? No, I don't see a lot of product founders coming up with that. But one of the underlying pieces of the sales playbook is a buyer journey. What are the different ways that buyers describe the problem you solve or the opportunity that you create? And how do they look to solve that? And how do they look to make that decision? That's something that a founder should be working on from day one, just to start crystallizing that. Another piece is the ideal customer profile.

• 7:35Speaker 00

  You know, so what are the attributes of like what a home run fit is for us versus not? The other attribute is like just the general value proposition that we're pitching. Like, these are typically areas where founders can make a lot of progress on their own. They might get it to like 70% of the way there. And then a professional seller is going to come in and take it the final mile and add the details like cold calling, getting the appointment, doing discovery calls, tailoring the pitch, handling objections, dealing with negotiations, all that kind of stuff.

• 8:03Harry Stebbings?

  I am a founder in your portfolio and I'm just, I don't know what I'm doing here. So you're going to help me. For my first sales hire then, I've got us to 700K in error. Do I have someone who's sold to customers like mine before? Or do I have someone who's sold deal sizes like mine before? If you could have one deal size or category that they've experienced before, which would you rather?

• 8:26Speaker 00

  I have a strong conviction that deal size has a higher weight in correlation to success. Let's just say we, we sell million dollar deals to banks. And I have two candidates. One candidate sells $10,000 deals to banks. And one candidate sells million dollar deals to hospitals. The skill necessary to get a million dollar deal done, there's so much in there in terms of like, how do I identify and build a good champion? How do I understand the political? Dynamics. How do I differentiate between an economic buyer, a technical buyer, an end user, a coach and a champion? How do I like understand medic as a sales process? How do I like deal with procurement? How do I deal with legal? My million dollar seller that sells to healthcare has all those skills.

• 9:11Speaker 00

  Okay. My person that sells to banks, but they sell $10,000 deals has none of those skills. I'll be much easier for me to teach the million dollar seller about banks than it is for me to teach a $10,000 transactional seller how to do all that other stuff.

• 9:25Harry Stebbings?

  Okay. I'm in this process hiring our sales rep or offer sales addition. What are the must ask questions?

• 9:32Speaker 00

  I love getting into a role play. That's the most important part is this part where it's like, okay, Harry, we're hiring for HubSpot. It's like, let's just pretend you're a small business owner and you downloaded the HubSpot inbound marketing ebook yesterday and you got the lead. Let's just do the first call. And so we'll do the call and I'm looking at things like really good, open ended questions, follow on questions to do discovery and qualify need and quantify need. I'm hoping that there's no show up and throw up and they give me like a five minute commercial on HubSpot that I could have just read online. And then I'll stop the interview a couple minutes in and then I'm going to assess coachability. You know, in most startup contexts, no one's going to come out of the gate hitting their productivity in month one. Like they have to

• 10:14Speaker 00

  learn the product, the methodology, the customer. So I'm assessing their ability to be coached. And so I'll have you self assess. And if you're like that, I was awesome. I have no feedback for myself, then that's a red flag. Every interview, I give a piece of positive feedback and a piece of need for improvement. So I give a positive, I give a need for improvement. I watch how they take the coaching and then usually I have them redo the role play. And then if we're going to do another meeting, I'll say, we're going to do it again. So I'll let you think about it for two days and then come back. And that's a big part of my assessment.

• 10:43Harry Stebbings?

  How fast do you know when you've made a missed hire?

• 10:46Speaker 00

  It takes a while and I have a lot of situations where I had a rep that was in there for three or four months and we weren't sure and they weren't hitting it, but we gave it a shot and seven months and they were toward the top and they stayed there. So that was perplexing to me, Harry, because like I want, I want a lot of early knowledge and leading. But I've seen that happen quite a bit. It just took them a little while to get there. The only thing I can say early on, kind of comes back to that coachability again. If I have a manager come to me and say, oh yeah, Pete's not working out. And I'll say, how do you know? Like, well, look at their numbers. And I'm like, okay, well, what are you coaching Pete on? And I, well, we're trying to get him to do a little better job on sense of urgency development. And I'll say, okay, how are you coaching him?

• 11:28Speaker 00

  So now I can assess if the manager's got a good diagnosis and good coaching model. And then I'm like, okay, when you're coaching them, are they staying? When you move them up a little bit, are they staying there? Or are they, are they there for a week and then they go down? If they're going up for a week and go down, yeah, we probably need to make a cut. But if they're staying there, this is taking a little while, let's hang in there. I think we're going to get there. That's the best I can see to get an early signal as to whether this person is going to make it.

• 11:53Harry Stebbings?

  In terms of the hiring process, when it comes to titles, what are some of the biggest lessons in terms of the title discussion? And what it might reveal about someone joining a company?

• 12:03Speaker 00

  It's probably a red flag if they're over obsessed with it. A little bit of ego stroking, and that's not going to be great for culture, especially early on when it has to be like, let's roll up our sleeves and do whatever it takes.

• 12:13Harry Stebbings?

  Should young companies be worried about giving away VP of Sales or Head of Sales too early? Because it makes it difficult to layer or not?

• 12:20Speaker 00

  I don't think it does. You know, to your point, I think it's a red flag for the candidate. But if I have a star and I have to give them a VP of Sales title instead of Director or a CRO title instead of VP to get them to do the job I see for them for the next 18 months and assess, I don't see it being an issue. Like, it's like, okay, I hire someone, they kill it for 18 months. And then after that, we decide we've got to up level them. In one case, their title is Director of Sales, in another case, their title is VP of Sales. I don't think that's harder.

• 12:50Harry Stebbings?

  What about money and incentive packages? Any big lessons there on advise me? I've never hired a sales team before, never hired a rep before. How should I do it? How should I structure it? What do you advise me?

• 13:02Speaker 00

  What most people do, which is I think a big mistake is they hire a sales person or leader and sort of delegate it to them because they sort of like are the functional expert on it. And then that person uses the sales comp model from their last company. That's really broken. What a lot of founders don't realize is you can get pretty creative here, especially in the early stages. The best way to devise a comp plan is to think about what you need the business to do in the next six to 12 months. Strategically, don't even think about sales, just strategically and holistically. Are any of those reinforceable with salesperson behavior or action? And if so, that's going to start deciding your comp plan. So I'll give you some really common examples.

• 13:46Speaker 00

  First off, which is like semi-related to that point. I don't like commission plan, salespeople in the journey to product market fit. Like, I just want pure equity people. If we're trying to find product market fit, if we have three design partner customers and we need to get to like 20 to understand product market fit, I'm going to bring on a salesperson to help us do that. And that person's making, say, 150, like 75 base, 75 commission. I don't want to put them on a comp plan. I'm going to say like, listen, I'm going to pay you like 125 flat out, no matter what, with some equity. That's the right person because like, we're sitting around and we're pivoting, pivoting, pivoting. We're, shoot, we've got it wrong. We have to go back to the driving board and it's going to take us three weeks to build this thing. All the engineers are making their salary, paying their mortgage and the sales rep is like desperate and sweating.

• 14:31Speaker 00

  I don't need that. And furthermore, like, that's not the rep I'm trying to attract right now. I'm trying to attract a rep that like enjoys that design journey, is sitting there shoulder to shoulder with the engineers, not sweating, making the mortgage payment or thinking short term. But then like, once we get into, okay, now we have product market fit. Then this is a classic example where it's like, now we need to get like, go to market fit. But we have to make sure that as we scale, we keep customer value and success top of mind. And so I want to make sure that my reps are not just selling customers and revenue. They're selling healthy customers, customers that are in my ICP. They're going to see a lot of value from our product. Most comp plans don't motivate that, don't incentivize that.

• 15:14Speaker 00

  But here's an example, what we talked about, like, think about your strategy and align it with a comp plan. It's like, okay, Harry, when you sell a deal, you're going to make 5% on that deal. I'm going to give you half of the commission when the customer pays and half the commission when they hit their leading indicator of retention, which usually happens in the first 30 days. So that could be as simple as like, they set up the product and process their first transaction. So as long as that leading indicator of retention is something meaningful, that again, can happen in the first 30 Days of the customer's life, but if it happens, they're probably going to be with it for a long time. And if it doesn't happen, they're probably going to churn. And you'd be shocked how much like the sales process in terms of what's discussed, how the product is presented, what types of customers are pursued drives that.

• 15:57Speaker 00

  And that's like a not commonly used compensation plan, but should be at that stage. And is aligned with the strategic objective of the company.

• 16:05Harry Stebbings?

  Are there any big fuckups that you see portfolio companies make on comp plans for sales teams that you're like, Harry, don't make this mistake.

• 16:12Speaker 00

  So many, if you're pursuing like PLG or land and expand, the sales compensation plan can really F that up. Because most sales compensation plans put most of the payment, the commission, on the first ACV from the customer and have very little, if any, on expansion. It puts the salesperson at odds with how you want customers to buy your product. Because when you're in PLG or land and expand, the buyer wants to start small, to test it out and then expand it, whether that's with other functions or departments or whatever. And you, as a company, a startup, your strategy is to do the same thing. Make it easy for customers to just like give it a shot and expand it. But if your reps are paid in that way, they want the opposite.

• 16:55Speaker 00

  They want you to buy everything upfront and you're likely to contract or churn. So that's a huge fuck up that we see a lot.

• 17:01Harry Stebbings?

  What's the right way to solve that then? Because I'm just taking it as say, it's like a 10K PLG product and 10K is kind of the entry price. But we want them to scale to 100K. As a company, you don't want to pay 100K upfront, get hit with cash flow problems in that way.

• 17:15Speaker 00

  I would do something like this, Harry. You're a salesperson, your job is bringing customers. I'm going to pay you 3% rate on the first ACV from a customer and 5% on any expansion revenue. So now it's like, oh, sweet. Okay, I get it. So I will make the most money if I sell customers on a very small ACV to start and expand them later. Yes, that's what you do. And then the salesperson's like, wait, wait, wait, am I a CSM now? No, no, you just go hunt. You go hunt, you sign up customers and we have a CSM team that onboards them. They expand them, they have their own comp, different comp plan, they have their incentives. That's just how yours works. If you sign up good, healthy customers with good expectations,

• 17:57Speaker 00

  you make a lot of money. If you sign up a bunch of crappy customers that don't stick around and don't expand, you're not going to make a lot of money.

• 18:03Harry Stebbings?

  The thing that worries me, honestly, and the biggest problem I see, even in our portfolio companies today, is sales-led growth with PLG pricing that doesn't expand. And what I mean by that is traditional, large sales teams selling 3K ACVs. And they say, "Yeah, but you know, if we prove it and if we do this and this and this, then it'll expand to 30K." And truth be told, it rarely does. And so we have this kind of enterprise sales cost base for a PLG pricing that doesn't often expand. At what price point does it make sense to have a sales team?

• 18:37Speaker 00

  Yeah, that was a really good question. Okay, so my approximation would be, even in HubSpot, we started at like 3,000 a year. I would say that's on the lower end. Now, that required a lot of inbound leads. There's a big missing part to that is like, the ACV is only one portion to answer like whether or not our go-to-market motion is working, whether we have a salesperson or PLG, or we're using marketing inbound, or we're doing cold calling, whatever. The absolute right answer comes down to unit economics. And there's a couple of different ways to measure unit economics. Let's just say payback period, which is the CAC divided by the ACV. Someone pays us $10,000 a year, then the CAC needs to be $10,000 for us to have a payback period of a year, right?

• 19:20Speaker 00

  So if someone pays us $10,000 a year and it costs us $10,000 to acquire them, we get payback in 12 months. Anything above that, you start to question whether unit economics work. Anything below that, it's, it's really good. The problem is ACV is only one part of that formula, Harry. The CAC is the other piece. The CAC for outbound sales teams is all over the place, because it depends on like, how many calls do you have to make to get an appointment? How many of those appointments turn into a demo? How many of those demos close, right? So there's a lot of different variations in there. Are you calling CMIOs of hospital systems? Or are you calling like landscapers of small businesses that pick up the phone a lot? It really comes down to like the, the absolute academic.

• 20:02Speaker 00

  And practical answer is it have to have good unit economics. The CAC and the ACV have to match up, but it's not always like at 3,000 ACV, you can have a sales team and at 2,000 you can't.

• 20:14Harry Stebbings?

  When you look at payback periods as an investor say, what are you like? Bad, good, great?

• 20:21Speaker 00

  At the IPO, um, less than 12 months is excellent. 12 to 15 is good. 15 to 20 gets concerning above 20, it's going to be a real problem. 20 months. At the series A, less than 12 is a, it's almost like you're probably being too efficient. Like we could probably like try to grow faster. 12 to 15 is really good. 15 to 20 is fine. It's kind of like, that's fine for now, we'll have to work on it later. Above 20, it gets concerning. Yeah. So you kind of have like some semblance, but there's a little more flexibility at the series A, because we know that there's a lot of, there's a lot of improvement that's just going to come with scale potentially.

• 21:03Speaker 00

  And then there's a lot of opportunities and low hanging fruit for us to get to that just isn't a priority right now.

• 21:08Harry Stebbings?

  So I see a lot of two to three month paybacks, which at series A, which to your point. Yeah, there's always a game with numbers though, Mark, isn't there? What's included in your CAC? And I've had somewhere, it's like, well, it's just my marketing spend, or it's just my outbound sales team. And it's like, well, that doesn't, that doesn't count. It's not quite that. What should be included in a CAC for a founder to truly understand their actual payback?

• 21:37Speaker 00

  Yeah. So at scale, it's going to be like on your income statement, the entire sales and marketing align is going to be the CAC. And you divide that by the number of customers that are acquired in that period. Let's say in a quarter that you're evaluating. Now that gets challenging at the series A, because if the founders are selling, well, then you have to attribute a part of their salary hypothetically. And if like you're throwing just general networking events for the company and that's leading to leads is that. So there's always these squishy costs, just to keep it simple. Everything you're spending on marketing and salespeople and sales leadership and sales ops. All that kind of stuff needs to go in there.

• 22:13Harry Stebbings?

  The one thing that we didn't discuss, though, actually, is the LTV. And it does matter because if we look at like banking customers, for example, or phone customers, I'm taking them because they are generally the longest serving customers. You know, they last for seven to 10 years. And so you can actually have a higher CAC if your LTVs are much longer. How do you think about that when analyzing early stage companies? Where we have in the UK, we would say, fuck all data.

• 22:43Speaker 00

  You know, there's multiple ways to measure your economics. There's payback and then there's LTV to CAC. For whatever reason, the industry talks about with LTV to CAC greater than three. It's a little bit of a farce, but it's not like a terrible measure. It's good to know what your LTV CAC is. That's where you could find that, Harry, and that's going to be tricky because theoretically, the lifetime value should be your ACV divided by your churn rate. You don't know your churn rate really for five years or more. So you have to make some pretty heavy assumptions there.

• 23:13Harry Stebbings?

  Do you not think you know your churn rate? So if we take like, you know, HubSpot, why did so many investors pass on HubSpot? Oh, you serve SMBs, don't they go out of business at such a high rate?

• 23:23Speaker 00

  Absolutely.

• 23:24Harry Stebbings?

  The churn rate's gonna be horrible. I think actually, I think there's some discrepancy and not blaming anyone, but on, I think, the early HubSpot churn rate, at some points it's been said to be like three to 4% and some 8%. Point just being SMBs go out of business.

• 23:40Speaker 00

  A month, by the way, yeah, it was high. Eight was the highest it hit in February of 2008. Throughout 2008, it was mostly between three and four, which is terrible. I mean, even at three or four, that's 40 to 50% a year churn. It's really bad.

• 23:55Harry Stebbings?

  You're an investor today. Do you invest in a company that serves SMBs with 3% to 4% churn rates?

• 24:00Speaker 00

  We do invest in companies that serve SMBs. That's become like. A really great starting point and you can build a healthy business there. But more importantly, use that success to move upstream to the mid-market when your product and brand and your sophistication justifies it. And then eventually to the enterprise potentially, these are very common plays. But yeah, with three to 4%, nah, not a lot. I mean, you have to have a lot of other things going right because actually you just don't have a business. Now, when you are, if you do want to make your business work in SMB, you just need a really healthy expansion motion because like just macroeconomics, because of like small business bankruptcy and budget sensitivities.

• 24:42Speaker 00

  If you're doing really well, you probably have an 80%, 85% logo retention in SMB. So you need to have at least a greater than 15% revenue expansion to get your business to be solid, to get your revenue retention to be above 100%. It's doable. In PLG, most starting ACVs is zero. It's all expansion, right? And so only the people that have already seen value in your product start with revenue and that usually sticks very nicely and then continues to expand. So SMB is very doable. It's just like, you probably have to start them on lowest ACVs and you have to have a really strong expansion mechanism.

• 25:19Harry Stebbings?

  Can I ask, I had Dave Kellogg on the show then, and he said that he loves GRR, gross revenue retention, and it's much more telling than net revenue retention. How do you think about net revenue retention versus gross revenue retention for founders listening going, which one?

• 25:33Speaker 00

  I think that are both needed. I probably put more weight in net revenue retention because at the end of the day, if you have 120% net revenue retention, you're going to grow 20% a year without acquiring any customers. That's really powerful. Whether that means you have 90% customer retention with 30% expansion and that's how you get to the 120, or you have 50% customer retention, 70% revenue expansion, and that's how you get to 120. Either way, you're going to grow by 20% a year if you keep that up. That's why I think that's the most important. The problem with the latter of having 50% customer retention with 70% expansion, yeah, the customers that stick with you are seeing a lot of value and paying more.

• 26:17Speaker 00

  But that means half the world out there are being like, yeah, I tried Harry's product and it didn't work for me. That's not good. So that's why I want to look at customer retention, but like, I kind of think net revenue retention is more.

• 26:29Harry Stebbings?

  Is that, is that not good? Like, I, I think if you have a tied ICP and you're very clear in terms of who your customer is, especially in a PLG world, that'll be people who pick it up and tried and it's not for them. Like, yeah, it was never meant for you.

• 26:42Speaker 00

  I just worry that like some customers don't, you know, know that. Like, I know this company is selling yoga software and they sell it specifically for like, more of like multi-location yoga studios, but yoga, yoga owners, yoga owners talk to each other. And when they're at like a retreat together and they're like, oh yeah, I tried that. It didn't work for me. I don't think they're like thinking, oh, were they an ICP or not? And they just think like, there's a reputation. So.

• 27:08Harry Stebbings?

  Oh, I'm not that ICP are good.

• 27:11Speaker 00

  Exactly. Right, right, right. Well, you're different than me.

• 27:13Harry Stebbings?

  Okay. So when you're investing today, a net revenue retention of 120 is good for founders? Like, how do you think about good and great?

• 27:22Speaker 00

  At some point, you need to get above 100% because if you're not above 100% net revenue retention, you have to, in order to grow, you have to outsell that gap with new customers. If you're at like 10 million in revenue, that's not that hard. If you're at 10 million in revenue and you have 90% revenue retention, that means that you start the year, your customers are paying you 10 million and those customers will be paying you 9 million at the end of the year. And so you just need to sell a million dollars of new software to, to maintain flat. And you need to sell 5 million of software to grow by 40%. That's not that hard. But once you get to a billion in revenue and you have a 90% net revenue retention, that means that at the end of the year, you're going to have 900 million.

• 28:07Speaker 00

  So you have to sell a hundred million dollars of new contracts to new customers just to remain flat. And 200 million of new software to new customers to grow by 10%. That is hard. Versus if you're at a billion and you have 110% net revenue retention, you can do nothing in new sales and you're going to grow by 10%. So at some point, it just like, you can't outsell our net revenue retention less than 100%.

• 28:34Harry Stebbings?

  One of the favorite things I have about HubSpot is the way that you just like broke the SaaS law. Of SMBs in terms of it being a great business to serve and not needing to scale necessarily into enterprise. But you invest today in amazing SaaS founders and I'm sure you see them say, ah, we're thinking about scaling into enterprise. How do you advise founders that you work with or advise me?

• 28:57Speaker 00

  Yeah.

• 28:58Harry Stebbings?

  In terms of when is the right time or at all to scale into enterprise?

• 29:03Speaker 00

  Both answers could be correct. I will say that it is extremely rare that you want to go into enterprise south of a couple million in revenue, extremely rare. So it's a little bit of a trap for most entrepreneurs to want to go to the enterprise too early. A lot of my students do this, you know, like, oh, if I can just get that huge logo, everybody else will follow. Well, two problems with that. Number one, you really underestimate what it's like to get that logo. It's going to take a long time, maybe a year and a half. Whoever's your champion, you might quit their job in that time. And by the time you get to the finish line, you're going to have to do SOX compliance and show all the stuff and you don't have it. So it's like, it's just going to kill you from a capital standpoint. Your better bet is to figure out what your product is, what your offering is, figure out your total just for a market and carve out the lowest part possible.

• 29:48Speaker 00

  Now, it's not always like a couple people, like we have an AI company for support teams. It doesn't work if you only have two support wraps. It just doesn't make sense. You have to have at least 20, but that's fine. We can go sell companies with 500 employees and 20 support wraps. That's fine. That's not trying to close a huge bank. So you just have to carve out the smallest possible. And then I've asked a lot of people from Chris Dagnan, one of our LPs, or the founding CEO of Snowflake. And the answer on when is always the same from them. It's like when you get pulled. Cause like, you know, you're, you're making hay in the SMB, you're going one million, three million, seven million. And like, big businesses start hearing about you. In fact, you're probably turning away big businesses before you're starting to sell them.

• 30:28Harry Stebbings?

  Take the bold stance of disagreeing with Dagnan and Egan, but that's why, it's why I disagree with them though. Cause you might actually get pulled at one million in ARR. And actually very often I find enterprises can distort strategy and product roadmap before they are ready for it. And people do not, like, do not understand what it truly means to be an entrepreneur. Price company, as you said, SOC two, all compliance is different. So no, not when they

• 30:55Speaker 00

  Yeah, you, I agree. You were actually in agreement, Harry. I probably didn't say it right. Is like, they would say like, you're not going to go unless you're polled, but if you're being polled, it doesn't mean you should go. You're on the same page with them, Harry. And like classic example, I mean, I think we're at two, three million in revenue at HubSpot. And one rep brought Facebook to the table as a customer. It was like a $3 million contract. It would have doubled our revenue and he said, no, we were being polled, said no. Everything's going to go bad at that point. Like they're going to start controlling your product roadmap. We're not built for that. It's not going to go well. Things are going to get around. It's going to distract the company. And the other thing that happens too, Harry is like, if one of them, I had another company recently that did this, where like a friend of the CEO at a big company came in and bought.

• 31:37Speaker 00

  And it was like a huge contract. Up until then, they'd been selling $15,000 ACVs. And this one was like 200,000. And all the salespeople were like, whoa, look at that. I made my annual goal in one sale and everybody will start doing that. And now all of a sudden you have no sales because you don't know how to sell those deals. That was like a lucky inbound. Real big trap.

• 31:57Harry Stebbings?

  In terms of like, you mentioned that, like the logo that drives social validity. To what extent do large logos drive social validity and subsequent sales? Does having Dropbox, Tesla, da, da, da, does that really work or is it like, nah, not really?

• 32:10Speaker 00

  Not as much as people think. Case studies in general, you throw a case study. Well, that's a bank and I'm in healthcare. Okay. Well, here's one from healthcare. Well, that's in oncology and I'm a dermatologist. Okay. Here's one in oncology. Well, that's in this type of oncology and I'm more this type, you know what I mean? It's like, or they're on the west coast and we're on the east. Like they're never satisfied. Yeah, it helps a little, but not as much as people think.

• 32:33Harry Stebbings?

  And do you think that when you're advising founders, it's great to get sheer volume, number of customers through the door, volume, volume or quality of those logos?

• 32:42Speaker 00

  Good, good question. Like, do you have to be specific about your ICP? Now, very early, it's a hypothesis. So let's say like, if you take the whole world and ultimately your ICP is going to be say like 5% of that. Well, I might be okay us selling to like 10 to 12% and drawing a little A little bigger circle because we just don't know. But like there's some folks, I like to do like a green, yellow, red. I have different attributes like, you know, how many employees were they located in the world? What sectors are they in? These types of things, right? And the green is like, we have strong conviction that those are good fits. Between 50 and 500 employees based in the US in tech. That's green and we're going to go after those all day. So when our SDRs are cold calling, they're only cold calling those people.

• 33:25Speaker 00

  Then there's reds where we have strong conviction, we will not sell. In fact, you cannot sell them. Okay, so that might be outside of English speaking territories. That might be healthcare, nonprofit government, and it might be like greater than 10,000 employees. Those are red, you are not allowed to sell them. Yellow is you can sell them if they're inbound. So we're not going to cold call them, but if they come inbound, we don't have enough conviction to know that they're not a fit. We also don't have enough conviction to like go outbound. So that's how I kind of try to think about it in that green, yellow, red mindset at least to start. And then over time, you can start to evaluate customer success, performances, et cetera, to get more conviction on it.

• 34:02Harry Stebbings?

  What was your inbound to outbound ratio at HubSpot?

• 34:05Speaker 00

  Ridiculously high. It's rare to see it that high. It was, I think a hundred percent of our customers came inbound for the first two or three years.

• 34:12Harry Stebbings?

  How did that change over time?

• 34:14Speaker 00

  I would say year four, and we also built a vibrant channel partner program, a very fragmented channel partner program through like very small channels, channel partners. So I would say by year five, we were 50% inbound, 30% channel, 20% outbound. Around the IPO, it becomes very blurry because at that point, you tend to just like go to territories. The brand becomes so strong that like it's really not clear what an inbound versus no. Like someone does a cold call and they're like, oh yeah, I, I know you just cold called me, but I'm already HubSpot customer. And you're like, what do you mean I'm a HubSpot customer? Like, oh, I've been using your marketing grader, your free marketing grader product for two years. Like, oh yeah, like you're not really a customer. Or like, oh, I heard about you guys. I saw you at an event.

• 34:56Speaker 00

  So it's like, when you hit brand scale, the lines start to get blurred.

• 35:00Harry Stebbings?

  I'm so enjoying this. Uh, you mentioned channel partners. I think so many founders go, wow, we're going to get a channel partnership with SAP or Workday. And then they're just going to sell for us and.

• 35:11Speaker 00

  Oh my gosh, so many. Huge pothole.

• 35:14Harry Stebbings?

  Okay, so tell me, like what is it? What are the biggest mistakes startups make with channel partnerships?

• 35:19Speaker 00

  Yeah, exactly what you said, Harry. A complete underestimate of what it takes to actually mobilize that partner. Okay. And it's, I get why they're doing it. It's like, we're going back to our product founder and they're like, yeah, we have like 10 design partners and 10 design customers and now we have to go acquire a bunch of customers. And I have two options. Option A is hire a big, expensive, scary sales team that's going to destroy my culture. I don't know how to hire our salespeople. Or just go partner with Workday who already has 5,000 salespeople and I'll just give them 20% of my profit. Why wouldn't they ever want to do that? That's, it makes perfect sense. First off, do you even know how to get into Workday's program? Like, you need to like, really have good alignment as high up as possible to do that. Second off, do you even know how to get the mindshare, the rep? Imagine being a Workday salesperson.

• 36:03Speaker 00

  You worked for hours to get 30 minutes with a customer. What are you pulling out of your bag to show them? Some startups little product that I get a 5% spiff on? To really mobilize, you have to like, you have to understand what the strategy at the C level is, make a case that your product aligns with that, and then convince them to spiff the crap out of their reps. So they're motivated to pull it out of their bag. Hard. I'm so sorry, what is spiff? It's a little like one-off bonus, okay? I'll give you an example. So Salesforce.com was an early investor in our Series D, believe it or not, and actually became a big channel partner for us over time, about 10% of our customers before we became competitive. Here's an example of what happened.

• 36:48Speaker 00

  We had contacts really high up. George Hu, I think it was, who was COO. And he eventually got us Benioff's ear. And we heard, at the time, Salesforce wasn't in marketing yet, in the marketing cloud. We also heard that the number one sales objection and reason for closed lost was, hey, cool, you get me, you organize my leads for me and my deals. My biggest issue is getting more leads. And the Salesforce.com sales reps didn't know how to talk about demand generation. Benioff knew it. And he's like, okay, we need to find partners that can help us with demand gen and help us train our reps how to talk about demand gen. And George, like, I got this new company, HubSpot, that's really cool. So he started to learn about us and Benioff's like, whoa, this is exactly what we need. So he-

• 37:29Speaker 00

  He's like, Benioff looks at all the partner, all the different things that are in their app exchange. Duck, you sign, all this stuff, right? And Benioff is like, we're gonna choose 10 out of the 3,000 that our reps get quota relief on. It counts toward their quota and HubSpot is one of them. And I'm gonna talk about that on our sales kickoff. So Benioff gets up and says, hey, keep selling all our, we have really cool channel partners, there are 3,000, it's a huge app exchange. And there's 10 of them that you get quota relief. And all the reps were like, whoa, that's amazing. Now, even when that happened, it only like 1% of our revenue came in. So I had to take one of our best salespeople, Adam Avricos, and assign him to that partnership.

• 38:10Speaker 00

  And Benioff and George Hu were so into it, they gave Adam his own office in Salesforce Tower in San Francisco, in in the Toronto office. And he had his own login to the salesforce.com CRM for the Salesforce team. And he was on chatter all day like, yeah, good job, you got quarter leave. And he'd fly around to all the Seattle offices. And after a year, they were contributing 10% of our revenue. So hopefully that's a good example of what it takes to mobilize a big partnership. It's hard.

• 38:37Harry Stebbings?

  Listen, Mark, I know you have to run today, so this is the first of a very special two-parter. We cannot wait to have you back on the show and thank you so much for joining us today. I love doing these vertical shows. I want them to be as granular and as helpful as possible to early-stage founders. So let me know if there's any people or topics that you'd really like me to focus on in the show. Do check it out on YouTube by searching for 20VC and I always love to see your comments there. But before we leave you today, we need to talk about our sponsor for the day, Clari. Clari is an industry-leading AI-powered revenue platform that is purpose-built to help companies optimize their end-to-end revenue process.

• 39:15Harry Stebbings?

  With over $4 trillion in revenue under management, Clari's customers have a material advantage to optimize their enterprise revenue process across all teams, from rep to the boardroom, by leveraging the world's largest and fastest-growing AI reservoir of enterprise revenue expertise. More than 1,500 organizations, including Okta, Adobe, Workday, Zoom and Finextra, run revenue on Clari to improve win rates, prevent slip deals, forecast with accuracy, and boost the productivity of all revenue-critical employees. To learn more about how you can create, convert and close revenue with Clari, visit clari.com. As always, I so appreciate all your support and stay tuned for an incredible 20VC episode coming this Monday with Sam at Greylock.