SaaS Interviews with CEOs, Startups, Founders
1137 David Skok Matrix Partners on Hubspot Pricing Axis, Category Leaders, $100b Softbank Fund
04 Sep 2018
Chapter 1: What insights does David Skok share about HubSpot's pricing strategy?
was on the operations side decided in you know around 2002 to jump onto the other side and was able to witness firsthand great stories like brian at hubstock hubspot and matt at namely really wants people to understand how to focus on pricing axes keep it simple when you're around five million have maybe two or three of those guys then as you need kind of scale professional services he has no problem with just make sure you scale it
at a 0% contribution margin after you get some sort of product market fit, and as long as it drives up LTV and retention.
Additionally, again, likes to invest in category leaders, but more importantly, he likes to find guys like Matt Straz and Brian Halligan that have the ability to sell their ideas into a market, to raise capital, to recruit, which he believes is the third core pillar these founders need to have.
Lastly, again, he's trying to codify all this for you guys at 4entrepreneurs.com and also at the 0-100 Matrix Growth Academy. Check them both out. This is the Top Entrepreneurs Podcast, where founders share how they started their companies and got filthy rich or crash and burn.
Each episode features revenue numbers, customer counts, and other insider information that creates business news headlines. We went from a couple of hundred thousand dollars to 2.7 million.
I had no money when I started the company.
It was $160 million, which is the size of many IPOs. We're a bit strapped. We have like 22,000 customers. With over 5 million downloads in a very short amount of time, major outlets like Inc. are calling us the fastest growing business show on iTunes. I'm your host, Nathan Latka, and here's today's episode. Hello, everyone. My guest today is David Skok.
He's best known for his blog, 4entrepreneurs.com, which covers many startup topics such as 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. In 2001, he joined early stage VC for Matrix Partners as an investor.
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Chapter 2: How does David Skok define product market fit in SaaS?
His successful exits as an investor include HubSpot, JBoss, AppIQ, Tableau, NetEzza, Diligent Technologies, CloudSwitch, TribeHR, and many, many others. Today, he serves on the boards of Atomos, CloudBees, Digium, NamelyHR, Salsify, and Zaius. David focuses on early stage investments in enterprise software, SaaS, cloud computing, open source, and more. David, are you ready to take us to the top?
Yeah, ready to go. I love that. All right. First things first, let me get, I want to hear right before you jumped into the VC world, 2001, did you do a turnaround right before that?
No, the last company I did was an application software server. It was in the very early days of Java. We were the first to jump onto Java and create a Java-based server. Later on became J2EE, Java 2 Enterprise Edition. And that was went public in 99 and was acquired by Novell in 2002. That's great.
And then and then you jump in. What made you go to the dark side, as many would say?
Yeah, that's a great point. You know, I've done five startups by that stage. You have to also think about the timeframe, 2001, 2002, kind of a black time in the startup world. The idea of doing another one wasn't that exciting.
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Chapter 3: What factors should CEOs consider for improving conversion rates?
And I knew what really made me passionate was actually helping other entrepreneurs. So felt like a great place to do that was from the venture capital world because you're in a good spot to not only see a whole bunch of things, but be in a place where you really were actually able to influence and help the startups directly and do many of them at the same time.
As you've done that, you've collected an impressive amount of data. I want to jump in kind of directly to some of these questions first off. So, you know, recently in SaskDoc New York City, you argued that really folks should fix conversion rates before driving more traffic. You're talking about kind of the funnel.
And my question to you is a lot of the CEOs that listen to this show, the problem is they lack confidence in their conversion rates when the traffic sample size is small. So at what point do you switch from getting enough traffic where the conversion rates are meaningful and leading indicators to switch to improving the conversion metrics?
Well, I would say what we're looking for with conversion rate is evidence of product market fit. And there are some other ways that you can get a product market fit beyond just data itself. So one of the top ones of the whole lot would be engagement. Are the customers who have signed up for your product actually using it? And if they're not using it, why are they not using it?
And what can you do to fix that? So that would be the first place that I would say you want to start fixing is engagement. the actual successful adoption and getting the results, the business results that the user bought the product for. And you don't necessarily need to have many customers to be able to focus in on that.
But if you don't have that working, the last thing you really want to spend your time on is wasting time getting a ton of new customers if they're all going to churn and not be successful with the product. So I would say start fixing things there.
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Chapter 4: How can startups effectively measure customer engagement?
And once you have things fixed there, then you're going to come back into trying to build the funnel to acquire more of them. And my thought there is you're going to have a series of phone calls if you don't have enough volume to try to find out why people aren't converting. So you don't just simply look at numbers and don't have the qualitative data as well.
So the quantitative is one part of it. But when it's thin in the early days, pick up the phone, start talking to people and actually find out from them why this is not appealing to them and try to understand whether that's fixable or not as well. So that's kind of where I would try to advise people.
When SaaS CEOs are analyzing onboarding metrics related to questions like, what do we have to get a new customer to do in the first day to increase their lifetime value or decrease churn exponentially? Many people have trouble setting up that decision tree in their head? In other words, what format do they set up? What system machine do they set up to reveal what that activation metric is?
And some challenges that they've articulated to me are, you know, the customers will say that they're buying for one reason, but when they actually track the things, the clicks they're doing in the software, they're doing something totally different. And that's what's leading indicator for stickiness. So how do you make sure the two match?
Yeah, it's a good point. Well, so I would definitely start with Generally speaking, you have a view of what your product's business benefit is going to be for the customer. And the customer, generally speaking, will declare to you that they bought the product for a specific reason.
So in the case of, say, a HubSpot, they would have bought it for more leads and maybe better conversion rates on leads. And so what you want to try to get inside of is what exactly...
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Chapter 5: What are the challenges of scaling pricing strategies?
can you do to get them to that business benefit as fast as possible? So don't focus in on engagement and usage, because in all honesty, some of the very best products I've seen actually have very low engagement because you simply do a sign up for them and they simply just start working. And if they have great business benefits and low engagement, that's the very best kind of product.
In other words, it's like it's like a security tool and it's preventative. So you don't want the user logging in every day. That means there's problems.
Yeah. I mean, certain products you have to log in to get the results, but it's a fake metric. The real metric that you should be focused on is what business benefit are they getting? And sometimes usage is a way you can get to that, but it'll be very specific usage. So
Understanding, for example, is there a metric inside of your software like there was inside of HubSpot to be able to figure out how many new leads that they've generated as a result of writing a blog post or how much improvement there's been in the conversion rate as a result of doing some nurturing using email or something like that.
Those would be clear metrics that you could take that would really... show that the products are what they're looking for. And that's going to be sticky and give them what they're looking for. So I think try to peel apart why people are buying your product and really focus in on what's the fastest way you can get them to that benefit. Cut out everything else you need to do.
And where necessary, recognize that some of your users will just do this very well themselves. And some of them won't. Some of them are not going to be actually great at competencies of using the product itself.
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Chapter 6: How does Matrix Partners evaluate potential investments?
And if that's the case and you really want to care about getting high retention rates, recognize that you're probably going to have to do some of that for them and with them and make sure that they actually get that benefit as a result of signing up.
Once you've got product market fit, you then start to look really to drive additional growth. You've got to start looking at how to drive meaningful expansion revenue to get to the beautiful holy land of negative, obviously negative churn or more than 100 percent net revenue retention.
When I asked Brian Halligan this question when he came on the show, he talked about exactly what you talked about, which were introducing variable pricing axes. Most people start around something that they see others price around, like number of users or a feature set combination. But then you start adding on these activation-related consumption things, which are data use, server space taken up.
You know, measurable things. Walk me through because you were on HubSpot, I think, from the early days. Walk me through how Brian and the team really went through identifying which axes to use aggressively because they had a huge pool to choose from.
Yeah, yeah, it's a great point. And you really have you've done your work here. You've you've studied the the the the. So in HubSpot's case, we started with an idea that simplicity was going to be great. And so we had one price point, which was 500 bucks a month, $6,000 a year for every single customer, regardless of what was going on. And there was no expansion access.
And we thought that was great because of the simplicity of it. But then we ran into recognizing, okay, we've got no chance of hitting negative churn. So the thought process you go through is, can you use users? And in the marketing area, that's not a great proxy, particularly in small companies, because there aren't really lots of people needed in marketing to make the product work well.
And there typically isn't a large organization, not like sales, for example, where actually seats is a very good metric of marketing.
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Chapter 7: What role do category leaders play in venture capital decisions?
How much value is being derived? So you look for value. So how can you find a pricing access that equates to the value that the customer is going to get? And I think in HubSpot's case, what we arrived at was the two things. You could have more sophisticated versions of the product that offered more powerful features. But the really interesting one was leads, the lead count that was in the system.
So HubSpot, if it was doing its job well, would generate more leads for you. And that was high evidence of good value being delivered. And if you were running a large lead base on HubSpot, you were going to get high value also from the nurturing and the email marketing capabilities of the product. And so using lead count was a great way to go for the variable access.
And I think as long as the customer feels like whenever they pay you more money, they equate that to getting more value from the product, you're in good place.
If you have a situation where your customers don't like your pricing, it's typically because it's not aligned with the value that they're getting out of it and you're not able to demonstrate to them they're paying you more because they're getting more value.
I'm going to ask for a few more examples here from your portfolio company. So December 1st, 2017, we had Matt Straz on from Namely. He talked about how they've raised, obviously, over $150 million. They viewed $25 million run rate in 2016, well north of $3 million a month today. But they had less than 2% churn, and their retention numbers were really through the roof.
Walk me through what they based theirs around. So HubSpot was number of leads. What's Namely?
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Chapter 8: What is the significance of SoftBank's investment strategies?
Yeah.
Yes. And namely is number of employees. So that's, again, quite an easy one to recognize if you're doing payroll or if you're doing any kind of benefits or anything like that. The number of employees in an organization is going to definitely equate to the amount of value that you're getting from the system.
And then to really get things going, what namely did was to identify that they could add other capabilities like benefits administration was was a big one that they added onto the product. Actually, they started with HRIS and added payroll.
So the goal is to get people onto all three of those major modules and then be able to charge them on a per employee per month basis, which is pretty well recognized in the HR space as being a good one there.
One last example, Lever. Are they using the same axes as Namely?
Yes, they are also working on the same size of company.
HR tech, right? So let's not push this to the extreme, right? At what, you know, hubs, you know, Brian talked about how they're using science fairs to always generate new ideas. And they've got a well-oiled machine there. The risk of these things is you end up with 7,000 products, 100,000 different pricing axes, and your salespeople don't know where to start.
So at what point does it get too complex? And how should someone listening right now with, say, $5 million in ARR, a team of 25 people, profitable with a million raised in the past, how should they think about when it's too complex?
Yeah, great, great point. So I think when you're at 5 million in ARR, you probably want to have two pricing axes, possibly three, but not more than that. And you want your pricing to be simple because the customer, it should be easy for them to buy and easy for them to understand what it is that they're paying for. So I would say two and keep it simple to start off with.
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