Hey Reader,
Welcome to The Middle, your midweek rundown of the most interesting things we've read this week.
Well, we have made it. My wife is due on Oct 5 (Friday). Send me your guesses on the due date; I’ll create a small betting operation as I head to the hospital.
Don’t worry; you’ll still get your bi-weekly dose of great content.
Let’s jump into The Middle.
Jeff
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Unit Economics = Long-Term Decisions
OnlyCFO delivered on SaaS Unit Economics in 2024 last week.
Companies are ultimately valued by their future cash flows and a major input to determine profitability is the company’s unit economics.
The SaaS Dream: 25%+ free cash flow margins and then stack that free cash flow level year after year.
This is why SaaS has been having such high multiples: fast growth combined with incredibly high future cash flows.
CEOs and operators must understand unit economics so they can make better long-term decisions based on what matters — maximizing future cash flow potential.
(Shameless plug for CoverYourSaaS, a finance course for SaaS leaders to sharpen their skills around key business metrics. Click here for 10% off to subscribers.)
Ripple effects
Tomasz Tunguz, a highly regarded VC at Theory, shared results from their 2024 GTM Survey results.
This stood out:
A SaaS business is like a machine - and if you start seeing deals take 12+ days longer to close, just think what that means.
The ripple effect could be something like this:
- Longer sales cycles delay revenue recognition, making it harder to predict cash inflows. This can disrupt budgeting, hiring plans, and investments in growth, like R&D or marketing.
- The customer acquisition cost increases as deals take more resources, time, and effort. This extends the payback period and strains your profitability targets.
- Longer sales cycles reduce the volume of closed deals, affecting individual performance metrics and possibly demotivating the sales team. It can also lead to higher churn in the sales team as targets become harder to hit.
- If the sales cycle lengthens, marketing may need to adjust its strategies. Campaigns need more nurturing content, and lead quality could be questioned, leading to more resource allocation in middle-of-funnel efforts.
Nothing can happen in a vacuum within a SaaS business; there is always a ripple.
"Today, we're going to find one item on here and fix it"
Shaan recants a story about Nat Friedman, who was CEO of Github.
Nat was named CEO of Github, and what he did on Day 1 was amazing.
[8 am: everyone in the company gets on a call].
Instead of sharing the vision & multi-year plan.
Nat screen-shared and displayed a giant list of 100+ issues & complaints from customers.
He says: “today, we’re going to find one item on here, and fix it”
“And tomorrow, we’re going to pick another one, and fix that”
“And the next day.. And the next.. Until we’ve nailed 20+ of these”
Loved this for two reasons…
- the bias for action
- the simplicity of focus (only one thing)
The bigger a company gets, the slower moving it becomes. Avoid that.
The bigger a company gets, the more we multi-task. Avoid that, too.