I am currently attempting to develop my tracking of companies though ‘the numbers’. There are a number of metrics that have been suggested both on the board and the knowledgebase. I have just started to dive into ‘Amp it up’ by Frank Slootman. Due to this board’s influence on my investing style I went straight to the ‘growth’ section of the book. I have only read a small slither but I thought I would share some thoughts on evaluating our business models:
If I have managed to format correctly:
Normal font is me
Italics are quotes from the book.
Bold italics are highlighted comments from Frank that I think are important.
Bold only comments are from me reviewing the prior quotes
Frank on revenue growth;
“Grow Fast or Die Slow” is the title of a 2014 study by McKinsey & Co that examined thousands of software and services companies between 1980 and 2012. It concluded that growth trumps everything else as a driver and predictor of long- term success. “Super grower” companies, which McKinsey defined as 60% or more annual growth, had five times higher returns than medium growth companies (which had less than 20% annual growth). Super growers also had an eight times greater likelihood of reaching $ 1 billion in annual revenue. The study found that when evaluating a young company, growth matters even more than profit margin or cost structure. Increases in growth drove twice as much valuation increase than equivalent improvements in profitability. No correlation was observed between cost structure and growth.
For me this obviously adds weight to our emphasis of revenue growth as our number one metric.
Frank on the impact of the product;
Silicon Valley is littered with companies lingering in the proverbial chasm (I have come to understand that this is the space between introducing your product to the market and hitting hypergrowth) for years and years. Their venture capitalists and management teams hope beyond hope that someday they will finally catch fire. I have personally been involved with more such ventures than I care to recall. Early on, in my naivete, I defaulted to inspecting their operational effectiveness. But that’s like rearranging deck chairs on the Titanic; the ship will still go down unless it substantially alters course. In business that means confronting the question of commercial viability. For a business to break out and reach escape velocity, it needs a ton of differentiation. It needs to profoundly upset and disrupt the status quo. People yawn when offered merely marginal change.
For me this has emphasised how important a moat is for the companies we analyse. Will the product/service revolutionise the market and can it maintain its advantage.
Frank on crossing the chasm;
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ramping up sales at Servicenow.
Nevertheless, the company nearly doubled its sales revenue that year, which I saw as a crystal clear sign that it was past time to ramp up sales. The company was starving for resources in other departments as well, but boosting sales and the sales- related functions had to be our top priority. We backed up the truck and went on a massive hiring campaign to boost our capacity. The entire sales staff more than doubled in headcount in less than six months. It wasn’t easy to recruit so many good people so quickly. We lured quite a few away from my former company, EMC, which ruffled a few feathers there. Nothing is more indicative and predictive of sales results than quota deployed on the street. Quota is the level of sales dollars assigned to deployed sales representatives. Once they have a quota and they need to hit it to make a living, it becomes a steamroller of channeled human effort. -
Ramping up sales at Data Domain
Our pivot from gradual, restrained hiring to opening the floodgate happened in a single quarter. It was such a dramatic change that our board members were stunned by how quickly we shifted the sales strategy and how well we executed it. The board had watched us for years as we had stressed caution and conserved our resources. But now we were doing the exact opposite: letting it rip. This wasn’t a hard call or a leap of faith. The numbers justified the pivot. If anything, we might have even pulled the trigger one or two quarters earlier. Because we waited until we had all the pieces in place, Data Domain’s bigger, more ambitious sales force started paying for itself quickly.
That’s how a power dynamic changes; your leverage comes from having a strong product and a formidable ability to sell it. If possible, always own your distribution rather than delegate it to a third party. Nobody cares about selling your product more than you.
I found this very interesting. What he is saying is there is a point in time where a company suddenly decides to hit hypergrowth. This seems to be linked to the hiring of sales reps. Does this mean that a sudden increase in S&M as a percentage of revenue is a marker for companies that may have lower growth (20 – 50%) suddenly moving up?
Apart from trawling recruitment pages, is there a way of getting ahead of this data being reported in an ER? Is there a metric already in place for this? Could we create one?
What have I learned:
• Sales revenue is king; but I probably already knew this.
• Game changing product and a moat are also key; but again, this is in the knowledgebase.
• Companies will wait to get their ducks in line before hitting the sales accelerator
o Can we find a way of noticing this moment effectively?
Apologies if any of this is; ‘yes, we already knew this.’
Smugley