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The Cadence: How to Operate a SaaS Startup

David Sacks

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The Cadence: How to Operate a SaaS Startup

Content
Startups

Let’s face it: most startups are a shitshow. Perhaps the most pervasive problem afflicting venture-backed startups, once they achieve a basic level of product-market fit, is managing the organizational chaos that results from rapid growth. Almost by definition, this is a chronic challenge of Series A-C stage startups since the rapid expansion of the team to chase a new market opportunity is the purpose of that venture funding in the first place. During this time, the growing pains of the startup will reach such a crescendo that the founders and board will cry out as one, “we need a COO!”

As with any potential problem in a startup, it is possible to posit that a perfect hire could solve that problem, but the more direct route is simply to solve it yourself. Putting your startup on an operating cadence is the way to do that. The Cadence is an operating philosophy that I first learned as COO of PayPal (during the so-called “PayPal Mafia” founding era) and then adapted for SaaS as founder/CEO of Yammer, which Microsoft acquired in 2012 for $1.2 billion. To this day, Yammer is still the fastest unicorn exit among SaaS startups, and a lot of that success is due to the Cadence. The Cadence helped us scale to almost 500 employees and $56 million in annual sales in 4 years.

The Cadence is most needed when scaling from 50 to 500 employees. This is when a pivotal transition in the way the startup operates is required. Before then, all of the employees fit into a single room (either physically or virtually), everyone knows what everyone else is working on, and founders can easily run around telling everyone what to build and what to do.

But at around 50 employees, this approach stops scaling. So the org chart is broken into silos for sales, marketing, customer support, and other functions, and product managers are hired to guide the development process. These new levels of hierarchy create a feeling of compartmentalization and disconnect in the organization. Meanwhile, a lack of leadership for some functions creates a sense of disorganization. Disconnect plus disorganization equals chaos. Ironically, the better the startup is doing, the more chaos there is. This is one of the few startup problems that growth doesn’t solve — in fact, it’s caused by growth.

Ironically, the better the startup is doing, the more chaos there is. This is one of the few startup problems that growth doesn’t solve — in fact, it’s caused by growth.

The Cadence is designed to synchronize the major functions of a SaaS startup so that the team works together in lockstep. It brings order to the chaos; it turns the shitshow into an army. It brings together disconnected areas so everyone understands what is happening and what they should work on. It replaces erratic release dates and sales targets with concrete milestones for shipping and selling. The impact of hitting those milestones, quarter after quarter, has a huge compounding effect on the performance of the business and its culture.

So what is the Cadence? It’s based on a few simple insights:

  1. First, the four major functions in a SaaS startup — Sales, Finance, Product, and Marketing — are all best run on a quarterly cycle.
  2. However, it’s not the same cycle. Sales and Finance are on one calendar; Product and Marketing are on another calendar. I call these the Sales-Finance System and the Product-Marketing System.
  3. If you snap these two calendars together, it will create a single operating cadence for the company.
  4. The key milestones and events in these systems create opportunities for company-wide communication and collaboration — a kind of superstructure for the organization.

This is a simple approach that every startup can use, yet few actually do. Let’s describe each function and then how they fit together.

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The Sales-Finance System

Sales and Finance are the first two functions that work together on a calendar.

The Sales Calendar

For the early-stage startup that is still doing everything ad hoc, moving to a written quarterly sales plan instantly makes the sales team feel better. Constant changes to quotas and territories undermine morale. Putting the team on a predictable quarterly cycle instills confidence that the goalposts won’t change.

Why is quarterly the right tempo? Annual quotas are too slow to judge performance in a startup and don’t easily allow for mid-course adjustments. By contrast, monthly sales are too volatile to impose a monthly quota for individual sales reps. Unless the startup has an extraordinarily quick and predictable sales cycle, a quarterly quota is the Goldilocks plan.

Once sales is on a quarterly plan, the sales leadership can create a series of milestones within the quarter. Every quarter should begin with a Sales Kickoff (“SKO”). At that kickoff, the sales team receives their new quotas, commission plans, and territories. Learnings and best practices from the most effective sales reps are shared across the group. Product managers present the latest product changes as well as the product roadmap. (Since SaaS startups are selling ongoing subscriptions, not just today’s version of the product, it’s important that every sales rep be able to sell the roadmap and vision.) PM involvement in SKO is an important opportunity for cross-functional collaboration.

The second month of the quarter revolves around pipeline inspections. Sales leaders make sure the team is on track to hit their goal, advise reps how to close deals, and help make adjustments. Meanwhile, the marketing and product teams are generating news, awards, and recognition (described further below) that sales can use to warm up prospects and put deals over the top. In the third month, the sales team should be heads-down on closing and making their number.

The Finance Calendar (Fiscal Year)

Every company runs on a fiscal year as an accounting requirement. This finance calendar should be synchronized with the sales calendar for reporting reasons. When the books close on a fiscal quarter, the numbers should reflect a complete quarter’s sales activity, not an incomplete mid-quarter picture. The leadership and board will have a much better sense of what’s happening in the business if sales plans are snapped to fiscal quarters.

There are two choices for the fiscal year. The most standard is a December 31 year-end. However, many sales-driven companies choose a January 31 year-end to avoid closing out the year during the Christmas-to-New Year period. Invariably, a lot of deals come down to the wire, and it’s miserable to be scrambling to hit the number when everyone is on vacation. Smart customers also know to demand discounts at the end of the year. Vendors improve their leverage if reps aren’t under pressure to hit quota at this time. If these reasons apply, I recommend a January 31 fiscal year-end. This means that sales quarters will end in January, April, July, and October. Similarly, it means that Sales Kickoffs will occur in February, May, August, and November.

Board Meetings

Board meetings should also be snapped to the Sales-Finance calendar to ensure that the Board reviews sales results while the data is fresh. Ideally, board meetings occur two to three weeks after the end of the previous quarter. So on a January 31 fiscal year, Board meetings will occur in February, May, August, and November. Preparing for those meetings will preoccupy the finance team during this time. More pieces of the SaaS calendar are falling into place.

The Product-Marketing System

In the same way that Sales and Finance work together on one calendar, Product and Marketing work together on another calendar.

The Product Calendar

In order to scale software development, startups create multiple independent dev teams working in parallel, with a product manager assigned to each major product area or strategic priority. Ideally the PMs own and manage their own product roadmaps in a decentralized way. However, the overall product roadmap should get reprioritized and resourced quarterly as part of a formal PM and design review process.

This review should ensure that every project that goes into development can be shipped within one quarter. The rule we had at Yammer is that projects would be assigned 2 to 10 engineers for 2 to 10 weeks. Similar to Jeff Bezos’ two-pizza rule, this meant that the absolute biggest strategic priority could get 10 engineers for 10 weeks. If the product couldn’t ship in that time, it needed to be shrunk down to something more MVP. This requirement improves the reliability of release dates and allows for user feedback before over-investing in a new product.

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A good analogy for product management is filling a jar with rock, pebbles, and sand. The rocks are new products, pebbles are features, and the sand are small fixes. If you want to fit the most stuff in the jar, you put the rocks in first, then the pebbles, then the sand. If you put the sand in first, somehow there’s not enough room for the rocks. Product management is like that. It’s about resource planning — maximizing the amount of stuff that you can push through the system with a fixed amount of resources. You will actually fit more through your roadmap by planning the rocks on a quarterly cadence.

When rapidly scaling startups don’t have effective product management, one of two things happens. First, they just ship sand. They polish and fix bugs and usability issues, but they don’t ship tentpole features, new products, and major releases. Or when they do, they end up going wildly over schedule. A product that was supposed to take one quarter will still be in development multiple quarters later. “V2”s that were supposed to take a couple of quarters end up being years late and paralyze the company. This happens because the product was never scoped correctly. The quarterly discipline ensures that you do big stuff — rocks, not just sand — while scoping correctly. None of this is to say that code can’t be shipped weekly or even daily for code management reasons, but PM planning should revolve around quarterly or seasonal releases.

The Marketing Calendar

Now that you know there will be a major quarterly product release, you can plan marketing around that. This is why marketing and product are on the same calendar. Startups are product driven, and most news that the company puts out will feed off of new product releases.

A quarterly tempo works well for marketing. It’s more compelling to aggregate news into four big “lightning strikes” than to release it in dribs and drabs over 52 weeks. The lightning strike combines live product demos with news about customers, financing, market share, metrics, or other milestones. Using a launch event to focus the world’s attention is a simple trick that has been foundational to the success of Elon Musk, Steve Jobs, and Marc Benioff. If event-based marketing has been effective for the most successful founder/CEOs in the history of our industry, why aren’t you doing it? Just putting out press releases doesn’t penetrate the clutter.

Using a launch event to focus the world’s attention is a simple trick that has been foundational to the success of Elon Musk, Steve Jobs, and Marc Benioff. If event-based marketing has been effective for the most successful founder/CEOs in the history of our industry, why aren’t you doing it?

Launch events are a critical part of the Cadence. It’s not just about the external marketing value: There’s a huge internal benefit from setting dates and deadlines in order to hit a public launch. If the team at Tesla knows that Elon is going on stage to present the Model 3, they have to hit those deadlines. The same is true with Marc Benioff at Dreamforce. Sending your CEO onstage to showcase a new product is tremendously motivating for the team inside the company. The date has been set, the invites have gone out, the world is waiting, and there’s no choice but to hit the goal.

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Launch events also force company leaders to think about prioritization in a different way. They know they will have to go on stage to present the new product and explain why it matters. This forces the leader of the startup to think months in advance about what is going to be important to customers. This makes the Product-Marketing System more like the Sales-Finance System in the sense of being customer-centric. Sales doesn’t work unless the customer buys what you’re selling. That’s a good dynamic because you get market feedback. Similarly, having to think about the customer reaction while you’re planning the product calendar is a great thought-exercise for the company.

For startups, I recommend one user conference per year and three smaller webinars or city events. The events don’t all have to be huge; the point is to force discipline and make sure that what you’re working on matters. In the age of Covid, it is fine for these to be virtual events or webinars. What’s most important is having an audience.

If you have product-market fit sufficient to raise a series A or B and are scaling from 50 to 500 employees, you have a fan base. You can engage this community. It may start small. It may only be a few dozen people at the first event, but it will grow.

A common objection I get from founders is that they think no one is going to come to their event. That was my fear at Yammer when we did our first annual user conference called YamJam. But even in our second year as a startup, enough customers, prospects, and industry observers showed up to fill a hotel ballroom. If you have product-market fit sufficient to raise a series A or B and are scaling from 50 to 500 employees, you have a fan base. You can engage this community. It may start small. It may only be a few dozen people at the first event, but it will grow. Just look at Dreamforce: starting from modest beginnings, it is now the largest tech conference.

Snapping the Systems Together

Now it’s time to snap these two systems together. In bringing the two calendars together, it’s important to offset the peaks. The Sales-Finance System culminates with the quarterly close, and the Product-Marketing System is oriented around the launch event. You want to space out these key events by about half a quarter apart to avoid lighting everyone’s hair on fire at the same time. It creates too much chaos in the organization, and it’s not good change management. Product demos shouldn’t change right when sales is trying to close the quarter. By the same token, when lightning strikes occur in the middle of the quarter, the positive press coverage helps to drive leads and advance deals.

Step by Step

Snapping the calendars together with an offset creates a single operating cadence for the company. Here’s how to do it:

  1. First decide your fiscal year. It’s going to be December 31st or January 31st. That will decide your fiscal quarters.
  2. Second, snap your sales plans to the fiscal quarters. This will determine when quarterly closings, SKOs, and Board meetings occur.
  3. Third, schedule a marketing event in the middle (second month) of each fiscal quarter.
  4. Fourth, plan your product cycle to hit those event deadlines.

This simple system will create a superstructure for everything happening inside of the company. Each month of the quarter takes on its own character and theme. For example:

  • Month One: “Plan”

Month One is going to be dominated by planning. It starts with Sales Kickoff. The Sales Ops team distributes new sales plans, territories, and quotas. The PMs also present at SKO. Meanwhile, the finance team closes out the books on the previous quarter. The exec team works on Board meeting prep. The Board meeting happens towards the middle or end of the month. The strategic insights discussed at that Board meeting are immediately fed back into the company. The product roadmap is reviewed and reprioritized for the following quarter’s release.

  • Month Two: “Launch”

Month Two is dominated by preparations for the big launch event that will happen in week six or seven. Keynotes are written. Marketing collateral is finalized. QA and testing begin on the release, and some features are already in closed beta with customers. Meanwhile, the product managers, when not testing, are racing ahead to get ready for next quarter. After the event, you debrief as a company. How did the launch go? What did customers say? Those learnings are internalized. This is also a good time to recognize employees for the great work that made the launch possible.

  • Month Three: “Close”

Month Three is a heads-down period. The sales reps are focused on closing deals and hitting quota. Hopefully the launch event generated positive news that they can use to put deals over the top. Meanwhile, the engineers are focused on coding the next release. Remember that in month two, the PMs finalized planning for this release while engineers were bug fixing. This is a time for minimal distractions, as the team cranks out code and closes deals. Once the quarter ends, the cycle begins anew, with the next SKO, quarterly close, and Board meeting.

All-Hands

Knowing the big milestones inside the quarter makes it easier to plan all-hands meetings. For example:

  • After the quarterly close, review sales results with the company.
  • After the board meeting, review strategy.
  • Before the big launch event, preview the new release.
  • After the launch event, debrief on how it went, what was learned, and where the product roadmap is headed.

Each major event creates the opportunity for an all-hands meeting to keep everybody up to date and synchronized.

Summary

The Cadence puts the four key functions in a SaaS company (Sales, Finance, Product, Marketing) on a quarterly calendar. Human beings are wired for seasons so this is a natural way to work. The Sales-Finance System is oriented around a quarterly close as its central event, while the Product-Marketing System orients around a launch event. Synchronizing these calendars creates a single operating cadence for the company.

The compounding effect of operating on a cadence is huge. You will ship four great quarters per year. Most big companies are lucky if they have even one. If you run the Cadence quarter after quarter, year after year, your SaaS company will graduate from a chaotic startup into an unbeatable army.

Read original - https://medium.com/craft-ventures/the-cadence-how-to-operate-a-saas-startup-436aa8099e8

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