Defending a Startups Greatest Asset through Recession & Recovery
Yesterday, Office Hours welcomed Lee Kirkpatrick, former CFO at Twilio to share his experiences managing through three different recessions: the dotcom era, the Global Financial Crisis, and today.
Lee headed finance for the company from $15m in ARR to more than $1b. In addition, Lee shared his view on usage-based pricing and defending a startup’s great asset, talent, from poaching during the next recovery.
Twilio was one of the pioneers of usage-based pricing. The company adopted UBP to achieve three aims.
- First, Twilio sought to align its success with customers’ success. As small companies like Uber grew on the iOS store, their Twilio usage blossomed.
- Second, UBP reduced friction for individual developers to tinker with the APIs. Once familiar, they often brought the technology to work, expanding the account.
- Last, Twilio’s business requires greater COGS (cost-of-goods-sold) than most software businesses. UBP enabled the company to manage COGs and gross profit. Gross profit equals revenue minus COGS.
UBP presented an opportunity to reinvent the account executive (AE) compensation model. AEs retired quota by closing annual contracts for a base level usage. Customers paid for overages at higher rates - a two part tariff.
AEs deliberately undersized the contract commitment to ensure customer happiness and create opportunities to re-engage the customer for expansion. Contracted revenue constituted less than 50% of ARR. This model propelled the company to better than 130% NDR.
Planning during Recessions
Lee shared the story of his first promotion. His first task: a layoff. Lee underscored the importance of involving a broader team in hard-financial decisions to build trust. During those processes, the team should collaborate on different scenarios and identify the signals to slow, maintain, or accelerate spending.
The areas to trim cost depend on each business’s situation. While slashing marketing program spend may reduce burn quickest and with the least difficult conversations, the company sacrifices medium-term pipeline.
Lee shared a counterpoint to the reflex to cut GTM spend. At one startup with product-market fit, Lee and the team paused product and engineering hiring, and instead funneled those funds into the sales and marketing teams to sustain the company’s acceleration.
Perhaps the most surprising and insight popped up at the end of the session. During the Office Hours, we talked about startups repricing their equity with new 409a valuations. That’s important today.
Startups must prepare for the inevitable economic rebound. Competition for talent will resume its fervor. When startups and incumbents ramp growth aggressively once again, management teams, who haven’t ensured their key employees earn attractive salaries and vest in-the-money options, risk talent flight.
Thank you again to Lee for illuminating three significant and timely topics.