Startup Best Practices 13 - Patience with Unit Economics
Financial discipline is a hallmark of great companies. It’s what enables businesses to build exceptional go to market models, weather difficult times, and ultimately succeed. Sometimes, financial discipline in startups is imposed by financial markets, like in 2008 when the total amount of venture capital investment plummeted after Lehman imploded. Other times, financial discipline is imposed by founders and management teams. The tweet above is from Lew Cirne, founder and CEO of New Relic, a $1.5B market cap company serving developers, who deliberately raised small arounds at the outset of the company to impose financial discipline on his business. In other words, Lew valued patience with unit economics.
When it’s easy for startups to raise capital, there is an easy way to solve most problems: hire more people. When the sales team needs more leads, hire more marketers. When the engineering team has fallen a bit behind in the roadmap, hire more developers. When the product team hasn’t designed the product well, hire more customer success managers. This human capital Band-Aid strategy is expensive and won’t scale, unless the company continuously raises large sums of money.
Mark Roberge, Chief Revenue Officer at Hubspot, recently shared with me how he instill patience in unit economics in his teams. He has three go to market principles:
- Adopt before you buy - develop a bottoms up product that people can try out and ultimately upgrade themselves without having to contact sales or support
- Product before people - focus on improving the product before hiring additional customer support or salespeople. The product has to stand on its own.
- Individual before team - The initial product experience should focus on the individual or single player experience first, and the broader team second.
As Hubspot is a bottoms up business, these principles makes sense. Focus on making sure the product is as efficient as possible moving potential customers through the funnel, minimize human interaction, in order to maximize margin.
In addition, Mark also has a best practice with the sales teams. After all, it’s common practice to settle a reasonable quota for sales teams and simply add more reps to scale growth. In contrast, Mark uses his sales teams’ performance to determine how quickly he grows the sales team. For example, a startup employing Mark’s strategy might have a $4k MRR quota for its five person sales team. The VP of sales would then tell the existing sales team, if they exceed $4.5k MRR quota next month, there won’t be any incremental hires. And the quota then increase the next month to $5.0k, and so on until the team can no longer meet the target.
This strategy stretches the sales teams to become more and more efficient through better qualification, sales process improvements, feedback product and so on. Salespeople ought to be motivated to limit the size of the sales team to ensure each individual has access to the best leads. Given this constraint, the sales team and the product team are aligned to figure out ways of scaling the sales process, and developing better efficiencies than previously thought possible.
Having the patience to develop compelling unit economics is one of the hardest things to do in a startup, particularly in an environment where capital is cheap and problems can be solved simply by hiring. But, this discipline enables companies to grow exceptionally quickly and capital efficiently in up markets and in down markets. It’s also a huge competitive advantage. Mark Roberge and Lew Cirne have created some exceptional examples to learn from.