2023 Operating Benchmarks

Time is a flat circle

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*BUCKETLIST ALERT*: I interviewed Tomasz Tonguz of Theory Ventures. His blog inspired Mostly metrics, where I try to demystify metrics and business model’s from the operator’s perspective. Enjoy our convo on what makes a great CFO, how many months you should plan ahead, and hiring / firing execs.

Listen on: Spotify / Apple / YouTube

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There are a few things I religiously mark on the calendar each year:

• Walter’s birthday

• Lil Wayne album release dates

• OpenView’s SaaS Benchmarking Report drop

I’ve been a disciple of this report since the very first operating plan I inherited 7 years ago. I was a first time FP&A manager at a software company, with literally zero operating experience…. this meant I had to figure out what “good” looked like real quick.

Luckily, this conveniently coincided with OV’s first ever report.

The package has come leaps and bounds since then, broadening the metrics covered, participants surveyed, and insights offered.

When I sit down to check out the report each year, I tend to tease out an underlying theme pretty quickly.

Two years ago the vibe was METRO BOOMin’!

VC’s giving away 100x ARR multiples

One year ago we were stretching our necks from the market’s WHIPLASH.

VC's reconsidering 100x ARR multiples.

And this year we are positioning for PRODUCTIVITY.

Kind of close to what I was trying to say. Great movie, BTW.

Companies are doing more with less, while still growing at a healthy clip (all things considered). And better yet, it looks like we may have bottomed out, and are reverting to back to the mean.

But regardless of the year, my meta takeaway, after seven years of reports (to steal a phrase from Rust Cole):

What do I mean? Well, it all comes back around. Whenever you over-rotate in one direction, the universe laughs and evens it out. And it evens it out across all metrics.

And that’s exactly what we’re seeing - it starts with revenue growth (which we’ll get into below) and permeates through headcount, net dollar retention, and CAC Payback period.

Here are my top five takeaways (which I guess are kinda sorta just one)

1/ Private company revenue growth rates got pummeled.

Public or private, you can’t hide. We saw a degradation in topline health across the board, from small, to medium, to large companies. And I’m not talking about run-of-the-mill companies; I’m also referring to best-in-class.

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2/ However, we seem to have hit the bottom, and are stabilizing from a growth perspective.

I mean, at least things aren’t getting worse…right?

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3/ But as you'd expect, with topline growth down, median headcount at those companies had to follow suit

According to layoffs.fyi, the most informational, yet simultaneously depressing, site in the world +1,100 companies laid off +250,000 employees in 2023. And we still have more than a month and a half left in the year for anyone who was delaying the inevitable.

You can see the car crash starting in mid 2022, and the pileup peaking in Q1 of 2023. Yikes. That was a tough quarter for a lot of people.

Shedding employees helped companies get back into their target ARR / Employee benchmarks, but not without some brain damage.

And in my opinion, the impact of headcount cuts on run rate performance is hard to quantify, and not immediately accretive, for three reasons:

1. The results don’t immediately show up in the P&L. There are one time costs related to severance that actually cause a temporary increase in spend.

   1. Employees receive pay through a transition period, in addition to benefits.

2. The teams who experienced cuts need to stabilize and may not be as efficient in the short term as they reorganize

   1. They need to re-motivate and refocus.

3. It’s common for orgs to backfill roles they just cut with different functional roles elsewhere in the org as they shift to a different strategy

   1. Quick math shows that 1 - 1 +1 is still 1

Net, net: Yes, there should be some sort of OPEX run rate adjustment for companies who make cuts - just probably not as much as you’d think.

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4/ And since tech companies are also the biggest buyers of tech, Net Dollar Retention Rates are getting worse as headcounts decrease

Ways to impact Net Retention include:

• Churn less

• Sell more of the same product to customers *(i.e., seats)*

• Sell new products to customers

• Increase existing customer usage

Less HC = Less Seats = Less Expansion Opportunities = Lower NDR

Companies FEASTED off expanding headcount in 2020 and 2021. Each new employee needs a Salesforce license, Slack license, Miro license… you get the point.

So CFOs were signing up for multi year contracts with built in license ramps. I did it myself.

But a lot of CFOs are waking up in year 3 of that same contract to a room that looks a lot like this:

There’s no need for more seats; in fact, most companies are trying to shrink and downsize commitments where possible. OV puts it well - the name of the game went from land and expand to just land and maintain.

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5/ And we are seeing the impact of muted growth on CAC Payback periods, as companies search for growth in the dark

Companies in 2023 were playing five dimensional chess to figure out a seemingly simple question:

If I put one dollar into my go to market machine, how fast do I get it back?

Not all marketing channels are equal. ZIRP distribution is dead, which requires new marketing discovery, which plays out in higher CAC Payback periods until we reconfigure the equation.

CFOs bravely staring down a rising CAC Payback Period

So, yea.

It’s all priced in.

It’s all related.

And time is a flat circle.

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Quote I’ve been pondering

“Until something exists, it is not going to appear in any graph”

-The Innovation Stack, by Jim McKelvey