Navigating Business Model Transitions in the Public Eye

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Varonis, a cybersecurity company, recently celebrated a decade on the NASDAQ. During that time they’ve undergone not one, but two major business model transitions in the public eye. CFO Guy Melamed (a fellow Boston College Eagle!) shares some hard-earned wisdom from these experiences.

The Transitions

2019: Moved from a perpetual model to an on-premise subscription model

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“The first quarter of 2019 aged me by five years.”

2023: Began transitioning from on-premise subscription to SaaS

Key Lessons

1. Align Technology with Your Goals

Melamed said the longest pole in the tent when it came to buy-in and readiness was systems. That’s right - not sales, not product, and not finance. Ensure your systems (and the people behind them) can enact the change you're trying to make:

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"If you don't have the right technology to support whatever change you're trying to make, it's just not going to work."

You may need to add more IT headcount (increasing the dreaded G&A line)
Think: How do we track a deal throughout its lifecycle?
If you can’t bill your customers on day one, you’re dead in the water.

2. Rethink Sales Incentives

Align your sales team's incentives with the new business model. Varonis introduced a grading system for discounts to encourage appropriate pricing in their new subscription model.

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"There has to be consequences if you are not positioning the transaction in the right way and you should be rewarded if you're doing it properly."

Incentives drive outcomes. Make it clear that your sales team will “win” at the individual level if they follow the new program
Editor’s note: I did this once at a prior company, and built something called a “cloud indifference model.” It made a rep indifferent between selling a subscription on-premise vs in the cloud

3. Communicate Clearly and Repeatedly

Overcommunication is key, especially with three main stakeholders:

Customers
Investors
Employees

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"It's about making sure that employees understand why we're doing the change."

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"No matter how much you plan and no matter how much the technology is at the forefront of the change, and no matter how many commission sessions you do, if management is not committed to change, it's not going to happen"

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"There's a lot of things investors don't like, but one of the major ones is don't surprise them."

4. Prepare for Short-Term Pain

Be ready for initial challenges, including potential stock price volatility:

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"We knew that there would be short-term pain, but we also expected it and believed that there would be long-term gain"

Varonis did indeed experience short term dips in stock price, which can be hard on employee and investor morale.
But as Melamed pointed out, it’s all relative.

5. Focus on the Right Metrics

During a transition, traditional financial metrics may become less relevant. Varonis focused on three "North Star" metrics:

Annual Recurring Revenue (ARR)
Free Cash Flow
ARR Contribution Margin

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"We want to make sure that we're not just showing our growth levels, but we're also showing that we can structure the transition in a healthy way from a cost perspective."

Business model transitions should maximize total valuation - not a singular metric.

The Results

While these transitions are challenging, they can pay off. As Melamed notes,

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"It ended up being a very successful transition. I think it was very catered to our customers that could consume more of the product. So it was a win-win and worked very well at the end"

Varonis' first transition from perpetual to subscription was completed in just five quarters, faster than the industry average of 4-6 years. And the company is now progressing well in its second transition to the cloud, with 43% of it’s $610M in ARR now cloud based as of Q3 2024 (Source: fleet.so).

Remember, transitions like these are never a smooth left turn. You have to prepare extensively, and also be ready to adapt when things inevitably don’t go to plan. But with the right approach and level of agility, they can position your company for long-term success and value creation.