Is “Growth at all Costs” still valid for tech (and other) companies in a down economy? That question has already been answered by a number of top executives, especially in Silicon Valley, as layoffs and deferred projects have become common of late.
The growth at all costs strategy was fine when capital was cheap and plentiful. It also worked when tech buyers had lots of discretionary budget to spend on new software/hardware purchases. But that world recently and rapidly changed and business models/strategies must adapt.
I recently spoke with Xactly founder and CEO, Chris Cabrera, on this topic. Cabrera’s firm sells a suite of sales incentive, planning and sales forecasting revenue intelligence solutions. If anyone would have a pulse on the market and executive thinking regarding the new economic climate, I figured Carbera would. Here are the highlights of that conversation.
Shift to EBIDTA
Cabrera sees a pendulum shift underway today. Instead of a slavish focus on growth, firms must move to a more balanced and thoughtful approach to growth AND profitability. Cabrera opined that “growth beyond 20% per year is expensive”. It takes a lot of capital to add new headcount, pursue each new marketing lead, acquire more office space, train new employees, etc. And, that doesn’t even account for the new people encountering learning curve issues for several weeks, months or years.
Cabrera and I discussed this in context of the Rule of 40 (R40). COFES provided this definition of R40:
For a software as a service company (SaaS), reaching the Rule of 40 is about measuring growth and profitability. The Rule of 40 assesses that the company’s growth rate and profitability numbers reach or exceed a combined total of 40%. Rule of 40 is used by investors and companies alike as a gauge for success and sustainability.
For hyper-growth companies, one might see 50% annual growth even though the company is posting a negative 10% profitability (loss). That company is sacrificing its profitability to become an even bigger entity. That strategy works if the economy is booming and investors are in-sync. However, some high growth firms are not hitting the R40 standard and are depleting their increasingly expensive capital.
Today’s economy requires a more fiscally and capital conservative approach. Why? Some sales will get deferred or canceled altogether, sales cycles could get extended and capital will be more costly. Growth is not assured and firms may benefit from playing a bit of defense instead of all-out offense.
Cabrera suggested that shareholders today will likely focus on EBIDTA (earnings before interest depreciation, taxes and amortization) and not R40. They’ll view a strong EBITDA focus as the mark of responsible/professional leadership.
Technology firms are clearly changing gears and making the shift to EBITDA. A review of the layoffs of 21 major technology firms in the last few months showed that the average big tech firm laid off approximately 4200 employees amounting to a bit more than 12% of their total workforces.
These layoffs are material. Cabrera indicated that firms are shedding sales teams and demonstration personnel. I can report that development personnel are also getting pink slipped. People who worked on discretionary or non-mission critical efforts are also vulnerable.
(As to user conferences, they are still going on with only slight reductions in marching bands and swag evident.)
Cabrera believes that a correction can be a good thing – a sentiment shared by other business leaders. He indicated that “we’ve been in a bubble for a long time”.
Cabrera and I also discussed valuations for tech companies. He stated “valuations were out of control” and that we’ve experienced something akin to a unicorn fallacy. (Unicorns, like their mythical name suggests, are often young tech companies with little or no revenue but somehow receive a $1 billion or better valuation.) The fallacy is that in a realistic market, no company would get a billion-dollar valuation when they’ve only got $40 million in revenue.
Activist shareholders & PE firms
We also discussed the reappearance of activist shareholders in tech. A recent investment involves Elliott Management and Salesforce. Activist shareholders often take a meaningful stock position in a firm that may need:
- better financial discipline;
- to offload underperforming business units or products;
- to put itself up for sale;
- to get acquired as it has reached the end of its useful life; and/or
- to assume more debt and pay a special dividend to the activist shareholders who arranged this bit of financial engineering.
Activist shareholders usually appear when a firm needs sharper financial focus, has lost its way with too many products, is bloated, or when the sum of the tech firm’s parts are worth more than the firm’s market value today.
Cabrera thinks these activist investors “play an interesting role” and may be “somewhat more aligned” with what shareholders want today.
Private Equity (PE) firms are a different animal and come in different variants. Some are asset strippers and, on the other extreme, some PE firms are intent on helping a company and its net worth grow. Xactly is owned by one of the latter: Vista Equity Partners.
Cabrera sees the current environment as one where PE firms may swoop in and acquire a number of unicorns and other tech companies whose valuations have been crushed lately. PE firms could either sell these firms to other companies, merge them into existing portfolio firms, or, right these firms with better people, processes, technologies, controls, business practices, etc. Vista actually has a playbook that helps its portfolio firms improve their operations and results.
Xactly and the new tech world
Xactly has had machine learning (ML) powered sales applications for several years now. I wrote about this and other Xactly news in a big Xactly article in mid-2019. Xactly has also amassed a significant amount of (big) data to power and teach the algorithms in its products. This kind of technology is especially useful to firms that are tightening their belts today.
These ML tools can provide insights around items such as:
- Which deals within the pipeline are most likely to close (not which ones the salesperson is hoping and praying will close) – This helps negate the effect of intuition and other reporting biases.
- How a given buyer’s purchases changed in previous economic downturns
- Which deals will see a lengthening of closing times
- Which prospects will be most price sensitive and likely to switch to a competitor
These new insights can therefore help a CRO (chief revenue officer) or VP of Sales produce a more relevant, realistic sales forecast.
Cabrera sees the market for AI/ML tools taking off now and that’s especially the case in the sales forecasting space. His firm is seeing this area being the fastest growing part of its product portfolio. Cabrera reported that for many organizations, sales forecasting has always been a “dark art ”. The newer AI/ML capabilities really improve the potential results. But the algorithms are doing more than just reviewing prior sales data and prior sales professionals’ results. The new technologies can also listen in on sales calls, read/review correspondence with customers/prospects, and make better assessments as to the probability and timing of new deals.
Technology like that can not only make the predictions, it can explain how it arrived at its conclusions. If sales leaders and sales professionals see this data, they can adjust their strategies with specific accounts and hopefully alter their future in a positive and profitable way.
Xactly has more than that, though. Another tool of theirs, Xactly Insights, takes in 50+ inputs to predict sales rep attrition or flight risk. While a number of HRMS products have flight risk/attrition prediction capabilities, there are certain signals and indicators that are specific to sales pros.
Xactly in today’s economy
Cabrera believes Xactly is in good shape to weather the current economic situation. It doesn't need cash/capital to grow. It runs a lean ship already. And, most importantly, their products are hot commodities in a market like today.
Inflation is the other elephant in the room currently. Inflation will likely trigger new kinds of discussions within a sales organization as price increases will impact sales, commissions, buyer purchasing strategies, contracting and more. The consultancy, McKinsey has recently published a number of pieces re: pricing in an inflationary economy. One solid overall piece on this is available here.
Last week, Xactly completed its annual sales meeting. Cabrera described the event as, “One of the most energized sales kickoffs in the history of the company.” That’s a noteworthy and very positive observation given some of the less positive news emanating from other tech companies today.
Cabrera also hinted at markets they will pursue. He stated: “To support the expansion in this area of our business, we are redoubling our focus on the mid-market and enterprise portions of our market. Stay tuned for some exciting announcements coming soon to address the sub- 25 rep portion of the market.”
Finally, Xactly has a new CFO, Jason Godley, and promoted Arnab Mishra to COO. They, and others, will be executing Xactly’s new sales strategies in this dynamic business climate. I suspect they will have better sales tools than most tech companies and we should check back with Xactly in a few months to see how the plan is unfolding.