ICONIQ's Doug Pepper: Survive to Thrive in 2025

00:00:03:06 - 00:00:34:14

Ben Hillman

You're standing on the edge of a vast canyon, you gaze across the seemingly endless expanse. The wind whistles through the rocky outcrops. The sun casts long shadows, and a river snakes its way far below. You might not want to, but you're about to navigate this canyon to traverse this challenging terrain. You'll need to understand the hidden paths, the potential pitfalls, and the best way to navigate the unpredictable environment.

00:00:35:18 - 00:01:05:10

Ben Hillman

I'm completely serious when I say we've got to be prepared for what's ahead. And I know you are, too. This canyon we speak of represents the complex and ever changing world of B-to-B SaaS. Navigating this landscape requires keen insight, adaptability, and the ability to identify macro trends that drive the industry forward. It's a world where understanding the terrain can mean the difference between thriving and struggling, where the right guidance can lead to sustainable growth and avoid collapse.

00:01:06:20 - 00:01:35:23

Ben Hillman

Enter Doug Pepper, a partner at Iconic Capital. He has proven himself to be an adept guide in the realm of B2B SaaS, serving on the boards of several high profile companies and investing in numerous others. Through this, Doug has gained a deep understanding of what it takes to thrive in the competitive world of SaaS. With years of experience and an impressive track record along the likes of Marketo, Canva and Cowardly, Doug is prepared to help you scale and succeed.

00:01:36:07 - 00:02:00:22

Ben Hillman

His knowledge of the SaaS economic landscape, combined with his unique insights, make him an invaluable resource for anyone looking to understand and navigate this challenging territory. In today's episode, we'll explore the mindset required to survive and thrive by 2025. We'll dive into Doug's thoughts on market trends, valuations, growth strategies and how to adapt in the face of economic downturns.

00:02:01:06 - 00:02:24:18

Ben Hillman

So sit back, relax, and let us take the notes for you as we embark on this exciting journey with Doug Pepper. Your Guide to Conquering the Canyon B2B SaaS from Paddle. It's Protect the Hustle, where we explore the truth behind the strategy and tactics of B2B SaaS growth to make you an outstanding operator. On today's episode, Doug Pepper talks to Andrew DAVIES about navigating an economic downturn.

00:02:25:02 - 00:02:56:23

Ben Hillman

They talk about what makes the current downturn unique. Becoming a wartime CEO, the three metrics to focus on for continued success. How to survive to Thrive in 2025. And finally, is this the new normal? After you finish the episode. Check out the show notes on how you can be set up to thrive in 2025. And then while you're leaving your five star review of this podcast, tell us what resonated most about Doug's advice.

00:02:59:22 - 00:03:06:11

Ben Hillman

First up, Doug talks about what makes the current downturn unique compared to the ones he's experienced. Ever since 2000.

00:03:10:00 - 00:03:33:08

Andrew Davies

Cool. So, Doug, you know, I'm looking at your profile. You've sat on the boards of or invested in high spot betterup stable table currently, Canva said Bird lattice marketer There's a huge number there. I know there's more as well. You've got such an interesting view on the SaaS space and we're walking into unknown territory for some people who haven't been around long enough to see the last downturn back in 28 years and nine.

00:03:33:10 - 00:03:38:23

Andrew Davies

What are you seeing out there? What are the trends you're seeing across the businesses that you have a really unique view into?

00:03:39:07 - 00:04:01:05

Doug Pepper

Yeah. First of all, thanks for having me and appreciate the intro. And yes, I do feel very lucky to have been a small part of some of these great journeys of amazing companies and it's been a lot of fun and a unique privilege to be part of these great founding stories. You know, in terms of today, I, you know, have, for better or worse, been been around long enough to see a batch of these.

00:04:01:06 - 00:04:22:12

Doug Pepper

I started in the business in 2000 and saw that very significant downturn. Of course, you mentioned oh eight. There was actually a SaaS crash in 2016. Then we had the pandemic in 2020, which was pretty scary for a quarter or two. And now we're here and in some ways this environment is similar than some of those. And some cases, you know, they're all very unique.

00:04:22:22 - 00:04:45:17

Doug Pepper

I'd say a couple of things. One. You know, we all know we've been just in an incredible time in the last ten years. We've had a very constructive economic environment that has led to lots of investment. But more than that, we've had really legitimate trends in software in the Internet, cloud computing. And those trends are real. And by the way, they continue I don't have any real concerns about the long term future.

00:04:45:17 - 00:05:07:09

Doug Pepper

The challenge is today and, you know, if I had to boil down what's going on, to me, it's sort of simple. We had an incredible set of tailwinds the last two years, both economically as well as with the pandemic, a rush to adopt technology. And that led to really the best performance I've ever seen in my career of software companies.

00:05:07:09 - 00:05:34:14

Doug Pepper

And we looked very closely at the data and no exaggeration in our portfolio here at Iconic, nearly 100% of companies met their plans in 2021 and the growth rates were high. The average growth rate for us across 100 portfolio companies was like 83%. And these are some larger companies as well. And we all made the mistake of doing was drawing a straight line from the growth rates of 2020 and 2021 through this year and next year.

00:05:35:06 - 00:05:56:16

Doug Pepper

And the reality is, was that, you know, those growth rates were probably too high to expect them to continue just in general given scale. But obviously now we have a new economic environment. And so most companies are seeing a real slowdown in their growth, but they've scaled and built their panels for a higher growth rate and therefore they're burning too much money.

00:05:56:16 - 00:06:18:19

Doug Pepper

And that's why we're seeing layoffs and other such things. But, you know, it's from valuation perspective, this feels a lot more like 2000. I mean, it is painful, right? The public companies that were involved with some of the best companies in the world are down anywhere from 60 to 80%. That is tremendous value destruction. And the private companies haven't yet seen that that revaluation yet.

00:06:18:19 - 00:06:49:18

Doug Pepper

But it's coming. And now we're seeing growth rates start to slow. So it feels like 2000 from a valuation perspective. But my point of view is that the markets are much healthier than that. These businesses are fundamentally sound strong businesses. They've needed to revalue themselves because we got ahead of ourselves on a multiple basis in terms of valuation and they need to adjust their spending and operating plans to account for more normalized growth going forward.

00:06:50:16 - 00:07:12:11

Andrew Davies

Super interesting. So you talk about a few different dips there. So 2000, 2008, Yeah, the SaaS dip in 16, then the pandemic in 20 and then you know what we're facing now. So can we pull out a few things that are similar about all of those crashes? And then maybe let's talk about some of those obvious differences. Well, what's similar in how companies are facing into them and the consequence of them?

00:07:12:19 - 00:07:34:03

Doug Pepper

Yeah, I think what similar is that for all the, you know, people that we work with most closely and partner with the founders, each one of those moments, maybe not 2016 because it was it was short, but each one of those moments, founders have to step back and really think about how do they change what they're doing. And it's challenging to do that and do it quickly in some cases.

00:07:34:03 - 00:07:51:16

Doug Pepper

And so in every one of these markets, investors and most importantly founders have to think about how do I adjust what I'm doing? Yes, I have to deal with the fact that my stock and valuation is much lower than I thought. Usually that's actually pretty easy to get over and you just move forward. I think the harder part is how do I adjust?

00:07:51:16 - 00:08:07:11

Doug Pepper

Yes, my spending, my hiring plan, my growth plans, how do I make sure I have runway to survive the hard times and be sure that thriving at a time where I'm going to need to fundraise in a year or two or three years from now, I also think a lot of companies are needing to change how they sell.

00:08:07:11 - 00:08:31:16

Doug Pepper

You know, today budgets are constrained. The decision makers are different in almost every case now, we're having to sell to CFOs to gatekeepers who make the ultimate decision on purchases. And therefore sellers have to learn not just to sell to their domain expert, but actually sell higher to the true economic decision maker. And and that's it. That's a real challenge.

00:08:31:23 - 00:09:01:01

Doug Pepper

So I think the similarity is in every one of these moments, founders have to think about all of those and many other dynamics about their companies. You know, what's different about each of these environments? You know, 2029 was a broad economic downturn that interestingly hit tech. But very briefly. 0809 was obviously the Great Recession and and maybe the biggest economic challenge that I've had in my lifetime, you know, broadly the economy.

00:09:01:06 - 00:09:23:02

Doug Pepper

But for tech, it was actually quite limited to 2000. Like today. That's the similarity. This is the landed right on tech. It's tech that has the greatest pullbacks in valuation. Tech is where the layoffs are. Other industries aren't seeing as many layoffs as us. And why is that? Because we were the greatest beneficiaries of the tailwinds of the last two years.

00:09:23:02 - 00:09:45:22

Doug Pepper

So it stands to reason, if you believe in reversion to the mean that that will be the industry that's most hard hit here, and that's certainly the case. So this feels a lot more like 2000 in terms of its technology impact, both valuations as well as layoffs. But again, I want to make the point that I don't think this is 2000.

00:09:45:22 - 00:10:10:00

Doug Pepper

Now, as an aside, I do think it's 2000 for crypto, which I believe similar to the Internet, which of course became very real. But in the 2000 timeframe, there were a lot of businesses that were public. They weren't real yet. And I think that's true of crypto as well. I think it's got a long way to go and there's many businesses that have high valuations and crypto that quite frankly should just go away in software and SaaS.

00:10:10:00 - 00:10:32:22

Doug Pepper

As I said before, incredibly bullish about the long term prospects and I'm actually bullish about the short term prospects. These companies are still in great demand and they are still thriving. Just maybe not to quite the extent that we thought. And in 2000, you know, we had lots of software companies in our portfolio. They couldn't sell anything to anyone.

00:10:32:22 - 00:10:49:00

Doug Pepper

It was a true nuclear winter and people went back to the concept You can't get fired for buying IBM. In today's world. You get fired for buying IBM, you get rewarded for buying innovation, which comes from startups.

00:10:51:05 - 00:11:00:02

Ben Hillman

Next, Doug talks about why it's important to become a wartime CEO.

00:11:00:02 - 00:11:21:16

Andrew Davies

So let's just go into a bit more detail on a couple of those points. So firstly, you mentioned about the role of a founder CEO at this time and how, you know, in all of those crises is the founder CEO role to to realize the fundamentals have changed and then to change that operating model, that team, etc.. We hear your Ben Horowitz and others always speak about wartime versus peacetime CEOs.

00:11:21:21 - 00:11:28:17

Andrew Davies

So is this the time for a wartime CEO in that nomenclature? And what does that actually mean? What makes a great wartime CEO?

00:11:28:17 - 00:11:48:16

Doug Pepper

Yeah, I think it is. And I think there's lots of analogies you could use. I was on a board call where the CEO of one of our great companies said that one of the challenges he has as an operator is that his team, the salespeople, are a summertime team that is not prepared for winter. And I thought that was pretty apt.

00:11:48:16 - 00:12:04:12

Doug Pepper

And I think that that for all of us, you know, it was summertime for a long time. The weather was nice and the environment was pleasant, and now it's and now it's more challenging. So I don't think it's just CEOs. I think it's all of us have to prepare to adjust for more of a winter like set of conditions.

00:12:04:12 - 00:12:30:20

Doug Pepper

And I think we're all making that adjustment. But I think for CEOs, you know, I'm seeing many of of our CEOs adjust really well, by the way. But I think it's being prepared and able to make tougher decisions more quickly. And what are those tough decisions? Obviously, you know, the hardest one for them in many of them is deciding that they've hired too many people over the last year or two.

00:12:31:07 - 00:12:57:10

Doug Pepper

That is not does not match the needs going forward. And the hardest thing for the CEO is to let go of good people who otherwise are doing all the right things. And about the war time CEO is making those very tough decisions and making them quickly and proactively. The other key decisions are the decisions of saying no. During summertime you say yes a lot.

00:12:57:10 - 00:13:23:11

Doug Pepper

Yes, let's go to Europe. Yes, let's move into, you know, Japan and Asia. Yes, we'll add that new product line. Yes, we'll add to our, you know, ideal customer profile. And I think the wartime CEO is saying no more often and largely operating under the, you know, the the word focus. Let's do fewer things better. Let's let's pick and prioritize one or two key initiatives.

00:13:23:23 - 00:13:38:19

Doug Pepper

And that's what we're doing during the tougher times. And and I'm seeing the wartime CEO make those those very important. Sometimes it feels like ruthless decisions in order to to bring the companies forward to drive.

00:13:39:11 - 00:13:59:03

Andrew Davies

And you hit on a really interesting point there in that phrase. We've got a summertime team that's not prepared for winter that your crew colleague was talking about. So how do we prepare our teams for winter? People who've perhaps only been in the workplace while it's been summertime or while it's been in the last few years of real strong economic climate?

00:13:59:03 - 00:14:03:14

Andrew Davies

To the tailwinds you've discussed, how do we communicate a reset expectations with a summertime team up?

00:14:04:03 - 00:14:21:00

Doug Pepper

I mean, I don't think there's any magic to it. And the truth is, let's be honest, you know, it's the CEOs that are doing it, not us, as they do everything, but the ones that I see successfully doing it, like almost every message that a CEO tries to carry to its employees, you kind of have to say it over and over.

00:14:21:11 - 00:14:52:04

Doug Pepper

And that's how great CEOs are with the broad vision of their company. And also, I think this reset is over and over, being able to communicate transparently why why it's important. And then again, almost like any important new behavior, trying to pull out the best examples that somebody who is on the forward side of this, you know, how they're selling, how it's working, why this new motion might matter, explaining the details, being specific about the numbers.

00:14:52:12 - 00:15:13:16

Doug Pepper

Here's our cash, here's our current burn rate, here's the runway. If we don't do something, do you think we should fundraise in 2023 or does everybody feel like it makes sense to raise in 2024? And I think having those types of conversations really pulls people along and helps them understand why and how of how you prepare for this time.

00:15:14:02 - 00:15:30:06

Andrew Davies

And you mentioned that many companies are realizing they have to change how they sell because they're now selling to a CFO decision maker rather than the prior decision maker because of things being run past the finance office. How are you seeing people adjust to that new persona in their buying committee? Are there some lessons we can learn that yeah.

00:15:30:06 - 00:15:51:21

Doug Pepper

It's amazing how I think I've had four board meetings in the last, you know, seven business days, each one of them separately kind of coming to this conclusion of the reality of the new sales motion, which is what you described. You know, you can't just sell that marketing solution to the head of demand gen or the solution to the recruiting manager.

00:15:52:00 - 00:16:14:16

Doug Pepper

You could in 2021, they had a credit card and they could swipe it. Today, they don't have that ability anymore. And by the way, they often don't know it until it's time to get the signature and then they find out I don't have the budget. And so we're having to proactively work with those people to make sure that they have the buy in of their senior leadership.

00:16:15:11 - 00:16:37:06

Doug Pepper

And so we have to empower those people with the right data and the right message to to sell their economic, you know, the economic buyer in their company. And so what's changed? One is, you know, we have to have people that that have the tools and the messages to talk that higher level message and that higher level message is is about productivity.

00:16:37:13 - 00:16:58:08

Doug Pepper

It's about our UI. It's about the immediacy of that, our why some things that we weren't talking as much about before as we have to give them the tools, literally the calculators to calculate those ROI and value propositions that are the only way that you could sell anything today. You know, we have to give those salespeople the confidence to go talk to a higher level self.

00:16:58:08 - 00:17:16:20

Doug Pepper

The buyer. It's intimidating to go to a CFO versus the domain expert that you know well, the H.R. manager that you might have been one day in the past. Now you're talking to the CFO and you know that persona as well. It's all those things that go into selling differently. And and this value selling is so important today.

00:17:17:04 - 00:17:58:17

Doug Pepper

And the truth is, you know, the winter time team, they're the summertime team. Not all of those people are able to make that transition to be able to sell higher and sell more of a value message. And but every company simultaneously is realizing that they need to do this. And the reality is not every company is going to be successful because now the CFO is getting flooded with all of these opportunities and they're not going to choose all of them in the must have versus nice to have line is now brighter than it has ever been and that line is moving up and the CFO is prioritizing what are the things that we must have.

00:17:59:05 - 00:18:10:00

Doug Pepper

And in 2021, things that were below that line still got purchased. And today they're not.

00:18:10:00 - 00:18:18:21

Ben Hillman

And in this section, Doug will give you the three metrics to focus on for continued success.

00:18:18:21 - 00:18:41:00

Andrew Davies

You mentioned in communicating to our teams, one of the things we can do is point to examples of success or green shoots that are coming around the corner. Are there any parallels across different companies you're seeing of where those green shoots lie? Are there any, you know, things you're seeing frequently reoccur of new products or markets or ways of messaging that people should lean into in this time?

00:18:41:21 - 00:19:06:13

Doug Pepper

Well, the first thing I'd say is that it helps to be in the right categories. That isn't that true of of all of our moments is you want to be in the right markets. And you know, there's certain markets today that are still viewed as core, still viewed as must have if you're a large enterprise. And so many are still in the early stages of this digital transformation of cloud adoption.

00:19:06:22 - 00:19:22:02

Doug Pepper

And so if you're still in the early stages of that and you know, you have to do it and they know they do, what are you going to adopt and what do you have to have? Well, you have to have the foundational elements. And a lot of that is about infrastructure. A lot of that is about data and analytics and security.

00:19:22:12 - 00:19:46:08

Doug Pepper

And so we look at the performance of our companies relative to plan by category in our portfolio. And you know that attainment versus plan is down pretty dramatically quarter over quarter. Q1 is still almost 100% of our company's hit plan. Now we're down to, you know, most companies are missing plan. I think we're with 20% of companies are hitting plan.

00:19:46:08 - 00:20:10:20

Doug Pepper

But if you look at some of those core categories, it's much higher. And those are areas you have to have data infrastructure, You have to have the analytics, of course, security and others like that. The challenging areas are ones, again, that are maybe nice to haves. And we're seeing some of the tools, sales tools or sales and marketing add on h.r.

00:20:10:21 - 00:20:34:19

Doug Pepper

Add on, you know, that help you kind of develop maybe a little bit of extra pipeline or help you hire faster, you know, which is obviously a value prop that people aren't looking for as much right now. Those are more challenging and but in marketing, we have companies in marketing that are still doing very well, but they position themselves and they are more core infrastructure.

00:20:34:19 - 00:21:06:17

Doug Pepper

Like you can't do marketing without this piece of infrastructure, just like you can't do sales without CRM, Salesforce as infrastructure. And so I think it's really important for companies to to work to position themselves as not a tool, not an add on, but core core infrastructure. Even if you're in marketing or sales or h.R. Can you position yourself and are you, you know, part of the core as a part opposed to maybe on the periphery a little bit?

00:21:07:03 - 00:21:22:18

Andrew Davies

So across the portfolio you're working with, what are you encouraging your leadership teams to focus on when it comes to metrics? What are the real, you know, three or four key metrics there, a universe across your portfolio that are the guiding the guiding metrics for those businesses?

00:21:23:04 - 00:21:42:23

Doug Pepper

Yeah. I mean, I think there's a few housekeeping things we think about to start. You know, we're looking at and I'm talking like at the most basic level and then moving beyond that, you know, number one is how much cash do you have in the bank and what are you burning on a monthly or annual basis and what your runway.

00:21:42:23 - 00:22:04:05

Doug Pepper

And the good news is, when we looked at our portfolio in 2020, during the start of the pandemic, the average runway was eight months earlier this year. When we looked at the runway of our portfolio, it was over 36 months. So the good news is the runway and this is not exclusive to our portfolio. Runways are much longer, but of course, we have companies that are less than two years.

00:22:04:21 - 00:22:23:09

Doug Pepper

And as we look forward and, you know, don't have visibility into how long this is going to last, the first question is what's your runway and how can we lengthen? And that's number one. And we really do look at that burden multiple. You know, what's your burn rate relative to the net new air bookings you're adding every month?

00:22:24:00 - 00:22:55:01

Doug Pepper

And if that metric is well over two, it feels like we're really inefficient and we're burning more than we should relative to the business we're adding. And so those companies with shorter runway or with higher burn multiples, those are the ones where, you know, we're all with the founder, of course, aggressive about changing some of those metrics. When we get beyond some of that housekeeping and make sure we feel like we've got an appropriate runway, then we're starting to look at the metrics we really care about away.

00:22:55:14 - 00:23:18:05

Doug Pepper

But I'd say in an environment like this, retention rises to the top for a number of reasons. Obviously, those that are nice to have versus must have that shows up in the retention and and the churn. And so one of the quickest ways that we can get a sense for how is the company in this environment going to fare in terms of selling new business.

00:23:18:05 - 00:23:41:10

Doug Pepper

It's the churn of their existing customer base and if their customers are churning, man, it it may be that it's even harder to sell to new customers because they're not seeing the value. Do you have the product market fit that you thought you did? Maybe not. So we really look at at gross and net retention. You know, obviously that retention includes the upsells and expansions, and we're seeing some of those metrics degrade right now.

00:23:41:10 - 00:24:08:05

Doug Pepper

So so there is that retention piece. But let's be honest, even in this environment, you know, we're working with smaller growth oriented startups that are trying to take share typically from larger companies growth matters. And the companies that we're excited about today and will be tomorrow. Yes, you have to be more efficient. Yes, you have to have great retention and runway, but you still have to be growing pretty fast as well.

00:24:08:05 - 00:24:13:02

Doug Pepper

And so we do look at that metric still, you know, as a very important top line metric.

00:24:13:05 - 00:24:30:10

Andrew Davies

So we've got a bunch of competing priorities here. And the most obvious is managing burn without destroying growth because growth is still important. So how do you think about, you know, keeping costs under control, keeping that burn multiple low whilst not, you know, destroying the future growth of the business?

00:24:30:10 - 00:24:57:07

Doug Pepper

I think we had that conversation in every board meeting I've been in the last two weeks. And it's a it's a delicate balance and one that we talk about a lot. And the good news is I think most of the companies were involved with have found ways to do both. And the reason it's possible is that I think we've all maybe come to the realization, again that beta has to be growing three X to have impressive growth.

00:24:57:18 - 00:25:20:16

Doug Pepper

Obviously, depending on your scale, if you're sub 10 million RR, you probably do want to be growing over two acts, maybe two and a half and ideally three X, But as you get to greater scale, I think we've all realized that you'd rather grow 80% year over year and burn less than grow 100% with an incredibly high burn.

00:25:21:05 - 00:25:39:14

Doug Pepper

And in the company. This is the big change that I think all of us in founders are are able to adjust to, as is that if you just dial back your growth from 100% to 80%, which is still very attractive and you're gaining share versus larger companies that might be growing ten or 20% that you can do it a lot more efficiently.

00:25:39:14 - 00:25:59:21

Doug Pepper

And with, you know, we looked at rule of 40, for example, and and really start to dial in that rule of 40, you know, with with a slightly lower growth rate. So those are the trade offs that we're making. But yes, whenever we're thinking about reducing that burn and burn multiple, we talk about what are those investments that we still need to make.

00:26:00:09 - 00:26:22:20

Doug Pepper

Usually it's in product and forward looking innovation that we want to maintain so that we're really strong, foundational. See that when we come out of this economic challenge, call it in early 2024. I'm making that up because nobody knows that we're strong from a foundational perspective and really thinking through those types of investments that we can't give up.

00:26:22:20 - 00:26:35:10

Doug Pepper

And maybe today there's certain investments in geographic expansion, for example, or a new segment of customers that we've never attacked before that maybe can wait for another year.

00:26:37:12 - 00:26:45:11

Ben Hillman

Next up, Doug talks about how to survive, to thrive in 2025.

00:26:45:11 - 00:27:02:21

Andrew Davies

So you mentioned uncertainty and software buyers are facing the uncertainty. That means they're probably not making as many decisions as they were previously to buy software. And also all of your boardrooms that you're sitting in will be facing uncertainty in terms of the timeframe for which they should plan. So what's the time on which your boards are planning?

00:27:02:21 - 00:27:11:12

Andrew Davies

We saw Salesforce recently say that they're not planning as far out as they used to be because of the uncertainty. So what are the timeframes across which people can plan robustly?

00:27:11:12 - 00:27:30:14

Doug Pepper

Yeah, it is uncertain and I don't think anybody really has a crystal ball. And so in some sense you have to plan further out as a result of that. I did hear an interesting quote that some companies are subscribed to, which is survive to thrive until 2025. And and that's because, you know, we don't know when things are going to get better.

00:27:30:14 - 00:28:10:09

Doug Pepper

So plan for the worst. Make sure you have runway until 2025 where it's likely the environment and fundraising environment will be will be more attractive. You know, how are we planning? We have to plan multiple years out. And and the reason is because you can't measure your spend for next year without knowing what your plan is for the following year, because it's the following year plan that determines your hiring for next year and so we do have to do a multiple year forward looking plan to accurately assess the hiring and the spend for the current year.

00:28:10:21 - 00:28:33:06

Doug Pepper

And so we really do look at multiple year plans. Obviously, those year or two in year three plans are less certain, but we have to have a model to measure against and we're really encouraging our companies to think of this is not a one year event, but something that could be challenging for a couple of years and then hope to be surprise and make adjustments.

00:28:33:06 - 00:28:55:12

Doug Pepper

And on that point, you know, it used to be for a while there, it was like a one year plan, set it and forget it. And the truth is, the plans now are much, much more adjustable and flexible. And we're looking at these plans quarterly. And so the idea is to set a plan that's conservative that gets us out that two year runway to 2025.

00:28:55:20 - 00:29:18:07

Doug Pepper

But then if the environment changes or we're seeing real performance and demand above those expectations, well then we can unlock investments and and say, okay, we did great in the first half of next year, let's unlock that new product line in the back half or unlock that geographic expansion. So I think companies are much more nimble now around their planning as well.

00:29:18:08 - 00:29:33:07

Andrew Davies

So we see top down planning, bottom up, planning your what's a healthy planning process from your perspective when there's that natural sense of tension between a CFO and then the different department leaders who have got to manage their own, you know, budgets and their own OpEx.

00:29:33:15 - 00:30:02:12

Doug Pepper

It's amazing. And this is new come up in a number of the board meetings as well. And I've seen this maybe for the first time is that they'll show a timeline of their budget process, almost like a product development pipeline or timeline. It is a very real process where they're gathering, of course, the input of all their team leaders and within the company, what do they need, what budget do they have, what desires do they have in terms of hiring and otherwise in gathering all those inputs?

00:30:02:12 - 00:30:24:15

Doug Pepper

And then, you know, talking as a board to get our input and what some of the constraints are and what of what are our, you know, positions in terms of what they need, in terms of timeline and runway. And it's very iterative and it takes time. I mean, I'm seeing some of these where it's multiple months of budgeting and planning and maybe then coming to the team, the board with an initial version.

00:30:24:23 - 00:30:48:03

Doug Pepper

Usually, you know, the team leaders can't get everything they want. So there's a cycle of going back and saying, hey, you need to cut that by 20%, gathering that new data and iterating on it. And it's a very collaborative process between CEO, CFO, all the general managers within a company and the board and investors to kind of, you know, come together on what the right plan going forward.

00:30:48:03 - 00:30:58:13

Doug Pepper

But it's it's a tremendous process and putting a lot of time and stress on the CFO and in the finance team. But generally I'm seeing people do a great job with it.

00:30:58:13 - 00:31:20:09

Andrew Davies

At the beginning, you mentioned about, you know, the line and drawing the line forwards and perhaps we drawn a line that was going from historic that are no longer true as humans. You know, we're very good at just drawing that straight line forwards up into the right. Is it just about being more conservative now? Are there any other kind of rules of thumbs that you're you're using or your companies are using in order to establish where that line should now go?

00:31:20:14 - 00:31:45:03

Doug Pepper

I think we do have a lot of data and precedents. You know, we've been lucky to invest in a lot of the very best companies that have gone public over the last few years. And before that, many of the cloud 100 companies that are now, you know, 100 million there are and beyond. And so one of the things that we can do is look at history and look at those very best companies and how they grew outside of the pandemic.

00:31:45:14 - 00:32:04:09

Doug Pepper

And that's what we've done. We've captured that kind of data for many, many years. And so one of the things that we're able to do and we're not the only one there's other firms with this data you share with our portfolio what the historical non average is, because our companies want to be, you know, top quartile, top decile companies.

00:32:04:19 - 00:32:35:07

Doug Pepper

But to look at those top companies from the past that are now public and show them in more normal times, between 20 and 50 millionaires are between 50 and 100 million. There are here's how those companies grew. This is what they're spend in sales and marketing or R&D or GMA look like to drive that growth. And so there are roadmaps that give us some sense for how companies like these at that scale should grow in more normal times.

00:32:35:20 - 00:33:05:23

Doug Pepper

And so we have a whole data science team that has really pulled that data together. They're busier there than they're they've ever been before because people are really hungry for that historical data on what growth rates look like. So we don't really have to make it now. Every category is different. Every company is different. You know, we look at bottoms up SaaS versus top down enterprise and break the data based on the type of company that type of selling model to try to try to give each curry company, you know, the best sense for how they should model their business.

00:33:05:23 - 00:33:16:20

Doug Pepper

So so that's what we're doing a lot these days is trying to tap into that historical data. And I think it's maybe the best roadmap that we have.

00:33:16:20 - 00:33:24:19

Ben Hillman

And now Doug answers the question, if this is really the new normal.

00:33:24:19 - 00:33:49:22

Andrew Davies

So let's finish this off with two final questions for all of those SaaS founders and executives that are listening here who aren't in your portfolio, let's give them the benefit of what they get in the boardrooms where you're part. What would your advice be for their companies? What are the top few things you'd love them to focus on or do as if you were an investor or a board member in their business as they look into 2023 and how they make sure they can survive to thrive in 2025.

00:33:49:23 - 00:34:23:20

Doug Pepper

Yeah, I'd say a couple of things. One, you know, to have and have confidence that we'll get through this. You know, I think for some founders that haven't seen a downturn like this, I think it's it may be shocking and challenging, but but we try to tell them is, you know, these have we've seen these in the past and you get through it and in particular, again, all the way back to the beginning, I think we're just fortunate to be in this amazing category and business model that is very resilient and so tough times for the next year or two, but for the most part, these companies will survive and thrive.

00:34:23:20 - 00:34:41:17

Doug Pepper

And I think having that knowledge and confidence is a good starting point. You know, the other thing that we would say is, is make those hard decisions. They are tough, but they position you to be able to thrive and get through this time and be there when things improve in a year or two from now. And so most are doing this.

00:34:41:17 - 00:35:02:08

Doug Pepper

It doesn't take a lot of pushing, but, you know, make those hard decisions and put your company in a position to be there when things improve. A couple other key points. One, focus, as always, on your people. You know, I think more than ever, communication frequently, transparently to bring people through this I think is more important than ever.

00:35:02:08 - 00:35:27:19

Doug Pepper

It's easy to create culture when things are good. I think it takes more time, more proactive focus to maintain a great culture in a tougher time. So really focus on your people. And then, you know, the other obvious one as well as focus on your customers. I think that that retention that we talked about is so important at this time, keeping those great customers on board and then selling more to that.

00:35:27:19 - 00:36:03:15

Doug Pepper

And if few can of course, much more efficient to sell to existing companies and generate more revenue from your existing customers, then going out to find that new, you know, really focusing on that existing customer base for retention and upsell is also something that were there were giving them advice on. And maybe the final point is, you know, I think keeping heads down and executing is a good thing, but maintaining a relationship with a very select set of investors that might be the right next investor for you a year from now or two years from now, I would devote a little bit of time to just continuing those relationships for when it makes sense.

00:36:03:21 - 00:36:04:14

Doug Pepper

Fantastic.

00:36:04:14 - 00:36:27:20

Andrew Davies

And finally, let's just finish off referring back to a comment you made earlier, which is that we're seeing a reversion to the mean. So is this the new standards in terms of valuations or valuation multiples and the balance of growth versus costs? Is this the new normal that we'll see now for the next five, six, seven years? Or do you see us coming back to some of the levels of valuation multiple we've seen over the last couple of years ever again?

00:36:27:20 - 00:36:46:16

Doug Pepper

Yeah, I won't say ever, because these things tend to happen every 10 to 15 years. And so I think there's a chance we get back, but not anytime soon. The anomaly is not now. The anomaly was the last two years and and we got into a place that was unsustainable. And hindsight's 2020, we should have all recognized it.

00:36:47:00 - 00:37:10:12

Doug Pepper

But the definition of a bubble is that we don't and all of us collectively in the venture industry and otherwise lost sight of the fact that we were in unsustainable territory. If you just look at the data, look at the five year SaaS revenue multiples five years pre-pandemic and ten years pre-pandemic, largely those numbers were five times one year out.

00:37:10:20 - 00:37:34:11

Doug Pepper

They are more revenue and we're right at five times now. So we're just about at the long term averages for valuation today. That would suggest we're at the normal place. My own opinion, by the way, is that we've overcorrected. Why? Because I think this market is way more interesting than it was five and ten years ago. The markets are bigger, the companies grow faster.

00:37:34:11 - 00:37:59:12

Doug Pepper

And I think this is a more core industry than it ever was. But should we ever get back up into those, you know, average 20 to 50 times? RR No. Could we go from 5 to 7 or 5 to 10? I think we could. And so I think things are better from here. I don't know when, but again, I don't think we go back to what we saw in 2021 anytime soon because that was that was unrealistic.

00:37:59:16 - 00:38:04:01

Andrew Davies

Fantastic. Doug, I've really appreciated to get your thoughts on this. Thank you so much for taking the time.

00:38:04:01 - 00:38:08:04

Doug Pepper

It's been a lot of fun. Thanks for including me.

00:38:08:04 - 00:38:31:22

Ben Hillman

A huge thank you to Doug for all his valuable advice. Now you're set up to thrive in 2025. Today, we talked about what makes the current downturn unique, becoming a wartime CEO, the three metrics to focus on for continued success, how to survive to thrive in 2025. And is this the new normal? Make sure to give Protect the Hustle a five star review, and tell us what lesson Doug taught you from today's episode.

00:38:32:10 - 00:38:42:05

Ben Hillman

Thanks for listening. Subscribe to and tell your friends about Protect the Hustle, a podcast from Paddle Studios dedicated to helping you build better SaaS.