Thoughts on benchmarking against other companies
In the early days of a startup, there is little reason to benchmark. For one, all your metrics are at 0, or can go back to 0 very quickly. Users, revenue, employees, etc. fluctuate wildly and there isn’t much predictability in what you do. On top of that, what you’re building is supposed to be very unique. This is the reason why you started working on it in the first place: because no one else was! As a result, the way you build, market and sell your product should be unique as well, and thus no one can really offer meaningful comparisons for you to benchmark your performance.
This stage should last until you have something people want: early traction, signs of repeatability, a rough idea of who your target customers are, etc. Then, as you start growing, the common wisdom dictates that you should try to learn from companies who’ve been there before. You should find out how they were doing across a variety of metrics, and make sure you’re doing at least as well.
I’m sure this is true in every business, but in SaaS much more than anywhere else, there is an abundance of metrics, KPIs, ratios and formulas that will tell you if you’re growing in the right way, slightly better, or slightly worse. They can help with any and all of the areas of the company:
- How to build a team: “you need X Sales Development Reps for every Account Executives”, “you need X Solutions Engineer for every Account Manager”, “you need X designer for every Product Manager”, “you need X Product Manager for every engineer”, etc.
- When to hire executives: “when you reach X in revenue, you should have hired Y and Z”, “you need a manager for every X people in a team”, etc.
- How much to spend for growth: “X% of your revenue should be spent on Sales and Marketing”, “Y% on General & Admin.”, “Z% on Engineering, Product, Design”, etc.
- How much to grow every year: for SaaS, the usual 3x, 3x, 2x, 2x.
- And much more…
As a founder, I wanted to make sure my company wasn’t falling behind, so I always kept a close watch on these benchmarks and how we were doing against them. If we happened to fall far from the norm, I’d worry, and if we were right on it, I’d make sure we didn’t deviate. However, I’ve recently come to the realization that this approach can be flat out dangerous for a growing company. It’s not that the ratios are wrong, but blindly comparing yourself against a pool of kind-of-similar companies completely fails to capture the specific nuances and unique traits that have allowed your company to grow and thrive up to this point.
Now don’t get me wrong. I’m not saying that measuring all of this is useless, or that having comparables in mind is always detrimental. Some ratios have intrinsic value: it is a fact of life that your ROIC cannot be negative for too long, or that revenue should grow faster than expenses. But for every benchmark or ratio that cannot be explained in 10 words or less (other than “that’s what we’ve seen before and therefore should be good”), your first impulse should be to question this ratio until you understand how it converged to this value, then see if the assumptions you had for the average company hold true for your own.
At Front we had a lot of unusual ratios. We’d look at the benchmarks and it was clear that we were off, and for the longest time, I saw these as inefficiencies that we were getting away with for some reason, but would have to fix eventually.
- For the longest time we had 1 PM for about 20 engineers. Everyone kept raising their eyebrows when they’d hear of this ratio, so I naturally started to worry about it myself. Much later, it occurred to me that we could afford such a low ratio, because everyone at Front uses the product daily, which creates a lot of alignment internally: the specs don’t write themselves, but we’re all generally aware of what our users want, which makes the entire product process much more efficient.
- It’s said that for Account Executives in SaaS to be profitable, they should bring in 5x what they’re paid, yet at Front the ratio has always been closer to 4x. However, Front has a “land and expand” model, that leans more towards expand than land: the size of the initial deal doesn’t predict well the value of the account 12 months in; and of course, with no initial deal the value at 12 months is zero. Knowing that, it’s OK for us to pay more than usual for new business, because we’ll realize most of the value later on.
- We grew to a sales team of 20, with no sales enablement whatsoever. Newly arrived leaders, unaccustomed to the situation, started to question it; but again, as everyone on the sales team was using Front daily, they were sufficiently expert in the product to not need dedicated resources helping with enablement. Their daily usage of the product was their training.
- Our first recruiter recruited 82 people in less than 2 years (she uses front which makes her incredibly more efficient 🤞)
- We had no “executive meeting” until very recently (we’re a very transparent company, we share a lot with our employees and therefore didn’t need to “sync” much)
In retrospect, I should have been more thoughtful about what part of the business was doing fine and what actually needed to be fixed, in the specific context of Front. The same holds true for other companies: the unique ways in which they should deviate from the “norm” are endless. And I don’t mean “beating” the norm: even though, as a startup, you’re trying hard to beat the average, it wouldn’t be reasonable to hope to beat all the averages. You cannot have the best user engagement and the highest LTV and the most efficient sales force and the lowest CAC, all at once. It’s just not realistic. Pick your battles and play to your strengths: accept that you’ll be slightly behind in some areas, and make sure you’re top of the class in at least one dimension.
The hard thing, of course, is to identify which is which: what is a strength, what is simply a tolerable “weak spot”, and what is a burning issue that you’ll have to face sooner than later. Good luck!