What’s your hierarchy of goals?
A simple framework that might help you with your 2023 planning
With only six weeks left in 2022, I’d like to share some thoughts that might be useful for founders as they start to think about their budgets and plans for 2023.
Given how much the market has changed this year, planning ahead for 2023 is different from any other year in the recent past. Until the end of last year, money was cheap, and investors tended to reward growth at almost all costs. This sentiment changed abruptly at the beginning of the year, and now the same investors who told founders to hire a large sales team way ahead of time last year are telling founders that they need at least 36 months of runway. ;-)
Think what you want about this type of VC advice, but the fact is that if you need capital to grow — and almost everyone does — you can’t completely ignore what’s going on in the capital markets. If the cost of capital goes up because of rising interest rates and lower valuations, it’s rational that the “efficiency vs. growth” pendulum swings toward the former. I spoke about this topic at the SaaStr conference in San Mateo a couple of weeks ago.
Let’s assume you’ve come up with a great plan for 2023. You’ve set ambitious but not unrealistic goals. The “Burn Multiple” line in your spreadsheet looks reasonable, your CAC payback time is acceptable and projected to decrease throughout the year, and your “Rule of 40” number is trending in the right direction. If you hit your targets, everyone around the table will be happy.
Now as I’m sure you’ve already experienced, the problem is that for startups, that’s a b̶i̶g gigantic “if”. The chance that you’ll hit all of your targets is tiny. Maybe you’ll achieve your revenue objectives, but your burn will be higher than planned. Perhaps customer growth will exceed expectations, but you’ll have a larger percentage of less happy customers, so you’ll have more churn down the road. Or you’ll be fine in terms of growth and burn, but you will have accumulated a lot of tech debt that you’re going to have to pay back in the following years.
Whatever it may be, you will almost certainly miss some of your targets. Knowing that, you have to decide which goals are more critical than others. If you don’t make this decision or if you’re not explicit about it, someone else will make it for you. People in your organization will work based on their own assumptions, and you may not like the outcome of that.
The hierarchy of goals
That’s why I find it helpful to have a hierarchy of goals. I’m not talking about the simple case of giving your objectives different priorities, e.g. “we have three goals — A, B, C — and A is the most important one.” The logic I’m talking about is more radical and says that if A is not achieved, B doesn’t matter. The obvious analogy is Maslow’s pyramid of needs, according to which basic needs like r̶e̶l̶i̶a̶b̶l̶e̶ ̶W̶i̶f̶i food have to be satisfied before you can attend to needs higher up¹. Can’t think of a singular goal that comes before everything else? A good starting point might be do not die² (or don’t run out of money, if you prefer less harsh words).
Let’s look at what a simplified hierarchy of goals might look like for a SaaS company:
As you can see from Goal 2, our fictional company wants to grow as fast as possible (who doesn’t!). But it doesn’t want to grow at all costs, and that’s what Goal 1 is there for. If the company’s Burn Multiple is about to exceed 2, the plan calls for measures aimed at increasing efficiency (e.g., lower marketing spending, overall cost reduction, etc.).
Let’s take a look at the goals further up the pyramid. In isolation, goals 4A and 4B would be crazy. But remember, this is a hierarchy of goals, so the way to read it is that the team should hire as many outbound AEs as possible as long as the CAC payback time for outbound stays below 15 months and should maximize SEO investment so long as the CAC payback period for inbound is below 9 months. In my opinion, this is much better guidance for your sales and marketing leaders than pre-defining a target for e.g. sales headcount and marketing budget at the beginning of the year. (This doesn’t mean that you shouldn’t set absolute limits for sales headcount and marketing budgets in addition to these more dynamic targets.)
Even if you manage to define the right hierarchy of goals (which isn’t easy), this goal framework won’t give you all the answers you need. Most of the decisions you’ll have to make are based on leading indicators and incomplete data. Especially early on, metrics like CAC payback are hard to measure and can be easily skewed, e.g. because of one or two AEs who didn’t work out, a failed marketing experiment, or other factors. No simple IFTTT here; your judgment is needed. :-) However, I believe being extremely explicit about your priorities may help you surface essential trade-offs and may help you adjust your plan based on the results along the way.
You will miss parts of your plans. The good news is that you have some control over which ones!
PS: You might be wondering why there are two goals (3a and 3b, as well as 4a and 4b) on the same level of the pyramid? Isn’t this against the core idea of forcing yourself to make every trade-off perfectly clear? You’re right. But while the purists among us might object to this, I think it’s useful to allow for goals that work in tandem to achieve a bigger goal to be on the same level. The same goes for goals that don’t compete for the same resources. You could rearrange the example above in a way that it becomes a strict hierarchy from the bottom to the top, but I think that would make it overly complicated.
¹⁾ Apparently, Maslow later clarified that satisfaction of a need is not an “all-or-none” phenomenon, admitting that his earlier statements may have given “the false impression that a need must be satisfied 100 percent before the next need emerges”. (Source)
²⁾ “Do not die” as your first company goal may be less uncontroversial than it sounds. If your goal is to win a large market, you sometimes have to swing for the fences.