Modules
Session 1: Driving Profitable Growth at Scale w/ Ian Steward
Transcript
Thank you for the warm, warm welcome by way of introduction. Ian Stewart, chief revenue officer at Tricentis. Tricentis is a three hundred and fifty million ARR business, nice growth company, will exit the year somewhere north of four hundred million annual recurring. I run a revenue organization of about four hundred and eighty employees or so.
I came into Tricentis by way of an acquisition, a company called QA Symphony. QA Symphony was acquired by Tricentis, a local Atlanta tech company acquired by Tricentis back in December of twenty eighteen. So prior to this ride that I've been on with Senus where we've gone from about sixty five million to the three fifty or so that we're at today, I had the privilege of going from one to thirty with QA Symphony. And so throughout that journey, naturally, I have had the privilege of compartmentalizing a lot of takeaways at different stages of the company's evolution.
Most of those learned through mistakes that I made along the way. Right? So with that, well, the theme that we're gonna touch on today is driving profitable growth at scale.
Seems thematically consistent with, the conference. The angle that I've decided to take on it is a bit more, I I would say, philosophical in nature. I think that you guys are probably, inundated with tips about how to get profitable or how to grow faster. So I figured I'd do something that, at least to me, felt a little bit more novel in the sense that, I'm gonna give you my kind of management philosophy that's enabled me to implement more dramatic plans for change inside of organizations as well as the operational playbook that I've used. Because at the end of the day, I think that those principles will apply to whatever you're trying to accomplish, whether it's growth or profitability.
So quick agenda. So first, I wanna frame up the dynamics that fueled this growth at all cost, dynamic that we've been living in. I think that most of you are probably familiar with the dynamics that have underpinned this, but I'll give you my lens on it. Wanna talk about what's changed in the market and what is now what the market now actually values in companies.
Second or excuse me. Third and fourth, I wanna talk about that leadership mantra that, in my opinion, helps enable dramatic change. And then fourth, more the operational approach to enabling dramatic change.
So starting with the dynamics that have fueled growth at all costs over the course of the last several years, Net net, it's been a confluence of macro and secular trends. So from a macro perspective, we've been living in or we're living in a zero interest rate environment for an extended period of time. I'm not sure, how many of you are familiar with the economics, of that and what actual impact it has to corporate valuations. But when you talk about the valuations of software companies, they're generally expressed as a multiple on revenue.
Right? We're getting a ten x. We're getting a twelve x. We're getting a twenty x.
Right? That seems like a relatively unsophisticated approach to value in companies.
So it's an easy way to communicate the way companies are valued, but, generally, there's a more sophisticated approach underpinning that approach. Right? And so one of those more sophisticated approaches is a discounted cash flow. Right?
And so a discounted cash flow effectively allows you to apply a net present value of future cash flows based on extrapolating growth and profitability trends. When you put a discount rate in a model close to zero when you're leveraging the Fed funds rate, that increases the value of those future cash flows and effectively does not make your model rely on current profitability to drive a high enterprise value of a company. The other major trends were quantitative easing, so there was a glut of liquidity in the markets, which effectively leads to asset inflation, and a lot of this asset inflation flowed through to the software universe.
And then there were some secular dynamics with the size of VC funds, increasing really dramatically, the volume of of VC funds increasing dramatically, and then also this dynamic that's kind of a power law type of approach that a lot of venture capital firms take where, call it, ten percent of their investments are gonna yield ninety percent of the returns that they make, which allows them to go after and chase great companies and write a lot of checks with the knowledge that not all companies are gonna survive. A handful of them, though, may return the fund may return the fund ten times over.
Right? So a lot of companies got funded during this period. Bottom line is valuations reached a peak in February of twenty one. The median ARR multiple at that time was twenty five x.
Right? So really, really dramatic. You could be an unprofitable company doing ten million in revenue and valued at two hundred and fifty, two hundred and fifty million, which means that if you wanted to sell twenty percent of the company to go raise capital, you could easily get a check for fifty million dollars What happens there? A lot of companies become dependent on external capital, and there's not a lot of discipline right around the operating metrics of that company that in turn translate to sustainability of the company.
So what changed? I think everybody knows what changed. Right? Sticky inflation, interest rates shot up to the Fed fund rates sitting at five to five and a quarter right now.
A lot of geopolitical risk and then recession concerns compound all of these issues. And so going back to that discounted cash flow approach in terms of the way that you're going to value an enterprise software company, the more sophisticated approach that you're going to take. When you move that discount rate up to five percent, it dramatically compresses the present value of future cash flows and makes you much more dependent on profitability to drive a premium valuation.
Then you couple that. It's kind of a two legs down scenario. Right? So first leg down is multiple compression.
Right? So companies just aren't valued the same way. And then the second is more secular and performance related. Right?
So there's a higher level of scrutiny around IT budgets. Right? So people are more selective with the way they deploy their capital in a b to b context. And then you have earnings shortfalls from the major software vendors.
So you're seeing less performance and less value overall in terms of nonperformant and performance software companies. And so net net, we're now down sixty three percent from the COVID highs, the COVID median highs. And so the high highs were down, like, eighty five percent in terms of valuation multiples. So what does that mean now that this tide has receded?
What does the market actually value? Right? So I've given you guys a lot of numbers. I apologize for that.
Let me know if you're if I'm moving too quick and you want me to slow down on anything, by the way, because I'm happy to happy to unpack it. But, so what you're seeing on the right hand side of the screen here, this is the rule of forty it's a rule of forty composition analysis. I did not do this to be clear. Meritec Capital did, which is a great, venture capital private equity firm that puts a lot of great data out there.
Encourage you guys to check them out if you're interested.
On the vertical axis, you've got next twelve month free cash flow margins.
On the horizontal axis, you've got next twelve months revenue growth rate. And so the companies that they studied here, I think there's roughly a basket of a hundred software companies. Keep in mind that these software companies are on average between a hundred million in revenue and a billion in revenue. So in terms of what's actually valued, it's going to be a sliding scale, meaning that if you go to earlier stage companies, there may be a lot more emphasis on growth and a little bit less emphasis on profitability provided the trend line for profitability is healthy.
Or if you go to, you know, the other end of the continuum where you're at a billion in revenue, there may be less emphasis on growth provided you can run thirty or forty percent operating margins and effectively generate a ton of cash. So the primary takeaways here, in terms of what are driving premium valuations of software companies today in this basket of companies that we're talking about. So from a qualitative standpoint, the way that I can best summarize it through my experience is they're durable, sustainable, growth oriented, and profitable. Durable means that you have the ability to withstand changes in externalities.
Right? So when macular or excuse me, macro trends change, secular trends change, your company is durable enough to withstand that. It doesn't mean that you don't take a hit on growth, you don't take a hit on profitability, but it doesn't represent an existential threat for you.
It's sustainable, meaning that you've got a large enough addressable market, not just the TAM. I think that a lot of people throw the word TAM around a lot, total addressable market, and I've never heard of a small TAM. Right? They're they're all massive numbers. Right? So I think that you really need to focus on this Sam metric, which is your serviceable addressable market, I e, if you look at the subset of accounts that you can actually meet the needs of inside of that very large addressable market, Is that large enough to sustain growth in the long term, right, and get to three, five, and ten year projections around profitability and cash flows?
There needs to be a growth orientation, and you need to be profitable or show a trend line towards profitability that can be extrapolated in concert with these other characteristics to get you to long term value creation and good economic return for investors. So how does that manifest in more of a quantitative dynamic? It's this composition of the rule of forty. So to extract what I would call a premium valuation, which is this is completely subjective.
You may say that a six x on next twelve months revenue is premium. You may say a twenty x is. I'm calling it twelve x. Right?
And because that feels like a kinda sexy sweet spot to me. Right?
In order to extract a twelve x, a twelve x on next twelve months revenue, you need around twenty to thirty percent ARR growth, forecasted ARR growth for the next twelve months, and you need around ten to twenty percent free cash flow margins. So primary takeaway here, and, again, sliding scale, if you're earlier stage, this may be fifty to sixty percent growth with, you know, five to ten percent margins or zero to five percent margins. Right? But this seems like the sweet spot to just really kind of illustrate what the market is valuing today.
And I think that the bottom line is going back to this concept of needing to support or implement dramatic change. A lot of companies aren't ready for this. Right? So we've been in this kind of grow at all cost mindset, with an abundance of external capital that allows you to go buy your market and not focus on, not focus on the internal capital needs of your company.
Right?
So with that, wanna first talk before I get into the operational approach that I've kind of continually implemented and refined over time, I wanna talk a little bit about a leadership mantra that, in my opinion, enables dramatic change.
So we speak a lot about this at our company, and it's something that I try to instill in my entire leadership team, the concept of believe then do.
And I'm gonna read these to you. I hate to read to you, but, you know, so a couple points around this concept of believe then do. So buy in, commitment, and alignment are some of your most powerful corporate assets. It basically turns your human capital into a force multiplier.
Right? So if you've got everybody in a boat and, you know, three people are rowing against you and three people are rowing forward, you end up in a very kind of static stagnant spot going around in circles. When you can get everybody aligned, bought in on a common vision, and rowing the boat in the same direction, you eliminate drag coefficient. Right?
And you kind of maximize the efficacy of all of those people in the boat.
In my experience, to appeal to a broad audience, you've gotta have a combination because people's brains just work differently. Right? They digest through different mediums. You've gotta have a combination of a very clear quantitative plan, but also an aspirational and inspirational plan that's a bit more qualitative in nature.
And, effectively, the end game is putting your team, company, whatever your area of the business is in a position to actually believe the plan that you're gonna execute on so that they can jump in the boat with you and start rowing in the same direction. And I think that a lot of companies are falling victim to kind of, you know, executives sitting in a room coming up with a plan, going out there and just whipping the backs of the troops, right, when you don't have buy in and it creates this kind of drag coefficient. Right? And you can never maximize the efficacy of your human capital.
A point or a picture to illustrate the point.
Does anybody know who this gentleman is?
Sorry? Who is Jeffrey? Nope. He ran against Jesse Owens. Nope. But you're getting close. Sorry.
Bannister. Bannister. You got it. So this is Roger Bannister.
In nineteen fifty four, he was the first person ever to break the four minute mile mark. Right? And so since nineteen fifty four to twenty twenty four, what advancements have been made in track and field for track stars? Anybody?
Effectively none. Shoes are a little bit better. You know, you know, long term health is better, but I don't think it changes the body composition of, you know, young runners in their teens or twenties. Since then, one thousand seven hundred and fifty five people have broken the four minute four minute mile mark.
And so the point being a couple of things, but nothing really changed other than the fact that the conventional thinking that it couldn't be done was broken. Right? And so, and then you saw a flood of people kind of, achieving the same accomplishment. So really two takeaways that I would leave you with here.
Dramatic progress can be made by focusing on the fundamentals. Right? Just refining and continually refining the basics without anything frivolous or really sexy. Right?
And the belief that it can be done is equally as important as the plan to actually get it done. Right? So with that, I wanna talk pivot from here, which this is the philosophical mindset that I would say kind of underpins all of my operational approach that I've ever implemented, to more of the what is the actual operational approach that we've used. And so this isn't written down in a playbook anywhere.
This is the best, way that I could synthesize this when I was making slides at ten o'clock last night. And I told so I saw I sent the slides to somebody, I think at, like, ten thirty. And when I got here, I said, hey. Did you get the latest version of the slides?
And the girl went, are you the guy that sent them at two thirty in the morning? I was like, woah. I I sent them at ten. Somebody else forwarded them to you at two thirty, so I wasn't that guy.
So, anyways, four kinda core components in terms of the way that I've distilled this down. So first is defining your go to market motion using a market first approach.
Second is selecting milestones and activities that actually matter.
Interestingly enough, I saw I peeked at the agenda on my way down here, and I think that there is a session around milestones and metrics that matter. So I'll be curious how they line up, and hopefully, I don't, you know, walk into a buzz saw here.
Third step in the process is building an operating plan. A lot of times people start with building an operating plan versus doing a lot of the intellectual work upfront. And then the fourth is setting the vision and executing on that vision. So, the way that I would think about this, it's kind of a sequential process is the way that I think about it, and I've given you some context around what I think that process should look like and a couple tips or takeaways associated with those.
So looks like I've got fifteen minutes, and I think that I'll be able to stay in the stay in the time. So defining your go to market motion using a market first approach. So as I kind of just alluded to, I see a lot of companies saying, we want to be this. Right?
We want to be a product led growth company. We want to run a velocity motion. We want to do, you know, these ten characteristics. And in my opinion, not to be harsh, but it's a navel gazing type of approach.
Right? It's very focused on you and not focused on what the external market needs and meeting the needs of that end market. Right? So in my opinion, you've gotta kind of rethink the way that you go to market and take this market first approach where you start outside with what the market needs and then kind of reverse engineer that into what your distribution should should look like to meet the needs of the end market based on the characteristics of your product.
And so the way that I've broken this out, again, this is a little bit of a brain dump in the sense that, like, hey. These are some continuum or dichotomies where, your market characteristics may fall on, and I think that they're good questions to ask yourself to understand what is the ideal go to market motion that you should be running based on the characteristics of your end market. Right? So is it, does the customer prefer open source versus proprietary software?
Does the customer prefer a value versus feature oriented approach? I are they looking for more of a widget, or are they looking for more of a transformation, right, that needs to be quantified in business value, and that's gonna be the way that they sell it internally. Right? Is your buyer business oriented or technically oriented?
Right? Because if you're talking to a developer, on average, they're gonna be technically oriented. If you're talking to a CIO, you may think that they're technically oriented. In my experience, they're very, very business oriented.
Their goal is to use technology to drive business change inside of the organization and their stakeholders or the other c staff members saying, yes. That guy did his job because I can do this faster, more efficiently, more effectively, or with less risk. Right? And so I think that those are questions that you've gotta ask.
I think you've gotta ask who controls the spend. Right? Does the developer have his own discreet budget? Does it roll up to a VP of engineering?
Does it roll up to the CIO ultimately?
Another, you know, kind of thought here is, does the partner own the spend? Right? Because a lot of times, there are ecosystems that are completely subsidized by partners, and the partner actually has the most strategic voice in the room. And you may not realize that's the person who's buying you actually need.
Right? So once you define the characteristics of your market, I think that's starting with the end in mind. Then I think you've gotta go to, hey. Let's assume that you've already got a product, right, and you're trying to connect the product with the, with the end market.
The questions that you've gotta ask yourself in my opinion are what are the levels of intervention or intervention required to demonstrate, realize, and maximize value? And when I say demonstrate, this is to get them to the initial moment. This product can bring me value. And, hey.
Is it product led, I. E. They can download a trial on their own, they can click through, and they go, holy smokes. This is gonna solve a lot of problems for me, or is there heavy business intervention required, heavy technical intervention required.
Right? But you've gotta figure out what it takes to demonstrate value. Next, you've gotta, figure out what it takes to realize value, I e, the customer gets they see the value that can be created, but what do they have to do to actually successfully consume the software? And then finally, maximizing value.
What I mean by that is if you land with a small land deal and you're addressing ten percent of the opportunity, how do you capture the other ninety percent of the opportunity in the sense that, sorry. I see one of my my slides a little messed up here. But, ninety percent of the opportunity, do you have to run back this heavy, demonstrative motion where you're going through, you know, a very clunky cycle, or will it expand horizontally across the org organically? And so when you're able to answer those questions, you can maximize performance and minimize any sort of waste in the ecosystem because, effectively, again, you're eliminating drag coefficient, and you're getting the most efficacious approach to your go to market rather than saying, hey.
We're going to address a business oriented CIO level buyer with clunky software through a product led growth motion, right, where you're gonna have a very low success rate and there's gonna be a lot of spend in your ecosystem that is completely unnecessary, and you're probably not gonna maximize growth. Does that make sense to everybody? Yeah. Cool.
Next, selecting milestones and activities that actually matter. Same theme here in terms of reverse engineering your go to market. Right? So I think that a lot of people say, okay.
They take this naval gazing internal approach. If we make a million calls and send ten million emails, it's going to convert at this rate per industry standards, and that's how we get to the desired outcome versus focusing on what are the actual prospect and customer milestones. Right? What are the moments that tightly correlate with a better outcome for for that prospect, I e, they end up buying your software and realizing value with it.
And depending on where you fall on that go to market continuum of sales led growth versus product led growth and all the other stuff that we talked about, you can then optimize for the right set of activities that get customers more consistently to those milestones and then distill them down into metrics that actually matter. Right? Because, hey, if in our business at Tricentis, for example, you could make a million phone calls and never get one single deal. Right?
You've got a network through global systems integrators. You've gotta find funded IT projects that are focused on transformation, and that's the way that you identify real opportunities for our business. By virtue of that fact, you can pound the phone, send emails all day, and, again, generate no revenue. You've gotta start with the milestones.
Right? Reverse engineer them into metrics that actually matter to maximize performance and efficiency.
And I think a lot of companies just waste time on, frankly, metrics that don't actually matter, whether they're holding their marketing team accountable for them, what that, you know, Jeff aptly alluded to before, sales team or whatever other, you know, resources are across the company.
Finally, then and only then. So rather than starting up starting with this inside out type of approach where you go, okay. We're gonna, you we're gonna run this playbook. This is what our funnel math is gonna look like because this is what the industry standards are.
Now that you've gone from milestones that actually matter, understanding your go to market and distilling those down into metrics that you know positively correlate with customer outcomes, that's when you cascade it down to all of your operating plans. Right? And so when I think about operating plans, the stuff that I live in day to day, it's funnel math to create accountability across sales, marketing, and customer success. What are expected conversion rates?
What are those inputs in terms of the metrics that actually matter? It's a capacity plan to determine, hey. Based on those activities that you've gotta run across the sales organization, the CX organization, how many of those activities can each respective resource handle, and how do we need to scale our headcount to support the anticipated demand or anticipated, ACV?
It's an operating cadence. Right? So the heartbeat of the business, in my opinion, where, hey. Every quarter is roughly thirteen weeks, and you're looking at those and saying, week one, we're gonna do this. We're gonna focus on these metrics all the way through to week thirteen so that you can get the rhythm of the business going in a very predictable and scalable manner.
Your board of directors plan. I don't know if, the Fulcrum or, insight guys are still in the room, but, hopefully, you're building yourself some nice cushion into your, board of directors plans and understanding where the leverage is.
And then going back to this theme of, hey, breaking the four minute mile mark, this is where you put your team on basically a workout plan to continually improve metrics. Right? So you show quarter over quarter improvements in these operating metrics, and you should be very clear about the source of sources of leverage. Right? And so when people think about sources of leverage, hey. It could come through automation making your sales reps and marketing teams more efficient.
Frankly, it can come from working harder. There's a lot of kind of, like, lack of lackadaisical type of attitudes in organizations nowadays, and the human capital is not, you know, at the level of productivity that most executives are desirous of. It could come from greater returns based on time allocation. Right? Because instead of pounding the phones and getting zero results, your SDR team now knows the s or the metrics that actually matter and know the activities to lean in on, and therefore, you're introducing leverage that way. There's a million different ways that you can introduce leverage, but doing it blindly in a spreadsheet without understanding where the leverage is going to come from generally creates issues, and it creates plans that you ultimately miss.
So, finally, setting the vision and kind of executing on this in the, the final five minutes that I've got up here. So this is the best way that I could distill the way that I've historically set the vision and gotten the team to execute once I've built a relatively audacious plan. Right? I've inherited teams where, you know, to continue with the analogy, they're running a fifteen minute mile, and it's gonna take me three years to get them running a four minute mile, but I've gotta chart the path to getting them down to a four minute mile.
I've inherited teams where they're running a five and a half minute mile, and it's just gonna take some optimization. Right? And, you know, kind of a nice clean short term plan to get them to best in class. But these are the things that I've consistently done to get there.
So number one, think that going back to setting the vision. Right? You've gotta make two clear statements about what your vision is, and you've gotta repeat them ad nauseam. Like, you have got to beat them into people's head to where it becomes a part of the corporate DNA.
One of those, in my opinion, needs to be an external vision. Right? Because not everybody's motivated by bringing home the largest w two or whatever, you know, the financial motive, might be internally. Right?
So I think that you've gotta say, hey. We're gonna change or disrupt the market by doing this. Right? This is the endgame for this company in an external facing fashion.
So I think you've gotta do that. Number two, you gotta have an internal vision. Right? Like so your sales organization has gotta have an identity.
Your marketing organization has got to have an identity, to maximize performance. And so in my experience on the, you know, kind of the internal vision, most teams wanna be high performing teams. Right? Especially in sales.
Right? They wanna go, okay. We are the market leader in enterprise sales. We bring home the biggest w twos, and we do, you know, these five other things.
And this can also tie into company operating metrics. Right? We're gonna be a high growth and profitable business so that everybody's really, really clear on the charter and why when you're driving them hard towards a very specific vision, they understand the inputs that are going in and the associated outputs.
Second, yeah, connect the qualitative vision with a quantitative. I'll actually kinda come back to that.
Demonstrating the path for continual improvement, this is where a lot of the intellectual work goes in because in my experience, I see a lot of board plans where people go, oh, we're just gonna get leverage here. You know, that conversion rate's gonna go up. Leads are going to increase, and then they continually fall short. Again, you've gotta be very intentional about the leverage that you're getting, quantify that leverage, and not go from point a to z overnight depending on, you know, kind of what the status of that team currently is.
Fourth, you want to quantify the impact of the individuals executing on the plan. Right? They're gonna have personal motivations. Right?
And, again, that could be bringing home a huge w two. It could be getting promoted. It could be having more work life balance. You're not gonna be able to appeal to everybody, but you wanna figure out what you're optimizing for for the masses and show them the path to that by executing on what the corporate plan is that you developed.
Right?
And I think that's a really, really critical component because at the end of the day, right, people wanna know what's in it for me.
And then fifth, and this is final. Right? Driving accountability and execution at an at an extreme level, to get companies fit. It's not fun.
Right? If you're running a ten minute mile and you need to run a four minute mile, there's gonna be a lot of discomfort along the way. If you're running a ten minute mile and wanna run a seven minute mile, it's gonna there's gonna be a lot of discomfort along the way, but the best possible way to get people on that plan to continual improvement is them explicitly opting in. Right?
And then you've earned the right. Right? When they've had the opportunity to say, I'm either in or I'm out and then, hey. We'll give you a good glide path to another role, another company, whatever it is.
When they go all in and they're bought in on the plan and they know what's in it for me, what's in it for the company, and they know the trend line and that it's that it's achievable, then you can maximize the efficacy, performance, and just well-being of your resources, in my opinion. So I know we're coming up on time, so I know we're coming up on time. So resources, in my opinion.
So I know we're coming up on time, so I'm gonna skip this one.
Thank you all for the time.
I've got a few minutes if there's any questions or anything that you guys would like.