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Demystifying the conversations we're already here at RRE and with our portfolio companies. In each episode, your hosts, Will Porteous, Raju Rishi, and Jason Black will dive deeply into topics that are shaping the future, from satellite technology to digital health, to venture investing, and much more.
Raju: There’s a squeaky dog toy in the background. I apologize about that.
Will: [laugh].
Raju: See, even podcasts don’t go to plan, sometimes. My wife buys my dog these, like, three dog toys, you know, in a bundle, and it’s usually Bark Box toys, actually. Bark Box is—
Will: Yeah? That’s great.
Raju: —fantastic. Yeah, she buys them, and then he needs to play with all three, and it’s incessant squeaking. And you can take away one, you can take away two, but the third one is inevitably difficult to find, and [unintelligible 00:00:27] where it is. So, anyway. So—
Will: [laugh].
Raju: —apologies for the squeakiness.
Will: Well, squeaky dog toys, you know, it’s… you want to be able to hear the squeaky dog toy in your business, and know what’s changed.
Raju: Yes, exactly.
Raju: I’m Raju Rishi.
Will: And I’m Will Porteous. Welcome to RRE POV, the show in which we record the conversations we’re already having among ourselves, our entrepreneurs, and industry leaders for you to listen in on.
Raju: Hello, RRE POV listeners. I’m Raju Rishi, and I’m joined by my partner Will Porteous today, and we are going to discuss the power of annual budgeting and planning cycle for startups.
Will: [laugh].
Raju: I know, it sounds really exciting. Some of you may think it’s boring, but I cannot stress enough how valuable this is at every stage of a startup. So, I’m going to kick it off a little bit for you, Will, and just ask you one question—
Will: Sure.
Raju: —in your just history with startups and operations, you know, what do you think the value of the annual plan is? And tell me the obvious, and maybe a little bit of the unobvious, if you have some ideas.
Will: Well, I think particularly for early-stage companies, every annual plan is wrong the moment after it’s been created—
Raju: [laugh]. True. It’s true. It’s true.
Will: And so, the reality is, that the value of the plan is as much in the exercise, and in the discipline, and in forcing the team to commit to the hours, and to be clear-sighted about the assumptions that they’re making, and about the unknowns. And I think that it really brings to light the feeling and the understanding of the things that you can control as an entrepreneur and with a management team and the things that are beyond your control. And you and I have both watched a lot of companies, kind of, on that journey of understanding. We can control what we spend on rent, we can control what we spend on office supplies and on our staffing, but there’s a lot of other things we can’t control, like the timing of when we make our first sales, and what the magnitude of those sales are, and when customers are going to pay us, and when we’re going to close our next financing. And we’re going to do an enormous amount to try to bring those things under our control, and eventually, successful companies always do, but it is the act and the exercise of planning that ends up being most important. And that’s my first idea on this whole topic.
Raju: Yeah, I agree with you. I mean, the obvious is, you know, whatever stage you’re at is you’ve got to do cash planning, right? So, part of the plan gives you an idea of, like, how long can I stretch these dollars before I hit an inflection point in the business? When do I have to, sort of, think about fundraising? And I think that is, you know, sort of clear cut, but I also think that plans need to include, kind of, critical APIs for your business—not APIs, KPIs for your business.
And there’s obvious KPIs like revenue, right, number of customers, maybe churn, and expense. And early stage, yes, you can’t really count on the revenue, but you can control your expense, and you know, you start building that, but I also think that the plan needs to use metrics that differentiate your business. And this is where, like, it’s kind of nuanced, it’s tight, it’s per company, but, like, improvement in your core technology, for instance, right? You can actually—you have a little bit of control over that. Like, if you’re an AI company, what’s your hallucination rate or your accuracy rate, you know? For an infrastructure company, it might be uptime.
And as you get later, those KPIs might be, you know, unit economics, like, payback period. Are you upside down on each sale, or are you wildly profitable so you can afford to drop the price to close faster? So, the assumptions are really, really important. And I think, like, when I encourage my startups to create a plan, they’ll have the obvious high-level metrics, I want to see some KPIs that are sort of important to the business long-term, and then I want to see what their assumptions are, like, a whole page on assumptions, and kind of re-evaluate that as we go, over time. So, there are differences, you know, between early, mid, and late stage in terms of planning.
And you know, I know you’ve been a venture capitalist a long time, and you kind of touched on the early-stage pieces, but I think that there’s, you know, sort of differences in how you create the plan, and what your assumptions are as you grow. Let’s stay on the early stage for a little while.
Will: Sure.
Raju: Any, sort of, thoughts that you give your entrepreneurs on what that early-stage plan looks like? And I think you hit on one that’s super, super important, Will, which is what you can control and what you can’t control. So, can control, you can control expenses, you can control your burn, but any sort of tips on creating those plans beyond, sort of, that expense piece?
Will: So, I think in addition to looking at what you can control, one of the most important lenses for how you spend the money is to be very conscious of the spend that creates value. Engineers who work for the company building product creates value for the enterprise, right? The money that you spend on rent may be a necessary and justifiable expense to create the right conditions to allow those engineers to create value through product, and so it justifies itself in that regard. And I think that every kind of expenditure in the early stage needs to be held up against that rubric. I’m often critical of management teams that hire a lot of outside contractors in the early days of company because I like to see small, focused core teams, all of whom work for the enterprise.
And one of the challenges in companies like the ones we back is that when you have a lot of contractors who are working on core components of your product, not only is that spend going out of the doors of the company, but the expertise is also going to leave the company, and it’s not really accruing and creating value within the enterprise. And so, I like to see my teams focus their spend on this question of, how are we creating value with the pool of dollars that we have with a small core, effective group, kind of, operating at minimum viable scale?
Raju: I love that. I love it. I love the contractor point because that learning needs to—you know, sort of, intellectual capital needs to sit within the company in addition to codebase or whatever it is. I mean, you obviously going to keep the codebase or whatever product you’re creating, but the intellectual capital is just as vital. I do have a few other tips that I give my early-stage founders.
Will: Let’s hear them.
Raju: [laugh]. I’m going to tell you [laugh]. And so, one of them is, you know—and you said it: keep it lean—I always think about let folks have multiple roles, like the early-stage employees, and obviously your co-founders, and, you know, don’t really hire functional heads until—it’s almost like, keep it so lean that, you know, people are not threatening me to quit, but like, kind of getting there [laugh], unless you kind of fill somebody in that role. So, you know, kind of agree. Like, where is the battle?
But there’s some folks tend to want to hire, you know, one bring in a VP of finance or a controller or something like that. You can outsource some of those functions. So, you know, it’s contrary to sort of the consulting kinds of things. I think, like, outside hiring for, like, a controller or somebody, like, in that functional seat is okay, but allow people to take on customer service, as well as maybe HR or something like that because—
Will: Right.
Raju: —yeah, so keeping it lean. The second thing is, I actually encourage my early-stage entrepreneurs, to maybe create a monthly plan as opposed to a quarterly plan, early on because the business is shifting so often. You obviously want to move to quarterly the later you get because you want to model yourself after Wall Street [laugh]. I mean, that’s the easiest way to say things. And I think the later you get, they are not, like, massive monthly trajectory changes in your business. It is a little bit more of a battleship, and it’s harder to move left or right. But early days, you know, sort of the monthly objectives are telling you things. And the last thing I do for early-stage companies is, I build in a mid year re-forecast and a re-plan.
Will: [laugh]. I have to laugh because when you proposed this topic, one of the first things I thought of was, early in my venture career, I kept asking myself, why is June such a hard month for my companies? And it turns out that—
Raju: Hilarious.
Will: June is the month that you do the re-forecast, right? If you had a plan that you set in December or January, and then you missed your numbers in Q1, the Q1 board meeting was all basically like, okay, well, we missed in Q1 but we’re going to make it up in Q2 [laugh]. But the June board meeting is when you know you’re not going to make it up in Q2, and you sit with the management team and they say, “Uh, we have to do a replan at this point.” And I think you’re making a really crucial point, Raju, which is in that category of things that are beyond your control, that you don’t know, the big question hanging over every early-stage company is, can you forecast your business or not? Can you forecast the sales side of your business?
And until you can, you’re constantly re-planning, you’re constantly re-budgeting, you’re constantly resetting goals and expectations for the year. And it’s important to actually be honest about the fact that that’s just the phase that you’re in. It’s not a permanent—shouldn’t be—a permanent state of affairs. If it’s a permanent state of affairs, somebody isn’t going to be doing that job much longer. But exactly: plan to re-forecast, what a great observation.
Raju: Yeah, it actually is almost—it almost should be mandatory, right, because, I mean, it’s rare that you’re a seed-funded company, and, you know, you put down a bunch of assumptions on number of deals you’re going to have, or, if you’re a consumer-oriented you know, company, you know, how many people are going to download the app and what the churn rates are. You have to project it. You have to kind of create that plan, right? What had—I think Ben Franklin said it, “Failing to plan is planning to fail,” right? So—
Will: Right.
Raju: So, you kind of have to have the plan because it kind of puts when you’re going to hire if you hit it. And, you know, like, I need to have account reps, and I need to have customer service, and I need to have sales people, but you know, early-stage startups, they should articulate it, but then you kind of sit down with your board and say, what does this really look like after two quarters have gone by? So, kind of like, right, there with you. Let’s kind of move to the later-ish stages, you know? Sort of you’re operating and you hit plan, let’s say, for, you know, last year or, you know, slightly off on one dimension or another. What are the things that you’re kind of suggesting to your companies at those sort of mid to late-stage that you know you want to add into the plan, or you want to see in the plan?
Will: Well, I think this is where you really do start to look for real financial leadership, and rigor, and experience in FP&A in guiding the finance function of the company. And you know, it’s worth pausing for a moment and say, finance leadership always lags, and then grows kind of in step functions in these companies. And so, you talked about hiring a controller earlier; the reality is you’re really focused on cash at the earliest stages, and understanding burn, and starting to learn to forecast the sales side, which is really leadership’s responsibility. And then eventually, if you’ve got a business and you’re getting to the mid and later stages, as you asked, you’ve got to have someone who can draw a relationship between people, particularly sales resources or level of effort putting into selling, and top line results. And part of that is understanding how marketing spend plays a role in the growth of the organization.
And this is where experienced FP&A leadership from your industry can start to make a pretty massive difference. And any investor that you’re going to be in dialog with is actually going to care about the value of the assumptions that you’re making in that. And finance actually has a real role to play in articulating the value creation that’s happening through the enterprise. And at this stage of a company, if you’re not talking about what makes you really valuable, and if you’re not talking about that in quantitative terms, in terms that can be translated into exit value, into enterprise value, in the eyes of investors, you’re not actually doing your job in terms of thinking about the growth of the company.
Raju: I agree, I agree. When I look at those mid to late-stage companies in my portfolio, there’s a couple of suggestions I give them. I love what you said, and I agree with that FP&A function sort of being added in, and having some industry expertise to see if you’re kind of moving the ship in the right direction. I also like to expand the KPIs when it’s mid and late-stage to include leading indicators. And what I mean by that is, like, you know, if you’re a SaaS company, I mean, there’s a revenue target for sure, and there’s definitely, like, a bookings target and a churn target, and you know, sort of, you kind of see that kind of stuff, but the leading indicator to me would be the size of the pipeline.
So, if you can actually include the size of the pipeline for the quarter or for next quarter in the projections, you kind of know, do I have enough pipe, knowing our close rate, like, we close 35 to 50% of what we, you know, have in the pipe, are you going to hit your quarter? Because then, you know, like, oh, we’re kind of screwed, right? We don’t have enough.
Will: I love this. I used to really focus in on pipeline coverage metrics in my companies based on the stage that they had reached, right? Like you needed to be at four or five times pipeline coverage relative to your booking [unintelligible 00:15:35] in the early stages, to have a prayer—to have a prayer—of hitting your numbers. And I know you read those kind of metrics, like, just naturally as you look across your portfolios. And because if you’re seeing that in the management teams not seeing it, then there’s an issue.
Raju: Yeah. And they do, but they don’t, [laugh] sometimes.
Will: [laugh].
Raju: Everybody’s optimistic. Oh, you know, we’re going to close, you know, 50% of the pipe. And we all know, like, if you’re closing 50% of the pipe, you should probably become more aggressive, right? Like, you know, 50% or plus, it’s kind of rare. But like, let’s say it’s 25% right, do you have 4x the pipeline coverage?
And if you don’t, you better get on the ball and start developing in-quarter pipe, which means a lot more marketing spend. And so, there’s micro adjustments you could make to sort of speed things up, but that is a leading indicator. The other one I look at is quota capacity. Do you have enough reps to be able to close, right? Because we all know, sales, you know, we kind of expect miracles, but like, you know, sales, people can touch eight deals a quarter, right, like, simultaneously.
They’re not going to be able to touch 16 or 20. So, you know, you may be saying, like, oh, you know, like, we have four reps and they can just do more business, but that’s just not the way it works, right? You have to have enough ramped salespeople, and that is part of your plan. So, those leading indicators tend to be very important to me.
Will: I used to force my earlier-stage and mid-stage companies to quantify selling capacity at any given moment in time, selling capacity being defined as fully trained up reps who had a demonstrated track record of knowing how to close deals. And at that stage of companies, the failure rate on—we’re talking about enterprise companies generally, I think—but the failure rate on new salespeople was typically around 50%. So, half the salespeople you hired were probably not going to work out anyway. And so, within the half, how many were actually ramped and prepared to close deals? Because that’s the kind of, what I would call the rated selling capacity of the company at any given moment in time. And that tends to bring people into reality pretty quickly in terms of what’s going to happen in their quarter.
Raju: And there’s leading indicators in [every 00:18:02], like, a size-of-pipeline quota capacity is definitely leading indicator for, like, enterprise software companies. But there’s different metrics for consumer-oriented companies, like, what is your click-through rate? What is your close rate, you know? If that’s dipping, you might have to throw more money into marketing. You may want to analyze that as you’re sort of evaluating.
The other thing in late-stage or mid to late-stage is sort of building in those management roles in your budget. A lot of people ignore that until the very last minute, and they don’t realize that you can’t have a team of 12 reps that can effectively be managed by one individual. Possible, but like, you probably want to get, like, a middle manager in there at some point. And so, I like to see those things in like that, head count, growth, what roles are being filled? Not just like, hey, we got 35 people in sales; it’s what are the roles there as part of that? So, those are tips I get. I don’t know if you have any other thoughts on that, or we can move to the next topic.
Will: Well, the last thing I’d say is, I don’t like heroics [laugh]. Like, I we all love to celebrate the big quarter, and we all love to celebrate the big win, but when it only happens because the founder or the CEO goes in and closes 80% of the deals to get everything across the goal line, everyone should be worried because you don’t have an organization that’s scaling, and growing, and developing capability as a whole to achieve a plan and success. And so, I find that we have both worked with pretty incredible founders who are great leaders of their companies, as well as being great sales people who love to spend time with customers, but the ultimate scaling of every company depends on the dissemination of that knowledge and the skill set permeating down through the organization so that your best quarters are when lots of people make quota across the board, and you start to have a real culture of success within the sales organization, and success becomes a habit, and it becomes normal. And that’s when you really know you’ve got a healthy business.
Raju: Yeah, I always love those business plans that show, hey, we got sort of… linear—we got, like, a tick up in Q1, a tick up in Q2, a tick up in Q3, and Q4…
Will: [laugh].
Raju: It’s going to be huuuge. You know? And I’m like, okay, why is Q4 so huge? Like, what did you figure out in Q4? And I find that those are some—sometimes it’s legit, right? Like, they go, you know, we have this new feature coming out, and you know, it’s blah, blah, blah, blah or whatever, but oftentimes it’s like, you know, you want to show 40, 50% growth or a hundred percent growth annually, and a lot of it comes in Q4, but the reality is, like, that’s a little bit of a prayer, and there’s got to be logic around it.
Will: Yeah, exactly.
Raju: So, a couple of thoughts from you. What do you do with the plan if the shit hits the fan?
Will: [laugh].
Raju: What’s the sort of mantra there, and what are your go-to exercise for the business?
Will: Well, you know, Mike Tyson said, “Everyone has a plan until they get punched in the face.” And I think as CEO and founder, part of your job is to see when and how everything can go to hell, to step back, to take a moment, probably every week, and assess the macro environment around you, the things beyond your control, or the things that may be in your control that aren’t going well—it could be product quality or product maturity issues, could be product-market fit issues—and to force yourself—and sometimes it’s only yourself—to be really clear-eyed about the fact that things are really going to hell. And you know, companies fail because they run out of money. And oftentimes the difference between running out of money or not can be traced back to making really hard choices at a moment when you realized that things were going to hell, and other people didn’t want to acknowledge it, people didn’t want to believe it, but there is an awful lot of discipline in looking at an organization that’s up and running and saying, we have to cut the company in half because our product’s not working, we don’t have product-market fit, and if we don’t double our runway, we’re not going to make it.
And you and I have both seen a lot of companies where the macro has changed, something has moved against them, they’ve effectively been punched in the face, even if they don’t know it, and they’ve failed to absorb the knowledge of that and make changes. I call it living in reality. I’ve done diligence on a lot of companies where the management teams were just not living in reality of the way the world had changed, or the way that the world was perceiving them. And that, to me is that is kind of the crucial skill set of leadership. And it’s very hard thing to do.
Raju: There’s a squeaky dog toy in the background. I apologize about that.
Will: [laugh].
Raju: See, even podcasts don’t go to plan, sometimes. My wife buys my dog these, like, three dog toys, you know, in a bundle, and it’s usually Bark Box toys, actually. Bark Box is—
Will: Yeah? That’s great.
Raju: —fantastic. Yeah, she buys them, and then he needs to play with all three, and it’s incessant squeaking. And you can take away one, you can take away two, but the third one is inevitably difficult to find, and [unintelligible 00:23:36] where it is. So, anyway. So—
Will: [laugh].
Raju: —apologies for the squeakiness.
Will: Well, squeaky dog toys, you know, it’s… you want to be able to hear the squeaky dog toy in your business, and know what’s changed.
Raju: Yes, exactly. So, I agree with everything that you said. You know, when I—inevitably, every single company is going to have this… moment, it’s an inflection point, something’s going to go awry, right? My initial thought process is to sit down with the team, the founder, you know, maybe the executive team, and kind of figure out, is this a blip, or is this a tectonic shift, right? If it’s a blip, you know, you have a period of time to figure out, right, we had maybe an outage, and the outage is affecting a lot of customers, and so what’s your game plan to sort of rectify that?
We’ve got to assume it’s going to get out into the market and people, it’s going to affect your pipeline and your close rate, and you’re going to increase your churn, but if you can get underneath that, you can sort of self-correct. And maybe you have an aberration for a quarter, but that’s about it. But if it’s a tectonic shift, like, you have a regulatory change, right, imagine being, like, a company that’s built around optimizing data for wireless carriers, and wireless carriers all of a sudden say data is free, right? Now, it’s like, okay, well—okay, that’s a big you know, like, now you have to really extend your burn rate. You have to really extend your burn rate.
And so, there may be, like, a massive core correction that happens because the thesis under which you built the company has fundamentally changed. So, I think it’s the extent of that. But I do think it’s important to, sort of, hit up your board very quickly, have a quick call and say, is this something that we can sort of solve and we know how to solve it? Is it something that we don’t know how to solve, and we need a period of time to solve it, and we don’t want to necessarily, like, do a massive course correction, maybe just slight adjustments, or is this big enough that we have to really kind of rethink the business a bit?
Will: I think what you’ve just said is so important, and it’s one of those blind spots that I see with so many founders. Is it a failure to anticipate how the external environment can shift against them and make what they are doing less relevant? Over and over again, we have seen businesses built around a set of assumptions, and then the platform companies, the hyperscalers, Microsoft, Apple, Google, Meta, et cetera, who have a lot of market power will make a decision that they’re going to offer that capability for free, or some version of that capability for free that actually isn’t very good, but fundamentally, it changes that company’s market. And as an entrepreneur, I think you can’t predict the future, but you can scenario plan, and you can anticipate ways in which your world may change. And then, as you say, there’s a tactical set of choices to be made when the world has moved against you.
Raju: Yeah, yeah. All right, reverse question: what if you’re blowing away your targets? It’s mid-year, and you’re cranking. Like, sales is cooking. It’s like you’ve basically 2x your revenue targets for the core, and you see a pipeline, and things are cooking. Any tips and suggestions in that stage that usually you recommend?
Will: I mean, I think it’s—the first question you’ve got to ask yourself, is, what? What makes this growth sustainable that’s happening right now? So, you’ve got to look upstream at your pipeline. Did you actually just drain your pipeline by closing a whole bunch of big deals? Is stuff progressing through, or are you going to kind of hit a dry quarter soon?
And I think you’ve got to ask the questions at the time about your level of resources to continue or even accelerate growth, if the market is taking off for you. Years ago, I came to the conclusion that most of the markets we invest in tend to break both later than our companies think they’re going to, and then faster than they think they’re going to. And sort of knowing, if you’re really at a place where the market is hitting an inflection point is really fundamental. You’ve got to look around and see, is it just us? Are we seeing other people start to succeed? Is the market actually breaking in our favor?
And then you have to ask basic questions about level of resources. Do you actually have the cash to continue growing at this rate? You know, closing deals means fulfilling orders, means delivering capability, and if you are in something other than a pure zero marginal cost business like a software business, that means you’ve got to make stuff, that means you’ve got to ship stuff, that means you have working capital questions you’ve got to answer. And so, I think getting the resources to sustain the growth, if things are really happening, becomes your next order of business. So.
Raju: Yeah, I agree with you a hundred percent. I mean, I think the, you know, same principle applies to if the shit hits a fan or you’re blowing away your targets, and if you’re blowing away your targets, you know, the thing you want to understand is this a short term blip, or is this, like, a massive trajectory shift and trend, right? Did you have, like, a one sales rep that kind of just went wild and kind of closed some easy business, low-hanging fruit, or, you know, is every single rep doing this, and the market’s kind of coming to you because a competitor failed, and, you know, now you see customers coming. And so, I think that’s really important to understand, is how sustainable is this massive growth that you’re seeing?
And that’s why great boards will do wonders in this you know, space. They’ll say, look, we’ll give you aggressive financing, right? Like, just provide additional capital for the business, and maybe we go out to fundraise sooner because we can actually hit that Series C, Series D, Series E milestones ahead of the curve. I also encourage my entrepreneurs to sort of create relationships with the next round of financers, the next round of VCs that could fund the company. Because some of this happens.
It’s a little more aggressive, and you’re, like, if you got somebody around the [hoop 00:29:33], and now you’re just like, “Hey, listen, we have this, you know? We’re hitting inflection points earlier,” and if they can dive in, it gives those people an opportunity, actually, to preempt these really high quality deals because you need the capital. Or you sort of get a bridge or additional cash from your existing investors, and you go to town. And I think that’s, like, a really powerful thing, but really understanding whether that is abnormal and sustainable, or this is sort of the new status quo is kind of very, very important.
Will: You know, your point about financing sources is so right. As an entrepreneur, you want to have four or five people who aren’t invested in your company who you can pick up the phone and say, “You’ve been following our progress, so I just want you to know we just closed a massive deal. Like, we’re seeing this big inflection point. I haven’t even told the board yet, but I wanted to give you a call because you clearly have an interest in what we’re doing, and if you can see a pathway on financing, we should get together soon.” You and I love to get that call, [laugh] and sometimes that’s the fastest way to solve for your next round of financing.
Raju: Absolutely.
Will: The other thing that I have to ask—and this makes me an unpopular board member at times—but in these moments where you do see that inflection point, and you do see that big acceleration close, it’s crucially important to talk about margin and cash timing. Because everyone’s high-fiving about the big revenue number, but it’s actually, when does the cash hit, and is it actually profitable business? And you and I have both seen that the lag on, you know, kind of the deal desk function, revenue operations, how we make sure that every piece of business that we close meets our profitability targets. That’s a skill that companies develop later. And as soon as you start to succeed, you actually have to be asking those questions.
Raju: And you also have to ask a very, very important question, which is, should I raise my prices?
Will: Yes [laugh].
Raju: No seriously that’s, like—and that might be the healthier answer for the business. It might actually slow down sales a little bit because you got, like, everybody’s coming, but now you raise the prices, and it’s like, okay, everybody’s coming, but now we’re slowing down, but we’re more profitable per deal, right? Our unit economics have gotten a lot better. Where they were sort of marginal to begin with, and now they’re awesome. And I love awesome. [laugh].
Will: Absolutely.
Raju: All right, so let’s go on to some tips. Any tips that you have that you want to throw to the audience on, kind of, what you want them to think about when they’re doing planning, or some stuff that’s sort of nuanced that you have recommended in the past? If you don’t, I have three or four on my side, but if you’ve got something, throw them out there.
Will: I think one rubric to force on yourself as an entrepreneur is to recognize what stage of the business you’re in and what levels and what kinds of spending are appropriate for that level of the business. And I think it’s crucial to ask yourself, what is the minimum viable spend that I can create to prove all the things that I want to prove to justify the next big uptick in the business. And years ago, one of my fastest growing companies managed to keep its burn rate under 200,000 a month, every month, in scaling from zero to 117 million in revenue. It was absolutely breathtaking. They never burned more than $200,000 a month.
And then once they had a lot of resources and they raised a huge financing, they lost that discipline entirely, and that loss of discipline ultimately really hurt them. And so, that notion of minimum viable scale from a spend standpoint is something that we scrutinize a lot as investors, and that I think should become the kind of the essential first rubric for planning for the business.
Raju: I love that tip. I have a couple I’ll throw out. One is I love to see two to three annual cross-functional initiatives with quarterly measurements in the plan.
Will: Mmhm.
Raju: I know it sounds a little weird, but these initiatives are really designed to create the unlock for next year. And so, an example of this is, like, let’s do a churn reduction program, right? And that actually is more complicated than people think, right? You want your marketing and your sales people there because maybe they’re targeting the wrong types of customers and those are churning out. You want your customer service people here because they’re hearing why people are churning, and they’re trying to keep the renewals. And you want product people in the initiative.
And I’d like to see that happen if that’s an issue with the business. If you have no churn, obviously this is not something you do, but it’s a cross-functional initiative that you might sort of constitute at the beginning of the year, and then talk about at each board meeting, you know, each quarter, kind of, what are the lessons that we kind of unearth? A second example of something like that would be, like, a channel program. So, we all know that, like, sales people, ultimately, you can’t scale the organization with direct sales all your life. At some point you have to sort of constitute a channel program where you get business partners, and you actually need a cross-functional team for that, oddly.
You would think it would just be a sales team, but you need your marketing person there, you need your sales person there, and you need your product person there because if the channel is actually implementing the product, or they’re sort of activating the product, or they have some notion, some long-term involvement, you might need a product adjustment to allow the channel partner to do certain things. And obviously marketing needs to be able to now send leads to a channel, and sales does as well. And I don’t think it’s something that you can create overnight, so having this cross-functional initiative and showing its progress on a quarterly basis.
And the third example is we’re going to go after a new market. We’re going to go after a new geography or we’re going to go after new vertical. And you have marketing and sales and product on that team. But typically by the end of the year, that cross-functional initiative has set the stage, has given you all the data, and has created the relevant product for you to hit that objective next year, like, activate a channel program, fundamentally reduce churn, if there’s a product issue involved, and fundamentally activate a channel program in a way that doesn’t fall apart. Because, usually they fall apart because you just give your best sales manager the goal of creating a channel program, and they’re like reinventing the wheel every time.
Will: Well, I love this because, as you and I have seen, companies begin as people building product, and then they become people building product plus sales organizations, but you’re pushing your companies to have the cross-functional discipline to actually solve their bigger problems before they become problems, right? To look at churn and say, churn is complicated. We all have a role to play in solving this problem. And to look at them kind of from a horizontal perspective, and also to accelerate the development of other fundamental functions, be they customer support and success, be they kind of, you know, the channel partner programs that most companies don’t start on until kind of late, and wish that they had started sooner in those conversations.
Raju: Exactly. And the other tip I have is, like—I think we touched on this a little bit—is hiring this year for next year. So like, do you have enough sales reps hired and ramped by the end of the year to hit your quarterly number for next year? And people are like, okay, I created my plan for 2025. Well, your 2025 plan really should be looking at the 2026 plan so that you’re, like, making the hires.
Do you have enough engineers in ramp to build a product, you know? Do you have enough customer service reps for the number of clients that you’re going to have when you hit that massive Q4, you know, bookings number? And so, you know, I think the plan needs to include that. And I think sometimes people, they develop the 2025 plan without having developed 2026 plan. And so, I think what I’m saying by this is like, if you’re really building a rolling two year plan, and that is more important than just a single year plan because your end-of-year needs to take into account the subsequent year.
Will: You’re completely right, yeah.
Raju: Okay. So, now we’re going to sort of move to Gatling gun, if that’s okay with you, Will?
Will: Super.
Raju: Yeah, I love this. Okay, so first question: do you have a personal yearly plan?
Will: [laugh]. I actually do. It’s pretty qualitative, but I have an annual plan, and I break it down into quarters, and I do measure performance against targets, and I do a review. And, you know, sometimes I have to do a board meeting. It’s pretty tough [laugh].
Raju: Yeah. Yeah, yeah, yeah. Okay, you do board meetings.
Will: How about you?
Raju: Wow, yeah, I do. So, I kind of think that, you know, all people have three personal platforms, right? There’s—and these are vital, right—so the health, your personal health, you know, financial, and then family and social. And that’s your sort of [unintelligible 00:39:19]. So, I kind of create goals around these things. And they’re a little qualitative, but I have, like, a, you know, relatively healthy, I have a fitness plan, right?
So, when I say, like, what do I want to, you know, sort of do on a quarterly basis, or maybe for the year, and I don’t really break it down very granularly, but, you know, I want to maintain weight, build muscle, you know, I want to try new sports because you want to stay engaged, those kinds of things. And my financial plan, I have one. I mean, it’s largely relegated to my financial planner, but I do review that quarterly to see kind of how my investments are doing, and more importantly, like, what’s the year looking like, and what does the future look like? And then, you know the family and social plan I actually take pretty seriously, like, you know, we plan our vacations, I have a network of friends and family, and I want to sort of figure out how to do more in certain dimensions.
And, you know, maybe I’m over emphasizing—I’m over-committing time to some other things. So, it’s a loose plan like yours, but I think in those three dimensions, and I always pick one area of growth where I just want to do more. Like, this year is reading; I just want to read more. Like I said, it’s just—it fits the health because I think, you know, reading is, like, mentally invigorating and interesting. But anyway, okay, great. I’m glad you have a plan. You are such a fifth human, so you don’t need to find—
Will: Yeah. Well, I think my plan breaks down across those dimensions as well. One of the things that I think we both have to acknowledge about our business and about our plans is that the nature of what we do means that there are these moments where you need to focus all of your professional energy on something, and that can push out everything else. And I’ve learned over the years, I kind of have to architect my life and my annual plan with the understanding, before I know what it is, that there are going to be two or three of these things—at least—that happen every year, could be a portfolio company, could be a family member’s health challenge, could be something good that takes a lot of time, and that you need to be you need to build your life to handle the shocks and to handle the surprises because there will be.
Raju: Yeah, exactly. I always have that shit hit the fan on my plan moment. When I look at my weight, sometimes…
Will: [laugh].
Raju: —actually, I’m very good. Like, four years ago, yes.
Will: No, you’re very disciplined. I’ve seen—I know how disciplined you are. Yeah.
Raju: Yeah, yeah, yeah, very disciplined. But four years ago, I used to have that, oh my God. Like, what the hell just happened to the scale? It’s definitely broken, and I need to stop eating. Or it’s like, I’m really, really good about that now. But, you know, I do course corrections on that as well, you know? Have I spent enough time with my kids, each of my children because they’re like, in the four corners of the earth now, and I have to, like, you know, make an effort. Okay.
Will: Right? Yeah.
Raju: Thank you for that. Top of the head, worst plan in history?
Will: Ugh, you mean among companies I’ve worked with, worst plan in history?
Raju: Yeah, no, anything. Anything in life that you said, hey, somebody had a plan. It didn’t work.
Will: [laugh]. Yeah, yeah. I mean, I’m thinking of a portfolio company of ours that launched a cheap mobile email device, and basically right at the same time that Apple launched iPhone 2. And it didn’t matter. No one cared. It was a great product that they built and launched, and they got overwhelmed by the market energy going in a completely different direction. They were making something cheap and useful at a time when customers were buying things that were expensive and aspirational.
And so, I think the failure to accurately read the macro is what leads to really bad planning. And some of the most insightful sort of moments in my career that have stayed with me have been spending time with teams that are just not living in the reality of the way the world has changed around them. The last thing I’ll say on this is when I was a young associate at RRE, we were still coming off of the highest of highs of the telecom era. I know you remember what I’m talking about because you were living it—
Raju: I love it. I love it. I love it [laugh].
Will: —as the young associate, we would get these really interesting communications equipment deals, and I would go in to meet these teams, and I’d fly up to Boston—for some reason, a lot of them were in Boston—and I would go in, and there would be 20 hardware engineers, 20 software engineers, 10 guys doing QA and documentation, a fully kitted out management team, 60, 70 people, company burning 70 people, burning two-and-a-half million dollars a month, and all of their customers were going bankrupt. [laugh].
Raju: Yes, I remember. I was at Lucent at the time, and we would we were doing—we were basically saying, hey, buy this 5ESS switch from us for a lot of money, but, oh, don’t pay any money. Just give us warrants in your company.
Will: [laugh].
Raju: [unintelligible 00:44:16] belly up, you have no revenue, you’re just giving away this massive product, and now the company has this product that they want to resell. Never used, right?
Will: And the reality is that everyone around the table, management and board members who had invested huge amounts in this plan were running away from the reality of the whole world has changed. What you’re making, what you’re building, what you haven’t even finished building yet, nobody is going to buy. The customer is not going to be there when you go to try to sell it to them. And the hard choices were, in many cases, very hard for those companies to make., and going to visit them and do due diligence was sort of like waving goodbye at the end to something that you knew was going to hit the wall in the months ahead.
Raju: Exactly. So, I have two worst plans, not in my portfolio. One: New Coke.
Will: Well, yeah [laugh].
Raju: Say no more. Say no more. The second is actually really a brilliant diagram. Do you know Edward Tufte? Do you know who Tufte is?
Will: Of course. Yeah, yeah.
Raju: Tufte?
Will: I’m a huge fan, yes.
Raju: One of the best visualization people in the world. Like, could give you all of this information on a single piece of paper that would describe everything in multiple dimensions, maybe five to seven dimensions. And he had this one chart on Napoleon’s 1812 Russian campaign, which was the worst plan in history. Napoleon had this Russian campaign, lots of people, lots of warriors, soldiers that were coming in. Didn’t think about the weather, didn’t think about logistics, like, the distances and how to get supplies.
Didn’t think about scorched-earth tactics that the Russian soldiers were going to use. Didn’t think about disease. And in that single chart, you can see all of these dimensions being articulated and the shrinking of his army as they progress. A really bad plan. New Coke, and Napoleon’s 1812 Russian campaign. Okay. Best plan in history? In history, that you can think of? You’re a historian.
Will: Oh, I may be a historian, but I don’t know that I can name the best plan in history.
Raju: I’ll say one. I’ll say one.
Will: Yeah.
Raju: I think the Marshall Plan was pretty damn good.
Will: Yes.
Raju: After World War II, had to revive Europe, prevent communism, create political stability. I think it did a really damn good job.
Will: Well, I think that’s a great observation, Raju, because at the core principle there was the recognition that if you created stable economies with good jobs and a healthy environment for people, and you rebuilt institutions like schools and political infrastructure, that you would give people back the dignity and the civilized society that they craved. And that took a lot of vision. You were right.
Raju: Ok.
Will: great plan.
Raju: Best planning movie?
Will: [laugh]. I know you have something in mind [laugh].
Raju: I do. I do. Oceans Eleven.
Will: Of course [laugh].
Raju: Ocean’s Eleven.
Will: Yeah.
Raju: What a great planning movie.
Will: Yeah.
Raju: I love that movie. I love that movie. Last question: worst personal plan that you had?
Will: Ooh, worst personal plan. I think it was probably proposing to my wife on a big family Thanksgiving holiday [laugh].
Raju: That’s kind of an interesting one.
Will: I invited my future wife to spend Thanksgiving with our large extended family in Mississippi, where my mother’s family’s from. And I like everybody in that family, but the reality is that it should have been a much more private moment for the two of us. And so, that’s a plan that I didn’t think through and I regret it.
Raju: Yeah. She’s still married to my friend. She’s still—yeah.
Will: She is still married to me, but this does come up from time-to-time [laugh].
Raju: [laugh]. Ok. I have one. This one’s hilarious. So, my wife and I had, recently, we just had finished MIT, and we both went to work at Bell Labs, and we had some very good friends who were still very good friends who we’re still very good friends with, and we went to Europe.
And it was kind of like, we didn’t have a lot of money because we just gra—we had student loans, just bought new cars, and, you know, Bell Labs paid well, but like, you know, we were just early in our—we had no cash—not much cash saving. So, we went there, and we’re getting on the plane, and we’re like, how much cash do you have? And this, by the way, was many years ago. There’s no ATMs. There’s no ATMs.
There’s, like. And we’re sitting there, my wife and I looked at each other, it’s like, “Oh, I didn’t take any cash out.” And she didn’t take any ca—and we’re going for, like, two-and-a-half three weeks, and we’re kind of backtracking. We have some stuff booked right, like, train rides and stuff hotels. And that’s fine. They take credit cards, but, like, you do need cash, at that time.
Will: [laugh]. [unintelligible 00:49:16].
Raju: Like, cash was super important. And so, we’re looking in our wallets, and we have just barely anything. And we were like, okay, what are we going to do? Like, how do we stretch the dollars? How are we, like, you know, going to, like—so we were staying with friends, and I remember we were in, like, the Netherlands at one point, and we’re, you know, writing—we told my friend, like, “Hey, can you pay for dinner, and we’ll write you a personal check for all of these dinners?” Or, you know, we’ll basically—and we were like, I cannot believe—we made—I think we had, like, $25 between the two of us going into Europe for two weeks.
And I know the value of the dollar has gotten, you know, better or worse, like, you need more money, but even back then, 25 was nothing. Oh, my God. Everything was like, IOUs and, like, and, thank God—
Will: Yeah, that’s painful.
Raju: Yeah, thank God my friends were like, very, very, like, understanding. We paid everybody back, so that wasn’t an issue, but like, we got on the plane, and we, like, started sweating a little bit like, oh my God. Like, do we have enough to actually get to the hotel.
Will: [laugh].
Raju: [laugh]. So anyway—
Will: That’s pretty rough.
Raju: Horrible, cash planning. Horrible ca—okay, but such a memorable trip because we basically decided we’re not going to do anything extravagant, but we’re going to kind of live on the earth [laugh] sometimes, you know, tent and stuff like that where we should have—
Will: Wow.
Raju: —gotten a—yeah, it was fun. It was fun.
Will: Wow. Well, this has been a great conversation. Any more questions before we wrap up?
Raju: No, this is it. This was wonderful. This was wonderful. Thank you for the time.
Will: Well, I feel like we could have gone on for hours, but for all of our RRE POV listeners, I think the important thing to remember is that failing to plan is planning to fail, and everyone needs a plan for critical things they’re trying to do. Thanks for joining us today, and we look forward to being with you again soon.
Raju: Thank you for listening to RRE POV. You can keep up with the latest on the podcast at @RRE on X or rre.com, and on Apple Podcasts, Spotify, Google Podcasts, or wherever fine podcasts are distributed. We’ll see you next time.