SaaStr Podcast #178: Phil Fernandez, Former Marketo CEO & VP @ Shasta Ventures with 10 Key Lessons From Scaling Marketo to IPO

Phil Fernandez is a Silicon Valley veteran, with more than 35 years of experience building and leading breakout technology companies. Phil co-founded Marketo in 2006 and led the company as Chairman and CEO for a decade, overseeing its successful IPO and acquisition by Vista Equity Partners. Prior to Marketo, Phil served as president and COO of Epiphany, an enterprise customer relationship management (CRM) software company. Today, Phil is a Venture Partner with Shasta Ventures, the fund with a portfolio including the likes of Nest, eero, Zuora, Canva, and many more incredible companies. In Today’s Episode You Will Learn:
  • When is the right time to hire your first CRO? Where did Phil make a big mistake in who owns what revenue numbers? What are the traits that make the best CROs? How should they look to work with both sales and marketing to drive efficiency internally?

  • Why does Phil you must hire the most senior Chief People Officer as soon as you can? What does the role of “Chief People Officer” really embody? How should they look to work with HR internally? Who should they report to? How does this role change with a scaling organization?

  • How has Phil seen the relationship between average contract value and potential for expansion change? What is the correlation between an ongoing services component and both customer NPS and expansion? Where did Phil go wrong with this at Marketo?

  • How should emerging SaaS startups today be thinking about technical legacy debt? Why does Phil believe it is never to early to have a Head of Research function? How should this function work with the team to build the latest technology into new products?

  • Why did Phil sell Marketo to Vista Equity Partners? What was the thesis and big learnings from that experience? What does Phil mean when he says he did not “watch the clock properly?’’ How can founders today be proactively thinking about ramp time for sales reps, new product engagement, etc?

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Harry Stebbings
SaaStr
Phil Fernandez Transcript  Harry Stebbings:  Hello, and welcome back to another week in the world of SaaStr with me, Harry Stebbings. You can find me on Instagram @hstebbings1996. I’d absolutely love to see you there. You can suggest questions for future guests and be named in that episode, but to the show today. With SaaStr Paris just one week away, we thought what better way to show the quality of SaaStr’s events than with one of my favorites from the annual this year with Phil Fernandez, former CEO of Marketo, on the top 10 things he would have done differently with Marketo. For those who don’t know Phil, as I said, he’s a Silicon Valley veteran with more than 35 years of experience building and leading breakout technology companies. Phil co‑founded Marketo in 2006 and led the company as chairman and CEO for over a decade, overseeing its successful IPO and acquisition by Vista Equity Partners. Prior to Marketo, Phil served as president and COO of Epiphany, an enterprise customer relationship management software company. Today, Phil is a venture partner with Shasta Ventures, the firm with a portfolio including the likes of Nest, eero, Zuora, and Canva, just to name a few of their incredible companies. I do also have to say huge thank yous to Doug Pepper at Shasta for the intro to Phil many months ago. I really do so appreciate that. That’s quite enough from me. It’s now time to sit back and relax and enjoy one of my favorite talks from this year’s SaaStr Annual with Phil Fernandez. [drumroll] Phil Fernandez:  I’ve got 10 things that are worth talking to. The first, and I get asked this when I spend time with entrepreneurs these days as often as anything else, which is what’s a CRO? Should I have a CRO? What’s a CRO do? I didn’t get this right at Marketo. I had a SVP, amazing Bill Binch that ran the most amazing customer acquisition machine. I had a marketing that my co‑founder I had…At one point to try to look at scale I experimented with a Chief Revenue Officer over marketing and sales. That was a mistake. I would never do that again. My chief customer officer had the whole back end of the customer process. I had lots of moving parts. As I look at that and as I think about modern SaaS companies and how things are going now, I would do that very differently. I think, ultimately, the way this has to happen is companies need a chief revenue officer that’s a revenue person, that’s a salesperson, that’s somebody that’s out there about putting money on the board. It comes out of a sales background. It owns every aspect of revenue, soup to nuts. Planning for acquisition, how does the demand funnel work. I don’t mean that they necessarily own demand but they have to understand it. How does growth happen? How does cross‑sell, upsell, multiple product sales go? How does success happen? How do renewals happen? That needs to fit under one executive. If you start to put seams inside those because different people run different pieces of that it doesn’t work. Professional services can go do enablement. Techops someplace has support. Marketing is separate. I even wrote a book, my revenue disruption book. I talked about how marketing and sales need to come together and how there’s lots in common and differences. As I’ve reflected over the years, I continue to realize how different marketing and sales are. Marketing is a long range strategic function. Sales is a right now, make the quota kind of function. I think marketing needs to be separate from the CRO but having one person that owns all of revenue is how I would do it over. We’re going to come back and we’re going to talk about revops in a couple of minutes because I think that’s one of the most important pieces of wisdom I would have to share. Last time, broken up. Next time, one chief revenue officer that owns every aspect of revenue. One person to ask to own that entire piece. Now we’ll shift gears just a little bit. I originally called this a CPO. I realized everybody’s going to think it was a chief product officer so I invented this term, CPeopleO. It looks a little funny but this is one of the lessons that I took away from Marketo that I think everybody can learn from. It will be a little bit controversial. I outsourced HR for a number of years at Marketo. As we were growing, brought in a great operational VP that could make sure we could do payroll, and we’d have benefits, and take care of the shop. It was only after we went public and had grown that I actually went out and found an amazing, very, very senior Chief People Officer. She’s now doing that job at Docusign here in the city. It was transformative to me to have this kind of an individual and this kind of an executive in the company that was able to look after the people function in the business. One of the things that I would say is that if you’re building a business you’re watching pennies. You’ve got investors that are asking you what your zero cash date’s going to be. You’re thinking about your next investment. All of those things make it really hard to make investments that aren’t in product or in go to market in the early stages of the company. I assert that you ought to hire the most senior, most capable, most executive chief people officer as soon as you can. If you’ve got 20 or 30 people or 40 people in the company, if you’re scaling, if you’re growing you need to have an HR function up and running. I read an expose just in “Business Insider” yesterday about a company that got into some scale and didn’t have an HR function and in fact had some goofy stuff going on with harassment in the company. There was no outlet for where that can happen. I think it’s a terribly important thing to do in a business. You need to hire the most senior HR person you can find. They need to report to the CEO, to have that direct pipeline and to have that kind of trust that comes in. This is really important because, number one, we are all in a global fight for talent. There is no safe refuge. I planted labs all over the world when we were at Marketo. We could no sooner be anyplace than Facebook, and Google, and everybody else come pounding in and started fighting for talent. If you don’t have somebody that’s helping you from day one think about that global fight for talent you’re going to lose compared to people that do. In this world, no matter what the tone at the top is, no matter how powerful the culture is in the company you need help to build a culture. You need somebody that’s a safe place to ensure that even if you’re setting the right tone at the top everybody in the organization feels empowered, feels safe, feels that they have a place to go. I think this is one of the most important things always, but even in the culture of the #metoo movement and other things today. I can’t say enough about how important this is. You still might not get the kind of amazing executive I was able to hire after IPO, but go big on this function. Go early on this function. Related to this a little bit, and another interesting lesson I learned at Marketo, was how to integrate social responsibility, community involvement, a perspective in the company beyond just the business. I didn’t do that at all when I started Marketo. I’m super high driving. My greatest weakness in the world is every time I get to the top of a hill, we accomplish something, we ship a product, we get our biggest customer, we land whatever, I get to the top of that hill and I say, “Great, let’s go on to the next one,” and forget to give people time. Culturally, being able to create that kind of space in a culture is important in general. I think one of the things that I realize is how important it is to start to integrate that set of ideas more broadly with volunteerism, with community, with creating an environment where a company doesn’t exist as an island but instead exists in the community and in the places that it operates. At Marketo we had a volunteer time off program, but no real program about it. We had grass roots encouragement for people to do things but there wasn’t very much that was going on. I would encourage you as… Salesforce, of course, was amazing at this. Marc Benioff’s 1‑1‑1 program of instilling in that organization from day one a culture of giving back, a culture of volunteerism. I admire so many things about that company but it’s one of the things at the very top of the list of what I admire. Even if you are just figuring out how to raise your series A or you’re trying to figure out how to grow and scale a little bit, if you’re leading a company you ought to be thinking about how to start to bring things like social responsibility and community involvement into your program. You need to staff for it. This does not happen by magic. We had a lot of energy going on at Marketo about it but people had busy jobs about creating opportunities. Later in the days we actually staffed a senior director level individual in the company just to help propagate and drive forward our involvement in the community. This is a CEO led function. For me, it was an amazing epiphany when I happened on this idea that I could integrate my own personal beliefs about social justice and even political beliefs within limits into the company environment as opposed to how I had deeply compartmentalized all those things before. By being able to bring an idea of what the company stands for in the communities in which you operate changes the complexion of a company. That doesn’t mean everybody that works for you have to believe. In fact, it’s important to create a safe environment. It is important to lead from the perspective of what you believe in and to create that as an animating force in the company. I think it provides a dimension to the workforce that you’ll never get if you don’t do something like that. One of my great regrets…I could have. I would have. I should have. We were very close to setting up, in fact, some pre‑public stock for a foundation. I had one board member that wanted to lay down on the tracks about that and stopped me. I could have run over if I had had the chance. I could have won that one and I didn’t. I chickened out. It was a mistake. I’m not saying this is right for every company but think of that magic thing. When we were public, when we were a $300 million run rate company, when we had great community involvement programs I would have killed to be able to have some funds and some ability to be able to invest in giving back as part of the company. If you ever think about that, if it’s a moment, don’t miss that moment in your company to be able to set aside and plan for the future because it’s a special thing that you can only do once. This is kind of a weird one. I’m on the board of another public company in New York that’s fighting through the exact same issues that I did at Marketo. I think it happens to more than just us. That’s about how to think about enablement, and bringing customers alive, and how you charge for it, and the like. I personally, in the early days at Marketo, remember writing a web page about our customer services and support. I wrote this line that was on our website for two and a half or three years. It said, “At Marketo, your success doesn’t have a price.” Big mistake. That produced. It was a culture that, in fact, translated right into the sales organization where sales, then, picked up on that and started to tell everybody, “Don’t worry. It’s really easy. You’ll be up and running. Don’t bother. Don’t worry about what it is to get running. It’s easy.” As a result, we had these unstructured enablement programs. We got a mentality of, “It’s so easy that you just get in and get out. Let customers be alone.” That’s a mess if you don’t do something better than that. It will translate directly into churn. It will translate directly into limiting the lifetime value of your customers. There’s a psychological thing behind this that I think is a lot of lessons, which is that if people don’t put skin in the game, if they don’t have a mental commitment and a financial commitment to what you’re asking them to do it’s really easy to get distracted. It’s really easy not to follow through. You see that. I see this in SaaS companies over and over and over again where a sale takes place but the customer never really quite gets there with the product. I think you should have expensive services with every time you sell a product. You should ask people to make a commitment to your product, to sign up to a one‑time check to be able to get live on your product. That gives you the ability to lavish attention on them. That gives them the psychological commitment that they need to follow through. I think it’s actually, even though you lose a deal here and there because you’re a little more expensive or whatever else, in terms of lifetime value of the customer I pretty much guarantee you’re going to win. It’s very important if you’re starting to think about this. If you have a service intensive product, as well, create choice. Create opportunity. Don’t just do it in house. Do some capability, but also work very early days at building partners and building a network of people because it’s quite remarkable. You can look at the statistics. I did it. I saw it at Marketo. I’ve seen it at other companies. The more there’s an ongoing how‑to services relationship, whether it’s you or a partner that’s engaged with the customer over time, the odds of a renewal, the odds of growth, the odds of success go up by a factor of who knows what. 2, 4, 10, something like that in terms of being able to keep people, to grow, and stay with you. I think this is very, very important to manage and grow the overall base of the business. Ensure that that engagement is continuing. Success has to have a price. You’ve got to be making people to make that commitment to you very early on. This is one of the important ones. It’s one of the ones that I’m so thrilled to see finally. That I see a dialog happening in the Valley. I see a dialog happening in the SaaS community overall about the amazing importance of this function that I call revops. It’s been called sales ops very frequently. I think revops is a very, very much better term. At Marketo, we went for the longest time…We had a great marketing ops function, a marketing that figured out how the whole demand funnel would work. My co‑founder John built this amazing ability to think about the marketing operation and how that impacted revenue. We had a sales ops function. We had in the chief customer officer that went and created a renewal ops function that figured out… The honest truth is they didn’t talk very much. They didn’t coordinate very well together. It really wasn’t very good. The second thing that I see all the time is when people start to build a sales ops function it turns out you go get the best Salesforce administrator you can possibly find and you ask them to be sales ops. They get Salesforce set up. They get the basic leads and opportunity models set up and all that kind of stuff. SFPC administration is not sales ops. It’s not revops. Revops is a very strategic function in a company. It’s about modeling. It’s about analysis. It’s about vision. It’s about understanding the business. I put adjacent to this, because it’s worth talking about. The other thing we did at Marketo was, for the longest time, the way we trained salespeople was we hired a new salesperson. We’d say, “Here, go sit next to Chipper. Go sit next to Kevin,” or whatever, “and do what they do because they’re making their numbers. Listen to what they do and do the same thing.” It doesn’t work very well when you’ve got 50 or 100 reps to hire but frankly it doesn’t work very well when you’ve got five to hire because people don’t really come to understand the nuance of the business. If I were doing it over, first of all, even by two or three million dollars in revenue I would be wanting to staff a VP level revops executive, an executive that ideally comes out of a sales or a revenue function but might be a financial planning and analysis, FP&A, person out of a finance organization. Somebody that knows how to model and understand the business. Somebody that knows and can communicate. One of the things that I look for in this kind of a person is somebody who can storytell, who can come back to me as an executive, come back to the team and say, “This is what’s happening in the revenue function. This is what’s working. This is how we should change it.” That ability to have that kind of a voice in the business, even very on, absolutely critical to designing the way in which you’re going to go to market, where you’re going to make money, how you’re going to grow customers, and ultimately how you build a great revenue, a good market operation. This person needs to have responsibility for the full end‑to‑end revenue operation. They need to look up into marketing, up into [inaudible 16:07] , understand where leads are coming from, what kind of a company’s marketing activities are taking place. What else is going on. Think about that all the way through the renewal process, the upsell process, the growth process. At the same time, I assert that if you’re not somehow, either inside or going outside, investing in formal sales training programs, formal sales certification programs where you actually ask salespeople to be tested or do practical demo kind of things to a sales trainer. A lot of the time you’ve got 10 reps. You are leaving money on the table because if you can take one more rep and make them 20 percent more productive or 30 percent more productive or, lo and behold, 10 reps just by a little bit you have paid for that function three times over before you’re done. Very, very good investment. This sales revops thing is tough. I’ve worked with sales executives that lean into it. In fact, I’ve worked with sales executives that are themselves revops people. They’re terrible sales executives because they’re not out selling. They’re worrying about the model instead. Don’t hire a sales leader, a CRO, that is. You want that person in sales if possible but a lot of times it doesn’t work. You’ve got a salesperson that just doesn’t get there. Then the answer’s just put him in finance. Give to a CFO. Give it to a director of finance. Have it report to the CEO. One way or the other, make sure this function exists and thrives in the business. This is quite the change from when I built Marketo. This focus on continuous expansion. Thinking not about maximum initial deal size. Not getting fixated. Every time we had a board meeting at Marketo we would get asked, “What’s our ASP? Has our average initial transaction size gone up?” People were fixated on that. I’m involved in another company right in the middle of their T2D3 in New York City these days. I’m on the board. The CEO there just made a strategic decision to completely change incentives, to go from a place where everything was incented about getting the maximum big deal to two‑year value of each initial customer. Changed sales comp plans and everything to think about how to think about continuous value creation. At Marketo, we have large monolithic products. We were always pushing for how big could we get the initial deal. Then we were really lousy, frankly, at how to come back and think about when and how to cross sell or upsell or start to grow customers. Even though we were a SaaS company we had every last micro detail about what our customers were doing. We had no telemetry flowing into the business or flowing into the sales team about who was using the product, how people were using the product, and when and how you should go cross sell somebody or whatever was happening. I think that’s all obsolete. A lot of people are getting this right but it’s really the most important thing to think about. Feature level packaging, smaller products, bite sized chunks. Design products so that they can be bought and consumed in ways so that people can get the toe in the water, then they can buy a little more. They can buy a little more with intentionally designed expansion pads. Product managers, product marketing people that either expect products or start to think about taking them to market are really good about what’s the positioning and really good about what’s the value message and all those things, but they don’t necessarily do such a good job at starting to think about what’s the two‑year path? What are the ways in which customers buy, and grow, and expand with products? Demand your product team or your product marketing team, at the same time they’re specing a product or starting to plan for go to market you ought to be able to answer the question of, “What’s their second purchase? What’s their third purchase? What’s their fourth purchase? What’s their fifth purchase?” so you can start to think about this continuous lifetime value. There are amazing products starting to hit the market, right? Apendo has some size. I talked about Aptrinsic that my long‑time tech leader Nick has been building here. These companies that are starting to build technologies that you can build into your own products and bring back into the organization for marketing, for selling, for lifetime value, for service and support. The kinds of telemetry you need to be able to understand how products are being used and to use your product as a demand engine. If somebody’s not using a key feature, the product ought to be telling the customer that they’re not using a key feature and incenting and driving towards a sale and feeding that right back into your sales team. You’ve got to build financial metrics. You’ve got to build quotas. You’ve got to make sure that the incremental sale and the growth of a customer is incented every bit as much as the big initial deal. You’ve got to celebrate it. At Marketo we’d cover a board with all the new deals. We didn’t have any board anyplace for upsells. Wrong answer. Celebrate life cycle revenue every step you go. I failed at this miserably, new products. I’ve been failing at this all my career, I think. I’ve been phenomenal at building new products. No problem creating new products at all but boy, figuring out how to get a second product, a third product, a fourth product, a fifth product to market and to have it start to expand and have the kind of effect on the revenue growth of a company. It’s a shockingly hard thing to do. Marketo, between our organic product creation and the M&A we did over time we grew to have five major product lines. For good reasons and bad, I made the decision to ask the same revenue team to sell all of them. Big, big mistake. Number one, because they had gotten really good at selling the first one. When you get really, really, really good at doing one thing it’s really hard to start to learn the next thing. Second, it’s hard when you’ve got the tyranny of a quarter breathing down your neck, or you’ve got a board that want to see how the revenue’s growing to be able not just say ultimately, “Yeah, I’m head of sales. I don’t care what product you sell. Just get the quarter made.” Big mistake. I did halfhearted things to create a general manager to own…I did the classic thing of putting a GM in the product marketing organization that had an overlay responsibility and a quota. That junk, it just doesn’t work from my point of view because sales is running at a different metabolism. They run over and around that kind of stuff too often. Downstream, we didn’t do the right stuff. Service and support kept doing their thing. We fundamentally squandered a lot of resources at Marketo, even in the context of all our success, building new products that never had the impact on revenue and growth that they should have. If I had it to do over, each of the new products I would have created a separate dedicated organization with a senior leader. Have to report to me or have them report to a senior executive, maybe to the CRO or maybe even to somebody other senior in the organization. You have to insist on separate quotas for the new product. If you don’t have the steely resolve to have a separate quote, to be able to say, “I don’t care if we’ve got to make the quarter. We have to sell this other product.” If you have a company bonus plan, if you have incentives, those incentives have to be at the very top level in the organization because everything in the business is working against getting this right. Finally, I’m the last person in the world to ever recommend a business book. If you know me, it’s just not my thing. Read Geoffrey Moore’s “Zone to Win.” It’s got a great thing about incubating new products that you need to know. Boy, tech is amazing, huh? Constant technology renewal. At Marketo, tech cycles were moving fast. We started to build the product on MySQL and no sooner did that happen and we were out that Hadoop came along. SQL stuff, and then AWS and cloud stuff. Now you’ve got containers and server lists. We’ve got the same stuff going on in the front end and products. We labeled all the old tech as tech dead. Tech dead isn’t as sexy as the new product boards. Don’t want to talk about tech dead. We didn’t renew our skill set at all adequately, either, because we were so focused on new product generation. If I had it to do over, you need a research function from day one. It might be the CTO. It might be another [inaudible 23:21] founder. You’ve got to be looking outside because if you aren’t reinventing your tech some new startup is going to grab the next new tech and they are going to beat you with it. I can basically promise you that. You’ve got to value technical currency as much as you value new products. You’ve got to allow schedule time in every last product cycle to be sure you’re staying current. It’s really hard when you’ve got to do features and you’ve got customers that want features. I guarantee you, if you don’t renew your technology and disrupt yourselves, somebody else will the way these tech cycles are moving. M&A is a great way to drive currency. Look at that as an option. Always be seeing more time. At Marketo we grew up. We made a decision to grow on the slipstream of Salesforce. They were growing so fast. It was nowhere near as big as they are now, obviously, in 2006. We got really focused on this lather, rinse, repeat kind of thing in one market. Later, we introduced Microsoft Dynamics support. This is obviously specific to our market. We started to take baby steps towards new TAM. Because we were so fixated on this one market all of our BDUE sources, all of our partner resources were focused on this one company as opposed to finding new friends, and expanding horizons, and thinking about what we would do next. No matter how good your initial TAM looks, no matter how big you think it is, don’t get comfortable. Always be thinking about what’s next. Get a strategic planning function. Force yourself, even series A or early series B level, to have a formal strategic planning process and think offensively. What are you going to do next? What’s the next market you can take? Think defensively. Salesforce bought ExactTarget three weeks after Marketo went IPO. That was a big gulp because I hadn’t done enough to think defensively about what happens if somebody makes a move like that. It turned out to be a non‑event, as it turned out, but it was a pretty big gulp when it happened because I hadn’t done enough planning for how the TAM might change if somebody makes a move. This has to be a top level organizational focus. Now we finally close here with my last set of thoughts. People ask me a lot of times, “What happened? Why did I sell the company to Vista? Why did Marketo, with all of our success, go down the path they did?” The answer is fundamentally I played the clock badly. By played the clock, I mean looking out and thinking about the time horizon of building the business. We scaled up just fine thinking about what next year was going to look like. We were at $100 million or maybe even $150 or so million of ARR in the business until this started to come home. We entered 2015 needing to add $50 million of ramped quota into the sales organization. That means you do productivity models and attainment models and that kind of stuff. That’s 60 or 70 new reps that we needed to hire to even make the numbers that people were expecting of the business, which means we needed at least 10 new sales managers to hire those 70 new reps. We were driving towards profitability. We were driving towards break even. All of those people were crossed because all these people other than the front line reps don’t make any money. You need a formal long range planning process by $50 million to think about the scale up thing. Most importantly, if I leave you with any thought you’ve got to accurately model what this is going to cost. I have seen so many companies where they’ve got a nine‑month sales ramp time but some board member says, “That’s too expensive. Make it six.” Do not do that because you’re lying to yourself. Live in the real world. Model how this works. Resist optimizing the magic number, your customer acquisition cost at the cost of the required investments and scale up because if you get late you will never be able to catch up. That’s what happened. As Vista saw that we had gotten behind. We were catching up. We were just on that up ramp and they hit that magic moment to come in and acquire a phenomenally great company at an expensive price, but still a good price. This is the lesson I took away. If you don’t watch the clock every time you scale it’s really, really easy to get behind with the time dimension of bringing revenue online. There you go. In 30 minutes, 10 things that I learned from. I hope each of you find at least one little thing to take away. [gong] Harry:  What an incredible talk that was from Phil. The most incredible learnings. I do want to say a huge thank you to him for giving up the time to do such a fantastic talk. That is the caliber that we have at SaaStr and we will see at SaaStr Paris. We would absolutely love to see you there. Likewise, we’d love to see you behind the scenes on Instagram @hstebbings1996. As I said, it’d be fantastic to see you there. As always, we so appreciate all your support and cannot wait to bring you next week’s episode. The post SaaStr Podcast #178: Phil Fernandez, Former Marketo CEO & VP @ Shasta Ventures with 10 Key Lessons From Scaling Marketo to IPO appeared first on SaaStr.

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