The Science of Scaling · 16 May 2024
How to Perfect Land and Expand w/ Kyle Duffy (VC, Gradient Ventures)
These are notes on the conversation, checked against its transcript. The episode itself has the full discussion.
In brief
Kyle Duffy, a former go-to-market operator now a VC at Gradient Ventures (part of Alphabet), where he invests in early-stage AI and machine learning companies, joins host Mark Roberge, a VC at Stage 2 Capital, for The Science of Scaling. They discuss why early-stage founders underweight expansion revenue, how to set up land-and-expand comp, pricing, onboarding and sales and customer success teams, and how AI products are being taken to market. The central argument is that founders should land with a narrow, lower-risk entry point and design for expansion from the start.
For founders
- Choose an entry product or team with low friction for the customer, and leave room in the account to expand from it.
- Make sure customers onboard correctly and see value, since Kyle's data review found failed onboarding was probably the top reason customers churned or did not expand.
- Keep opening prices low enough to leave room for expansion rather than maximising opening annual contract value.
- Do not swing too far away from services, because services help customers stick even though they are valued well below software revenue.
- Have 10 to 12 customer conversations per week in the early stage, as Kyle suggests.
For revenue leaders
- Pay account executives on net new business from existing customers as well as new logos, but not on renewals, so they are motivated to grow accounts.
- Organise sales and customer success around shared accounts in pods to reduce silos as the team grows.
- Let customer success managers watch for expansion signals and bring in the account executive, who owns net new expansion revenue.
- Treat expansion revenue as good revenue, since Kyle says its CAC is lower than the cost of net new customers.
- When procurement cycles are long, enter an enterprise with the least risky application or a single team and expand from there.
What was said 28, most useful first
In 2023, longer procurement cycles made it easier to land with a sliver of the product or with one team at a larger enterprise, then expand. Listen
Kyle says procurement cycles lengthened in 2023. He says it is easier to get in the door either with a part of the product set that is less risky for the customer, or into one specific team at a larger enterprise to prove the model before going bigger within the account.
“it's easier to get in the door with either a sliver of your product set that's maybe less risky for the customer or into a group, one specific team at maybe a larger enterprise to prove out the model before going bigger within an account”
Listen to the episode Sales process & deals Link to this Report a problem
Pay account executives on net new expansion from existing customers, not on renewals. Listen
Kyle says it is fine for reps to sell a $25K deal rather than a six-figure deal to get in the door, and that comp should motivate them to grow the business later. The AE is comped on new business and on business from existing customers, but not on renewals. For example, if a $25K deal renews a year later at $50K, the AE is not paid on the initial $25K but is paid on the $25K of net new expansion.
“Making sure that the AE is comped not just on new business in the door, but also business coming from existing customers.”
Listen to the episode Sales team, hiring & comp Link to this Report a problem
Expansion revenue is good revenue, and its acquisition cost is lower than that of net new customers. Listen
Kyle says that when other VCs push back that AEs should hunt and not spend time on renewals and expansion, he does not think it is a waste of time, because it is revenue and good revenue. He says he will guarantee the CAC is lower on expansion revenue than on net new customers.
“I will guarantee the CAC is lower on that the cost to acquire that revenue is lower than a net new customer.”
Listen to the episode Metrics & finance Link to this Report a problem
The most common reason customers churn or fail to expand at his last company was that they never onboarded correctly. Listen
Kyle pushes back on the advice not to offer services, saying some products need a level of services to make customers successful. At his last company, data mining showed that churned customers mostly never onboarded correctly, which he says is probably the number one reason they could point to. He says customers must see value in the product and operationalize it successfully in order to expand.
“customers who churned. Ultimately, it was because they would never onboard correctly. It's probably the number one reason that we could point to.”
Listen to the episode Retention & customer success Link to this Report a problem
Account executives should own net new expansion revenue, while customer success managers look for expansion opportunities and bring in the AE. Listen
Kyle says he has a personal bias that the AE owns any net new expansion revenue, to keep customer success a trusted advisor to the customer. He says the CSM should constantly look and listen for expansion opportunities and know when to pull in the AE, who does the upsell or cross-sell, talks commercials and is commissioned on the net new expansion. He notes he has seen it work both ways.
“I have my personal bias to say that the account executive is going to own any net new expansion revenue and the reason for that is to keep customer success as a trusted advisor for the customer.”
Listen to the episode Sales team, hiring & comp Link to this Report a problem
Over-focusing on opening annual contract value can leave no room to expand, since customers who have used less than half of a year-long contract make the expansion conversation very hard. Listen
Mark says that while a high opening contract value accelerates short-term revenue and shows willingness to pay, many SaaS businesses reach the end of a year-long contract where the customer has used less than fifty percent of what they bought. He calls that a very challenging renewal conversation and a next-to-impossible expansion conversation. Keeping the opening price low keeps perceived value in line with what the customer pays and leaves room for expansion.
“a customer has used less than fifty percent of what they bought. That is a very challenging customer”
Listen to the episode Pricing & packaging Link to this Report a problem
In a large enterprise, start with the least risky AI application, one that does not overhaul operations or use the company's most proprietary data, then expand from there. Listen
Kyle says that when a big enterprise has a number of AI applications it could use, a company should start with the less risky one. That might be one that does not completely overhaul operations, does not require letting people go, and uses a data set that is less proprietary than the company's secret sauce. Entering with that frictionless application builds trust, and the company can expand from there.
“Let's start with the application that's less risky. So let's get in the door there.”
Mark is more bullish on AI use cases where incumbent platforms lack the data, such as sales coaching, than on forecasting or copilots where incumbents already hold the data. Listen
Mark says he has an opinion that across the specific go-to-market use cases, he would be more bullish where incumbents do not have the data. Incumbents already have the data to do AI forecasting and copilots, but he says they do not really have the data to do sales coaching, where a company could attach coaching activity to performance data.
“I'd be more bullish on the use cases where the incumbents do not have the data.”
Choose land modules that deliver value quickly, match the perceived customer need, act as a wedge for platform adoption and create high switching costs. Listen
Mark says that in a go-to-market assessment he wrote for a company he recently invested in, land and expand is becoming more common and generally preferred by customers, especially for large transformative technologies. To mitigate its negatives he picks land modules by four criteria: low time and effort to retainable value, alignment with the perceived rather than evangelized customer need, a strategic wedge for further platform adoption, and high switching costs once implemented.
“choosing the land product modules that fit the following four criteria. Number one, enable low time and effort to retainable value.”
Listen to the episode Strategy & market Link to this Report a problem
Early-stage founders focus too narrowly on new-customer acquisition and under-invest in expanding existing customers. Listen
Kyle says that at the early stage companies want revenue and customers in the door, and he does not think there is enough focus on customer success, specifically on how to expand the customers they already have. In his portfolio, many founders and early sales leaders have not focused on the customer in the past and are concentrated on getting new logos rather than on the opportunity to expand.
“I don't think there's enough focus spent on customer success and specifically around that how to expand customers that you already have”
Listen to the episode Retention & customer success Link to this Report a problem
Land and expand is most applicable when the company has something to expand, either a product that can be sold in parts or one that applies to several teams. Listen
Kyle says that, probably, the most applicable case is a company that has something to expand. That means either a product solution where part can be sold first and another part upsold later, or a product that applies to a number of different teams within an organization.
“I think probably the most applicable is it's a company that has something to expand”
Listen to the episode Strategy & market Link to this Report a problem
Founders should get specific about the persona they sell to first, align the whole company on it, and pick the least-friction entry point. Listen
Kyle says the foundation of land and expand is being very specific about who you sell to within the organization. Founders should ask what the least friction way into a customer is, and make sure everyone is aligned on the persona and ICP being sold to.
“Making sure that everyone is aligned around the foundation of the persona and the ICP that you're selling to.”
Listen to the episode Sales process & deals Link to this Report a problem
Early-stage founders should be having 10 to 12 customer conversations per week. Listen
Kyle says he usually tells early-stage founders they should be having 10 to 12 customer conversations per week, and if they are not, something is wrong.
“You should be having 10 to 12 customer conversations per week”
Services revenue is valued well below software revenue, but founders should not swing too far away from services. Listen
Mark recalls that in the late 1990s and early 2000s, investors and entrepreneurs confused services businesses with scalable software businesses. He says services revenue was valued at around one times, while good software revenue was valued at say ten times, so companies swung too far toward software. He suggests a mix of around ninety percent software and ten percent services can work, because services help make customers stick.
“Good software revenue is valued at say ten x.”
Listen to the episode Metrics & finance Link to this Report a problem
Silos between sales and customer success tend to grow as the team scales, so they need to be removed deliberately. Listen
Kyle says early teams stay aligned because they sit together, but over time that alignment can slip and silos form between teams, so he works to remove them. Co-locating the go-to-market team helps where possible, although it is not always possible in a remote world, and aligning sets of accounts across teams is more valuable than haphazard territories.
“over time you can lose some of that alignment, and silos can be created between the teams.”
Listen to the episode Sales team, hiring & comp Link to this Report a problem
Pod structures that align sales and customer success on the same accounts work well, especially for bigger accounts with an ABM strategy. Listen
Kyle says he has seen pod structures work well, especially where accounts are bigger and the company runs an ABM strategy. Aligning both sales and customer success around particular accounts, rather than haphazard territories, is valuable.
“you could see kind of pod structures work well, where for, you know, especially if it's bigger accounts, where you've got more of an ABM strategy.”
Listen to the episode Sales team, hiring & comp Link to this Report a problem
When sales and customer success sit apart, a salesperson may not learn which CSM has their account until it churns. Listen
Mark describes companies where sales sits on one floor and customer success on another, so the closing rep submits the deal and it is assigned to a CSM they never speak with. He says pods that physically sit together, or have most of each rep's customers go to the same CSMs, get the two talking about account issues, such as missed onboarding calls or questionable deals at quarter end.
“The only time the salesperson finds out which CSM got their account is when the account churns”
Listen to the episode Sales team, hiring & comp Link to this Report a problem
Once a customer sees value, they are less likely to push back on price when asked to roll the product out to a new team. Listen
Kyle says if a customer is in the door, experiencing the product and having a great experience, they are less likely to push back on price when the vendor asks them to roll the product out to a new team, because they already see the value.
“they're less likely to push back on price when you go and ask them to roll out the product to a new team because they already see that value.”
Listen to the episode Pricing & packaging Link to this Report a problem
Leave room for expansion in the initial pricing rather than pricing for the maximum upfront. Listen
Kyle says that from the initial pricing perspective, founders should make sure they leave room for expansion down the road. This applies whatever the pricing variable is, such as seats, API calls, consumption or a subscription model.
“From the initial pricing perspective, I think just making sure that you leave room for expansion down the road.”
Listen to the episode Pricing & packaging Link to this Report a problem
AI companies selling into legacy industries such as retail and legal find it easy to get meetings, but customers hesitate once they start rolling out AI. Listen
Kyle says he has seen AI companies verticalizing into industries like retail and legal, which are often more legacy. The excitement around AI makes it easier to get in the door and get meetings, and these companies are doing quite well at that. Once the sales conversation moves forward, customers hesitate because they do not quite know where to start.
“there's more hesitancy on the part of the customers as you roll out AI because they don't quite know where to start.”
Larger enterprises are especially scared about data security and compliance when rolling out AI products. Listen
Kyle says that customers hesitate when rolling out AI, and that the bigger enterprises especially are really scared about data security and compliance.
“Especially the bigger enterprises are really scared about the data security and compliance”
Kyle frames AI as human in the loop plus AI, applied across the sales cycle. Listen
Kyle says AI is a tool, and he believes it is human in the loop plus AI, which he expects to be one plus one equals three. The question is where to apply it, and he looks at it through the sales cycle, from building the sales foundation through prospecting and deal work.
“I believe it's human in the loop plus AI. It's going to be a one plus one equals three.”
Kyle sees AI useful at the top of the funnel for market analysis, building lists of the most relevant prospects and personalizing messaging. Listen
Kyle says he looks at the top of the funnel and prospecting, where AI can help analyze the market, understand how to build a list of the most relevant customers and prospects, and then personalize messaging. He says he has been researching this and is seeing some companies using AI in these ways.
“I look at the top of funnel and prospecting. So I think again here analyzing the markets”
Listen to the episode Pipeline & demand generation Link to this Report a problem
Kyle expects many startup AI innovations to be acquired by existing platforms, since there are already too many point solutions in the sales tech stack. Listen
Asked by Mark whether AI use cases that look like features incumbents could capture limit the opportunity for founders, Kyle says there are already too many point solutions layered onto the sales tech stack. He says startups will create much of the innovation, but because existing platforms have the reach, they will probably acquire some of this technology, and something like a virtual AI SDR is probably better integrated into an existing CRM than bought as a point solution.
“So I think we're going to see a lot of acquisitions in the space where maybe the innovation's coming from startups, but given that existing platforms have the reach, they're probably going to be acquiring some of this technology.”
Kyle expects AI to help sell turnkey self-service products, and thinks deals around $5K ACV will likely be served by AI bots in the not too distant future. Listen
Kyle says that for turnkey solutions, AI is going to help a lot on the sell side. He describes products that are self-service but may need some sales assist for now. He says that for deals around a $5K ACV, he thinks those will likely be handled by AI bots in the not too distant future.
“I think those will likely be serviced by AI bots in the not too distant future.”
Steady growth with high retention and expansion is a better foundation than tripling revenue with a leaky bucket. Listen
Mark asks whether a business tripling in revenue but losing half its customers is preferable to one growing steadily at 30% a year, where everybody loves the product, sticks around and expands. He says the latter might sound less sexy but is a far better foundation on which to build a company.
“Would you rather have a business that's tripling in revenue? but has a leaky bucket and half of them leave”
Listen to the episode Metrics & finance Link to this Report a problem
Start with a narrow first offering that customers are ready to buy, as Bezos did with books. Listen
Mark describes how Bezos quit his hedge fund job to start an e-commerce company but did not set out to start a bookstore. He made a list of fifty products and chose books, because customers were not yet ready to buy most things they could not touch and books had millions of unique titles and decent gross margins. Mark says this built the foundation and the decentralized delivery infrastructure to capture the bigger vision later.
“He created a list of fifty products and said which one would be the best to start with, and he chose books.”
Listen to the episode Strategy & market Link to this Report a problem
The best early-stage companies have a customer-obsessed founder, sales leader, customer success leader and product team. Listen
Kyle says the best companies he sees have a customer-obsessed founder, a customer-obsessed sales leader and a customer-obsessed head of customer success, and product also has to think about the customer from the beginning. He adds that early companies are creating raving fans of the product, not just customers.
“So I think across the board you have to be focused on the customer.”
Listen to the episode Leadership & culture Link to this Report a problem