Growth Efficiency = Growth/Cash Burn. $1 of cash burn generates $GE of net new revenue.

Low Growth Efficiency (GE) means low growth and high cash burn. The two most important financial negatives for a VC board member — other than a phone call asking for an emergency bridge to fund the next payroll.

Low GE causes your VC board members to look like the cartoon on the left.

Low GE results in very tense board meetings.

Low GE forces the board to consider three tough choices:

1. Just ignore the low Growth Efficiency. And push ahead.
2. Cut operating expenses.
3. Sell.

(1) Just Ignore it. And Push Ahead.

Most management teams say just have faith. Just believe in the plan and everything will be ok — despite the low growth rate and high cash burn today (ie, low GE).

From the outside, it looks like the company is waiting for a miracle.

Sometimes, faith is the right answer. Sometimes, it is not. The board’s job to determine which is which.

Faith is much easier if:

Do you see a Clear Path to Cash Flow Break Even (ie, Good GE)?

It is easier for boards to support a very high cash burn if the board sees a clear path to cash flow break even and a clear path to funding the burn rate.

Companies with recurring business models become cash flow positive if:

Clearly, both elements don’t have to be equal concurrently. For example, excess GTM contribution (new billings x gross margin > GTM expenses) can fund poor Non-GTM contribution, and vice versa. But, I find that this framework provides an useful path to cash flow break even by providing some guidance on how much to spend on GTM expenses and R&D.

This path to CFBE requires separate analysis of GTM and non-GTM

If the company has low GE, I mentally divide the business into two parts: GTM (which includes sales, marketing and business development) and non-GTM (which includes R&D, G&A). Then, we can examine the returns from each part, and how to improve the GE for each part.

Note: This is merely a mental financial modeling exercise. The real business cannot be separated into these two parts, since each part needs the other.

This analysis is summarized in the table below:

Non-GTM Expenses: When will renewals cover the R&D budget (and all non-GTM expenses) ?

Companies can have a low GE, despite having good GTM productivity, due a very large R&D budget. Some products just require a large R&D team.

I remember teams freaking out over the necessary R&D budget. They ask how can we afford to hire enough engineers.

As long as the revenue growth rate exceeds the R&D expense growth rate, this problem will be solved. It is only a question of when — or more importantly how much cash is required until then.

The chart below shows the cross over point, when the Renewal contribution (Renewals x Gross Margin) covers all non-GTM related expenses:

Two important observations about this chart:

1. the non GTM expenses (especially R&D) is increasing. It is not flat! The key question is not the growth of R&D expenses, but how much faster is billings growing than R&D.
2. the company can clearly see the cross over point one year in advance, since both next year’s renewals and next year’s R&D budget can be forecasted with high confidence. This clear confidence makes it much easier to tough out yet another year of high cash burn.

Life is much easier after achieving this cross over point (where renewals covers all non-GTM expenses), since the company now has a cash generator.

For example, many companies use the excess billings contribution to fund additional GTM expenses, even if the GTM productivity drops below the “good GTM productivity” threshold mentioned in the table above.

Since high growth solves the non-GTM expenses, we return to the key question.

GTM Expenses: Is the GTM Productivity good enough?

We have great GTM productivity if: GTM expenses = new billings x gross margin. This is a GTM productivity of 1.0. Basically, GTM is paying for itself with a 1 year payback.

Note: This target assumes that new billings are only recurring and have 1 year total contract value. The GTM productivity must be higher if the new billings are not recurring or have multi-year contract values.

This is great! Maybe too good; maybe the company should invest even more in GTM, even though the GTM productivity will decline.

A GTM productivity of 0.67 is “good enough” for SaaS companies with a high renewal rate. 0.67 means: new billings x gross margin = 0.67 x GTM expenses. This assumes a 1.5 year payback for GTM expenses.

GTM productivity turns out to be the critical question. And, thus a major focus of our efforts, as reflected in two recent posts:

Reviewing Go-To-Market results at Board Meetings

Once a company starts projecting revenue, I find myself asking the same Go-To-Market (GTM) questions at every board…

blog.stormventures.com

What if the GTM Results are Underwhelming?

We all have experienced board meetings where the company’s GTM results are underwhelming or confusing.

blog.stormventures.com

We find that if the GTM productivity is not good enough, then growth is not the answer. It requires a fundamental fix — which is hard.

(2) or (3): Cut Operating Expenses or Sell

Both can be tough decisions. But, if the fundamental GTM productivity cannot be fixed in a reasonable time, the company will need to cut operating expenses to buy more time to fix the GTM productivity or achieve GTM productivity through a sale.

If the Go-To-Market productivity is good enough, then fast growth will ultimately solve the company’s Growth Efficiency problem and the company will become cash flow positive.

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