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Eloqua Founder on managing through crisis like he did during 9/11 terrorist attacks
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Offer equity to employees instead of cash to save cash during crisis
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VC backed companies deserve just as much relief as laid off Restaurant workers, Organ says
Chatted with Eloqua founder Mark Organ via Skype last week on Friday. Full interview below. Scroll for quick highlights. Subscribe to podcast for more virus related interviews like this.
Mark Organ, fromer CEO of Influitive and co-founder of $1b+ winner Eloqua, doesn’t lose sleep over looking after his company’s interests. “I think we’re in survival mode,” says Organ. “At this point, I’m thinking less about the restaurant worker in Kentucky and more about how do I make sure my company survives this. When I get to the other side of this, I’ll be employing 3 or 4 times as many people.”
The CEO believes in the capitalism machine enough to deal with a hostile news headline after taking a stimulus loan. In the interview with our host Nathan Latka, Organ even steps into dangerous territory, claiming that “restaurants do not create as many high-tech sustainable jobs as [Influitive.]”
Copy Eloqua’s 9/11 Survival Playbook: Selling Stock to Employees
A novel approach to cut costs during Covid-19 would be to sell company stock to the employees. One of Organ’s clients rolled out an option to buy company stock with their compensation, which was a big hit.
The company had raised $22 million and, pre-virus, employed 320 people, which went down to 280 during the pandemic.
To keep the 280 remaining employees happy, but also to conserve cash, the company asked employees to take equity and 80% cash for their monthly salaries instead of 100% cash.
For an employee making $10k/mo, now they’d make $8k/mo during the crisis and they’d buy equity in the company with the remaining $2k/mo.
The company set up about $2m worth of company equity (last round valuation was about $100m) for this “survive the virus” program. All employees were on board.
The effective total equity of this program $2m/$100m comes out to about 2% of the company. On the other side of the virus, you end up with a hyper engaged workforce of 280 employees who all own a little bit more fo the company now. This was the same playbook Organ ran while managing his first company, Eloqua, during the 9/11 crisis.
Organ recalls the post 9/11 crisis, when his own company, Eloqua, had 4 months of cash runway left. They, too, opted to sell employees shares at an “arbitrary” price of $0.10 a share. The company, at the time, was valued around $2 million, and it wasn’t just most of the employees who bought the stocks—their parents and relatives did, too. This move alone, Organ recalls, extended the company’s lifetime from 4 months to 9 months.
Eloqua exited for $871 million in 2012, which meant some “pretty junior folks” at the company made “$10+ million” from the transaction. But it did critically extend the company’s runway, and, ironically, it did strengthen their internal motivation. The employees who bought shares in 2001 “really were owners” of Eloqua, which built a “strong, resilient culture.”
Smart VCs, Organ argues, are always happy to see employees get more ownership at the company, especially if they’re paying for it. Compared to the usual option packages, which are often superficial and ephemeral, actually buying stocks has a much stronger effect on morale. The employee-owners, Organ points out, will show up to annual shareholder meetings and be on a level playing field with other investors.
First Non-Ramped Sales People First, Then Engineers Working on Long Term Projects
If it does come to layoffs, many people face the dilemma of retaining engineers—who have a longer payback period—versus salespeople. Organ says he would let go of non-quota-carrying sales representatives. “In a time of crisis your cost of capital is enormous, which means that you need to get payback very quickly with a high level of certainty,” the CEO explains. “A new sales rep is going to be a very uncertain investment, it’s gonna take too long. If you have 4 reps and one of them is still ramping, cut the one that’s ramping.”
As far as engineers are concerned, Organ suggests retaining ones that are going to generate payback within 6 months. Horizon 3 investments—the long-term, risky ones—are gone for now, Organ says. There should be room for one Horizon 2 investment—the one which would generate 10x the churn within 2 years. “Everyone else has got to be zeroed in on the current customers and do whatever it takes to minimize churn, especially things that reduce cost and risk for our customers,” the CEO explains.
It may look like a short term perspective, Organ adds, but your company may be the only one left standing after the whole Covid-19 situation, and then “you can do whatever you want.”
3 Ways to Cut Payroll Costs During Covid-19 Without Endangering Critical Operations
Organ built and grew Influitive to $12 million in annual revenue before he appointed Dan McCall as the new CEO. What would his advice be to other CEOs trying to figure out the optimal action plan during the Covid-19 epidemic?
Strong defense, Organ says, is paramount. “It’s difficult to innovate for new products and services until we know we have enough runway,” the CEO explains his rationale. Smart defense, Organ says, involves flexibility: one of his clients managed to save some 20% on payroll costs by introducing 4-day workweeks, instead of laying people off. The employees are grateful to keep their jobs, and the business doesn’t face permanent damage.
If layoffs are inevitable, Organ advocates strict employee prioritization. “Employee 1,” the founder-and-CEO, could be considered irreplaceable. “Who else do we absolutely need?” Organ asks.
“Okay, I need someone in finance, I need someone in marketing. Build up from the bottom, instead of coming down from the top.”
Another one of Organ’s clients planned to let go 20% of the workforce. After a careful cost-benefit analysis, he ended up laying off 30% of his employees. This was, Organ considers, the optimal solution, since it gave the client company critical runway while not endangering any core operations. You can always fill those non-essential positions later, Influitive CEO says, especially now.
How Much Cash Runway Should You Have to Survive COVID-19?
If you do choose to sell employees stock to extend your lifetime, you should aim to extend their runway to at least 9 months. “I think most good founders and CEOs can figure how to get their company profitable in 9 months,” Organ says. “9 months for me is the absolute minimum, and it’s exactly what I did at Eloqua.”
Overall, Organ suggests adding 10% churn to your Covid-19 9-month recovery plan. New sales growth is going to be “pretty anemic” during this period.
Mark Organ: Pivot to Services to Stay Profitable, then Do Whatever You Want
In these tough times, Organ coaches clients to cut partners and focus on services. “I think services is really a missed opportunity for a lot of SaaS companies,” the CEO says. If startups can enjoy the luxury of focusing on high-margin SaaS products during the prosperous times of 200% YoY growth, now it’s “all about survival.” Lower-margins services can save the day be the lifeboat many CEOs desperately seek.
“Especially when your customers themselves are letting go of people, there are myriads of opportunities to spend more time with customers, especially with senior customers” Organ says. “And understand more in-depth how they’re using your software, what other software they are using. What are they using spreadsheets for, what are they using CRM for? And figure out what else you can do, because there’s probably more you can do.”
Right now, Organ adds, it doesn’t really matter what VCs think, while staying cash-flow positive plays a huge role in any company’s success. To make sure your core offer adapts to the changing needs, Organ offers to “think more like a services company.” There’s lots of opportunities to deliver services at $200/hour and higher, CEO says.
Organ argues that as a SaaS provider, you’re already an expert on something. And you’re already doing services—consultations and proposals are services, just essentially done for free by SaaS providers.
Steps SaaS Founders Should Take to Get US Governement Stimulus Money via Paycheck Protection Program (PPP)
Within the $2 trillion US stimulus bill, $350 billion are to become loans for businesses with fewer than 500 employees. These loans will, hopefully, help SMBs cope with insurance, payroll and utility expenses to avoid layoffs. As of April 3rd, loans are capped at $10 million per business.
Here’s some real-world math of how this could work. Say, you have 10 employees that you pay $100,000 per year. Here’s the formula of how much you could get from the government:
10 (number of employees) x $100,000 (average salary) / 12 x 2.5 = $208,333 (loan received)
It’s important to note that loan-eligible salaries are capped at $100,000 a year. So if you have someone on the payroll whom you pay $200,000, the loan amount you’ll get for that employee is as if they’d be making only $100,000. Read: you’ll get 2.5 months’ worth of payroll, with a salary cap at $100,000.
Free money comes in handy, but a debate is sharpening on whether VC-backed firms should be eligible for payroll stimulus. In the eyes of the public, a software firm with $30 million still in the bank from their fresh Series X round and 12 remote employees isn’t exactly the frontline in the war against economic downswings, compared to, say, laid-off waiters in Kentucky.
More info here: https://blog.getlatka.com/saas-guide-coronavirus-covid-loan-program/
