Previous month:
September 2023
Next month:
November 2023

October 2023

Taming the Annual Budget


While you are thinking about the overall strategy and initiatives for the upcoming year, you must also prepare a budget that enables you to fund these efforts. Generally speaking I’m in favor of a bottoms-up approach to management. However, when it comes to budgeting, a top-down approach is more efficient. The senior team (CEO, CFO, COO) should develop an overall financial model which includes top-line growth targets for bookings, ARR (Annual Recurring Revenue) and expenses including headcount. This budget model should include sufficient investment to ensure that the top initiatives will succeed.

Think carefully about the skills and headcount required on new initiatives so that you’re not inadvertently overloading people and undermining initiatives that are strategic to the company. For example, if you’ve got a critical new Engineering project, it needs an owner who is 100% focused on that. It can’t be a part-time job for someone who already has more than a full-time role already.

Typically, you might converge on the financial targets using a couple of different approaches:

  • Extrapolation from prior year performance based on a targeted growth rate

  • Bottoms up quota-based revenue model, factoring in retention, expansion, churn

  • Deal-based revenue model, based on average deal size, segments, geographic regions

  • New initiatives to expand the product offering, distribution channels or geographic reach

In the startup stage, there is no one-size-fits-all model for the annual forecast. It typically requires a triangulation of multiple approaches. For example, if you grew at 70% in the prior year you might adjust that number up to reflect your optimism around new product initiatives and your desire to be attractive to new investors in anticipation of further fundraising.

If you’ve got a direct sales model, you’ll want to understand how much new bookings are required and whether you have enough sales people to achieve those targets. If you’re seeing traction with larger customers or anticipate a new premium priced offering, you might expect larger deals and some expansion with existing customers.

There’s no one single way to build the model, but you want to make sure that you’re funding the right initiatives and staffing to achieve the desired results. If you’re expecting sales to double, you want to make sure there’s sufficient management, training, headcount and lead generation to support those efforts. As the number of customers expands, so does the requirement for customer success, support and so on.

Each department should create their own annual plan and budget. This will not be as sophisticated as the company’s annual plan, but should fit in with major initiatives. For example, if there’s an overall company goal to expand into Europe that will have implications for language translation, local sales and marketing, local language support, marketing events and so on. 

Each department will have their own departmental specific initiatives through the year. For example Engineering might have goals related to improving uptime or performance. Sales might have goals related to hiring and training. Marketing will have goals around product launches, lead generation, pipeline, analyst relations, PR, etc. A departmental plan could be as short as one or two pages, and ideally no longer than five. The plan should include a definition of what success will look like and identification of any key risks that should be addressed.

Departments Must Be In Sync

You’ll want to make sure that there is coordination between the departments so that Product, Engineering, Marketing, Sales are all in sync. If there’s a product launch expected in Q2, you want to make sure Engineering and Product are clear about delivery dates and major features. Marketing and Sales need to be collaborating on launch plans, training, lead generation and so on. You also need to make sure that you don’t set every major initiative and new hire to start in Q1. You will need to temper ambitions so that things are spread through the year.

I have found the best way to do this is to have departmental leaders share their plans with their peers and collaborate together to understand who is doing what and when. This works best if the executives can get on the same side of the table and work out their needs and priorities together. It also helps to understand the “client relationship” between departments. For example, Engineering is there to build the features that the Product team needs to win in the market. Marketing is signed up to deliver content and lead generation so that Sales can close more bigger deals, faster.

While you might not get 100% alignment across every issue facing every department, you want to avoid too many gaps. I have found that Sales always wants more leads than Marketing will sign up for. But if they can narrow the gap to 15%, that’s close enough. Especially, if there’s a possibility of larger deal sizes, or expansion which can provide some relief for required lead generation. But you want to avoid a gap that’s larger or requires a miracle in the fourth quarter.

Drive Toward Efficiency

Once a company has product-market fit and traction beyond $5-10m in ARR, you will typically want to drive increasing operational efficiency. So, if revenues are to double in the next year, that may require doubling or close to doubling the size of the Sales team to ensure proper quota coverage. However, you want to be careful that other departments such as Marketing, Sales, Support, Engineering, HR, Finance expand at a slower rate. Otherwise you may never get to break-even cash flow positive. 

There can be some back-and-forth discussion or negotiation with the department heads on headcount requirements. Are they hiring individual contributors or managers? At what level of seniority or location? Also consider whether to trade-off headcount for program expenses such as use of part-time contractors for specialized skills. Asking departmental leaders to create their own bottoms-up budgets and headcount plans without top-level targets and constraints takes too long to converge. You are best off assigning them their departmental headcount and dollar budgets and asking the departmental leaders to live within those constraints. How they spend the money and what roles they require is up to them.

Be Flexible

No plan or budget can be set in stone. The business will evolve as things proceed and it pays to be flexible. For example, if instead of hiring more Engineers, there’s a need for more QA, that’s a trade-off that the head of Engineering should be able to make, as long as they are living within the overall budget constraints.

It’s worth having a mid-year check-in on the budget to make sure that things have not gone off the rails. In particular, if hiring and expenses are running high and revenues are lagging, that may require you to reconsider which initiatives to double down on and which should be scaled back.

That said, you want to be careful not to set the expectation there’s more headcount to be had with an all-new budget process. You want to make sure you’re building a disciplined approach to growing the company.

Conquering the Dreaded Annual Plan


As we enter into the autumn season, it’s time to consider the dreaded annual plan. Most startups begin work on this in November and with the Christmas holidays and end of quarter, a lot of work gets crammed into the last week of December. Then departmental budgets and plans come together in January, jammed between the Sales kickoff and the board meeting. It’s a lot of pressure, but somehow everything gets done. And then next year, in an effort to reduce the pressure, the process starts a couple of weeks earlier. Yet the same dynamic plays out. It’s still a last minute scramble. You can try to tame the beast by giving it more time, but the budget process never gets any better. What’s going on?

For most startups, spending more time on the annual plan and budget doesn’t materially improve the business. And there’s a good argument that beyond a certain effort, more time spent on planning reduces time that could be spent on execution. (The Germans, depressed souls that they are, have a word for this. Verschlimmbesserung: an attempted improvement that only makes things worse.)

The annual planning process is important. But don’t mistake the map for the territory. I’ve rarely seen a plan make it all the way through the year without some adjustment. Think of it as a first draft for what you hope will happen in the coming year. It’s important to have a plan, but there’s no such thing as a perfect plan. A good plan is one that states your priorities, what you’re trying to accomplish and what resources you need to do it. It’s also good to identify the things you are saying “no” to in order to stay focused.

SWOT Analysis

If you’re not sure where to start, one approach I have used it so create the MBA standard SWOT analysis. This is a useful framework for identifying internal Strengths and Weaknesses and external Opportunities and Threats. Writing is a great way to clarify your thinking and focus on the top challenges your business faces. 

Think carefully about what is working and what’s not working. Where are you hitting your goals and where are you missing? How is your product landing with customers? What do customers like? What is unique in your offering? Where do you miss the mark? Are some segments performing better than others? Why? When customers churn what do they tell you? 

From your SWOT analysis you should identify a handful of top initiatives for the company. This should include hard unsolved problems. These are often complex problems (or opportunities) that span multiple departments. Are there new features, integrations or distribution methods that could open up additional markets? Are there limitations in your product that are preventing you from closing large deals? Are there additional opportunities in the market that your company is uniquely qualified to solve? Don’t get too hung up on which category items belong to. But generally speaking remember: Strengths and weaknesses are internal, opportunities and threats are external.

It’s unlikely that there will be easy answers to these questions. It may take days or weeks of contemplation, discussion and refinement before you get a clear picture of the priorities and what can and should be done. I have found that writing the SWOT process helped me identify internal problems as well as market opportunities. Sharing early drafts to executives and getting feedback, helped crystalize my thinking. Sometimes creative ideas would present themselves at strange times, during a long run, in the shower, driving or other times when the normally critical brain functions are not as dominant. 

Your annual plan might include a handful of strategic initiatives. These might be product related, market related, or something else. Here are a few examples of initiatives from when I was at Duo Security:

  • Expand the business into Europe with a field sales and support office 

  • Develop a partner / reseller channel

  • Launch a new Enterprise product and go-to-market strategy

  • Develop a vertical market plan for health care

  • Launch a new premium service offering

Each of the initiatives you embark upon will require additional focus and headcount. So be careful of taking on too many things at once. If you can identify projects that are no longer a priority, that can be useful to free up resources. You want to make sure that all departments are working together to make these initiatives successful and everyone is pulling in the same direction. Each department must be aware of their contributions and how things rank in priority to the routine day-to-day operations.

Can Your Team Scale?

Think also about the management team. Who’s running a good operation? Who is struggling? Who has capacity to take on more? If the company doubles over the next year, who will be in over their head? Who are the up and comers who should be challenged to take on more? Who is strategic in their thinking? Who has the pulse of customers? Who is thinking about the competition and how we can beat them? If there’s a need to drive a new strategic initiative, who has the skills and bandwidth to do so?

If your team can continue to take on new growth and the related initiatives with high confidence, that is the best situation. But most executives have a range (span of control, number of products or functions) and when you get beyond their upper bound, it’s normal to bring in people with more experience and a broader range. Someone you hired to grow sales from $1m - $10m in product-led growth is probably not the ideal candidate to grow revenues to $100 million in Enterprise sales. If they want to learn from a more experienced mentor, you may be able to retain them and have the continue to contribute, while you expand the skills and range of the executive team.

Let me know if this has been helpful. In a follow-up post next week, I will provide guidance on how to tie together departmental plans and develop the annual budget.

Product Council


One of the biggest challenges in scaling a company comes when the Engineering and Product functions expand beyond the founders. What started out as a tight-knit effort between a small, high-functioning group turns into any number of problems:

  • Feature creep
  • Blown schedules
  • Projects in limbo that never ship
  • Teams get larger but fewer things make it out the door
  • Major unplanned rework of features, user interface or architecture
  • Corners are cut in QA or performance testing
  • Overtime evenings and weekends in crunch mode
  • Engineering burnout, low morale
  • Marketing is surprised to learn that several key features got cut
  • Sales doesn’t know how to sell it
  • Product features don’t land with customers

Over the years, I’ve seen all these issues and more. While it’s tempting to blame the outcome on the head of Engineering (whose head must surely roll), changing out the leadership without changing the process is likely to yield only an incremental improvement.

If you’ve suffered from some of the problems, you might break into a cold sweat thinking about past situations. But rest assured, it doesn’t have to be that way.

In several companies, I have helped implement a Product Council and review process that can provide  better visibility and predictability as well as a standardized process that addresses many of the problems above. It’s not a panacea, but it can make things run much smoother. Software development is part art and part science. This requires a balance of exploration and constraints.

You’re also trying to create an environment where Engineering is going to take on some risky projects and if they don’t succeed, you redirect or shut down the efforts fairly quickly and without a huge stigma.

The development activities of any given Engineering team or squad is determined by the Product Manager and Engineering Manager working together. They are the leaders of the team, and if the team is failing or wildly successful, it ultimately reflects this leadership. The features under development should fit into the overall priorities of the company, the roadmap, competitive situation, customer feedback, etc. The team, represented by the leadership of Product and Engineering, should be building features and improvements that are measurably improving the company’s business outcomes and the customer experience. If they are not, you need to redirect and change tactics to get better results in the next cycle.

The Product Council is built on several fundamental ideas:

  • The job of the Product Council is to periodically review an Engineering team’s progress toward defined objectives. Typically, I have found that a 90 day window works well, with a kick-off at the beginning of the quarter, a mid-point check-in and an end-of-quarter review.
  • The Product Council should include the head of Product, the head of Engineering as well as representation from Marketing, Sales, Customer Success. Key leaders (or proxies in their stead) represent the core functions of the business. This ensures every department is in sync and aware of what is being built and why.
  • The Product Manager and Engineering Manager together present their team’s plans to the Product Council for review and approval. They can also ask for guidance, input, more resources, etc. The EM and PM must work together at all times. There can be no finger-pointing.
  • The council membership (the key leaders of various functions) must provide guidance, ask for more detail, approve, redirect or cancel any product development when it is under review.

A Product Council meeting typically runs 45 minutes. Materials and artifacts are shared ahead of time and it’s expected that the product council membership reads these materials in advance. It’s usually a good idea for the EM and PM to walk through the material with the VP of Engineering and/or the VP of Product in advance to identify areas that need more customer research, more data, and so on. Doing a “dry run” helps avoid surprises and can often improve the session for all attendees with more strategic insight, clearer communication, identification of risks or potential problems.

The EM and PM should present a plan that identifies what they propose the team works on for the next cycle (typically 90 days). This should encapsulate why the work is being done, what the technical risks are, plans for mitigating the risk, what a successful outcome looks like and how it will be measured. For example, if customers are complaining about the speed of the product, there should be a clear proposal for how the problem will be solved, and the resulting performance gain they are aiming for. If there are competitive features being addressed, how will the new features be better than the competition? If there is technical debt to be corrected, how will it improve customer experience or reduce the support burden?

This is not a meeting in which the product council members are meant to sit back and throw rocks at a squad. As I often told the PMs and EMs, it’s not a PhD thesis defense. The Product Council is there to contribute  and help the team.

Avoid Surprises

A key element in reviewing the product plan in the Product Council is to make sure that Marketing and Sales are bought in and hopefully see some major new capabilities that will expand the market or reduce sales obstacles. If Marketing and Sales don’t see major headline features, that should be considered a red flag. At the very least, it might suggest revisiting the marketing launch efforts. It’s always better to find out early in the process when something can still be done, changed, or strategy shifted rather than when the product pages go live.

The mid-quarter check-in meeting is done in order to verify progress is being made and also to consider taking more drastic action for any items that are not going as planned.

I first used the Product Council process way back in the day at Borland. It helped us get several key projects on track, sometimes by cutting back features. I’ve used a modified version of this in other companies from time to time. At Gatsby, Dustin Schau, then VP of Product rolled out the Product Council to provide much needed focus and discipline. While it placed an added burden with a cluster of meetings (one for each squad) it made our Engineering and Product delivery process far more predictable and aligned across Product, Engineering, Marketing, and Sales As Dustin sometimes would say, if we’re going to have a meeting, we’re going to make it valuable, and Product Council certainly was a valuable meeting for all functions.

Find and Fix Problems Early

As an example from Gatsby, in a mid-quarter check-in we learned that an experimental feature we had dubbed “Luda Mode” didn’t reliably deliver the 10x performance gains the team had planned when testing with customers. Rather than treat this as a failure, the team took feedback from the Product council session and identified and delivered other performance gains that, while not quite 10x, delivered a marked improvement to the customer experience and one that Sales and Marketing could still trumpet with minor changes. This is a good example of embracing a “failure,” learning what can be done, and using the mechanism to communicate and discuss openly the right, customer-focused strategy. Best of all, everyone was in sync.

By now, you get the idea. Product council exists to drive alignment, awareness, and strategy down to the squad (where it belongs!), upwards to the Product Council, and across all key functions of the business. It can be an effective process to make Engineering more predictable and increase confidence that you are building the right products. Note also, that the Product Council is not a substitute for the normal day-to-day and weekly management of Product and Engineering.

The Product Council works well at high-growth startups, and can be applied equally well in larger organizations to help increase collaboration between Product and Engineering. It also helps reduce the number of surprises when launching products. Try some of the ideas out, make them your own adapting to your unique situation.

If you’ve found these ideas helpful, I hope you’ll share them with your team.

How To Run An Offsite


If you’ve worked in a growing startup company for more than a few years you’ve likely noticed when the executive team schedules an offsite meeting and wondered what happens there. Sadly, there’s often a lot of bonding and not enough actual work. So let me suggest a framework for how to lead an effective offsite meeting.

First of all, you must be clear: what is the purpose of the meeting? If you think it’s for team building then I will forgive you if you’ve never seen a great offsite. Yes, team building can happen. But if that’s the main purpose, you are setting a low bar. In my experience the purpose of an executive offsite meeting should be one of three things:

1. To consider and plan for a change of strategy

2. To develop a set of priorities in advance of the annual planning cycle

3. To work on the company’s hardest unsolved problems in a creative forum

In some cases, perhaps it is a combination of these items. If you cannot determine a priori the purpose of the meeting, it will likely be a waste of time and money. You can do all the trust exercises you want, but if the executive team is not working on the business, it’s unlikely there will be any lasting impact. After you’ve left Austin, Napa or Tahoe you will still have the same problems you had before.

Developing The Next Generation of Leaders

Once you are clear on the purpose, it is much easier to then identify the key people and topics you want to cover. Maybe you’re wondering: if it’s the executive offsite isn’t it just for the executives? Yes, that is one approach. But I have found that if you expand the group slightly, to include the next-level up-and-coming leaders, you can have far more impact.

In fact, I would consider another purpose to the executive offsite can be:

4. Develop the next-level of managerial talent

Bringing in a broader range of participants can be especially helpful when tackling the myriad of “hard unsolved problems.” The goal is to fully integrate everyone into solving complex problems that often span beyond a single department. Everyone has a seat at the table. Every is expected to contribute. This is not a spectator sport.

You may want to brainstorm the topics in advance to ensure focus. Once the topics are determined, I have found it works well to assign each topic to a pair of people. Ideally, colleagues who might not otherwise be working together. Perhaps a VP paired with a Director in a different department. They should prepare enough material to kick-off a discussion with the entire group, then break down into smaller groups to come up with ideas.

Work on the Hard Problems

At MySQL, we often had a nagging problem of how to improve product differentiation. MySQL was an open source database and people loved it. But it was not always clear why and when someone should pay us. We talked about the problem all the time, but we weren’t making much progress. So I proposed that at our next executive offsite we do three things.

1. We make differentiation the major topic of discussion

2. We invite half a dozen up-and-coming leaders in the company to join us at the meeting

3. We pair up leaders to lead a workshop on the problem

I organized the session and reviewed the materials in advance. I was not asking the leaders to solve the problem (which was unlikely) but rather, to frame the topic and then lead a workshop whereby we split into groups to brainstorm ideas.

Bertrand and Edwin, two Director level managers led the effort. It was brilliant. They brought a fresh perspective to the problem. Bertrand provided an excellent example of a commoditized product that could be differentiated (bottled water!) that reframed the problem in a creative way. It caused everyone in the room to think differently. And it was inspired people to became unstuck from earlier views. That resulted in much more creative idea generation than we had seen previously.

While I won’t say that the problem was completely solved in the course of two days, it did pave the way for us to develop further enterprise differentiation. Instead of just asking ourselves “Why can’t we follow the Red Hat path?” or “Why don’t we close source some features?” we got much more creative, coming up with a subscription model that solved more problems of our Enterprise customers, delivered more value, and provided differentiation.  Ultimately, the subscription model became the growth vector for the company and led to a billion dollar sale to Oracle. 

One of the key things I’ve observed from offsite meetings is it’s important to get a cross-section of people across different disciplines and backgrounds to tackle hard problems. If you just ask the product team to solve all the product issues, they will eventually run out of ideas and get stuck. But sometimes, when you bring in someone from a different field, whether it’s Finance, HR or Sales into the brainstorming you will get unexpected questions, examples, and suggestions that might never have come up otherwise.

Follow-Up for Required

Offsite meetings can be a great a way to generate creative ideas and momentum. I remember one executive complained later that while we generated a lot of ideas, where was the follow up? Ultimately, it is up to the functional leaders, the head of Sales, the head of Marketing, the head of Engineering and so on, to determine (with input from the CEO, of course) which ideas and initiatives should move forward. In my experience this results in the best ideas getting the resources they need. To do otherwise is to circumvent the line authority of department leaders.

This is one reason that it can be helpful to hold an executive offsite meeting before you undertake the annual planning process. It drives creativity and focus before operating plans are finalized.