You Are What Your Record Says You Are

Many founders are wondering what to make of the current market for technology stocks. No one knows what the markets are going to do, but I happen to believe we are seeing more of a market correction rather than a market crash. In my mind, the last two years were the aberration as opposed to now. This chart is from a few months back but you’ll see what I mean.

EV / NTM Revenue Multiples (SaaS and Cloud Companies)


If this is true, you want to plan as if these market conditions are going to persist. That means a compelling story is not going to be enough to raise your next round. It will need to be about your metrics. In other words, we should listen to the slightly edited wisdom of Mr. Parcells: You are what your P&L says you are.

With that in mind, here’s an exercise that I’d suggest: decide the valuation where you hope to raise your next round. Maybe your last round was high enough where you’d be happy with a flat round. Maybe you want to reach some milestone like a billion dollar valuation.1 Whatever it is, establish some target just to put a stake in the ground.

Next, figure out the P&L that would earn you that valuation in an environment like today. If you or your team don’t know how to do that, ask one of your investor board members to help you.2 As you are thinking about valuation methodologies, be conservative on multiples. Don’t pick some private company that raised at a crazy price in peak 2021 mania. Use public comps. Think long and hard about whether the same investors pricing those companies are going to view your company differently. Most importantly, remember that this is an internal exercise. Being overly aggressive on a multiple is only lying to yourself.

Once you have the target P&L, stare at it for a little bit next to your current P&L. The numbers might look dramatically different.3 This will hurt. You will feel like you are the only company in the world that is dealing with this problem. You’re not. Tons of companies are in this situation right now; in fact, you will already have taken a huge step ahead of most of them by simply acknowledging reality.

Now that you’ve acknowledged reality, it’s time to embrace it. If the numbers are so far apart that there is no hope of doing that on your current cash balance, either change your cash burn assumptions (you can almost certainly extend runway more than you think) or change the valuation goal until you get to a target P&L that is aggressive but achievable.

Ok so you have your target P&L. Now what?

The key is to now translate that into metrics that can actually change behavior. If you show a P&L that you want to reach in 3-4 years at your next all-hands, nothing will change because no one will know what to do differently once they leave the meeting.

So turn the P&L into financial metrics that mean something to you and your team. If you are a SaaS company, that might mean NNARR, sales efficiency metrics and net dollar retention. If you’re a marketplace, it might mean GMV, contribution margin, and GMV retention. Next, turn those financial metrics into operating metrics. Again, if you’re a SaaS company, how many sales reps do you need to hit the target NNARR per quarter? How many deals do they need to close? How does that compare to what they close now? If you’re a marketplace, how much new supply do you need to add at what cost? How many new customers do you need to add at what LTV?

No matter what kind of business you are, you will need to review your cost structure. You’ll use metrics like revenue or gross margin per employee and things like that but you’ll also need to rely on your intuition. Is the answer to every question you ask that the company needs to hire more people? Do you feel like you have twice as many people but are moving half as fast?

Ultimately you’ll want to create a simple table that compares your key operating metrics today to where you want them to be in the future. Once you have that, you can set the goals for the next quarter that put you on track to where you want to be and start to execute against those.

This entire exercise will be painful. You might feel like your goal is out of reach. You might have to make some very hard decisions on people.

But I can promise you there is goodness on the other side of it. You will give yourself the license to focus on a singular goal. You will move faster. And your results will get better.

And as Bill Parcells astutely observed, that’s what matters in the end.

I can’t call these companies unicorns.

If they don’t know how to do it, ask another investor you trust (and find a new investor board member).

If you raised your last round in the back half of 2021, you can replace “might” with “almost certainly”