160. Why $100M AI Companies Are Failing at Renewals? ft. Cassie Young & Kyle Poyar

So the sub$50 a month AI native companies had 23% gross revenue retention. So more than three quarters of their revenue leaves within a year.

Cassie Young:
I would read about these go to market companies and they would cite customer logos in them and, and I would say to my team, let's go get on the phone with these customers to understand more about how they're using it. And literally 9 out of 10 times we would hear something to the effect of, oh yeah, we tried it, but we're not going to use it anymore.

Josh Schachter [Host]:
You're listening to Unchurned, brought to you by the Gainsight podcast network. The fastest growing companies in SaaS history might also be the most vulnerable companies, hitting 10 million, 20 million ARR in just months. Everybody's buying AI, but something's wrong. Today's guests have been tracking a troubling pattern. Customer is churning before anyone realizes there's a problem. Cohorts aren't renewing. And the metrics that built the last decade of customer success might be lying to us. Cassie Young is a partner at Primary Ventures and former CCO at Marigold.

Josh Schachter [Host]:
A recent article warned tech is on the brink of a gross retention apocalypse. Kyle Poyer runs growth unhinged, reaching 80,000 subscribers with data backed insights. His piece echoed the same alarm the AI churn wave. They're not pessimists. They believe companies that understand what's really happening will build something more durable than anything we saw in the last decade. I'm Josh Akter and this is Unchurned. Hey everybody. Welcome to this episode of Unchurned.

Josh Schachter [Host]:
I'm your host Josh Schachter and I'm excited to be here today with two mega thought leaders in the world of SaaS, we have Cassie Young. Cassie is a partner at Primary Ventures, which is New York's premier seed stage vc. She has a background in customer success. She was the CCO at Marigold through her work, also at Sail through and she recently authored an article called Tech is on the Brink of Gross Retention Apocalypse and a Customer Success Renaissance. So for this audience, we definitely want to dive into that. Joining Cassie and myself is Kyle Poyer. Kyle has a large, large following. He is the founder of Growth Unhinged.

Josh Schachter [Host]:
He has over 80,000 subscribers to that, myself included. Uh, he is the host of Mostly Growth podcast and and former operating partner which many, many of your followers know you from at OpenView and a pricing expert. People follow you for different reasons, but I know you've got that background at at Simon Kutcher and so pricing is your shtick. Data backed as well. And Kassy, I know you're very data backed in all the work you do as well. Um, Kyle, you also posted a very similar piece to Cassie that came out very recently called the AI Churn Wave. So both of you guys welcome and thank you for being here.

Cassie Young:
Thanks for having us. This will be a lot of fun.

Kyle Poyar:
Yeah, this is going to be fun.

Josh Schachter [Host]:
Yeah. Will it be fun? So you know, I was going through.

Kyle Poyar:
I'm going to have fun.

Josh Schachter [Host]:
You're going to have fun. I mean, you know, SAS might collapse but like, as long as Kyle's having fun, we're good. So here's the picture. Little bullets on my notes here from collectively both of your articles. I'm going to run through some themes and we're going to talk about this, the picture that you guys paint. Rembrandts over here. Experimental run rate revenue versus your traditional annual recurring revenue. ARR 60% of Genai investments are coming out of innovation budgets.

Josh Schachter [Host]:
Series A valuations are up by 20% year over year four. Deployed engineers are like all the rage and they're holding down the fort in many ways. MIT says nobody's getting value out of AI usage. Pricing vs seat based pricing vs outcome based pricing vs 10 other types of pricing that Kyle can tell us about. What do we choose? Kyle claims that the Median GRR for B2B SaaS is 40% for AI native companies, 40% for GRR and gross margins. I think they've gone down the window and then you've got all everything that you hear on CNBC and everything about this AI bubble. What did I miss? Did I get this? So from I'm hearing from you guys, what I'm taking away is we're in an AI bubble with hyped startups that are not actually delivering value to customers, have no idea how to manage their P and L, their pricing or their costs. They're leaning on deployer for deployed engineers and CS teams to help them save customers.

Josh Schachter [Host]:
And the apocalypse is coming. Tell me on that.

Cassie Young:
I think that's a pretty accurate summary. Maybe the one thing I'll add, and I think I said this somewhere in the article, is I think buyers are in this precarious situation of they're afraid of getting fired. Right. We all read the articles of it's going to be part of the performance review. Right. You're not going to last in the role if you're not able to do that. I've heard from friends who are B2B executives that it feels like the most opaque job market out there because CEOs are figuring out what they want. And, and so I think.

Josh Schachter [Host]:
Step back. Sorry, I'm interrupting you, but. But it's going to be in the poor performance view. I actually haven't heard that before, so. So elaborate on that a little bit.

Cassie Young:
Yeah, I mean, I feel like you see companies like Shopify, right, who have gone out very publicly and said, when we do twice annual performance reviews, we want to know how you're using AI. And I absolutely think those realities in organizations are massively driving a lot of the structural problems that we're talking about today, where every person with authority in a company is looking for tools to experiment with. And I think one of the things you're starting to see happening is this great reckoning of the bottoms up versus the top down. Right where everybody was like, I got to try a bunch of stuff. And then you have a CIO wake up one day and say, oh my God, like how many tools is the organization using? We don't even talk about roi. It's just like this sprawl of technology which injects, you know, risks from a security perspective. It ingests risks from a. What are we paying for multiple products that are doing the same things.

Cassie Young:
But I wanted to explicitly call out just those buyer dynamics because I think they're so core of. To everything that we're going to talk about today.

Kyle Poyar:
I think that's spot on. And to me, if this were, if we were talking about SaaS companies, I would say we have a pipeline crisis. Because there is no oxygen to buy SaaS at the average company. Everyone is feeling pressured to adopt AI. There's a lot of appetite around AI. And so in SaaS, the biggest challenge is probably the sales and marketing costs of acquiring a customer. For public companies, the CAC payback periods have gone up to three years for many companies based on data that Jamine Ball has published in Clouded Judgment. And so, you know, we're looking at that CAC payback problem for SaaS companies.

Kyle Poyar:
But for AI companies, paybacks are often great. There's actually so much pull, so much market demand for these AI products that it's like you're just trying to do as much as you can. To serve the demand that exists. And I think that's where that's the root of the retention problem is that there's too much demand.

Cassie Young:
I think that's well said. Actually maybe just one, one comment on that. We told you we were going to have fun. As we started talking about this, there was a piece that Bessemer put out a couple weeks ago, Kyle, I don't know if you saw it, and they had this line in there that was something to the effect of cogs is the new cac, right. And the whole idea was that in traditional software you were rate limited, right, by your ability to go to market effectively. Right. You had really compelling gross margins as companies are investing in compute, right. If they're allegedly doing AI, you see that compression on the gross margin, they can't be bad at both.

Cassie Young:
Right. And so there's this pressure to run the business more effectively, which we can talk about like all the AI investments to make the OPEX look better, et cetera. But it also becomes this question of like the product kind of has to sell itself. Right? And there's, you know, I talk about this in the piece as well. At primary we're talking a lot about like the jaw dropping customer experience. But I don't just mean that as the killer app. It's like the product has to sell itself not just because it looks cool but because of this whole product bit of how it's delivered, how you get the roi, et cetera. But I think that's an important point of like you have no choice right now, right? You, you have to get better at the ability to do that if you are an AI native solution because that gross margin lines look very different than traditional SaaS.

Josh Schachter [Host]:
Cassie, what was the call to arm for you to publish this article? You had quoted 2024 work by. I'm blanking on her name, the author.

Cassie Young:
That it was from JAM in Altimeter. Yeah.

Josh Schachter [Host]:
Oh, okay. Yeah, about err. Right. So this is. So you published your article a little over a year later. So something then triggered for you to get on.

Cassie Young:
Well, I published the article a year later. I will tell you that if you walk the halls of primary you will hear that I have been relentless about that worry since the day that article was published. Right. Because I read it and I sort of saw it and I started worrying about it in our own portfolio, right, where you had these like really compelling AI products. Companies were going to market faster than they ever had before. And one observation that I had in the months to come was I was reading about like all of these really compelling fundraising rounds. And at Primary, as an investor I'm expressly focused on companies that are transforming the P and L of go to market specifically which we define as anything that touches the customer. Customer.

Cassie Young:
And so I would read about these go to market companies and they would cite customer logos in them and I would say to my team, let's go get on the phone with these customers to understand more about how they're using it. And literally 9 out of 10 times we would hear something to the effect of oh yeah, we tried it but we're not going to use it anymore. And so I referenced this in the article. There was one company that sort of blew up this, you know, 11x. And the joke at Primary was that I tipped off the reporter. I had nothing to do with that whatsoever because I was so adamant about this ARR versus err risk. So much so that like founders in our portfolio, I have a portfolio company called One Mind in the go to market AI space. Every time they sign an expansion deal, the founder text me that err.

Cassie Young:
Because she knows I'm just so obsessed with what is. So I've been thinking about it for a long time but candidly, some of the recent data that came out on the decline in seed to series A graduation rates really got my gears turning on it because I started to wonder, you know, if you have, you know, really fast ARR growth, is it a red herring? Do you know what I mean? We're actually like, it's not enduring, there's not traction and I worry about it in terms of the health of the overall, overall startup ecosystem of what that looks like. Right. And you're not going to see those companies advance. So the piece was delayed in coming to market in a, in a public way about it, but it's something that's, that's really been on my mind and a point that I've been driving home with our portfolio founders for a year and a half now.

Josh Schachter [Host]:
So you've just been busy. Okay. But, but your sentiment has always been the same. That's what I'm hearing. And, and I know that to be true. I know that to be true from all the events that I keep inviting you to. Cassie and I know you're busy, but one day, one day now that we're with Gainsite, we got a bigger budget. Yeah, we will, we will get you there.

Josh Schachter [Host]:
I look forward to it.

Kyle Poyar:
She's busy experimenting with AI tools.

Josh Schachter [Host]:
Yeah. Her err, I mean, yeah, off the, off the charts. So you're, you're I mean, you're an expert in, in seed stage companies, right, At Primary. But where is that biggest chasm then you're seeing from? You mentioned, you know, seed Series A. Is it that, is it Series A to Series B? Do you have any sentiment around that?

Cassie Young:
I think it depends a little bit. I mean, I think we're in a bit of a market like shift right now because what was happening a year ago, right, is the Series A's were coming so quickly after the seed. And I can remember my partner Emily Mann at Primary making a comment to me at one point in 24 where she said, you know, what's happening with Series A's right now? They're being done on vibes, right. I think she was totally right where there was this kind of like real ARR. Momentum of what's there. But then on the flip side of that, people maybe started digging in a little bit more in terms of, okay, what's actually happening with these customers, is there predictability and repeatability on the enterprise side, etc. So I think for a while it was more Series B and then what happened is people started waking up to it and now do, you know, I mean, you're kind of seeing this bit of, you know, what's happening. Like the Series A's aren't quite as easy as they maybe were 18 months ago.

Cassie Young:
To be clear. I think the Series A's are still being done on a lot of top line promise of what's there, but I, I don't know how long that's going to last. And that, that was kind of the centerpiece of, you know, the apocalypse, you know, bell ringing which was I, it might not even be a month from now, might not be six months from now, but I think at some point the market's going to wake up to it.

Josh Schachter [Host]:
I want to get back to the apocalypse and Kyle, I want to hear about your wake up call. But, but the founder in me can't, can't, can't, can't hide from, from wanting to go deeper into this Series A stuff. Both of you guys are investors. What do you look for right now? When a young team comes to you, an early team comes to you, what do you look for in the durability of that team? Because you know that, that, you know, market wise they're all, there's all these headwinds that maybe they can't control.

Cassie Young:
Yeah, Kyle, you want to start? Then I can add up.

Kyle Poyar:
Well, so I will say I am no longer an investor. I'm a solopreneur. Now. So I'm kind of an entrepreneur myself, but with zero employees.

Josh Schachter [Host]:
I meant it's in your DNA, Kyle. It's still in your DNA.

Kyle Poyar:
I have been in the investment world for about a decade and I'd say right now the biggest thing I look for is founders that have domain experience. Because I think that when folks can identify really important workflows and understand the data, the kind of domain specific demands that's required and they can think about how to solve that problem in a complete way and they can find ways to build a bigger moat around that wedge. To me that ends up being so much more captivating and I find you don't see nearly as much experimental revenue or retention risks for those businesses because the ROI story is so strong for customers. And I think of these as almost like the anti YC founders. They're folks that often come from outside of the Bay Area, they're from the industries that they've served. Maybe they even founded a company in the space that they served. And those are generally not the hypey companies that are hitting 100 million ARR in 12 months. But there's, there's real value that's being created with AI for these businesses.

Cassie Young:
And I. In no particular order, just a couple thoughts and I think that's well said on many fronts. You know the first thing is I think I'm excited by founders who are way more interested in transformation and incrementality. I just think there are so many solutions out there right now that it's like how do we get 15% more efficient on this one functional work stream versus blowing up how people do work today? So that always captures my attention. You know, going back to my point on the customer success renaissance. Customer obsession is a non starter for me and I think a lot of people say they're customer obsessed but you actually know it when you see it, right? Like they eat, sleep and breathe their businesses. They're constantly adapting their point of view based on what they're hearing in the market and we pick up on that even in indulgence and certainly like in the early days of working with someone. But a couple like cues we look for.

Cassie Young:
I always say when I get pitched on something I'm like reasonably well networked with go to market buyers. If I have to chase those buyers, like to look at the email again, I'm an automatic pass because if I'm chasing them right there's no market pull on that. I know immediately the opportunities I'm going to get excited about because people are like that's a massive problem I have and I definitely want to take it. And I think similarly to that is this ROI story, right where we all know in the glory days of SaaS there was a lot of ROI that was done in spreadsheets and it was back of napkin of like this many hours. And this is what it equates to. And I just don't think companies are going to have that luxury anymore. And so similarly, you know, when we're diligencing solutions and I asked the buyer, you know how they're building the business case in the ROI and they say like I'm working on it or the founder is helping us figure that out. I'm like unsubscribe.

Cassie Young:
I'm not interested. Because it has to be something that is so directly correlated. I mean into the P and L of the company. The only other thing I was going to maybe quickly call out is I got a little distracted last year. That's worth naming. And I made a couple of mistakes on what I liked in founders where Kyle, you made me think about it. When you talk about like these domain experts, we use this term internally, the zero CAC founder and we got really excited about zero CAC founders. What I meant by that is like they have this Rolodex and get in there.

Cassie Young:
That really matters. But it's not enough I think is the key learning. Right. You need the access and the expertise plus that jaw dropping customer experience. Because I think there's lots of founders out there that are like I'm well networked. I have the idea. But if they don't over index on delivering for the customer, like the business isn't going to go anywhere.

Kyle Poyar:
I have to ask you, Cassie, what do you think about a deal like the Clulee seed?

Cassie Young:
Oh, I think that that is like an interesting one.

Josh Schachter [Host]:
Set some context for us. I don't know what you guys are talking about. I'm sure as many don't as well.

Cassie Young:
Quite the marketing campaign. You want to talk a little bit about it, Kyle?

Kyle Poyar:
Yeah. Yeah. So this founder is kind of notorious and he pitched that he's building a cheat on everything app, has a wild kind of social media presence specifically on X. But elsewhere I think he's only hired people that have at least a hundred thousand followers on a social media platform like they are the best startup at getting attention out there. And then what they released while they.

Cassie Young:
Were students at Columbia. Right. And dropped out to do it or something like.

Kyle Poyar:
So I think it was after they got kicked out they did this but it's cheat on everything app inspired by an app that the founder had built at Columbia to kind of cheat on job applications. And then the product that they launched is like an AI note taking app, which I feel like there's thousands of these things out there and I just feel like the, the difference between like the attention and the hype and then the product that was launched is just so wild to me. But it's a founder where if you believe distribution is all that matters and that's what you look for in a founder, this is the prototype of the founder that you'd want to back.

Cassie Young:
Yeah. And so you get why Kyle asked the question that he did. Right. Where it's like, okay, that, that absolutely can help. Right. And that can help on a first mover, but it's just not enough. Right. To build the enduring business.

Cassie Young:
You have to absolutely have both.

Josh Schachter [Host]:
Yeah, yeah. I mean, maybe 20, 22, both you guys are investing in those. Kyle, you're coming from a PLG vc and Cassie, you know, early stage, maybe times have changed.

Cassie Young:
Yeah.

Josh Schachter [Host]:
So Kyle, let's go back to, to the abyss. You cite some really terrible numbers there and I want you to go deeper into those for us. What was your call to arms here? Like, what was your wake up call that like, I got to, I got to publish around this and tell us what you found.

Kyle Poyar:
So what has been concerning for me is seeing essentially founders bragging about how fast they're growing. And usually it's like we hit 10 million in a month, we hit 20 million in two months. There's no cohorts going up for a renewal cycle in these businesses. Often they're PLG businesses, which in some ways I love, just how easy it is to, you know, get, get onboarded to try out a product. But it's hard to tell that these are recurring revenue businesses. And the other concern for me is like in classic plg, these were freemium businesses or free trials, where you had a 30 day free trial. In many of these AI apps, it's kind of a paid trial or you get like a daily usage limit. So you're still kind of on a trial even if you're paying for the app.

Kyle Poyar:
And so you have these like apps that are going viral that are hitting these revenue thresholds like crazy. And then you have a whole ecosystem that is promoting these companies. So you have founders building in public bragging about their success. You have VCs getting on podcasts saying if you don't hit 100 million ARR in 12 months, you're not fundable. T2D3 is dead, yada yada yada. And then you have people saying, well we have to work996 because the only thing that matters is speed and we're in a race to, you know, beat the competition, whatever it is. And it's, you know, if you know how much time you're working is your moat, like you really don't have a moat. And so that led me to want to actually investigate is this a bias that I have like, or is there something real here? And I turn to something called Chart Mogul, which is a SaaS metrics and growth platform.

Kyle Poyar:
I made kind of analyst in residence with them, which means they give me access to some of their reports and kind of live data across their customers. So I can tell stories about that data, which has been been fun. But they have, they sit on data across thousands of customers.

Josh Schachter [Host]:
Oh, that's an awesome role. I don't know if you're the world's first analyst in residence and I know Cassie, you come from an analyst background as well. But that's, that's a really cool role to have.

Kyle Poyar:
It's like a part time Peter Walker, which is like my dream. But so they, they've got thousands of software companies and we pull data on 3500 companies which were a mix of B2B SaaS, B2C SaaS and AI native companies. It can be a little hard to tell the difference between all of us. So we use an AI web scraper to actually scrape websites of companies and categorize them. And for AI native companies, we also specifically looked at companies founded after, you know, after chatgpt. We were left with a data set of a few hundred AI companies, about 600 B2C SaaS and about 2,700 B2B SaaS companies. And yet as you had mentioned, the average or the median, I'll be specific, the median trailing three month average gross revenue retention is 40% for AI native companies, which is worse than B2C SaaS at 44% and significantly worse than B2B SaaS at 63%. All that said, there's actually a bunch of interesting data when you kind of unpack that and go under, under the.

Josh Schachter [Host]:
Surface, I think we might have to unpack that. I mean you said 63% is the average for B2B SaaS companies that are non AI native in this dataset.

Kyle Poyar:
Yes, which Chart Mogul I think has a number of companies that have a heavy self serve component with a lower deal size. And so that number 63% to me is much lower than a typical enterprise B2B SaaS where I'd look at like 80, 85, 90% gross revenue retention. But that feels normal and more of like a high velocity PLG B2B SaaS company.

Josh Schachter [Host]:
Got it. That makes sense because I'm about to ask Cassie, I'm like hey, somebody comes to you with a 63% GRR, what are you saying? Immediately like thumbs down. Right. So but I guess it's the segment you were looking at there.

Kyle Poyar:
Well, that's where we split the data based on wanted to look at companies that sell for less than $50 per month. Right. So if you're like a calendly, a lot of your customers are going to be spending 10, 15amonth for example, but a lot of PLG SaaS is under 50amonth. Then we split that of less than 50amonth 50 to 249amonth and above 250 per month now could have kept going way up, but that was just an easy way to delineate and have plenty of data. And in B2B SaaS, the, the typical company that was selling under $50 a month had a 44% median GRR. And then it was 59% for 50 to 249 and 70% for above 250 for AI native. What was shocking is at the low end is where it was AI native companies just see an insane amount of churn. So the sub$50 a month AI native companies had 23% gross revenue retention.

Kyle Poyar:
So more than three quarters of their revenue leaves within a year. The positive side or like the silver lining is the AI native companies that are selling for above 250amonth looked pretty statistically similar to B2B SaaS. There actually wasn't that much of a difference. And so I think part of the, part of this sort of phenomenon that we're seeing is it's the curse of the AI wrapper. If you're not bringing a ton to the table, the above and beyond what someone can get from ChatGPT, Perplexity or Claude, they're going to, you know, try your product, but they're going to turn pretty quickly. It's the companies that are doing something that are, you know, generally solving a much more valuable problem and going after stickier use cases and selling for larger deals and then also have the budget to do things like invest in customer success. Those are much healthier businesses.

Josh Schachter [Host]:
So are these just symptoms of like you guys have kind of alluded to folks just aren't building valuable enough products. I mean, Cassie, you talk about, you have a quote in your article that those who weather the gross retention, we talk about that as well. But the gross retention apocalypse will be the ones who treat customer success not as a function but as a core operating philosophy. So is there anything that can be done to remedy to this?

Cassie Young:
Yeah, I think absolutely. And one comment I'm going to make here is that a lot of the opinions I have on this topic actually also held true in SaaS. There was just less experimentation and the switching costs were higher. Right. And what I mean by that is I think one of the biggest pitfalls of customer success universally is this confusion of activity for productivity, right? Where it's like, I'm going to check the boxes of did I have the quarterly business review, did I have a meeting with the buyer in the last 90 days? And there's this failure to understand what actually makes you money. Right. And so what I mean by that. And let's pick on net retention for a moment and later we can talk about why I picked on gross retention specifically.

Cassie Young:
Specifically, you know, you actually have to do the math like just as all the fun stuff that Kyle's doing. I'm like, I call them the sticky drivers of net retention. Right? So what are the things that customers do that make them that much more durable? Right. So when I was operating like we would uncover things like, gosh, if our salespers clients actually used us for personalization, meaning we powered the algorithms in their email, that net retention curve was 40 points higher than if they did it. So guess what? We said we're changing the rules of implementation. Implementation time to value is not go live because that is meaningless. It is a lift and shift over what you're doing. You don't matter if you're not using that algorithm because you're fundamentally not a good customer and you're at risk.

Cassie Young:
And I name that because I think that's even more important in the era of AI, right, where time to value matters. But time to value is not going live. And I think this is what so many companies get wrong. It's time to the real value of what you know is going to be durable, even if that's a working assumption, because you're a startup, right, that you evolve over time. So I think that's huge. Right? And the whole customer life cycle needs to be focused on those things that, you know, drive real dollars back into the business. I mean, I constantly find myself on this soapbox of we forget that retention is the Cheapest form of growth that any company has. You have 180% net retention, you can never sign another new logo again and you're growing 80% year over year.

Cassie Young:
And so when I hear about these businesses that have these wild divides between net and gross, I'm like, you are just leaving so much money on the table. And I talk about this in the article. I live this like crazy experience. When I got to sail through in 2013 where, you know, I, in my interview process, I asked about net retention, right? I didn't ask about gross retention. The net retention of the business, you know, was over 120%. The gross retention was 60%. And this is why I called out this expressly in the article because I think any business gets lucky with customers, right, that are growing rapidly, that find the use cases and go and do it. But it masks a problem with core gross retention, right? I think core gross retention is actually a better leading indicator or product market fit in many, many ways, particularly for early stage companies.

Cassie Young:
And so the, the, the drum I wanted to beat was you have to look at both of those in parallel. And I'm like, I don't, I just don't think that net retention will tell the full story. It's funny. Kyle will tell you, when I was writing this piece, I'm like, who do I know that would actually have data on this? So I immediately phoned a friend to Kyle and he said, you know, hang tight because I'm, I'm working on some stuff. And when I read that piece, you know, just a couple days ago, you know, I joked with him like I'm glad I could put my money where my mouth was. But I was actually even more dire than I probably would have expected. And I agree with everything he said on, you know, the PLG angle of it. Candidly, I, I do think this is going to come to bear even for the mid market and up because I think that like there's a saying I used to have when I was an operator.

Cassie Young:
Phase two never happens and it's just a matter of like when the customer wakes up and has that happen. And that's usually what, what triggers the churn event.

Kyle Poyar:
I think you said something really interesting around leading indicators of stickiness and this idea of like, for you it was adopting personalization. I think when folks have a great customer success team, they start getting those insights. They understand qualitatively what's happening with customers. But that's actually much harder with PLG businesses because you don't know your customers. You have People signing up, they don't talk to sales, they don't talk to anyone. They start taking action in the product. In many cases now, it's that they're essentially asking AI to build something for them. Right? There's a prompt bar experience.

Kyle Poyar:
They're not even necessarily clicking on that much stuff. They might have gotten an output that they liked and they did something with. They might have gotten up, but they didn't like. But you don't have a whole lot of visibility into what happened after they adopted your product. And so it's especially challenging to get this leading indicator data and understand what are the sticky factors. But one of the things that we did, you know, with Open View portfolio companies that were plg, is we would do what we called a patient zero analysis, which is a little bit dark in the age of COVID and everything. But we'd go back and look at customers that retained and ideally expanded. And we'd say, not just what are they doing now? What did they do within the first seven days and the first 30 days? And that's often what was the source of the lead.

Kyle Poyar:
So how did they hear about us and sign up? Who was it that signed up and were they in our ideal customer profile or not? You start getting a better sense for who your ideal customer profile is and what are some of the integrations they set up and things that they did that led to stickiness. And you end up getting a much more interesting set of insights. I think a lot of people when, when they have a churn problem, they go and say, all right, what are our turn customers doing differently than average? But I think what people are often missing are what are your best customers doing and how do you take.

Cassie Young:
Yeah, yeah, I love that.

Josh Schachter [Host]:
Okay, so if I'm unpacking some of this, Cassie, you're saying for companies that you work with come into the portfolio, you're unpacking their metrics with them, their GRR and their nrr. You're saying, okay, if there's a. There's a major chasm, major divide between the two, let's look and see, is your NRR being held up by some just big whales, but really you're struggling, struggling our retention, or, you know, if your NR is actually not much further along than your grr, then maybe you have more of an opportunity to expand and cross sell than you than you currently are. And then you're. And you guys are both saying, get to time to value of what product activity is really driving value for your customer. Figure out a way to Correlate that which you know, as an early stage startup can be maybe more difficult. Larger stage companies have more data to do that regression on but figure out what those product milestones are and then drive, drive, drive towards those valuable milestones. Am I getting that right?

Cassie Young:
Yeah, I think that's largely right. I mean one thing I would say is it kind of, let me think about it where I think it's such an interesting point. Like at plg you can't just go talk to all these customers. Same thing with early stage companies. You don't have all of the data so you don't get to go do that regression analysis. So what does like good old fashioned growth hack I recommend to our portfolio companies is like do you understand what's going to get your buyer promoted or like the performance review of a lifetime. Right. Because I think that's a very good way to go about this.

Cassie Young:
Right. Of like okay, you know, you're the CRO of company X outside of hitting the number right. What's going to make you look like a hero to the board and everything you do needs to be played back in that language to them. Right. That's an easy way to de risk where in the absence of like you don't know what the behaviors are, you're kind of like working your way backward to that with the hope that it lands you in a good place while you amass some of that data. So that's just a one, you know, passing thought I would share on that.

Josh Schachter [Host]:
I like that. I mean that also plays into marketing because now you're going through the hero's journey and now you're able to articulate that hero's journey of delivering value, of how you took your customer from where they were and went through the, you know, the ups and downs and took them to a higher elevated ground. I'd also say, you know, maybe for larger companies you mentioned, you know, QBRs, are they doing anything, et cetera. You know I spoke to Teresa Anania recently. She's the CCO chief customer officer at Sophos. You know previous previously she led post sales at Zendesk and she has done a lot of analysis on the high on understanding what high value activities on her team's end. Right. So not the product adoption but actually the QBRs versus I mean at gainsight right now we're looking very closely at our instance reviews as being correlated to retention, you know, or is it webinars if you're at a longer tail type of, you know, setup but basically kind of.

Josh Schachter [Host]:
And again that's, that's data, that's, that's analysis that maybe some earlier stages might not have the benefit of. But looking into that also as ways to understand how you can move the needle.

Cassie Young:
I agree with that. I think it comes back to something I said earlier. There's product and there's whole product and the whole product matters. Right. And so exactly, exactly to that point, like I can remember at Sail through we had this, this was way before COVID at people doing stuff more virtually. But there was an insight that customers who attended a live training because we would do these half day Salesforce Academy things were off the charts in terms of the net retention curves and it informed this business decision of like if there's a customer that we think is mildly at risk, we will fly them to the closest training because we know the spread on those two numbers. Right?

Josh Schachter [Host]:
Yeah, yeah. Kyle, you mentioned in your article tips for folks on how to stop churn some of the stuff that we've already talked about. Go after valuable workflows and use cases with real budgets. Deliver services in addition to AI. Stop overselling on the first deal. Narrow the gap between product delivery adoption, sell more annual plans. We all would love that. I want to go into the deliver services in addition to AI because the other thing that you start hearing more and more about that, you know, a year ago I'd have to Google but now it's, it's ingrained is forward deployed engineering.

Josh Schachter [Host]:
So is that what you're referring to? Go deeper into that comment.

Kyle Poyar:
You know, it's, it is a buzzword, this concept of forward deployed engineers. But I have to, you know, give credit where credit's due. I think the best performing AI company right now is Palantir and this is a core part of their model. And the idea is we're going to work with very large enterprises or governments. We're going to find out the most important thing that we can solve. We're probably not going to have a product turnkey ready to be built for that. And so we're going to prototype that with our customers and really, and probably also capture the business case like really understand the customer sort of pain and roi, et cetera as part of that building. And we're going to essentially front load those services because once the customer has a working version on something that is really important to their business, like the willingness to pay is kind of infinite at that level.

Kyle Poyar:
And, and of course they're going to convert and buy because at that point like why wouldn't they? Right. And so it's taking this idea of essentially more of a post sales function in terms of onboarding, implementation, professional services and applying this as part of the sales motion. I also personally think that you know, this is probably the best thing companies can do to prevent churn is having customers live in production in really valuable use cases before they've even paid. Now this is expensive to deliver and I don't think most businesses necessarily need like a forward deployed engineer but in some cases, you know, this might be a services person, an onboarding manager, even like a 30 minute to an hour call to get set up can go can go a long way to wrap.

Josh Schachter [Host]:
Us up here and maybe reiterate some of what you've already shared. Let's go into a lightning round of questions here. So Kassie, we'll go with you first and we'll alternate what's the most overrated metric in SaaS right now?

Cassie Young:
I think it's good old fashioned new logo. ARR growth or just ARR growth if you're plg not a logo. Yep.

Kyle Poyar:
Kyle LTV to cac. I just, I've just been saying this for a while. I don't believe you're LTV to cac. I've never believed it. The math doesn't math for me. Especially if you're like a one or two year old business.

Cassie Young:
You have no idea what's your lifetime. 18 months in like the churn assumptions all over the place. That's another good one.

Josh Schachter [Host]:
What's the most underrated metric? Cassie?

Cassie Young:
Gross retention. Glad he asked.

Josh Schachter [Host]:
Not NRR Gross retention.

Cassie Young:
Gross retention.

Kyle Poyar:
Everyone talks about NR North Star usage metrics. I think like that if, if you understand the core usage metric that defines success for your customers, that is a much better leading indicator of the future health of your business than anything else. Because even gross retention there's a lag around that metric and so the closer you can get to what is the real time value you're delivering for actual customers, the better. That's what I'd go with.

Cassie Young:
I like that. And actually if I could add on to that and this actually is not really a metric, so I wouldn't even say it's underrated. But I think about it a lot. In our portfolio is this like cohorted time to expansion, right? So to your point on like NRR being lagging to some degree, you know, as we think about that, I love this. What's the time to first expansion? Because that's a monetary way of thinking about the time to value equation as you go and do that And I think that can be really meaningful. Meaningful in these enterprise deals.

Kyle Poyar:
I love that.

Josh Schachter [Host]:
I've never heard that before. That's a good one.

Cassie Young:
That's why it's not even underrated. It's not really like a thing yet.

Josh Schachter [Host]:
You heard it here first, folks. Cassie, go, go write that LinkedIn post on that.

Cassie Young:
It's buried somewhere in the apocalypse piece.

Josh Schachter [Host]:
Yeah, okay. A SaaS principle that will be still true in 10 years.

Cassie Young:
If you do everything in your power to make your customers wildly successful. You would have to catastrophically screw something up to not succeed.

Josh Schachter [Host]:
Kyle.

Kyle Poyar:
So customer friendly. Cassie, I would say figure out your ideal customer profile. This is just something that I think even AI companies are trying to relearn this right now when there's been so much appetite for AI and everyone seems to be buying and it feels like you can sell to everyone. You know the money is there, but you then will look 6 months, 12 months, 18 months later and realize that a lot of folks left and then you wish you had sold more to the ones who stuck around. And so the, the better handle you can get on ideal customer profile the better. Especially going deeper than just like firmographics like company size and industry. You want to understand like the tech stack they're using, the motivations, the roles of the buyers, you know, go, go a level deeper than just that service level.

Josh Schachter [Host]:
So turn your customer from zero to hero, like Cassie was saying. But also make sure it's the right customer that you're transforming.

Cassie Young:
And maybe one point on that, this is just an observation of what I've seen in some later stage board meetings which I really like is if you're an early stage company, it's going to take you a while to figure that out. And that's okay, right? You have to figure out the course. And so one observation I've seen is these later stage companies actually splitting out the metrics between current ICP customers and maybe legacy customers on the NRR side, et cetera. Because then they're saying like listen, we learned we haven't fired them, but we do want to kind of like split that out so that people understand we have a command of what matters today.

Josh Schachter [Host]:
I love that.

Kyle Poyar:
Yeah, and sometimes that's a little bit BS in my mind because it's like, oh yeah, these like customers that we're going to churn, we're just going to look at ARR among the good customers. When I think that's not BS is when you have a purpose built strategy to attract more of the ICP fit customers and you can show that the share of revenue coming from ICP increases quarter after quarter. And you know how to reach them. If you're just using it as a way to show that your metrics look better with one group. Like that's a non start.

Cassie Young:
There needs to be a very critical distinction. So thank you for saying that. I think that's a very important part of the equation.

Josh Schachter [Host]:
Yeah, are, are you reframing the pivot that way? What's one thing you're optimistic about in SaaS right now, Kassy?

Cassie Young:
We have tolerated bloat and reactivity since the dawn of software and I think we're finally going to not do that anymore. And that's deeply exciting to me.

Kyle Poyar:
Oh, I don't know if I share that optimism, but it may not be.

Cassie Young:
This year, Kyle, but there's going to.

Kyle Poyar:
Be more shiny objects. I think for me, the thing that makes me optimistic is that the promise of being able to tap into headcount budgets by actually solving bigger problems, like a lot of SaaS was just a productivity benefit and we competed against people doing things manually or with pen and paper. And realistically, in a lot of industries like 80 to 90% of tasks are still manual pen and paper. With Excel, that is still the biggest competitor. And it's because software wasn't that much more valuable for enough of the market. And with AI, we can actually not just become a productivity driver, but we can deliver entire work products and outcomes. And that I think can 10x the budget power if we, if we tackle the right things and we do it well. So that's what, that's what makes me optimistic is just the size of the industry can get much bigger because we're.

Josh Schachter [Host]:
Doing more if we do the right things. TAM can explode that, that Actually, Kyle, we didn't talk about pricing. You know, I wanted to, but we had such a good deep conversation on the apocalyp. So I would love to have you back to talk about pricing and increasing that tam, you know, by serving work at some point. Cassie Young, Kyle Poyer, thank you so much for being on the show. This was a great one. Really glad we were able to share this with our audience.

Cassie Young:
Thanks for having us, Josh.

Kyle Poyar:
Yeah, thanks for organizing.