Profitable Growth: Scaling and Running Businesses Built To Last
Profitable Growth: Scaling and Running Businesses Built to Last
Vista’s annual CXO Summit convenes leaders from across our portfolio of enterprise software companies to step out of their routines and look collectively at the challenges and opportunities their businesses are facing. This year, we explored the importance of profitable growth in the current environment.
In response to today’s uncertain economic environment, software companies need a path toward near-term profitability and the capacity to generate free cash flow – both of which are strong indicators of a company’s ability to navigate economic fluctuations.
Profitable growth spurs agility, allowing for wise usage of resources and the ability to reinvest in the business, while cash flow generation is crucial for paying down debt in an era of high interest rates. By streamlining processes, minimizing waste and continuously improving efficiency, businesses can cultivate long-term operational excellence and value creation.
We aim to transform businesses into highly profitable, mission-critical assets with defensible top-line growth and market positions. Here’s a look at our approach to scaling and running enterprise software companies that are built to last.
Move the Needle With Efficiency Metrics
To scale and thrive, it is crucial to select the right benchmarks and track them diligently. Overall, software businesses should focus on success metrics, such as annual recurring revenue (ARR), revenue growth less operating expense growth and strict adherence to the Rule of 40. However, different segments within a business will require a focus on different levers. For example:
● Sales and Marketing: Key metrics include net and gross retention rate, customer acquisition cost payback period, return-on-marketing investment and sales and marketing expenditure as a percentage of revenue.
● Research and Development: Monitor research and development (R&D) spend as a percentage of revenue, the number of coding days needed per week and track roadmap delivery versus commitments.
After establishing benchmarks, create targets and track trends while adjusting along the way. For example, to measure operational efficiency, a business could track ARR per full-time equivalent. When evaluating engineering team efficiency, they could measure and manage developer productivity with the target of achieving R&D spend as 15%-30% of revenue based on scale. Or, if a company is tracking sales and marketing efficiency, they could implement a Customer and Prospect Database that focuses sales representatives on prospects with the highest propensity to buy as a lever that influences productivity per salesperson.
Driving Change Operationally and Culturally
Beyond tracking efficiency metrics, implementing profitable growth across an organization requires your team to work in lockstep through:
1. Strategic Alignment: Ensuring alignment among executive teams is paramount. This alignment sets the stage for a cohesive journey toward profitable growth and creates ownership and accountability. When establishing a strategic approach, consider designating profitability drivers like the Rule of 40 as a key pillar, and map incentives back to company-wide objectives that support these strategic pillars, such as ARR and cash flow.
2. Operational Mindset Shift: An operational mindset shift is vital. Implement process changes – like streamlining hiring, conducting an ROI-based review on all expenses and maintaining focus on working capital – throughout the organization to shift to an ROI-driven culture.
3. Long-Term Outlook: Maintain a long-term outlook, and plan accordingly. Influence company culture to build sustainable operations ideal for long-term health.
Achieving profitable growth is a journey and the key to creating resilient, valuable and enduring enterprise software businesses. At Vista, we aim to accelerate the corporate maturity of our businesses by building durable companies with efficient operating models, equipped with the right metrics and insights to ensure long-term success.
Beyond that, we take quick action to ensure our portfolio companies have the right systems and processes in place to navigate shifts in the market effectively. We continue to focus on what we believe creates long-term value for our investors, companies, employees and stakeholders – superior products and operational excellence – in the most productive sector of the global economy: enterprise software.
Learn more about the CXO Summit from Robert F. Smith, the Founder, Chairman and CEO of Vista Equity Partners.