SaaS Capital CEO Series: Andre Lavoie from ClearCompany Discusses Scaling

This is the first of what we hope are many short conversations with SaaS Capital portfolio company CEOs covering varying topics that all growing SaaS companies experience. In this conversation, Andre Lavoie, co-founder and CEO of ClearCompany, discusses the different stages of scaling a SaaS company from $1 million in annual recurring software revenue (ARR) up past $30 million and his lessons and best practices learned along the way.  The “too-long-didn’t-read” version of the conversation is:

• ClearCompany is an award-winning Talent Management Software provider and the only HR software provider that unifies Recruiting, Onboarding, Performance Management, and Goal Tracking.
• ClearCompany, a previously bootstrapped company, joined the SaaS Capital portfolio in 2015, using growth debt to grow from $3 million of ARR to $15 million ARR before raising $60 million from Primus Capital in 2018.
• Andre is hyper-focused on the typical SaaS metrics of his business, and this awareness has paid off in spades.
• With single-digit millions of ARR, your focus should be on new bookings and net revenue retention (NRR). Driving revenue growth is the goal and you are still in “experiment mode.”
• As you reach double-digit ARR, you need to shift your focus to efficiency, and you now have the data to do so: namely accurate and consistent Lifetime Value (LTV) calculations.
• Double-digit and beyond ARR is all about efficiency. Improving LTV:CAC is the name of the game.
• Capital efficiency literally lets you grow the business with less funding, which is less dilution for your team and existing shareholders. Forecasting LTV to Customer Acquisition Cost (CAC) is critical as you scale to whether you are becoming a less or more efficient business as you grow.
• Capital efficiency also lowers risk, as you are not as dependent on the next funding round. This further increases value today.
• More broadly, growth is the number one value driver. A low-growth business, even with strong other metrics, just isn’t as valuable as a high-growth company. We recently showed that growth rate alone makes up 51% of the valuation of public SaaS companies.
• You need to treat net revenue retention and gross revenue retention differently – they are not both just “retention.” They impact your business differently and require separate attention.

In future conversations, we will cover fundraising, M&A, developing channel partnerships, instituting a customer success organization, and more. The video and summary transcript are below.

Summary transcript:

Rob

Hi everyone, my name is Rob Belcher and I’m a managing director with SaaS Capital. We provide capital to SaaS companies. We lend $2 to $10 million to B2B SaaS companies with anywhere from $3 million of ARR and up, and I’ve got Andre Lavoie with me today. He’s the CEO of ClearCompany, which is one of our portfolio companies. This is the first of hopefully many CEO roundtables. We’re just going to have a conversation about building SaaS companies, and hopefully, there’s some interesting information for other SaaS companies. ClearCompany has reached a decent scale, so I want to hear from Andre on the different milestones and the different experiences he’s had as he’s grown from early stage, up to, what I’ll call decent scale and again won’t share too much, he can share all that with you. Andre, please introduce yourself, and then we’ll go from there.

Andre 

Alright, that sounds awesome. Well, it’s a pleasure to have the opportunity to spend a half-hour with you on this. As you know, we’re huge fans of SaaS Capital. And in terms of ClearCompany, we’re a talent management platform. We’re the fastest-growing talent management platform for five years now straight. And look, there’s never been a better time to be in the talent business, it’s hot, hot, hot. We’re excited to be there, providing end-to-end across the board, talent management, all the way from recruiting to onboarding Performance Management Engagement, all in a single platform for the big market.

Rob 

Do you mind doing just a 60 second on you also your background?

Andre 

Sure, I started my own company out of school, very unsuccessful, shut it down, joined another startup company, that one [CCBN] was very successful, and sold to Thomson [Reuters], I went on to run the investment management business at Thomson which was just about a billion-dollar business. I left that in 2013 and jumped into ClearCompany full time as co-founder and CEO, and we will finish this year well above $30 million in ARR.

Rob 

That’s great. Why don’t you share a little of the lifecycle. When was ClearCompany founded, and what where were the big inflection points you’ve been through? I’ll try not to steal your thunder, but I know the company is old enough that you’ve been through some macro events.

Andre 

I co-founded the company back in 2004 with my co-founder Colin Kingsbury, and I used the capital from the sale of CCBN to Thomson Reuters to seed fund the business and Colin really ran it for a number of years. And then 2006 kind of first product launch, and then again I joined it in 2013 So this was a period of kind of, I would say, really slow growth but the company was building the platform over that period of time with Colin, my co-founder, running it. And then I joined in 2013, when we had a little over $1 million in revenue, and about seven or eight people, so it was still a very small operation at the time.

Rob 

So, bootstrapped through the early days with your money. Right?

Andre 

Yeah, bootstrapped through that period of time. I would write checks into the business during that period to grow it. My litmus test for that was that I’m always going to put in at least one times ARR. I’ve never seen a business that’s growing sell below one times ARR. That was a way to feel safe about continuing to make that investment in a company that I really wanted to be a part of. With a growing family, I never felt like I can just jump into something that was that small, so I felt that when it got to $1 million in ARR I felt as if, okay, I’m ready to kind of jump in there and use the skills that I have to grow it at a much faster pace.

Rob 

All right, so that’s 2013, and you’ve been there since. Any comments on sort of the growth trajectory from then till today.

Andre 

You were a huge part of that story for us. I went out looking for ways to raise capital and looked at the dilutive nature of venture funding at the time. People were willing to write three on five at the time, which felt like oh my gosh, I’ll be working for you if I do that in an $8 million post-money valuation type of business. So, I started looking for debt and people would ask me questions. What’s your PPE [physical plant and equipment]? I would say well, I don’t have any, but I think that’s a good thing. They’re always looking for these collateral questions which a good tech SaaS business didn’t have. Until SaaS Capital. I think you were one of the innovators in that business, and we were delighted that you came along. It was the perfect type of facility for where we were. We were $3 million ARR, and we used SaaS Capital to grow all the way to $15 million and into our first private equity rounds, so we skipped a lot of rounds in the process.

Rob 

Yeah, this isn’t, this isn’t meant to be a testimonial, but you really did probably better than any of our borrowers, really did lean into the model and grow. Like you said, you skipped all those rounds and pushed hard using the facility. So, again, not to be a testimonial, but that was cool to watch. You pushed through $3 million to $15 million and did your private equity round.

Andre 

Yeah, we did a private equity round 2018, and a recap. That was a $60 million raise. Think about it in terms of value creation for the founders, which was really, I think a big part of the aim for the company. Everyone got to participate in a liquidity event in 2018, and we were able to hold on to the majority of the business going forward. Now we have a lot of dry powder for the next round to grow the business. I would say that in terms of milestones of the business, the first couple of years was focused on growing as fast as humanly possible using all of the capacity that we have.

Rob 

When you’re saying earlier, is this all the way back to the beginning?

Andre 

More like $1 million to $15 million, so 2013 to 2018. Again, let’s grow the business, the top line, any ARR number as fast as possible, staying within the covenants. I believed, and I think it’s still true today, that growth is the number one kind of driver of value. If you have everything else but you’re not growing fast, nobody really cares. So, a lot of focus is on growth. I would say, post the 2018 period, that started to change over to gross retention, and then NRR and really efficiency. The last 18 months has been all about LTV to CAC efficiency.

Rob 

Was that driven by the COVID slowdown and pandemic or was that just stage and that’s where you were?

Andre 

Well, in my view, it’s fundamental to growing a great SaaS business. If you don’t have capital efficiency, you’re just going to always have to go out and raise more money. That’s why these numbers are important. The reality is, if you start to get closer to to taget efficiency numbers you can start to run a business, with as much growth as you want, off of the profitability of your business. You can grow cash flow even and funnel that cash back into a business that’s growing efficientally. I don’t know if efficiency was nearly as popular then it is as it is now in terms of a metric that other people like. For us, it’s realizing that we’re either going to have to go out and raise another $30 million or $50 million round like all of our competitors have done, or get really good at unit economics so that we can grow at the same rate but not actually have to raise all that capital.

Rob 

I like your idea, and this is important. So, you’re at $15 million to $20’ish million of ARR when you decide to focus on efficiency. You said X number of years ago that efficiency wasn’t necessarily the focus. Do you think that is true, or do you think, in 2013, 2014, 2015, it’s not as important when you’re at $2 million or $3 million of ARR, is it not. Do you think LTV to CAC, is as important at that stage, as it is at a later stage, or do you think your idea to focus on growth was the right idea at the time, looking back?

Andre 

Yeah, I don’t think you know enough to start to really dial those in when you’re smaller. I think you’re still in a series of experiments. What is my deal size? What is my ideal customer profile? How do I get to them efficiently? What’s my combination of inbound and outbound, and how do those overlap? Where am I getting leads from and how are those leads running through the funnel? Your questions are much more basic. I think if you’re working on efficiency at that point, you’re just too early in the whole process. Let’s just go find as many people as we can get them into the funnel, and then start to walk them all the way through to retention, so that you know you’re keeping them.

Rob 

When you are smaller, you haven’t had the lifecycle yet even to know the LTV, right?

Andre 

Exactly. It’s like seven years until you know what your real LTV to CAC is because you have to have customers stick around. And so, what we were focused on, as you probably remember, NRR. Yeah, and it was good, it was solid. Our revenue retention was pretty good, but everybody kept poking at the gross retention number, and I thought maybe I should be spending more time looking at gross retention. Even though I felt like 100% NRR was good, like that’s good enough. We bring in what we sold, we keep it. We can grow on it and we have 100% NRR every year, so everything we put on top of that is just growth. But, dialing into gross revenue retention as we’ve done over the past couple of years makes you realize that you can just have a stronger business. Once you treat gross and net differently, you can dive into gross and look at all of the variables in the conjoint analysis and the product pairings that can lead to better gross retention. And again, it’s actually easier when you have more customers than when you have fewer and don’t really know all the data.

Rob 

Yes, when you are smaller you don’t really know. Everything’s an anecdote.

Andre 

Exactly. So, now you can start when you have over 2000 customers and actually look at real data and make data-driven decisions. It’s not about tweaking the product but other things that drive gross revenue retention.

Rob 

That’s interesting. So early days, its about NRR. Getting customers to buy more of your product or use it more, and growth. Then it’s an interesting arc you’re weaving where then the efficiencies and the gross retention really matters. Is that a good summary?

Andre 

Yeah totally. And it’s what are the elements associated with reducing your CAC. So, your LTV to CAC and gross margin plays a factor. You have to be more efficient as a business. CAC is a factor in lifetime value and gross retention. So all of these are important in their own way to start driving that LTV to CAC up to four and a half. I encourage everyone to actually have in all of their plans front and center their LTV to CAC forecasts. I don’t think a lot of people do that or use that as a major metric. Everybody says I have to look at my burn rate, but you should be looking at whether you’re becoming a more efficient business or not over time. And if you’re not, figure out how to become more efficient as a business because you’re runway will extend.

Rob 

We did some research on LTV to CAC, and we actually have de-emphasized it as a metric that we’re tracking. But, we were working with mostly single-digit ARR companies and the LTV is sort of unknown yet. If you have a gross retention number that gets too close to 100, your LTV becomes infinite, and so it gets useless. And I’m just wondering where you think that switches.

Andre 

I was post $20 million in ARR before we spend a lot more time on gross retention.

Rob 

Okay, so maybe $10 million of ARR is the point where you need to be focused on gross retention?

Andre 

Look, if you think about these things early days, you’re going to create value if you think about them from the get go. It’s about, what is the best business I can be in that has the most efficient way of capturing customers? That’s where you’re going to build a great business right off the bat.

Rob 

And that plays into growth rate and value. Capital efficiency and growth are high-value, high-multiple stuff. It all sounds like it’s gone swimmingly, so I would love to hear any challenges or things that you would have done differently at any stage. I know that’s a huge question, but if there’s anything that really stands out to you like “we got to $10 million of ARR and we did this but we should have been doing that” we’d love to hear.

Andre 

There are so many! I think the last time we sold a company, I had the preference stack is so darn big that I left that business with $175,000 maybe. And this company was a huge success story so the second time around, I said well I’m not gonna let that happen again. We really pushed out the envelope in terms of when we would raise institutional capital to $15 million in ARR. We took what I would say was a disproportionate amount of capital off the table than I think we probably should have. I think we had a lot of runway in front of us, a lot of opportunities from exciting things, and I think that prior experience kind of clouded our judgment in terms of how much we should have kind of put into the business versus takeout. However, it all turned out great in the end because we had a business that we were rigorously executing on. We knew all of the metrics that we wanted to focus on, but I probably would have left more capital on the balance sheet to grow the business.

Rob 

It’s interesting because that’s a popular thing these days. A lot of people are getting to $10 million ARR and then do a recap. However, for every month you’re growing, you’re adding $100,000 of MRR, or $10,000 of MRR. You multiply that by your 6, 7, 8, or 10 times multiple and that’s how much equity value you’ve given up, so that’s interesting to hear.

Andre 

Everybody has their moment.

Rob 

That’s the thing. You’ve earned it, and you want to see that cash. You know it’s paper money up until then and want to see the cash in your bank account.

Andre 

I didn’t take a paycheck for the first five years after joining the business so I had to make up for a lot of time. The second thing was that we did put some cash on the balance sheet and push down really hard on growth. And I still hadn’t gotten into the really rigorous kind of efficiency mindset. I probably burned a little more than I should have for that next six months to a year period because I was just pushing the business so hard to put the headcount in because I wanted it to grow. I said at some point, and I don’t know when it’s going to be, but it’s been 10 years so something’s got to happen to the economy so I want to grow this business as fast as we can while we’re doing really well. We could have been more deliberate about capital efficiency, and I think this is a problem that a lot of CEOs and a lot of companies run into is they get flushed with cash. They get really excited about using it and they waste some of it. They could have just said, keep the cash on the balance sheet, figure out how to get some of these little elements in line because we have the capital to go and really research and take time. Then utilize the capital in a more efficient way. We’ve got plenty of cash in the bank, the business is  growing in excess of 30% and we even had growth through COVID. We didn’t grow 30% but had pretty good growth, double digit growth, but that’s where I would have maybe taken a breather, gotten my efficiency locked in, and focused on making sure I had the very best people in each role to really use the capital, even more efficiently.

Rob 

I have heard that hiring and finding the right VPs is difficult. Have you found that I mean, you’ve had some good teammates all along, but curious on hiring, recruiting, and team.

Andre 

Well, this is a great stuff. Yes, finding and hiring a great VP is really, really hard, and extremely important. You know them when you see them but I think the interesting part in the way I kind of think about talent is, you’ve got the people that have grown from $1 million to $5 million. And, I would put myself in that category when I was a lot younger and a lot less experienced. A few of them will grow with you and others you’ll have to find that next level of talent. Some people grow themselves out of that level where they’ll say, I need to be a VP and you need to pay me this. You say okay, I’ll pay you that, but you actually have to do the job and if you can’t do the job, you’re now in a category where I can go out and get someone for that price to replace you. So you either have to do it or if you’re not. If not, then I need go out and get somebody, and pay them that. You’re going to give the people that you have a chance to go into that role, but if they’re not doing to, if the Peter Principle, you have to find another person. Right now is probably the hardest time in history, to get talent, which is again, great for ClearCompany because we’re in the business. But we’re seeing that this market is like nothing you’ve ever seen before, and people are just starting to wake up to the fact that there are more requisitions than we’ve ever had in history out right now. There are fewer applicants than we’ve ever had right now. And, the turnover rate in most of the companies across the US are higher than they’ve been in 18 months, and it’s creating a perfect storm for talent. People are looking and thinking, something’s wrong with Indeed or something’s wrong with my applicant tracking system but it’s not. The entire US market is desperate to hire roles because the economy’s booming and they’re trying to grow their businesses. The single biggest constraint I see right now across our 2100 companies and growing is access to great talent.

Rob 

Interesting. And so it’s like a bullwhip right now. People hunkered down, didn’t want to lose their jobs, and now everyone wants to leave their jobs. It’s like the housing market too. No one was moving. And now there’s this just dearth of supply. It’s slowly coming out but people are trying to buy ahead of time, trying to hire ahead of time, and grow for the year because the prospects are very good.

Andre 

We have a visitor. Charlotte, can you say hi.

Charlotte

Hi.

Rob 

Awesome. It is the COVID way, right?

Andre 

That was a real thing.

Rob 

That’s awesome. That’s great. And he’s a real person, everyone. He is the CEO and a dad. This is great, Andre really enjoyed it. Thanks so much for your time. Really appreciate talking to you.

Andre 

Thank you, Rob. I’m a huge fan of SaaS Capital. Thank you for creating as much enterprise value as you did for ClearCompany, happy to come back anytime.

Rob Belcher

Managing Director, SaaS Capital

SaaS Capital® pioneered alternative lending to SaaS. Since 2007 we have spoken to thousands of companies, reviewed hundreds of financials, and funded 100+ companies. We can make quick decisions. The typical time from first “hello” to funding is just 5 weeks. Learn more about our philosophy.