Setting the Scene
When talking with founders and revenue leaders across the Notion portfolio in 2023 a common theme that emerged was the desire to improve predictability in sales performance, and by proxy their forecasting.
This is no surprise given the uncertainty we’re operating in this year. During uncertain times — people yearn for stability.
I am fortunate enough as a founder to have not endured too many crises which have impacted the running of my business. In fact, I remember very confidently telling an investor around 2 years into the journey at Paddle that we would never be impacted by macro factors…. which 9-10 years later sounds very naive indeed.
If anything, over time in my personal experience as a founder the macro conditions made things easier and easier, given we started the business back in 2012. Specifically, access to capital became easier over time. In fact, it was our series A fundraise, which was the most difficult of all. Years down the line Paddle has now raised $300m.
The first real macro crisis I ever had to lead a company through was Coronavirus in 2020. It was a particularly turbulent time for me, moving to/from New York during the pandemic. However, I always relished the challenges these crises presented as a leader.
To have the opportunity to lead the company through what was the most turbulent time for me ever as a founder, and for many of my employees too, felt like a huge responsibility, and one I was eager to take on. Looking back, that period was one of the few moments which really defined the company.
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The “black swan” of 2020
Lots was written about how to navigate the uncertainty around coronavirus in 2020. Notion shared great advice with founders and were particularly supportive during board meetings.
One of the most prominent bits of content shared at the time was Sequoia’s “Black Swan Memo”. The memo suggested that companies carry out a number of actions, many of which are similar to those we’ve been asked to deliver in 2023.
1. Extend Cash Runway
They asked: “Do you really have as much runway as you think?”, “Could you withstand a few poor quarters if the economy sputters?”. Today, how many folks have been asked to extend runway during this macro outlook?
The memo stated: “Private financings could soften significantly, as happened in 2001 and 2009.” This is true of the fundraising environment in 2023 too where we’re seeing less overall activity, especially at latter stages. Many folks are looking to extend runway with a view of wanting to fundraise when access to capital is greater, and in the hope they are able to raise and on better terms.
3. Sales Forecasts
Aha! Our topic of the day. The memo said to anticipate buyers changing their spending habits. To be prepared for this, and “dont get caught flat footed”. Today we’ll talk about not only how to build an effective forecast, but how to ensure it remains a useful tool during turbulent times, or times of change.
“With softening sales, you might find that your customer lifetime values have declined”. As a result folks may need to “rein in customer acquisition costs, to maintain consistent returns”.
We were asked to evaluate critically where we could do more with less. During Corona at Paddle we furloughed a large number of staff, I’m sure many readers did too. Today, in our current challenging operating environment we’re seeing huge layoffs. As of Feb 12th 2023,
“#340 tech companies w/ layoffs, # 101807 employees laid off according to Layoffs.fyi.
6. Capital Spending
“Until you have charted a course to financial independence, examine whether your capital spending plans are sensible”. This is similar advice to today with fighting for budget feeling harder than ever, and with every dollar spent scrutinized more heavily than ever before.
All of these suggestions seem very familiar.
Having run through the suggestions, the memo stated:
“Having weathered every business downturn for nearly fifty years, we’ve learned an important lesson — nobody ever regrets making fast and decisive adjustments to changing circumstances.” ~ Sequoia Capital - The Black Swan of 2020”
This feels like something that rings true, probably even during “peace time” as a leader. It was a message that resonated with me, and something I wanted to act upon, but didn’t feel confident doing so.
Forecasting Status Quo
In terms of forecasting status quo at Paddle during this period.
I felt I had no leading indicators to suggest where my revenue team would land each quarter. Instead, I had qualitative guesses from my VP Sales on where we’d land for bookings. These felt particularly risky given the “hockey-stick” style quarters we experienced as many others do.
This frustrated me given my desire to act upon the advice given. We had historically left financial planning to CEO/CFO, but the current forecasting model felt far too simplistic. We wanted to not only be more confident where we’d land, but to also get that visibility quicker.
We had furloughed a number of our team, who we wanted to return. Meanwhile, we felt the conditions could even provide an opportunity for us to accelerate past competitors. However all of this was contingent upon confidence in our numbers and performance.
As such, we decided to take much of the business / commercial related planning off finance’s hands for the first time, and bring this into Revenue Operations.
Our first goal was to build a basic bookings forecast. In doing so, we didn’t feel there was much content out there on how to do this super effectively
We stumbled upon something, easy to replicate, that each of you can apply.
We’ll start by talking through how to implement a basic bookings forecasts. We’ll then discuss some tools at your disposal to keep this forecast useful and relevant in a changing world
Building a bookings forecast
The starting point for a bookings forecast is forecasting based on opportunities. Opportunities are created and live in the CRM, against an account, with a dollar value.
To start with - you should not be forecasting performance from Opp Created to Opp Closed. You may be able to get away with this if the time from Opp Created > Opp Closed is super short. However, this is rare in b2b SaaS, especially with higher-value deals.
Instead, you want to break down your opportunities into various stages. These stages help give very early visibility for our FC, which is critical during times of uncertainty.
Spend time on the entry/exit criteria of each stage, and ensure you setup steps/stages based on how the customer buys. They should map the internal hoops, decisions, and evaluations the customer is making along the buying process. They are not a reflection on the path you ideally want them to go down, or path that makes it easiest for you to FC, they should match reality.
Once you have your opportunity stages, look at your historic funnel analysis to determine two things:
Both conversion rates & sales length are critical for our FC.
What this allows us to do is build what’s called a “weighted forecast”. With the total value of aggregate opps at any stage calculated, the % conversion allows us to predict what % of $$ value will proceed, while “time taken” allows us to anticipate when those specific opportunities or dollars are gonna fall.
You end up with the number and dollar value of opps expected to close within quarter, and those that you expect to fall into the next
It’s relatively straightforward to implement once your opp stages are defined. I’ve seen the actual maths take place in spreadsheets, eventually BI tooling and more.
Bookings forecast tips
Lastly — my favourite meeting we ever rolled out a Paddle, to the extent our chairman would often join too, was our “weekly opportunity review”.
We built a view in SFDC which listed every open opp, its value, stage, owner, RAG status, agreed next step, days in stage, etc. All AEs would attend (eventually split based on size/region). Sales managers were then asked pick-out opps at random - challenging the rep on whether their deal was in the right stage, what was their plan to get through to the next step in the buying process and more.
AEs would ask for help and brainstorm how to move a deal forward. Eventually, we’d ask AEs themselves to chair the meeting, helping them practice and critically assess deals. Coaching them towards being Sales Managers themselves.
Most importantly this builds the practice in sales managers and reps to manage their day-to-day through the CRM and the data in it.
“Opp is in X stage, in which case Y needs to be true. Should it really be there?”. This ensures process is followed, data is accurate, etc.
As founder and revenue leader, I loved that it gave me insight into deals in the pipe, how I could help, why the market was (or wasn’t!) buying and more.
Before we talk about the impact of uncertainty, the focus today has been on how to build a forecast as a high contract value, b2b, sales-led organization.
These principles also apply to higher velocity sales motions. Say an inside sales team converting users in a product-led motion
Whilst the time from opp to initial close is typically shorter, say 7 days, 14 days, often the length of a free trial, the principles are similar.
In this case rather than breaking down opp stages, you might want to look at what steps in the product the user has to take or typically takes before converting. You can think of these in the same way as opp stages.
Product setup > X details input > Y action complete > paid User.
You can build a similar weighted forecast based on the funnel of these actions taking place.
At this stage we’ve established there are four ingredients to your bookings forecast:
The problem with working in 2023 or during coronavirus is that you build the FC based on historical performance of the ingredients. But as the black swan memo warned us — buyer behavior will change in uncertain times.
So what do you do?
We start planning for the impact that changes to our forecast’s inputs (these ingredients) would have on our performance or business outcomes.
You can project forward what a change in win rate would do for you — where do bookings end up? How much more pipeline are you going to need to reach goal X.
In 2023 when budgets are being fought for, it’s easy to project forward what longer deal cycles are going to mean for bookings, thus revenue, and then cash.
Most companies settle on a base, lower, and upper scenario, baking in tweaked inputs based on current knowledge and end up financially planning accordingly.
Week on week, month on month, whatever necessity dictates, you can compare actual performance against these plans and continue to be informed around what the future is likely to hold.
Leading indicators are incredibly important. Rather than waiting for opps to be won/lost to see changes in performance, having broken down our opps into multiple stages, we get a much earlier view on time taken between stages, win rates and more.
Opps created & closed in quarter
At this stage, I have an idea of where I expect to land in terms of a booking FC during the quarter.
If we’re expecting to massively outperform our plan, I can begin investing more heavily.
Bringing some of those folks back from furlough, or taking decisive action that the memo suggested. If the FC is looking bad — I can set expectations early, sounding the alarm bells.
But a big problem arose for us… something which is talked about even less than how to pull together a basic bookings FC.
A big problem we had at Paddle was that huge amounts of our pipeline was created and closed within quarter, sometimes as much as 40% of our bookings.
My previous FC only allows me to effectively FC based on the opps I had in play. It wasn’t accounting for the opps I expected to create and close within the quarter.
We approached this problem in a similar way to the forecasting of opps which already had been created. We built out a number of pre-opp stages, largely worked by BDRs, and this allowed us to do a few things.
Firstly we could build a weighted forecast of opportunities we expect to create, based on the pre-opportunities we had in play in this “pre-opp funnel”. Looking at the number, value, time of the pre-opps in-play to determine how many would become actual “opps” during the quarter.
We then needed some view into how many pre-ops we’d expect to create before the quarter ended too! Here we looked at our historic six-week rolling “conversation creation” rate, to account for conversations also yet to happen
Very similar concepts, just applied earlier in the funnel.
The great thing about the pre-opp funnel is you have much more data. So you can get really confident in this FC super quickly. Interestingly at Paddle in the pre-opp phases, we saw quite similar performance across deal sizes. Behavior and conversion only significantly changed after opp creation i.e in the latter stages of the buying process.
Aggregating your forecast
Having built out our bookings forecast based on opportunities, and our pre-opp forecast to account for opps not yet created. We’d aggregate these together to work out where we were going to land for the quarter.
The light blue columns are the pipeline we expect to close based on the opportunities which already exist in our funnel. The darker blue part of the columns are the opps we expect to create and close in quarter, based on the conversations taking place, or we expect to take place, between now and the end of the quarter.
As you get farther into the future, given your pipeline has an average time to close or shelf life. You’ll see more of the pipe to be closed to be made up of convos you’re yet to have given we are looking so far into the future.
This too is useful, since you can determine: “If we continue at our current rate, or trajectory of demand and maintain our historic performance of closing this demand, where do I end up?”
This article should help you build out your first forecast, giving better visibility into performance for your business. As well as how to account for some of the uncertainty we’re seeing in the market today.
It’s worth calling out these forecasts can live in spreadsheets, your BI tooling and more. However, there are a huge number of tools out there which help too, Clari being a great tool recommended by most!