Cloudflare Growth Playbook Revealed: How Cloudflare scaled to $1 Billion AR | Growth & Go-to-market-strategies | Chris Merritt, Former Cloudflare Chief Revenue Pfficer

Fabian Tausch:
[0:00] Chris, welcome to the Unicorn Bakery.

Chris Merritt:
[0:02] Fabian, thanks for having me. It's good to be here.

Fabian Tausch:
[0:05] Since in Europe, it's not that often the case that companies get scaled to $1 billion in ARR, and we have to learn from the US very often. And in your case, you did it as a CRO of Cloudflare. What would you say needs to be true for my product to be able to scale beyond $1 billion in ARR?

Chris Merritt:
[0:29] I think there's a lot of ways to build a billion dollar business that is healthy and scaling and growing. I often think about it as a pyramid, where you have a certain amount of customers that are giving you a lot of feedback on the product, and you're getting very fast, tight loops that you can build upon. And then as you scale up like those there's customer types they'll give you a lot of feedback but may not pay you a lot of money and that is really healthy because your product team has a lot of latitude right to try things to do some experiments and then as you move up the curve to customers that are paying you a lot there are slas and there are expectations around how the product works and how it integrates into their stack and candidly how much testing there's been you know how enterprise grade and solid is it and you know one one way that i think i think is really healthy is to have a stack of customers that are not paying you a lot and then the customers that are you have a testing infrastructure and a certain level of ability to confirm that the features functions that large enterprises need before they're paying you a lot of money.

Chris Merritt:
[1:44] And ultimately getting a lot of value, like you've had a chance to work out all the kinks. So I think you earn the right to move up that stack to larger paying customers. And maybe you don't have a large stack of customers that aren't paying you anything. But over time, you have to earn the right to be able to take large contracts and for customers to really bet their business on you. And I think that's an earned responsibility that you have to take serious on the product side and on the go-to-market side. So I think it's layers, right? And if I go back to my pyramid analogy, there's layers of learning. Along the way and then leaning into that responsibility and taking it serious because by the time a customer is spending a lot of money with you they're betting their organization and many times they're betting their careers on you and on your platform in.

Fabian Tausch:
[2:33] What ways can i earn that the right.

Chris Merritt:
[2:35] And earning the right is really based on trust i think trust is is really the people say relationships i think what they're really talking about is trust and trust is a you know I'm not sure I'm going to get the Webster's dictionary version, right? But it's really a, it's a, it's a feeling that one gets that you're looking out for the other person. So you're looking out for the best interest of your customers and you're making that.

Chris Merritt:
[3:02] Obvious over the course of your relationship in the beginning when you're getting to know each other it's really about do you have a problem that i can solve and am i credible in being able to solve it so the that ability to identify problems authentically solve them is where i think trust is started and then if you fast forward over time it's this consistent i've identified a problem you have tried my service we think it works let's take another step and exchange a fair amount of value once you start paying for products and the money starts to go up the expectation on realizing value continues to go up and it goes back to this trust nature if you don't if it doesn't work you as the company providing services you need to be honest and authentic with yourself with your team in a way that communicates to the customer like it does this really well you have a different problem so let me see if we can solve it another way but the minute that you start to get a little bit off target with your product doesn't really solve that problem you try to force it in i've said differently sometimes you try to jam it in.

Chris Merritt:
[4:12] That's where you start to break trust and if you think about earning the right to have customers spend a lot of money with you i keep using this word trust you probably do a trust count how many times I've said it. But I think it is a function of being authentic and being open and honest and direct with where it works, where it doesn't, where you're trying to take the product over time. Maybe it overlaps, maybe it doesn't. And that's how you earn the right.

Fabian Tausch:
[4:40] You said the expectation of realized value goes up when the contracts and the amount of money that i spend on your product is higher besides the realized value like probably a two-sided question what are the different ways of realized value that i could, expect from your product and therefore what are the different intents why i might buy your product.

Chris Merritt:
[5:09] I think as you're starting a relationship on the product side there is often there is a there is a specific thing that it needs to do and there's a certain element of i think about like practitioners people that are fingers on keyboards using the product, they will know really quickly whether it works or not. And I think of them as your first line of, is this going to be a good fit? So getting access to them. And I think the goal of that phase of the engagement is to make them champions. This thing clearly, this company, this firm, this potential partner that is evaluating your service, they'll look at you and say, they understand our problem. We've tried it. It actually solves the problem and we'd like to move forward. Moving them from sort of like possibly engaging with you to being a champion, like this thing really works. So I think about that first layer of how do you make practitioners champions? And then their expectation is that it works. It solves a problem and doesn't cause headaches.

Chris Merritt:
[6:21] And then you move up the stack to where you have decisions makers that are not users of the product. They have sort of agenda responsibility, whether that's the CIO or the CISO or the CTO or the VPN or the head of DevOps. They all have...

Chris Merritt:
[6:39] Agenda items and it's often like to deliver service to the organization at a certain cost and over time take that cost as a percentage of the overall spend down but it's an agenda item and that is very different than the practitioner they're related but the agenda item is to deliver service on time on budget with certain expectations and you know think about them being two different ends of the buying spectrum. One is fingers on keyboards, making sure that it's successful. And the other is making sure that it's like socially acceptable in their agenda. Are you saving them costs? Are you raising SLAs? Are you raising service delivery inside the organization?

Chris Merritt:
[7:23] And the analogy that I use, once you have those two parts of the organization saying this is a solution that really works for us, Then I think if I'm like as a bottom and it's like a dog sort of biting into a bone, right? You have this bottom jaw, the practitioner's like, yes, we're going to do it. And then the top jaw is the decision makers. And if you get those two working in concert, then you can take a good grab onto the organization and the value will be realized at both ends. And it's a much stronger relationship. it's a much more secure bite and you're also getting feedback from both sides is it working and is it does it match the agenda of the organization and i think that's you got to get those two things operating in concert i'm not sure that it totally addresses your question but that's how i think about the question as you asked it.

Fabian Tausch:
[8:21] I would love to have another different angle that's a bit more on the question like how do i cross a billion dollars in revenue at some point what about the balance of building the best product versus building a world-class sales organization.

Chris Merritt:
[8:42] So i'll take them and like you ask two different questions like one is how do you cross a billion dollars in revenue and the other is how do you build up sort of product and go to market um, The billion-dollar mark is like a waypoint. And I didn't grow up carrying the bag. I'm an engineer that ultimately became a go-to-market leader and business builder. But think about it as math. You have to have a base that is growing that you can expand, a base of customers that is growing that you can expand. And at a certain point, it's your base times a growth number. And that number either has enough momentum and like escape velocity to get across a billion dollars or it does not.

Chris Merritt:
[9:30] And along the way, you know, there's a couple different ways. You can either have millions of transactions at a very small amount that looks typically like a consumer model, or you have a very few number of customers spending a lot of money.

Chris Merritt:
[9:46] And I think that the desired outcome is to have both. Like the healthiest business to grow the fastest are ones that have a very large addressable market that you can service small transactions in high volume and then high transactions in small volume and get the benefit of those two and the math will tell you whether you can cross a billion dollars or not and then if you can kind of like intellectually get your head around this thing has legs to go to go that distance then you just start executing and it's about keeping that engine going with growth and you'll cross a billion then the funny thing about once you start going from from tens of millions to hundreds of millions to billions like you you don't stop once you cross a billion you're thinking about like well how about two and a half how about five how about ten And you just kind of keep going because your real responsibility, if you have that opportunity, the real challenge is not the number. It's that you have tucked into a problem and a mission that everybody's excited about. And your responsibility is to ensure that it lives up to its full potential. And a billion dollars is just a waypoint. A public offering is just a waypoint.

Chris Merritt:
[11:01] And I would say that's like, it's the most wonderful part of building this business is it's all the waypoint. Also, the hardest part, because the journey never ends and the expectations don't stop. You might be a public company on four 13-week sprints a year. If you think about the quarterly cycle, that does not stop.

Chris Merritt:
[11:23] And if you think back to, I think it was Greg Lamond that said, it never gets easier when you're peddling that hard, you just go faster.

Chris Merritt:
[11:31] So that's question one is, how do I think about a billion dollars? It's a waypoint and you have to earn the right and if you can have balanced, customer set where you have lots of customers spending little and some spending a lot that's a really good base that will keep you growing past a billion if you look at the composition a lot of those companies they have both and then your question is like how to like great product and then world-class go-to-market, I think about it as part of, as you asked the question, I thought about it as canvas. If you don't have a great product, then you have not earned the right to go on that journey to a billion dollars and beyond. So let's assume that great product is a function of a really high quality mission that you've tagged into with a problem set that you can solve with a team that is building really high quality product that customers think is worthy of their time. Let's assume that's true.

Chris Merritt:
[12:30] And then on top of that, you have a feedback loop with your customers where you're engaging with them to try to figure out what's working, what's not, what they don't like, what competitors are doing, what the context of their business is, how much money they have to spend, what the rest of their stack looks like. Like how that's changing over time, how their business itself is growing, what kind of financial constraints they have, et cetera. Like that is a feedback loop for product. And your go-to-market team is really responsible for finding a way to get that feedback into the system quickly. And along the way, create relationships, as we were describing earlier, where you get a fair value exchange that are healthy, structured in a way that the customer clearly understands what they're getting for their spend. And it's clear to the organization what is expected of them to deliver service to the customer in a way that they're you know they're expecting it's clear expectations both on what the product is supposed to do and what the the how the customer is going to evaluate value especially as that spend goes up and like that work that go-to-market organization it exists for that And it's like a canvas. And I'm a playbook person to a degree, but I really believe that each of those companies and those markets are kind of unique.

Chris Merritt:
[13:49] And the way you go to market is pretty bespoke. So if you look at each of these companies, yes, there are some commonalities. But in reality, if you dig into them, there's a lot of bespoke work that you won't find common across the other companies.

Fabian Tausch:
[14:05] Let me rephrase the question a bit more spicy does.

Chris Merritt:
[14:09] The best product always win i appreciate the spice does the best product always win i would say that winning companies always have great products like you look at the ones that win consistently over time, so i think that there's a there's a certain amount of you have to have a great product or the value exchange is not going to work at a certain point, I think there's quite a lot of media happening around companies that, you know, without going into specifics, but companies that are getting out of the gates with strong engagement with customers, but the products are not living up to those expectations. And why are they written about? They're written about because they're starting to fall, falling short of expectations because the product didn't live up to expectations. So, no, I don't think that you can build a great organization without a great product. But i would also say to like to flip it say you can screw up building your go-to-market organization and not have the company live up to its full potential meaning the full potential of the product so i don't think that just because you have a great product that doesn't mean that you're going to have a great outcome.

Fabian Tausch:
[15:17] So as you're retired from the operator role and now working with a lot of earlier stage startups from seed to growth and have board seats and all the things alike i would love to get an understanding for the phases you look at when you look at companies how are you determining and and structuring different phases so that you know or can discuss with the founders and entrepreneurs and go to market leaders that you're working with where these companies are probably it's not black and white but still and try to help them navigate through the different challenges that are coming and are attached to each of these stages.

Chris Merritt:
[16:05] And we're talking about growth companies you have this this first part of the growth curve where they have market traction in some fashion they have a product that is finding a market better yet the market is finding the product and now you're trying to repeat that engagement how do you have customers find you and not just the first few but the next 10 the next 50 the next 100 and do they have an experience that is consistent and repeatable and it's it's going from what i call sort of like this mad science where in a lab you can kind of get it to reproduce every once in a while to, you know, we know how to do this and you're getting consistency. That I think is all the first phase and there's so much learning loops and.

Chris Merritt:
[16:57] You're just trying to get it to the point where you know how to repeat it. You can repeat creating the product, delivering the service, and finding customers that have those problems and creating some fair value exchange. And in there, you've probably figured out whether you have good unit economics. Like, is this thing going to be a healthy business if we scale it? I think that's phase one. And it's just getting the repeatability consistently.

Chris Merritt:
[17:24] And then you get into like the crossover into you have something that is working. And now you're going to throw some gas on the fire. You're going to see if you can scale it beyond the $5, $10 million, maybe it's $20 million you've gotten to depending on how fast you're growing. And can you bring more resources in to the organization? And there's a subtlety in there which is in the beginning you have it's the organizations are full of very mission driven people this is their life's work this is what they want to do and now and they've typically found their founders and their early engineers and maybe some early product people and some early garden market folks like they are driven by the mission once you start to get out of that first phase into the next phase, they might be interested in the mission and they might really think it's cool, but they weren't there when it was very uncomfortable, to make that decision, socially unacceptable, nobody had heard of the company, not everybody agreed with how it's going to get solved. So you're bringing people in that are not quite the same level of conviction of the founding sort of 50 or 100 people.

Chris Merritt:
[18:42] Not to discredit any of the work that gets done by the team, because it is still really hard. But the question is, can you bring people in, and in a short fashion, they catch fire on the mission, and they're able to do the work and grow with consistent outcomes. So I would say it's more about bringing new people in and scaling the organization into this is now repeating beyond sort of the high conviction, mission-driven early team.

Chris Merritt:
[19:14] And that can go up to, I call it $100 million. You could say it's more, depending on the check size. But it's a very hands-on process. And you still know most people inside the organization. You're still interviewing almost everybody that comes in. And there is a high mission composition. There's a lot of DNA that the original team has sort of ensured, is repeated in this next phase. It's diluted a little bit, but not a lot because it's very hands-on. And then the third phase beyond that is it's scaling so fast and it's diluted quite a lot because it's just, you're scaling so many people. And you're not able to imprint the dna quite as much so that next phase is really a function of did the momentum from the second phase did it carry like is now the momentum obvious and it's a, it's like this virtuous cycle is working as a as a machine and it's less personality driven.

Chris Merritt:
[20:20] I know it's a little bit, a little vague, and it's certainly not as spicy as, I'm sure you'll spice it up with some questions. But I think about those things, like, can you repeat the science experiment? Can you bring new people in? And then the third is, does the machine have momentum?

Fabian Tausch:
[20:35] When we look at phase one, I have to find the first signs of product market fit of there is something that could be a fire at some point that I could pour oil in. How is this currently changing i'm very sure that how go-to-market and everything like in generally in general companies were built 10 years ago five years ago 20 years ago, differs a lot from what's happening currently and i'd love to understand what you think are the biggest differences that you're currently noticing i.

Chris Merritt:
[21:15] Think there's some there's some The changes in how the companies are, like how the stacks are being built right now, if you take it from the customer's side, 10 years ago, the way SaaS was built and the way the infrastructures were built, it was a pretty known problem. You knew the trajectory of your business. You knew how this transition from on-prem to the cloud was happening. The unbundling of all of the software that you used to buy from SAP, Oracle, Microsoft was coming into individual apps. It was pretty rational and straightforward. The customer problems were pretty straightforward. And the cycles were measured in three, five, you could argue 10 years. Not without sort of the market ups and downs of economy, but that transition was pretty rational. Yeah. The transition right now with companies having these existential moments, I have this large customer base, what is AI going to do to my business? Just think about the customers. There's a risk that if they don't evolve to adopt the new leverage points that you should be able to get out of machine learning or AI or use any of the terms you'd like to describe it as, if you're not intensely focused on how your business is going to change.

Chris Merritt:
[22:40] You fear that you're going to run out of runway and your business is going to go under. So there's like this big level of angst in the marketplace is causing customers to try to rethink their engagement with their customers and all of their back office functions in the lens of what do you do with AI. That is very different than this rational sort of like on-prem the cloud migration and unbundling of software like the the market forces are different so if you watch companies get built right now that have that are going to that early phase they have customers coming at them with massive desire and need and spend that is not like the prior 10 years and i would argue it's not like the last 50 years, where they have to make these big experimental bets and i think it's still in the experimentation phase. How do you use AI to change the engagement with customers and with how you run your business? There's a bunch of experimentation going on, but the money does not look like experimentation money historically. It's big spends. So I think that if you're building out one of these companies that is small, especially if you're in the AI space, you see check sizes coming at you that are not like.

Chris Merritt:
[23:55] $5,000, $10,000, $15,000 spends that might have happened for a new service 10 years ago. $50,000, hundreds of thousands of dollars, in some case millions of dollars to do experiments in AI. So I think you can be in this first phase and have radical spend coming at you. And I think the question that you have to ask is, do I have product market fit? Is this really going to repeat? Are the Unidoc economics, like, do I understand them? Or is this just I happen to be at the right place at the right time, but I may not be the winner in the category. I may not even be competitive because somebody over here is getting, is building a better mousetrap, is building a better model, is leveraging the model fast. Like, the cycles are so fast and the money is at a different scale than it's been seen before. So I think there's a lot of mixed signal in there, but the context is very different.

Fabian Tausch:
[24:54] What would be your tips for founders who are currently doing founder-led sales and are like on the way to their first million in ARR and then also thinking about, okay, I want repeatability as early as possible. I think it will be possible. It will definitely be needed at some point if we make it to bring on somebody. But how long do I do founder-led sales? When do I try to bring on the first person? What would you say from your experience?

Chris Merritt:
[25:23] I think founder-led sales are great because that, why do I say that? The feedback loop between customer and the team responsible for the product is like there's no gap. There's no air gap between the two, like no daylight between the two. And what does that mean? That means that the founder is getting real-time body language, real-time data feedback, and real-time verbal feedback from the customer. And when I talk with founders that are doing founder-led sales, especially the ones that are actually growing, they listen and they react.

Chris Merritt:
[26:02] But they have a backbone. They know why they're in the business, and they're not going to get pushed around because they're convicted around the problem. So, at a certain point, when the founder feels like, hey, I'm getting consistency, I've listened to the feedback, we've addressed the feedback, and now this thing is repeating, and I'm now comfortable that somebody else can work alongside me, and if I weren't in the room. Like now the question is like, what kind of a person do you bring in? But it's at the point where you feel like you have the feedback consistent enough and you've addressed it and the customers are getting value and consistency out of their engagements with you. That's where I see founders starting to bring in not just customer founder, but customer founder and then the third person, which is, hey, can I get somebody new to take a lot of the repeated responsibility and do this at scale, at least at the next phase of scale? It's that transition when the founder's like i i now think this thing is repeating so.

Fabian Tausch:
[27:11] I think there is no like absolute value of like when you reach this amount of revenue this is happening or just these amount of customers because it's dependent on your product and your average contract with the customers and everything like that so to so it's not easy to say it's like this specific revenue corridor right.

Chris Merritt:
[27:32] Now i you could say it's it's probably single digit millions it's not it's not tens of thousands and it's not tens of millions it's somewhere in that band, where you think about like the job of a ceo or a founder ceo specifically they won't be able to scale the business if they're spending 100 of their time engaging with customers now i think that there is a certain amount of time they should engage with customers forever. But it's not 100% of the time or they won't be able to scale the balance of the business.

Fabian Tausch:
[28:05] You joined Cloudflare in the single-digit million in ARR. Why was that the right timing?

Chris Merritt:
[28:14] They look at the time that there were three co-founders. One was very technical. One was very commercially-minded, meaning the business model and the strategy and the product. and then one was the glue person. And they built a great product and the community was finding them. And it was repeating on paper. If you looked at it, there were many, many signups every day just finding Cloudflare. Most of them, 95 plus percent of them spending nothing. So it was this, we think we have a certain level of market pool. And there was not a go-to-market person on the founding team that had built a business like that before so i think they were trying to augment the team with good sort of fundamentals commercial go-to-market architectural fundamentals and the market was pulling the product so it was like the combination of those two things composition of team and healthiness of the market pull early on.

Fabian Tausch:
[29:23] So you've been that person that you referred to earlier on when you said now who is the person that I want to bring on so who were you and why were you the right person.

Chris Merritt:
[29:39] If I zoom out for a minute I think that if you know all the feedback when you're being recruited about yourself if you could go back and look at all of the interview notes that people had on you I think I don't think you'd want to know it so thankfully I don't have all the interview notes I think that, What they had been, I don't know the whole story of everybody they talked to, but if I were in their shoes, and if I were going to go back and do it again, I think you'd talk to some of the incumbents. If they were going down the list of how to transition the network stack from on-prem to cloud, which was the remit at the time for Cloudflare, they've expanded the aperture certainly beyond that at this point. But at the time, you should probably talk to the folks that were selling boxes, at least to understand, at the very least to get some market intel. And I can imagine that they would have done that. They would have spoken to spokes from Cisco or Juniper or any of the 1U network boxes that were in the marketplace.

Chris Merritt:
[30:42] And I think that that would give them interesting feedback. The truth is that also when you're building something that's different in the marketplace, there's this phase change or platform shift. I don't think you want somebody to bring the playbooks from the old way of doing it because that's what you're going to get. You're going to get the old way of doing it, not a new way. My own profile is, like I said before, I didn't grow up carrying the bag. I was an engineer coming out of school, but I was not a network engineer, which means I got zero credibility inside the organization. I would be teased. They'd be like, you're not an engineer. I'm like, well, technically I am an engineer. I'm not a network engineer.

Chris Merritt:
[31:20] But that was like a teasing I would get. So I had this engineering mindset. I had a certain level of go-to-market experience across other categories and industries. And I think I had enough experience. Naivete like you have to be a little naive to step into these things and think that i i can learn this stuff i i can figure out the context and the customer need and the use cases and there's a physics associated with building go-to-market machines it's like it's like the science and the culture and the science is like these are universally true when you're building a campaign infrastructure to take product to market there are certain things that need to exist and then there are certain cultural aspects that will change for the markets and the the america's markets operate very different than many of the asian markets as an example and then europe has a different flavor as well so and then even inside of asia like singapore is very different than china i think you i had i had a lot of that market context having built businesses domestically and overseas i dragged my family all over the world and you know i had learned had that sort of lived learned experienced and a lot of energy and enthusiasm and naivete so i think that they probably saw some some combination of those things but thankfully like i said i don't have all the feedback to also see all the things that they didn't like.

Fabian Tausch:
[32:48] It turned out great i guess um probably they wouldn't go back and change their decision. But let's flip the switch and say, I'm a founder that you're advising and I'm approaching the stage of, hey, I need to start looking for somebody that I could bring on as a support in go-to-market or then over the long-term, maybe even taking over. What would you advise me?

Chris Merritt:
[33:15] I'm of two minds. And if you ask me again in like five or 10 years, I'll have another opinion. I think the debate is whether you bring somebody in that's junior or senior. And there's blessings and curses with both sides of doing that. I think the benefits of bringing somebody in junior is that, They don't have a lot of skepticism coming in and they don't have a lot of patterns that you're having to overwrite, meaning they're going to come in, they'll learn the product and they'll just like the machine will just start running. They'll just start doing the work without having a lot of these patterns in their mind that they're trying to match. And there's a benefit to that because you're going to get pretty fast execution and you're going to get it stylized around the existing team, typically the founding team. And there's a benefit to that. So if the existing founding team is doing things right, a junior person will augment, will sort of repeat that.

Chris Merritt:
[34:26] And the benefits is you'll get straightforward execution and not not a lot of coloring outside the lines and the w typically a little bit easier to keep inside the lines i think that if you if you jump to the other side of you hire somebody who has more experience they've got patterns in their mind at the very least they're trying to figure out like how to apply these patterns.

Chris Merritt:
[34:50] Like i've seen this before in other industries they're maybe feeding back giving like nudging the team a little bit like hey i heard this thing we might want to move a little bit in another direction so they're they're they're going to color outside the lines a little bit and sometimes founding teams just don't want that so there's a little bit of like the okay can you please just get back in the box. I just want you to do these things.

Chris Merritt:
[35:17] And that's like, that's thing one. And then thing two is you'll hear people say, well, is there a person that you hire that gets from zero to 10 or from one to 10? And there's a person from 10 to 50 and then 50 to a hundred. In fact, one of my, one of the folks I know in the industry was trying to write a book on this and they called and we were talking about it. And he said, well, can you give me some feedback on the kind of person that goes there to 10, 50, 100. And I said, well, I just disagree with the premise. Because if you change over your sales leaders or your marketing leaders, any of your leaders, typically you get a changeover in the team that they've recruited. People don't leave companies, they leave managers. So I think you inherently, you introduce more churn in the teams when you change the leaders out. And the one axiom, like the back to the physics, tenure of your team drives expertise. The longer they're there, the more expert they are at their job. And expertise drives productivity.

Chris Merritt:
[36:20] The better they are at the job, the more they can get done. So if you change the team out, you're introducing a certain dip in productivity. And that is anathema. That is like the last thing you want as you're scaling a business is to take productivity down. You want it to go up. So I just think inherently you have this tension of, yes, there are some natural sort of boundaries that people are good at. But you want somebody that can take you as far as possible so that you reduce the churn in the organization and you know selfishly when i joined cloudflare i was looking for a canvas that i could build on somebody once said like hey you're gonna be excited when we cross a hundred million dollars i'm like it's a waypoint i came here to build a world-class organization i want to cross a billion And I thought I was crazy at the time, but I was serious. And so my lens was to go across multiple phases and build the business to a very large organization. And I think it's possible if you get the right leader, it has the right lens.

Chris Merritt:
[37:33] You didn't ask this but like typically experienced folks have a hard time coming down to when it's super risky because in in their career they've sort of been de-risking so if you bring it down to when it's super risky and where they're doing individual contributor kind of work it takes a certain person to do that whereas if you hire somebody that's only done individual contributor kind of work they typically like they're learning all the management piece at a certain point so like you know which problem set do you want.

Fabian Tausch:
[38:00] Would you say it's a mindset for the leader that you're hiring that they also aren't allowed to think in like hey i'm the person from 10 to 50 or does it depend on how fast can you grow personally want to keep up with the growth of the company.

Chris Merritt:
[38:22] I rarely see people define themselves as i'm the person that goes from zero like one to ten or i saw this more.

Fabian Tausch:
[38:31] Often in the u.s and in europe.

Chris Merritt:
[38:32] I've seen it but like when i talk with people in the industry they don't introduce themselves that way, they will sometimes get categorized by others and if they're trying to be like easy to get along with maybe they'll regurgitate that, but I don't think people really define themselves that way. I think that they're, you know, maybe, not in the micro, at least, not like one to 10. They may say I'm an early phase person, and what they might be saying is I like it when things are undefined. I like it when things are risky. Or they may just be a, like, I'm used to working in billion dollar plus organizations and I'm comfortable there when it's more data-driven and anonymous. I don't think that means that they are self-defining in the early phases. And I would argue that if you are self-defining, pause and really think through why you're saying that. And if there's some missing link, fill it in. Like, if there's some gap in your experience, fill it in. Because I think that these are artificial limiters.

Fabian Tausch:
[39:43] So why in the end were you able to grow from approximately 1 million in ar to 1 billion in ar with the company.

Chris Merritt:
[39:52] Well i think you have that great product it starts there we talked about that earlier and i think it'd be it'd just be untrue if i said that was not the case i think you have that great product and then i think you have to have a learner's mindset you You have to constantly be seeking out what's not working, actively seeking what's not working, and prioritizing that in the context of all the work to be done. There's a certain amount of debt. Like you do things that are short-term nature and you know you're doing them. And the question is whether you're good at writing them down and going back and fixing them later. And if that debt builds up too much, you sort of topple over because what you're building is not stable. And I think that's where leaders like myself, I think that's the risk to doing this work, having this balance of, are you learning? The category I described at the start earlier, the category that Cloudflare started in, it was a widening aperture over time. The question is, can you learn to keep up with the markets?

Chris Merritt:
[40:58] And what you knew about the markets to be true in year one is not true in years three four five eight ten you have to be able to learn and keep up and while i was not a network engineer i was an engineer and i knew how to learn i understand physics i think the hardest part in all of that candidly is if you're not the user of the product it's harder so if you if you really, have never used the product, I think at a certain point, that becomes really hard. And it's hard over the course of a decade. You have to become a market expert, if not a user expert, which means you're learning about this changing dynamic market. So I think I was pretty good at learning. And I think I was good at surrounding myself with people that I learned from and that were better than I was and I cared I think that the thing that when you get up in the morning and you look at yourself in the mirror and you're thinking okay I'm getting ready to go to work like do you care about the work that's being done do you get a little uncomfortable does that energize you.

Chris Merritt:
[42:07] And, you know, if you're not a little bit paranoid going into work, like, am I learning fast enough? Am I bringing in the right people? Am I keeping up with my peers? Am I, you know, am I constantly sort of breaking through the calcification that comes as you're in a role for a while? And you're getting feedback whether you like it or not you're getting feedback and it's not all positive and the question is what you do with that sometimes you know that sometimes you're just like you know you reject it you're like that's not true that's bs you know and that's like a normal defensive reaction there's there's often like too much tone in the feedback it's like it's spicy to use your comment earlier it's spicy feedback or it's negative and you have to sort through like okay this is it's making me sad or it's making me uncomfortable but like there's a message in there what am i going to do with it am i going to improve areas that need to be improved or am i going to hunker down and not take the feedback and not be a learner and ultimately get passed over and i think that i was pretty good at being resilient that way one.

Fabian Tausch:
[43:14] Of the things you mentioned earlier for successes like the small distance between product feedback and implementation, so remember we're still in phase one we're still trying to find product market fit and the repeatable process and everything what is the groundwork that i can do to intersect product and go to market as deeply as possible that i won't have two parts of the organization that are drifting further and further away when the organization is growing.

Chris Merritt:
[43:49] Let's talk about product experience for a moment. So if I'm a customer using the product, I'm a practitioner. I'm experiencing in real time whether this thing works and solves my problem. As I'm experiencing it, the question is, who is getting the feedback? Is it a salesperson that is engaging with the customer? They're seeing the feedback, but like I've described earlier, they're probably not a user of the product. For all of the hard work they've done to learn it, et cetera, they're absorbing the feedback in a way that is in their lens. And they're losing fidelity on what the customer is really experiencing. And then they're taking that feedback and giving it to product. So you lose fidelity on one, and then you lose it as you're translating it to product. So this fidelity loss is a problem. And it comes out in a few different ways. One way it comes out is you're giving the wrong feedback to product.

Chris Merritt:
[45:00] So you fix the wrong things or you'll curate the product experience in a way that is not really getting at the problem. That's problem one.

Chris Merritt:
[45:10] And that's bad. problem two is by the time the product team figures out that oh the feedback that we got from this go-to-market organization was off target you now lose respect you lose like credibility and respect and you start to have this happen inside the organization so like and like there are other problems but those are the main two as they manifest so that's like what do you do well i'll tell you what you do you go back and you actually like you get the product team and the go-to-market organization to, you know, to basically hear the customer at the same time. And that is a better recipe for high-fidelity feedback and a team that is also learning together. Like, they can both get, like, oh, the customer is saying, really what the user is saying is this. The product team can interpret it better so that the go-to-market team is like, oh, that's what they meant. So they're learning at the same time as compared to this loss of information flow. So in the early days, having product and go-to-market, experiencing these customer feedback sessions, which means going on joint calls—.

Chris Merritt:
[46:32] Pitching together and you know doing support tickets because that's where you get direct feedback it's like where are all the feedback points try to do those together so that you're learning at the same time i think that's one of the hacks.

Fabian Tausch:
[46:46] Fair and i think that's super important and it's not often talked about like you try to look at all the parts like go to market or product or anything else quite individually and often forget that they are these are intersecting parts when we think about the phase while we're growing like knowing that like it's amazingly hard to find the first customers and then build a product and then growing from there and find more customers and repeatability when is the next point that feels like a make or break for let's say especially venture firms that have to have have to fulfill a need for high growth what is the next part that will be after i found the first repeatability and the first like i know what my icp is i know how to approach what is the next barrier that i'm running into my.

Chris Merritt:
[47:46] The reaction that i had as you were forming that as i was thinking through like the scars like where the where are the points in my past that hurt the most as you go through across that phase and one of the ones that comes to the surface is you have this element of i talked about it earlier but i'll i think it's important to to rehydrate it for this part of the conversation you're the founding team, And it's not just the founders, but it's the people around the founders in the beginning. It's certainly the first 50 to 100 people. And they are so driven by the cause.

Chris Merritt:
[48:27] And as a result, they pay attention to every single detail. And they care deeply. When you get into like, oh, this is now happening. There's usually, and in the beginning, there's very little buzz in the market. There's like almost no buzz. It's like nobody knows this problem, the set that people are working on, except for like really high-lice, like they have like really good taste. They know what the thing is and they've been flocking like, oh, I've been trying to solve this DNS problem forever. I've been trying to solve this encryption problem forever. This is the only place that I can solve it. Like they're driven by these problems. Okay. That's the founding organization of Describing Run. Then the next part is there's usually signal coming out. This is a hot company that it's getting funded. Like now you have all this signal coming out that is bringing a different kind of person to the organization. Like, oh, I want to work on something fun. I want to work on something exciting.

Chris Merritt:
[49:31] There's nothing wrong with them. They're just coming at it not with a like, I'm drawn by the problem. They're really drawn by something that's flashy. And good antibodies like they will keep the wrong people like antibodies meaning the founding team like they act like antibodies they will keep the wrong people from getting in but they're just it's not the same dna so in this next phase you have a group of people that are really interested in building out an organization around this problem they're probably interested in the mission, and then we'll catch on to that more and more and more over time. But the challenge is they are, They're not as connected to the problem set. And while they care about the work they're doing, they don't care as deeply as the founding organization. So in this next phase, as they're scaling out the engagement with customers, I think the risk is you don't do it as carefully as you did in the first phase.

Chris Merritt:
[50:42] And how does that manifest negatively? It might manifest negatively where the founding team sort of knew exactly, you know, the founding organization sort of knew exactly what the problem was, and they knew exactly how to position it, and they knew exactly what the customer, if the customer said X, what they meant. The next group of people they don't have that same level of like perfection and it can come across as a little bit careless and maybe a little bit not living up to the standards that were set in the first side so things get a little bit looser and it's that disconnect in the precision of the organization so in this next phase with high product market fit the company can sort of go through that because there's not the 100% precision required. The product works so well. The value exchange is working. The playbooks that have been getting defined are tight enough that it'll scale. But if those conditions are not true, if it was not as perfectly product market fit, if the market has changed a little bit or competitors have reacted perfectly and the precision is not 100%, this is where it gets a little bit loose and it can start to fall apart.

Chris Merritt:
[52:01] And it will manifest as, wow, the early results are not repeating. The productivity is lower. The customers are churning at a higher rate.

Chris Merritt:
[52:12] And then there can be the finger pointing, which is the new folks just like, they don't care as much. They're irresponsible. They're careless. They're not very good. And then the organization starts to fall apart. But I really think it's like the DNA and the precision between the early team and the next scaling team. That's where I see one of the biggest risk points.

Fabian Tausch:
[52:34] So what did you do as the leader of the go-to-market team to bring these folks together instead of letting them, let's say, throw names at each other being like, hey, you are the non-productive. No you whatever like so what did you do to make both parties who are one team in the end but like still and working for the same company but pull on the same string instead of on opposite sides.

Chris Merritt:
[53:06] I think there are a few things. I think if you zoom all the way out, one of the smart decisions we made as a team early on is you're trying to find your tone. What's the experience you want customers to have? You just start with that. What is the experience? And you try to get as close to the high-fidelity, early experience that the customers had. Well, most customers were experiencing the company through the blog the first time. Very technical blog, very technical users, practitioners, and they're like, in a highly stylized writing by the product and engineering team. So you have this memorialized version of what's the product, why do we build it, and it's written by engineers for engineers. So why do I bring this reference up? That was the tone that the marketplace was reacting to favorably. So we said, okay, we have to amplify and repeat that tone. So as we brought the team on, it was how do you create a go-to-market organization that matches the blog, technical blog. So in the beginning, the only people that could really match that were solutions engineers, like very technical people that we brought in to engage with customers.

Chris Merritt:
[54:29] And the early AEs we found AEs that had engineering backgrounds or had sold very technical products and they were technically oriented so you you sort of match as much as you can this this tone for the organization and largely what we've been talking to it up until this point is like technical products for technical people.

Chris Merritt:
[54:51] Translates to other categories but i think one of the most difficult areas to to match is like technical products and non-technical people so you're constantly sort of like you have a reference architecture you have a standard and it's the blog so we would create we created a.

Chris Merritt:
[55:14] An evaluation architecture that was really around like we'd get them to read the blog We'd get them to use the product and stand up the website, put Cloudflare around it, and then react to it. And you're able to evaluate really quick whether they, one, are technical or two, have an interest or three, can learn things. And then four, expend the energy to stay with it. We were pretty slow in hiring people. We'd have them meet five, eight, 10, 12 people. And if somebody was just looking for a job with a hot company, they would find a job quicker than we would react to. We would wait them out. And if they were able to sort of learn and keep that standard to the blog, that's how we did it. Because we wanted to keep that experience high. And the DNA of the team was highly technical or at least highly technical capable. They could learn and match the expectations of a technical engagement.

Chris Merritt:
[56:23] I think that's some of the secret sauce in how we did it in the beginning because it just kept that component high. And with an organization that was very technical building, technical product, it was easier for those people to engage and have respect for each other in the organization. And then if you fast forward, that high technical mix on the go-to-market team early on, we kept that standard high for a long time. And I would argue that's really the secret of the success of the team over time on the go-to-market side. And I'm super proud of that work, but it was not easy. And you would get feedback. You would get feedback really fast when a person's just not a great match on the dimensions we were just talking about. Or they come in and they were able to keep up the learning for a period of time, but they're not keeping up and they can't stay.

Fabian Tausch:
[57:21] You mentioned you had a very technical product and there's a certain amount of understanding needed for it being sold and also like communicated to to customers how quickly after i started at cloudflare would i have been in contact with customers or did i have to run through a training center or like what was the ramp up period for me if i would start there under your belt so that you can be sure that i am living up to the quality expectations that you had i.

Chris Merritt:
[58:00] Was fast super fast we would, We did an onboarding. In the beginning, it was cultural and product. And they were really intermingled. Why did we build certain things? How does the product work? It was not playbook-driven. It was really like, do you understand what we're doing and why and what the zeitgeist is and why we exist in the marketplace? And we would also tell stories about Cloudflare at its best. You know, if you put myself back in those shoes, at its best, it looks like this.

Chris Merritt:
[58:35] And, you know, when you really, you get yourself tested is when things are the hardest. So when Cloudflare had its worst days, like, this is how the company responded. You would tell those stories. And that's really how we got people over sort of the product and the culture and why we exist. And that was like the first week or two. And then from there, it was straight to customer engagements, working with smaller customers that were not spending that much with us, and doing support tickets. And it was both of those, that you're getting your hands on the product, you're getting your direct thrown right in front of customers with technical needs. And that would force you to apply to the learnings that you just had they said tls ssl what's the difference between the two and like the very detailed question you're like tls i can't spell tls what does that mean and the organization was very good at like not just answering the questions but like hey like, you know not not giving them fish but like teaching them how to fish and i would i would say that's also one of our superpowers and i would credit our early se's to be very to being very good at not just doing the work but actually helping people learn along the way so they were you know gentle and good teachers se's.

Fabian Tausch:
[1:00:01] Being solution engineers right.

Chris Merritt:
[1:00:02] Yes yeah thank you for translating that just so you so fabian if you were in the organization you would have experienced customers within the first couple of weeks um and at pace and it would have been uncomfortable and that would have been the point you know you learn you learn quicker when you're in these uncomfortable positions fair.

Fabian Tausch:
[1:00:19] Point because i know both sides i know companies that 100 million in arr for example here in germany and technical product and a lot of like pretty much an academy and tests that you had to run through after the first months and probably one or two months and then they decided if they keep you or not, and then there are ones that throw you right in. So for both, there's place.

Chris Merritt:
[1:00:45] There's a place. I think if you have this, back to this pyramid, if you have a large set of customers that are not spending a lot with you, and you have a large pool, it's pretty easy to put people in there and to have them not do harm, but learn. It's it's different if you only have 50 to 100 customers and they're like the crown jewels you're gonna you're gonna wait to put new people in front of them it's very rational the question is do you have this spectrum of of customers to interact with and is there an appropriate place to have new people learn why.

Fabian Tausch:
[1:01:23] Are so many b2b companies stuck in the death valley of like 3 to 20 million in ARR?

Chris Merritt:
[1:01:30] Well, I think that the cop-out answer would be, not all products are great. And, you know, I say that kind of tongue in cheek. When you start to scale the product and put new people into it, for all the dynamics that we've already talked about, the pretenders get sorted out. And I don't mean that pretenders is probably an unkind of way of saying it. But if it's not a great experience for the customer, customers vote with their feet. And once you really start spending money, I'm not talking about $20 a month. Once you start spending hundreds or thousands of dollars a month, that's real money. And especially technical users, they have no time for product that doesn't work. Or they have no time for an engagement that leaves them flat. Or they have no time for it they feel like they were bait and switched. So like the i would say that in that phase it's mostly about there is not good suction between the users and the product and the experience they're having with with the organization or the team and then it's situational the question is like which of those three things is really the you know the the friction that is slowing down or stopping the organization from getting traction what.

Fabian Tausch:
[1:02:56] Is needed once i figure out okay my product is good enough and i can keep up the momentum and at the same time it's a competitive landscape i have to also land grab because otherwise my competitor is doing it how am i balancing aggressiveness with health healthy, company not sure if metrics is the right word.

Chris Merritt:
[1:03:25] But more.

Fabian Tausch:
[1:03:26] Like building a sustainable company.

Chris Merritt:
[1:03:28] Yeah you know the adage of like speed kills and if you apply if you're in a car if you apply too much acceleration the rear wheels break loose and you spin the car out is that is the easy example like there's this sort of consistent acceleration that.

Chris Merritt:
[1:03:47] A vehicle in motion can handle. I think the same is true of building a business. There's a certain level of rational growth. And I'm going to come back to your comment around land grab in a moment, but it's sort of like consistent, rational building. I know somebody was describing it once as how do you fly a plane? How do you crash a plane? Your job as a pilot is to kind of keep it like 10 to 15 degrees. The no is like 10 to 15 degrees above the horizon, sort of above. And too much and it stalls too low and you crash. It's to keep it sort of in this rational zone of growth. And I think that analogy applies to building businesses as well. The minute that you start bringing in too many new people or you start to really fracture out the team across capturing too many different product categories at once, you're spread too thin and the variability goes up. And when variability goes up, execution, consistency goes down. So like this sort of rational growth. Now, if you're in a market where it's land grab, which is everybody is in the market right now.

Chris Merritt:
[1:05:01] And you're either going to get them for this next sort of three-year spend or not, okay, then you have to take a risk and you have to go fast.

Chris Merritt:
[1:05:11] Most businesses are not in a land grab. I think this land grab term is one that is like, It's almost like people expected to be in the startup scaling playbook. I don't believe that to be true. And now, you know, smart people will come in and tell me I'm wrong. And there's all the evidence that land grab and hyper scaling is the way to go. That might be true. But if you think about sort of rational business building with learning loops that you can actually take into account and building out the team in a way that the new people have a chance to actually ramp up to be experts and productive as you're bringing in the new folks. But if you ramp up the team and it's one existing team member to 10 new people, how are they going to learn? So once you get into these out of whack i think these were these organizations like you know the the vibration goes up and the and it falls apart there are some tricks when it comes to, hyperscaling and lamb grabbing but make no mistakes it's it's high risk when you scale up so i would really challenge this notion of if you're going to grow faster than.

Chris Merritt:
[1:06:33] 2x, where you're doubling the size of the organization at scale. It's one thing if you're 2x-ing, 3x-ing when you're small, but when you're large, you're introducing a lot of risk into the organization if you're having to grow the team at that pace. If the customer spend is just going up that much, That's not a land grab. That's just customers spending more.

Fabian Tausch:
[1:06:57] What is your definition of large in this case?

Chris Merritt:
[1:07:01] Large in terms of customer size?

Fabian Tausch:
[1:07:03] Large in terms of when you're doubling at a size that's large.

Chris Merritt:
[1:07:07] Yeah. Yeah. Okay. I think I would say large in this case is when you're north of $100 million. So like if you're $100 million and you're doubling, you're putting all of the infrastructure, You're billing infrastructure under strain. You're putting your physical footprint, like how many people in what countries under strain. And you're putting your hiring, et cetera. And the question is, are you getting 10x increases in customer spend? Well, in that case, then doubling at $100 million is not – you're not going to challenge those systems that I just described. But if you're getting 10, 15, 20% growth, 30, 40% growth, and you're bringing on incredible amounts of new customers that require engagement, that's when those systems of scaling start to get really tugged on and the vibrations might break them. So I guess it's about $100 million I'm talking about.

Fabian Tausch:
[1:08:11] To the best of your recollection what would you say was the growth trajectory in like percentages for cloudflare north of 100 billion in arr i.

Chris Merritt:
[1:08:22] Think you'd have to go back to public to public statements to get that information my recall is not perfect.

Fabian Tausch:
[1:08:27] Okay we can we can skip it then but it i had a question in mind that i forgot now give me a second to get into my head and find it pull it out again i was about land grab fast growth oh yeah so i know that's super hard to answer in general but as you're working with different companies have seen a lot and experience a lot with with cloudflare as well what would you say are your best learnings on pricing. I know this will be worth an episode itself or two episodes or five, but still I need to put it in there.

Chris Merritt:
[1:09:17] Yeah. So when you say pricing, I hear pricing and packaging. I think they go together. And I think the discipline of pricing and packaging is, I guess, one of the big unlocks. And it's probably the area that in the beginning, it's not often given that much thought. And I don't mean to be critical of that. It's more a function of you create a product, you have a unit of measure, how you're going to price for it, and you set a price point. And then you'll take it up or down if you buy more or less. And you're trying to make it rational. People are consuming and they're buying something. And in the beginning, you're looking at it going, oh, that makes sense. You're just looking for the, oh, that makes sense, head shake and checkbox so that you can move on. And then at a certain point you're at scale and you're adding more extensions of at least features maybe you're charging for those features and then and then you get to the point where you're now you probably have another product category this is where you as a company you desire to have multiple products and multiple categories for all the reasons that you know we can go into if you'd But on the pricing and packaging side, this is where your historical pricing starts to come under pressure. And those pricing decisions are often like heritage.

Chris Merritt:
[1:10:44] They're deep in the bowels of history. They're set. They're typically set by the most senior early founding, like often by the founders. So you like challenging them later as you have brought more market to bear and you have other price other products to price in concert with the original products this is where it becomes a game packaging so who are the users how are they consuming it what's relevant to their use cases and not all use cases look alike anymore. So this game of pricing and packaging becomes incredibly important because that's how the market is going to then internalize the value they're getting. The packaging is like, this is how you're consuming it and this is how you should evaluate the value, which is different than how you originally priced it. Priced was like sort of this narrow lens and then packaging is opening the aperture to have more of a value construct. And pricing is often a sub-function of either the founding team or the product team.

Chris Merritt:
[1:12:05] It largely starts to come into it, and it sort of transitions across product and go-to-market, and there's often a function in the middle. And greater organizations, a pricing and packaging team, is built in a way that really recognizes the importance and the responsibility, and it becomes a strong entity in and of its own, but not always. So I think the discipline of pricing and packaging is really important. It's underrepresented in the beginning. And then over time, you typically have that team becomes really important, strategically important and drives a higher level conversation. And it's a very long game because you also don't want to change pricing too much. You confuse the marketplace. You create inequities. Early customers have one pricing. It's not in pricing has come down. How do you bring them along? They feel like they got jammed, et cetera. So it's really important, but it's amazing how it's not given that kind of oxygen early on.

Fabian Tausch:
[1:13:05] How do you lead a conversation with a potential customer so that we're not hung up on price itself, but we have the room to talk about everything that I thought about when it's pricing and packaging to present it in a way that's not like, oh, price feels too high, price doesn't feel okay for me, I'm out.

Chris Merritt:
[1:13:30] Certainly in the early days, what you don't want to do is lose on price. You never want to lose on price in the early days because you want to get the customer to experience your product and your unit economics when you're small, you're still figuring them out. So you're often more flexible on price in the beginning than you realize. And if you i think we're very smart to take the axiom of never lose on price and it was something that i had done in a prior life and i saw it the same way with the founders um, And I think the tension on that is you think that, you know, the customer can probably pay a little bit more. The market will bear it.

Chris Merritt:
[1:14:16] And like there's this zone of this is probably too low for us. It's probably a bad deal. And then this is probably a bad deal for the customers. Like, okay, find that middle ground. And you're just trying to create a sense that it was a fair exchange, just fair. And if anything provide more value than you capture meaning give a better price to the market than maybe you even think you should just to get the customer con like feedback loop going get them using the product get them tugging on it there's a time to optimize price later but i would argue in the beginning you really don't know what your gross margins are going to be you're trying to figure out your cost base what economies of scales are going to are going to come in and all of that as a function of, you know, if you do the math, like price really matters, but in reality, you don't know your costs that well long-term. So I would say be flexible on price in the beginning and take the signal out of the marketplace.

Chris Merritt:
[1:15:15] Customers will tell you what's too expensive. And some customers are just like, whatever your first price is, is too expensive. And they're just, you know, that's the way they negotiate. And others will tell you like what the competitive context is, or candidly, like, hey, I only have X dollars to spend. Take it or leave it. And you need to figure out if they're being honest with you and you have a decision to make. So I think it's an art in the beginning. And I just subscribe to the theory of don't lose on price.

Fabian Tausch:
[1:15:48] For everyone interested in a bit more like deep dive into how to lead sales conversations, I did an episode with Stevie Case from Vanta and former Twilio. So therefore, because we won't have the time to do another deep dive here, I wish, but you will definitely at some point say, hey Fabian it's about time so therefore just just a quick shameless plug of self-promotion for for another episode but because what I hear quite often from from startups let's say you're a fintech you're building in a German market and you have a potential client and then you hear hey yeah but competitor x undercut you by 50 percent which is absolutely happening and then you're in the situation you're like huh should we do that right now to win the first customers shouldn't we do that how do i evaluate in such a situation if it's worth taking the risk and undercutting the competitor who is aggressively undercutting myself i.

Chris Merritt:
[1:16:52] Think there's a there's a pivot here which is if this is the only product you're going to be competing in you now have feedback on what your competitors are gonna do. And the question is whether you can match it. And that's sort of a single product lens. And maybe that's the company you're building, you don't have any aspirations or ambitions to go beyond that. The market has spoken, and you need to find a way to price aggressively to win. And that means you need to be maniacal about getting your cost base to be better than your competitors. Okay, that's context one. Context two is, I think that this product is the first of many we're going to have.

Chris Merritt:
[1:17:30] And I'm going to use it as, do I need to cover all of my future profit? Or is this just a way for me to get into the market? and I might have to be to treat it as a loss leader. And then the next product is really where I'm gonna be more competitive for any number of reasons, in which case I wouldn't stress over the opening price and the opening margins. Yes, you should always be creating the lowest cost base versus your competitors. That is long-term competitively differentiated and good and healthy. But if you aspire to be a multi-product company, you take the pressure off of your early unit economics a little bit you can't be irresponsible but you know you're going to get another bite at the apple and maybe the competitors you're competing against won't and won't have the ability to expand the profit margin on that customer over time and that's the best case is that you can be competitive against them in their market and then over time make more margin in areas that they can't compete when.

Fabian Tausch:
[1:18:31] Is the right time to go from single to multi-product.

Chris Merritt:
[1:18:35] This is probably one of the you know once you get past like the early easy questions this is one of the harder questions and i think it's also one of the ones that is like existentially important and i think about this really in two ways and it's, one is are you going to have more opportunities to just bolt on more features that you might be able to charge for that is still probably single product plus feature charges you know think about the guy buying a car and all the add-ons like those are feature add-ons maybe you get more price over time but it's it's a car versus like cars trucks buses maybe in the context of tesla like you know launching rockets and or solar panels or however you define the you know the boundaries of those companies today. I think the first is like, do you have feature expansion in which case.

Chris Merritt:
[1:19:36] Getting, probably getting facile with launching features and charging for them is a good sort of first step. What I think of other products, it's like other products that have clear competitors that you're selling to the same install base, clear signifier there is same customer install base, meaning the same customer that bought the first product is going to buy the next one. That that is like a single product demanding features the next like level of degree of difficulty is going to same customer buying multiple products that they would have bought from different competitors and then there's like just like give me some definitions the last is, different product to a different buyer and like the degree of difficulty on that one is much higher because the organization doesn't know how to engage with that buyer yet. And an example would be you're selling to technology executives and now you're going to sell to marketers. They're very different. So I think about like degree of difficulty being this progression model.

Chris Merritt:
[1:20:46] And you'll get feedback along the way as you start to sell more features and bolt features on the existing products or bring in another product to sell to the same buyer. You'll learn what the organization is good at. And I think about doing it in that progression, very sort of regimented, thoughtful. And I think you earn the right to go beyond selling, attaching features to the same product, to introducing new products to the same buyer, to introducing new products to new buyers. I wouldn't skip steps. Skipping steps is where you get in trouble.

Fabian Tausch:
[1:21:20] Lots of things we covered. and I'm currently thinking is there a topic that we need to add to the discussion or are we... Doing too much do you have a topic in mind where you're like hey this will be a natural topic to add or do you think we did a good round trip through everything i.

Chris Merritt:
[1:21:48] Think you went really deep in a bunch of areas and this interplay between product and go to market that feels like the the center of the bullseye for what you were covering i'm not sure that i would add anything at this.

Fabian Tausch:
[1:22:01] Point okay then you're probably aligned i just wanted to to make sure yeah so chris last question just out of curiosity i mean it was never or it always took companies very long time to build from like zero to 100 million in arr and by now there are several examples of like many months to one or two years that because of all the momentum in the ai space and then they did it with like 10 to 20 people or sometimes less or a few more or here and there what are your thoughts when you see how the approach to go to market changes for some of the products and also how the adoption for such products is evolving because it's different from a few years ago Yeah.

Chris Merritt:
[1:22:53] I think we talked about this a little bit earlier, but just to bring it back to the surface, the customers are in this radical experimentation mode where they have to refactor their business to stay competitive as the experiences that are augmented or improved upon with all the tooling that exists. So how do you bring a really... High quality chat experience to bear around your customers. You know, watch, you watch how we're all using, learning to use them, the models, whether it's chat GPT or Gemini or Claude or any of them, like it's changing the way we engage with technology. And how do you bring that experience into your user set for your, your company? That's thing one. And thing two is how do you augment your existing staff or start cutting your staff because of the tools so like this radical experimentation on the customer engagement side and on how you deliver service through your your workforce those things are flying at such a pace and coming at these handful of companies that are getting great traction and great adoption and if you look at cursor.

Chris Merritt:
[1:24:11] I hear it just all the time how many developers are using this product and getting great value out of it right that's a function of the cycles on both ends that i just described like you have to go faster and adopt these tools and that transition usually transitions take 10 20 years this transition is measured in single digit years sometimes months and we're in this like we're in this phase where the investment from companies to try to drive more top line or bottom line improvement is so fast and so extreme that small companies are getting these spends much faster than small companies have had spends before. And I think the blessing is that you can build a.

Chris Merritt:
[1:25:04] Larger revenue company per employee than you have been able to before much faster the downside is those spends can come and they can go fast so you might get whipsawed and two the scaling mechanisms like you have to be able to deploy highly scaled tooling and highly scaled leveraged teams fast and that that just brings risk and like i don't mean risk in a bad way it just brings a certain amount of you have to be really careful in how you do it the reward rewards are great you can have a 30 person company doing gosh what like a hundred million dollars now i've heard these you know how many people are really at cursor and are they close to 200 million and how many employees it really had so i don't think it's 30 employees anymore but it's it's not it's not thousands, so yes it's it's just i think the spends are coming into the marketplace really fast by large companies and we're going through this radical refactoring of how work is done and it's a moment in time and i've not seen anything else like this in my lifetime and i'm not sure that i'll see another one.

Fabian Tausch:
[1:26:20] Chris i'll leave the audience with that because i think this is something to think about and to think through for themselves on what that means for them building companies i'll link your linkedin below and i will think about topics for which i can invite you again because i really enjoyed it so the wall is in my ballpark now but thank you so much for taking the time it's been such a pleasure and super insightful and i'll find another topic and then we'll figure out if we'll do it remote again or if we'll do it in person somewhere in california.

Chris Merritt:
[1:26:59] It was really a pleasure thank you for having me take care.