By Edward Keelan (B2B Software Investor) and Ben Newsome (B2B Software Portfolio Talent)

Until recently, the mantra for a newly venture capital (VC) -funded company was growth above all else. So it should come as no surprise that when the cheque lands most VC-funded companies go on an immediate hiring spree to make that growth happen. This hiring spree is fine if the company immediately executes against its early business plan, but if the company doesn’t grow quickly, and cash burn skyrockets, everyone gets nervous. Then pressure builds to become more efficient. 

With that scenario in mind, in this blog we’re introducing what we call the “headcount calculator”. This is a tool that we hope might provide some high-level guidance around where headcounts should be, relative to growth level. It’s written specifically with a Software as a Service (SaaS) business in mind, but some of the lessons may help those in other sectors. Read on to learn a little more about how it works.

Striking the balance 

There is no doubt that in recent years, some VCs have had a part to play in creating the growth at all costs mindset. But is there a different way? One in which a VC doesn’t just talk up growth, but helps the newly funded company to align growth and headcount. 

Historically, VC’s have used KPIs, such as Rule of 40, to deal with high-level efficiency. But these tend to be backward looking. They function more effectively as a kind of scorecard of past accomplishments, and are more useful as a means of evaluating prospective investments than as a tool entrepreneurs can use for future planning.  In addition, KPIs such as ARR per Full Time Equivalents (SaaS Capital put out a great blog on this KPI) don’t take into consideration key assumptions such as growth rate or gross margin that can make a huge difference. 

From our experience, when it comes to cash efficiency and hiring too quickly, most mistakes are identified too late. The horse has bolted, and the company has entered a potentially downward spiral of cutting costs (laying off staff) whilst simultaneously trying to grow and maintain culture. So, what can we do to help? We believe that the answer lies in better and clearer headcount planning.  

The Headcount Calculator 

We’ve developed the calculator from a decade of board experience, and years of scaling large tech teams in the B2B software sector. Because of this, the calculator has a bias towards B2B software companies, SaaS in particular, but hopefully some of the principles of the calculator could apply just as well to other sectors.  

We also need to add the (very large) caveat that the calculator is only useful to a point. It is not intended to give you “the answer,” but instead to aid discussions about how you think about your headcount planning. There are plenty of broad assumptions that give a high-level picture, rather than a pound-by-pound accurate forecast. It should be used, and is described, with that in mind. 

The first part of the calculator establishes some baseline assumptions, such as growth rate, starting ARR, and average salary.  It then asks the user to consider the “Target Burn Multiple”. This is the ratio of Cash Burn / Net New ARR added. For example, if you add £1m of ARR, and have a cash burn of £2m, then your Burn Ratio will be 2x. It is generally considered that a Target Burn Multiple of 1 or less is considered good, while 1 to 2 is OK for a fast-growing company, and anything over 2 is poor. 

We have also provided the ability to split employees into different divisions. The calculator doesn’t try to suggest what this split should be, but there are some useful articles surrounding how headcount should be distributed around a SaaS company, such as this one from Blossom Ventures.  

Now, to give an idea of how the calculator works, let’s use examples of two SaaS businesses with the following baseline assumptions: 

For Company A, the target number of employees comes to around 60, whereas for Company B it’s closer to 40. Perhaps the most striking part of the analysis is the demonstration that two SaaS companies can start out with the same ARR, but given their growth rates, margin and average salaries, arrive at wildly different headcounts. If we’d only referred to  ARR per FTE, as useful as it is, we may have come to a very different conclusion on the appropriate headcount. 

Keeping the books balanced isn’t the only reason to take headcount planning seriously; it’s important because the headcount describes real people – with real lives, and real personal ambitions. There is a significant cultural and personal cost to getting it wrong. We’ve never met a CEO who wants to tell someone they no longer have a role at the company – not even the most hardened – while the impact on the individuals concerned can be completely life changing. Anyone who has had to go through a restructure is unlikely to forget it, and the personal costs may be huge. For many reasons, making layoffs is an extremely hard thing to do. Hiring efficiently isn’t just good for building a long-term sustainable business – it’s responsible. 

As we’ve mentioned, the headcount calculator isn’t meant to provide an exact answer. It makes a number of assumptions, and has its deficiencies. Still, we hope that it can act as a great starting point for the conversation – and encourage responsible hiring.  

Responsible hiring means making a conscious effort to build teams and pillars in the business at the right speed, and in line with company goals. At Octopus Ventures, we’re fortunate enough to have a dedicated People and Talent team that can guide portfolio companies to the right headcounts and organisational structures for their circumstances, as well as help with implementing best practice to attract, recruit, and onboard the most competitive new talent, with strong culture and values in mind. But until we meet you, we hope that this headcount calculator might offer some useful guidance, from a business perspective, on how to think about your companies staffing needs. 

Please get in touch if you’d like an editable copy of the calculator. We’re delighted to share it, and welcome feedback on any tweaks or improvements that make it more useful for start ups and founders, seeking to hire responsibly. Please reach out to Edward, at [email protected].  

This information is for discussion purposes only. It contains information used only as an example which may be based on unverified and unaudited information. All information contained herein is subject to updating, revision and/or amendment (although there shall be no obligation to do so). No representation is made, assurance is given, or reliance may be placed, in any respect, that such information is correct and no responsibility is accepted by Octopus for any direct, indirect or consequential loss or damage suffered or incurred by any person in connection with the information contained herein or actions taken from it.