If you have any paying customers, don’t quit

Edited excerpt from The Right Sales Metrics For Your SaaS Startup, an interview with Jason Lemkin:

Q: You share a lot of advice about business growth on your blog, Saastr.com, taken from your own experiences. What was the most important lesson you took away from growing EchoSign or NanoGram?

A: The most important lesson, especially for earlier-stage entrepreneurs, is don’t quit. What I’ve learned from both my startups is if you have anything at all, build on it. Every SaaS company has a different story of how they got to initial traction, that $1 million to $1.5 million run rate. Some got there in 2 months, others took 4 years to get to a million in revenue. It may seem bleak if you’re doing just $10,000 or $5,000 a month, but it’s almost impossible to get anyone to buy anything. They don’t need any more business web services. So if you have something, even if it that doesn’t pay everyone’s salaries, don’t quit.

Notes:
(1) Cf. Why SaaS and subscription businesses often take longer than B2C.
(2) Cf. For SaaS startups — how to avoid increasing costs inefficiently and prematurely.

Selling to enterprises via selling to individual employees — the B2C2B model

Edited excerpt from Lessons Learned on the B2C2B Model by Sachin Rekhi:

Advantages: The main advantage of B2C2B [selling to individual employees as a path to an enterprise sale] compared to traditional top-down sales is that it can significantly reduce your customer cost of acquisition. The traditional B2B sales process requires large marketing budgets and long sales cycles. It’s very expensive to generate highly qualified leads that will convert to promising enterprise customers, whether with search advertising, native advertising, or trade shows and events. The B2C2B model provides free or cheap solutions targeted at individual employees or small teams with far cheaper cost of acquisition, whether word of mouth, search optimization, or viral distribution.

Success depends on: employees’ influence over decision makers. For more broad-based employee solutions, individual employees have leverage with decision makers purely through scale.

Levers: With B2C2B, you can gather detailed demographic and behavioral data on each of your end users that can help to significantly optimize and prioritize your upsell and sales efforts. LinkedIn was lucky enough to have this information for all of our end users since they provided their current employer on their LinkedIn profile, but you can alternatively gather this information through parsing the corporate domain name of the email addresses they registered with, reverse IP lookup leveraging the MaxMind database to determine the company accessing your site, or simply just asking the user as part of registration.

Challenges: The cost associated with maintaining the free or cheap tier of service for your non B2B customers can be significant. Also, you need to be able to create compelling differentiation between your free/cheap tiers and your enterprise solution to convince decision makers to rollout a company-wide solution as opposed to simply allowing their end-users to continue to use the tool as is. Coming up with this free vs. paid line can be incredibly difficult and is a careful balancing act.

Notes:
(1) While upselling from individuals to a team is a big opportunity, don’t forget Mark Roberge’s advice — “individual before team”. See For SaaS startups — how to avoid increasing costs inefficiently and prematurely.
(2) “Coming up with this free vs. paid line can be incredibly difficult and is a careful balancing act” — this is exactly our experience in Seeking Alpha with SA PRO.
(3) Cf. How to extend a SaaS business from small to large sales without using outbound calling.

For SaaS startups — how to avoid increasing costs inefficiently and prematurely

Edited excerpt from Startup Best Practices 13 – Patience With Unit Economics by Tomaz Tunguz:

Mark Roberge, Chief Revenue Officer at Hubspot, recently shared with me how he instills patience in unit economics in his teams. He has three go-to-market principles:

1. Adopt before you buy – develop a bottoms up product that people can try out and ultimately upgrade themselves without having to contact sales or support.

2. Product before people – focus on improving the product before hiring additional customer support or salespeople. The product has to stand on its own.

3. Individual before team – The initial product experience should focus on the individual or single player experience first, and the broader team second.

Notes:
(1) “Focus on improving the product before hiring additional customer support or salespeople”: A frequent VC error is to push companies to scale prematurely. If VCs want the money they put into a company to be deployed immediately and aggressively, and they have no experience of how to measure product quality, VCs may push to add sales people before the product is good enough.
(2) See Don’t scale before you have product-market fit and The three steps to building a great company, and why most startups fail on the first step.
(3) This post is characteristic of Tomaz Tunguz. His focus on the unit economics at the heart of SaaS companies’ business models makes him highly sensitive to capital efficiency. Rightly so. See Tom Tunguz’ five keys to building a successful company.

How to extend a SaaS business from small to large sales without using outbound calling

Edited excerpt from The Innovator’s Solution For SaaS Startups – The Flywheel SaaS Company by Tom Tunguz:

Many software companies disrupt incumbents by first serving the small-to-medium business and then move up-market by transitioning to serve larger enterprises with outbound sales teams. This transition is largely due to the more attractive characteristics of larger customers, namely higher sales efficiency and reduced churn rates.

But there’s another, novel way of building companies that still isn’t very well understood. In this approach, the enterprise sales team is exclusively inbound. They are explicitly denied the option of seeking business outside the customer base, and must gin up business from only existing customers. The enterprise sales team is an up-sell and cross-sell team. In fact, so is the mid-market sales team. Only the SMB marketing team is permitted to acquire new leads. In short, this approach flips the traditional idea of enterprise people as hunters and others as farmers.

The marketing engine spins a customer acquisition flywheel that captures all kinds of customers, both big and small. Some of these customers are true small businesses; others are teams or departments in companies. Over time, the product spreads from team to team, and department to department, increasing customer size and revenue to the startup. It’s the responsibility of the mid-market and enterprise teams to find, cultivate and upsell these growing accounts.

The up-sell conversation is a very easy one: “Mr. CXO, there’s no need for a trial or feature comparison. 25% of your employees are already using our product.” What better argument for success is there than internal social proof?

Notes:
(1) On the “higher sales efficiency and reduced churn rates” of multi-seat deals, see Why you should add team features to a SaaS product for individuals.
(2) This model also enables lower customer acquisition costs and thus dedication of a higher percentage of your resources to value generation for users. See What to focus on to build a great subscription business.

Why capital efficiency is critical for SaaS and subscription businesses

Edited excerpt from The Long Lost Myth of Capital Efficiency by Brad Feld:

Do you remember all the blog posts about how companies needed so much less money? All the articles about how capital efficient businesses were — a result of AWS, better software development tools, easier starting points, better scaling technologies, and lots of other things?

This was all just five years ago. Oh how things change.

I’m going to assert, based on the successful, capital efficient companies in our portfolio, that it’s a parallel universe of happiness. We’ve learned that it is a lot easier to make a 10x return on capital on a company that has only raised $10m then it is to make a 10x return on capital when a company has raised $100m.

When a company can become cash flow positive on a small amount of capital (say $5m – $10m) and grow over 100% year-over-year without raising another nickel of equity, well that’s a silent killer.

Notes:
(1) Capital efficiency gives you time, which is critical for businesses that scale steadily but without viral growth, such as SaaS and subscription businesses.
(2) Cf. Ben Horowitz’s Profitability = control of your own destiny and this quote from Warren Buffett.

Why SaaS and subscription businesses often take longer than B2C

Edited excerpt from The Low Viral Coefficient of SaaS, And Why That’s Just Fine by Jason Lemkin:

Whatever you do, make your first 10, 20, 30, 100 customers happy. But the thing is, this probably won’t help at all getting to $1m in ARR any faster.

Our friends over in B2C talk a lot about viral coefficients. How quickly one WhatsApp user gets you another. How quickly your social map explodes across some new app.

It turns out in B2B it’s there, it’s just usually a lot slower. At EchoSign, from the date of first contract send to New Signer, to how long it took for that new account to convert to paid, it took 8 months, on average.

For the first year, that was incredibly painful. Because we had so few customers in the early days, that even after 8 months, they could only beget us a handful. It really wasn’t until the end of Year 2 that viral really kicked in. That’s just the math of a low viral coefficient. And it didn’t even get good until Year 3, when we finally had a large enough installed customer base, using the product, to become our second largest source of new customers.

Now, if you’re building a free B2C app, where you need tens of millions of users to get to Initial Scale, that’s a disaster. But in SaaS, when you’re on a 7-10 year journey to $100m in ARR, it actually doesn’t matter that much if your viral coefficient is low when you get the viral customers. When it does come, it comes on materially, and strong.

Why you should add team features to a SaaS product for individuals

Edited excerpt from Why Tilting Just a Smidge from Self-Service Can Grow Your Revenue 30x by Jason Lemkin:

If your product is 100% individual-focused, and you add just enough features to sell to a Team, to tilt just slightly upmarket — you can grow your revenue, at least a segment of your revenue, by 20-30x.

Why? The key is a combination of (x) churn and (y) value. Virtually every self-service, individual seat web service churns at a relatively high rate — from maybe 2.5% a month at best, to 3.5% or 4.0% a month or more in many cases. So that means maybe your customer lasts 8-10 months, maybe a bit longer but not too much.

Now, come up with a slight extension of that same product, wherein some group, team or segment of an entire enterprise can use it together. Let’s call it just 5 seats to start, instead of 1. Maybe you add management-level analytics. Some sort of collaboration. I’m not sure what it will be for you. But let’s call it the most basic features necessary so a team or a group will buy, instead of an individual user.

And what you’ll find is epic on the churn side. Your churn as the deal gets just a smidge bigger will fall dramatically, toward 1-1.5%. And as you add more seats, the churn will trend toward 0% and eventually become negative. Because your customers will add more seats over time than they cancel.

All of a sudden, in say a $30/month product … you’ve gone from a $240 Customer Lifetime Value for the single seat purchase to $5400 CLTV over 3 years from the same customer, from the same basic core product, just with whatever additional functionality you need for your Team or “Enterprise” edition.

What to focus on to build a great subscription business

Avrom Gilbert, quoted in Israel’s subscription challenge by Michael Eisenberg:

There are two ways to approach growth in net lifetime user value. [“Net lifetime user value” is the profit from a user over their lifetime as a user, minus the cost of acquiring that user.] One is to reduce your customer acquisition cost. The other is to improve the product so that you grow lifetime user value.

It’s likely that at some point you will reach a point with your customer acquisition cost where it will be hard to improve it significantly. However, if you keep improving your product then your lifetime user value can keep growing indefinitely, which keeps growing your net lifetime user value. This in turn means that you can choose to increase profit or, more likely, spend more to take more market share (even at the risk of increasing your customer acquisition cost). Growing lifespan through improving product gives you another fantastic growth engine for your business in addition to the free customers you get.

As an interesting aside, reducing customer acquisition cost is an exercise with limited upside. Put another way, you can only reduce your customer acquisition cost to zero, but you can grow your lifetime user value many fold.

Notes:
(1) Cf. Obvious, but forgotten: the best way to lower customer acquisition costs.
(2) Cf. It’s easier to fix marketing than engagement.

Building a moat – barriers to entry for SaaS companies

Excerpted from Tomasz Tunguz:

The three enduring types of competitive advantage for SaaS companies I’ve observed are network effects, data network effects and ecosystem creation.

Data Network Effects exist when the value of additional data is compounded with time. For example, Infer builds predictive scoring models that prioritize leads for sales teams. The more data Infer gathers about a sales team’s customers, the better their predictive ability. If a customer switched to a competitor after twelve months, the customer would destroy 12 months’ worth of machine learning, quite an expensive tradeoff.

Network Effects exist in enterprise social networks, jut not just any kind of network. Email and chat systems suffer from fungibility. GMail arguably serves an Outlook business just as well. Instead, data network effects exist when the SaaS company forges a new network with novel relationships like LinkedIn for recruiting, Axial and Angellist for finance, Doximity for doctors and so on. Those networks are proprietary and long-lasting competitive barriers to entry.

Ecosystem Creation: when a SaaS business surrounds itself with successful partners who serve many different types of customers, often not addressed by the SaaS company, and reinforce the value of the SaaS product, it has employed an ecosystem defense.