SaaS Company’s Journey to Relevance
Recently, I attended the annual SaaStr conference where thousands of people in the SaaS community – Founder CEOs, VC & PE investors, operators and service providers of all stripes – descended upon San Francisco’s Hilton Union Square to learn, hear from, and network with some of the most exciting upstart software companies in the world.
This year, juxtaposed against the conference was the backdrop of a major stock market correction, where the Dow Jones Industrial Average (DJIA) dropped over 2,000 points in a single week amid concerns over rising interest rates. Having professionally invested through the 1999-2002 tech wreck and now as a CFO operator to my SaaS clients, the question running through my mind was “What are the implications for an industry that has seen non-stop growth over the past decade?”
Of course, a well-built business will survive, and oftentimes thrive – no matter the macro volatility. After attending about 20 sessions over 3 days and hearing from many inspirational and battle-hardened entrepreneurs, there were several common themes that emerged from the conference.
Below are my three (3) big takeaways:
1. Software penetration is still very low — it is in the early innings
Don’t let stock market volatility distract from this fundamental revolution. Tomasz Tunguz, a well-followed VC blogger, believes SaaS M&A will be very strong in 2018, after a weak 2017. Big cap tech companies flush with cash need to continue fueling their growth engines, and they are competing with PE funds that raised over $343 billion in 2017. That money will be put to work to continuously penetrate every corner of the global economy with cloud-based software. The median multiple is 7x forward ARR…growth is alive and well.
2. A SaaS company’s journey to relevance is an exercise in de-risking the company
To acquire a VC investment or become an attractive acquisition target, your company must begin with relevance. There are three stages in every start-up’s journey to a relevant state: a) product-market fit, b) search for a repeatable, scalable and profitable growth model, and c) scaling the model. Consider:
a) How does a CEO know whether they have achieved Product-Market fit?
The company must meet two criteria:
◦ The company has a number of referenceable customers who have purchased the product
◦ Customers are happy as evidenced by:
▪ Product usage
▪ A reluctance to give it up
▪ Expanded usage
▪ Low churn
b) After Product-Market fit is established, the startup must quickly transition to the search for a repeatable, scalable and profitable growth model:
◦ Don’t try to boil the ocean – pick one target market with a single use case and benefit
◦ Quickly close your early access sales
◦ Invest in customer success to ensure your customers are accomplishing their goals
◦ Build a buyer persona — what do they buy and what do they care about? — find a predictable and repeatable motion, and then begin scaling that process. For example, predictable sales bookings can be simplified to the number of sales reps times sales productivity
◦ Understand your unit economics and make it profitable
c) Scaling the model through proper management of the sales and marketing function to achieve maximum sales bookings velocity, including:
◦ Hire enough sales people and pay up for the great ones. Too many companies make the mistake of underspending here to conserve cash… that can be a big mistake
◦ Set ambitious but achievable sales quotas that inform and roll up to the company’s revenue objectives
◦ Regularly track the productivity of each sales rep, e.g. what % is achieving >70% of their quota, and >100% of their quota.
Accomplishing a, b & c will undoubtedly result in a terrific story, but in the eyes of an investor, it is fundamentally about risk mitigation. The lower the risk, the more likely you will attract capital.
3. Run your company around Annual Recurring Revenue (ARR)
This may seem like an obvious point to longtime observers of SaaS companies, but plenty of entrepreneurs still fail this basic test when pitching to venture capitalists. The first slide of every investor deck should include ending ARR (and its trajectory over time), which is the single most important valuation metric.
◦ Break down ARR into its component parts:
▪ Starting ARR
▪ New ARR bookings
▪ Expansion ARR
▪ Churn ARR
▪ Ending ARR – if this does not continually grow, it is a red flag that sales have stalled.
◦ Growing bookings is the key sign that you are making it as a company. For SaaS companies, bookings are defined as Net New ARR (New + Expansion – Churned). Never count bookings if it does not convert to cash within 90 days.
The SaaStr conference affirmed the industry’s abundance of capital, intelligence, creativity, discipline (through trackable metrics), and unwavering confidence that software will rule the world. Software remains the envy of every other sector of the economy. Entrepreneurs who are armed with the right toolkit, as outlined above, can and will be building great SaaS businesses for many years to come, irrespective of the business cycle and stock market gyrations.
TechCXO, Managing Partner Nashville