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Thoughts and Takeways from SaaStr 2019

October 29, 2020 by Megan Esposito

For a second straight year, I attended the annual SaaStr conference in the Bay Area.  SaaStr is a community of thousands of people – Founder CEOs, VC & PE investors, operators, and service providers of all stripes – that focus their business efforts around the proliferation of software-as-a-service, which is arguably the dominant business model of our day, penetrating all corners of the economy.  There are so many rich takeaways from the conference that it’s impossible to do it justice in a short narrative — but three key learnings come to mind and are summarized below:

Viraj Parikh TechCXO

Viraj Parikh is TechCXO’s Managing Partner in Nashville

  1. Do not underestimate the value of a Business Operations leader: One of my favorite sessions was with the Co-Founder/CEO of Glassdoor, Robert Hohman, and Neeraj Agrawal of Battery Ventures, a leading Silicon Valley VC firm. Robert spoke about how critical it was to fill various ops roles, including sales ops and, most notably, “biz ops.”  Robert spoke about a conversation he had with one of his board members from Google about how critical this position was in Google’s early days; hiring for it ultimately transformed Glassdoor.  The Biz Ops leader’s function is to understand the key drivers of the business at a deep level, and work horizontally across every part of the business to answer questions.  Allowing this position to go unfilled will come back to haunt you.  It is not an obvious hire because there is often not an immediate payback.  When this position was filled at Glassdoor, about two years late according to Robert, it was not one big thing wrong with the company, but 50 medium things – and it took three months just to unpack it all.  Those 50 things can add up to be an existential threat to the company, since you know something major in the company is going to break, but it is impossible to even identify the break point.  Once identified, it  takes courage to make the necessary decisions to fix it, but the only way to make these decisions is to have a business operations leader who understands how everything in the business is tied together.
  1. The biggest challenge founders face in scaling up their organizations: Many of the sessions at SaaStr were devoted to the intricacies and hiring path necessary to scale businesses. Of course “scaling” means different things at different stages ($5mm ARR, $20mm ARR, $50mm ARR, etc.), but from a founder’s perspective, Hubspot CEO Brian Halligan’s paraphrase of Aaron Levie, CEO of Box, made the point perfectly: “Your success in the early days of your startup is largely a function of you getting very good at doing all the jobs that must be done, while the success factors in a founder’s scale-up is to get really good at doing none of those jobs.  You must get out of everyone’s way and allow people to specialize at doing their respective jobs really well.  Your superhero strengths in startup mode – being a control freak – becomes kryptonite at scale.  You must find a way to back out of the day-to-day, and find other things to do to add value.”  Your greatest strengths as a founder can often become your greatest weaknesses in the scale-up process of your company.
  1. Is your SaaS startup growing fast enough to attract venture capital?: Rory O’Driscoll from Scale Venture Partners gave a compelling argument that a “Mendoza” line exists for startups – essentially a curve plotted against various ARR and growth rates – above which a company makes for an interesting venture capital investment, while below it would imperil the chances for a VC investment and eventual IPO. This is not a hard and fast rule, but rather a handy rule-of-thumb as well as an aspirational goal:

 

A corollary to this rule is that best-in-class SaaS companies, after reaching $10 million in ARR, exhibit growth rates that decline at a fairly predictable rate: roughly 80%-85% of the prior year’s growth rate. Rory’s term for this rule is “growth persistence” – the above table uses a growth persistence of 82%. Although the vast majority of successful SaaS companies lie above this curve, faltering below it does not spell doom – it is possible to reaccelerate again, but recovery and maintaining at a high level is never easy once altitude has been lost. Rory’s blog post can be found here.

Conclusion
Software penetration into the economy remains in the early innings. As much as technology has been weaved into our everyday life, there is still a long way to go. One of the gratifying things about this year’s SaaStr conference was seeing the large number of non-Silicon Valley CEO founders and companies – not just getting funded, but prospering. World class business models and cutting-edge business practices are proliferating in mini tech hubs across the country and world. The abundance of capital will continue to fund countless new products and services, and the number of fortunes to be made will not abate for the foreseeable future.


Viraj Parikh TechCXO

Viraj Parikh is TechCXO’s Managing Partner in Nashville

Filed Under: Finance Tagged With: Business Planning for Startups, Key Performance Indicators, News

SaaS Company’s Journey to Relevance

October 29, 2020 by Megan Esposito Leave a Comment

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.

Conclusion

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.

Viraj Parikh TechCXOViraj Parikh
TechCXO, Managing Partner 
Nashville
TN
viraj.parikh@techcxo.com
(917) 523-6940

See Viraj’s full bio

Filed Under: Finance Tagged With: Business Planning for Startups, CFO, Key Performance Indicators

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