There was a period early on when we called ourselves a SaaS fund, playing just slightly on the “me too” side of the biggest trend of the 2000s, the saasification of software. We have since honed our message, but in those earliest of days, being a SaaS entrepreneur or investor was differentiating.
Fast forward more than a decade, and SaaS is not a differentiator for companies or investors. It remains a terrific business model, but while there are increasingly a lot of good SaaS companies, there are decreasingly many great SaaS companies.
Why? There is ferocious competition when selling to customers. While customers now expect SaaS — versus the early days of educating — there is deafening noise and precious few green spaces or verticals. SaaS is no longer differentiating for another reason. While modern dev tools and the cloud make it cheap to start a SaaS company (or any tech company), SaaS companies are expensive to scale. It turns out the only thing better for scaling than getting paid consistently over time is being paid upfront! With SaaS, investors fund now what customers pay back later, and that leads to large liquidation preferences on cap tables. Thus, even good SaaS companies often struggle under this weight, yielding disappointing returns for founders, employees, and investors.
So what is the key to a great SaaS company? It’s pretty simple… but hard to achieve. In a great SaaS company, the 10th sale is 10 times easier than the first, and the 100th sale is 10 times easier than the 10th. This concept applies to almost any SaaS company, but here I focus specifically on enterprise.
Hard questions are frustrating, and nothing is as hard in SaaS as answering “How will your 10th sale be 10x easier than the first, and the 100th 10x easier than the 10th?” Several entrepreneurs have given me a knitted frown in response to this question recently (among other reasons :-
Sounds nuts, right? Well, this effect can manifest in two distinct ways (for now holding everything else constant).
- First sale of $100K took 20 months in cycle time, 10th sale of $100K takes two months
- First sale of $100K took 20 months, 10th sale at $1M takes the same time.
The second mode above is more common, but both are possible and describe a like economic reality. As we know, sales cycle time is a proxy for CAC in enterprise SaaS. SaaS companies that can achieve this base-10 exponential sales ease effect are rare. We are lucky to have one in our portfolio — FourKites.
Does that mean a company with this characteristic actually grows base-10 exponentially on the same burn? Well, no, and that is why this effect is so needed. Here are all the reasons why most SaaS companies become less efficient over time and cannot even grow linearly on the same burn, holding inherent sales ease constant:
- Your 1st salesperson is never as good as the founders at selling
- Your 10th salesperson is never as good as your 1st at selling
- Half of the sales people you hire won’t work out
- Your first non-founding employee worked 10 hour days; your 50th works 9 to 5 (ish)
- Office politics themselves grow exponentially with employee count, consuming time
- It’s bring your dog to work day, and everyone is playing with a puppy
- Churn can fundamentally limit growth because of math
- Competitors catch up or otherwise muddy the waters
- You get the point
Even holding sales ease constant, a linear growth SaaS company will often asymptote at the same burn because of these, especially churn. The only way to maintain exponential growth is to have a sales ease effect that greatly outweighs this drag.
So how can you find this effect? There are a few obvious (but hard) ways:
Network effects: FourKites benefits from extreme network effects — it is software that tracks the location of long haul trucks for shippers. The supply chains they serve comprise a complex multi-part network of shippers, trucking companies and retailers. When they sell a new shipper, the shipper brings new trucking companies and retailers. Those trucking companies and retailers then bring more shippers. And so on.
Virality: Box, Dropbox, Slack. Need I say more?
De Facto Standardism: In a way, Epic has achieved this in the Hospital EMR world. “Nobody ever got fired for going with IBM.” Replace “IBM” with “Epic”. Veeva has done the same in pharma CRM and systems. The common theme between the two in reaching a de facto standardism is a vertical focus. Within a vertical, there is a resonance of brand and usership that can lead to standardization relatively quickly.
So ask yourself, what is your answer to making your 10th sale 10x easier than the first?
Originally published at vcwithme.co on May 28, 2019.