Every successful company needs a powerful idea, but sustainable growth boils down to execution. This is particularly true for software-as-a-service (SaaS) startups, where success hinges on the ability to attract and keep customers over the long-term. It takes an incredible amount of skill to build a SaaS company that’s on track to achieve a billion dollars in revenue. Zuora CEO Tien Tzuo and his team are a brilliant example of how it’s done well. For any entrepreneur with this lofty aspiration, here are six key insights — and debunked myths — from my years investing in SaaS companies to keep in mind.
Myth #1: Perfect your SaaS metrics early on
More often than not, SaaS entrepreneurs today focus too much on trying to hit all their SaaS metrics too soon. Ultimately, it’s important, but in my experience, it doesn’t make sense to focus on perfecting the business metrics before you’ve hit $1 million or even $3 million in revenue. Instead of thinking about customer acquisition costs or customer lifetime value, founders should focus their energy on proving the idea, the market, and the product — basically, figuring out their ideal customer profile and fine-tuning their product-market-fit. Once that’s baked, then it’s time to shift the focus to optimizing the SaaS business model. That’s not to say you ignore the business metrics, but it’s really a question to address once you hit $10 million and need to take a hard look at which customers are the most profitable. That will guide you as you build the next phase of your business.
In the early days of Marketo, they focused more on customer acquisition than the efficiency of customer acquisition. They ran the business on a monthly cadence. What did they care about? Logos, logos, logos. Why? If they won a critical mass of customers, then everyone would think of Marketo as the market leader. Once Marketo started to attack larger enterprises, the company then switched to quarterly plans. Win the market. Then you win the perception that you’re going to become the leader.
Myth #2: Every customer is a good customer
The startup mentality is all about growth — acquiring as many customers as fast as possible. Customer growth matters, but not every customer is a good customer. That becomes abundantly clear as a company gets bigger. The type of customers that got you to the first 50 customers may not be the type of customers to get you to 3000. And that’s okay. To get from 50 to 3000 customers, it may be that half of the original 50 don’t survive. Not all the customers that get you through a phase are the customers you need to grow the business profitably. In some stages of a company’s growth any dollar may be the right dollar because it’s forcing you to refine your product, it’s forcing you to build out the capabilities you need. With time, you move on from those customers.
One thing to note, there can be a phase where the ideal customer profile is any customer. Or, over time, that ideal customer may change, moving from small customers to mid-size or even big customers. Anaplan realized it needed to relentlessly focus on the Global 2,000 to drive profitable growth. Once that became abundantly clear, the company aligned its marketing, sales, business development and customer success to achieve this. As an entrepreneur, you have to understand which customers will help you build a healthy business model as you continue to scale. It takes courage to accept that you may need to fire, or at least stop closing, a certain category of customers in order to achieve long-term success.
Myth #3: SaaS companies shouldn’t have a lot of professional services revenue
SaaS companies need their customers to renew on an ongoing basis, which requires building long-term relationships and continuing to provide value. There’s an idea floating around the tech industry that SaaS companies shouldn’t have a lot of professional services revenue because the product should stand on its own. That’s not necessarily true. We see successful enterprise-oriented SaaS businesses where 20 percent of their revenue is professional services. For a company that provides a high-touch service, customers may require support in figuring out how to handle something like architecture integration. And it’s okay to charge customers for services — right from the start. As Marketo Founder and CEO Phil Fernandez says, “there really isn’t any friction about asking customers to pay for services.” If you let them know the product is great, it will transform their business but it’s not easy and it will cost money, they will spend it.
Usually to go public, entrepreneurs need to break even on their professional services business but early on, they can lose money on services in order to make their customers as happy as possible. Workday’s professional services became an increasingly important component of the business as its product became more complex, connecting to lots of other systems and collecting large amounts of data. Customers were paying a lot for Workday and relying on it heavily, so professional services were essential to ensuring Workday could deliver on its full promise and keep customers satisfied.
Myth #4: You have to be a marketer to do good marketing
It never hurts to have a genius marketer on your startup team, but you don’t have to be a professional or superstar marketer to come up with memorable and effective campaigns. Ultimately, the “secret” to marketing comes down to the ability to convey a clear and compelling message. Good marketing is about diving into an idea, distilling it down, and turning complexity into something anyone can understand. What’s one line that will stick in people’s minds, that captures what you do? That may seem simple, but actually discovering that storyline is tough. It requires constant iteration, playing around with an idea and modifying it until you get the reaction you want.
Remember the Salesforce logo from years ago that had the word “software” in a circle with a red slash through it? That was in the very early days of SaaS when the idea of putting data in the cloud was new and controversial. Without a squad of elite, experienced marketers driving the campaign. Salesforce was going up against legacy giants and came up with a simple yet provocative logo that got its message across.
Myth #5: There’s a one-size fits all go-to-market strategy
Like all things in the tech industry, there are certain go-to-market strategies that become trendy. Silicon Valley remains particularly enamored of the freemium, free trial, low-friction model at the moment, but a go-to-market strategy is not one-size-fits-all. Refining your business model requires understanding individual buying behavior. A model that works for Dropbox and Slack may not work for your company, so you have to tune into how people are buying the product out in the real world.
Sometimes, the best go-to-market strategy emerges by surprise or by accident. WebEx gained traction through sales reps, who were using WebEx during sales pitches. Customers would see the technology and decide they also wanted to use it for their own sales pitches, which would lead other sales reps to see it, and so on. WebEx decided to roll with that low friction, low-cost monthly payment model and grew organically from there. Then looking through the data, WebEx realized that some companies had 15 different people using the product on separate accounts, so they contacted IT and inquired about consolidating into an enterprise account. The company built on what was actually happening in the market and it was very effective.
Myth #6: Look for the magical inflection point.
It’s no secret that building a startup can sometimes feel like you’re lurching from challenge to challenge and crisis to crisis. All growing companies reach inflection points when a big and often difficult decision has to be made. Ultimately, startups experience multiple inflection points. That’s a good sign, because it means things are moving forward, but inflection points don’t mean the road ahead suddenly becomes clear. Rather, they present an opportunity to take stock in how things are going, learn, and perhaps make big changes that will get you to the next point along the way.
We’ve seen so many companies level off at $20M ARR (annual recurring revenues), $30M ARR and even $50M ARR. If you’ve figured out that the next 2000 customers are the same segment as the last 10, then you’re at an inflection point. You have to look deeply to see if the next customer is the same as the last customer. If you can add $200M in ARR by just executing against the next set of customers, then you know you’re at the next inflection point. It’s not a question of “Was that a good quarter?” It’s more about, “How did you get there?” And, “Can you do it again?”