7 Habits of Successful SaaS Startups
(or, What I Learned at Salesforce.com)
Recent times have seen a surge of SaaS IPOs. In 2014 there were several high-profile floatations: Zendesk, Hubspot, New Relic, and Hortonworks. At the start of 2015, Box completed its initial public offering and raised $175 million in the process; its stock jumped 66% on the first day of trading.
All of these companies owe their very existence to Salesforce.com, which paved the way for all Software-as-a-Service companies. I had the good fortune of joining Salesforce before its IPO in 2004; the company has since grown into a global powerhouse. The success of Salesforce ushered in an era of enterprise software based on a new business model — software delivered via the Internet and licensed on a subscription basis.
The software industry has changed forever because of the vision of Marc Benioff and the other co-founders of Salesforce.com: Parker Harris, Dave Moellenhoff, and Frank Dominguez. Working alongside them will forever be a highlight in my career.
Entrepreneurs today should study the tactics Salesforce used to transform from scrappy upstart into an industry bellwether. Salesforce became a great company — and was able to IPO — by applying the following 7 principles:
- Your Value is Easy to Articulate.
- Rally Your Team Around a Cause.
- Know Your Customers. Make Them Heroes.
- Build a Platform.
- Make Trust Your #1 Value.
- Punch Above Your Weight Class.
- Take Risks and Ride the Wave.
You’ll observe many of these same traits in today’s successful SaaS companies.
Although there’s no guarantee that your SaaS company will IPO, if you adhere to these 7 principles you’ll tilt the odds in your favor!
Your Value is Easy to Articulate.
To have a viable business, all of the following should hold true (and if they do, your startup has the potential to take-off like a rocket ship!):
- You product satisfies a need and others are willing to pay for it.
- You have enough potential customers to grow your company.
- Your solution is complex, with high barriers to entry for competitors.
- You are able to effectively market and sell your product.
If you can succinctly state the value of your product, many things will follow. The market will easily understand what you have to offer. Your message will resonate with potential customers because they can easily comprehend and remember it. Providing a simple statement of your solution belies its technical complexity and puts customers at ease (while putting competitors on their back foot). You’ll also be able to market and sell your offering to your customers and to potential employees.
The Salesforce product at the outset was strictly for Salesforce Automation (SFA), with aspirations to become a full-lifecycle Customer Relationship Management (CRM) suite. That’s a lot to comprehend for potential customers and employees alike.
Simply stated, Benioff’s vision was to make Enterprise Software as simple to use as Amazon.com. As you can see, Salesforce closely resembled its inspiration (and incorporated a pithy phrase to describe its value to customers).
- Salesforce: “Point. Click. Close.”
- Zendesk: “Zendesk is software for better customer service.”
- Hubspot: “Solve for the Customer.”
- New Relic: “We are all data nerds.”
- Hortonworks: “We do Hadoop. Enabling the Data-First Enterprise.”
- Box: “Enterprise content collaboration.”
Rally Your Team Around a Cause.
Building a startup and scaling it into a lasting company is no small feat. To accomplish this, entrepreneurs need a team as passionate about the company as they are.
In an interview from 2000, venture capitalist John Doerr made the following statements about startup hiring which highlighted the differences between “mercenaries” and “missionaries”:
Mercenaries think opportunistically; missionaries think strategically. Mercenaries go for the sprint; missionaries go for the marathon. Mercenaries focus on their competitors and financial statements; missionaries focus on their customers and value statements. Mercenaries are bosses of wolf packs; missionaries are mentors or coaches of teams. Mercenaries worry about entitlements; missionaries are obsessed with making a contribution. Mercenaries are motivated by the lust for making money; missionaries, while recognizing the importance of money, are fundamentally driven by the desire to make meaning.
A startup with the vision to change the world will attract missionaries who strive for a goal loftier than a large pay packet. Not all startups can provide this type of motivation to their employees; companies that do will assemble a team motivated by purpose rather than profits.
Salesforce had a truly aspirational goal: to change the way enterprise software is delivered. Benioff was a visionary who recognized in 1999 that the Internet could be used to deliver Software-as-a-Service. This notion was preposterous at the time. Companies were reluctant to store their data on 3rd party servers. CIOs had an array of concerns about SaaS; they doubted a web-based application could compete with packaged software with respect to security, performance, functionality and control.
In the face of this, Benioff extolled the virtues of “No Software.” He stated that companies should be able to rent software over the Internet, a proposition that was much cheaper than the hefty expense of an “on-premise” Enterprise Software purchase.
Every entrepreneur wants a team fervent about the company mission. Truly great companies are those that instill passion and devotion among their employees.
In the case of Salesforce, the cause was “The End Of Software” (as we knew it).
Know Your Customers. Make Them Heroes.
A lasting relationship with customers is important for any business, but it’s absolutely critical for building a successful SaaS company. What might work in the offline world — focusing on a point-in-time transaction and not caring about usefulness and value to the customer — will not create a sustainable SaaS business. Think about the differences between traditional Enterprise Software and the SaaS business model.
Traditional Enterprise Software is…
- Purchased by the customer in a one-time transaction.
- Expensive. List price for Enterprise Software is in the millions of dollars.
- Installed “on-premise” by the customer, on hardware also purchased by the customer.
- Operated by an IT staff that the customer has to retain.
- Subject to upgrades that the customer has to purchase and install.
Contrast this with the SaaS model…
- “Sales” are replaced with “Leases” on a per-user basis (as much or as little as needed).
- Customer does not purchase software or hardware.
- Customer does not need an IT staff for operating the application.
- SaaS updates are performed in a way that is seamless to the customer.
In the SaaS realm, a “sale” is just the beginning of a long-term relationship with the customer. SaaS providers should be attuned to the needs of their customers; if their service doesn’t provide value, the customer won’t renew (much less expand) the lease.
SaaS providers are landlords, leasing access to functionality and data storage on their servers. Being a successful “landlord” (SaaS company) means having happy “tenants” (customers). Salesforce shared this apartment analogy on its website, in marketing campaigns, and at user conferences until the term “muti-tenant” became associated with SaaS. (We also filed many patents on our multi-tenant database architecture.)
Benioff understood that SaaS required more than a traditional customer support team and defined a new role in the company: Customer Success Manager (CSM). Access to a CSM would be available to customers willing to invest in a higher-priced plan; in exchange, the CSM would analyze customers’ use of Salesforce and proactively suggest best practices. CSMs would frequently chat with customers and provide “quarterly scorecards” to highlight features or add-ons for the service.
Salesforce also made a point of marketing the success of its customers. Posters emblazoned with images of actual users were placed in the Salesforce corridors; each person was labeled a “Hero” for their adoption of our SaaS. Salesforce even ran print and online ads touting these “Heroes.” Our customers became advocates for the product within their companies and at our user conferences.
Promoting customers as heroes had a side-effect — it created a personal connection among our team. We all felt a duty to the people on those posters.
We wanted them to keep smiling as a result of our software.
Build a Platform.
You’re an entrepreneur building a SaaS business, and can succinctly state the value of your offering. Your team is motivated by the audacity of your vision and is dedicated to make it a reality. You understand that your startup needs to entice and retain customers (long-term “tenants”) of your service. Given all of this, the following advice will seem counterintuitive:
Don’t build what your customers are asking for.
Your customers may ask for something specific, but you should decide if it’s the right thing to build for their success (and yours).
This example from the early days of Salesforce will illustrate. In the early-2000s, companies were not accustomed to having their corporate data outside of their possession. The idea of an application owned and operated by a 3rd party was anathema. Many potential customers (and investors!) of Salesforce insisted that Benioff provide an “on-premise” version in addition to a SaaS offering.
It took the resolve of Marc, Parker, Dave, and Frank to stay true to their mission — to upend the software industry. They heard what their customers were asking for, but delivered something better. They refused to build an “on-premise” version of their product. And if they had, it would have prevented them from building a platform for SaaS applications.
From 2004 thru 2008, Salesforce laid the groundwork of becoming an application platform. It should be noted that customers didn’t ask for any of these things:
- 2004: we enabled deep metadata-driven customizations, which was marketed as “Customforce.”
- 2005: we announced “Multiforce” — a widget to selectively expose application functionality in the Salesforce UI.
- 2006: we launched AppExchange — a directory of extensions to the core Salesforce service.
- 2007: we announced Apex, an expressive language to add business logic to Salesforce system events.
- 2008: we unveiled Visualforce — a template language to build custom Salesforce UIs.
Salesforce assembled the pieces of a platform, and convinced 3rd party developers to build features for the service. If you can replicate this model, you’ll (virtually) scale your product development team by several orders of magnitude!
Build a platform that you know will provide value for the majority of your customers. Listen to their requests and use them to guide, but not dictate, your product roadmap.
You want to ensure customer success and not build what your customer is asking for? I don’t disagree.
Make Trust Your #1 Value.
The death knell for a SaaS company rings when there’s a problem with customer retention. For a thriving SaaS business, you want to maintain “customers for life.” Your user base should accrue over time, ideally using more features of your service at higher price points as they become more sophisticated.
Your customers won’t stick around if they don’t trust you.
Within 18 months of the Salesforce IPO, we had a trust problem. Our team, our software, and our databases grew in size and complexity. It became difficult for us to deliver features in a timely manner, with the quality that was required for enterprise software.
The performance and uptime of our servers suffered. From December 2005 to February 2006, Salesforce experienced a series of serious outages. Critics argued that the limits of the SaaS delivery model had been reached. The viability of the company was in doubt. Our customers lost trust in us, and we lost trust in ourselves.
In times of crisis, you prove your mettle.
Salesforce co-founder Parker Harris responded to the outages by halting all new feature development. Our team focused on improving the performance and reliability of the service, a process that took months. In the midst of this, Salesforce launched a site called trust.salesforce.com, which displayed the real-time status of its servers. This type of status page is commonplace today; in 2006, this amount of transparency was a novel idea.
To this day you’ll see the following statement on the Salesforce trust site:
Success is built on trust. And trust starts with transparency.
With a SaaS offering, you need to earn your customers’ trust through service reliability and full disclosure when systems are having issues. Like any other utility, your customers expect your service to be nearly always available.
Punch Above Your Weight Class.
How do you get recognition and respect for your SaaS startup? The odds are stacked against you:
- Transformation of IT to cloud services has really just begun. Why SaaS?
- Your marketing budget is tiny. You need to build a brand. Who are you?
- Your startup competes with incumbents. What’s special about you?
- Potential customers dislike change. Why should they switch now?
To build a sustainable business, you must answer all these questions. You need to convince customers that SaaS is the best approach. You need to convince industry analysts and press that your startup is a disruptive force. You need to convince customers that your solution is as reliable as established offerings. And you need to convince everyone that your company is introducing a sea change right now, and they don’t want to miss the boat.
Why Saas? Software-as-a-Service allows customers to rent as many or as few licenses as they need. For SaaS customers, there’s no software (or hardware) to buy because the product lives in the cloud. For SaaS providers, there’s a single version of the application to maintain and update; it is far more efficient to support a SaaS application than traditional software. This is an easy story to tell because everybody wins!
To answer the remaining questions of who, what, and why (now), take a page from the Salesforce playbook.
From its earliest days, Benioff spoke of Salesforce as a viable alternative to Microsoft, Siebel Systems, Oracle and SAP. By associating his fledgling startup as a rival to these successful companies, Benioff controlled the conversation. It didn’t matter that all of those companies were far more established than Salesforce. By repeatedly comparing Salesforce to the industry giants, Benioff added a level of credibility to the company.
Analysts and press began covering the scrappy SF startup that had the audacity to challenge the old guard. Salesforce was clearly the underdog, and Benioff took every opportunity to upstage his larger competitors.
One early Salesforce ad campaign declared “The End of Software” and depicted a sleek fighter jet shooting down a red biplane; by implication the jet was Salesforce—and the biplane was Oracle.
Salesforce also employed guerrilla-marketing tactics at a Siebel Systems user conference, staging a mock rally to protest “The End of Software.” The stunt was so convincing that it was covered on the evening news!
Salesforce always provided a continuous stream of strategic press releases. These well-timed announcements kept Salesforce top-of-mind, and could be about a new client win, an industry partnership, or the steady growth rate of its customer base. Emphasizing growth is particularly savvy, because a startup will naturally have a higher growth rate than an established incumbent — by virtue of starting from a much smaller base!
As a startup, you are an underdog in the industry. Embrace it as Salesforce did. It’s an effective way to make a name for your company; you have nothing to lose. And if large competitors react to your tactics, they will have done you a favor — by validating your message!
Take Risks and Ride the Wave.
A startup has several advantages over its competitors: it is nimbler, more creative, and can leverage newer technologies than its staid counterparts. Startups exist to solve existing problems in novel ways.
Entrepreneurs are visionaries; they see a better future and are convinced they can make it come to fruition. This is certainly true at the founding of a startup.
The challenge for entrepreneurs is this: to continually think about their next move. What is the next disruption that can be introduced and how will it shape the company? Entrepreneurship is about risk taking, and making bold statements about “what’s next.”
Benioff is a serial visionary. His ambition didn’t stop at the initial idea for the Salesforce product. Benioff was always thinking about the evolution of Salesforce: from a single-application, to a suite of applications, to a rapid application development platform, to an enterprise collaboration tool, to an application container and database provider.
Each phase of the evolution of Salesforce was shaped by observing the developments of its direct competitors as well as companies in adjacent fields. Product strategy was informed by trends in mobile computing, social networking, and big data. Salesforce learned to acquire companies for core technologies that would advance its ambitions.
Benioff regularly makes bold statements about the future of software, and challenges his team to turn these statements into reality. He’s also fond of the following saying:
Everyone overestimates what can be accomplished in a year, but underestimates what can be accomplished in a decade.
Think of what tomorrow could bring. Make a bold statement about what your company can achieve in 10 years.
Then hop up on your surfboard. Ride the wave. And don’t forget your Hawaiian shirt. Aloha!