3 Takeaways from SaaStr Annual 2016
I’ve spent the last few days pondering my experience at SaaStr Annual. I often find I learn a lot from attempting to coherently convey my thoughts in writing so I thought I’d just share them here.
Before I get started, a note on perspective. I’m a first-time SaaS CEO but I’ve been running Union Metrics for a few years. We’ve bootstrapped ourselves to meaningful revenue, nearly 1,000 subscribers and a team of 22. My best guess is that we were on the right side of the bell curve at SaaStr Annual in terms of our revenue and overall organizational maturity but we’re by no means a unicorn or — god help me — a pre-nicorn. Grain of salt, YMMV and all that.
1) Aaron Ross’ Predictable Revenue approach is the gospel. I’m a skeptic.
It’s become received wisdom that every SaaS company simply must transition to outbound sales for lead generation and that relying on inbound is a sign of immaturity. (Unless you’re Atlassian who plays by Australian rules.) And, predictably, when you’re ready to build a “real” sales team, then you use Aaron’s playbook.
I’ll admit, I’ve been inspired by Aaron’s approach. I bought a copy of Predictable Revenue about 18 months ago and promptly worked with our VP of Sales to set up an SDR-based approach to outbound lead generation. It didn’t work for us at the time for a couple reasons.
The first issue with the SDR approach is that it’s expensive. Tomasz Tunguz described the challenge in his talk on Wednesday when he discussed the costs of hiring one AE. That AE may have an OTE of “only” $150k but she needs leads and those have to come from… somewhere. By the time you’ve added in a couple SDRs and a dollop of marketing, you’ve spent $750k to feed the first AE. (This isn’t including the cost of the VP of Sales you’ll soon need to keep everyone on the same page.) This can amortize out as you scale, except… it doesn’t really. The SDR-based approach is expensive at the beginning before you have enough sales to cover the SDR salaries and it never really yields economies of scale because the number of SDRs is always going to grow with the number of AEs. While this is “predictable” in the sense that you can put money in and (probably) get more money out, it deepens the cash trough that David Skok talks about so you better make damn sure you have the capital to cover it.
The second issue with the SDR approach strikes closer to the heart of the reasoning behind SDRs — generating predictable revenue without having to rely on marketing to generate inbounds. The problem is, SDRs actually require quite a bit of marketing and it’s often of the expensive corporate type, not the crucial demand generation kind you need at a startup. The reason is that it’s much, much easier to be an SDR if you’ve got a brand behind you. If you’re an SDR emailing from Salesforce, New Relic or Marketo, you’re more likely to get a nibble on that 4th email in your 5 touch process than you are if no one has ever heard of your company before. It’s very hard to find, motivate and retain even the hungriest smiling-and-dialing knife salesman when literally no one will return their calls or emails — no matter how much they hack.
The fundamental ideas in Predictable Revenue that you should a) separate the lead generators from the opportunity closers and b) not rely on inbound marketing for all your leads are solid. However, they shouldn’t be gospel for companies of every stage. Early on in the under-capitalized grind (see below), focus on demand generation marketing to build relatively inexpensive, relatively predictable sources of leads that you can nurture. (For what it’s worth, I recommend Hubspot-style free tools approach that Dharmesh Shah talked about vs a pure freemium model — but that’s another post by itself.) Dip your toe into the outbound world by “outbounding the inbound” and immediately reaching out to some of your best inbound leads. If you do that successfully, you’ll likely get to the point where you can afford to give SDRs a try.
2) It’s complicated: The relationship between Sales and Customer Success in SaaS
Thursday had a couple of good sessions that touched on the intricate relationship between Sales and Success including ones from Dan Steinman from Gainsight and Annie Tsai from DoubleDutch. Dan’s talk, in particular, made the point that most of your revenue from a customer in SaaS will likely come after the initial sale; making customer success the long-term arbiter of company success. I generally think that’s true but, well, it’s complicated.
I noticed throughout the conference that several speakers referenced “sales motions” and “retention motions”. While we’ve never used those terms internally at Union Metrics, I might start doing so because it’s a useful way to categorize two very different behaviors. A “sales motion” involves the work necessary to turn a prospect into a paying customer. This includes everything from articulating the value proposition to someone who knows nothing about your product to navigating an organization to asking for the order to helping the prospect through the buying process. It usually requires overcoming objections and tenacious follow up. A “retention motion” is generally going to include everything from answering support questions to customer education to ensuring product adoption. Ok, great. We optimize the sales team for sales motions and the success team for retention motions. So, what’s the problem?
The problem is that these “motions” aren’t mutually exclusive and the required motion is almost always driven by the customer; making it unpredictable. Consider a renewal. Clearly a retention motion, right? That’s literally what retention is for. Well, what if the buyer from last year is gone and you have to convince an entirely new person that they should continue to use the product? What if the customer is interested in an upgrade but needs some convincing? Or, consider a customer running a pilot. You’re still in the process of convincing them to buy so it’s definitely a sales motion, right? Except, the only way you’re going to convince them to stick around long term is with education and helping them on product adoption — two retention motions.
I wish I had some amazing insight to add here. All I can say is that it’s incredibly hard and requires extreme cooperation and trust between Sales and Success. Early on, we put together a set of guidelines to define how Sales and Success would work together. They are:
- Our primary goal is to grow our business by developing long-term, sustainable relationships with customers.
- Sales is responsible for generating new revenue.
- Success is responsible for customer retention and happiness.
- When in doubt, we will do what’s best for the customer, not what’s convenient for us.
We added to these guidelines by layering on some definitions and rules to clarify some specifics (e.g. upgrade opportunities exceeding $500 MRR should go to sales, while success can close smaller deals) but the approach has served us pretty well. There will be some conflicts and questions and when those occur it’s up to the CEO (me, in our company at least) to referee while trying to keep the best interests of the customer at heart.
3) SaaS companies must grind out significant revenue while under-capitalized (But you can!)
SaaStr Annual came at a particularly interesting time in the public and private markets. We’re not at RIP good times levels but the environment is much harsher than it was just two quarters ago. Mark Suster, Danielle Morrill and Tomasz Tunguz all reiterated this in various ways with copious data points.
Tomasz in particular noted that getting to a Series A now is probably going to require $150k MRR which could take up to 2.5 years of bootstrapping or carefully managing seed funds to achieve. But wait, how is this even possible? What about David Skok’s SaaS cash trough where you have to invest everything up front in CAC only to get paid back months or years later?
First, remember that because of GAAP deferred revenue the P&L trough and the cash trough in SaaS aren’t necessarily the same thing. You can break this association (and perhaps even reverse it) by charging up front as soon as possible. This gets cash in your hands after, say, 60 days even if it only shows up on the P&L in 12 monthly installments. If you’ve got a reasonable track record at all, you’d be surprised how many of your customers will welcome the opportunity to pay annually or quarterly for your product. For larger customers an annual invoice is often preferable to monthly credit card purchases. Be prepared that this might come with some additional paperwork and the occasional service agreement but in the end it’ll be worth it because your customers are essentially loaning you money to continue developing your product. You pay it back by providing the service for the next N months. Remember though, loans come due. Make sure you carefully manage this up front cash and don’t get in a cycle where one or two slow invoicing months leads to a crunch.
Second, don’t leave good money on the table (but do leave the bad money). There are two kinds of revenue in SaaS: MRR and distracting bullshit. If you can do something that increases MRR, do it. Make it easy for customers to upgrade, increase your prices if you can, make your onboarding better so customers don’t churn, ask for annual commits so customers don’t churn, personally hug each and every customer so they don’t churn (see a trend?). As a cash-constrained business it can be appealing to chase after other sources of dollars: professional services, transactional products, etc. Like fatty foods, they taste great now but do bad things to you long term. Avoid them if you can afford it (if you can’t, get the cash and figure it out later… nothing matters without cash). Occasionally professional services can increase MRR, but in general it won’t scale unless you hire more people. Those people then require that you get ever more professional services business to pay their salaries. This cycle is the reason most agency businesses don’t get good multiples. Transactional offerings are sometimes appealing because they can scale reasonably cheaply and have a shorter sales cycle than convincing someone to buy a subscription. However, you’ll find yourself constantly choosing between the transactional and the recurring when allocating resources. Roll whatever you’re doing transactionally into your recurring product and go get that MRR.
Finally, keep your costs under control. For most SaaS businesses, people will be the biggest expense so hire carefully. Try to solve problems with automation or product vs hiring and scaling out teams of people. When we hire new people I like to think in terms of incremental capabilities vs new capabilities. Will this person give me more of something we’re already doing or will this person allow us to do something we simply can’t do as an organization today? It’s much easier to hire for the incremental capabilities. You already have a good idea of the skills you need and you can tell that the people you have today are stretched too thin. It’s much harder and more costly to hire for new capabilities. Often it’s an expensive hire that you don’t really have the skills to evaluate. This came up frequently when discussing VPs of Sales at the conference. The best advice I heard was to make sure you hire someone you want to work with or for. Don’t dismiss cultural issues with someone because you think that’s just the way a person in that role “is supposed to be”. Everyone you hire needs to agree on your company’s fundamental vision and values regardless of their role.
Suffice it to say, when you screw up a hire of either type, fix it fast. It sucks to let someone go (but never forget it sucks more to be let go, so be respectful) but if you don’t act quickly the damage can be lasting.
The good news in all this is that it’s a grind, but the joy of SaaS is you absolutely can generate a real, meaningful business without setting mountains of cash on fire. Once you get over the initial hump and get a handful of paying customers, you can make it work even with minimal capital. Don’t expect hockey sticks on all your charts; aim for a solid up-and-to-the-right trendline. Remember, SaaS compounds so months of linear growth can suddenly start to add up.
For me, the best thing about SaaStr Annual was realizing that every SaaS company out there has the same set of challenges we do. We’re all fighting to acquire customers and keep them, to keep our CACs in check and increase our LTVs. I was impressed with how many other CEOs would actually talk metrics and challenges; a refreshing change from the usual Silicon Valley exchange of “we’re killing it”.
This honesty combined with a focus on metrics that are directly tied to revenue serves SaaS well. We might be in for a short-term change in how the markets value SaaS companies but thanks to SaaStr and its community, we’re all focused on doing what’s necessary to generate lasting businesses. I don’t think there’s been a better time to be a SaaS founder.
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