Where is the value in your SaaS startup?
In the rush to grab a piece of the $500bn software market, we see a lot of SaaS startups focusing almost entirely on marketing efficiency.
Fine. You’ve found your customers, but what are you really doing for them?
The sales pitch isn’t exactly the easy thing, but it is very far from being everything. As someone who started their career in software in the 90s, I remember the practice of selling empty ‘seat licenses’ to big enterprises that didn’t need half of them.
The result was short-term growth and ultimately, reduced maintenance revenue, poor references, and companies that should never have been funded. A case of buyer — and investor — beware.
Back then my mentor at Apax, Peter Englander, taught me to visit references to understand how integral using the software was to end users. In today’s SaaS world, where software usage has become measurable in terms of reach, usage frequency, virality, data or transaction intensity, we no longer have to do that.
What matters today is usage.
At Mosaic Ventures we look for companies that focus on product and measured customer experience as the real drivers of business model innovation. These provide context for the other financial and marketing metrics that are commonplace (and obviously still important).
After one entrepreneur recently shared his operating numbers with me I was struck by the richness of this metrication within what was really quite a small startup. With this data, you know exactly who your users are and how useful your software is to them. And yet very few SaaS startups present their businesses to us by highlighting their usage metrics, or maximising the measured efficacy that their customers derive from their product.
We want a demonstration of the real value a startup brings.
We like how Danish-founded SaaS leader Zendesk benchmarks and shares best practises, which both drives usage and feeds it back as added value to its customers.
Two other well-executed examples lie in two of the fastest growing startups of the past 18 months, Slack and Zenefits.
Slack’s pricing model is per seat, but unused seats are measured and customers are reimbursed for seats that don’t use the application in a given month. This builds an unusually high level of trust between customer and vendor, and supports the decision to purchase more seats up front. It’s genius. Zenefits’ platform is free and the customers only pay for the insurance plans they purchase over it. Initial free entry cost has led to remarkable growth, and an aggressive network effect, pulling both customers and third party vendors onto the Zenefits platform.
Both of these models reduce friction to adopt because they believe in the utility of their offering.
One of my pre-Mosaic investments was in Swedish-founded contract analytics focused Seal Software. Initial contracts always focus on getting usage going because the company is so confident in demonstrable value — indeed, almost every customer has analysed more contracts via Seal over time.
Squarespace, which my partner Simon invested in in a personal capacity pre-Mosaic, is another product-centric ‘consumerised’ application. One of the reasons it has been so successful in a crowded space (GoDaddy, 1&1, Wix, Jimdo, Weebly etc.), is its fantastic UI, while its growing library of templates eases the pain of building a website for new customers. That UI and library provides immediate value generates tremendous word of mouth. That lowers CAC and allows the company to price at a premium.
The common thread between these companies is the early utility that their product demonstrates, which unlocks large, long-term customer lifetime value. Product and business model are intimately related.
By contrast, we evaluated a fast growing security SaaS business where it turned out that 80% of customers and prospects really weren’t vulnerable in a way that justified current pricing. We passed on the investment.
Entrepreneurs with great product aimed at a large market, who understand how it enables their business model, are able to take the calculated risks that can lead to them growing into big companies.
The SaaS companies we want to invest in need to be product focused and driven by customer usage and value. And they know that. You don’t get to scale or to network effects without tremendous initial utility. That’s why we love product-focused entrepreneurs because product always wins.