Why you don’t need to be based in San Francisco or Toronto to build a world-class SaaS company
Written by Brian Kobus, Partner, OMERS Ventures
There has been a rising chorus of voices over the past several years proclaiming how the next great startup can come from anywhere, that founders with ambitions to build the next multi-billion-dollar success story no longer need to follow the well-worn path to Silicon Valley. The Covid pandemic has only amplified this sentiment, with remote work diluting some of the advantages to being located in a large startup ecosystem.
However, while the number of category-defining companies emerging from smaller markets continues to rise, the Bay area remains the alpha startup ecosystem, producing more unicorns than any other region. If we look a layer deeper though, segmenting business models, customer focus (e.g. consumer, SMB, enterprise) or industry vertical (e.g. banking, insurance, healthcare, etc), I believe the data would show that in certain segments, the “rise of elsewhere” is even further along than many may think. A prime example of this is SMB-focused SaaS companies.
OMERS Ventures has had the good fortune of investing in several category leading SMB SaaS companies. The most well-known of these is clearly Shopify. Wave is another very successful company, now part of H&R Block following a US$405M acquisition. And our current portfolio includes stars like TouchBistro, a leading SaaS provider to restaurants, and Jobber, a SaaS platform for home services SMBs which announced a $60M growth equity investment earlier this week. What do these companies have in common, other than being SMB-focused SaaS companies? They are all based in Canada, calling cities like Ottawa, Edmonton and Toronto home. In addition to OMERS Ventures investees, there are several other examples of SMB-focused SaaS companies in based in Canada which are a leader in their respective segments, including Lightspeed POS, Freshbooks and Clio.
So what it is about the characteristics of the SMB-focused SaaS business model that appears to have made it possible, perhaps even likely, that leaders will emerge from outside the Bay area? Here are a few observations:
Proximity to customers: SMBs are present in large numbers in every city. Restaurants, home services entrepreneurs, accountants, craft e-tailers — regardless of where you live, in the early days of building an SMB-focused SaaS offering, you can find entrepreneurs in your local network to help you learn about pain points and challenges that you can develop a solution to address. And in most cases, the challenges faced by SMB entrepreneurs are common across geographies, so if you nail product-market fit in your local market, it will likely be similarly applicable to customers based in other cities. Conversely, if you are a building a product for large enterprise customers, it sure does help in the early days to be based in a large market like San Francisco or New York where there are many early adopters.
Go-to-market approach: SMB SaaS offerings are generally priced at <$500 per month, and often start at <$100 per month. At these price points, a field sales model isn’t feasible, so sales need to be conducted over phone/video, or even better in a self-serve model. That means you can scale quickly across many geographies because no part of your pre-sales or post-sales model involves physically meeting with your customers. So while is helps to have proximity to customers in the customer discovery and product definition phase of your business, an inside sales model (characteristic of SMB SaaS companies) reduces friction to scaling quickly. Not having to physically meet prospective customers to close new deals is also a reason why many SMB-focused SaaS companies have continued to achieve strong growth during the Covid pandemic.
Capital-efficient business model: Enterprise-focused SaaS offerings tend to be more complex than SMB-focused products, requiring integration points with software from other vendors and greater security and support requirements. This means a larger team is needed to build a viable product and a longer time-to-revenue for early stage startups, which increases capital requirements. Lead generation and sales often involve physically meeting with prospects, can involve trip to conferences, and a procurement process which requires deft navigation through various departments, such as Legal and Compliance, all of which translates to longer sales cycles and even greater capital requirements. For business models which are capital hungry in the early stages, it helps to be located in markets where there is an abundance of venture capital available. SMB SaaS companies, on the other hand, can often establish product-market-fit in a shorter timeframe and with fewer resources, which reduces the amount of capital required, which in turn means proximity to sources of venture capital is less important.
Talent attraction: There can be huge benefits to being a “big fish in a small pond” when it comes to attracting and retaining talent in the early stages of scaling. Word that a company is breaking out will spread quickly in a smaller startup scene, and the top talent will flock to these companies since there may only be one or a small number of them in the local market. While it may be necessary to open additional offices in larger cities as you scale, there are many examples of SMB-focused SaaS companies hiring their first 100–200 employees locally, by which time they have strong metrics to demonstrate and can access capital to expand their team and access more specialized skill sets.
Cost-of-living and SaaS Metrics: Demonstrating healthy unit economics are critical to scaling a SaaS company. For SMB-focused SaaS companies with <$500 per month price points, operating in markets with a lower cost of living, and therefore lower salary levels vs a market like the Bay area, can provide an important edge in making the unit economics work. For instance:
- Customer Acquisition Cost (CAC) — with lower salaries, sales teams can spend a bit more time helping prospects understand the benefits and value of the solution they are selling;
- Churn — with lower salaries, SaaS companies can offer more in-depth onboarding and customer education, increasing the likelihood of a positive customer experience and therefore lower churn over the long run;
- Lifetime value — with lower CAC, lower support costs and lower churn, the lifetime value of a customer rises;
- Profitability — with lower operating costs, the overall profitability of the company rises, which reduces capital requirements; there may also be government programs available to companies in smaller markets which further reduce capital requirements.
Building a category leading company is tremendously difficult no matter where you are based, and if you’re based in a smaller startup ecosystem, it may feel like your competitors in other markets have it easier than you do. But if you’re building an SMB-focused SaaS company, hopefully the points above ring true, and if you stick with it and stay focused, you may just find you’re already exactly where you need to be.