8 things that will definitely happen as you scale your SaaS business from $0-$1m
This is our story. I can guarantee it will be yours too if you are in the $0-$1m phase.
Some time in 2017, ScreenCloud reached $1m in Annual Recurring Revenue. Seems like a million years ago now, but I remember that it was a significant milestone for us. Not just because of the number, but because this journey is such a fraught and fragile one, it felt like a huge validation that we were doing something right. Yet as a milestone, it is one so few people talk about, I suppose because in the world of investment, this is so early in the game that it just doesn’t register on many investors’ radars. But as the chances of falling by the wayside are so high in that first $1m leg, we should talk about it more. In fact, we’ve written a free e-book about some of the more practical considerations on that journey.
However, back to our story.
It is said that getting from $0m - $1m is impossible, getting from $1m — $10m is improbable, and getting from $10m — $100m is inevitable.
It had taken us 22 months from launch but we’d finally joined the ‘improbable’ club of $1m-$10m. Improbable is better than impossible, right? But it also felt that we had created something that was real: something that could sustain itself and the people who were part of it.
I was recently telling someone about the early days and I’d forgotten how unknown the territory felt at the time. Although we had launched and exited several tech businesses before, SaaS businesses are different to other businesses. Which is part of what makes them so appealing. If you are about to embark on the journey of launching a SaaS business, here are some things that you will almost certainly encounter as your business grows from nothing to $1m in Annual Recurring Revenue.
1. You will underestimate how much resources product development will need.
You will underestimate money generally — sad but true — but tech costs especially will always slap you in the face. The three of us who started ScreenCloud have been running technology businesses since 2004. For most of that time we were providing technology solutions for clients where we had to price and estimate timeframes for delivery, so you think we’d be old pros at this. But even we failed to appreciate quite how much effort would be required.
The two major things we got wrong were: pre-launch, making sure that the product was stable enough to ask people to pay for it. Under laboratory conditions everything worked fine, but in the real world, where Wi-Fi connectivity in public spaces is patchy, we needed to go back to the drawing board. It delayed launch by 3 or 4 months.
Then once we launched, although it was technically our MVP, we assumed it would mainly be a case of maintaining the service and adding a few improvements along the way. But as we quickly realised, what you think represents product market fit, almost certainly doesn’t chime with the actual market itself. Things we thought were ‘nice to haves’ (such as the ability to show content on vertical screens, or to zone screens for multiple content sources) turned out to be deal-breakers for several potential clients.
We’ve ended up realising that there is a much bigger potential here than the one we originally envisaged and so we have doubled-down on our development team. Those responsible for aspects of the product currently make up the majority of our staff.
2. Innovators and Early Adopters will be pretty forgiving.
When we look back on v1 of the product, we’re amazed that people paid for it at all. Don’t get me wrong, it did what it said on the tin, but it was very basic. What we found is that your innovators and early adopters are happy to go on the journey with you if they believe your story and ambition. These are the people who ‘discover’ you and they are willing you to succeed, partly because they can see you are working to solve a problem they have, but partly also to confirm that their instincts were right.
So, when your product is in its infancy, don’t try and pretend otherwise. People are OK that it’s not there yet, or at least the visionary ones are. If someone asks if your product does something that it can’t, tell them whether or not it’s on the roadmap and if it is, let them know (in very broad terms) when they can expect to see it. Nine times out of ten, they’ll be happy with that. It also gives you an excuse to go back and talk to them again once you launch the particular feature they were looking for. We had quite a few customers asking for zoning of content on the screen, so we comp’d them their screens until we were able to launch the zoning feature. Guess what? People were generally OK about paying once we did the thing we said we would do.
3. Raising investment will take way more time and effort than you thought.
Raising money can be a timely and painful experience. What’s more it’s one task that you can’t delegate. It has to be led from the front and even if not all the founders are totally engaged on a day-to-day basis, the chances that they won’t all get sucked into the process at some point, is remote.
I would estimate that in the first 18 months of the life of the company, about 12 months of that was spent in fund-raising mode. What does fund-raising involve?
- Building a deck (which in itself is the subject of numerous articles and talks)
- Building a business model and forecast (ditto)
- Networking at investor events
- Pitching to anyone and everyone who might be interested
- Getting rejected by most of them and dealing with that
- Hiring a lawyer
- Getting to and agreeing a term-sheet
- Negotiating the finer details of the shareholders agreement and articles
- Due diligence
- Legal and financial compliance
That neat little list belies quite how messy and time-consuming it all is. Even getting in front of a potential investor with your story straight can seem like an impossible task. Getting knocked back will make you question yourself and your whole business. Then when you finally get an offer you might think you’re done save for a few signatures and exchange of bank details, but this is just where the real fun starts. Negotiating a term-sheet isn’t like haggling over a second-hand car. Get that wrong and you might end up regretting it for the rest of your life. Having your lawyer tell you that the other side’s lawyer disagrees with something your lawyer thinks you really should insist upon, is stressful (and starts to become expensive very quickly). Due Diligence: if you haven’t got everything stored logically and if even if you have, is tedious and frustrating. All in all, it’s a huge distraction when your business needs your undivided attention more than ever. There isn’t much you can do to avoid this, but at least if you are aware of quite how much of your life it will consume, you can be prepared.
4. It will feel impossible to stand out.
The kinds of conversations we have today with potential investors, potential employees and potential customers are so different to the ones we had when we were a few months old. Part of the reason for this is that it’s impossible to ‘prove it’ in the early days and you are fighting for attention in a big pool of wannabes all making similar claims.
Take investors (see my point above). We were pitching alongside Bullshit Businesses that got more interest from investors than us but, in our humble opinion, were often no more than novelty ideas with little hope of significant long-term scale. Why? Because what we were proposing wasn’t that sexy and also required a level of technical understanding of the challenges we were looking to solve. It wasn’t the sort of business you could brag about investing in to your mates, unless your mates were a little bit nerdy. And because in the early stages, it was unlikely any established VC would be interested in backing us, we had to look to Angels who are a mixed bag, to say the least. Fortunately we were able to meet some smart ones who got where we were coming from, but it meant pitching to a lot of people who didn’t, too.
Compare that to now, where VCs with significant funds reach out to us and the conversations we are having demonstrate how thoroughly knowledgeable they are about SaaS and what our numbers mean.
5. Sales revenue growth will feel painfully slow (to begin with).
This for me was the most disorientating thing of all. When we started our digital agency in 2004 from nothing, we were doing about $50,000 per month within 3 or 4 months. Why? Because the barriers to entry were non-existent and you only needed a handful of customers paying you $10-$15k for a smallish project to get to that level. And you will generally be able to find those people in your existing network without too much of a stretch. We’d built up a few side projects along the way, some of which we were able to exit, but they were always just that: side-projects. ScreenCloud, on the other hand, was what we’d bet our future on: we had decided to sell our agency (which was the one thing we could rely on to generate money each month to pay our rent and feed ourselves) and put all of our faith into this fledgling SaaS business. And unlike the agency, we weren’t pulling in $50,000 per month shortly after launch. In fact, at 4 months after launch, we’d achieved a whopping $3,000 in Monthly Recurring Revenue. Although that seemed like an achievement because it represented 56 paying customers, if we’d carried on growing at a rate of $3k every 4 months, it would have taken us over 5 years to reach the same sort of monthly revenues that we did just 4 months into our new agency!
This was scary.
But what we had to do was have faith things would start to develop momentum. Because, although each of our customers was only spending around $50/month with us (as opposed to the $10k+ in agency land), they were spending that EVERY month. What’s more, we didn’t have to pitch to each and every one of them to get them to become a customer.
What we found was that, although our growth in dollar terms was small, our monthly growth in percentage terms looked great. And when we started extrapolating that out, the numbers started to look quite exciting. So exciting in fact that it was hard to believe that they were possible (as we celebrated punching through the $5k Monthly Recurring Revenue mark in Month 6).
Jump forward to Month 22 and we were at $85,000 MRR which also took us over $1m in Annual Recurring Revenue. And, while it took us almost 2 years to get to $1m, it only took us another 6 months after that to double it to $2m. Doubling revenue in 6 months at those numbers was something we were never able to achieve when we had our agency. It turns out, betting on our SaaS business wasn’t quite so foolhardy after all.
6. Metrics will suddenly make sense.
I wrote a bit about this recently. To begin with, you have no choice but to make up numbers as you go along. One potential investor in the UK told us to stop being so “British” about our forecasts (which meant that we were being too conservative). Making up numbers is difficult because you feel a bit of a fraud as you are kind of pretending to have a crystal ball. It also feels a bit contrived and that you are somehow complicit in a fantasy that nobody really believes anyway. But the reality is a bit different.
Yes your numbers are made up, but they should be based on assumptions that can be justified — either because you have some data to justify them, or they follow an industry norm. For investors, they want to be able to see that if your assumptions are correct, there is a potential payday down the line. If your business was all about disrupting an industry by providing a better service for a lower price but it turned out that your cost of sales were 99% of the unit cost for example, then that would be a red flag. Similarly, if you thought that you were going to grow by 500% per month for the first 24 months post-launch, then again, someone might question your logic.
But assuming your assumptions are all logical and believable, you still start off with a spreadsheet of KPIs that are largely just guesses. So they don’t really carry much weight in terms of your decision making.
However, as you carry on, you’ll find that things will start to emerge: trends will start to appear. Your growth rate will start to look predictable; you will start to see conversion rates from trials to paid fall into a similar pattern; and your customers might start behaving in a strangely uniform way — in our case, expanding their accounts month-on-month.
Suddenly, those KPIs that you had created assumptions for will start to be real numbers and then in turn, those numbers will start to give you more and more accurate forecasts. Your metrics will have moved from fantasy to reality, which means that you can make sense of them.
7. You’ll keep circling back.
You would expect that once something was working and you were on a predictable growth trajectory you would just need to hold on tight and enjoy the ride.
Although your core plan will hopefully remain consistent (unless you decide on a major pivot or something catastrophic happens), like a sailor who is constantly trimming her sails to keep it on course, you too will have to keep taking decisions along the way to keep things on track. This may be due to problems, such as customers consistently asking for something that your product doesn’t quite do; or it may be due to advice you get that doesn’t quite chime with your current assumptions but nevertheless makes sense and is from a credible source; or it may be because an opportunity presents itself that you’d never considered: a fantastic partnership, or the option to hire a superstar.
We found ourselves spending a bit more on marketing one month, then delaying hiring a new developer a month later as we tried to get the right balance between investment and cash conservation. Like riding a bike, you begin by focusing most of your effort on not falling off. But we also changed our minds on when and what type of funding to raise, whether to rebuild the platform or keep evolving the current one, whether it was time to push hard on outbound marketing or hold off until the product was more mature. In fact, every day is a set of micro-decisions designed to keep us moving as fast as we can.
8. Things won’t get easier, but they will get better.
Sadly, once you get to $1m, it doesn’t get any easier: the stakes are higher and the decisions you take can make a bigger impact; the problems are more complex; your team will be bigger; your competition will start to look like a threat; your product roadmap will be longer; and the responsibilities you have to your staff, customers and investors can feel overwhelming at times.
But I still maintain that the journey from $0 to $1m in ARR has its unique brand of toughness. You have to summon up every advantage you have whatever that may be: luck, skills, contacts, experience, access to money or just dogged perseverance. Looking back, the $0-$1m period was more unpleasant compared to now: we were placing a lot of faith in ourselves and our idea with little data to back it up. Conversely, the task for us today for the year ahead is much more challenging because it is so much larger, but we have the confidence that comes from our performance to date.
So, although things may seem a bit desperate to begin with, it will get better, maybe not easier, but definitely better. Just stick to the plan, even if you are constantly reassessing the details, and you’ll get there. Good luck!