IPOs in the software industry are at an all-time high in 2020 despite — or perhaps bolstered by — COVID-19. Seems like every week there’s a new app or software-driven service to help us live our lives better in quarantine or enable businesses to adapt to fast-changing environmental factors.
One twist: VC investors are clenching their wallets.
So how are SaaS companies growing? Those focused on efficiency and lower cash burn, like many of the firms that took part in a prepandemic survey of the SaaS industry by VC OpenView Venture Partners, were well-positioned to maintain growth and investor confidence.
A key trait of these companies is that they’re efficient with cash in early stages, regardless of outside investments. One way they reduce costs is through product-led growth, or PLG, a go-to-market strategy that typically depends on bottom-up adoption driven by an excellent user experience. PLG-oriented SaaS companies offer customers something they can’t refuse: a product that alleviates a pain point at no or low cost. Free or freemium offerings are by far the most popular PLG drivers, but there are a lot of nuances, like product analytics, a self-service buying experience and bottom-up sales.
A traditional model, in contrast, may involve costly marketing campaigns and sales operations that draw money away from product development.
PLG-oriented SaaS companies are able to build their brands, create user communities and gather insights to inform future development. What wouldn’t an investor love about low customer acquisition costs at a critical stage in a startup’s lifecycle, especially paired with the ability to convert users to paying customers once they’ve built brand affinity?
In 2019, more than half of the SaaS company CFOs in the OpenView survey listed product and go-to-market execution as their top concerns; see the full list below.
We’ll be very interested in how that changes in OpenView’s current survey, which is going on now and is open to SaaS businesses.
Our take is that companies leveraging PLG strategies have mostly been able to keep sales and marketing costs below 20% of ARR as they get their products off the ground, and once they hit roughly $10 million in ARR, leverage those early adopters to drive growth. Because these strategies reduce sales and marketing spend, that leaves more cash in the bank for development — or rainy days, quarters or years.
And finally, companies best equipped to sustain growth are breaking the Silicon Valley mold. In fact, they aren’t even in Silicon Valley. If rent for empty buildings and high salaries are keeping you up at night, why not try “Silicon Slopes,” Omaha or central Ohio? Companies in low-cost regions grew 20% faster than their Valley peers because they’re saving on real estate costs, perks and salary.
Check out the video for more on how companies are sustaining scalable growth and increasing investor confidence, including reducing cash burn and building ROI by going outside the tech-industry norm.
Melissa Goraj is a licensed CPA and a senior solution consultant in the software/high tech vertical at NetSuite. She works with financial professionals to evaluate business processes and develop system-based solutions to facilitate organizational growth. As a former controller with a decade of experience in accounting, Melissa understands the impact that processes and systems can have on an organization and has a proven track record of increasing operational efficiency. Melissa is a Vermonter now living in Austin, Texas.