In short:
- You can drive long-term growth efficiently and sustainably and gain investor confidence. But some best practices are far from obvious
- Leading with a great product seems like software 101, but not all product-led growth tenets are second-nature
- Lower cash burn in early stages means more financial resources available when it comes time to go big
- Buying into the Silicon Valley 23-year-old ‘coder bro’ architype doesn’t yield the best returns — not even close
Getting any sleep lately? SaaS CFOs losing zzz’s over their companies’ go-to-market and product strategies are in good company. A recent benchmark survey by SaaS VC OpenView Venture Partners revealed that these are top concerns regardless of company size, listed by over half of the software executives polled (an overview of the findings is here).
We get it. The push to deliver the next innovation while also driving steady growth is intense.
Part of that pressure is external, because the software industry cool kids have very public profiles. When your product is code rather than cars or craft beer, you’re constantly being scrutinized for market disruption, valuations and profitability — or lack thereof.
And there’s a love/hate aspect to that focus. From the FTC’s noises about antitrust actions against companies it deems too big to high-profile IPO fails, it seems like society is simultaneously scared of success and experiencing some schadenfreude.
So how do top software suppliers beat the odds, bring new products to market efficiently and deliver sustainable growth?
The SaaS companies surveyed cite some common success factors, including establishing an annual recurring revenue model. However, there are three less-obvious top traits that we think are worth considering.
Trait: They’re Efficient with Cash in Early Stages
Many SaaS companies, increasingly even large ones, employ product-led growth (PLG) tactics to drive user acquisition while keeping burn rate down. PLG is a go-to-market strategy that typically depends on bottom-up user adoption based on delivering an excellent customer experience versus a traditional model involving complex and costly marketing campaigns and sales efforts that draw money away from product development at a critical stage in a startup’s lifecycle. Companies that are successful in following a PLG strategy are able to reduce sales and marketing spend, leaving more cash in the bank.
PLG-oriented SaaS companies offer customers something they can’t refuse: a product that alleviates a pain point at no or low cost. As a result, companies can build communities, burnish their reputations, increase satisfaction and then convert users to paying customers once they’ve built brand affinity.
Free or freemium offerings are by far the most popular PLG tactic, as we discuss in this article delving into the strategy. But other key policies include product analytics, a self-service buying experience and bottom-up sales. It’s a win-win for customers and SaaS providers.
Besides a focus on customer experience to drive adoption and, ultimately, sales, PLG fosters efficient use of cash. Companies that offer self-service or freemium services focused around a well-developed product were found to bring sales and marketing spend below 20% of ARR. While it may take longer for PLG companies to obtain users initially, they’re able to grow fast once adoption takes off — a more-efficient early stage go-to-market strategy means having the financial resources available to hire and onboard talent and adopt a more traditional inside and/or indirect sales strategy once you hit about $10 million in ARR. And, referrals from happy early adopters drive additional growth at no cost.
And finally, what investor doesn’t want to see less risk? Without high marketing spend, customer acquisition costs are much lower. For investors, a low CAC means higher profits.
Trait: They Really Know Their Markets
So now that you’ve acquired initial customers at no or a low cost, how do you price your product for sustainable growth?
There is a direct correlation between target customer, sales channel and annual contract value (ACV). Smart software companies know how their customers like to buy, what they can spend and how they want to be charged and allocate resources accordingly.
Best-in-class software companies are spending less to win contracts with lower ACV while making it easier to attract users. At the same time, they’re allocating resources to bring in higher-dollar contracts through indirect and field sales channels. Inside sales is most commonly used when ACV is between $1,000 and $50,000; when ACV is greater than $50,000, field and indirect sales are dominant.
In addition, top SaaS providers are sticking to industry norms when setting pricing, always a balancing act. You need to make money, but customers don’t want to feel taken advantage of. A time-tested way to avoid losing money on a contract if a customer grows, without pinching their budgets early on, is by charging based on usage or users. In fact, 70% of the 639 software companies surveyed use these types of pricing metrics; that’s true across developer, vertical and horizontal applications.
Because so many companies are using these sales channels and pricing metrics, they’ve become de facto industry standards. If your strategy differs from the norm, expect to devote resources to explain to customers, the press and investors why that is.
Trait: They Aren’t Afraid to Break the (Silicon) Mold
In contrast to out-of-the-box price-setters, SaaS companies that don't conform with the cultural norms of the software industry are doing objectively better than their peers. While it isn’t exactly news that women-led tech companies have consistently outperformed their male-dominated peers, as we’ll discuss, our survey shows similar performance metrics for companies with more experienced founders as well as those outside of high-cost tech hubs.
And what’s more, software companies that are breaking the Silicon Valley stereotype are more profitable.
It’s a no-brainer that companies in high-cost areas will burn more cash on necessities like rent, utilities and employee salaries. But location doesn’t determine how innovative a product is. Software companies located in low-cost regions were found to grow 20% faster and realize 20% to 30% greater efficiencies at scale. Why? Because their executives aren’t spending time keeping the lights on. Leaders in tech hubs were 33% more worried about fundraising and 27% more concerned about cash burn than their peers in lower-cost areas.
What are those latter execs doing with that time? Driving growth.
And if your company thinks that you can’t attract top talent outside of tech hubs, think again. A 2018 study by the Wall Street Journal found that millennials are leaving big cities in droves, seeking out more affordable places to live. This exodus includes workers of all income and education levels. The cost of living and home ownership in places like San Francisco, New York and Boston can make even a $200,000 salary seem low.
Software companies located in more affordable areas may pay less than their Silicon Valley peers, but those salaries will go further. As workers who came to tech hubs to start their careers look to make a change, software companies in cities like Pittsburgh and Cincinnati are recruiting them — and burning less of investors’ cash while they’re at it.
Second, experience matters. While the media loves to talk about young men who dropped out of college to become tech billionaires, founders who were over 30 when they started their companies had a 65% higher growth rate than their younger peers. There’s a straight line between more experience before launch and shareholder value. What wouldn’t an investor love about a founder who’s been around the block and has the résumé to prove it?
And as we mentioned, studies going back to 2007 have found that female-led tech companies are more capital-efficient, achieve higher ROI and grow faster than those headed by men. In 2019, SaaS companies with 50% of their teams led by women had growth rates of 115% compared with those where men dominated leadership roles. What’s more impressive is that these women are achieving these higher growth rates with 50% less capital raised through funding.
How are women-led companies able to achieve such high growth rates with less capital? An obvious answer is, because they’re accustomed to making the most of what they have and rising above challenges that men are less frequently subjected to.
The Boston Consulting Group has studied more than 1,500 Boston-based companies since 2010 and found that women received less than half of the funding that men did, an average $935,000 versus $2. 1 million. Thus, women in a variety of studies conducted across different markets were on average more conservative and efficient in their go-to-market strategies. Less cash meant fewer risky decisions, which directly translated to higher ROI. For investors in companies from the BCG study, revenue earned by female-led startups was 78% of the amount invested versus only 31% for those led by men. When the authors of that study looked nationally, they determined VCs could have made $85 million more in a five-year period if they’d invested equally in startups led by men and women.
Adding women to leadership on the company or board level, being mindful of ageism and thinking outside tech hubs when hiring or planning new offices are steps all SaaS providers can take in 2020.
Whether you’re looking to PLG to get customers through the door while keeping CAC low, pricing based on industry trends or going against the Silicon Valley norms to achieve higher ROI with less cash burn, efficiency is key to bring in investors and scale faster. If you're wondering how your company stacks up against its software industry peers, OpenView offers an assessment questionnaire that yields insights into PLG touchstones, like how to select which paid features to add and ways to minimize barriers to trying your product.
Melissa Goraj is a licensed CPA and a 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.
