8 Dos and Don’ts for SaaS Startups23 min read

Blog Post banners (6)

Many SaaS startups make mistakes in their initial years of doing business, and that sets a foundation for how they continue to do business. Whether you’re a founder, sales leader, or product specialist – everybody makes mistakes. But if you’re equipped with the right knowledge from the get-go, those mistakes can be avoided, to an extent.

Christoph Janz, Partner at Point Nine Capital, and Nick Franklin, Founder & CEO of ChartMogul, shared eight do’s and don’ts for SaaS startups, on the SaaStock stage. Let’s get right into them…

  1. Don’t give away your product too cheaply.

It’s natural for founders to downplay the quality and potential of their product, because you know all the shortcomings of your product better than anyone else. It’s probably a mistake which most SaaS founders make, especially those that are trying to sell to bigger customers.

DO try to increase your prices. Companies spend millions of dollars on software, so double your prices. You don’t have a lot to lose. But if it works out, and in many cases it does work out, it can completely transform your business.

  1. Don’t assume growth will be the same after your first year of business.

Just because you’re growing at over 20% month-on-month in your first year of business, you won’t necessarily be able to do the same thing in your second year of business. You can have high percentage growth rates, of course. But you’re starting at a very low base.

DO base your forecasting on net MRR increase, instead of percentage growth rates, to help you think about what you really need to do to achieve continuous growth. What churn rate do you need to maintain? How many salespeople will you need to hire? Think about those things.

  1. Don’t reinvent the wheel.

Don’t try to build tools and processes that already exist. Today, we live in a world where you have AWS for your infrastructure, Algolia for search, New Relic for application performance monitoring, Optimizely for A/B testing, Stripe for billing, and the list goes on.

DO leverage all these great tools and all the work that others have already done for you, so you can grow at a much faster rate. You can still innovate, but don’t reinvent the wheel.

  1. Don’t mistake latent demand for product-market-fit.

The initial spike you get after launching your product can often be short-lived. The product often needs to evolve quite considerably post that initial traction, in order to be addressable to a wider market beyond those early adopters.

DO understand the market dynamics of your product and the market, and before your growth plateaus, evolve your product. Evolve until you’re ready to scale up, and invest in sales and marketing when your product is truly ready to scale up.

Those are the first four tips on what to do and what not to do when starting off a SaaS startup, from Christoph and Nick. Watch the full video on our YouTube channel, for the next four tips from the experts. You can read the full transcript of this video below.

New call-to-action


Transcript

Nick Franklin:
Okay. Thank you and hello everyone. We’re very excited to be here in Dublin. I think Alex deserves huge props for pulling this off. We decided to do our talk on eight tips, eight do’s and don’ts for SaaS startups. And I’m going to start with a small apology, some of these might seem a little bit obvious to some of the audience, but we’ve tried to put a good range in there for everyone. Let’s do the introductions. My name is Nick Franklin, I’m the founder CEO of a company called ChartMogul. We’re a SaaS software company, of course, and we help other SaaS businesses measure their KPIs and metrics and get insights from their data. Prior to ChartMogul, I spent five years at Zendesk as their head of European region and then Asia region. Christoph?

Christoph Janz:
Hi everybody. My name is Christoph Janz of Point Nine Capital. Point Nine is an early stage VC. We’re based in Berlin, focused on SaaS. We’ve been lucky to invest in some great European SaaS companies, some of which are here today. Like Algolia, FreeAgent, Typeform and, of course, ChartMogul. Many thanks to Alex for organizing this great, really awesome conference. And thanks for inviting us, I’m very excited to be here today. I think we only have a few minutes per do or don’t so we better get started.

Christoph Janz:
You’ve probably seen this picture before. It’s from the Black Tuesday in 1929 and it shows a man who offers his car for a hundred bucks because he lost everything in the stock market. That’s a very sad story, but the good news is that you’re not as desperate as this man. And therefore our first recommendation, our first tip is to not give away your product too cheaply. Giving away your SaaS product too cheaply is something which we’ve seen many times. In fact, it’s probably a mistake which many, maybe even most SaaS founders, make. Especially those that are trying to sell to bigger customers. It’s pretty easy to see why that happens.

Christoph Janz:
First, most startup founders have never worked in a large company, so it’s very hard for somebody who’s never spent more than a few hundred bucks on any piece of software to imagine that companies really spend millions of dollars on software.

Christoph Janz:
Second reason is that you know all the shortcomings of your product better than anybody else. You know everything that sucks about your product, you know all the [box 00:02:56], you know all the features that are on the roadmap but aren’t done yet. And you probably feel like you can’t ask for big dollars until your product is perfect, which it probably will never be.

Christoph Janz:
Third, you want customers, you want happy customers. You probably want to please your customers. You’re trying to remove any friction from the conversion process, maybe you want to avoid difficult conversations with your customers. Maybe you’re a bad negotiator, maybe you don’t want to talk to your customers at all and just build a self-service business. That’s all very understandable, but it’s exactly these biases and pressures that make it very likely that you’re currently underpricing. And I want to encourage you to try to increase your prices and to change that and increase your prices. Double your prices. Really give it a try, you don’t have a lot to lose. But if it works out, and I’ve seen many companies where it did work out, it can completely transform your business. So don’t give away your product too cheaply.

Nick Franklin:
Thanks Christoph. And we recently raised our prices for new customers in June and so far it’s been definitely a good move. So, tip number two is don’t assume that because you’re growing at over 20% month on month in your first year of business, that you can do the same thing in your second year of business. Imagine you’re a SaaS company, after the first 12 months of selling your product, you go from $0 in MRR to maybe $50,000 in MRR. This is a good performance. It’s quite common. And during that first year there are some months, many months, where you’re growing at more than 20%. I remember when ChartMogul was at $15,000 or $10,000 in MRR. There were some months where we grew at 50% month over month, it’s absolutely amazing. You can have such high percentage growth rates, of course. But you’re starting at a very low base.

Nick Franklin:
And it’s tempting, you read SaaStr and these other VC blogs and the number of 10% or more month over month is often used as this benchmark of, okay, every successful high growth SaaS business must be growing at 10% month over month. And so it’s tempting as a founder to think, well, we’re growing 25% month over month. So it’s going to be easy to grow at 10%, month over month next year. But percentage growth at very quickly compounds. So at 50,000 growing at just 10% is an additional $5,000 in net new MRR, it’s not so hard. Nine months later, that’s $10,000 in net new MRR to keep growing at 10%. 13 months, it’s $15,000 in net new MRR. 19 months is $25,000 net new and just very quickly compounds on what was a gentle stroll in your first year very quickly turns into this vertical cliff.

Nick Franklin:
And to really achieve this kind of growth either requires some sort of real virality or you have to build up quite a considerable sales and marketing operation to support this. And even if you have the capital available to you and you deploy that capital in building out the necessary marketing and sales machine, it’s still difficult to go from adding $5,000 in net new MRR to adding $15,000 in the space of 12 months, which is what is required to grow at just 10%. So the tip here is instead of basing your forecasting on percentage growth rates, base it on net MRR increases and this will help you think about what you need to do to achieve this, what churn rate you need to maintain because obviously once you get to initial scale churn starts to eat away at growth. How many salespeople will you need to hire? All these kinds of things. And this will help with your forecasting and with your planning versus relying on just extrapolating percentage growth out into the future. And I for one made this rookie mistake at least once over the last couple of years.

Christoph Janz:
And I’m sorry, because I’ve seen this before, but apparently I didn’t warn you. Sorry about that. So number three, don’t reinvent the wheel. I remember that when I started my first internet company, which was about 20 years ago, which sounds insane and tells you something about how old I am. We had to build everything ourselves because nothing existed. There was no AWS, no Google Analytics, no Stripe. There was really nothing. And what’s maybe more, there was also absolutely no information out there on how to build and run a web startup. Chora didn’t exist yet, there were no blocks, even conferences like this one pretty much didn’t exist. So we really had no clue. And there was nobody who we could ask and that’s why I picked this picture because we probably looked like this poor boy at those times.

Christoph Janz:
Today, we’re living in a completely different world. You have AWS for your infrastructure, you have Algolia for search, you have New Relic for application performance monitoring, you have Optimizely for A/B testing, you have Stripe for billing and the list goes on and on. And by using all of these great tools, by leveraging all the work that others have already done, you can just move so much faster and that’s definitely something that you should do.

Christoph Janz:
Also, the playbooks of some of the most successful startups have been opened. Jason Lemkin alone has answered more than 2000 questions on Quora, most of them on SaaS and startup related topics. Between his answers and everything he publishes on SaaStr and the blocks of people like Hetan Shah and [inaudible 00:09:12] and many others. And of course, conferences like this. You can find great answers on pretty much any question that you can imagine. So make sure you use that wealth of knowledge. Whether it’s about pricing, content, marketing, landing page optimization, sales team compensation, there is such a wealth of information out there which helps you learn about all the best practices.

Christoph Janz:
You should, of course, still try to innovate, try to build a better product, try to innovate on user experience, or try to find new growth hacks, but don’t reinvent the fucking wheel. Or as Father Jack would say, don’t reinvent the fecking wheel. I actually don’t know that guy, but Nick told me that everybody in Ireland loves him, so I hope it was an appropriate joke.

Nick Franklin:
I’m not sure. All right. Number four, don’t mistake latent demand for product-market-fit. When a new SaaS company first launches, they often get an initial spike of signups or activity and this is usually due to latent demand. There’s often a class of customer out there that may just be waiting for exactly what you’ve built. And often those customers often similar to yourself, as founders often build SaaS products that they themselves would like to use. But this initial spike can often be short-lived and the product often needs to evolve quite considerably, post that initial traction, in order to be addressable to a wider market beyond those early adopters. And this is especially true in SaaS companies that build their product on top of a preexisting ecosystem. Be it, you build your SaaS company on top of Slack, perhaps. Or in our case, this was building on top of billing systems like Stripe and Braintree and Ricoh and other systems like this.

Nick Franklin:
So we actually had to evolve our product considerably, post getting off to a really fast start, in order that it could be addressable to a wider market and preempt that before our growth plateaued and evolve the product. So my only learning from this is trying to understand the market dynamics of your product and the market. And don’t jump the gun and invest too much into sales and marketing early on before that your product is truly ready to scale up in a large enough market. In a small, addressable market word of mouth is probably sufficient and will probably be very effective. So keep evolving the product until you’re ready to scale up and invest in sales and marketing when your product is truly ready to scale up.

Christoph Janz:
There is a book related to that, which probably some of you have read called Crossing The Chasm. If you haven’t read it yet, highly recommended it.

Nick Franklin:
And the segue I think was a good example of this. Although I think you remember better the one-

Christoph Janz:
I don’t know if there was latent demand but at least there was a huge amount of latent hype. I know that people hype their product so much saying that whole cities will be transformed and life will never be the same. So I think by now we actually see a segue every now and then, but I guess it hasn’t really transformed cities yet.

Nick Franklin:
No.

Christoph Janz:
Okay. Number five, don’t screw up your fundraising. If you’re the CEO of a company of a startup one of your most important jobs is to make sure that you have money in the bank, if you like it or not. And unless you’re bootstrapping a profitable, it means that you have to raise money probably multiple times. So it’s important that you’re getting really good at this. And there are lots of ways how you can screw up your fundraising. We could do an entire do’s and don’ts talk about this. I could probably talk about this topic for hours.

Christoph Janz:
So I just pick a few of the many mistakes that I’ve seen many times firsthand. The first one is you should create a really awesome deck. I think founders sometimes underestimate the importance of that and just spend a little bit of time creating an okay deck. But I think you should really aspire to build a really great deck. And I think you should assume that it’s time well spent it. It’s your chance to leave a great first impression with investors. And I think you shouldn’t miss that. It also forces you to carefully think through all aspects of your business. So it also is a good exercise to make sure that you will become really clear about what you want to do and how you want to do it.

Christoph Janz:
Second, make sure that you talk to the right number of investors. You should obviously not blast out an email to hundreds of investors, ideally with everybody on CC. Yeah, that happens occasionally. That’s not a great way of doing it, but it’s equally bad if you talk to only one or two VCs because you think you’re friends with them. Your goal should be that at the end of the process, you end up with two or three firms that are great, that you like and they want to do the deal. So you can run a somewhat competitive process. And that probably means that you have to start with 10 or 15 investors in the beginning. Maybe more, if you get a lot of rejections, you have to add more VCs or investors in general to the funnel. So consider it a process and the sales funnel in a way.

Christoph Janz:
And the third point on this, make sure you’re really on top of your metrics. If you’re looking at the wrong metrics or if there are inconsistencies or if you have trouble getting hold of your KPIs, that can be a huge turn off. Obviously, you should have an intrinsic interest in your KPIs anyway, but as it relates to fundraising, it’s very important as well. If you can present investors with a comprehensive set of KPIs, that’s a big plus, and also helps you preempt a lot of due diligence questions, which you would otherwise get. And if you’re a SaaS company, I think Nick has a pretty good tool to help you get all these metrics.

Nick Franklin:
Thank you. Number six, do everything you can to win the US market. In SaaS, you really want to be the category leader. At Zendesk, if you’re the category leader, your sales and marketing efficiency is just way better. At Zendesk, we were the category leader. Every single deal, every single decision to buy a new customer service software, Zendesk would be one of the options on the table. And it just makes everybody’s life easier if that’s the case. And Salesforce is obviously the ultimate example of a category leader. Every decision to buy a new CRM within an organization will have Salesforce as one of the options being looked at by default. And the other CRMs that are being considered will probably have to spend a ton of money on marketing just to get onto the table at all. And you can also charge more if you’re the category leader.

Nick Franklin:
So in other words, you really want to be the category king. And the US and Canada makes up about, I was really surprised researching for this, that this is the truth, but it makes up around 50% of the world’s global software spending. And it also happens to have a single language, for the most part English, which is also spoken in other large software markets like the UK, Australia, New Zealand, here in Ireland. So the English speaking market, it’s the majority of the world’s software spending. So I forgot my thread, but-

Christoph Janz:
Go there yourself.

Nick Franklin:
Yeah. So because of size of the US market, the company that wins in the US by default wins globally, in any kind of winner takes most market. This is part of the reason why a lot of founders of successful SaaS startups end up going to the US, moving to the US from Europe and other places. And often VCs sometimes recommend, and occasionally require that founders go to the US when making an investment just because you’re much more likely to be successful in a market if you go there yourself versus hiring a local executive who may not be as committed. And if a new, sunnier opportunity comes along, might just switch to that. So it’s often a good idea to go there yourself and that’s often what happens.

Nick Franklin:
So my advice is just to do everything you possibly can to win in the US market, even if that means that you neglect your home market if you’re not from north America. If you’re from Europe, even if it means neglecting your home market, because in the long run, if you just focus on your home market and neglect the US you’ll lose eventually because the one that wins in the US will just come and eat your lunch in your home market, eventually. Maybe not always, but usually.

Christoph Janz:
Number seven, don’t end up in the SaaS graveyard of low LTV and high CACs. That probably requires some explanation. So let’s take a look at this chart. What you can see here is a simple two axis chart with CACs, short for Customer Acquisition Costs, on the x-axis and LTV, for Lifetime Value, on the y-axis. If you have a high LTV and probably also high CACs, then you’re going after bigger customers, you’re going for enterprise customers. Or as I like to call them you’re hunting elephants, or maybe even whales. Some of the most successful large SaaS companies are in this corner. Workday, Veeva, probably even Salesforce, since they also derive a majority of their sales from very large customers.

Christoph Janz:
If you look at the opposite corner, you have what I like to call rabbit hunters or mice hunters. These are companies like Squarespace or Typeform, which have a very low LTV, but also have very low customer acquisition costs, usually because there is some kind of referral loop or some kind of viral loop built into the product.

Christoph Janz:
And then there is the corner in their top left, like the animals that you can chase. There are very elusive and very few companies manage to combine low customer acquisition costs with a higher LTV. Maybe Slack is up there, maybe Dropbox, maybe Zendesk, but it’s a very lonely place up there. So that only leaves us with the corner in the bottom, right? Which I like to call the death zone, where you basically have zombies hanging around. Unfortunately, this squadron is filled with a lot of SaaS companies that didn’t manage to align their CACs and their LTV with our LTV in a scalable way. And if you’re in that corner, you really have to get out of there. There are obviously a few things that you can do.

Christoph Janz:
Either you can go up, which means you have to increase your prices, you have to add layers to your product, charge more, or maybe go after a different type of customer. Another option is to go left. That means you have to try to increase your CACs. If your product has some level of built in viral potential, some sort of inherent referral loop, you should be obsessed about maximizing that because that can obviously be completely picture changing. If there’s no inherent referral loop attached to your product, you probably won’t be able to edit artificially. But you can still try to decrease the customer acquisition costs by improving your product in general, by improving your onboarding experience, or by finding new distribution channels. So you have to either go up or go left or do a combination of both things, or you will stay in the graveyard.

Nick Franklin:
Number eight. The final point is don’t blow your seed round on paid ads. Now full disclosure, I doctored this image and stuck Yahoo’s logo there so it’s not very fab, but you can imagine this might be a story of a tech startup with way too much money doing something like this at the Super Bowl. Instead, invest in engineering and just build a world-class product. In your first couple of years running a SaaS business, you want to create as much distance as possible with the other startup competitors in your category. And I think there’s this temptation that when you close your first seed round, you have your first real round of funding, and you have $1 million in the bank, or maybe $2 million in the bank, to spend some of that money to acquire new customers on and spend some of that money on paid ads to acquire new customers. But I think this is usually not the right decision in the early days.

Nick Franklin:
Paid advertising by definition does require some waste in both time and money. You have to run different experiments to see what works and what doesn’t. And those wasted paid clicks on not something you get to keep once you’ve spent that money on them. And I think when you have very finite resources, everything that you spend money on, you want it to be something that you get to keep.

Nick Franklin:
So I think instead you should just invest heavily in product development and try and build the best product in your category. And you probably don’t have enough money anyway, to really buy mind share with paid advertising. But you probably do have enough money to build the very best product in your category. And that will bring you mind share and authority through word of mouth by having the best product and word of mouth is by far the best form of marketing anyway. So you want to just do everything you can to make that happen. So, yeah, my advice is spend the vast majority of your seed round on engineering. And your product is still not mature, it needs that investment and win by having the very best product. And as SaaS products are not the most visual of products, I’ve picked three hardware products which show these world-leading products in their categories.

Christoph Janz:
Well I think this was pretty fast. I think we actually have three minutes left, so we can probably take one or two questions if there are any, but we can’t see anything because it’s lights.

Christoph Janz:
The range is very broad. Maybe if we talk about our pool for a second, ACV and CAC is obviously then something which you can put in relation to that. I think in SaaS the ACV is average contract value per year for your customer base. I think it’s usually between a few hundred dollars when you charge $20, $30 a month up to really millions of dollars, I would say what I would consider the whales are customers where you charge them seven figure amounts per year. Something which obviously not that many companies achieve, but charging six figure amounts for customers on a yearly basis is not that rare. And if you look at these amounts in terms of the ACV, and then because you asked about the customer acquisition costs, a good rule of thumb is probably that you should spend maybe roundabout 12 months of MRR on CACs. Obviously you can go higher if you have a very high lifetime value and maybe you should go lower depending on a bunch of factors. So it’s just a very rough rule of thumb.

Christoph Janz:
One more? Otherwise, well done.

Nick Franklin:
No questions.

Christoph Janz:
Thanks very much.

Nick Franklin:
Thanks everyone.

Sign up to our newsletter

LATEST | POSTS

banner - landscape

Case Study: Second-time founder on launching Akoova with Osvaldo Spadano (Akoova)

This episode’s guest is Osvaldo Spadano, Founder & CEO of Akoova. Osvaldo discusses becoming a second-time founder and launching Akoova with Alexander Theuma, CEO of SaaStock. A learning that Osvaldo shares is not to keep your eyes on the prize and be so caught up in what the results are going to be – they…

Top mistakes CEOs make when scaling

Top Mistakes CEOS make when scaling from $10MM to $100MM with Shelley Perry (Scalelogix Ventures)

This episode’s guest is Shelley Perry, General Partner of Scalelogix Ventures. Shelley discusses the top mistakes that CEOs make when scaling from $10MM to $100MM. The first mistake Shelley discusses when CEOs are scaling is that they don’t understand what advice they should filter out, which advice they should gravitate to or how to put…

Podcast Banner (Landscape) (3)

Learnings for early stage SaaS startups with Michael Cardamone (Forum Ventures)

This episode’s guest is Michael Cardamone, CEO & Managing Partner of Forum Ventures. Michael discusses some of his top learnings for early stage SaaS startups. One learning he talked about is that you need to be able to answer the question: “What are the things people need to believe for your business to get really…