By Joe Krancki
It’s no secret that SaaS is a powerful and attractive business model. Since poster-child Salesforce was founded in 1999, some 1,850 SaaS start-ups have garnered over $8.5 billion of venture capital and transformed the software industry. Along the way, entrepreneurs the world over have created enormous shareholder value. How did they do it? As an investor in SaaS companies like DealFlo, DynamicAction, EDITED and Vulog, I’ve seen first-hand that serving up success takes more than following a simple recipe.
The SaaS playbook is a venerable alphabet soup of metrics, with ACVs, LTVs, MRRs, SDRs, and plenty more. With such a KPI driven approach, it would seem there is a clear formula for building a SaaS company. Simply set your LTV:CAC to 3 or more, Magic Number to 0.75 or better, and Payback Period to single digit months. Add in a dollop of negative churn. Top it with several rounds of venture funding. Voila! A big exit or an IPO is just a matter of time.
Not so fast. When was the last time you followed a recipe exactly as prescribed and it turned out just like the picture? Never. Every situation is different. To start and scale a SaaS business, you need to adapt and adjust constantly. At Frog, that’s why we deliberately tailor our Scale-up Methodology to match the unique needs of each business we back.
Beyond the well-documented rules of thumb, we’ve identified three core values that will help improve your odds of SaaS success. They are 3Ps: Patience, People and Planning.
1. Patience. The median time for a SaaS business to reach IPO is 10 years. While plenty of patience is required to go long, it’s critical in the early stages too. You cannot rush the first two key steps: finding product-market fit and developing a powerful growth engine. Those who give in to the temptation to race ahead before completing these two critical stages often burn more capital and end up with a less valuable business, if one at all.
“Mise en place” is a philosophy all great chefs share; it means to have “everything in its place” before starting to cook. If you’re cooking with SaaS, you need to embrace the same discipline. Before you push on the growth phase, you need to establish convincing product-market fit and a scalable, predictable and profitable growth model. These can take time and vary greatly from business to business. Only when go-to-market processes are well-defined and KPIs show promise, is it time to turn up the heat and go for growth.
2. People. A business will never be better than its people, and it’s the senior leadership team that sets the tone and cadence for the organisation. Issues that arise in any area can usually be traced back to shortcomings in the senior team. To successfully scale, you need a head chef and a full band of talented senior leaders with profiles that coherently work together.
A healthy culture is also key to keeping everyone on track. Mess this up, and all your hard work could end up in the compost heap. As Peter Drucker said, “Culture eats strategy for breakfast”. A winning culture can include any number of ingredients. Since SaaS businesses have to continually deliver on their promise to customers, I recommend mixing in some version of individual accountability, empowerment and transparency.
3. Planning. It’s difficult to understate how important robust planning is for a SaaS business. Planning is where strategy and all those SaaS metrics come together. The more accurate and predictable they are the better. That way, you ensure you have all the ingredients, notably cash, that you’ll need to reach the next set of milestones. Falling short here exposes weakness. An undercooked dish can be fatal.
A strategically-minded CFO is an imperative for any SaaS business that is poised to scale. The CFO balances the flavour of an ambitious CEO, and plays a crucial role in gauging the temperature of the business and deciding when and how the dials need adjusting.
In the final mix, bringing all the ingredients together and serving up a successful SaaS business is a tall order. Solving a tough problem with elegant software and building a big, happy customer base is a long, arduous journey. A solid foundation in the science of SaaS is table stakes. Having patience, valuing people and teams, and embracing robust planning will tip the scales in your favour. At Frog, our Scale-up Methodology aligns to these values. They’re critically important to us, and they’ve been proven to help SaaS CEOs deliver an extra-large portion of shareholder value.