Tomasz Tunguz is partner at Redpoint
. I write daily, data-driven blog posts about key questions facing startups. I co-authored the
book, Winning with Data
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There are three pricing strategies for startups. Maximization dominates SaaS products in the mid-market and enterprise markets; penetration is synonymous with freemium in the SMB market. Once you've decided on the right strategy for your company, what is the best way to price? By seat? By minute? With or without a platform fee?
Through the end of July in 2016, $70B worth of SaaS companies sold. Their size follows a power law with LinkedIn at $26B and Netsuite at $9.3B. The more than $600B in cash on the balance sheets of large public tech companies combined with a recent pricing correction in SaaS companies presaged a flurry of acquisition activity. But it hasn't unfolded as expected in three different ways.
If a software company grows at 20% annually, it has a 92 percent chance of ceasing to exist within a few years.
Where is the budget to pay for your SaaS startup's software coming from? There are three possible pockets. First, they are dollars the competitor you displaced used to collect. Second, the company enlarges the current budget to finance the purchase. Third, the company creates a new budget.
What is the smallest price point at which a SaaS startup can justify building an inside sales team? This is a natural question that many SaaS startups raise as they begin to complement bottoms-up, product-led adoption with assisting customers through the sales process.
Over the last year, the amount of series A investment in US startups has fallen by nearly 33% from a high of $6 billion to about $4 billion in Q2 2016. Later stage investments have followed a similar path. Curiously, the series B/Expansion stage market has witnessed remarkable resilience, continuing to increase despite volatility.
The last time I learned a new programming language was 2004. I had been writing in Java for about four years, and then I heard whispers of a new framework called Rails that allowed engineers to write web applications in one-tenth the time of a Java web application. Over the course of a few weeks, I bought an armful of paper books, read them, and worked through the examples. A few weeks later, I built my first Rails application and brought it to work at Google.
In addition to increasing labor costs, startups in San Francisco are facing monotonically increasing real estate prices. JLL the real estate broker shared their data on the average asking rent in San Francisco from 2007 two 2016, year to date. In 2009, the average asking rent was $31.37. In 2016 that number has more than doubled to $73.05, for an average annual increase of just about 13%.
The next big shift in SaaS is an evolution from software as a service as a displacer to a disruptor. Displacement technologies compete with incumbents on the same buying parameters. Disruptive companies change the way a buyer thinks about solving their need. Most SaaS products today are displacers.
Salesforce's initial public offering in 2003 demarcated the beginning of a new era, the era of Software as a Service. In the 13 years that followed, many startups have followed their path to build innovative software that has transformed their respective industries and sectors. The shift has been revolutionary both in software delivery as well as sales. It's not an understatement to say everything has changed.