Customer pull is an amazing feeling for a startup. Because the customer demand is visceral, everything seems to move quickly: sales is booking deals quicker than can be on-boarded; product and engineering are rushing to build the features customers request; marketing’s efforts to raise awareness of the business are magnified by word of mouth; and recruiting is doing all they can to fill the looming vacancies.
“What is the one equation that describes our business?” asked Scott, our new director at Google, during one of our first meetings. I had been there only for a few quarters, so I was startled when he asked. I had never viewed our business this way, but after he asked the question, I wondered why I hadn’t. It seemed obvious in retrospect.
Today, 70% of startups in the US that raise a Series A have raised a seed round. That’s up from 50% ten years ago. In the same period, the amount of seed capital invested in the US has increased about 10x from $200M per year to $2B. What does this imply for early stage founders?
First, it implies greater competition at the Series A. Larger seed rounds enable a seed stage company to achieve more - more growth, more revenue, more hiring. In addition, these larger seed rounds enable successful startups to raises larger series As, and the data supports it. The correlation coefficient between seed round size and Series A size in the Crunchbase data set is 0.89 across all startup sectors.
SaaS Enabled Marketplaces benefit from a unique advantage in their go-to-market. They have a panoptic view of their market place, which over time provides them an unassailable competitive advantage.
SEMs provide software to suppliers and consumers, and then make a market between them. The first SEMs flourished in advertising. Google manages one of the world’s largest advertising market places. They provide software to publishers, the supply side, which manages available ad inventory with a product called DoubleClick for Publishers, or DFP. In addition, Google provides the demand-side inventory system, AdWords, to help advertisers manage their budget. In between, Google operates an advertising marketplace, AdX. Today there are an increasing number examples of SEMs including StyleSeat (beauty), Zenefits (benefits), Quartzy (lab management), Makeable (manufacturing), Yardbook (landscaping), Joist (construction), among others.
In 1977, a British polymath named Christopher Alexander, who studied Math and Architecture at Cambridge and was awarded Harvard’s first PhD in architecture, published a book titled A Pattern Language: Towns, Buildings, Construction. This book would transform the architecture world, and more surprisingly, forever influence the way computer scientists write software.
A Pattern Language prescribed rules for constructing safe buildings, from the layout of a region of 8M people, to the size and shape of fireplaces within a home. Today, A Pattern Language still ranks among the top two or three best-selling architecture books because it created a lexicon of 253 design patterns that form the basis of a common architectural language.
One of the most powerful levers for SaaS companies to master is payback period. Payback period is the number of months a company requires to payback its cost of customer acquisition. The median SaaS startup has a payback period of 15 months on a gross margin basis.
A short payback period confers two massive advantage to a startups: smaller working capital requirements and a consequent ability to grow much faster.
When writing the post Vertical SaaS Startups Require Different Go To Market Than Horizontal SaaS Companies, I realized that there is a perception on my part and perhaps more broadly that vertical SaaS companies enjoy greater sales efficiencies than horizontal SaaS companies.
After all, vertical SaaS companies target a smaller number of potential buyers. The marketing team concentrates their media buys to target this audience, the sales team focuses on a smaller lead list.
Vertical SaaS requires a different go-to-market than horizontal SaaS companies. Vertical software companies, a recent important trend in SaaS startups, pursue customers only in a particular industry. They trade a more narrow customer base and consequent reduction in market size for a competitive advantage in that market segment.
The most salient example, Veeva, sells software to the largest life sciences companies, which are subject to a unique regulatory regime in their sales processes. A spectacularly efficient business, Veeva raised only $4.5M in venture investment before going public six years after founding. Today, Veeva’s market cap exceeds $3.3B. Similar large market cap examples exist in real estate (CoStar - $5.8B), insurance (Guidewire - $3.7B), logistics (Fleetmatics - $1.8B) among other categories.
During their fundraising processes, founders often tell me “I’d really like to get back to building the business.” I’m certain it’s true. Every founder surely would certainly rather be building their product and company than fundraising.
Nevertheless, a founder skilled in fundraising can create enormous leverage for their business and develop unassailable competitive advantages. This is why it’s critical for early stage founders to invest time to perfect their pitches.
Much has been written about the consumerization of IT, the movement fueling many SaaS startup’s growth by targeting individuals in a target customer called B2C2B, rather than selling top down. But until yesterday, I hadn’t found anyone who had quantified the size of the movement.
In mid-2014, CEB published Harnessing Business-Led IT to answer this question. While the entire report is worth reading, the chart above answers the particular question above. Just how big is B2C2B?
