The SaaS ecosystem has been evolving incredibly quickly. Most of the time, the changes in the ecosystem are embodied in one particular company which grows exceptionally quickly. Focusing on these fast-growers, the macro shifts can be hard to discern. Last week, Okta released a report Business at Work sweeps across SaaS to reveal these recent evolutions. These are the points that I found most interesting.
Over dinner, a veteran product manager argued most SaaS products’ onboarding practices miss a crucial step: create value for the user in the first session. After that conversation, I signed up for many brand-name SaaS products pretending it was for the first time, and I couldn’t help but agree with him.
Most SaaS products guide a user through three steps. First, collect the requisite data to create an account, like email and password. Second, configure integrations with related services, customize the platform and/or invite other key users. Third, educate users about the product by indicating the most important menus and actions.
The public markets are down more than 10% from their highs in the last few months. Public SaaS companies have been particularly hard hit. The chart above shows the enterprise value of publicly traded SaaS companies. Many of them are down substantially more than 10%. Let’s dig in a bit more.
I’ve been to many YC Demo Days and I always look forward to them. This year was no exception. There are so many wonderful ideas and companies founded by terrific entrepreneurs. In addition to the pitches themselves, the types of companies presenting forbear trends in the startup world more broadly.
To get a better sense of those trends, I’ve categorized more than 250 startups in 3 recent classes and plotted the evolution of the classes. The bar chart above shows that the split between consumer and enterprise has remained constant over these three classes. Healthcare companies, those focusing on drug discovery or deeper diagnostics have notably risen in number in 2015. This increase in activity seems to be driven by advances in data analysis for drug discovery and novel sensors.
The most potent weapon in sales is understanding a buyer’s perception of time. As Mark Roberge wrote, “At HubSpot, this lacking sense of urgency is the number one objection we face in the sales funnel.” To succeed, SaaS startups’ sales teams must consistently create urgency in the sales process.
Time is scarce. Either the seller’s time is scarce or the buyer’s time is scarce. Understanding that scarcity and focusing the buyer on it is the key to repeatable sales.
While culture may seem an ambiguous and fuzzy concept, strong cultures are the best way for leaders to manage their companies throughout their evolution. One founder/CEO described his company’s rapid growth to several hundred employees in just a few years this way. First, I was one of a few founders. As we grew, I became a manager of people. Then a manager of managers. And now I’m a manager of managers of managers.
In a book called The Outsiders - Eight Unconventional CEOs and their Radically Rational Blueprint for Success, the author William Thorndike asks the question, who have been the best CEOs ever? And what metric should be used to gauge them?
Thorndike doesn’t choose Jobs or Welch or Gates. Instead, he selects the 8 CEOs whose company’s share price appreciated the most compared to the S&P 500. While Welch grew GE share price at 20% compounded, he did so when the S&P 500 grew at 14% annually. Great CEOs, he argues, grow their business value in headwinds and tailwinds.
No matter the stage of the business, startups need to manage the size of their Employee Stock Option Pool or ESOP. The ESOP contains the shares set aside by the company for hiring and retaining employees. Like a financial budget, ESOP budgets help a startup plan how to finance its growth.
Most Series A companies create pools of 15-25% of outstanding stock. When a startup is young, the equity has the potential to be quite valuable, but isn’t worth very much at the time. To attract great employees, the startup has to provide large grants.
In a recent First Round Review article, former Google President of Enterprise Apps Dave Girouard voiced the importance of speed in making decisions. “Deciding on when a decision will be made from the start is a profound, powerful change that will speed everything up.” I believe this statement is broadly true, and no where else is it more tangible for me than in managing daily email. After all, what is responding to email other than a thousand decisions?
When we say a startup has raised a big round, we often mean the round is big in two dimensions - total amount invested and valuation. And when we say a big valuation, more precisely we imply the round was priced at a high revenue multiple. A SaaS company that will generate $400M in revenue next year that raises $200M at $1B valuation has raised a big round, but at low valuation-to-revenue multiple of 2.5x. In contrast, most high growth SaaS startups are raising at very high multiples, somewhere between 10-20x forward revenues. What are the implications of raising at a large multiple?