5 Ways to Build Your SaaS with Customer Cash
In the technology industry, there isn’t a loud voice for the bootstrapping community. Too much emphasis is placed on funding rounds and growth at all costs.
Funding hype drives the apparent creation of enterprise value but ultimately, these companies—that may have had lots of potential in the beginning—can’t go public because they aren’t producing cash and they can’t be acquired because they’re overvalued. They also face increasing pressure from investors who expect a return, whatever the cost.
In 2019, we started to see some cracks in the veneer of some high-profile unicorns. WeWork’s catastrophic fall from grace is the most notable. Slack, Uber, Peloton and a host of other companies are now trading well below their offer prices.
These stories are a great lesson for new or aspiring SaaS entrepreneurs: VC funding and IPOs do not necessarily equate to long-term success for the entrepreneur or his or her company. The next decade will bring innovative SaaS capital models that keep the focus on sustainable, deliberate growth, not on funding rounds and 2T3D growth.
This blog post summarizes the five ways in which entrepreneurs can build their SaaS businesses by reinvesting revenue from paying customers:
- Focus on product-market fit and value creation
- Let growth strategy drive the financing requirements
- Start measuring
- Build your team
- Take a cost-efficient path to success
The guide features examples from real companies who have done (and are doing) just that: Qualtrics, Atlassian, Shopify, Jane Software, Wagepoint, Predictable Revenue, and more.
1. Focus on product-market fit and value creation
According to a recent study from CB Insights, the most common reason startups fail is that they don’t meet a market need. This is a profound phenomenon. Entrepreneurs often find themselves tackling problems that are interesting to solve rather than those that serve a market need. One participant in the study said:
“Startups fail when they are not solving a market problem. We were not solving a large enough problem that we could universally serve with a scalable solution. We had great technology, great data on shopping behavior, great reputation as a thought leader, great expertise, great advisors, etc. What we didn’t have was technology or business model that solved a pain point in a scalable way.”
To avoid this pitfall, entrepreneurs should select a value proposition thesis or identify a market need and then seek to prove that the need exists and is compelling enough for customers to take action and (spend money).
Founders should be mindful that evaluating product-market fit should be a repeatable exercise—not just one that takes place in the early days prior to product development. It should be built into the culture of the organization so that the business continuously asks itself, “Is my software delivering value to customers and how can I provide more value…and charge for that additional value?”
“People don’t buy ideas. Building a startup is not about your idea. It’s about helping customers. Today, we have over $450,000 in MRR and we still don’t take product-market fit for granted.
For us, customer validation and product-market fit is an ever evolving quest.”
Collin Stewart, Co-Founder, Predictable Revenue
2. Let growth strategy drive the financing requirements
There are many who believe it’s impossible to build a SaaS company in 2019 without significant funding. This relies heavily on your growth model. There are many examples of companies who are growing at a deliberate, reasonable pace of 30-50 percent year over year—and they’re doing it without any outside capital whatsoever.
This model of sustainable growth requires a start up to have excellent metrics (specifically, good gross margin percentages and good customer acquisition metrics), relative predictability, and to be capital efficient. Capital efficiency requires discipline, work, and practice. If a company can bootstrap through critical growth phases, it will be well positioned for capital efficiency if it decides to take capital later on—whatever form of capital that may be.
“Our monthly burn rate hasn’t changed in the last 5 years, we just keep growing our business. We keep an eye on the metrics and make decisions about new hires carefully.
We usually share the burden of additional work across the team until we’re completely satisfied that we have the MRR to fund another headcount without increasing burn.”
Shrad Rao, Founder and CEO, Wagepoint
Get as much recurring monthly or annual revenue as you can up front and ensure you’ve maximized your startup grants from government sources. After that, speak to your bank and try to access lines of credit. Once you’ve tapped out the bank credit, research other non-dilutive sources of capital such as revenue financing. Keep revisiting non-dilutive options any time you’re considering additional financing down the road.
3. Start measuring
The wonderful thing about SaaS companies is that there is an endless set of metrics you can use to monitor the health of your business. The worst thing about SaaS companies is that there is an endless set of metrics you can use to monitor the health of your business!
Metrics can be complicated—and often misleading—particularly for people with no finance background. It’s prudent to hire a CFO early but if budget can’t stretch to that, commision a financial consultant to help build the basics for you.
When it comes to SaaS, everyone talks about average contract value (ACV), lifetime value (LTV), and the cost of acquiring customers (CAC). These metrics are really important later on so it’s important to start collecting the data early to build trendlines.
However, in the early days of startup growth you might consider these metrics to be more important:
- Revenue growth against cash burn
- Gross margin
- Sales efficiency (also referred to as customer acquisition costs (CAC))
- Return on human capital (ROHC)
- Payback period
- Cash conversion cycle (CCC)
Almost everything that matters about the financial performance of a young SaaS business is captured in these metrics. There are lots of existing resources online that demonstrate how to calculate these metrics.
4. Build your team
When you’re bootstrapping a company, building a team is a thoughtful and calculated process. Founders often lack experience in certain areas of the business—product, sales, marketing, customer success, finance, and so on—and they generally don’t have the money to buy that experience immediately (you can’t justify a $200,000 spend on a VP of Sales before you’re selling that much). Instead, you must build a team of entry-level sales people and put the time and energy into training and motivating them.
The lesson here is to sweat your talent. Make it work for you. Double down on what you’re good at—as long as it’s working—and fill in the gaps when you can afford to.
“We started out with what I thought were two-halves of a brain—I was all things customer and my co-founder, Trevor, was all things product. But we’ve since realized that we were actually only two-fifths of a brain. We haven’t filled the sales “lobe” out yet, but we’ve added leadership in marketing and finance to help round out our knowledge gaps.
When you start with a small group of people, you get to focus on the things you do really well and that looks a little different for every start up.”
Alison Taylor, Co-Founder, Jane Software
It’s rare that a founder has strengths in all five areas of their business—product, marketing, sales, customer success, and finance. They’re usually strong in one or two areas but require help with the others.
5. Take a cost-effective path to success
There are many ways you can foster cost-efficiency in your business:
- Culture is free: Most startups know that culture is important, but they find it elusive, hard to define, and even harder to control. Your culture will reflect your founders’ and early employees’ personalities, so the founding team needs to think through how they can expose the attributes they want people to emulate and keep the ones they don’t under control. Start early. Culture starts to develop the day the team starts working together. Build in attributes like customer obsession, quality product, and empathy — and lead by example.
- Leverage partner ecosystems: The right partnerships can help startups build their products more efficiently, gain access to industry experts, and fill product feature gaps. The most common partner ecosystems for SaaS startups are cloud-hosted platform partners like Salesforce.com’s AppExchange and Google Marketplace. Other examples include industry-specific ecosystems like Quickbooks in financial services and CareDox in healthcare and education.
- Embrace remote and diversified workforce: Remote and diverse workforces help startups to capitalize on creativity, access skilled employees more efficiently, and build agile teams.
- Business applications are (almost) free: The good thing about being a bootstrapped company is that you don’t have the luxury of going out and buying a tool to fix every problem, you have to figure things out yourself first. The biggest pains can be solved by process, experience, and knowledge. When you understand the problem and have processes in place, you can then research the right tool to help create efficiencies. There are many low-cost tools to help with productivity (you can read a comprehensive roundup here). Be thoughtful about your app strategy as businesses can get bogged down with app fatigue very quickly and sometimes, an app that solves one problem creates another.
Join our webinar on January 9 or download the full guide, Build your SaaS with Customer Cash, for a more detailed examination of the common challenges faced by founders of startups like Qualtrics, Shopify, and Grasshopper.
The guide provides actionable advice on how to overcome these challenges based on interviews with companies like yours including Jane Software, Wagepoint, Predictable Revenue, Metazoa, and more.