Founders’ Panel: Build Your SaaS with Customer Cash

By Mark Bakker

Posted January 23, 2020

To launch TIMIA’s eBook, Build Your SaaS on Customer Cash, we invited a panel of bootstrapping founders from our portfolio to discuss some of the topics in the eBook and take questions from the audience.

Panel Speakers:

  • Moderator: Mark Bakker, Marketing Director, TIMIA Capital
  • Jennifer Mercer, CEO, Metazoa
  • Mike Anderson, COO, Echosec
  • Dustin Yoder, CEO, Sureify

 

 

Transcript:

Mark Bakker: Let’s get started. This webinar is about building your SaaS with customer cash. Over the past year, TIMIA has worked with our portfolio partners to build out an eBook on this topic. We want to share some of those learnings and experiences here.

Traditionally, there hasn’t been a strong voice for the bootstrapping community in the industry. Techcrunch is all about Series A, Series B, swinging for the fences. There’s not enough focus on bootstrapping.

Today I’m delighted to be joined by Jennifer Mercer, CEO, Metazoa; Mike Anderson, COO, Echosec; Dustin Yoder, CEO, Sureify who will share some insights on success and failures of building their SaaS companies with customer cash.

The topics we’ll discuss are:

  1. Focus on product-market fit and value creation
  2. Let growth strategy drive the financing requirements
  3. Measurements and KPIs to watch
  4. Build your team
  5. Take a cost-efficient path to success

Mike do you want to start us off by talking about building a team and using metrics to define when and where to hire?

Mike Anderson: Echosec has been around for about six years. We are an online Information Discovery company for threat intelligence.

We had some good traction early on with a nice group of online investigators who were able to help us hone the product. Because the investigators aligned with the product that we were building as a founding team, we were able to invest primarily in development early on and our journey to building a sales team came a fair bit later — a few years later than a lot of companies do.

Only for the past three years, we’ve been focused on building a strong repeatable sales team. We took the growth we saw in our trailing three-month revenue and looked at how can put this into our sales and marketing to increase growth as we go.

Mark Bakker: So what measurement tools did you use to identify areas where you can add new hires?

Mike Anderson: So, a lot of that is really measuring what works. Something that we focus on is measuring our cost of acquisition and cost of goods sold, which for a SaaS product is quite difficult. We like to have a very good understanding of how much money we’re actually going to get back from a customer in order to reinvest into future sales.

We’ve taken a few approaches to building inbound and outbound sales strategies to get leads. However, for early-stage companies, it’s important to make sure that you measure and you have an expectation of what you’re going to do and how you’re going to meet that expectation.

Without that, you’ll end up saying, “Well that was successful, we made more money,” without a proper understanding of how and why you made more money.

Jennifer Mercer: The cost of customer acquisition is something that we really focus on at Metazoa too. And for us, it’s primarily looking at marketing dollars because, when you’re running your company on cash, you need to see what’s working and what’s not working.

We’re in the Salesforce ecosystem so it’s a little bit different for us. But generally, you can’t just throw money at it as it’s not scalable in the big wide world.

I had done the VC thing and now I’m trying something different but it’s very event-driven and word-of-mouth-driven and it’s a very social environment so brand recognition and credibility are huge. That’s where we pay attention to our dollars mostly.

Mark Bakker: Jennifer, your career path is very interesting. You had a VC-backed company for quite a few years and this time, you’re choosing a different path.

Jennifer Mercer: Yes. I was also a co-founder of a company called Dreamfactory in 2006 and we raised 6 million right off the bat with our series A and went on to raise over 23 million before our exit.

During that time, we were one of the very first Salesforce partners to have an app on the app exchange. So we had that history with them and, around 2011, the investors prompted us to try something off of the Salesforce platform, thinking that that wasn’t a viable option to run a business and have a successful exit.

I’ve definitely been a part of the “go big or go bust” mentality. It’s Silicon Valley Valley right now and it’s not changing anytime soon.

I am doing a lot of press for Salesforce right now and was just at Dreamforce speaking to a lot of new partners. This is one of the things I’m talking to them about. There are a lot of benefits to keeping your cashflow going and keeping your equity rather than going for series A, B and so on. I know from experience it wasn’t necessary to hire 40 people in the first year.

Mark Bakker: Dustin, do you want to add anything on how and where you choose to invest your time and your cash into new hires?

Dustin Yoder: Sureify is purely focused on large B2B enterprise sales. What’s interesting about us is that our average deals 300K-400k per year. Our target market in North America is about 500 Enterprises.

When you look at cash management, you have to look at how quickly you’re able to close those types of deals. You can throw 40 people at something, but if the market is closing 5-10 deals a year and not 50 deals a year (which is the mindset of your traditional venture), you’re basically racing at a brick wall.

I was fortunate enough to have a CFO as a core member of our team from the beginning. The ability to track dollars, cash on hand, ARR, and so on was so important.

Knowing when to spend, trying to grow at a predictable rate, trying not to constrict growth — that worked really well for us because we’re not saying we’re going to grow 40 accounts a year, we’re saying we’re going to grow 10.

It’s great to have a partner that understands this clear path to growth.

Mark Bakker: Dustin we were chatting a few months back about how you were looking at putting your growth strategy into place, and what your valuation is currently looking at your options, but you decided that based on your growth strategy you’d be able to get your valuation higher, and so there was this like window of a few years that you needed to get into so you can keep the equity in your business and get that valuation up. So, when you looked at that growth strategy. What were the metrics that were most important to you?

Dustin Yoder: It’s easier to determine the valuation of a B2B business as it’s based on growth.
There are generally no arbitrary or viral factors that can lead to hyper-inflated valuations.

We know investors might under value us right now based on our revenue. If we worked with TIMIA for one to two years and grew our revenue by $10 million, we could get a six to eight times multiplier in valuation — that’s a $60 to $80 million increase in value.

It’s an almost comical calculation that I encourage any founder to do if you’re going to increase your business value. TIMIA will charge you on the interest side of things, but when you look at the percentage of your business you’re going to sell today, versus the $60 million increase in value two years from now, it is almost laughable. What is the real cost of that capital? You’re comparing hundreds of thousands versus tens of millions of dollars.

So by taking a cost effective path, you continue growing your business but you do it in a bootstrapped fashion, respecting every dollar you spend.

Look at sales velocity and deployment velocity. Can we sell faster and be out there marketing lots? Sure. For us it’s just a case of adding a couple of marketing and sales team members. We already had one member so that’s a 200 to 500% growth there.

On the deployment velocity side, we’re investing in product maturity or hardening to be able to deploy faster. So those are the two areas that will contribute to driving $10 million additional ARR.

I’m still approving every hire so we’re still calculating every day and managing every dollar like we were when we were three people in my garage.

If you have $10 million in the bank, you just start spending money unnecessarily.

Mark Bakker: Mike, do you want to add to that? I know you’re working a lot on the development side of the product side but you’re also making some key marketing hires.

Mike Anderson: Our goal is to identify the sales that were highly effective where we provided the best value to our end users in the largest addressable market.

We sell into multiple verticals within threat intelligence and there are a few different ways you can use our tool but our goal is to look at where we are seeing consistent value. We build sales plans around these “high-confidence” end users where we can just plug in more sales effort for more outbound lead generation and more repeatable sales conversations. Then we can model how much it costs to convert, what percentage converts, and what the average contract value needs to be.

When you have a plan — and it can change as you gain more new information — but the plan ensure you don’t just throw money at it. You have measurements in place and you can be sure you’re spending money on growth.

When you’re taking money from TIMIA, it is a really great deal. When you can take the money, and add the interest on, and you attach this money to the cost of growth. It’s very clear, you can see your three-year/four-year/five-year payout on that. That’s where you start to get into responsible business operations.

Mark Bakker: Jennifer, do you have anything to add on that?

Jennifer Mercer: Absolutely. We’re less than two years old so we’re looking at every penny we spend.

Market research is important to your strategy. We have the benefit of a decade’s worth of market research for our product and we know our ideal customer profile — it’s very specific.

We are B2B enterprise so we sell into some of the largest customers that Salesforce has across a broad range of verticals — financial, healthcare, government, manufacturing, and so on.
Our product was baked very quickly because of our experience and deep, deep understanding of the Salesforce ecosystem and technology. Fortunately for us, the Salesforce ecosystem and the AppExchange takes you through security reviews so we are vetted and able to start selling into the enterprise immediately.

We focused a lot on branding, word of mouth, and building credibility. Next we focused on inbound and outbound sales with SDRs. We’re just incrementally adding on as we build our ARR and our MRR.

Working with TIMIA, you don’t have to go big or go bust, you can have a moderate growth plan, which I think is a strategy for longevity, versus the other route.

Mark Bakker: Question from the audience, what is the strategy for discounting on the annual contract? Or upfront versus monthly payments to get more cash in your business.

Jennifer Mercer: I can jump in there quickly. We do charge upfront for an annual contract. We don’t discount very often. The only time we do is support a multi-year deal and it does provide more cash in the front end.

Mike Anderson: I’ll jump in there as well. We always aim to do manual prepays. We will occasionally do quarterly or monthly billing but that’s really not something we like to focus on. We’re not the kind of transactional product that you use on a month to month basis. You need to embed our solution fairly deeply in your workflows and we expect you to be a lifetime customer.

We will do a discount for a multi-year deal because you know you’re pledging consistency and and sustainability for the business. I think you have to look at your cost of delivery. A lot of startups that are still working on their pricing can get into a trap — especially if you’re not good at modeling your cost of sales — where you may have actually paid a customer to be a customer.

If you’re going for broke maybe that’s okay, but that’s something we should be aware of. This connects interestingly with churn as well, especially when you look at customers that may require a lot of account management.

Dustin Yoder: Nowadays I’m not allowed to talk about price with anybody. That’s for sales to manage.

But let’s be frank here. All companies are going to look at cash differently depending on where they’re at.

Is the cash super important? Does it drive your growth or secure you for 1/2/3 more months? Can you put a value on that?

Like I said, our cash payments are pretty large so maybe we’re more flexible. In the beginning, we started taking upfront payments a lot and it was driving our growth.

But sometimes, people can get foolish when they have a lot of cash in their bank. It’s sometimes like having a bunch of investment money in your bank, you can actually spend it foolishly. Should we really be looking at spending that money now or spreading it out?

It can be a trap to think that you’re going to get that money again, or that you’re indirectly not spending money that’s actually committed to the end of the year. I want to just call that out and advise everyone to have wise spending habits, or else you can get knocked. You could have a great business and be out of cash and be like holy shit this is bad.

Mike Anderson: Because we deal with a lot of government contracts, we often end up with seasonality in our revenue. And that’s just something to be aware of. I agree with Dustin totally. You’re borrowing from yourself with prepays. It’s money that you can use to fuel growth and if that math works, then great. You’ve made a great business choice. Just make sure the math works.

Mark Bakker: Jennifer you’ve been on both sides. What, what’s your experience with that?

Jennifer Mercer: When you’re selling into the enterprise, you’re going to deal with unpredictable revenue.

The customers that we work with, all have to go through procurement and that’s what takes the longest for us. The buyer wants the product quickly, the procurement can take months, and that’s where you’re dealing with a cash flow issue. Or, you have a company like MetLife or Merck who pays net 90 days and won’t budge on that.

So once you’re past the buyer, you’re dealing with a procurement manager that doesn’t really care. You’re a stack of papers on their desk and they just have to get through it.

If you’re going to do monthly or quarterly, you could do it with a credit card but that’s difficult for our customers as well. We do the prepay and just try to be as careful as possible knowing that the revenue is not predictable.

Mark Bakker: Let’s try to cover off one or two more topics. I know a lot of you founders are within the five year mark, how can you ensure product market fit and really continue to drive value creation, especially in the early days?

Jennifer Mercer: We had a decade of learning for product market fit and we saw a major problem that nobody was solving. By the time somebody finds us, they’re already in a critical need. We don’t have to sell them, they know they need a product.

The problem we face is how do they find us? Or do they know we exist? That’s why we have to attend these big shows like Dreamforce, TDX, and community events and user groups. It’s really just about getting out there and making sure that we’re known to the Salesforce admins. They have the keys to the castle. They have the purchasing authority. Our struggle is just making sure that the admins know that we exist.

Mike Anderson: I think it’s very important to consider both traditional and nontraditional marketing channels.

There’s no silver bullet — they all work at different times. For example, your traditional inbound/outbound channels are great when you have a sales play and a solid idea of repeatable revenue.

There’s a good reference in the eBook to building something minimal and get someone to find value in it and pay you some money for it. These parts don’t need to be repeatable right away. If your industry has a network of trainers or experts that regularly provide services, can you get them to be referrers to early adopter customers?

Can you yourself provide education in the space and steer that education towards your product? We invest quite heavily in training people in open source intelligence because it helps drive value for our end users and drives them towards us.

Mark Bakker: Dustin, do you have an example of some marketing that you’ve seen in the past that helps drive value creation but also identify the product market fit?

Dustin Yoder: All founders and product teams ideas, right? Ultimately, we took the time to build an idea based on what we knew about our market of 500 North American prospects. I spend a lot of time with the prospects to find out what they need.

Ultimately you’re matching software with what they actually need. You may have your innovation side that has a long term product view or you have a creative element but the primary focus should be on product refinement.

As a company, from a product standpoint, we’re doing that constantly. One of our resolutions in 2020 is to spend even more time with our clients on site — more time getting wine-induced feedback on your product, or where you’re failing, orwhere there’s a big opportunity.

It’s the whispers that are important in software to help you get the competitive advantage. In the enterprise, when you’re integrating with other systems and there’s legacy technology, there’s change management involved and you need to be there and be listening.

Mark Bakker: So Dustin, you’ve heard that whisper and you hear someone having an additional problem, or there might be an issue with the service they’re getting, etc. How do you turn that feedback into improvements, and most importantly, how do you talk to that customer again, and ask them to pay more money?

Dustin Yoder: I’m an open guy. We go directly at it. I’m big into hitting the nail on the head, calling the kettle black, or whatever.

I get the product team and account management and address it head on. We don’t take this lightly, we want to dive in, we want to learn, we want to evolve. We have delivery, account management, and product teams come together to come up with that plan. We let the client know about it and we document it.

We run an agile enterprise software company. I actually struggle with putting too many people in the room, rather than too few. And if I hear the whisper echoed a lot, then it’s a bigger meeting.

Your customers will talk, if you ask them to.

Mark Bakker: Jennifer, how do you differentiate what a problem might be versus actually getting someone to pay for that extra feature?

Jennifer Mercer: Customer nurturing is our focus for 2020. Our product is really sticky but if you do have any churn, it’s very painful. Not knowing why that customer didn’t renew is even worse. We just had our first bit of churn and I can tell you it’s so painful. I want to know why so that’s the focus for our next hires.

With regards to feature requests, we have a channel with pretty consistent feature requests that come in every day on Slack. We consider how big the development cycle is, how big the customer is, how important the feature is for renewal for that customer, and how many other customers would benefit from the particular feature request.

Mark Bakker: Mike, do you have any additional things to add on that topic?

Mike Anderson: If I can echo one thing, it’d be talking to customers and finding the time to find out what gives them value.

As I said, we have quite a few verticals that we sell our product into and our focus is on the ones that give us the best blend of conversion efficiency and contract value.

When you’re doing an exit interview with a client, the comment that bothers me is when they say it’s a budget issue. I want to know why it’s not worth the budget. The more you can invest in account management to really track this, the better. I believe with good account management, you’ll spot the renewal issues sooner.

Mark Bakker: Another question from the audience. What’s the biggest pain point in building your SaaS with customer cash versus getting a VC?

Mike Anderson: I don’t know if I can pick one pain. Definitely, the nice thing about growth driven from customer cash is that you can attach your expectation of growth to it. When you take VC money, there’s an expectation of growth. Every dollar you take has an expectation of return.

When you build with customer cash, that expectation is at least your own. It could be aggressive, but it’s your own expectation.

I would say the biggest pain point comes down to how reliable and how sure you are of your growth plan. It’s up to you. It’s not the investors coming in with a large sum of cash, it’s the result of many small things all working together.

Mark Bakker: Jennifer, do you want to quickly add your perspective on that?

Jennifer Mercer: I agree with what Mike said. There’s nothing wrong with venture capitalists, it’s just their expectation is 10 times the return and they don’t want to wait 10 years for that.

So, there is a big expectation to use every dollar to grow quickly and sometimes you will spend cash foolishly because you need to spend that cash quickly.When you’re growing with your customer cash, you’re much more methodical, careful, and tactical about where you spend your cash and grow your business.

Mark Bakker: Well we’re approaching quickly the end of this webinar so I just wanted to thank our panelists. Jennifer from Metazoa, Dustin from Sureify and Mike from Echosec.

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