Most young SaaS companies have a remarkably similar business model:
- Phase 1: Identify an unsolved market problem
- Phase 2: Raise funds and build a team to fix said problem
- Phase 3: ???
- Phase 4: Profit
For decades, through boom and bust, this has been the roadmap for most software startups. Yet there’s never been a clear answer for how these young companies can best navigate those choppy waters between Phase 2 and Phase 4. In fact, this gap is exactly where many companies fail.
You might call it SaaS puberty. Those awkward years between startup infancy and profitable maturity. Those difficult years where early positive indicators give way to the harsh realities of effectively scaling a business against all odds.
The Thrill is Gone
In recent years, there has been a lot more attention paid to SaaS startup adolescence (which makes sense because a lot of SaaS businesses are just starting to outgrow their startup shells). And it’s not always a bed of roses.
When Chris Hubble’s found his market-research business struggling through its puberty, he had some serious concerns.
“There was a complete loss of startup hunger,” he told Inc. recently. “A kind of apathy set in.”
This apathy is often the cousin of fear. With startups, anything is possible; any future is within the realm of possibility. But as companies mature, outside forces start to carry more weight, and demands start to become clearer and louder.
Phil Libin, whose company Evernote is a success story for SaaS companies maturing gracefully, knows all too well about how scary maturation can be.
“Many goals are no longer externally imposed,” he told the news source. “So not only do you have the stress of executing, you have the additional stress of not being sure the goals you have set are the correct goals.”
The bubble of an optimistic startup is often burt unceremoniously, as board members and venture firms start to have real concerns about how a business model turns into an actual business.
A Graceful Adolescence
All of this ‒ the fear, the changing expectations ‒ raises an obvious question for executives at young SaaS companies: What can I do to give my company the best shot at achieving a graceful adolescence?
There are no easy answers to this question. (If there were, all SaaS startups would emerge from adolescence as beautiful, profitable swans.) But there are proven ways that young SaaS companies can successfully bridge the gap between young SaaS startup and profitable mid-market company.
We talked to founders, executives and people from the VC world to come up with these 3 ways for executives at young companies to make it through SaaS puberty and come out better than ever.
Conquer the Sales Learning Curve
One of the most difficult thing for SaaS executives to master is finding product-market fit. By their very nature, SaaS products are rarely (if ever) fully formed by the time they go to market, which means that executives are put in the difficult position of deciding when to make that all-important gear shift between building a product (and gathering intelligence about its market) and starting to ramp up efforts to sell it.
This was the topic for an influential Harvard Business Review article called “The Sales Learning Curve.” The article makes the case for executives (particularly at SaaS companies) to hold off building a full sales force until they have a) perfected their product b) identified the right market for it and c) established sufficient demand for their offering.
This, of course, goes against the nature of many goal-oriented (and bookings-measured) executives, but it is critical for avoiding the worst of SaaS puberty. Any SaaS startup can beg, borrow and steal the first dozen or so customers, but if the product isn’t holding up its end of the bargain, that company’s adolescence is going to be particularly painful.
For this reason, we put together a guide for CEOs who want to master the sales learning curve. Although it can be difficult for CEOs to sit on their hands while they wait for product-market fit to be formalized, this period of patience will pay off in the long run.
Carefully monitoring KPIs around loss reasons, lead generation, and pipeline growth before building a full-size sales team helps ensure that problems are identified early and go-to-market strategy isn’t cobbled together on the fly.
Aim for a Higher ASP
When team-collaboration app Slack found itself in SaaS puberty, it learned a very important lesson about sustained, scalable growth: it was going to need to sell to bigger companies. And, to do that, it was going to need to iterate on its product.
Stewart Butterfield, Slack’s CEO, remembers the moment he realized that lesson vividly. He had just acquired Rdio as a customer and was startled by how much bigger Rdio was than their normal customer, and how that was affecting his product’s performance.
“Suddenly we saw that the product looked like from the perspective of a much larger team, and it was pretty gnarly,” Butterfield told Fast Company recently.
Having Rdio as a customer ‒ and targeting larger companies in general ‒ turned out to be the perfect thing for Slack. They started making vast improvements to their product that ultimately made it stronger and, more importantly, helped them hit their growth goals and move upmarket, one of the toughest things for any SaaS startup to do.
Why is increasing ASP so important? Well, first of all, it’s not important for every SaaS startup. Plenty of software companies have made it to the other end of SaaS puberty by closing a ton of relatively small deals. But these companies are the exception. The vast majority of successful SaaS companies get that way by incrementally increasing their ASP over time.
The reason this is true can be boiled down to a single phrase: unit economics. The strong case for why unit economics are so important to growing software companies has already been made many times (I’m looking at you, David Skok), so we won’t get into the nitty gritty here. But suffice it to say that acquiring new customers is especially expensive for young SaaS companies, and small customers (for whom it takes much longer to recoup acquisition costs) can sometimes do more harm than good.
SaaS companies that are trying to make it through SaaS puberty often find out the hard way that it is in their best interest to incrementally make deals with the fleshy middle of the market. It may involve some growing pains ‒ bigger deals take longer to close and are won less frequently than smaller ones ‒ but it is one of the only reliable ways to go from startup to profitable company.
Closing bigger deals and securing profit-market fit are only half of the equation, though. SaaS companies hoping to make it through puberty alive are also going to need to find new ways to quickly accelerate demand for their product. Much of this can still be done through marketing channels like inbound and events, but at a certain stage, growing startups need to get more targeted.
That’s where outbound leadgen comes in. Sometimes scoffed at by modern tech companies, outbound lead generation is actually an incredibly important part of scaling sales execution for companies in that awkward adolescence. And rumors of its demise has been greatly exaggerated.
So where should puberty-mired SaaS companies start? The first step is to ask themselves the hard questions. Who are they targeting? Who does the team report to? When do you need to spike sales?
From there, they need to come up with the right talk track, dial plan, and prospecting metrics to track. An effective outbound team won’t solve all the problems of a growing SaaS company, but it will go a long way to coming out of SaaS puberty firing on all cylinders.
The Winding Path to Maturity
The 3 tips explained above are critical to making it out of SaaS puberty alive, but that list is far from comprehensive. Just like it is for people, puberty is different for every SaaS company, with unique challenges and obstacles.
But the central point remains: arriving at the other end of SaaS puberty is one of the hardest and most important things for any software company to accomplish. Don’t leave this critical stage to chance: be proactive and take the necessary steps to make sure your SaaS company makes it out of the awkward years.