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We’ve already learned so much from Jason Lemkin, but luckily, he has even more wisdom to share about growing a Software-as-a-Service startup. Lemkin co-founded two successful SaaS businesses: EchoSign, which was acquired by Adobe, and NanoGram Devices, which was acquired for $50 million just 13 months after founding. Now, Lemkin is looking for the next great SaaS company as Managing Director at Storm Ventures, an early-stage VC fund.
With his experience in SaaS, Lemkin knows business analytics are vital for nearly every aspect of a startup. He spoke with us about the lessons he’s learned from founding companies, his perspective on SaaS as a VC, and the key SaaS startup metrics you need in order to reach traction and grow to success.
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1) You co-founded and then sold two successful startups. Do you feel that SaaS companies face different challenges compared to other startups?
With the recurring revenue models in SaaS, it’s much harder to fake it until you make it. You’ve got to put the numbers up every month. If you’re doing B2C, you can pretend your users matter, even if you may not be able to monetize them. If you’re building something physical, you can feel like you’re making progress even before you sell that physical good. But in SaaS, if the numbers aren’t there, you’re not achieving anything. There’s not a lot to hide behind in the metrics. A Minimum Viable Product doesn’t count in SaaS – it has to be a Minimum Sellable Product. Until you’ve sold your SaaS product to someone that isn’t your friend or your ex-boss, it doesn’t count. There is no MVP, only an MSP.
[blockquote cite=”Jason Lemkin” align=”left”] Until you’ve sold your SaaS product to someone that isn’t your friend or your ex-boss, it doesn’t count. There is no MVP, only a Minimum Sellable Product. (Click to Tweet)[/blockquote]
2) What are some key attributes that make SaaS companies successful in the marketplace?
We can talk all about different strategies and growth hacking and business development, but the reality is, what drives growth is word-of-mouth. In the very beginning, almost no one will have heard of you. Those first few customers, you have to get yourself – you have to pick up the phone and do it. Once you have maybe just 100 customers, those customers create the majority of your going-forward revenue – whether it’s through true virality, word of mouth, being a reference, or, importantly in many SaaS businesses, through upgrades, buying more seats and more licenses. Ultimately customer satisfaction and word-of-mouth really drives everything.
3) You share a lot of advice about business growth on your blog, Saastr.com, taken from your own experiences. What was the most important lesson you took away from growing EchoSign or NanoGram?
The most important lesson, especially for earlier-stage entrepreneurs, is don’t quit. What I’ve learned from both my startups is if you have anything at all, build on it. Every SaaS company has a different story of how they got to initial traction, that $1 million to $1.5 million run rate. Some got there in 2 months, others took 4 years to get to a million in revenue. It may seem bleak if you’re doing just $10,000 or $5,000 a month, but it’s almost impossible to get anyone to buy anything. They don’t need any more business web services. So if you have something, even if it that doesn’t pay everyone’s salaries, don’t quit.
In both my startups, it was bleak at that time, people quit, and I don’t blame them. But you’ve got to push through. At Echosign, I pushed through because I refused to lose my investors’ money – it just wasn’t acceptable to me. At my first startup, NanoGram Devices, we founded it and 12 and a half months later we sold it for $50 million. It sounds like a great story, but we had so many near-death experiences during that time. We lost all of our customers; everything was a disaster. The real reason we made it through was my cofounder – she and I were each other’s rock. The best thing you can do to get is to have an amazing cofounder who is as committed to this as you are. You’ve got to bring in someone else to help shoulder the load.
4) What are some of your favorite growth hacks that you believe really work? Should SaaS companies look at growth differently than other companies?
Everyone’s got growth hacks – some work well, some don’t. There are a whole group of entrepreneurs that have already had one successful SaaS company, and they’re working on their second SaaS company. You want to know what all of these guys are doing? They’re way over-investing in the beginning in customer success. Most first-time entrepreneurs hire one person for success, and then do it as cost center and hire maybe one customer success manager for every $2 million in revenue. Those of us that have done it before know that making your customers happy isn’t just a good thing to do, it creates all your subsequent revenue down the road – 80% of it. Overinvest in customer success – that’s my #1 growth hack. That doesn’t get you to your first 10 or 20 or 100 customers, but that’s the best way to turn those 100 customers into 1,000.
5) Churn is a huge risk for SaaS companies. What role should customer service play in order to minimize it?
I feel like everybody completely misunderstands churn. Churn is not an absolute. Just because your SaaS service churns at 3% and mine churns at 4% doesn’t mean you have a better product than me. These statistics are almost nonsense. Let’s talk about the funnel – the easier you make it to get into your funnel, the more people will go into your funnel. The harder you make it to go into your funnel, the fewer people will sign up, but your conversion rate is going to go up. You’re going to end up with an organic churn rate that is inherent to your product. The most important thing is measure it and then drive it down. That’s what I did.
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We set a goal at Echosign to decrease churn 20% year over year. You need to measure it and force the team to own a metric. The job of your customer success team – period – is to drive churn down, or drive revenue from the install base up. There’s no soft squishy numbers, no best efforts – everyone has a number. If you have a sales team without a quota, you don’t have sales. It’s just as true post sales as pre sales. If managers don’t agree with that philosophy, if they’re best efforts guys – don’t hire them. You’d be shocked how many SVPs, VPs, and C-level executives don’t really have metrics they personally have to own that are quantified. That just doesn’t work at a startup.
6) How important do you believe is it to focus on data-driven results in all aspects of a business? How have you used metrics to achieve better business results at your past companies?
What matters, especially for the CEO or founder, are two or three core end metrics, and one metric for each functional area. But don’t over obsess about the sub metrics. The classic one a lot of folks obsess over is pipeline. You bring in some fancy VP of Sales and he says he created 10 million in pipeline? I don’t care – show me the (Monthly Recurring Revenue) growth month over month. But telling your VP of Sales how to get there? Be careful about that. It’s the same for your head of marketing. I strongly believe in having mandatory lead commits, whether qualified leads in general, or MQLs. The number of committed leads has to exceed the revenue growth rate – if you want to grow 100% this year, marketing has to deliver 120% more qualified leads. But how marketing does that? That’s up to them.
[blockquote cite=”Jason Lemkin” align=”left”]If you want to grow 100% this year, marketing has to deliver 120%. (Click to Tweet)[/blockquote]
Don’t obsess over these sub metrics, but obsess over the key metrics that ties into your revenue growth. Everything can be measured, including engineering, PR, product and marketing. If you have your engineering team agree to measure the output of features quarter over quarter, you will get more features built. It’s just a fact. You have to measure every functional area. Measure them all and have everyone agree to the same growth goals to support your revenue, and magical things will happen.
7) What SaaS metrics in particular do you think are vital to measure in order to ensure success?
There are two metrics that aren’t discussed enough. The first is lead velocity rate, which is tied to the lead commits we discussed. What rate are your qualified leads growing month over month? Your MRR growth is great, but really that just tells you about the present – how you’re doing now. But if your leads are growing faster than your revenue, I can see the future growth. Being able to quantifiably track the velocity of qualified leads is going to be your best possible indicator as a CEO of where you’re going to be in the future.
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The second metric will help founders get from initial traction to scale: understanding revenue per lead and how that works across your company. Once you have a repeatable set of leads and lead velocity, you want to drive up the revenue per lead. That’s an area where you can help the sales team by measuring each individual rep – what’s their revenue per lead? How many leads can you give them before their productivity declines? Why do some reps make certain types of leads more productive than others? The earlier you can do this post-traction the better. Leads are precious for a long time in startups, and if you can get 20 percent more out of each lead, that’s magic. But if you don’t measure it down to the individual rep level and you just look at MRR, you’re missing an opportunity to improve things.
8) Now that you’re on the VC side of things, how has your thinking changed about SaaS startups? Do you look back on your experiences differently?
When I was a founder, I really didn’t appreciate how much risk VCs take. Next week, I’m writing a $3 million check into an amazing startup by a first-time founder. I’ll be the first investor in this company. He’s an amazing entrepreneur, but if something were to go wrong, that $3 million is lost and I’m out of a job.
It’s very easy for me to invest in people I’ve known for years. But VCs don’t get to date a lot before you get married. As a founder, do as much as you can to build trust, because it’s a fast wedding. Beyond that, as a VC, I look for founders that are better than me. When I meet those entrepreneurs, I’ll usually offer, within 20 or 30 minutes of the meeting, to invest. I met with an entrepreneur today and even though he only has one customer and it’s very risky – I still offered to invest on the spot.
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9) When you’re considering funding a startup today, how do you decide which business has potential and which doesn’t? What key metrics, sales processes or other qualities do you look for?
First, I only invest in SaaS and SaaS businesses. I’m not trying to find the next Uber or to invest in some robotics company. I really look for four things. I’m looking for founders that are better than me, with a great team. I’m looking for that lead velocity rate we talked about, even if their revenues aren’t growing – as long as there’s leads and interest. Even if you don’t know how to close all those leads today, I can help you get a VP of Sales, a VP of marketing, and a VP of Customer Success, but I can’t create interest out of thin air.
[blockquote cite=”Jason Lemkin” align=”left”]The really good SaaS entrepreneurs…can tell me the future. They can tell me exactly how their market will look in 4 or 5 years. (Click to Tweet)[/blockquote]
The third thing I like to see is the potential for better unit economics. I know a lot of VCs will look for customers paying $100,000 a year and a company that has a 3-day sales cycle. I’m looking for folks that have under-maximized their unit economics. Folks that today, maybe their customers are paying $1,000 a year, but I know they could get $10,000 out of those customers. If they could 10x their revenue per lead they’ll hit $10 million fast. I love companies where the unit economics can get even better, not where the unit economics are maxed out.
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The really good SaaS entrepreneurs I’ve known over the last 10 years can explain the competition and the market dynamics and how they’re going to hit their plans for next year, but the very best ones can tell me the future. They can tell me exactly how their market will look in 4 or 5 years. I remember having that conversation with Aaron Levie back in ‘07. He told me about Box and how that future would be today. They’re the less than 1% that can see the future. Now they’re not always right, but they see a lot of it. They understand where the chess pieces are going.
10) What advice would you offer to startup founders trying to build businesses today?
I’d give you maybe one bit of advice, at least in SaaS: Take your time. First, whatever you do, make sure you get the right team. As we’ve talked about, going it alone is really tough in SaaS. I think it’s impossible. If you’re good but your cofounder isn’t great, take a break and slow down. I know it seems like there’s a lot of competition and the world is moving quickly. But stop, find a better cofounder, build a better team. A great idea, a great beta, even a great MVP cannot fix a suboptimal team. If you have to wait, even if it seems like the market is escaping you, pause anyway, otherwise you’re wasting your life.
The other part is some folks should not do SaaS. There’s no quick wins here. It’s going to be a 7 to 10 year journey. The good news of recurring revenue is it recurs. Once you get to $10 million in ARR, I know you’re going to get to $20 million. It may take a while to get to $100 million, but you’ll get there. It takes a lot of time and energy to speed up the hill. If you’re not willing to commit to 10 years, go try to do an Instagram. Don’t do SaaS.
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Lemkin is Managing Director at Storm Ventures and shares his thoughts on SaaS and startups often on his website saastr.com. He helped Aaron Ross co-author the recent eBook sequel to Ross’ best-selling book, “The Predictable Revenue Guide To Tripling Your Sales.” He has no known hobbies.
[framed_box]Don’t miss these other great articles on SaaS metrics:
- Quick Ratio: The Golden Rule for Measuring SaaS Revenue Growth
- The Secrets to SaaS Success, from SaaStr Annual
- Why SaaS Companies should Care about Dollar-Weighted Account Churn
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