Earlier this year, I violated Yet Another Rule of Venture Capital. Don’t invest in services businesses, They Say — and that includes SaaS businesses born out of services business. Yes, Hootsuite, Servicemax, and others have made this transition work well in the end, growing out of agencies and the like. But generally, they say, founders that come out of services businesses are (x) too underinvested on the tech side, (y) too conservative, (z) too slow to step on the accelerator, and (aa) too stuck in a services mindset to ever build a SaaS Unicorn.
I’m sure They are right.
So I decided to break that rule even further and invest in a SaaS company that had been a services business for almost 10 years 🙂
But it was easy. Because three things were clear to me: One, the company had a better founder-CEO than me. Two, they had a great set of 50+ not-easy-to-convince, conservative customers who were in love with the product, which is changing an industry (eDiscovery) by reimagining it in the age of Slack, Dropbox and Box. And the unit economics were compelling, and I could easily see a path to 100s of semi-routine six-figure deals down the road. (More on my criteria here). And beyond that, they’d strategically reinvested all their profits from their services business and aggressively used them to build a seven-figure ARR SaaS business. So the (x), (y), (z), and (aa) risks above were mitigated.
And then I had to add one final Big Question: How Tired is the Team? Because they’d not only been doing it for years — but they’d invested all their profits into the SaaS business they build out of their eDiscovery services businesses. Which was impressive (and probably, a little bit crazy) — they’d invested millions they could have put in their pockets. My learning: they weren’t tired at all. They were energized. And ready to build a Unicorn.
>> So sign me up. Indeed I signed up for $4m (more on that here).
Anyhow it’s gone well in just a few months, the company has millions in ARR growing in the mid-teens MoM (pre-Hyper Growth). There are tons of challenges ahead, but I asked Andy Wilson, CEO to share his learnings on doing The Almost Impossible — Founding a Successful SaaS Company and Product out of a Services Business:
There’s a good chance that if you’re running a services business that it can be transformed into a SaaS business. That’s what I realized in 2009. And although it took 4 years to complete the transformation, it was worth it. Because if we didn’t do it to ourselves, someone else would’ve. Your results will vary.
Below are 8 things I learned during the transformation from services to SaaS. If you’re a services business and are thinking about transforming to SaaS, I hope these learnings will be useful to you.
Despite what you may see in San Francisco, not all service businesses should become SaaS businesses. SaaS is hard work. You need a lot of people to make it work. You need a big, or quickly growing market. You need a product-focused team. You need a lot of stuff.
That said. If you can take what you do today as a service, and leverage the internet to achieve a faster and easier experience for your market, then you should explore it.
“Convenience on the internet is basically achieved by two things: speed, and cognitive ease.” – Ev Williams, Co-founder of Twitter
2. Find the friction in your services business.
Friction. It’s all around your services business. Client emails, phone calls, order forms, invoices, etc. This kind of friction is not allowed in SaaS, so you need to figure out how to give the desired outcome with fewer steps.
One of the things that we did early on in 2009 was to count the number of steps it took to deliver the end result our clients wanted. The results?
2,500 steps per-request.
That’s how many steps it took us to deliver our service: a searchable ediscovery database for legal teams. Shockingly inefficient, we know, but we’re atoning for that now.
So we made a goal: 3 steps or less (one of the big reasons it took us so long to launch).
Don’t leave any steps out. Count every click, every touch, every email. Everything. You may be shocked to find out how inefficient your service really is. We sure were and we were/are technical people! 2,500 steps is mind-numbingly slow. And slow won’t cut it in SaaS.
3. Consume ALL the SaaS knowledge out there. But you gotta drive to really learn.
There’s a TON of SaaS knowledge on the internet now. Want to learn how to price your SaaS? Want to learn how to comp sales reps? Want to learn anything SaaS? It’s there. No excuses. Read it all.
Thanks to sources like SaaStr (my personal favorite =), Tom Tunguz blog, David Skok’s blog, Joel York’s blog, Christoph Janz blog, and countless others there is an endless stream of SaaS content you can learn from.
Having read from all the SaaS leaders, I can tell you that you don’t really know sh*t till you start driving your own SaaS business. It’s just like driving a car: you learn to drive by driving a car, not by reading the car’s manual.
4. Change the name game: Customer not Client.
In most services businesses you have “Clients” not “Customers”. Clients indicate a level of customization that just isn’t common in SaaS. Granted, with the rise of Customer Success in SaaS becoming critical to a SaaS companies success, I’m starting to hear more B2B SaaS businesses refer to their users as clients, not customers. But I digress.
Regardless, what I did early on was to establish that in order for us to move from services to SaaS we had to have customers, not clients. So I made it a point for everyone on the team to say customers, not clients. It’s a subtle thing, and a bit micro, maybe even femto, manage-y, but it helped change the mindset: no customization in SaaS.
5. Sell to your new customers, not your old clients.
Related to #4, you have to get out of your comfort zone. Go find 10, 20, or 40 potential customers and sell them on your new SaaS. Do this even before you have a product. They’ll be an excellent source of social proof, pricing experiments, and much more.
Remember, your clients know you as a customizing machine. You’re like a genie to their customized services wishes, except they usually ask for unlimited wishes first. Clever clients! So you can’t go to them first. They’ll have you make an amazing SaaS product…just for them =)
Besides, if your SaaS idea fails, you can always go back to servicing your old clients. Maybe.
6. Build a product focused team and celebrate ALL THE WINS, no matter how small.
This is probably one of the most challenging things you’ll need to do when building your SaaS. You have to make the entire company product-focused. Try and get everyone with deep domain experience to transition into new SaaS roles. Project Managers, for instance, can make for GREAT Customer Success Managers (so long as they can go from reactive to proactive).
In the early days from services > SaaS you will have so few wins it will seem hopeless. It won’t be. Not if you celebrate every. single. win. No matter how small, celebrate it. That “Wow! This new SaaS idea you’re thinking of building is great. It will save me at least a week of time” quote you got in a prospective customer discovery call? SHARE IT WITH THE TEAM ASAP! Slack-it. Email-it. Whatever. Just share it!
When you go from services > SaaS, you’re going to be able to affect orders of magnitudes more people. So, your job is to make that really friggin obvious to the entire team. “If this feature will save her 1 week, just imagine how much time we’ll save other people when we have N customers?! WOW! Ship it! LETS GO!!!”
7. Product pricing. Not service pricing.
In services, you have so many options. So many add-ons. So many little customizations here and there. As a new SaaS app that no one has ever heard of or needs (yet), you gotta go simple. And you need to move away from customized pricing. Don’t overthink it. Literally, KISS your pricing model, or you risk kissing your newbie SaaS business goodbye. Complexity is a killer.
This pricing simplicity took us a long time to figure out (almost 2 years). And it still isn’t perfect, but here are a few tips:
1. Don’t copy others, unless the leader has already established “this is how it’s done” pricing, but even then do you your own research, because…2. Align your price with the value received from your customer and make it as predictable as possible upfront. This is much easier said than done, but if you can align your pricing with value, you may just have a scalable and disruptive SaaS business that will kill your former self, the services business AND all the competition.
8. Switch teams. Cannibalize yourself. Don’t give up.
Once you’ve made the transition from services > SaaS, you need to fully switch teams and let the market know why the “old” services way sucks, and why the market should switch to your “new” way, which is anything but suck. You have to switch teams. Don’t be wishy-washy on this. You are now your own worst enemy. Embrace it.
And you have to cannibalize your former self. But keep parts of services-brain intact. Your experience with customized services is going to come in handy with customer support, success, and general customer communication best practices.
Lastly, don’t give up. It took us 4 years to transform from services > SaaS. Your results will no doubt vary.
Was it worth it? Hell yes it was. We’re helping more people than we ever could have before as a services business. We’re hiring some amazing people (FYI, we’re hiring! Join us in bringing the ancient, and horribly inefficient legal system, into the 21st century). We’re doing so much more, faster.
And speed is the name of the game. Find the friction in your services business. Reduce it. And put it on the internet for a recurring monthly/annual value-scaled-price. Then call yourself a SaaS business. Hopefully one with thousands of happy customers and lots of negative churn =)