In SaaS, Your Burn Rate is Muchly a Function of Your Chosen Competition
I’ve been doing this SaaS thing for a solid decade now, with some success, and plenty of mistakes, and yet there are some questions that are at some level, almost a mystery, mostly around “average” CACs and “average” burn rates in SaaS:
- Why was Veeva able to burn only ~$10m net on its way to an IPO? Yet Box needed $250m? And why was say MobileIron (also at SaaStr Annual) in between those two poles at IPO? All sell to the Enterprise. So it’s not that. Yes, Veeva has a very high ACV, with prepaid contracts. That helps a ton. Yet … is that really the whole story?
- How did Pardot get to a $100m exit without any venture capital, when competitors Eloqua, Marketo and Hubspot needed tons? David Cummings please chime in, but see our case study here.
- Why was Dropbox so insanely capital efficient in the early days (not anymore), when Box wasn’t? It’s not just because it’s freemium, folks. Box has a freemium component too, albeit a pretty small one today. So did YouSendIt/Hightail, Drop.io, and 52 others. And now Dropbox is burning a lot. Why?
- Etc. etc. Why are burn rates so divergent in SaaS?
Now, at a micro-level, we can come up with a lot of factors that explain various burn rates:
- Some founders certainly are scrappy. Others ain’t. At the SaaStr Annual, all the CEOs on our “Second Timers” panel had relatively high burn rate, well-funded start-ups. Perhaps in part because they had that luxury — they already had a win on their belt.
- Market dominant strategy does work in SaaS, at least muchly. So might as well play this card if you can. This is a fine reason to spend a bajillion dollars. Mark Organ (founder of Eloqua, CEO of Influitive) talked about that here. A longer SaaStr post on Dominant Strategies in SaaS here.
- Some spaces have higher CACs that others. I guess. Maybe. But that’s not the answer. It’s just a derivative of what I think the “root cause” is. Because if you’ve ever bid on Adwords, you know exactly what drives the price of an Adword up. Competition.
Now I have the luxury of working with about 20 SaaS companies directly, in one form or another (institutional investor, advisor, angel, friend). And I have also my personal experience to build on. I got to cash-flow positive at $4m in ARR growing > 100% YoY with a sales-driven model. So it can be done. If I did, you can probably do it too.
I think one thing is clear to me: your burn rate in SaaS is highly correlated to Your Chosen Competition.
Let’s go back for some examples and look at Talkdesk and Guidespark, who we did a deep dive on at Dreamforce here and both of whom presented at The SaaStr Annual.
Talkdesk has gone from basically $0 to $6m in ARR in 14 months, and is cash-flow positive. Hmmm … Now let’s dig in. On the surface, Talkdesk is in a very competitive and old category with scores of vendors. Contact center software. Bigger incumbents, for sure. And yet … yet … I’m pretty close to the company. And sales is hard there, sales is always hard. But Talkdesk has a pretty differentiated product if you really understand the market. There is competition in more and more deals now there, but at least today, Talkdesk is differentiated enough that once you get a great sales rep in the deal … they win. That will change as they get bigger, and compete more and more head on with others. Then, their win rate will actually goes down (as it does to all of us, once we hit the mainstream, but before we have the dominant brand). But today, Talkdesk is far enough ahead of the competition they see today that they’ve gotten to $6m in ARR without even a VP of Marketing, as the CEO noted at the SaaStr Annual (for better or worse).
Guidespark also presented. They’ve gotten to $20m+ in bookings in the past 24 months with a relatively modest amount of capital spent (a decent amount raised, but not all that much spent). As the CEO and VPS noted at both The SaaStr Annual and at Dreamforce … there’s tons of competition for employee training, their broad space … but for the true solution Guidespark delivers … the competition is relatively defined and specific. At least, it’s not bare-knuckle, to-the-death competition against 3 can’t-hardly-tell-the-difference competitors in every single deal. The real competition is just getting the customer to actual buy. Budget.
Now of course, at least in theory, the fewer the places you compete, the smaller the current opportunity you address — and perhaps, the slower you grow. With hindsight, the reason I was able to get cash-flow positive at EchoSign is because I focused on areas where I had a clear competitive advantage (in the early days), and avoided areas I didn’t. I’m not saying this is right way to go. I’m just saying it’s more capital efficient. I suspect the story was the same for Pardot, where they seemed to have focused on a segment of the low-end of the market in the early days, back in the day, below Marketo and Eloqua and adjacent to Hubspot. Today, under Salesforce, it’s become a direct competitor. But I suspect not as much, back then. And Veeva as we discussed above — it’s not as if there are 20+ enterprise-grade Pharma SaaS CRM solutions …
Ok now let’s go back to Box. Box has simply been in the most competitive category in SaaS, IMHO. But now … in the past few quarters … their CAC has declined. Their magic number has fallen below 1.0. Why? We didn’t address this directly with Aaron at The SaaStr Annual. But we addressed it indirectly. Box has become The CIO’s choice, and this is a relatively recent development. As that happens, the direct marketing costs goes down. You don’t have to struggle to get the word out — the prospects already know they want Salesforce, for example. And that’s happening with Box now too. You don’t have to convince them to pick you, to come to you. And so you can spend more on brand (which often has a fixed cost, so the cost per customer goes down). And more and more leads just come to you, and if you are perceived as “The CIO’s choice”, the job of sales becomes not so much to convince you why this is the vendor of choice … but rather … why to buy now, vs. later. Your competition becomes budgets more than other vendors. That’s cheaper.
So what’s my point? I guess maybe just 3 things:
- First, find the CAC that works for you. This may sound silly, but it isn’t. As interesting as the 40% rule may be, it’s just an average or a median. If you’re in a highly competitive space, and you’re playing to win, you probably need to spend more to take the incumbents on directly. But if that doesn’t work for you, focus for now on the segment where you are 10x better and get the leads to (eventually) come to you. If you’re a Second Timer and can raise $15m tomorrow, you can go head on with anyone you want. If you can’t .. don’t. Average burn rates, like CAC Averages, are misleading.
- Be careful of others’ models and burn rates. You don’t know the whole story. Get the real story. Yammer as some amazing freemium story? Only in part — as a top-of-funnel accelerant. As David Sacks noted at The SaaStr Annual, he scaled up an enterprise sales team in Year 1. Slack? As Stewart Butterfield noted, even with an epic ’14, it’s still really selling to software product teams. They don’t need a single rep to get to $20m and then $100m ARR. That may not be you. It wasn’t Yammer, neither.
- Capital is a weapon. But don’t let it discourage you. You may need an extra $100m to win your category (more on that here). But if you can’t pull that off, focus on your competitive advantage and triple down there until your cost of capital becomes trivial.
Net net, if you have a truly differentiated product, that’s a real solution … there’s more than one way to get to $10m in ARR. In today’s world, where everything is growing faster than ever in SaaS, I’d throw fuel on the fire as much as you can. Grow as fast as humanly possible. Just don’t let your peers’ burn rates and pre-Initial Scale growth strategies confuse you. You can pick and choose how and where you compete, and at least in part, your way up to the top.