The other day you may have seen Michael Krigsman from CXO Talk and I did an in-depth sessions about learnings about the next great generation of SaaS companies, and how they are scaling. The video is embedded below and got 5k+ views just over the weekend so it seems to have hit a nerve.
And for those of you that don’t video, the transcript is also below, and on Michael’s site here.
CXOTALK.COM – Transcript
Build an Enterprise Software Startup
Jason Lemkin, Managing Director, Storm Ventures
Michael: (00:03) Hello
Jason: (00:05) Hello
Michael: (00:08) Yes hello. The world of enterprise software and enterprise start-ups is a pretty rarified one. Everybody wants to be involved, and yet selling to the enterprise is really quite challenging. Today on episode 107 of CXO-Talk I am thrilled to welcome Jason Lemkin who is a company founder. Runs one of the most popular entrepreneur blog sites, Start for SaaS Founders and has done a lot of other things. I’m here with my glorious co-host Vala Afshar, except Vala’s actually not here. Vala wherever you are out there in the ether I hope you are doing well and Jason how are you?
Jason: (01:06) I am on top of the world thank you very much.
Michael: (01:11) And I assume that everywhere you go you get royal horns.
Jason: (01:17) I hope so.
Michael: (01:18) I think you should expect nothing less. So Jason, you have a pretty broad background tell us about your professional background.
Jason: (01:29) So I have been founding, running on the management team and now for the last 17 month investing in start-ups my entire career. But I’ve done all different pieces of it right, from being an advisor to a consignary to on the management team of start-ups to founding two of my own companies that was sold to the enterprise. The last was EchoSign which was required by Adobe on July 15th 2011, and now I just invest and work in SaaS company.
(02:03) I’m done trying anything new. I just want to invest and help other SaaS entrepreneurs do even better than me. And kind of in a nutshell after EchoSign was acquired in 2011 I came to the conclusion that I no longer had anything to hide. I didn’t have to pretend I knew anything. I didn’t have to cover over my mistakes and all the things I screwed up, like hiring the wrong the VP in sales or screwing up a sales com plan or not even knowing what a VP in marketing was supposed to do or what Demand Gen was and I decided I would just share everything, right. I had nothing else left to hide.
(02:41) In fact a story – a few years we got 1300 answers on Quora, 250 blogposts and we got about a million views a month and we sort of accidentally created this pretty fun community called saastr, which I think a lot especially first time founders to learn and repeat folks for reasons are pretty eclectic today.
Michael: (03:04) So you started saastr with – well first off, what exactly does saastr mean?
Jason: (03:11) So I don’t know, but I reserved the URL way back in 2010 when everyone thought the enterprise was really boring.
(03:19) You may remember in 2011 when SuccessFactors was bought, (the title and tech zzzz 03:24). Like was like the most boring thing in the world that there was $3billion acquisition. So back then SaaS was not sexy and hot. It was not 60% of the latest (licom later class 0:35).
(03:36) So I’m full of bad jokes so you know the last thing I thought a hipster would do in 2010 was be into SaaS. So SaaS was what a SaaS Hipster would be. I reserved it for fun, I thought I might use it as something to do at EchoSign and never used it. But then after the acquisition I decided I would just share out my learnings and do it under this URL.
(03:55) So it means nothing other than people having fun, learning and growing SaaS things together.
Michael: (04:03) So you’re having fun but you’re getting a million views a month. And you’re the top person answerer on Quora as well.
Jason: (04:11) I don’t know if at the top, but we’re definitely in the top few every month. Especially given how niche the content is, I think is pretty cool.
Michael: (04:19) So what are the kinds of issue that you’re discussing on Saastr.
Jason: (04:25) Yeah, so let’s step back for a minute. My most profound insight, having done with a couple of start-ups and sold millions and millions of dollars to big companies, enterprises and small companies as well.
(04:36) What I sort of knew but I didn’t understand more empirically, is that once you get the initial traction, that first million, million and a half of revenue. Once you do, basically all these companies scale the same way for a given ACV, right.
(04:52) So companies with the 5K ACV pretty much all do the same thing once they get to (? 04:57) revenue companies which is 20K ACV. ACV I mean Annual (? 05:01), how much for your average customer pays you for a year. So they’re sort of premium like DropBox and you know maybe the customer has 600 bucks a year
(05:09) There’s high velocity inside sales at $5,000 a year. There’s sort of lower velocity inside sales at 20K. You get into field sales at a 100K or above. And wherever you are, whatever your average ACV is pretty much sell market the same way as the next guy. Your product may be different and we all tend to get to that first 1 million in revenue in very different ways based on the backgrounds of the founders which we can talk about, right. Like if you know how to sell, you’ll get there buy selling, right.
(05:38) If you know how to sell yourself, maybe you’ll get there through PR and inbound leads. There’s different ways to that first million. But because we all scale the same way after that, if we just share the operational learnings of how we do that, it becomes wildly applicable to SaaS startups who do 10,000 different things and 5,000 different verticals.
Michael: (06:02) So we have a question from Twitter and I hope I pronounce his name correctly Bartolome Rodriguez and he asks, do you usually like to see the growth of your business or investment through any specific tool.
Jason: (06:20) Through tools, boy I don’t know. I mean it’s. let me step back for a minute. What I do think is important is these days whether your using better metrics which a lot of start-ups use or other similar tools, I think transparency is the normal in 2015, right.
(06:38) So I think best practices is what every start-up should be doing is sharing with their investors, advisors or others. The metrics, each month, every month, regularly and interestingly, the longer the lag time it is, I find in has a strong inverse correlation to the quality that starts, right.
(06:59) The best start-ups that I have invested or work in is I advise the best ones, get there monthly metrics out in whatever email whether fair metrics or Excel or whatever it is they get it out within a week at the end of the month, and the longer it takes, usually the lower relative quality at the start-up.
Michael: (07:17) We have another question – so as people ask questions let’s just do that. How’s that for you.
Jason: (07:24) Sure yeah. We’ll dig in on of a few of the good questions you and I had chatted a little before, but let’s get some questions from the audience for sure.
Michael: (07:30) Alright, so Vasu and again I apologize. I hope I’m pronouncing your name correctly, Prakapati is, are SaaS sales based on a hard ROI standard and expected. Do these expectations vary by deal size?
Jason: (07:59) You know it’s interesting. I was having a conversation yesterday. Yesterday I was at a company called BetterWorks and I’m on the board and had a Goal Summit and they had about 300 C-level executives to talk about enterprise goals and I met with the C-level, maybe a CIO of a pretty large financial services company and you know what he said. He said the first year we don’t even bother to calculate our ROI and I don’t think he meant – what I’m talking about is high end enterprise. We’re talking about financial services, right, and Fortune 50 companies’ right.
(08:33) And obviously he didn’t mean that they buy products and they don’t care about ROI, right. And what he meant and what we we’re talking about true enterprise. And we confuse the term ‘enterprise’ with business, right.
(08:43) When you’re selling to the Fortune 500, the Fortune 100 you know what you really are buying is business process change, right. And bringing in a tool to change the way I do business. So I’m bringing in workday to change the way that we can track and manage our people or interact with this. And so the idea of ROI calculator is mission critical to that, I think it’s a bit apocryphal right and a little simplistic.
(09:12) But I do think ROI calculators, (net hold?) trend are very important air cover, especially the person you’re selling to and you’re deal champion has to sell it out to the organization. Right, because if you’re selling straight the the CIO, they’re going to figure out their own impact on the enterprise, right. But when you’re selling to the Director of IT, who has to go to the CIO to convince her to buy this product right, which may not be budgeted. The the ROI calculator, as silly as it is sometimes becomes mission critical, right. But you’ve got to do it but understand that it may really be air cover.
Michael: (09:49) So you mentioned you defined enterprise software as essentially being business process change. Maybe you could elaborate on that, because I think many founders, who especially come out of the consumer world don’t have a full appreciation of what that actually means. And it is fundamental to sell successfully to the enterprise.
Jason: (10:13) So let’s step back for a minute. I think when the main stream tech media went from that 2011 example that we talked at that point thinking that you know, quote ‘enterprise software was so boring’, it was all z’s and (head of tech crunch) is interesting today right. The challenge for founders is that the term enterprise kind of got redefined, right, and so in the old days enterprise meant selling to big companies, pieces of software. And let’s talk about this, that were you know change the way your business did, took a lot of implementation and a lot of overhead and a lot of change right. And enterprise software was never something like freemiun or low end like Dropbox, that was never to be considered enterprise software five or seven years ago.
(10:56) Today, these terms have got all mixed up and anything that were business pays money is now called enterprise and I think it creates a lot of confusion. I don’t know how to solve it, that train has already left the station, right.
(11:10) So what I’ve tried to help people understand is break B2B products or software to service products into tools and solutions, okay. And tools are generally inexpensive, easy to adopt, right. Slack is amazing, but slack is a tool okay for the most part, but we’ll talk about it if you want, why for many folks it can become a solution. But DropBox is a tool, Slack can be a tool, Evernote can be a tool, it’s easy to adopt. Often it comes out of your own credit card and does not fundamentally change the way the business works.
(11:46) And CIO’s don’t buy those things and those are not how six figure and seven figure yet deals get done, right. Solutions are something that changes one of the core business processes of a company.
(11:59) So, let’s step back a minute, whether it’s a tiny company or large company, if you are one of the core systems that that company runs on, you can charge a lot of money. You’re replacing people, right. The average person – my brief as 10 years as a corporate VP at Adobe, the average fully burden cost of a person was $250,000 a year, right. You save me the cost of a couple of people and make my organisation run 10 times better, I can write you a half $1 million cheque a year, it’s no big deal.
(12:28) But even as a corporate VP, me getting DropBox at five dollars a month expense was torture, right. So tool versus solution is people get confused on the difference, and then s a founder and another interesting question is can you go from one to the other, right and Box is a great case study, right, because we all know Box, very visceral. Box started off as a low-end premium tool and migrated to become a solution for enterprises to manage their content, right. It became an enterprise content management solution.
(13:01) When in the beginning it was a cheap and free tool way to stick files on the web. And so I just think understanding the difference is important and understanding the pricing and understanding who you’re selling to. It’s understanding for value, and ultimately even if you’re killing it and doing well, you need to understand that once you get to a $1 million, at least in theory how you’re going to get to $100 million right and you are probably going to become more of a solution like Box, rather than stay like a tool like Dropbox.
Michael: (13:27) So this notion of solution then seems to imply that you are doing something that is core to some process or some organizational function that’s not just an individual as you said using your tool, but that’s actually changing how the corporation works.
Jason: (13:54) Yes, and so that has good and bad. The good is if you’re changing the way the corporation works, they can pay more money. I don’t just mean literally that in the Fortune 100, I’ve met many start-ups selling the small businesses. But even relatively small businesses can pay 20 or $30,000 a year for one app. I call the app that runs on the monitor on the shop floor. The one app that every single person in the business runs their business on – except the tiniest businesses, I’m not talking about independent contractors.
(14:27) But even the smallest businesses can afford to spend $20,000 a year on one app. So five figures is a very interesting sign in SMB sales, you have a real solution that you’re really solving a problem.
(14:39) So good news for solution, you can make 5 to 20 times more money. The bad news is sales cycles are longer, because you have to think about it more and quoting bad news, although this isn’t really bad news is that your average enterprise is only going to buy so many solutions. For a given business process they’re only going to buy one. So I may collude together seven or eight little sales widgets for my sales team, but I’m only going to buy one for my sales team. So there are going to be fewer apps that are solutions versus tools. But if you hit it you can get 20 to 50 times the revenue.
Michael: (15:13) The implications of this however, and correct me if you see it differently. The implication seems to be that as you said, the planning and the building of this solution is far more complicated, because if you’re building a solution, you’re not just building a feature. So it means you have to have very significant domain expertise. And then the sales process is also very complicated, because you’re not just selling to one person in a single department necessarily, but you’re now selling to a team and you have to satisfy all of their constraints.
Jason: (15:54) You do and that’s why if you look at a lot of SaaS apps that are started by first-time founders, they usually don’t have domain expertise. They don’t know how to sell the power. They don’t know how to sell a solution. They don’t even know what a business process change is. So many, at least by number most of the SaaS apps that we see today start from the bottom. They start either with small businesses, or individual users, silos, or groups or individual application.
(16:21) And you know when Aaron Levie started Box he was 20 as a sophomore who dropped out of USC, and he was never a CIO to the enterprise now CIO’s love him. So that migration path is the way the majority of SaaS vendor’s do it because they can’t do it any other way.
(16:36) But interestingly a lot of the repeat founders skipped that step. If you look at Josh James at Domo, he’s not messing around this time. He sold Omniture, for 1.5 million last time and he is going for 15 billion this time and he’s skipping straight to the enterprise. But most of us founders don’t have the skillset to do that. So you have to start as a tool with premium, with SMB and then learn like Aaron Levie with Box in how to go up market over time.
Michael: (17:00) And how common is the ability for a founder to be able to make that leap.
Jason: (17:08) Well all of it is uncommon, which we can chat about. Success is celebrated far more often than it occurs. But you know with the companies that I work with and the CIOs that I know, it’s relatively common that you can do that. I invested last year in a company called TalkDesk, just last July it was doing about 1 million ARR. By this July they will do over 10 million in ARR, so one to 10 in 12 month and that’s not quite slack but it’s pretty breathtaking.
(17:43) And in that time TalkDesk has quickly grown in many many six figured deals, and six figured deals are routine, so it happened a lot, and I can give you many other examples.
(17:54) You know, we had a company called GuideSpark that represented the SaaS and they went two to 20 million in two years in ARR. They ended up by driving their ARR average deal size from about 20K to 300K. So it’s pretty common, but success is always uncommon no matter what it looks like in the media.
(18:13) But my learning from all of this is that if you haven’t done it before and you’re a first time SaaS founder, the most important thing I’d say to you then is listen to that when you get one or two big customers so don’t dismiss them. So if I go back in our top 20 of 100 mistakes in my first year as a SaaS founder, you know what one of them was? When we closed our first couple of enterprise customers, some of the folks on the (? 18:38) thought they were anomalies. They didn’t want to support them. Those aren’t anomalies, those are the future.
(18:44) So in your first year as a paid product and you can get a Fortune 100 customer, that is the future. So if you haven’t sold to the enterprise before – to the true enterprise, big companies with business process exchange, and you get a five or six figured deal your first year, don’t view it as a pain in the neck. Don’t view it as a distraction. Don’t view their future request as annoying. View it as a gift from heaven as a chance to learn. That’s the way you can go that value chain and into a solution by taking advantage of anything you can get.
(19:14) If you’re out there for a few years as a SaaS founder, and it’s been 24 months and you haven’t had a single like big company customer or enterprise, maybe you’ll never get one. Maybe that’s not your product that you’re leading, or you never will be a solution.
Michael: (19:26) So the path to (Ca-ching!!) That’s supposed to be a cash register but it sure doesn’t sound like one. That sounded like pennies dropping. So the path to revenue and to really some meaningful revenue. Then based on what you were saying it depends on being adaptable to take what is coming and evolve yourself on the basis of it. And yet at the same time, how does a founder or team discern whether or not this flexibility is just chasing rainbows and in fact is distractedness. How do you make the determination?
Jason: (20:19) Well let’s step back for a minute. So in this age of 120 folks in the last YC and every single person we know becoming a founder. Let’s step back for a minute. One of the big things that’s different in 2015, even from the last wave of ’08 or ’09, let alone that first wave me and Box in ‘05 and ’06, is there are 10 bajillion web apps today and nobody needs another web application – no business, right.
(20:48) Look at all the businesses in your block on your Street. Are going out of business because they don’t have a web app? No. Every business is doing just fine. So the last thing that anybody needs is to invest a whole bunch of time to find another web app. Maybe if your insecurity and you work with Target or Sony it’s different, right. That you’re desperately looking for security solutions that work better, but for business process no business is going out of business because they don’t have your new web app that no one’s heard of.
(21:14) So what does that mean? What it means to me is that if you have what I call 10 unaffiliated customers, if you can close 10 customers that are not your ex-bosses or friends from the enterprise irregulars, from the whatever – 10 folks from the ether, even if they only pay you 20 bucks a month you have something. Because no one has ever heard of you and if you can get 10 you can get 20, and you can get 100. And if you’re tenacious you can get 1000, right.
(21:43) So I say ignoring money and all the stresses of surrounding a company and everything, just see if you can get 10 unaffiliated customers, and then do whatever you can to just double down and keep going. Because it’s impossible to get 10 unaffiliated customers, and then just don’t quit.
(21:59) Then what commencing with that is the other mistake that a lot of founders make is because it’s so hard to get 10, and because it takes so much time and so many iterations. If the founding team is not sufficiently committed, you have almost 100% chance of failing. The initial founding team has to commit for 24 month to have any meaningful revenue. We just talked about TalkDesk, it’s going to go from one to 10 or more in 12 month, but it took them 2½ years to get there to get to that first one. We talked about GuideSpark, 2 to 20 in two years, but it took the entire team four years to get to that first 2 million.
(22:38) Slack, you know Slack we had an amazing explosion, three billion-dollar valuation yesterday after only being in business as Slack for a year, but it’s predecessor company and all this around 4 to 5 years. This overnight success in SaaS often is preceded by 2 to 3 years of desperately trying to get that first million in revenue.
(23:00) So, get to 10 unaffiliated customers, don’t quit, and make sure your founding team is willing to commit to 24 month to the first million in revenue, then you’ve got a shot.
Michael: (23:10) What a tough potential road to hope because you’re absolutely committing – based on what you were saying, 24 month into the unknown and absolute uncertainty of any type of meaningful resolve.
Jason: (23:29) Yes, if you can’t do that, go and build Instagram. I was invited to speak at the Stanford Business School a couple of months ago, and this is when I had this 24 insight. I mean I knew it but I didn’t know how to summarize in a sentence. And I got up and I said, well most of the folks in the room wanted to do B2C. But a lot of them wanted to do B2B or SaaS or enterprise, and I said, the one thing I can tell you, is going to take you nine months to figure out if your product worked, and then maybe another couple of months to get those first 10 unaffiliated customers, and then you wouldn’t be doing anywhere near 1 million in revenue. It may take you another 6 to 9 months, that’s 20 months total just to get to that million, and then you may need a blog post, so that’s 24 months. And if you don’t commit for 24 month like you have no chance for success.
(24:12) And these aren’t 20-year-old out of MIT going into YC and they are a older now, but they are still relatively young kids in school and all of them were like, well what am I supposed to do. I can’t afford to live for 24 months or I lose my company. Not my problem.
(24:31) I mean, then you shouldn’t be an entrepreneur. Go and work at Salesforce or Facebook, or Google they’re still amazing jobs, right. Go and work at Zenefits or guide spark or TalkDesk or BetterWorks, don’t start your own. It’s not meant to be easy. Right, it’s supposed to be hard.
(24:46) So yeah, go solve that problem. Raise extra money, work on (Ramen?), Do whatever it takes. It’s not my problem. What I can tell you is that all the great companies find a way to commit to 24 months to the first meaningful revenue in B2B.
Michael: (24:59) We have an interesting question from Alex MacLaverty, who asks what are the signals he used to identify a dead in the water or zombie SaaS start-up.
Jason: (25:22) So let’s step back for a minute. Let’s define what a dead in the water zombie start-up is, because all occurring revenue companies should always grow. I’ve talk a lot about this concept of you know we’ve talked about second order revenue, we’ve talked about upgrades, upsells all of this. You know, there is always churn in recurring revenue, but you should always have more growth in your churn.
(25:55) So a true zombie is a SaaS company that’s not growing, that’s just awful. That’s a crime. But maybe the bar is higher than that. I’m going to say once you’re at – even just a million in revenue, you know if you’re not doubling every year you’re a borderline zombie. You’re growing too slowly to ever get there. Because the key to making the whole SaaS thing work is getting from one to 10 as quickly as you can. Your average SaaS business, it seems the whole sales team like we talked about. You need customer success, unique product management, you need marketing, you need demand Gen. You need basically 50 people to make a SaaS company work.
(26:40) And think about what that costs, especially in California, (the barrier?), it cost you $10 million a year so you have got to get to that 10,000,000 to make viable business, and if you’re at 1 million and you’re not even growing 100% every year, I’m not sure that in 2015 you’ll ever get there fast enough.
(26:57) So given that, how do you know if it zombie if you don’t – if you have the numbers you’ll know from the numbers. If not and I think if you look at their LinkedIn, and you see that they’re not adding headcount with that growth rate than they’re probably a zombie. You can learn a lot, and that interestingly sucks us in as a core data point, but if you are not seeing at least 60% of employee growth year after year, you’re probably a zombie.
Michael: (27:23) So what’s the set of criteria then that you use to evaluate an investment, and I’m asking really from the point of view of the founder to help expose these lessons to SaaS start-up founders.
Jason: (27:42) Yeah I can tell you exactly what I’m looking for and it’s kind of sad because I didn’t achieve it so listen, I had a great exit. You know return 5X to my investors, it was good and always great and especially by 2011 standards. But I’m looking for companies that did better than me. And what I’m actually looking for, let me quantify and then I can give you some other characteristics.
(28:06) In today’s world of Slack and Zenefits and TalkDesk and other hyper growth companies that we talked about, looking for companies that can, and I’m often going to invest before the stakes so we can chat about that. I’m looking for customers, at least in theory who have a shot from going from one to 10 million ARR in 5 quarters or less.
(28:30) And to summarize that, is not quite here but that really means once you hit 1 million revenue, you have got to be growing at least 15% month over month. Even if that doesn’t quite compound to that number but its close enough, but most of the companies haven’t hit $1 million in revenue yet; I’m an early-stage investor. But if I have, and they hit 1 million and they are growing five or 6% a month, which in classical times would be okay. As a VC now I can’t invest, there’s no way I would make enough money.
(29:01) So the bar has gone up and you know we’re not going back in time like box when these companies got started back in the day, we didn’t see that type of growth. Salesforce did but no one else did. You know, Slack is 3 billion, but it ain’t 3 billion because it’s going 6% month after month. It’s 3 billion because the investors are expecting Slack to go from one to 100 million in two years.
(29:24) Zenefits, that I spoke that’s in the SaaS triangle, they are apparently raising around 3 million now to and Zenefits is projecting 1 to 100 million run rate in two years. I’m not asking all start-ups to do that, right but I think the bar is one to 10 million ARR in 5 quarters, or at least if you are investing earlier like I often do. At least you hope they can, right. You try and read the tea leaves, is the team strong enough. Is the early customer growth good enough. I look for deal sizes going up, because even if your customers are only $5000 here today and if some of them are 20 or 50K, I know you have a chance to drive deal sizes is that which makes the physics of recurring revenue easier.
(30:02) But all boils down to hoping and you know as a VC most of them will work out, but hoping you do one to 10 in 5 quarters or less.
Michael: (30:09) So Jason, what happens in the example of a company that can achieve the kind of revenue that you’re talking about, and yet maybe not at the growth rate that you’re describing. Any other world then than the VC investing world, such a company would be considered wildly successful.
Jason: (30:55) It would.
Michael: (30:36) And so the situation that you’re describing
Jason: (30:39) That’s why I said it’s kind of sad I didn’t even get to 1 to 10 in five quarters, so I don’t judge anybody, but keep going.
Michael: (30:45) So basically then what you’re saying is that there is only room in the market for either a small VC non-refundable business or lifestyle business which people call, and I don’t mean that in any negative sense whatsoever at the low-end. Or these hyper growth companies at the high end, and anything in between basically seems impossible based on what you were describing.
Jason: (31:13) I think so. It’s confusing. You see all this press on TechCrunch and Dan preMax and all these funds are getting raised an bigger funds whenever right and you see all monster rounds every day, right. 80 million to this, 50 million to this and whatever it was to Slack, 160 million and that’s happening but no one is dumb. People think people are dumb or investors are dumb. No one is dumb, the bar is going up. But the thing is when you hit it, and the valuation is much higher to reflect the higher growth rates. So our jaw drops, it’s slack and its 3 million, but if Slack can do one to 100 million in two years, I would say based on current multiples and the current crazy world we live in 2015, I’d say is justified.
(32:00) And Slack goes from one to 20 million in two years, then that evaluation is insane. So yeah, it’s tough. If companies had a matrix of a Box or an EchoSign then maybe Gamma, or Evernote – pick your brand name I don’t think they get funded that. They couldn’t get funded and it just sucks.
(32:19) But on the other hand it makes sense because what’s different today – two things are happening that are different and the first one you’re very familiar with Michael from everything on CXO-Talk. So much more of the CIO’s budget is being migrated to SaaS.
(32:37) So if you hit it and selling to the CIO or the true enterprise, you should go faster because there’s more budget than a few years ago. The overall’s CIO budget hasn’t changed much other than from inflation. But the percent of a $1 trillion budget going to SaaS, it doesn’t take too many basis points for that to create 50 ideas.
(32:56) So that trend is accelerating and the other trend that’s accelerating outside the CIO’s office in SaaS is that more and more segments of the market and businesses are getting Saasified at a much higher rate, right. So because all of that is accelerating, the best companies should grow faster and if you’re not somethings not quite right. You do not quite have the product market fit you think, right or somethings off because all the markets are bigger than they were just a few years ago.
Michael: Okay, you’ve been talking revenue and growth have been at the center of the points that you have just been making.
Jason: (33:42) Growth solves all ills in referring revenue businesses. Growth SaaS business say have 80% plus margins. Growth can solve all of your problems.
Michael: (33:55) Okay, so let’s talk then about how do you achieve growth, and let’s talk specifically about selling to the enterprise because I think again it’s one of those areas that’s unless you’ve been involved with large organizations and this dynamic, it’s not intuitive at all in how you sell to the enterprise.
Jason: (34:17) So let’s step back a minute and this doesn’t help founders who are desperately trying to hit numbers this month, right. But when you’re taking a longer term view and trying to build a unicorn or decacorn or $100 million business, understand that at the end of the day almost every great business period, and almost every great software company has been built on word-of-mouth, okay.
(34:44) The most extreme version of word-of-mouth is virility, right. So you see a WhatsApp and this is B2C, you see aWhatsApp or a snapshot or Instagram explode or Facebook. Because that word-of-mouth becomes a piece of technology, right.
(34:58) But everyone grows through word-of-mouth once they have a brand, right. So once you have – and even what I call a mini brand. A mini brand is – it’s not Coca-Cola, it’s not Salesforce. It’s not Workday, right. But once you have a brand just for your core customer that they would have heard about that I call a mini brand and that can happen as early as one or 2 million ARR, then those customers start to get you more customers, right. So to give a personal example, let’s step back.
(35:29) It took us 18 months to close Google, it was a lot of work, right. From Google, I think it took is 90 days to close Facebook, right. And after Facebook I think it took is 30 days to close Twitter, right so you see that happening, right. We did it in insurance to, and it took was like a year to close Aetna, and I think it took is 90 days to close (Signa?) From that right. Then they just kept getting faster and faster and faster, and it wasn’t because we got better at knowing how to sell these verticals, although we did, right. It’s a mini brand, right.
(35:58) And so if you abstract everything away, what’s the game plan here, right. First, I figured that I have to sell something to those 10 and 100 unaffiliated customers, which has got to be hustle and Chutzpah because no one’s heard if you, right. It’s some kind of hustle and Chutzpah whether it’s outbound sales, the press, or PR, or add words, or product hunt, somehow getting out there right and connecting with hyper early adopters.
(36:21) And then what people tend to do in different ways the underinvestment the net brand in what I call the second order of revenue. And they underinvestment in the customers that they have, and the overinvest in trying to get new customers, which is natural right. And as soon as you have even 100 customers, I would argue especially as a CEO, you should spend at least half of your time with your existing customers not with prospects. Okay, and then you can figure out everything else once you have a brand that people love that people are paying for, right.
(36:48) That’s the real secret to this whole thing, is getting the mini brand, and then over investing not under investing in the mini brand, and that’s why I say overinvest in customers success, right make them happy here. And as the CEO, get off your back and get out of chair and go and visit your practicing customers wherever they are. They will get you more customers, right. Have a customer conference, like we did at BetterWorks yesterday, right. Even if you’re only a year and a half old, have 200 customers come there.
(37:15) Do this stuff because you can figure out the rest of enterprise sales, you can hire talent, you can hire folks that have sold you to the enterprise for a week and chat about that, right. But this key is the mini brand and second-order revenue, and the thing is the bigger your deal size is and enterprise is it just takes longer. Right, it takes longer, the larger the deal size is the more money you get, but the longer the sales cycle.
Michael: (37:58) So Jason what you’ve just said at the beginning it’s hustle and Chutzpah that’s how you sell. However, once you’ve built that mini brand then your sales approach is going to be very different, which implies that the activities that a SasS start-up team must undertake change quite dramatically as the life cycle of the company evolves.
Jason: (38:09) Yes, and hopefully from a sales strategy that you’re able to sequence a couple of things at the same time. Hopefully, usually whether you’re any good at it or not every great founder CEO has to have a hustle and Chutzpah in trying to get those customers right. And then hopefully by then, you’ve hired – even if you’ve never done this before as most of us haven’t, you’ve hired 2 to 3 sales reps and you knew were successful. Right, and maybe they’re bit quirky and they are going to be very different from sales reps 20, 200 and 300. But 2 to 3 folks that you trust that you believe in and can work with you, and they can replicate a little bit of the secret sauce that you’ve figured out at hustle and Chutzpah.
(38:47) Right, and usually those 2 to 3 plus you will be structurally sufficient to get you to that million – million and a half in revenue, which also will equel your mini brand, right. So if you are able to do all that, usually the perfect timing to bring in a VP, or senior director of sales or whatever, to help take that mini engine that’s just starting to work, right. It’s just starting to come together and then help you just run that things faster.
(39:14) Right, so that’s the playbook right and the mistake that a lot of us make is that we bring in the VP of sales to early, right before the wheels are starting to turn and that’s never ever never ever works, right.
(39:26) You want to bring the VP of sales in, when the wheels on this train or heavy steam engine is just starting to turn on the rails, right. And all your VP of sales is going to do is this and that’s all they do right. The VP of sales are not magicians and they don’t create customers out of thin air. A VP of sales cannot sell an unsellable product. If your product is unsaleable, the VP of sales will not solve that problem.
(39:50) A VP of sales is a manager, a process manager and a recruiter. Right, and the good thing is if you can get 2 to 3 reps under you working to get to a million, you will have the mini brand, right. You will start to get pearls, you’ll start to get second order revenue. You’ll start to get people talking about you and you’re ready to go for it.
Michael: (40:09) Okay, we have another question, an interesting one from Sachta Gani, who asked what do you value more highly, product market fit or execution capabilities.
Jason: (40:25) It’s interesting, you know we were just having this discussion last night. It depends what whether your pre-or post-initial retraction. Whether you are a before and after a first million, or maybe even earlier. Let’s call 20K MRR, paying $250,000 here as annual revenue.
(40:44) Because no one in the world needs another business product out there, right. If you’re before 20K MRR, a quarter of 1 million year revenue, all I care about is (market fit? 40:54) I care about nothing else, because no one needs the product.
(40:59) As soon as you have a statistically significant number of customers, which is probably 50. Then the execution engine becomes incredibly (supportive?) right. So I would say the the dividing line is probably 50 customers, before 50 I’m not sure if your product market fits, so all I care about is product market fit. After 50 customers I don’t need to see a demo of your product. I don’t need to see it to invest. Then I want to know how you’re going to execute and get from 50 customers to 5000.
Michael: (41:26) Okay, so to put it another way in the early stages up to say 50 customers, all you are trying to really figure out is can you build shit people want to buy?
Jason: (41:38) Yes.
Michael: (41:40) And then at some point that changes and now you’re building the machine, and can you build a machine to do this over and over and over again.
Jason: (41:48) Yes, and I can help you build that machine. I can help you recruit to people and figure out the right people, right. Personally, I can’t help you with the product market fit. If it ain’t there, it ain’t there right. There’s 100 new web apps built every month and maybe one of them is going to have product market fit, right. Not one, but 1%, I can’t solve that problem, I’m not that smart.
Michael: (42:08) So basically what you’re saying as far as you’re concerned stars are born, not made.
Jason: (42:15) Yeah, or even personally I’ve done pre-revenue and post revenue investment, but if it’s pre-revenue I don’t need to see a deck, I don’t need to see slides, I don’t need to see a demo. It’s just the team, right,. Before those 50 customers I’m just betting in a great amazing team, pointing in a pretty good direction and decent space, right.
(42:37) Post initial attraction, then – Post 50 customers are just trying to hope that that 50 can come to 5000, and hopefully because I’ve gone from 50 to 5000, maybe I have a slightly more better insight than someone else. Or I will see less risk than someone else and be able to pull the trigger on one of those deals that the other people see as too risky.
Michael: (43:00) You know, we only have a couple of minutes left, you’ve been doing this for so long and you’ve had so much experience, drop on our is some advice for founders just deep from your heart.
Jason: (43:25) Just two things, I think the most important thing is you know if you don’t have an A+ team fix it, right. Because the difference between a good and great company is orders of magnitude from financial and life experience returns, right. So let’s break it up into two phases, you know founding team and layer, right.
(43:53) If you’ve got a set of founders and they may be individually extremely talented that they are, but if you don’t have this great team that is going to go into battle together every single day for the next 24 months to get toinitial traction, take a pause. Don’t launch, find a new founder, find a new something. Don’t start something without a great founding team that that’s committed for 24 month, you’re just going to fail.
(44:15) So then you are into it for 24 month of initial traction, right. And then my other bit of advice is just you know if you don’t have the perfect set of founders, go bring those people in. It’s never too late to add an amazing person to the team to carry some of that load. And whatever you do, once you have someone, even if it’s just those 10 customers, 50, a million revenue or 2 million, make sure you’re not turning all the load yourself. It’s too much, right. And if you don’t have a co-founder at that point that you carry load with you, it’s okay.
(44:48) You can find one or two amazing people on your management team that are almost what I call (Expose facto? 44:53) founder, right they care so much about the product, the passion, and they are A+’s that they can do it, right. For me, my VP of sales, VP of product, even my head of customer support, and others. All of them cared so much about what we are doing it are hard and the VCO is the hardest job on the planet. Man, it 50 times harder than anything I’ve done, right.
(45:16) Whenever VCs complain about how hard their life is, I just like want to roll my eyes and blow my brains out. They don’t know what it’s like to be a CEO, it’s 50 times harder than being a VC and it’s 20 times harder than VP. So find an expo facto founder or colleague to help you carry the load, because you’ll never make it otherwise. So from the heart, those are the two things and there are very few of us that can do it on our own, right. That’s why they came up with the term called partners.
Michael: (45:42) All right, Jason you have really given our is a lot to think about this afternoon.
Jason: (45:50) Good, well thanks for the time Michael, it’s good we got questions from Twitter, we went a little off the script which is always more fun, so thanks for having me it was great.
Michael: (45:59) Well thank you. You have been watching episode number 107 with really the great Jason Lemkin, and Jason I give you a big hand.. Everybody gives you a hand. My co-host Vala Afshar has been out somewhere in the ether and I hope you come back next week for episode number 108 of CXO-Talk. And Jason, I hope you’ll come back and be our guest another time.
Jason: (46:33) That would be great, thank you.
Michael: (46:34) Alright, thanks everybody for watching. See you next time.
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