SaaS Enemy #1: Churn

At time we sold Pardot several years ago, our monthly gross churn was 1.4%. On an annualized basis, it was roughly an 80% renewal rate. Back then, we had next to no upselling of customers due to a poor pricing model (it was subsequently changed), resulting in a net renewal rate (upsells less downgrades and cancels) that was essentially the same as the gross renewal rate.

With a growth rate of 100% year over year, we weren’t concerned with plateauing where new customer signings are negated by customer churn resulting in a no-growth business (general ballpark, depending on a number of factors, is that the growth rate goes down 20% per year e.g. 100% year one, 80% year two, 60% year three, etc.). Only, without a much better net renewal rate, ideally over 100%, it was clear that in the next few years the customer base would get so large, and the new customer signings larger, but not large enough, that the business would no longer grow.

Customer churn is the #1 enemy of SaaS startups.

So much shine wears off a startup when it isn’t growing fast, and the fastest way to ensure that it keeps growing, is to not have any churn (nearly impossible save for software to large, enterprise customers), or low churn plus upsell, resulting in growth even if no new customers are signed. Everything from custom professional services to great customer support to heavy qualification of the potential customer before they’ve signed should be employed to ensure the highest probability of customer success, and thus the greatest chance of being a customer for life.

Churn is part of the SaaS experience, but everything possible should be done to minimize it and maximize the chance for net negative churn.

What else? What are some more thoughts on churn as the #1 enemy of SaaS startups?

Start a Startup with Community

Recently I was meeting with an entrepreneur that’s early in the search for product/market fit. With a few paying customers, he was looking for scalable ways to find people that would both be potential customers as well as provide feedback on the product. Instead of just looking for potential customers immediately, I suggested a different approach: build a community of like-minded people that care about the problems and opportunities he cares about for his startup.

But how? Create a local meetup.

Find five people that care about the idea or topic. Don’t worry if they are potential customers or potential competitors. If they care about the common idea, get them together. Invite a guest speaker or develop some conversation starters for the group.

Meetups like this promote idea sharing, help everyone develop personal relationships, and make great content for future blogs, tweets, and videos. The human connection shouldn’t be underestimated. Even with all the digital interactions, people want to be around other people, live and in person.

Then, how do you scale this? Go to another city.

Find a like-minded person or customer in a different location. Setup a dinner at a central restaurant or ask another company to use their board room. Build more relationships, share more ideas, and create more community.

Community starts with one other person. Then another. And another.

Like any overnight success many years in the making, community takes time. The best time to start is now.

What else? What are some more thoughts on starting a startup with community?

So you have a startup idea, what’s next?

Earlier this week I was talking to an entrepreneur that has a startup idea, but is having a hard time making progress. Naturally, he’s intently focused on raising money and believes cash from investors will solve the problems. While cash from investors would help with building his idea in its current form, it doesn’t validate a need in the market. In fact, demonstrating authentic demand would significantly help convince investors to invest.

So, what’s next? The recommended next step is to read The Lean Startup by Eric Ries. From the book blurb:

The Lean Startup approach fosters companies that are both more capital efficient and that leverage human creativity more effectively.  Inspired by lessons from lean manufacturing, it relies on “validated learning,” rapid scientific experimentation, as well as a number of counter-intuitive practices that shorten product development cycles, measure actual progress without resorting to vanity metrics, and learn what customers really want.

Some startup ideas need a go-forward-at-all-costs approach because the market doesn’t know what they want. The vast, vast majority of startup ideas are better off going the “validated learning” approach where the entrepreneur starts with a thesis, works to get ideas and input from potential customers in an unaided fashion (don’t lead the witness!), and then iterates from there.

With an idea and a vision, the next step is to validate it.

What else? What are some more thoughts on what to do next when you have a startup idea?

Spend Time Producing Content, Not Just Consuming It

Last week I was talking to a would-be entrepreneur and I recommended he start a blog to share some of his thoughts with the universe while he searched for a business idea. After hemming and hawing, he said he just likes to consume content. True, consuming content is fun and easy, but it doesn’t force thinking through ideas and articulating a position. The act of producing content, even for an audience of one, while difficult at first, gets easier with time.

Another entrepreneur I met with recently was asking for go to market ideas for her new product. With a focus on small businesses, it was clear that the cost of customer acquisition would have to be low based on the product price point, and that it was going to require a light-to-no touch sales process. I asked about search engine optimization (SEO) and content marketing only to have her lament that they’d tried it without much luck. SEO and content marketing, just like most endeavors, takes a significant amount of time and energy to be successful. The best time to start producing content was years ago. The next best time to start is now.

Spend time producing content, not just consuming it.

Whether it’s simple tweets on Twitter, or long-form articles, entrepreneurs would do well to start writing more frequently. Take the time, put in the effort, develop the muscle — it’s not easy, but, ultimately, it’s worth it.

What else? What are some more thoughts on producing content, not just consuming it?

How Much to Raise When Times are Good

Talking to entrepreneurs lately, it’s clear we’re seeing some of the best valuations in nearly 20 years (hello, dot com days). This is especially true for startups with limited/no metrics as well as ones that have outstanding growth rates. In the middle — a startup with decent growth and decent metrics — times are pretty normal and valuations are much more reasonable.

Last week, when asking an entrepreneur how much they were targeting for their next valuation, he said he wanted the highest valuation possible along with personality fit with the new investor. On the surface, this makes sense — minimize dilution and enjoy the journey. Only, there’s a piece missing here, and it’s an important one: if you raise at too high a valuation, the business might not be able to grow into it, and the downside can be catastrophic.

Two weeks ago I talked to a different entrepreneur that’s raised almost 5x the equity as they have in annual recurring revenue, and the business isn’t growing fast (< 30%). Unfortunately, the Rule of 40 has been broken for years in this case. Too much money was raised at too large a valuation and the business hasn’t performed. Now, the cap table is broken. Lots of pain is imminent (cram down, down round, common equity getting wiped out, etc.).

When times are good, and exceptional valuations possible, find the upper in end of reasonable where the business can confidently grow into the valuation. The valuation might not be as glamorous as possible, but there’s tremendous value in resting easy knowing that even if the business falters a smidge, the last valuation is readily exceeded with time and the existing cash in the bank.

What else? What are some more thoughts on how much to raise when times are good?

When Freemium Works as a Business Model

Last week an entrepreneur mentioned they were thinking about introducing a new product with a freemium business model. Freemium, where there’s a free edition of the product along with a premium upgrade, has been a mainstay of cloud software for decades now. Only, it doesn’t work for most products.

Let’s look at when freemium works best. Here are a few characteristics:

  • 2nd or 3rd generation product – Once the market has been educated, and people know how to use that type of product, freemium works as users can jump in and be productive (e.g. Mailchimp was a 2nd generation product when it came out).
  • Fast time-to-value – Products that deliver value quickly work best for freemium such that users can understand and appreciate the product with minimal handholding (e.g. Google Docs where you can start typing immediately). Complex, complicated products don’t work well in the freemium model as there’s too much energy required to get value.
  • Viral distribution – Freemium really shines when the very nature of using the product propagates it to other users. Think about Calendly links for scheduling meetings, Dropbox sharing of files to different people, etc. Distribution is one of the most difficult aspects of B2B software, and the most successful freemium products have a heavy viral component.

Freemium, when it meets these criteria, is one of the best business models around due to elegant product distribution and scalability. The next time freemium comes up, see if it has these three characteristics.

What else? What are some more characteristics of the most successful freemium products?

Constant Course Correction on the Entrepreneur Journey

Earlier this week I was talking to an entrepreneur and he shared that they’d just found product/market fit. With a few dozen customers, and strong sales momentum, things are looking good for the startup. Naturally, I had to ask: was this the original idea for the company? As expected, it wasn’t anything remotely related to the original idea.

Almost every successful entrepreneur I’ve met wasn’t successful with the initial idea.

While some pivots are more dramatic than others, Jonathan Chambers chimed in that it’s constant course correction. Sometimes the current course needs minor tweaks (standard iteration) and sometimes a completely different direction is required (full pivot).

Plan for constant course correction on the entrepreneur journey. New information, new findings, and new innovations are part of the search for success.