You Can Never Over Invest in Product

One of the phrases I’ve heard a couple times in the past week is “you can never over invest in product.” The idea is that once you have product/market fit and a repeatable customer acquisition model, sales and marketing is always out in front of product development. There’s a natural tension between the go to market teams and the product/engineering teams, but often there’s an imbalance. Product development and engineering have nearly infinite economies of scale when combined with a great market.

Here are a few reasons why you can never over invest in product:

  • Finding great software engineers, UI/UX professionals, and product managers is really hard. No matter how fast you’d like to hire, it always takes longer than expected.
  • Software products have almost no marginal cost and great economies of scale making each incremental prospect signed and customer renewed that much more valuable. Better products make for happier customers.
  • Market opportunities come and go. If there’s a really special opportunity at hand, the opportunity cost of not winning the market is enormous.

Once entrepreneurs are in the growth stage of the business, you can never over invest in product. An amazing product has so many benefits, and opportunities.

What else? What are some more thoughts on the idea that you can never over invest in product?

Successful Startups Average At Least One Pivot

Recently I was talking to an entrepreneur about his startup and he lamented that they’re now on their third idea. Idea one failed. Idea two failed. Now, after another pivot, they’re excited about idea three. I paused, looked up, and shared that almost every successful startup I know wasn’t successful with their original idea.

I’d bet that successful startups average at least one pivot. One of the hottest startups in town is on their third product after two pivots and a tremendous amount of iterating.

Here are a few ideas why pivots are so common:

  • Unvalidated Ideas – Most entrepreneurs start with an idea and then go looking for a market. Unfortunately, the initial idea is almost always not viable (see customer discovery).
  • Lack of Market Understanding – After jumping into a market with an initial idea, more opportunities start appearing, often related, and it becomes clear there’s a better direction. Time for a pivot.
  • Poor Unit Economics – Many times a product is working and a handful of customers like it. Only, the cost of customer acquisition relative to the price the market will bear don’t match up. Meaning, if it costs thousands of dollars to sign up a customer, and the customer is only willing pay to $50/month, the business model doesn’t work.

Entrepreneurs would do well to recognize that most successful startups go through a pivot and that it takes time to find an idea that works.

What else? What are some more thoughts on the idea that successful startups average at least one pivot?

Annual User Conference to Catalyze Internal Departments

With the Amazon Web Services annual conference last week (see the TechCrunch article), and all the great enhancements they announced, it reminded me of the power of an annual user conference to catalyze internal teams. There’s nothing like a hard and fast date to sharpen the focus and rally the team. Once a critical mass of customers is reached — say 200 — every software company should run an annual user conference.

Here are a few thoughts on different internal departments and an annual user conference:

  • Sales – Annual conferences are a great event for prospects and partners to both build rapport and close more deals. The human element of hearing success stories and meeting happy customers is incredibly powerful.
  • Customer Success – Most customer success teams help customers over the phone and the Internet without a face-to-face component. The annual user conference provides a mechanism to connect the sound of someone’s voice to the actual person, and build the relationship further.
  • Product Development – Engineering teams often struggle the most with hard deadlines and deliverables as product development is part art and science. An annual user conference is one of the best ways to get the engineering team focused on a major upgrade.

Annual user conferences are a great way to build community and focus the internal departments with a firm deadline. Entrepreneurs would do well to incorporate an annual user conference once they have modest scale.

What else? What are some thoughts on annual user conferences to catalyze internal departments?

The $15 Million SaaS Revenue Plateau

One of the challenges for SaaS startups that hit the growth stage is stalling revenue right around $15 million. After finding product/market fit and a repeatable customer acquisition model, things look great. Only, the $15 million recurring revenue milestone turns into a plateau, and not another simple number on the way towards serious scale ($100+ million). What gives?

Here are a few reasons why SaaS startups stall at $15 million in revenue:

  • Leaky Bucket – As the customer base grows, the number of customers that churn each month grows as well. Eventually the amount of new revenue signed will equal the amount of revenue lost unless the renewal rates are high and the customer expansion rate is strong.
  • Lead Velocity – Often, when starting to scale, there are a small number of lead sources that provide the bulk of the leads. Only, as the business grows, the lead volume from these sources don’t scale resulting in growth challenges.
  • Market Size – While entrepreneurs talk about the amount of money spent in a market, the reality is that a much, much smaller percentage is spent on new software each year in that market. Most markets are smaller than what people think.
  • Internal Challenges – Organizational health is much harder than it appears. Once the organization passes 150 employees (Dunbar’s number) things get even more complicated internally, and that affects growth.

SaaS startups in the growth stage often hit a $15 million revenue plateau and don’t recover. Recognize the impending challenges and work to minimize them.

What else? What are some more thoughts on why certain SaaS startups stall at $15 million in revenue?

Video of the Week: How to make hard choices | Ruth Chang

For our video of the week, watch How to make hard choices by Ruth Chang. Enjoy!

From YouTube:
Here’s a talk that could literally change your life. Which career should I pursue? Should I break up — or get married?! Where should I live? Big decisions like these can be agonizingly difficult. But that’s because we think about them the wrong way, says philosopher Ruth Chang. She offers a powerful new framework for shaping who we truly are.

Most Second Product Initiatives Fail

Recently I was talking with some entrepreneurs and the topic of second products came up. Here, a second product would be an additional product offering that’s a true, standalone product and not an add-on to the original product. Without missing a beat, everyone went around and said that every second product they launched failed.

I’ve been there. I’ve tried launching a second product multiple times and they all failed. Why?

Here are a few thoughts:

  • Lack of Product/Market Fit – Inevitably, a new product doesn’t accurately meet the needs of the customers. Even with one product that does have product/market fit, it’s incredibly hard to build a second one.
  • Must-Have vs Nice-to-Have – Very few products are a must-have. The chances are high that while the first product was a must-have, the second product was a nice-to-have.
  • Best People Challenge – With one product working, the likelihood that the very best people are assigned to a new product is low. And, if they are assigned to the new product and the first product starts to have issues, they’ll be pulled back to the first product immediately.

Second products can work but entrepreneurs would do well to maximize every element of their core product before expanding.

What else? What are some other reasons why second product initiatives fail?

Funding Dynamics for Modest Growth SaaS Startups

Continuing with the discussion around SaaS funding valuations and forward multiples, I was talking with a growth equity investor out of the Northeast yesterday and the topic of valuations came up. Now, growth equity typically targets startups with $10 – $25 million in annual recurring revenue and makes a sizable investment ($10+ million). For this particular firm, they focus on SaaS startups with modest growth between 10% and 30% where they believe the companies can continue to grow for a number of years, but are often overlooked by the larger funds because they don’t have a high growth rate (e.g. 60%+ growth per year).

Here’s how they think about these investments:

  • Growth rate still drives valuation with typical valuation range being 3 – 5x current annual recurring revenue (but usually closer to 3 – 4x)
  • Return expectations are targeted at 3x cash on cash in 3 – 5 years (imagine buying in at 4x run rate, the company doubles in size over a few years, and a buyer comes along that pays a higher multiple)
  • Forward multiples are less relevant as there’s not as much competition among investors driving valuations up
  • Metrics like gross margins and renewal rates, as well as the management team and market size, also play an important role in valuation

Entrepreneurs looking to raise institutional capital at a large multiple need to have a great growth rate to go with it. Otherwise, the valuations are a much lower multiple of a run rate.

What else? What are some more thoughts on funding dynamics for modest growth SaaS startups?