Category: Strategy

When analyzing Software-as-a-Service (SaaS) market types, it’s helpful to have different frameworks or patterns to compare against. While people like to talk about SaaS in general, the type of market a particular SaaS product is targeting greatly affects things like sales cycle, potential investor enthusiasm, and overall opportunity.

Here are three SaaS market types to think through:

• New Technology – Are customers replacing a legacy product or is this the first time they’ve ever bought a product like this because it’s a new technology? Almost all of Pardot’s customers had never used marketing automation before.
• Middlemen – Are customers replacing a legacy service that’s traditionally used middlemen (e.g. benefits, financial planning, etc.)? In this case, they’re spending money but not necessarily on a SaaS offering.
• Labor Intensive – Is the outcome that the SaaS product provides already achievable but labor intensive? Things like building a list of prospects (SalesLoft) or integrating ecommerce systems (Kevy) can be done by hand, but are time consuming and error-prone.

When evaluating an opportunity, it’s important to understand the market type and corresponding nuances. No type is perfect but each has example success stories.

What else? What are some other SaaS market types to consider?

Recently I was talking to an entrepreneur that was making good progress in his startup. After signing a couple dozen customers it became clear that there were two strategic directions to take the business, each with their own pros and cons. We got to talking more about the strategic directions, and even after drilling in, both appeared favorable.

Here are a few questions to ask when comparing two strategic directions:

• Of the existing customers, how many fit the proposed directions? How many are good fits vs OK fits for the new directions? Why?
• Which direction has the largest total addressable market?
• Which direction is growing fastest?
• Which direction has the most competition? How innovative is the competition (e.g. most incumbents have difficulty innovating)?
• Which direction excites the team the most?

Tweaking the strategic direction in a startup is more common than expected. In fact, there are many success stories of startups that started doing one thing and ended up doing something entirely different. Regardless, comparing strategic directions is a normal part of the journey.

What else? What are some more thoughts on comparing two strategic directions?

Larry Cheng, Managing Partner at Volition Capital, has a new post up titled My Favorite Value Proposition is Admittedly Boring. The idea is that after 16 years as professional investors, he’s zeroed in on his preferred type of tech startup that has the following criteria:

• Existing Market – People/companies are already paying for the product or service (it’s not a new market)
• Cheaper Offering – Instead of better, faster, and cheaper, the focus is on the cheaper part of the equation
• Structurally Defensible – At it’s core, this new technology or delivery model is different enough from the incumbent that it’s not feasible for the incumbent to switch (many companies have died clinging to their golden goose)
• Sustainable – Like the transition from buying in stores to buying online, it has to be innovative and sustainable (ecommerce isn’t going away anytime soon)

My personal style as an entrepreneur is to invent new products whereby the business buyer didn’t have a solution before, and not the cheaper offering route. Thankfully, there are a number great ways to build successful companies.

What else? What are some more thoughts on a cheaper offering that’s structurally defensible and sustainable?

Entrepreneurs love to talk about viral customer acquisition — the idea that by the very nature of the how the product works, users will introduce other users to it. Facebook is one of the most popular examples whereby the viral nature of their product helped them acquire over 1 billion users. David Skok has a great article up titled Lessons Learned – Viral Marketing. Only, most of the viral marketing discussion is geared around the business to consumer (B2C) startup world and not the business to business (B2B) startup world. So, I started thinking of B2B applications with a viral component. Here are a few examples:

• EchoSign – Whenever someone requests an e-signature from another person, that person is introduced to EchoSign and its benefits
• Calendly – Whenever someone requests a meeting and the recipient asks them to self schedule it with Calendly, that other person is introduced to Calendly and its benefits
• Mailchimp – Whenever someone sends out a newsletter, the recipients see a “Powered by Mailchimp” message at the bottom of the email, introducing the brand and service many times over

B2B examples of viral marketing aren’t as common but they’re still plentiful. Entrepreneurs would do well to look for ways to incorporate a viral marketing element to their startup if it makes sense.

What else? What are some other examples of viral marketing within the B2B world?

Jason Cohen, founder of WP Engine, has a great new post up titled The Lindy Effect on Startup Potential. I had dinner with Jason a few years ago before a Capital Factory Demo Day and he’s as thoughtful and passionate in person as he is in his writing. The idea in this most recent post is that the Lindy Effect, understood as the expected lifespan increases according to the length of its current age, directly applies to startups. Said another way, the longer you’ve been doing something, the longer it’s going to last.

My favorite part of the post is where Jason applies the Lindy Effect to startup growth when he says:

You can probably double your size, doing roughly what you did to get to this point, but 10x will require innovation.

I’ve seen this happen several times. A startup achieves product-market fit and a solid repeatable customer acquisition process. Everything looks great, and then at a certain point, the growth stalls as the primary lead generation channel only has so much capacity, no matter how hard it’s pushed. Just like the lead velocity rate is the most important metric in SaaS, if the primary lead source peaks or additional quality lead sources aren’t found, growth won’t continue.

Doubling the current size is likely but getting to 10x the size requires innovation.

What else? What are some more thoughts on Jason’s post and the idea that 2x growth is likely but 10x growth requires something new?

Recently I had the chance to watch the On Doers interview of Allen Nance and hear him talk about the quest to build billion dollar businesses. Silicon Valley has averaged one new billion dollar tech company per quarter for many years now while most cities, Atlanta included, are lucky to have one billion dollar tech company every five years (Air Watch was the last Atlanta one and sold for well over a billion in 2014). Allen’s new venture, Tech Square Labs, aims to create two billion dollar tech companies in the next 10 years.

Earlier today @danprimack tweeted a billion or bust comment from a corporate development person:

To me, most entrepreneurs don’t set out to build a billion dollar business. Most want to solve a problem, build a great lifestyle, create jobs, and control their own destiny. I’m a fan of thinking big and shooting for a billion dollar company, but realize it’s not commonplace. Entrepreneurs would do well to outline their goals as early as possible in the entrepreneurial process and make them known to anyone that will listen.

What else? What are some more thoughts on having a stated goal of building a billion dollar company?

Over the past few years I’ve invested in a number of lean startups and a few heavy startups. As it sounds, a heavy startup is nearly the opposite of a lean startup: a high burn rate from the beginning and an assumption that the original idea will be successful. While the heavy startups are making progress, the lean startup model has been superior.

Here are a few lessons learned from investing in heavy startups:

• No matter how great the idea sounds, it always hard to build a product that customers love and where customers can be repeatedly acquired
• Every successful business requires multiple product iterations, and sometimes full pivots, before arriving at the product that takes off (thus, it’s important to plan accordingly with financial resources)
• Regardless of how much cash is in the bank, it will be burned within 12 months, so the more cash in the bank, the higher the monthly burn rate — entrepreneurs love to spend money to get things done (myself included)
• Many aspects of the customer discovery and product/market fit process take time no matter how many people are on staff (similar to the idea that adding software engineers towards the end of a project actually makes the project take longer — see The Mythical Man Month)
• Laying people off is much more painful to morale compared to running on limited staff and waiting to hire until the requisite revenue growth

Heavy startups, while more limited now, are still a part of the startup ecosystem. My recommendation is to go the lean startup route and delay raising a large amount of money and hiring a big team until product/market fit is in place and a repeatable customer acquisition process has been proven.

What else? What are some other lessons learned with heavy startups?

Last week I was talking with an entrepreneur about their new product focus. After digging in, he volunteered something that really stuck with me: their new direction connects the product with the wallet in a way it never was before. Similar to the idea of candy, pain-killers, or vitamins, products that can clearly demonstrate an increase in revenue for the customer are more desirable.

Here are a few thoughts on connecting the product to the wallet:

• Something that saves time is less compelling compared to something that makes more money (more bonuses are tied to revenue growth than decreasing costs)
• Products that provide value closest to where money is made are easiest to show value (e.g. a sales tool is easier to attribute to revenue growth compared to a tool to manage meeting rooms)
• Case studies and ROI calculators are more compelling when it’s clear how the value is generated

Entrepreneurs would do well to connect the product to the wallet, whenever possible. Products that help generate revenue are more compelling than products that save time or money.

What else? What are some other thoughts on connecting the product to the wallet?

Recently I was talking with an entrepreneur about his startup and the concern about potentially not being able to hire fast enough. After asking a few questions about product-market fit, repeatability in acquiring customers, burn rate, and more, it became clear that the business wasn’t close to the scaling phase. The entrepreneur was worrying about a non-issue.

Here are a few thoughts on nailing the basics:

• Ensure product-market fit is in place (see 5 Happy Customers With No New Bugs)
• Prove that the customer acquisition process is repeatable (see The Four Stages of a B2B Startup)
• Develop an Internal Meeting Rhythm and ensure everyone is aligned with a Simplified One Page Strategic Plan
• Create a strong corporate culture (see 23 Corporate Culture Ideas for Entrepreneurs)

Entrepreneurs would do well to nail the basics before worrying about scaling the business. Scaling brings on an additional set of challenges best handled with a strong foundation.

What else? What are some other thoughts on nailing the basics first?