I recently read an article by Tomasz Tunguz, a venture capitalist at Redpoint. Tunguz does a great job explaining the SaaS/Excel phenomenon. Essentially, Excel is such a common and accessible software that many professionals use it for an array of job needs, from calculations to simple CRM. But as companies and teams grow, their job needs become more complex and users no longer know how to make Excel work for them. Instead, they need a new solution. Enter any of hundreds of SaaS companies, who step in ready to solve a pain point with a crisply packaged service and a compelling demo.
Tunguz’s article got me thinking about how low the barriers to entry really are for starting a SaaS company these days: identify a problem, hire a developer, and boom. Over the past 10 years, AWS and Microsoft and Google have made it so easy to develop and deploy cloud-based applications and instantly create something massively scalable. So, the question arises: If everyone can scale, why don’t they? As an investor, I see a lot of SaaS ideas come and go, and I’ve even invested in some failures myself. Through that journey, I’ve identified several qualities of successful SaaS companies and entrepreneurs. If you’re running a SaaS company, keep these five things in mind as you work to grow your business. If you’re an investor, examine the SaaS companies in your portfolio through this lens to assess whether they’re headed for success, or whether it’s time to make some adjustments.
1. They start with a genuinely sticky product.
The ultimate question is this: If you were to turn off the servers or take the product away from customers, would they panic and scream about it? "Where did this go? I need it back! I can't function without it!” If this would be their reaction, you’re golden. If not, the company is only a nice-to-have, and you need to get closer to the problem.
2. They really understand their customers.
Many CEOs think that once they get a few customers or hit that first million dollars in revenue, they have it all figured out. They think they've got the product exactly where they need it to be. After all, it’s selling! But that’s a dangerous assumption to make. You may have no idea how your customer is actually using your product, or how else you could be adding value. Companies best poised for success get close to the customer, understand how they’re using the product, and continue to adapt it to best suit their needs.
3. They’re the turtle, not the hare.
A misconception among many entrepreneurs is that once they land an investment, they think they have to move rapidly. It’s that West Coast mentality of go-go-go. But instead of running out to burn the money quickly (and perhaps not so wisely), successful companies are typically more patient. They’re methodical about their spend, in fact. And, they aim for profitability above all else, because they know once they’ve achieved that, they really can control their destiny.
4. They evolve beyond a technical founder.
Typically, SaaS companies start with a technical founder, which is great. It’s important to have top leadership that understands the nuts and bolts of the technology. But once a company hits a certain point of growth, it's time to bring in a business leader who truly understands how to cultivate and scale a business.
5. They don’t skimp when hiring talent.
In addition to having a strong business leader at the company’s helm, most successful companies also have rock stars for each of their functional areas. Of course, to get A-list players, you’re going to have to pay for them. In my experience, CEOs rarely regret spending more once they see the impact a seasoned professional can make. This is especially true if your company has an intention to sell to enterprise customers. That process is incredibly difficult to navigate if your marketing or sales executives have little experience working with or selling to a major company.
Based on your own experience, what other traits of successful SaaS businesses would you add to this list?
About the Author
Cres Ferrell is Vice President at BIP Capital, a venture investor in the Southeast serving entrepreneurs, investors and operators. Cres currently focuses on SaaS businesses and how to apply their growth to new markets. A non-traditional VC, Cres began his career in engineering after graduating from Georgia Tech, and went on to spend 15 years working for corporations in manufacturing, retail, consumer products, business services and consulting. Cres established himself as a successful entrepreneur after building and selling two prior companies - COLDfire Technology and 4th Strand, with a greater than 50X return to investors. Follow Cres on Twitter @cresferrell.