80% of venture capital investments take place in the enterprise

From Tomasz Tonguz
Quote in SaaS & Tech Growth Strategy

Characteristic 1: Product Is Core to the Operation of the Business The product is essential to the operation of a customer’s business. For example, Zuora enables subscription billing; Expensify manages employee expenses; ZenDesk builds customer support systems. Customers can’t function without it.

Characteristic 2: Cost/Value Proposition is Straightforward The product is either cheaper than the alternative: hiring an engineering team to build and maintain a custom implementation of the product;

Or provides network effect benefits otherwise impossible to find: LinkedIn’s network effects drive the adoption of LinkedIn’s applicant tracking system;

Or offers sophisticated technology that is difficult to replicate: Infer builds machine learning models on top of sales data to improve company performance. Not every company has ML expertise.

Characteristic 3: Finances Its Own Growth
The company benefits from negative working capital and shorter time-to-market.

Negative working capital means customers pay at the beginning of a month or quarter or year to use the product. These customers pay to improve the software over time by providing cash up front, reducing the cash needs of the business. Because customers are paying to improve the product, rather than buying a “production-ready” enterprise product, the company can go to market much earlier in their development.

At the outset, the company targets the less sophisticated SMB segment which doesn’t demand the compliance, heavy security and integration features needed by enterprise customers. This also decreasing time to market and provides revenues and product feedback in the short term.

Characteristic 4: Efficient Sales Model
The company is able to recoup its cost of customer acquisition, be it online marketing or inside/outside sales, in less than a year. Ideally, the company offers 12 month contracts and the company can be profitable on a customer before the customer has an option to churn. Hand-in-hand with this idea is strong customer retention.

Characteristic 5: Market Leadership The company is already a market leader, is on the path to becoming the market leader, or is operating in a segment with little viable competition. In SaaS, sales and marketing execution are critical to the success of the business. Competition increases customer acquisition costs and increases sales complexity.

More SaaS + Software Stats

Our experiences with SaaS startups indicate that they usually start with a couple of lead generation programs such as Pay Per Click Google Ad-words, radio ads, etc

High-growth companies offer a return to shareholders 5 times greater than medium-growth companies

Since churn is so important, wouldn’t it be useful if we could predict in advance which customers were most likely to churn?

SaaS companies in the $7.5MM-$15MM range are among the fastest growers

The fastest growing SaaS companies raise an average of $9.5M in Series A funding

Non-renewal rates are higher than gross dollar churn rates and higher for shorter duration contracts

73% of organizations indicated nearly all their apps will be SaaS by 2021

Customer’s lifetime value (LTV)= average revenue per user (ARPU) / monthly churn rate

The statistic shows the worldwide IT spending on enterprise software from 2009 to 2020.

Companies that spend more on sales and marketing (as a % of revenue) generally grew at a faster rate than those that spent less

More SaaS & Tech Growth Strategy Stats

The median average contract length is 1.3 years and the average billing term is seven months in advance in 2016. Comparable to 2015, with average contract length shortening from 1.5 to 1.3 years and average billing period increasing by one month from 2015 to 7 months

The statistic shows the worldwide IT spending on enterprise software from 2009 to 2020.

As companies scale their growth engines, a slightly-above-average churn rate becomes harder and harder to offset with net new revenue growth, especially when the goal is to outpace it by 4x

Three uses for the SaaS Guidelines

For a SaaS business of almost any scale, the valuation impact of better retention is in the tens of millions over time

In 2018, the market size of information technology outsourcing amounted to 62 billion U.S. dollars.

Median annual gross dollar churn was 8%, 7%, 6% and 8% in 2016, 2015, 2014 and 2013

55% of SaaS companies rate Customer Retention as the key metric to measure

The average Quick Ratio of fastest growing SaaS companies (those with a CAGR of over 50%) is 3.9: generating $3.9 in revenue for every $1 lost to revenue churn

The average SaaS company spends just 6 hours determining their pricing strategy