An interview with Lauren Kelley of OPEXEngine and David Orfao of General Catalyst.
Lauren Kelley is CEO and founder of OPEXEngine, provider of financial and operating benchmarks for the technology industry. At a recent General Catalyst dinner, she discussed how to create value in fast-growth SaaS companies. General Catalyst Managing Director David Orfao hosted the event, which was attended by CEOs and CFOs of the Boston startup ecosystem.
In the following Q&A, Lauren and David share lessons from each of their 25 years of technology management, tailored for SaaS companies.
Q: What are the do’s and don’ts in building a successful SaaS company?
Lauren: SaaS is more complex and slower building than traditional software where you book revenue up-front. SaaS has many more moving parts, and it can take quite a while to build. Once you hit momentum, it builds fast after that and you have to scale quickly. If we can talk about metrics that are the most important and how they change, clearly, it is cash early on. But fundamentally, subscription businesses are all about customer acquisition, retention and upselling, so the metrics reflect those goals.
Once you hit momentum, it builds fast after that and you have to scale quickly.”
In the early stages, you are looking at your customer metrics and lead-to-close metrics in order to find tune your model, and target the “right” customers. At this time, renewel rates reflect whether you’ve hit a good sales and marketing model and are ready to scale. Later on as you scale, renewal rates identify inefficiencies in the handling of customer renewals.
Q: What are some mistakes you see companies making?
Lauren: The biggest mistake I see is not having a clear understanding among all members of the management team and investors about the company goals and how to achieve them. Again, SaaS is a more complex business model in which many moving pieces need to come together. In the past, the management of some tech companies functioned by conflict and out of conflict came excellence. In a SaaS business, that doesn’t work. The lone cowboy approach just doesn’t work as well here.
The biggest mistake I see is not having a clear understanding about the company goals and how to achieve them.”
And finance plays a much stronger role in a SaaS business. The traditional finance perspective of focusing on profits and traditional accounting has to change. Finance has the data and the analytical capabilities to help the rest of the team drive a SaaS model. But finance has to be forward looking and support investing up front for results later, while experimenting and iterating on the model. These aren’t the traits of the traditional finance manager.
Q: What about the importance of direct versus channel sales?
David: It’s very hard to get to $100 million without a good partner ecosystem. And building a partner ecosystem in the SaaS world is different than in the perpetual license world or single-tier or double-tier distribution with resellers and value-added resellers.
It’s very hard to get to $100 million without a good partner ecosystem.”
Lauren: That’s right. Look at Salesforce. Even though they had a direct sales organization, they built a very strong partner ecosystem that helped them get to $1 billion and then $4 billion. In the same way, HubSpot did an excellent job of building an ecosystem that they sit in the center of.
Q: What’s different about building a partner ecosystem in a SaaS company?
Lauren: It’s not so much about establishing resellers and VARs. It is about building a channel of partners who are evangelists and can help install and customize your product. Today, there are so many individual consultants and small groups of consultants.
It is about building a channel of partners who are evangelists and can help install and customize your product.”
Companies like Salesforce and HubSpot have harnessed their energy and given them something to make money with. They also taught them how to sell a solution, not a technology — remember SalesForce’s “no software?”
Q: So it’s more important to focus a partner ecosystem on sales than on the technology?
Lauren: The focus is on a solution to a business problem. Frankly, Salesforce isn’t as intuitive and easy to use as it used to be, but as a business user, I’m not going to take the time. Because you’ve taken IT out of the picture with a SaaS product, you need to do something to help the buyer use your product. So, a lot of software companies are building out professional services in order to accelerate customer acquisition and make their product sticky. They might be better served investing in a partner ecosystem, giving partners better training and tools and providing corporate “air cover.”
Q: In terms of growth and exits, what do you expect in the New Year?
Lauren: All venture-backed firms are getting the word that partner ecosystems are important, we see that in the data. It’s important for revenue growth, churn reduction, and building relationships for an exit.
In 2015, there will also be more attention to platform scalability, security and costs. Services and technologies are rapidly evolving and fast growth companies have to invest ahead of the curve, without over investing in a structure that is obsolete or overly expensive in a few years. This is another area where we are benchmarking and working to help companies benchmark hosting expense together with business results.
David: When thinking about growth and exits for SaaS companies, geographic, expansion will be key. Companies need to think about worldwide economies and establish themselves in North America, Europe and Asia Pac. This geographic diversification will allow SaaS companies to take advantage of worldwide economies and balance around the world. Companies that have a worldwide footprint are clearly more valuable when it comes time for maximizing shareholder value in an IPO or M&A process.
Q: Is there anything that we haven’t touched on that we should be discussing?
Lauren: With the overall SaaS market growing by 20% and if your business is growing by 50+%, finding, hiring and retaining great talent is going to be key in 2015.
David: In HOT employment markets, hiring the “best of the best” is always difficult. In these markets, you need to market your company’s vision, values and culture. Dedicating time to find the next generation of managers and individual contributors is critical to your company’s success. Spending time on college campuses, having creative job fairs and other activities to attract the next generation of employees is a must! This needs to be one of your key operating initiatives for the year and your fiscal operating plan or it won’t get the attention it deserves.