What does it take to build a high-growth SaaS company? Triple, triple, double, double, double (T2D3) is the answer, according to Battery Venture's Neeraj Agrawal.
Brad Feld describes the 40% rule based on a meeting with a late stage investor. The 40% rule is that your growth rate + your profit should add up to 40%. So, if you are growing at 20%, you should be generating a profit of 20%. If you are growing at 40%, you should be generating a 0% profit. If you are growing at 50%, you can lose 10%. If you are doing better than the 40% rule, that's awesome, he writes.
The question is, how do you achieve such a growth rate? What constitutes getting to these numbers?
Here's an outline.
1. Hire great people, quick
There are roughly three core roles that most SaaS companies focus their energies on: engineering, sales and support. It's the people that define how fast your problems are solved, how efficiently they will be resolved and how intelligently will the feedback be assessed as the next product iteration.
And all of this has to be done and achieved fast. Always be recruiting great talent who can not only solve problems, but help you take a step further in building a better relationship with your customers.
Which leads to the next point...
2. Faster product iterations
On the growth path, you're serving the existing needs of the customers through constant improvements and bug fixing, then building new features as you get feedback and work up on your vision for the product and thirdly, look at how innovatively you solve the next problem or product iteration.
All of this happens through your existing teams by dividing time or resources. Oftentimes, you're pressed for resources, in which case it's better to leverage Developer as a Service for faster product iteration by hiring developers quickly that can supplement your existing team.
3. Sales fixes everything
Guy Kawasaki is popularly known to have said, "Sales fixes everything." He writes, "As long as you have sales, cash will flow, and as long as cash flows, (a) you will have the time to fix your team, your technology, and your marketing; (b) the press won't be able to say much because customers are pouring money into your coffers; and (c) your investors will leave you alone because (i) they will focus on companies with weaker sales and (ii) they won't want to jinx your success."
Sales is an important component for SaaS companies that are on the growth path. Relying on inbound marketing alone will not get you the desired returns. Your SaaS company has to invest in an outbound sales and marketing strategy at the same time, reaching out to potential customers.
HubSpot for instance does have a dedicated outbound sales team, contrary to popular belief. There are two ways of approaching this--one is to hire an internal team and go through the learning (investment heavy) if you're doing outbound sales for the first time, or hire an external agency to the likes of GravityLeap to help you get started quickly.
4. Getting pricing right
"Freemium is not easy, but when you get it right, it is awesome!" Brian Balfour, VP of Growth at HubSpot tells me. Pricing is tricky. It can either get people excited and convert/upgrade to a more solid value proposition, or result in a high churn.
According to Brian Balfour, there are four specific elements that make freemium model work really well for SaaS. One is the understanding that you're targeting an individual and if you plant the seed with them individually, it tends to spread. Most tend to go wrong pitching a B2B team driven products to individuals.
The second thing is that it's a really quick time to value. So, if your product requires a lot of education and a lot of setup, to get to that value it's not going to work. You're better off raising your prices and having a more hands on approach to it.
The third is that you have to have some form of referral and virality. The value of that free user base that never converts basically needs to work for you in another way, which is bringing in more users.
And the last, over the long term, you need a path to go from the individual account to the team account. Because that's where this model takes off. Dropbox and Evernote is a good example of this where they start with the individual and expand into the organization.
5. Reduce churn
A great way to go from a slow start to a fast growing company would be to reduce churn that you witness in your product.
"The issue of getting people back or SaaS churn is not always a product/market fit issue--it's that people are busy and they always gear towards the shiny object and they use it for 5 minutes. If in that 5 minutes they can't immediately get it, they may leave and forget to come back," Sujan Patel, co-creator of ContentMarketer.io, tells me.
He adds, "People forgetting to come back is not a problem with the product necessarily. It's something you can do with something like email nurturing to get them back. So, what I recommend is setting up email drip campaigns after you start talking to customers."
6. Build a value add
While the core product platform largely remains web-based for SaaS companies, a value added mobile app can always help in stickiness of your product. The best examples of value added apps in the SaaS landscape are those that provide a dashboard to its customers.
A mobile app as a value-add could eat into your mindspace and this is best outsourced by leveraging Developer as a Service. Here are some of its benefits.
And lastly, a few good resources/newsletters you must subscribe to for keeping in touch with the SaaS landscape are Hiten Shah's SaaS Weekly, SaaSClub and SaaStr.
This article was originally published in Inc. Magazine.