There is a disconnection between the traction in sales and recurring revenue that a saas startup will be able to generate, and the actual traction that many founders and venture capitalists expect.
A startup goes through many stages, after seeing the birth and traction of many saas businesses for over 4 years, I have identified the following stages:
- Saas Product Discovery.
- Saas Early stage and search for saas product market fit.
- Saas Growth and go to market fit.
- Saas Scaling
Saas Phases to market fit
Saas Product discovery
At this stage, a saas is a solution to a problem. In the best of cases, the founder has discovered a need, and thanks to his years in the sector, has defined an MVP, according to his and his team’s way of understanding it, but there has been no real significant contact with the potential buyer persona.
This is one of the phases of a Saas, in which it is more complicated to define a product, since a software “invented in an office” has been implemented, according to the team’s interpretation.
A product needs to have contact with customers, sooner rather than later is better, and the first launch is complicated, it never seems to us that it is right to launch.
During the last few years, I have personally seen only one case of exponential growth (more than 250 startups a year pass through the Lanzadera programs) and great traction, from the product discovery phase, Internxt.
Internxt went from 0 to 30,000 euros MRR in less than 4 months, to 50,000 euros MRR in just over 1 year and 100,000 MRR in 2 years. Always with an efficient cash management, close to break even. Today it has investments from Angels, Wayra or Balaji Srinivasan, former CTO of Coinbase.
However, after more than 1 year of product development, and with a strong b2c component.
What should a saas take into account in the product discovery stage?
Not to build a big layer of technology. The most important thing is to receive feedback from customers and iterate the “dispatch product”.
Fail fast and cheap, you have a 99% chance of not getting it right.
In these early stages, I personally find interesting people coming from consulting backgrounds, since, thanks to doing customer service, they know their needs and have been able to identify a problem.
If you raise a round at this stage, in general, it usually costs much more, and your valuation is usually much lower, unless you are top founders with extensive experience.
There are exceptions, such as Abacum, which raised an initial round with a power point and there is a good valuation for that stage.
You can offer services to finance yourself. But be careful not to prostitute yourself with service.
This is about reducing risk, and you can start automating and productizing services, as we talked about in this post
Product discovery action plan
Build a good, nice and cheap product. It is not enough with mvps that do nothing.
The most important thing at this stage is to discover needs, without spending too much.
Relying on no code or low code tools can give you speed, but keep in mind that when you validate, in most cases you will have to start building the product again without no code.
Don’t freak out with the technology, you must have contact with the customer, to see if you really solve his problem, or the one you think.
Failures with a saas mvp:
- Testing with customers too late.
- You don’t need a CTO, you need a CPO, a product guy.
- Focusing on a market that is not big enough or not scalable enough.
Early Stage: Go to market and search for saas product market fit
After a few months, it seems that the startup has identified a problem that may have an interesting market, has productivized some processes and the first sales start coming in.
Until this stage, the startup was not a company, it was an expensive hobby.
You start projecting the excel, and you go from 0 to 30,000 visits on the web in a short time. Your sdr’s are able to generate 30% of conversations … excel projections hold everything, and you break even after the first round.
Actually what I’ve seen happen the most is :
After almost 1 year of product development, the sales process begins.
Has anyone thought about the go to market strategy during this time?
Another year of sales goes by, they have not been able to generate relevant sales and they have little cash left.
SaaS startup that defines its value proposition around big corporates. They are able to reach these elephants, close their first contracts and develop a product by listening to their needs.
Over time, they realize that sales cycles are very long:
- More than 4 months to close the contract.
- Months of compliance.
- Plus the actual integration and implementation time.
Making a product is hard, but selling it is the really hard part.
With all this, they decide to go down a step and define a value proposition for an average SME. But then, the way of selling changes and the product must adapt.
Ease of implementation.
Define a new pricing, with new margins.
New go to market strategy.
All this is expensive.
Ei, this is the good case.
Needs at saas early stage:
- You can no longer rely only on no code, you have to hire a technical team.
- The main objectives are to attract sales opportunities, don’t get obsessed with analytics and metrics. But keep them on your radar. The box is your friend.
Failures in saas early stage
- It is difficult to define a pricing strategy. We are usually always afraid and tend to be cheap.
- Not talking to customers enough.
- You don’t need a CTO, you need a product guy.
- Focusing on a market that is not big enough or not scalable enough.
- You already need to introduce certain product usage measurement tools, but don’t get obsessed with it, start simple, without mortgaging your future.
- There is a lead generation problem, don’t get obsessed with improving conversion rates.
- The cash flow sheet is your friend, you should be obsessed with it.
If you want to get a round, there are no metrics to rely on, so other factors must be taken into account:
- Founder experience.
- Problem and market size.
- Time to market.
- Hype of the market or that you are able to create.
- As they said in the Silicon Valley series, you can always say you are pre-market, and you won’t have to prove metrics.
But, do not forget, that in fundrising you also compete with other startups.
Saas Growth and go to market fit
It seems that sales start to come in, this gives the team wings, but it’s hard to get that recurrence. Your MRR is more like a saw blade than a stick.
The typical seed stage startup does not have the channels, processes and sales skills to be able to sell fast enough to achieve that growth.
We hear about product led growth, sales machine, viral adoption and network effects… But the reality is that most startups acquire their first 20-30 paying customers by pick and shovel.
What may seem like a replicable and predictable sales process, as the books tell 👿, is more like a founder-driven sale, getting down in the mud, with a melee for each new sale.
The party starts, when the founders have to define a sales playbook, and hand the sales process over to their first SDR team
Everyone has read the books that everyone recommends: The predictable revenue, The BLA BLA BLA BLA sales machine… but putting it into practice, with new hires and without a well-defined value proposition, is really complicated.
Most of these first experiences end up with the poor SDRs not working:
He just didn’t sell.
He just doesn’t know the product and hasn’t been able to understand what we do….
It’s just that…
But you really have to think about it…
Have we done a proper onboarding for it?
Have you defined and validated the sales playbook, which defines each sales process and the situations that can be encountered?
After this setback, the go to market plan collapses and although the product fits the market, the company fails to achieve the sales targets set to be sustainable or to fight the next round of investment.
Each process, each stage, takes time and carries an opportunity cost. There are no shortcuts, a SaaS startup in search of Go to Market fit, must go through the following sales stages:
- Founder Sales. The Founder Sales phase is successfully completed when the founders have been able to sell approx. 30 paying customers, depending on size and ticket, of course. These are usually similar companies buying for similar reasons.
- Professional Sales. The Professional Sales phase will be successfully completed once the founders team has been able to disengage from the sales process, at least in part, and the sales team has been able to sell to several customers on their own.
- Scale b2b sales. The sales escalation phase is successfully completed and you can claim to be ok for the market when a large group of new sales people have been successfully recruited and onboarded and are able to achieve their targets. These new salespeople have no longer been trained by observing the founders, but through a training program and a sales playbook.
Problems of a SaaS in search of Go to Market fit
You have to tread with caution, because if you move to the professional sales phase before successfully completing the founders’ sales phase, you are likely to waste a lot of money on the b2b sales team, as they are stumbling around, not knowing exactly what to do.
Similarly, if you try to move from professional sales to sales at scale, without first documenting the sales process and defining a playbook, you may be wasting a lot of dough on a sales team that struggles to hit targets.
Funding rounds also often coincide with these phases. Venture capitalists like to fund you until the next milestone, to minimize risk and thus increase your valuation. Watch your cash flow.
Saas Market fit
Saas Market fit needs:
- Compensate team mix between sales outbound and marketing inbound.
- Define processes in all areas.
- Measurement and calculation of key metrics is key in a saas: Cashflow, CAC, LTV, Churn are the daily bread.
- Prioritization and goal setting between departments.
This is a stage that, to be honest, I have seen very little. I have not lived this situation beyond 4 conversations. So I can’t say much about it, but I couldn’t skip this stage 😉.
This stage is when everything explodes.
In some developments technical debt has accumulated, quiet it is impossible to escape it.
You need to C-Level to get to the next level. Even some founder will have to step aside, and leave the team, either because of personal issues or because he can no longer grow at the pace the company needs.
And this is the end of today’s post, I hope you have felt identified with any of these stages, either from outside or involved in the whole thing and share this classification with me.
I’m glad to know your experience, to have feedback and that you can share it to help me reach more people.