How to Build a Massive SaaS Business Selling to SMEs | SaaS Conferences | SaaStock 2017

[Music] all right good afternoon everyone very pleased to be here is my second time at SAS dock which makes sense because it's only been happening twice I've been told if anyone has questions while I'm talking I just realized oh another clicker does anyone have a clicker for me yeah I've been told that if you have questions just go to slide oh and log your questions there and I'll be happy to answer them at the end thank you Green is forward all right beautiful so I'm here today to talk about scaling strategies for SAS companies that sell to SME so the small and mid-sized business market I'll do a very brief introduction to myself I'm going to talk about the SME market talk about the challenges and selling to SMEs and some of the tactics that I've seen work over the years in selling to SMEs first of all who here is part of a SAS company that sells to the small and mid-sized enterprise market almost everyone perfect everyone else you can go this is not relevant for you beautiful ok quick intro so as said my name is Mark McLeod I've been in the venture back startup world since the late 1990s I spent 14 years as CFO for a number of VC back startups most notably Shopify and FreshBooks also spent three years as a general partner at Canada's largest and most active seeds today's venture fund where I was investing primarily in SME staffs companies you can't tell from my accent but I'm actually Scottish and I lived in Scotland for 11 years so I'm really happy to be on this side of the pond again I now run a company called sure path Capital Partners so we are a boutique investment bank we raise growth capital for companies we exit companies we have a very deep focus on SME SAS companies we our headquarters are in Toronto Canada and we have an office in San Francisco as well perfect segue from the last panel where folks were talking about coming into the u.s. a big part of our value to European companies is helping them either raise capital in the US or ultimately get bought in the US what I've seen over the years is that most of the buyers tend to be North American and the big outcomes from any part of the world at some point end up having us institutional investors on the cap table so that's a big part of why I'm here it's not just for the guiness just a couple of deals that we've closed we've been closing about a deal a quarter I won't spend any time on that and get into SME as I said we have a really simple goal for our firm which is to be the leading advisor leading boutique investment bank to the global SME software market we have very deep relationships with all the buyers of those companies and all the investors who look at those kinds of companies and SME is the market that we love the most which is perfect segue into our talk so let's talk about SME so this is um this is us data but I think kind of the breakdown here applies across geographies there are 30 million small businesses in the US alone 60 million in the english-speaking countries and 600 million globally and as you can see the vast majority of them kind of ninety-one percent in the u.s. anyway tend to be pretty small and that trend I think is similar across markets we see a few trends that are kind of driving as I said it's already a massive market as you can tell right 30 million folks 30 million businesses in the US alone but it's actually growing a lot more in the coming years and that's why we're really excited about this market and it's growing really for a couple of I guess a couple of macro trends that we see one is a change in the nature of work it's increasingly rare for people to you know graduate from university and join some big company and go work there for the rest of their lives people are wanting more meaning more authenticity more flexibility and they're choosing to work for themselves either in whole or in part the other is just a change in demographics again I don't have a European stat for this but in the u.s. every single day 10,000 people turn 65 and so what you're seeing that obviously spans us just entrepreneurs that's everyone but what you're seeing is that just a turnover in entrepreneurial demographics where older generations of entrepreneurs we're very happy to run their businesses on pen and paper and Word and Excel but the new generation the people in this room absolutely will not they're gonna look on their phone first and if they don't find what they like there they're gonna look on their desktop browser they're gonna find something and try it and so whether they're its front office software or back office we see just many many categories of software that are gonna go through big growth as a result of these these two trends and the last thing I'll say here is that unlike kind of consumer and enterprise software which tend to be winner-takes-all or winner takes most kind of market dynamics an SME software it's so fragmented that there's always room for new players and similarly there's always room to to consolidate just one example so prior to launching sure path I ran finance biz dev & Corp dev for fresh books we competed with Intuit you know there's 30 million small businesses in the US Intuit had a three decade Head Start and they had seven million of those 30 million small businesses so it's not nothing but it's not the kind of near monopoly that you see in other market segments so that's just just a little overview of the SME market and given that most of you in this room cater to that market hopefully I was kind of preaching to the choir there so let's talk about some of the challenges that you see when when catering to small business this is from Jason Lemkin mr. SAS sir he says that you know SMBs churn at a very high rate and so you're usually forced to go up market finding larger customers but if you can get the math to work then that's when the magic happens and some of the biggest outcomes are in SME so that's just setting the stage so churn is the single most important metric in any recurring revenue business that applies to enterprise consumer and SME so this is just a really simple illustration of the impact of churn just take a cohort of 100k of monthly recurring revenue and what happens to it over time at different churn rates if your churning at 5% a month that very quickly goes down to nothing where's on the flip side if you can even modest negative revenue churn then you have a growing annuity so that cohort just keeps growing in value in time and that is when investors kind of back up the Brinks truck and ask you how much money they can give you because you have a really valuable asset this is what I've seen over the years in SMB and and here's the thing SMB incorporates again selling to like freelancers and all the way up to kind of 500 person businesses but closer to the low-end more the s than em this is what I've seen kind of work over time in terms of best-in-class unit economics you know kind of a two two and a half percent logo churn which equates to kind of keeping a customer for about four years and where you pay no more than a quarter of that customers lifetime value on a fully-loaded basis so kind of programs and sales and marketing bodies so it gives you a four deck for Excel TV to CAC ratio so let's talk now about scaling strategies I'm kind of blasting through this but and you know these are kind of seven strategies that I've seen kind of work over time to really build a big company when you sell to SME you know product is super important but most of the value in your startups journey will be created through distribution through finding customers through getting kind of large amounts of revenue and if your venture funded you know your VCS often will push you to kind of move up market and chase larger customers and higher are poo and the thing about SME is if you can just tough it out and kind of leverage one or more of these channels then over time you can you can build a really large business so let's kind of go into the each strategies and I should mention none of these are mutually exclusive obviously you know it's not like you pick one and that's your strategy but you know different strategies apply either kind of either different stages in the company lifecycle kind of different segments of the market etc so the first one is to have a low cost of acquisition that is usually driven by some kind of viral loop so companies that come to mind include a drop box where if you refer folks you get kind of more and more space SurveyMonkey a MailChimp right you either fill out a survey or you receive an email newsletter and you think hey that's a really cool tool I'll sign up you know type form is a more modern example of that and what I've seen with these kind of viral loop driven business models is they tend to have there's a period where it feels like it's kind of going super slow and then suddenly boom there's this inflection point and it and it shoots up and you see that with kind of Dropbox user growth where it was flat for a while and then just took off and if I had a graph of linkedin's kind of network user base over time it would be the exact same pattern so creating viral hooks in your product to turn recipients you know users of your your users into your users that's confusing any of it fire hooks is one strategy second and not unrelated is freemium where and there's kind of two flavors of freemium one is the products entirely free and it's monetized indirectly usually through advertisements and then the second is where you have again a free base product but then there's basically incentives or you know those most engaged users are going to basically convert and become paid subscribers over time freemium was super hot a few years ago and then folks were like hey it's actually really hard to make freemium work I can't get the math to work I still think it has a role to play but there are certain prerequisites for freemium to work in my books one you know very very large market second the incremental cost to serve each of those free users is near zero and third you know very kind of differentiated upgrade path so that your most engaged users will just naturally become paid customers so there's lots of examples of companies to do that again MailChimp survey monkey ducks and the here just a bunch of companies strategy three this is a busy slide but cross selling products so the thinking here is you kind of just tough it out for a bunch of years with one product and then get enough scale that you can either build products or buy other companies and and get new products that you can cross sell to that same customer base GoDaddy is the quintessential example and the largest probably kind of pure SMB SAS company that sells multiple products you probably think of them as a domain name provider but they do a whole bunch of other things they are the largest reseller of Microsoft Office online globally they have about seven different products that they resell you know HubSpot was a one product company for a lot of its history but then it had enough scale that it could you know build new products it's become an active acquirer now as well and same thing for for Zendesk so it's not something you want to do when you're just starting up because you don't have the scale you don't have the resources you know not all of your customers on product one are gonna buy product two so you need a big enough base that you can cross sell but over time as you get bigger you know cross selling is a very valuable strategy number four build a channel you know there's only so far that direct response marketing goes before your incremental cost of you know acquiring that end customer it just becomes really high and starts to approach the lifetime value of that customer and so you need to start thinking about building channels and again if you do it really early it's probably tough because no one else wants to sell your product is hard enough for you to sell your product so kind of not at the beginning but more kind of wants your product is established there's clear product market fit you've got some kind of brand awareness that's when you start thinking about building a channel again HubSpot is an example here they have agency partners who bring in about a third of their revenue and then the big accounting software guys like you know zero zeros main go to market strategy as through accountants they go and give accountants a whole bunch of practice management tools and like here run your business on zero and then go and convert all of your clients onto zero and so you'll see for every accountant you get you may get five ten fifteen you know fresh new customers so a lot of leverage there number five give great customer support this is sort of a counterintuitive one many companies think that they cannot afford to give great service when they sell to small business because the customers are so small but here's the thing you know first of all small business owners they're super stretch they have no time they don't have an IT department they and the other thing is is that they talk to each other right so if you give great customer support they tell their peers they tell their friends and that kind of just leads to kind of more customers so at FreshBooks this is really a core part of the culture every single person in the company no matter how junior or senior introvert or extrovert spends the first 30 days of their life as a fresh books employee in customer support you know picking up the phone responding to email learning the product learning the culture when you call customer support at fresh books today if the phone is not picked up in three rings literally every single phone in the office will ring until someone serves that customer so what that has bred over the years is just an insane customer first culture and a very high Net Promoter Score at act Apple level territories and a high NPS just gives you so much leverage for your marketing because there's just so much kind of free love that's coming in so something to think about there next is to add payments so this is not going to apply to all software categories but anything that's kind of well you see front office examples like Shopify you know I'm gonna run a store and now I need to collect payments you're gonna see back-office examples like Xero and fresh books where I send an invoice and now I want you to pay me you see it with vertical specific applications like mind body where I can open up a yoga studio and you know collect payments online but for a small business owner kind of there's only so much they're willing to pay for software but the payments piece kind of psychologically comes out of a different pocket and so you add it together and it can actually add up to kind of meaningful revenue and so it's hard to see here but the graph at the bottom is Shopify's quarterly revenue and over time you know the merchant services that's their payments offerings is now 50% of the business or a little bit more actually as of today and if they had just stuck with software there the growth really what it tapped out but because they've added payments they're now a company that's worth over ten billion dollars so not saying if you add payments are gonna be worth ten billion dollars don't quote me on that but you know for many businesses adding a payments product is super important and from that small business customers point of view the thing they care about the most those two things one is finding customers but second kind of getting paid on time and so having a payments offering is actually super valuable strategy 7th segmentation so remember earlier I said there were thirty million small businesses if you try them if you have built a product that you think of is applicable to all thirty million small businesses you've really built something that's applicable to no one you know no business owner just thinks of themselves as I am a small business owner they think of themselves as whatever industry they're in I'm a plumber I'm a dentist I'm a doctor whatever and so you know the best SAS companies and ironically some of the biggest have started out and spent a meaningful amount of their history being super narrow and focused on serving one customer or one vertical and you know FreshBooks again today I keep going back to that just because I know it well only thinks about five verticals and if there's customers that come in from elsewhere that's fine but you know they're when they are thinking about product decisions thinking about messaging thinking about marketing channels events whatever they're only thinking about it through kind of the lens of a small number of verticals so just kind of some lessons learned over time from scaling SMSs the first is business owners have no time and that's not going to change any time soon and I think that kind of has implications for how you build products for SMSs with AI a machine learning kind of getting more and more reliable I think you have the opportunity to build these black boxes that just kind of do one thing really well and I as a business owner can just trust it and off it go or on the flip side have a complex product that is supported by services that either you provide or an ecosystem around you provides you see that with Shopify where they have people who can build and design your stores you see that with Squarespace where you have website builders who can you know take a template and then customize it for you the commonality there kind of one extreme you know a pure AI or two software with managed services is still I as the business owner do not have to spend time in the product because I don't have that time so that's that's an important thing second you know growing superfast is is actually expensive SME is a huge market but it tends to grow at a certain rate there are three million new businesses started every year some number of those have a common set of needs they need a domain they need email marketing they need accounting software so on and so on but if you try and grow at kind of 2x or 3x the natural growth rate in your market then your incremental cost of acquisition kind of goes way up and this is the challenge probably that many of you feel when you're dealing with early-stage VCS who want you to 3x your business every year and I was talking to a CEO today you know where we agreed that kind of an SME like it's great to raise some initial capital but then you actually have this sort of desert you have to cross between kind of 1 million and 10 million ARR where you're not growing fast enough to be really appealing to the VCS which is often why they try and get you to move up market but kind of 10 million AR beyond you get into more growth stage private equity territory where again your business won't grow 3x a year but it could probably grow 50 to 75 percent a year more or less in perpetuity because many categories of SME software have been around for a long time and they're gonna be around for a long time so thinking about the natural growth rate in your market and then thinking about how long you know the opportunity you have to build your company and just aligning that to the capital that you bring in that's kind of really the point here Third Point really is around Net Promoter Score I've talked about that with the fresh books example do not underestimate it I think it's a critical metric invest in kind of getting you know real customer love and you know help your customers grow and what I mean by this is again if I go back to the two things that an entrepreneur cares about most it's finding customers and then getting paid by those customers so if you have built a product that helps me save time like yeah I don't really care whereas you've built a product that's gonna help me grow my business I care a lot last thing is and this goes back to my point about evergreen markets you know good things just take time if you think about some of the biggest SME software companies they've been around for a long time so Ho's been around for since 1996 Basecamp and survey monkey you know 1999 and so on you don't have you know if you read kind of TechCrunch all the time then you think like inside three years you're gonna sell your business for 300 million dollars sometimes that happens more often than not it doesn't and you know with SME in particular you really do have an opportunity that just hunker down and build a very meaningful business but over decades not years that's it thank you very much I think we're out of time but if there's questions up on the board I'm happy to take them [Applause] [Music] you

Channel: SaaStock

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Keywords: small business saas, Saas business, saas startup, saas product, building a saas business, saas development, build your own saas, building a saas product, saas pricing, smb saas, enterprise saas, saas it, lesson in SME SaaS, SaaS to SMBs, How to build a SaaS business

Id: ATRU_32iCrM

Length: 21min 53sec (1313 seconds)

Published: Thu Dec 07 2017