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This course will inform startups about the differences between growing and scaling a SaaS startup. It will also provide information about the steps companies take to scale up their businesses, the common struggles they face, and the possible ways to overcome those challenges. It will discuss the metrics used in measuring how effective a company has scaled up (e.g. MAU, ARR, CAC, LTV, etc.) and the positive effects of scaling up on employees (e.g. liquidity of equity shares after an acquisition).
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What It Means to Scale for SaaS Startups#
Your startup has reached a point where you now have 50 to 500 employees.
You have been in the industry for 5 to 10 years.
You have your product or service; you have an understanding of your customers and what you want to offer to them.
Now, you are ready for the next level, and that is to grow your business. (Note that there is no set of indicators, whether qualitative or quantitative, to signal that a business is ready for scaling since businesses are different.)
We should scale and not just grow our business because ... ... scaling allows for exponential growth since more revenue is earned for less time and resources. Software as a service (SaaS) startups are particularly seen as naturals when it comes to scaling. This is since we are able to service long-term customers who pay on a monthly basis with very minimal additional expenses. According to Aaron Bird, CEO and founder of Bizible, maker of B2B marketing automation software, “scaling a SaaS company looks very different compared to businesses with non-recurring revenue streams.” Take a look at some steps or techniques that SaaS startups take to effectively scale.
First, identify your ideal customers:
As additional customers is the key to scale your business, you need to make sure that you identify the right kind of customer for your business and that you have a strong understanding of who they are. You can do this by observing the following:
(a) Market. Instead of selling to too many groups, just pick one target market.
Build your sales funnel using a buyer-centric lens. For example, instead of focusing on what you need as a business, focus on your customers' needs and behaviours. Instead of immediately scheduling a demo after your prospect has filled out a form on your website, you might consider calling them to assess their needs first. Then, instead of getting them to be your customer after 30 days, perhaps a 90-day sales cycle would be more realistic.
Develop your ** buyer persona** by understanding what they are concerned about and how they decide to buy. What are their demographics, jobs, goals and challenges, values and fears, etc.?
Maximise how you market and sell to your customers. If your customers check peer-to-peer review platforms, ask customers to give you reviews. If they read blogs and publications about your product, make sure to use those platforms, too.
(b) Offering: Instead of positioning your offering for several potential uses, focus on one major use of your product. Then, solidify and demonstrate your brand's unique value proposition (UVP) by ensuring that your investors, customers, employees, and other stakeholders know full well what makes your product stand out.
(c) Message: Communicate the benefits of your product to your buyers; make your message clear, concise, and catchy. Also, when scaling a business in time of a downturn, since messages take time and resources to establish, consider adjusting your message to fit the current needs of your market.
Common Scaling Issues Faced by Startups
We went over what it takes for startups to scale and the differences between scale and growth as well as the exponential growth that comes from scaling.
Not finding product market fit Some companies scale up before finding their product-market fit and later on face a lot of challenge. It's possible that there are still errors with your product, ... that there is no market for the product or solution you are offering, ... or that there is a demand for your product, but the demand is not sustainable. It is also possible that due to tight competition, what separates your product apart from your competitors is not strong enough.
Which are the possible reasons for not having product-market fit?
Not having enough capital
As the business gets bigger, the expenses also grow. You need more money for product improvement, infrastructure, marketing, hiring people, etc. Also, startups don't usually experience their profit during the early years since they put their money back to their business.
Furthermore, some startups funded by investors find it hard to properly manage their finances, and this can bring a lot of pressure to the company.
**3. High customer acquisition cost (CAC) **
Customer acquisition cost (CAC) refers to expenses related to acquiring a new customer. Along with customer lifetime value (LTV), it is used to gauge the value gained by acquiring a new customer.
SaaS companies spend almost nothing for adding potential customers to their servers. However, turning them into customers can cost companies a substantial amount.
They are likely to struggle more with CAC than other types of companies because they sell highly technical products to a specific target market that might be hard to reach. It usually takes more money to reach these potential customers and turn them into buyers.
On the other hand, these customers are likely to stay long term and have high customer lifetime value (LTV), so their high CAC should be worth it over time.
Metrics of Success for SaaS Startups
This applies to businesses, particularly to SaaS business where metrics used are different from traditional businesses.
The numbers will help determine the status of your business whether you are really scaling and meeting your objectives.
They will help you see the specific areas in your business that need improvements.
Regularly checking the numbers will help your members see the importance of those numbers; then, they will be more motivated to help improve them.
Your management team and the company will then be aligned about the direction that you want to head in.
According to David Skok, there are two variables to look in when determining the valuation of a SaaS business, and they are the following: growth rate and profitability (operating profitability as a percentage of revenue).
This will show us that we don't only need to grow fast, but we also need to be profitable. Alternatively, we can grow not as fast, but we must be much more profitable.
Rule of 40: It’s a principle that balances revenue and profit growth in software companies; it is calculated by adding growth rate and profitability, and the goal is to score at least 40%.
Annual Recurring Revenue (ARR) It refers to the annual revenue that a company expects to receive from its customers in exchange for its products or services. It is used for quantifying a company’s growth, evaluating its subscription model, and forecasting its revenue. It provides a long-term view of a company’s progress while MRR (Monthly Recurring Revenue) is suitable for identifying the company's short-term improvements. To compute for it: divide the customer's contract's total amount (e.g. $10,000) by the contract's length (e.g. 5 years): ARR = $10,000 / 5 = $2,000
** 5. Churn**#
In a SaaS business, the company loses a lot of money to acquire customers during the early stage, and it doesn’t get this money back quickly.
The important question now is if you're losing a lot of money at an increasing rate, what can assure you that you will gain profit and become successful eventually?
Positive Effects of Scaling on Employees
You have scaled up and overcome the challenges that scaling up entails. Now, what's next?
After a series of funding, probably by Series B, your company would be thinking of some exit strategies, such as selling the company, getting acquired by another company, or going public (going for your Initial Public Offering or IPO) However, how will these steps most probably affect employees?
Let's talk about acquisition.
An acquisition occurs when one company gain control of another company by buying most or all of its shares. By owning at least 50% of the target company's shares and other assets, the acquirer has the power to make decisions about the acquired company.
Acquisitions can sound frightening for employees of the target company because of the uncertainties, changes, and … yes, emotions.
However, acquisitions also bring a lot of positive effects. For one, it means that the company is doing well for a larger company to actually want to acquire it.
In this lesson, we'll talk about how acquisition can benefit employees of the acquired company.
Liquidation of Equity Shares For employees with equity shares, this can be the first big prize of being acquired. Most startups provide employees with equity shares as part of their compensation package. This is since startups don't usually have enough cash to attract and maintain good talents. They offer them equity shares (also called equity compensation) that employees can liquidate after a certain number of years. In a way, the equity shares also serve as a startup's way of motivating employees to help the company become successful.
Let me walk you through. There are actually two types of equity compensation: stock options and restricted stock. The latter is usually given to founders and early employees, but the stock options are awarded to employees, officers, directors, advisors, and consultants. They are the most common form of employee equity compensation.
Aside from money, acquisition can also provide opportunities for career growth to employees from the acquired company.
This can be especially true for founders and team leaders, who are usually moved up to new executive roles, such as CEO. For engineers and product people in SaaS startups, you are most likely to stay and enjoy better perks and higher salary, too.
Wider Network Through the help of the bigger company, employees from the acquired company will be exposed to many new networks and influential people. The kind of exposure you will get will help you find more open doors that should open new ways for you to perceive things. Also, more new networks would mean more business. You can also take advantage of the well-established distribution channels of the acquirer to leverage more of your services and products to a wider market. You will also get to experience deeper market penetration since acquirers usually have already laid out groundwork and marketing strategies.