Scaling with speed: How to rocket ship your software startup
At the recent SaaStock exhibition, Philip Edmondson-Jones, Oxx, a venture capital (VC) company investing in ambitious B2B SaaS companies, explained the best practice when scaling your business rapidly.
How do you know when the time is right to scale? How do you know that you have got the foundational building blocks in place so you can grow efficiently? As Philip explained, a lot comes down to product-market fit. This is a widely used term but one that doesn’t necessarily have a common definition, and certainly not one where people align on the same terminology.
Philip commented: “At Oxx we subscribe to the Mark Roberge of HubSpot and Harvard Business School perspective. For a SaaS business, the most compelling evidence you have that you’re achieving product-market fit is customer retention - pure and simple. Retention is an implicit indicator that you’ve got a product that there’s a compelling use for, with an established customer base.”
However, this product-market fit stage comes at the start of the journey for a SaaS business, and takes place at a slightly scrappier stage in a software company’s development. This can be a very challenging stage and approximately nine out of ten startup businesses fail to get compelling evidence of product-market fit.
Philip added: “At Oxx we specialise in the stage slightly later than this - the go-to-market fit stage. The focus changes quite significantly here. Whilst at the product-market fit stage you’re looking at company retention, here it’s really all about proving scalable economics – you’re not just selling to the true believers, and the early evangelists in the product, you’re really looking to attract a much wider majority of people to your software solution.”
At this stage the business will start becoming more scalable, more codified, and the numbers are slightly bigger in terms of fundraising rounds. However, it is still a really precarious and perilous stage in the journey of a software business. Many companies don’t successfully make it through to the growth stage or to an exit event, and fail to learn the lessons of the past. Philip added that there are quite a few common mistakes that Oxx see founders making time and again during this phase.
“One of the key pitfalls that we see time and time again is founders thinking of product-market fit too early, raising very large rounds of funding and trying to throw money at the problem, scaling at breakneck speed, throwing money behind sales and marketing, and assuming what worked in the past, will necessarily continue to work in the future.”
Philip continued that this is the dark side of what is known as blitz scaling, which often doesn’t go according to plan, resulting in poor decisions, missed opportunities, wasted money, unnecessary dilution, and the human costs of individual burnout and a lack of retention of employees as the business fails to scale effectively (something which is often overlooked).
“It’s worth stating that blitz scaling can be a very effective strategy,” Philip added, “but only if it’s done on solid foundations. The main problem is how do you know when the time is right? How do you know when the foundations are solid, and you’re ready get this rocket ship growth that you’re after?”
He highlighted that there are particular milestones and metrics which, if hit, are a good indication that you’ve achieved go-to-market fit stage. If you are achieving a logo retention of somewhere around 90% a year, and net revenue retention statistics of over 100% on an annualised basis, then you can say quite confidently that you have developed a product for which there is a compelling need for in the market, assuming of course that the figures are from a broader range of customers than just your early adopters.
Philip continued: “The problem you’ll face in some situations, is if you’re a particular type of business, for example an enterprise SaaS company selling two or three year paid in advance contracts, big annual contract values, long sales cycles etc, it’s going to take you a long time to collect enough proof points. And the last thing you want to do is sit on the side while your competitors raise lots of funding and steal your market share.”
Therefore, Philip explained that a lot of the best-in-class SaaS companies, even before series A stage, develop predictive leading indicators of protection. There is not a one-size-fits-all model for exactly what this looks like, however, there are common characteristics in most software businesses’ predictive models, around the number of users or teams using the product, the number of sessions or logins that people have, different modules that people are logging into or the number of actions that people are taking in the platform.
Philip added: “This should be an iterative process and you should learn as you go. You should be able to back test these results against your outcome stats for your gross and net retention. This isn’t just an academic exercise that should be done for interest, this is something that should be a key role for your customer success and support teams. It should be able to steer those teams into the highest value clients in your existing customer base and take remediating action to try and fix any problems.”
Oxx state that the go-to-market fit stage is the critical scale up stage for a successful SaaS business. If product-market fit is all about proving there are customers out there who value your product, go-to-market fit is all about whether you can identify, segment, reach, sell to, onboard, and upsell them, all in an economically rational way, underpinned with sound reporting and solid unit economics.
However, timing and measurement are vital. It is easy to scale too quickly, which can lead to unfortunate outcomes. Whereas, scaling too slowly in this environment can also be really damaging if your competitors are raising money and taking your market share.
“Much like in the product-marketfit stage, you should be measuring retention statistics,” added Philip, “but also, in the go-to-market fit stage, you also need to be measuring return on investment (ROI). The typical statistics that we’re looking at here are around the lifetime value of a client, the cost to acquire them, and on capital efficiency, what the payback period is for the months that it takes you to repeat the upfront investment in the sales and marketing costs to acquire them.”
Again, there are general benchmarks here on what that looks like. For example, a Customer Lifetime Value to Customer Acquisition (LTV:CAC) ratio of three to four times, and payback periods that are commensurate with the size of business that you are targeting. If it is an SMB software platform for example, you might be looking for sub-12 months, for mid-market and enterprise you might be looking for 12 to 24 months. These factors need to be considered in conjunction with each other.
Philip continued: “We would argue that if you hit the foundations and you’ve got some good early evidence on return on investment and your payback period, that gives you a good indication that you can put some additional investment into your go-to-market machine, and it’s going to return some productive outcomes.”
He added that this is not purely about metrics in and of themselves, but an important cultural element that underpins the entire business. In the product-market fit stage, the business will be developing a minimum viable product, experimenting, and iterating. As a direct counterpoint in the go-to-market fit stage, which Oxx refer to as a minimum viable go to market test - where the go to market team will be expanding on multiple fronts – the company may be moving into new territory, deploying product led growth to move into enterprise clients, or going into entirely different sectors.
“The key here is what happened in the past, isn’t necessarily going to happen to the same degree in the future,” he added. “So, it’s worthwhile getting the early warning signs in place as best you can. You need a culture of experimentation and ownership around sales and operating metrics that you’ve built in the product-market fit stage to continue to apply in the go-to-market fit stage.”
4 key strategies
He added that there are four key strategies that Oxx has seen time and time again which software companies deploy to scale quickly. The first is around specialisation within the go-to-market team. He explained that specialised resources tend to perform better than ‘Jacks of all trades’, and within the go-to-market team specifically, there is generally a distinction between the sales and development team, who are focused on qualifying opportunities, and account executives who are focused on closing them.
There are many different ways you can specialise within the go-to-market team, but it is important to remember that not only does specialisation increase performance, it is that specialisation that makes hiring quicker and easier – and at the scale up stage, this is one of the most compelling differentiators that you can have as a business.
“The key point in the go-to-market team around role specialisation is that you should be able to see this quite quickly in the sales and operating metrics. If you are hiring quickly and efficiently, and making fewer mistakes, you will see the time to quota for your account executives reduce, and the average quota attainment for your account executives also improve significantly. Given this is one of the main drivers of revenue growth in software businesses, this is one of the most important things that we would recommend sorting out up front,” Philip continued.
Strategy number two is something of a cliche in SaaS land, but for good reason. Net revenue retention is one of the magical features of software businesses and doubling down on this can be one of the most effective strategies you can deploy to grow quickly.
Based on a ten percent difference in net revenue retention, a company can achieve double the revenue of another over a four year period, despite the same number of customer acquisitions. “That’s quite a dramatic change and what’s more, the valuation impact is going to be even more significant, because, quite rightly, both public and private market investors are paying a real premium for companies with top net revenue retention,” Philip added.
If there is any issue with retention it is important to fix it as soon as possible. Issues compound over time, including mistakes, so take action today if retention needs to be fixed - whether it is changing the product, changing the structure and go-to-market team, or investing in integrations on the onboarding team (either inside the organisation or outside).
Recommendation number three is making sure the company has a laser focused proposition on exactly the customers and economic buyers that are being targeted. This comes in many shapes and sizes but it is much better to build a distinctive brand in a more clear market opportunity (and then build on from that), than it is to win a much bigger market segment by trying to shout louder than anyone else.
The fourth and final recommendation is to invest ahead of the curve in your scalable demand generation. Philip continued: “When you start in the product-market fit stage, your business will look like a slightly ugly ice cream cone with lots of different flavours. As you go through the go-to-market-fit stage, you’ll start to see a little more predictability in the top of your funnel. It doesn’t matter where the top of the funnel leads are coming from, what’s critical is that it’s well designed to the type of business model that you have, and there’s a level of rigour and predictability in the leads coming in.”
Again, this isn’t just an academic exercise, there are huge operational benefits. If you have a very technical pre-sales team or heavy onboarding implementation requirements for example, if there is no predictability coming down the funnel, it can lead to delays in getting customers onboarded. It can also cause a huge amount of friction between your sales and marketing team, which absolutely no one wants, and it can cause real headaches for your business.