46. The Must-Have Characteristics of SaaS Startups (Tomasz Tunguz)

The Full Ratchet Podcast on iTunesNick Moran Angel List

Tom Tunguz of Redpoint Ventures joins Nick to cover The Must-Have Characteristics of Successful SaaS Startups. We will address questions including:

  • Must-have characteristics SaaS TunguzCan you talk about your decision to blog, selling your partners at Redpoint, how it went in the early going and what results it’s created for yourself and Redpoint?
  • Let’s start w/ when a SaaS founder first approaches you w/ their pitch… what key elements are you looking for in order to take a deeper dive?
  • We had a great interview with Mamoon Hamid some months ago about SaaS and discussed a lot of the key metrics like MRR, ARR, the Quick Ratio, etc. What are the main metrics you measure and what levels are you looking for?
  • From a marketing and channel standpoint, what practices have you seen the best SaaS companies employ?
  • You’ve written a lot about the sales process. Any must-haves here before you’d consider making an investment?
  • You’ve talked about the two-step value proposition in the past. Can you touch on what this means and why it’s so critical for SMB SaaS companies?
  • I’ve enjoyed a great deal of your writing on pricing in SaaS. Could you highlight the key mistakes made in pricing and give us some insight on how SaaS startups can determine an optimal pricing strategy?
  • Software-as-a-Service has grown exceptional fast and in 2014 venture capital funding to SaaS companies hit $11.7B, a 70% increase year-over-year according to CB Insights. What are you thoughts on the trajectory going forward?
  • Do you have any other thoughts or suggestions regarding must-have characteristics for either startup investors or founders?

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Key Takeaways:


1- Critical Elements & Metrics for SaaS Startups Pitching for Capital

Four Elements:

1. Unique idea, unique point of view and a vision.. what Peter Thiel calls the secret
2. Winner take all dynamic
3. Early signs of great sales and marketing execution
4. Ability to raise money

Three Metrics:

1. Revenue Growth- 15-25% monthly
2. Payback Period: The median is around 15 months, but every once in a while you find an exceptional payback in the 6-8 month range
3. Account Expansion: How much more your customers pay you this period vs. the previous period


2- Sales in SaaS

Tom cited four items that are critical when conducting diligence calls with customers. On each call he asks the following questions…

1. Related to growth, virality and customer acquisition, he asks: How did you hear about this product?
2. Related to value proposition and defensibility,he asks: Why is this product much better than everything else?
3. Related to speed of adoption and use, he asks: How is the implementation?
4. Related to ongoing product use, engagement and likelihood to recommend to others, he asks: Did the product deliver what the sales team promised?


3- SaaS Pricing Strategy

Tomasz reviewed the mistakes that founders make when pricing their product which can hurt their cash position, limit customer adoption or cause elevated churn rates. These included:

-They don’t move to annual pre-pay soon enough. So while critics believe startups may leave money on the table by offering a discount for annual pre-pay… this provides a huge cash efficiency advantage, to a company where cash efficiency is king.
-The next trap Tom mentioned was when startups have an overly complex pricing model. It doesn’t really matter how appropriate a complicated model is, if it’s too difficult for a user to understand, it will limit conversion.
-The next was a lack of understanding that price is an evolution. One needs to keep testing and keep evolving the pricing model over-time.
-Tom also mentioned that customer procurement groups are often compensated by how much they can negotiate down. So startups need to approach the sales process with a lot of extra giveaways to throw-in, so that the customer can negotiate down and get their compensation.
-The final point discussed related to not using relative price discovery… So, how much is the customer willing to pay relative to X product that already exists in the marketplace. And it doesn’t have to be a perfect proxy for the new SaaS product on offer… it just needs to be related and similar enough to get an idea of acceptable price ranges that the customer is anchored on.

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