Founders attempting to build a predictable, scalable business face common challenges beyond achieving product-market fit. One is knowing when to expand into a new market or vertical. Another is adjusting your product roadmap for those growth opportunities. Then there is the challenge of accurately forecasting your business as it changes and grows.
As a partner at Bain Capital Ventures, I invest in early-stage software with a particular focus on SaaS organizations. In the software heyday of the 1990s, I was an early employee at the enterprise software startup Trilogy, where I ran our product and go-to-market organizations and increased annual revenue from $1 million for a single product and vertical to $300 million on a multi-product, multi-segment strategy.
My experience as both an operator and a SaaS investor (full disclosure: Clari is a portfolio company) has taught me some key lessons about scaling a SaaS business.
Never Promise Your Customers 100%
A lot of startups promise they can meet 100% of a customer’s needs. That’s a mistake, because it’s not just realistic. I made that mistake myself at Trilogy.
This approach also puts the customer in the driver’s seat for setting your product roadmap. You want to listen to customer feedback and adjust in response to what they share. But your biggest or loudest customers should not be who shapes your product strategy. That power should lie with your thoughtful, internal decision makers.
If I could give myself one piece of advice for the early Trilogy days, it would be to proactively put a stake in the ground with customers about where the product was headed. You want them excited about where you’re going, and you want to invite them on that journey with you. Tell them the truthÚ You might not be able to deliver everything they want. But by coming along with you, they’re going to get 80-90%—and that’s going to be an incredible ride.
A Good Product Sells Itself
Another way to think about this growth challenge relates to your total addressable market, or TAM, and how that should change over time. In the very early days of a startup, the TAM tends to be pretty narrow. You focus on highly qualified customers in a market subset where you can provide unique value and dominate.
You also rely on the founder’s evangelical sales skills, their charisma, and their vision to close those early clients. But that’s not a sustainable way to sell as you grow. You want the product to be so good it sells itself.
A good indicator that you’ve hit product-market fit is when anybody in your company can sell to anyone in your target market. This means you’ve defined your initial segment well, and also built a product that is truly superior for that segment. The value proposition you’re describing and the product you’re selling becomes the same for each client. At that point sales become repeatable. That's the key to scaling into a bigger TAM.
Embrace Now, Then Move Up or Out
As your product evolves and you add more features and capabilities, the company grows and so does its opportunity to expand its TAM. Startup leaders and management teams could go international, move up market into larger, enterprise contracts, or sell into a new vertical. Each direction would impact the product roadmap.
Therefore, it’s important to be opportunistic, but also thoughtful about how you want your company’s growth to play out over time. That vision should affect how you prioritize product investment.
When you consider a new direction, keep in mind that it’s more difficult to go down market than to go up market. This is because it’s actually hard to make a product simpler. It’s easier to make a product more feature-rich. Many companies have started at the bottom of the market and worked their way up over time.
The alternative is to stay focused on your segment—maybe it’s small and medium-sized businesses—and keep expanding your suite of products for that group.
The good news for software entrepreneurs is that markets these days are big. In the software boom of the 1990s, $300 million in annual revenue was incredible. Today's markets can support companies with $5 billion or even $10 billion in revenue. That means there’s less pressure to move segments and add verticals, since opportunities in each market are so large.
Expect Tension as You Grow
Selling into new markets and opportunities may feel like you're back in the early days of figuring everything out. That’s because you are. Each new customer group will have differing needs. You won’t have repeatable sales until you figure out what works for the new group.
Any changes you make to your core addressable market require a real product investment. You can’t just throw salespeople at the problem when your product is not designed for that vertical or segment. The investment you have to make there may detract from other investments you might be making at the same time.
As you shift into new markets and grow, you should expect to feel some tension. Your product and sales machines still push for your initial segment, and you’ll naturally want to put more resources into these because they’re driving your sales velocity. But if you don't invest in developing more segments to expand your TAM, you’ll soon realize you haven’t made progress and have become boxed in.
Instead, continue building product capabilities that over time naturally expand your TAM. This will build a strong, scalable business.
Smaller Deals Build Core Business
Big deals bring in huge annual recurring revenue, and prove a sales rep’s value to the business, with their connection to the client business’s C-suite. But big deals are hard to predict. One small hiccup can extend the sales cycle six or nine months. Economic shocks can freeze big deals, because they require so much buy-in across the corporation.
We advise portfolio companies against relying on large deals to hit their target annual run rates. Instead, they should focus on deals under $250,000 as the predictable, core business. Plan to hit maybe 80 or 90% of your number with these core deals. Then those big deals can provide a welcome pop.
We also advise portfolio companies to think about big deals as a separate line item for goals and forecasting. For instance, you may have quarterly sales goals, but you might look at large deals on an annual cycle. If you lump your core business and the big deals together, you’ll skew the averages and your data will become noisy and therefore unhelpful.
As you close more larger deals, they too will feel more predictable and repeatable. You may not know which companies will close, but with greater large deal volume you’ll have a better sense of the share you’re likely to win. Plus, you’ll build a bigger pipeline. As you continue to grow, both the volume of deals and the value of total deals in your pipeline should increase.
The SaaS Sea Change
We’re living in an unprecedented time for software entrepreneurs, thanks to several shifts in software since the 1990s.
First is the shift to a recurring revenue business model. In the ‘90s, when you sold software, revenue came from clients purchasing a license. You had to sell to more users to earn more revenue. Today, most software companies have recurring revenue models with customers who pay monthly, quarterly, or annually. This provides more cushion, protection, and predictability than the old model.
The second big change shift is the cloud. In the ‘90s, you had to actually go to the client’s site and mess with servers. Now, you can sell your software anywhere, to big companies and small, and deploy updates remotely. The cloud has opened up market sizes.
The last change is more recent. COVID-19 is a devastating tragedy. But this pandemic has also revealed that companies must embrace cloud technology. Cloud-based software is powering the ability for remote teams to do their work, and for customers to get business done.
How we live and work has profoundly changed in the last five months, and in my view much of the impact will remain even after the pandemic. Many companies will continue to work remotely. With reps selling from home, startup leaders will need to lean even more heavily on their corporate tech stack for reliable sales data. Accurate sales forecasting will become even more critical. These trends will create even more opportunity for software entrepreneurs. SaaS will only grow.