Editor’s note: Nino Marakovic is the CEO and managing director of Sapphire Ventures. Rajeev Dham is a vice president at Sapphire Ventures.
Given the success of Box, it’s hard to imagine that founder Aaron Levie believes he should have done something differently in the company’s early years. However, while speaking to Storm Ventures’ Jason Lemkin at this year’s SaaStr conference, Levie revealed exactly what he would have changed.
Although it is somewhat hidden in the rest of the interview, Levie points out the eventual need for SaaS businesses to adopt different habits when growing up, and the reality that perhaps more steak (or sushi) dinners are on the horizon.
In order for SaaS businesses to gracefully cross the inevitable chasm between early rapid growth and at-scale sustained growth, it’s imperative to have a healthy appreciation for an enterprise-ready, go-to-market infrastructure early on.
Instead, we’ve noticed that more and more SaaS businesses at <$10 million annual recurring revenue (ARR) are focusing their efforts on selling smaller deal sizes to small and medium-sized businesses, or specific departments and line of business buyers, and avoiding the tradition of traveling 50 percent or more of the year to discuss pain points with C-level executives.
As an example, take ExactTarget, a prior Sapphire Ventures portfolio company, which initially gained rapid penetration by selling to the likes of laundromats in Indianapolis. This model is typically characterized by efficient customer acquisition and high-deal velocity and thus faster growth early on. In fact, empirical evidence supports the trend towards selling to consumers within an enterprise.
While this “bottoms-up” model is ideal for early rapid growth, SaaS businesses that focus their cultures and organizations solely on this model will eventually face significant challenges when trying to scale beyond initial adopters to build and grow from a larger base of revenue. And having a large enterprise customer base is also attractive and valuable to a potential acquirer down the line, as noted by Hyde Park’s Guy Turner.
Therefore, it’s critical that when building sales, marketing and support organizations, practitioners be mindful to also embrace a strategy that allows them to eventually and seamlessly incorporate some “old school” enterprise skills in order to maintain growth and sell larger ACVs to larger organizations with more onerous requirements.
To elaborate, most rapidly growing SaaS businesses initially, and naturally, take advantage of selling their “next-generation” product first to early adopters – their peers in the startup, venture-backed technology ecosystem or individual departments within larger enterprises. This idea is discussed in our recent blog on the risks of a startup-heavy customer base. Yet, we’ve observed that at around $30 million to $50 million ARR, and sometimes earlier, the law of large numbers takes hold, and adding enough new “small deals” to maintain a high growth rate becomes increasingly challenging.
At this point companies begin to realize that what once worked simply won’t allow them to scale, and they start exploring increasing ACVs and selling to larger enterprises. If they already have a more traditional enterprise GTM infrastructure in place then they are well-positioned to spur the next phase of growth.
So a sales teams, professional services and support staff, and account managers need to evolve quickly to meet the demands of larger enterprise customers.
Perhaps most important is the evolution of the sales process and the skills required to achieve success. Initially, inside sales takes precedence. However, with higher ACVs, more field and strategic selling (involving those in-person interactions), as well as a deep understanding of specific enterprise requirements, become necessary.
As deal sizes increase, a business user that previously may have swiped her credit card to purchase software gives way to centralized IT needing to vet budget availability and security standards before making a purchase. Having more sophisticated sales personnel in place who understand how to navigate the complexities of a large enterprise with multiple buying centers and constituencies goes hand-in-hand with substantially higher compensation.
These more expensive sales folks should be expected to engage in solution selling – meaning they have a deep understanding of each customer’s business and his or her individual pain points. So, here again, larger deal sizes with larger quotas are needed to offset the expense of more experienced personnel.
In addition, hiring a combination of a seasoned enterprise-oriented VP of sales, initial layers of sales management and of course more traditional outside or field reps shouldn’t be signals of growing up and getting old, but rather getting smart. This kind of sales organization can ensure a company’s readiness when the next phase of growth is needed and the switch to selling enterprise-wide licenses to C-level executives becomes the lifeblood of a SaaS business.
Finally, the CEO’s role must change from being more product-focused, and letting inside sales provide periodic updates, to spending a significant portion of time on the road with large enterprise customers.
Professional Services and Support
Being “enterprise-ready” means having a services organization that can sufficiently support large and oftentimes high-touch customers. But this isn’t necessarily a bad thing. A culture that doesn’t shun some portion (15-25 percent) of revenue from professional services is prudent when selling to larger enterprises that may need more implementation, integration, training and onboarding, in addition to some manageable level of ongoing support.
It is well-documented that the adverse impact of churn on a company with a larger base of ARR is more challenging to overcome than it is when the company is in its early existence with less revenue. Moreover, growing revenue from an existing customer base also requires customer success folks to have “active strategic conversations,” as Levie puts it, with multiple constituents regarding how they can use a product more across the organization.
And, oh by the way, in addition to being a company’s best salesperson, the CEO should also be at the forefront of account management, splitting his or her time between wining and dining prospects and existing customers while on the road.
All too often we get the sense that the next generation of rapid growth SaaS businesses deems the old school skills as sacrilegious.
And, there is a fine line between simply deploying an early-phase growth strategy versus building a culture and mindset around it; pivoting later on toward accepting norms that were previously dismissed will be very difficult.
Ultimately, we’re not promoting one go-to-market strategy as superior to the other, but we do believe that CEOs of software services aspiring to build multi-billion-dollar enterprise SaaS companies should be cautious of this transition and culturally and structurally align their organizations accordingly.
So beware not to build antibodies toward a more old-school approach at the start, because aspects of a more traditional approach may be the very ingredients needed down the road to sustain high growth and build a large enterprise SaaS business.