Even the fastest-growing software startups aren’t expanding as fast as they used to.
Of course, this is partly by choice; you have to trade off growth if you want profitability, and vice versa. The yardstick for measuring startup performance has changed over the past year, but changing startup performance standards means that we need a new baseline for fast growth, VC firm OpenView argues in its fourth annual Product Benchmarks Report.
“As SaaS companies have pivoted away from growth-at-any-cost, we’ve updated the report’s definition of ‘fast-growing’ from 100% to 75% year-on-year growth,” the report’s authors wrote.
Based on a survey of 1,000 private software companies, the report found that 22% of software startups qualified for OpenView’s definition of ‘fast-growing,’ down from 32% last year, despite the lower growth rate needed to enter the cohort. OpenView ran the survey with product analytics startup Pendo.
It is not just private software startups that are finding growth harder to come by; listed SaaS companies are struggling as well. Almost all the most valuable SaaS businesses that went public since 2019 saw their net dollar retention (NDR) decline in 2023 compared to 2022.
We’ve observed that too: Snowflake’s most recent earnings are a good indicator that even the companies with the most impressive NDR are not immune to market changes.
The right NDR for SaaS startups to target is a huge topic, and OpenView typically addresses it in the SaaS Benchmarks Report that it releases in the fall. As for this product benchmarks report, it is much more focused on the operational levers that software companies can pull to emulate the best in class. This is obviously a top concern for founders hoping to find ways to unlock new revenue without huge investments.
Finding one’s group
What do healthy SaaS product benchmarks look like in 2023? Well, it’s complicated. If you are selling enterprise contracts, you can’t expect the same sign-up rate as you would for a self-serve product catered to developers, for example.
“This is why we tried to cut the data in different ways, so that people can find the relevant metrics for their specific product experience,” said OpenView operating partner Kyle Poyar, one of the report’s authors.
Another goal of this segmentation, Poyar added, is to show companies some of the decisions they can take if they want to move to a different bucket. “Things like what kind of customer you’re selling to, whether you have a freemium motion, a free trial motion or a reverse trial…a lot of that is actually under your control as a business.”
One of the key changes that many founders are pondering is whether they should adopt some form of product-led growth (PLG), as opposed to more traditional sales-led growth.
In 2022, OpenView’s previous report showed that product-led companies were twice as likely as sales-led peers to grow more than 100% year on year. Such growth rates may be out of reach this year, but it still explains why companies are considering PLG. However, adoption of this strategy remains uneven and there are many nuances worth considering.
The kind of customer a company is selling to is a strong predictor of whether it has adopted PLG. For instance, OpenView found that only 11% of vertical software companies that sell to enterprise businesses are product-led, compared to 70% that target developers at small and medium businesses (SMBs).
Despite the slow adoption, OpenView is bullish about product-led growth. “Cracking vertical enterprise PLG is just really difficult, but the companies that do will be in a really good spot,” its VP of growth, Curt Townshend, told TechCrunch+.
Hype and reality
It is not just the adoption of PLG that may be slower than everyone expected. Within product-led growth itself, some trends that have made headlines are still not commonplace — reverse trials and product-led sales tools, for example.
A reverse trial means that users get to use the paid version’s features for some time before they’re reverted to a more limited, free usage tier if they don’t open their wallet.
I wasn’t alone in being intrigued by this middle ground between freemium and free trials, but OpenView’s report puts this enthusiasm into perspective. “While reverse trials are a hot topic online, they’re a bigger source of chatter than they are a source of new users. Reverse trials have just 5% adoption among our respondents.”
Likewise, we’ve seen the emergence of PLG CRMs (customer relationship management), a category of tools focused on enabling product-led sales, but their adoption remains low. Even among product-led companies with more than $20 million in annual recurring revenue, only 6% told OpenView they were using product-led sales tooling.
However, 72% of respondents with some PLG tooling said that their stack included product analytics software, a more established category represented by Pendo and competitors like Mixpanel and Amplitude. According to OpenView, “this shouldn’t come as a surprise; in order to turn your product into a growth engine, you need visibility into what users are doing inside your product.”
Trends worth tracking
Product-led sales tools may not be commonplace yet, but OpenView’s report validates one of the firm’s key hypotheses: The fastest-growing companies will be the ones that can find the best leads among their current users.
“We looked at varying growth rates in the data to understand what impacts growth most, and overwhelmingly, the number one thing was tracking product-qualified leads,” Townshend said.
Also known as PQLs, these leads are the needle in the haystack for sales teams at product-led companies. How do you know which free user is not worth your time versus which one works at a large company that could turn into a major customer?
Product analytics help here somewhat, of course, so I am a bit surprised that only a few respondents said in the report that they used product-led sales tools for this. The point remains: To grow fast, you need to track this data.
Similarly, reverse trials aren’t widespread yet, but the hypothesis that companies are trying to remove friction from their user acquisition process is still valid. About 16% of its survey respondents who employ PLG, OpenView found, offer an ungated product, for which users don’t even need to sign up to get started.
“The potential with ungating your product is that a much, much higher percentage of folks who land on your website will do something of value,” Poyar said. Once they do, the startup can have them sign up if they want to share what they created with a coworker, for instance.
Even with a gated product, collaborative features are often a useful tool to drive conversions and revenue. For instance, this can be a solid route for companies to get more users within an organization to adopt their product. “So we’re seeing companies really focused on removing friction around that internal expansion step, to start to increase the number of use cases a company can find in a product,” Townshend explained.
Companies always had an incentive to make sure their sales funnel wasn’t too leaky, but this need could become more pressing if user acquisition becomes more expensive. That could be a side effect of organic search becoming less central, which may just happen.
According to OpenView’s report, organic traffic is still the leading product discovery channel, but only amounts to 32% of leads, compared to 39% a year ago. This is a significant drop, especially for a channel that is usually fairly stable.
While the decline may be partly due to the macroeconomic environment, “if this trend continues, it means acquiring users is going to get much more expensive for software companies,” Poyar said.
The elephant in the room when it comes to organic search, of course, is generative AI. If users get answers to their questions without clicking on search results, product-led companies need to find new ways to attract and retain users, and they’d better start working on it sooner than later.
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