Everyone loves Ask Me Anything sessions with SaaStr founder and CEO Jason Lemkin, and for good reason. As a SaaS veteran who built and sold a software company for nine figures, invested in startups since 2013, 10x-ing his fund, and continues to build a powerhouse community of SaaStr fans, he offers some hot takes on the communities’ burning questions.
Let’s jump right into this set of community questions focused on SaaS metrics, growth, and efficiency.
Q: There’s a lot of chatter about the overall buying environment changing because there is no more zero interest. What metrics should we expect in this environment?
Let’s start with the meta. “I would say, in my career in SaaS, the folks saying that on social media are missing the point. Sales is much harder than in 2021. Exactly as hard as it always used to be,” Jason shares.
Until the second half of 2020, most companies had enough apps and weren’t looking on their own to spend more. During the Boom, people doubled their apps, which wasn’t sustainable. 2021 made no sense in terms of budgeting. Therefore, sales and marketing practices made no sense in 2020. They were attuned to buying patterns we’ve never seen before and may not see again for another decade or more.
For folks on social who complain about how hard the market is, most of them aren’t hireable. It was never easy, and the easier times lasted too long. There is a whole generation of kids out of school and senior folks who were promoted who don’t know what it was like before the easier times. Some people are unwilling to work in the current environment and blame it on customers and the macro.
It’s supposed to be hard. The bar was always supposed to be insanely high for software. You were supposed to change the world and be utterly disruptive to succeed. Now, there may be a lost generation of folks who grew up during the Boom and are unwilling to work at SaaS companies today.
How Does That Impact Sales and Marketing?
If you compare your company to two years ago, you have to be twice as efficient. The average public company today has over $300k of revenue per employee; in 2021, it was just over $100k. The average public SaaS company is twice as efficient.
Will there be some tradeoff in growth? Yes, there will be some tradeoffs. How do you budget this? Let’s look back at what we used to do.
You have to do zero burn, zero cost budgeting. Even the best companies did this until 2019, when capital got easier. You have to figure out the absolute best you can do with your budget. In 2021, many sales folks were marginally efficient. We can’t do that anymore.
In most startups, your payback time and magic number don’t matter. If you’re tracking the top and bottom line, those CAC and payback metrics are important, but, in the old days, they were devised by VCs so they could understand how to invest in SaaS companies.
These payback metrics are important for investing. For startups, though, just the bottom line matters.
Do zero-cost budgeting. If you have a good sales and marketing team, they will respond. A great sales team is almost always accretive, bringing in more money than they take out. Good marketers will spend on what works and is within their budget.
Q: When it comes to GTM efficiency, what are the most important leading indicator metrics?
“Nothing has changed,” Jason says. You can watch this episode on the CMOs of Hubspot and Zapier’s new podcast called Against the Grain. The whole point of the conversation was that there’s too much noise for marketing.
Marketing’s job is to accelerate the top of the funnel. You have to figure out what type of marketer you have. What are they good at? Focus the energy there, growing that at least 20% a quarter.
Asking them to do motions they aren’t good at won’t work well. Figure out the level of pipe they’re optimal at, measure it consistently, and drive it up 20%.
Q: In terms of efficiency, what should your expected return on investment on marketing spend be – 2x, 3x?
You’ll see those metrics, and they’re not practical for startups. The number one thing to focus on here is your bottom line. You have to start with the budget, not the metrics.
In startups, a 1x return is good enough. You’re trying to grow and put points on the board. You’re not Dropbox growing 6% a year. You have to be careful to measure where money is going, and anything that gets you a customer is worth it.
You have a mini brand as you get to a few million in revenue. People will start to hear about you, and you’ll get some zero-cost leads. You have to blend that with your paid.
Ultimately, all the top software companies’ number one source of customers is word of mouth. Your real job is to accelerate word of mouth in marketing. If half of your marketing initiatives get you 1x and the other half are from word of mouth, marketing costs are pretty low.
If you’re at scale and deploying $50M or $200M, you have to get every sale right. However, what most SaaS marketers get wrong is not seeing what performs at all. Most stuff won’t work. So, if you have any ROI at all, do more of that and get better at it. Do anything that works, and as much of it as you can.
For sales, we lost a little of the picture in 2021, but for all eternity in software, we’ve had 3x, 4x, and 5x multiples for SMB, Mid-Market, and Enterprise, respectively. As leaders, slow it down and make sure your reps are profitable and that leads are going to the right people.
Do the most you can do without breaking the team. The most destructive thing across startups today is too low quota attainment. It’s a cancer on the sales team.
You need a majority of your sales team hitting quota or people don’t feel good, and they start to believe they can’t do it. So, if there’s stress in the system and you can cut back a bit and still meet bottom line goals, do it. You’ll make more money with people hitting quota.
Q: Do you achieve a higher growth rate in the usage-based model over user-based models?
When usage-based stuff exploded, it wasn’t simple. Even the Snowflakes weren’t only usage-based. They had commitments at scale. The only way to get a decent deal on AI is to make a commit.
If you read public companies, you’ll see what to expect. Look at Zoominfo, for example, one of the best SaaS companies of all time. When times got tougher, their customers tried to use less. NRR plummeted as everyone had less reps and SDRs were using less Zoominfo.
The Cloudflares and Snowflakes came off the low faster. The truth is, none of it likely matters. One model is not more enduring than another, so this shouldn’t be a debate anymore.
Buyers are veterans, so if your app is like Stripe, price it like Stripe. If your product is like Hubspot, price it like Hubspot. You add so much friction to sales if you price your app different than the market prices for similar apps.
Who is like you? It doesn’t have to be a competitor. Who is adjacent to you, or has similar buyers or ways it’s used? Price how they do, and remove massive friction.
Q: Will AI change any of the above?
“Nothing is going to change with AI,” Jason says. And he’s not saying it’s not highly disruptive. It will change some things. But there’s no evidence today that AI will get rid of 90% of our sales and marketing teams.
Jason has done a lot of investing in contact centers like Gorgias, Intercom, Front, TalkDesk, etc. In traditional SaaS, AI is disruptive. People are trying to get rid of 30-40-50% of their support teams. A lot of folks in the industry haven’t performed as well as promised, so there’s some AI backlash.
As disruptive as AI is in this space, there’s no way it’s going to lead to no one ever picking up the phone, at least not in our short lifetime. And it’s important to remember that all of these waves of disruption in software, for the most part, have created the need for more high value professionals and less need for low value support.
We don’t have a history of technology displacing high-value professionals. Instead, it enables them.
Q: How can a bootstrapped company effectively approach the growth of its business?
In general, there’s a point somewhere between $10M and $20M ARR where it doesn’t matter whether you’re VC-backed or not. At some point, $30M a year in financing is enough for most B2B companies, and you don’t need venture funding.
With that said, Jason sees some value in one round of capital. You could raise $4M-$5M right now and take some stress out of your system. The real issue is bootstrapped companies tend to fail the balance sheet test.
What is the balance sheet test? If you don’t have about half of your ARR on your balance sheet, you underinvest. It seems simplistic, but it makes sense. If, at $7M and you’re bootstrapped, but you only have half a million in the bank, you can’t hire that VP that’s great.
If you’re at $7M and have $4M in the bank, you can hire any VP that’s great. So, do anything possible to get half your ARR on your balance sheet. It destresses SaaS. Once you have more than half, you can invest the year out.
