In this, the third and final episode of our SaaS Primer – or “everything you wanted to know about SaaS” – we look into Financing/Fundraising, share findings on Benchmarking/KPIs, as well as end the discussion on Lessons Learnt and Predictions. Do listen to episodes 15 and 16, in which we had a SaaS Overview, looked at Business Models, as well as Sales and Pricing.


  • Introduction (01:24)
  • Section 1 – Financing/Fundraising (02:01)
  • Section 2 – Benchmarking/KPIs (16:08)
  • Section 3 – Lessons Learnt (29:07)
  • Section 4 – Predictions and Conclusion (46:19)
  • Conclusion
  • Please check below to download our SaaS Primer PDF deck, serving as reference for our episodes 15-16-17
Our co-hosts:
  • Bertrand Schmitt, Tech Entrepreneur, co-founder and Chairman at App Annie, @bschmitt
  • Nuno Goncalves Pedro, Investor, co-Founder and Managing Partner of Strive Capital, @ngpedro
Our show:
Tech DECIPHERED brings you the Entrepreneur and Investor views on Big Tech, VC and Start-up news, opinion pieces and research. We decipher their meaning, and add inside knowledge and context. Being nerds, we also discuss the latest gadgets and pop culture news.

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Intro (01:24)

Bertrand: Welcome to Episode 17 of Tech Deciphered .  In this episode 17, our third and last episode of our SaaS Primer, we’re going to talk about financing, benchmarking, lessons learned, and our predictions, to conclude, about where is going the SaaS Industry. For further reference, please have a listen to our previous episodes, episode 15 and episode 16, where we started this SaaS Primer . Nuno, let’s start today with financing.

Section 1 – Financing / Fundraising (02:01)

Nuno: In financing, our first analysis is around equity capital raised by ARR. So Annual Recurring Revenue that has been achieved by the company. Not a huge amount of surprises, but maybe the sole surprise is that companies are raising more equity capital at earlier stages. Definitely, it seems pretty capital intensive that we have, for example, companies generating less than 1 million in ARR, 10% of those companies having raised $5 to $10 million. 6% of the company’s raising 10 to $20 million. That seems like a very hefty bar to start generating such little ARR, in companies that are generating a lot more ARR, so above $50 million, 65% of companies unshockingly or not very shockingly will have raised more than $50 million by then.

And then very few, I’d say 12%, 12%, 12% will have just raised anywhere from below $5 million, $10 to $20 million, and $20 to $50 million. It seems to be no man’s land for above 50 million, seems to be 5 to 10 million. So no companies that are raising more than 50 million will have raised only 5 to 10 million, which is again, an interesting counter-intuitive realization.

We will come back to the point around how much money do you need to raise, to actually generate significant ARR. The reality is, the later you are in the ARR curve, the more ARR you’re generating, the likelier you are to be in the midst of basically blitz-scaling your organization in particular sales and marketing organization, we’ve talked about it in previous episodes. And if that’s the case, then at that point, it’s the time where you raise a lot of capital. So it seems a little bit counter intuitive. A lot of people would say, once I get to 2.5, 10 million in ARR, I need less to get to the next level. Actually that’s, in many cases, when you need more to get the next level, cause you actually need to buy yourself into the next wave and that way to buy into the next wave is to hire a lot of people around sales and marketing.

Bertrand: Yeah, I think that, as we discussed in the previous episodes, there are big expectations from a lot of investors, in term of how fast you’re growing the business. And definitely, one way to grow fast is to invest cash,  so that you can grow faster. There is definitely a race if your space is considered hot enough and by hot I mean , that’s the right time to scale this industry, the right technologies, then definitely, you won’t be the only one, as a company trying to win that market, you will have competition. And one way to outpace your competition, or even with less competition, to just generate the type of pace, investors have been expecting for now a decade, then you have to get some financing. 

Obviously, if your space is smaller, if there is less competition, you might be in a situation where you might be needing less cash. And actually, you should be careful, about burning too much cash in these situations. But definitely, when companies tell you they’re going to get at break-even at some point relatively quickly. No that’s rarely what’s happening, if your space is hot, and if you can keep growing the market pretty fast, there will be a premium to that. 

Nuno: On the activity around B2B funding, this is a really interesting analysis. If you look at the numbers and the 2020 numbers, just to be clear, our numbers as of end of first half of the year, so June 30th, 2020. It seems like there’s very little slow down, I mean if you extrapolate the numbers, maybe we’re going to have a slight decrease on deal count. Although we know ends of year actually increase deal counts. So maybe we will come closer to the deal counts of the previous year. But in terms of deal values and what has been deployed, we’re more than past half of last year. So last year, $61.3 billion were raised for B2B companies. And this year we’re talking about 34.2  billion dollars already raised in half a year.

This for me is very surprising. We will come back to that in the next few charts, because there’s a couple more surprising findings. What it leads me to believe is that Software as a Service and B2B enterprise software, actually in some cases, it has been positive correlated to what’s happening with COVID. With more remote work, companies that had very strong on prem IT functions might actually need to move more and more to the cloud and actually more rapidly than they had estimated.

So somehow, it seems like we’re seeing a relatively positive effect, at least that’s how I would read most of the financing analysis that we see on this in the section. What are your thoughts, Bertrand?

Bertrand: Yeah, I think that, definitely, at least on the late stage side, there has been some positives: one is, businesses moving even faster to a more efficient solution / cost pressure. And of course, SaaS is a great answer to optimizing your cost, buying different SaaS software. Two, it’s a question of also helping you transition to this new world. And again, you will find some great SaaS solution. If it’s time to move from regular commerce to M-commerce, or E-commerce, you will have to buy some new SaaS products. And the last point is that, definitely, the stock market has been doing pretty great. Actually, amazingly great, surprisingly enough. I think that does help, close, larger  late stage deals. And maybe one last point is that, I guess a lot of VCs have tried to either provide bridge financing or pre-empt the next round. Because, during that situation of COVID, obviously, there is a premium to investing in companies you already know, while you’re already an investor, versus trying to invest more early stage in companies you don’t know as well and where you have not even be able to meet face-to -face the founders and the exec team.

Nuno: Very interesting indeed. And maybe the next chart starts giving us a few hints on what’s actually going on and why there is a higher volume of capital deployed versus deal count and why we’re seeing some interesting dynamics around the space. The next chart basically states and rightfully so that’s early stage B2B deals, receiving smaller portion of VC dollars, and not only that, but actually if we look at it, late VC is for the first time, it’s having its highest percentage of deals that were done in late stage, is happening now in 2020 and we’re going back as far back as 2006. So there’s a tremendous amount of capital being deployed in late stage rather than early stage or angel and seed, which justifies some of the numbers we’re seeing around investment in B2B deals here. 

Also interesting is, as you were mentioning Bertrand, how much of this is existing investors preempting the next round, doing bridge? So doing what we would call classically follow ons versus investors are coming in with new investments. We don’t have that analysis, but that would be interesting. My hypothesis would be, that a lot of these investments are actually still being driven by follow ons. 

So a lot of inside deals being done at this stage and maybe some larger rounds with new investors coming along the way, but maybe a much higher percentage of follow ons being done right now than ever before versus what we’ve seen in previous years. 

And if we look at, maybe the most fascinating number of all these charts is actually in this analysis, which is the medium following recent growth trend analysis, that shows that basically the median in terms of US VC B2B tech deal sizes, slightly increased this year versus last year to 3.8 million. But if we look at the average, it’s gonna up by a lot, it’s now 18.7 million versus 14.6 million last year. And again, this resonates very much with the previous analysis we were just discussing, that there’s a lot more late stage venture capital going into these markets. So while the median staying more or less around the same number, the average is being dramatically skewed because it’s a late stage market versus an early stage or angel market right now that we are observing. 

So this 18.7 number again, linking really well with the fact that we’re seeing a lot more late stage VC investments, rather than anything else. One other thing that I’ve observed in the market as a venture capitalist, we are seeing a lot of companies that are probably on the verge of IPO-ing, a lot of software as a service companies, and even we now have some discussions that there might be some really hot software as a service IPO this year even in 2020. And so these might be the last rounds, the “six months before” type play before companies IPO, where you’re still getting in some capital, just to get you through IPO, where you have to basically hire the bankers, scale the company and scale the team, clean up a couple of numbers.

And you still have that last cash infusion pre IPO. So, again that might be that dynamic, again, anecdotally as an investor, I’ve seen that a little bit, a lot of software as a service deals that are probably very close to IPO within the next 6 months to 12 months, getting some final rounds of cash infusion at this stage.

Bertrand: Yes, absolutely.

Nuno: And the final analysis here in terms  of fundraising and financing in particular, is the what I called the “The Analysis” , but actually there’s a part of this that’s not so “The” which is, this is analysis on cash burden growth by cost of region. And the dope part is, low cost regions are a fraction of high cost regions.

We’re talking about a monthly operating cash burn in low cost regions of 375k, I guess this is an average and 875K on high cost regions. That’s, the, “the” part . The part that’s not “The” at all is the growth rate annual. In low cost regions, 99% and 84% in high-cost regions. So companies in low cost regions are growing much faster than in high cost regions.

Again, company low cost regions are growing much faster than companies in high cost regions. And so why the hell would you be in high cost regions? Interesting. I have a couple of thesis for this, but interesting. But definitely there is an interesting trend here where there’s an hyper growth going on outside.

And we’ve seen this, we’ve mentioned this quite a bit, and Bertrand and I’ve had this discussion a bunch of times in particular on B2B software as a service, there is truly a global innovation, that were seeing. It’s not just Silicon Valley, there are a lot of companies emerging from the strangest parts of the world, right? Certain parts of Europe, you wouldn’t expect companies to come from, even in Southeast Asia and other parts of the world. So definitely , this seems to ring true that there is innovation that is going beyond, software as a service, in Bay area versus software service in other areas. There’s a lot of innovation coming outside of the US. And even in the US, in lower cost regions in the US, so for example,  this chart is very focused on that, on lower cost regions in the US, we look at places like Utah, where a lot of companies have a lot of their infrastructure and headquarters, and we look at other parts of the US that really are seen as low cost.

But for me, one interesting dimension of this analysis is why then would you be in high cost regions? One argument is still that your potential buyer will in many cases, be in high cost regions. And so the fact that you’re growing much faster because in you’re in a low cost region, might not necessarily link to the premium that you get paid on exit.

And so the premium you got paid on exits still links a bit to proximity to your purchaser, potentially. We will see that very much, up for grabs as Covid sort of dissipates in the next few years. So maybe that will no longer be true, but right now at this stage, it’s still probably true that there is a premium given for proximity.

And so if you’re a high cost region buyer, you want a high cost region company that you’re buying rather than low cost region. As I said with COVID that might all change dramatically.

Bertrand: I’m not sure if it’s still true even of today, that you would be worried as a buyer to get a company from a low-cost region. And also, there’s always a question, what do we mean by low-cost region? Is it just HQ? Is it the engineering center? Is it sales org?

So, the team might be a bit all over, and I think global companies are used to have teams a bit all over. In some cases, if the people are not at the right location, they don’t hesitate to move them and usually, some  might get excited. And again, as you said, with COVID, for sure, there’s probably a big re-evaluation   around this question.

I think it’s really a key part of the game. You want to optimize, your business, you want to grow fast, you want to grow faster. You want to raise less capital, as little as you need. I think that approach going and optimizing with low-cost regions as much as you can,  that’s something that makes a lot of sense from my perspective.

Nuno:  I would agree with everything you said, and again, this might be anecdotal, but there’s a little bit of smoke and mirrors here. Recently, one of the companies I’m involved in, and they’ve been in a bidding process between three companies to potentially acquire them. And one of the companies that was potentially acquiring them is, I won’t say the name of the company or where they’re based. But this is actually a company that has announced that they’re remote for life. So anyone can work remotely from now on. So the potential acquirer has announced, we are remote for life. And the interesting thing, is this company has walked away from the deal because they’re like, your team would need to relocate to our headquarters.

And I’m like, woah, wait a second, haven’t they just announced that they’re remote forever. It’s like, these guys have announced they are remote forever. And they’re saying, if I’m going to acquire, you need to be where I am.  I don’t understand. So again, smoke and mirrors. Everyone says, oh yeah, we’ll acquire everyone in the world.

But for example, for engineering talent, if it’s more of acqui-hire or for very product specific things, I’m not sure that’s totally true and sometimes we get significant surprises, like this company did in these discussions.

Bertrand: Interesting, interesting. Smoke and mirrors.

Nuno: I can tell you later who the company was. It’s an interesting discussion.

Section 2 – Benchmarking / KPIs (16:08)

Bertrand: Let’s go to benchmarking, our  benchmarking section. How companies compare: so first, we have quite a lot of interesting analysis around, if you pick a special type of company, how does it compare to its peers on many metrics? And we have done that previously, as well, but here it’s really to the core focus.

How many employees do you get depending on your ARR? And actually, pretty interestingly enough, it’s quite tight. The range, is usually quite tight, if you are between 2.5 to $10 million of ARR, you can expect to be from 40 to 80 employees. If you are from 20 to 50 million ARR, you are probably between 150 to to 280 employees. And obviously, beyond 50 million, it will totally depend on the exact ARR you have. So, there’s definitely a scaling. We like to say in SaaS that we’re product companies, that we’re not services companies, that we don’t need more people to scale the business proportionally to the business scaling. But actually, we still do that, because we need more sales people to sell, we need more engineers to develop the product, maintain it, upgrade the existing products, launch new products. Definitely, with more scale comes bigger teams.

Nuno: In terms of mix of employees by function by ARR scale, unsurprisingly, it’s very skewed towards engineering when it starts, a couple of surprising numbers here, even below 1 million ARR, marketing sales and customer success make up for a big, big chunk. We’re talking about 36% or so. That was a little bit surprising to me that there would be as much already put into it, at that stage maybe it’s a proxy for broader business functions so the CEO would be there somehow. It goes down and interestingly enough, it goes back up, on the engineering side to 29% from 24%, above 50 million in ARR generated.

And at that stage also customer success seems to reduce size as well as marketing. So maybe there’s some effect at that point where there’s more efficiency around that. I’m not sure I would read a huge amount into these numbers, but certainly a bit surprising on this, that engineering bulks back up, and that customer success and marketing bulks back down, I would have expected customer success to at least stay the same. Maybe marketing will have some gains of scale? But that felt to me like the most surprising piece of this analysis.

Bertrand: I always like to look at, when looking at companies, what’s their percentage, breakdown of staff between one side, R&D and the other side, sales and marketing. And it’s clear at the beginning  ,  you have more R&D than sales and marketing. But I think one encouraging trend for me is that, actually, at some point, even if you are pretty big, you still have a big chunk of R&D. Here, above 50 million, we’re talking about 40% still in R&D. And I think that’s a very positive trend, because it means that these companies are probably more product led and product centric than were SaaS companies 10, 15 years ago. In the past, you reach 50, 100 million, maybe you have 20% in R&D and I think that’s a big change. The new approach, the new product-led growth is pushing companies to keep investing in  product and engineering. And I think that’s a good thing, that’s a good trend. That also means that you are probably scaling more efficiently, because you don’t need to add as many sales and marketing people, just to grow with the business. 

Nuno: On SaaS metrics by company ARR, a couple of really interesting observations I would have here. One, that 2.5 seems to be the new 1 million. For a long time, 1 million ARR was that magical number where you could raise a lot more capital and move forward, et cetera. 

And right now, one to 2.5 million seems to be very similar. The only thing that’s changing is you have more employees, but funding seems to be similar, year on year growth seems to be similar. Your spend seems to be very similar, your burn rate magically seems to be very similar. I guess you have more employees, but they’re are more distributed. 

Very interesting that’s the case. For a long time, I’ve been defending that if you’re coming to us with one million in ARR, and you are all happy? Unfortunately, sadly, it’s maybe no longer enough for you to raise a series A, so you will have raised your 3 million, which is maybe a smaller seed in current environment, but we’ll be a little bit more difficult for you to have raised a Series A.

Further down the road, above 15 million, as I was alluding earlier, there is a big chunk of change between 20 million and above where the funding just goes up dramatically at that stage. And that’s maybe unsurprising, as I said, that’s probably the scale up stage where you need to scale dramatically, your customer success and your sales team and your marketing team to go after a lot more clients. And to really generate a growth at that point, that’s difficult. Generating 42% between 10 and 20 million ARR is, not quite as difficult as generating 40% at 20 to 50 million ARR. So in order to scale and keep growth stable, you actually need to hire a lot of people and that sort of manifests itself through a number of numbers. Shockingly enough, the monthly burn rate doesn’t change automatically on average. The range, if we look at the range does change quite a lot.

Bertrand: Yes, I think one interesting data point is also, CAC Payback, we discussed about that. How many months does it take to pay back your cost of customer acquisition? And interestingly enough, a lot of companies, in their business plan, you can see that they have hoped everything gets better actually over time, when actually based on analysis like this one, it’s not true. It just gets worse from early on where your CAC Payback is very fast, five months, then it moves to eight months, it move to 11 months. And on average, once you are beyond 10 million ARR, your CAC Payback is actually, on average around 15 months and obviously, there is some variance there. But that’s something to keep in mind when you’re planning. A lot will depend, obviously, also on the competitive situation, and things totally out of your control.

And when we’re talking about net dollar retention, another super key metric, we see that it’s also not a clear trend line.  It gets better around 2.5 to 10 million, but  once you keep getting bigger, actually, on average, there is not a clear trend that you are improving your net dollar retention. It actually seems to go down ultimately, when you are above 15 million in ARR. It might be because there is more competition. It might be because your clients, after 18 months, you don’t really have so much to upsell to them anymore. So some early indicators of a good net dollar retention might actually change over time.

If we go to the next analysis, and it’s a very interesting one, it’s looking back at SaaS companies that went public. And looking back in time, what were the metrics when they were still private, before going public, and when they were at a specific size 25, 50, 100 million. Before, all our analysis was based on mostly on private companies. Companies that have not been able to successfully IPO yet. Here, we’re more looking at what looks like, your typical company that manage to do IPO. Obviously, one issue with that analysis is that it’s older data. We might talk about companies that went IPO 10 years ago, and not really representative of what you would expect today.

One thing we see is that the gross margin, move partly significantly, from 63 to close to 70%, when you reach 100 million ARR. I think today, it’s probably on the low side of the expectations for new public companies. And what we see for these companies, when they reach 100 million ARR, is a very significant spend in sales and marketing. That’s actually quite stable, over time, so they were big spender in sales and marketing, 47, 44, 46% on average, depending their size. And an overall spend in R&D, so not headcount, but really spend in R&Ds, that pretty quickly end up being around 20%. And a pretty fat G&A spend, close to 20% , nearly as much span in G&A than in R&D. And personally, I feel bad, I feel there is something wrong when you end up at this scale, spending as much in G&A  than in R&D

One key metric is that companies look like, once they start to reach a specific size is, should I invest more to increase my growth rate? Or  should I be more careful, and invest potentially less, to make sure I’m improving my free cash flow margins? You have that tension between growth rate and free cash flow margin.

What a lot of companies have done and analysts on Wall Street, is start to look at both at the same time. What is your growth rate in comparison with your free cash flow margin? And in some case, they would make a sum of the two: growth rate plus free cash flow margin percentage, and is it above or close to 40%? Might be 30%, but if you combine these two metrics and you go above 40%, you are definitely in a good place. But more and more 30, 20%, also put you in a good place.

So it’s a very useful analysis, because that’s always the question. So with that, it means that if you’re growing, 60%, and you have a rule of 40, that tells  you combine that 60% of growth plus free margin, and you get to 40%. Then it means, it’s okay to have a minus 20% free cash flow margin. You can combine this 60 minus 20, you get to 40.

However, if you are, generating, cash on the other end, let’s say you generate 20% of cash, it’s okay to grow slower. It’s okay, because if you go 20% growth, plus 20% free cash flow margin, gives you 40% total. That’s a good rule of thumb. 

You want to be careful not to overdo it. Again,  it looks like at 20, 30 total number,  you’re also in a good place. And these metrics also gives you a good sense of multiples and that’s really the key part. Basically the higher you go, when you combine these two metrics, the more you get a higher multiple of your revenues, in term of valuation. Going much lower than 40% will work in some way, but you won’t get the same multiple. The 10X, 20X that you see some companies getting, they are definitely growing faster, and generating cash in a better way than in a company that is growing 20% not generating cash, you are a total of 20%, that might not be good enough to get a higher multiple, maybe you’re in a 5 to 10 multiple.

Nuno: There’s two aspects I would highlight, around this slide that are not implicitly in it. One, we’ve discussed in previous episodes, the whole land grab fundraising scenario where people raise a lot of capital to do a massive land grab on the market. And in some ways it seems to be justified under the sufficiencies core play, which is, if I can command a much higher forward multiple by just acquiring that market at all costs, why wouldn’t I even at the expense of free cash flow early on? And I think that’s justified for many, the whole play around land grabs, raising a lot early on and just scaling very quickly companies in the software as a service and B2B space overall. The second piece is this can actually be very dangerous and we’ve seen until now a couple of effects of this, but think of it as almost like a giant Ponzi scheme, right?

So I raise a ton of money. I do a land grab and my growth looks amazing on paper. I have incredible growth rates and therefore, my forward multiple, right? My enterprise value over forward revenue is silly and I’m commanding evaluation that’s well above, right? my forward revenue because I’m growing so fast, but you’re doing it  at the expense of very negative free cash flow.

And so in some ways, I’m a bit cautious around land grab strategies. They are an interim solution to get to a point where you stabilize your unit economics and you can still sustain pretty nice growth with positive free cash flow. That’s how I would like to look at it. Certainly, these companies if they decide to IPO at some point, that’s what will be asked from them, are you profitable? Are you generating free cash flow that is positive or not? Et cetera. Otherwise you get into this, I live on fundraising and again, that magically looks like a lot of stuff that we know that is not very legal. I would just be warning of this. Don’t live by the metrics as is they’re everything don’t live by the metrics and just fundraise the hell out of the market.

And then at some point, get stuck with a business that fundamentally doesn’t have the right unit economics. At some point, you need to stabilize your growth rates and get to positive free cash flow.

Bertrand: Yes, indeed. and if we look at typical IPO in SaaS, it’s okay to be negative free cash flow, as long as you compensate with a significant growth rate. But usually, you need the story to go to cash flow break-even. And usually, you need that story for sooner rather than later. It’s probably a 12 to 18 months story.

Section 3 – Lessons Learnt (29:07)

Let’s move to the lessons learned. I’ve spent, nearly all my career in SaaS. Nuno, you have spent some time investing in SaaS, and I’m happy to share some lessons learned. Me, one thing I often see with SaaS companies is that they might have invested quite a bit in the product, but the go-to-market side, not as much. And especially true for companies in Europe, for instance. More engineering driven, sales is sometimes an afterthought , and I think it’s key to really optimize that.

And what I mean is, you want to optimize, and not just to optimize, but I certainly believe that product-led growth strategy make a lot of sense. So, can you build a product that has a freemium component? Can you build a product that has virality built into it? Can you build a product that is  an inbound lead magnet, an SEO magnet, a product that generates automatically content marketing? Do you have an open source product? I think that if you can go into the SaaS 2.0 world, that’s how I call the product-led growth, you will be in such a better shape. One, you will be more nimble, you will be faster, you won’t need as many salespeople. You will need a lighter marketing organization. And everything you build is actually mostly going into product investments. I think that’s really something that a lot of companies need to invest more in and don’t just expect to hope for the best at some point. If it’s not there relatively early on, it’s not easy to add that in the middle of the road.

Nuno: And a couple of interesting aspects about your view, Bertrand on this. One, viral is viral. So it’s not just word of mouth. There’s a bunch of ways to generate word of mouth, but actually figuring out in your product, where are your virality anchors? Where can people do referrals for other users? For other users in their org, for other users outside of their organization, where can users somehow get others to come into the product in a measurable way, where you can actually measure virality coefficient. So important element here of distinction. The open source piece is also interesting, I call it freemium for B2B somehow, and we have some amazing case studies like, Docker early on, very based on their failing a little bit early on, then having an open source product that sort of led to the rise of Docker as a for profit organization on top of it.

And very early on all also around services, not actually around product on the for profit side. So open source has to be very thought through. It can be that you’re just an open source company. Cause if you’re just an open source company, the likelihood that you will, you know, generate cash that you’ll generate a business out of it, is increasingly a little bit that you have a side by side angle where there is an open source piece that you’re supporting. There’s an ecosystem that you create around you in some ways, again, very similar to the freemium model. And on the other hand, there is a for-profit angle and there’s clear value add from that for-profit angle that you’re bringing to the table.

Bertrand: So, another point I really like to look for, very hard,  especially for SaaS companies. It’s probably true for most companies, it’s a flywheel. What is it that you have built in your business, that just keeps accelerating the more you build your company? And if look at in tech, one of the most famous flywheel we can think about is probably the Amazon flywheel. And let me give you an example of what I mean by that.

Amazon started to push for lower price in as many products as possible. When you get lower price, you increase customer visits. If you increase customer visits and become a demand magnet, you will attract more third-party sellers. If you attract more third-party sellers, then you can expand your store, you can expand your distribution. If you expand all of these, you will grow revenues, but your cost actually don’t increase that much. You might have even fixed costs there.

And if you do that, then it becomes easier to provide lower prices. And then you have done the full loop on your flywheel. So, In a way, for me, flywheel is, how is your business going to grow by itself, even if you were to turn off R&D in some ways? You are just letting it run, no R&D, how does it keep running? How does it even accelerate without R&D? And, of course, you want R&D on top of it. But if you can find a flywheel that can run by itself, you are in a fantastic position. And 2 other points to that, usually data is a key part of the flywheel. And two, if you can ride on a wave that’s bigger than you, apps, SaaS, e-commerce, video, at the right time, you will also be in a much better shape than trying to go against the wave.

Nuno: I would just make two remarks to just to add to what you just said, Bertrand. The first one, flywheels can be broken and Amazon again, a great example that the fact that they start with lower pricing on more offerings, is there one of their core values is to pass value as much value as they can to customers and consumers, and if at some point they stopped doing that, if at some point they said, Oh, you know what? Let’s increase prices just for the sake of it. We’re not going to do this. They could actually risk breaking this flywheel, they could actually risk breaking the circle that brings them more and more customers that brings in more and more business per customer.

And so you have to be really careful in how you manage the flywheel and I would say it needs to align well with your value system and how you optimize your business cases, your selection of projects, how you move forward in doing product A versus product B, how you price it? it’s very easy to say, you just have a flywheel and ride it, at some point, you can break it, so you have to be very cautious around that. The second remark I would make is on the wave bigger than you point. It’s almost like a must. If you’re going into a space in a market, we’ve talked about it at previous episodes. If you’re going into a bad market, a market that’s having low growth or that is characterized by very heavy regulation and it’s difficult to enter it.

All of these things are gonna break your business. You can’t beat the market you go into. So we’re not just defending here that you need to do momentum plays. We’re almost saying you need to be in markets that have ascendancy, that can go to the next level. If you are not, then your business will not survive or will not scale to the extent that you think it should or could.

Bertrand: Yes, totally agree.  What are some of the few top SaaS challenges that every SaaS company is going through? So, Usually, the first biggest challenge is, how do you manage to be at the same time product centric and customer centric? Because, I am hearing a lot of companies that say, “You know what? We are product centric.” Or, “You know what? We are very customer centric.”

My answer to that is that you have to be both. If you’re not product centric, you won’t have a good business model. You will have trouble in SaaS. You need some things that’s repeatable. You need to be in a software business. At the same time, if you don’t listen to your customer and build your products on one side, [laughs], if you’re not reactive to what your customers tell you, and thinking carefully about them,  you would be in trouble. For me, it’s not an opposition, it has to be a combination of the two and that’s really key part of the game.

Two, it’s around competition. Be careful about the competition. At the end of the day, some people say, “I just focus on my customer, and this, and that.” Yeah, sure, but if you’re outflanked on the left, on the right, [laughs], on the back, in front of you, you will have some troubles. Think carefully about how to optimize there as well.

Three, we talk about pricing, it’s key and it’s relatively easy versus other stuff to correct, and improve, and optimize. Please spend time thinking about pricing. 

Four, churn. Churn can kill your business, churn is connected to your net dollar retention. Make sure that you really do your best not to lose clients easily. That’s a key part of the game. You don’t want a leaky bucket.

Five, sales org, if you have a fantastic sales org, life would be much easier. The ability to control your destiny, [laughs], to predict your numbers, to forecast carefully, is key. And it’s even more key when you start to play with the big boys. When you start to be at bigger scale, when you are planning for IPO, you need that repeatability. And it comes from a very strong well organized sales org. 

Nuno: I would add that in sales org, it’s one of those cases where it’s always wrong until it’s right. And a lot of mistakes are made very early on in terms of who you hire to do sales. You go for a field sales veteran that might be used to just doing management of people. When in reality, what you needed was to figure out how your product actually links well to the market and do a bunch of early acquisition of customers and clients to your platform in a way that’s much more linked to product. Or you hire the wrong people, people churn, people move on, so very difficult. I always say there’s a natural tension sales orgs are never all perfect, there’s always in flux and really taking value out of them is really a bit of an art form. Making sure you keep hitting it and getting the returns and getting stuff out of them, even though you have some suboptimal pieces of the puzzle is vital.

Bertrand: First rule of a sales org, re-org every year, [laughs]. That’s part of the fun and the game of leading sales organization. Another piece is we talked a lot about metrics, about comparables, but at the same time, don’t overdo it. Don’t overdo it.

You have to think carefully about how your business is different. You cannot be the average of every metrics. You will be probably at one extreme for some metrics. At some other extremely, on the other side, for some other metrics, and that’s okay, because each business is really unique. And you need to be able to explain and defend, why is it unique? How is that? How can you improve, of course, but you need to have a clear, logical story. So don’t follow blindly, comparables, or metrics. 

And last piece, being global. I think it’s more and more critical for any type of business, these days, but especially in SaaS, you make so much big investment in R&D, that it will be crazy not to try to go global, and sell the hell of your product, everywhere where you might get customers. And I think you might be surprised that they are now everywhere. It’s not 10 years ago, where only American businesses started to be ready to buy SaaS products. Everyone, now, in Asia, in Europe, in the US, is willing to buy SaaS. No one is scared by it anymore, no one is worried by the data safety anymore. Nothing more than other business obviously. So  it would be a shame not to leverage these R&D dollars, and not try to sell your product, wherever you can get customers.

Nuno: I would add one challenge if I may, Bertrand, which is, at some point, if you’re becoming truly successful and you are really a large player, you’ll need to acquire, you’ll need to acquire companies. You’ll need to acquire teams, bringing them on board. So I would add as a key challenge, the whole post-merger or post acquisition path.

And how do you do it? How soon do you integrate the teams? How soon do you integrate products? And we’ve seen some incredible success case studies through the years of companies that were really built very dramatically on acquisitions.  Adobe being an interesting example of that, but there are companies that are solely built their growth path in the last 5 to 10 years on acquisitions and getting them right, is one part of the puzzle. But then the post-merger post acquisition piece is the vital piece. How fast you integrate them? How would you bring them on board on roadmap, et cetera.

Bertrand: Yeah, having managed and directed acquisitions at App Annie, it’s a key part of the game. You want to build organic growth, you might want to make acquisitions, especially if you look for fast growth, there is no question about that, that’s a big part of the game. And, in some ways, the earlier you start to be good at it, the better. You don’t want to just start late and do a very big acquisition, as a starting point. It’s a key part of the game, no question.

Looking about some of the main fast growth challenges and it’s not just true of SaaS, to be frack. It’s probably true of any B2B SaaS business, or even any startup. If you are growing very fast, what are the key challenges you want to think about? One, for me, cash is king. If you don’t have cash in the bank, that’s trouble. Always think about it, get cash from customers, that’s the best, and if you cannot get cash from investors. But you need cash to survive, so get cash.

Two, understand your TAM. Your TAM might be bigger than you think, it might be smaller than you think. Understanding it as carefully as you can is key. Not just for fundraising and convincing investors, but for you, running your business.

Three, one thing I’ve seen is that as CEO of a company, what you want to do is and I will use a bus analogy for that, you are setting a direction. You are bringing the right people on board, in your bus, and then you want to make sure you have gas to run the bus and to go there. Setting direction, bringing the right people, making sure you have the gas, that’s a key part of the game.

Four, culture, culture is key. You want to set the right culture relatively early on? And, I think some overdo it, early on, because when you are still very small, 10 people, it can flow naturally from the founder. It doesn’t need to be as clear and explicit as, everything. But step by step, the more you grow your team, you have to make it more and more clear. You have to make it more and more visible. It’s quite critical to do it and when you do it, you want to do it bottom up and top down. You don’t want to just do it bottom up, and at the top, you don’t like what you see . At the same time, it cannot just be a dictatorship type of approach to culture.

Five, recruiting is hard. You need to build a recruiting machine. There is no company growing fast, doubling or tripling their team every year, without a very strong well-oiled recruiting machine. And very quickly, your first tricks to recruit people will stop working, i.e. were you’re just recruiting at your local university, or whatever? At some point, it just doesn’t scale. Be careful, recruiting is hard.

Managing teams, it’s key to measure employee engagement on a regular basis. It’s key to organize a senior exec group that is not just your direct execs, but an overall bigger, senior leadership organization. Because you want to hear from others, not just your direct reports. And, of course, you want to go direct, to your teams. 

Seven, delegate don’t abdicate. That’s true of CEOs of fast running companies, but true of probably any manager. Delegate but don’t abdicate. 

Another point, personally, I’m a big fan of strong opinions weakly held. I will have my opinions, but if I have new data, new rational to think about things in a different way, I’m ready to change opinion, pretty   

Nuno: I would say, that for me it’s the core intellectual honesty piece. Definitely, when I’m looking at founders to investing. I need to understand if they’re intellectually honest and particular in their super power. We have talked about it at a previous episode as well, which is, can I change your mind? Can we have a discussion that would make your mind change? If I can’t, then you’re just very stubborn and you’re not willing to look at data and make changes.

 Also funnily enough, and this is an interesting tidbit, strong opinions weakly held, and we were trying to play with a weekly as well to be like in a week as an a timeframe was initially one of the ideas we had for the name of this podcast.

So this could have been called strongly opinions, weakly held instead of, tech deciphered.

Bertrand: Indeed, indeed. Another point versus fast. Of course, you want to be right, but sometimes, if it takes you too long to be right, you better be fast. And hopefully, not wrong too often. But moving fast is key in a fast-paced environment, or it will change and be a slow-paced environment.

Another piece for me is, please, combine strategy and the long-term thinking with the short-term, and the tactics. You cannot just pick one or the other. You have to both think long term and short term. You have to both work on the strategy and the tactics. If you just pick one side or the other it simply won’t work.

Nuno: And in here, I would just say two skews that I’ve seen a lot of the companies that I’ve invested in, that I’ve worked with over the years. The right versus fast, normally the biggest skew is towards slow. So it is towards getting that right answer. I’m not saying all the mishaps that I’ve seen are because people got something wrong or not, but I am saying that most of the cases that I’ve seen is just slow. People are just slow in making that decision and that commitment. And so it does happen a lot that’s the issue. 

On the strategy versus tactics again, very early on the companies, I’d say there’s too little strategy, there’s too little thinking about strategy. It comes maybe sometimes even too late, understanding of competition, understanding of market dynamics. How do I occupy space? And then it’s somehow inverts, I’ve seen much later stage companies that’s spent an inordinate amount of time on strategy, but then not enough on tactics, not enough on the street fighting piece.

Now, how do we get actually that market share? How do we try new things? Skunkworks? How do we launch products a little bit underneath the radar and see how the market reacts so. Interesting that you mentioned, I agree fully that you need a good balance between the two things. And that balance just seems to be very differently skewed depending on the stage of company, at least based on my experience.

Bertrand: Agreed. 

Section 4 – Predictions and Conclusion (46:19)

Let’s move to our last section, and probably our conclusion combined. 

Where do we see the SaaS industry going? So, a few predictions, for me, one thing is clear, is that SaaS has taken over software, and will fully take over software in that coming decade. 

The cloud industry is becoming and will completely become a global industry. Your HQ can be anywhere, at some point. And it was becoming true. I think it will be fully true by end of this decade. And it’s definitely connected with, future of work, and where remote work is going.

Another piece I believe that is probably less discussed, at least at this stage, is a more efficient use of capital. We talk about how much equity you need to raise for a specific amount of ARR and there are really clear question, why do you need to use equity for that? Couldn’t you use debt to achieve similar objectives? And I think so, actually. I think equity is great to build products, to take bets, to make acquisitions, in some case. But if it’s to scale a sales and marketing org that is well optimized, well oiled, there might be some logic to use debt instead. If you have your customer acquisition cost, CAC under control, why not optimize that in a different way?

Nuno: Indeed and there was a couple of side effects of what you just said that I fully agree with, but what you just said, there’s a couple of side effects that I would highlight, if cloud industry becomes a global industry, then surely the venture capital investing space needs to adapt. You need to search for the deals you need to be more multi geo or at least have funds in different parts of the world to address that need. The efficient use of capital, obviously again, for the investment space has a lot of implications. Do I also provide that and not just capital ? How do I see debt coming into the relationship I have with the company? And how do I address it? 

Moving to the next part of predictions, the future of work powered by Software as a service tools, the world we’re in does look increasingly remote. As you guys will recall from a previous episode, Bertrand I don’t seem to fully agree whether this is going to be a more full remote world, or if it will be more of a hybrid world, we have slightly different opinions. But in any case, there will be more, a lot more remote workers.

And those remote workers will be enabled by software as a service tools by definition. So we don’t see a world where software as a service doesn’t continue to scale dramatically, but also software as a service needs to adapt to a world where the IT department is not on premise, that the IT department can’t help with issues that customer service have to be elongated and not just focus on customers that are physically located in the US, because some of those customers might actually be physically located all over the world from day one, even smaller companies. So again, there will be a couple of shifts.

I see also on the operating model side for software as a service companies and the last piece on future of work is, we do see significant shifts happening around how recruiting is done, how freelancing is used in some of these companies in making a lot of the burn, much more variable and how do you access talent? The pools of talent, if we assume the world will be more remote and it will be more evenly distributed around the world,  I’m looking for the best talent around the world. And if that talent is in Bielorussia, Portugal, Spain, France, in Utah, in the middle of Colorado, it really doesn’t matter. And the tools today that we have, the marketplaces we have today for freelancing and recruiting are still at very early stages of really addressing that need and in making it more evenly distributed to talent around the world.

Bertrand: Agreed and let’s talk about go-to-market approach. 

For me, I guess you heard me before, but it’s a key part of the game. You need to invest in a very efficient go-to-market approach. And again, I believe that product-led growth, combined with a bottom up sales approach is definitely the best way to get there. Another  piece and angle is, depending on which type of SaaS business are you doing. It’s where moving in a way to a consumerized enterprise, or to more consumer type of SaaS products. Because consumers are also going step by step to be willing to buy software for their own needs, in a subscription-based approach. And platforms, like the Apple App Stores have enabled to do that efficiently at scale. I think that will be a key part of the game, thinking from a consumerized enterprise approach, as well as targeting consumers with SaaS offerings 

Nuno: And to be clear, I think we share this observation, a lot of the acquisition that’s done today, like consumer-like acquisition in this space is done with a view to then creating lead generation for enterprise customers. And what we see here is in some cases that might actually not be the aim. The aim might be that, actually you get more and more consumer like behavior on your software as a service platform that is generally addressed and paid by those users. And what we mean by that is that we end up in a world where I am serving the individual consumers, et cetera. And I don’t need to necessarily deal with the CIO where it’s truly a world where people bring in their own services. Again, in a world where we see more freelancing and a few other aspects around the development of teams, this definitely might be more obvious. 

Moving to product design. Clearly we have a world that will be cloud native designed at the onset. The whole world where I’m a hybrid day one, and I’m thinking about on-prem versus cloud, we think is going to disappear. It’s going to be very much cloud focused. 

Also from a user experience perspective, very focused in many cases on mobile first. It will obviously depend on the type of users, but the majority of the world will go mobile first and think through how does the UX look like for mobile first experience. 

AI gets embedded from the start, so it becomes  a table stakes position rather than anything else. If you don’t have AI, it’s almost like why? Rather than, Oh, I have AI and we’re like, cool. What sort of AI do you have? What are you using and how, is really the question. 

Communication either integrated into product or connected to existing platforms. So communication becomes again, table stakes. Are you integrating with existing services like Zoom, Slack, and others, or do you build communication stacks around the product itself? And that’s part of what the product does and enables to do. 

And then finally, Bertrand has talked in a previous episode about this, the whole notion of privacy that privacy also needs to be addressed. Not only because of regulation with GDPR, CCPA and other regulations that we’re having around this. But I think there is a genuine  expectation of privacy going forward.

Bertrand: Yes, I totally agree. This is big trends that are  clearly visible for those who know to look. But this decade, all of these trends from AI, cloud native, mobile first, communication fully integrated, privacy, all of these, will be a key part of the game for every SaaS companies.

In term of new directions, new stuff we see going, definitely, a few stand out, for us. 

One is, B2B transactions. It’s clear that most of are going to go online. I’m always shocked when I hear people still managing transactions manually, on Excel Sheets, or whatever, some are even using fax machine, believe it or not. So, B2B transactions fully going online, you will be dead if you don’t do that as a business.

Two is, automation at scale. It’s clear you want to work differently. You want to organize your business. You don’t just keep people doing basic stuff that could be automated. You will automate everything you can, including a software business. You will automate every part you can.

Third is, definitely the rise of no code, or low code. Where you are a provider of bricks that are easy to integrate, and that let your clients do fantastic things without the need for coding. And it brings some new services and products that before, required a lot of extra investment, engineering expertise, that suddenly you can give to a marketing guy, or a sales guy, or a BD guy.

And connected to that, in some way, is also the API business model. We expect that to happen more and more, so that bricks are either easy and visual to connect together, or they’re actually easy to automate and combine from a pure software automation perspective. APIs are also another big trends and some of the most famous providers, like Twilio, have done extremely well playing the game.

Nuno: Thank you, Bertrand. This concludes our episode 17, and it also concludes our trilogy on “software as a service” primer. Thank you for joining us and please check out our episodes 15 and 16, to get more context on our “software as a service” primer.

Bertrand: Thank you, Nuno.

Nuno: Thank you, Bertrand.