The business of SaaS

Understand why SaaS businesses work and how to grow them.

Software-as-a-service (SaaS) is a billing and delivery model for software which is so superior to the traditional method for selling software licenses that it restructures businesses around itself. This has led SaaS businesses to have a distinct body of practice. Unfortunately, many entrepreneurs discover this body of practice the hard way, by making mistakes that have been made before, rather than by spending their mistake budget on newer, better mistakes.

Preparing Businesses to Make Lateral Changes: Unit Tests

What I find more common is for the business to be unprepared to make lateral changes to a product. Even rational unit tests are a medium term investment. You need to spend time developing features customers don’t see, and apply those tools for some time, to see quality differences. That can be difficult to justify in a number fairly normal business scenarios (low cashflow/reserves, high tech debt/regret, etc.).
To help offset the cost (and delayed benefits), I’ve always suggested phasing in unit test strategically. Pick a module or cross-section of the product that is suffering from bugs that customers see (i.e., affecting revenue) and add the minimum viable tests to that. Repeat as needed, and within months/years, you’ll have coverage that fits the business needs well.

Advice for First Time Founders

3. Our customers made us successful.

.. A. The importance of good communication with potential and existing investors. Done effectively it significantly increases your chances of keeping the company funded, and therefore of success. Done terribly it makes you borderline un-fundable.

.. B. Investors never say no. They always say maybe. Everything is a no except a yes. And a yes is still about 50-50 to an actual term sheet. This is rational behavior by them.
We learned it through brutal experience! I remember clearly a large, famous fund saying “maybe we want to do the whole round” – I immediately emailed our YC partners and said “we can stop fundraising, we’ve found our lead!” They quickly reminded me that unless you have a termsheet, the deal isn’t remotely done.

.. C. (More for B2B) Marketing tends to be overrated compared to product-market fit in the early days by founders, especially within a batch / cohort of strong companies.

.. Don’t undervalue experience. We made a lot of easily avoidable mistakes early on because we thought paying more to get experienced people wasn’t worth it. If you do need to hire (YC already gives enough advice on not over-hiring), then be sure to be honest about what you don’t know and bring on people that have that experience.

.. 1. Be ready for skepticism. Startups that survive take feedback well and adapt.

.. 1. Don’t just write code and read PG blog posts. Sell and talk to users. Verify you’re solving a problem.

.. 1. Do what you love or you’ll burn out I was the CEO 3 times, 4th time I’m the CTO and can’t be happier. A cofounder who compliments you was a saving grace for me.

.. 1. Being remote first was one of the best things we ever did. You need to overcommunicate due to being distributed but that overhead pays off when it comes to scaling quickly and finding a different kind of hire (lots of senior folks can only work remotely)

.. 1. Understand your limitations. For example, I’m not a consumer guy. Enterprise is both what I like doing and what I find myself suited for. I don’t mind wearing a suit and doing sales. It’s better than trying to understand what the masses want at the hopes that they’ll pay you $5/month and then not leave you the next month because the button switched from green to blue.

2. Tried SMB at one of my previous startups, realized I just couldn’t handle the clientele

3. Successfully selling to fortune 2000. It’s a lot easier to understand their needs.

.. The single most important piece of advice: never undervalue the relationship you have with your cofounders, your significant other, or their significant others. You’ll ultimately spend more time with your cofounders on a daily basis. Knowing your cofounder plans and ambitions and life situation, as well as their significant other’s, and whether they align with yours over a long horizon, really matter. It’s impossible in many cases to overcome incompatibility.

.. E. Don’t enter into relationships adversarially. It’s really easy to think in us versus them terms of investors, partners, and even cofounders. One of the most sincerely toxic things I’ve seen in startup is ultimately shortsighted thinking: investor X is useless,

.. Understand how important it is to take care of myself physically and mentally: sleeping, exercising, eating well and having a social life.
.. Very few things allow me or you to be more effective than sleeping 8h a night.
.. 1. Aesthetics really matter in the early stage. Spend time and/or money early on nailing a cool logo and beautiful slide template. It really matters. Even copying other beautiful stuff is fine.
For getting our first 3/10/100 clients, the fact that we looked and sounded totally pro meant a lot. We seemed like a larger more innovative company because of it. Even for our Series A, the fact that our deck looked world-class helps build the belief. For hiring too it helps.

.. 2. Learning how to create FOMO is the most important negotiating dynamic you can learn. FOMO = fear of missing out. Whether it’s with fundraising, hiring, even clients (i.e. limited promotions etc) it is so so so powerful to have FOMO working for you.

.. Time-boxing things. Have multiple options that are openly competing. Spend time developing strong back-up plans. Defining unique/custom value props for individuals.

.. 3. Maintain optionality on most decisions. I’m notorious internally for wanting to keep my options open for things – i.e. avoiding prematurely locking into something or trying to avoid making a decision among only 1 or 2 options. Yes, this can be detrimental too. But early stage is all about being shrewd about your decisions, and in my experience, often the best move is to just wait a bit or pursue some other avenue. I’ve found that with individuals on our team, often they want to suggest a single course of action vs. really exploring the problem space.
Hiring a VP? Get 3 top candidates that you’d be happy to work with right on the finish line, and now you’re negotiating from a position of strength.
Making a big infrastructure choice? Try to see if there’s a way it can be less all-or-nothing. Is there a more incremental change we can do and then see what we learn over the next 90 days?

.. A. Nobody makes real progress on a startup until the startup is a full-time job.

B. Don’t worry much (early on) about competition.

C. Tech startup success depends surprising little on technology.

D. Fire faster.

E. At the beginning, almost all that matters is shipping quickly, then iterating.

.. A. If you want the folks at your company to know something (e.g. high-level company goals, product direction, etc) it’s not enough to just say it once. You have to repeat it many times and weave it into the operational rhythm of the company.

.. B. About 99% of what you read around early-stage startups who are “crushing it” is actually false. Founders have a great reality distortion field. It’s practically a requirement to make it through the tough times. But, comparing yourself to what you read in the tech press is a losing battle against a fictional opponent. Save yourself the mental anguish – don’t create unrealistic comparisons for yourself.

C. Venture investors want to hear crazy ideas, not pragmatic plans. When I first pitched investors, I was talking about how we would add customers slowly at first, because that’s how enterprise SaaS works. Honesty is always a good policy. But those pitches did not go well.

.. 1. Don’t fall in love with your technology. Fall in love with your customer.

.. Customers are the most important people to be talking to. Like most startups at the early stage, we underestimated how much we needed to spend time with customers and slightly overestimated how much we needed to talk to everyone else (e.g. investors, advisors, other founders, etc.). In the end, they are the only people that matter.

The secret to Germany’s happiness and success: Its values are the opposite of Silicon Valley’s

a magnetic 38-year-old named Christian Lindner, has openly expressed a desire to shake things up. In an August interview with the Economist, in which he called Germany’s economy “a prosperity hallucination,” Lindner also explained that in his country, “entrepreneurship has long been undervalued … and societies that are prepared to be more daring and have efficient capital markets have overtaken us on this.”

.. The vast majority of Germans don’t want it. For progressive and even centrist Germans, the startup-style definition of Erfolg (or “success”) is utterly incompatible with their values—which do not center on individual wealth, recognition, or even careers.

.. Germany’s cultural mores—which include a vehement defense of the country’s robust social safety net, largely credited for the relatively quick recovery from last decade’s recession—mean it is largely inoculated from the bootstrap fever that has long gripped the US.

.. In an off-script response to a heckler during a speech about startup culture’s positive attitude toward failure, Lindner memorably decried the fact that “people would rather go into public service than start something themselves.” He explained that, “when you’re successful, you end up in the sights of the social-democratic redistribution apparatus, and when you fail you’re sure to be the subject of mockery and derision.”

Lindner was correct on one point: Many Germans would rather go into public service than start a business themselves. But his theory about their motivation is all wrong. Lindner’s country-people simply don’t have the same enchantment with self-made financial success that he does.

.. Thanks in part to a general leftward tilt on economic issues after the student revolutions of 1968, most of them view the collective good, and the comparatively high taxation that accompanies it not as a sacrifice, but as a fundamental component of civilized society.

.. They are largely content with their take-home salaries, but not out of altruism. Rather, they view the role of wealth acquisition and consumerism in a fundamentally different way.

.. To Germans, caution and frugality are signifiers of great moral character. Sure, they favor high-quality consumer goods—but they deliberate on what to buy for years, and expect their possessions to last for decades

.. Moreover, for Germans, a good work-life balance does not involve unlimited massages and free meals on the corporate campus to encourage 90-hour weeks. Germans not only work 35 hours a week on average—they’re the kind of people who might decide to commute by swimming, simply because it brings them joy.

.. And a German wouldn’t be caught tot pounding down a bar or a glass of Soylent to replace a meal

.. just as Christian Lindner is obsessed with making money and driving sports cars, so have Germans been obsessed with making fun of Christian Lindner because they find his thirst for financial success so gauche.