A good rule of thumb for SAAS startups: the 40% rule.
Your annual revenue growth rate + your operating margin should equal 40%
So, if you are growing 100% year over year, you can lose money at a rate of 60% of your revenues
If you are growing 40% year over year, you should be breaking even
The idea being that it makes sense to spend money for growth.
It wasn't always accepted that you could charge money for software. Bill Gates cemented the idea of software=property in his 1976 Open Letter to Hobbyists. Jim Warren's response that same year:
There is a viable alternative to the problems raised by Bill Gates in his irate letter to computer hobbyists concerning "ripping off" software. When software is free, or so inexpensive that it's easier to pay for it than to duplicate it, then it won't be "stolen".
SAAS shows a viable alternative to that viable alternative: You don't need to cut prices. You make duplication impossible (you don't ship source code when you host the servers) and distribution trivial (just punch in your credit card).
Getting going as a SAAS company is tough. Getting the first few clients is scrappy, especially because their expectations aren't yet set. Formal work orders help nail this down.
The Y Combinator Sales Template Agreement is excellent -- the first page is a box-filling exercise which helps you think about what you're selling. Service fees, initial term, one-off implementation fee, pilot limitations.
After the scrappy stage: what product/market fit looks like for SAAS.
It's something like $100k MRR (monthly recurring revenue) and 10% month-on-month growth.
Do not pour on the gas at this point.
I'm trying to remember who described Series A financing to me like this... they said: You're Series A ready when you've found a lever that costs you one quid to pull and when you pull it, two quid drops out.
That's when you pour on the gas!
The lever is product/market fit. You've discovered the product, you've found who wants it, and you've got the sales machine to sell it.
Systematizing Sales With Software And Processes:
How to move upmarket from a low-touch sales SaaS into a more rigorous sales process, without losing your sanity.
Fantastic insights; great resource. Medium touch.
For low-touch or a more B2C model, a good user growth pipeline is: Acquisition, Activation, Retention, Referral, Revenue.
More about that growth pipeline aka the pirate metrics, because the acronym is AARRR.
So I'm thinking about SAAS for three reasons.
On that last point, I know the team at Winnow.
Winnow is working with kitchens small and large to tackle food waste.
It's a web-connected weigh-scale that sits under the bin in commercial kitchens, and a subscription to their service that has led
to waste reductions of 30% to 70% by value. Easy ROI for customers.
Hardware + recurring revenue. Neat.
See also: In the smart home, SmartThings is introducing a premium subscription service.
Samsung says the service will enable SmartThings to automatically send users or other contacts a text when it detects a problem in the house, such as a flood or fire.
Reid Hoffman (founder of LinkedIn) says:
a really great idea ends up with three innovations -- product service, product distribution, and revenue model
LinkedIn was a product service innovation. But it also innovated in distribution: Users invited their contacts, so it traversed the social networks and spread without ad spend. And revenue, LinkedIn made freemium work.
In the hardware world, I see a ton of great products from startups. BUT:
Everyone's still experimenting with revenue... 30% product margin won't cut it, and that's why Winnow is interesting. And distribution hasn't been cracked: Physical stuff has such a tough challenge with virality compared with, say, apps... it's hard to hear about and hard to buy. Still looking for good examples of hardware startups innovating there.
What's the SAAS flip for hardware?