According to SaaS markets expert Tomasz Tunguz, 2016 will be the year that investors crack down on unit economics when reviewing potential investments. His article 'The Metric That Matters For Startups In 2016' correlates this new investor focus with the increasing cost of startup capital in the SaaS market.
So for those not from an economics background, what does this mean? To put it simply; unit economics are the revenues and costs for your SaaS business, broken down to a unit level. By unit this could be by business, team or individual user (depending on your business model).
Some key questions Tomasz raised that investors will be focusing on are:
- How much capital will be needed before exit?
- How hard will it be to raise the capital required?
- How quickly can the business show it's unit economics work?
For many SaaS companies capital has been fairly easy to raise, especially those with solid traction and massive potential markets. This has resulted in money being the solution for a number of problems, most often in the form of hiring more sales staff to drive more traction, or more support staff to reduce churn.
With investor focus shifting to unit economics the mentality of 'throwing money at problems' will need to change, and it will need to change fast. Being financially savvy will become a critical point in getting future investment. A good framework for this is 'a bootstrapping mentality with the money to keep it moving quickly'.
So we've read the blogs, we know unit economics are a top priority (as well as good old traction and massive potential markets) but how do we achieve this?
Two key words. AUTOMATION. FOUNDATION.
The most successful SaaS businesses in market identify what works and repeat it. Then they automate as much as possible. This allows them to scale exponentially at a much lower cost, resulting in very attractive unit economics (high revenue with low cost) and high traction.
Two key areas for automation are:
- Qualified Lead Generation - identifying ways to automate qualifying leads and scaling the generation of these leads can dramatically increase traction and conversion rates.
- User On-boarding - creating a product that encourages and supports self-adoption, while supplying the user with relevant in-app education can reduce both sales and support costs internally.
In addition to automation, successful SaaS businesses also focus on the foundations of the business, such as;
- Long Term Product Development - often young SaaS businesses feel pressured by customers to get new features out as quickly as possible which leads to shortcuts in coding. These shortcuts can then bite you when you scale, resulting in a large outlay of capital to resolve before traction drops off. Think about technical debt early and clearly weigh the pros and cons. Know what the shortcut could cost you.
- User Prioritisation - this should be SaaS 101 but often startups focus on user feedback and involvement in product development, and forget about it for prioritisation. Knowing the right order in which to deliver new product features can make a large difference to your product uptake, and ensure your development is cost efficient.
- Business Planning - go old school here and write this stuff down, even better map it out with data in a SaaS Model Forecast so you have a clear outline of what you need to achieve in the short, mid and long term to succeed. A SaaS Model Forecast is a much more cost effective way to determine if a particular strategy is feasible, as opposed to the 'throw money at the problem' approach. Once you have your business plan outlined share it with everyone, keep everyone on the same path, and update it regularly as your business needs change and grow.
- Be Patient - allow your strategies time to work, nothing magically happens overnight (or we'd all be doing it). One fast way to throw away money is to jump from magical solution to magical solution. Allow the time needed for relevant data to be gathered before writing off a potential solution and moving on to something new.
In order to be successful a SaaS business needs to maintain the right balance between both Automation (for Traction) and Foundation. It is easy for a business to focus more on one side, leading to a high scaling business with crumbly foundations, or a business with supremely solid foundations and no growth. One solution is to mark each key decision with TRACTION or FOUNDATION to make sure you are keeping the balance steady.
The result of making this work (and don't get me wrong - this stuff is really hard to make work) is a smaller team (lower cost) of highly skilled and specialised people able to focus clearly on the goals they need to achieve to ensure high traction and solid foundations. A business like this can then scale exponentially in good times, and easily ride out the storms and droughts of the bad times.
So build it to last.
Amy Walker - Specialist in SaaS Strategy & Business Execution
I work with SaaS companies to develop their key strategies, and assist them to get the right tools in place to be able to execute seamlessly in market. I believe that the only thing preventing a great idea from scaling globally is a clear strategy supported by strong execution.