#120: Lightning Edition: Questions on Enterprise SaaS Startups, with Jason Lemkin, Storm Ventures


Everybody wants to be an enterprise startup,
sing that song. Everybody wants to be an enterprise startup, SaaS startup and it ain’t that
easy. And today, on episode number 120 of CXO-Talk. Wow! Yeah, the bronze anniversary or something
like that. We have the bronze anniversary edition. I’m
Michael Krigsman and my co-host is Vala Afshar. Vala, I hope you’re doing well. I’m doing great thanks Michael. And today on the bronze anniversary edition
number 120, we’re doing a lightening edition with Jason Lemkin, and it is no exaggeration
to say that Jason Lemkin is the most popular enterprise, SaaS, startup, writer, blogger
on the face of the planet. That is true isn’t it Jason. At least I think it’s true in Palo Alto
where I am at the moment and I feel good about that. But yes, yeah, we just crossed 10 million
views on Quora which is fine and we’re over a million a month overall, so at least we’ve
got something that’s pretty fine. Okay, well we’re going to do what we call
a lightening edition, and for the lightening edition we’re going to ask Jason a series
of questions and he is going to answer with short, pithy answers. Yup, yes, pithy, short and pithy are my middle
name but these are the questions. These are the questions. Okay, shall we get
going? Yes, please do. Okay, Vala you want to kick it off? Sure Jason, well thanks for being on the show
and let’s start with asking you what is SaaStr, how do you pronounce it. Did I pronounce
it correctly and where did you come up with the name? Boy, well you do pronounce it SaaStr that’s
right. I wanted to maintain the mystery and no longer share where the name comes from
so you couldn’t invent it yourself. Apparently it has some meaning in Sanskrit, some people
think it’s like a person who is into SaaS. Some people think it’s just misspelling,
but I will tell you one thing. It’s better than the original title which I never used,
which is catharsaas. That was the original idea, was to share all my mistakes in learnings
for you the cathartic. So the original idea was catharsaas. We have the URL, but I hope
to never deploy it. Jason, you are managing director at Stormventures.
What is a managing director of a VC firm? It’s a good question to help founders, so
Managing Director really needs partner, and it’s confusing these days because especially
in bigger firms, there’s been a lot of title inflation and sometimes everyone is a partner.
And if you want to know who can actually write a check in a venture firm, usually look for
a not just partner, but a general partner or Managing Director because actually usually
there are legal distinctions that really mean you can write a check to a founder without
getting a lot of permission from the other folks there. Jason, what are the characteristics you look
for when investing? You know I’ve boiled it down to just 2½,
because there’s just so many great start-ups these days, or at least there’s so many
good start-ups there’s never that many great, but there is so many good. So I just look
for 2½ things. Because I’ve been a SaaS found myself, a little different, a little
quirky, I look for founders that are better than me, adjusted for time. They don’t know
as much as you know I do or we do, but adjusted for time, they’re better than me. I look
for better use of economics than I had, because if you can sell something for $10,000 a year,
for the same work as for 1000, it’s just 10 times easier. And then I look for something
that’s vaguely in a good space. Now a good space changes these days, but you do ideally
want to have something or someone else who can also write a check further down the road,
so, great founders, better than average in economics, and at least a space that in a
year or two may be interesting. What are the main challenges that enterprise
SaaS startups… It’s a little slow down in the hangout,
but if you can hear me I think I’ll still answer it. You guys hear me okay? Yes I can. We can hear you, but your video has died. Okay, what are the main challenges that startups
face, it’s a broad question. But I’ll throw out the one learning. So what we see
today is the very best SaaS startups grow than ever, the Slack’s, the Zenafits, the
TOPdesks. These are folks that can go from one to 10, 1 to 50, 1 to 20 million in cases
in 12 months, right. That’s a breathtaking pace.
So, the best ones are faster than ever, but on the flip side of that this product market
fit is harder than ever. So a great idea that used to be a dime a dozen, now I think they
are like a penny a dozen, right. So product market fit is actually more elusive than ever
when there’s 100 billion folks doing every SaaS idea instead of just five or 10. Jason, what are the phases that a start-up
goes through? Wow, well I want to have little different
view, but I will break it up maybe into three or four phases the first one I call getting
10 unaffiliated customers. Getting 10 folks who aren’t your old friends, your ex-boss,
someone down the hallway to actually pay money, pay money for your product because then you
actually have something. Right, I’m not interested in viable products,
I’m interested in sellable products as everyone who does enterprising, so phase 1 is 10 unaffiliated
customers. We call it beer money. It’s never enough money to pay your engineers or to pay
income, but at least it shows that you should never quit if you have something.
The next phase, and it’s a long gap, is what I call initial traction which is usually
around 1 million area a 1 million revenues. That’s when the engine starts to come together,
right you don’t have enough leads, you don’t have enough customers. But you pretty know
every month you’re probably going to have more customers than last month and more revenue
coming in. This is really the right time to build a lot of your management team, VP of
sales, VP of marketing around that, initial traction. Then, there is this long slug to
what I call initial scale, around 10 million plus or minus. 10 million in revenue then
the brand starts to come together, and you start to have enough revenue and enough (fact?).You
can have directors, and Senior Directors, and extra engineers. And so the real lesson
is that if you get to a million then what ever you do, hold out to 10 million, because
it gets easier when there’s that in the system, and it gets easier when you have a
brand. Jason, when should a founder kill the idea,
because it’s not working? Yeah, I have pretty controversial views here.
I don’t feel that you should ever kill something once you have those 10 unaffiliated customers.
Once you have 10 people that you have never met that by your product, even if it’s just
for 20 bucks a month, okay 20 bucks a month times 10 customers, $200 a month, like that’s
not making anybody the next Elon Musk Or Mark Benioff.
But if this is your passion and your dedicated, if you can get 10, do you think there is any
chance you can get 20? Of course you can, right of course you can. I can tell you this
almost 100% chance that you can get 100, and there is more than a 1% chance that you can
get 1000. So I think in SaaS, people quit too early,
they kill things too early. Now, if you never get 10 unaffiliated customers after whatever,
six months, 12 months, 18 months, 180 months, however long and however much patience you
have as we were, then kill it. But don’t kill it at 10 because product market is harder
than ever. When a company is going through the startup
phase, the initial phase, what are some of the main challenges? If in SaaS, I think what people don’t appreciate
that if they haven’t met it before is how cross functional it is. So if you are doing
B2C, you need to build something that’s cool and you need to send out (data by what’s
growing?) to get more users. The challenge in SaaS is nowadays you need everything, you
need sales, you need marketing, you need customer success, you need support, you need dev-ops
as well as engineering, and how the heck can you do that with (broad backs or prospects?).
Right, it’s impossible. So somehow you have to find the way to probably
do 3 to 4 more functions including sales than you ever thought you’d have to do. When a company is going through the ramp up
phase, what are the main challenges that they face? The main challenge in that sort of 1 to 10
phase from initial traction, initial scale, s there aren’t enough people. Every single
founder that I meet is in that 3 to 4, 5 million revenue AR range is just like dying, they’re
dying. Because what ends up happening in that range, from 1 to 10 is that you end up having
a new problem. You have more customers than you can service. Up to 1 million in revenue,
you never have more customer, but you always do whatever it takes to make your top customers
happy. As you get to 3, 4, 5 million, but you only
have 20, 30, 40 people in your company, there’s simply aren’t enough people to take care
of all your customers. From future gaps to customer success you’re just buried, just
buried. And the main challenges in the expansion phase,
and maybe tell us what the expansion phase is as well. Yeah, the main challenge I think from sort
of getting from eight to 10 run rate to the next level 20, 30, 40, and I’m not going
to talk beyond that phase, I’ll let others talk about the pre-idea phase, the main challenge
people have is that they don’t build a strong enough management team.
So, once you get to 8 to 10 million, as founders or CEOs, you should not be managing anything
directly. You have got to no longer be a micromanager in any way shape or form, you need VP’s
at every function, and they need to be real VP’s and not fake VP’s and they need to
be running things and they need to know how to do everything. All your VP’s need to
know how to hire every single person that will get you from 8 or 10 million to 50 million,
and the biggest thing that you can do as you come up to that initial scale that 8 to 10
million is not to put the management team in place and then you are just losing time.
You’re destroying that investment and your brand.
So once you have a few million in revenue, always spend 20% of your time recruiting,
and as you get bigger do it for your VP’s. Jason, what’s the difference between a real
VP and a fake VP, how can you tell the difference? Yeah, I think we all – and fake may not
be fair. What I mean by fake VP is once you get to 8 to 10 million, half of any VP’s
job is going to be recruiting and managing a team. If its sales it will probably all
be internal resources. If it’s marketing, it may be a mix of external resources and
internal resources. But it’s a management game, and the problem often is we hire folks
who are really smart and we want to believe in them, and they are up and comers, but if
they have no management experience, they often stumble really hard when it comes time to
hire four, five, six, 10 people for the team. There are exceptions, but especially in sales
I almost never see someone that can scale as a VP of sales that has never built at least
a small team before. That I call a fake VP. And what do you see as great investment areas
today. Boy I flip it around. I say don’t look at
the past and don’t be jaded, because in SaaS, since everything has been SaaS-ified
in a way that was even in a years ago, things that a couple of years ago would have been
too niche or too small or not too niche, too small today. So actually I have no prejudices,
in fact what I don’t want to do is invest in another CRM, ERP, HCM – I don’t even
like those acronyms. Even although as we know on CxOTalk, that’s where all the money is,
right. And of course there will be great CRM companies.
But the real reason I like to do CRM, ERP, and HCM is that five or six years ago nothing
else was being done, right. Look at whose idea it was, right. today, the markets are
a 100 times bigger, so you can have vertical CRMs, and you have 100 things that are actually
ERPs, but industry specific – they all do nine figures in revenue.
So I actually don’t you know – I have the opposite view, which is have an open mind
and watch things that flow and just try to learn why because the world is different. What are the characteristics of a great VC?
This is a very important topic for entrepreneurs. Boy it is, we can spend an hour on this. Bear
in mind that what a great VC means for founders, is a little bit different than what it means
for LPs where the people who invest in VCs. VC is a financial product. It’s like a mutual
fund or it’s just something that the VCs own investors select. All the people that
put money into VCs funds care about is a number, results: What’s your IRR, what’s your
return to capital. That’s all they care about, cash on cash returns.
What founders these days really want is a VC that was also a (CEO?). Someone who can
go through the journey. They all really want that, but it turns out, founders don’t actually
make the best VCs. The best VCs are just great pickers, and often times they were never an
entrepreneur even for five seconds. What are the characteristics of successful
entrepreneurs? Well you know it’s interesting I’d say
let’s break it up, what is a success? From a venture perspective, VCs can only make money
out of unicorns. So VCs only care about folks that are at least trying, at least are giving
it a shot to build something worth billions. That is hard, I didn’t do it, right I had
nine and eight figure exits, I didn’t have one dollar for and exit myself, it’s hard.
But if you are a VC, even a modestly sized fund, $150 million fund, a $150 million fund
means you have to return $450 million back to your own investors. You can only do that
with unicorns, right. so for a VC you want a founder who are simply plane sane and crazy.
Because most founders as soon as they get – you know, we used to use this term (FU-money),
let’s call it a lot of money. Most founders who are san normal people, living normal lives,
they will sell. As a founder myself then more power to you,
right. So if your 500 startups or an angle or doing super early stuff there is a broader
definition, but for bigger VCs you have to invest in crazy insane people, with crazy
insane ideas to like turn empty rooms into like a house that disrupts the Hotel industry.
I mean it sounded crazy but Airbnb’s done okay, right you have to invest in crazy. So this is a question about selling in the
enterprise, how can an entrepreneur know who is their customer. Who is their customer in
the enterprise, who is the actual buyer? How do you figure that out? Sure, well if you don’t know then you probably
haven’t done enterprise sales before and that’s okay. The majority of SaaS start-ups,
the founders have not done enterprise sales, and basically you have two options and you’re
going to do both. One, try and connect with folks on as many
levels of the oratory that you can. What’s natural if you haven’t done it before is
to talk to a line manager. Someone that might implement your product, right. But reach out
to a CXO, we’re on CXO-Talk you may be surprised. And the enterprise, a lot of innovation is
driven from the CIO talk or some of the CXO talks and they will taint meetings with startups
if it can have a profound impact on the company. So my number one bit of advice is challenge
challenge yourself and don’t just sell at the level of the organisation that is comfortable
for you. Try at every level, from line manager to Director, to VP from c-level and see at
least if you can get a meeting at each, because if you can get a meeting. Just getting a meetings
hard man, a 1000 SaaS products out there, like no one takes a meeting.
If you just get a meeting you can sell something if you are tenacious. So then do that and
then do your best and then figure out over 12 months what organically works, and then
hire a VP of sales that has experience selling to the fattest part of your existing customer
ecosystems, to the portion that generates the most revenue. When should a startup hire a salesperson? Yeah, so let’s break that up between a salesperson
and a VP of sales. I think in an ideal world, you as the CEO or a co-founder should close
the first 10 customers him or herself. Ideally at least the first five of those 10 unaffiliated
customers, you’ve got to go out and close them. Otherwise you don’t know. You cannot
even hire the most junior sales rep if you haven’t done it before, that’s a recipe
for disaster. So close 10 yourself and as soon as you are
comfortable that you know how to do the next 10, hire two reps. Go out and hire two reps,
and don’t hire one because you have got to AB test especially if you haven’t done
before. So hire your first two reps at 10 customers, and then hire your VP of sales
that you can wait once it’s repeating, not necessarily repeating at the world’s fastest
rate, but every month it’s repeating. Usually that is somewhere around 1 million, 2 million
in revenue. So it might need to push it to 500K in revenues and maybe you have deferred
to 2 million. But don’t hire the VP of sales before there is at least some engine going,
because the job of the VP of sales is to make that engine run faster. What is your advice for closing sales, enterprise
sales of course. Yeah, well my number one bit of advice for
founders is don’t be discouraged, because founders are naturally great middler’s,
almost all of them. Some of them are closers, but most of them don’t know how to do outbound,
they don’t know how to pick up the phone, they don’t know how to generate a lead,
and they actually aren’t comfortable asking for the money at the end of the day, but they’re
great in the middle. They’re great at doing the demo, explaining the value propositions,
bonding with the customers, right. Building out the business process change map, even
management change and management doesn’t even know what management change is these
days. So, what will happen is that if you are a
great middler, you can be at least a great mediocre closer, so don’t worry about the
fact that you’re not any good at closing sales. Just be a middler, build relationships
with the customers, as CEOs. The customers want to talk to founders and you’ll close
as many as a real rep could, but that’s okay because you have to learn. And once you’ve
closed the 10, get closers to help you learn that close. How do you build relationships with customers
with influences with the press. Well those are almost 3 different questions.
It turns out – but let’s just focus on customers first. Building a relationship with
customers turns out to be profoundly easy. And what I mean by that is let’s talk about
that as those 10 unaffiliated customers, nobody is dumb out there and this is a mistake that
many founders make. Especially the first time that they meet with a C-level person, the
CIO. They think you know Bob, Linda, or Jerry were some big startup – no, they know exactly
who they are dealing with. They know that it’s six guys who set up the market in San
Francisco with 11 customers. They know that. But they also know that they have to make
a couple of bets a year on things that can truly disrupt things that can add profound
value in their companies. So when you get that lead, so my advice is that when you get
that lead take it as the CEO, or founders. Talk to the customers, don’t be scared of
talking and don’t outsource it to your sales rep, who you hired to early. To be honest
yes, we’re 10 folks. I had a vision that would just change the entire industry, and
I will do whatever it takes Linda, my leads to make you a success.
When they hear that I’ll do whatever it takes as a CEO to make you a success, one
out of 10 of those leads will take that risk because then you can help. Jason, what makes a fast startup fundable?
Of course it depends on the stage. But let’s break up the sort of trite standard two buy
two matrix, right there’s traction and team right. The best traction and team, then you
get slack doing around you know 10 million in ARR 2.6 billion. Right, that’s traction,
plus team you get Josh James at Domo, already having done, on the chair raises an angel
round of 600 million in valuation. Okay, so traction plus team has never had a higher
premium than today. The mistake that founders make is that they
don’t realise that no team, no traction is no check. So if you are not proven and
you have no customers in SaaS, do not ask VCs or even sophisticated Angels for any money.
It isn’t going to happen. You have to have some sort of social proof on your team or
something to make it happen. Otherwise just to whoever will help you and knows you and
take a bet that’s not going to go anywhere. But remember traction, more team. So if you
are totally unproven you can’t even say to the salesforce Mafia – I hate the Mafia
term, but the salesforce mafia, the Google Mafia, the PayPal Mafia you really have nothing,
even major angel list profiles look great, then you have got to go out and get 10k (in
a month?). Is it possible to build a SaaS startup without
significant funding. Absolutely, but almost certainly you have
to focus on premium and the low end of the business. Actually you know the enterprise
is ultimately the most profitable part of SaaS. If you can close seven, eight figure
deals, those are inherently highly profitable. But you need a salesforce. You need to invest
money, you need to pay six figured salaries. It’s hard.
So if you’re going to do that without any capital or with minimal capital, it’s almost
always that you come up from the bottom. You don’t have to stay premium for life, you
don’t have to stay a very small business or SMP for life. Box started off not as a
premium product and now premium is less than 1% of Boxes revenue, so you can go upmarket.
But for most of us it is almost impossible when you are true enterprise without capital
because we just need all the headcount. What are the pros and cons of VC funded investments
versus other sources. Yeah, so don’t ever take VC money unless
it’s clear that it’s the right source of funding for you. And what I mean is in
one case, if it’s the only source of funding for you then it’s the right source of funding.
So my first startup, EchoSign I needed 9 million for it to get off the ground, right and this
was a decade ago. There was no angel list and I all we had one way to make 9 million,
I had to sell 80% of my company to do it, but it wasn’t really an option. Today there
is more options, right. There is Angels, there’s angel lists, there’s accelerators, there’s
syndicates, there’s Micro Micro VCs, there’s ultra-tiny VCs.
And so VC now actually works well when you’re trying to build a unicorn, something big,
and you can deploy that capital efficiently you’ll know it. Right, you’ll know that
gosh, if I just drop 5 or 6 million in my company and higher 20 sales reps, I can grow
twice as fast next year. That’s the magic that you should take venture capital. But
it has a cost associated with it, and if you don’t feel that in your gut and it will
accelerate your business and it’s accretive, take venture capital only if it’s accretive
or if you have no other choice. What are the unique challenges that face enterprise
startups. The number one is the cross functionality
of it, and I know that’s a kind of malapropism, but cross functionality. People don’t get
that just in a million in revenue or less, you need customer success, sales, marketing,
support, sales engineers, solution architects. You need to pass security audits, you need
dev-ops you need DR. You need 10 times more stuff than you ever thought, and that’s
the one that nobody plans for correctly, and if you want to wing then you just have to
suck it up and number one has got to wear four hats. H and ow are the fresh start-ups different
from consumer start-ups. Boy, that’s a long list. First of all, some
people think they are more something than they are than if you think about premium,
and to some extent a premium product without salesforce, an (lasseum?) and a Slack has
many like consumer elements in it. So I define enterprise to me as sales driven to keep it
simple. And that’s the main difference. You’re going to have to learn to love sales
if you’re going to enterprise. You’re going to have to enjoy getting on jets. You’re
going to have to enjoy ringing the bell. You’re going to have to enjoy hanging out with your
sales team. You’re going to have to enjoy sitting in your pit with your sales team,
dealing with those daily dramas. If you don’t want to get on a jet and you don’t like
hanging out with the sales guys, don’t do enterprise. Here’s a personal question, what advice
do you have for founders who want you to fund them. Well I’m quirky. I’m different. The best
advice is send me the most detailed email you possibly can with a DEC, with every single
metric, and with why you are building something that’s great. Just everything. I only meet
with one founder a week max, but I actually read and looked at almost everything. And
I can process a lot off-line because I’ve done it before, so the trick is not a punchy
line, and don’t send me a pinned document or teaser, I don’t do coffee and I’ve
had plenty of coffee, here’s my third cup and I don’t want a fourth coffee today.
Send me the world’s most amazing email, plus DEC, plus metrics, plus everything. Tell
me why it’s insanely great and if it is and even if it’s a totally cold email I
will probably take the meeting. Jason you talk about metrics, specific to
SaaS metrics what are two, three, four, five metrics that you want to see in this email
to grab your attention. A lot of people actually – and I am clearly
a SaaS guy, a lot of people care more about the metrics than I do. I’ve learned that
a lot of them don’t really matter in the early days. I don’t really care what your
customer acquisition cost is, because if you have a good start-up it’s always low in
the early days and then it gets high. I don’t really care if your customer lifetime value
is – I don’t really want to know what it is.
If you have true enterprise customers, they’re going to last like five or seven years. If
you sell to various small businesses on a credit card, they’re going to churn out
three or 4% month, like I know this like clockwork. I don’t care what you’re CAC is I don’t
care what your customer lifetime value is. I don’t care about any of these things,
but one of the reasons is that I can distil it all just from two metrics, what’s your
top line growth and how much money are you burning. Then I know the whole story. So I’m
interested in startup’s that when they get to a million in revenue, and most of all my
investments have been before that stage. But I’m interested in one thing, when they get
to a minimum revenue, they’ll grow at least 15% month over month, without hemorrhaging
cash. As long as the burn rate is tolerable, and you can grow 15% or more and a million
in revenues, and your great founders and a great space probably I’m going to write
a check. And the final question which I think is a
repeat and I think you’ve just said it is, what grabs your attention as an investor.
Maybe just put a finer point on it. Amazing founders, as we talked about that
are better than me and then the ability to go from one to 10,000,000 in ARR in five quarters
or less, that’s what gets my attention. And beyond that I don’t really care what
your SaaS product does. 1 to 10 million ARR in five quarters or less… This isn’t 2006 okay, this is the best ones
do that. the Slacks, the Zenifits, the TOPdesk’s, the Abloy’s , the other ones, they do it
in five quarters or less. I didn’t do it, like no criticism to me if you didn’t do
it because I didn’t do it. But the best ones do it, they find a way. And it’s not
just because the founders are better, the founders actually aren’t a lot better. The
markets are bigger than we all started this, right. They’re all bigger. The percent of
the CIOs budget that is going to SaaS is higher, right. It’s just 1% transition of the CIOs
budget to SaaS, like the CIOs overall budget I mean we have different members, trillion
dollars whatever it is, right. What’s 1% of 1 trillion, like that’s a lot of unicorns.
So that’s why the best ones if they hit it, if they just hit that product market fit,
and they have great teams they will just grow faster than old people like me that did it
in you know like 05, 06, or 08, or 09, but these new ones grow faster. Well you have survived a CXO-Talk lightning
addition. Yes, I haven’t been shocked all burnt I’ve
come through it safe and sound. Then, we have not done our job. But you did
a great job, thank you. Yeah, thanks guys for the time for the time. Thank you Jason. Talk to you soon. So, you have been watching episode number
120 of CXO-Talk. As Jason said the bronze – what was it the bronze anniversary edition. I don’t know which one it is. And we have been doing a lightning round with
Jason Lemkin, and Jason we are going to get a whole lot of short videos out of this, so
thank you so much. Awesome, thanks for the time. And Vala, I look forward to seeing you on
Friday for our next show, which is with Graeme Hackland have claimed the CIO for Williams
Martini racing, F1 racing, and that’s going to be interesting. It’s going to be fast. It’s going to be fast, everybody thanks
for watching, and please come back on Friday. Thank you so much everybody, bye bye.

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