Two ways to grow your SaaS business

PhotoSpin Money & Finance 2 ? 2001 PhotoSpin www.photospin.comSaaS is a pretty simple business: You pay to acquire a customer on day one. Over time as you invoice that customer you recover your acquisition cost. From then on, the longer you keep that customer the more profitable they are. As the years go on and you keep more and more customers that you have already paid for, your business as a whole becomes profitable. Simple, right?

Tomasz Tunguz from Redpoint recently asked whether SaaS startups are less profitable these days. According to his data (below), no matter whether you sell to small companies or enterprise, over time the profitability of SaaS companies converges around a similar median.


According to Tomasz, the median SaaS company generates around 20% free cashflow post IPO. However, we’re not seeing that in recent IPOs. Instead, companies today are burning.

The main reason for this is the importance of growth. Investors today (in both public and private companies) reward growth above all else. The companies that grow the fastest get the highest valuation multiples. This is why Workday trades at over 14x revenue. It’s also why Salesforce, the company that essentially invented SaaS, has cumulative losses of  $ 343M and is still not profitable!

Almost all the most recent SaaS IPOs are money-losing companies:

Xero Wix Hubspot Box
Loss as a % of Revenue 37% 36% 44% 136%

Box wins the prize for losses. For every $1 in revenue it burns through $ 1.36. But it’s growing fast. And most importantly, on paper each customer is profitable.

As you read this, you may be thinking the only way to build a great SaaS business is to raise bucket loads of capital. After all, Hubspot (the most recent SaaS IPO) raised $100M from VCs before going out. However, raising big VC$ is not the only path available to you.

This weekend I was reading Unbounce’s 2014 Year in Review post. Back in my past life as a VC I led Unbounce’s first and only venture round. I love this company and keep in touch. In a Moz-like show of transparency, Unbounce shared lots of great stats about this past year.

The one that stands out most for me is their growth: That graph is going up and to the right pretty steeply. Amazingly, they delivered that growth while being profitable!


Unbounce has taken the long game and eaten its own dog food. If you’re an inbound marketing focused company, then chances are very good you’ve been on Unbounce’s blog. They have grown their business largely through inbound leads. And their blog is an amazing resource for the market (and as a result is an amazing source of leads).

I remember encouraging their CEO Rick to start doing paid marketing. He was insistent that they didn’t need it. And he was right. They have built an amazing growth engine on a very small amount of capital.

Now for sure Unbounce is smaller than the public business mentioned above. And it may very well choose to raise more capital over time. But the key word here is choose. As a profitable business with a steep growth rate it can choose when and whether to raise. That’s an amazing thing.

I can tell you firsthand, from both sides of the table, that the businesses VCs want to invest in most are the ones that don’t need their money.

So, as you plot your growth strategy think about which path is right for your business? Can you take a slower, capital efficient route, a la Unbounce? Or do you need to raise lots of capital?

Some of the factors that will drive this decision for you include:

Who you target as customers: If you sell to enterprise, then you need to build a sales force. That’s expensive. In addition, before large companies spend big bucks with you, they want to know that you have a strong balance sheet and won’t run out of business soon. So that means raising.

The time factor: Are you in a highly competitive segment? If so, time matters and may force you to raise money. Most tech sectors operate in a ‘winner takes all or most’ dynamic. The lions share of the gains goto the market leader. VC Boris Wertz quotes some research on this:

the biggest winners win by staggering amounts compared to their competitors. What used to be perceived as a 5x or 10x gap in valuation between the winner and a runner-up is now more widely seen as between 100x or even possibly 1000x.

Opportunity size: If you’re not sure about how big your company be (or how big you want it to be) then the less capital you raise the more of the company that you will own come exit time. Most VC exits are sub $50M. Something to keep in mind. Bear in mind, even that $50M outcome is highly improbable. A $500M outcome is much, much harder to achieve. Some folks just don’t want to take that risk.

The point of all this is: When you get onto the VC train, it’s a one way thing. You need to go big. Think through what is the right strategy for you and your business. There’s more than one way to do it.