Our team just got back from Dreamforce 15 in San Francisco. At the conference, our CEO BJ Lackland participated in a session with Jason Lemkin and Aaron Ross. Jason is the Partner of Storm Ventures, and founder of SaaStr. Aaron Ross is the author and Co-Founder of Predictable Revenue. Their discussion focused around funding and scaling SaaS businesses, and how to successfully transition from a service company to a product company.
In the past five years or so, the funding landscape has shifted dramatically. While there are more capital and funding options available, there’s also a lot more competition, and institutional VC money has become difficult to secure, especially for first-time founders. Newer entrepreneurs will find that they need to hack their way to $1–$1.5 million in annual revenue, plus be on a trajectory for 10x growth in 6 quarters or less to get VCs interested.
Other early-stage funding options, such as angel investments and revenue-based loans have picked up some of the slack. But entrepreneurs are increasingly turning to another way to bootstrap their way to success: funding their product with service revenue. There’s a lot of logic to this approach. Service companies require minimal investment to launch, and the revenue and insight gained from providing services to customers can be invaluable when it’s time to build and launch a product.
Nonetheless, this transition is not easy. You are changing your business model, which means you may need different talent on your team, a different go-to market strategy, and a different revenue model. The transition can take longer and cost more than you first imagine. Here are four tips that will ensure a smooth and successful transition.
1. Be prepared for the mentality shift
Successful service companies typically start by asking their prospects “What are your problems?” Landing deals involves showing prospects that your team has the skillset to solve whatever problems they have. But that’s the exact opposite of what a product company needs to do, which is to ask prospects, “Do you have this particular problem that my product solves?” And if they don’t, move on—as a product company, your solution is already set.
That’s why before you launch, it’s important to know your market demand and work toward product/market fit.
Secondly, service companies tend to be more conservative. You are probably not used to investing heavily in engineering and technology. You also may not feel comfortable developing a “freemium” product just to grow your user base. Transitioning to a product company requires you to be outside of your comfort zone and just “do it.”
2. Have the right expectation when it comes to fundraising
Traditionally, VCs don’t like investing in service companies because they don’t scale the way product companies can. Without the ability to scale quickly and provide exponential growth, your company’s chances of becoming a unicorn are zero, and you’ll have a hard time attracting VC interest. But if you are transitioning from a service company to a product company, you may have a better shot.
If you are making the transition and happen to have the opportunity to pitch VCs, be careful about how you use data to tell your story. For example, in the early part of your transition, overall revenue may be flat, even while your product revenue is growing quickly. You need to show the revenue breakdown for potential investors, and also make the case for why your experience on the service side of the industry makes you uniquely poised to reach your target market more quickly—and deliver a product that customers won’t be able to live without.
3. Follow Jason Lemkin’s 1 and 30 rule
To help you stay focused on fundraising, Jason described the raising process is no different than a medium-long sales cycle. You need to generate new and qualified prospects, nurture existing prospects, and make sure your existing customers are happy. In the contrary, many entrepreneurs take fundraising as an episodic approach.
Jason recommends following the 1 and 30 rule—that is, every single week, you spend 1 hour meeting with potential investors, and 30 minutes keeping in touch with the investors you already have.
“The biggest mistake 90% of founders make is not paying attention to the people who’ve already invested in them,” says Lemkin. Maintaining strong connections with current investors is critical; these are the people who can vouch for you during your next fundraising round, and help you find new investors.
Keeping in touch needn’t be complicated. A short weekly email update with a few key metrics and any newsworthy developments will go a long way to building confidence and relationships with existing investors.
4. Go upmarket as soon as you can
It’s hard to build a big business out of small deals. If your average deal size is small, you need to move upmarket as soon as you can. Sure, it’ll take time before you can do enterprise-size deals. You need to build out your product, develop a solid customer base at a lower price-point, and solidify your reputation. But you should always keep an eye out for opportunities to double—or triple—your deal size.
The real key is finding just one bigger deal. Because once you’ve done one, you can do another. That bigger customer is not an aberration. They’re not the only one on the planet with the right needs and budget.
If you’re strapped for cash and need to hack it, start smaller and wait for a larger customer to come to you. And when they come, you move heaven and earth to close the deal. Because once you land one, you’ll land more.
Want to hear more from Jason, Aaron, and BJ? Watch the full video recording from this Dreamforce session